Pennon Group Plc

Today, everyone here is 100% focused on returning a safe water supply to the people and businesses in and around Brixham. Our number one priority continues to be the health and safety of our customers and our operational teams who are working tirelessly around the clock. We're ensuring customers have access to bottled water and have already restored normal supply to a number of the customers initially impacted. We continue to work at pace alongside the relevant authorities to restore supply fully to every customer in business and we won't stop until this is done. We know this has caused significant disruption and distress to our customers. I am really sorry. Customers are right to be angry and will have questions for us. I am fully committed to ensuring our customers have all the answers to all the questions. But right now I am 100% focused on restoring the full water supply in Brixham. Immediately after the safe restoration of water, we will have a full investigation into what happened. But be in no doubt, as we work to fully understand what has happened, I am clear that whatever we conclude, it is our responsibility to deliver safe, reliable and clean drinking water to all our customers. Beyond Brixham, the provision of safe, reliable drinking water is always our priority in line with our 4 million customers and their expectations. This incident, post year end, highlights how important a role we have. So today I want to take you through the results and highlights of the last year, underlining the sustained investment in our services and infrastructure. Our fundamentals are strong, reflected in record levels of investment, record support for customers and creating record levels of job directly and in the supply chain, supporting the economic health of the region. We are growing sustainably, whether through acquisition or investment, with an efficiently funded and robust balance sheet, growing shareholder value. Building blocks are in place, focusing on not only what we do, but how we do business. And this, in turn, is ensuring we are making good operational progress, delivering on our four priorities and what matters most to customers. With a strong balance sheet and a sustainable future. We have a clear twin track organic and acquisitive grey strategy. Let's start with organic. With peak capital investment up nearly two thirds year on year to £583 million for 2023-24, this represents our largest ever investment programme in water. That translates into cumulative RCV growth of 65% on track to deliver 70% to 2025. This investment delivers asset backed inflationary returns for investors. Our operations in the group require reliable and efficient power supply, and we are investing to increase our renewable energy provision through Penn on Power, with the first EBITDA contribution due at the end of 2024, supporting our net zero ambitions and meeting 40% of energy requirements for the group. We are also delivering on our acquisition strategy, which is progressing well in two key areas. First, realising the benefits we set out as part of the Bristol Water acquisition, with around £17 million of annualised operating synergies, and on track for the targeted £20 million run rate for 2024-25, on top of the £18 million financing benefits already realised. And secondly, having acquired Sutton and East Surrey Water in January, safeguarding their financial resilience during a successful equity raise. We are now fast-tracking through the CMA process ahead of plan. We continue to deliver across four priorities on what matters most to customers. We're listening, whether from Bristol to Bournemouth and across Devon, Cornwall and the Isles of Scilly and soon to be certainly Surrey. Our customer and community roadshows have been a personal highlight as we have been able to reconfirm our four priorities. In investing to protect water quality and enhance resilience, we have broken the drought cycle for Devon and Cornwall well ahead of plan. In tackling stormwater flows at our beaches and eradicating pollutions, we're expecting to retain the gains we have made in the previous years with a revised trajectory to achieving four-star performance for 2025. We're working to protect the environment from climate change with our catchment management schemes progressing well. And at the same time, we continue to successfully manage customer bills to be lower than they were 10 years ago as we pledge to eradicate water poverty. Bills in the region are no longer the outliers in the sector they once were in the aftermath of post-privatisation and the 13 billion legacy costs of putting wastewater treatment into the region for the first time. And for our PR19 commitments, we are ahead or on track in delivering 70% of our outcome delivery targets. This is also a year in which the weather has been both friend and foe. Fundamentally, we have broken the cycle of drought, achieving 100% strategic reservoir capacity for Devon and Cornwall ahead of target, with a third of the improvement directly because of our interventions supported by the weather. This has been a monumental undertaking from teams across South East Water and our supply chain. At PACE, we have opened two reservoirs at Blackpool Pit and Hawks Tor, alongside a number of pump recharge schemes and increased treatment capacity at Rialton. We are also on track to deliver a two-phase desalination scheme for Cornwall. This has resulted in us being able to deliver on our 2025 target for Devon a year early, with an increase of 30% resource availability. We are on track for a 45% increase in resource availability in Cornwall, with 30% delivered today. It's not just been about fixing the here and now, as we are investing enough today to protect resources over the next 25 years. There are always two sides to the coin. Yes, it's about diversifying our portfolio of resources and investing in those, but also about reducing demand. We are delivering on our leakage targets today. Our set to lead into mile reduction schemes are focused on supporting customers to use less water and save money, with over 500 water saving devices issued every single day. We are also piloting trial tariff schemes to better distribute charges and encourage water efficiency. And whilst we have protected water resources, water quality continues to be good. In 2023, we have delivered a step change in the Isles of Scilly with zero failures of treatment processes for Devon, Cornwall and Bournemouth and with a robust action plan in place for Bristol. Briefly, I want to talk about the weather. In doing so, it's not an excuse, but it's important context for the plans we have been focused on and importantly evolving where we focus next. As a result of the weather, we are seeing significantly increased wastewater flows, which have impacted our headline performance for wastewater pollutions and the use of storm overflows. With 10 named storms and 12 yellow weather warnings in September, and with the average rainfall increasing by 50% when compared to long-term averages, we have had the fifth wettest year on record for Devon and Cornwall. And rainfall this year in 2024 continues to be above the long term average, up 40 percent, and with elevated groundwater levels resulting in a one year impact on flows equivalent to the previous 20 years rate of increase. So let's look at pollutions. For pollutions, we need to look beneath the headlines to understand how our plans have been improving outcomes. Historically, 70% of our pollutions have occurred in our networks, and the work we have done here is working with performance stabilising. We're seeing three things. We're achieving sector-leading internal sewer flooding performance, we're outperforming regulatory targets for sewer collapses and blockages, and we're maintaining the gains we've made previously in reducing network pollutions. We've done this by investing in 12,000 sewer deck monitors, supporting predictive and proactive interventions, as well as continuing to invest in rising main replacements and sewer upgrades, alongside supercharging maintenance and targeting cleansing activities. Going back to the 20% increase in flows into our system, we need to remove or divert these flows, so we are focused on infiltration reduction and sewer separation to achieve this. We've had to rebalance efforts at both our treatment works and pumping stations where the higher levels of flows have driven spikes in performance. By reinvigorating action plans, our treatment works performance has recovered from the degradation we saw in 2023, stabilising performance into 2024 with a combination of inlet and storm tank cleansing, risk-based generator servicing, site-based compliance, re-bed surveys and refurbishments. Efforts have now turned to our pumping stations with improved site MOTs and enhanced cleansing, as well as tackling power resilience. Reducing pollutions remains a top priority for the board and all my colleagues. We are clear and transparent about where we are and over time we have improved self-reporting of pollution incidents and we are now one of the best in the sector. I am reassured that we have maintained serious pollution incidents at our lowest levels for 2023, noting that we are still aiming for zero. For all the incidents, we have a revised trajectory for achieving four-star performance for the 2025 calendar year. The high flows in our networks has mastered demonstrable improvements made through our interventions in reducing the impact of storm overflows. On a like-for-like basis, the investments we are making today are delivering underlying performance improvements which we will see in future years. There are 280 schemes completed or underway. For example, our work at Hatherley Suits Treatment Works has reduced bills by 90%. And the tank we have installed at Chisleham Holt has reduced bills by 70%. As we are focused by 2025 on improving 49 of the 151 beaches through our WaterFit programme, WaterFit Live is giving communities and visitors to the region near real-time information about their favourite beach, alongside community roadshows as we place communities at the heart of our plans. And whilst beaches are a priority, we are equally focused on improving river water quality with reasons for not achieving good ecological status reduced from 19 to 12.4%. We have a nature-first approach to investment. Our award-winning catchment management programme is leading the way for biodiversity gains, as well as continuing to help the way others manage their land, improve water quality, biodiversity and climate resilience. Activities range from building ponds, improving farm tracks, slow storage, as well as planting trees and buffer strips to catch and filter water. We have restored 127,000 hectares cumulatively, as well as exceeding our tree planting target of over 250,000. Having worked on our catchments for the last 15 years, we have the science to back up the improvements. And I was delighted that we officially opened our partnership with the University of Exeter in March this year, providing research to a state of the art laboratory into the key challenges and issues facing the water and wastewater sector. In tackling affordability, it is about two things. keeping bills as low as they can be for all customers and secondly, supporting those who are struggling. We have always been focused on being as efficient as we can be in delivering services and in keeping bill increases to 2025 well below inflation. That's why we continue to support customers and communities, having provided over 100 million of customer support, with 132,000 customers benefiting from one of our social tariffs, building awareness of our customer outreach engagement programmes as well. As a result, over 98% of customers across all our regions find their bills affordable. And against our customer commitment, 70% of our outcome delivery incentive schemes are ahead or on track. Given you can't choose your water provisor, we believe you should have a say, which is why we plan to grow our unique WaterShare Plus scheme and extend this scheme to Sutton and East Surrey customers for the first time. The building blocks for a sustainable future are in place. We're reshaping the group to be efficient as we grow and to ensure we are performance-led with planned improvements in processes and operational effectiveness, which has delivered synergies of 26 million in 2023-24, with a targeted 86 million annualised run rate in 2K8. We are bolstering delivery of the wider supply chain, collectively known as Amplify, with a two-tier supply model already in place and already mobilised, delivering 1,000 projects in support of our £2.8 billion investment in the region. And to be a sustainable business, I've always been clear, our investments can't just be in assets, it's in people too. We are the only water company to have been recognised as a top 100 employer for apprenticeships. With over 470 apprenticeships to date and accredited as the gold employer for our earn and learn approach, one in 10 colleagues have either undertaken an apprenticeship or graduate programme. We have promoted social mobility, giving young people the opportunity to dive into their local water company. For the third year running, we have had our best health and safety performance as we deliver on our home safe strategy to ensure everyone who works for us and with us goes home safe every single day. And finally, we're leveraging technology, trialling AI in customer services and using predictive modelling to support wastewater operations. Overall, we have a robust financial position with solid financial performance and we are well positioned for the next regulatory period. Our efficiency programmes are focused on keeping costs below inflationary levels. despite the impacts of the unprecedented wet weather. Furthermore, with a robust balance sheet, we are also efficiently funded and growing shareholder value. Our strategy for financing will continue to seek to ensure we remain one of the most efficient in the sector. We have raised around £1.2 billion of new and renewed facilities since March 2023, and with a successful effort to raise £180 million for the Sutton and East Flurry acquisition, we're well on track for our funding. Our water group gearing at 63.5% is in line with K7 policy, reflecting the increased investment spend in assets and timing of our CV build. Our business-to-business retailers, Penn & Water Services and Water to Business, are delivering over a 50% increase in EBITDA and increased market share through providing excellent customer services. We paid an interim dividend of 14.04 pence per share on 5th April 2024. We have carefully evaluated the recommended final dividend position, considering performance in the round for the group. Growth in our business-to-business retailers, development of the pen and power business, and our water businesses, we have considered of what's recent guidance in this area. The final recommended dividend for Pennon has therefore been adjusted to reflect a £2.4 million fine linked to a South West Water prosecution we had in May 2023, where we believe the ultimate shareholders of the group should bear that impact and not the customers. As such, the revised final dividend recommended is £30.33 per share. With that, I am pleased to hand over to Steve, who will deliver his first year-end results for the group.

Thank you, Susan, and good morning, everybody. Overall, our financial results for the year 23-24 are in line with our expectations. The key themes are a strengthening income statement with underlying profits improving to £334.7 million of EBITDA, a step up in capital investment to £642.4 million, which is driving significant growth, 7.3% cumulative outperformance of K7 regulated returns, in excess of £1 billion of liquidity, which provides flexibility and resilience, and gearing at 63.5% within our target range. Our headline results include Sutton and East Surrey Water, SES, since acquisition and to help comparison with the prior year in places we have presented numbers excluding SES. And this is indicated. As we expected, the income statement for the year was weighted to the second half. The second half was also improved from a loss in H2 22-23 to a profit. I will walk through the headlines on year-on-year movement on the next slides. Non-underlying costs of £25.9 million are associated with the SES acquisition and establishing a comprehensive cost transformation programme in readiness for K8. I will return to this programme. Earnings per share, excluding the expected SES loss, are £7.2 and are broadly flat year-on-year. Excluding SES, organic revenue growth of around 6% has been achieved as a result of inflationary tariff increases, offset by prior year ODI penalties and adjustment for over-recovery from prior years. Following significant inflationary increases in the prior year, the cost base is stabilising with softer inflation and self-help actions on cost reduction. As a result, the South West Water cost base is broadly flat despite weather impacts. As you would expect, as we grow the RCV, the depreciation charge is increased. This is also the case for financing costs, driven by increased debt and increases from higher interest rates. I am pleased with the continued growth and profitability in Penn on Water services, whose profit for tax has more than doubled in the year. SES is included from date of acquisition of 10th January, and as expected, contributed a loss of £2.5 million. You will be aware of the post-acquisition integration programme for Bristol Water. The programme is almost complete having delivered 17 million annualised synergies and is expected to achieve the target 20 million savings. Our ambitious PL24 plan submission included a commitment to reduce costs which will reduce customer bills. To underpin this ambition we have commenced a programme to reshape the business. This programme has delivered 9 million Totex benefits in 2023-2024 and is targeted to achieve around 55 million annualised savings in K8. The programme will optimise asset maintenance activity, improve chemical and power consumption of operational sites, reduce our overheads and strengthen procurement. We have targeted 11 million of integration benefits from the SES acquisition. This programme will commence once we have CMA clearance for the acquisition. As you will be aware from the business plan, year 4 and 5 are peak years for the K7 investment programme. This has been our largest year of capital expenditure with investment 80% higher year on year at £642 million excluding SES. The regulated water business increased investment by 63% year-on-year to £583 million, with the balance being the commencements of our investment at £59 million into renewable energy, pen on power. The K7 investment has enabled significant growth in the RCV, which is now 66% higher than the start of K7. Around £820 million of shareholder value has been created in the water business during K7 from base returns, RCV inflation and Rory outperformance. A prudent approach to dividends in the water business has resulted in only £250 million of this value being distributed by South West Water to Pennon for K7 to date, leaving over £500 million of retained shareholder value. The case of an investment programme and reinvestment of Rory Outperformance were weighted to years four and five. We have successfully accelerated 80 million investment from year five in the water business to improve resilience to drought and water quality. This is a timing matter only. However, there has been 80 million additional expenditure on base maintenance in order to mitigate the impact of severe weather on pollutions and leakage while expanding our Quality First programme. We expect 50% of this expenditure to be recovered in K8. As a result of this, our expectation is that capital expenditure will be around £930 million cumulative for years 4 and 5 as the timing reverses and base maintenance returns to levels in line with the PR24 plan. I am particularly pleased about our strong liquidity and successful debt raising activities over the last year. To support the growth of the business, we have raised around $850 million of debt across our diversified debt portfolio. Our most recent private placement was oversubscribed by four and a half times. We have increased that equity to over $1 billion, which ensures we have flexibility and resilience. We will be establishing an EMTM programme which will expand our debt portfolio to include UK and European debt markets. We are well advanced on our work to attain two public credit ratings which we expect to be strong investment grade. We continue to deliver strong Rory performance at 7.3% cumulative, equating to around 160 million outperformance. This has enabled the funding of additional capital investment initiatives as discussed earlier. The structure of the debt book has enabled financing outperformance of £255 million to date in K7. The outperformance continued in year 4 but has reduced year on year due to the impact of falling inflation. ODI penalties have been incurred as a consequence of the extreme weather events including heavy rainfall through to March 2024. Consistent with our planned submission, there are a number of ODIs which are calculated at the end of Act K7 and we anticipate these being a reward of the order of £20 million. Totex has reduced outperformance by £60 million cumulatively due to peak levels of capital expenditure. The south-west water gearing is 63.5%, excluding SES. The SES business will be included going forward once the de-gearing has been completed after CMA clearance. The South West Water gearing is about 2% higher than planned due to the higher capital of spend and reduced operating cash flows as a result of the income statement. We are still within our 55% to 65% policy range and anticipate this will be the case at the end of K7. And as we transition into K8, the group will have flexibility to respond to the outcome of PR24 draft and final determinations. This will include ensuring that we have a strong investment grade credit rating for South Westwater, debt leverage opportunities for Penn on Power and considerations of the retained value of over £500 million in South Westwater. This will lead to the development of K8 balance sheet and capital allocation policies to achieve the best value for shareholders. I'll now hand back to Susan.

All this means that as we look ahead to PR24, we have a robust base on which to build. It's an ambitious plan that we have based on the four priorities that customers care about the most. We will be investing and investing efficiently. Total expenditure in the plan will be £4.5 billion. with 12% of efficiency, keeping bill increases to a minimum, and with a good support from customers at 74%. For investors, there is growth. In nominal terms, 38%. In real terms, 25%. We have put forward an ambitious set of outcomes that will see the opportunity to gain from good performance, and with an ability to share this between investors and customers, with an 8.6% maximum return on regulated equity. With a draft determination due on the 12th of June, we stand ready to deliver, with an investor update planned for that day and a capital markets day in late September. So in summary, our fundamentals are strong, reflected in record levels of investment, record support for customers and creating record levels of jobs directly and in the supply chain, supporting the economic health of the region. We are growing sustainably, whether through acquisition or organic investment, with an efficiently funded and robust balance sheet growing shareholder value. Building blocks are in place, focusing on not only what we do, but how we do business. And this, in turn, is ensuring we are making good operational progress, delivering on our four priorities and what matters most to customers in UK water, well positioned for the future with robust financials. Thank you.