Utility Week - authoritative, impartial and essential reading for senior people within utilities, regulators and government
Issue link: https://fhpublishing.uberflip.com/i/647766
Operations & Assets 18 | 4TH - 10TH MARCH 2016 | UTILITY WEEK Analysis T he Pennon Group restructure announced last month is more of an evolution than a revolution. The changes appear, on the surface at least, to be relatively subtle. Group chief executive Chris Loughlin admitted as much. "It isn't a particularly new strategy but there are some new nuances," he said at a capital markets day last week. Pennon is the parent company of the waste and resource business Viridor, and of the water companies South West Water and Bournemouth Water, with the latter being bought into the group in April 2015 following a £100.3 million takeover. The FTSE250 company has £5.8 billion of assets and employs more than 4,500 people across the three enterprises. The restructure aims at becoming a leaner, more efficient organisation, and keeping shareholders happy, with good levels of returns. Loughlin has set an ambitious dividend of RPI+4 per cent. The restructure is costing Pennon £8 million. The company is expected to reap rewards of £11 million a year aer two years. Before the restructure and strategy review, the Pennon management treated the South West Water and Viridor businesses as entirely separate entities. Now there is a recognition of an overlap between the port- folios. Group chairman Sir John Parker says the aim has been to "streamline by removing layers, therefore improving governance and allowing faster decision making". The old structure had separate boards and non-executive directors for Viridor and South West Water, with no group chief executive overseeing the company's two divi- sions. The new structure removes the dou- bling up of decisions that was taking place. The number of shared services within the Pennon Group will increase, with HR, pro- curement and IT being some of the elements that are set to be centralised, although the final plans are still to be confirmed. The integration of Bournemouth Water into South West Water, and the Pennon Group as a whole, is also well underway and expected to be completed by the end of this financial year. Loughlin said this will include reducing the back office cost base at Bourne- mouth Water by a quarter, to "take the cost out" of that company, and using shared services. This will enable Pennon to deliver "greater totex outperformance" at South West Water than the £29 million South West achieved in the first half of 2015/16. Alongside the drive to be more cost effi- cient and deliver greater returns to inves- tors, reshuffling the Pennon pack has been conducted with one eye on the imminent opening of the non-domestic water market, alongside the amalgamation of Bourne- mouth Water. A separate legal entity has been created, under the moniker Pennon Water Services, which will house the non-domestic retail businesses – Source for Business, Avon Val- ley Water, South West Water Business Ser- vices, Bournemouth Water Services, and Aquacare. The wholesale and domestic retail arms of both South West Water and Bourne- mouth Water continue to be housed under the South West Water arm of the company. While the changes in the company's strat- egy are "nuanced" and the overall structure not a significant departure from that which went before, they are aimed at future proof- ing the company and building on its current strong foundation. As group chairman Parker said, it is about making "the new Pennon even leaner, more nimble and more able to capitalise on opportunities." Recasting Pennon Group With the acquisition of Bournemouth Water – and to better prepare for non-domestic competition – Pennon Group has restructured its businesses. Mathew Beech looks at its plans. Market reaction Pennon announced its group restructure on 11 February and the reaction from the financial markets was muted. The share price fell slightly from 833 pence per share on 10 February to 814p on the day of the announcement, and has been hovering around the 830p mark since. Analysts at Citi said: "We do not expect the announcement to have a material impact to the Pennon shares. Pennon is currently trading at a 32 per cent premium to its regulated asset value, in-line with the average of UK regulated utilities." 900 880 860 840 820 800 PENNON SHARE PRICE, ONE MONTH 28 Jan 4 Feb 11 Feb 10 Feb 25 Feb PENNON RESTRUCTURE Old structure New structure South West Water (inc Bournemouth Water) Pennon Water Services (non-household retail) Viridor Pennon board of directors Pennon executive board Pennon board of directors Pennon South West Water board South West Water Non-household Household Viridor board Viridor Retail Wholesale Recycling/ resources Energy