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Pennon investors weigh drought risk and sewage dumping scrutiny

Pennon Group is among water companies scrutinized for sewage spill amid concerns over deteriorating condition of UK waterways

The Pennon Group expects full-year performance to match management’s forecast after the utility giant was boosted by the potential completion of its acquisition of Bristol Water.

The acquisition of Bristol Water for £814m was finally completed in February, with the June 2021 deal stalled by a Competition and Markets Authority investigation, and the combined water business now operates under a single license, Pennon told investors on Tuesday.

But Pennon Group shares were unmoved by the trading update ahead of its June 1 results, with investors focusing on its handling of drought issues and scrutiny of its environmental practices over the past year. coming year.

Pennon Group is among water companies scrutinized for sewage spill amid concerns over deteriorating condition of UK waterways

Pennon Group is among water companies scrutinized for sewage spill amid concerns over deteriorating condition of UK waterways

A drought status in South West England declared last year by the Environmental Agency remains in place, following some of the driest and hottest weather on record for the region.

Pennon highlighted its “save every drop” customer engagement campaign as well as its investment “in a suite of innovative solutions” to secure the water supply.

It expects the first of its new desalination facilities to become operational later this year, “significantly increasing” water resource capacity, according to the group.

He added: “In addition, the Hawkstor Reservoir, purchased in March 2022, is fully operational and supporting Cornwall supplies.

“Our dedicated teams continue to work around the clock to ensure a clean, safe and reliable supply to customers, supporting the 24/7 refill of our strategic reservoirs in preparation for the summer period.”

The group’s handling of the regional drought is important for investors, as it was among the issues behind a surge in interest in short selling late last year.

While the magnitude of short positions has moved away from its peak, JPMorgan Asset Management (UK) maintains a position equivalent to 0.77% of its shares, according to regulatory data.

Aarin Chiekrie, equity analyst at Hargreaves Lansdown, said: “Pennon is proactive in launching water resilience campaigns and engaging with clients to save every drop.

“But when summer comes, we wonder if reservoir levels will be sufficient to keep customers supplied at full flow. If not, the group could find itself deprived of performance incentives or potentially even fined by regulators.

Another pressing concern is public and regulatory scrutiny of the group’s environmental credentials, particularly with respect to sewage discharge.

The dumping of untreated sewage occurs during periods of heavy rain, when capacity is exceeded and companies are forced to release pressure on treatment facilities to stop the overflow. Water companies are allowed to discharge sewage under certain conditions, but there are growing concerns that the limits are being illegally breached.

Pennon’s South West Water became the latest target of an Ofwat investigation into a possible sewage spill in June last year, weighing on its actions.

Last year, Severn Trent was one of the few companies in the sector not to be sanctioned by regulator Ofwat for polluting rivers, with 11 suppliers fined.

Three of Britain’s biggest water companies paid their bosses nearly £9million in the last financial year despite coming under fire for sewage pollution and executive bonuses.

The companies have also been criticized for what some see as excessive returns to shareholders at a time when investments in the water system are needed.

Water companies could face tougher rules on executive pay if they fail to reduce waterway pollution and improve customer service, Ofwat warned in December.

Thames Water recently announced plans to inject £1.6billion into upgrading its sewage treatment system over the next two years in a bid to reduce pollution in rivers.

Pennon told investors he was “implementing our ambitious environmental improvement plans”, but acknowledged “there is still a long way to go”.

He said: ‘We have improved our wastewater pollution performance by more than 50% in two years, including a 75% reduction in severe pollution in 2022 from 8 to 2, alongside our improved facility compliance 99.4% wastewater treatment.

“Since the launch of our WaterFit program in April 2022, we have made significant progress in our commitments to protect and improve the quality of coastal and river waters, with 100% bathing water quality achieved for the second consecutive year, such as measured by the Environment Agency.

“We accelerated the installation of monitors on our network by approximately 1,600 storm overflows and now have 100% coverage.”

He added that the group is making progress towards its 2025 goal to achieve a reduction in storm overflow releases.

This month, Pennon will launch the first phase of its “WaterFit Live – Your Opinion, Your Beach, Our Investment” initiative, a digital resource aimed at providing customers with detailed updates on storm surges and bathing waters. .

Edison Group Director Neil Shah said: “Pennon Group has high hopes for the year ahead, saying the acceleration to reach 50% self-generation by 2030 as part of its Net Zero commitment 2030.

“Expansion plans appear to be successful as the company brings in initial funding through group capital, allocating £160 million offering the potential for attractive commercial returns with achievable short-term development timelines.

“Pennon’s focus on delivering results will help him maintain his positive momentum for the year ahead, while being able to navigate the market around him.”

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