Last week, Pennon hosted a capital markets day, which sought to reassure investors about its longer-term prospects. Given that it was awarded Ofwat’s coveted enhanced status (only Affinity Water managed to do likewise) and that its dividend policy is a 4 per cent year-on-year increase over RPI until 2019/20, outsiders may wonder where reassurance was needed.
Unlike the other two quoted privatised water companies – Severn Trent and United Utilities – Pennon has built up a sizeable waste business, Viridor. Recently, Viridor has stumbled somewhat, to the detriment of Pennon’s share price. Over the past year, shares in Severn Trent have risen by c4 per cent whilst Pennon’s shares have fallen by c5 per cent.
In the lead presentation, Pennon’s new chairman, Sir John Parker, confirmed a more centralised board structure (see main article, left). In terms of the regulated water business, Pennon’s focus will be on delivering major cost savings over the five-year period until March 2020. This will be crucial if Pennon is to grow its underlying earnings at a sufficient rate to enable its aggressive dividend policy to be implemented.
More specifically, it confirmed last week that the integration of Bournemouth, whose regulatory asset value (RAV) is just 5 per cent of Pennon’s c£3 billion RAV, is proceeding well.
The Viridor business is more of a challenge. However, one underlying message in Pennon’s presentations was the belief that the near complete build-out of the energy recovery facilities (ERFs) has de-risked its operations. Eight of the 11 ERFs are now operational, with the two plants at Runcorn being key components. Importantly, too, Pennon has confirmed that 80 per cent of its projected ERF revenues are hedged.
Of the other waste-related activities, landfill gas sites are being cut back – from 17 to three by 2020 – while the recycling continues to face head winds.
Importantly, too, in its presentations, Pennon drew attention to its low borrowing cost – just 3.2 per cent on net debt, which has an average maturity of 23 years. This borrowing rate is the lowest in the sector. All Pennon needs now is for all these positive messages to get through to potential buyers of its shares.
Nigel Hawkins, director, Nigel Hawkins Associates