Pennon Group to end year in line with expectations
Water utility and waste management company Pennon Group updated the market on its trading on Monday, ahead of its financial year-end, confirming that its underlying financial performance for the year ending 31 March was in line with its expectations.
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The FTSE 250 firm said the 2020-2025 business plan for South West Water had been 'fast tracked' by the regulator Ofwat, with momentum in that business continuing as it claimed “sector leading” customer service, and an enhanced return on regulated equity (RORE).
It added that the operational ramp-up for the Glasgow, Dunbar and Beddington Energy Recovery Facilities (ERFs) was progressing “well”, with the construction of Avonmouth “well advanced”.
The strategic focus on on recycling and residual waste at Viridor had been aligned with the government's resources and waste strategy, the board said, adding that the company remained in a “strong” liquidity and funding position, with £680m of financing secured so far in the financial year, of which £450m was under Pennon's sustainable financing framework.
Looking in more detail, at South West Water, Pennon said RORE was on track for “consistent continued outperformance” for the financial year, with an expected cumulative rate of 11.8%.
“Continuing its strong customer service performance this year, South West Water was ranked first in the Ofwat industry customer experience survey for the third quarter and is expected to see a further increase in its overall customer service score for 2018-2019,” the board said in its statement.
“Despite unprecedented demand due to the prolonged dry weather over the summer, operationally our infrastructure has performed well this year with no water restrictions for the 22nd year in a row.”
Pennon said operations were focused on replenishing water resources in the second half, adding that revenue from increased customer demand over the summer was expected to broadly offset the operational cost of delivery.
Momentum had been maintained in respect of achieving both the £300m target for total expenditure outperformance, and the delivery of further net ‘outcome delivery incentive’ (ODI) rewards, the board added.
It said South West Water's business plan for 2020-2025 had qualified for a 'fast track' process, claiming to have been the only water company to have achieved that status for two consecutive price reviews.
At Viridor, the board said the three new ERFs at Glasgow, Beddington and Dunbar had all progressed through commissioning to service commencement ahead of full operation.
Optimisation was ongoing, and operations would continue to ramp-up over the next 18 months in line with the pattern experienced already in Pennon’s existing portfolio.
“In line with management expectations, the existing assets in our ERF portfolio have continued to perform ahead of our base case scenario, underpinning the full year results forecast,” the board said.
“Work at the Avonmouth ERF has progressed as expected this year with all major process equipment parts and steelwork for the building in place.”
Pennon said it remained confident that the recycling business was on track for full-year results in line with expectations.
Recyclate prices remained “largely stable” over the period, although with increasing customer quality requirements in line with recent trends.
It said Viridor had continued with targeted investment in its recycling assets in order to improve output quality, including a focus on reliability-centred maintenance and working with customers to improve the quality of input materials.
“We continue to see a positive future for the recycling business, with the announcement of the government's resources and waste strategy aligning with Viridor's strategy and key priorities and with opportunities for contract backed asset investment.”
On the financial front, Since 31 March last year, Pennon confirmed it had secured £680m of financing so far - £450m of which had been through the use of its sustainable financing framework.
Pennon noted that its half-year results recognised a gross receivable of £72m due from Interserve Construction, adding that as the amounts recoverable from Interserve Construction related to rectification and completion costs, under accounting standards, the difference between the gross contractual receivable of £72m and the expected recovery would be taken directly to the income statement.
At the half-year, taking into account an assessment of market indicators of credit risk, a provision of £8m was recognised against the receivable.
“We have continued to monitor Interserve's financial condition and currently we are recognising a provision of £16m,” the board said.
“The £16m non cash provision recognised to date will be reported as a non underlying item.”
Pennon said that, given recent announcements regarding Interserve entering into administration, it was seeking further clarification regarding the financial position of Interserve Construction - the ongoing operating company with which it had contracted - which could change the level of provision to be announced with the full year results.
“We will continue to pursue recovery of all amounts due from the operating subsidiary Interserve Construction, and will take all the necessary legal and procedural steps to achieve this.”
Looking ahead, Pennon said that given South West Water’s 'fast track' status, a draft determination was expected on 11 April, with the final determination in December.
The board said it was “well positioned” to deliver “outstanding services” to water customers through the 2020-2025 period, and added that it remained confident in the UK residual waste sector fundamentals, with further capacity essential to meet longer term demand.
“With our clear strategy of focusing on the UK water and waste market, supported by a strong balance sheet, Pennon is well-placed to continue to deliver for customers, communities and shareholders.”
Pennon said it intended to announce its full-year results on 30 May.