Pennon Acquisition Of Ses Water

Pennon Group plc ("Pennon", the "Group" or the "Company") is pleased to announce that it has today acquired 100% of the issued capital of Sumisho Osaka Gas Water UK Limited ("SOGWUK"), the holding company of Sutton and East Surrey Water plc ("SES Water") and certain other ancillary businesses, for £89 million from Sumitomo Corporation and Osaka Gas, with a total enterprise value of £380 million (the "Acquisition").

Pennon is also announcing its intention to issue new Ordinary Shares to raise up to £180 million (the "Equity Capital Raise") in connection with the Acquisition, in order to ensure that the pro forma leverage and capital structure for the enlarged Group following the Acquisition remains consistent with Pennon's well-established water business gearing range of 55-65%(1).

Key Investment Highlights

• Acquisition of SES Water and other ancillary businesses, adding a high-quality business with over 750,000 customers and a forecast shadow Regulatory Capital Value ("RCV") of £351(2) million as of 31 March 2024
• Purchase price of £89 million for the equity, including repayment to the vendors of £14 million of equity invested into SOGWUK since 31 March 2023
• Enterprise value of £380 million based on net debt of £291(3) million (as of 31 March 2023)
• Enterprise value equates to a premium to SES Water 2023 RCV of c.6% (after certain adjustments)(4). The transaction is expected to increase the Group's RCV by c.7% on Acquisition
• SES Water's 2025-2030 regulatory period ("K8") RCV is forecast to grow at an attractive average annual rate of c.5%(5)
• Builds on Pennon's existing water operations by acquiring another high-quality, water-only business, along with access to an experienced and talented management team, and follows the successful previous acquisitions of two water-only companies
• Acquisition will benefit SES Water's customers and other stakeholders - SES Water's customers will be offered the opportunity to participate in Pennon's unique WaterShare+ customer shareholding scheme
• Expected to be earnings accretive from the first year of full ownership (2024/25), and to generate attractive returns whilst supporting further RCV growth in the 2020-2025 regulatory period ("K7"), bringing total expected growth over K7 for Pennon to 71%
• Complementary ethos focused on customer affordability and delivering better outcomes for customers and the environment with SES Water's digital capabilities and smart technologies complementing Pennon's current offering
• Consistent with Pennon's successful track record of value creation through the realisation of synergies, a run rate of £11(6) million per annum is anticipated, enabling enhanced shareholder returns, driven by operational efficiency initiatives, lower financing costs and economies of scale

Commenting on the Acquisition, Susan Davy, Group Chief Executive said:

"SES Water is a fantastic fit for Pennon as we further expand our presence in water supply across Southern England, building on our successful similar acquisitions of Bournemouth Water and Bristol Water alongside the adoption of water supply in the Isles of Scilly.

The business is a proven, high-quality water operation. We are particularly impressed by the innovation and technology-led solutions implemented by SES Water.

As part of the Pennon Group, we will enhance SES Water's financial resilience and better position the business to serve its customers and all stakeholders, as has proven to be the case with our acquisitions of Bournemouth Water and Bristol Water.

We are able to invest in SES Water's resources infrastructure, environment and people thanks to our strong financial performance and long-term UK shareholder base, delivering a seamless transition for SES Water's customers while also providing a more robust and reliable service in the medium term.

We expect SES customers to benefit from Pennon's stewardship of the business, including being able to offer them the opportunity to participate in our unique WaterShare+ scheme and participate in the ownership of their local water provider."

Financing and Expected Timetable

• Completion of the Acquisition, which is not subject to any conditions, has already occurred
• The Acquisition will now be subject to review by the Competition and Markets Authority ("CMA"), with input from the Water Services Regulation Authority ("Ofwat"). Pennon considers that the Acquisition will create a net benefit for customers and shareholders and expects to receive a decision from the CMA within its usual timescales
• The Acquisition is being financed from existing cash and financial resources
• There is not expected to be any funding impact on South West Water's plans to otherwise deliver a compelling AMP8 investment plan
• The proceeds from the Equity Capital Raise will be used in connection with the Acquisition to ensure that the enlarged Pennon Group remains within our well-established water business gearing range of 55-65%(1) following completion
• Further information on the Equity Capital Raise and the use of proceeds from it can be found in the separate announcement being released by Pennon today

Webcast and Conference Call

A webcast for investors and analysts will take place today at 8.00am (GMT) by Susan Davy, Group Chief Executive and Steve Buck, Group Chief Financial Officer, immediately followed by a live Q&A.

The presentation can be accessed here: https://www.pennon-group.co.uk/investor-information/financial-reports-and-presentations

The conference call can be accessed using the details below.

United Kingdom (Toll-Free): +44 800 358 1035

United Kingdom (Local): +44 20 3936 2999

Global Dial-In Numbers

Conference passcode: 956400

The Acquisition of SES Water represents a strong strategic fit for the Group and has been assessed in line with the Board's highly disciplined review of potential growth opportunities, conforming with our twin-track growth strategy. In reviewing the Acquisition, the Board considered a range of factors including earnings accretion, value creation from the impact on shareholder returns and the impact on customers and other stakeholders.

The Board believes that the Acquisition presents an attractive opportunity to further expand South West Water's wholesale capabilities, whilst also deploying best practice from both businesses to deliver value for customers, shareholders and wider stakeholders.

In addition, Pennon represents a stable, well-financed and long-term custodian of SES Water that will enhance SES Water's financial resilience and is able to invest in SES Water's water resources infrastructure, environment and people owing to Pennon's strong financial performance and long-term UK shareholder base.

Furthermore, Pennon's ownership and approach to the local delivery of local services will give SES Water customers greater advocacy, involvement and ownership in their water provider with Pennon's unique share issuance scheme WaterShare+, providing SES Water customers with the opportunity to become shareholders in their local water company.

The Acquisition will increase the size and scale of the Group to serve a total population of c.4.3 million and will deliver an estimated c.7% increase in RCV on acquisition, bringing total expected RCV growth for Pennon to 71% over K7. It also adds another 476 dedicated employees to the Group, enabling access to a new, wider and diverse talent pool in Southern England.

Completion of the Acquisition, which is not subject to any conditions, has already occurred. Following completion, the Acquisition will now be subject to review by the CMA, with input from Ofwat.

SES Water and the other ancillary businesses which make up the Acquisition will be managed separately from the rest of the Pennon Group until the CMA review is complete.

Under the terms of the Acquisition, Pennon is making a total aggregate cash payment of £89 million to Sumitomo Corporation and Osaka Gas for 100% of the issued share capital of SOGWUK, which includes £14 million to reimburse equity contributions they have made to SOGWUK since 31 March 2023.

The size of the Acquisition means that it represents a Class 2 transaction for the purposes of the UK Financial Conduct Authority's Listing Rules.

Pennon LEI: 213800V1CCTS41GWH423

About SOGWUK and SES Water

SOGWUK

SOGWUK is the holding company for SES Water and certain other ancillary businesses including SES Home Services, SES Business Water, Allmat Limited, Advanced Minerals Limited and Surrey Downs Property Investments Limited, however these are very small in size in the context of SES Water.

SOGWUK had adjusted net debt of £291(3) million as of 31 March 2023.

SOGWUK had gross assets of £613 million as at 31 March 2023 and profit before tax of (£31 million) for the period 31 March 2022 to 31 March 2023.

SES Water

SES Water is a local water supplier company in South East of England with over 150 years of operating history in the abstraction, treatment, storage and distribution of clean potable water to household customers and businesses.

Serving over 750,000 customers, its designated geographical coverage, includes neighbourhoods of East Surrey, West Sussex, West Kent and South London.

Purpose led, SES Water's aim is to harness the potential of water to enhance nature and improve lives. It aims to achieve this by placing customers and the environment at the heart of its decision making and driving transformation through digital innovation as an industry leader in smart networks.

SES Water is one of the best performing water companies across a range of indicators including:

• Reliability of service - a top performer on supply interruptions in 2023
• Reducing leakage - targeted reduction plan on track
• Water quality - upper quartile performance in the sector

SES Water had an RCV of £334 million as of 31 March 2023 and an RCV of £351 million estimated as of 31 March 2024(2).

• Based on management forecast of RCV as at 31 March 2024
• Reported net debt adjusted to include unamortised issuance costs and short term debt, before fair value uplift, rounded down from actual figure of £291.52m
• Premium stated before £14 million of vendor equity contributions since 31 March 2023 and reflects adjustments including pensions and Pennon's view on the value of unregulated assets
• K8 total nominal growth rate of 25%, based on SES Draft Business Plan for AMP8
• Anticipated run rate of targeted efficiency savings (on a net basis)
• March 2023 Ofwat numbers