Pennon Group expects full-year performance to be in line with management forecasts after the utility giant was boosted by the eventual completion of its Bristol Water acquisition.
Bristol Water’s £814m acquisition was finally completed in February, with the June 2021 deal stalled by a Competition and Markets Authority investigation, and the combined water company now operates under a single licence, Pennon told investors on Tuesday.
But Pennon Group shares were unimpressed by the trade update ahead of the June 1 results, with investors focusing on tackling drought issues and scrutinizing environmental practices in the year ahead.
Pennon Group is one of several water companies under scrutiny for wastewater dumping over concerns over the deteriorating condition of Britain’s waterways
A drought status in the south west of England declared by the Environmental Agency last year remains in effect, following some of the region’s driest and hottest weather on record.
Pennon highlighted its ‘save every drop’ campaign of customer engagement and investment ‘in a range of innovative solutions’ to secure water supplies.
It expects the first of its new desalination facilities to become operational later this year, “significantly increasing its water supply capacity,” the group said.
It added: ‘In addition, the Hawkstor Reservoir, purchased in March 2022, is fully operational and supporting Cornwall’s supply.
“Our dedicated teams continue to work around the clock to ensure clean, safe and reliable supplies for customers, supporting the 24/7 charging of our strategic reservoirs ready for the summer period.”
The group’s handling of the regional drought is important to investors, as it was one of the issues that caused an increase in interest in short selling late last year.
While the size of short positions has declined after its peak, JPMorgan Asset Management (UK) maintains a position equivalent to 0.77 percent of its shares, according to regulatory data.
Aarin Chiekrie, equity analyst at Hargreaves Lansdown, said: ‘Pennon is proactive in launching water resistance campaigns and engaging customers to save every drop.
“But as summer comes, we wonder if reservoir levels will be enough to keep customer stocks running at full capacity. If not, the group could miss out on performance incentives or possibly even be fined by the regulators.’
Another pressing concern is the public and regulatory scrutiny of the group’s environmental credentials, particularly with regard to wastewater disposal.
Raw sewage is discharged during times of heavy rainfall, when capacity is exceeded and companies are forced to reduce pressure on treatment plants to stop overflows. Water companies are licensed to discharge wastewater under certain conditions, but concerns are growing that the limits may be illegally exceeded.
Pennons South West Water became the latest target of an Ofwat investigation into possible sewage discharges in June last year, which weighed on its shares.
Last year, Severn Trent was one of the few companies in the industry not penalized by the regulator Ofwat for polluting rivers, with 11 suppliers fined.
Three of Britain’s largest water companies paid their bosses nearly £9m in the past financial year, despite coming under fire for sewer pollution and executive bonuses.
The companies have also drawn criticism for what some say are excessive shareholder returns at a time when investment in the water network is needed.
Water companies could face stricter rules on executive compensation if they fail to reduce waterway pollution and improve customer service, Ofwat warned in December.
Thames Water recently announced plans to pump £1.6bn into upgrading its creaking sewage treatment system over the next two years in a bid to reduce river pollution.
Pennon told investors it “lived up to our ambitious environmental improvement plans,” but acknowledged that “more needs to be done.”
It said: ‘We have improved our wastewater pollution performance by more than 50 per cent in two years, including a 75 per cent reduction in severe pollution from 8 to 2 by 2022, in addition to our best-ever wastewater treatment plant compliance of 99, 4 percent.
“Since the launch of our WaterFit program in April 2022, we have made significant progress on our commitments to protect and improve coastal and riverine water quality, achieving 100 per cent bathing water quality as measured by the Environment Agency for the second consecutive year .
‘We have accelerated the installation of monitors in our network of approximately 1,600 storm overflows and now have 100 percent coverage’.
It added that the group is making progress toward its 2025 goal of reducing storm surge releases.
This month, Pennon is launching the first phase of its “WaterFit Live – Your Say, Your Beach, Our Investment” initiative, a digital resource focused on providing clients with detailed updates on storm surges and bathing waters.
Director at Edison Group Neil Shah said: ‘Pennon Group has high expectations for the year ahead, citing the acceleration to reach 50 percent self-generation by 2030 as part of their Net Zero 2030 commitment.
“Plans for expansion appear fruitful as the company reports initial funding through group capital, allocating £160 million, offering the potential for attractive commercial returns with actionable near-term development timelines.
“Pennon’s focus on delivering results will help maintain their positive momentum for the year ahead, while also enabling them to navigate the market around them.”
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