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RNS Number : 6138U
Pennon Group PLC
26 November 2019
26 November 2019
Half Year Results 2019/20
for the period ended 30 September 2019
Bringing resources to life
Chris Loughlin, Pennon Chief Executive said:
"Pennon has maintained its positive momentum through the first
half of 2019/20, delivering robust performance across our water and
waste businesses. We continue to deliver on our promises to
customers, communities and shareholders as our strong operational
performance and ongoing investments drive tangible, positive and
sustainable results.
Viridor continues to deliver sustainable growth in UK recycling
and residual waste management. Our existing portfolio of Energy
Recovery Facilities (ERFs) is consistently outperforming our
investment case returns. This underpins Pennon's earnings growth
for 2020 and beyond. Our Recycling division is on a growth
trajectory with a new plastics processing facility on track to add
much needed capacity in the UK market. With its diversified
complementary operations and unique competitive advantages, Viridor
is well positioned to take advantage of strong market dynamics and
a favourable UK policy environment.
South West Water performance is underpinned by strong cost
control. We have made an early start on our business plan for
2020-2025 after receiving fast-track status from the regulator for
the second consecutive review, the only water company ever to
achieve this. Our plan will see customer bills reduce further, with
the cost of the average bill lower in 2025 than it is today. Almost
two thirds of South West Water employees are shareholders and, from
next summer, our 'New Deal' will give South West Water customers a
financial stake and a say in the business. We have challenged
ourselves to be more ambitious on environment and climate action,
reducing leakage and targeting net zero carbon emissions by
2030.
In September we announced a full review of Pennon's strategic
focus, growth options and capital allocation policy. The review is
ongoing and we will announce our conclusions in 2020."
Financial Highlights
H1 2019/20 H1 2019/20 H1 2018/19 Change(1)
(excluding (excluding
IFRS 16 IFRS 16
Underlying^ impact[1]) impact)
Revenue GBP712.4m GBP712.4m GBP746.7m (4.6%)
EBITDA^ GBP283.9m GBP276.8m GBP274.0m +1.0%
Adjusted EBITDA^ GBP311.5m GBP304.4m GBP294.7m +3.3%
Operating profit GBP180.7m GBP179.5m GBP178.5m +0.6%
Profit before tax (PBT) GBP142.9m GBP143.7m GBP142.5m +0.8%
--------------------------------- ----------- ------------- ----------- -------------
Non-underlying items before GBP20.2m GBP20.2m (GBP8.9m) -
tax[2]
Profit before tax GBP163.1m GBP163.9m GBP133.6m +22.7%
Tax (GBP29.6m) (GBP29.6m) (GBP17.6m) (68.2%)
Profit after tax (PAT) GBP133.5m GBP134.3m GBP116.0m +15.8%
Adjusted earnings per share[3] 31.1p 31.3p 30.0p +4.3%
Statutory earnings per
share 30.1p 25.6p +17.6%
Dividend per share[4] 13.66p 12.84p +6.4%
From 2019/20 the new accounting standard IFRS 16: Leases has
been adopted, which results in all leases whether operating or
financial being treated on a consistent basis within the reported
results. Overall there is marginal net impact on the income
statement of GBP0.8 million reducing underlying profit before tax
from GBP143.7 million to GBP142.9 million and profit before tax
from GBP163.9 million to GBP163.1 million. For 2019/20 only, to aid
the comparability of reported results against the prior period, all
figures and narrative in this statement will focus on the results
using consistent accounting policies, with references to
performance measures excluding the impact of IFRS 16. A full
reconciliation of the statutory reported results is included in
Item (iii) in the Alternative Performance Measures on pages 70 to
71 of this announcement.
Pennon Group
-- Group performance in line with management expectations
-- Underlying PBT up by 0.8% to GBP143.7 million, resulting from:
o Viridor EBITDA growth driven by strong performance across all
activities, with ERF availability on track for >90% in
2019/20
o Lower revenues and EBITDA at South West Water reflecting
reduced customer demand compared to the elevated level during last
year's hot dry summer, net of lower operating costs through
continued focus on cost-savings
-- Profit before tax (excluding the impact of IFRS 16) up +22.7%
to GBP163.9 million due to efficient financing providing a
non-underlying gain of GBP18.0 million, and a non-underlying gain
of GBP2.2 million from aspects of the finalisation of pension
commitments relating to the exit from the Greater Manchester
contract
-- Statutory earnings per share up +17.6% to 30.1p
-- Interim dividend per share up +6.4% to 13.66p
-- Cash flow from operations reflecting robust operational
performance, whilst significant capital investment across the Group
continues
Viridor
-- Excellent track record, successful growth - capitalising on favourable UK policy environment
-- Focus on infrastructure model, de-risked through index-linked, long-term contracts
-- Good operational performance and EBITDA growth in H1 2019/20
across Viridor's complementary activities with EBITDA up +9.9%
o Build out of ERFs supporting strong, profitable growth -
performing consistently in excess of investment case returns
o Portfolio of 10 operating ERFs on track to deliver full-year
availability >90% for the fourth consecutive year, with planned
maintenance weighted to H1
o Optimisation ongoing at Glasgow, Beddington and Dunbar ERFs
through operational ramp-up process
o Robust volumes and pricing in landfill and landfill gas -
strong engine availability and gas collection
o Resilient performance in recycling with continued focus on
quality
o Driving ongoing efficiencies in indirect costs
-- Confidence in long-term market outlook
o Well placed to benefit from substantial imbalance of supply
and demand for ERFs and plastics recycling
-- Growth through investment in ERFs, plastics recycling activities and Energy Parks
o Avonmouth ERF on track for commissioning in H2 2019/20
o Joint Venture with Grundon Waste Management Limited for a new
ERF at Ford, West Sussex - heads of terms signed
o Construction at our GBP65 million Avonmouth plastics recycling
facility underway - c.85% of inputs and c.75% of offtake now
contracted with third parties
o Energy Park development - contract signed for the private wire
agreement at Beddington ERF - offtake up to 27 MWs for up to 25
years
-- Visible pipeline of future growth projects
o Exploring two further co-located plastics recycling facilities
at Ardley and Dunbar ERFs
o Two additional ERFs being considered as market fundamentals
remain favourable
o Leveraging value from Viridor's asset base through Energy Park
opportunities
South West Water
-- Delivering for our customers
o Bills lower today than they were 10 years ago
o Upper quartile in Ofwat's Service Delivery report for
2018/19
o Improving operational performance - written complaints down
15%, reducing pollution incidents, and reducing supply
interruptions
o On track to meet our leakage target - met every year since
inception
o c.99% of bathing waters meeting the quality standard - c.83%
achieved excellent status
o H1 2019/20 return on regulated equity (RORE) 11.9% -
cumulative RORE for K6 11.8%
o WaterShare delivering GBP121 million of cumulative
outperformance to be shared with customers
-- Continuing momentum for K7 (2020-25)
o Highest potential outperformance for K7 - confidence in
outperformance across all areas
o Delivering early investments to target ODI rewards - laying
the foundations for future performance
o Innovation at the centre of our plans for the next regulatory
period - international collaboration agreements signed and UK
Innovation Centre launched
-- Working in the public interest - 'New Deal' for our customers and communities
o Improving our impact on the environment - reducing leakage by
15% by 2025
o Targeting net zero carbon emissions by 2030
o Delivering our WaterShare+ commitment - empowering customers,
giving them a stake and say in our business
Pennon Water Services
-- Robust performance in a competitive market
o Gaining national customers with multi-year contracts
o Focused on a broader customer offering including value-added
services as well as reducing costs and driving efficiency
Presentation of Results
A presentation for City audiences will be held today, Tuesday 26
November 2019, at 09.00am at The Lincoln Centre, 18 Lincoln's Inn
Fields, Holborn, London, WC2A 3ED.
A live webcast of the presentation can also be accessed using
the following link:
http://www.pennon-group.co.uk/investor-information
For further information, please contact:
Chief Financial Officer
Susan Davy Director of Corporate Affairs & Investor
Sarah Heald Relations 01392 443
Jennifer Cooke Investor Relations Officer 168
James Murgatroyd 020 7251
Harry Worthington Finsbury 3801
PENNON BUSINESS REVIEW & OUTLOOK
Pennon has maintained its positive momentum through the first
half of 2019/20, delivering a strong performance from both our
water and waste businesses. We continue to deliver on our promises
to customers, communities and shareholders as our investments drive
tangible, positive and sustainable results for all our
stakeholders. Over 60% of Pennon's shareholders are UK pension,
savings, charities, individuals and employees, with almost two
thirds of South West Water's employees being shareholders. Viridor
continues to perform strongly across its recycling and residual
waste processing and transformation operations. South West Water
has made an early start on the business plan for K7 (2020-25) after
receiving fast-track status from the regulator, Ofwat, for the
second consecutive review, the only water company ever to achieve
this.
Viridor: Confident outlook - unique platform for growth
Viridor is focused on delivering UK recycling and residual waste
processing and transformation. Over recent years the business has
been re-positioned to focus on a de-risked infrastructure model,
with investment backed by profitable, index-linked, long-term
contracts. We believe there are continued favourable waste market
dynamics in both recycling and residual waste, supporting
opportunities for further investment and growth.
We expect the UK ERF capacity gap to be around seven million
tonnes (mT) to 2035[5]. Viridor's portfolio of ten operating ERFs
are performing well with optimisation and operational ramp-up
underway for the Glasgow, Beddington and Dunbar ERFs commissioned
in 2018/19.
Viridor continues to expand its ERF portfolio with the
construction at Avonmouth progressing to budget and commissioning
planned during H2 2019/20. Operational ramp-up is expected during
2020/21. During H1 2019/20, Viridor also signed heads of terms with
Grundon Waste Management Limited for a new ERF joint venture in
Ford, West Sussex. A site with outline planning permission has been
identified, which is neighbouring one of our existing materials
recycling facilities and Grundon Waste Management Limited's waste
transfer station, giving rise to potential Energy Park benefits.
Viridor also continues to assess two further ERF opportunities. We
believe our landfill portfolio complements the combustible residual
waste strategy, with a requirement for a landfill solution into the
medium/long term.
The 'Blue Planet' effect continues to encourage action and we
were pleased to see the Resources & Waste Strategy published in
December 2018. The strategy has cross-party support and is expected
to be brought into effect through the Environment Bill once
Parliament returns after the General Election. Whilst the recycling
market has been challenging, with changing public perception and
Government support for recycling and the UK Plastics Pact outlining
a roadmap with targets to 2025, we are confident in the long-term
market outlook.
We view plastics reprocessing as an exciting area of growth and
see opportunities to further increase our market share in this
area. Viridor's GBP65 million plastics processing facility,
co-located with Avonmouth ERF, remains on track for contribution to
earnings in 2020/21. Viridor has now secured c.85% of inputs and
c.75% of offtake contracts including the recently announced
contract with Unilever, creating a viable and sustainable
alternative to virgin plastic. Once commissioned, Viridor will
process virtually all of its recyclable plastic in the UK. We see
strong market fundamentals in plastics recycling and processing and
we are exploring investment opportunities for two further
reprocessing facilities co-located with our ERFs at Ardley in
Oxfordshire and Dunbar, near Edinburgh.
South West Water: strong foundations for continued
outperformance into K7
South West Water continues to perform strongly in the final year
of this regulatory period. It continues to lead the industry with a
cumulative Return on Regulated Equity (RORE) of 11.8% and is one of
the only companies to have outperformed on every measure for each
year of K6: total expenditure (totex), financing and Outcome
Delivery Incentives (ODIs).
Cumulative totex savings for the 2015-20 period to date are
GBP268 million and are on track to deliver the c.GBP300 million
savings targeted. This demonstrates continued focus on cost
efficiency and the use of innovation to deliver operational
improvements at a lower cost for the benefit of our customers.
We know that delivering a resilient service in South West Water
is critical for our customers, with no water restrictions for the
23rd consecutive year. South West Water has delivered further
benefits for customers through our innovative WaterShare mechanism
with around GBP121 million of benefits achieved since 2015.
Customers will continue to benefit from reinvestment in services
and lower bills into the next period.
South West Water was pleased to be awarded fast-track status for
its K7 business plan by Ofwat earlier in the year, the only water
company ever to achieve this in two consecutive price reviews. This
has enabled us to start planning and making early investments to
target ODI rewards earlier in the next regulatory period. The key
focus for our business plan is empowering customers through a 'New
Deal' - giving customers a stake and a say through our innovative
WaterShare+ mechanism. The option for customers to have a
shareholding and participate in customer AGMs gives them a tangible
stake in our business through the outperformance delivered and will
further ensure customers are at the heart of our business.
Pennon Water Services: Focus on customer service and
delivery
Pennon Water Services (PWS), our 80:20 retail venture with South
Staffordshire Plc, continues to perform robustly in a competitive
market gaining national customers with multi-year contracts,
serving over 160,000 customer accounts across 18 different
wholesale regions. We are focused on a broader customer offering
including value added services supporting our goal of being the
retailer of choice.
Strategic review of focus, growth options and capital allocation
for the Group underway
Given the strong financial performance and operational progress
of the Group, coupled with the imminent start of the new K7
regulatory delivery period for South West Water and the near and
medium-term growth opportunities at Viridor, the Pennon Board has
concluded that it is an appropriate time to conduct a full review
of the strategic focus, growth options and capital allocation
policy for the Group. The review is ongoing and we will announce
our conclusions in 2020.
Dividend policy
Whilst delivering on our promises to customers and communities,
Pennon's long established 10-year dividend policy delivers 4%
year-on-year growth above RPI inflation to 2020 to shareholders.
The dividend policy to 2020 has been supported by our sustainable
growth strategy and is underpinned by the highest return on
regulated equity in the water sector over K6 (2015-20) and the
growth in earnings delivered by Viridor's operations.
For H1 2019/20, the Board has declared an interim dividend of
13.66p, an increase of 6.4%. The interim dividend will be paid on 3
April 2020 to shareholders on the register on 24 January 2020.
Pennon offers shareholders the opportunity to invest their dividend
in a Dividend Reinvestment Plan (DRIP).
Interim dividend payment information
23 January 2020 Ordinary shares quoted ex-dividend
24 January 2020 Record date
6 March 2020 Final date for receipt of DRIP applications
3 April 2020 Interim dividend payment date
Upcoming Events
30 March 2020 Trading Statement
4 June 2020 Full Year Results 2019/20
23 July 2020 Annual General Meeting
25 September 2020 Trading Statement
24 November 2020 Half Year Results 2020/21
PENNON FINANCIAL PERFORMANCE
H1 2019/20 H1 2019/20 H1 2018/19 Change
(excluding (excluding
IFRS 16 impact) IFRS 16
Underlying impact)
Revenue GBP712.4m GBP712.4m GBP746.7m (4.6%)
EBITDA GBP283.9m GBP276.8m GBP274.0m +1.0%
Adjusted EBITDA GBP311.5m GBP304.4m GBP294.7m +3.3%
Depreciation and amortisation (GBP103.2m) (GBP97.3m) (GBP95.5m) (1.9%)
Operating profit GBP180.7m GBP179.5m GBP178.5m +0.6%
Net interest (GBP45.1m) (GBP43.1m) (GBP40.8m) (5.6%)
Share of JV profit after
tax GBP7.3m GBP7.3m GBP4.8m +52.1%
Profit before tax (PBT) GBP142.9m GBP143.7m GBP142.5m +0.8%
--------------------------------------- ------------- ------------------ ------------ ------------
Non-underlying items before GBP20.2m GBP20.2m (GBP8.9m) -
tax[6]
Profit before tax GBP163.1m GBP163.9m GBP133.6m +22.7%
Tax (GBP29.6m) (GBP29.6m) (GBP17.6m) (68.2%)
Profit after tax (PAT) GBP133.5m GBP134.3m GBP116.0m +15.8%
PAT (attributable to holders
of hybrid capital) GBP7.0m GBP7.0m GBP8.6m (18.6%)
PAT (attributable to minority (GBP0.1m) (GBP0.1m) (GBP0.1m) -
interests)
PAT (attributable to shareholders) GBP126.6m GBP127.4m GBP107.5m +18.5%
Adjusted earnings per share[7](,[8]) 31.1p 31.3p 30.0p +4.3%
Statutory earnings per
share 30.1p 25.6p +17.6%
Dividend per share[9] 13.66p 12.84p +6.4%
Capital investment[10] GBP172.0m GBP200.6m (14.3%)
South West Water GBP77.6m GBP68.6m +13.1%
Viridor(10) GBP94.4m GBP131.9m (28.4%)
Other - GBP0.1m (100.0%)
30 September 30 September 31 March Change
2019 2019
(excluding 2019 (excluding
IFRS 16 impact) IFRS 16
impact)
Net debt GBP3,296.0m GBP3,177.7m GBP3,079.5m +3.2%
Non-underlying items before tax
Non-underlying items for the half year total a credit of GBP20.2
million (H1 2018/19 charge of GBP8.9 million). The Directors
believe excluding non-underlying items provides a more useful
comparison on business trends and performance.
The non-underlying credit of GBP20.2 million is a result of:
-- The movement in the fair value of long-dated derivatives
associated with South West Water's 2040 bond. These derivatives no
longer met the Group's accounting hedging requirements and early
settlement enabled South West Water to lock in a 'mark to market'
gain. This has resulted in the recognition of a pre-tax credit of
GBP18.0 million (H1 2018/19 charge of GBP8.9 million) and cash
proceeds on termination of the derivative of GBP87.2 million
-- Aspects of the closedown of defined benefit pension
commitments following the cessation of the Greater Manchester
recycling operating contract have resulted in a pre-tax credit of
GBP2.2 million (H1 2018/19: GBPnil).
Delivering results responsibly for all stakeholders
Our businesses provide essential services to local communities.
We have a responsibility to deliver these well and our customers
depend on our ability to operate in a sustainable way. Our approach
ensures we are aligned and integrated with our values; trusted,
responsible, collaborative and progressive.
We are at the forefront of sustainable financing through our
successful financing framework and were the first water and waste
company to achieve the Fair Tax Mark accreditation, which
demonstrates transparency and best practice across the Group.
Robust Group underlying financial performance
IFRS 16: Leases
From 1 April 2019 the new accounting standard IFRS 16: Leases
has been adopted, which results in all leases, whether operating or
financing leases under the previous IAS 17 classifications, being
treated on a consistent basis within the reported results with the
lease being recognised as a liability on the balance sheet along
with an associated right of use asset. Overall there is marginal
net impact on the income statement and the balance sheet. The
impacts from the implementation are:
-- At 1 April 2019, recognition of GBP108 million of right of
use assets within property, plant and equipment and GBP121 million
of lease obligations (these lease obligations are excluded for the
purposes of banking covenants)
-- GBP7.1 million increase in EBITDA in H1 2019/20 (reflecting
the removal of operating lease rentals)
-- GBP5.9 million increase in depreciation in H1 2019/20
(arising from the depreciation on the newly recognised right of use
assets)
-- GBP2.0 million increase in interest charges in H1 2019/20
(reflecting the interest on the newly recognised lease
liabilities)
-- GBP0.8 million overall reduction profit before tax in H1 2019/20.
For 2019/20 only, to aid the comparability of reported results
with the prior period, all figures and narrative are on a
consistent accounting basis with references to performance measures
excluding the impact of IFRS 16. A full reconciliation is included
in item (iii) on pages 70 and 71 of this announcement.
Financial performance in line with expectations for 2019/20
Revenue
Group revenue in H1 2019/20 decreased by 4.6% (GBP34.3 million)
to GBP712.4 million due to the planned cessation of the Greater
Manchester recycling operating contract and lower landfill tax
receipts in Viridor and in South West Water, lower customer demand
in H1 2019/20 as the exceptionally hot, dry summer last year, which
resulted in higher revenue, has not been repeated. In Pennon Water
Services revenue has increased reflecting continued robust
performance.
EBITDA
Good operational cost control across the Group and strong
performance across Viridor's activities has resulted in Group
EBITDA and adjusted EBITDA being ahead of the same period last year
by 1.0% and 3.3%, respectively. The increase between EBITDA and
adjusted EBITDA is being driven by the strong performance of
Viridor's joint ventures in the Lakeside and Runcorn I ERFs.
Net Finance Costs
Underlying net finance costs of GBP43.1 million are GBP2.3
million higher than the prior half year (H1 2018/19 GBP40.8
million), primarily due to the change in treatment of interest
charges on construction as the Beddington, Glasgow and Dunbar ERFs
have become operational.
The Group continues to secure funding at a cost that is
efficient with the effective interest rate reducing to 3.5% (H1
2018/19 3.6%), reflecting lower margins on new and renewed
financing.
The effective interest rate for the Group is calculated after
adjusting for capitalised interest of GBP6.1 million (H1 2018/19:
GBP8.3 million), notional interest items totalling GBP5.8 million
(H1 2018/19: GBP6.3 million), interest received from shareholder
loans to joint ventures of GBP3.4 million (H1 2018/19: GBP2.5
million) and IFRIC 12 interest receivable of GBP7.4 million (H1
2018/19: GBP7.3 million).
During H1 2019/20 underlying net finance costs (excluding
pensions net interest costs of GBP0.8 million, discount unwind of
provisions of GBP5.0 million and IFRIC 12 notional interest
receivable of GBP7.4 million) were GBP54.2 million, covered 4.0
times by Group operating profit (H1 2018/19 GBP52.6 million and 4.4
times).
Profit before tax
Group underlying profit before tax was GBP143.7 million, an
increase of 0.8% compared with the prior half year (H1 2018/19
GBP142.5 million). Underlying profit before tax includes the
Group's share of joint venture profit after tax of GBP7.3 million
(H1 2018/19 GBP4.8 million), which has increased by 52.1% following
strong operational performance and the acquisition of a further
37.5% of the economic interest in Runcorn I ERF in H2 2018/19.
Profit before tax was GBP163.1 million (H1 2018/19 GBP133.6
million) reflecting a non-underlying credit before tax of GBP20.2
million (H1 2018/19 non-underlying charge of GBP8.9 million) and
GBP0.8 million reduction in profit before tax arising from the
implementation of IFRS 16.
Taxation
The Group's underlying mainstream UK corporation current tax
charge for the half year (before prior year adjustments) was
GBP13.7 million, reflecting an effective tax rate of 9.6% (H1
2018/19 charge of GBP15.6 million, 10.9%), which has reduced due to
the current tax impact of the accelerated pension deficit recovery
payment. The consistent lower effective rate versus the UK's
mainstream corporation tax rate of 19% reflects the accelerated
level of capital allowance claims available to the Group compared
to the Group depreciation charge. There was a prior year credit of
GBP4.9 million recognised for the half year (H1 2018/19 credit of
GBP3.2 million), as previous uncertain tax items have been
clarified.
Underlying deferred tax for the period (before prior year
adjustments) was a charge of GBP13.1 million (H1 2018/19 charge
GBP12.2 million). The charge for H1 2019/20 primarily reflects
capital allowances across the Group in excess of depreciation
charged. There was a prior year deferred tax charge of GBP2.5
million recognised for the period (H1 2018/19 GBP5.3 million
credit), partially offsetting the prior year current tax credit of
GBP4.9 million, as previous uncertain tax items have been
clarified.
In addition, in H1 2019/20 there is a non-underlying net tax
charge of GBP5.2 million[11] (2018/19 H1 GBP1.7 million net tax
credit) relating to the non-underlying movement in the fair value
of long-dated derivatives associated with South West Water's 2040
bond of GBP4.8 million and the transfer of pension liabilities upon
exit from the Greater Manchester recycling operating contract of
GBP0.4 million.
Overall the total tax charge for the period was GBP29.6 million
(H1 2018/19 charge of GBP17.6 million). The Group's taxes borne and
collected (those that are a cost to the Group and those where the
business acts as a collector of taxes) results in a total tax
contribution of GBP141 million[12] being paid to the
Government.
Earnings per share
Statutory earnings per share and adjusted earnings per share (on
an underlying basis before deferred tax) have increased by 17.6% at
30.1p (H1 2018/19 25.6p) and 3.7% at 31.1p (H1 2018/19 30.0p)
respectively. Adjusted earnings per share (excluding the impact of
IFRS 16) increased by 4.3% to 31.3p. From 2019/20 the 2017
perpetual capital securities qualify for tax relief, following a
change in legislation. The relief for 2019/20, accounted for in
full in H1 2019/20 is GBP1.6 million, increasing earnings per share
by 0.4p. The growth in earnings per share is benefiting from the
non-underlying gain on the long-dated derivatives and pension
settlements.
Robust cash inflow from operations, continuing investment in
future growth
The Group's operational cash inflows in H1 2019/20 were GBP339.8
million (H1 2018/19 GBP266.6 million). These funds have been used
in efficiently financing the Group's capital structure and
investing in future growth. This investment has resulted in higher
Group net debt.
Contributions into the Group's pension schemes for the half year
were GBP37.9 million (H1 2018/19 GBP8.5 million), including a
voluntary GBP17.2 million accelerated deficit recovery payment.
Corporation tax payments were GBP26.8 million (H1 2018/19: GBP12.2
million) reflecting the changes in legislation for the timing of
payments on account. Total tax payments reflecting all taxes borne
by the Group in H1 2018/19 were GBP75.7 million[13] (H1 2018/19
GBP63.4 million).
Sustainable funding position underpinning investment
The Group has a strong liquidity and funding position with
GBP1,600 million of cash and committed facilities at 30 September
2019 with c.GBP800 million of headroom for investment. This
consists of cash and deposits of c.GBP530 million (including GBP209
million of restricted funds representing deposits with lessors
against lease obligations) and undrawn facilities of GBP1,070
million. At 30 September 2019 the Group's borrowings totalled
GBP3,706 million, excluding GBP118 million of obligations now
classified as leases under IFRS 16.
Pennon has created and pioneered a Sustainable Financing
Framework to integrate commitments to environmental and social
objectives into a variety of funding opportunities across the
Group. GBP655 million of sustainable funding has been raised
cumulatively to 30 September 2019:
-- GBP230 million against Pennon Group's ESG performance
-- GBP90 million green long-funding lease facilities
-- GBP260 million from sustainability-linked counterparties
-- GBP75 million against South West Water bathing water targets.
This progressive approach to financing maximises the
availability of financing at efficient rates and increases the
speed of execution through the framework.
Noting the announced potential abolition of LIBOR in 2021, South
West Water has completed the first LIBOR to SONIA amendment for a
sustainable Revolving Credit Facility (RCF). Whilst financial
institutions finalise the precise workings of the successor measure
to LIBOR, widely expected to be SONIA, this amendment to an
existing facility allows the Group to address documentation and
early system changes that will be required.
During September 2019 the Group early settled the fixed to
floating derivatives associated with the South West Water Finance
Plc 2040 bond. The settlement locked in value and removed future
volatility from the income statement. This resulted in a cash
inflow of GBP87.2 million, which will be utilised to fund South
West Water's capital commitments.
Financing in place to support operations has increased in the
six months to 30 September 2019 through the following
facilities:
-- GBP500 million Pennon RCF has been signed, which provides the
Group with flexible, efficient and effective funding during the
ongoing strategic review
-- GBP85 million of new facilities secured for South West Water
including a GBP25 million sustainable RCF.
Since the 30 September 2019, GBP190 million of further funding
for South West Water has been raised bringing the total sustainable
financing to date to GBP845 million:
-- GBP50 million sustainable CPI-linked loan facility,
maintaining South West Water's proportion of index-linked net debt
in line with Ofwat's notionally funded company and supporting
Ofwat's transition from RPI to CPI
-- GBP140 million term loan with delayed drawdown capabilities
to support South West Water's sustainable projects into the next
regulatory period.
As a result, Pennon has cash and committed facilities covering
planned expenditure and funding requirements for the period out to
March 2022.
Efficient long-term financing strategy
The Group has a diversified funding mix of fixed (GBP2,089
million, 66%), floating (GBP519 million, 16%) and index-linked
borrowings (GBP570 million, 18%). The Group's debt has a maturity
of up to 38 years with a weighted average maturity of c.18 years.
Much of the Group's debt is floating rate and derivatives are used
to fix the rate on that debt. The Group fixed, or put swaps in
place to fix, the interest rate on a substantial portion of the
existing water business debt for the entire K6 period, in line with
the Group's policy for this regulatory period to have at least 50%
of funding fixed.
South West Water's cost of finance is amongst the lowest in the
industry. Around two thirds of South West Water's net debt has been
raised from finance leases (as previously defined under IAS 17)
which provide a long maturity profile. Interest payable benefits
from the fixed credit margins which are secured at the inception of
each lease. GBP522 million (c.25%) of South West Water's debt is
index-linked at an overall real rate under 2.0%. This represents a
quarter of the net funding for South West Water, a level below
Ofwat's notional level of 33%, which we believe gives an
advantageous position given the RPI to CPIH transition.
Following the submission of the K7 (2020-25) South West Water
business plan and the resulting Draft Determination from Ofwat, the
Group is aligning the hedging for the next regulatory period with
the changed regulatory methodology. A proportion of new debt will
be hedged in K7 on a rolling ten-year basis whilst still
maintaining flexibility within the overall portfolio. Our embedded
debt hedging is aligned with the five-year regulatory delivery
period. Around 50% of South West Water's embedded floating net debt
has already been hedged into K7 during the last 12 months, taking
advantage of falling swap rates.
Net debt position
In the first half of 2019/20 the Group's net debt increased by
GBP98 million, to GBP3,178 million. Following the implementation of
IFRS 16, an additional GBP118 million of debt has been recognised
on the balance sheet as at 30 September 2019 primarily representing
the discounted future lease obligations for operational land and
properties. For the purposes of banking covenants these lease
obligations are excluded from net debt.
Cash inflow from operations for H1 2019/20 was GBP340 million,
compared to GBP267 million for H1 2018/19, an increase of GBP73
million. Cash outflows relating to the capital programme totalled
GBP193 million[14], (H1 2018/19: GBP192 million). The gearing ratio
at 30 September 2019, being the ratio of net debt to (equity plus
net debt), was 66.3% reflecting this investment in growth capital
expenditure (31 March 2019 64.7%, 30 September 2018 65.5%) and is
expected to reduce by the year end, given the timing of dividend
payments.
The combined South West Water and Bournemouth Water debt to RCV
ratio is 63.1%[15] (31 March 2019 58.9%, 30 September 2018 61.9%)
aligned with Ofwat's K6 target for efficient gearing of 62.5%.
During the half year South West Water also made a voluntary
accelerated pension deficit recovery payment of GBP17.2 million
covering two years of planned payments, adding 0.5% to gearing.
Group net debt includes GBP2,212 million for South West Water
with the remaining GBP966 million supporting investment in Viridor
growth and expansion.
Reducing capital investment as current ERF build out nears
completion
Group capital investment was GBP172 million[16] in H1 2019/20
compared with GBP201 million in H1 2018/19.
Viridor
Capital expenditure in the period amounted to GBP94.4 million,
down GBP37.5 million from the prior period (H1 2018/19 GBP131.9
million) with the ERF assets now operational. The majority of the
expenditure continues to relate to the ERF portfolio, principally
the continued development of Avonmouth ERF on track for
commissioning in H2 2019/20. Other larger projects in the period
include the commencement of construction of the GBP65.0 million
Avonmouth plastics recycling facility and the GBP15.4 million
refurbishment and upgrade of the Masons materials recycling
facility in Suffolk.
Ongoing restoration and remediation programmes continue for our
landfill assets, ensuring we meet or exceed our environmental
duties and responsibilities.
South West Water
South West Water's capital expenditure in the first half of the
year was GBP77.6 million, compared with GBP68.6 million in H1
2018/19 with the profile aligned with the K6 capital plan, but with
additional expenditure to make an early start on key K7 initiatives
focused on ODI delivery.
Key areas of investment[17] and activity during H1 2019/20
included:
-- Further investments in our drinking water quality programme
work now underway to install Granular Activated Carbon (GAC)
treatment at College water treatment works in Cornwall. This GBP10
million project will improve the resilience of our water quality
for c.35,000 customers
-- Schemes to deliver National Environment Programme (NEP)
commitments, including phosphorus and ammonia discharge
reductions
-- Continued improvements at wastewater treatment works, including flood resilience
-- Investment for growth to meet increases in supply and demand
-- Ongoing commissioning of Mayflower water treatment works and
early preparations for the new treatment works in Bournemouth.
Pensions
The Group operates defined benefit pension schemes for certain
employees of Pennon Group. The main schemes were closed to new
entrants on or before 1 April 2008.
At 30 September 2019 the Group's pension schemes showed an
aggregate deficit (before deferred tax) of GBP38.5 million (March
2019 GBP60.8 million), a reduction of GBP22.3 million. The key
movements are as a result of:
-- GBP34.0 million contributions including GBP17.2 million
following the Group's decision to voluntarily accelerate a
significant proportion of the planned deficit recovery payments
-- A further reduction in corporate bond yields (used to
discount the liabilities under IAS 19) of 0.6% from 2.4% at 31
March 2019 to 1.8% at 30 September 2019
-- Greater Manchester recycling operating contract cessation has
decreased liabilities by GBP14.4 million.
During H1 2019/20, South West Water made a capital structure
dividend payment to ensure the gearing profile was aligned with
Ofwat's assessment of a notional company structure. Aligned with
our approach to dividends for South West Water, we have considered
the remaining agreed pension deficit recovery payments and
accelerated these, recognising that obligation.
The last actuarial valuation was in 2016, where contributions,
including the recovery plan of annual deficit contributions to 2022
(in line with the 2014 Final Determination allowances) were agreed.
The 2019 triennial valuation for the Group's principal scheme is
underway and is expected to conclude in the first half of 2020.
The net aggregate liabilities of GBP32.0 million (after deferred
tax) represented around 1% of the Group's market capitalisation at
30 September 2019.
As at 30 September 2019, GBP19 million of the pension liability
relates to two schemes operated by the Group in connection with the
Greater Manchester recycling operating contract. Following the
planned exit from the Greater Manchester recycling operating
contract, it is expected that all previously active members of
these schemes at 31 May 2019, the date of contract exit, will be
transferred to the new operator's pension scheme. In the results to
30 September 2019, a non-underlying credit of GBP2.2 million has
been recognised in the income statement in connection with active
employees moving to deferred status in these schemes. As a result
of the contract termination a surplus amount relating to one of the
pension schemes associated with this contract now becomes
recoverable. Accordingly, a gain of GBP12.2 million, along with an
associated tax charge of GBP2.3 million, have been recognised in
the statement of comprehensive income. On a net basis no additional
material IAS 19 charges are expected to arise on transfer of the
remaining liabilities.
Energy hedging
Pennon has adopted a Group portfolio management approach to
energy hedging. Currently around 50% of volumes generated are
either used within the Group (South West Water and Viridor) or
contracted for the long-term through private wire offtake
agreements (c.40% for Viridor internal usage). The new growth
opportunities for energy parks will increase the Group position to
c.60% (c.50% for Viridor alone).
The Group has the ability to hedge the pricing for its
generation for periods up to five years ahead, further helping to
protect revenues. Forward hedges not already under long-term
contracts or naturally hedged within the Group have been put in
place in the liquid market with the Group c.100% hedged until March
2020, c.90% hedged until March 2021 and c.75% hedged until March
2022 for its energy (generation net of internal usage of
electricity). The energy portfolio management team continues to
actively manage the Group net energy generation position in liquid
markets.
VIRIDOR PERFORMANCE
Strong delivery in H1 2019/20
Underlying H1 2019/20 H1 2019/20 H1 2018/19 Change
(excluding (excluding
IFRS 16 impact)
IFRS 16
impact)
Revenue[18] GBP388.1m GBP388.1m GBP422.3m (8.1%)
EBITDA GBP92.4m GBP86.2m GBP78.4m +9.9%
ERFs GBP71.4m GBP71.0m GBP66.6m +6.6%
Landfill GBP4.6m GBP4.4m GBP3.8m +15.8%
Landfill gas GBP11.1m GBP11.1m GBP8.1m +37.0%
Recycling GBP10.1m GBP7.6m GBP7.4m +2.7%
Contracts, Collections &
Other GBP21.0m GBP18.5m GBP20.3m (8.9%)
Indirect costs (GBP25.8m) (GBP26.4m) (GBP27.8m) +5.0%
Depreciation and amortisation (GBP43.7m) (GBP38.5m) (GBP36.2m) (6.4%)
Share of JV profit after
tax GBP7.3m GBP7.3m GBP4.8m +52.1%
Net interest (GBP14.5m) (GBP13.1m) (GBP10.8m) (21.3%)
Profit before tax GBP41.5m GBP41.9m GBP36.2m +15.7%
Share of JV EBITDA GBP20.2m GBP20.2m GBP13.4m +50.7%
IFRIC 12 interest receivable GBP7.4m GBP7.4m GBP7.3m +1.4%
Adjusted EBITDA GBP120.0m GBP113.8m GBP99.1m +14.8%
Revenue
Viridor revenues reduced by 8.1% (GBP34.2 million) due to the
expected cessation of the Greater Manchester recycling operating
contract and lower landfill tax receipts as landfill volumes
declined following the net closure of two sites in the period.
After taking into account overhead savings in relation to the
Greater Manchester recycling operating contract exit, these lower
revenues had a minimal profit impact.
Recycling revenue per tonne increased by 11% to GBP122 (H1
2018/19 GBP110) reflecting the mix of recycling focused on higher
quality materials. Despite the closure of landfill sites and lower
volumes the average gate fees remained stable at GBP22 (H1 2018/19
GBP22).
EBITDA
In H1 2019/20, Viridor's EBITDA increased by 9.9%, underpinned
by a solid performance in the ERF business. The ten operational
facilities are performing well with availability on track to exceed
90% for the full financial year. Availability for H1 2019/20 was
86% compared to 89% in H1 2018/19 as the newer ERFs ramp up to
optimal availability levels; excluding these assets in ramp up,
availability was 89%.
Despite a reduction in landfill volumes, following two site
closures, cost efficiencies have generated an increase in EBITDA of
15.8% to GBP4.4 million (H1 2018/19 GBP3.8 million).
The landfill gas business has performed well in H1 2019/20
benefiting from the strategy implemented in the previous financial
year to invest in more efficient engines. The resulting
improvements in reliability and favourable landfill gas pricing
have resulted in a 37.0% increase in EBITDA to GBP11.1 million (H1
2018/19 GBP8.1million). Average revenue per megawatt hour (MWh)
increased by 24% to GBP107 (H1 2018/19 GBP87), with the average
margins increasing to GBP55 (H1 2018/19 GBP39).
Recycling EBITDA at GBP7.6 million (H1 2018/19 GBP7.4 million)
is consistent with the prior half year with pricing pressures in
the global recycling markets for paper offset by Viridor's
continued focus on investing in the most valuable recycling
markets. As a result, EBITDA margin has increased by GBP3 per tonne
(25%) to GBP15 per tonne (H1 2018/19 GBP12 per tonne).
Contracts, collections and other EBITDA reduced marginally by
GBP1.8 million to GBP18.5 million (H1 2018/19 GBP20.3 million).
During H1 2019/20 Viridor successfully repurposed a landfill site
for alternative use, with the resulting sale crystallising a profit
of around GBP2.0 million. The 'run-off' contract for recycling
operations with Greater Manchester Waste Disposal Authority has now
successfully transitioned to the new operator. Although this has
led to lower volumes and revenue, it has had a limited impact upon
Viridor's earnings.
Viridor's indirect costs have continued to fall, down 5.0% to
GBP26.4 million (H1 2018/19 GBP27.8 million), in part due to
overhead savings following the planned exit from the Greater
Manchester recycling operations contract.
Joint venture EBITDA has increased from GBP13.4 million in H1
2018/19 to GBP20.2 million, an increase of 50.7%. This is a result
of the purchase of a greater economic interest in Runcorn I in
December 2018 (increasing the economic interest in INEOS Runcorn
(TPS) Holdings from 37.5% to 75.0%) and the high levels of
availability achieved at both the Runcorn I and Lakeside ERFs. The
joint venture at Lakeside ERF (a 50:50 joint venture with Grundon
Waste Management Limited) continues to outperform its original
targets for both waste processing and power generation and is on
track for full year availability to be in excess of 90%.
IFRIC 12 interest receivable, associated with certain ERFs, at
GBP7.4 million is in line with H1 2018/19 of GBP7.3 million.
Viridor has delivered both robust operational and financial
performance across the business from our existing portfolio of
assets.
H1 2019/20 H1 2018/19
Total Waste Inputs (mT) 3.1 3.5
ERFs 1.4 1.0
Landfill 0.7 0.9
Recycling and Other 1.0 1.6
Recycling Volumes Traded
(mT) 0.5 0.6
ERF availability - fully
operational 89% 89%
ERF availability - all
assets 86% 86%
Leading UK waste management core infrastructure business
Viridor is focused on delivering UK recycling and residual waste
processing and transformation. Over recent years the business has
been re-positioned to focus on a de-risked infrastructure model,
with investment backed by profitable, index-linked long-term
contracts. We have a strong track record of diversification and
growth through our complementary portfolio of activities:
collections, landfill, recycling and ERFs.
We remain confident in the UK waste market fundamentals and
believe there are continued favourable waste market dynamics in
both recycling and residual waste providing a unique platform for
growth. Viridor is well placed to benefit from the imbalance of
supply and demand for ERFs and plastics recycling in addition to
leveraging our existing asset base through Energy Park
opportunities.
Residual Waste
Continued momentum of our ERF portfolio
Our existing portfolio of 10 assets, including the three sites
progressing through their operational ramp up, have performed well.
EBITDA has increased by 6.6% (GBP4.4 million) to GBP71.0 million in
the period, principally through good operational performance and
from securing some beneficial new input contracts. Assets in
operational ramp-up have moved from contractual financial
contributions in H1 2018/19 to full operating financial
contributions in H1 2019/20. All our fully operational ERFs have
successfully completed their major annual outage maintenance
programmes[19] and the portfolio remains on track to achieve
full-year availability of >90%[20] for the fourth consecutive
year. In line with the expected H2 weighting, we are looking
forward to increased financial and operational performance in the
second half from higher availability (due to having completed the
major maintenance outages) and higher winter electricity
prices.
Glasgow, Beddington and Dunbar ERFs taken over towards the end
of 2018/19 and are progressing through operational ramp-up and
optimisation during H1 2019/20. At the Glasgow Recycling &
Renewable Energy Centre (GRREC) we have received confirmation that
Renewable Obligation Certificates (ROCs) have been secured for a
period of 20 years from commissioning. This underlines the
recognition that the facility generates important renewable
energy.
As previously reported, the rectification and completion costs
of GRREC exceeded expectations and Viridor are contractually
entitled to recover incremental costs from the original principal
contractor Interserve Construction Limited. We have now issued
arbitration proceedings to progress legal recovery of the debt. The
gross receivable of GBP72 million continues to be recognised and
having again considered the assessment of the Interserve credit
risk, the cumulative provision of GBP28.7 million remains unchanged
from the position at 31 March 2019.
Construction at Avonmouth ERF continues to progress. The
development remains on budget with commissioning expected in H2
2019/20 and operational ramp up during 2020/21. Avonmouth will add
a further 320,000 tonnes and 34 megawatts (MW) capacity to our ERF
portfolio.
Our operational capacity is currently 2.8 million tonnes of
waste per annum and 233 MW of electrical generation (including
joint ventures). This will extend to 3.1 million tonnes of waste
and 267 MW when Avonmouth becomes operational.
100% of base inputs are secured either under long-term
index-linked contracts (80%) or short/medium term contracts of less
than 10 years (20%). Further opportunities to de-risk the portfolio
are being considered with higher demand for medium/longer term
commercial and industrial contracts as well as the increasing move
to process UK waste in the UK resulting in a reduction in RDF[21]
exported.
Viridor continues to identify that significant ERF capacity
needs to be constructed in the UK to meet this longer-term demand.
We are continuing with the development of options for up to three
new ERFs, and as a first step towards this we have signed heads of
terms to develop a new 40 year joint venture with Grundon Waste
Management Limited, our existing joint venture partner at Lakeside.
A site owned by Grundon Waste Management Limited with outline
planning has been identified adjacent to our materials recycling
facility in Ford, West Sussex. This investment supports our
de-risked portfolio approach through shared input commitments and
an economic benefit assessed for 40 years from completion. This
development would give rise to additional value through potential
energy park benefits.
Optimising long-term value from landfill
Overall landfill volumes have decreased in the period to
September 2019 reflecting the closure of two landfill sites to
active waste resulting in consented landfill capacity of 28 million
cubic metres (mcm) (H1 2018/19 30 mcm). However, gate fee pricing
has remained strong at GBP22 per tonne. We continue to operate from
eight locations to meet the market demand for the provision of a
landfill solution with six sites forecast to remain operational
into the medium/longer term.
We continue to invest in landfill facilities where commercially
attractive and have developed new cells at two of our landfill
sites in the period, with a further new cell set for completion in
H2 2019/20.
High quality restoration and remediation of our landfill sites
remains the cornerstone of our land stewardship responsibilities.
As an example, since closure last year, Beddington, South London,
landfill is being transformed into a network of species-rich
habitats including wet grasslands, meadowlands and hedge habitats,
providing birdwatching hides and a cycle way. We have seen the
successful disposal of the Norlands, Surrey, closed landfill site,
which has been sold to developers for repurposing, further
reflecting the responsible management of the site.
Securing reliable generation of landfill gas
The targeted investment undertaken through our engine
optimisation strategy and gas collection systems has helped improve
the overall engine availability and the gas collection process.
This has resulted in the volume of electricity generated from
landfill gas falling by c.4% compared to the same period last year,
a second year of decline at a lower rate than experienced in
previous years. We have continued to invest in our engine
optimisation strategy this half year, installing four new engines
to further enhance availability and better match gas output to
engine input requirements. Our landfill gas portfolio currently
stands at 32 sites with 85 MWh of generating capacity, providing
enough energy to supply around 100,000 homes.
Over time the decline in landfill gas volumes has created
surplus grid connection capacity at some landfill gas sites. We are
currently seeking to capitalise on this opportunity through the
installation of gas peaking engines, which use natural gas to
generate electricity at times of peak demand, all of which are
co-ordinated from a central control room in Ardley,
Oxfordshire.
At our Dunbar landfill site we will be trialling a new
'CarbonOrO' technology with additional gas cleaning processes to
ultimately produce a gas stream that is equivalent to natural gas.
The first phase of the project is to demonstrate that the resultant
gas quality is consistent over time. A pre-application meeting has
been held with SEPA (Scottish Environment Protection Agency) and
early planning preparations are underway.
Recycling - delivering continued progress
The recycling business continues to focus on quality.
Operationally we have seen higher volumes and prices in plastics,
and Crayford MRF has performed well following the investments made
last year. However, global paper markets have been challenging,
with fewer offtake opportunities as demand and quality requirements
change. Overall recycling volumes are lower than the same period
last year, but both revenue and EBITDA per tonne are ahead driven
by our focus on quality.
The construction of our GBP65 million plastics processing
facility has commenced with the plant set to contribute to Viridor
earnings from 2020/21. Co-located at Avonmouth ERF this provides a
model example of our Energy Park development approach. Building on
our existing commercial relationships, we have secured c.85% of the
total input requirements and c.75% of offtake to date under
medium-term contractual arrangements. In addition, we are currently
upgrading Masons MRF at a cost of c.GBP15 million, investment that
will increase both output volumes and quality. This investment is
underpinned by a ten-year contract with Suffolk City Council.
Energy Parks - leveraging value from Viridor's asset base
Viridor has a number of Energy Park connections leveraging value
from the existing asset base and reducing exposure to the energy
markets. Expanding this activity further, a new private wire
agreement has been signed to supply a co-located data centre from
Beddington ERF and we are exploring two new plastics recycling
facilities at Dunbar and Ardley.
These new facilities will result in c.50% of Viridor's total
power output supplying long-term private wire connections or own
usage.
Confident outlook for Viridor - visible pipeline of growth
projects
Looking forward, the market fundamentals for ERFs remain strong.
In its Resources and Waste Strategy, the Government recognised
energy recovery as a long-term feature of the waste market. We
expect the ERF capacity gap to be around seven million tonnes (mT)
to 2035[22] indicating the market can support multiple new viable
ERFs, requiring capacity equivalent to c.23 large ERFs[23], with an
additional c.12 large ERFs required if recycling rates do not
improve.
Building on this potential for growth, Viridor continues to
expand the ERF portfolio with Avonmouth ERF on track to become
fully operational in 2020/21. Viridor has also signed heads of
terms with Grundon Waste Management Limited for a new joint venture
in Ford, West Sussex and continues to assess two further ERF
opportunities.
Whilst the recycling market has been challenging, with changing
public perception and Government support for recycling and the UK
Plastics Pact outlining a roadmap with targets to 2025, we are
confident in the long-term market outlook. 46%[24] of UK plastic
waste is currently collected for recycling with a significant
increase required to meet the Government's target of 75%[25] by
2030 (with current expectation of 67% by 2025). To fulfil the
increasing capacity gap by 2025[26], the UK would require the
equivalent of c.14 facilities the size of our Avonmouth plastics
recycling facility, with a further c.10 facilities required if all
plastics in the market were recyclable. This increased requirement
is not only driven by Government policy and regulation but also
consumer demand. The 2019 Viridor Recycling Index[27] found that
90% of consumers believe that plastic waste should be used to
create resources that can be used again, and that 90% of consumers
think the UK should deal with its own recycling.
Viridor sees market opportunity as policy and regulatory drivers
call for greater domestic recycling. As a result, we see UK-based
recycling as an exciting area of growth, with opportunities to
significantly increase our market share and move up the value
chain, capturing additional margin in this area. Alongside the
Avonmouth plastics recycling facility, which is due to be
operational next year, we are currently developing options for two
further facilities co-located at our Dunbar and Ardley ERFs. The
portfolio of plastic recycling facilities will minimise the
recyclate going to third parties and will mean that virtually all
of our recyclable plastic waste will be processed in the UK. These
new facilities will more than double Viridor's capacity for
plastics processing, resulting in an estimated market share of
greater than 15%.
SOUTH WEST WATER
H1 2019/20 H1 2019/20 H1 2018/19 Change
(excluding (excluding
IFRS 16 impact) IFRS 16
Underlying impact)
Revenue[28] GBP292.9m GBP292.9m GBP301.5m (2.9%)
Operating costs (GBP102.3m) (GBP103.2m) (GBP106.8m) +3.4%
EBITDA GBP190.6m GBP189.7m GBP194.7m (2.6%)
Depreciation and amortisation (GBP59.1m) (GBP58.4m) (GBP58.8m) +0.7%
Operating profit GBP131.5m GBP131.3m GBP135.9m (3.4%)
Net interest (GBP35.3m) (GBP34.7m) (GBP35.6m) +2.5%
Profit before tax GBP96.2m GBP96.6m GBP100.3m (3.7%)
Revenue
South West Water revenue for H1 2019/20 has reduced by 2.9%
(GBP8.6 million) compared with the prior period. Noting our c.84%
metered customer base, following the exceptionally hot, dry summer
last year tariff rises of 0.6%[29] have been offset by lower
customer demand (down 5%). Revenue from new customer connections
(c.4,500 in H1 2019/20) has been offset by meter switchers and an
increase in leak allowances to customers in the first half of the
year as we continue to target reducing customer side leakage. Year
on year changes in revenues (compared with the Final Determination)
are subject to a revenue true-up mechanism.
EBITDA & operating profit
As a result of lower revenue in H1 2019/20, South West Water's
EBITDA and operating profit reduced by 2.6% and 3.4%, respectively.
The ongoing focus on strong cost control and efficiency delivery,
as well as c.GBP3 million of extreme weather costs in the prior
period which have not been repeated, resulted in operating costs
decreasing by 3.4%, significantly below inflation. South West
Water's bad debt performance remains strong with a charge of 0.6%
as a percentage of revenue. This continues to be driven by
efficient cash collections with the annual charge below the levels
assumed for K6 in our Final Determination.
Continued operational performance - strong foundation into
K7
South West Water continues to perform strongly in the final year
of this regulatory period. It continues to lead the industry with a
cumulative Return on Regulated Equity (RORE) of 11.8% (H1 2019/20
11.9%) and is one of the only companies to achieve outperformance
in all areas throughout K6; total expenditure (totex), financing
and Outcome Delivery Incentives (ODIs).
Cumulative totex savings for the 2015-20 period to date are
GBP268 million and are on track to deliver the c.GBP300 million
savings targeted. This demonstrates continued focus on cost
efficiency, use of innovation to deliver operational improvements
and capital investments at a lower cost for the benefit of
customers and shareholders. Innovation is at the centre of our
plans for the next period to achieve more challenging operational
targets at a lower cost.
South West Water was pleased to be awarded fast-track status by
Ofwat this year. This has enabled the company to start planning and
make early investment decisions that target ODI rewards earlier in
the next regulatory period. One of the key enablers for success in
the next period is our relationship with strategic suppliers and
during the half year key supply chain agreements were negotiated
and put in place. This continues a successful outsourcing model
driving flexibility and out of hours responsiveness to minimise
adverse impacts for customers.
Our business plan is focused on empowering and building closer
relationships with our customers through a 'New Deal' - giving
customers a stake and a say. It will ensure customers are sharing
in our success and having a say through a Customer AGM and
quarterly meetings allowing customers to hold us directly to
account. In addition, the option for customers to have a
shareholding gives them a tangible stake in our business benefiting
from the outperformance delivered and will further ensure customers
are at the heart of our business, increasing trust and legitimacy
with our customers.
Delivering high quality services for our customers
Upper quartile performance
South West Water was ranked as upper quartile (4(th) ) in
Ofwat's Service Delivery report for 2018/19. The report noted
strong performance delivered in several common measures
including:
-- Totex outperformance - highest level of outperformance with c.16% efficiencies delivered
-- Leakage - target met in every year since inception
-- Supply interruptions - 58% reduction since 2014, continuing momentum
-- Internal sewer flooding - top performer in this area.
South West Water recognises that there continues to be a small
number of areas to focus on including water quality contacts, where
despite a 47% improvement since 2012 and meeting our ODI commitment
we remain in the lower quartile for this measure. In addition, we
continue to focus on reducing the number of pollution incidents and
have made positive progress this year.
Step change in SIM performance over K6
Improving customer service is at the heart of our delivery
plans. Since 2015 South West Water has delivered continuous
improvements in our Service Incentive Mechanism (SIM) and in
2018/19 we achieved our best ever customer service score, ranked
third in both the South West and Bournemouth regions and second for
the quality of customer service. Ofwat has stopped publishing the
SIM score results as it prepares to introduce a new customer
experience (CMex) metric in the next regulatory period. We continue
to focus on delivering improvements in customer services with
written complaints down 15% in H1 2019/20 compared to the same
period last year.
Industry leading support for vulnerable customers
South West Water is leading the industry in providing support
for customers in vulnerable circumstances or who struggle to pay
their bills. We continue to focus on this and have committed to
eliminating water poverty in our K7 (2020-25) business plan, which
was praised by Ofwat for its high-quality customer engagement and
affordability.
Preparation for these additional activities is well advanced. We
have rolled out a dual-billing pilot for unmetered customers in
North Devon, we are expanding our WaterCare+ programme through an
interactive WaterCare App which gives an instant assessment of
support available, and we continue to work with our partners to
reach more customers needing support. This innovative scheme is
achieving on average over GBP90 per week of additional benefits for
eligible customers. A total of GBP2.5 million of benefits income
has been realised through this programme since 2015. The number of
customers currently receiving support through reduced tariffs has
increased to c.24,500 customers, with around 59,500 customers
supported through this and other programmes.
Continued outperformance - highest sector returns
South West Water has performed well in H1 2019/20 and has
delivered results in line with management expectations. Strong
operational and financial performance underpins our sector leading
RORE which has been consistently above 11% annually and remains at
11.8% cumulatively since the start of the K6 business plan
period.
Of the cumulative 11.8%, 6.0% is the base return, 2.6% reflects
totex savings and efficiencies, 0.3% reflects a net reward on ODIs
and 2.9% reflects the difference between actual and assumed
financing costs using a cumulative forecast RPI of 2.8%, which is
consistent with the approach adopted for calculating our innovative
WaterShare mechanism. Cumulatively the WaterShare RORE
outperformance over K6 is consistent with the approach adopted by
Ofwat
H1 2019/20 K6 to date
Base return 6.0% 6.0%
Totex outperformance 2.7% 2.6%
ODI outperformance 0.3% 0.3%
Financing outperformance 2.9% 2.9%
WaterShare RORE 11.9% 11.8%
Ofwat RORE 12.0% 11.7%
Totex efficiency reducing customer bills
South West Water continues to strive for ever greater
efficiency. Totex outperformance has already achieved cumulative
savings of GBP268 million to September 2019 and we are on track to
deliver our target of c.GBP300 million totex savings by the end of
the year.
These savings are being driven by:
-- Managing upward cost pressures, with actual net price rises
being below annual average inflation rates
-- Continuing advantages from our strategic alliances and
driving efficiency from our procurement processes
-- Reducing customer debt through enhanced collections
activities and increasing our affordability schemes (such as social
tariffs), with the cost of bad debt now below the level assumed
within the 2014 Final Determination
-- Efficiencies from the Bournemouth Water integration,
including delivery of key capital schemes in the region, with the
c.GBP27 million of net synergies secured.
This focus on cost efficiency is reducing bills for customers.
Our K7 business plan was identified as one of the most efficient,
this being a key aspect of achieving fast-track status.
ODIs continue to deliver net reward for K6
Operational performance measured on delivery at 30 September
2019 resulted in a net ODI reward of GBP1.7 million (GBP13.0
million cumulatively for K6) reflecting RORE outperformance of
0.3%. Good asset reliability with stable serviceability across all
water and wastewater areas has been maintained. Rewards were
delivered across water restrictions and continued improvements in
internal sewer flooding. The cumulative net reward of GBP13.0
million comprises GBP20.7 million of total rewards and GBP7.7
million of total penalties. ODI penalties which apply within the
regulatory period will reduce customer bills as they are 'passed
back'. ODI net penalties of GBP0.3 million have been adjusted in
customer bills for 2019/20.
Whilst a small number of ODIs are in penalty this year, South
West Water is forecasting to deliver net ODI rewards again this
year - as has been the case throughout K6.
-- Flooding - continuing strong performance
The total number of flooding incidents in the first half of
2019/20 has continued to fall with a 3% reduction this year.
-- Water resources - 23rd consecutive year without water restrictions
The South West Water region remained unrestricted for a 23(rd)
consecutive year and the Bournemouth water region maintained its
position of having no water restrictions since privatisation.
-- Bathing water quality - c.99% achieving sufficient quality, over c.83% excellent
Our legacy of major investment to protect bathing waters
continues to be reflected in extremely positive results for the
2019 bathing water season. Of the 151 bathing waters tested in the
South West Water region, 149 (c.99%) were classified 'sufficient'
or better, with more than c.83% classified as 'excellent'. Neither
of the two bathing waters rated as 'poor' were attributed to any
failure of South West Water's assets.
-- Leakage - on track to meet 2019 target
Targeted investment and operational resources (including fixing
visible leaks and providing additional support to customers)
ensured we met our 2018 target of 84 megalitres per day ensuring no
ODI penalty was incurred and remain on track to meet the target for
2019. Leakage targets have been met every year in this regulatory
period, and new technologies, such as acoustic loggers and advanced
working techniques are being deployed to deliver on the stretching
commitments for K7, which targets a 15% reduction in leakage by
2025.
-- Supply interruptions - maintaining strong performance
Average duration of supply interruptions per property for South
West Water is below the target set for the year to date and
maintains the strong performance from previous years.
-- Pollution incidents - serious pollution incidents reducing
The number of serious pollution incidents (Category 1&2) has
reduced with one potential incident in the year to date, therefore
no penalty has been forecast. The number of minor incidents
(Category 3) has also decreased compared to the same period last
year following the recent investment strategy to drive reductions
in incidents. These include mobilisation of a fleet of jetters and
vactors to provide resilient support on the network. However
significant focus is being maintained to improve this performance
further with stretching targets for the next regulatory period.
Financing investment efficiently
Alongside strong operational outperformance, South West Water is
confident that the efficient and effective financing strategy in
place will continue to deliver cumulative financing outperformance,
with GBP146 million delivered in the K6 period to date. South West
Water's diverse and flexible financing structure has underpinned
one of the lowest effective interest rates across the industry at
3.4% for H1 2019/20 (H1 2018/19 3.5%).
Pennon's Sustainable Financing Framework opens further
opportunities for debt investment, for example GBP60 million of
leasing specifically linked to the new innovative Mayflower water
treatment works. Gearing levels remain aligned with Ofwat's current
notional level and South West Water is the only UK water company to
share the benefits of lower interest rates with customers.
Sharing outperformance between customers and shareholders
South West Water is sharing the benefits of business
outperformance between customers and shareholders through our
unique WaterShare mechanism. Since 2015 GBP121 million of
cumulative benefits have been identified to share with customers
through future bill reductions, ODI service improvements and
reinvestment in services. This reflects GBP86 million of totex
savings, GBP13 million of net ODI benefits and GBP22 million of
other benefits (including financing and tax). These totex savings
and efficiencies (including the forecast to 2020) have been
reflected in the K7 business plan, lowering bills for customers
over the next regulatory period. The other savings identified in
recent years and expected out to 2020 will provide the basis for
the c.GBP20 million WaterShare+ scheme in 2020 - a first of its
kind, an ambitious, voluntary share scheme, which will give all
customers a choice of how to receive these benefits including the
option of receiving Pennon shares.
Sector leading outperformance forecast to continue
Following the publication of the Draft Determinations for Slow
Track and Significant Scrutiny Companies, South West Water
continues to have the highest outperformance potential for the next
regulatory period and we are confident in delivering outperformance
across all areas (totex, ODIs and Financing). Totex allowances in
K7 are broadly consistent with the allowances in K6 and higher than
the current forecast spend for K6 which reflects the c.GBP300
million of totex outperformance on track to be delivered by
2020.
An efficient financing structure is already in place for the
next regulatory period and South West Water has continued to
lock-in its strong financial position through interest rate swaps
as rates remain low, with c.50% already in place from 2020. The
ODIs[30] for K7 are a mixture of bespoke performance measures which
are proposed and designed by South West Water and 15 common
measures which will be measured consistently. South West Water has
a strong base for outperformance in K7 and this position was
supported by the early certainty principle at the initial
assessment of our plan.
South West Water's continuing investment in our assets and
services into K7 reflects significant planned capital expenditure,
above forecast K6 levels. This results in c.10% growth in RCV to
GBP3.75 billion[31] by 2025 (around 28% growth over 10 years).
Innovation driving performance into the next regulatory
period
South West Water has signed an international innovation exchange
agreement with Singapore Public Utilities Board and a Dutch
technology innovation company[32] to include the development of
ceramic membrane and ion exchange technology for water treatment
works. Following the success of the Mayflower treatment works, we
will be deploying this technology again with plans for two new
water treatment works in the Bournemouth area.
A new partnership with the University of Exeter has been
established to work together on a UK Innovation Centre to
accommodate state-of-the-art, specialist laboratory facilities, and
designated space to encourage collaborative research between
academics and experts from the water industry. Crucially, the
research will draw on Exeter's world-leading expertise across a
wide range of disciplines to develop innovative new solutions that
benefit the environment, global societies and the economy. GBP10
million of Government research funding has already been secured and
South West Water is providing matched funding to support this
programme.
South West Water is also leading the way in managing our network
and is the first UK water company to acquire Advanced Value
Technologies EZ Valves. This benefits customers by being able to
fix bursts with no interruption to supply. We will install large
volumes of fixed and acoustic loggers for pin-point targeting of
leaks to reduce how much water is lost each year.
In addition, there will be increased use of 'digital twins' of
our water and wastewater systems enabling greater real time
visibility of our operations, robotics, telemetry, and 'smart
networks' technology. Development of modular manufacturer
techniques will also be developed with local industry to drive
efficiency within our capital investments.
Working in the public interest
South West Water is committed to delivering outstanding customer
service and environmental performance, recognising the substantial
role we have within our communities. Alongside keeping bills as low
as possible, we have set out our key commitments including:
-- Building on our track record and reducing leakage by a further 15% by 2025
-- Commitment to eliminating water poverty by 2025
-- Delivering our WaterShare+ commitment giving customers a stake and a say in our business
-- Achieving net zero carbon emissions by 2030
-- Supporting the planting of new trees and forests as well as
continuing our extensive catchment management, Upstream Thinking
Programme, which promotes carbon sequestration and
biodiversity.
PENNON WATER SERVICES
Underlying H1 2019/20 Change
(excluding
(excluding IFRS 16
H1 2019/20 IFRS 16 impact) H1 2018/19 impact)
Revenue GBP86.6m GBP86.6m GBP84.1m +3.0%
EBITDA GBP0.9m GBP0.9m GBP0.9m -
Depreciation and amortisation (GBP0.3m) (GBP0.3m) (GBP0.4m) +25.0%
Operating profit GBP0.6m GBP0.6m GBP0.5m +20.0%
Net interest (GBP0.9m) (GBP0.9m) (GBP1.0m) +10.0%
Profit before tax (GBP0.3m) (GBP0.3m) (GBP0.5m) +40.0%
Revenue & operating profit
Pennon Water Services has delivered sales growth of 3.0% in H1
2019/20 compared to H1 2018/19. Overall operating profit for the
first half is GBP0.6 million (H1 2018/19 GBP0.5 million), with a
continuing focus on operating cost efficiencies.
Focus on delivering operating cost efficiencies
Pennon Water Services, our 80:20 retail venture with South
Staffordshire Plc, continues to perform robustly in a competitive
market gaining national customers with bespoke multi-year
contracts, serving over 160,000 customer accounts across 18
different wholesale regions. We are focused on a broader customer
offering including value added services which supports our target
of being the retailer of choice.
We continue to focus on delivering customer service that
reflects the needs of our business customers with satisfaction
scores increasing in the period. We are now implementing further
strategies to improve operating cost efficiency within the
competitive market including within billing and cash
management.
Technical Guidance 2019/20
Pennon Group 2018/19 Change
Capex Passed peak of committed ERF capex. Growth GBP396m
capex in near term principally reflects
completion of Avonmouth and investment
in recycling
--------------------------------------------------------------- ----------------- -------
Dividend Reflecting policy of RPI + 4% annual increase 41.06p
in dividend per share
--------------------------------------------------------------- ----------------- -------
Underlying effective tax rate lower than
UK headline rate of 19% reflecting capital
Tax rate allowances (including ERFs) 11.6%
--------------------------------------------------------------- ----------------- -------
IFRS 16 Minimal impact on profit before tax -
--------------------------------------------------------------- ----------------- -------
South West Water
----------------- -------
Revenue Impact of net tariff increases and lower GBP581m
metered volumes reflecting 2018 extreme
summer weather
--------------------------------------------------------------- ----------------- -------
Opex 2018/19 includes costs associated with GBP214m
extreme weather. Continued efficiency into
2019/20
--------------------------------------------------------------- ----------------- -------
Totex Efficiency On track to deliver c.GBP300m over K6 GBP237m
cumulative
--------------------------------------------------------------- ----------------- -------
RORE Continued momentum for delivering outperformance 11.8% cumulative
in all areas
--------------------------------------------------------------- ----------------- -------
IFRS 16 Impact of new standard applicable in 2019/20. N/A
Minimal impact on profit before tax. Approximate
impact on balance sheet and income statement
lines as follows:
* GBP32m gross assets; GBP34m gross liabilities
* GBP2m EBITDA; GBP2m depreciation; GBP1m interest
--------------------------------------------------------------- ----------------- -------
Viridor
----------------- -------
Revenue Lower following impact of cessation of GBP853m
Greater Manchester recycling operating
contract and lower IFRIC 12 construction
revenue, partially offset by ERF ramp up
and full year operations at new ERFs
--------------------------------------------------------------- ----------------- -------
EBITDA Impact of ERF ramp up GBP179m
--------------------------------------------------------------- ----------------- -------
IFRS 16 Impact of new standard applicable in 2019/20. N/A
Minimal impact on profit before tax. Approximate
impact on balance sheet and income statement
lines as follows:
* GBP76m gross assets; GBP85m gross liabilities
* GBP12m EBITDA; GBP9m depreciation; GBP3m interest
--------------------------------------------------------------- ----------------- -------
Board Matters
In September 2019 we were pleased to welcome Claire Ighodaro to
our Board as an independent non-executive director. Claire's
extensive background in finance and across both regulated and
non-regulated industries is a great asset to the Group and
complements the broad range of skills of the existing Board.
Chris Loughlin
Group Chief Executive Officer
26 November 2019
Financial Timetable
23 January 2020 Ordinary shares quoted ex dividend
24 January 2020 Record date
6 March 2020 Final date for receipt of DRIP applications
30 March 2020 Trading Statement
3 April 2020 Interim dividend payment date
4 June 2020 Full Year Results 2019/20
June 2020 Annual Report & Accounts published
23 July 2020 Annual General Meeting
23 July 2020* Ordinary shares quoted ex-dividend
24 July 2020* Record date for final dividend
10 August 2020* Final date for receipt of DRIP applications
2 September 2020* Final dividend paid
25 September 2020 Trading Statement
24 November 2020 Half Year Results 2020/21
* These dates are provisional and, in the case of the final
dividend, subject to obtaining shareholder approval at the 2020
Annual General Meeting.
PRINCIPAL RISKS AND UNCERTAINTIES
In accordance with DTR4.2.3 and 4.2.7 of the Disclosure &
Transparency Rules, the principal risks for the remaining six
months of the financial year have been reviewed by the Directors
and are considered to be unchanged from those reported within the
Risk Report on pages 58 to 69 of the Annual Report and Accounts
2019. A summary of Pennon Group's principal risks is detailed
below.
These principal risks have been reassessed against a continued
back drop of broader macro political and economic uncertainties
including; increased scrutiny and regulation of the UK water
industry and the potential impact of Britain's withdrawal from the
European Union. With a General Election called for the 12th
December, the risk and uncertainty of a potential renationalisation
of the water industry in the event of a Labour Government remains
as a Principal Risk. As noted in the Pennon Annual Report and
Accounts 2019, the viability assessment assumes that should
renationalisation occur it would be conducted in an orderly manner
in line with market conventions noting this would be dependent on
the specific approach adopted by a government to implement a
renationalisation policy.
The Board considers the principal risks to be:
Law, Regulation and Finance
-- Changes in Government Policy - renationalisation
-- Changes in Government Policy - single use plastics
-- Regulatory reform
-- Compliance with laws and regulations
-- Maintaining sufficient finance and funding to meet ongoing commitments
-- Non-compliance or occurrence of avoidable health and safety incidents
-- Tax compliance and contribution
-- Failure to pay all pension obligations as they fall due and
increased costs to the Group should the deferred pension scheme
deficit increase
Market and Economic Conditions
-- Non-recovery of customer debt
-- Macro-economic risks impacting commodity and power prices
Operating Performance
-- Poor operating performance due to extreme weather or climate change
-- Poor customer service and/or increased competition leading to loss of customer base
-- Business interruption or significant operational failures/ incidents
-- Difficulty in recruitment, retention and development of skills
-- Non-delivery of Regulatory Outcomes and performance commitments
Business Systems and Capital Investment
-- Failure or increased cost of capital projects and/or exposure to contract failures
-- Failure of information technology systems, management and protection including cyber risks.
CAUTIONARY STATEMENT IN RESPECT OF FORWARD-LOOKING
STATEMENTS
This Report contains forward-looking statements relating to the
Pennon Group's operations, performance and financial position based
on current expectations of, and assumptions and forecasts made by,
Pennon Group management which may constitute "forward-looking
statements" within the meaning of the U.S. Private Securities
Litigation Reform Act of 1995. Forward-looking statements are
identified in this Report by words such as "anticipate", "aim",
"believe", "continue", "could", "due", "estimate", "expect",
"forecast", "goal", "intend", "may", "outlook", "plan", "probably",
"project", "remain", "seek", "should", "target", "will", "would"
and related and similar expressions, as well as statements in the
future tense. All statements other than of historical fact may be
forward-looking statements and represent the Group's belief
regarding future events, many of which, by their nature, are
inherently uncertain and outside the Group's control. Various known
and unknown risks, uncertainties and other factors could lead to
substantial differences between the actual future results,
financial situation, development or performance of the Group and
the estimates and historical results given herein. Important risks,
uncertainties and other factors that could cause actual results,
performance or achievements of Pennon Group to differ materially
from any outcomes or results expressed or implied by such
forward-looking statements include, among other things, changes in
Government policy; the exit of the United Kingdom from the European
Union; international treaty changes and other events;
re-nationalisation; regulatory and legal reform; compliance with
laws and regulations; maintaining sufficient finance and funding to
meet ongoing commitments; non-compliance or occurrence of avoidable
health and safety incidents; tax compliance and contribution;
failure to pay all pension obligations as they fall due and
increased costs to the Group should the defined benefit pension
scheme deficit increase; non-recovery of customer debt; poor
operating performance due to extreme weather or climate change;
macro-economic risks impacting commodity and power prices and other
matters; poor customer service and/or increased competition leading
to loss of customer base; business interruption or significant
operational failure/incidents; difficulty in recruitment, retention
and development of skills; non-delivery of regulatory outcomes and
performance commitments; failure or increased cost of capital
projects/exposure to contract failures; failure of information
technology systems, management and protection, including cyber
risks; and all risks described in the Pennon Group Annual Report
published in June 2019. Such forward looking statements should
therefore be construed in light of all risks, uncertainties and
other factors, including without limitation those identified above,
and undue reliance should not be placed on them. Nothing in this
report should be construed as a profit forecast.
Any forward-looking statements are made only as of the date of
this document and no representation, assurance, guarantee or
warranty is given in relation to them including as to their
accuracy, completeness, or the basis on which they are made. The
Group accepts no obligation to revise or update publicly these
forward-looking statements or adjust them as a result of new
information or for future events or developments, except to the
extent legally required.
UNSOLICITED COMMUNICATIONS WITH SHAREHOLDERS
A number of companies, including Pennon Group plc, continue to
be aware that their shareholders have received unsolicited
telephone calls or correspondence concerning investment matters
which imply a connection to the company concerned. If shareholders
have any concerns about any contact they have received then please
refer to the Financial Conduct Authority's website
www.fca.org.uk/scamsmart. Details of any share dealing facilities
that the Company endorses will be included in Company mailings.
PENNON GROUP PLC
Consolidated income statement for the half year ended 30 September 2019
Unaudited
------------------------------------------------------------------------------------------------------
Non-underlying Non-underlying
Before items Before items
non-underlying (note Total non-underlying (note Total
items 5) half year items 5) half year
half year half year ended half year half year ended
ended 30 ended 30 ended ended 30
September 30 September September 30 September 30 September September
2019 2019 2019 2018* 2018* 2018*
Notes GBPm GBPm GBPm GBPm GBPm GBPm
Revenue 4 712.4 - 712.4 746.7 - 746.7
Operating costs
Employment costs (104.6) 2.2 (102.4) (101.5) - (101.5)
Raw materials and consumables
used (57.2) - (57.2) (70.2) - (70.2)
Other operating
expenses (266.7) - (266.7) (301.0) - (301.0)
Earnings before
interest,
tax,
depreciation and
amortisation 4 283.9 2.2 286.1 274.0 - 274.0
Depreciation and amortisation (103.2) - (103.2) (95.5) - (95.5)
Operating profit 4 180.7 2.2 182.9 178.5 - 178.5
Finance income 6 12.7 18.0 30.7 11.5 - 11.5
Finance costs 6 (57.8) - (57.8) (52.3) (8.9) (61.2)
----------------------------------- ------- --------------- ----------------------- ----------- ---------------- ----------------- ----------
Net finance costs 6 (45.1) 18.0 (27.1) (40.8) (8.9) (49.7)
Share of post-tax profit
from
joint ventures 7.3 - 7.3 4.8 - 4.8
Profit before tax 4 142.9 20.2 163.1 142.5 (8.9) 133.6
Taxation 7 (24.4) (5.2) (29.6) (19.3) 1.7 (17.6)
--------------- ----------------------- ----------- ---------------- ----------------- ----------
Profit for the period 118.5 15.0 133.5 123.2 (7.2) 116.0
=============== ======================= =========== ================ ================= ==========
Attributable to:
Ordinary shareholders
of the
parent 111.6 15.0 126.6 114.7 (7.2) 107.5
Non-controlling interests (0.1) - (0.1) (0.1) - (0.1)
Perpetual capital security
holders 7.0 - 7.0 8.6 - 8.6
Earnings per ordinary
share
(pence per share) 8
- Basic 30.1 25.6
- Diluted 30.0 25.5
* The Group has applied IFRS 16 'Leases' using the modified retrospective
method. Under this approach, comparative information is not restated. See
note 21 for further details.
The notes on pages 45 to 65 form part of this condensed half year financial
information.
PENNON GROUP PLC
Consolidated statement of comprehensive income for the half year ended 30
September 2019
Unaudited
--------------------------------------------------------------------------------------------------------------
Non-underlying Before Non-underlying
Before items Total non-underlying items Total
non-underlying (note 5) half year items (note 5) half year
items half half year ended half half year ended
year ended ended 30 year ended ended 30 30
30 September 30 September September 30 September September September
2019 2019 2019 2018* 2018* 2018*
GBPm GBPm GBPm GBPm GBPm GBPm
Profit for the period 118.5 15.0 133.5 123.2 (7.2) 116.0
Other comprehensive
income
Items that will not
be reclassified
to profit or loss
Remeasurement of
defined
benefit obligations
(note 16) (20.5) 12.2 (8.3) 7.6 - 7.6
Income tax on items
that will not
be reclassified 3.8 (2.3) 1.5 (1.3) - (1.3)
-------------------- ----------------------- ----------- ---------------- ----------------- -------------
Total items that will
not be
reclassified to
profit
or loss (16.7) 9.9 (6.8) 6.3 - 6.3
-------------------- ----------------------- ----------- ---------------- ----------------- -------------
Items that may be
reclassified
subsequently to
profit
or loss
Share of other
comprehensive
income from joint
ventures (0.2) - (0.2) 0.7 - 0.7
Cash flow hedges (16.0) - (16.0) 4.1 - 4.1
Income tax on items
that may be
reclassified 2.7 - 2.7 (1.1) - (1.1)
Total items that may
be
reclassified
subsequently
to
profit or loss (13.5) - (13.5) 3.7 - 3.7
-------------------- ----------------------- ----------- ---------------- ----------------- -------------
Other comprehensive
income for the period
net of tax (30.2) 9.9 (20.3) 10.0 - 10.0
-------------------- ----------------------- ----------- ---------------- ----------------- -------------
Total comprehensive
income
for the period 88.3 24.9 113.2 133.2 (7.2) 126.0
==================== ======================= =========== ================ ================= =============
Total comprehensive
income
attributable to:
Ordinary shareholders
of the
parent 81.4 24.9 106.3 124.7 (7.2) 117.5
Non-controlling
interests (0.1) - (0.1) (0.1) - (0.1)
Perpetual capital
security
holders 7.0 - 7.0 8.6 - 8.6
==================== ======================= =========== ================ ================= =============
* The Group has applied IFRS 16 'Leases' using the modified retrospective
method. Under this approach, comparative information is not restated. See
note 21 for further details.
The notes on pages 45 to 65 form part of this condensed half year financial
information.
PENNON GROUP PLC
Consolidated balance sheet at 30 September 2019
Unaudited
-----------------------------
30 September 31 March
2019 2019*
Notes GBPm GBPm
ASSETS
Non-current assets
Goodwill 383.1 385.0
Other intangible assets 89.6 92.1
Property, plant and equipment 21 4,673.0 4,509.4
Other non-current assets 263.8 256.4
Derivative financial instruments 3.9 70.5
Investments in joint ventures 58.2 51.1
----------------------------- -----------------
5,471.6 5,364.5
----------------------------- -----------------
Current assets
Inventories 30.7 28.8
Trade and other receivables 497.7 484.8
Derivative financial instruments 2.0 11.8
Cash and cash deposits 14 528.0 569.6
----------------------------- -----------------
1,058.4 1,095.0
----------------------------- -----------------
LIABILITIES
Current liabilities
Borrowings 14 (124.9) (150.4)
Financial liabilities at fair value
through profit (2.6) (3.8)
Derivative financial instruments (3.0) (11.1)
Trade and other payables 18 (284.3) (298.0)
Current tax liabilities (15.8) (19.1)
Provisions (27.2) (28.7)
----------------------------- -----------------
(457.8) (511.1)
----------------------------- -----------------
Net current assets 600.6 583.9
----------------------------- -----------------
Non-current liabilities
Borrowings 14 (3,699.1) (3,498.7)
Other non-current liabilities 18 (146.6) (147.9)
Financial liabilities at fair value
through profit (42.0) (43.1)
Derivative financial instruments (35.8) (9.9)
Retirement benefit obligations 16 (38.5) (60.8)
Deferred tax liabilities (303.4) (305.1)
Provisions (198.0) (203.1)
----------------------------- -----------------
(4,463.4) (4,268.6)
----------------------------- -----------------
Net assets 1,608.8 1,679.8
============================= =================
Shareholders' Equity
Share capital 10 171.3 171.1
Share premium account 11 226.0 223.6
Capital redemption reserve 144.2 144.2
Retained earnings and other reserves 769.5 843.0
----------------------------- -----------------
Total shareholders' equity 1,311.0 1,381.9
----------------------------- -----------------
Non-controlling interests 1.1 1.2
Perpetual capital securities 12 296.7 296.7
----------------------------- -----------------
Total equity 1,608.8 1,679.8
============================= =================
* The Group has applied IFRS 16 'Leases' using the modified retrospective
method. Under this approach, comparative information is not restated. See
note 21 for further details.
The notes on pages 45 to 65 form part of this condensed half year financial
information.
PENNON GROUP PLC
Consolidated statement of changes in equity for the half year ended 30 September
2019
Unaudited
-------------------------------------------------------------------------------------------------------------
Share Retained Perpetual
Share premium Capital earnings Non-controlling capital
capital account redemption and interests securities Total
(note (note reserve other (note Equity
10) 11) reserves 12)
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 April 2018 170.8 218.8 144.2 807.1 1.5 296.7 1,639.1
Profit for the period - - - 107.5 (0.1) 8.6 116.0
Other comprehensive income
for the period - - - 10.0 - - 10.0
--------- -------- ----------------------- --------- -------------------- ---------------- --------
Total comprehensive income
for the period - - - 117.5 (0.1) 8.6 126.0
--------- -------- ----------------------- --------- -------------------- ---------------- --------
Transactions with equity
shareholders:
Dividends paid - - - (162.0) - - (162.0)
Adjustment in respect of
share-based
payments (net of tax) - - - 1.9 - - 1.9
Distributions due to
perpetual
capital
security holders - - - - - (8.6) (8.6)
Own shares acquired by
the Pennon
Employee Share Trust
in respect of
Share options granted - - - (1.5) - - (1.5)
Proceeds from shares issued
under the
Sharesave Scheme 0.2 3.5 - - - - 3.7
0.2 3.5 - (161.6) - (8.6) (166.5)
55
--------- -------- ----------------------- --------- -------------------- ---------------- --------
At 30 September 2018 171.0 222.3 144.2 763.0 1.4 296.7 1,598.6
========= ======== ======================= ========= ==================== ================ ========
Unaudited
---------------------------------------------------------------------------------------------------------
Share Retained Perpetual
Share premium Capital earnings Non-controlling capital
capital account redemption and interests securities Total
(note (note reserve other (note Equity
10) 11) reserves 12)
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 April 2019 171.1 223.6 144.2 843.0 1.2 296.7 1,679.8
Opening adjustment on
adoption
of IFRS 16 - - - (8.0) - - (8.0)
--------- -------- ----------------------- --------- -------------------- ---------------- --------
At 1 April 2019 (adjusted
for IFRS 16) 171.1 223.6 144.2 835.0 1.2 296.7 1,671.8
--------- -------- ----------------------- --------- -------------------- ---------------- --------
Profit for the period - - - 126.6 (0.1) 7.0 133.5
Other comprehensive income
for the period - - - (20.3) - - (20.3)
--------- -------- ----------------------- --------- -------------------- ---------------- --------
Total comprehensive income
for the period - - - 106.3 (0.1) 7.0 113.2
--------- -------- ----------------------- --------- -------------------- ---------------- --------
Transactions with equity
shareholders:
Dividends paid - - - (172.6) - - (172.6)
Adjustment in respect of
share-based
payments (net of tax) - - - 2.4 - - 2.4
Distributions due to
perpetual
capital
security holders - - - - - (8.6) (8.6)
Current tax relief on
distributions
to perpetual capital
security
holders - - - - - 1.6 1.6
Own shares acquired by
the Pennon Employee Share
Trust in respect of Share
options granted - - - (1.6) - - (1.6)
Proceeds from shares issued
under the
Sharesave Scheme 0.2 2.4 - - - - 2.6
0.2 2.4 - (171.8) - (7.0) (176.2)
At 30 September 2019 171.3 226.0 144.2 769.5 1.1 296.7 1,608.8
========= ======== ======================= ========= ==================== ================ ========
The notes on pages 45 to 65 form part of this condensed half year financial
information.
PENNON GROUP PLC
Consolidated statement of cash flows for the half year ended 30 September
2019
Unaudited
------------------------------------------
Half year Half year
ended 30 ended 30
September September
2019 2018*
Notes GBPm GBPm
Cash flows from operating activities
Cash generated from operations 13 244.2 151.7
Interest paid (38.0) (31.4)
Tax paid (26.8) (12.2)
Net cash generated from operating activities 179.4 108.1
-------------------- ---------------------------
Cash flows from investing activities
Interest received 2.7 4.4
Loan repayments received from joint
ventures 3.7 2.0
Purchase of property, plant and equipment (194.7) (181.9)
Proceeds from sale of property, plant
and equipment 10.6 0.5
Deposit of restricted cash (5.0) (3.7)
-------------------- ---------------------------
Net cash used in investing activities (182.7) (178.7)
-------------------- ---------------------------
Cash flows from financing activities
Proceeds from issuance of ordinary
shares 2.6 3.7
Proceeds from derivatives early settlement 5 87.2 -
Purchase of ordinary shares by the
Pennon
Employee Share Trust (1.6) (1.5)
Proceeds from new borrowing 14 50.0 50.0
Repayment of borrowings 14 (67.2) (16.1)
Cash inflows from sale and leaseback
transactions 14 85.0 35.0
Lease principal repayments (2018: Finance
lease principal repayments) 14 (18.1) (16.0)
Dividends paid 9 (172.6) (162.0)
Perpetual capital securities periodic
return (8.6) (5.8)
-------------------- ---------------------------
Net cash used in financing activities (43.3) (112.7)
-------------------- ---------------------------
Net decrease in cash and cash
equivalents (46.6) (183.3)
Cash and cash equivalents at beginning
of period 14 365.7 403.0
Cash and cash equivalents at end of
period 14 319.1 219.7
==================== ===========================
* The Group has applied IFRS 16 'Leases' using the modified retrospective
method. Under this approach, comparative information is not restated.
See note 21 for further details.
The notes on pages 45 to 65 form part of this condensed half year
financial information.
PENNON GROUP PLC
Notes to condensed half year financial information
1. General information
Pennon Group plc is a company registered in the United Kingdom
(UK) under the Companies Act 2006. The address of the registered
office is given on page 65. Pennon Group's business is operated
through two principal subsidiaries. South West Water Limited includes
the merged water companies of South West Water and Bournemouth
Water, providing water and wastewater services in Devon, Cornwall
and parts of Dorset and Somerset and water only services in parts
of Dorset, Hampshire and Wiltshire. Viridor Limited's business
is recycling, energy recovery and waste management. Pennon Group
is also the majority shareholder of Pennon Water Services Limited,
a company providing water and wastewater retail services to non-household
customer accounts across Great Britain.
This condensed half year financial information was approved by
the Board of Directors on 25 November 2019.
The financial information for the period ended 30 September 2019
does not constitute statutory accounts within the meaning of section
435 of the Companies Act 2006. The statutory accounts for 31 March
2019 were approved by the Board of Directors on 29 May 2019 and
have been delivered to the Registrar of Companies. The independent
auditor's report on these financial statements was unqualified,
and did not contain a statement under section 498 of the Companies
Act 2006.
2. Basis of preparation
This condensed half year financial information has been prepared
in accordance with the Disclosure and Transparency Rules of the
Financial Services Authority and with IAS 34 "Interim financial
reporting" as adopted by the European Union (EU). This condensed
half year financial information should be read in conjunction
with the Pennon Group plc Annual Report and Accounts for the year
ended 31 March 2019, which were prepared in accordance with International
Financial Reporting Standards (IFRSs) as adopted by the EU.
Having made enquiries, the Directors consider that the Company
and its subsidiary undertakings have adequate resources to continue
in business for the foreseeable future, and that it is therefore
appropriate to adopt the going concern basis in preparing the
condensed half year financial information.
This condensed half year financial information has been reviewed
but not audited by the independent auditor pursuant to the Auditing
Practices Board guidance on the "Review of Interim Financial Information".
The preparation of the half year financial information requires
management to make judgements, estimates and assumptions that
affect the application of accounting policies and the reported
amounts of assets and liabilities, income and expense. Actual
results may differ from these estimates. The significant judgements
made by management in applying the Group's accounting policies
and the key sources of estimation uncertainty are consistent with
those that applied to the consolidated financial statements for
the year ended 31 March 2019, with the exception of changes in
estimates that are required in determining the half year provision
of income taxes, and as a result of adopting IFRS 16 'Leases'.
The most significant of these relate to the following matters:
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
2. Basis of preparation (continued)
The discount rate used in the calculation of the lease liability
involves estimation. The discount rate is calculated on a lease
by lease basis. For vehicle leases, which account for less than
1% of the present value of future lease payments, the discount
rate is determined by the implicit rate within the lease. For
all other leases, where implicit rates are not available, discount
rates are calculated using the Group's estimated Incremental Borrowing
Rate ('IBR') for each lease. The IBR is determined with reference
to applicable reference rate borrowing curves (e.g. LIBOR or its
successor), credit margins for the different business segments
and lease terms. At the commencement of new leases, discount rates
are updated to ensure the Group applies the IBR that reflects
current market conditions. At 1 April 2019, the date of transition
to IFRS 16, the range of rates used was between 2.43% and 4.5%
and the weighted average IBR across all leases was 3.6%. If the
weighted average rate used was increased by 10bps, this would
result in a c.0.9% reduction in the present value of lease liabilities
recognised at 1 April 2019.
The tax charge for September 2019 and September 2018 has been
derived by applying the anticipated effective annual rate to the
first half year profit before tax.
3. Accounting policies
Other than the revised policy on leases as a result of the application
of IFRS 16, as set out in note 21 below, the accounting policies
adopted in this condensed half year financial information are
consistent with those applied and set out in the Pennon Group
plc Annual Report and Accounts for the year ended 31 March 2019
and are in accordance with all IFRSs and interpretations of the
IFRS Interpretations Committee expected to be applicable for the
year ending 31 March 2020 in issue which have been adopted by
the EU.
Other than the adoption of IFRS 16, which is explained in note
21, new standards or interpretations which were mandatory for
the first time in the year beginning 1 April 2019 did not have
a material impact on the net assets or results of the Group.
New standards or interpretations due to be adopted from 1 April
2020 are not expected to have a material impact on the Group's
net assets or results. Existing borrowing covenants are not impacted
by changes in accounting standards.
PENNON GROUP PLC
Notes to the condensed half year financial information (continued)
4. Segmental information
Operating segments are reported in a manner consistent with
internal reporting provided to the Chief Operating Decision-Maker,
which has been identified as the Pennon Group plc Board.
The water business comprises the regulated water and wastewater
services undertaken by South West Water. The waste management
business is the recycling, energy recovery and waste management
services provided by Viridor. The non-household retail business
reflects the services provided by Pennon Water Services.
Unaudited
------------------------------------------
Half year Half year
ended 30 ended 30
September September
2019 2018
GBPm GBPm
Revenue
Water 292.9 301.5
Waste management 388.1 422.3
Non-household retail 86.6 84.1
Other 10.3 10.6
Less intra-segment trading (65.5) (71.8)
------------ ----------------------------
712.4 746.7
------------ ----------------------------
Segment result
Operating profit before depreciation,
amortisation and non-underlying
items (EBITDA)
Water 190.6 194.7
Waste management 92.4 78.4
Non-household retail 0.9 0.9
Other - -
------------ ----------------------------
283.9 274.0
------------ ----------------------------
Operating profit before
non-underlying
items
Water 131.5 135.9
Waste management 48.7 42.1
Non-household retail 0.6 0.5
Other (0.1) -
------------ ----------------------------
180.7 178.5
------------ ----------------------------
Profit before tax and non-underlying
items
Water 96.2 100.3
Waste management 41.5 36.2
Non-household retail (0.3) (0.5)
Other 5.5 6.5
------------ ----------------------------
142.9 142.5
------------ ----------------------------
Profit before tax
Water 114.2 91.2
Waste management 43.7 36.2
Non-household retail (0.3) (0.5)
Other 5.5 6.7
------------ ----------------------------
163.1 133.6
------------ ----------------------------
The impact of IFRS 16 on the segmental profit above is outlined
in section (iii) of the Alternative Performance Measures (APM)
on pages 70 to 71.
PENNON GROUP PLC
Notes to the condensed half year financial information (continued)
4. Segmental information (continued)
Intra-segment trading between different segments is under normal
market based commercial terms and conditions. Intra-segment
revenue of the other segment is reflected as a cost.
Factors such as seasonal weather patterns can affect sales
volumes, income and costs in both the water and waste management
segments.
The grouping of revenue streams by how they are affected by
economic factors, as required by IFRS 15, is as follows:
Non-Household
Retail
Water Waste Management (WM) Other
------- ------------------------------------------------------ --------------- ----------
Six months ended 30 Rest Rest WM Total
September 2019 UK UK of EU China of World UK Total UK Total
Unaudited Total Total
------- ------ ---------- ------- ------------ ----------- --------------- ---------- -------
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Segment revenue 292.9 371.4 7.5 3.4 5.8 388.1 86.6 10.3 777.9
Inter-segment revenue (53.4) - - - - - (1.8) (10.3) (65.5)
------- ------ ---------- ------- ------------ ----------- --------------- ---------- -------
Revenue from external
customers 239.5 371.4 7.5 3.4 5.8 388.1 84.8 - 712.4
------- ------ ---------- ------- ------------ ----------- --------------- ---------- -------
Significant service
lines
Water 239.5 - - - - - - - 239.5
Non-household retail - - - - - - 84.8 - 84.8
Waste management
services - 295.7 - - - 295.7 - - 295.7
Energy - 48.9 - - - 48.9 - - 48.9
Recyclate - 26.8 7.5 3.4 5.8 43.5 - - 43.5
239.5 371.4 7.5 3.4 5.8 388.1 84.8 - 712.4
------- ------ ---------- ------- ------------ ----------- --------------- ----------
Non-Household
Retail
Water Waste Management (WM) Other
------- ------------------------------------------------------ --------------- ----------
Rest Rest WM Total
Six months ended 30 UK UK of EU China of World UK Total UK Total
September 2018 Unaudited Total Total
------- ------ ---------- ------- ------------ ----------- --------------- ---------- -------
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Segment revenue 301.5 400.1 6.6 10.6 5.0 422.3 84.1 10.6 818.5
Inter-segment revenue (59.9) - - - - - (1.3) (10.6) (71.8)
------- ------ ---------- ------- ------------ ----------- --------------- ---------- -------
Revenue from external
customers 241.6 400.1 6.6 10.6 5.0 422.3 82.8 - 746.7
------- ------ ---------- ------- ------------ ----------- --------------- ---------- -------
Significant service
lines
Water 241.6 - - - - - - - 241.6
Non-household retail - - - - - - 82.8 - 82.8
Waste management
services - 342.8 - - - 342.8 - - 342.8
Energy - 26.0 - - - 26.0 - - 26.0
Recyclate - 31.3 6.6 10.6 5.0 53.5 - - 53.5
241.6 400.1 6.6 10.6 5.0 422.3 82.8 - 746.7
------- ------ ---------- ------- ------------ ----------- --------------- ----------
PENNON GROUP PLC
Notes to the condensed half year financial information (continued)
5. Non-underlying items
Non-underlying items are those that in the Directors' view
are required to be separately disclosed by virtue of their
size, nature or incidence to enable a full understanding of
the Group's financial performance in the period and business
trends over time.
Unaudited
---------------------------------------------------------------
Half year Half year
ended 30 ended 30
September September
2019 2018
GBPm GBPm
Operating costs
Pension past service credit (1) 2.2 -
---------------------------------- ---------------------------
Total operating costs 2.2 -
Remeasurement of fair value
movement
in derivatives (2) 18.0 (8.9)
Tax (charge) / credit arising on
non-underlying
items (5.2) 1.7
---------------------------------- ---------------------------
Net non-underlying credit /
(charge) 15.0 (7.2)
---------------------------------- ---------------------------
1 Upon cessation of the Greater Manchester contract, Viridor
employees on this contract transferred to the new contract
provider. Accordingly, defined benefit pension commitments
for these employees are in the process of being transferred.
The past service credit of GBP2.2m (H1 2018/19: GBPnil)
reflects curtailment and other gains resulting from active
employees moving to deferred status in these schemes.
As a result of the contract termination a surplus amount
relating to one of the pension schemes associated with
this contract now becomes recoverable. Accordingly, a
gain of GBP12.2m, along with an associated tax charge
of GBP2.3m, have been recognised in the statement of comprehensive
income.
2 In the period a gain of GBP18.0m was recognised relating
to non-cash derivative fair value movements associated
with derivatives that are not designated as being party
to an accounting hedge relationship (H1 2018/19 charge
of GBP8.9m). In the period these instruments were early
settled, as the instruments no longer met the Group's
accounting hedging requirements, and this has locked in
the mark to market gain. These movements are non-underlying
due to the nature of the item being market dependant and
potentially can be significant in value (size).
PENNON GROUP PLC
Notes to the condensed half year financial information (continued)
6. Net finance costs
Unaudited
----------------------------------------------------------
Half year ended Half year ended
30 September 2019 30 September 2018
---------------------------- ----------------------------
Finance Finance Finance Finance
cost income Total cost income Total
GBPm GBPm GBPm GBPm GBPm GBPm
Cost of servicing debt
Bank borrowings and overdrafts (28.7) - (28.7) (25.0) - (25.0)
Interest element of IAS
17 finance lease rentals (19.8) - (19.8) (19.6) - (19.6)
Interest element of IAS
17 operating lease rentals (2.0) - (2.0) - - -
Other finance costs (1.5) - (1.5) (1.4) - (1.4)
Interest receivable - 1.9 1.9 - 1.7 1.7
Interest receivable on
shareholder loans
to joint
ventures - 3.4 3.4 - 2.5 2.5
(52.0) 5.3 (46.7) (46.0) 4.2 (41.8)
--------- -------- ------- -------- -------- --------
Notional interest
Interest receivable on
service
concession arrangements - 7.4 7.4 - 7.3 7.3
Retirement benefit obligations (0.8) - (0.8) (0.9) - (0.9)
Unwinding of discounts
on
provisions (5.0) - (5.0) (5.4) - (5.4)
(5.8) 7.4 1.6 (6.3) 7.3 1.0
--------- -------- ------- -------- -------- --------
Net finance costs before
non-underlying items (57.8) 12.7 (45.1) (52.3) 11.5 (40.8)
Non-underlying items (note
5)
Fair value remeasurement
of
non-designated derivative
financial instruments,
providing commercial
hedges - 18.0 18.0 (8.9) - (8.9)
- 18.0 18.0 (8.9) - (8.9)
Net finance costs after
--------- -------- ------- -------- -------- --------
non-underlying items (57.8) 30.7 (27.1) (61.2) 11.5 (49.7)
--------- -------- ------- -------- -------- --------
Interest charged on lease rentals increased under IFRS 16 due to
the addition of interest of GBP2.0m attributable to leases previously
classified as 'operating leases' under IAS 17. Refer to note 21 for
further details regarding the impact of IFRS 16.
PENNON GROUP PLC
Notes to the condensed half year financial information (continued)
7. Taxation
Unaudited
-------------------------------------------------------------------------------------------------------------------
Before Non-underlying Total Before Non-underlying
non-underlying items (note half non-underlying items (note Total
items 5) year items 5) half year
half year half year ended half year half year ended
ended 30 ended 30 30 ended 30 ended 30
September September September September 30 September September
2019 2019 2019 2018 2018 2018
GBPm GBPm GBPm GBPm GBPm GBPm
Analysis of charge
Current
tax charge 8.8 16.3 25.1 12.4 - 12.4
Deferred
tax charge/
(credit) 15.6 (11.1) 4.5 6.9 (1.7) 5.2
Tax charge/
(credit)
for the
period 24.4 5.2 29.6 19.3 (1.7) 17.6
--------------- ---------------------------- ---------- --------------- --------------------------- ----------
UK corporation tax is calculated at 19% (H1 2018/19 19%) of
the estimated assessable profit for the year. The tax charge
for September 2019 and September 2018 has been derived by applying
the anticipated effective annual tax rate to the first half
year profit before tax.
Tax on amounts included in the consolidated statement of comprehensive
income, or directly in equity, is included in those statements
respectively.
The effective tax rate for the period before the impact of non-underlying
items was 17% (H1 2018/19 14%).
The effective tax rate for the period including the impact of
non-underlying items was 18% (H1 2018/19 13%).
PENNON GROUP PLC
Notes to the condensed half year financial information (continued)
8. Earnings per share
Basic earnings per share are calculated by dividing the earnings
attributable to ordinary shareholders by the weighted average
number of ordinary shares outstanding during the period, excluding
those held in the employee share trust which are treated as
cancelled. For diluted earnings per share, the weighted average
number of ordinary shares in issue is adjusted to include all
dilutive potential ordinary shares.
The weighted average number of shares and earnings used in the
calculations were:
Unaudited
---------------------------------------
Half year Half year
ended 30 ended 30
September September
2019 2018
Number of shares (millions)
For basic earnings per share 420.0 419.3
Effect of dilutive potential ordinary shares
from share options 1.5 1.1
For diluted earnings per share 421.5 420.4
---------- ---------------------------
Adjusted basic and diluted earnings per ordinary share
Adjusted earnings per share are presented to provide a more
useful comparison on business trends and performance. Non-underlying
items are adjusted for by virtue of their size, nature or incidence
to enable a full understanding of the Group's financial performance
(as described in note 5). Perpetual capital returns are proportionately
adjusted to allow a more useful comparison in the period. Earnings
per share have been calculated as follows:
Unaudited
--------------------------------------------------------------------------------------------------
Half year ended Half year ended
30 September 2019 30 September 2018
Profit Earnings per Profit Earnings per
share share
after Basic Diluted after Basic Diluted
tax tax
GBPm p p GBPm p p
Statutory earnings 126.6 30.1 30.0 107.5 25.6 25.5
Deferred tax before
non-underlying items 15.6 3.8 3.8 6.9 1.7 1.7
Non-underlying items
(net of tax) (15.0) (3.6) (3.6) 7.2 1.7 1.7
Proportionate impact
of
perpetual capital returns
(note 12) 3.5 0.8 0.8 4.3 1.0 1.0
Earnings before non-underlying
items and deferred
tax 130.7 31.1 31.0 125.9 30.0 29.9
----------- --------------------------- --------------- ---------- --------------- ----------
PENNON GROUP PLC
Notes to the condensed half year financial information (continued)
9. Dividends
Amounts recognised as distributions to ordinary equity holders
in the period:
Unaudited
---------------------------------------
Half year Half year
ended 30 ended 30
September September
2019 2018
GBPm GBPm
Interim dividend paid for the year ended
31 March 2019: 12.84p (2018 11.97p) per
share 54.0 50.2
Final dividend paid for the year ended
31 March 2019: 28.22p (2018 26.62p) per
share 118.6 111.8
172.6 162.0
---------- ---------------------------
In the six months to 30 September 2019 the 2018/19 interim and
final dividends were paid resulting in a cash outflow of GBP172.6m.
Unaudited
---------------------------------------
Half year Half year
ended 30 ended 30
September September
Proposed interim dividend 2019 2018
GBPm GBPm
Proposed interim dividend for the year ended
31 March 2020: 13.66p (2019 12.84p) per
share 57.4 54.0
---------- ---------------------------
The proposed interim dividend has not been included as a liability
in this condensed half year financial information.
The proposed interim dividend for 2020 will be paid on 3 April
2020 to shareholders on the register on 24 January 2020.
PENNON GROUP PLC
Notes to the condensed half year financial information (continued)
10. Share capital
Allotted, called up and fully paid Unaudited
--------------------------------------------------------
Number of shares
--------------------------------------------
1 April 2018 to 30 September 2018 Treasury Ordinary
shares shares GBPm
At 1 April 2018 Ordinary shares of
40.7p each 8,443 419,743,183 170.8
For consideration of GBP3.7m, shares
issued - 563,592 0.2
in respect of the Company's Sharesave
Scheme
At 30 September 2018 ordinary shares
of 40.7p each 8,443 420,306,775 171.0
--------------- --------------------------- ----------
Unaudited
--------------------------------------------------------
Number of shares
--------------------------------------------
1 April 2019 to 30 September 2019 Treasury Ordinary
shares shares GBPm
At 1 April 2019 Ordinary shares of
40.7p each 8,443 420,520,598 171.1
For consideration of GBP2.6m, shares
issued
in respect of the Company's Sharesave
Scheme - 353,265 0.2
At 30 September 2019 ordinary shares
of 40.7p each 8,443 420,873,863 171.3
--------------- --------------------------- ----------
Shares held as treasury shares may be sold, re-issued for any
of the Company's share schemes, or cancelled.
The weighted average market price of the Company's shares at
the date of exercise of Sharesave
Scheme options during the year was 760p (H1 2018/19 753p).
PENNON GROUP PLC
Notes to the condensed half year financial information (continued)
11. Share premium account Unaudited
---------------------------
GBPm
1 April 2018 to 30 September 2018
At 1 April 2018 218.8
Shares issued under the Sharesave Scheme 3.5
At 30 September 2018 222.3
---------------------------
1 April 2019 to 30 September 2019
At 1 April 2019 223.6
Shares issued under the Sharesave Scheme 2.4
At 30 September 2019 226.0
---------------------------
12. Perpetual capital securities
Unaudited
---------------------------
Half year Year ended
ended 30 31 March
September 2019
2019
GBPm GBPm
GBP 300m 2.875% perpetual subordinated
capital securities 296.7 296.7
296.7 296.7
--------------------------- ---------------------------
On 22 September 2017 the Company issued GBP300m perpetual capital
securities. Costs directly associated with the issue of GBP3.3m
were set off against the value of the issuance. They have no
fixed redemption date but the Company can at its sole discretion
redeem all, but not part, of these securities at their principal
amount on 22 May 2020 or any subsequent periodic return payment
date after this.
The Company has the option to defer periodic returns on any
relevant payment date, as long as a dividend on the Ordinary
Shares has not been paid or declared in the previous 12 months.
Deferred periodic returns shall be satisfied only on redemption
or payment of dividend on Ordinary Shares, all of which only
occur at the sole discretion of the Company.
As the Company paid a dividend on 4 April 2019 the periodic
return of GBP8.6m, scheduled 22 May 2020, is payable and consequently
has been recognised as a liability at 30 September 2019.
PENNON GROUP PLC
Notes to the condensed half year financial information (continued)
13. Cash flow from operating activities
Reconciliation of profit for the period to net cash inflow from
operations:
Unaudited
---------------------------------------
Half year Half year
ended 30 ended 30
September September
2019 2018
GBPm GBPm
Cash generated from operations
Profit for the period 133.5 116.0
Adjustments for:
Share-based payments 2.0 1.9
Profit on disposal of property, plant
and equipment (2.5) (0.2)
Depreciation charge 100.7 93.0
Amortisation of intangible assets 2.5 2.5
Non-underlying pension past service credit -
(note 5) (2.2)
Non-underlying remeasurement of fair
value movement in derivatives (note 5) (18.0) 8.9
Share of post-tax profit from joint ventures (7.3) (4.8)
Finance income (before non-underlying
items) (12.7) (11.5)
Finance costs (before non-underlying
items) 57.8 52.3
Taxation charge 29.6 17.6
Changes in working capital:
Increase in inventories (1.9) (5.6)
Increase in trade and other receivables (2.0) (66.0)
Increase in service concession arrangements
receivable (12.4) (1.3)
Increase / (decrease) in trade and other
payables 19.5 (42.3)
(Decrease) / Increase in retirement benefit
obligations from contributions (29.3) 2.0
Decrease in provisions (13.1) (10.8)
Cash generated from operations 244.2 151.7
---------- ---------------------------
Unaudited
---------------------------------------
Half year Half year
ended 30 ended 30
September September
2019 2018
GBPm GBPm
Total interest paid
Interest paid in operating activities 38.0 31.4
Interest paid in investing activities 6.1 8.3
Total interest paid 44.1 39.7
---------- ---------------------------
PENNON GROUP PLC
Notes to the condensed half year financial information (continued)
Interest paid in operating activities increased under IFRS 16
due to the addition of cash paid of GBP1.8m (H1 2018/19 GBPnil)
attributable to leases previously classified as 'operating leases'
under IAS 17. Refer to note 21 for further details regarding
the impact of IFRS 16.
14. Net borrowings
Unaudited
----------
Half year
ended 30 Year ended
September 31 March
2019 2019
GBPm GBPm
Cash and cash deposits 528.0 569.6
Borrowings - current
Bank and other loans (10.2) (59.8)
Other current borrowings (27.0) (27.0)
Leases (IAS 17 finance) (78.7) (63.6)
Leases (IAS 17 operating) (9.0) -
---------- ---------------------------
Total current borrowings (124.9) (150.4)
---------- ---------------------------
Borrowings - non-current
Bank and other loans (1,674.7) (1,628.0)
Other non-current borrowings (357.4) (373.9)
Leases (IAS 17 finance) (1,557.7) (1,496.8)
Leases (IAS 17 operating) (109.3) -
---------- ---------------------------
Total non-current borrowings (3,699.1) (3,498.7)
---------- ---------------------------
Total net borrowings (3,296.0) (3,079.5)
---------- ---------------------------
Refer to note 21 for further details regarding the impact of
IFRS 16 Leases. References above to IAS 17 finance and IAS 17
operating leases represent the classification of these lease
balances under IAS 17 prior to implementation of IFRS 16.
The movements in net borrowings during the periods presented
were as follows:
Unaudited
--------------------------------------------------------------------------------------------------
Net
borrowings Foreign Other Net borrowings
at 1 April Cash flows exchange non-cash at 30 September
2018 - other adjustments movements 2018
GBPm GBPm GBPm GBPm GBPm
Cash and cash deposits 585.3 (179.6) - - 405.7
Bank and other loans
due
within one year (149.6) - - 96.9 (52.7)
Other current borrowings (32.0) 16.1 - (13.6) (29.5)
Leases due within
one year (28.2) 28.9 - (27.9) (27.2)
Bank and other loans
due
after one year (1,408.8) (50.0) (0.9) (96.6) (1,556.3)
Other non-current
borrowings (291.4) - - 13.5 (277.9)
Leases due after
one year (1,476.8) (35.0) - 7.8 (1,504.0)
Total (2,801.5) (219.6) (0.9) (19.9) (3,041.9)
----------- --------------------------- --------------- ---------- ---------------------------
PENNON GROUP PLC
Notes to the condensed half year financial information
(continued)
14. Net borrowings (continued)
Unaudited
-------------------------------------------------------------------------------------------
Adjustment
for
transition
to new Net
Net accounting borrowings
borrowings standard Foreign Other at 30
at 1 April (note Cash flows exchange non-cash September
2019 21) - other adjustments movements 2019
GBPm GBPm GBPm GBPm GBPm GBPm
Cash and cash deposits 569.6 - (41.6) - - 528.0
Bank and other loans
due
within one year (59.8) - 53.6 - (4.0) (10.2)
Other current borrowings (27.0) - 13.5 - (13.5) (27.0)
Leases (IAS 17 finance)
due within one year (63.6) - 12.3 - (27.4) (78.7)
Leases (IAS 17 operating)
due within one year - (8.9) 5.8 - (5.9) (9.0)
Bank and other loans
due after
one year (1,628.0) - (49.9) (1.1) 4.3 (1,674.7)
Other non-current borrowings (373.9) - - - 16.5 (357.4)
Leases (IAS 17 finance) -
due
after one year (1,496.8) (85.0) - 24.1 (1,557.7)
Leases (IAS 17 operating)
due
after one year - (112.3) - - 3.0 (109.3)
------------- ------------ ----------- ------------- ----------- ------------
Total (3,079.5) (121.2) (91.3) (1.1) (2.9) (3,296.0)
------------- ------------ ----------- ------------- ----------- ------------
During the half year ended 30 September 2019, the Group raised GBP85m
through sale and leaseback transactions of certain water and waste water
assets including, where possible, eligible assets under the Group's
sustainable financing framework. This did not meet the revenue recognition
criteria under IFRS 15 and has been reflected as a financing transaction.
For the purposes of the cash flow statement cash and cash equivalents
comprise:
Unaudited
--------------------------
Half year Year ended
ended 30 September 31 March
2019 2019
GBPm GBPm
Cash and cash deposits as above 528.0 569.6
Less: deposits with a maturity of three months
or more (restricted funds) (208.9) (203.9)
-------------------------- ------------
319.1 365.7
-------------------------- ------------
Restricted funds are available for access, subject to being replaced
by an equivalent valued security.
PENNON GROUP PLC
Notes to the condensed half year financial information (continued)
15. Fair value disclosure for financial instruments
Fair value of financial instruments carried at amortised cost
Financial assets and liabilities which are not carried at an amount
which approximates to their fair
value are:
Unaudited
--------------------------
Half year ended Year ended
30 September 2019 31 March 2019
Book value Fair value Book value Fair
value
GBPm GBPm GBPm GBPm
Non-current borrowings:
Bank and other
loans 1,674.7 1,946.3 1,628.0 1,828.9
Other non-current borrowings 357.4 337.7 373.9 345.2
------------ ------------ ------------- ----------
Non-current borrowings excluding
leases 2,032.1 2,284.0 2,001.9 2,174.1
Lease obligations (IAS 17 finance) 1,557.7 1,497.4 1,496.8 1,431.6
------------ ------------ ------------- ----------
Total non-current borrowings 3,589.8 3,781.4 3,498.7 3,605.7
Other non-current assets 263.8 276.2 256.4 270.5
The carrying and fair values at 30 September 2019 exclude newly
capitalised leases, that were previously classified as operating
leases under IAS 17, following adoption of IFRS 16.
Valuation hierarchy of financial instruments carried at fair value
The Group uses the following hierarchy for determining the fair
value of financial instruments by valuation technique:
* quoted prices (unadjusted) in active markets for
identical assets or liabilities (level 1)
* inputs other than quoted prices included within level
1 that are observable for the asset or liability,
either directly (that is, as prices) or indirectly
(that is, derived from prices) (level 2).
The fair value of financial instruments not traded in an active
market (level 2, for example over-the-counter derivatives) is determined
by using valuation techniques. A variety of methods and assumptions
are used based on market conditions existing at each balance sheet
date. Quoted market prices or dealer quotes for similar instruments
are used for long term debt. Other techniques, such as estimated
discounted cash flows, are used to determine fair value for the
remaining financial instruments. The fair value of interest rate
swaps is calculated as the present value of the estimated future
cash flows.
The Group's financial instruments are valued principally using
level 2 measures:
Unaudited
------------
Half year
ended Year ended
30 31 March
September
2019 2019
GBPm GBPm
Level 2 inputs
Assets
Derivatives used for hedging 5.9 6.5
Derivatives deemed held for trading - 75.8
------------ -------------
Total assets 5.9 82.3
Liabilities
Derivatives used for hedging 38.4 20.5
Derivatives deemed held for trading 0.4 0.5
------------ -------------
Total liabilities 38.8 21.0
PENNON GROUP PLC
Notes to the condensed half year financial information (continued)
16. Retirement benefit obligations
Defined benefit schemes
The principal actuarial assumptions were: the rate used to discount
schemes' liabilities and expected return on scheme assets of 1.80%
(March 2019 2.40%) and the inflation assumption of 3.10% (March
2019 3.30%).
Unaudited
------------------------------------------
Half year ended Year ended
30 September 2019 31 March 2019
Present Fair
Present Fair value value value
value of of plan of of plan
obligation assets Total obligation assets Total
GBPm GBPm GBPm GBPm GBPm GBPm
At beginning of
period (994.8) 934.0 (60.8) (948.0) 898.5 (49.5)
Amounts recognised
in the
income statement (13.9) 10.5 (3.4) (41.3) 23.8 (17.5)
Remeasurements
through
other
comprehensive
income (85.2) 76.9 (8.3) (37.4) 20.2 (17.2)
Company
contributions - 34.0 34.0 - 23.4 23.4
Benefits and
expenses
paid 20.4 (20.4) - 31.9 (31.9) -
At end of period (1,073.5) 1,035.0 (38.5) (994.8) 934.0 (60.8)
-------------- ------------ ------------ ------------- ---------- -------
Net pension liabilities decreased by GBP17.2m following the Group's
decision to voluntarily accelerate a significant proportion of
the planned deficit recovery payments.
Included within the total obligations and assets noted above are
defined benefit pension commitments in connection with the Greater
Manchester contract operated by Viridor. Upon cessation of the
Greater Manchester contract, Viridor employees on this contract
transferred to the new contract provider. Accordingly, defined
benefit pension commitments for these employees are in the process
of being transferred. Within 'amounts recognised in the income
statement' is the past service credit of GBP2.2m (H1 2018/19: GBPnil),
which reflects curtailment and other gains resulting from active
employees moving to deferred status in these pension schemes. Furthermore,
as a result of the contract termination a surplus amount relating
to one of the pension schemes associated with this contract now
becomes recoverable. Accordingly, a gain of GBP12.2m is included
within 'remeasurements through other comprehensive income'.
17. Capital expenditure
Unaudited
--------------------------
Half year
ended Year ended
30 September 31 March
2019 2019
GBPm GBPm
Property, plant and equipment
Additions 166.3 387.2
Net book value of disposals 13.7 2.6
Capital commitments
Contracted but not provided 204.6 201.0
PENNON GROUP PLC
Notes to the condensed half year financial information (continued)
18. Trade and other payables & other non-current liabilities
Unaudited
------------
Half year
ended Year ended
30 31 March
September
2019 2019
GBPm GBPm
Trade and other payables - current
Trade payables 99.0 127.6
Contract liabilities 9.9 10.3
Amounts owed to joint ventures 3.1 4.1
Other tax and social security 52.6 32.5
Accruals and other payables 119.7 123.5
284.3 298.0
------------ ---------------------------
Other non-current liabilities
Contract liabilities 119.6 116.1
Deferred income 7.0 7.5
Other payables 20.0 24.3
------------ ---------------------------
146.6 147.9
------------ ---------------------------
19. Contingencies
Contingent liabilities
Unaudited
---------------------------
Year
Half year ended ended
30 September 31 March
2019 2019
GBPm GBPm
Performance bonds 202.0 201.7
Guarantees in respect of performance bonds are entered into in
the normal course of business. No liability is expected to arise
in respect of the guarantees.
Other contractual and litigation uncertainties
The Group establishes provisions in connection with contracts
and litigation where it has a present legal or constructive obligation
as a result of past events and where it is more likely than not
an outflow of resources will be required to settle the obligation
and the amount can be reliably estimated. Matters where it is
uncertain that these conditions are met include a potential prosecution
by authorities such as the Health and Safety Executive.
Contingent assets
In addition to contractual recoveries related to our construction
contracts in respect of Glasgow Recycling and Renewable Energy
Centre that are reflected in the financial statements, there are
further possible recoveries that are contingent on events in the
future that are not wholly within the Group's control. These contingent
assets of GBP25m have not been recognised as at 30 September 2019.
Further details of this matter were provided in the Annual Report
and Accounts for the year ended 31 March 2019.
PENNON GROUP PLC
Notes to the condensed half year financial information (continued)
20. Related party transactions
The Group's significant related parties during the period were
its joint venture in Lakeside Energy from Waste Holdings Limited
and its joint venture in INEOS Runcorn (TPS) Holdings Limited,
for which disclosures were made in the Pennon Group plc Annual
Report and Accounts for the year ended 31 March 2019.
There were no material changes during the half year to September
2019 in the nature of transactions with these related parties.
21. Change in accounting policy on leases
Adjustments recognised on the adoption of IFRS 16
This note explains the impact of the adoption of IFRS 16 'Leases'
on the Group's financial statements, and it discloses the new
accounting policies that have been adopted from 1 April 2019,
where they are different from those applied in earlier periods.
On adoption of IFRS 16, the Group recognised lease liabilities
in relation to leases which had previously been classified as
'operating leases' under the principles of IAS 17 'leases'. These
liabilities were measured at the present value of the remaining
leases payments, discounted using the Group's weighted average
Incremental Borrowing Rate of 3.6%.
Following adoption of IFRS 16, the Group no longer distinguishes
between an on the balance sheet finance lease and an off the balance
sheet operating lease. For Leases previously classified as finance
leases, the Group recognised the carrying amount of leased assets
and lease liabilities immediately prior to transition as the carrying
amount of the right-of-use asset and lease liability at the date
of initial application. The measurement principles of IFRS 16
only apply after this date.
As permitted under IFRS 16 the Group will present right-of-use
assets and lease liabilities within property, plant and equipment
and borrowings respectively. This approach is consistent with
the Group's previous presentation of Finance leases under IAS
17.
At 31 March 2019 the Group had non-cancellable operating lease
commitments of GBP195.7m. These predominantly relate to leases
of properties occupied by the Group in the course of carrying
out its businesses.
On transition on 1 April 2019, the Group recognised the following
items in the balance sheet:
* right-of-use assets - increase by GBP107.7m
* prepayments - decrease by GBP0.5m
* lease liabilities - increase by GBP121.2m
* accruals - decrease by GBP4.4m
* deferred tax assets - increase by GBP1.6m
* retained earnings - decreased by GBP8.0m
PENNON GROUP PLC
Notes to the condensed half year financial information (continued)
21. Change in accounting policy on leases (continued)
A reconciliation of the lease liability recognised at 1 April
2019 to operating lease commitments at 31 March 2019 is shown
below:
GBPm
IAS 17 operating lease commitments 195.7
Less: contracts to which the short-term leases
exemption has been applied (0.1)
Less: contracts to which the low-value leases exemption
has been applied (1.6)
Add: adjustment due to different assessment of
lease term 0.6
Less: Impact of discounting at weighted average
discount rate of 3.6% (73.4)
--------
Operating Lease liabilities recognised at 31 March
2019 121.2
Add: finance lease liabilities recognised at 31
March 2019 1,560.4
--------
IFRS 16 lease liability as at 1 April 2019 1,681.6
--------
Of which:
Current lease liabilities 72.5
Non-current lease liabilities 1,609.1
--------
1,681.6
--------
Associated right-of-use assets for selected land and building
leases were measured on a retrospective basis as if the IFRS 16
had always applied from lease inception. All remaining right-of-use
assets were measured at the amount equal to the lease liability,
adjusted by prepaid or accrued lease payments under IFRS 16 transition
provisions relating to leases recognised on the balance sheet
at 31 March 2019.
A reconciliation between the opening lease liabilities and right-of-use
assets at 1 April 2019 is shown below:
GBPm
Lease liabilities following first application of
IFRS 16 121.2
Less: adjustment for onerous lease accruals (1.5)
Less: adjustment for other accruals (2.9)
Add: adjustment for prepaid lease rentals 0.5
Less: adjustment due to application of IFRS 16 at
lease inception (9.6)
------
Right-of-use assets on first application of IFRS
16 107.7
------
In applying IFRS 16 for the first time, the Group has used the
following practical expedients and made the following elections
permitted by the standard:
* the use of single discount rates to portfolios of
leases with similar characteristics
* reliance on previous onerous lease assessments
* account for operating leases with terms less than 12
months as at 1 April 2019 as short-term leases
* the application of hindsight, such as in determining
the lease term if the contract contains options to
extend or terminate the lease
* Applying the modified retrospective approach: the
cumulative effect of initially applying IFRS 16 has
been calculated as a reduction to retained profits at
1 April 2019 of GBP8.0m. Under this election no
restatement of comparative figures will be made
* Electing to apply the standard to contracts that were
previously identified as leases when applying IAS 17
PENNON GROUP PLC
Notes to the condensed half year financial information (continued)
21. Change in accounting policy on leases (continued)
A summary of opening and closing right-of-use assets are shown
below: As at As at
30 September 1 April
2019 2019
GBPm GBPm
Land and buildings 97.1 100.6
Infrastructure assets 357.6 360.2
Operational properties 340.6 344.4
Fixed and mobile plant, vehicles
and computers 381.0 368.0
Construction in progress 5.2 5.2
-------------- ---------
Total 1,181.5 1,178.4
-------------- ---------
The total value of right-of-use assets at 1 April 2019 and 30
September 2019 includes GBP1,070.7m and GBP1,077.5m respectively
of assets previously classified as 'held under finance leases'
within property, plant and equipment in accordance with IAS 17.
Based on the additional lease liability and associated assets
recognised at 1 April 2019 it is estimated that the impact on
profit for the year ended 31 March 2020 would be a reduction in
profit after tax of GBP1.0 million, resulting from:
* an increase in EBITDA of GBP13.9m
* an increase in depreciation of GBP10.9m
* an increase in finance costs of GBP4.1m; and
* a reduction in corporation tax of GBP0.1m.
EBITDA increased as operating lease costs previously charged against
EBITDA under IAS 17 has been replaced under IFRS 16 with charges
for depreciation and interest which are excluded from EBITDA (albeit
included in earnings). Short term and low value leasing costs
continue to be charged against EBITDA.
Net operating cashflows increased under IFRS 16 as the element
of cash paid attributable to the repayment of principal is included
in financing cashflows. The net increase / decrease in cash and
cash equivalents remains the unchanged.
Lease accounting policy
All leases are accounted for by recognising a right-of use-asset
and a lease liability except for:
* Low value assets; and
* Leases with a duration of twelve months or less
Operating leases under IAS 17
Contracts previously classified as 'operating leases' are measured
at the present value of contractual payments due to the lessor
over the lease term, with the discount rate determined by reference
to the rate inherent in the lease unless this is not readily determinable,
in which case the Group's incremental borrowing rate on commencement
of the lease is used.
PENNON GROUP PLC
Notes to the condensed half year financial information (continued)
21 Change in accounting policy on leases (continued)
After initial measurement lease payments are allocated between
the liability and finance cost. The finance cost is charged to
profit and loss over the lease period to produce a constant periodic
rate of interest on the remaining balance of the liability for
each period. The interest element of cash payments in respect
of these leases is included within interest payments in determining
net cash generated from operating activities. The capital element
of the cash payment is included within cash flows from financing
activities. Right-of-use assets are amortised on a straight-line
basis over the remaining term of the lease or the remaining economic
life of the asset if shorter.
When the Group revisits its estimate of lease term (because, for
example, it re-assesses an extension option), it adjusts the carrying
amount of the lease liability to reflect the payments to make
over the revised term, which is discounted at the same discount
rate that applied on lease commencement. In these circumstances
an equivalent adjustment is made to the carrying value of the
right-of-use asset, with the revised carrying amount being amortised
over the remaining (revised) lease term.
Finance leases under IAS 17
Accounting for assets and liabilities previously accounted for
as 'finance leases' under IAS 17 will not be impacted.
Pennon Group plc
Registered Office : Registered in England No 2366640
Peninsula House
Rydon Lane
Exeter
EX2 7HR
pennon-group.co.uk
PENNON GROUP PLC
DIRECTORS' RESPONSIBILITIES STATEMENT
The Directors named below confirm on behalf of the Board of Directors
that this unaudited condensed half year financial information has
been prepared in accordance with IAS 34 "Interim financial reporting"
as adopted by the European Union and to the best of their knowledge
the interim management report herein includes a fair review of the
information required by DTR 4.2.4, DTR 4.2.7R and DTR 4.2.8R of the
Disclosure and Transparency Rules, being an indication of important
events that have occurred during the period and their impact on the
unaudited condensed half year financial information; a description
of the principal risks and uncertainties for the remaining six months
of the current financial year; and the disclosure requirements in
respect of material related party transactions.
The Directors are responsible for the maintenance and integrity of
the Company's website. Legislation in the United Kingdom governing
the preparation and dissemination of financial information may differ
from legislation in other jurisdictions.
The Directors of Pennon Group plc at the date of the signing of this
announcement and statement are:
Sir John Parker
Gill Rider
Neil Cooper
Iain Evans
Claire Ighodaro
Chris Loughlin
Susan Davy
For and on behalf of the Board of Directors who approved this half
year report on 25 November 2019.
C Loughlin S J Davy
Group Chief Executive Officer Chief Financial Officer
INDEPENT REVIEW REPORT TO PENNON GROUP PLC
Introduction
We have been engaged by the Company to review the condensed consolidated
set of financial statements in the half-yearly financial report for
the six months ended 30 September 2019 which comprises the Consolidated
income statement, the Consolidated statement of comprehensive income,
the Consolidated balance sheet, the Consolidated statement of changes
in equity, the Consolidated statement of cash flows and related notes.
We have read the other information contained in the half yearly financial
report and considered whether it contains any apparent misstatements
or material inconsistencies with the information in the condensed
set of financial statements.
This report is made solely to the company in accordance with guidance
contained in International Standard on Review Engagements 2410 (UK
and Ireland) "Review of Interim Financial Information Performed by
the Independent Auditor of the Entity" issued by the Auditing Practices
Board. To the fullest extent permitted by law, we do not accept or
assume responsibility to anyone other than the company, for our work,
for this report, or for the conclusions we have formed.
Directors' Responsibilities
The half-yearly financial report is the responsibility of, and has
been approved by, the directors. The directors are responsible for
preparing the half-yearly financial report in accordance with the
Disclosure Guidance and Transparency Rules of the United Kingdom's
Financial Conduct Authority.
As disclosed in note 2, the annual financial statements of the Group
are prepared in accordance with IFRSs as adopted by the European Union.
The condensed set of financial statements included in this half-yearly
financial report has been prepared in accordance with International
Accounting Standard 34, "Interim Financial Reporting", as adopted
by the European Union.
Our Responsibility
Our responsibility is to express to the Company a conclusion on the
condensed set of financial statements in the half-yearly financial
report based on our review.
Scope of Review
We conducted our review in accordance with International Standard
on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial
Information Performed by the Independent Auditor of the Entity" issued
by the Auditing Practices Board for use in the United Kingdom. A review
of interim financial information consists of making enquiries, primarily
of persons responsible for financial and accounting matters, and applying
analytical and other review procedures. A review is substantially
less in scope than an audit conducted in accordance with International
Standards on Auditing (UK) and consequently does not enable us to
obtain assurance that we would become aware of all significant matters
that might be identified in an audit. Accordingly, we do not express
an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes
us to believe that the condensed set of financial statements in the
half-yearly financial report for the six months ended 30 September
2019 is not prepared, in all material respects, in accordance with
International Accounting Standard 34 as adopted by the European Union
and the Disclosure Guidance and Transparency Rules of the United Kingdom's
Financial Conduct Authority.
Ernst & Young LLP
Leeds
25 November 2019
Alternative performance measures
Alternative performance measures (APMs) are financial measures
used in this report that are not defined by International Financial
Reporting Standards (IFRS). The Directors believe that these APMs
assist in providing additional useful information on the underlying
trends, performance and position of the Group as well as enhancing
the comparability of information between reporting periods. As the
Group defines the APMs they might not be directly comparable to
other companies' APMs. They are not intended to be a substitute
for, or superior to, IFRS measurements.
(i) Underlying earnings
Underlying earnings are presented alongside statutory results as
the Directors believe they provide a more useful comparison on
business trends and performance. Note 5 in the condensed half year
financial information provides more detail on non-underlying items,
and a reconciliation of underlying earnings for the current year
and the prior year is as follows:
Underlying earnings reconciliation Non-underlying
30 September 2019 items
Pension Derivative Earnings
past service fair value Statutory per share
GBPm Underlying credit movement results (p)
EBITDA (see below) 283.9 2.2 - 286.1
Operating profit 180.7 2.2 - 182.9
Profit before tax 142.9 2.2 18.0 163.1
Taxation (24.4) (0.4) (4.8) (29.6)
---------- ------------- ----------- ----------
Profit after tax (PAT) 118.5 1.8 13.2 133.5
PAT attributable to perpetual
capital holders 7.0
Non-controlling interests (0.1)
----------
PAT attributable to shareholders 126.6 30.1
Deferred tax before non-underlying
items 15.6 3.8
Non-underlying items post tax (15.0) (3.6)
Proportional adjustment on perpetual
capital returns 3.5 0.8
---------- ----------
Underlying earnings 130.7 31.1
---------- ----------
Underlying earnings reconciliation Non-underlying
30 September 2018 item
Derivative Earnings
fair value Statutory per share
GBPm Underlying movement results (p)
EBITDA (see below) 274.0 - 274.0
Operating profit 178.5 - 178.5
Profit before tax 142.5 (8.9) 133.6
Taxation (19.3) 1.7 (17.6)
---------- ------------- -----------
Profit after tax (PAT) 123.2 (7.2) 116.0
PAT attributable to perpetual
capital holders 8.6
Non-controlling interests (0.1)
-----------
PAT attributable to shareholders 107.5 25.6
Deferred tax before non-underlying
items 6.9 1.7
Non-underlying items post tax 7.2 1.7
Proportional adjustment on perpetual
capital returns 4.3 1.0
----------- ----------
Underlying earnings 125.9 30.0
----------- ----------
Alternative performance measures (continued)
(ii) EBITDA
EBITDA (Earnings before interest, tax, depreciation and
amortisation) is used to assess and monitor operational underlying
performance. An adjusted EBITDA is also presented that includes
Viridor's share of EBITDA from its joint ventures and finance
income on service concession arrangements. This measure is
presented to aggregate earnings from all the Viridor ERFs which are
accounted for differently depending upon the contractual
relationships, as shown in the reconciliation below.
Adjusted EBITDA reconciliation
Half year ended Half year
30 September ended 30 September
2019 2018
GBPm GBPm GBPm
Statutory EBITDA 286.1 274.0
Non-underlying items (2.2) -
Underlying EBITDA 283.9 274.0
IFRIC 12 interest receivable(1) 7.4 7.3
Joint venture EBITDA(1) 20.2 13.4
Adjusted EBITDA 311.5 294.7
--------------- -------------------
(1) These adjustments relate to the waste management business,
resulting in adjusted waste management EBITDA of GBP120.0m (H1
2018/19 GBP99.1m).
Alternative performance measures (continued)
(iii) Consistent accounting basis financial performance
From 1 April 2019 the new accounting standard IFRS 16 'Leases'
has been adopted, which results in all leases, whether operating or
financing leases under the previous IAS 17 classifications, being
treated on a consistent basis within the reported results with the
lease being recognised as a liability on the balance sheet along
with an associated right of use asset, subject to limited
exceptions for short term leases and leases of low value assets, as
explained in note 21. As the new standard is effective from 1 April
2019 and the Group has elected to apply the modified retrospective
transition approach, our reported results for H1 2018/19 are not
restated and reflect pre-IFRS16 accounting standards. For the
current financial year FY 2019/20 only, to aid the comparability of
reported results with the prior period, the impact of IFRS 16 has
been excluded as shown in the reconciliation below to provide
performance comparison to the previous reporting period on a
consistent accounting basis. These results on a consistent
accounting basis are referred to throughout this document.
Half year Half year Half year Half year Change
ended 30 ended 30 ended 30 ended 30 (excluding
September September September September IFRS 16
2019 2019 2019 2018 impact)
Income statement (excluding (IFRS 16
Underlying IFRS 16 Impact)
GBPm impact)
Revenue 712.4 712.4 - 746.7 (4.6%)
Operating costs (428.5) (435.6) 7.1 (472.7) +7.8%
EBITDA 283.9 276.8 7.1 274.0 +1.0%
Water 190.6 189.7 0.9 194.7 (2.6%)
Waste management 92.4 86.2 6.2 78.4 +9.9%
Non-household retail 0.9 0.9 - 0.9 -
Depreciation (103.2) (97.3) (5.9) (95.5) (1.9%)
---------- ----------- ---------- ---------- -----------
Operating profit 180.7 179.5 1.2 178.5 +0.6%
Water 131.5 131.3 0.2 135.9 (3.4%)
Waste management 48.7 47.7 1.0 42.1 +13.3%
Non-household retail 0.6 0.6 - 0.5 +20.0%
Other (0.1) (0.1) - - -
Interest (45.1) (43.1) (2.0) (40.8) (5.6%)
Share of post-tax profit from
joint ventures 7.3 7.3 - 4.8 +52.1%
---------- ----------- ---------- ---------- -----------
Profit before tax (PBT) 142.9 143.7 (0.8) 142.5 +0.8%
Water 96.2 96.6 (0.4) 100.3 (3.6%)
Waste management 41.5 41.9 (0.4) 36.2 +15.7%
Non-household retail (0.3) (0.3) - (0.5) (40.0%)
Other 5.5 5.5 - 6.5 (15.4%)
Tax (24.4) (24.4) - (19.3) (26.4%)
---------- ----------- ---------- ---------- -----------
Profit after tax (PAT) 118.5 119.3 (0.8) 123.2 (3.2%)
---------- ----------- ---------- ---------- -----------
Alternative performance measures (continued)
(iii) Consistent accounting basis financial performance
(continued)
As at 30 As at 30 As at 30 As at 31 Change
September September September March 2019
2019 2019 2019
(excluding (IFRS 16 (excluding
IFRS 16 impact) IFRS 16
Balance sheet impact)
GBPm Impact)
Non-current assets 5,471.6 5,367.6 104.0 5,364.5 +0.1%
Current assets 1,058.4 1,058.9 (0.5) 1,095.0 (3.3%)
Current liabilities (457.8) (453.2) (4.6) (511.1) +11.3%
Borrowings (124.9) (115.9) (9.0) (150.4) +22.9%
Other current liabilities (332.9) (337.3) 4.4 (360.7) +6.5%
Net current assets 600.6 605.7 (5.1) 583.9 3.7%
Non-current liabilities (4,463.4) (4,355.7) (107.7) (4,268.6) (2.0%)
Borrowings (3,699.1) (3,589.8) (109.3) (3,498.7) (2.6%)
Other non-current liabilities (764.3) (765.9) 1.6 (769.9) (0.5%)
Net assets 1,608.8 1,617.6 (8.8) 1,679.8 (3.7%)
As at 30 As at 30 As at 30 As at 31 Change
September September September March 2019
2019 2019 2019
(excluding (IFRS 16 (excluding
IFRS 16 impact) IFRS 16
impact)
Net debt Impact)
Net debt 3,296.0 3,177.7 118.3 3,079.5 3.2%
(iv) Effective interest rate
A measure of the mean average interest rate payable on the
Group's net debt, which excludes interest costs not directly
associated with Group net debt. This measure is presented to assess
and monitor the relative cost of financing for the Group.
Half year Half year
ended 30 September ended 30 September
2019 2018
Net finance costs after non-underlying items 27.1 49.7
Exclude impact of IFRS 16 (shown above) (2.0) -
Non-underlying net finance costs 18.0 (8.9)
Interest receivable on shareholder loans to joint
ventures 3.4 2.5
Net interest on retirement benefit obligations (0.8) (0.9)
Unwinding of discounts on provisions (5.0) (5.4)
Interest receivable on service concession agreements 7.4 7.3
Capitalised interest 6.1 8.3
------------------- -------------------
Net finance costs for effective interest rate calculation 54.2 52.6
Opening net debt 3,079.5 2,801.5
Closing net debt (excluding the impact of IFRS 16) 3,177.7 3,041.9
------------------- -------------------
Average net debt (opening net debt + closing net
debt divided by 2) 3,128.6 2,921.7
------------------- -------------------
Effective interest rate 3.5% 3.6%
------------------- -------------------
Alternative performance measures (continued)
(v) Interest cover
Underlying net finance costs (excluding pensions net interest
cost, discount unwind on provisions and IFRIC 12 interest
receivable on service concession arrangements) divided by Group
operating profit before non-underlying items.
Half year ended Half year
30 September ended 30 September
2019 2018
Net finance costs after non-underlying items 27.1 49.7
Exclude impact of IFRS 16 (shown above) (2.0) -
Non-underlying net finance costs 18.0 (8.9)
Net interest on retirement benefit obligations (0.8) (0.9)
Unwinding of discounts in provisions (5.0) (5.4)
Interest receivable on service concession arrangements 7.4 7.3
--------------- -------------------
Net finance costs for interest cover calculation 44.7 41.8
Operating profit before non-underlying items (excluding
IFRS 16 impact) 179.5 178.5
--------------- -------------------
Interest cover (times) 4.0 4.4
--------------- -------------------
(vi) Capital investment
Property, plant and equipment additions plus IFRIC 12 service
concession expenditure (ERFs) less landfill restoration asset
(spend accounted for through provisions). The measure is presented
to assess and monitor the total capital investment by the
Group.
Half year ended Half year
30 September ended 30 September
2019 2018
Additions to property, plant and equipment 166.3 192.6
Landfill restoration asset (3.1) -
IFRIC 12 additions to other intangible assets -
service concession agreements - 1.9
IFRIC 12 additions to non-current assets - service
concession agreements 8.8 6.1
IFRIC 12 additions to current trade and other receivables
- prepayments and accrued income - 2.9
less: IFRIC 12 additions subject to legal contractual
process - (2.9)
--------------- -------------------
Capital investment 172.0 200.6
--------------- -------------------
(vii) Capital payments
Payments for property, plant and equipment additions net of
proceeds from sale of property, plant and equipment plus IFRIC 12
service concession expenditure (ERFs). The measure is presented to
assess and monitor the net cash spend on property, plant and
equipment.
Half year ended Half year
30 September ended 30 September
2019 2018
Cash flow statements: purchase of property, plant
and equipment 194.7 181.9
Cash flow statements: proceeds from sale of property,
plant and equipment (10.6) (0.5)
IFRIC 12 additions to other intangible assets -
service concession agreements - 1.9
IFRIC 12 additions to non-current assets - service
concession agreements 8.8 6.1
IFRIC 12 additions to current trade and other receivables
- prepayments and accrued income - 2.9
--------------- -------------------
Capital payments 192.9 192.3
--------------- -------------------
Alternative performance measures (continued)
(viii) Operational cash inflows
Cash generated from operations before construction spend on
service concession agreements, pension contributions and other tax
payments.
Half year ended Half year ended
30 September 30 September
2019 2018
Cash generated from operations per cash flow
statements 244.2 151.7
IFRIC 12 additions to other intangible assets
- service concession agreements - 1.9
IFRIC 12 additions to non-current assets - service
concession agreements 8.8 6.1
IFRIC 12 additions to current trade and other
receivables - prepayments and accrued income - 2.9
Pension contributions 37.9 8.5
Other tax payments (1) 48.9 51.2
Payment in respect of terminated synthetic derivative,
related to a prior period non-underlying charge - 44.3
--------------- ---------------
Operational cash inflows 339.8 266.6
--------------- ---------------
(1) Other taxes include business rates, employers' national
insurance, fuel excise duty, carbon reduction commitment,
environmental payments, climate change levy and external landfill
tax.
^ Measures with this symbol ^ are defined in the Alternative
Performance Measures (APMs) as outlined on pages 68 to 73.
[1] Change in performance is calculated on a consistent
accounting basis by removing the impact of implementing IFRS 16
leases on the performance measure. A full reconciliation of the
statutory reported results to the adjusted results is included in
Item (iii) in the Alternative Performance Measures on pages 70 to
71.
[2] Non-underlying items are adjusted for by virtue of their
size, nature or incidence to enable a full understanding of
financial performance
[3] EPS before deferred tax, non-underlying items and
proportionately adjusted for the return on the perpetual capital
securities (Note 8)
[4] The RPI rate used is 2.4% as of 30 September 2019.
[5] Source: Tolvik, Defra, SEPA, NRW, MSW and Viridor analysis
net of Refuse Derived Fuel (RDF) export analysis
[6] Non-underlying items are adjusted for by virtue of their
size, nature or incidence to enable a full understanding of the
Group's financial performance
[7] EPS before deferred tax, non-underlying items and
proportionately adjusted for the return due on the perpetual
capital securities
[8] Weighted average number of shares for H1 2019/20 of 420.0
million (H1 2018/19 419.3 million)
[9] The RPI rate used is 2.4% as of 30 September 2019
[10] Including construction spend related to service concession
arrangements net of amounts subject to legal contractual
process
[11] GBP5.2 million net tax charge: GBP16.3 million current tax
charge and GBP11.1 million deferred tax credit
[12] Total tax contribution includes landfill tax collected and
borne, VAT, business rates, employment taxes, corporation tax, fuel
excise duty, carbon reduction commitment, environmental payments
and climate change levy
[13] Total tax includes corporation tax, business rates,
employers' national insurance, fuel excise duty, carbon reduction
commitment, environmental payments, climate change levy and
external landfill tax
[14] Includes net proceeds from sale of property, plant and
equipment and spend on service concession arrangements (before
amounts subject to legal contractual process)
[15] Based on Regulatory Capital Value (RCV) at 31 March 2019
and South West Water group net debt (excluding the impact of IFRS
16). Regulatory gearing is 65.8% at 30 September 2019 (62.1% at 30
September 2018)
[16] Including construction spend relating to service concession
arrangements, capitalised interest of GBP6.1 million (H1 2018/19
GBP8.3 million), ERF maintenance, net of amounts subject to legal
contractual process
[17] Infrastructure spend (IRE) was GBP11.7 million capital and
GBP6.3 million operating expenditure
[18] Including landfill tax and construction spend on service
concession arrangements
[19] Ongoing capital and operational maintenance underlying
future average rate of 3.5% of capital spend
[20] ERF availability is an average weighted by site capacity,
including 100% of joint ventures
[21] RDF - Refuse Derived Fuel
[22] Net of RDF export forecast
[23] Based on Viridor forecasts and an illustrative 300kt
plant
[24] Defra UK statistics on waste - 2019
[25] 75% recycling rate for plastics packaging by 2030 subject
to consultation - UK Government Resources and Waste Strategy
[26] 2025 capacity gap of 1,141kt based on Wrap forecast of
2,410kt plastic packaging placed on the market and a forecast
implied recycling rate of 67%
[27] Source: Edelman intelligence for Viridor, 2,500 UK general
population - July 2019
[28] Includes wholesale revenue for non-household customers
[29] Net tariff increase reflects the net position post
Wholesale Revenue Forecast Incentive Mechanism (WRFIM) pass back of
GBP9.0 million for H1 2019/20
[30] Bespoke ODIs, unique rewards for South West Water with up
to GBP68 million reward, up to GBP66 million of rewards for common
ODIs where performance is currently upper quartile or above
industry average and ODIs which are an area of focus for
improvement reflect a penalty up to GBP28 million.
[31] Based on Draft Determination published in April 2019
[32] PWN Technologies
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END
IR UVRORKRAAUUA
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