Pennon issues new equity to underpin AMP8 and accepts its final determinations
Pennon accepted Ofwat’s final determinations (FDs) for South West Water and SES Water for 2025-2030 on 29 January, calling them ‘challenging but fair’ for all stakeholders.
It has underpinned its £3.2bn allowed totex with a £490m rights issue, exclusively to fund the water businesses. In tandem, it announced a new dividend policy of annual growth in line with CPIH, adjusted for the now larger capital base. It also confirmed that it was already targeting 200 basis points of regulatory outperformance, through a mix of cheaper financing than regulatory assumptions, performance rewards (ODIs) or cost efficiencies.
Although delivery of its plans remains a challenge, the FDs will allow: revenues that align with management expectations; funding for 97% of totex requested; and the formal recognition of work completed in the current five year period which will increase opening regulatory capital value (RCV) by an additional 20%. This will lead to a 34% increase in its RCV over the next five years. Management said that delivery of its plans is being accelerated; some £625m of projects have been already handed over to its new supply chain.
Analysts’ queries
Analysts questioned whether £490m was the appropriate level of equity increase to meet the challenges ahead, noting that gearing was likely to be higher than Ofwat’s expectation of 55% debt/RCV at between 60-65%. They also pressed management on how the expectation of 200 basis points of regulatory outperformance could be achieved over 2025-2030.
Management would not be drawn on the specific mix of financing, ODI or cost efficiencies. Management reminded analysts that the group was already earning a premium on the base allowed return of 5.1% for the “Outstanding” business plan of South West Water of 30 basis points and a 5 basis points premium for SES Water. Moreover, its recent debt issuance had been competitively priced relative to Ofwat’s cost of debt benchmark indices.
There was also concern that more fines might be forthcoming from various ongoing investigations. Would future fines be deducted from dividends as they were in 2024 when £2.4m was deducted from the cash dividend?
Management emphasised that this had been a ‘one-off’ at the time, when public opprobrium was high. Pennon, however, would be following closely the progress of the The Water (Special Measures) Bill going through Parliament at the moment which has as one of its aims the imposition of “automatic and severe” fines for wrongdoing.”
Pennon’s share price had increased by 7.8% intra day.
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