Following Ofwat’s PR24 Final Determinations in December 2024, Pennon Group has announced that after careful consideration, South West Water and SES Water will be accepting their respective Determinations and will not be seeking a reference to the Competition and Markets Authority (CMA).
The Final Determinations support a significant uplift in investment over the K8 period to 2030, with capital expenditure increasing from an expected K7 (2020-2025) outturn of c.£1.9bn, to a record c.£3.2bn. The investment will be across a range of transformational projects that are focused on areas like tackling the use of storm overflows, bolstering water resources through a new reservoir in the South West, and expanding the programme of nature recovery.
The company said that with challenging performance commitments, the clarity and visibility of the Final Determinations, coupled with Pennons advanced preparation for delivery means it can confidently move forward, targeting c.7% Return on Regulated Equity (RORE), within Ofwat’s expected RORE ranges.
For the third consecutive price review, Ofwat recognised the outstanding nature of SWW’s business plan with a 30 bps uplift to the cost of equity (subject to meeting certain targets over the forthcoming period), whilst SES benefits from a 5 bps uplift for a good/standard plan.
An investor summary document detailing the assessment of the Determinations has been published on the Pennon website and can be accessed here: Price Review (PR24) | Pennon Group PLC
The step change in investment delivers growth in Regulatory Capital Value (RCV) of c.34% over the K8 period. To maintain robust balance sheet resilience, Pennon Group is launching a fully underwritten c.£490m rights issue, used to fund increased investment in the water businesses.
SWW is consistently named in the top category for financial resilience by Ofwat, and since acquisition in 2024, Pennon Group has supported SES to improve its financial resilience which has been noted in Ofwat’s most recent financial resilience report.
Pennon anticipate gearing in the water business to be 60-65% consistent with its long-term gearing policy for the water businesses of 55%-65%. Pennon are targeting retaining a strong investment grade credit rating of Baa1 for the water companies over the K8 period, with Pennon Group leverage expected to be a few percentage points higher than the water businesses but unlikely to exceed c.5%.
Considering the SWW and SES Final Determinations, and Pennons overall comprehensive financing package for K8, Pennon are announcing a revised dividend policy.
The total dividend amount for the year to 31 March 2024 of £129.3million will be rebased on a dividend per share basis (taking into account the effect of the Rights Issue), with the rebased dividend per share growing in absolute terms, by CPIH inflation from and in respect of the current financial year ending 31 March 2025 and each financial year thereafter to 31 March 2030.
Coupled with the c.34% organic RCV growth projections to 2030, Pennon said this represents an attractive combination of underlying asset growth and income to its shareholders.
Susan Davy, Group Chief Executive Officer commented:
Susan Davy, CEO of Pennon
“We have listened to customers, communities, and stakeholders. With these record levels of investment, we will be transforming what we do, fixing storm overflows, building new reservoirs and creating natural habitats for wildlife. This is so much more than just about water. It’s about much needed regional investment, creating jobs and building homes.
“At the same time, we will be supporting customers when they need it most, keeping bill increases low, with innovative tariffs and our £200m support package. We’re doing this.”
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