Pennon Group expects full-year performance to match management forecasts after the utility giant was boosted by the eventual completion of its Bristol Water acquisition.
The £814million acquisition of Bristol Water was finally completed in February, with the June 2021 agreement stalled by a Competition and Markets Authority investigation, and the combined water business is now operating under one licence, Pennon told investors Tuesday.
But Pennon Group shares were unmoved by the trading update ahead of its 1 June results, with investors focused on its handling of drought issues and scrutiny of its environmental practices in the year ahead.
Pennon Group is among the water companies being scrutinised for sewage dumping amid concerns about the deteriorating condition of Britain’s waterways
A drought status in England’s South West declared last year by the Environmental Agency remains in place, following some of the driest and hottest weather on record in the region.
Pennon highlighted its ‘save every drop’ campaign of engagement with customers as well as investment ‘in a suite of innovative solutions’ to secure water supplies.
It expects the first of its new desalination facilities to become operational later this year, thereby ‘significantly boosting’ water resource capacity, according to the group.
It added: ‘In addition, Hawkstor reservoir, purchased in March 2022, is fully operational and supporting Cornwall’s supplies.
‘Our dedicated teams continue to work around the clock to ensure clean, safe and reliable supplies for customers, supporting the 24/7 recharging of our strategic reservoirs in readiness for the summer period.’
The group’s handling of the regional drought is important for investors as it was among the issues driving a surge in short-selling interest late last year.
While the scale of short positions has fallen away from its peak, JPMorgan Asset Management (UK) maintains a position equivalent to 0.77 per cent of its shares, according to regulatory data.
Aarin Chiekrie, equity analyst at Hargreaves Lansdown, said: ‘Pennon are being proactive in launching water resilience campaigns and engaging with customers to save every drop.
‘But come summertime, we wonder if reservoir levels will be sufficient to keep customer’s supplies running at full flow. If not, the group could find itself missing out on performance incentives or potentially even being fined by the regulators.’
Another pressing concern is public and regulatory scrutiny of the group’s environmental credentials, particularly with regard to sewage dumping.
Untreated sewage dumping happens at times of heavy rainfall, when capacity is breached and companies are forced to release pressure on treatment facilities to stop overflow. Water companies are licenced to dump sewage under certain conditions, but there are growing concerns limits may be being illegally breached.
Pennon’s South West Water became the latest target of an Ofwat investigation into potential sewage dumping in June last year, weighing on its shares.
Last year, Severn Trent was one of the few companies in the sector not to be punished by the regulator Ofwat for polluting rivers, with 11 suppliers being slapped with fines.
Three of Britain’s largest water companies paid their bosses almost £9million during the last financial year despite coming under fire over sewage pollution and executive bonuses.
The firms have also faced criticism for what some argue are excessive shareholder returns at a time when investment in the water network is needed.
Water companies could face tougher rules on executive pay if they fail to reduce waterways pollution and improve customer service, Ofwat warned in December.
Thames Water recently announced plans to pump £1.6billion into upgrading its creaking sewage treatment system over the next two years in a bid to reduce river pollution.
Pennon told investors it was ‘delivering on our ambitious environmental improvement plans’ but recognised ‘there is still more to be done’.
It said: ‘We have improved our wastewater pollutions performance by over 50 per cent in two years, including a 75 per cent reduction in serious pollutions in 2022 from 8 to 2, alongside our best ever wastewater treatment works compliance at 99.4 per cent.
‘Since the launch of our WaterFit programme in April 2022, we have significantly progressed our commitments to protect and enhance coastal and river water quality, with 100 per cent bathing water quality achieved for the second consecutive year, as measured by the Environment Agency.
‘We accelerated the installation of monitors across our network of c.1,600 storm overflows and now have 100 per cent coverage’.
It added that the group is making progress towards its 2025 target to achieve a reduction in releases from storm overflows.
This month Pennon will launch the first phase of its ‘WaterFit Live – Your Say, Your Beach, Our Investment’ initiative, a digital resource focused on providing customers with detailed updates on storm overflows and bathing waters.
Director at Edison Group Neil Shah said: ‘Pennon Group has high hopes for the upcoming year, stating the acceleration to achieve 50 per cent self-generation by 2030 as part of their Net Zero 2030 commitment.
‘Plans for expansion seem fruitful as the company reports initial funding through the Group capital, allocating £160million offering potential for attractive commercial returns with actionable near-term development timelines.
‘Pennon’s focus on delivering results will help keep their positive momentum for the upcoming year, while also being able to navigate the market around them.’
