Pennon Group PLC - Half Year Results 2018/19

Delivering for customers, communities and shareholders

Chris Loughlin, Pennon Chief Executive said:

 "Momentum for Pennon continues with a strong performance in the first half of 2018/19 across both water and waste.  We are delivering on our promises to customers and communities and our investment across the Group is driving tangible and positive results.

In water, we demonstrated our service resilience in extreme weather conditions, with the aftermath of the exceptional cold weather in March followed by the hottest summer on record. Our focus on customers has been reflected in South West Water's best ever customer service score for this half year. With a relentless focus on efficiency and cost savings, average bills are lower than they were 9 years ago, with a further 11% decrease expected in the next regulatory period 2020-2025 under our new business plan. Customers will be empowered as part of a New Deal giving them a tangible stake and say in South West Water.    

The focus for Viridor is UK recycling and residual waste processing and transformation. Waste market dynamics are favourable, with the 'Blue Planet' effect spurring action, and we are optimistic that positive changes will be announced in the Government's Resources & Waste Strategy later this year enabling a UK recycling system fit for the future. The operating fleet of Energy Recovery Facilities (ERFs) is performing well, transforming waste into electricity and heat. Progress continues bringing Viridor's remaining four ERFs in the portfolio on stream, with three now in operational ramp up and the final facility under construction. We have further consolidated our position through increasing our holding in one of our joint venture ERFs, Runcorn I. The development of Viridor's ERF portfolio will support Pennon's earnings growth to 2020 and beyond".

Financial Highlights

Underlying[1]

H1 2018/19

H1 2017/18

Change

Revenue

£746.7m

£723.9m

+3.1%

EBITDA[2]

£274.0m

£253.5m

+8.1%

Adjusted EBITDA[3]

£294.7m

£285.8m

+3.1%

Operating profit

£178.5m

£162.4m

+9.9%

Profit before tax (PBT)

£142.5m

£131.1m

+8.7%

Non-underlying items before tax[4]

(£8.9m)

(£1.3m)

-

Statutory profit before tax

£133.6m

£129.8m

+2.9%

Tax

(£17.6m)

(£17.5m)

(0.6%)

Statutory profit after tax (PAT)

£116.0m

£112.3m

+3.3%

 

 

 

 

Earnings per share[5]

30.0p

25.3p

+18.6%

Statutory earnings per share

25.6p

21.8p

+17.4%

Dividend per share[6]

12.84p

11.97p

+7.3%

Pennon Group

·    Pennon is on track to meet management expectations for full year 2018/19

·    Underlying PBT up +8.7% following: 

o  Higher revenues and EBITDA at South West Water reflecting increased customer demand over the summer

o  Continued cost saving focus, leading to Total Expenditure (Totex) outperformance, at South West Water, a key component to RORE[7]. On track for continued outperformance for 2018/19

o  EBITDA growth of +17.7% at Viridor supported by the build out of new ERFs

o  Momentum in group efficiencies maintained with c.£15 million p.a of the £17 million p.a expected from 2019 already secured

·    Statutory PBT up +2.9% to £133.6 million

·    Statutory earnings per share growth of +3.8p to 25.6p

·    Interim dividend per share up +7.3% to 12.84p

·    Cash flow from operations reflecting robust operational performance, whilst significant capital investment continues

·    Development of our sustainable financing framework, with £350 million of £480 million secured linked to the sustainable nature of the business, reducing our cost and reflecting our environmental and social credentials

South West Water

·   Strong performance, demonstrating service resilience through extreme climatic conditions

o  Highest ever Customer Service (SIM) score achieved with South West Water now ranked 2nd overall in England and Wales in H1 2018/19[8]

o  Cumulative Return on Regulated Equity (RORE) at 11.8%[9] - WaterShare delivering c.£100 million of outperformance for sharing with customers to date

·   On track to deliver all our business plan commitments by 2020

o  Cumulative net ODI reward of £9.3 million[10] to H1 2018/19

o  Continued strong focus on efficiency, on track to deliver the c.£300 million Totex outperformance to 2020 - £209 million delivered cumulatively to H1 2018/19

·   New Deal launched in our Business Plan to Ofwat for the next five year period 2020-2025 (K7), giving customers a tangible stake and say in the business

o  Operational delivery preparations already underway    

Viridor

·   Focused on UK recycling and residual waste processing and transformation

·   Favourable recycling market dynamics

o  Public perception, 'Blue Planet' effect - driving Government support for recycling 

o  Recovery in recycling markets since H2 2017/18 - EBITDA of £7.4 million in H1 2018/19 ahead of £4.4 million achieved in H2 2017/18

·   Strong residual waste market opportunities

o  Build out of ERFs supporting strong growth in EBITDA of +17.7%[11]

o  Operational ERFs outperforming base case.  On track for full year availability >90%[12]with planned maintenance weighted to H1

o  The three new ERFs at Glasgow, Beddington and Dunbar are all processing waste. Optimisation is ongoing and operations will ramp up over the next 18 months as has previously occurred at the other ERFs in our portfolio

o  Further consolidated our position through increasing the holding in Viridor's joint venture (TPSCo)[13] which owns Runcorn I ERF

·   Maximising value from landfill energy

o  Robust landfill demand forecast into the medium term.

o  10 sites open to waste arisings, with volumes and gate fees holding up well  

o  Investing in landfill gas for improved longer term yields

Pennon Water Services

·   Pennon Water Services, one of only five associated retailers to have achieved net growth in the new competitive non-household market. Focused on value enhancing contracts and future cost base efficiencies.

About Pennon Group

Pennon is one of the largest environmental infrastructure FTSE 250 groups in the UK with assets of around £6.2 billion and a workforce of around 5,000 people. Around 63% of Pennon's shareholders are UK pensions, savings, charities, individuals and employees, with two thirds of South West Water's employees being shareholders.

The integrated water company of South West Water and Bournemouth Water provides water and wastewater services to a population of c.1.7 million in Cornwall, Devon and parts of Dorset and Somerset and water only services to c.0.5 million in parts of Dorset, Hampshire and Wiltshire.

Since 1989 South West Water has invested around £7 billion to improve water and wastewater services.  This investment means that we will supply some of the best quality drinking water in the UK and have achieved record bathing water quality in recent years.

South West Water was awarded enhanced status for its 2015-2020 Business Plan, and has the highest potential returns in the water sector to 2020.

Viridor is a leading UK recycling and residual waste processing and transformation business providing services to more than 150 local authorities and major corporate clients as well as over 32,000 customers across the UK.

Pennon Water Services provides water and wastewater retail services to over 160,000 non-household customer accounts across Great Britain, and is an 80:20 venture with South Staffordshire Plc.    

10 year sector-leading dividend policy

Pennon's purpose is bringing resources to life. We aim to protect the environment, provide an outstanding service to customers and communities, while creating value for our shareholders. Pennon is investing significantly in its UK water and waste infrastructure and estimates capital expenditure of c.£1.7 billion between 2015 and 2020, with £1.3 billion invested to date. The Group generates robust operating cash flows, and has a strong liquidity and balance sheet position, underpinning a well established sector leading dividend policy.

South West Water has delivered further benefits for customers through our innovative WaterShare mechanism with around £100 million of benefits achieved since 2015. Customers will continue to benefit from reinvestment in services and lower bills into the next period.

Whilst delivering on our promises to customers and communities for investors Pennon's long established 10 year dividend policy of 4% year-on-year growth above RPI inflation to 2020 results in an expected doubling of dividend over 10 years (2010-2020)[14]. This policy reflects the Board's confidence in our sustainable strategy and is underpinned by the highest potential Return on Regulated Equity in the water sector over K6 (2015-2020) and the growth in earnings being delivered by Viridor's ERFs.

For H1 2018/19, the Board has recommended an interim dividend of 12.84p, up 7.3%. The interim dividend will be paid on 4 April 2019 to shareholders on the register on 25 January 2019.

Pennon now offers shareholders the opportunity to invest their dividend in a Dividend Reinvestment Plan (DRIP).

Interim dividend payment information

24 January 2019                     Ex-dividend date

25 January 2019                     Record date

8 March 2019                          Final date for receipt of DRIP applications

4 April 2019                             Interim dividend payment date