Annual Report and Accounts

2023

Bringing

Water to Life

Supporting the lives of people and the

places they love for generations to come

Contents

Strategic Report

Year at a glance 1

Chair’s letter 2

Chief Executive Officer’s review 4

Our business model 8

Our strategic framework 10

Ambitions to 2050 12

Market overview 14

Key Performance Indicators 17

Operational review 22

How we do business 27

Group Chief Financial Officer’s report 44

Risk management and principal risks 52

Viability statement 63

Our integrated approach to ESG 65

Sustainability reporting 67

Streamlined Energy and Carbon Report (SECR)

SASB Pennon 2022/23 Disclosure

Taskforce on Nature-related Financial Disclosures

(TNFD)

Task Force on Climate-related Financial Disclosures

(TCFD)

Non-financial and sustainability information statement 96

Governance

Governance at a glance 98

Chair’s introduction to governance 100

The Board 102

The Executive Team 105

Board Leadership and Company Purpose 107

Stakeholder engagement 110

Section 172 statement 112

Division of responsibilities 114

Composition, succession and evaluation 116

Audit, risk and internal control 118

Audit Committee report 120

ESG Committee report 126

Nomination Committee report 128

Health and Safety Committee report 132

Remuneration Committee report 134

Directors’ remuneration report 136

Directors’ Report 158

Financial Statements

Independent auditor’s report 162

Financial statements 170

Notes to the financial statements 176

Other Information

Alternative performance measures 220

Five-year financial summary 224

Glossary 225

Shareholder information 226

Visit us online

Our annual report and the other reports in our corporate

reportingsuite can be found on our website www.pennon-group.

co.uk/investor-information/financial-reports-and-presentations

Our reporting suite

Clear and transparent reporting is important to us and our

stakeholders. Our annual report is supported by additional

disclosures contained in our wider corporate reporting suite.

These include:

Net Zero plan

Modern slavery statement

ESG Databook 2023

Gender and Ethnicity Pay Gap Report 2023

Fernworthy Reservoir,

Dartmoor National Park

Our front cover picture of Fernworthy Reservoir was

taken by Georgia Hawking, a people admin team leader at

Pennon Group.

Year at a glance

Making progress on our key priorities

Augmented

supply and

storage

schemes

New

resources

repurposing

of quarries

Driving

demand-side

initiatives

Sustainable

living

Championing

renewables

Reversing

carbon

emissions

Carbon footprint

reduced

by c.40%

since 2021

80%

of catchments

improved

Net zero

environmental

gains

Improving the

environment

100%

bathing water

quality – second

consecutive year

c.30%

reduction

in storm overflow use

c.50%

reduction

in wastewater

pollutions in 2 years

c.£358

million

capex in 2022/23

c.50%

increase

in 2022/23

Investing over

£750million

over the next two

years

Record

capital

investment

Addressing

customer

affordability

Below

inflation

bill increases

for 2023/24

Second

issuance

c.£85

million

customer support

to date

Financially

resilient

Double digit

RORE

60.8%

gearing

year on year

reduction

Pension

scheme in

surplus

11.1%

4.6%

Water quality

and resilience

Pennon Group plc | Annual Report and Accounts 2023 1

Strategic Report Governance Financial Statements Other information

Chair’s letter

Thank you to our employees

I would like to start by recognising everyone who works for Pennon.

They deserve credit for what we have achieved this year. With over

3,000 people, and nearly the same number of supply chain partners, it’s

their dedication, care and consideration for customers and each other,

as well as their passion for the places they live and work in, that has

enabled us to deliver another year of robust results. It has not always

been easy for them with the media headlines shining a spotlight on what

we can and need to do better. On behalf of the Board, I thank you all, and

we are proud of what you do.

Challenging times for the UK Water sector

We have made steady progress in delivering our strategy, and our

operational commitments across all parts of the Group, with strong

leadership from our Executive Team. However, there is more we need

to do, more rapidly, to modernise our Victorian sewage system, and to

protect the environment.

The Board are focused on planning, prioritising and investing in the

changes needed. We are listening to our customers, stakeholders and

regulators. We all share the same view; this is a multi-generational

challenge, and one that will take time to achieve sustainably. We can and

must make progress in the short-term too.

Our focus has been on reducing the use of storm overflows and we have

seen a 30% fall in numbers. Continuing on this trajectory will achieve our

planned 50% reduction by 2025. We also continue to reduce pollution

levels with sustained improvements of 50% over each of the past 2 years.

This is integral to improving our EPA performance. This remains a key

area of focus for the Board.

The effects of climate change have also been felt severely in the South

West, given our topography and 860 miles of coastline and adjacency

to the Atlantic Ocean. We have experienced extreme weather patterns,

from storms to freezing temperatures and sustained periods of drought.

It is clear we all need to do more to safeguard the planet for future

generations and we are making progress with our Net Zero ambitions

to 2030.

The drought has brought into clear focus how important it is that we are

able to supply world-class drinking water to all our customers. We are

therefore investing in additional water resource capacity for Cornwall

and Devon. We are also on track to deliver new water treatment works

for Bournemouth customers.

Finally, it has been pleasing to see continued progress and growth

in our non-household retail businesses Pennon Water Services and

water2business, with strong customer service.

Many are struggling financially in these challenging

economic times.

The cost of living crisis has continued to weigh heavy on many.

Our region, given its dependency on agriculture and tourism, can

experience socio-economic challenges. Our Board commitment to

eradicate water poverty has remained a priority. We have kept bill

increases below the rate of inflation, lower than the average sector bill

rises seen elsewhere and in other utilities. We have focused on those

most in need with over 110,000 customers benefiting from our broad

range of affordability initiatives.

We also recognise that the same cost of living pressures are being felt

by our employees and it was right therefore that we have awarded our

highest ever pay award to those earning the least and those focused on

delivering for our customers and communities. We also continue to be a

living wage foundation employer for all.

“We continue to focus on leading a sustainable

business that delivers for customers, colleagues,

our shareholders and the UK.”

Gill Rider

Chair

2 Annual Report and Accounts 2023 | Pennon Group plc

c.110,000

customers benefited from our broad range of

affordability initiatives

Strengthening our Board, championing diversity

This coming year will be my last as Chair, and I am grateful to work

alongside a talented and diverse Board. This year we have focused on

Board succession, and I am pleased to welcome Dorothy Burwell and

Loraine Woodhouse as new independent Non-Executive Directors.

Loraine will succeed Neil Cooper as Audit Chair when he steps down this

summer, having served on the Board since 2014 alongside me. I would

like to thank Neil for his wise counsel and careful stewardship over many

years and in his role as Senior Independent Director.

For the first time in Pennon’s history, more women now serve on the

Board than men, and Susan and I continue to be strong advocates for

championing inclusion and diversity. I am encouraged by the good

progress being made across the Group, in building a more inclusive

culture, and particularly in our graduate and apprenticeship programmes

as we build the workforce we need for the future. We are making

our largest ever investment in skills and people, with a doubling of

apprenticeships and graduates to 1,000 and we will also offer 5,000 work

placements over the same period. We do this, because it is important

we have people with the right skills to deliver for our customers and

the environment, and also in doing what’s right in a region where one in

three constituencies score above the national average for deprivation.

The Group continues to deliver on its commitments to

our wider stakeholders.

We continue to grow a sustainable business that delivers for customers,

colleagues, our shareholders and the UK. Our loyal shareholders include

UK pension funds, savings funds, charities, employees and customers.

Pennon’s dividend policy of CPIH + 2% reflects the Board’s continuing

confidence in the longer-term sustainable growth strategy, and in

recognition of the ongoing investment required to deliver for the future.

The Board is recommending a final dividend of 29.77 pence per share

for the year ended 31 March 2023. Together with the interim dividend of

12.96 pence per share paid on 5 April 2023, this gives a total dividend for

the year of 42.73 pence.

In summary

Pennon is ready to lead through to the next phase of the water sector’s

evolution. Coupled with our ongoing investments in people, assets and

continuing strong financial and operational discipline, we are confident

we will continue to grow and deliver for all our stakeholders.

Gill Rider

Chair

31 May 2023

Knapp Mill Water Treatment

Works, Bournemouth

You can read more on how we are engaging with our stakeholders in our

Section 172(1) statement on page 112.

Pennon Group plc | Annual Report and Accounts 2023 3

Strategic Report Governance Financial Statements Other information

Bournemouth

Knapp Mill

Alderney

Bournemouth

Water

Bristol

Water

South West

Water

Exeter

Falmouth

Stithians

Newham

Radford

Ernesettle

Camels Head

Marsh Mills

Lowermoor

Allers

Pynes

Mayflower

Littlehempston

Restormel

Northcombe

Brokenbury

Dawlish

Buckland

Countess Wear

Maer Lane

Tiverton

Ashford

Cornborough

Par

Menagwins

Hayle

Newquay

Cambourne

Isles of Scilly

Plymouth

Cheddar

Banwell

Stowey

Barrow

Littleton

Purton

Chief Executive Officer’s review

Reflections on the Year

As I reflect back on the year, this has been an extraordinary one, in

which extreme weather patterns have tested our operational resilience.

At the same time, inflationary pressures have tested our financial

resilience. We have been able to respond to both with agility and pace,

pivoting to focus on the things that matter right now, and tackling the

biggest challenges head on. Whether it’s the use of storm overflows,

water resilience, the cost of living crisis or climate change, we are

investing more than ever before. We couldn’t do any of this without

the support, dedication and pioneering spirit of our c.3,000 employees,

who see opportunities where others see challenges, and I am so

proud of ‘TeamPennon’. We continue to invest in our leaders of the

future, doubling our apprenticeship and graduate schemes to 1,000 by

2030. This year, we were awarded Gold membership of the 5% club, in

recognition of our efforts to provide “earning and learning opportunities”

to our employees. And we have also strengthened our executive

capability across the year, with new appointments, and as we have

successfully integrated Bristol Water into the Group.

We have been well placed to respond

Our business model ensures we have the headroom and capacity to be

fleet of foot, tackling challenges head-on and taking opportunities when

they arise. Overall, we are investing more than ever before, re-baselining

our capital investment to over £350 million in the year to become the

new normal, and with plans to spend at least the same again, each

year, for the remaining period to 2025 and as part of our £1.5 billion

environmental investment programme over K7.

Susan Davy

Chief Executive Officer

“In an extraordinary year, we have tackled the

challenges head on, responding with agility and

pace, as we have pivoted to focus on the things

that matter most.”

Major Wastewater Treatment Works

Designated bathing waters

Major Water Treatment Works

4 Annual Report and Accounts 2023 | Pennon Group plc

Tackling challenges head on

Looking beyond the headlines, there has been progress. We are building

momentum and making record levels of investment. One year ago, we

launched WaterFit, our plan for healthy rivers and seas as part of c.£100

million of investment to 2025 focused on the protection of our 860 miles

of coastline and rivers in the South West. This includes an additional

c.£45m reinvestment of out-performance.

This includes the things our customers care about most such as bathing

water quality, where for the second year running, we have achieved

100% as measured by the Environmental Agency, and in their testing of

harmful bacteria in our seas. This compares to 70% across the rest of

the sector.

For 2022, overflow spills reduced by 30% and we remain on target to

reduce spills by 50% by 2025. Whilst undoubtedly the drier weather

will have played a part, the majority of the improvements are down to

interventions made whether capital investment to increase network

capacity or through proactive maintenance.

With 100% monitoring of storm overflows now in place, a year ahead of

plan, we launched WaterFit Live, giving customers and visitors near time

information about their favourite bathing beach, and storm overflows,

as well as the detailed investments we are making to reduce overflow

spills across the region’s coastline by 2025, with 49 beaches prioritised.

Through #Your beach, Your Say, Our investment, we will empower our

customers and communities to work together to plan our next phase

of improvements.

We continue to drive down pollution levels, as we committed to, with

a 50% overall reduction since 2020, a 75% reduction in the number

of serious incidents and maintaining our record of zero category 1

incidents. Continuing this trajectory to 2024 will see us achieve the

lowest number of absolute pollution numbers. Our focus continues in

rising main replacements, installing 9,000 sewer depth monitors and

continuing our investment in technology and innovation. We anticipate

that this performance will see us regain our EPA rating of 2 star for 2022

and we remain focused on achieving 4 star for 2024.

Against our pledge to reduce our impact on rivers by one third by 2025,

we are well on our way to mitigate impacts from our own assets and

practices. Through sewer separation and four phosphorous schemes

completed during the year our impact has reduced from 19% to 12.6%.

In addition, our pilots on the rivers Dart and Tavy to explore how

we might achieve the region’s first bathing quality river, are well

underway. Given this is a community-led designation process, we

have been bringing together stakeholders and community groups

to work collaboratively.

This was also a year where in addition to drought, we saw some of the

worst storms, with freezing temperatures, rapid thawing and flooding.

It’s clear that the impact of climate change is here now, and we all need

to play our part in protecting precious resources. Delivering on our Net

Zero 2030 commitment is more important than ever, and we are making

good progress in all 3 areas of our promise to the planet – sustainable

living, championing deliverables and reducing carbon emissions. We are

investing c.£160m in renewable energy generation, having made the

first acquisition of a PV solar site, with more planned to counteract the

ongoing volatility of the energy markets. We have improved 80% of the

catchments we work in, through activities such as peatland restoration

and tree planting. We have also reduced our carbon emissions by c.40%

since 2021.

The weather impacts, and need to pivot, ensuring we have focused

on the areas that have mattered most, has impacted our stretching

business plan delivery, with SWW at 70%, and Bristol Water at 65%

of ODIs.

Water resilience and water quality

Water is essential for life. The supply of clean and safe drinking

water remains our top priority and it’s easy for this to have become

overshadowed in people’s minds given the attention on storm overflows.

We can never be complacent and it’s the reason we take a “quality first”

approach to ensuring we can always provide clean and safe drinking

water to our customers. We operate across a unique topography where

over 90% of water resources are derived from rivers and reservoirs.

None of our strategic reservoirs are directly connected to treatment

works, and therefore the efficacy is directly driven by the health of the

rivers. This means it’s the low river flows that will drive the depletion of a

reservoir, which act as a storage facility in drier months.

The last six months of 2022 were exceptional. We experienced the

hottest, driest, weather on record and a consequence of climate change.

A combination of a lack of rain, the fourth driest period in 130 years,

extreme heat, with high levels of soil moisture, and increased demand as

a result of population growth, uniquely converged to put pressure on one

of our five strategic reservoirs. Colliford reservoir, serving Cornwall, was

depleted as we sought to continue to protect the river health in

the region.

£100m

investment planned

to 2025 to protect

ourcoastline and rivers

Living by our values

It’s also a year in which the UK Water sector has been rightly challenged

to clean up its act. The use of storm overflows has become the

unacceptable face of a Victorian sewage system, once revered across

the globe. Like all water companies in the UK, we’ve relied on storm

overflows to prevent sewage filling our streets and flooding our houses.

The release from storm overflows can result in diluted raw sewage

going into our rivers and seas and it is not acceptable, it puts at risk the

bathing water quality standards, it is wrong and it must stop.

The Board and I are clear that we can and we need to do more to protect

our environment.

As CEO, it’s my role to set the tone from the top, to lead by example

and champion living our values. It’s also right that we reset to build trust

in the sector, and for our customers and communities to feel listened

to. For this reason, with the full support of the Board, and given the

cost-of-living crisis weighing heavy on many customers, I will not be

taking either my annual bonus or long-term incentive award for this year.

Instead, the funds will go where it’s needed most, to our customers, as

part of our unique WaterShare+ scheme.

Pennon Group plc | Annual Report and Accounts 2023 5

Strategic Report Governance Financial Statements Other information

Financial Resilience

Driving out-performance give us the flexibility to deliver more within a

regulatory delivery period. Our RORE performance for 22/23 continues

to be strong with South West Water achieving 11.1% and Bristol Water

4.6%. This supports our cumulative Group RORE position of 8.7%,

equating to £192 million and an increase on £149 million in 2021/22. This

out-performance, combined with the strength of our balance sheet, is

supporting c.£300 million of additional and accelerated initiatives. We

have also been able to absorb the impact of elevated inflation on power

and interest costs during the year, reducing our gearing to 60.8% as well

as ensuring our pension scheme remains in surplus.

We are a stronger business as One Pennon.

In February we successfully concluded the licence and statutory

transfer of Bristol Water, successfully TUPEing employees into South

West Water. As part of One Pennon, it is now easier to share best

practise, for example our approach to Quality First, in ensuring clean

and safe drinking water is at the top of our priorities. In April, Ofwat

also announced their draft Accelerated Programme, which includes an

additional £125 million investment to 2030 and just under half will be

delivered in the current regulatory period. This builds on our existing

investments in the region including Green Recovery, WaterFit and

Stop the Drop initiative.

At the same time, we are making complementary investments in

renewal energy generation and storage. Our £160 million investment

will significantly accelerate the Group’s 2030 Net Zero target for 50%

self-generation as well as reducing our reliance on the volatility of global

power markets.

Furthermore, our sustainable and profitable B2B businesses,

Pennon Water Services and Water2business, with a combined market

share of 12% continue to win contracts and are driving strong

financial performance.

The Group continues to deliver on its commitments to

our wider stakeholders.

Our purpose, Bringing Water to Life, supporting the lives of people and

the places they love for generations to come, is at the heart of what

we do and why we do it. We continue to focus on being a sustainable

business that can deliver for colleagues, customers, our shareholders

and the UK as a whole, with sustainable financing and accreditation

with the Fair Tax Mark. Our supportive shareholders include UK pension

funds, savings funds, charities, employees and uniquely for Pennon,

our customers. Across the UK, the number of private individuals with

shareholdings has been declining for some years. Last year it was

reported that c15% of the UK stock market was held by individual

shareholders. In the 1960s, that number was c.50%.

130,000 free water

saving devices issued

as part of our ‘Stop the

Drop’ campaign

Chief Executive Officer’s review continued

The pace and speed in which we have been able to deploy innovative

solutions, using tried and tested models elsewhere in our region, and

with shareholder support was key. In the space of less than a year, we

have built 25% more expanded capacity for Cornwall and 12% for Devon,

and with a £125 million investment to ensure future resilience. Using

our learnings from the Isles of Scilly’s successful use of desalination,

this is now an important component of our future water resource

strategy, and we are well into progressing plans. Our proactive and

speculative acquisition of disused mining quarries over the past 15

years, re-purposing them as water resources, meant we could provide

additional storage in the second half of the year, and we continue to do

so, alongside building new pipelines. We have increased our leakage

activities, as well as fixing customer side leaks for free, and have

routinely fixed three times the planned levels averaging around

2,000 a month.

On the demand side, the success of South West Water’s unique and

innovative Stop the Drop campaign, where the campaign gained traction

as the collective might of the people came together to see a sustained

reduction in customer demand (c.5%) over the period, has been a

useful learning. We continue to engage with our customers to influence

behavioural change, through our now ongoing customer campaign

Save Every Drop, and in issuing over 130,000 free water saving devices

from water butts to shower heads. At the same time, we are focused on

reducing our own usage on our sites.

Against a worse credible planning scenario, we are better positioned

because of the actions we have already taken, and what we plan to do.

Furthermore, our acquisition of Bristol Water, driven by synergies and

strategic water resource benefits, and our commitment to progress the

Cheddar 2 reservoir, will bring benefits to the Greater South West over

the longer-term including the neighbouring Wessex region.

Susan at the ‘Topping Out’ ceremony for the Centre for Resilience in

Environment, Water and Wastewater (CREWW), Exeter University

6 Annual Report and Accounts 2023 | Pennon Group plc

We believe there is a place for both, as do our customers. As a direct

result of our innovative WaterShare+ scheme, giving customers a stake

and a say in their water company, we now have four times as many

customer shareholders as we do institutional shareholders. With our

second issuance, 1 in 14 households in the South West Water region

opted to take shares as opposed to money off their bill, and we were able

to include Bristol Water customers for the first time. With this ownership

model, it means that we spend more time directly engaging with our

customers, at quarterly public meetings and at our customer AGM, so

we can hear directly what matters most. And, in this cost-of-living crisis,

we believe every customer should benefit from what we do. We have

therefore ensured annual bill levels increases have remained well below

inflation levels and the c.7% average annual increases seen across the

sector, as we double the number of customers on support tariffs, and in

eradicating water poverty.

We also believe in investing for the future for the good of the sector.

Our 25-year partnership with the University of Exeter, CREWW – the

Centre for Resilience in Environment, Water and Wastewater, is working

to resolve some of the most pressing global challenges in the sector, not

just in the UK but globally. Bringing together some of the best minds

in Geography, Biosciences, Engineering, Economics and Psychology,

we are looking to find answers ranging from how we can ensure there

is enough water to cope with population growth and climate change,

to how we prevent pollution and eliminate micro-plastics in our water

supply. Our hope is that CREWW will become a beacon of change for

the sector, in the UK and globally, whilst at the same time driving benefit

and investment back into the South West as projects incubators for idea

generation and commercial opportunities.

Looking ahead

In summary, our full year results reflect resilient performance, in a

challenging year and in which we have pivoted to focus on what matters

most today, and in building our capabilities for the future.

As we look forward to our next price review, which we submit in October

2023, the Board is very focused on ensuring we can continue to develop

innovative and sustainable solutions for the issues the sector faces and

in delivering more for our customers, communities and the environment.

We are currently undertaking our most comprehensive customer

engagement programme ever, as this is the key to unlocking both

ambitious and credible plans, supported by our WaterShare+

Advisory Panel.

We want to ensure we continue to deliver world class drinking water,

boosting water resources and resilience across the greater South

West for the longer term. We also plan to reflect the unique needs of

our region, and in particular our 860 miles of coastline, building on

our expertise in biodiversity, catchment management and Net Zero

capabilities. And, with a focus on ensuring our plans are affordable,

we will explore a suite of charging options and tariffs, reflecting our

customer demographics, as well as continuing to evolve our affordability

toolkit, protecting the most vulnerable and eradicating water poverty.

Susan addressing the annual

Pennon Homesafe Conference

in Bristol

As One Pennon, with a strong balance sheet, financial and operational

resilience, we are well placed to deliver a sustainable future for all.

Susan Davy

Chief Executive Officer

31 May 2023

Pennon Group plc | Annual Report and Accounts 2023 7

Strategic Report Governance Financial Statements Other information

Our business model

Delivering services through all stages of the natural water cycle

Bringing water to life –

supporting the lives

of people and the places

they love for generations

to come

Water resources

Ensuring an available and sufficient supply of raw water is critical

to ensuring a continuous supply to customers. Our operations

play a vital part in maintaining the level of river flows and their

ecological health – from the level of water we release from

our reservoirs into rivers, to the level we abstract and take to

our treatment plants. Protecting the region’s precious natural

resources is at the heart of what we do.

SWW BW BRL

SWW

South West Water

Bournemouth Water

BRL

Bristol Water

B2B Retailers

Wastewater

treatment and

recycling

We treat wastewater to a

high standard at our 653

wastewater treatment

works before returning

treated wastewater to

the environment, safely.

Bioresources created

during the treatment

process are a valuable

source of both nutrients and

energy and contributes to a

circular economy.

SWW

Wastewater

collection

We maintain and operate c.23,000km of sewers in

the South West region,removing waste from the

homes and properties of our customers.

Through our programme of proactive interventions,

informed by extensive data and AI, we keep our

network in the best possible condition, identifying

and repairing issues alongside an extensive

sewer cleaning programme

SWW

Services to homes, businesses

and our wider communities

We manage an extensive network to deliver uninterrupted

supplies to our customers whilst keeping customers’ bills

affordable. Our household and business retail contact centres

are focused on providing excellent end-to-end customer

experiences. From providing water and sanitation, through to

environmental protection, recreational facilities, education, local

jobs and investment for future generations. The services we

provide are essential for the health and economic wellbeing of our

localcommunities.

SWW BW BRL WR

Water treatment

and distribution

We take water from our

reservoirs, river and

groundwater sources and

transport it to our treatment

works, where it is treated to a

high standard using a number

of processes. Once the water

is clean, safe and reliable we

transport this to customers’

homes and businesses through

our c.25,000km ofwater pipes.

SWW BW BRL

Our business model is shaped by our purpose - Bringing Water to Life, supporting the lives of people

and the places they love for generations to come. This means we are not only seeking to create value

for our stakeholders today but reinvesting in our business in a carefully planned andsustainable way

for the future.

8 Annual Report and Accounts 2023 | Pennon Group plc

Our key strengths and resources

Benefits and value we create for:

Environmental –

Natural Capital

High-quality assets

• Investing in world-class

facilities and plants, using

innovation and technology

to help safeguard our

natural resources.

Environmental stewardship

• Constantly seeking more

sustainable ways of working

to protect, enhance and

reduce our impact on the

natural environment.

Social –

Social and Human Capital

Strong reputation and

customer service record

• High levels of employee

engagement and accreditation

as best place to work.

A stake and a say

• Our unique WaterShare+

framework offers customers

a greater stake and a say

through Pennon share

ownership or bill reductions,

alongside a dedicated

customer AGM.

Governance –

Manufactured, Intellectual and FinancialCapital

Effective governance

• A strong governance framework, supporting robust

decision-making and performance management.

• Comprehensive risk management processes.

• Fair tax mark accreditation.

Efficient financing

• Sustainable financing framework.

• Low effective interest costs.

Strong acquisition expertise

• Track record of success in acquisition integration.

Strong relationships with our suppliers

• Always ensuring their performance meets our

expectations, upholds our standards, aligns with our

policies, protects human rights and promotes good

working conditions.

CustomersEnvironment

220,000

trees planted to date, on

track to plant 250,000

by 2025

100%

with an affordable bill

by 2025

>50%

forecast growth to 2025 in our water

businesses’ regulatory capital value (RCV)

Suppliers

Regulators

c.2,900

suppliers in our Group supply chain

Regular and proactive contact and engagement

with Regulators

c.3,000

Largest private sector

employer in the region

Talented people

>4,000

pupils helped by our

educational programmes

Communities

Find out more about how we engage with our stakeholders on page 27.

2030

Net Zero commitment

Investors

Underpinned by our purpose, twin-track growth strategy, continuous innovation and environmental commitments

Role of the Group

The Group provides strong pillars of strategic direction, financial management, risk management and governance.

Combined with the Group’s robust fundamentals this creates resilience in a challenging economic environment

and drives long-term sustainable growth.

Pennon Group plc | Annual Report and Accounts 2023 9

Strategic Report Governance Financial Statements Other information

Our strategic framework

Leadership in UK water

The Group has continued to deliver resilient services through extreme

climate variability and high demand. Alongside this, we have delivered

some of our best environmental performance to date, including our best

ever wastewater treatment works compliance, a reduction in wastewater

pollutions, and outstanding bathing water quality across the region.

Currently, over c.110,000 customers benefit from our broad range of

affordability initiatives, and we continue to work hard to deliver quality

services at an efficient cost, so that bills remain affordable. In 2022/23,

customer bills in the South West Water region were lower than they were

10 years ago, and £10 lower than in 2021/22 and, recognising the cost-of-

living pressures customers are facing, bills across the Group for 2023/24

will see below-inflationary increases.

Driving outperformance across the Group gives us the ability to deliver

more within a regulatory delivery period. As a Group, we are strategically

positioned to outperform in the current macro-economic environment.

Our flexible financing strategy and diverse debt portfolio, with a relatively

lower level of index-linked debt compared to the industry average allows

us to outperform, and is reflected in our strong return on regulated equity,

with outperformance enabling reinvestment in additional initiatives.

Progress against our strategy

100%

bathing water quality across the region for the second

consecutive year

c.10.5% in 2022/23

Continued doubling of base returns on

regulated equity across the Group

c.£85m

of customer support delivered to date

Pioneering Solutions

We continue to pursue a relentless approach to improving operational

performance through innovative solutions that drive the best outcomes

for all stakeholders. Our pilot, test and deploy approach to innovation

helps us to mitigate risk for customers, communities and the environment.

Our new WaterFit Live tool, launched in early 2023, demonstrates our

commitment to increased transparency, empowering customers and

stakeholders to hold us to account on our performance and allow them

to make informed decisions on water-based recreation. It features a new

interactive map that provides customers and visitors to the region with

more information on the performance and location of storm overflows

at all designated bathing waters, as well as the investments South West

Water is making now, and in the future, to reduce overflow spills across the

region’s coastline by 2025.

As a purpose-led business, we think differently about the relationship

we have with our customers through our innovative and pioneering

WaterShare+ scheme developed to give our customers a greater stake

and a say in our business. We are delighted that since 2021 almost 90,000

customers have opted to become shareholders through WaterShare+.

Progress against our strategy

£40m

returned to customers in K7 through our unique

customer sharing mechanism WaterShare+

Centre for Resilience in Environment Water

andWastewater – our joint venture with the University

of Exeter

Developing innovative solutions to water resources

including desalination and re-purposing quarries

Growth in Environmental Infrastructure

Through the successful delivery of our twin-track strategy – driving both

organic and acquisitive growth underpinned by our disciplined capital

allocation, we will continue to create long-term sustainable value.

Our logical and accretive water acquisitions have delivered significant

value for our stakeholders along with meaningful benefits for customers

and shareholders.

Our value-enhancing investment in renewable energy generation and

storage will provide attractive, sustainable returns into the long term, and

fast-track the achievement of our Net Zero 2030 commitments.

We are well underway in delivering on our largest environmental

investment programme which also reflects the delivery of additional and

accelerated investments including Green Recovery, WaterFit, our Save

Every Drop water resilience investment and Ofwat’s recently announced

Accelerated Infrastructure Delivery.

Progress against our strategy

>50%

RCV growth over K7, driven by our twin-track strategy

c.£1.5bn

our largest environmental investment programme,

including additional and accelerated initiatives

£160m capital allocation

in renewable energy generation – 1st c.40 GWh

site acquired

Our three-pillar strategy

We are continuing to drive progress on our three strategic

priorities through our strategic framework.

10 Annual Report and Accounts 2023 | Pennon Group plc

Investing in renewables –

energy generation

We have set aside £160m to

invest in renewable energy and

have identified a pipeline of

solar opportunities.

In May 2023 we acquired a c.40

GWh site in Dunfermline which

is ready to build with consents

in place, and is expected to

commence generation in 2024.

The site also has the capacity for

a two-hour 60 MW battery that

will support the UK Grid’s move

to renewables and provide a

healthy return.

WaterFit Live

In March 2023, we launched

WaterFit Live, an interactive

digital system which shares

with customers the status of

their local bathing waters and

whether there is any impact from

a storm overflow.

WaterFit Live is another milestone

in our progress to protect the

environment by reducing storm

overflows, enhanced monitoring,

providing clear and transparent

reporting for our customers and

increasing our investment to

improve performance.

Driving synergies - Bristol

Water acquisition

We are making strong progress

with our integration blueprint.

Bringing together the two water

businesses to improve customer

service, strengthen our teams and

share and implement learnings.

The licence change and statutory

transfer completed on 1 February

2023, bringing Bristol Water under

the South West Water licence.

Our proven integration blueprint

consists of three phases.

The first, focused on integrating

our back office teams, is

largely complete, and we are

well underway in developing

a combined plan for PR24 to

deliver the best outcomes for all

stakeholders. Phases two and

three will focus on Operations

and Customer Services.

Ensuring future water

resilience

As part of our continued

investment in water resilience, we

purchased Hawks Tor Reservoir

on Bodmin Moor in Cornwall

in March 2022. To tackle the

drought we have deployed a

twin track approach of demand

and supply side investments

augmenting storage scheme,

expanding the treated water

network and repurposing disused

quarries. The interventions deliver

an increase in supply when it is

needed most that equates to 25%

of Cornwall’s demand and 12%

of Devon’s demand. To target

water efficiency we are deploying

initiatives such as ‘Stop the Drop’

and ‘Save every Drop’ alongside

our broader water efficiency

campaigns aimed at helping

customer reduce demand.

Read more on the progress we are

making to become Net Zero on

pages 42 to 43.

Strategy in action…

Informed by our engagement with our wider stakeholder group and what they want

Customers Communities People Suppliers Policy makers Investors Regulators

Safe drinking

water, clean

rivers and seas,

continuous

supply and an

affordable price

Protect the

environment and a say

in our business

A values-led

employer,

fair wages

and personal

advancement

Fair contracts,

access to

data and

opportunities

forgrowth

Investment and

support in reaching

2050 targets

Achievement of

business plan

targets, long-

term sustainable

growth and a

fair return

Innovation

in support of

the delivery

of continually

improving targets

Reflected in our approach to sustainability and ESG commitments

65% c.£700k 31% 100% £1.5bn >50% c.70%

reduction in

Scope 2 market-

based GHG

emissions

in 2022/23

investment into

our communities

women in

leadership

roles

of our supply

chain engaged

with our code

of conduct

2020-25 environmental

investment programme

- our largest to date

202-25 growth

in regulated

capital value

of ODIs in 2022/23

on track or ahead

of target in SWW,

with c.65% at

Bristol Water

Pennon Group plc | Annual Report and Accounts 2023 11

Strategic Report Governance Financial Statements Other information

Ambitions to 2050

Our Strategic Direction to 2050 sets out our ambition for the water

system of the great South West, the leadership and action we will

take, the action needed from others, and the opportunities we must

collectively grasp if we are to ensure high-quality, reliable and resilient

water services for future generations. Our ambition is to protect

and enhance the environment at every stage of our operations and

provide a resilient service in the future. Achieving that ambition will

also require fundamental changes to the ways that we, our customers

and stakeholders all use and interact with our services and the aquatic

environment. The ways in which we are meeting these challenges

together are described in more detail at https://www.southwestwater.

co.uk/about-us/documents/business-plan-2020-2025/.

Bringing water to life –

supporting the lives

of people and the places

they love for generations

to come

Water resources

Resilient water resources through

healthy catchments

What we will do

• Meet all water needs for homes, businesses and

the environment

• Create greater capacity through a diverse

portfolio of water sources, strategic regional

resources and interconnectors

• Protect and boost river flows

• Reduce leakage in the network and at

customers homes

Services to nature and

the environment

Protect and enhance

natural resources

What we will do

• Increase biodiversity, through

further habitat creation

and improvement

• Decarbonise our operations and

net zero emissions

• Use our land and resources to

generate renewable energy

Wastewater collection

Controlled & treated

wastewater flows

What we will do

• Evolve our water recycling

and sewerage system to

meet the needs of our

communities and

the environment

• Enhance sustainable

drainage to reduce risk of

flooding and pollution

• Return treated water safely to

the environment

Services to homes, businesses

and our wider communities

Trusted customer &

community experience

What we will do

• Boost active participation of customers

and communities in the sector

• Make it easy for customers to reduce

their water consumption and manage

their water bills

• Promote progressive charging so that

every customer has a fair and affordable

water bill

Water treatment and distribution

Top-quality

water supplies

What we will do

• Ensure world-class drinking

water that meets stringent water

quality standards

• Progressively address

emerging risks

• Create resilient, smart networks

with real time tracking and

management of water pressure,

flow and quality

12 Annual Report and Accounts 2023 | Pennon Group plc

Clear near-term environmental targets and milestones

contributing to our long-term ambitions to 2050

125,000 hectares

of habitat and land

management improved

Single-digit spills, if any at

all coastal locations

2030 Net Zero target

for our operational

carbon emissions

2030 Net Zero plans

published by our regulated

water business

TCFD metrics and targets

including commitment to

self-generate up to 50% of

renewable energy by 2030

Net Zero strategy pages

42 to 43

TCFD disclosures page 74

WaterFit plan

Underpinned by our ongoing, long-term investment programme

2045 Race to Zero

commitment to reduce

greenhouse gas emissions

(GHG) across our entire

value chain

Net Zero strategy and

Race to Zero commentary

pages to 43

2023 2025 2030 2045 2050

50% leakage

reduction and 1/4

consumption reduction

Zero ecological harm

from wastewater spills

and discharges

375,000 hectares

of habitat and land

management improved

2050 ambitions working

in harmony with the

water cycle with near-

term targets 2020-2025,

medium-term targets

2025-2035 and long-term

targets 2035-2050

Our 2050 ambitions

targets page 12

2025 targets for ESG

priority measures

100% bathing water

quality standards met

all year round

ESG priorities

targets page 66

ODI targets page 25

WaterFit plan

2025 targets for selected

ODIs and operational

activities, including

commitment to eliminate

water poverty by 2025

Committed to setting

both near and long-term

Science Based Targets

(SBT) in accordance with

the Science Based Targets

Initiative’s Corporate Net

Zero Standard

Reinvesting £170m

of our current

RORE outperformance

Committed to further

enhancing our disclosures

consistent with the Task

Force on Climate-related

Financial Disclosures

TCFD disclosures

targets page 74

SBT commentary page 43

Our biodiversity strategy

page 41

Our WaterFit plan targets

significant investment

to 2025 to further

protect river and

coastal water quality

Pennon Group plc | Annual Report and Accounts 2023 13

Strategic Report Governance Financial Statements Other information

Market overview

Accelerating

climate change

Impact

We are already experiencing the impact of climate

change. These impacts are set to increase, with

temperatures anticipated to be at least 1.5-2°C

above pre-industrial levels by the end of this century.

This is not just a longer-term problem, but a very

real issue for us today as the 2022/23 drought in our

region has shown.

The South West of England is particularly vulnerable

to climate change, given its 860 miles of coastline,

and adjacency to the western approaches of the

Atlantic Ocean – this exposes the area to impacts

from rising sea levels and storm intensity and we

are already starting to observe significant and

unpredictable impacts on our operations.

Link to strategy

1, 2, 3

How we are responding to 2050

We will need to optimise investment in asset

health and resilience, through integrated long-term

planning that will deliver the right level of investment

to ensure that our assets and networks are able

to cope with more extreme weather and demand.

We will need to work collaboratively in the building

of new developments in our region, optimising

local water cycles through investing in re-use and

recycling of water, as well as natural assets.

We also need to think about how our infrastructure

is impacted by the services we rely on – such as

electricity to power our pumps and treatment

processes. We have developed a systems thinking

approach to consider the resilience of our operations

in the context of this wider system.

Rapidly evolving

customer

expectations

Impact

Putting the customer first has long been a focus

of the water sector, as we look to provide excellent

service and address issues first time. Customer

expectations are rapidly evolving in the

following areas:

• Our operations – Customers expect a

continuous, seamless service with us also being a

force for good in our communities.

• Transparency and ethicalness – we need to

be increasingly transparent about operations,

performance, and services.

• Personalised services – Customers are more

empowered than ever by digital technology, and

expect personalised products and services to

meet their needs.

Link to strategy

2, 3

• Smart technology – Smartphones and social

media are transforming how and how often we

engage with customers.

• Environment – Customers are increasingly

environmentally aware and expect us to be

custodians of our local environment.

How we are responding to 2050

We will boost active participation of customers

and communities in the sector and ensure every

customer can afford to pay their water bill.

We will make it easy for customers to reduce their

water consumption and manage their water bills.

We will decarbonise our operations and increase

biodiversity, using nature-based solutions

as a default.

Growing

population

and changing

demographic

Impact

The global and local population and demographic

is changing. Official forecasts suggest an additional

530,000 people will be living and working in our

region by 2050, adding to the c.3.5 million who

currently live in the regions we serve. As a coastal

region, our resident population swells during the

year as 10 million visitors come to enjoy the South

West. During the Covid-19 pandemic, we saw nearly

half of the anticipated 2050 growth in population

due across the region, concentrated in the tourism

areas of Devon and Cornwall due to the increase in

home working and an increase in staycations.

How we are responding to 2050

A growing population puts pressures on existing

water sources, as more people need access to

clean, safe water. Our twin approach is to reduce the

demand and leakage of water, whilst also building

new sources of water supply. Building on the three

Link to strategy

1, 2, 3

disused quarries that have been repurposed into

reservoirs for drinking water, we will build new

sources from desalination plants through to new

reservoirs. We will halve leakage by 2050 and help

customers to use less water – as we look to drive

consumption down by one quarter through water

saving initiatives. The roll out of smart meters will

help reduce consumption and address customer

side leakage – up to one third of all leakage.

A growing population adds to the loads that our

sewers and wastewater recycling centres need to

process, and we will invest to meet those demands.

As areas become more urbanised due to growth,

green spaces do naturally shrink. We have ambitious

plans to reverse this trend, and build more green

spaces which will allow surface waters to drain away

naturally rather than run into our sewerage systems.

And by moving small isolated communities from

septic tanks and soakaways to full treatment works,

we can protect rivers in the local environment.

Key – Strategic priorities

Growth in Environmental

Infrastructure

Pioneering Solutions

Leadership in UK Water

Pennon is one of three FTSE-listed companies supplying water and

wastewater services across England and Wales. Pennon’s group of

companies provides water and wastewater services to a population of c3.5

million across the South West of England. Pennon provides their services

in the context of key trends and challenges faced in the local market and

by the wider water industry. In 2023, Pennon has noted the following key

trends and challenges in the market.

14 Annual Report and Accounts 2023 | Pennon Group plc

Desire for

environmental

improvements

Impact

A healthy environment is important for our region,

and in the face of climate change, ecological decline

and greater recreational use of rivers and seas,

customers and stakeholders rightly tell us that

they expect environmental leadership from us

as a priority.

Our research tells us that customers have a more

positive attitude to companies that support social

and environmental issues.

Our customers recognise the value of investment

to deliver services which also provide social and

environmental benefit.

Link to strategy

2, 3

How we are responding to 2050

Our strategic direction recognises the importance

of re-connecting the water cycle, and water cycles

operate within catchment.

Catchments are the natural way to consider the

marine environment. Better coordinated action

at the catchment level by those who use water or

nearby land is a great enabler for change.

Engagement and collaboration are at the heart

of catchment-based approaches. Catchment

work requires joint delivery by all stakeholders

within a catchment, supported by regulators and

policymakers. This would ensure we address

all pressures placed on the water environment

including from water company activities, but also

diffuse pollution from both agricultural and

urban sources.

Changing supply

chain

Impact

We serve c.3.5 million people a day, through our

3,000 talented employees and nearly the same

number of supply chain partners across the South

West. Working together, we have reduced cost

and improved service to our customers, keeping

increases to customer bills below inflation whilst

delivering record levels of investment.

But across the country and in the South West –

supply chains are under pressure as they face the

twin challenge of:

• Ramping up to deliver boosted investment to

deliver improved interconnectivity, transport links,

environmental improvements and Net Zero.

Link to strategy

1, 2, 3

• Increasing costs of materials and

commodities, higher rates of inflation

and the recessionary environment.

How we are responding to 2050

We are focused on working with supply chains to

build resilience and work together for success:

• Improving end to end visibility of our future

investment plans.

Working collaboratively to build talent, especially

specialist skills:

• Adopting innovations, machine learning and AI.

• Building future readiness for potential shocks

and uncertainties.

Technology

advances

Impact

Big Data, digital technologies and open data are

being leveraged to increase reliability, optimise

assets, improve supply chains, and boost

customer relationships.

Some key technology trends which impact us are:

• The availability and accuracy of sensors that

collect and transmit data is improving.

• The ability to collect, store and analyse data

has expanded.

• Big Data, digital twins and computing algorithms

are being developed which translate unstructured

data sets into actionable intelligence.

These trends will only increase as there is more

integration of the Internet of Things, faster access

to the Internet, and advances in the computational

power of computers and mainstream devices.

For customers this means that we can predict

operational problems and fix them before they have

an impact, it allows us to be transparent, to be agile,

and therefore, build trust and legitimacy.

Link to strategy

2, 3

How we are responding to 2050

We will drive technology, leveraging data and the

supply chain. We will need to collect and analyse

more data to understand better and manage our

systems in real time. We will make more data publicly

available as a way of stimulating new ideas and

partnerships so we can provide better services for

customers and better protection of the environment.

We will continue to work with our colleagues

across the sector in shared research and learning

through organisations such as UKWIR (UK Water

Industry Research).

At the very heart of our approach is intelligent

asset management – we will invest further in our

telemetry, operational control systems, meters and

network sensors to provide greater automation, real

time system feedback and inform decision-making.

We will also replace our asset and work management

systems and data analytics capabilities to provide

actionable insight, both for us and our customers.

The Upstream Thinking Argal Reservoir project

delivered in partnership with the Cornwall

WildlifeTrust

Pennon Group plc | Annual Report and Accounts 2023 15

Strategic Report Governance Financial Statements Other information

Market overview continued

Impact

In just over 30 years, over £200bn of private

sector investment has enhanced water sector

infrastructure across the UK, benefiting consumers

now and for generations to come. But there is

more to do as infrastructure continues to form the

backbone of a successful modern economy. The

government has set out ambitious goals for the

economy and environment, putting infrastructure at

the heart of its plans. These goals include:

• Environment – a 25-year plan to improve the

environment by removing harmful abstractions,

improving discharges and reducing water lost

through leaks and used by customers.

• Net Zero – ambitious targets have been

set, backed by green jobs that can support

clean growth.

• Levelling Up – Investing to unlock growth,create

opportunities, and jobs, boosting education and

Link to strategy

1, 2, 3

Evolving

government

infrastructure

policy

living standards, in areas where these are set

apart from the rest of the nation.

• Sustainable housing – 250,000 homes need

to be built each year across the UK to avoid

spiralling prices and maintain affordable homes.

These homes need to be sustainable – reducing

water and energy use, boosting biodiversity, and

minimising waste.

How we are responding to 2050

Our future plans include large-scale infrastructure

projects to deliver environmental improvements,

including two new reservoirs for the region. We

are being clear on the scale of investment that is

needed as part of supporting steps to streamline

infrastructure decision-making whilst maintaining

transparency and objectivity.

Alongside, we are enhancing wastewater treatment

as part of government plans to unlock growth in

those areas where environmental issues are slowing

down development.

Impact

Employment market flexibility and diversity has

been steadily increasing, with more people than

ever working in self-employment, part-time jobs, and

under zero-hour contracts.

An important consequence of these changes is

ensuring the skills and talent for the future. As

sustainability and the environment becomes more

important, and as technological advancement and

artificial intelligence are increasingly common in

the workplace, new and niche skills become more

important. STEM based occupations, such as digital

literacy and ICT skills, are emerging areas of focus.

Good employers will take ownership for future

proofing skills and talent to reflect the new ways

of working.

Link to strategy

1, 3

Evolving

employment

market

How we are responding to 2050

We plan to harness energy and creativity by creating

great spaces to work and promote diversity to bring

together a mix of minds and representation of the

communities we serve. We recognise the need to

deliver on total wellbeing by being at the forefront

of mental health as well as a leader in health and

safety performance and offering the most flexible

family friendly benefits. We will continue to work with

schools, colleges, and universities in our region

to create Pennon-sponsored skills academies

to lead on the skills agenda in the region and

across the wider supply chain in building emerging

talent pipelines.

Upstream Thinking

Ockerton Peatland

Restoration Project

16 Annual Report and Accounts 2023 | Pennon Group plc

Key Performance Indicators

We measure our performance against our strategy through a range

of non-financial and financial metrics. Operating in the UK water

sector means we have a number of performance commitments,

Outcome Delivery Incentives (ODIs) to meet the requirements of

our regulators.

Non-financial metrics

Clean, safe and reliable water

Water quality (CRI score)

Compliance Risk Index (CRI) is

the Drinking Water Inspectorate’s

measure of water quality.

In 2022/23 we have continued

with our ‘Quality First’

transformation programme and

performance in South West

Water has improved. In Bristol

Water, our score has been

impacted by the drier summer

where demand increased over

the summer increasing the

output and pressure on our

network. Across the Group we

continue to invest in advanced

treatment including ceramic

membranes, granular activated

carbon and other innovations to

drive improvements.

The performance across the

Group was impacted by ground

movement over the summer

months as well as the extreme

periods of cold weather and rapid

thaw over the winter months. As

a result, the number of bursts

increased, with a number of

larger more complex events to

respond to, which increased the

duration of interruptions.

Supply interruptions

(Duration per property

per year)

2.06

3.02

4.19

4.60

3.86

2.39

South West Water

Bristol Water

2020

2021

2022

2020

2021

2022

00:30:17

00:02:31

00:13:40

00:05:38

00:08:42

00:08:03

South West Water

Bristol Water

20/21

21/22

22/23

20/21

21/22

22/23

Reducing leaks is a critical

component of ensuring a

sustainable water supply.

In 2022/23, we enhanced our

leakage reduction activities

over the summer months to

support high demand meeting

our regulatory targets despite

the colder winter. In Bristol Water,

leakage increased in the year

driven by an increase in bursts

this year.

We recognise that customers

expect their drinking water to

look and taste great and this

is important in maintaining

customers’ trust in the quality of

our supplies. Across the Group

improvements in our treatment

processes and managing our

network continue to improve

performance for customers.

Asset Health is essential for ensuring a robust supply of water to

our customers.

2022/23 performance was again impacted by the colder winter weather

with mains bursts increasing across the Group. In South West Water our

unplanned outages continued to outperform our targets for the year,

however an unplanned and complex event at our largest treatment

works in Bristol Water increased this measure during 2022/23.

Leakage (3-yr average –

Megalitres per day)

Taste, smell and

colour (contact per

1,000 population)

Mains repairs

(Number of repairs

per 1,000km)

Unplanned outages (%)

Read more on pages 22 to 26 for further detail on our operational performance.

1.65

1.39

1.21

1.42

1.55

1.51

South West Water

Bristol Water

2020

2021

2022

2020

2021

2022

126.8

116.7

113.0

36.0

37.0

37.9

South West Water

Bristol Water

20/21

21/22

22/23

20/21

21/22

22/23

1.01

1.74

6.27

0.2

0.96

0.70

South West Water

Bristol Water

20/21

21/22

22/23

20/21

21/22

22/23

111.4

154.2

106.4

170.8

141.1

151.8

South West Water

Bristol Water

20/21

21/22

22/23

20/21

21/22

22/23

Pennon Group plc | Annual Report and Accounts 2023 17

Strategic Report Governance Financial Statements Other information

Protecting the environment – robust wastewater delivery

We measure the compliance

of our discharges against our

permits. 2022 has seen our best

ever score which is expected

to be upper quartile across

the industry.

We are continuing our pioneering

catchment management

approach with over 111,000

hectares of land restored,

including 300 hectares of

peatland restoration ahead of

our target.

Environmental Performance Assessment

A combination of a basket of measures, the EPA is the Environment

Agency’s assessment of environmental performance. We have seen

improvements across all these measures resulting in a provisional 2 star

rating this year; with a planned strategy of achieving 4 star by 2024,

there is much to focus on.

Pollution incidents

(number of

wastewater incidents)

Our targeted Pollutions Incident

Reduction Plan is delivering

results with a 50% reduction

over the last two years – but we

know there is more to do and we

continue to target a further step

change in performance.

Biodiversity (Hectares)

Numeric Compliance (%)

225

151

108

●

Actual

2020 2021

2022

99.04%

97.46%

99.4%

●

Actual

2020 2021

2022

85,100

95,453

111,515

●

Actual

20/21 21/22

22/23

Internal sewer flooding

(Incidents per 10,000

sewer connections)

External sewer flooding

(Number of incidents)

1.34

0.76

0.63

●

Actual

20/21 21/22

22/23

20/21 21/22

22/23

1,499

1,407

1,816

●

Actual

Sewer flooding is a key area that significantly impacts on customers.

2022/23 has continued our positive performance with a further reduction

in internal incidents – continuing our best ever performance. External

flooding incidents have however increased with the drier weather over

the summer increasing the number of blockages and flooding during the

wetter winter months.

Sewer collapses

(Incidents per 1,000km)

Sewer blockages

(Number)

●

Actual

20/21 21/22

22/23

9.8

6.7

8.3

6,484

6,545

7,056

●

Actual

20/21 21/22

22/23

These measures reflect service impacts to our customers as well as

being a lead indicator of asset health. We have seen an increase in these

measures with the exceptionally dry weather over the summer months

increasing blockages – although both measures have met target.

Read more on pages 22 to 26 for further detail on our operational performance.

Key Performance Indicators continued

18 Annual Report and Accounts 2023 | Pennon Group plc

Customer Measure of Experience (C-MeX)

C-MeX is Ofwat’s measure for customer experience both for those

customers who contact us as well as the perceptions of all our

customers. Across the Group, our C-MeX rankings have remained

consistent year-on-year.

Delivering for our customers

Overall satisfaction

with PSR (%)

We have over c.112,000

customers on the Priority

Services Register (PSR) across

the Group and we measure

customer satisfaction with these

services each year. South West

Water at 91% and Bristol Water at

88% are both ahead of our target.

South West Water

Bristol Water

20/21

21/22

22/23

20/21

21/22

22/23

Developer Measure of Experience (D-MeX)

D-MeX is Ofwat’s measure of service experience for developers which

directly compares us with our peers.

We are targeting zero water

poverty by 2025 and our range of

affordability schemes are helping

around 110,000 customers. South

West Water and Bristol Water

have a measure which assesses

customer affordability which is

improving year-on-year.

South West Water has over 860

miles of coastline to protect,

representing over one third of

the UK’s bathing waters. In 2022,

100% of our bathing beaches

met the high standards set for

water quality for the second year

in a row.

Our new investment programme,

‘WaterFit’ is focused on

protecting rivers and seas. During

2022 the average number of

spills reduced by c.27% and we

continue to deliver our plans to

reduce to an average of 20 spills

by 2025.

Customer affordability

(%)

93.3

99.0

100.0

96.9

89.4

South West Water

Bristol Water

20/21

21/22

22/23

20/21

21/22

22/23

Bathing waters Average Spills

2020 2021 2022

100

99.3

97.4

100

●

Met standards (%)

●

Good/exellent (%)

2020 2021

2022

40.0

38.9

28.5

Pennon Group plc | Annual Report and Accounts 2023 19

Strategic Report Governance Financial Statements Other information

Alignment with strategy

Our KPIs are aligned to our three long-term strategic priorities.

Growth in Environmental Infrastructure

Pioneering Solutions

Leadership in UK Water

New regulatory period

2018/19 2019/20 2020/21 2021/22 2022/23

11.6

12.1

7.8

8.2

6.3

8.0

5.2

●

South West Water

●

Bristol Water

2018/19 2019/20 2020/21

2021/22

2022/23

9.4

9.3

9.1

8.6

4.5

Annual

Operational

Profit before tax (£m)

Why is this KPI important to us?

Profit before tax is a key measure of the Group’s financial

performance after deducting all operating and finance costs.

Underlying Profit before tax is measured to exclude any distorting

non-underlying items as explained in our Alternative Performance

Measures on pages 220 to 223.

Our performance in 2023

Commentary on performance

is set out in the Group Chief

Financial Officer’s report on

pages 44 to 51.

Link to remuneration,

bonus/LTIP

Annual bonus

performance measure.

Return on capital employed (ROCE) (%)

Why is this KPI important to us?

ROCE provides a measure of the return being generated by the

Group compared to the total equity and debt capital deployed to

generate that return.

Our performance in 2023

Commentary on performance

is set out in the Group Chief

Financial Officer’s report on

pages 44 to 51.

Link to remuneration,

bonus/LTIP

LTIP performance measure.

Return on regulated equity (RORE)^

(%)

(WaterShare)

Why is this KPI important to us?

Return on regulated equity (RORE) expresses the return the water

businesses have managed to earn above and beyond expectations

set by the regulator through financial and operational performance

as explained in our Alternative Performance Measures on pages

220 to 223.

Our performance in 2023

This reflects a doubling of

base returns. Commentary

on performance is set out in

the operational performance

review on pages 22 to 26.

Link to remuneration,

bonus/LTIP

LTIP performance measure.

Key Performance Indicators continued

Financial Metrics

^ Measures with this symbol are defined in the Alternative Performance Measures (APMs) as outlined on pages 220 to 223

1. For further information on the relevance to Executive Directors’ remuneration see page 134

2. Calculated using WaterShare methodology using K7 CPIH forecasts.

3. Cumulative K7 measure.

4. South West Water ROCE measure used for 2020/21 and 2021/22. This provides a comparative figure to previous Group performance. See calculations provided in the alternative

performance measures section on pages 220 to 223.

20 Annual Report and Accounts 2023 | Pennon Group plc

Sale of Viridor

2018/19 2019/20 2020/21 2021/22 2022/23

42.7

41.1

43.8

21.7

38.5

2.8x

3.4x

3.2x

3.7x

3.8x

●

Dividend per share

●

EBITDA dividend cover^ (times)

Sale of Viridor

2018/19 2019/20 2020/21 2021/22 2022/23

0.2x

1.4x

1.5x

1.4x

Long-term

Earnings per share (pence)

Why is this KPI important to us?

Earnings per share (EPS) is a key financial metric indicating the

Group’s profitability after tax and provides a relative measure of

profitability in comparison to the Group’s share price. Underlying^

EPS excludes the impact of potentially distorting non-underlying

items as explained in our Alternative Performance Measures on

pages 220 to 223.

Our performance in 2023

Commentary on performance

is set out in the Group Chief

Financial Officer’s report on

pages 44 to 51.

Link to remuneration,

bonus/LTIP

LTIP performance measure.

Dividend per share (pence)

Why is this KPI important to us?

Our sector-leading dividend policy is a key measure of the success

of our sustainable growth strategy.

Our performance in 2023

Commentary on performance

is set out in the Group Chief

Financial Officer’s report on

pages 44 to 51.

Link to remuneration,

bonus/LTIP

LTIP sustainable

dividend measure.

Group dividend cover (times)

Why is this KPI important to us

Group dividend cover, ensures that the profitability of the Group

supports the sustainable delivery of our dividend policy.

Our performance in 2023

Commentary on performance

is set out in the Group Chief

Financial Officer’s report on

pages 44 to 51.

Link to remuneration,

bonus/LTIP

LTIP sustainable

dividend measure.

Pennon Group plc | Annual Report and Accounts 2023 21

Strategic Report Governance Financial Statements Other information

Operational review

Regulated Water

Clean, safe, reliable drinking water

Across the Group, we are committed to ensuring the continuous supply

of clean, safe, and reliable drinking water, whilst preserving the natural

resources within the South West. The hot, dry summer has impacted

the outcome of some of our water measures, however our dedicated

teams and ongoing investments ensure that we are able to respond to

challenges now and into the future.

Water quality

CRI

The Compliance Risk Index (CRI) score as reported by the Drinking

Water Inspectorate (DWI) measures water quality compliance.

In South West Water CRI was 2.39, and whilst above the industry target

of 2, is an improvement from 3.86 last year and expected to be better

than the industry average. Our ‘Quality First’ transformation programme

is delivering results and the continued investment in advanced

treatment technologies, including ceramic membranes and granular

activated carbon, is designed to ensure compliance measures improve in

future years.

CRI in Bristol Water at 4.60 is ahead of last year impacted by the drier

summer where demand increased over the summer increasing the

output from our works to near capacity levels and placing pressure

on our network. Further enhanced maintenance and resilience

improvements are being delivered across our water treatment works

with specific sites targeted for improvement.

Taste, smell, and colour contacts

We recognise that consumers expect their drinking water to look and

taste great and that this is important in maintaining consumers’ trust in

the quality of our supplies and we continue to invest in all aspects of our

operations from source to tap to maintain that trust.

South West Water contacts per 1,000 population continue to decrease

to 1.51 from 1.55 and achieved the performance commitment target,

despite our maintenance flushing programmes being temporarily

suspended in the region over the hot dry summer to reduce demand on

our water supplies. Bristol Water performance at 1.21 shows a continuing

improvement but is adverse to their target of 0.98 with increased

contacts due to air in supply. We continue to progress well in delivering

enhanced manganese removal schemes at Restormel and St. Cleer

in Cornwall. To address taste and smell, we are progressing further

significant investments in advanced granular activated carbon treatment

at Stithians in Cornwall and Littlehempston in South Devon, and are

installing temporary GAC treatment at Horedown in North Devon to

provide great resilience over the coming summer.

100%

monitoring of storm overflows in place

220,000

trees planted towards our 2025 target

79%

Reservoir storage at the end of March 2023

Pennon and Devon Wildlife Trust visiting a South West Water Green

Recovery Upstream Thinking project in the Exe Catchment

The Postbridge Herbal Ley soil sampling & surveying trial funded

through the Pennon Green Recovery catchment management

programme in partnership with the Westcountry Rivers Trust

Performance as measured by our outcome delivery incentives (ODIs) was c.70% for South West Water,

and c.65% for Bristol Water.

2022/23 has been dominated by the weather, with some of the hottest, driest, weather on record seen over the summer months, followed by rapid

periods of extreme low temperatures over the winter months. The impact of the extreme weather varied across our regions – with a focus on water

resources in Cornwall, whilst temperatures were coldest in the east of our region.

Our plans to improve our environmental performance continue at pace and our dedicated plans saw pollutions reducing by 50% over the first two years

and our treatment works compliance improving to our best ever score.

Both regions have delivered cumulative RORE outperformance with South West Water’s cumulative RORE of 8.0% representing a more than doubling

of base returns, and Bristol Water’s cumulative RORE achieving 5.2% also higher than base returns

22 Annual Report and Accounts 2023 | Pennon Group plc

Bournemouth Water treatment upgrades

As part of our business plan, we committed to building two state

of the art water treatment works in the Bournemouth area. Good

progress continues on both of these schemes. At Alderney work has

continued on site clearance, building foundations, and enabling works

as well as advanced procurement. Further design and piloting have

been completed at Knapp Mill to reduce power demand and chemical

consumption of the proposed scheme, as well as optimising the scope.

Working with the local council we expect to secure Planning Permission

by the end of June 2023.

Reducing leakage and supply interruptions

Leakage

We recognise that the prevention of water being lost in leakage from our

pipes and assets is a key issue for all customers and is something we

work continuously to reduce.

At South West Water, the specific investments made since the start of

the regulatory period, teamed with the launch of our targeted action

plan, are delivering results. Knowing this is a priority area, we have

financed £100m on activities that reduce leakage over the last three

years. In 2022, we targeted further leakage activities, focused on the

Cornwall region to support supplies during the hot dry summer, which

included offering free leak repairs to customers, increasing detection and

repair resources in the region as well as using innovative techniques to

identify leaks – including satellite scanning. The rapid periods of extreme

cold inevitably increased leakage over the winter, however the focus on

activity earlier in the year resulted in achieving our three-year average

target, even with a year-on-year increase in leakage. Whilst we know

there is still more to do to find, fix and prevent leaks on our network, we

are encouraged by the progress made to date, and continue to focus on

delivering further improvements to achieve a 15% reduction over the

K7 period.

In Bristol Water, we also experienced a significant increase in the number

of major bursts in December when a deep freeze and subsequent thaw

put a strain on the water network. However, this leak outbreak was more

prolonged in its effect with a marked increase in customer supply pipe

leakage. As a result, the three-year rolling average target was missed.

Minimising customer supply interruptions

We understand the inconvenience that supply interruptions can cause.

The importance of ‘always on’ supplies, maintaining both public health

and customer confidence is one of our key priorities. Across the Group

the hot dry summer followed by the extreme cold following by rapid

thaw has resulted in performance below target of 5 minutes 45 seconds

for both South West Water and Bristol at 8 minutes 42 seconds and 8

minutes 3 seconds respectively.

At South West Water, this weather caused an increase in the number

of bursts and interruptions during December, and two large diameter,

complex trunk mains failures accounted for c.14% of the total

interruptions. This reflects the way in which performance against this

target can be impacted by a one-off issue. We have set out an action

plan to improve performance with our strategy of dedicated, in-house

supply continuity and alternative water supply team making long-term

improvements to customers and our innovative network training centre

ensuring we are managing our network effectively following repairs.

Bristol Water was also impacted by the freeze/thaw as well as increased

bursts over the summer months as the network was tested by extreme

demand and ground movement. Two significant mains burst events

accounted for c.42% of the total interruptions.

Investing to secure resilience, now and into the future

Per capita consumption (PCC)

This is an important metric to help the industry be more resilient into the

future and help incentivise companies to conserve the natural resources

around us. Per capita consumption is measured in percentage terms

from a baseline.

In the year, South West Water has targeted demand reductions through

our extensive water efficiency programmes – giving away over 130,000

free water saving devices, successfully reducing demand in Cornwall

through our ‘Stop the Drop’ incentive and ongoing ‘Save Every Drop’

campaign. Overall consumption has reduced, driven by lower numbers

of visitors to the region, although still significantly higher than historical

levels but the remaining demand from households has increased due to

the hot dry summer.

For Bristol Water, the impact of the hot dry summer continues to drive

high levels of household demand driving per capita consumption higher

than the target.

To help customers reduce their consumption, we provide free water

saving devices as well as donations to charities supporting water

conservation to help promote and educate customers. This is in addition

to our schools outreach programme, which aims to teach children about

the importance of looking after our natural resources.

Water availability

In 2022, some of the hottest, driest weather on record, coupled with

elevated demand from customers and tourism in the region placed

significant pressure on our water resources. As a result of this, for

the first time in 25 years, South West Water placed water restrictions,

through ‘Temporary use bans’ on customers in our Colliford water

resource zone in Cornwall. All other areas, including Bristol Water had no

water restrictions.

Despite the challenging conditions, positively no customers were without

water, and we have established robust plans to recover reservoir storage

and manage supplies during this year (as set out on page 41) including a

new reservoir on Bodmin Moor, winter recharges for Roadford reservoir

and a new treatment works and recommissioning abstractions at

Newquay in Cornwall.

Bristol Water’s water resources were robust to the hot dry summer with

reservoir storage at c.100% at the end of March 2023.

Our Awesome Water display at the Cornwall Show, Summer 2022

Pennon Group plc | Annual Report and Accounts 2023 23

Strategic Report Governance Financial Statements Other information

Operational review continued

Smarter healthier homes

As part of our Green Recovery plan, “Smarter, healthier homes” focuses

on investments that directly benefit our customers and help improve

supply resilience focused on installation of smart meters – enhancing

customer engagement to help them manage their water use and bills

more easily, carrying out a supply pipe ‘adoption’ trial, to relieve the

worry of sudden unplanned financial demands arising from leaking

and/or failed service pipes and embarking on a proactive lead pipe

replacement programme.

As part of the acceleration investment ahead of the next regulatory

period, we are expanding this programme into the Colliford area with

an additional 40,000 smart meters and supply pipe replacements, with

plans in the Bristol region to deliver around 2,000 lead and supply

pipe replacements

Maintaining asset health

Mains repairs

The ground movement and pressure on the network during the hot dry

summer, and the colder winter weather, particularly the ‘freeze/thaw’

experience in December has impacted the number of mains bursts

this year.

In South West Water the work to optimise the operation and control

of our network by pressure management and other ‘network calming’

activities, particularly in the Colliford area to support drought activities,

meant that whilst the number of bursts significantly increased above

historical levels in December 2022 and early 2023 our target for mains

repairs was met at 141.1 repairs per 1,000 km of mains.

The weather impacts in Bristol Water, have been similar, and whilst

we have continued to minimise high pressure risks where we can and

monitor the network for ‘transient’ pressure spikes that can lead to

mains failures the impact of the weather resulted in a significant increase

in mains bursts, missing the target for the year.

Unplanned outages

Water treatment unplanned outage provides a means of assessing

reliability of our water treatment works. It tracks the temporary loss of

production capacity across all water treatment works, resulting from

unplanned breakdowns and asset failure.

South West Water’s performance in 2022/23 has remained strong,

despite the significant challenges of high demand over the hot dry

summer and compares favourably with the rest of the industry. Our

‘summer preparedness’ programme alongside our demand and supply

management during the challenging summer resulted in unplanned

outages reducing again this year with a figure of 0.70% compared to the

industry wide target of 2.34%.

At Bristol Water, unplanned outage has increased in 2022/23 primarily

because of outages at our largest water treatment works, Purton,

due to pump failures when the treatment works was operating at near

capacity to manage supplies during drought conditions. These asset

failures account for 5.69% of the total 6.27% unplanned outage in

2022/23. However, despite the higher level of unplanned outage

during an exceptionally dry year, customers were not impacted with

any restrictions.

Regulated Wastewater

Protecting the environment – robust wastewater delivery

At South West Water, we continue to target and drive improvements

in wastewater services through innovation by constantly seeking out

new ideas, pioneering and piloting new technologies with a focus on

nature-based solutions where possible and by enhancing governance

and working in partnership with others.

Reducing flooding incidents

During 2022/23, the number of internal sewer flooding cases decreased

again from last year with 0.63 incidents per 10,000 sewer connections

(50 individual incidents). This is a significant outperformance against

target and places us as one of the best performers in the industry on

this measure. External sewer flooding events were impacted by the

dry summer which led to debris within the network that increased the

number of flooding incidents during the periods of significant rainfall

from November onwards. The largest increase was on transferred sewers

where smaller supply pipes were more impacted by these blockages.

Improving asset health

Sewer collapses & blockages

The dry summer weather has also increased the number of sewer

collapses and blockages that are a key cause of flooding, pollutions,

and service impacts to our customers as well as a lead indicator of

assets health.

We have seen collapses increase to 8.3 (from 6.7) collapses per

1,000km of sewers ahead of target for the year. Whilst blockages also

increased to 7,056 (from 6,545) marginally adverse to the 7,020 target.

We will continue with the proactive management of our network,

including a relentless drive to investigate, clean, and repair sewers.

This is supported by an enhanced programme of educational visits to

commercial premises over sewer misuse (fats, oils, and grease) and we

are developing our approach to target those properties that habitually

block our sewers with debris.

Pioneering catchment management for over 15 years

We maintain that our pioneering catchment management approach for

over 15 years is fundamental to help unlock the environmental challenge

we all face. Approximately 111,000 hectares have been improved to

date with catchment management being undertaken across 80% of our

region, working with over 1,700 farmers. Our continued commitment to

tree planting is ahead of plan with over 220,000 trees planted towards

our 250,000 target by 2025.

Mayflower Water Treatment Works in Plymouth

24 Annual Report and Accounts 2023 | Pennon Group plc

The additional catchment management targeted in our Green Recovery

initiative is also progressing well with 350 hectares of peatland restored

on Dartmoor and delivered with farmers.

Targeting improvements in EPA

A combination of a basket of measures, the EPA is the Environment

Agency’s assessment of environmental performance. We have seen

improvements across all these measures this year with a provisional

rating of 2 star this year. With our strategy of achieving 4 star by 2024,

there is much to focus on.

Pollution incident reduction plan delivering results

South West Water’s Wastewater Pollutions Incident Reduction Plan

continues to deliver results after being launched in September 2020 –

with a 50% reduction in incidents over the last 2 years. In 2022/23 there

were 108 Category 1-3 incidents – our lowest ever level. In addition, our

more serious Category 2 incidents reduced by 75% and positively we

again had none of the most serious (Category 1) events.

Whilst we have seen improvements our focus remains to continue this

step change in performance.

Our ongoing Pollution Incident Reduction Plan (PIRP) has continued

to deliver with key activities including additional telemetry on our

infrastructure with 1,440 sewer depth monitors installed in the year,

continued investment at around 50 pollution hotspots to prevent repeat

events, MOT investment at pumping stations and treatment works and

using predictive analytics to support operations in managing issues

before they arise. Our targeted rising mains replacement programme

has delivered at 18 higher risk locations with a further 18 planned

for 2023.

Numeric compliance

Numeric permits place measurable conditions on the final effluent

discharged to the environment and measure compliance with these

conditions. This year our MOT programme, investment plans and

targeting third-party compliance have delivered our best ever score at

99.4% and is expected to be in the top quartile for the industry.

Rivers and coastal water quality

Our WaterFit programme launched in April 2022 is focused on nurturing

healthy rivers and seas through reducing the number of storm overflow

spills, reducing our impact on rivers by one-third by 2025, maintaining

our excellent bathing water quality standards all year round and

developing plans to target zero harm on river quality by 2030 with six

pledges underpinned by specific targets.

One year into our plan and we have been making great strides towards

our 2025 targets.

Reducing spills from storm overflows

With 100% monitoring of storm overflows now in place, a year ahead

of plan, we have launched WaterFit Live, giving customers and visitors

live information about the storm overflows which impact the region’s 90

bathing beaches, as well as the detailed investments we are making to

reduce overflow spills across the region’s coastline by 2025. Through

our latest campaign #Your beach, Your Say, Our investment, we are

empowering customers and communities in working together to plan our

next phase of improvements. In 2023, we are expanding WaterFit Live to

all storm overflows across our assets.

For 2022, overflow spills have reduced by 30% on average

(from 38.9 to 28.5), and we remain on target to deliver an average

of no more than 20 spills across storm overflows by 2025. Whilst

undoubtedly the dry weather will have played a part, over half of the

improvements seen in the year are due to interventions we have made

- whether capital investment to increase network capacity or through

proactive maintenance.

Record quality levels recorded at our bathing waters

South West Water has over 860 miles of coastline to protect,

representing over one-third of the UK’s bathing waters. This is

something we, and our customers, have always valued and prioritised.

In 2022 we achieved 100% bathing water quality – for the second year

running, with 99% meeting the more stringent good or excellent levels.

We have continued to deliver our planned bathing water investment

schemes with 10 schemes at two sites in Bude, Cornwall, and Galmpton

in Devon delivery this year.

Driving river water quality improvements

As part of our Green Recovery investments, we have started our three-

year Rivers Dart and Tavy Inland Bathing Waters Pilot. The pilot aims to

increase our understanding of the water quality of these two iconic rivers

and build stronger relationships and collaborations with river users, local

communities, and stakeholders – with over 50 stakeholders joining our

Steering Group for the project.

We have developed an innovative approach to engaging with rivers

users through the ‘Hello Lamp Post’ platform – using QR codes located

at potential inland bathing sites and in other riverside locations to raise

awareness of river water quality issues and capture people’s perceptions

of the river throughout the year. In addition, monitoring of the first

bathing season has been completed through the use of real-time river

monitors and ‘spotsamples’ and in summer 2023, we will also be using a

state-of-the-art genetic monitoring technique to determine which types

of animals are contributing bacteria to the river water.

Delivering for shareholders

Continued RORE outperformance underpins the Group’s sustainable

dividend policy whilst enabling the reinvestment of efficiencies and

keeping customer bills low, with a double-digit RORE for South West

Water for 2022/23 of 11.1% and Bristol Water of 4.6%. During K7 to date

we have delivered Group RORE outperformance of 8.7% cumulatively,

equating to c.£192 million – an increase on £149 million in 2021/22.

This consists of c.£13

million – Totex^, c.£200 million financing, net of

c.£21 million ODI penalty

. This has enabled the funding of additional

initiatives, that are now well underway including:

• WaterFit - c.£45 million reinvestment of efficiencies to enhance

coastal and river water quality.

• Green Recovery – c.£82 million accelerated and additional spend on

initiatives delivering environmental benefits, including river water

quality pilots, smart metering, and peatland restoration.

• WaterShare+ – acceleration of c.£20 million returns to customers

through our second issuance in K7.

ODI performance across the Group in 2022/23 has been impacted by

the freeze/thaw conditions across the region over the winter months.

South West Water continues to build on its strong ODI performance,

with c.70%

either on track, or ahead of target across a broad range

of challenging bespoke, common, and comparative measures. ODI

performance for South West Water during 2022/23 has resulted in a

penalty of c.£4.2 million (2021/22 net reward c.£0.6 million). Bristol Water

is on track to achieve c.65% of its ODIs and has resulted in a net financial

penalty of c.£5.9 million.

Our flexible financing strategy and the company’s diverse debt

portfolio, with a relatively lower level of index-linked debt compared

to the industry average allows us to outperform the cost of debt

allowances. Our efficient financing strategy continues to drive significant

outperformance with South West Water’s effective interest rate at 5.5%

(2021/22 3.9%

Whilst the elevated inflationary environment is placing significant

pressure on costs, including wholesale power, we continue to focus

on efficient Totex delivery, supported by our pioneering approach to

innovation across the Group.

1. Includes c.£18 million tax

2. Excludes the impact of the third-party Carland Cross event in 2021 which we are

seeking to recover from the third-party

3. ODIs on track or within regulatory tolerances

4. 2021/22 water business comparator of 3.7% re-analysed to provide comparative

performance under post-integration South West Water Limited group of

companies’ structure

Pennon Group plc | Annual Report and Accounts 2023 25

Strategic Report Governance Financial Statements Other information

B2B retail services

Pennon Water Services (PWS)

PWS continued to deliver for business Customers via a suite of attractive contracted dual retail

tariffs, loyalty bonuses and value-added services, whilst also delivering year-on-year improvements

inits revenue, EBITDA and PBT.

Serving its customers

PWS maintained its focus upon high quality customer interactions,

resulting in a Trustscore of 4.8 out of 5 measured through the

independent review platform Trustpilot, comparing favourably to its

peers. Its large strategic users of water rated the quality of service

from their account team at 4.95 out of 5, demonstrating its ability to

provide tailored support services to meet varying business needs. Its

customer service teams issued over 300,000 customer bills in the year

and answered over 90,000 phone calls, assisting with simple queries as

well as complex customer challenges relating to their site and its future

requirements. Its focus upon root causes of complaints into its own

service and those it recorded against wholesalers has supported a 15%

reduction in its volume of complaints compared to the prior year and a

24% reduction in escalated complaints.

Revenue Growth

12%

PBT

£1.8m

EBITDA Growth

26%

Trustpilot

4.8/5

Financial performance

Revenue increased by 12% from £195 million in 2021/22 to £218 million

in 2022/23. A direct result of continued customer growth, low customer

attrition and customer consumption increasing.

EBITDA and PBT grew by 26% and 80% in the year respectively,

demonstrating operational efficiency against its higher revenues and the

success of its focus upon customer debt recovery and the support of

wholesaler incentive schemes, improving the accuracy and efficiency of

the deregulated market.

Since the competitive market opened in 2017 PWS has switched over

21,000 supply points. Its simple, clear and transparent approach to

pricing has proven popular with businesses of all sizes, especially

strategic users of water who value its expertise and support in

developing water strategies encompassing contingency plans and

measures designed to reduce consumption, save money and minimise

carbon impact. New contracts in the year included Places for People,

Frasers Hospitality and Frank Roberts & Sons.

Whilst growth in new contracts continued PWS maintained its low levels

of customer attrition. Since 2017 just over 11% of its deemed contract

customers have switched to another supplier, many a result of National

tendered procurement exercises at unfavourable margins where we

opted not to compete. Our continued focus upon value and service to

customers ensured we renewed 100% of our own tendered customer

base including the extension of contracts with amongst others Princes

Foods, ExxonMobil, Unilever, Walkers and Nuffield Health.

As a result of new contract growth and low levels of attrition, PWS’

share of market consumption grew by over 9,000 megalitres, taking

its cumulative position since the market opened to almost 50,000

megalitres, the equivalent of 20,000 Olympic sized swimming pools.

Delivering Innovation

The deregulated market was in part set up to drive innovation through

competition. PWS has continued to seek solutions to lower business

consumption over and above its package of leakage detection and

repair products.

Following a successful bid to MOSL’s inaugural Marketing Improvement

Fund, PWS were awarded £150,000 to fund innovation projects for

sustainable projects to save water. In partnership with SDS a sustainable

drainage company PWS led a pioneering Rainwater Recovery project

which will see businesses benefitting from a free installation of retro

fitted, monitored rainwater recovery systems. These systems will store

and filter rainwater collected from underground attenuation tanks for

non-potable business use. The project offers a solution to a long-

standing UK sustainability challenge by using less potable water for

non-potable purposes such as vehicle washdown, irrigation and toilet

flushing. This will reduce the amount of water wholesalers need to treat

and distribute whilst saving customers money by using less treated

water. Two systems for Plymouth Argyle and The Headland Hotel have

been commissioned and are in operation with 40,000 litres of potable

water saved to date.

Non-potable water is captured from existing underground assets and

is filtered, pumped and stored aboveground ready for non-potable

business use.

Outlook

Pennon Water Services remains well placed to deliver against its long-

term strategic objectives, growing organically and sustainably, investing

in its people, systems, processes and innovative customer solutions.

Water2business

Through our acquisition of Bristol Water, we acquired a 30% share

in water2business – led by a strong team who are also focused on

delivering an outstanding customer experience, with a Trustpilot score

of 4.9/5. With a c.6% market share, water2business offers tailored water

and wastewater management helping customers improve efficiency and

deliver savings. Water2business delivered resilient financial performance

during the year, contributing c.£0.3 million of associated companies’

profit after tax to the Group’s results, supported by the addition of

c.4,400 new customers this year.

PWS took an active role in engaging with Ofwat, MOSL

and Defra to continue to evolve the water market for

all stakeholders

26 Annual Report and Accounts 2023 | Pennon Group plc

We believe that ESG is not a bolt on, it's woven into how we do business.

How we do business

Read more about how our Board and Executive engage with our

stakeholders in the Governance section which includes our Section

172(1) statement on pages 112 and 113.

Spotlight on...

Stakeholder engagement forum

In 2022, we developed a Stakeholder Engagement Forum. The

Forum brings together all of our stakeholders to listen, collaborate,

understand and knowledge share to make improvements across

the Great South West. As a result of the Forum, we aim to:

• develop trust and confidence in Pennon Group as an

organisation, genuinely committed to protecting and improving

the environment, raising awareness of the activity already

being delivered;

• ensure that our Group companies continue to be regarded

by our delivery partners as a credible and suitable funder (in

particular the Farming and Wildlife Advisory Group, Devon and

Cornwall Wildlife Trusts, Westcountry Rivers Trust) as we seek to

expand our collaboration with them;

• understand priorities, concerns and project pipelines of our

stakeholders in order to reflect and respond in our strategic

plans, and identifying opportunities for our involvement;

• identify and develop partnership collaboration opportunities to

tackle local wastewater, flooding and drinking water challenges,

including nature-based solutions, including delivery partners and

landowners; and

• identify and create new forums where required and to respond

positively to invitation

We understand that we don’t have all the answers and are here to

serve our customers and local stakeholders; hence, we have created

a framework to ensure that all voices are heard. This framework is

underpinned by our innovative WaterShare+ scheme, which was

developed in direct response to feedback from customers who said

that they would like to share in our successes and have a greater say

in our business.

In 2023, 1 in 14 customers in the South West Water region are Pennon

shareholders and have the ability to have their say at our unique

Customer AGM with further challenge coming from the independent

WaterShare+ Advisory Panel. Those customers who are not shareholders

and local interest groups have the ability to voice their concerns and

share ideas at our periodic Stakeholder Engagement Forums - see the

spotlight section below.

Our approach to business is based on a bedrock of good governance

and a desire to be an exemplar of corporate citizenship. To this end:

• We are proud of the continued progress we have made this year to

diversify our Board through the appointments of Dorothy Burwell and

Loraine Woodhouse.;

• We continue to commit to procuring 100% of our financing needs

through our Sustainable Finance Framework which aligns with the

ICMA Green Bond Principles, Social Bond Principles and the LMA

Green Loan Principles; and

• We were the first company operating in the water industry to be

awarded Fair Tax status and have maintained this accreditation

ever since.

Now is the time to double down on our integrated approach to ESG in

order to meet the challenges faced in the communities we serve.

Our impact is greater when we work in partnership and we have

developed collaborative solutions to address issues, working with our

customers, our people and landowners, some of which are highlighted

in following pages.

Susan attending a Stakeholder Engagement Forum

Pennon Group plc | Annual Report and Accounts 2023 27

Strategic Report Governance Financial Statements Other information

Placing our customers at the centre of

what we do

Stretching from Bristol to Bournemouth, Devon, and Cornwall,

including the Isles of Scilly, we serve a unique population. Our region,

given its dependency on agriculture and tourism, experiences large

socio-economic challenges, particularly in urban and coastal areas.

School outreach

In the year we launched our WaterFit Warriors programme,

to inspire thousands of water quality champions in schools

and communities across the region. Our Pennon educational

team spanning the Great South West has worked in 83 schools

teaching 4,051 pupils, and helped over 280 students through its

school talks, work experience and mentoring programmes.

2022/23 highlights

• Average bills in the South West Water region reduced in the year

(< 10 years ago) whilst investing at record levels

• Further significant progress vs target of eradicating water poverty

by 2025 (c.110,000 customers helped this year)

• Significant funding since 2021 (£375k) for organisations that

support the community by saving water, and neighbourhood

community projects (146)

• 246 relationships established with local organisations to deliver

support to vulnerable customers

2023/24 priorities

• Deliver value-for-money for customers - annual bill increase below

inflation in year ahead

• Maintain investment in projects in our communities

• Increase our support for our vulnerable customers

Sustainable Development Goals

Delivering more for our

customers

28 Annual Report and Accounts 2023 | Pennon Group plc

We have seen the cost of living crisis put many of our customers in

extremely challenging financial circumstances, some for the first time,

placing even greater responsibility on the Group, to develop new,

inclusive and creative solutions.

Keeping Bills as Low as Possible: We continue to keep bills as lows

as possible with bills in the South West Water region being down £10 in

2022/23 and remaining lower than 10 years ago, whilst the acquisition

of Bristol Water by Pennon has enabled us to deliver a reduction in

customer bills, further aided by an innovative smoothing of bill increases

across future periods to mitigate pressure on customers. Despite

record levels of investment the annual increase for 2023/24 will be

below inflation.

Sharing progress and innovation: We have accelerated innovative,

inclusive projects to reduce bills and support our customers – our

unique industry leading programmes, Watershare+ and our Stop the

Drop targeted water efficiency incentive in Cornwall, has given nearly

£50m back to customers through reduced bills during these difficult

times, whilst also giving customers a greater say in our business and

incentivising lower water use to protect our environment for the

longer term.

Eradicate Water Poverty: We continue to target support to those who

need it the most as measured through our industry leading ambition to

eradicate water poverty by 2025, which we are on track to achieve. This

is at the heart of our approach and we have already made great strides

with nearly 65,000 customers being helped through one of our schemes

from April 2020 to March 2023, with over £30m of support provided over

the same period.

The innovative use of data is at the forefront of eradicating poverty,

allowing us to identify and reach out to the ‘struggling silent’. During

2022-23 we have developed a cross sector leading data suite and

approach which has given us the ability proactively to identify customers

at risk of being in water poverty. This coupled with information provided

through our data sharing agreements with government bodies and local

councils, has for the first time allowed us to auto-enrol customers onto

support tariffs removing the need for customers to apply.

This has reduced the barriers for customers in getting the right support,

allows us to reach the ‘struggling silent’ and ensures we are helping more

customers than ever before. The success of this approach can be seen

through the in year growth of number of customers on support tariffs by

12,452k (23%) with this set to further increase by 17,331 (26%) in 2023-24

across both South West Water and Bristol Water.

Our Affordability Toolkit: Goes beyond support tariffs and provides

a range of measures for all customers designed to lower customers’

bills and provide support to those who need it the most. Metering and

giving customers the tools, advice and opportunity to save water and

save money has not only bill but also environmental benefits with over

133,000 South West Water saving devices issued in 2022-23 alone.

Supporting Customers in Vulnerable Circumstances: We have

empowered our staff to identify all types of vulnerability, from transient

to long-term, to find the right support for our customers through

enhanced, innovative training and ongoing support. We have been

supported in the development of our Affordability and Vulnerability

Training program, delivered to both Contact Centre and Field Staff, by

external partners such as the mental health charity MIND and Dementia

Friends. This has enabled us to provide additional insight and awareness

for all customer service staff so that they are able to recognise potential

and emerging vulnerabilities.

Going Further: To date over 110,000 customers have accessed or

unlocked financial support from our support tariffs, company funded

debt write off schemes and income maximisation but we know there is

more to do as all customers are impacted by cost-of-living pressures.

However, it remains vital that the most financially vulnerable in our

society receive the support they need and to do this we expect the

number of customers benefiting from support to grow by more than

50% to over 150k to 2025.

Supporting our local communities

The need to reach and support our communities when they need our

help the most only strengthens our resolve to work harder. To help us do

this, we have launched our largest ever community outreach programme

with our significantly expanded Community Team. This team attended

247 events across the South West Water region in the year, where

our presence is most needed offering support and education and the

opportunity to engage face to face.

One of the measures of success of our Community Outreach programme

is the number of our most vulnerable customers who are on our Priority

Services Register. This currently stands at 8% for South West Water

customers and 6.5% for Bristol Water, with customer awareness of PSR

and the extra support and assistance we offer leading the industry as

measured by the CCW.

Our wider understanding of the affordability crisis and where we can

help extends to our community teams, who are constantly being trained

to have a deeper understanding of energy and other bills so that they

can also offer holistic advice.

Through the Bristol Resource West Partnership, a partnership with Wales

& West Utilities and National Grid, we are launching a trial of how energy

and water messaging and support can be delivered together allowing us

to reach even more customers.

Community Funding

South West Water have launched two community funds which, since

2020/21, have already provided £375k of funding and will continue to

provide support in the months and years ahead:

• Water Saving Fund - a first of its kind £75,000-a-year Fund designed

to support community groups and registered non-profit organisations

within SWW’s service area who can provide a benefit to the

community by saving tap water and demonstrating a reduction in

water use. This saving not only positively impacts the environment

but saves customers money on their bills.

• Neighbourhood Fund - is all about supporting our local community.

We have made £100,000-a-year funding available for neighbourhood

community groups which inspire physical activities, education, health

and wellbeing and deliver positive environmental outcomes.

To date we have funded 146 neighbourhood projects with the aim of:

• Protecting nature for the benefit of community health and well-being.

• Providing new opportunities for people to learn and develop.

• Assisting local projects which bring communities together.

• Supporting upkeep neighbourhood centres and facilities to keep

communities strong.

The Waterfit River Dart bathing water pilot with the Friends of the

River Dart and MP for Totnes, Anthony Mangnall

Pennon Group plc | Annual Report and Accounts 2023 29

Strategic Report Governance Financial Statements Other information

Partnerships

We understand the value of partnership working to deliver support to

our financially and non-financially vulnerable customers and have over

170 relationships in place with a variety of organisations across our

regions. These can be split into six key groups:

So we can expand our partnerships, which have never been so

important, increase the support help us to reach out to the ‘struggling

silent’ who would not otherwise realise they are entitled to support we

have initiated the facility for local partnerships/charities to apply for

support on behalf of customers through a personalised web page called

our ‘WaterCare Hub’ which also incorporates our affordability toolkit.

Some examples of the work we are undertaking with our partners in

response to the affordability challenge all customers are facing include

the support we are providing to North Somerset Council’s public living

rooms, which are warm spaces for our most vulnerable customers.

We are providing funding to help run some of these living rooms.

With the cost of energy soaring, we recognise that our most vulnerable

in society will be choosing between heating and eating, or even both.

We have also partnered with Bournemouth and Poole Citizen’s Advice

Bureau and Wessex Water to jointly fund a ‘Water Guru’, who works with

customers in-person to advise if they might be eligible for support.

Through our partnerships our community teams have also set up regular

stalls in local food banks, job centres and community affordability events,

as well as in public living rooms, to increase our visibility and awareness

in local communities and have agreed with local food banks to provide

information packs on our affordability support in food bank parcels.

local community

groups and

foodbanks

charities

debt support

partnerships

The Deaf Hub receiving funding from our Neighbourhood

Fund scheme

Our team ready to meet customers at the at the Trevithick Day,

Camborne, Cornwall

Our customers continued

council and

government groups

housing associations

NHS surgeries

30 Annual Report and Accounts 2023 | Pennon Group plc

Our People Strategy is all about,

‘talented people doing great

things for customers and

each other’

2022/23 highlights

• Ranked 1st in the utility section of the FTSE Women Leaders Review

• Achieved external accreditation as a Great Place To Work

• Announced plans to double down on apprenticeships/graduate opportunities

and work placements to 1,000 and 5,000 respectively by 2030

2023/24 priorities

For 2023/24 we will continue to deliver in line with our Group People Strategy

and our Priority Areas. These include:

• Developing out leadership and management capability

• Refreshing our Group Values

• Continuing to invest apprentices and graduates

Sustainable Development Goals

We want to be the best place

to work for our

people

Pennon Achieves Gold Status

We were delighted to be awarded Gold Membership

status into the 5% Club, where members are united in

addressing the issue of poverty, a result of high youth

unemployment and in ensuring the right skills in

the workplace.

We are the only utility sector company to achieve the

Gold Membership accolade.

Achieving Gold status demonstrates

our long-term commitment to

investing in structured Apprenticeship

and Graduate programmes for

our employees.

Pennon Group plc | Annual Report and Accounts 2023 31

Strategic Report Governance Financial Statements Other information

Our people continued

As one of the largest employers in the region, with over 3,000

colleagues, we have a responsibility and duty to make a positive societal

contribution. Our goal is to be the Employer of Choice across our region

through promoting social mobility, prioritising Diversity and Inclusion by

addressing racial and gender inequality, and in providing safe, secure

and meaningful employment where all employees are paid fairly for the

work they do and where trust is high.

Over the past 10 years the South West has seen significant population

growth. It’s been estimated that more people moved to the region during

the pandemic and just after than had been anticipated by 2050. This

increase in population has an impact on many different areas of society,

including employment, housing and opportunities for young people.

Our Reward Strategy continues to evolve each year, noting the feedback

we receive from colleagues ensuring it aligns to our People Strategy.

The key focus for this year has been on supporting colleagues during

the cost-of-living crisis. Prioritising those colleagues that need it most:

those earning up to £40,000 (over 80% of colleagues) were awarded an

annual pay increase of 7% as well as a one-off lump sum equivalent to

three months backdated pay increase and an additional day's holiday

for this year, giving a total value of 9.2%. Those earning above £40,000

have received a tapering award with employees earning over £80,000

awarded 4.6%. During 2022/23, as part of the Bristol Water integration

work, we have used the strategy to review the remuneration elements

received by Bristol Water colleagues ensuring parity across the

organisation at total remuneration level. All colleagues are now able

to participate in the all company share arrangements following the

roll out of the Share Incentive Plan across Bristol Water and the

Sharesave schemes.

With a double coastline and dispersed population, many coastal towns

around the South West suffer from high rates of poverty, unemployment

and health risk factors, together with poor housing and public service

provision, poor public transport and communication connections.

All this goes to show that whilst the greater South West region has

traditionally had a reputation as a well-off area, in reality the picture is

far more complex. This places an even greater responsibility on Pennon,

as the largest private sector employer in the region, and given the wider

supply chain we support.

At Pennon we take our social stewardship role seriously, whether that’s

through supporting the Green Recovery of our region with a £82million

investment in economic and public health projects, and in creating up to

500 jobs directly and in the supply chain. Bristol Water’s Social Contract

seeks to do the same. Established in 2019 it looks at the key community

wellbeing challenges and identifies specific projects in response. It aims

to have a positive impact on customers, communities, colleagues and

the environment.

Our approach to Human Capital seeks to go further; supporting

Community Investment and social mobility across the Greater South

West by creating education and employment opportunities across our

region; ensuring we pay our employees a fair wage for doing a fair day’s

work and therefore be well placed to be able to make a wider societal

contribution; and delivering our Diversity and Inclusion strategy by

prioritising diversity of thought, gender and ethnicity to promote social

mobility and opportunity for all.

This is all part of a wider strategy to be the employer of choice in the

region, and in creating a Great Place to Work.

Over 100

Mental Health First Aiders trained

1,000

new apprentices and graduates by 2030

Across the Group we have developed a coherent approach to leadership,

culture, talent, and skills development which will not only help us unlock

the full potential in our business, ensuring we are match fit today, but

also in anticipation of future challenges.

Over the past two years, we have been focused on making a step change

in our approach to leadership, culture, talent, and skills. This ensures we

are well placed to meet the challenges of today and also in anticipation

of future challenges, as the Group evolves.

Ensuring our people are at the heart of all these key areas of focus will

mean we continue to successfully deliver for all our customers and

stakeholders that rely on us. Our people are our greatest asset. We

are proud of the values we live by in all that we do and we have been

delighted in how our employees have risen to the challenges we have

faced throughout the last year and in going above and beyond to deliver

for our business and our customers.

We continue to deliver across all areas of our Group People Strategy,

ensuring we remain focused on the right areas and meet both the

external and internal opportunities and challenges we face. In the battle

for talent, it’s clear that the most successful organisations will be those

who can lead and galvanise others around a sense of mission, offer

purposeful opportunities at work, make a broader societal contribution

with strong values, and have the appropriate infrastructure in place to

invest heavily in skills and development programmes.

On 1 February 2023, Bristol Water colleagues officially became part of

the Group, helping us transition into the new One Pennon team as we

successfully transferred our Bristol Water colleagues into South West

Water. As One Pennon, we have brought together the best-of-the-best

to share our expertise and best practices, building on our respective

strengths and our strong heritage in delivering our essential water

services for those who rely on us every day.

The integration of Bristol Water has acted as the springboard to review

and restructure our organisation design across the business to ensure

One of our customer service advisors discussing the benefits of

smart meters and affordability initiatives with a customer

32 Annual Report and Accounts 2023 | Pennon Group plc

we develop the most efficient operating model for the future, while

embracing the best of both Bristol Water and South West Water.

We continue to work to develop strong relationships with our

employees and Trade Union Partners, ensuring we are engaging with

these important stakeholders in our business in all aspects of our

People Strategy.

As a purpose-led organisation, Pennon has strong values and ethics

which are important barometers in fostering the culture and beliefs

that we require to be successful. One of the key reasons why we use

Great Place to Work to survey our employees is that it is one of the few

providers that seeks to measure values and ethics. These are notoriously

difficult areas to measure as they are impacted by individual’s personal

values and ethics.

Our focus in 2023 will be to engage with colleagues to redefine our

values, in support of the Group’s Strategic Direction following our

acquisition of Bristol Water there is an opportunity to review both

organisations’ current values and develop a combined set of values.

Our 2022/23 Great Place To Work (GPTW) Colleague Survey took place

for all Pennon Group employees. With a record participation rate of

85%, and a trust index score of 65%, Pennon has successfully achieved

GPTW accreditation for the second time in a row. This is a strong result,

given that typically, whilst the journey to becoming a GPTW is generally

associated with big picture actions, maintenance is harder, with more

targeted interventions.

We are delighted to be formally recognised as a Great Place To Work

for the last two years, but we are determined to keep improving and we

are focusing on colleagues ‘doing the right thing’ across all areas of the

business through:

• our Speak Up process where employees can highlight a potential

problem or issue

• our improved disciplinary and grievance processes

• our Quality First Drinking Water Services programme prioritises

always doing the right thing and never compromising on quality

• our HomeSafe programme that is focused on the non-negotiables

around safety

• our new STREAM performance review process encourages quarterly

review meetings, helping ensure we deal with problems quickly

and effectively

• the launch of three internal training programmes designed to help

in this area, covering People Management, Inclusive Leadership and

Bullying and Harassment.

Onsite at Mayflower Water Treatment Works in Plymouth, Devon

Listening and acting on employees’ views

Under the Financial Reporting Council’s (FRC) code of standards,

companies are required to explain how they are incorporating employee

views in Board decisions. You can read more on how the Board are

engaging and making decisions in our Section 172(1) statement on

pages 114 and 115.

Over the course of this year, we have continued to develop and evolve

the opportunities for employees’ views and input, as well as enabling

employee forums across the Group to ensure employees are represented

and have opportunities to understand and feed into discussions on

matters that impact them and the work they do.

RISE - Our Employee Engagement panel

During the year we have embedded our relaunched Employee

Engagement panel, RISE. The new RISE forum is inclusive and

employee-led, with each area of the business establishing its own panel

that feeds into a larger, Group-wide panel chaired by the Group Chief

Executive Officer. During the year we have integrated Bristol Water

employee members into the forum and addressed important topics

including cost-of-living, our future working arrangements: onboarding,

induction and colleague communications. Throughout the year, we have

increased our RISE members to over 100 members, giving employees an

even stronger voice.

Speak Up

Our Speak Up whistleblowing policy continued to operate throughout

the year, providing another engagement channel. Speak Up helps to

create an open, transparent and safe working environment, where

employees feel able to speak up and are supported if they do so. Read

more on Speak Up on page 119 in the Corporate Governance Report.

Additionally, all employees are invited to pose questions or comments to

our senior leaders through our new Open Door communication channels.

This new approach brings together several employee communication

channels and encourages employees and senior leaders to keep

connecting more.

Enhancing our employee communications

During the year, we have enhanced and grown many of our employee

communications and engagement channels.

Our regular Big Chat video calls with our CEO and the Executive

team continue to be very well supported by employees with strong

engagement. Items discussed largely focus on the topical business

issues of the time plus key employee highlights. We have also broadened

the group of speakers, involving colleagues from all areas and levels

across the company.

Our Time to Talk sessions focus on a broad range of topics and are

supported by many external specialist speakers and facilitators. Topics

discussed include mental health, the cost-of-living crisis, financial

wellbeing, apprenticeships and business specific initiatives including

nature and catchment management.

Our internal communications tool and discussion platform, Yammer,

is growing in popularity and is now used regularly by over 2,000

Group employees.

For our remote teams working tirelessly around the clock, we host

regular breakfast meetings supported by our senior leaders. These

have proved to be helpful in promoting more effective two-way

communication with front-line operational teams.

WaterWorks is a new monthly performance measures dashboard

which helps employees keep updated on how we are delivering for our

customers, communities and the environment.

We continue to recognise our HomeSafe Heroes and celebrate the work

of our colleagues across the business who make sure that everyone

goes home safe every day.

Pennon Group plc | Annual Report and Accounts 2023 33

Strategic Report Governance Financial Statements Other information

Our people continued

We have a strong commitment to investing in the development of our

employees and in building and recognising talent across the Group.

Training and development are available for employees at all levels within

the Group and are actively encouraged to participate. Our aim is to

increase productivity, job satisfaction and safety, and to equip the next

generation of leaders and employees with appropriate knowledge, skills

and the competencies they need to thrive.

As a business we joined the 5% Club, an organisation with over 750

members that aims to address the issue of poverty arising from high

youth unemployment and a shortage of the right skills for the workplace

of today and tomorrow. This year, we were delighted to be awarded

Gold Membership status into the 5% Club as we have around 10% of

our employees undertaking apprenticeships or on a formal structured

graduate programme. We were the only utility sector company to

achieve the Gold Membership accolade. Achieving Gold status

demonstrates our long-term commitment to investing in structured

Apprenticeship and Graduate programmes for our employees.

During the year, Pennon also scooped two awards at the National

Apprenticeship Awards. Pennon won Large Employer of the Year at the

regional finals and was also awarded Highly Commended in Recruitment

Excellent category. We are delighted that our apprenticeship programme

was recognised for these awards as it confirms the high quality

programme we offer and showcases the talented apprentices we have.

Throughout 2023/24, we delivered 15,458

training days for our 3,143 employees,

ensuring that on average eachemployee

received 36 hours of training - 5 days.

Our Graduate programme

In our 2022 Annual Report, we explained how we had launched our new

Graduate Management Programme and set a long-term commitment

to recruit 100 graduates by 2025. The programme has proved such

a success in attracting both female and ethnically diverse talented

graduates, we have doubled our commitment to recruiting 200

graduates by 2030.

Since the launch two years ago, the graduate programme has recruited

55 talented graduates, with over half being female and almost 60% being

ethnically diverse or international graduates. Attracting larger numbers

of female and ethnically diverse employees has been a core part of our

People Strategy. We are delighted our graduate programme is helping

deliver this outcome whilst providing high-quality career opportunities

for all these individuals.

Apprenticeships

In addition to our graduate programme, we have a long-standing

commitment to apprenticeships. This year we have doubled our

commitment and target for apprenticeships/graduate opportunities and

now pledge to support 1,000 roles by 2030. Attracting and developing

the next generation of talented employees is vital in building resilience

in our workforce and ensuring we can deliver the essential services our

customers and communities deserve.

Last year we supported a further 141 new apprentices across the Group.

This brings the total number of new apprentices we have supported

since 2021 to 342, we are ahead of schedule to achieve our 2030 target.

Leadership development

We have continued to invest in our senior leaders to provide structured

assessment and development opportunities for our senior leaders.

This programme supports leaders across the whole Group and was

one of the first activities offered to Bristol Water employees as part

of the integration.

Customer Service heroes at the Royal Cornwall Show, Summer 2022

One of our hard working apprentices

34 Annual Report and Accounts 2023 | Pennon Group plc

Prioritising health and wellbeing

Our Wellbeing strategy is a core area in our People Strategy to ensure

our people know that we care about them. It is estimated that in any

given week, one in six people of working age experiences a common

mental health problem like stress, depression or anxiety. Most of us will

understand, from personal experiences or friends and family, the huge

personal cost that this can bring.

Our Wellbeing strategy focuses on the following four main areas:

Mental

Taking care of our minds, coping

effectively with life and creating

satisfying relationships

Physical

Taking care of our bodies,

acknowledging the importance of

activity, nutrition and sleep

Financial

Taking care of our financial

wellbeing, being in control over our

financial future

Community

Encompassing the major external

and internal factors such as

social health

Separately, data from Champion Health, our online wellbeing platform

provider, supports the outcomes from the Great Place to Work survey.

93% of employees who completed the Health Assessment were

motivated to change, with their three key areas being improving energy

levels, reducing stress and improving mental wellbeing.

Our approach to wellbeing, incorporates a number of initiatives including:

• Mental Health First Aiders: We have trained over 100 Mental Health

First Aiders across the Group – one for every 30 employees, ahead of

our target of one for every 50 employees.

• Wellbeing Champions: We have established a network of wellbeing

champions across the business to help us engage colleagues.

• Time To Talk: Regular sessions where colleagues are invited to join

online webinars focusing on a range of health and wellbeing issues,

primarily focused on mental health.

• This is Me: a podcast with colleagues talking about their own health

and wellbeing experiences and how they have dealt with them.

• Champion Health: Our Champion Health portal gives colleagues

a broad range of resources, advice and guidance across all areas

of wellbeing from healthy recipes to fitness regimes, mental health

support and health assessments. It is free to both employees and

their families.

• FinWell partnership: We have launched a new partnership with

FinWell, a financial wellness organisation to provide employees with

help, support and advice about their personal finances.

• Inside Out partnership: Our close partnership with the Inside Out

Leaderboard provides a tangible way of demonstrating leadership,

commitment and action to the mental health agenda.

• EAP Helpline: Our Employee Assistance Programme (EAP) had a 6%

uptake compared to the industry average of 1.39%. The service is also

available for employees’ families.

HomeSafe – our flagship health and safety programme

The Group’s flagship health and safety programme, HomeSafe, continues

to provide the framework for driving significant improvements in all

health and safety activities., delivering a 14% reduction in our Lost Time

Injury Frequency Rate (LTIFR) in the year.

We continue to drive a culture where every person takes ownership

to ensure they and their colleagues go home safe every day. After

delivering our best performance in 2021/22 recording the lowest number

of lost time incidents ever, we set the ambitious target to have our best

year ever once again, while continuing to drive change and improvement

against each of the six HomeSafe strategic pillars, improving risk

management and reducing harm.

Our Leakage Detection Team

in the field

Pennon Group plc | Annual Report and Accounts 2023 35

Strategic Report Governance Financial Statements Other information

Our people continued

We set out to achieve this through:

• continued Senior Manager face-to-face engagement.

• implementing a robust and consistent approach to incident

investigations leading to improved identification of the root cause of

incidents, tackling these quickly.

• integrating best practice knowledge with Bristol Water and

implementing these quickly across the Group.

We have taken the best-of-the-best approach in many areas including

improved minimum PPE standards and HomeSafe concepts. Two areas

in particular we have quickly standardised are the approach to point of

work risk assessment and investigations accountability.

Managing risk

Sharing and learning

Working together

Protecting health

Enabling leaders

Being resilient

We implemented the Take 5 for Safety approach to point of work risk

assessment that was active and delivering benefits In Bristol Water.

We launched this to the Group at our inaugural Group Health and

Safety Conference in February 2023. This saw over 170 colleagues and

members of our supply chain come together for an interactive day

focused on the Take 5 concept and the fact that, while no one believes

an incident will happen to them, it really can. The audience enjoyed a

presentation by the Pennon Board Health and Safety Committee Chair,

Jon Butterworth, who shared his safety expertise and experience to help

enthuse everyone to be a driver of change and become

HomeSafe pioneers.

The second area is bringing in the simple 2:2:2 approach to

investigations ensuring a timely response to incidents, investigations,

learning and improvement, with a two-hour notification, two-day initial

investigation and two-week finalised report and action plan developed.

We have developed and refined our HomeSafe bitesize programme

across the year and now have active modules for employees to use to

increase knowledge, awareness and accountability to ensure everyone

goes home safe every day. These modules are manager-led within

teams, focused on the core principles, while supporting managers to

focus these on specific activities their teams carry out. The bitesize

programmes work for all employees, regardless of role or location.

We have increased our assurance through the year with our health

and safety experts completing over 500 individual unannounced site

and activity audits across Bristol Bournemouth, Devon, Cornwall and

the Isles of Scilly. These audits focused on adherence with our Life

Saving Rules in HomeSafe as part of our Managing Risk Strategic Pillar.

Minor improvements were identified and resolved with the local teams

immediately, with no major non-conformances found.

Lost Time Injury Frequency Rate (LTIFR) continues to be the Group’s

primary measure of health & safety performance. Against our ambition of

our best year ever for the new Group composition, we delivered a 12.5%

reduction in actual LTI numbers, with 28 LTIs in the year, compared to 32

last year and an LTIFR of 0.59.

In addition to our supply chain partners’ involvement and support at

the health and safety conference, we have held two dedicated Tier

1 and Tier 2 supplier health and safety days in the year, improving

Our Bristol Water Bar at the North Somerset Show, Summer 2022

HomeSafe Heroes

We are proud of our people and celebrate positive health and

safety behaviours through our HomeSafe Heroes programme.

To supplement this, at our inaugural HomeSafe conference we

invited our teams and our supply chain to nominate people for a

variety of awards. In the category for ‘HomeSafe champion’, Owen

Lovegrove was nominated by several members of his team. Owen

joined us in June 2022 and has brought a fresh energy to health

and safety within his team. Owen constantly questions why things

are done the way they are, to ensure that he knows how to carry

out the work safely, and also to try and find better, safer ways of

working. Owen has led from the front with the Take 5 approach

to completing tasks, ensuring that methodology is both safe and

efficient. Owen ensures the right tools and equipment are available

and in good condition before starting the task. This leadership has

had a positive impact on the wider team.

Through Owen’s relentless pursuit of safety improvements the

whole team and now more engaged with identifying further health

and safety improvements. Owen was presented with his HomeSafe

Champion award at the Health and Safety conference in February,

receiving his trophy from Adele Barker, Group Chief People Officer.

36 Annual Report and Accounts 2023 | Pennon Group plc

collaboration and showcasing innovations to reduce risk and increase

productivity. One of our Strategic Partners, Kier, hosted a ‘Kier Live’

event at Exeter Racecourse in August to showcase innovations in health

and safety aligned to improved productivity, with particular focus on

excavation safety and working in the highway.

Future plans

Our targets are ambitious, however ensuring everyone who works for

us, with us or interacts with us goes HomeSafe every day is paramount,

and that requires us to have ambitious plans. HomeSafe is not a project

to be completed. It continues to be the way we work and deliver all our

performance commitments. We recognise any injury is one too many and

have very ambitious HomeSafe 2025 plans to improve health and safety

across the Group, requiring us to have our best year ever, year-on-year.

We have delivered on this for two consecutive years. We have set out our

roadmap to 2025 that becomes ever more challenging and ambitious.

However, we will relentlessly pursue improvement towards ensuring

everyone goes home safe every day.

Diversity, equity and inclusion

As one of the largest employers in the Great South West, we have a

responsibility to promote social mobility, address inequality and drive

inclusivity across our region.

We continue to champion diversity and promote an inclusive workplace.

We have published our Gender Pay Gap report for the sixth year and are

delighted to voluntarily publish our very first Ethnicity Pay Gap report.

These can both be found on our website: www.pennon-group.co.uk

It is important to be open and transparent about the gender and ethnic

diversity of our employees and this report is a key tool for us to do that,

whilst also allowing us to share the measures we have taken and will be

taking to continue to create a more diverse workforce across all roles

and levels within the organisation.

We also understand the importance of inclusion in retaining our people,

ensuring our employees feel valued, have a sense of belonging and feel

able to be themselves.

Following the acquisition of Bristol Water, we are now working to build

a sustainable workforce underpinned by our investment in new talent

programmes, with focused support and development for our female

colleagues and colleagues from underrepresented backgrounds.

It takes time to build representation at management and senior

levels, which can often be one of the causes of a pay gap, but we are

committed to attracting, retaining and developing talent from

all backgrounds.

We are delighted to have been highly commended in the finals in the

Balance in Business Awards. These awards focus on gender balance at

Executive and Senior Leadership level with support of the FTSE Women

Leaders Review.

We are pleased with the recent progress made but know there is more to

do in increasing the diversity of our workforce during the coming year.

Creating a diverse workforce

If there was ever a time for us to put gender and ethnic diversity at the

top of our agenda, then that time is now. Building a sustainable, agile and

diverse workforce is a key pillar of our People Strategy.

We are one of a handful of top FTSE businesses to have both a female

CEO and Chair and have more women on the Board than men for the

first time in Pennon’s history. Ranking in first position in the Utilities

section of the FTSE Women Leaders Review, we are exceeding the

40% target. We are pleased to have made further improvements during

the last year in two primary metrics - the percentage of the Executive

Committee and direct reports (increasing to 47.2% from 44.4%) and the

percentage of women on the Board (increasing to 55.6% from 42.9%),

and we achieved the 7th highest score in the FTSE 250. Our all-

employee female representation across the whole group has increased

to 31.4% this year from 29.5%.

Once again, we were listed in the 2023 Bloomberg Gender Equality

Index, as one of almost 500 companies globally committed to disclosing

their efforts to support gender equality through policy development,

representation and transparency. We have continued to make further

progress against this measure for transparency in gender data reporting.

Our overall score increased to 70% from 65% last year with our

disclosure score exceeding 97%.

Pennon largely operates and employs people in the South West of

England which traditionally has some of the lowest proportions of

ethnic diversity in the country. However, as a responsible business, we

believe we have an important role in ensuring we support mobility of

all types. Over the last two years, we have increased our proportion

of ethnically diverse employees significantly, from c.0.5% to 3%. This

increase has come from our more-targeted recruitment approaches

clearly acknowledging we welcome applications from ethnically diverse

applicants, as well as from the Bristol Water acquisition. Despite the

good progress we have made during the last year, there is still much

more to do if we are to achieve our ambition to have a much more

diverse workforce.

WorkFit candidate Hannah celebrating 1 year working as a Customer

Service Administrator

Pennon Group plc | Annual Report and Accounts 2023 37

Strategic Report Governance Financial Statements Other information

Our people continued

Recruitment

During the last year, we have redefined our Employer Value Proposition

to be more attractive to a wider range of talent pools. We launched our

new recruitment campaign #justaddwater as well as our new careers

website to attract a more diverse applicant group.

We have also reviewed our approach to monitoring diversity and

inclusion with a specific focus on job applications. We use a software

gender decoder tool which allows us to check all our job adverts for

masculinity to reduce the potential risk of alienating female applicants.

Similarly, we ensure a large proportion of our images used in the adverts

are of ethnically diverse employees, which encourages more diverse

candidates to apply. We are pleased that we are seeing significant

increases in the number of applications we are receiving from ethnically

diverse applicants and females into what is still a male-dominated

industry. Last year, around 28% of job applicants were female and around

26% were ethnically diverse. Additionally, offering dedicated support to

new employees through the graduate programme and supporting the

10,000 Black Interns Programme have further bolstered these numbers.

Our employee network groups

We recognise and appreciate the importance of creating an environment

in which all employees feel valued, included, and empowered to do

their best and share new ideas. Employee networks play a key role in

encouraging and supporting employees in bringing the best version

of themselves to work, contributing to an inclusive environment and

building a sense of community. Our employee networks provide peer-

to-peer support and improved awareness, contribute to the broader

Diversity, Equity and Inclusion enhancements and have delivered

business improvements in how we work together. The employee network

groups support: Race, Ethnicity and Cultural Heritage, LGBTQ+, Women,

Menopause, Grief, Financial Wellbeing, New Parents, Carers and

New Starters.

Change the Race Ratio initiative

In 2020, Pennon pledged its support to the Change the Race Ratio

initiative, a campaign to increase racial and ethnic participation in the

senior leadership of companies, as a route to encouraging more diversity

at all levels and was the first water company to do so. During 2022/23,

our pledge and ongoing commitment continued to help shape our

business activities and decisions.

10,000 Black Interns initiative

We are pleased to be a proud supporter and sponsoring business

of the 10,000 Black Interns initiative. During 2022, we successfully

completed nine internships which provided opportunities for individuals

to experience working in their chosen career functions. Following

successful completion of their internships, most students returned

to university to complete their degrees. Two have already graduated,

and we were delighted to see them successfully apply for roles on our

graduate programme. This important scheme not only offers black

students an opportunity to understand our business but also to improve

the levels of ethnic diversity across our industry.

Diversity awareness and training

We have continued our programme of Unconscious Bias training and

have rolled this out to the majority of our senior leadership and hiring

managers during the year. We have held Lived Experience group

sessions to understand what it is like to work at Pennon for employees

from minority groups. The outputs have been shared with our Diversity

Committee to understand these perspectives and consider appropriate

actions when issues are raised.

Our Gender Pay Gap

Since our last report, the composition of the Group has further evolved

with the acquisition of Bristol Water plc. Shortly after the 2021 snapshot

date, the Group completed the purchase, welcoming over 500 additional

colleagues. This is therefore the first year of including Bristol Water in

the Pennon Group results.

Our 2022 mean and median pay gaps have both seen an improvement

since 2021 which shows positive steps in the right direction.

One of our water treatment

technicians onsite

38 Annual Report and Accounts 2023 | Pennon Group plc

Highlights include:

Improvement of nearly 10% in the

mean gender pay gap in Pennon

Water Services

Improvement of 1.38% in the mean

gender pay gap in South West Water

This has led to a mean gender pay gap of 8.41% for Pennon Group

overall, with our median gender pay gap improving 3%. More can be read

on our performance and plans on our website.

Ethnicity Pay Gap

In 2022, we have voluntarily produced and published our Ethnicity Pay

Gap for the first time, which shows a pay gap of 10.3%. There is still

more for us to do in this area, including increasing the employee self-

disclosure diversity rates across the Company and continuing to attract

more ethnically diverse candidates at all levels across the Group.

Furthermore, by offering dedicated support to new employees through

the graduate programme and supporting the 10,000 Black Interns

Programme, these approaches have both helped to further attract

ethnically diverse applicants. As many of these applicants are recruited

and progress their careers, we anticipate them having a further positive

impact on our ethnicity pay gap.

Social Mobility Pledge

We continue to be a proud signatory of the Social Mobility Pledge and

have set further commitments across the Group during this year to

strengthen our resolve to deliver for our customers and communities

and support the drive to address social injustice. During the year we

have doubled our commitment to apprentice and graduate recruitment

and set new targets to support 1,000 apprentices and 200 graduates

on structured programmes by 2030. We have set a new commitment

and target to offer 5,000 work placements for young people by 2030,

significantly growing our previous work in this area but, we believe this is

vitally important in helping young people understand our Company and

the water industry and supporting them in their early careers.

One of our skilled lab technicians

Slave-Free Alliance membership

Pennon has maintained its membership of the Slave-Free Alliance,

which is part of Hope for Justice, the global anti-slavery charity. Our

membership demonstrates our commitment to the highest employment

standards for both our direct employees and those within our supply

chain. Our Modern Slavery Report is published annually and can be

found on our website www.pennon-group.co.uk

Human rights

We are fully supportive of the principles set out in the UN Declaration of

Human Rights, and the Group ethics policy outlines the high standards

of employment practice with which all employees of Pennon Group

are expected to comply. The Group also supports the International

Labour Organization’s core conventions for the protection and safety

of employees wherever they may work throughout the Group. These

standards are also embedded in our sustainable supply chain and

documented in our procurement policy and Code of Conduct for supply

chain partners.

Onsite at Banwell Water Treatment

Works, North Somerset

Pennon Group plc | Annual Report and Accounts 2023 39

Strategic Report Governance Financial Statements Other information

2022/23 highlights

• 15,696 hectares of land management was improved, including

over 300 hectares of peatland restoration. This now brings the

cumulative total to 111,515 ha, as of the end of financial year 22/23,

bringing us closer to our end of AMP7 target of 123,209 ha.

• With the help of our delivery partners we planted a total of 72,398

trees, far exceeding our annual target by nearly 50%. This now

brings the cumulative total to 220,187 trees planted, well on our

way to achieving our end of AMP7 target of 250,000 trees planted.

• We published our Biodiversity Strategy called “Growing Nature”

which is a strategy to grow nature on our land and beyond

• We are becoming increasingly transparent, including increased

Sustainability Reporting, which can be found on pages 67 to 95

2023/24 priorities

• Continuing to deliver land management, peatland restoration and

tree planting targets in collaboration with our delivery partners

• Delivering a new programme of biodiversity enhancement

schemes at targeted sites across the region, including the creation

of wet woodland

• Continuing to improve the environmental impacts of water

company operations across the region, including the installation

of eel screens, eel and fish passes and the exemplary control of

invasive non-native species

Sustainable Development Goals

The natural environment of the

South West is incredibly special.

From our precious National Parks

and Areas of Outstanding Natural

Beauty, to beautiful beaches.

We're proud to call it home.

Drought presented opportunities

for Pennon to further expand our

control of invasive non-native

species (INNs)

Burrator reservoir levels dropped to under 40%, which increased

the risk of stress in the population of American signal crayfish

in the reservoir which could cause them to move and spread,

something which landowners are legally obliged to take action

to prevent. Pennon worked with leading crayfish specialists and

carried out a pilot large scale control of these highly invasive

animals. With 2,470 trap days, nearly 6,000 crayfish were

caught. This control programme will be repeated next year.

The Bude canal was virtually devoid of water, presenting an

unusual opportunity to carry out Zebra mussel surveys to

determine their exact location along the canal. We used novel

methods to promote awareness of INNS and biosecurity,

including sniffer dogs to locate invasive species. Pennon is

proud to have the most sites in the AQUA (Aquatic Quality

Award) biosecurity accreditation scheme and remains the

only organisation to have any gold Awards - at Roadford

and Burrator reservoirs. We also have 7 silver and 22

bronze accreditations. We continue to work with a range of

stakeholders, especially supporting INNS Site Guardians,

anglers and watercraft users (boats, canoes, wind surfers, stand

up paddleboarders), both locally and nationally.

Focused on initiatives to improve the

environment

40 Annual Report and Accounts 2023 | Pennon Group plc

Water resilience

and drought

2022 saw some of the hottest, driest, weather on record as a

consequence of climate change. A combination of a lack of rain – the

4th driest summer in 130 years, the hottest summer, low levels of soil

moisture and increased demand exacerbated by the impact of the

pandemic and heatwaves, uniquely converged to put pressure at just

one of our five strategic reservoirs, at Colliford. Importantly, no-one

served by Colliford, or across our region, or visiting our region, suffered a

loss of supply or dips in water quality.

At the same time, we maintained the environmental compensation

releases from our reservoirs throughout 2022, essential to river health,

and have continued to do so in dry periods of 2023. We are investing

£125m to increase our access to water suppliers when we need them

most. In 2022/23 we have invested to secure the equivalent of 25%

demand in Cornwall and 12% in Devon. We can show that, whilst the

circumstances in this one area were challenging, culminating in a worse

than 1 in 200-year event, our actions were appropriately timed, and we

are now more resilient across the region as a consequence.

Despite a lack of new reservoir capacity across the sector in the last 30

years, over the last 15 years we have been focused on building additional

capacity. As early as 2007, Pennon invested in disused quarries in

Cornwall to repurpose as water resources. Building on this, our proactive

acquisition of Hawks Tor in March 2022, was an important mitigation,

providing additional storage, and coming online in October 2022.

Together with drought permits and focusing on demand side actions,

such as ‘Stop the Drop’ and fixing of customer side leaks for free, has

meant that from the lowest point of water resources levels at the end of

October 2022, we are now sitting at 76% and 99% respectively for South

West Water and Bristol Water. Bournemouth and the Isles of Scilly are

also in a better position heading into spring/summer 2023.

We are not being complacent as we look forward for the rest of the year

to 2024 and beyond. Our acquisition of Bristol Water, driven by synergies

and strategic water resources benefits, and our active progression of the

need for the new Cheddar 2 reservoir, brings benefits to all of the wider

south west region, including the Wessex region.

In the meantime, we are focused on building further resilience into our

region, Colliford Water Resource Zone and Roadford Water Resource

Zone, and by 2025 we will secure resources to access when we need it

most that is equivalent to 45% of Cornwall’s demand and 30% of Devon’s

demand, and this is proactively being managed as part of a Drought and

Resilience Programme, led by our new Group Drought and Resilience

Director, David Harris. David has significant experience in managing

water resources, and in managing through drought in one of the hottest

climates in the world. Our objectives are to ensure that by 31 March

2024 Colliford and Roadford strategic storages both reach 90% storage

to ensure that we do not have the risk of either dropping into Drought

Level 3 during 2024 and therefore that we can break the “drought cycle”.

Hawks Tor Reservoir, Bodmin Moor, Cornwall

Pennon is engaged and participating in the range of local and regional

public, private and third sector partnerships tacking action to tackle

climate change and nature recovery. We also convene a number of

forums and events to engage partners and share best practice and we

together reflect on progress and develop shared plans for the future.

We are proud of the delivery partnerships with whom we monitor,

collaborate and deliver our environmental improvement and biodiversity

enhancement activities.

Biodiversity enhancement

Catchment management protects and improves river quality and critical

water abstraction sources to provide clean, safe drinking water without

the need to provide additional infrastructure. It is supported by our

customers as part of Pennon’s commitment to protect and enhance the

environment in the catchments in which we operate. This performance

commitment is designed to incentivise an increase in the area of land

under active improved catchment management as part of the ‘Upstream

Thinking’ and the more recent ‘Green Recovery’ project interventions.

The annual target for Upstream Thinking is 10,000 hectares of new land

under active improved catchment management (50,000 more hectares

over the five-year regulatory period). The Green Recovery programme

will deliver a further 10,000 hectares of new land under active

management during the four years it will be active leading up to 2025. In

2022/23 a further 12,282 hectares of land were added to our Upstream

Thinking project whilst a further 3,414 hectares were added to the Green

Recovery programme, resulting in an annual delivery of 15,696 against

an annual combined target of 12,000 ha. This brings our cumulative

position to 111,515 ha of new areas under active catchment management

since April 2015. This is above our performance commitment position of

95,209ha.

Biodiversity compliance

In order for Pennon to avoid pollution harming the most special and rare

habitats and species present across the Great South West, we have a

particular focus on freshwater locations. This includes sites which are

designated as a Site of Special Scientific Interest, as a Special Area of

Conservation, as a Special Protected Area, or as a County Wildlife Site.

During 2022, there were no pollutions events at any of these locations

and therefore, as in the previous 2 years, the target was met. This

outcome supports the Pennon commitment to achieving the outcomes

of the Government Environmental Improvement plan and its ambitions

to improve the condition of all Sites of Special Scientific Interest in the

next 10 years.

Preventing biodiversity deterioration

The maritime nature, climate and geography of the Great South

West means that wildlife and nature are particularly under threat of

deterioration from the presence and spread of invasive non-native

species (INNS). Invasive non-native species (INNS) can impact on

all aspects of the business with significant operational, compliance,

reputational and financial risks and are considered to be one of the

most significant causes of biodiversity loss globally. This measure is

to incentivise the delivery of biosecurity installations at Pennon sites,

to prevent the introduction of new and spread of existing INNS and

over the last year we have accelerated our delivery of guidance and

awareness raising signage which are now installed at 90 sites. We have

also installed 11 biosecurity wash down facilities and are scoping two

further watercraft washdowns. Our exemplar biosecurity wash down

facilities at Roadford, includes a pressure washer for watercraft, an

angling dip tank and a boot scrub.

Our Partnerships

Pennon Group plc | Annual Report and Accounts 2023 41

Strategic Report Governance Financial Statements Other information

Environment continued

Net Zero – our promise to the planet

In 2021, we published our Promise to the Planet - our ambitious plan to reduce our operational carbon

emissions to Net Zero by 2030. At the same time, we joined the UN backed Race to Zero commitment

which aims to tackle GHG emissions across our entire value chain by 2045.

Pillar Our three-pillar strategy remains unchanged Progress against our three-pillar strategy

Sustainable

living

• Reducing emissions through changes to

operational practices, increasing energy

efficiency, and switching to lower carbon

fuel sources.

• Meeting our commitments to reduce leaks and

help customers to use less water – protecting

the environment and saving carbon.

• Our fleet transition plans have begun with the first 53 EV

vans delivered.

• We have partnered with Drax to deliver the charging

infrastructure required with 15 new 22KW charge points

installed across our sites.

• Our energy efficiency programme has audited 19 of our

treatment sites which has identified significant savings of nearly

1,175tCO

• Across our offices and depots, we’ve implemented a number

of energy efficiency projects including LED lighting at our

Exewater site with an aim to expand our office energy efficiency

projects over the coming year as part of our Net Zero plan.

Championing

renewables

Maximising self-generation from renewables at

our sites across the South West – working with

partnerships and utilising our expertise.

• Where we cannot generate enough electricity

to meet all our needs ourselves, 100% of what

we purchase will be from renewable sources.

• From April 2022, South West Water (excluding the acquired

Bristol Water business) switched to 100% renewable sourced

electricity as part of its new energy supply contract.

• We are targeting to produce 50% of our own energy by 2030

from a mix of embedded onsite Solar PV, floating Solar PV,

grid connected Solar PV, along with other renewables such as

hydroelectricity and making more use of our bioresources for

generating energy.

• Our on-site renewable assets have been significantly enhanced,

with 2MW of new solar capacity installed.

• We’ve expanded our renewable energy team to support

project delivery whilst maximising performance of our existing

renewable assets.

• The Group are also in advanced discussions with a range

of counterparties offering large scale solar development

opportunities at sites situated across the UK. These

opportunities, which would be initially funded through the

Group capital allocation of c.£160 million, offer the potential

for attractive commercial returns, with actionable near-term

development timelines. In May 2023 we acquired a c.40 GWh

site in Dunfermline for a total acquisition and build cost of £35m.

This site has potential for a 2-hour 60MW battery storage facility

at a cost of £25m, which would support the broader UK grid’s

move to renewables and provide healthy returns.

Reversing

carbon

emissions

• Reversing carbon emissions from our

core activities.

• Working in partnership to ensure our core

activities reverse carbon emissions through

solutions such as peatland restoration.

• Supporting the development of innovative

solutions to develop low carbon footprint

processes through research and development.

• Our catchment management programmes include peatland

restoration, improving soil management, tree planting, creating

wetlands and buffer strips and other nature-based solutions.

These all lead to more carbon being stored in the landscape

and less loss to the atmosphere. It’s also good for water storage

in the catchments and long-term resilience.

• We have planted 72,398 trees against annual target of 50,000

trees and restored 303 hectares of peatland. Our current

peatland programme aims to restore 2,800 hectares of peat

bog across the South West by 2025. Our peatland restoration in

AMP7 is expected to save around 650,000 tCO

e over the next

50 years. Meanwhile the 250k trees we aim to plant by 2025 will

save a further 100,000tCO

• Looking forward, South West Water is developing an ambitious

program of nature-based solutions for the PR24 Business Plan

submission (2025-2030) to include investigating how WaterFit

can support the improvement and opportunity for carbon

sequestration in estuarine and marine environments.

42 Annual Report and Accounts 2023 | Pennon Group plc

As a Group, we have also committed to setting both near and long-term

Science Based Targets (SBT).

Further details of how we are integrating climate into our business and

readying for a low carbon future can be found in our TCFD report on

pages 74 to 95.

GHG emissions performance

In line with good practice and to reflect the outcome of our 2021/22

materiality assessment, we set new interim Net Zero targets in 2022.

Our 2022/23 performance is presented below.

Net Zero target

2022/23

Performance*

2022/23

Target*

2025

Target* 2030 Target

% Energy usage from

renewable generation 6.8% 7% 13% 50%

Reducing GHG

emissions (%)* 65.7% 65% 70% 100%

A – Externally Assured by DNV

* Scope 2 market-based emissions only

Renewable energy

• A key pillar of our Net Zero strategy, we are targeting 50% of our net

energy use from renewable sources by 2030.

• We’ve made strong progress against our interim target of 13% in 2025

and achieved 6.8 % across the group in 2022/23. In particular we have

increased our installed on-site Solar PV capacity to 5.5MW and solar

and wind generation overall has increased 5.2% from 2021/22. Overall

our renewables capacity now totals 17MW.

• In spite of this progress, increased overall energy demand, largely

driven additional pumping required as part of our drought response,

combined with the impact of the drought conditions on our

hydropower generation (down 8% from 2021/22) meant we fell

marginally short of the 2022/23 target.

Renewable energy capacity (MW)

●

Solar

8.7

●

Hydro

5.8

●

CHP

1.4

●

Wind

0.1

1. Net Zero Plan scope includes Scope 1 & 2 (market based) GHG emissions and the

following Scope 3 activities: outsourced activities; power transmission & distribution,

business travel, grey fleet (private vehicles used on Company business)

GHG Emissions

• Scope 2 market-based GHG emissions have reduced from 89,434

tCO

e to 31,321 tCO

e this year from our 2020/21 baseline equating to

a 65% reduction.

• Overall GHG emissions against our Net Zero 2030 scope

have

decreased by 40%.

Full details of our 2022/23 GHG emissions are provided in our SECR report

from page 67.

Process emissions

Process and fugitive emissions, mainly in the form of methane (CH4)

and nitrous oxide (N2O), arise from our wastewater treatment processes.

Worldwide there is difficulty in measuring process emissions and as a

sector we are working together to update the calculated carbon aspects

of our processes. As part of the sustainable operations pillar, we are

doing two things:

• Investing in measurement - we can only manage what we can

measure. This includes collaboration with industry partners to set

up onsite emissions monitoring trials, as well as partnering with the

University of Exeter, through our CREWW partnership, to analyse the

data outputs from those trials.

Centre for Resilience in

Environment, Water and Waste

• Investigating the opportunities to mitigate process emissions from our

wastewater treatment by optimising our processes to minimise the

formation of emissions, as well as exploring the potential for longer-

term mitigation strategies such as using more innovative approaches

to cover processes and capture emissions.

Transition Plan

Through our established strategies, plans and policies, we are preparing

for a changing climate and lower carbon economy. Our annual TCFD

response on pages 74 to 95 sets out further details of this in accordance

with the TCFD recommendations. This identifies one of our key

transition risks as rising energy costs. Through our planned investment

in renewable energy alongside our dynamic hedging strategy we are

managing this risk. We are aware of the work of the newly established

Transition Plan Taskforce (TPT) to develop a ‘gold standard’ framework

for transition plans. We are considering the TPT’s guidance and will look

to publish our Group Transition Plan in due course.

For further information, please see our Taskforce on Nature-related Financial

Disclosures on page 73

Pennon Group plc | Annual Report and Accounts 2023 43

Strategic Report Governance Financial Statements Other information

Paul Boote

Group Chief Financial Officer

Financial highlights of the year

Resilient financial fundamentals

Future revenues linked to inflation, offsetting

increased cost base, including significant

increase in power costs in 2022/23.

More information on pages 44 to 47

Efficient financing strategy

Well placed in elevated inflationary environment

as a result of our diverse debt portfolio.

More information on page 47

Increasing environmental investment

49% increase in capital investment compared to

FY 2022.

More information on page 48

Investing in renewable energy generation

First site acquired in May 2023 to provide

36GWh of generation.

More information on page 51

Group Chief Financial Officer’s report

During 2022/23, volatility in the global economy, reflecting the

geopolitical situation and economic difficulties arising from the global

pandemic, has continued. We started to experience the impact of this

in the second half of the financial year ended 31 March 2022 and, as

expected, the impact of elevated inflation on power and interest costs

has reduced our near-term earnings. The second half of this financial

year has also been impacted by the drought in the South West,

which has resulted in increased levels of operating costs and capital

expenditure. Where appropriate, specifically identifiable operating costs

have been treated as non-underlying given the unprecedented summer

weather conditions with 2022 being one of the hottest, driest years

on record.

Over the long term the elevated inflationary environment provides

the Group with additional growth in long-term sustainable value

with revenues and RCV linked to November and March CPIH

inflation, respectively.

Bristol Water has contributed to the Group’s financial results since 3

June 2021 with full clearance for the merger of our wholesale water

businesses granted on 7 March 2022. The merger of South West Water

and Bristol Water completed on 1 February 2023 with the combined

water business now operating under one licence held by South West

Water Limited. Within this report, to aid comparability both now

and ongoing, the results of South West Water include the operating

performance of Bristol Water in the current year and in the prior year.

The results in the comparative financial year ended 31 March 2022 only

include Bristol Water for ten months from the date of acquisition.

The Group’s statutory revenue for 2022/23 of £797.2 million included

non-underlying revenue reductions of £27.8 million in respect of the

second issuance under WaterShare+ (£20.2 million) and our “Stop The

Drop” demand reduction incentive (£7.6 million).

The Group’s underlying revenue has increased from £792.3 million to

£825.0 million, an increase of 4.1%, with South West Water increasing

by £13.5 million and Pennon Water Services delivering further external

revenue growth, predominantly outside South West Water’s regions, of

c.£19 million.

Overall, underlying EBITDA has reduced 19.8% from £383.9 million to

£307.8 million with the increase in power costs being the most significant

contributing factor to this reduction.

Further details of the performance of South West Water and Pennon

Water Services is outlined below.

We recognise the pressure the cost-of-living crisis poses to our

customers and we are focused on providing a broad range of

affordability measures to support those in financial need. Across all

Group businesses, the potential impact of significant increases in the

cost of living on affordability has been considered in assessing our

expected credit loss charges.

44 Annual Report and Accounts 2023 | Pennon Group plc

^ Measures with this symbol are defined in the alternative performance measures section of the annual report on pages 220 to 223.

1. Includes full 12 month Bristol Water performance during 2021/22

2. Includes ODI penalties and revenue forecast incentive adjustment

Underlying revenue of £701.3 million for 2022/23 has increased by 2.0%

(£13.5 million) compared with the prior year (2021/22 £687.8 million).

Adjusting for the additional two months of revenue in this financial year

from the Bristol Water region (£22.5 million), revenue on a like-for-like

basis has reduced by £9.0 million, with the inflationary impact on

tariffs being more than offset by the reduction in demand and

regulatory adjustments to revenue, including in-year ODI penalties

from 2020/21. South West Water’s statutory revenue for 2022/23

includes a non-underlying reduction of £27.8 million in respect of

the second WaterShare+ issuance and our “Stop The Drop” demand

reduction incentive.

Underlying operating costs of £392.9 million increased by £89.9 million

(2021/22 £303.0 million) reflecting the following significant factors:

• Inflationary and other macro-economic impacts on wholesale energy

market prices and transmission costs (£48.6 million).

• Additional two months of operating costs (not including power) for

Bristol Water (£10.0 million).

• Responding to operational drivers including continued elevated

demand prolonging high production volumes, supporting

improvements to leakage and pollutions performance, and underlying

cost increases to address the extreme operating conditions including

the freeze/thaw event to ensure resilience of water supply

(£5.9 million).

• Increased costs relating to the price review for the next

regulatory period

2021/22

Revenue

2 months

Bristol Water

Revenue

Water

demand

Water regulatory

adjustments

(revenue)

Water

inflationary

price increase

PWS

Contract

Wins

PWS

demand

Growth

2022/23

Revenue

792.3

22.5

(7.0)

(25.9)

24.2

11.2

825.0

7.7

750

850

800

775

825

160

120

2021/22

PBT

2 months

Bristol Water

EBITDA

Water

demand

Water

regulatory

adjustments

(revenue)

Power

(water

business)

Other

inflationary

impacts

(excl. power)

Group

depreciation

increase

Group net

interest

charge

increase

PWS PBT &

AC PAT

(Water

2Business)

2022/23

PBT

143.5

12.5

(7.0)

(25.9)

(48.6)

(7.9)

(8.0)

(42.9)

1.1

16.8

Cash collections throughout the Group have remained robust during

the financial year. Underlying expected credit loss charges for 2022/23

of £7.0 million for South West Water (1.0% of revenue) are in line with

previous levels (2021/22 0.8%

). For Pennon Water Services, the expected

credit loss charge of £0.8 million (0.4% of revenue) is also in line with

previous levels (2021/22 of 0.3% of revenue).

The Group reported a statutory loss before tax of £8.5 million (2021/22

profit £127.7 million) after net non-underlying costs of £25.3 million

(2021/22 £15.8 million). Group underlying profit before tax decreased

to £16.8 million from £143.5 million in 2021/22. This outturn reflects the

significant near-term pressures on earnings from elevated power pricing,

financing costs and revenue reductions in the water business through

lower customer demand as a result of continued water efficiency

promotion and mechanistic regulatory adjustments

South West Water

Since 1 February 2023, the trade and the significant majority of assets

and liabilities of Bristol Water plc were transferred to South West Water

Limited under a statutory transfer mechanism set out in the Water

Industry Act. The Bristol Water brand will continue as a trading name of

South West Water. As noted above the financial performance of South

West Water includes the performance of Bristol Water in both this

financial year and the comparative year.

Revenue underlying^ (£m)

Profit before tax (PBT) underlying^ (£m)

Pennon Group plc | Annual Report and Accounts 2023 45

Strategic Report Governance Financial Statements Other information

• Pay increases of between 3-5% across the Group, with the majority

at 5%.

South West Water’s underlying EBITDA and underlying operating profit

reduced by 19.9% and 34.6% respectively. Despite the level of inflation in

tariffs lagging behind actual cost inflation in the year, overall increases

in operating costs excluding power were carefully managed to remain

broadly in line with the inflation embedded in tariffs.

The net interest charge of £145.3 million is £47.3 million higher than prior

year (2021/22 £98.0 million) primarily reflecting the impact of higher

RPI and CPI rates on index-linked debt. The Group’s efficient funding

mix, which includes a relatively low proportion of index-linked debt, and

hedging strategy minimises these market effects resulting in an Effective

interest rate^ of 5.5% (2021/22 3.9%

South West Water’s capital expenditure was £358.2 million, an increase

of £117.8 million (49.0%) on the prior year (2021/22 £240.4 million),

primarily due to water resources investments to boost supplies and

enhance water quality, including GAC schemes to provide further

resilience, and development work at the new Alderney water treatment

works in the Bournemouth region. Wastewater investments included the

roll out of our WaterFit programme, targeted investments in wastewater

pollutions hotspots and the installation of event duration monitors on

our storm overflows to achieve 100% coverage in 2022. The increase

also includes the additional two months of capital expenditure in the

Bristol Water region in this year compared to last.

Pennon Water Services

Pennon Water Services has once again performed strongly this financial

year through its disciplined approach to winning new business and

benefited from higher demand.

Non-household demand has continued to recover, up 5.8% on 2021/22,

and consumption is approaching pre-covid levels, with recovery

predominantly in the hospitality, tourism and manufacturing sectors.

New contract wins have contributed £11.2 million of additional revenue

compared to last year. The overall growth rate in this financial year was

11.6% and compares to 2021/22 levels of 19.9%.

Underlying operating costs have grown marginally behind the improving

revenues and the business has boosted its underlying EBITDA by

26.5% to £4.3 million (2021/22 £3.4 million). This strong performance

has resulted in the business reporting a profit before tax of £1.8 million

(2021/22 £1.0 million), a significant 80% increase on the previous year.

The business continues to maintain its focus on targeting high quality,

sustainable customers who will benefit from the value-added services

that form part of Pennon Water Services’ differentiated service

proposition, with new annualised contract wins of c.£14 million secured

during the year.

Group net finance costs

Total net finance costs for the Group of £118.2 million include £18.4

million non-underlying gain resulting from the repayment of the Bristol

Water plc index-linked bond due 2041. Underlying net finance costs

for the Group of £136.6 million are £42.9 million higher than last year

(2021/22 £93.7 million), driven largely by the current high levels of

inflation impacting index-linked debt charges but also includes an

additional two months’ finance cost contribution from Bristol Water in

2022/23. Whilst the Group benefits from a lower proportion of index-

linked debt compared to the water industry average, following the Bristol

Water acquisition c.30% of Pennon’s regulated water businesses’ gross

debt was index linked. Actions have been taken during the second half

of the year to smooth both inflation volatility over the period to 2025

and lower our level of index-linked debt over the long-term to around

20-25%. The non-cash element of our finance charges, which accretes to

the debt principal, was c.£84 million (2021/22 c.£36 million).

The Group continues to efficiently secure funding for South West Water

through its Sustainable Financing Framework and to ensure c.60% of its

interest rate risk is mitigated in line with the Group treasury policy, which

is achieved through issuing both fixed rate debt and effective interest

rate hedging, with a further element being index-linked. Prior to the

acquisition of Bristol Water, the index-linked proportion of debt had been

maintained at a relatively stable proportion of c.25%.

In the second half of the year, the Group reduced its proportion of index

linked debt by repaying the Bristol Water plc index-linked bond due

2041 and entered into £300 million of RPI to fixed rate swaps to fix the

interest charge over the period to 2025 to smooth the impact of inflation

over K7. These changes have helped to manage the Group’s exposure to

the current volatility in its finance costs.

Effective Interest Rate^ (%)

2018/19 2019/20 2020/21 2021/22 2022/23

3.4

3.5

2.5

3.9

5.5

Share of post-tax profit from associated companies

As part of the acquisition of Bristol Water in June 2021, we obtained a

30% interest in Water 2 Business Limited (W2B), a water retailer joint

venture with Wessex Water. This investment is accounted for under the

equity method and following a period of losses, as the business reached

scale, we are pleased to recognise £0.3 million of profit after tax from

associated companies in this year’s results.

Non-underlying items and acquisition accounting

Non-underlying items for 2022/23 total a charge before tax of £25.3

million (2021/22 charge of £15.8 million). Non-underlying items are those

that in the Directors’ view should be separately identified by virtue of

their size, nature or incidence and where they believe excluding non-

underlying items provides a more useful comparison of business trends

and performance.

The non-underlying charge of £25.3 million consists of:

• £20.2 million reduction in revenue being the recognition in full of

the second issuance of our WaterShare+ scheme, which has been

extended to include Bristol Water customers and £2.2 million of

associated costs.

• A combination of elevated demand from increased tourism and

record-breaking extremes of prolonged dry and hot weather led

to extremely low water storage levels in the Cornwall region.

Drought permits were issued allowing increased extractions and

water saving measures were issued for the South West Water region

for the first time since 1995. To ensure the region could be supplied

with water over the summer and continuing into 2023, South West

Water has instigated a series of mitigating measures and one-

off expenditure to address the situation. Due to the exceptional

combination of these events and the significance of the mitigating

actions this has resulted in the recognition of £7.6 million revenue

reduction from the Stop the Drop discount incentive to reduce

water consumption and £9.4 million of specific costs relating to the

measures being treated as non-underlying.

• £4.3 million of costs in connection with the merger, statutory licence

transfer and integration of Bristol Water into South West Water.

• £18.4 million gain resulting from the repayment of the Bristol Water plc

index-linked bond due 2041, as part of re-balancing the proportions of

index-linked debt in the Group debt portfolio.

The non-underlying charges in 2022/23 give rise to a net tax credit of

£5.3 million in relation to the above items. In 2021/22 the total non-

underlying tax charge was £98.2 million, including a credit of £1.3 million

in connection with non-underlying pre-tax items and a £99.5 million non-

underlying deferred tax charge, recognised for the change in future tax

rate which was substantively enacted during the previous financial year.

Group Chief Financial Officer’s report continued

46 Annual Report and Accounts 2023 | Pennon Group plc

As part of the requirements of acquisition accounting, we have finalised

the fair values of the acquired balance sheet of Bristol Water. The

provisional values reported in the Group’s results to 31 March 2022

have been revised to reflect a £5.5 million increase in the fair value

of the acquired deferred tax liabilities with a corresponding increase

in Goodwill.

Goodwill arising from the acquisition of £121.6 million has been recorded

in the Group consolidated balance sheet and is attributed to the

synergies expected to be derived from the combination and the value of

the workforce which cannot be recognised as a separately identifiable

intangible asset.

Responsible approach to tax

The Group is pleased to confirm it has once again maintained the Fair

Tax Mark accreditation for the year. This is the fifth year in succession

that the Group has been awarded the accreditation and we are proud of

our responsible approach to tax.

The overall 2022/23 tax credit for the Group is £8.9 million (2021/22

charge of £112.1 million). On an underlying basis, the net tax credit for

2022/23 for the Group of £3.6 million (2021/22 charge of £13.9 million)

consists of:

• Current tax credit of £2.7 million, reflecting an effective tax credit rate

of 16.1% (2021/22 charge of £5.0 million, 3.5%). This reflects a £2.7

million current tax credit in respect of the prior year as a result of

additional super deductions and lower non-deductible expenditure

following the preparation and submission of the 2022 corporate

tax computations.

• Deferred tax credit of £0.9 million (2021/22 charge of £8.9 million).

This reflects a current year deferred tax credit of £1.6 million in

relation to capital allowances in excess of depreciation charged

across the Group, largely due to super-deductions, offset by tax losses

carried forward for utilisation in later periods. A £0.3 million credit

also arises as a result of the change in tax rate, on current year items

(including tax losses generated in the year carried forward for future

relief) which will crystallise at 25% rather than 19%. It also includes a

deferred tax charge in respect of the prior year of £1.0 million which

arises largely due to additional super deductions.

There is also a non-underlying tax credit of £5.3 million in 2022/23

relating to the non-underlying items set out above. This includes a

current tax credit of £2.8 million in relation to losses to be carried back

to relieve against prior year profits, and a deferred tax credit of £2.5

million which relates to losses carried forward for utilisation in later years

and the unwind of the fair value adjustment in relation to the Bristol

Water bond terminated in the year.

The Chancellor announced in the March Budget, that the 130% super-

deduction on plant and machinery will be replaced with full expensing

deductions for the next three years from 1 April 2023 to 31 March 2026,

with a plan to make this permanent when fiscal conditions allow. Without

this change, the writing down allowance would have reverted to the

previous rate of 18% on plant and machinery (where the expected life

is less than 25 years). The 50% first year allowance on long life assets

and integral features has been extended for the same three-year period,

again with the aim to make this a permanent change. Without this, relief

would have reverted to 6% per annum on a reducing balance basis.

Given the Group’s continued capital investment programme, these

changes mean that the Group anticipates generating tax losses in

the remaining years of K7, and therefore does not expect to make any

corporation tax payments during this time.

Earnings per share

The Group has recorded a statutory earnings per share of nil pence per

share for the year ended 31 March 2023 (2021/22 4.9 pence per share).

This includes a net non-underlying charge before tax of £25.3 million

and a net non-underlying tax credit of £5.3 million. Statutory earnings

per share for 2021/22 were impacted by the significant non-underlying

deferred tax charge in respect of the change in corporation tax rate and

also the average number of shares used to derive the earnings per share

were impacted by the share consolidation in July 2021.

Our adjusted earnings per share^ excludes the impact of deferred tax

charges and non-underlying items. For the Group, we have generated

adjusted earnings per share^ for 2022/23 of 7.3 pence (2021/22 50.2

pence), with this reduction in earnings reflecting the significant impacts

from higher power costs and the impacts of inflation on finance costs

and operating costs more generally.

Sustainable net debt position

The Group’s cash flow from operating activities for 2022/23 was £313.7

million (2021/22 £334.2 million). Cash collections have remained robust

and we continue to monitor cash collections closely and are focused on

providing a broad range of affordability measures to support those in

need of support.

Net interest payments were £154.8 million (2021/22 £72.0 million) within

the increase driven by £51.5 million of interest paid on lease settlements

relating to interest accreted to the lease principal and a full 12-month

impact of Bristol Water. A significant element of the increased income

statement finance charges arises from our index-linked debt, and is non-

cash, as the indexation element accretes to the debt principal repayable

on maturity.

Our accelerated environmental investment programme has resulted

in an increase in capital investment cash outflows of £102.9 million to

£330.5 million (2021/22 £227.6 million).

Other significant movements in net debt in 2022/23 include the final

tranche of the share buy-back programme of c.£40 million, payment of

our interim and final dividends for 2021/22 and £84.3 million of non-cash

indexation on our loan instruments. Other movements of £116.4 million

arise in the main from a reduction of debt associated with historically

accreted lease interest (£51.5 million), the unwinding of fair value

adjustments on acquired debt (£44.3 million), notably following the

repayment of the Bristol Water plc index-linked bond due 2041, and VAT

recovered on lease repayments (£21.5 million).

The Group’s IFRS net debt at 31 March 2023 was £2,965.4 million

(31 March 2022 £2,682.9 million), which is also referred to as sustainable

net debt. This includes fair value adjustments on acquired debt of

£124.0 million

which are released over the life of the related debt

instruments. The Group’s net debt position excluding these adjustments

is £2,841.4 million.

Sustainable net debt

Pennon Group – summarised net debt flow

(£m) 2022/23 flows

Net debt excluding fair value uplifts 1 April (2,514.3)

Opening balance 1 April (2,682.9)

Cash generated from operations 313.7

Corporation tax paid (1.4)

Net interest paid (154.8)

Capital investment (330.5)

Repurchase of own shares (40.0)

Ordinary dividends paid (101.6)

Non-cash index-linked accretion (84.3)

Other movements

(3)

116.4

Closing balance 31 March (2,965.4)

Net debt excluding fair value uplifts

31 March (2,841.4)

(2)

Agile and efficient financing

The Group has made several changes to its financing since the end of

the last financial year to ensure we can efficiently support the needs

of our business strategy and are agile to address the changes in the

macro-economic environment.

Since 31 March 2022, the Group has secured and completed c.£825

million of new and renewed facilities, including:

• Our first syndicated £300 million private placement with an average

maturity of 12 years.

1. 2021/22 water business comparator of 3.7% re-analysed to provide comparative performance under post-integration South West Water Limited group of companies’ structure

2. Carrying value of fair value acquisition adjustments to debt as at 31 March 2023 - £36.4m Bournemouth Water, £87.6m Bristol Water.

3. Including fair value unwinds on settlement of Bristol Water 2041 bond, a reduction of debt associated with historically accreted leave interest and net VAT recoverable from

lease repayments.

Pennon Group plc | Annual Report and Accounts 2023 47

Strategic Report Governance Financial Statements Other information

• £205 million of new term loans and leasing with an average maturity

of 9 years.

• £25 million 20-year private placement.

• £295 million of new and renewed revolving credit facilities.

During 2022/23 all new and renewed facilities were raised under our

Sustainable Financing Framework.

Our lease portfolio will continue to deliver long-term benefits as part of

our diverse range of facilities as we look to further diversify our portfolio

going forward, as a strand of our Sustainable Financing Framework.

During the year, we continued our programme of repayment and

restructuring of the portfolio to ensure its continued efficient and

effective management with a further c.£167 million (including interest on

leases) repaid during 2022/23.

The Group has taken steps during the year to re-balance the proportion

of index-linked debt to align with previously maintained levels for the

longer-term. In November 2022, we reduced our index-linked debt

proportion by repaying the £40 million Bristol Water plc index-linked

bond due 2041, generating an £18.4 million non-underlying gain.

The statutory transfer of the Bristol Water business to South West

Water completed in February 2023, including outstanding debt being

transferred on an unsecured basis.

Resulting from the changes above and drawing of new debt during the

year, South West Water

gross debt at 31 March 2023 was £2,918 million

(31 March 2022 £2,848 million). The debt has a maturity of up to 34

years with a weighted average maturity of c.15 years.

At 31 March 2023, South West Water

net debt to RCV^ ratio

stood

at 60.8%, (31 March 2022 62.0%). This is broadly in line with Ofwat’s

notional structure of 60%.

South West Water’s cost of finance, with an Effective interest rate^ in

2022/23 of 5.5% remains among the lowest in the industry, continuing to

benefit from the diverse portfolio of debt.

Financing portfolio - strategic positioning

The Group has a strong liquidity and funding position with £420 million

of cash and committed facilities as at 31 March 2023. This consists

of cash and cash equivalents of £165 million (including £22 million

of restricted funds representing deposits with lessors against lease

obligations) and £255 million of undrawn facilities. £104 million of the

cash holdings are held at the Pennon company level.

Following the successful transfer of Bristol Water to South West Water,

this has meant changes to the regulatory licence and we are targeting

to obtain a strong investment-grade rating for South West Water for the

start of the next regulatory period.

South West Water

net debt at 31 March 2023 is a mix of fixed / swapped

(£1,854 million, 65%), floating (£609 million, 21%) and index-linked

borrowings (£402 million, 14%), which reflects our diverse debt portfolio

and compares to an industry average

of fixed / swapped 42%, floating

4% and index linked 54%. New debt raised during this regulatory period

has been fixed to align to iBoxx indices in line with Ofwat’s approach to

allowed cost of debt. Where appropriate, derivatives are used to fix the

rate on floating rate debt.

As we progress through the remainder of K7, we expect the mix of our

debt portfolio to evolve and are strategically targeting index-linked debt

to represent 20-25% of our portfolio in the long term. This will enable

the Group to maintain its financing flexibility, whilst remaining within our

treasury policy of at least 60% fixed rate debt.

As the Group continues to develop, and we see our funding

requirements grow, we expect the Group to manage its portfolio with

larger and more diverse debt instruments, taking advantage of the

public ratings once established in 2025, in line with Ofwat’s final PR24

methodology requirements.

Major Categories of Capital Expenditure (£m)

Group Chief Financial Officer’s report continued

£358.3m

TOTAL

●

South West Water (Water):

£210.6m

●

South West Water (Wastewater):

£147.6m

●

Other:

£0.1m

Longham Lakes,

Bournemouth

48 Annual Report and Accounts 2023 | Pennon Group plc

We will continue to maintain a diverse portfolio of debt to support

flexibility and growth opportunities. We expect that our reinvestment of

our outperformance in environmental enhancements will be financed

through debt, resulting in increased net debt to RCV gearing in the short

term. In the long-term this investment will provide returns though K8

revenues and a higher RCV. We now expect RCV to reach £5.2bn at the

start of K8.

Water business Net Debt Structure (£m)

£2,865m

TOTAL

●

Index-linked:

£402m

●

Floating:

£609m

●

Fixed:

£1,854m

Internal borrowing

South West Water’s funding is treated for regulatory purposes as

ring-fenced. This means that funds raised by South West Water are not

available for other areas of the Group.

Bristol Water was transferred to South West Water in February 2023

and all the debt is now managed on the South West Water standard

covenant package as unsecured and unrated.

Pennon Water Services funding is predominantly provided by Pennon.

Pennon will continue to use funds to support the Group’s ongoing

operations as appropriate.

Taxation strategy

Transparency remains a critical component of our approach, recognising

that openness and honesty with our customers is essential. Optimising

our tax position benefits them, for example by keeping water bills down,

but we do not enter into artificial tax arrangements, use tax havens or

take an aggressive stance in the interpretation of tax legislation. As a

long-term business with a long-term approach to financial management,

there have been no changes to the Group’s overall tax strategy this year

compared to last.

We continue to hold the Fair Tax Mark. Launched in 2014, the Fair Tax

Foundation’s purpose is to encourage and recognise businesses through

their Fair Tax Mark accreditation scheme. This is an independent

accreditation scheme for businesses paying their fair share of

corporation tax and reporting on their tax practices transparently.

Achieving the Mark demonstrates that we are paying the right amount

of corporation tax in the right place at the right time and apply the gold

standard of transparency.

Under our tax strategy we:

• At all times, consider the Group’s corporate and social responsibilities

in relation to its tax affairs.

• Operate appropriate tax risk governance processes to ensure that the

policies are applied throughout the Group.

• Comply with our legal requirements, file all appropriate returns on

time and make all tax payments by the due date.

• Consider all taxes as part of ongoing decisions.

• Do not enter into artificial tax arrangements nor take an aggressive

stance in the interpretation of tax legislation.

• Do not undertake transactions that are outside the Group’s low-risk

appetite for tax or not in line with the Group’s Code of Conduct.

• Engage with HMRC in a proactive and transparent way and discuss

our interpretation of tax laws in real time, such interpretations

following both the letter and spirit of the laws.

• Do not have any connections with tax havens unless it is necessary

for the purposes of trading within those jurisdictions.

• As a long-term business with a long-term approach to financial

management, there have been no changes to the tax strategy which

is reviewed and reaffirmed on an annual basis.

Further details are given in the Group’s tax strategy report available on

the Pennon Group website www.pennon-group.co.uk

Regulatory Capital Value (RCV) (£m)

●

South WestWater

2019 2020 2021 2022 2023

£3,505 m

£3,573 m

£4,209 m

£4,716m

£3,393 m

1. Based on South West Water Limited’s group of companies, including Bristol

Water plc.

2. Based on South West Water

net debt and shadow RCV

3. UK water position as at 31 March 2022 as per published annual performance reports

- weighted average

Pennon Group plc | Annual Report and Accounts 2023 49

Strategic Report Governance Financial Statements Other information

Tax contribution 2022/23 – borne/collected

£95m

TOTAL

●

Employment taxes:

£41m

●

Business rates:

£35m

●

Corporation tax:

£1m

●

Environmental payments:

£12m

●

Fuel excise duty:

£1m

●

Other:

£5m

The Group’s total tax contribution (TTC) for 2022/23 amounted to £95

million (excluding £150 million of VAT receipts) (2021/22 £88 million

reanalysed to excluded VAT receipts). TTC is a standardised measure of

a group’s total tax contribution, having been developed by PwC and the

100 Group (FTSE 100 Finance Directors). It is acknowledged as being a

fair and comparable representation of total tax cost.

TTC looks at taxes borne, and taxes collected. Taxes borne includes

all taxes which are a cost to the Group, such as landfill tax, business

rates, corporation tax and employers’ National Insurance contributions

(NICs). Taxes collected and recovered highlights where the business is

collecting tax on behalf of HMRC.

Employment taxes totalled £41 million (2021/22 £37 million) including

employees’ Pay As You Earn (PAYE) and total NICs. The total amount of

£41 million includes PAYE of £4 million (2021/22 £4 million) on pension

payments made by the Group pension scheme. A net amount of £30

million (2021/22 £27 million) was collected on behalf of the authorities

for employee payroll taxes.

Business rates of £35 million (2021/22 £34 million) were paid to local

authorities. This is a direct cost to the Group and reduces profit

before tax.

UK Corporation Tax payments to HMRC in the year were £1 million

(2021/22 £7 million) in relation to payments due for prior years.

There were no payments due in respect of 2022/23 as the Group has

generated tax losses in the year.

Payments to the Environment Agency and other regulatory bodies total

£17 million (2021/22 £17 million). This reduces profit before tax.

Fuel excise duty of £1 million (2021/22 £1 million) related to transport

costs. This reduces profit before tax.

VAT repayments of £150 million due (2021/22 £88 million) have been

received to the Group from HMRC. VAT has no material impact on profit

and is excluded from the TTC figure to avoid distortions in this.

Contingencies

Ofwat and the Environment Agency announced an industry-wide

investigation into sewage treatment works on 18 November 2021. In

June 2022, as part of its ongoing investigation, Ofwat announced

enforcement action against South West Water Limited, alongside the five

companies which received enforcement notices in March 2022.

On 23 May 2023 Ofwat announced an investigation into South West

Water’s 2021/22 operational performance data relating to leakage

and per capita consumption. This operational performance data was

reported in South West Water’s Annual Performance Report 2021/22.

All company data is subject to extensive process checks, which include

both internal and external assurance. All data disclosed in South West

Water’s Annual Performance Report is subject to checks and balances

carried out by South West Water’s external technical auditor.

The company continues to work openly and constructively with

regulators to comply with the formal notices as part of these ongoing

investigations by engaging and providing information as required.

Pensions

At 31 March 2022, the surplus on retirement obligations of £66.3 million

comprised a surplus on the Group’s principal pension scheme, Pennon

Group Pension Scheme (PGPS), of £59.5 million and a surplus of £6.8

million in respect of Bristol Water’s defined benefit pension obligations.

The overall surplus at 31 March 2023 has reduced to c.£29 million

reflecting the following principal movements:

• £23 million net reduction in surplus from the movement in financial

actuarial assumptions with significant reductions in liabilities, from

the increasing discount rate, offset by the reduction in asset values,

(reflecting market volatility and the greater level of hedging in

the schemes).

• £16 million reduction in surplus with the change in other actuarial

assumptions reflecting the impact of inflation on immediate term

pension increases, and other changes in actuarial assumptions from

the March 2022 triennial valuation.

The triennial valuation of PGPS as at 31 March 2022 has been agreed

and no deficit recovery payments are required. The valuation recorded

an actuarial technical provisions surplus of c.£8 million, representing

c.101% funding. The valuation reflects the improvements in the funding

of PGPS over recent years supported by the responsible payments made

by the Group. The ongoing funding requirements for the Company to the

scheme are limited to the continuing administration expenses.

As funding of PGPS has improved the investment portfolio has been

de-risked through increasing the scheme’s real gilts hedging position

through Liability Driven Investments (LDIs), which are commonly used

by UK pension schemes. Whilst LDIs remain a critical part of the hedging

strategy, further risk management and monitoring strategies have been

implemented to help protect against the potential for rapid movements

in yields given what was seen in gilt markets last autumn.

Bristol Water’s pension surplus relates to the Bristol Water Section of

the Water Companies Pension Scheme (WCPS). The liabilities of the

scheme are fully insured, securing the pension promises made to the

benefit of members through a bulk annuity policy. Changes in actuarial

assumptions have little impact on the surplus recognised as the change

in liabilities is materially matched by the change in asset values through

the bulk annuity policy. As a result the net surplus of c.£7 million

remains largely unchanged. The surplus recognised is restricted by a tax

deduction of 35% under UK tax legislation.

Dividends

The Group continues to strive to deliver on its commitments to

customers, shareholders and stakeholders as our investments

drive strong and sustainable results. Around two thirds of Pennon’s

shareholders are UK pension funds, savings, charities and individuals

with almost half of the Group’s employees, now including Bristol Water,

also being shareholders. Following the second issuance of our unique

WaterShare+ initiative, customers now make up more than four times the

number of institutional shareholders.

Pennon’s sector-leading 2020-2025 dividend policy of growth of CPIH

+2% reflects the Board’s ongoing confidence in the Group’s strategy

and is underpinned by continued RORE outperformance in South

West Water.

The Board has recommended a final dividend of 29.77 pence per share

for the year ended 31 March 2023. Together with the interim dividend of

12.96 pence per share paid on 5 April 2023 this gives a total dividend

for the year of 42.73 pence. This represents an increase of 10.9%

(March 2023 CPIH + 2%) on 2021/22. Pennon offers shareholders

the opportunity to invest their dividend in a Dividend Reinvestment

Plan (DRIP).

1. UK water position as at 31 March 2022 – weighted average

Group Chief Financial Officer’s report continued

50 Annual Report and Accounts 2023 | Pennon Group plc

The proposed dividends totalling £111.7 million are covered 2.8 times

by underlying EBITDA (2021/22 3.8 times). The reduction in EBITDA

dividend cover^ was expected given the significant near-term pressures

on earnings from elevated power pricing. Pennon Group plc has

substantial retained earnings and a sustainable balance sheet to support

its stated dividend policy. The strong fundamentals of its principal

operating subsidiary, South West Water Limited, underpin this policy

with its strong RORE and growing RCV. Dividends are charged against

retained earnings in the year in which they are paid.

Investing for sustainable growth – renewable

energy generation

In line with both our long-term sustainable growth strategy in UK

environmental infrastructure and our desire to accelerate on our Net

Zero target by 2030, we have allocated £160 million for investment in

renewable energy generation. This strategy will also benefit the Group

by reducing our exposure to future volatility in wholesale power markets,

that we have experienced this year, and will provide commercial returns

ahead of those earned from our regulatory water business.

In May 2023 Pennon Power Limited, a direct subsidiary to Pennon Group

plc, acquired a c.40 GWh site in Dunfermline for an expected total

acquisition and build cost of around £35 million. This is an attractive

ready to build site, with consents in place, and is expected to commence

generation in 2024. This site also has capacity for further investment of

around £25 million for a 2-hour 60 MW battery storage facility that will

support the UK’s transition to renewable energy and earn further

healthy returns.

In addition, we are in advanced discussions on a further four sites that

could provide a further 150 GWh generation, potentially bringing our

total generation to c.190 GWh from these projects. This amount equates

to around 45% of our electricity usage and would be a big step forward

towards our 2030 target of 50% self-generation.

Financial outlook

Looking to 2023/24, there are some signs of inflation stabilisation before

it recedes to more normal levels, whilst the global economy continues to

be volatile and reactive to a range of ongoing geopolitical dynamics.

We recognise the pressure that inflationary pricing increases pose to

our customers, and customer bill affordability continues to remain a key

consideration for us. Our broad range of affordability measures ensures

we are able to support those in need of support, and we continue to

focus on delivering improvements efficiently and effectively.

We expect overall revenues to increase with the combined impact

of inflation on our 2023/24 tariffs (net of the year on year impact of

regulatory adjustments and ODI penalties) and ongoing expected

growth in our non-household retail business.

Whilst wholesale cost levels remain elevated, we anticipate, power costs

to remain broadly flat year on year

compared to 2022/23 total power

costs of c.£103 million (wholesale costs £67 million, non-commodity

costs £36 million). We have recognised the pressure sustained high

levels of inflation place on our colleagues and pay increases of c.5-7%

have been agreed across the Group with a greater allocation towards

lower income bands. In other areas the sustained elevated levels of

inflation continue to place upward pressure on our input costs. Despite

these upward cost pressures we are targeting to maintain total operating

costs in South West Water at 2022/23 levels, whilst growth in the retail

business outside our region will increase wholesale water costs.

We have reduced the level of volatility on our interest costs by reducing

our exposure to index-linked debt with £300 million of RPI swaps to

smooth the impact of inflation over the remaining years of K7. Whilst the

changes we have made in our financing remain efficient the increased

borrowing rates on variable debt and increased debt levels to support

our capital investment profile are expected to result in an overall

increase in net finance costs.

Overall, these impacts are expected to result in improvements in

near-term earnings and, in the longer term, the elevated inflationary

environment provides the Group with additional growth in long-term

sustainable value, with revenues and RCV linked to November and

March outturn inflation, respectively.

Paul Boote

Group Chief Financial Officer

31 May 2023

1. Based on current market pricing and current hedged position of c.75% for 2023/24

Roadford Reservoir

in West Devon

Pennon Group plc | Annual Report and Accounts 2023 51

Strategic Report Governance Financial Statements Other information

The Group’s risk management framework encompasses both a ‘top-

down’ and ‘bottom-up’ approach. This:

• allows risks and opportunities to be cascaded and

escalated effectively.

• enables a common understanding of the risks and opportunities

and their potential impact on the achievement of the Group’s

strategic priorities.

• provides a multi-layered approach to the review and challenge of risk.

During the year, as part of the broader integration of Bristol Water and

other organisational changes, the Group’s risk management framework

and associated governance and processes have been further enhanced

and standardised across the Group. All members of the Pennon

Executive attend the Pennon Executive Risk Committee meetings,

reflecting the increasing interconnectedness and complexity of the

principal risks facing the Group.

Our risk assessment methodology

A consistent methodology is applied in the assessment of the Group’s

risks (including climate-related risks) and opportunities, which considers

both the likelihood of the risk occurring and the potential impact.

Impact is assessed across the following financial and non-financial

categories: financial, safety, environmental, stakeholder and customer

impact, reputation, sustainability, and quality. Over the past year the

Group has enhanced the impact assessment criteria to better reflect

environmental and sustainability considerations, including impacts to the

Group’s climate, carbon, and nature objectives.

Likelihood is defined as likelihood over the next five years under

four categories (probable, possible, unlikely, or rare) with defined

probability thresholds.

Risks are assessed on both a ‘gross’ (without the consideration of

existing control measures) and ‘net’ (with consideration of existing

control measures) basis. The impact and likelihood is multiplied and

plotted on a 4x4 matrix to determine the overall Red, Amber, Green

(RAG) risk rating which is used to prioritise risks and actions.

Risk management and principal risks

Managing our risks

The long-term success of the Group is dependent on the effective

management of risks and opportunities and remains a key focus for the

Pennon Board and Executive. To achieve this, Pennon operates mature

risk management and internal control frameworks which are aligned to

the Group’s strategic priorities and are embedded into our processes,

culture and ways of working. These frameworks form a key part of our

governance structure ensuring that there is robust review, challenge and

assurance over the management of both our current and emerging risks

and opportunities.

Pennon risk management framework

The Group operates within a complex and evolving risk landscape which includes changing

Government policy, multiple regulatory frameworks and increasing customer and wider

societal expectations.

Risk

monitoring

and reporting

Risk

mitigation

Risk

appetite and

identification

Risk

assessment

Risks Matrix

1 2 3 4

Minor Moderate Major Severe

Impact

Likelihood

Probable (>70%)

Possible (30-70%)

Unlikely (10-30%)

Rare (<10%)

Opportunity Matrix

1 2 3 4

Minor Moderate Major Severe

Impact

Key - Financial Impact

Minor Moderate Major Severe

<2%

PAT

2% - 5%

PAT

5% - 7.5%

PAT

>7.5%

PAT

52 Annual Report and Accounts 2023 | Pennon Group plc

Key risk management responsibilities

• Reviews the Group’s principal risks

and mitigation strategies.

• Provides challenge to individual

functions over the management of

their business-level risks.

• Considers mitigation plans for High

Impact Low Likelihood (HILL) risks.

• Receives functional and

departmental updates on business

level (bottom-up) risks.

• Performs horizon scanning on

emerging risks and opportunities.

Key assurance activities

• Quarterly review of Group principal

risks and key subsidiary /

functional risks.

• Undertakes deep-dive reviews of

specific risks.

Pennon Executive Risk

Committee

Group Internal

Audit

Key risk management responsibilities

• Day-to-day management of the Group’s principal and operational risks.

• Establishes the relevant Group-wide risk management processes

and procedures.

• Maintains the internal control framework.

Key assurance activities

• Performs a thorough appraisal of the Group’s principal and emerging

risk profile quarterly.

• Monitors the Group’s performance against operational and

financial metrics.

• Establishes and reviews policies, procedures and delegated authorities

Pennon Executive

Second line

Third line

Operational Risk Management

Asset Management Project Risk Management

Key risk management

responsibilities

• Identifies and

assesses subsidiary

/ functional-level

risks.

• Implements

and executes

appropriate risk

mitigation strategies,

aligned with the

agreed risk appetite.

• Monitors compliance

with internal

control framework.

• Review of subsidiary

/ functional principal

risks on a quarterly

basis by senior

leadership teams.

Key assurance activities

• Functions provide

assurance activities

across key business

processes including

regulatory, legal,

health & safety.

• Self-certification of

compliance

with the internal

control framework.

Individual

subsidiaries /

functions

First line

Key risk management

responsibilities

• Establishes the

Group’s approach to

energy management

and risk exposure in

line with the desired

risk appetite.

Key assurance activities

• Monitors adherence

to agreed strategies

and risk positions.

Energy Risk

Committee

Audit Committee

Key risk management responsibilities

• Reviews the effectiveness of the Group’s risk

management framework.

• Reviews the adequacy of the internal control framework.

Key assurance activities

• Performs quarterly deep-dive reviews on principal risks.

• Approves the Group Internal Audit Plan.

• Receives reports on the outcomes of key assurance activities.

Pennon Board

Oversight

Key risk management responsibilities

• Sets the Group’s strategic objectives.

• Establishes the Group’s risk appetite.

• Determines the Group’s principal risks.

• Ensures an effective internal control framework.

Key assurance activities

• Quarterly review of the Group’s principal risks against the

determined risk appetite.

• Quarterly review of the Group’s emerging risk log.

Governance of the risk management and internal control frameworks

The consideration and reporting of risk management and the key responsibilities and activities which encompass the Group’s risk management

framework are summarised below.

Principal and business-level risks are subject to regular review and challenge by individual functions, the Pennon Executive Risk Committee, the

Pennon Executive and the Pennon Board.

The Group mitigates its risk exposure in line with the desired risk appetite and tolerance levels, through the operation of a robust internal control and

assurance framework which is aligned to the ‘three lines’ model.

The Group Executive and the Pennon Board obtain assurance over the effectiveness of the internal control environment across all three lines of

defence from a variety of internal and external assurance providers, including an independent Group Internal Audit function.

Key risk management

responsibilities

• Provides

independent, risk-

based assurance on

the effectiveness

of the internal

control framework.

• Coordination

of independent

assurance activities.

Key assurance activities

• Regular reporting

to Audit Committee

and Pennon

Executive on the

effectiveness of

internal controls and

the outcomes of key

assurance activities.

Pennon Group plc | Annual Report and Accounts 2023 53

Strategic Report Governance Financial Statements Other information

Environmental, social and governance risk management

Our purpose and values recognise the broader societal role that the

Group plays within the regions and communities it serves. Consequently

environmental, social and governance (ESG) considerations are at the

heart of the Group’s activities and how we operate as a responsible

business. The identification, assessment and management of ESG

risks and opportunities are integrated into the Group’s overall risk

management framework and methodology. The delivery of ESG metrics

and targets, and the associated risks and opportunities, are monitored

thorough the ESG framework by the ESG Committee. Further detail is

provided on page 126.

As the owner of a water and wastewater company, the Group

acknowledges the fundamental impact that climate change has on the

Group’s strategy and priorities and is considered to be pervasive across

the Group’s principal risk profile. The assessment of the individual

principal risks, as detailed within the table below, has included the

consideration of both physical and transitional climate change impacts,

where relevant, and the mitigating actions being taken.

Further detail on the specific physical and transitional climate change

risks and opportunities relevant to the Group, along with mitigating

actions being taken, are detailed further within TCFD on pages 74 to 95.

South West Water technical (non-financial) data

In addition to the risk management framework detailed above which

applies across the Group, recognising the importance of the regulatory

ODI framework, South West Water engages independent, third-party

auditors to audit the accuracy of the technical (non-financial) data

reported within the various annual performance reports and regulatory

publications and submissions, including its performance commitments

and environmental data. Furthermore, a third party provider, DNV,

has also performed additional assurance work over selected

sustainability measures.

Continuous improvements to risk management and

internal control

The Group is committed to continuously improving its ability to

identify and respond to current and emerging risks. Examples of risk

management improvements during the year include:

• The creation of a Compliance function overseen by the Group

Compliance Director, bringing together key second line compliance

activities undertaken across the Group

• A Compliance Committee has been established enhancing the

governance over key compliance aspects and returns

• Detailed analysis has been undertaken to inform the Group’s capital

investment to address long-term water resource and environmental

improvement plans as part of the business planning process

• Testing of resilience and response plans has been undertaken

covering various scenarios, including power outages and

cyber security

• The successful launch of the ‘Quality First’ initiative as part of the

continuous improvement of drinking water production.

Management of South West Water within the Group’s

risk management framework

Pennon manages its risks in such a way that South West Water, as a

regulated company, is protected from risk elsewhere in the Group. The

Group’s principal risks and uncertainties include those Group-level risks

that could materially impact on South West Water.

Pennon’s risk management and internal control frameworks ensure

that it does not take any action that would cause South West Water

to breach its licence obligations. Further, the Group’s governance and

management structures mean that there is full understanding and

consideration of South West Water’s duties and obligations under

its respective licences, as well as an appropriate level of information

sharing and disclosure to give South West Water assurance that it is not

exposed as a result of activities elsewhere within the Group.

Horizon scanning

Emerging risks and opportunities are considered to be factors and

events which could have a future impact on the achievement of the

Group’s strategic priorities but lack the required clarity or certainty in

order to adequately assess their impact. Horizon scanning of emerging

risks and opportunities is embedded within the risk and opportunity

review process performed by individual subsidiaries and functions.

Emerging risks are reviewed by the Pennon Executive Risk Committee,

Pennon Executive and Pennon Board as part of their regular assessment

of the Group’s risk profile. Notable emerging risks and opportunities are

detailed within the table below:

Risk/opportunity

Micro-pollutants, plastics and micro-plastics

Comment Risk category impact

The continued focus on the

impact of micro-pollutants

and micro- plastics could

present both risks and

opportunities arising

from changes to water

treatment processes.

• Operating performance.

• Business systems and

capital investment.

Time horizon

Medium-term

Risk/opportunity

Changes to the demographics within the South West

Comment Risk category impact

Increases in population

migration to the South West

due to the longer-term

impact of COVID-19 and

climate change could place

further demand on our

resources and assets.

• Operating performance.

Time horizon

Long-term

Risk/opportunity

Biodiversity

Comment Risk category impact

Threats to the region’s

biodiversity, as a result of

development, pollution and

climate change, may require

changes to how we interact

with species and habitats in

the areas where we operate.

• Operating performance.

Time horizon

Long-term

Risk management and principal risks continued

54 Annual Report and Accounts 2023 | Pennon Group plc

Risk/opportunity

Artificial intelligence and machine learning

Comment Risk category impact

There is a risk that

automated intelligence and

learning deployed within

operational processes

develops faster than

Government regulations

and standards.

• Operating performance.

Time horizon

Long-term

Risk/opportunity

PFAS and forever chemicals

Comment Risk category impact

Changes in regulatory

requirements or the

introduction of statutory

standards may require

significant changes in

operational processes in the

water treatment process

• Operating performance.

• Business systems and

capital investment.

Time horizon

Long-term

Risk category

Law, regulation and finance

Risk appetite statement

The Board is committed to complying fully with, and being

seen to be complying with, all relevant laws, regulations and

obligations and has no appetite for non-compliance in this area.

This includes (but is not limited to) health and safety where

the Board places the highest level of importance on the welfare

of our employees, the public and those who work with or on

behalf of Pennon. The Group also operates a prudent approach

to our financing strategy to ensure our long-term financing

commitments are met.

The Board acknowledges, however, that the Group operates in a

complex environment influenced by Government and regulatory

policy. Consequently, there is acceptance of increased inherent

risk in these areas and the Group seeks to mitigate any

potential downside and leverage opportunities that may arise

from Government policy and regulatory change.

Risk category

Market and economic conditions

Risk appetite statement

The Board recognises that the Group’s activities are exposed

to changes in macroeconomic and external market conditions.

The Group seeks to take well-judged and informed decisions to

mitigate these risks where possible but accepts that a level of

residual risk may remain beyond the Board’s control.

Risk category

Operating performance

Risk appetite statement

The Board has no appetite for significant operational failure of

our water and wastewater assets, and seeks to reduce both the

likelihood and impact through long-term planning and careful

management of our operational assets.

There is greater appetite for well-informed risk taking to

develop further markets, subject to this not detrimentally

impacting on the level of service expected of our regulators,

customers and wider stakeholders.

Risk category

Business systems and capital investment

Risk appetite statement

The Board has a low risk appetite for risk associated with the

delivery of capital investment within our regulated business

plan. There is greater appetite for broader investment with

decisions taken through weighting risks against the expected

level of return on a case-by-case basis.

The Group seeks to minimise technology and security risk to

the lowest possible level without detrimentally impacting on the

Group’s operations.

Risk appetite

The UK Corporate Governance Code requires the Group to determine the risk appetite considered appropriate in achieving the Group’s strategic

priorities. Striking an appropriate balance between risk and reward is key to the success of the Group’s strategy.

The Board has developed risk appetite statements for each risk category and for each principal risk. This allows the business to pursue value-

enhancing opportunities, while maintaining an overall level of risk exposure that the Board considers to be appropriate. The Board’s evaluation of the

comprehensiveness of the Group’s internal controls in mitigating its principal risks to an acceptable level is considered with due consideration of the

relevant risk appetite. The risk appetite for each risk category is detailed below:

Pennon Group plc | Annual Report and Accounts 2023 55

Strategic Report Governance Financial Statements Other information

• The Bristol Water acquisition principal risk has been removed

following clearance from the Competition and Markets Authority and

merger of Bristol Water’s licence into South West Water.

• Key risks associated with the delivery of regulatory outcomes and

performance commitments are reflected within individual principal

risks and has therefore been removed as a standalone principal risk.

These principal risks have been considered in preparing the viability

statement on page 63.

Overview of Pennon’s principal risk profiles

Category Reference

Strategic

priorities Risk description Net risk

Law. Regulation

and finance

1, 2, 3

Changes in Government policy

1, 2, 3

Regulatory Frameworks

1, 2, 3

Non-compliance with laws and regulations

1, 3

Inability to secure sufficient finance and funding, within our debt covenants, to

meet ongoing commitments

2, 3

Non-compliance or occurrence of an avoidable health and safety incident

Failure to pay all pension obligations as they fall due and increased costs to the

Group should the defined benefit pension scheme deficit increase

Market and

economic conditions

1, 2, 3

Macroeconomic near-term risks impacting on inflation, interest rates and

power prices

Operating

performance

2, 3

Failure to deliver the Group’s 2030 Net Zero Commitment to respond to the

impact of climate change

2, 3

Availability of sufficient water resources to meet current and future demand

1, 2, 3

Failure of operational water treatment assets and processes resulting in an

inability to produce or supply clean drinking water

1, 2, 3

Failure of operational wastewater assets and processes resulting in an

inability to remove and treat wastewater and potential environmental impacts,

including pollutions

2, 3

Non-delivery of customer service and environmental commitments

1, 2, 3

Insufficient skills and resources to meet the current and future business needs

and deliver the Group’s strategic priorities

Business systems and

capital investment

1, 2, 3

Insufficient capacity and resilience of the supply chain to deliver the Group’s

operational and capital programmes

Inadequate technological security results in a breach of the Group’s assets,

systems and data

Principal risks and uncertainties

The Group’s business model exposes the business to a variety of internal

and external risks that are influenced by the potential impact of macro

political, economic and environmental factors. Specifically, the macro

level events have contributed to the high inflationary environment, and

the consequential impact on power prices and interest rates both in

the UK and globally has continued to directly and indirectly impact the

Group during the year. While the ability of the Group to influence these

macro-level risks is limited, they continue to be regularly monitored and

the potential implications are considered as part of the ongoing risk

assessment process. The Group performs a range of scenario planning

and analysis exercises to understand the risk exposure of one, or a

number, of these events occurring.

During the year the Board has carried out a detailed review of the of

the current and emerging risks in the context of the Group’s strategic

objectives and priorities as well as the external environment within which

it operates. This has resulted in the following changes to the Group’s

principal risks compared with those previously reported:

• The availability of sufficient water resources has been separated from

the broader drinking water principal risk and is now included as a

standalone Group principal risk.

• The Group’s principal risks reflect the delivery of the Group’s 2030

Net Zero commitment in mitigating the impact of climate change.

• The delivery of customer and environmental commitments have been

combined to form a standalone principal risk.

• Non-recovery of customer debt has been removed as a principal

risk reflecting the Group’s robust debt management and customer

collections processes. With ongoing cost-of-living challenges for

our customers, this continues to be carefully monitored as an

operational risk.

Risk management and principal risks continued

56 Annual Report and Accounts 2023 | Pennon Group plc

Law regulation and finance

Principal risk

Changes in

Government policy

Strategic priorities

1, 2, 3

Climate Change Impact:

Strategic impact

Changes in Government policy and direction may fundamentally impact our ability to deliver the

Group’s strategic priorities, impacting shareholder value.

Mitigation

There has been continued focus on the performance of the water sector by Government, with its Plan

for Water launched in March 2023 following on from its Storm Overflows Discharge Reduction Plan in

August 2022. With a General Election due in 2024 this focus is expected to continue.

South West Water has been given approval to accelerate c.£125 million of investment to meet these

requirements alongside the delivery of its WaterFit strategy that is designed to go further than the

Government’s Plans.

We actively engage and respond to policy consultations and the Group regularly engages with MPs

and other political stakeholders, both directly and via Water UK, demonstrating the value from our

operational performance, continued investment in our network and wider societal contribution.

Horizon scanning of emerging changes in Government policy, including climate change-related

policies, is regularly undertaken to monitor and assess the potential direct or indirect impact on

the Group.

Appetite

We recognise that Government policy evolves which presents both risks and opportunities. The Group

seeks to minimise the potential risks and maximise opportunities through regular engagement and

robust scenario planning.

Net risk

Principal risk

Regulatory frameworks

Strategic priorities

1, 2, 3

Climate Change Impact:

Strategic impact

Changes to regulatory frameworks may impact on the deliverability and affordability of the Group’s

priorities, which can impact shareholder value.

Mitigation

Ofwat has published its final methodology for the next Price Review period and investment plans and

priorities are well developed, overlaid by a robust governance and assurance framework. South West

Water’s business plan will be submitted in Autumn 2023.

We are actively engaging with regulators through this process but there remains a risk sufficient

funding is not provided through the regulatory mechanism to achieve the environmental and

climate-related ambitions of the Group, or that the priorities of regions we serve are not recognised

by regulators.

Established processes exist for monitoring changes in the regulatory environment and responding to

regulatory consultations, including via Water UK.

Appetite

We accept that regulatory frameworks evolve which creates both risks and opportunities. We seek to

minimise the potential risks by targeting changes which are Net Present Value (NPV) neutral over the

longer term to protect customer affordability and shareholder value.

Key – Strategic priorities

Growth in environmental infrastructure

High Increasing

Transitional climate change impact

Pioneering solutions

Medium Stable

Physical climate change impact

Leadership in UK water

Low Decreasing

Our water leak

detection dogs,

Denzel and Kilo

Pennon Group plc | Annual Report and Accounts 2023 57

Strategic Report Governance Financial Statements Other information

Law regulation and finance

Principal risk

Non-compliance with

laws and regulations

Strategic priorities

1, 2, 3

Climate Change Impact:

T, P

Strategic impact

The Group is required to comply with a range of laws and regulations across our businesses. Non-

compliance with one or a number of these may result in financial penalties or a negative impact on our

ability to operate effectively and reputational damage to the Group.

Mitigation

There remains an increased appetite amongst regulators for pursuing enforcement action for perceived

non-compliance with, for example, an industry-wide investigations of wastewater treatment works permit

compliance ongoing. The Government is also seeking to amend the maximum amount that water companies

can be penalised for damaging the environment.

The Group operates within robust and mature frameworks ensuring compliance with permit and other

requirements of Ofwat, the Environment Agency and other relevant regulators. These frameworks are

regularly reviewed to ensure the Group remains compliant with the increasingly complex legal and

regulatory landscape.

The Group also maintains a comprehensive internal framework to ensure compliance with corporate laws

and regulations, reinforced through key policies endorsed by the Pennon Board and compliance training

provided to staff.

These frameworks have been further strengthened during the year through the establishment of an

executive-led Compliance Committee and Ethics Management Committee, that maintains oversight

of the Group’s confidential whistleblowing processes, allowing concerns to be raised confidentially and

appropriately investigated.

Appetite

The Group maintains the highest standards of compliance and has no appetite for legal or

regulatory breaches.

Net risk

Principal risk

Inability to secure

sufficient finance

and funding, within

our debt covenants,

to meet ongoing

commitments

Strategic priorities

1, 3

Strategic impact

Failure to maintain funding requirements could lead to additional financing costs and put our growth

agenda at risk. Breach of covenants could result in the requirement to repay certain debt.

Mitigation

The Group has well-established treasury, funding and cash flow arrangements in place, underpinned by

a Treasury Management Policy endorsed by the Board.

The Group’s financing commitments and cash flow, funding and covenant compliance are regularly

reviewed by the Executive and the Board.

Whilst the macro-economic environment has increased financing costs, the Group remains comfortably

within debt covenant levels with sufficient headroom in place to meet ongoing commitments.

The Group retains £420 million of cash and committed facilities as at 31 March 2023 in line with its

established pre-funding approach.

Appetite

The Group operates a prudent approach to our financing strategy in order to ensure our funding

requirements are fully met.

Principal risk

Non-compliance or

occurrence of an

avoidable health and

safety incident

Strategic priorities

1, 2, 3

Strategic impact

A significant health and safety event could result in financial penalties, significant legal costs and

damage to the Group’s reputation.

Mitigation

During the year the Group has continued to deliver and embed the 2025 HomeSafe strategy, which has

included launching HomeSafe within the Bristol region.

Health and safety training, communication and policy updates are provided to all staff and senior

leaders regularly visit sites, reinforcing the Group’s health and safety culture.

Health and safety performance is monitored by the Executive and the respective Board and Executive

Health and Safety Committees. There has also been continued investment for safety improvements,

focused on operational sites and activities.

This has resulted in the Group achieving its lowest ever number of LTIs during the year.

Appetite

The Group has no appetite for health and safety-related incidents and maintains the highest standards

of compliance for our staff, contractors and other third parties.

Risk management and principal risks continued

58 Annual Report and Accounts 2023 | Pennon Group plc

Law regulation and finance continued

Principal risk

Failure to pay all

pension obligations

as they fall due and

increased costs to

the Group should

the defined benefit

pension scheme

deficit increase

Strategic priorities

Strategic impact

The Group could be called upon to increase funding to reduce the deficit, impacting our cost base.

Mitigation

The Group has in-house pensions expertise supplemented by external specialists, including

professional advisors who manage the scheme’s investment strategy.

In response to the fall in gilt yields in October 2022, the investment portfolio has been de-risked

through increasing the scheme’s real gilts hedging position through LDIs (Liability Driven Investments).

As at 31 March 2023 the Group’s pension schemes remain in surplus, reflecting the improvements

in the funding of PGPS in recent years, and no deficit recovery payments are required following the

triennial valuation of PGPS as at 31 March 2022.

Appetite

The Group will ensure that all obligations are met in full but seeks to manage this without unnecessary

costs to the Group.

Net risk

Market and economic conditions

Principal risk

Macro economic near-

term risks impacting

on inflation, interest

rates and power prices

Strategic priorities

1, 2, 3

Climate Change Impact:

T, P

Strategic impact

Significant changes in inflation, interest rates and power prices could increase the Group’s near-term

cost base.

Mitigation

The macro-economic volatility experienced during the year has stabilised somewhat with UK power

prices and inflation softening and expected to fall further over the next 12 months.

A significant proportion of the Group’s power prices have been hedged in line with the agreed strategy

set by the Group’s Energy Risk Committee. Careful management of the debt portfolio has also enabled

c.66% of the Group’s net debt to be fixed or swapped.

The Group’s in-house procurement function also drives value through competitive tendering of high

value contracts.

Long-term protection from the increasing inflationary environment is also provided through regulatory

mechanisms with inflation-linked revenues and RCV growth, along with regulatory true-ups.

Appetite

The Group seeks to mitigate the potential impact of macroeconomic events where possible including

through inflation-linked revenues and RCV growth, recognising there remains a degree of near-term

exposure beyond its control.

Operating performance

Principal risk

Failure to deliver the

Group’s 2030 Net

Zero commitment to

respond to the impact

of climate change

Strategic priorities

2, 3

Climate Change Impact:

Strategic impact

Failure successfully to transition to Net Zero may result in an adverse environmental impact, increased

costs and reputational damage.

Mitigation

The Group remains on track to deliver its commitments within the 2030 Net Zero strategy which is

overseen by an executive led Net Zero Committee.

During the year we have continued to support carbon capture through peatland restoration, increased

the deployment of electric vehicles and progressed towards our target of 50% energy self-generation

through discussions with counterparties offering large-scale solar development opportunities.

The Group’s capital allocation of £160 million has started to be deployed which will accelerate our

journey to Net Zero.

Appetite

The Group is committed to achieving Net Zero whilst recognising that this needs to be balanced

against the need to deliver other priorities for our customers and the environment.

Key – Strategic priorities

Growth in environmental infrastructure

High Increasing

Transitional climate change impact

Pioneering solutions

Medium Stable

Physical climate change impact

Leadership in UK water

Low Decreasing

Pennon Group plc | Annual Report and Accounts 2023 59

Strategic Report Governance Financial Statements Other information

Risk management and principal risks continued

Operating performance continued

Principal risk

Availability of sufficient

water resources to

meet current and

future demand

Strategic priorities

2, 3

Climate Change Impact:

T, P

Strategic impact

An inability to ensure the necessary water resources exist to meet demand may lead to impacts for our

customers, increased operational costs and reputational damage.

Mitigation

The drought of 2022 had a significant impact on river flows, groundwater levels and reservoir stocks in

our regions. Climate change is expected to result in hotter, drier summers becoming more frequent and

greater demand through increased population within the South West.

During the year the Group has enacted its Drought Management Plan, alongside extensive

engagement and collaboration with regulators and innovative initiatives – such as the Stop the Drop

campaign – to minimise the impact of the dry weather on both customers and the environment.

Additionally, there has been continued focus on leakage reduction and the launch of region-wide

customer communication campaigns.

Despite the action taken, storage levels remain below their historical levels heading into Summer 2023.

Further action is being taken including exploring desalination in Cornwall as well as more water storage

options and increasing the ability to move water around our network.

Appetite

The Group is committed to ensuring there are sufficient water resources through careful management

of both supply and demand activities.

Net risk

Principal risk

Failure of operational

water treatment assets

and processes resulting

in an inability to

produce or supply clean

drinking water

Strategic priorities

1, 2, 3

Climate Change Impact:

T, P

Strategic impact

An inability to produce or supply clean drinking water could result in financial penalties, regulatory

enforcement and damage to the Group’s reputation.

Mitigation

Our drinking water assets and processes have remained resilient despite challenging conditions during

the drought and the freeze / thaw conditions that occurred in 2022. Where such events do occur, these

are managed through established incident management procedures and utilisation of the Group’s

supply chain partners.

Asset health is managed through a well-established programme of routine planned and preventative

maintenance works with asset and network performance monitored by the 24/7 Control Centre.

Additionally, our ‘Quality First’ initiative was also launched during the year and is a cultural and training

programme reinforcing the continuous improvement approach adopted by our Drinking Water

operational teams.

Appetite

The Group operates a low tolerance for significant operational failure of its water treatment assets or

quality of water produced and seeks to mitigate these risks where possible.

University of the 3rd Age on

a tour of Launceston Sewage

Treatment Works, Cornwall

60 Annual Report and Accounts 2023 | Pennon Group plc

Operating performance continued

Principal risk

Failure of operational

wastewater assets and

processes, resulting in

an inability to remove

and treat wastewater

and potential

environmental impacts

including pollutions

Strategic priorities

1, 2, 3

Climate Change Impact:

T, P

Strategic impact

An inability to remove or treat wastewater could result in adverse environment impacts, financial

penalties, regulatory enforcement and damage to the Group’s reputation.

Mitigation

Minimising the impact of our activities on the environment remains a strategic priority for the Pennon

Board and Executive.

Delivery of the Group’s WaterFit strategy and Pollution Incident Reduction Plan continues as the Group

drives for a step change in environmental performance, which includes enhanced processes, targeted

capital investment and proactive asset maintenance.

These strategies have contributed to a further decrease in the number of pollution events and our best

ever performance during 2022/23, 100% of our bathing waters met the high standards for water quality

and a c.30% year-on-year reduction in the average number of storm overflow spills.

During the year WaterFit Live has been launched providing the public with information on where

bathing waters may be affected by the operation of our overflows as well as information on

future investment.

Despite this progress it is recognised there is more work to do to deliver a step change in our

environmental performance and this will continue to remain an area of strategic focus in both the

current and next regulatory period.

Appetite

The Group operates a low tolerance for significant operational failure of its wastewater processes and

assets and maintains the highest level of environmental standards.

Net risk

Principal risk

Non-delivery of

customer service

and environmental

commitments

Strategic priorities

2, 3

Climate Change Impact:

T, P

Strategic impact

Failure to deliver our customer and environmental commitments may result in reputational damage,

and financial penalties impacting on shareholder value.

Mitigation

The Group continues to enhance and invest in its customer services teams, expanding the channels by

which it can interact with and support household and business customers.

The Group offers a range of schemes and tariffs to support customers with affordability challenges

and South West Water is BSI18477 accredited, a dedicated standard for identifying and responding to

customer vulnerability.

The Group also has a number of initiatives which support the communities that we service.

It is recognised that further work is required to improve both South West Water and Bristol Water’s

regulatory customer service metrics. Pennon Water Services continues to maintain high customer

satisfaction scores, including a rating of 4.8 out of 5 on Trustpilot.

The Group’s environmental commitments are measured through 39 metrics with performance reported on

the Group’s website. The delivery of the WaterFit strategy, is key to this and progress remains on track. See

page 25 for further details.

Appetite

The Group continually seeks to deliver high levels of customer service with performance in the upper

quartile for the Water sector.

Key – Strategic priorities

Growth in environmental infrastructure

High Increasing

Transitional climate change impact

Pioneering solutions

Medium Stable

Physical climate change impact

Leadership in UK water

Low Decreasing

Pennon Group plc | Annual Report and Accounts 2023 61

Strategic Report Governance Financial Statements Other information

Risk management and principal risks continued

Operating performance continued

Principal risk

Insufficient skills and

resources to meet the

current and future

business needs and

deliver the Group’s

strategic priorities

Strategic priorities

1, 2, 3

Climate Change Impact:

Strategic impact

Failure to have a workforce of skilled and motivated individuals will detrimentally impact all of our

strategic priorities. We need the right people in the right places to innovate, share best practice, deliver

synergies and move the Group forward.

Mitigation

There remains high demand nationally for the skills and expertise utilised within the Group.

The Group’s People Strategy enables the Group to attract, retain and develop our employees as

well as recognising the significant contribution that our people make. The Group’s RISE employee

engagement forum provides a platform for our people to provide feedback, raise their priorities and

promote ideas.

Additionally, we have continued to develop a diverse and inclusive talent pipeline and have updated

long-term commitments, with enhanced recruitment targets for graduates and apprentices through to

2030 and continued prioritisation of our diversity and inclusion agenda. Furthermore, the acquisition of

Bristol Water has enabled the best talent from across the business to come together.

The Group’s senior leadership has also been further strengthened during the year with a number of key

Executive appointments, as described on pages 105 and 106.

Appetite

While turnover of employees does occur, we ensure the appropriate skills and experience are in place

with succession plans providing adequate resilience.

Net risk

Business systems and capital investment

Principal risk

Insufficient capacity

and resilience of

the supply chain to

deliver the Group’s

operational and

capital programmes

Strategic priorities

1, 2, 3

Climate Change Impact:

T, P

Strategic impact

The inability of our supply chain to support in the delivery of our operational and capital programmes may result

in increased costs and delays, detrimentally impacting our ability to achieve our change and growth agenda.

Mitigation

The Group engages with a range of partners to support in the delivery of operational and capital

programmes. The demand for these skills and expertise continues to increase, particularly across

the Water Industry to deliver programmes in the current regulatory period and to prepare for future

investment programmes during 2025-30.

We are underway with a full tender for Tier 1 contractors to support our current, accelerated

investments and to be in place for the next regulatory period. We anticipate awarding more Tier 1

contractors than in our current framework to support elevated investment levels.

Supplier events have been held to expand the number of partners we work with and to utilise the

expertise that exists within the regions we serve. The Group also uses its in-house procurement

expertise to help source and drive value within the purchasing process.

The Group regularly monitors the financial health of key partners and we work in partnership with our

supply chain to identify and manage potential issues and challenges. Where action is required there

are established plans and alternative arrangements which provide mitigation and early intervention.

Appetite

The Board has a low appetite for risk associated with the delivery of key operational and capital

programmes within our regulated business plan.

Principal risk

Inadequate

technological security

results in a breach of

the Group’s assets,

systems and data

Strategic priorities

Strategic impact

Failure of our technology security, due to inadequate internal processes or external cyber threats, could

result in the business being unable to operate effectively and the corruption or loss of data. This could have a

detrimental impact on our customers and result in financial penalties and reputational damage to the Group.

Mitigation

External threats are increasing in complexity and sophistication and continue to be carefully monitored

by the Group’s information security teams.

The Group maintains a strong preventive and detective information security framework, aligned to

guidance issued by the National Cyber Security Centre with regular awareness training provided to

staff. South West Water continues to hold the ISO27001 accreditation.

As part of the Group’s planning, cyber response exercises have taken place during the year featuring

members of the Executive. Broader disaster recovery plans are also in place for both corporate and

operational technology and are subject to regular review.

The Group’s water businesses continue to progress actions as part of the roadmap to meet the

requirements of the Network and Information Systems (NIS) Directive, with activities aligned to the

priorities identified by the Drinking Water Inspectorate.

Appetite

The Group seeks to minimise technology and security risk to the lowest possible level without

detrimentally impacting on the Group’s operations.

62 Annual Report and Accounts 2023 | Pennon Group plc

Viability statement

The Board’s consideration of the longer-term viability of the Group is an

extension of the Group’s strategic business planning, which is managed

through regular long-term modelling and monitoring of key measures

including gearing, debt covenant headroom and level of liquidity.

The resilience of the business and these key viability measures are

appropriately assessed by a number of mechanisms including a robust

risk management assessment, sensitivity analysis and stress tests of

financial performance.

The overall market context is a cornerstone of the viability assessment.

The Group’s main operating subsidiary of South West Water now

accounts for the vast majority of the Group’s earnings, being a long-term

business characterised by multi-year investment programmes, with

associated revenue streams with high levels of future visibility.

The viability assessment has been made with reference to the Group’s

current position and prospects, including consideration of the ongoing

impacts of the Ukraine crisis, climate change, its longer-term strategy,

the Board’s risk appetite and the Group’s principal risks and how these

are managed, as detailed on pages 52 to 62 of the risk report.

Period of assessment

The Board regularly considers the appropriate period for the viability

assessment to be performed in line with the UK Corporate Governance

Code. The Board considers the appropriate period to assess the Group’s

viability remains unchanged at five years, which recognises both the

longer-term visibility in the regulatory environment of the South West

Water business and the corporate activity, including acquisitions and

other non-regulated investments undertaken by Pennon.

Risks

The Board considers the preventative and risk management actions

in place and the potential impact of the principal risks (as detailed on

pages 52 to 62) against our ability to deliver the business plan. This

assessment has considered the potential impact of these and other risks

arising on the business model, future performance, solvency and liquidity

over the period in question. The Group has a strong liquidity and funding

position with £420 million of cash and committed facilities as at 31

March 2023 and net assets of £1,119.3 million. The Group has a mixture of

fixed, floating and index-linked debt financing with a weighted average

maturity of 13 years. In making their assessment, the Directors reviewed

the principal risks and considered which risks might threaten the Group’s

viability. Over the course of the year, the Board, either directly or through

the activities of the Audit Committee, has considered a deep-dive review

of the following principal risks to enable a thorough assessment of the

impact of these risks on ongoing viability.

• Cyber security.

• Non-collection of debt.

• Insufficient finance and funding.

• PR24.

• Power outage.

Stress testing

The Group’s business plan has been stress-tested. Whilst the Group’s

risk management processes seek to mitigate the impact of principal

risks as set out on pages 52 to 62, individual sensitivities (shown in the

table below) have been identified. These sensitivities, which are ascribed

a value with reference to risk weighting, factoring in the likelihood of

occurrence and financial impact, were applied to the baseline financial

forecast which uses the Group’s annual budget for FY 2023/24 and

longer-term strategic business plan through to March 2028.

The impact of climate risks have been assessed in detail as set out in

the Task Force on Climate-related Financial Disclosures (TCFD) section

on pages 74 to 87. The Group’s strategic business plan includes the

expected investment identified at this stage to meet climate-change

adaptation. The stress-testing scenarios applied during the viability

assessment period do not include specific reference to climate-change

related risks alone as climate change has been considered as part of the

Principal risks identified. Beyond the period of assessment, additional

impacts from climate change are considered in more detail within the

TCFD section along with mitigating actions.

Principal risk Viability sensitivities tested

A: Changes in Government policy Changes in Government policy affecting the water industry, such as additional environmental

legislation may impact operational performance or investment requirements. The estimated

average adverse impact on the Group’s cash flows from a range of potential policy changes

has been applied as a sensitivity.

B: Regulatory reform Potential changes in PR24 price review may impact allowed regulatory returns in South West

Water. The estimated average adverse impact on the Group’s cash flows from a range of

potential policy changes has been applied as a sensitivity.

C: Non-compliance with laws and regulations The estimated impact of financial penalties and reputational damage from failure to comply

with laws and regulations has been modelled as a sensitivity.

D: Inability to secure sufficient finance and funding to

meet ongoing commitments

The impact of reduced availability of financing resulting in increased costs has been modelled

as a sensitivity.

E: Non-compliance or occurrence of an avoidable

health and safety event

The financial impact and cash outflows related to a major health and safety event has been

applied as a sensitivity.

F: Failure to pay all pension obligations as they fall due

and increased costs for the Group should the defined

benefit pension scheme deficit increase

The financial impact on the Group’s gearing from additional funding being required to support

the Group’s defined benefit pension schemes has been applied as an adverse scenario.

The Directors of Pennon Group plc are responsible for ensuring

the long-term viability of the Group. The Directors need to ensure

the resilience of the Company by identifying, managing, avoiding

or mitigating risks which may impact viability.

Pennon Group plc | Annual Report and Accounts 2023 63

Strategic Report Governance Financial Statements Other information

Stress-testing evaluation and mitigations

Through this testing, it has been determined that none of the individual

principal risks would in isolation, or in aggregate, compromise the

Group’s viability over the five-year period. The assessment has been

considered by reviewing the impact on the solvency position as well

as debt and interest covenants. The financial impacts of the risks were

probability weighted to obtain a value that was used in the stress testing.

While mitigations were not required in any of the above individual or

combined scenarios to ensure that the Group was viable, additional

mitigations could be deployed to reduce gearing and increase covenant

headroom. These include:

• Reduction in discretionary operational expenditure

• Deferral of capital expenditure and/or cancellation of non-essential

capital expenditure

• Reduction in the amount of dividend payable

• Raising additional funding.

The Group has confidence in its ability to raise additional funding if

required should it be required to ensure the Group maintains solvency.

In addition, a reverse-engineered scenario that could possibly

compromise the Group’s viability over the five-year assessment period

has been modelled. This scenario builds on the factors above and

additionally assumes all the Group’s principal risks incurring in any given

year across the viability period, with no probability weightings attached.

The Board considered the likelihood of this scenario on the Group’s

viability over the five-year viability period as remote, concluding the

Group could remain viable. Mitigations, as noted above, could also be

deployed over the period if deemed necessary.

In making its assessment of the Group’s viability, the Directors have

taken account of the Group’s strong capital solvency position, the

Group’s latest assessments of forward power and other commodity

prices, latest inflation forecasts, its ability to raise new finance and a key

potential mitigating action of restricting any non-contractual payments.

In assessing the prospects of the Group, the Directors note that, as the

Group operates in a regulated industry which potentially can be subject

to non-market influences, such assessment is subject to uncertainty,

the level of which depends on the proximity of the time horizon.

Accordingly, the future outcomes cannot be guaranteed or predicted

with certainty. As set out in the Audit Committee’s report on pages

120 to 125, the Directors reviewed and discussed the process

undertaken by management, and also reviewed the results of

the stress testing performed.

Viability assessment conclusion

The Board has assessed the Group’s financial viability and confirms that

it has a reasonable expectation that the Group will be able to continue in

operation and meet its liabilities as they fall due over a five-year period,

the period considered to be appropriate by the Board in connection with

the UK Corporate Governance Code.

Principal risk Viability sensitivities tested

G: Macroeconomic risks impacting on inflation, interest

rates and power prices

The adverse impact of higher operating and finance costs from increasing power prices

and general inflation increases over and above increases assumed in base financial plans,

including the impact on Totex underperformance on regulatory returns and impact on debt

financing costs have been applied as a sensitivity, as well as a reduction in the collection of

customer debt from adverse economic conditions.

H: Failure to deliver the Group’s 2030 Net Zero

commitments in response to the impact of

climate change

The adverse impact of the failure to transition towards Net Zero in a timely manner could

lead to increased costs; these have been applied as a sensitivity.

I: Availability of sufficient water resources to meet current

and future demand

The cost of sourcing water from outside the South West Water catchment area to ensure

availability of supply has been included as an adverse scenario.

J: Failure of operational water treatment assets and

processes resulting in an inability to produce and supply

clean drinking water

The adverse impact from non-delivery of regulatory performance targets which result in

ODI penalties, other financial penalties and required additional investment reducing Group

revenues and cash inflows have been applied as a sensitivity to the base plan.

K: Failure of operational wastewater assets and

processes resulting in an inability to remove and treat

wastewater and potential adverse environmental impacts,

including pollutions

L: Non-delivery of customer service and

environmental commitments

M: Insufficient skills and resources to meet the current

and future business needs and deliver the Group’s

strategic priorities

N: Insufficient capacity and resilience of the supply

chain to deliver the Group’s operational and

capital programmes

O: Inadequate technological security results in a breach

of the Group's assets, systems and data

The adverse financial impacts of a cyber attack resulting in operational disruption, potential

loss of data, potential detrimental impacts on customers with potential for financial

penalties have been included in the sensitivity analysis.

A combined stress-testing scenario has been performed to assess the overall impact of these individual scenarios impacting the Group collectively.

The combined weighted impact of the risks occurring is c.£120 million: this value is considered equivalent to an extreme one-off event that could

occur within a year, though the probability of such an event happening is deemed unlikely.

Viability statement continued

64 Annual Report and Accounts 2023 | Pennon Group plc

Our integrated approach to ESG

External benchmarking

Our ESG strategy and capitals framework has driven positive change in the business as we continue to embed sustainability in everything

we do.

During the year, we continued to show strong performance across external ESG ratings, demonstrating our commitment and management of

risk across the ESG agenda.

Latest external assessment scores

13.8

ESG Risk

(Previous rating: 16.5)

ESG Rating

(Previous rating: 78)

CDP Climate Change

(Previous rating: B)

CDP Water security

(Previous rating: B)

MSCI ESG Indexes

(Previous rating: AA)

GRESB

Infrastructure

Public Disclosure

(Previous rating: B)

60/100

(Previous rating: 59/100)

3.9/5

(Previous rating: 3.5/5)

ISS corporate

rating

(Previous rating: B)

S&P Global

Corporate

Sustainability

Assessment

(CSA)

Disclaimer

The use by Pennon Group of any MSCI ESG Research LLC or its affiliates (“MSCI”) data, and the use of MSCI logos,

trademarks, service marks or index names herein, do not constitute a sponsorship, endorsement, recommendation, or

promotion of Pennon Group by MSCI. MSCI services and data are the property of MSCI or its information providers,

and are provided ‘as-is’ and without warranty. MSCI names and logos are trademarks or service marks of MSCI.

Our approach to ESG ensures everything we do supports our commitment to provide environmental

stewardship and to support our customers and local communities. As a responsible employer,

we remain focused on employee development alongside a robust health, safety and wellbeing

programme. Our activities are underpinned by a strong governance framework that upholds our core

values within the organisation and throughout our supply chain.

ESG Capitals

Creating value through our ESG approach

Everything we do links to a capital in some way – the development of our capitals framework is integral to better decision making for the future.

Our ESG capitals progress

We are on track with our plans to develop appropriate measures, benchmarking our approach and identifying tools and methodologies to help us value

these metrics in line with our materiality assessment, keeping close alignment with our Net Zero and Green Recovery ambitions.

Our Natural

Capital – Environment

Our Social & Human Capital

– Social

Our Manufactured,

Intellectual & Financial

Capital – Governance

• Freshwater

• Land (including soils)

• Species

• Ecological communities

• Coasts

• Atmosphere

• Waste

• Colleagues

• Customers

• Communities

• Supply chain

• Responsible business

• Stakeholders and partnerships

• Finance

Pennon Group plc | Annual Report and Accounts 2023 65

Strategic Report Governance Financial Statements Other information

ESG performance and targets

UN Sustainable Development Goals (SDGs)

We actively engage with the UN SDGs to inform our approach and better

understand our impact. We have mapped which of the UN SDGs our

ESG targets most directly support. Our primary contribution is to SDG 6:

Clean water and sanitation. Read more on our ESG targets on page 87

and 88 and to read more on our contribution towards the SDGs, visit our

website www.pennon-group.co.uk/sustainability

Materiality assessment

We undertook a detailed materiality assessment with our stakeholders in

2021/22 to inform our strategy and ESG targets to 2025. Findings were

published in our 2022 Annual Report. Further stakeholder engagement

took place in December 2022 to inform our 2050 Strategic Direction

report https://www.southwestwater.co.uk/about-us/documents/business-

plan-2020-2025/. This feedback alongside assessment of business

and external risks has been used to reappraise our material issues

which broadly confirmed we are focused on the right issues. However

importance of certain issues has evolved, a summary of the high priority

issues is given below.

Highest Importance to all Stakeholders What it means to all stakeholders

Net Zero Taking action to mitigate our own emissions

Freshwater stewardship Taking care of precious water resources

Water quality – river and coastal Taking action to deliver a step change in both river and coastal water quality

Climate resilience Our preparedness for climate change

Drinking water quality The provision of clean, safe drinking water

Amenity and recreation Access to high standard bathing water across our region’s coasts and inland waters

Trust and transparency Being open and transparent in a time of increased water sector scrutiny

Material issue and associated target Annual performance

against target

2022/23 target 2025 target SDG

Net Zero

% energy usage from renewable generation

Reducing greenhouse gas emissions

65%

13%

70%

Freshwater stewardship

Reduce water use within our operational sites

5Ml 10Ml

Biodiversity

Trees planting (cumulative)

180,000 250,000

Material issue and associated target Annual performance

against target

2022/23 target 2025 target SDG

Customer and community engagement

Increase our community investment by 10% each year

10% 30%

Diversity and skills

% Female representation

Increase REACH recruitment (excluding Bristol Water)

Achieve 5% club status

31%

Gold Accreditation

33%

10%

Gold Accreditation

Health, safety and wellbeing

Number of LTIs across the group

Great Place to Work accreditation

Maintain

Measure/issue and associated target Annual performance

against target

2022/23 Target 2025 target SDG

Trust and transparency

ESG Rating (Sustainalytics)

Fair Tax Mark accreditation

% of active institutional investors met or offered to meet

>75

Maintain

68%

Maintain

75%

Sustainable finance

New funding raised through Sustainable Financing

Framework %

60% 75%

Supply chain

Supplier payment days (average)

% of key and strategic suppliers that have established

an ESG policy or equivalent

40 days (Group)

50%

30 days (Group)

100%

Key:

Achieved Not Achieved

66 Annual Report and Accounts 2023 | Pennon Group plc

Streamlined energy and carbon report (SECR)

Pennon Group plc GHG emissions

2022/23 2021/22

market-based location-based market-based location-based

Scope 1 GHG emissions by source (tCO

Direct emissions from burning of fossil fuels (tCO

e) 8,003 8,003 4,962 4,962

Process and fugitive emissions (tCO

e) 15,389 15,389 14,388 14,388

Transport: Company owned or leased vehicles(tCO

e) 5,381 5,381 5,052 5,052

Total Scope 1 GHG emissions (tCO

e) 28,773 28,773 24,403 24,403

Scope 2 GHG emissions (tCO

e) 31,321 77,217 80,279 80,847

Total gross Scope 1 & 2 GHG emissions (tCO

e) 60,094 105,990 104,682 105,249

Scope 3 GHG emissions

(tCO

e) 230,737 230,737 292,698 292,698

Total gross Scope 1, 2 & 3 GHG emissions (tCO

e) 290,831 336,727 397,380 397,947

GHG emissions removals through purchases of Renewable Energy Guarantees of Origin

(tCO

Included

in scope 2

above –

Included

in Scope 2

above –

GHG emissions saved by exporting self-generated electricity (tCO

e) 0 0 (1,428) (1,494)

Total annual net GHG emissions (tCO

e) 290,831 336,727 395,952 396,454

Energy consumption used to calculate Scope 1 and 2 GHG emissions (MWh) (see Energy

usage section)

461,716 461,716 426,429 426,429

GHG emissions intensity measure: (tCO

e) (gross Scope 1+2/£100,000 revenue)

7.3 12.9 13.2 13.3

Biogenic GHG emissions outside of Scopes (tCO

e) 3,148 3,148 2,521 2,521

Notes:

Group total Scope 1 (28,773 tCO

e) and Scope 2 market-based (31,321 tCO

e) and Scope 2 location-based (77,217 tCO

e) GHG emissions. These figures have been independently

assured by DNV.

Scope 1 (direct GHG emissions): GHG emissions activities owned or controlled by our organisation that release emissions straight into the atmosphere. For Pennon, primary Scope 1

GHG emission sources during 2022/23 include GHG emissions from stationary plant, fugitive emissions from air conditioning plant and wastewater treatment and transport related

GHG emissions from our own vehicles and fleet Scope 2 (indirect GHG emissions) GHG emissions released into the atmosphere associated with our consumption of imported

electricity. Scope 3 (other GHG indirect emissions) GHG emissions that are a consequence of our actions, which occur at sources which we do not own or control.

1. GHG emission figures are expressed in tonnes of carbon dioxide equivalents (tCO

e) whereby emissions of carbon dioxide (CO

), methane (CH

), nitrous oxide (N

O), the

fluorinated gases (HFC, PFC, SF6) are shown in terms of the equivalent emissions from CO

. A breakdown of emissions by GHG is available in our ESG databook available on

our website.

2. Estimated GHG emissions for relevant Scope 3 categories calculated in 2022/23 are provided in our ESG Databook available on our website www.pennon-group.co.uk/

reportandpresentations.

3. Based on relevant Group revenue for 2022/23.

4. Renewable Energy Guarantees of Origin (REGOs) have been allocated for electricity consumption to March 2023. REGOs for April 2022 to March 2023 are to be allocated in

October 2023.

Sustainability reporting

Fernworthy Reservoir, Devon

Pennon Group plc | Annual Report and Accounts 2023 67

Strategic Report Governance Financial Statements Other information

SECR continued

Change in GHG emissions

Operational Scope 2 market-based GHG emissions for the Group

decreased by 65.7% from 2021/22 as a result of South West

Water’s purchase of REGO backed electricity. Our generation of

renewable electricity also contributed to reducing our Scope 2

location-based emissions.

The revenue-based intensity metric has reduced for the Group both

with and without Bristol Water and now stands at 12.9 tCO

e/£100,000

turnover. This shows that emissions have decreased relative to the

revenue earned.

Scope 3 GHG emissions

Scope 3 categories were evaluated for relevant categories in line

with the reporting guidance. The assessment, carried out by carbon

consultants EcoAct on behalf of Pennon, is based on 2022/23 activity

data for the Group.

The estimated Scope 3 GHG emissions for 2022/23 for the Group

are 230,737 tCO

e compared to the equivalent figure in 2021/22 of

284,147 tCO

e. Bristol Water’s Scope 3 activities have been calculated

and reported within the Group figures for the first time. The change

in reported emissions is due to better interrogation of the spend data

used to drive Category 1 purchased goods and services calculation.

This analysis showed that some financial spend lines were wholly down

to financial transactions with zero emissions associated and therefore

these activities were excluded from 2022/23 calculations.

A breakdown of our estimated Scope 3 GHG emissions is

provided in our ESG Databook, published on our website

(www.pennon-group.co.uk/sustainability).

GHG Reporting Methodology

Our approach follows the UK Government’s Environmental Reporting

Guidelines, including Streamlined Energy and Carbon Reporting

guidance (2019) and the Greenhouse Gas Protocol Corporate Standard

including the Scope 3 Calculation Guidance (collectively referred to

here as the reporting guidelines). In calculating our emissions, we have

used the 2022 UK Government conversion factors for GHG reporting

and considered the Department for Environment, Food & Rural Affairs’

(Defra) 2009 GHG reporting guidance.

Organisational boundary and scopes

The GHG emissions listed here cover 100% of the Group’s companies,

each of which uses the financial control approach to report

GHG emissions. We report our Scope 1, 2 and 3 GHG emissions

where relevant. A breakdown of Scope 3 GHG emissions categories

is provided in our supplementary ESG Databook online at

www.pennon-group.co.uk/reportsandpresentations.

Market and location-based methodology

We report both market-based and location-based Scope 2 GHG

emissions. Where our supply is backed by Renewable Energy Guarantees

of Origin (REGOs), this qualifies as zero carbon market-based emissions.

Where supply is not REGO backed, in accordance with the reporting

guidelines, we have used our electricity suppliers’ specific published Fuel

Mix Disclosure emissions factors to report our Scope 2 market-based

emissions. Where Fuel Mix Disclosure emissions factors are not available,

we have used the residual grid mix emissions factor.

Self-generated renewable energy export

In accordance with the reporting guidelines, we may report an emissions

reduction in our reported net CO

e figure for any renewable electricity

we have generated and exported to the national grid or a third party.

External assurance statement

Group Scope 1 and 2 GHG emissions and energy use, together with

selected Scope 3 GHG emissions, have been independently assured by

DNV. The assumptions, methods and procedures that are followed in

the development of the reported data have been tested and the data

audited for accuracy and consistency. Assurance statements can be

found at www.pennon-group.co.uk/sustainability.

Offshore Emissions

All of Pennon Group’s energy usage is within the UK and Pennon Group

had no offshore GHG emissions or energy usage in the reporting period.

Energy usage

Including self-supplied energy, the Group used 485,823 MWh of energy

in 2022/23, compared to 448,914 MWh in 2021/22. A breakdown of Group

energy usage and associated data assessment methodologies is shown

below. Further details and previous years’ data are provided in our

ESG Databook.

Operational Pennon Group plc GHG emissions by business

South West Water Bristol Water Group Total*

Scope 1 GHG emissions 23,317 5,310 28,773

Scope 2 GHG emissions (market based) 48 31,273 31,321

Total gross scope 1 & scope 2 GHG emissions (tCO

e) 23,364 36,583 60,094

Operational intensity measure (kgCO

e/Ml) – water 59.72 358.51 n/a

Operational intensity measure (kgCO

e/Ml) – wastewater 128.45 n/a n/a

Note:

The water business figure provided here includes the impact of emissions from our two hydroelectric power stations. This does not form part of our annual reporting to the water

regulator Ofwat since these sites are outside of the Ofwat regulated contract.

For ‘Water’ measure Ml = measured water into supply. For ‘Wastewater’ measure Ml = full measured flow treatment.

*Group total includes 146 tCO

e from Pennon Water Services and Group shared services.

68 Annual Report and Accounts 2023 | Pennon Group plc

Energy usage

2022/23

(MWh) 2021/22 Group (MWh) Methodology

Imported grid electricity

399,301 378,880

Metered data except some NHHM supply which is

estimated by electricity supplier (see note

)

Imported private wire electricity (renewable) 4,819 4,874 Metered data

Self-supplied renewable electricity 12,079 11,859 Metered data

Self-supplied heat 7,141 5,780

Estimated that 60% of heat generated by sewage gas

CHP is beneficially used, the rest (40%) is released

to atmosphere

Natural gas

23,471 17,787 Metered data – from billing (some element of estimates)

Liquid fuels (for stationary applications)

14,904 6,798

Estimated based on fuel use/spend data. Reported

totals calculated based on raw data provided by

the supplier

Energy used by fleet transport

24,107 22,963

Estimated based on fuel use/spend and mileage data

(see note

)

Total energy usage 485,823 448,914

Intensity measure: MWh/£100,000 revenue

58.97 56.66

Energy usage data notes:

1. Total energy usage (MWh) (485,823 MWh) by has been independently assured by DNV.

2. Hire car fuel usage and grey fleet (use of private vehicles on company business) are included in these SECR volumes – as per SECR guidance.

3. Based on relevant Group revenue for 2022/23.

# Energy consumption used to calculate Scope 1 and 2 GHG emissions.

Energy efficiency action taken

A key pillar of our Net Zero plan is Sustainable Living, which targets energy and carbon reduction through changes to operational practices, and

increasing energy efficiency. Some of our planned energy efficiency projects during the early part of 2022/23 were disrupted by essential drought

measures as some of the most energy intensive rotating assets were and are critical to ensuring water supply. Equally challenging was the impact and

delay observed in the international supply chain including lack of raw materials, especially steel.

In spite of these headwinds, some major refurbishments were conducted during the year with notable energy efficacy projects completed in the

year including major pump refurbishments at Littlehempston, Restormel, and Roadford. The clean water pumping program has reduced energy

consumption by around 990 MWh since October, this will increase as analysis from other sites are completed.

We’ve continued our meter replacement programme which continues to help identify areas for further efficiency improvements and alter us to aging

assets. Permanent efficiency monitoring equipment has been installed across all 64 sites in the clean water pumping program. Building on this

programme’s success similar projects are being proposed for waste pumping and aeration. Across our offices, we’ve implemented a number of smaller

energy efficiency projects including LED lighting at our Exewater workshop with an aim to expand our office energy efficiency projects over the coming

year as part of our Net Zero plan.

South West Water retained its ISO 50001 energy management system accreditation. We are looking to expand the certification to cover Bristol Water

sites as part of our integration plans.

The River Dart, part of our

river bathing water quality

pilot, Devon

Pennon Group plc | Annual Report and Accounts 2023 69

Strategic Report Governance Financial Statements Other information

SASB Pennon 2022/23 Disclosure

Metric Code Pennon Disclosure

Energy Management

(1) Total energy

consumed

(2) percentage

grid electricity (3)

percentage renewable

IF-WU-130a.1 Pennon Annual Report, SECR, Energy Usage, page 69

Drinking Water Quality

Number of:

(1) acute health-based

(2) non-acute

health-based

(3) non-health-based

drinking

water violations

IF-WU-250a.1 Pennon Annual Report

Clean, safe and reliable water, (CRI Score), page 17

Taste, smell and colour contacts, page 17

Discussion of strategies

to manage drinking

water contaminants of

emerging concern

IF-WU-250a.2 For more information about our specific strategies such as the Upstream Thinking Project, please

refer to: Upstream Thinking – available at: https://www.southwestwater.co.uk/environment/working-in-

the-environment/upstream-thinking/the-project/

For more information about Bristol Water's catchment sensitive farming partnership to improve water

quality and enhance habitats see: https://www.bristolwater.co.uk/performancecommitments

Distribution Network Efficiency

Water main

replacement rate

IF-WU-140a.1 Mains Repairs, (Number of repairs per 1,00km), page 17

Volume of non-revenue

real water losses

IF-WU-140a.2 Leakage (3 yr average), page 17

Effluent Quality Management

Number of incidents

of non-compliance

associated with water

effluent quality

permits, standards,

and regulations

IF-WU-140a.2 South West Water EPA Data Report, Section 4. Discharge Permit Compliance metric – produced by

the EA, available from gov.uk

Sustainability reporting continued

For the second year, we have aligned our non-financial disclosures to the

Sustainability Accounting Standards Board (SASB) reporting framework. SASB

provides a set of industry specific standards (Water Utilities and Services

industry), which each contain topics which are material to our investors. These

topics contain a number of metrics we disclose against. SASB metrics now

include the full Group including Bristol Water for the first time however some

metrics related to regulated figures which are currently reported separately

within the South West Water and Bristol Water Annual Performance Reports

(APR) respectively. The latest APR’s were published in July 2023.

Burrator Reservoir,

Devon

70 Annual Report and Accounts 2023 | Pennon Group plc

Metric Code Pennon & Bristol Water Disclosure

Effluent Quality Management continued

Discussion of strategies

to manage effluents of

emerging concern

IF-WU-140a.2 To access data that South West Water contribute to the Chemical Investigation Programme (CIP),

please refer to: CIP data portal – available at:

https://ukwir.org/sign-up-and-access-the-chemical-investigations-programme-data-access-portal

To see the findings from the last CIP2 report, please refer to: CIP2 report – available at:

https://ukwir.org/the-chemicals-investigation-programme-phase-2,-2015-2020

End-Use Efficiency

Percentage of water

utility revenues from

rate structures that are

designed to promote

conservation and

revenue resilience

IF-WU-420a.1 Omitted based on lack of applicability – Pennon do not offer different rate structures

Customer water savings

from efficiency measures

IF-WU-420.a Pennon Annual Report, Water Saving Community Fund, page 29

Network Resiliency & Impacts of Climate Change

Wastewater treatment

capacity located in 100-

year flood zones

IF-WU-450a.1 This year we are publishing our first Drainage and Wastewater Management Plans (DWMP), in

accordance with new government regulations. Within this plan we have outlined which of our

assets are within flood zones 3 (FZ3). This plan will be accessible from May 2023, via the South

West Water webpage.

1) Number and

(2) volume of sanitary

sewer overflows (SSO),

(3) percentage of

volume recovered

IF-WU-450a.2 Please refer to: EDM Return – available at:

www.southwestwater.co.uk/search/?category=0&searchTerm=EDM

(1) Number of unplanned

service disruptions, and

(2) customers affected,

each by duration category

IF-WU-450a.3 Pennon Annual Report, Operational KPI, page 17

Description of efforts

to identify and manage

risks and opportunities

related to the impact

of climate change

on distribution and

wastewater infrastructure

IF-WU-450a.4 South West Water

WRMP, Section 5. Forecasting our supply requirements, chapter 4. Impacts of climate change on

water supply. Please refer to: South West Water Draft Water Resource Management Plan (WRMP)

2024 - available at: https://www.southwestwater.co.uk/environment/water-resources/water-

resources-management-plan/

Climate change Adaptation Report, 2021. Appendix A: Detailed risk management matrix - available

at: https://www.southwestwater.co.uk/siteassets/document-repository/environment/climate-

change-adaption-2021.pdf

Bristol Water

Bristol Water’s Draft Water Resource Management Plan (WRMP) 2024, Chapter 9. Climate Change

- available at: https://www.bristolwater.co.uk/about-us/our-plans/water-resources/

Water Affordability & Access

Average retail water

rate for:

(1) residential

(2) commercial

(3) industrial customers

IF-WU-240a.1

South West Water average retail water rates for business customers is available at:

https://www.source4b.co.uk/SourceForBusiness/media/Documents/22-23-Charges-Scheme.pdf

The average retail water rate for residential customers is available at:

https://www.southwestwater.co.uk/your-account/bills/our-charges

Bristol Water household charges, available at:

https://7850638.fs1.hubspotusercontent-na1.net/hubfs/7850638/Bristol%20Water%20

Charges%20scheme%2022-23.pdf

Non-household and wholesale charges, available at:

https://f.hubspotusercontent30.net/hubfs/7850638/Assurance%20statement%2022-23.pdf

Typical monthly water bill

for residential customers

to 10 Ccf (1,000 cubic

feet) of water delivered

per month

IF-WU-240a.2 South West Water charges document, available at:

https://www.southwestwater.co.uk/bills/our-charges/

Bristol Water household charges available at:

https://www.bristolwater.co.uk/our-blogs/charges-2021-22

Pennon Group plc | Annual Report and Accounts 2023 71

Strategic Report Governance Financial Statements Other information

SASB Pennon 2022/23 Disclosure continued

Metric Code Pennon & Bristol Water Disclosure

Water Affordability & Access

Number of residential

customer water

disconnections for non-

payment, percentage

reconnected within 30 days

IF-WU-240a.3 Omitted based on lack of applicability – Pennon do not disconnect customers for non-payment

Discussion of impact of

external factors on customer

affordability of water,

including the economic

conditions of the

service territory

IF-WU-240a.4 South West Water’s addressing affordability and vulnerability Document- available at:

www.southwestwater.co.uk/siteassets/document-repository/business-plan-2020-2025/

addressing-affordability-and-vulnerability.pdf

Water Supply Resilience

Total water sourced from

regions with High or

Extremely High Baseline

Water Stress, percentage

purchased from a third party

IF-WU-440a.1 South West Water and Bournemouth Water Drought Plan (2022)- available at:

https://www.southwestwater.co.uk/siteassets/document-repository/environment/sww-bw-final-

drought-plan-september-2022.pdf

For further information of classifications, please refer to the EA’s Water Stressed Areas

Classification report available at:

https://www.gov.uk/government/publications/water-stressed-areas-2021-classification

Under the EA classification Bristol Water do not source water from regions with high or

extremely high-water stress

Volume of recycled water

delivered to customers

IF-WU-440a.2 Omitted based on lack of applicability – We do not deliver recycled water to customers

Discussion of strategies to

manage risks associated with

the quality and availability of

water resources

IF-WU-440a.3 South West Water

Draft WRMP 2024, chapter 1 section 9.5.9 Drinking Water Safety Plans, and chapter 10

modelling & scenario analysis.

Please refer to: South West Water Draft Water Resource Management Plan (WRMP) 2024

- available here: https://www.southwestwater.co.uk/environment/water-resources/water-

resources-management-plan/

Bristol Water

Draft WRMP 2024, section 5. Water Supply and section 8. Sustainable Abstraction.

Please refer to: Bristol Water’s Draft Water Resource Management Plan (WRMP) 2024 -

available here: https://www.bristolwater.co.uk/about-us/our-plans/water-resources/

Activity Metric

Total water sourced,

percentage by source type

IF-WU-000.B South West Water and Bristol Water APR

Additional regulatory information section - Water resources asset and volumes data table

ESG Databook, section 1.5 Water

Total water delivered to:

(1) residential

(2) commercial

(3) industrial

(4) all other customers

IF-WU-000.C South West Water and Bristol Water APR

Additional regulatory information – Water network plus, Treated water distribution – assets and

operations table

Average volume of

wastewater treated per

day, by:

(1) sanitary sewer

(2) stormwater

(3) combined sewer

IF-WU-000.D South West Water and Bristol Water APR

Additional regulatory information -Wastewater network plus, Wastewater network+ – Sewer and

volume data able and Sewage treatment works data table

Length of:

(1) water mains

(2) sewer pipe

IF-WU-000.E South West Water APR

Additional Regulatory Information –Water Network Plus section, Water Network+ table – mains,

communication pipes and other data

Wastewater network plus, Wastewater network+ table –sewer and volume data

72 Annual Report and Accounts 2023 | Pennon Group plc

Pennon TNFD summary

Governance

We have developed our governance framework for Pennon’s ESG

Committee to include oversight of the company’s nature-related risks

and opportunities. These were identified through our ESG materiality

assessment undertaken in 2020-21 in line with the ‘risk appetite and

identification’ stage of our existing risk management cycle.

Our approach to following best practice and how we comply with legal

and regulatory requirements is outlined in our Biodiversity and

Environmental policies.

Strategy

Our plans set out how we strive to maintain compliance, meet

regulatory requirements, drive performance using targets, adopt best

practice and invest in nature-based solutions (NBS).

Our policies are underpinned by a series of environmental strategies

and plans that interlink up to 2050.

Risk & Impact Management

Through our longer-term planning processes we measure a range of

nature-related risks such as flood risk, biosecurity risk prevention and

habitat restoration.

Metrics & Targets

Our long-term targets align with government expectations for bathing

water quality improvement, delivering Biodiversity Net Gain and

achieving favourable conditions for SSSI sites.

We measure Group performance on nature-related metrics against

our ESG targets and communicate the environmental impact of our

operations using South West Water’s Environmental Dashboard.

Next Steps

Initially we have drawn together our interpretation of the TNFD guidance

and LEAP process (Locate, Evaluate, Assess, Prepare) and are starting

to gain oversight on how we map our interfaces with nature across our

operations, activities, and supply chain. From this, the way we identify,

assess, and prioritise nature-related risks and opportunities (transition

and physical risks) will inform our nature-related risk registers.

We are using previous work and relevant risk assessments in this area

and considering the additional actions required to manage our nature-

related risks to deliver on our nature-positive objectives.

The delivery of our business plans including Green Recovery,

WaterFitand Net Zero Plan to 2030 will define our contribution to

a nature positive economy. Looking to the future of ESG reporting,

the Group is now looking to further embed TNFD recommendations

for nature-related risk and opportunity management into business

decision making in preparation for PR24 and beyond.

The aim of TNFD is to support a shift in global financial flows toward

‘nature-positive’ outcomes. We welcome the development of TNFD as an

important mechanism for further embedding environmental leadership

across the business. Our voluntary engagement with the TNFD

framework is strengthening our long-term risk management and aligns

to our strategic ambition to create green investment opportunities.

Our interpretation of TNFD

We recognise this is the decade of action for nature restoration and

we are adapting to the national policy landscape which is developing

at pace to set new standards and frameworks for businesses to better

prioritise, manage and disclose nature-related risk and opportunities.

Stakeholders rightly tell us that they expect environmental leadership

from us as a priority, which we intend to deliver with increased

transparency around our management of green and blue spaces, our

environment, and our natural resources.

What we are doing

Across the business, there is already a wide variety of nature-related

activity facilitating the TNFD which we are in the processes of assessing

to inform future financial planning. We are continuing to align processes

and plans for nature-related risk management whilst using TNFD to

inform our decision making as we aspire to meet best practice and

maximise ‘win-win’ opportunities. For example, we have made significant

investment into nature-based solutions through our climate change

adaptation plan to tackle simultaneously a range of emerging risks such

as pollution, climate change and biodiversity loss.

Baseline natural capital assessments undertaken in 2019 provide good

indication of our ‘business footprint’ which informs how we map our

interface with nature as well as better understand our upstream, direct

and downstream activities dependent on natural resource management.

Furthermore, in the past year internal teams began working together to

understand how we can incorporate existing tools and platforms into the

(LEAP) methodology for TNFD.

Key considerations

Going forward, our intention is to incorporate nature-climate related

risks and opportunities into strategic decision making. There are key

interdependencies to address between TNFD and Taskforce for Climate

related Financial Disclosure (TCFD), which we have implemented since

2019. Importantly, we need to consider potential negative trade-offs

between nature and climate for future financial planning. For example,

if water quality is best improved using end-of-pipe solutions vs. grey

structures with more embodied carbon.

Furthermore, individuals and businesses will depend on nature in river

catchments we interface with, but we are not the sole actor impacting on

them and therefore developing collaborative approaches to nature-related

risk and opportunity management is very important e.g., engagement in

regional planning groups for the WRMP to deliver collaborative catchment

management approaches such as Upstream Thinking.

Taskforce on Nature-related Financial Disclosures (TNFD) 2023 –

our approach

Pennon Group plc | Annual Report and Accounts 2023 73

Strategic Report Governance Financial Statements Other information

Task Force on Climate-related Financial Disclosures (TCFD)

Since our 2022 TCFD disclosure, South West Water have published our

draft Water Resources Management Plan (dWRMP24) and Drainage &

Wastewater Management Plan (DWMP), and are currently developing

its business plan for PR24, which involved developing best-value plans

and strategies to ensure the resilience of our assets and operations,

supporting our communities and the environment. Therefore, our

TCFD disclosure this year reflects updated current and future actions

to mitigate risks and realise opportunities. The updates to our risk

assessments also consider new climate-related evidence and recent

publications from the IPCC and CCC, further to recent publications from

Ofwat (South West Water’s economic regulator) on scenario analysis,

adaptive planning, PR24 methodology, and updates in regulation

and legislation, the latter of which gives us greater confidence in our

transition risk impact reporting in the short term.

We have also provided further details on impacts under each horizon

and distinguished primary financial impacts to our business between

impacts of the unmitigated risk and impacts from mitigating the risk

to emphasise the investment required to build adaptive capacity (or

alternatively, the costs of not taking action).

The Group is focused on delivering for our stakeholders including our

customers and shareholders. As a result, we are continuing to embed

climate change resilience and sustainability into decision making within

our business, as well as managing the near-term inflationary pressures

including power prices. We will also continue to manage change to our

investments to explore new technology, materials, and nature-based

solutions, within the current global constraints on capacity and supply

chains to deliver both affordability and fairness for our customers.

As a Group, we maintain consistent and strong reporting with the CDP

presenting our efforts to combat climate change and our GHG emissions

since 2013. Our GHG emissions performance continues to improve,

reported through our CDP Climate Change submission in which we

received a B in 2022. You can read our GHG emissions performance on

page 67.

We are committed to meeting the challenges arising as a result of

climate change and the transition to Net Zero. Our TCFD disclosure sets

out the key climate-related risks and opportunities being addressed by

the Group. Our regulated water business is the main focus of our TCFD

disclosures with the majority of our assets, revenues, and expenditures

related to this area of our business.

TCFD recommendations

Created by the Financial Stability Board (FSB), the TCFD published

its recommendations in June 2017. This is our fourth year of TCFD

reporting and the below shows our progress and compliance to the

recommendations including the updated TCFD guidance (2021 Annex).

In alignment with the FCA listing rule 9.8.6R(8) we have taken into

account available knowledge and guidance concerning the listing rule

and climate-related risks to develop our compliant TCFD disclosure.

Each year our disclosures have been enhanced as knowledge and

guidance improves. Pennon has addressed the 11 recommended

disclosures and has considered the latest best practice guidance from

the TCFD.

As part of our ongoing TCFD programme, we have enhanced our

assessment of physical risks, transition risks, and climate-related

opportunities. In 2022 we expanded upon our focus on physical risks,

which was the focus of our 2021 TCFD disclosure and South West

Water’s Climate Adaptation Report in 2021.

The year of 2022 provided record-breaking weather events, including

extreme high temperatures, prolonged dry conditions, and consecutive

red weather warnings for storms and high winds. These events have

provided us with significant insight into our resilience to these kinds of

events (which we could see more frequently in the future) which are

factored into our update of physical risk assessment and our review of

adaptive strategies.

Solar panels at De Lank Water

Treatment Works, Cornwall

We are driven by our strategic focus of leading UK environmental infrastructure, delivering for the

benefit of our customers, communities, and the environment.

74 Annual Report and Accounts 2023 | Pennon Group plc

Governance

The organisation’s governance around climate-related risks and opportunities

2022/23 progress 2024 and beyond

• We have further developed our governance framework, including

increased recognition of the role that each Board Committee and

several executive committees play in managing climate-related risk

and opportunities

• We have enhanced how carbon impacts are considered in

our capital planning by incorporating carbon values into

investment appraisal.

• Whilst climate change is already considered as part of the

decision-making process across the business, we will continue to

further embed the TCFD considerations into the governance and

management of climate risks across our business in 2023/24

• We will continue to further embed the assessment and identification

of climate-related risks within our investment appraisal processes.

Strategy

The actual and potential impacts of climate-related risks and opportunities on the organisation’s business, strategy, and financial planning

2022/23 progress 2024 and beyond

• We have reviewed and enhanced our assessments of physical and

transitional climate risks and opportunities. We have re-assessed

the materiality of key risks with stakeholders across the Group

and enhanced the actions we are taking to manage the most

pressing risks.

• We have considered climate change in South West Water’s

strategic planning for Water Resources (dWRMP24) and Drainage

& Wastewater (DWMP), and we are embedding climate resilience

and Net Zero into the PR24 business plan as part of PR24.

• We will continue to integrate our climate risks within our existing

risk management systems and risk registers across the Group. Risk

owners will continue to drive and monitor action to manage risks and

pursue opportunities.

• We will continue to review our policies and strategic decision-making

across the Group in order to enhance considerations of climate risks

and opportunities.

• South West Water will publish it’s final WRMP and our draft business

plan for PR24.

Risk Management

The processes used by the organisation to identify, assess, and manage climate-related risks and opportunities

2022/23 progress 2024 and beyond

• We have enhanced our risk management methodology to improve

consideration of impacts related to carbon, sustainability, nature,

and the Group's ESG goals.

• We have reviewed our principal risks and enhanced our recognition

of how climate change and Net Zero impact and influence our

principal risks.

• We will continue to review and update our management of climate

change and our decision-making frameworks to ensure climate-

related risks are clearly identified and assessed through the

investment processes and operational decision-making.

Metrics and Targets

The metrics and targets used to assess and manage the relevant climate-related risks and opportunities

2022/23 progress 2024 and beyond

• We have enhanced our metrics linked to key climate risks and

opportunities, and our investments in climate action. We are

tracking progress against our ESG targets and our Net Zero

commitments and renewable energy generation.

• We are undertaking analysis to quantify key risks, such as major

assets at risk of coastal flooding.

• We are continuing to explore options to develop quantitative metrics

for our key climate risks and opportunities, and exploring our ability

to report on our capital expenditure related to climate action.

Climate-related Governance

Disclose the organisation’s governance around climate-related risks and opportunities.

Recommended disclosures

a. Describe the Board’s oversight

of climate-related risks

and opportunities.

b. Describe management’s role

in assessing and managing

climate-related risks

and opportunities.

Board oversight

The Group has a strong governance structure in place to oversee the effective operation of our business and

to manage all risks - including climate-related risks and opportunities. Overall ownership and responsibility

for risks, opportunities, and mitigation actions is held by the Pennon Group Board and CEO. Various Board

Committees and executive sub-committees play a key role in overseeing climate-related risks within

their domain.

The Group recognises that climate change and the transition to Net Zero impacts and influences several of

the Group’s principal risks (see our Principal Risks report on page 52. Principal risks are reviewed as part of

our audit governance processes. During the regulatory period, climate change planning is assessed to ensure

the business remains resilient to changes to its capital programme.

Pennon Group plc | Annual Report and Accounts 2023 75

Strategic Report Governance Financial Statements Other information

TCFD continued

Pennon Group and South West Water Board

The Group and South West Water Boards provide oversight to the management of the climate-related risks and opportunities. The Board has overall

responsibility for the Group’s risk management policies and processes, and all principal risks are reviewed by the Board on a regular basis. The Board

considers climate-related risks and opportunities throughout its duties - including when considering the Group’s strategy and objectives, monitoring

business and operational performance, business planning and annual budget setting, reviewing major capital expenditures and existing investments,

and in considering acquisitions/divestitures. We are continuing to enhance the awareness and capacity of our Board and senior executives relating to

climate risks and opportunities. For more information see our Corporate Governance report pages 98 to 161.

Board Committees

All Board Committees play a role in managing our climate-related risks and opportunities, and matters are escalated to the Board as

appropriate. Board Committees report their actions and decisions to the Board, ensuring robust governance - including for matters

influenced by climate change and the transition to Net Zero. The responsibility for climate-related risks and opportunities is cascaded through

the business in order to meet our targets and objectives.

Audit Committee

Attendance: Meets 4 times annually.

Attended by the Chair and other Non-

Executive Directors.

Role relating to climate risks and

opportunities: The Committee monitors the

Group’s financial reporting, including how the

impacts of climate risks are accounted for

in financial statements. The Committee also

reviews key risks and opportunities (including

climate-related risks), and challenges and

tests the Group’s internal control processes

including risk management and internal audit.

Further information on page 120.

ESG Committee

Attendance: Meets 4 times annually. Attended

by the Pennon Board, CEO, CFO and other

Group Executives.

Role relating to climate risks and

opportunities: Provides the platform for

discussion of the Group’s ESG agenda and

related climate risks and opportunities, as well

as setting and reviewing key metrics relating

to our ‘6 capitals’ assessments, and reviewing

performance against ESG targets and goals. The

Sustainable Financing reporting and monitoring

is reported to the Committee for onward

submission to the Board. Further information on

page 126.

Nomination Committee

Attendance: Meets 4 times annually.

Attended by the Chair and other Non-

Executive Directors.

Role relating to climate risks and

opportunities: Considers competency related

to climate risks and opportunities when

reviewing the structure, size, and composition

of the Board and senior executives In the

Group. Further information on page 128.

Remuneration Committee

Attendance: Meets 4 times annually.

Attended by the Chair and other Non-

Executive Directors.

Role relating to climate risks and

opportunities: Considers the Group’s

objectives and responsibilities, and advises

the Board on the framework of executive

remuneration for the Group and for the

wider workforce, including mechanisms

to incentivise achievement of the Group’s

objectives related to climate change, Net Zero,

and sustainability goals. Further information

on page 134.

Health and Safety Committee

Attendance: Meets 3 times annually. Attended

by the Chair, CEO, CFO, and other Non-

Executive Directors.

Role relating to climate risks and

opportunities: Supports the Executive Board

on matters of risk across all areas of health &

safety, resilience, and process safety - including

areas impacted by climate-related risks,

particularly related to extreme weather events.

Also reviews the effectiveness of the Group’s

procedures for H&S reporting and performance.

Further information on page 132.

PR24 Committee

Attendance: Meets during the Board cycle as

we progress the plan. Attended by the Chair,

other Non-Executive Directors, CEO, CFO and

other Group executives.

Role relating to climate risks and

opportunities: Considers climate change and

Net Zero as part of business planning and the

Group’s PR24 strategy.

Peatland restoration on

Bodmin Moor, Cornwall

carried out by the South

West Peatland Partnership

team

76 Annual Report and Accounts 2023 | Pennon Group plc

1. CBO = Chair of the Board, CEO = Chief Executive Officer, CFO = Chief Financial Officer, GCCS = General Counsel & Company Secretary, COO = Chief Operating Officer,

CPO = Chief People Officer, CCDO = Chief Customer and Digital Officer

Pennon Executive Committee

Attendance: CEO, CFO, COO, GCCS, CPO, CCDO, Director of Regulation Strategy and Asset Management, Chief Engineering Director, Director of

Drought and Resilience

Role relating to climate risks and opportunities: The Committee monitors, approves and reviews business objectives and plans, and provides

challenge and feedback to investment decisions. Throughout these processes climate-related risks and opportunities are considered and actions to

manage risks are embedded in business planning and Investment decision-making. There are several executive committees who report to PEx, and

below are some of the key committees which consider climate-related risks and opportunities within their remit:

• The monthly business review meeting - oversees and informs Board Committees on operational performance and risks across the Group, including

the impacts of climate-related risks to operations and the actions being taken to manage operational risks. Other committees report to OPEx, and

key committees with a specific remit related to climate risks and opportunities include: PR24 Executive Committee, Compliance Committee, and

Drought & Resilience Programme Steering Committee

• Energy Risk Committee - focused on managing the Group’s energy risk exposure and reviewing renewable energy opportunities

• Executive Risk Committee - reviews and approves items relating to principal risks before they are presented to Committees at Board level -

including risks and opportunities relating to and influenced by climate change

• IPC Procurement Committee - considers climate-related risks and opportunities when reviewing and approving investment planning and major

procurement items

• ESG Executive Committee - reviews and approves items relating to ESG before they are presented to the ESG Committee at Board level - including

items which relate to or are influenced by climate change

• Net Zero Executive Committee - monitors, reviews, and provides support for the implementation of the Net Zero Strategy, including considering

risks and opportunities relevant to delivery of the strategy

Management’s role

Executive managers play a key role in identifying, assessing, and managing climate-related risks and opportunities, and Executive managers sit

on relevant Executive committees. The responsibility for climate-related risks is clearly owned, managed, and assessed by a number the Group’s

management teams across our business including our management responsible for water resources, wastewater, regulation, procurement, and finance.

Risk is identified and categorised in different parts of our business prior to being formally passed onto senior management responsible for those

business functions. Each business function and department maintains a risk register, and management escalates risks to the Executive Committees

as appropriate.

The Executive Directors’ remuneration policy is set to incentivise the achievement of key performance objectives. In 2021/22, the element previously

based on personal objectives was changed and now relates to ESG objectives and performance including targets relating to our carbon reduction

goals, the working environment for our employees, and diversity.

Strategy

Disclose the actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning

where such information is material.

Recommended disclosures

a. Describe the climate-related risks and opportunities the organisation has identified over the short, medium, and long term.

b. Describe the impact of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning.

c. Describe the resilience of the organisation’s strategy, taking into consideration different climate-related scenarios, including a 2°C or

lower scenario.

Our most material physical and transitional climate-related risks and opportunities are presented on the following pages. These have been identified

by considering the climate scenarios described on page 90

. The risks have been assessed using the Pennon 4x4 risk assessment matrix which puts

the highest risks in the red category under the RAG rating. Further information on our risk assessment methodology can be found on page 52. We have

identified impacts over short (0-10 years), medium (10-30 years) and long term (30-100 years) horizons (the rationale behind these time horizons is

presented on page 90).

Due to the nature of the business, the opportunities are not only assessed on financial merits, with some opportunities not increasing revenues but are

opportunities to save costs and/or carbon, which supports our ability to provide the best outcomes for our customers and stakeholders.

We then present our findings from scenario analysis, exploring the potential range of impacts and our strategic responses under plausible contrasting

climate scenarios (see page 91).

Pennon Group plc | Annual Report and Accounts 2023 77

Strategic Report Governance Financial Statements Other information

Physical Risks

Key impacts identified on our operations and customers

Examples of our actions to mitigate risks and realise opportunities Primary financial and reputational impacts to our business

Key physical climaterisks

Increasing frequency and intensity of droughts - risks to water supply,

wastewater networks, and services.

• Increased daily and peak demand for garden watering, crop

irrigation, and tourism during drought events exceeds capacity

to redistribute water.

• Sustained drought can lead to supply shortfalls with a heightened risk

for recovering water storage if there are consecutive drought years.

• Drought events lead to loss of supply and de-pressurisation of pipelines,

greater incidence of pipe failure and contamination.

• More extreme wetting and drying cycles cause soil movement, more

pipe movement/ subsidence and bursts/ increased leakage.

• Lower river flows as a result of drought events reduce yields. Could lead

to reductions in our future abstraction allowances and increased need to

release more water to rivers/the environment (see also 'climate-related

regulation in the Water sector' transition risk).

• Lower groundwater levels reduce borehole yields. Intake, borehole pump

and reservoir draw-off levels may not match reduced levels.

• Saline intrusion due to lowering groundwater compounded by sea level

rise (see 'Rising sea levels’ risk).

• Decreased intake raw water quality (see 'Increasing average

temperatures and heatwaves' risk).

• Impacts on wastewater networks due to low flows from surface water.

Current actions:

• Collaborative water resource management planning – West Country

Water Resources and Water Resources South East.

• Drought planning including more extreme events. Stochastic and

multi-year drought analysis to test how water supply systems perform

in extreme prolonged droughts.

• Prioritisation of support for vulnerable customers during droughts.

• Demand management and water efficiency, including Per Capita

Consumption (PCC) reductions and leakage reduction strategy.

• Investigation of regional water transfers.

• Potential Abstraction Incentive Mechanism (AIM) schemes.

• Enhancements to distribution system to remove bottlenecks/ support

us to meet peak demand.

• Desalination scheme in development for 2023 to enhance our

drought management.

Planned or future actions:

• Finalise draft Water Resources Management Plan 2024

including:

• demand management options i.e. increased metering,

leakage reduction.

• schemes to increase water supply (e.g. Cheddar2 SRO, Mendip SRO,

enhancing interconnectivity of water resource zones) with new

sources, storage.

• water treatment improvements and wastewater reuse

• Potential for additional desalination schemes.

Impacts from mitigating the risk:

We could incur increased expenditure (Opex and Capex) to increase

capacity for water supply infrastructure, and to manage drought

conditions and water demand. Some of these costs could be

recoverable through the regulatory system. Increased energy and

material use could impact our operational and embodied carbon.

Impacts of the unmitigated risk:

Service disruptions could negatively impact our reputation and

reduce ODI rewards/ increase ODI penalties (affecting our revenue).

We could face additional expenditure (Opex and Capex) to recover

from service disruptions, reduce leakage, and manage water demand.

Some of our assets could deteriorate and face impairment due to

physical impacts.

Relevant time horizon

Short, medium and long term, with increasing likelihood and

magnitude of risk over each horizon

Risk score in 2025 including current actions

Risk score in 2050 without further action

Key physical climaterisks

Increasing average temperatures and heatwaves - risks to water

quality and water treatment

Relevant time horizon

Short, medium and long term, with increasing likelihood and

magnitude of risk over each horizon

Risk score in 2025 including current actions

Risk score in 2050 without further action

• Decreased water quality (odour, discolouration, dissolved organics,

Cryptosporidium) requiring additional resources and cost to remove

pathogens from drinking water or ensure water quality meets regulatory

standards at WTWs.

• Increased microbe propagation and survivability affecting

treatment processes.

• Higher septicity levels in received wastewater.

• Algal blooms, triggered by catchment runoff, are exacerbated by

higher temperatures.

• Higher peak demand for water compounded by reduced runoff yields

due to higher temperatures increasing evaporation (see 'Increasing

frequency and intensity of droughts' risk).

• Decreased water quality during heatwaves compounded by overheating

of equipment/assets.

• Cascading impacts to interdependent networks (e.g. power supply) from

overheating, leading to service disruption.

• Increased prevalence of invasive non-native species (INNS).

Current actions:

• Upstream Thinking catchment management tackling raw water

quality to increase resource availability in 80% of our drinking

water catchments.

• Granular activated carbon at certain Water Treatment Works (WTWs).

• Robust health and safety practices and management.

• Farm water efficiency and resilience project – 1,000 pond

nature-based solutions.

• Biodiversity management and INNS programmes.

• Installation of cooling systems for equipment/assets.

Planned or future actions:

• Upgrade to granular activated carbon treatment at further WTWs.

Impacts from mitigating the risk:

We could incur increased expenditure (Capex and Opex) for water

and wastewater treatment and odour management, and to increase

capacity for water supply infrastructure. Some of these costs could

be recoverable through the regulatory system. Increased energy and

material use could impact our operational and embodied carbon.

Impacts of the unmitigated risk:

Service disruptions and lower-quality service provision could

negatively impact our reputation and reduce ODI rewards/increase ODI

penalties (affecting our revenue).

We could incur increased expenditure (Capex and Opex) to recover

our services or use alternative water supplies.

Some of our assets could deteriorate and face impairment due to

physical impacts.

Key physical climaterisks

Increasing frequency of heavy rainfall and floods - risks to assets &

services, water quality, and the environment

Relevant time horizon

Short, medium and long term, with increasing likelihood and

magnitude of risk over each horizon

Risk score in 2025 including current actions

Risk score in 2050 without further action

• Flooding of assets and treatment works, loss of access to assets,

and greater sediment levels in raw water which disrupt services and

potentially impact the environment.

• Cascading impacts to interdependent networks (e.g. power supply) from

flooding, leading to service disruption.

• Increased groundwater leading to increased infiltration into assets.

• Increased volumes of storm water exceed pump capacity leading to

service failures.

• Exceedance of storm tank design and asset flooding/damage with

interruption to service.

• Increased frequency and duration of storm overflows, with potential

impacts to water bodies - including potential closure of beaches.

• Increased river flows and risk of bank erosion exposing wastewater

pipes increasing the risk of collapse.

• Catchment erosion in moorland or peatland areas, with nutrients

leaching that increase algal growth in waterbodies and reservoirs.

• Dilution of, and rapid variations in, influent flows – longer

retention of water in storm tanks leads to increased septicity

and operational problems.

• Increased flood incidence impacts water quality for some boreholes,

may result in temporary inaccessibility or contamination. Increased

turbidity of water sources.

Current actions:

• Drainage & Wastewater Management Plan (DWMP).

• Asset flood risk assessments undertaken every five years.

• Contingency planning in flood risk hotspots e.g. River Otter, including

prioritisation of support for vulnerable customers.

• Sites have temporary deployable flood protection.

• Investment in PR19 to improve flood defences at four WTWs up to 1-in-

1,000-year events.

• Catchment management through Upstream and Downstream Thinking.

• Continued investment in our WaterFit Plans - reducing storm overflow

releases and improving river and coastal water quality, creating and

restoring habitat, and looking to inspire local champions to improve

water quality through schools and communities.

• New Mayflower WTW in Plymouth increases local flood resilience.

• Partnership flood schemes e.g. Countess Wear Wastewater Treatment

Works (WWTW)(Exeter).

Planned or future actions:

• Further sewer separation schemes in areas at risk.

• Surface water drainage plans and investment in key areas.

• Expand our Upstream Thinking initiative.

• Real-time monitoring and control (e.g. at all CSOs).

• Continue to improve incident management.

Impacts from mitigating the risk:

We could incur additional expenditure (Opex and Capex) to improve

operational resilience and flood defences, and to enhance our

Upstream and Downstream Thinking programmes.

Some of these costs could be recoverable through the regulatory

system. Increased energy and material use could impact our

operational and embodied carbon.

Impacts of the unmitigated risk:

Service disruptions and combined storm overflows could negatively

impact our reputation and reduce ODI rewards/increase ODI penalties

(affecting our revenue).

We could incur additional expenditure (Opex and Capex) to recover

our services and repair damaged assets.

Some of our assets could deteriorate and face impairment due to

physical impacts.

TCFD continued

Key – Strategic priorities

Risk Opportunity

High Medium Low Increasing Stable Decreasing

1. Key impacts are taken as the top-scoring risks from South West Water’s Adaptation Report 2021 under the relevant climate driver, considering the 2025 and 2050 time horizons.

78 Annual Report and Accounts 2023 | Pennon Group plc

1. South West Water draft WRMP24 chapter 11 recommended plan v2.1 (southwestwater.co.uk)

Physical Risks

Key impacts identified on our operations and customers

Examples of our actions to mitigate risks and realise opportunities Primary financial and reputational impacts to our business

Key physical climaterisks

Increasing frequency and intensity of droughts - risks to water supply,

wastewater networks, and services.

• Increased daily and peak demand for garden watering, crop

irrigation, and tourism during drought events exceeds capacity

to redistribute water.

• Sustained drought can lead to supply shortfalls with a heightened risk

for recovering water storage if there are consecutive drought years.

• Drought events lead to loss of supply and de-pressurisation of pipelines,

greater incidence of pipe failure and contamination.

• More extreme wetting and drying cycles cause soil movement, more

pipe movement/ subsidence and bursts/ increased leakage.

• Lower river flows as a result of drought events reduce yields. Could lead

to reductions in our future abstraction allowances and increased need to

release more water to rivers/the environment (see also 'climate-related

regulation in the Water sector' transition risk).

• Lower groundwater levels reduce borehole yields. Intake, borehole pump

and reservoir draw-off levels may not match reduced levels.

• Saline intrusion due to lowering groundwater compounded by sea level

rise (see 'Rising sea levels’ risk).

• Decreased intake raw water quality (see 'Increasing average

temperatures and heatwaves' risk).

• Impacts on wastewater networks due to low flows from surface water.

Current actions:

• Collaborative water resource management planning – West Country

Water Resources and Water Resources South East.

• Drought planning including more extreme events. Stochastic and

multi-year drought analysis to test how water supply systems perform

in extreme prolonged droughts.

• Prioritisation of support for vulnerable customers during droughts.

• Demand management and water efficiency, including Per Capita

Consumption (PCC) reductions and leakage reduction strategy.

• Investigation of regional water transfers.

• Potential Abstraction Incentive Mechanism (AIM) schemes.

• Enhancements to distribution system to remove bottlenecks/ support

us to meet peak demand.

• Desalination scheme in development for 2023 to enhance our

drought management.

Planned or future actions:

• Finalise draft Water Resources Management Plan 2024

including:

• demand management options i.e. increased metering,

leakage reduction.

• schemes to increase water supply (e.g. Cheddar2 SRO, Mendip SRO,

enhancing interconnectivity of water resource zones) with new

sources, storage.

• water treatment improvements and wastewater reuse

• Potential for additional desalination schemes.

Impacts from mitigating the risk:

We could incur increased expenditure (Opex and Capex) to increase

capacity for water supply infrastructure, and to manage drought

conditions and water demand. Some of these costs could be

recoverable through the regulatory system. Increased energy and

material use could impact our operational and embodied carbon.

Impacts of the unmitigated risk:

Service disruptions could negatively impact our reputation and

reduce ODI rewards/ increase ODI penalties (affecting our revenue).

We could face additional expenditure (Opex and Capex) to recover

from service disruptions, reduce leakage, and manage water demand.

Some of our assets could deteriorate and face impairment due to

physical impacts.

Relevant time horizon

Short, medium and long term, with increasing likelihood and

magnitude of risk over each horizon

Risk score in 2025 including current actions

Risk score in 2050 without further action

Key physical climaterisks

Increasing average temperatures and heatwaves - risks to water

quality and water treatment

Relevant time horizon

Short, medium and long term, with increasing likelihood and

magnitude of risk over each horizon

Risk score in 2025 including current actions

Risk score in 2050 without further action

• Decreased water quality (odour, discolouration, dissolved organics,

Cryptosporidium) requiring additional resources and cost to remove

pathogens from drinking water or ensure water quality meets regulatory

standards at WTWs.

• Increased microbe propagation and survivability affecting

treatment processes.

• Higher septicity levels in received wastewater.

• Algal blooms, triggered by catchment runoff, are exacerbated by

higher temperatures.

• Higher peak demand for water compounded by reduced runoff yields

due to higher temperatures increasing evaporation (see 'Increasing

frequency and intensity of droughts' risk).

• Decreased water quality during heatwaves compounded by overheating

of equipment/assets.

• Cascading impacts to interdependent networks (e.g. power supply) from

overheating, leading to service disruption.

• Increased prevalence of invasive non-native species (INNS).

Current actions:

• Upstream Thinking catchment management tackling raw water

quality to increase resource availability in 80% of our drinking

water catchments.

• Granular activated carbon at certain Water Treatment Works (WTWs).

• Robust health and safety practices and management.

• Farm water efficiency and resilience project – 1,000 pond

nature-based solutions.

• Biodiversity management and INNS programmes.

• Installation of cooling systems for equipment/assets.

Planned or future actions:

• Upgrade to granular activated carbon treatment at further WTWs.

Impacts from mitigating the risk:

We could incur increased expenditure (Capex and Opex) for water

and wastewater treatment and odour management, and to increase

capacity for water supply infrastructure. Some of these costs could

be recoverable through the regulatory system. Increased energy and

material use could impact our operational and embodied carbon.

Impacts of the unmitigated risk:

Service disruptions and lower-quality service provision could

negatively impact our reputation and reduce ODI rewards/increase ODI

penalties (affecting our revenue).

We could incur increased expenditure (Capex and Opex) to recover

our services or use alternative water supplies.

Some of our assets could deteriorate and face impairment due to

physical impacts.

Key physical climaterisks

Increasing frequency of heavy rainfall and floods - risks to assets &

services, water quality, and the environment

Relevant time horizon

Short, medium and long term, with increasing likelihood and

magnitude of risk over each horizon

Risk score in 2025 including current actions

Risk score in 2050 without further action

• Flooding of assets and treatment works, loss of access to assets,

and greater sediment levels in raw water which disrupt services and

potentially impact the environment.

• Cascading impacts to interdependent networks (e.g. power supply) from

flooding, leading to service disruption.

• Increased groundwater leading to increased infiltration into assets.

• Increased volumes of storm water exceed pump capacity leading to

service failures.

• Exceedance of storm tank design and asset flooding/damage with

interruption to service.

• Increased frequency and duration of storm overflows, with potential

impacts to water bodies - including potential closure of beaches.

• Increased river flows and risk of bank erosion exposing wastewater

pipes increasing the risk of collapse.

• Catchment erosion in moorland or peatland areas, with nutrients

leaching that increase algal growth in waterbodies and reservoirs.

• Dilution of, and rapid variations in, influent flows – longer

retention of water in storm tanks leads to increased septicity

and operational problems.

• Increased flood incidence impacts water quality for some boreholes,

may result in temporary inaccessibility or contamination. Increased

turbidity of water sources.

Current actions:

• Drainage & Wastewater Management Plan (DWMP).

• Asset flood risk assessments undertaken every five years.

• Contingency planning in flood risk hotspots e.g. River Otter, including

prioritisation of support for vulnerable customers.

• Sites have temporary deployable flood protection.

• Investment in PR19 to improve flood defences at four WTWs up to 1-in-

1,000-year events.

• Catchment management through Upstream and Downstream Thinking.

• Continued investment in our WaterFit Plans - reducing storm overflow

releases and improving river and coastal water quality, creating and

restoring habitat, and looking to inspire local champions to improve

water quality through schools and communities.

• New Mayflower WTW in Plymouth increases local flood resilience.

• Partnership flood schemes e.g. Countess Wear Wastewater Treatment

Works (WWTW)(Exeter).

Planned or future actions:

• Further sewer separation schemes in areas at risk.

• Surface water drainage plans and investment in key areas.

• Expand our Upstream Thinking initiative.

• Real-time monitoring and control (e.g. at all CSOs).

• Continue to improve incident management.

Impacts from mitigating the risk:

We could incur additional expenditure (Opex and Capex) to improve

operational resilience and flood defences, and to enhance our

Upstream and Downstream Thinking programmes.

Some of these costs could be recoverable through the regulatory

system. Increased energy and material use could impact our

operational and embodied carbon.

Impacts of the unmitigated risk:

Service disruptions and combined storm overflows could negatively

impact our reputation and reduce ODI rewards/increase ODI penalties

(affecting our revenue).

We could incur additional expenditure (Opex and Capex) to recover

our services and repair damaged assets.

Some of our assets could deteriorate and face impairment due to

physical impacts.

Pennon Group plc | Annual Report and Accounts 2023 79

Strategic Report Governance Financial Statements Other information

TCFD continued

Key impacts identified on our operations and customers

Examples of our actions to mitigate risks and realise

opportunities

Primary financial and reputational impacts to our business

Key physical climaterisks

Rising sea levels and coastal erosion - risks to

assets and services

Relevant time horizon

Short, medium and long term, with increasing

likelihood and magnitude of risk over each horizon

Risk score in 2025 including current actions

Risk score in 2050 without further action

• Direct asset damage from flooding, storm damage and/or coastal erosion.

• Cascading impacts to interdependent networks (e.g. power supply) due to damage from

coastal flooding, storm damage and/or coastal erosion.

• Rising sea levels increase the extent of the saline intrusion zone. Tidal limits move

upstream, causing increased salinity at river intakes. This can cause accelerated asset

deterioration and reduced process performance efficacy.

• Increased health and safety implications e.g. hydrogen sulphide gas from wastewater

treatment works.

• Saltwater intrusion of groundwater sources causing source to become unusable

(compounded by lowering groundwater levels – see our ‘Increasing average temperatures

and heatwaves’ risk).

• Coastal estuarine storm overflow discharges become tide-locked hindering free discharge

• Increased environmental ambition by other stakeholders to replace lost coastal habitat

and manage coastal erosion, impacting our assets and services (in some cases requiring

us to carry out actions which may not be funded through the regulatory system).

Current actions:

• Asset flood risk assessments undertaken every five years.

• Prioritisation of support for vulnerable customers.

• Improved flood resilience of all assets in the coastal floodplain.

• Partnership flood schemes e.g. Countess Wear WWTW (Exeter).

• Protection of sites from saline intrusion/incursion (Otter Basin).

• Continuing work with stakeholders involved in managing

coastal erosion.

Planned or future actions:

• Protection of further sites from saline intrusion/incursion.

• Desalination programme.

Impacts from mitigating the risk:

We could incur additional expenditure (Opex and Capex) for protecting

our sites and assets from coastal flooding and saline intrusion. Some of

these costs could be recoverable through the regulatory system.

Increased energy and material use could impact our operational and

embodied carbon.

Impacts of the unmitigated risk:

Service disruptions could negatively impact our reputation and reduce ODI

rewards/increase ODI penalties (affecting our revenue).

We could face additional expenditure (Opex and Capex) for using

alternative water supply if sites/sources become unusable.

Some of our assets could deteriorate and face impairment due

to physical impacts.

Key physical climaterisks

Increasing frequency of extreme weather events

and storms - risks to assets and services

Relevant time horizon

Short, medium and long term, with increasing

likelihood and magnitude of risk over each horizon

Risk score in 2025 including current actions

Risk score in 2050 without further action

• Power supply failure due to high winds, heavy rainfall/flooding, lightning at key network

and treatment sites and resultant cascading impacts to interdependent networks,

including water supply delivery and wastewater management.

• Cold snaps and freeze/thaw events leading to pipe bursts/ increased leakage.

• Reduced ability for our services and assets to recover under consecutive storms.

Current actions:

• Cold weather plan, including prioritisation of support for

vulnerable customers.

• Investment in centralised control room and alternative water

supply teams.

• Duplication of strategic water mains network.

• Backup power at plants to manage risks of energy

supply interruption.

• Recovery plans for 100 WWTWs.

• Working with other stakeholders (e.g. energy providers) to

enhance resilience.

Planned or future actions:

• Extend real-time monitoring and control.

• Extend recovery plans at more WWTWs.

• Further investment in generating renewable energy and

back-up power.

Impacts from mitigating the risk

We could incur additional expenditure (Opex and Capex) for

maintenance and upgrades to assets to enhance resilience to storms.

Some of these costs could be recoverable through the regulatory system.

Increased energy and material use could impact our operational and

embodied carbon.

Impacts of the unmitigated risk

Service disruptions could negatively impact our reputation and reduce ODI

rewards/increase ODI penalties (affecting our revenue).

We could face additional expenditure (Opex and Capex) to restore

services and repair assets. Some of our assets could deteriorate and face

impairment due to physical impacts.

Transition Risks

Type as defined by TCFD

Policy, Regulation and Legal Risks

Relevant time horizon of risk

Short and medium term

Potential for this risk to decrease over time as

regulation evolves to remove contradictions and

misalignment, and as leadership on climate action

becomes commonplace across Government and

the economy.

Current Risk Rating

Risk of challenges balancing trade-offs in regulation in the Water sector between

agendas of Net Zero, climate resilience, environmental enhancement, and other

objectives, posing the risk of increasing costs and carbon: Potential undesired climate

outcomes due to trade-offs in regulatory priorities. Challenges with balancing objectives to

improve environmental outcomes while reducing carbon emissions at the same time as rapid

changes in climate-related policies and regulations are occurring in the Water sector.

A holistic and balanced approach to delivering our goals for Net Zero, providing a resilient

water supply and protecting and enhancing the environment, could be at risk if one agenda

imposes more stringent regulation, thus presenting a misalignment in the pace with which

preferably holistic actions can be delivered relative to actions that benefit a single more

stringent agenda. In some cases, new/enhanced policies and regulations pose a risk due

to increasing costs to Pennon or increasing Pennon’s carbon footprint, in other cases the

absence of policies and regulation pose a risk due to potential that costs incurred by Pennon

may not be recovered through the regulatory system.

Some examples include:

• more stringent environmental regulation being imposed in response to the climate

adaptation and nature positive agenda, including the pace with which requirements are

being imposed:

• reduced abstraction allowances and increased compensation flows into our rivers being

imposed (see our ‘drought’ physical risk)

• increased environmental ambition by other stakeholders to replace lost coastal habitat

and manage coastal erosion (see our ‘rising sea levels’ physical risk).

• changes to carbon accounting methodologies and scope boundaries, including changes

to location-based GHG accounting methodology instead of market-based accounting (e.g.

disincentivising power purchase agreements (PPAs) for renewable energy).

• enhanced requirements which increase Pennon’s energy and carbon footprint e.g.

phosphorus removal, UV disinfection, reducing combined sewer overflows in cases where

the scale and pace required disadvantages nature-based solutions.

• regulation in contradiction to achieve overall Net Zero goals, and regulatory system

providing limited incentives for wider Net Zero action outside of the regulated

water business.

Balancing trade-offs from actions to address different agendas

in policy and regulation:

Current actions:

• Horizon scanning to identify emerging/changing regulation.

• Stakeholder engagement/public relations management.

• Net Zero programme.

• Engaging with regulators to explain the climate change impacts of

new regulation.

• Working with others in the sector to clarify carbon

accounting approaches.

• Adaptive planning approach within dWRMP24, including high,

moderate, and low environmental ambition.

• Considering options which Pennon can take outside of the

regulatory framework (e.g. offsite investment in renewable energy).

Future actions:

• Pursuing opportunities for nature-based solutions where these are

acceptable under the regulation.

• Investment in innovation/ research and development, and

investment in enhancements to resilience to key climate risks.

• Considering applying an internal carbon price to consider full costs

and benefits of decisions.

• Public value assessments in decision-making (balancing

trade-offs of different agendas, and contradictions in the

regulatory framework).

• Seeking opportunities for additional funding, making the

investment case based on core water company activities.

• Future climate adaptation planning and transition planning.

Impacts from mitigating the risk:

We could incur increased expenditure (Capex and Opex) due to changes

to regulation, for example costs related to installation and operation of new

process equipment to meet enhance regulations.

Some of these costs could be recoverable through the regulatory system.

Increased energy and material use to meet increased regulatory

requirements has potential to increase our carbon footprint through

operational and embodied carbon.

Impacts of the unmitigated risk:

If we fail to balance regulatory requirements, we could face reduced ODI

rewards/ increased ODI penalties (affecting our revenue).

Public perception of how we balance trade-offs could result in negative

impacts on our reputation (see our ‘Negative public and stakeholder’

reputation risk).

Some of our assets could incur obsolescence and impairment If they are

driving high carbon emissions or poor environmental outcomes.

Key – Strategic priorities

Risk Opportunity

High Medium Low Increasing Stable Decreasing

80 Annual Report and Accounts 2023 | Pennon Group plc