TIDMPNN
RNS Number : 9127O
Pennon Group PLC
04 June 2020
4 June 2020
Full Year Results 2019/20
Strategic value realised through sale of Viridor,
well positioned for new regulatory delivery period
Pennon, one of the UK's largest environmental infrastructure
groups, is issuing its Full Year Results for the year ended 31
March 2020.
Solid 2019/20 performance
-- We continue to do all we can to support our employees, customers and communities through this unprecedented COVID-19 pandemic, with the vast majority of operations continuing as usual
-- Pennon is well positioned with strong funding and liquidity
of GBP1.6 billion, prior to receipt of net cash proceeds from
Viridor sale, to weather ongoing uncertainty
-- Solid financial and operational performance across the Group,
in line with management expectations, delivering for all our
stakeholders, well positioned for K7 (2020-25)
-- South West Water finished K6 (2015-20) with sector leading cumulative RORE [1] of 11.8%
-- Viridor has performed well, successfully delivering key priorities and growth investment
-- Delivering on dividend commitment for 2019/20, announcing a
sustainable 2020-25 dividend policy for the Continuing Group of
CPIH [2] +2% per annum
Financial impact of COVID-19
-- Financial impacts for 2019/20 focused on expected credit
losses (ECL) - related to customer debt - provision of GBP9.0
million across the Pennon Group
-- Pennon Water Services not requiring deferral of wholesale
payments at this stage - a number of other retailers taking
advantage of wholesaler regulatory support
-- Impact for 2020/21 - assumes a three month lockdown with ramp-up over the remaining year
o non-household revenue expected to reduce, offset by increased
household demand
o risk from ECL for businesses, retailers and households.
Support schemes to mitigate impacts
o Viridor resilient through ERF contracts
Sale of Viridor on track for early summer completion
-- Sale of Viridor to KKR [3] for an Enterprise Value of GBP4.2
billion representing an EV / EBITDA multiple of 18.5x [4]
-- Shareholder approval and European Commission merger clearance
received, now finalising the last condition precedent
-- Net cash proceeds expected to be GBP3.7 billion ([5]) , to be
used to reduce Pennon company borrowings, reduce the pension
deficit, retain headroom for future value creating opportunities,
and make a return to shareholders
-- Following the sale of Viridor, Pennon will focus on its
sector leading water and wastewater businesses and will continue to
pursue growth within the UK water industry.
Financial Highlights
Continuing Group Continuing Group and Viridor
Underlying ^ 2019/20 2018/19 2019/20 2018/19 Change
Revenue GBP636.7m GBP632.6m GBP1,389.9m GBP1,478.2m (6.0%)
EBITDA ^ GBP365.3m GBP367.3m GBP563.4m GBP546.2m +3.1%
Adjusted EBITDA ^ GBP365.3m GBP367.3m GBP619.8m GBP592.7m +4.6%
Operating profit GBP245.5m GBP250.1m GBP361.5m GBP351.0m +3.0%
Profit before tax (PBT) GBP183.0m GBP191.7m GBP287.6m GBP280.2m +2.6%
------------------------------------ ----------- ----------- ------------ ------------ ---------
Non-underlying items before GBP10.1m GBP9.7m GBP13.9m (GBP19.9m) -
tax [6]
Profit before tax GBP193.1m GBP201.4m GBP301.5m GBP260.3m +15.8%
Tax (GBP70.6m) (GBP32.8m) (GBP95.2m) (GBP37.7m) (152.5%)
Discontinued Operations GBP83.8m GBP54.0m
Profit for the Year GBP206.3m GBP222.6m GBP206.3m GBP222.6m (7.3%)
Statutory earnings per
share 47.7p 51.1p 47.7p 51.1p (6.7%)
* From continuing operations 27.7p 38.2p
Adjusted earnings per share
[7] 61.7p 57.8p 61.7p 57.8p +6.7%
Dividend per share [8] 43.77p 41.06p 43.77p 41.06p +6.6%
IFRS 16: Leases
From 1 April 2019 the Group adopted the new accounting standard
IFRS 16: Leases resulting in a marginal net impact on the income
statement. A full reconciliation is included in note 15 on pages 62
to 65 of this announcement.
Continuing Group
On 18 March 2020, the Group entered into a formal sale agreement
to dispose of Viridor to Planets UK Bidco Limited (Bidco), a newly
formed company established by funds advised by Kohlberg Kravis
Roberts & Co. L.P. (KKR). In accordance with IFRS 5
'Non-current assets held for sale and discontinued operations', the
operations of Viridor have been classified as discontinued
operations in both the current and prior year. The 'Continuing
Group' consists of South West Water, Pennon Water Services and
Pennon Group (the Company).
The results of the Continuing Group compared to 2018/19
reflect:
-- Revenue up marginally, from GBP632.6 million to GBP636.7
million as growing retail revenues from Pennon Water Services from
outside of South West Water's operational region offsets lower
wholesale revenues from South West Water due to weather driven
reduced demand
-- EBITDA is marginally lower at GBP365.3 million from GBP367.3
million, reflecting the mix of margin on retail and wholesale
revenues, with South West Water's wholesale margin reducing as a
result of lower customer consumption
-- Profit before tax reduces by GBP8.7 million from GBP191.7
million to GBP183.0 million reflecting lower EBITDA, increased
depreciation on asset growth and higher absolute interest
-- Non-underlying items of GBP10.1 million reflect the gain from
efficient financing, net of COVID-19 related ECL adjustments
-- Tax of GBP70.6 million (increased from GBP32.8 million)
primarily reflects the change in the legislated tax rate from 17%
up to 19% which has increased the deferred tax charge
-- Discontinued operations of GBP83.8 million (up from GBP54.0
million) reflects the delivery of growth and expansion of Energy
Recovery Facilities in Viridor
-- Adjusted earnings per share up +6.7% to 61.7p, statutory
earnings per share down (6.7%) to 47.7p reflecting the deferred tax
charge from changes in enacted headline rates
-- Dividend per share up +6.6% to 43.77p.
To aid the comparability of reported results year on year, the
figures and narrative in this statement will focus primarily on the
results of the aggregate Continuing Group and Viridor. A full
reconciliation of the statutory reported results is included in
Item (i) in the Alternative Performance Measures on pages 67 to 72
of this announcement.
Continuing Group and Viridor
-- As expected, Group revenue reduced 6.0% to GBP1,389.9
million, reflecting the exit from Viridor's Greater Manchester
contract and lower demand at South West Water due to weather driven
lower volume consumption by customers
-- Underlying profit before tax increased +2.6% to GBP287.6
million, supported by efficiencies across the Group and earnings
growth from Energy Recovery Facilities (ERF) at Viridor
-- Profit before tax for the year increased +15.8% to GBP301.5
million, due to efficient financing providing a non-underlying
gain
-- The increase in the tax charge largely reflects the deferred
tax impact of the Government's decision not to go ahead with the
planned reduction in corporation tax rate from 19% to 17%
-- Adjusted earnings per share up +6.7% to 61.7p, statutory
earnings per share down (6.7%) to 47.7p reflecting the deferred tax
charge from changes in enacted headline tax rates
-- Dividend per share up +6.6% to 43.77p
-- Group has GBP1.6 billion of cash and committed facilities
providing strong liquidity and funding
o GBP840 million of new or renewed finance was raised in
2019/20, including GBP245 million of funding through the
Sustainable Financing Framework for South West Water.
OUTLOOK
Completion of the Viridor disposal is expected early summer
2020, following which the Continuing Group of South West Water and
Pennon Water Services and Pennon Group (the Company) will be a UK
focused water infrastructure group.
Entering the new K7 regulatory period (2020-25), South West
Water is the only water and wastewater company to have achieved
fast-track status for two consecutive price reviews. Work is
underway to deliver the commitments in the Business Plan focusing
on cost base efficiency, operational performance, customer service
and sustainable growth. South West Water is focused on providing
services in the most efficient and sustainable way, using
innovation and new technologies to serve its customers, communities
and the environment.
Chris Loughlin, Pennon Chief Executive, commented:
"We are pleased with the solid operational and financial
performance delivered this year. Viridor has continued to drive
growth while South West Water has maintained its sector leading
returns. In these uncertain and difficult times arising from the
COVID-19 pandemic we would like to thank all our employees across
the Group for the incredible hard work and dedication that has
contributed to this performance. The health, safety and wellbeing
of our employees and customers is paramount and continues to be our
number one priority.
The performance for 2019/20 underpins the dividend of 43.77p per
share.
It has been a landmark year for Pennon, culminating in the
announcement in March of the proposed sale of Viridor to KKR for an
Enterprise Value of GBP4.2 billion. Viridor has become a leader in
engineering excellence, new technology and tackling environmental
challenges, and the transaction recognises the strategic value that
has been created over many years, accelerating the realisation of
that value for shareholders.
Following the sale, Pennon will be a leading UK-focused water
infrastructure group, delivering for customers and providing
services in the most efficient and sustainable way possible. We are
pleased to announce our Continuing Group dividend policy of CPIH +
2% growth per annum through to 2025, with additional returns to
shareholders to come from the sale of Viridor."
Presentation of Results
A presentation of these results hosted by Chris Loughlin, Chief
Executive Officer and Susan Davy, Chief Financial Officer will be
available on our website
www.pennon-group.co.uk/investor-information at 09.00am BST, today 4
June 2020.
We will be hosting a live Q&A session from 10:00am via
conference call. Please click this link to register for the
conference call.
For further information, please contact:
Chief Financial Officer
Susan Davy Director of Corporate Affairs & Investor
Sarah Moody Relations
Jennifer Cooke Investor Relations Manager 01392 443 168
James Murgatroyd
Harry Worthington Finsbury 020 7251 3801
PENNON BUSINESS REVIEW
Notwithstanding the challenging backdrop of the COVID-19
pandemic, Pennon has maintained its positive momentum through
2019/20 delivering solid performance in both water and waste as we
enter the new K7 (2020-25) period. On 18 March 2020 we announced
the sale of Viridor to KKR for GBP4.2 billion which the Board
unanimously believe realises the full strategic value that Pennon
has developed and nurtured in Viridor over many years, and the
realisation of that value for shareholders.
COVID-19
Operational impact of COVID-19
In these unprecedented times, arising from the COVID-19
pandemic, the health, safety and wellbeing of our employees and
customers is paramount and remains our number one priority.
Following the latest Government and Public Health guidance, we have
strict precautions in place at our sites including enhanced levels
of cleaning, additional hygiene facilities and protective personal
equipment, and social distancing. The majority of our employees are
designated key workers and are delivering the best possible service
to customers during this challenging time. Enhanced precautions and
safety checks have been established and only critical customer
visits are taking place. We know that this is a difficult time for
our customers and we have stepped up our support for those in
vulnerable circumstances, including a dedicated COVID-19 priority
services register and extending our support schemes for customers
who struggle to pay their bills.
Financial impact of COVID-19
The financial impact of COVID-19 on our 2019/20 financial
results have been limited to the expected credit losses (ECL) on
our customer debt across the Group (GBP9.0 million provision
recognised) with the largest impact for non-household business
customers of c.GBP5.0 million. There has been no significant
additional Totex impact as a result of the pandemic to date.
During lockdown South West Water has seen a change in customer
demand with a decline in wholesale demand from businesses (c.20%),
particularly those within hospitality and retail sectors, net of
increased residential demand (c.5%) as people remain at home during
this period with c.84% of our customers on a meter. We continue to
monitor these impacts closely, however any net shortfall in
household and non-household demand would be recovered through
existing regulatory mechanisms.
The extent of the impact of COVID-19 on the UK economy remains
uncertain with the risk of ECL from business and commercial
customers increasing during and following lockdown, although post
year end cash collections have remained strong and Pennon Water
Services has not taken advantage of wholesaler regulatory support
through deferral of any payments at this stage.
The strong collections performance for household customers and
use of our social tariff and support schemes has successfully
reduced our bad debt costs in recent years. We believe these
support measures and our continued focus on collections will help
mitigate the financial impacts of COVID-19.
The strong local authority contracted position in Viridor
provides resilience to the underlying business, with strong ERF
performance mitigating the volume impact from commercial &
industrial customers in collections, landfill and recycling.
Solid financial and operational performance
South West Water finished the K6 (2015-20) regulatory period
with a sector leading return on regulated equity (RORE) and the
successful conclusion of the 2019 Price Review process (PR19). As a
result, South West Water began the K7 (2020-25) regulatory period
as the only company to have achieved fast-track status for its
Business Plan in two consecutive 5-year Price Reviews.
Over K6 South West Water has transformed performance in many key
operational areas and is focused on delivering for customers and
targeting environmental performance improvements.
Pennon Water Services has sustained its position in the
competitive market providing high quality customer services, whilst
improving its profitability through growth in value added services
and reducing the unit cost to serve through automation,
self-service and efficiency.
This has been an important year for Viridor operationally, as
the most recent ERFs at Glasgow, Beddington and Dunbar have moved
through their ramp-up phases and the construction at Avonmouth ERF
has progressed with commissioning underway.
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 funds, savings, charities, individuals
and employees, with over half of South West Water's employees being
shareholders.
Crystallising value from the sale of Viridor
Over recent years, the Board has closely monitored the market
value of the Group and its component parts. It has been clear for
some time that the fundamental value of Viridor was not fully
reflected in Pennon's share price. In addition, given the strong
financial performance and operational progress of the Group, the
Board announced in September 2019 that it was an appropriate time
to conduct a review of the strategic focus, growth options and
capital allocation policy for the Group.
The sale of Viridor recognises the full strategic value that
Pennon has developed and nurtured in Viridor over many years and
accelerates the realisation of that value for shareholders. The
Board carefully considered the wider implications of the deal and
agreed unanimously that the transaction was in the best interests
of shareholders and key stakeholders.
The sale of Viridor for an enterprise value of GBP4.2 billion
was approved by Shareholders on 28 May 2020 and European Commission
merger clearance has been received. We are finalising the last
condition precedent ahead of an expected completion in early
summer.
Pennon has strategically invested in Viridor since 1993,
creating a de-risked infrastructure model across a complementary
portfolio of assets, underpinned by long-term, index linked
contracts. Viridor's ability to capitalise on economic and market
trends has delivered consistent growth and we look forward to
seeing how the business develops through its next phase under new
ownership.
Dividend policy
The Board has evaluated the Group's dividend for 2019/20 in
light of the COVID-19 pandemic and has concluded that it is
appropriate for Pennon to continue to deliver on its dividend
commitment. The Group has significant cash and liquidity of GBP1.6
billion (prior to receipt of net cash proceeds from the sale of
Viridor), has not received any Government support measures and
continues to progress our WaterShare+ scheme which will see c.GBP20
million of benefit shared with customers through a customer rebate
or a stake in the business through Pennon shares. In addition, the
majority of Pennon's shareholders are UK based pension funds,
charities, employees, customers and other retail holders who rely
on this income.
For 2019/20, the Board has recommended a final dividend of
30.11p, subject to shareholder approval at the Annual General
Meeting on 31 July 2020. Together with the interim dividend of
13.66p, this will result in a total dividend of 43.77p, an increase
of +6.6% from last year. This is in line with our dividend policy
for 2010-2020 of Retail Price Index (RPI) +4% growth per annum,
which has been achieved whilst investing more than GBP3.6 billion
in our businesses over the past 10 years. Pennon offers
shareholders the opportunity to invest their dividend in a Dividend
Reinvestment Plan (DRIP).
The crystallisation of the Viridor sale is equivalent to 22.66p
per share of the recommended 2019/20 dividend. This implies a
Continuing Group dividend (after excluding Viridor) of 21.11p per
share.
The Board intends to use the c.GBP3.7 billion of net cash
proceeds to reduce Pennon's company borrowings and pension deficit,
retain some funds for future opportunities, and make a return to
shareholders. Details of additional returns to shareholders from
the sale of the Viridor business will be announced in due
course.
Pennon's dividend policy for 2020-25 for the re-based Continuing
Group will be growth of CPIH + 2% per annum, from an implied
Continuing Group dividend for 2019/20 of 21.11p per share. The
shift from the existing policy of linking the growth in dividend
from RPI to CPIH reflects the change in the regulatory model for
South West Water, matching allowed revenues.
The re-based dividend reflects the sector leading position of
the Continuing Group, with expectations for outperformance on
financing and Totex supporting the sustainable dividend growth
policy and dividend cover.
Final dividend payment information
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 payment date
*These dates are provisional and are subject to obtaining
shareholder approval at the 2020 Annual General Meeting.
Upcoming Events
Early Summer Expected completion of Viridor sale
31 July 2020 [9] Annual General Meeting
18 September 2020 Capital Markets Day
25 September 2020 Trading Statement
24 November 2020 Half Year Results 2020/21
30 March 2021 Trading Statement
25 May 2021 Full Year Results 2020/21
PENNON FINANCIAL PERFORMANCE
Continuing Group Continuing Group and Viridor
Underlying ^ 2019/20 2018/19 2019/20 2018/19 Change
Revenue GBP636.7m GBP632.6m GBP1,389.9m GBP1,478.2m (6.0%)
EBITDA ^ GBP365.3m GBP367.3m GBP563.4m GBP546.2m +3.1%
Adjusted EBITDA ^ GBP365.3m GBP367.3m GBP619.8m GBP592.7m +4.6%
Depreciation and amortisation (GBP119.8m) (GBP117.2m) (GBP201.9m) (GBP195.2m) (3.4%)
Operating profit GBP245.5m GBP250.1m GBP361.5m GBP351.0m +3.0%
Net interest (GBP62.5m) (GBP58.4m) (GBP88.7m) (GBP83.2m) (6.6%)
Share of JV profit after
tax GBP14.8m GBP12.4m +19.4%
Profit before tax (PBT) GBP183.0m GBP191.7m GBP287.6m GBP280.2m +2.6%
------------------------------------- ------------ ------------ ------------ ------------ ---------
Non-underlying items before GBP10.1m GBP9.7m GBP13.9m (GBP19.9m) -
tax [10]
Profit before tax GBP193.1m GBP201.4m GBP301.5m GBP260.3m +15.8%
Tax (GBP70.6m) (GBP32.8m) (GBP95.2m) (GBP37.7m) (152.5%)
Discontinued Operations GBP83.8m GBP54.0m
Profit for the year GBP206.3m GBP222.6m GBP206.3m GBP222.6m (7.3%)
PAT (attributable to holders
of hybrid capital) GBP7.0m GBP8.6m GBP7.0m GBP8.6m (18.6%)
PAT (attributable to minority
interests) (GBP1.1m) (GBP0.3m) (GBP1.1m) (GBP0.3m) +266.7%
PAT (attributable to shareholders) GBP200.4m GBP214.3m GBP200.4m GBP214.3m (6.5%)
Adjusted earnings per share
[11] 61.7p 57.8p 61.7p 57.8p +6.7%
Statutory earnings per
share 47.7p 51.1p 47.7p 51.1p (6.7%)
* From continuing operations 27.7p 38.2p
Dividend per share [12] 43.77p 41.06p 43.77p 41.06p +6.6%
Capital investment [13] GBP339.2m GBP395.9m (14.3%)
South West Water GBP161.0m GBP154.0m +4.5%
Viridor(13) GBP177.6m GBP241.7m (26.5%)
Other GBP0.6m GBP0.2m +200.0%
31 March 31 March Change
2020 2019
Net debt Continuing Group and Viridor GBP3,264.0m GBP3,079.5m +6.0%
IFRS 16: Leases
From 1 April 2019 the Group adopted the new accounting standards
IFRS 16: Leases resulting in a marginal net impact on the income
statement and balance sheet.
Based on the additional lease liability and associated assets
recognised at 1 April 2019 for the Continuing Group the impact on
profit for the year ended 31 March 2020 was a reduction in profit
after tax of GBP0.6 million, resulting from:
-- an increase in EBITDA of GBP1.9 million
-- an increase in depreciation of GBP1.4 million
-- an increase in finance costs of GBP1.2 million; and
-- a reduction in corporation tax of GBP0.1 million.
A full reconciliation is included in note 15 on pages 60 to 63
of this announcement.
Non-underlying items
The non-underlying items before tax for the Continuing Group and
Viridor total a credit GBP13.9 million and after tax total a charge
of GBP29.3 million, consisting of:
GBP18.0m
* 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 and cash proceeds
on termination of the derivative of GBP87.2 million
(GBP9.0m)
* A provision charge for expected credit losses related
to the impacts of the COVID-19 pandemic across the
Group - c.GBP5 million Pennon Water Services, c.GBP3
million South West Water and c.GBP1 million Viridor
GBP4.9m
* Aspects of the closedown of defined benefit pension
commitments following the cessation of the Greater
Manchester recycling operating contract resulting in
a pre-tax credit
(GBP2.6m)
* A net tax charge on the above items
(GBP40.6m)
* A deferred tax charge resulting from the announced
change of headline tax rates from 17% to 19%
Of the total GBP29.3 million net charge, GBP22.1 million relates
to the Continuing Group with GBP7.2 million relating to
Viridor.
Financial performance from the Continuing Group and Viridor
(before non-underlying items)
Given the significant contribution of Viridor to the Group's
results for entire financial year, pro forma results for the whole
Group including continuing and discontinued operations have been
presented alongside the statutory results in the income statement.
The commentary on the overall performance of the Group is based on
this approach.
Revenue
Group revenue has reduced by 6.0% (GBP88.3 million) to
GBP1,389.9 million (2018/19 GBP1,478.2 million). The majority of
this reduction was due to the planned cessation of the Greater
Manchester recycling operating contract and lower landfill tax
receipts in Viridor. South West Water's revenue has reduced
marginally due to customer demand falling from the exceptionally
hot, dry summer in 2018/19 in comparison with the wetter weather
this year. Revenues in Pennon Water Services are broadly in line
with the previous financial year with the decrease in South West
Water revenues offset by continuing growth in the rest of the
market, with a focus customer profitability.
EBITDA
Group EBITDA and adjusted EBITDA were ahead of last year by 3.1%
at GBP563.4 million (2018/19 GBP546.2 million) and 4.6% to GBP619.8
million (2018/19 GBP592.7 million) respectively driven by good
operational cost control across the Group and strong performance
across Viridor's activities, particularly from the fleet of
ERFs.
Net finance costs
Underlying net finance costs of GBP88.7 million are GBP5.5
million higher than last year (2018/19 GBP83.2 million), primarily
due to the cessation of capitalising interest on assets in the
course of construction as the Beddington, Glasgow and Dunbar ERFs
which are now operational.
The Group continues to secure funding at a cost that is
efficient with the effective interest rate reducing to 3.5%
(2018/19 3.6%), reflecting lower margins on new and renewed
financing. The effective interest rate for South West Water is
3.4%, reduced from 3.5% in the prior year.
The effective interest rate is calculated after adjusting for
capitalised interest of GBP11.0 million (2018/19 GBP15.2 million),
notional interest items of GBP9.0 million (2018/19 12.5 million),
interest received from shareholder loans to joint ventures of
GBP5.3 million (2018/19 GBP5.3 million) and service concession
contracts of GBP15.1 million (2018/19 GBP14.6 million).
During 2019/20 underlying net finance costs (excluding pensions
net interest costs of GBP0.8 million (2018/19 GBP1.4 million),
discount unwind on provisions of GBP8.2 million (2018/19 GBP11.1
million) and interest receivable from service concession contracts
of GBP15.1 million (2018/19 GBP14.6 million) were covered 3.8 times
by Group operating profit (2018/19 4.1 times)).
Profit before tax
Group underlying profit before tax was GBP287.6 million, an
increase of 2.6%, compared with the prior year (2018/19 GBP280.2
million). Included in profit before tax is our share of joint
venture profit after tax of GBP14.8 million (2018/19 GBP12.4
million). After non-underlying items, profit before tax was
GBP301.5 million (2018/19 GBP260.3 million) reflecting a combined
non-underlying credit before tax from continuing and discontinued
operations of GBP13.9 million (2018/19 charge of GBP19.9
million).
Taxation
On an underlying basis the net tax charge of GBP52.0 million
(2018/19 GBP42.7 million) consists of:
-- Current year current tax charge of GBP28.0 million,
reflecting an effective tax rate of 9.7% (2018/19 GBP32.4 million,
11.6%). The 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 with the
depreciation charge and tax relief on accelerated pension deficit
recovery payments made during the year
-- Current year deferred tax charge of GBP26.7 million (2018/19
GBP23.2 million) primarily reflect capital allowances across the
Group in excess of depreciation charged
-- Following the submission of prior year tax computations:
o Current tax credit of GBP9.2 million (2018/19 GBP3.0 million),
reflecting clarification of uncertain tax items
o Deferred tax charge of GBP6.5 million (2018/19 GBP9.9 million
credit), reflecting finalisation of capital allowance claims
The 2019/20 non-underlying items result in a GBP43.2 million
[14] tax charge (2018/19 GBP5.0 million credit), primarily
reflecting the impact of the announced change of tax rates from 17%
to 19% in March 2020.
Overall, the total tax charge for the year was GBP95.2 million
(2018/19 GBP37.7 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 GBP278 million [15] being paid to the Government.
Earnings per share
Whilst earnings per share on an underlying basis increased by
6.7% to 61.7p (2018/19 57.8p), earnings per share on a statutory
basis reduced by 6.7% to 47.7p (2018/19 51.1p) driven by the
c.GBP41 million non-underlying deferred tax charge relating to the
change in tax rate from 17% to 19%. From 2019/20 the 2017 perpetual
capital securities qualify for tax relief, following a change in
legislation. The tax relief for 2019/20 is GBP1.6 million,
increasing earnings per share by 0.4p.
Strong cash inflows from operations, continuing capital
investment
The Group's operational cash inflows in 2019/20 were GBP728.6
million (2018/19 GBP649.0 million). These funds have been put to
use in efficiently financing the Group's capital structure and
investing in our capital programmes. This capital investment has
resulted in marginally higher Group net debt (before the effects of
IFRS 16).
Contributions into the Group's pension schemes were GBP48.1
million (2018/19 GBP32.2 million), including a voluntary GBP17.2
million accelerated deficit recovery payment. Corporation tax
payments were GBP52.6 million (2018/19 GBP29.2 million) reflecting
the changes in legislation for the timing of payments on account.
Other tax payments made by the Group in 2019/20 total GBP147.1
million [16] (2018/19 GBP137.9 million).
Sustainable funding position
The Group has a strong liquidity and funding position with
GBP1,639 million cash and committed facilities at 31 March 2020.
This consists of cash and deposits of GBP699 million (including
GBP227 million of restricted funds representing deposits with
lessors against lease obligations) and undrawn facilities of GBP940
million. At 31 March 2020 the total Group borrowings were GBP3,963
million, including GBP137 million of obligations now classified as
leases under IFRS 16. GBP3,715 million of gross borrowings are in
the Continuing Group with GBP2,520 million at South West Water and
GBP1,195 million at Pennon Group and subsidiaries and GBP248
million of lease liabilities in Viridor.
The net debt of the Continuing Group including Viridor (before
the impact of IFRS 16) was broadly comparable with the prior year.
An increase of GBP137 million has been recognised attributable to
lease liabilities in accordance with IFRS 16. As a result, total
net debt is GBP3,264 million compared with GBP3,080 million in the
prior year. The net debt of the Continuing Group as at 31 March
2020 is GBP3,049 million (GBP822 million at Pennon Group and
GBP2,227 million at South West Water).
Pennon has pioneered a Sustainable Financing Framework to
integrate commitments to environmental and social objectives into a
variety of funding opportunities across the Group, with GBP845
million raised since 2018. The framework allows Pennon to access
future funding opportunities aligned with the Green Loan
Principles, Green Bond Principles and Social Bond Principles. The
framework has been certified by DNV GL a leading sustainability
verifier. Pennon is committed to continuous annual improvements in
sustainability ratings and KPIs which may lead to improved interest
rate margins.
During the year, GBP840 million of new and renewed facilities
have been agreed, GBP500 million in Pennon Group plc and GBP340
million in South West Water. The total includes a Pennon revolving
credit facility (RCF) which provides the Group with flexible,
efficient and effective funding during the strategic review. In
total, GBP245 million of the new facilities signed in the year are
linked to the sustainable nature of the business. This includes a
new GBP50 million CPI linked sustainable loan, this maintains South
West Water's proportion of index linked net debt and supports the
industry's transition from RPI to CPIH.
During the year the Group also early settled the fixed to
floating rate derivatives associated with the South West Water
Finance plc 2040 bond. The settlement locked in the value and
removed the future volatility from the income statement, the
resulting cash inflow of GBP87.2 million will be utilised to fund
South West Water's capital commitments.
In preparation for the announced abolition of LIBOR in 2021,
South West Water has completed the first LIBOR to SONIA amendment
for a sustainable RCF. While 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. Further work continues and later this year it is
expected that our financial institutions will no longer provide
LIBOR linked financial products.
Efficient long-term financing strategy
The Group has a diversified funding mix of fixed (GBP1,797
million, 55%), floating (GBP844 million, 26%) and index-linked
borrowings (GBP623 million, 19%). The Group's debt has a maturity
of up to 37 years with a weighted average maturity of c.17 years.
Much of the Group's debt is floating rate and derivatives are used
to fix the rate on that debt.
Following the K7 (2020-25) South West Water Final Determination
the Group has aligned its hedging strategy with the changed
regulatory methodology in this area. A proportion of new debt will
be hedged in K7 on a rolling ten-year basis while still maintaining
flexibility within the overall portfolio. Embedded debt hedging is
aligned with the five year regulatory delivery period. Around 60%
of South West Water's embedded floating net debt has already been
hedged through K7, taking advantage of falling swap rates and
assuring the Group transitions smoothly into the new regulatory
period.
South West Water's cost of finance, with an effective rate of
3.4%, is among the lowest in the industry. Around two-thirds of
South West Water's net debt is from finance leases which provide a
long maturity profile. Interest payable benefits from the fixed
credit margins which are secured at the inception of each lease.
GBP576 million (c.26%) of South West Water's net debt is
index-linked. This is below Ofwat's notional assumption of 33%,
giving an advantageous position through regulatory transition from
RPI to CPIH.
The overall average effective rate through the K6 regulatory
period for South West Water has been 3.3%, being a drop of 0.6%
from the average rate achieved in the K5 regulatory period of 3.9%.
Expectations are for a similar period on period reduction in the
effective interest rate as we move into K7, given the advantageous
interest rate hedging that has been undertaken to date.
Net debt position
The net debt of the total Group including Viridor was GBP3,264
million, an increase of GBP184 million during the year (2018/19
GBP3,080 million), which is largely attributable to GBP137 million
of lease liabilities being recognised in accordance with IFRS 16.
For the purposes of banking covenants these lease obligations are
excluded from net debt. The net debt of the Continuing Group as at
31 March 2020 is GBP3,049 million, and ongoing covenants are not
adversely impacted by the Viridor sale.
In the year, cash inflow from operations was strong at GBP728.6
million (2018/19 GBP649.0 million). Cash outflows relating to the
capital programme totalled GBP339.9 million [17] (2018/19 GBP384.5
million). The gearing ratio at 31 March 2020, being the ratio of
net debt to (equity plus net debt) was stable at 64.6% [18] (31
March 2019 64.7%).
The combined South West Water and Bournemouth Water debt to RCV
ratio is 63.6% [19] (31 March 2018 58.9%) which is broadly in line
with Ofwat's K6 target for efficient gearing of 62.5%. Gearing at
South West Water is expected to fall in the coming regulatory
period meeting the trajectory of Ofwat's notional structure. During
the 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 GBP2,227 million for South West Water
and GBP215 million for Viridor, with GBP822 million implied for
Pennon the Company.
Reducing capital investment as ERF build out progresses
Group capital investment from continuing and discontinued
operations decreased to GBP339.2 million in 2019/20 from GBP395.9
million in 2018/19.
South West Water
South West Water's capital expenditure in the year was GBP161.0
million, compared to GBP154.0 million in 2018/19 with the profile
aligned with the K6 capital plan, in addition to expenditure
accelerated to make an early start on key K7 initiatives focused on
ODI [20] delivery.
Key areas of investment and activity during 2019/20
included:
-- Further investments in our drinking water quality programme
including installation of 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
-- Continued investment in the network to drive leakage
reduction to support pledges made in the next regulatory period
-- Investment in the Plymouth region to improve resilience of
water supplies with the completion and commissioning of the
Mayflower water treatment works and upgrades to the network and
pumping stations
-- Schemes to deliver National Environment Programme (NEP)
commitments, including phosphorus and ammonia discharge
reductions
-- Continued improvements at wastewater treatment works,
including flood resilience and at pumping stations to reduce
pollution incidents
-- Investment for growth to meet increases in supply and demand
-- Early preparations for the new water treatment works in
Bournemouth, building on the innovative investment at
Mayflower.
Pennon Water Services
Capital investment during the year was focused on improving
service and driving efficiency within our systems and
processes.
Viridor
Viridor's capital spend in the year was GBP177.6 million
(2018/19 GBP241.7 million), a reduction of GBP64.1 million over
2018/19 as the ERF assets have become operational.
The majority of the expenditure continues to relate to the ERF
portfolio, principally the continued development of Avonmouth ERF
where commissioning is underway. Other larger projects in the year
include the commencement of construction of the GBP65.0 million
Avonmouth plastics recycling facility and upgrade of Masons
Materials Recycling Facility (MRF).
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 31 March 2020, the Group's pension schemes showed an
aggregate deficit (before deferred tax) of GBP8.5 million (March
2019 GBP60.8 million), a reduction of GBP52.3 million as a result
of:
-- GBP32.6 million contributions over and above the ongoing
service and net interest charges following the Group's decision to
voluntarily accelerate GBP17.2 million of the planned deficit
recovery payments
-- Greater Manchester recycling operating contract cessation
decreasing liabilities by GBP2.0 million
-- Reduction in liabilities of GBP51.9 million due to lower long
term inflation rates reducing liabilities
-- GBP25.1 million reduction in asset values caused by the
financial market uncertainty arising from the COVID-19 pandemic
-- Changes in other actuarial assumptions increasing the net deficit by GBP9.1 million.
The net aggregate liabilities of c.GBP7 million (after deferred
tax) represents less than 0.2% of the Group's market capitalisation
at 31 March 2020.
Of these liabilities a surplus of GBP6.6 million relates to
Continuing Group and a deficit of GBP15.1 million relates to
Viridor. On completion of the Viridor sale, expected early summer
2020, the Continuing Group will assume responsibility for near all
of Viridor's defined benefit obligations.
For the Group's principal scheme, of which South West Water
accounts for around 82%, Viridor 12% and 6% for Pennon company, the
2019 triennial valuation has been finalised, recording an actuarial
technical provisions deficit of c.GBP53 million. In agreeing to the
valuation, the Group committed to deficit recovery contributions in
line with those agreed at the 2016 triennial actuarial valuation to
2022, noting the significant acceleration of contributions during
the year.
In addition to the principal scheme, the Group has further
pension liabilities (GBP20.9 million at March 2019 calculated on an
actuarial technical provisions basis), that relate to schemes in
which the Group participates in connection with Viridor's Greater
Manchester recycling operating contract which ceased in May 2019.
Following the planned exit from the Greater Manchester recycling
operating contract, it is expected that the assets and liabilities
associated with all active members of these schemes at 31 May 2019
will transfer to the new operator's pension fund. A non-underlying
credit of GBP4.9 million has been recognised in the income
statement in connection with active employees moving to deferred
status in these schemes.
The Group is in the process of consulting with all employees on
plans to modernise its pension arrangements. The proposals which
are being consulted on include the closure of the main defined
benefit scheme to future accrual with all employees transitioning
to a new defined contribution scheme offered through a master trust
arrangement. The outcome of the consultation is expected to be
announced in June 2020.
Energy hedging
Pennon has adopted a Group portfolio management approach to
energy hedging. The Group has continued to trade over the last 12
months to maintain its net hedged position in accordance with Group
policy. Forward hedges for South West Water not already under
long-term contracts have been put in place in the liquid market
with 100% of the energy requirements hedged until March 2021 and
c.92% until March 2022.
SOUTH WEST WATER PERFORMANCE
Underlying 2019/20 2018/19 Change
Revenue [21] GBP570.3m GBP581.0m (1.8%)
Operating Costs (GBP206.1m) (GBP213.9m) +3.6%
EBITDA GBP364.2m GBP367.1m (0.8%)
Depreciation and amortisation (GBP118.8m) (GBP116.0m) (2.4%)
Operating profit GBP245.4m GBP251.1m (2.3%)
Net interest (GBP71.4m) (GBP70.5m) (1.3%)
Profit before tax GBP174.0m GBP180.6m (3.7%)
Revenue
South West Water revenue for 2019/20 has reduced by 1.8%
(GBP10.7 million) compared with the prior year. Noting our c.84%
metered customer base, tariff rises of 0.6% [22] have been offset
by lower customer demand (down 3.7%) from the wetter weather
experienced this year. Revenue from new customer connections
(c.9,000) has been offset by meter switchers and assessed charges.
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 2019/20, South West Water's
EBITDA and operating profit reduced by 0.8% and 2.3%, respectively.
The ongoing focus on strong cost control and efficiency delivery,
as well as extreme weather costs in the prior year which have not
been repeated, resulted in operating costs decreasing by 3.6%.
South West Water's bad debt performance remains strong with a
charge of 0.5% as a percentage of revenue excluding the impact of
COVID-19 (1.0% including COVID-19 impact). This reflects the
continuation of efficient cash collections, with the annual charge
below the levels assumed in our K6 Final Determination.
COVID-19 resilient delivery of critical services
Focus on safety and supporting our employees and customers
Our focus has been on the safety of our employees and we have
prioritised their mental, physical and financial wellbeing. Our
swift response to the emerging challenges of the COVID-19 pandemic
ensured we have a continuing supply of personal protective
equipment (PPE) and we have committed to paying our staff in full
without Government support. Our technology infrastructure was
resilient and supported the swift changes in working locations and
practices allowing staff to work from home wherever possible. We
have implemented an extensive staff engagement programme with a
dedicated online COVID-19 facility providing up to date information
and guidance to support both individuals and their families.
D elivering a robust service safely
During these unprecedented times the health and safety of our
staff and customers has been paramount whilst continuing deliver a
robust service to the communities we serve. We responded rapidly to
the emerging developments and we have maintained the vast majority
of our services - particularly those critical to operations and
customer needs with over 90% of our staff either at sites, out in
the communities they serve or continuing to operate by working from
home. We have continued to deliver our key capital schemes, working
effectively with our partners to ensure safe working practices. In
addition to maintaining services, South West Water successfully
completed the expansion into the Isles of Scilly despite the
restrictions in place.
Supporting vulnerable customers and maintaining customer
service
A key part of our pandemic response has been focused on
supporting all our customers through these difficult times,
especially those in vulnerable circumstances. We continued to
operate our call centre ensuring we maintained our operational
support whilst providing reassurance to customers who were
concerned about paying their bills.
South West Water was the first company to launch a COVID-19
Priority Services Register where customers could register that they
were in a high-risk, vulnerable group and would need ongoing
support or if they were self-isolating for a short period due to
potential symptoms in their household. Around 21,000 customers have
registered over this period and in the unfortunate event of an
operational incident these customers will receive support directly
to their property.
Like many companies we have limited our visits to customer
properties (unless for a critical incident). Despite this we have
continued to deliver our support schemes to those customers who
struggle to pay their bills and for those on a social tariff or
other support scheme. We have extended the period for renewals and
lessened the requirements for applications in the short term to
provide greater support to those who need it.
We have also supported our communities, providing a mobile
incident support vehicle which is being used as a COVID-19
temporary GP medical consultation room in Cornwall.
Well established 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, with c.60,000 customers benefiting through our range
of support programmes. This includes:
-- Social tariff - continued to develop since its introduction
in 2013/14 with over 25,500 customers supported through this
scheme
-- WaterCare+ programme - supporting customers to ensure they
are receiving all their eligible benefits (GBP2.8 million of
benefits income realised through this programme since 2015)
-- Restart - which incentivises customers into regular payment plans (GBP5.2 million over K6)
-- Freshstart - a dedicated fund which supports customers who
find themselves in temporary hardship (GBP1.0 million contributed
into the scheme over K6)
-- Dual billing pilot - K7 programme already underway focused on
water efficiency and reducing bills.
Our K7 plans continue to focus on this area and we have
committed to eliminating water poverty within our regions.
Strong delivery and performance throughout K6 regulatory
period
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.
Customer service improvements over K6
Improving customer service is at the heart of our delivery
plans. Since 2015 South West Water has delivered a step change in
our SIM score with the highest improvement across the sector [23] ,
ranked third in both the South West and Bournemouth regions and
second for the quality of customer service.
Our continued performance improvements since 2015 has seen
written complaints more than halve, customer wait times of less
than a minute, unwanted contacts reduce c.40%, and complaints to
CCW [24] have fallen by almost two thirds. In addition, our
positive operational response to customer issues and targeted
investment has resulted in 96% of operational contacts resolved the
first time a customer contacts us.
Ofwat has ceased publishing comparable SIM score results as it
prepares to introduce a new customer experience metric (CMex) in
the next regulatory period, and we have been focused on these
changes in our delivery plans this year. C-Mex consists of two
customer surveys which obtain feedback from those customers who
have contacted the company along with a perception survey to a
random selection of customers who may not have had any previous
interaction with the company.
Excelled and transformed performance in key operational
areas
Whilst a small number of ODIs are in penalty in 2019/20, South
West Water is forecasting to deliver net ODI rewards again this
year of GBP2.0 million. This brings the total net reward position
for K6 to GBP13.3 million.
-- Bathing water quality - c.99% achieving sufficient quality, 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 - targets met every year
The leakage target in the South West region was met again this
year and has been met every year since targets began. Bournemouth
Water K6 leakage target was exceeded, resulting in an ODI reward
this year. We continue to focus on new techniques to deliver the
stretching commitments for K7, which target a 15% reduction in
leakage by 2025.
-- Supply interruptions - maintaining strong performance
Average duration of supply interruptions per property for South
West Water continued to outperform the targeted performance
commitment in 2019/20, despite a significant interruption caused by
a third-party developer. Excluding this impact, interruptions have
more than halved over K6. For the Bournemouth region, the number of
properties at reduced risk of large-scale interruptions over K6
outperformed the target resulting in an ODI reward for the
year.
-- Water resources - 23rd consecutive year without water restrictions
Throughout K6 South West Water has achieved zero water
restrictions in both regions, again resulting in an ODI reward this
year despite the impact of the very dry weather in Summer 2019
placing challenges on specific reservoirs.
-- Flooding - wet weather impacted performance
The wet weather in 2019/20, including the extreme storms in
February 2020, resulted in an increase in internal sewer flooding
incidents which exceeded the target for the year, however no
penalty was incurred. Over the K6 period the focus on delivering
solutions to reduce flooding has been successful with a 12%
reduction in internal and 9% reduction external flooding incidents,
which outperformed the target in 2019/20.
-- Customer contacts - reduced in both water and wastewater
Our customers want water that is free from taste, smell and
colour and to ensure the odours from our wastewater treatments
works are kept at a minimum. We monitor the number of contacts we
have in both areas and for 2019/20 outperformed our targets
recognising a reward in the year. As well as outperforming our
target, over K6 water taste, smell and colour contacts have reduced
by 44%, with wastewater odour contacts falling by 27%.
Environmental performance - remains a key area of focus
-- Pollution incidents - serious pollution incidents reducing
The number of serious pollution incidents (Category 1&2) has
reduced with one Category 2 incident in the year (7 incidents in
2015), therefore no penalty has been incurred. Disappointingly the
number of minor pollution incidents (Category 3 & 4) has
increased compared to last year. In February 2020 South West Water
published a consultation on our plans to tackle wastewater
pollution incidents with significant focus to improve this
performance with stretching targets for the next regulatory period.
The metrics have a key impact on the Environment Agency's
Environmental Performance Assessment (EPA).
Delivered sector leading outperformance
South West Water has performed consistently well throughout K6
delivering strong operational and financial performance which
underpins our sector leading cumulative RORE [25] of 11.8% over K6.
We have delivered the highest RORE outperformance in every
year.
2019/20 K6
Base return 6.0% 6.0%
Totex outperformance 2.9% 2.6%
ODI outperformance 0.2% 0.3%
Financing outperformance 3.0% 2.9%
WaterShare RORE [26] 12.1% 11.8%
Ofwat RORE [27] 11.9% 11.7%
Totex efficiency reducing customer bills
Totex outperformance has achieved cumulative savings of GBP297
million over 5 years delivering our target of c.GBP300 million
totex savings which is shared with customers, reducing future
bills. This represents c.15% outperformance compared to regulatory
allowances.
These savings have been delivered across all areas of water,
wastewater and retail activities. The key efficiencies have been
driven by:
-- Managing upward cost pressures across the 5 years, with
actual net price rises being below annual average inflation rates
again this year
-- 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 K6 Final Determination
-- Taking advantages from our strategic alliances, driving
efficiency from our procurement processes, and supporting
innovation in our capital programme delivery
-- Efficiencies from the Bournemouth Water integration,
including delivery of key capital schemes in the region, realising
c.GBP27 million of net synergies which were secured early in the
integration.
ODIs continue to deliver net reward for K6
Outperformance in ODIs for 2019/20 include those relating to
Bournemouth Water where performance (and rewards) were measured at
the end of the 5 year period. This has resulted in a net ODI reward
of GBP2.0 million [28] (GBP13.3 million [29] cumulatively for K6)
reflecting RORE outperformance of 0.3% on average over the period
through operational improvements, good asset reliability with
stable serviceability across all water and wastewater areas and
delivering the service customers want. The cumulative net reward of
GBP13.3 million comprises GBP22.3 million of total rewards and
GBP9.0 million of total penalties.
Financing investment efficiently
South West Water's efficient and effective financing strategy
has delivered one of the lowest effective interest rates across the
industry consistently over the 5 years. This has resulted in
cumulative financing outperformance of GBP164 million. South West
Water's diverse and flexible financing structure has reduced the
effective interest rate this year to 3.4% (2018/19 3.5%).
Sharing outperformance between customers and shareholders
South West Water is sharing the benefits of outperformance
between customers and shareholders through our unique WaterShare
mechanism. Since 2015 GBP139 million of cumulative benefits have
been identified to share with customers through future bill
reductions, ODI service improvements and reinvestment in services.
This reflects GBP103 million of totex savings, GBP13 million of net
ODI benefits and GBP23 million of other benefits (including
financing and tax). South West Water was the only company to
voluntarily share financing and tax outperformance with customers -
an approach which has now been adopted by Ofwat for K7.
The total other savings provide the basis for the c.GBP20
million [30] WaterShare+ scheme in 2020. This scheme will give
customers a choice of how to receive these benefits including a
reduction in their bill or the option of receiving Pennon
shares.
Looking forward - delivering the fast-track K7 plan
Performance transition to K7 (2020-25)
As we transition to K7 the potential return on regulatory equity
(RORE) is impacted by the base returns and the change in approach
to K7 outperformance. Base returns (through the allowed cost of
equity) have reduced to 3.9% compared with 6.0% during K6. Gearing
has also reduced to 60% and the wholesale totex sharing rate has
been lowered to 50% for fast-track companies compared to the 55%
allowed for South West Water (as an enhanced company) in the last
regulatory period. In addition, the cost of debt allowed reduced to
a nominal cost of debt of 4.2% from 5.5% in K6, reducing the
potential for financing outperformance despite lower expected
effective interest rates.
Applying these changes rebased the 11.8% cumulative
outperformance delivered during K6 to 9.0%. Overall the Final
Determination noted a potential RORE of 8.5% with increased
potential and scale for ODIs offset by more challenging cost
efficiency allowances resulting in the potential doubling of base
returns.
K6 Average K7 Rebased K7 Final Determination
Base return 6.0% 3.9% 3.9%
------------
Totex outperformance 2.6% 1.2%
ODI outperformance 0.3% 2.2%
Financing outperformance 2.9% 1.2%
Total Outperformance 5.8% 5.1% 4.6%
------------
WaterShare RORE 11.8% 9.0% 8.5%
South West Water is confident that it will deliver
outperformance in each area and is targeting delivery in every
year, with financing outperformance locked-in through favourable
swap rates (c.60 bps lower than K6) and a focus on delivering
substantial cost savings alongside increased targeted ODI
rewards.
Strong track record of improvements
In February 2020 South West Water accepted the Final
Determination for the K7 business plan which targets continued
improvements for our customers and the environment alongside a
significant investment programme. Whilst the plan includes
stretching performance targets we have a strong track record of
delivering improvements across the regulatory period. During
2019/20 we made an early start on our investment plans, including
targeting areas for ODI delivery and performance.
Isles of Scilly expansion completed
On 1 April South West Water completed the expansion into the
Isles of Scilly with assets transferred and operational teams
already working well to deliver essential water and wastewater
services. A first for the industry, we collaborated with all our
regulators and key stakeholders on the islands to ensure a smooth
transition and our plans over the next 5 years include significant
investment in critical infrastructure and improvements for both
customers and the environment.
Significant enhancement programme of investment
Alongside stretching operational targets and maintaining
resilient services to our customers our plan includes a significant
enhancement programme of investment. Delivering safe, reliable
drinking water is a primary focus and development of our two new
water treatment works in the Bournemouth region is underway. These
works will build on the technology and experience gained from
delivering the Mayflower water treatment works in Plymouth which
uses innovative ceramic membrane technology to improve the
resilience of water quality - a first of its kind in
the UK. Work is due to begin on testing a pilot plant at our Alderney site this summer.
Protecting the environment is key to our plans which include
improvements to bathing water quality, through investments at 8
sites across the region and our pollutions enhancement strategy is
focused of reducing both the number of incidents and the impact,
with a target of zero serious pollution incidents.
PENNON WATER SERVICES PERFORMANCE
Underlying 2019/20 2018/19 Change
Revenue GBP173.5m GBP173.7m (0.1%)
SWW wholesale elimination (GBP106.4m) (GBP119.3m) (10.8%)
Revenue - external to the Group GBP67.1m GBP54.4m +23.3%
Operating Costs [31] (GBP171.6m) (GBP172.7m) +0.6%
SWW wholesale elimination GBP106.4m GBP119.3m +10.8%
Operating Costs - external to
the Group (GBP65.2m) (GBP53.4m) (22.1%)
EBITDA GBP1.9m GBP1.0m +90.0%
Depreciation and amortisation (GBP0.7m) (GBP0.7m) -
Operating profit GBP1.2m GBP0.3m +300.0%
Net interest (GBP1.6m) (GBP1.9m) +15.8%
Loss before tax (GBP0.4m) (GBP1.6m) +75.0%
Financial Performance
Pennon Water Services performance has been driven through stable
revenues and a focus on reducing operating costs. Revenue has
remained stable with a focus on value added services to large
national customers and winning dual tariff customers offsetting the
attrition from businesses switching retailer, primarily in South
West Water's wholesale region. Operating costs have reduced through
automation, increased self-service and overhead efficiencies which
has resulted in EBITDA almost doubling on last year. Increasing
cash collections has reduced the level of debt, further reducing
net interest costs. The focus continues to be on improving services
whilst driving efficiency to reduce the cost to serve our
customers.
High quality business services delivering value and positive
environmental impact
High quality customer service in a competitive market
Our customer centred approach has underpinned our focus on
excellent service, with our Trustpilot score achieving 9.1 out of
10 during the year. Written complaints are down 41% from the prior
year and Pennon Water Services was placed within the top three in
the regulatory market performance standards. This strong and
resilient performance ensures we are well placed to deliver our
long-term strategic objectives once the business market
'normalises' following the impact of COVID-19.
Delivering operating cost efficiencies
Our focus has been on reducing operating costs through
investment in our people, processes and technology, increasing the
automation of our systems and offering greater self-service to
customers. Strong operational delivery focused on increasing cash
collections has reduced the bad debt costs to <0.5% of revenue
before the impact of COVID-19 (3.0% of revenue post COVID-19).
Further growth and cost efficiencies are targeted through
offering added value, non-retail services including support to
address private leakage and compliance with environmental
standards.
COVID-19 impacting the Non-household retail market
The largest impact of COVID-19 has been on businesses and
commercial customers. During lockdown we have seen a decline in
non-household demand and numerous customers being identified as
temporarily vacant within the market.
Our customer service operations and contact centre have
continued to operate effectively through this period and we
continue to focus on cash collections, whilst supporting those
customers who find themselves in financial difficulty.
We have engaged with our regulators to ensure the regulatory
interventions put in place to support the non-household market are
appropriate. The liquidity support from the wholesaler provides a
safety net for the whole market, however, Pennon Water Services has
not required to take advantage of this support to date as a result
of our focused operations and collections. The future mechanism to
recover any additional risk from bad debt (above 2% of revenue)
will ensure retailers can provide additional support to business
customers where needed.
VIRIDOR PERFORMANCE - Discontinued Operations
Underlying 2019/20 2018/19 Change
Revenue [32] GBP757.8m GBP852.7m (11.1%)
EBITDA GBP198.1m GBP178.9m +10.7%
ERFs GBP165.6m GBP154.8m +7.0%
Landfill GBP5.2m GBP4.8m +8.3%
Landfill Gas GBP26.8m GBP20.6m +30.1%
Recycling GBP14.2m GBP14.9m (4.7%)
Contracts, Collections &
Other GBP36.0m GBP39.0m (7.7%)
Indirect Costs (GBP49.7m) (GBP55.2m) +10.0%
Depreciation and Amortisation (GBP82.1m) (GBP78.0m) (5.3%)
Profit Before Tax GBP104.6m GBP88.5m +18.2%
Share of JV EBITDA GBP41.3m GBP31.9m +29.5%
IFRIC 12 Interest Receivable GBP15.1m GBP14.6m +3.4%
Adjusted EBITDA GBP254.5m GBP225.4m +12.9%
Revenue
In line with expectations, following the successful exit from
the Greater Manchester recycling operating contract at the end of
May 2019, and activities to optimise the landfill portfolio last
year, Viridor revenues reduced by (11.1%) to GBP757.8 million
(2018/19 GBP852.7 million). After taking into account overhead
savings in relation to the Greater Manchester recycling operating
contract exit, these lower revenues had a minimal impact on
profits.
EBITDA
In 2019/20, Viridor's EBITDA increased by 10.7% to GBP198.1
million, underpinned by growth from the ERF business.
The ERF portfolio has performed strongly over the year. Ramp up
of operations continue at Glasgow, Beddington and Dunbar, all three
having commenced operation towards the end of last year, and
Avonmouth generated its first financial contribution [33] this
year. It is currently under commissioning and on track for
operational ramp up during 2020/21. ERF availability achieved c.90%
[34] for the fourth successive year. ERF EBITDA has increased 7.0%
to GBP165.6 million for the year.
Landfill EBITDA has remained consistent with 2018/19 at GBP5.2
million (2018/19 GBP4.8 million). Pricing has held up well, with
volumes down but in line with expectations following the closure of
two sites last year. We continue to operate from eight locations to
meet the market demand for the provision of a landfill solution.
Cost savings have helped increase the level of EBITDA per tonne
above the prior year.
Landfill Gas has performed strongly in the period with EBITDA up
30.1% to GBP26.8 million (2018/19 GBP20.6 million). Investment in
gas collection infrastructure has improved collection volumes, and
investment in engines has improved availability and reliability.
These factors have contributed to gas volumes declining at slower
rates than previously experienced. Coupled with improved hedged
pricing and higher renewable pricing this has resulted in a strong
performance for the year.
We have maintained a continued focus on quality through the year
in order to ensure continuation of supply, however, recycling
performance has been impacted by global recyclate price headwinds
in H2 2019/20 in particular, resulting in a 4.7% decrease to
GBP14.2 million for the year (2018/19 GBP14.9 million). The market
for high grade export paper recyclate has effectively closed with
product now being sold as mixed grade paper.
Contracts, collections and other has seen a reduction in EBITDA
of 7.7% to GBP36.0 million (2018/19 GBP39.0 million). This was in
line with management expectations following the successful
transition of the Manchester contract to Suez at the end of May
2019, and timing of the disposal of surplus assets. The closed
landfill site at Norlands was also disposed of in the year. This
has been sold to developers for repurposing following the
completion of high-quality restoration and remediation.
We have continued our focus on indirect costs, which have fallen
to GBP49.7 million following the exit from the Greater Manchester
contract and delivery of further efficiencies. This reduction of
GBP5.5 million represents a 10.0% saving over the same period last
year (2018/19 GBP55.2 million).
Share of JV EBITDA has increased by 30.4% to GBP41.3 million
(2018/19 GBP31.9 million). This reflects an improved contribution
from both Lakeside and TPSCo joint ventures based on strong
operational performance in the year, and the increase in
contribution from the additional investment in TPSCo in December
2018. We received a GBP6.0 million dividend from Lakeside during
the year.
COVID-19 - Resilient operations in unprecedented times
Viridor is well positioned to manage the impact of COVID-19
through the unprecedented lockdown period. The strong local
authority contracted position provides resilience to the underlying
business, with strong ERF performance mitigating the volume impact
from Commercial & Industrial customers in Collections, Landfill
and Recycling.
Operational sites have largely remained open throughout the
period. Household Waste Recycling Centres which were closed for a
period have now reopened in conjunction with our Local Authority
customers.
We are supporting our staff across the business, with a strong
emphasis on the heath & wellbeing of our people. Remote working
has been facilitated across the business where possible, and
guidelines on social distancing are being adhered to at operational
sites. We have manged our supply chain to ensure that personal
protective equipment has remained available across our
operations.
Successful delivery of key priorities for 2019/20
2019/20 2018/19
Total Waste Inputs
(MT) 6.7 6.8
ERFs 2.9 2.3
Landfill 1.2 1.5
Recycling and Other 2.6 3.0
Recycling Volumes
Traded 1.0 1.2
ERF availability [35] 90% 91%
This year Viridor has delivered robust operational performance
across a complementary portfolio of assets. We are delivering
continued progress in our targeted growth areas, with increasing
contribution from contract backed infrastructure assets.
Viridor has seen strong growth in energy recovery with the ramp
up and optimisation of existing plants being augmented by the first
financial contribution from Avonmouth ERF. We are mitigating near
term challenges in recyclate markets and we remain confident in the
UK residual waste and recycling sector fundamentals. Construction
is progressing at the Avonmouth Plastics Processing Facility.
Strong growth from ERF portfolio
For 2019/20 our ERFs have performed strongly with availability
c.90% [36] for the fourth consecutive year.
Glasgow, Beddington and Dunbar, which were all taken over
towards the end of H2 2018/19, have been progressing through their
ramp up stage towards optimisation. The Glasgow Recycling &
Renewables Energy Centre (GRREC) is our first ERF to utilise
Advanced Conversion Facility (ACF) technology. Unlike our existing
ERF fleet this produces a synthetic gas which is then controlled
and converted to provide energy. This innovative technology has
required the development and adoption of new skill sets to fully
optimise the plant.
Avonmouth ERF has now entered the commissioning stage with the
facility on track for operational ramp up during 2020/21. This now
takes our ERF portfolio to 11 facilities.
The ERF joint venture with Grundon Waste Management at Ford
(announced in H1 2019/20) is progressing through project design
with our technical advisors. Further ERF capacity is essential to
meet longer term demand and Viridor continues to progress a
pipeline of opportunities to deliver two further ERFs.
Efficiently managed landfill sites with demand into the long
term
Overall landfill volumes have decreased in the year reflecting
the closure of Beddington and Rigmuir to active waste in the prior
year, in line with management expectations. Heathfield has been
reopened and Broadpath closed, as planned, leaving 8 sites in
operation.
High quality restoration and remediation of our landfill sites
remains the cornerstone of our land stewardship responsibilities.
We have disposed of one former site (Norlands) in the year which
will now be repurposed for other activities.
Landfill gas has shown a robust operational performance
reflecting the benefits from investment undertaken in our
generation equipment and infrastructure. Investment in new engines
has reduced both maintenance downtime and costs, and improvements
to the efficiency of our gas collection systems has improved
overall engine output. This has led to electricity volumes
declining at a lower rate than experienced in previous years which
allied to higher pricing, including the renewable energy value, has
resulted in improved performance year on year.
We have continued to invest in our engine optimisation strategy
this year installing eleven new engines to enhance future
availability and better gas outputs.
Over time the decline in Landfill gas volumes has created
surplus grid connection capacity at some sites. We are currently
seeking to capitalise on this opportunity by the installation of
gas peaking engines.
Recycling - long term fundamentals remain strong despite short
term paper headwinds
The construction of our GBP65 million plastics processing
facility at Avonmouth continues to progress. To fill the predicted
UK plastics reprocessing capacity gap by 2025 would require the
construction of c.14 Avonmouth sized facilities. We continue to
progress plans for two further plastic processing plants co-located
with Ardley and Dunbar ERFs and have held regional events to engage
stakeholders ahead of submitting formal planning applications.
Through investment in UK based plastics processing we are reducing
exposure to international markets and moving recyclate production
higher up the value chain. This reflects our continued focus on
quality and driving value from the Circular Economy.
The impact of global paper markets has adversely affected the H2
2019/20 recycling performance. We have seen a fall of c.GBP50 per
tonne in paper pricing, with negative paper pricing on mixed paper
and the market for high grade export paper effectively closed.
These downside issues have been somewhat mitigated by the risk
share mechanisms in place with our customers.
Technical Guidance 2019/20
Pennon Group 2019/20 Change
Revenue GBP636.7m
* Impact of lower tariffs based on K7 Final [37]
Determination (c.GBP20m)
* Reduced non household demand (c.GBP15m including
impact from customers outside of the South West Water
region) partially offset by increased household
demand (c.GBP5m) as a result of COVID-19
* Non-underlying sharing of outperformance with
customers through WaterShare+ of c.GBP20m
-------------------------------------------------------------- ---------- ----------
Net debt GBP1,122
* Expectation of reduced Pennon company debt levels [38]
following Viridor sale completion
-------------------------------------------------------------- ---------- ----------
* Underlying effective tax rate lower than UK headline
Tax rate rate of 19% reflecting capital allowances 9.7%
-------------------------------------------------------------- ---------- ----------
South West Water - transition to new regulatory 2019/20 Change
period
---------- ----------
Operating GBP206.1m
costs * Increased costs reflecting inflation, expansion into
the Isles of Scilly, net of continued efficiency
-------------------------------------------------------------- ---------- ----------
Net interest GBP71.4m
* Efficient financing reflecting lower interest rate
swaps - effective rate reduction
-------------------------------------------------------------- ---------- ----------
Capex GBP161.0m
* Capital expenditure reflects K7 profile of investment
- 2019/20 included advancement of investment from
2020/21
-------------------------------------------------------------- ---------- ----------
RORE 9.0% (rebased)
* Continued outperformance targeted in all areas [39]
-------------------------------------------------------------- ---------- ----------
RCV GBP3,573m
* Reduction due to impact of K7 Final Determination
reflecting midnight adjustments of c.GBP200m driven
by the significant totex outperformance in K6
* Potential impact of COVID-19 on future inflation
rates
-------------------------------------------------------------- ---------- ----------
Pennon Water Services 2019/20 Change
---------- ----------
Operating GBP171.6m
costs * Reduction in operating costs due to lower wholesale
charges due to COVID-19
-------------------------------------------------------------- ---------- ----------
EBITDA GBP1.9m
* Focus on continued cost efficiency with strong
collections offsetting potential bad debt impact of
COVID-19
-------------------------------------------------------------- ---------- ----------
Viridor - completion of transaction expected 2019/20 Change
early summer
---------- ----------
Profit GBP83.8m
after tax * Continues to contribute to Group earnings up until
the point of completion
-------------------------------------------------------------- ---------- ----------
COVID-19 assumptions are based on Government current position
and timeframe of lockdown, successful exist of lockdown and no
second wave of the pandemic supporting a recovery in economic
activity over the year.
Board Matters
We were pleased to welcome Claire Ighodaro to the Board in
September 2019. Claire's extensive range of Boardroom experience
and her background in finance, across both regulated and
non-regulated industries, is a great asset to the Group and
complements the broad range of skills on the current Board. We
ensure that our Board has a broad skill set and deep
experience.
Sadly, we will say our farewells to both Lord Matthew Taylor and
Martin Hagen who have both served on the Board of South West Water
for some 10 years in order to provide continuity through to the K7
regulatory period. Both have rendered exemplary service to the
South West Water Board and deserve our heartfelt thanks.
Chris Loughlin
Group Chief Executive Officer
4 June 2020
Financial Timetable
4 June 2020 Full Year Results 2019/20
June 2020 Annual Report & Accounts published
Early summer Expected completion of Viridor sale
23 July 2020 Ordinary shares quoted ex-dividend
24 July 2020 Record date for final dividend
31 July 2020 [40] Annual General Meeting
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
30 March 2021 Trading Statement
25 May 2021 Full Year Results 2020/21
* Subject to obtaining shareholder approval at the 2020 Annual
General Meeting.
PRINCIPAL RISKS AND UNCERTAINTIES
COVID-19
The Board recognise the significant impact that COVID-19 has had
globally and within the UK. In response to the current situation
the UK Government has designated keyworker status to our front line
operational water and waste activities.
In order to continue delivering the expected levels of service
to our stakeholders we have reviewed our processes and ways of
working and drawn on our resilience and continuity plans, while
continuing to prioritise the health, safety and wellbeing of our
employees and customers which remains paramount during this period.
We also continue to work closely with our key stakeholders and
peers including local resilience forums, Water UK, Ofwat and Defra
ensuring a joined up and collaborative response. Both the Pennon
Executive and the Pennon Board continue to receive regular updates
on the Group's response.
To date, our business has remained broadly resilient to the
immediate risks that have been presented by COVID-19. It is likely,
however, that there will be ongoing restrictions in place during
2020/21, which could provide continued challenges to the delivery
of our key operational activities.
Medium-term response planning has been undertaken to establish
strategies to mitigate these risks where possible, which has
considered a range of potential scenarios and been informed by
actions taken by other countries impacted by the pandemic. These
plans will continue to be reviewed and updated as further
Government and public health guidance is provided.
Britain's Exit from the European Union
Prior to Britain's exit from the EU detailed contingency plans
had been established and tested to mitigate against potential
issues that may have occurred in the event of a no-deal scenario.
Negotiations on a future trading agreement between Britain and the
EU is ongoing and
continues to be closely monitored.
The impact of any agreement on the Group's operations and
processes will be fully evaluated as further detail is confirmed.
In the event that no agreement is reached, and trade arrangements
revert to World Trade Organization (WTO) rules, existing
contingency plans will ensure that the Group is well prepared to
mitigate against any short-term impact that is likely to arise from
this scenario.
Principal Risks
The Board considers the principal risks to be:
Law, Regulation and Finance
1. Changes in Government Policy
2. Regulatory reform
3. Compliance with laws and regulations
4. Maintaining sufficient finance and funding within our debt
covenant to meet ongoing commitments
5. Non-compliance or occurrence of avoidable health and safety incidents
6. Tax compliance and contribution
7. Failure to pay all pension obligations as they fall due &
increased costs to the Group should the defined benefit pension
scheme deficit increase
Market and Economic Conditions
8. Non-recovery of customer debt
9. Macro-economic risks arising from the downturn impacting inflation commodity and power prices
Operating Performance
10. Poor operating performance due to extreme weather or climate
change
11. Poor service and/or increased competition leading to loss of
customer base
12. Business interruption or significant operational failures/
incidents
13. Difficulty in recruitment, retention and development of
skills required to deliver the Group's strategy
14. Non-delivery of Regulatory Outcomes and performance
commitments
Business Systems and Capital Investment
15. Failure or increased cost of capital projects and/or
exposure to contract failures
16. Failure of IT 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; 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. These risks will be described in greater detail in the
Pennon Group Annual Report to be published in June 2020. 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 year ended 31 March 2020
Discontinued
operations
Discontinued (note
operations Statutory 16)
Pro
(note Forma Pro Forma
Statutory 16) Total(1) 2019 2019 Total
(Restated(2) (Restated(2)
2020 2020 2020 ) ) 2019(1)
Notes GBPm GBPm GBPm GBPm GBPm GBPm
--------------------- ------ ---------- ------------- ---------- -------------- -------------- ----------
Revenue 4 636.7 753.2 1,389.9 632.6 845.6 1,478.2
Operating costs
Employment costs (70.0) (130.4) (200.4) (67.2) (138.6) (205.8)
Raw materials and
consumables
used (14.9) (87.2) (102.1) (15.0) (94.3) (109.3)
Other operating
expenses (186.5) (337.5) (524.0) (183.1) (433.8) (616.9)
--------------------- ------ ---------- ------------- ---------- -------------- -------------- ----------
Underlying Earnings
before
interest, tax,
depreciation
and amortisation 4 365.3 198.1 563.4 367.3 178.9 546.2
Operating
non-underlying
items 5 (7.9) 3.8 (4.1) 3.9 (29.6) (25.7)
Depreciation and
amortisation (119.8) (82.1) (201.9) (117.2) (78.0) (195.2)
--------------------- ------ ---------- ------------- ---------- -------------- -------------- ----------
Operating profit 237.6 119.8 357.4 254.0 71.3 325.3
Finance income 6 4.1 22.5 26.6 3.5 20.0 23.5
--------------------- ------ ---------- ------------- ---------- -------------- -------------- ----------
Finance costs:
Underlying 6 (66.6) (48.7) (115.3) (61.9) (44.8) (106.7)
Finance costs:
Non-underlying 5 18.0 - 18.0 5.8 - 5.8
--------------------- ------ ---------- ------------- ---------- -------------- -------------- ----------
Finance costs (48.6) (48.7) (97.3) (56.1) (44.8) (100.9)
--------------------- ------ ---------- ------------- ---------- -------------- -------------- ----------
Net finance costs 6 (44.5) (26.2) (70.7) (52.6) (24.8) (77.4)
Share of post-tax
profit
from joint ventures - 14.8 14.8 - 12.4 12.4
--------------------- ------ ---------- ------------- ---------- -------------- -------------- ----------
Underlying profit
before
tax 183.0 104.6 287.6 191.7 88.5 280.2
Non-underlying
operating
and finance costs 5 10.1 3.8 13.9 9.7 (29.6) (19.9)
--------------------- ------ ---------- ------------- ---------- -------------- -------------- ----------
Profit before tax 4 193.1 108.4 301.5 201.4 58.9 260.3
Taxation
(charge)/credit 7 (70.6) (24.6) (95.2) (32.8) (4.9) (37.7)
---------- -------------- ----------
83.8 206.3 54.0 222.6
Profit from
continuing
operations 122.5 168.6
Profit from
discontinued
operations 16 83.8 54.0
Profit for the year 206.3 222.6
Attributable to:
Ordinary
shareholders
of the parent 200.4 214.3
Non-controlling
interests (1.1) (0.3)
Perpetual capital
security
holders 7.0 8.6
--------------------- ------ ---------- ------------- ---------- -------------- -------------- ----------
Earnings per
ordinary
share (pence per
share) 8
--------------------- ------ ---------- ------------- ---------- -------------- -------------- ----------
From Continuing
operations
- Basic 27.7 38.2
- Diluted 27.6 38.1
--------------------- ------ ---------- ------------- ---------- -------------- -------------- ----------
From Continuing and
discontinued
operations
- Basic 47.7 51.1
- Diluted 47.5 50.9
--------------------- ------ ---------- ------------- ---------- -------------- -------------- ----------
1 Pro forma results represent non-GAAP measures presented to
provide sufficient detail to enable certain users of the financial
statements to assess the combined results of the continuing and
discontinued operations of the Group during the current and prior
financial years.
2 The prior year income statement has been restated to reflect
the impact of classifying our waste management activities provided
by Viridor as a discontinued operation (see note 16).
Consolidated statement of comprehensive income
For the year ended 31 March 2020
2020 2019
GBPm GBPm
Profit for the year 206.3 222.6
----------------------------------------------- ------- --------
Other comprehensive income/(loss)
Items that will not be reclassified
to profit or loss
Remeasurement of defined benefit obligations 17.7 (17.2)
Income tax on items that will not
be reclassified 0.1 3.2
----------------------------------------------- ------- --------
Total items that will not be reclassified
to profit or loss 17.8 (14.0)
----------------------------------------------- ------- --------
Items that may be reclassified subsequently
to profit or loss
Share of other comprehensive income
from joint ventures 0.2 0.5
Cash flow hedges (14.3) (6.4)
Income tax on items that may be reclassified 3.1 0.6
----------------------------------------------- ------- --------
Total items that may be reclassified
subsequently to profit or loss (11.0) (5.3)
----------------------------------------------- ------- --------
Other comprehensive income/(loss)
for the year net of tax
net of tax 6.8 (19.3)
----------------------------------------------- ------- --------
Total comprehensive income for the
year 213.1 203.3
----------------------------------------------- ------- --------
Total comprehensive income attributable
to:
Ordinary shareholders of the parent 207.2 195.0
Non-controlling interests (1.1) (0.3)
Perpetual capital security holders 7.0 8.6
----------------------------------------------- ------- --------
Balance sheets
At 31 March 2020
2020 2019
Notes GBPm GBPm
ASSETS
Non-current assets
Goodwill 42.3 385.0
Other intangible assets 1.2 92.1
Property, plant and equipment 3,171.8 4,509.4
Other non-current assets - 256.4
Derivative financial instruments 4.1 70.5
Investments in joint ventures - 51.1
Retirement benefit obligations 6.6 -
---------- ----------
3,226.0 5,364.5
Current assets
Inventories 4.9 28.8
Trade and other receivables 185.8 484.8
Current tax receivable 1.9 -
Derivative financial instruments 2.7 11.8
Cash and cash deposits 13 665.9 569.6
---------- ----------
861.2 1,095.0
Assets held for sale 16 2,675.3 -
---------- ----------
3,536.5 1,095.0
---------- ----------
LIABILITIES
Current liabilities
Borrowings 13 (59.9) (150.4)
Financial liabilities at fair value through profit (1.5) (3.8)
Derivative financial instruments (7.1) (11.1)
Trade and other payables (115.3) (298.0)
Current tax liabilities - (19.1)
Provisions (0.6) (28.7)
(184.4) (511.1)
Liabilities directly associated with assets classified as held for sale (756.3) -
---------- ----------
Net current assets 2,595.8 583.9
---------- ----------
Non-current liabilities
Borrowings 13 (3,654.9) (3,498.7)
Other non-current liabilities (122.9) (147.9)
Financial liabilities at fair value through profit (43.1) (43.1)
Derivative financial instruments (27.2) (9.9)
Retirement benefit obligations - (60.8)
Deferred tax liabilities (261.6) (305.1)
Provisions - (203.1)
---------- ----------
(4,109.7) (4,268.6)
---------- ----------
Net assets 1,712.1 1,679.8
---------- ----------
Shareholders' Equity
Share Capital 10 171.3 171.1
Share premium account 227.0 223.6
Capital redemption reserve 144.2 144.2
Retained earnings and other reserves 872.8 843.0
---------- ----------
Total shareholders' equity 1,415.3 1,381.9
Non-controlling interests 0.1 1.2
Perpetual capital securities 11 296.7 296.7
---------- ----------
Total equity 1,712.1 1,679.8
---------- ----------
PENNON GROUP PLC
Consolidated statement of changes in equity for the year ended 31 March 2020
Share Share Capital Retained Non-controlling Perpetual Total
capital premium redemption earnings interests capital Equity
(note account reserve and other securities
10) reserves (note
11)
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 year - - - 214.3 (0.3) 8.6 222.6
Other comprehensive loss
for
the year - - - (19.3) - - (19.3)
---------------------------- --------- --------- ---------------- ----------- ---------------- ------------ --------
Total comprehensive income
for the year - - - 195.0 (0.3) 8.6 203.3
Transactions with equity
shareholders:
Dividends paid - - - (162.0) - - (162.0)
Adjustment in respect of
share-based
payments (net tax) - - - 4.4 - - 4.4
Distributions to perpetual
capital security holders - - - - - (8.6) (8.6)
Own shares acquired by the
Pennon Employee Share Trust
in respect of
Trust in respect of Share
options granted - - - (1.5) - - (1.5)
Proceeds from shares issued
under the
Sharesave
Scheme 0.3 4.8 - - - - 5.1
----------- --------------- --------- --------- ---------------- ----------- ---------------- ------------ --------
Total transactions with
equity
shareholders 0.3 4.8 - (159.1) - (8.6) (162.6)
---------------------------- --------- --------- ---------------- ----------- ---------------- ------------ --------
At 31 March 2019 171.1 223.6 144.2 843.0 1.2 296.7 1,679.8
IFRS 16 leases opening
adjustment - - - (8.0) - - (8.0)
---------------------------- --------- --------- ---------------- ----------- ---------------- ------------ ----------
At 1 April 2019 (adjusted
for IFRS 16) 171.1 223.6 144.2 835.0 1.2 296.7 1671.8
Profit for the year - - - 200.4 (1.1) 7.0 206.3
Other comprehensive income
for the year - - - 6.8 - - 6.8
---------------------------- --------- --------- ---------------- ----------- ---------------- ------------ ----------
Total comprehensive income
for the year - - - 207.2 (1.1) 7.0 213.1
Transactions with equity
shareholders:
Dividends paid - - - (172.6) - - (172.6)
Adjustment in respect of
share-based
payments (net of
tax) - - - 4.8 - - 4.8
Distributions 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 3.4 - - - - 3.6
Total transactions with
equity
shareholders 0.2 3.4 - (169.4) - (7.0) (172.8)
---------------------------- --------- --------- ---------------- ----------- ---------------- ------------ --------
At 31 March 2020 171.3 227.0 144.2 872.8 0.1 296.7 1,712.1
---------------------------- --------- --------- ---------------- ----------- ---------------- ------------ --------
PENNON GROUP PLC
Consolidated statement of cash flows for the year ended 31 March 2020
2020 2019
Notes GBPm GBPm
Cash flows from operating activities
Cash generated from operations 12 516.3 399.8
Interest paid (97.7) (83.9)
Tax paid (52.6) (29.2)
Net cash generated from operating
activities 366.0 286.7
--------------------------- ----------------------------
Cash flows from investing activities
Interest received 3.4 10.3
Dividends received 6.0 5.5
Investment in joint venture - (54.8)
Loan repayments received from joint
ventures 13.4 0.5
Deposit of restricted deposits (23.3) (21.6)
Purchase of property, plant and
equipment (332.8) (356.0)
Purchase of intangible assets (0.6) -
Proceeds from sale of property,
plant
and equipment 10.6 6.3
Net cash used in investing
activities (323.3) (409.8)
--------------------------- ----------------------------
Cash flows from financing activities
Proceeds from issuance of ordinary
shares 3.6 5.1
Proceeds from derivatives early
settlement 87.2 -
Purchase of ordinary shares by the
Pennon Employee Share Trust (1.6) (1.5)
Proceeds from new borrowing 268.2 384.5
Repayment of borrowings (84.8) (181.6)
Cash inflows from lease financing
arrangements 115.0 74.9
Lease principal repayments (2019:
Finance
lease principal repayments) (142.8) (27.8)
Dividends paid 9 (172.6) (162.0)
Perpetual capital securities
periodic
return 11 (8.6) (5.8)
Net cash generated from financing
activities 63.6 85.8
--------------------------- ----------------------------
Net increase/(decrease) in cash and
cash
equivalents 106.3 (37.3)
Cash and cash equivalents at
beginning
of year 13 365.7 403.0
Cash and cash equivalents at end of
year 13 472.0 365.7
=========================== ============================
PENNON GROUP PLC
Notes
1. General information
Pennon Group plc is a company registered in the United
Kingdom
under the Companies Act 2006. The address of the
registered office
is given on page 66. Through the year, Pennon Group's
business
has been operated through two main subsidiaries. South
West Water
Limited includes the integrated water businesses 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
is a recycling and residual waste processing and
transformation
business. 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. On 18 March 2020 Pennon agreed to sell Viridor
Limited
for GBP3.7 billion, subject to a number of conditions. The
sale
is expected to complete in early summer 2020 (see note
16).
The financial information for the years ended 31 March
2020 and
31 March 2019 does not constitute statutory accounts
within the
meaning of section 434 of the Companies Act 2006. The
Annual Report
and Accounts for the year ended 31 March 2020, including
the financial
statements from which this financial information is
derived, will
be delivered to the Registrar of Companies after the AGM
on 31
July 2020. The auditor's report on the 2020 financial
statements
was unqualified and did not contain a statement under
section 498
of the Companies Act 2006.
The full financial statements for the year ended 31 March
2019
were approved by the Board of Directors on 24 May 2019 and
have
been delivered to the Registrar of Companies. The
independent auditor's
report on those financial statements was unqualified and
did not
contain a statement under section 498 of the Companies Act
2006.
This final results announcement and the results for the
year ended
31 March 2020 were approved by the Board of Directors on 3
June
2020.
2. Basis of preparation
The financial information in this announcement has been
prepared
on the historical cost accounting basis (except for fair
value
items as set out in the 2019 Annual Report and Accounts)
and in
accordance with International Financial Reporting
Standards (IFRS)
and interpretations of the IFRS Interpretations Committee
as adopted
by the European Union, and with those parts of the
Companies Act
2006 applicable to companies reporting under IFRS. The
accounting
policies adopted are consistent with those followed in the
preparation
of the Group's 2020 Annual Report and Accounts which have
not changed
significantly from those adopted in the Group's 2019
Annual Report
and Accounts (which are available on the Company website
www.pennon-group.co.uk
), except as described in note 3 below.
3. Accounting policies
IFRS 16 'Leases'
The impact of the new leasing standard, which was adopted
by the
Group from the 1 April 2020, is provided in detail in note
15 below.
Other than the adoption of IFRS 16, 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 (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 non-household
retail business comprises the services provided by Pennon Water
Services in the non-household water and wastewater retail market
which, while regulated, is open to competition. Following the
Group entering into a formal sale agreement on 18 March 2020
to dispose of Viridor, the waste management business has been
accounted for as a discontinued operation.
2020 2019
(restated)
GBPm GBPm
Revenue from continuing operations
Water 570.3 581.0
Non-household retail 173.5 173.7
Other 10.1 10.5
Less intra-segment trading * (117.2) (132.6)
------- -----------
636.7 632.6
Revenue from discontinued operations
Waste management 757.8 852.7
Other 9.4 10.9
Less intra-segment trading (14.0) (18.0)
753.2 845.6
Pro forma total revenue 1,389.9 1,478.2
------- -----------
Operating profit before depreciation,
amortisation and non-underlying items (EBITDA)
from continuing operations
Water 364.2 367.1
Non-household retail 1.9 1.0
Other (0.8) (0.8)
------- -----------
365.3 367.3
EBITDA from discontinued operations - Waste
management 198.1 178.9
------- -----------
563.4 546.2
------- -----------
Operating profit before non-underlying items
from continuing operations
Water 245.4 251.1
Non-household retail 1.2 0.3
Other (1.1) (1.3)
------- -----------
245.5 250.1
Operating profit from discontinued operations
- Waste management 116.0 100.9
------- -----------
361.5 351.0
------- -----------
PENNON GROUP PLC
Notes (continued)
4. Segmental information (continued)
2020 2019
GBPm GBPm
Profit before tax and non-underlying items
from continuing operations
Water 174.0 180.6
Non-household retail (0.4) (1.6)
Other 9.4 12.7
--------------- ------------
183.0 191.7
Profit before tax from discontinued operations
- Waste management 104.6 88.5
--------------- ------------
287.6 280.2
--------------- ------------
Profit before tax from continuing operations
Water 189.0 184.6
Non-household retail (5.4) (1.6)
Other 9.5 18.4
--------------- ------------
193.1 201.4
Profit before tax from discontinued operations
- Waste management 108.4 58.9
--------------- ------------
301.5 260.3
--------------- ------------
* Intra-segment trading between and to different segments is
under normal market based commercial terms and conditions.
Intra-segment revenue of the other segment is at cost.
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 year and business trends over time.
Continuing Discontinued Pro Continuing Discontinued Pro
operations operations forma operations operations forma
total total
2020 2020 2020 2019 2019 2019
GBPm GBPm GBPm GBPm GBPm GBPm
Operating costs
Pension past service credit
(1) - 4.9 4.9 - - -
COVID-19 provision for expected
credit losses (2) (7.9) (1.1) (9.0) - - -
Pension past service cost
(GMP equalisation impact)
(3) - - - (2.1) (0.9) (3.0)
Provision for receivable (due
from Interserve in respect
of Glasgow Recycling Renewable
Energy Centre) (4) - - - 6.0 (28.7) (22.7)
--------------- ------------ --------
Earnings before interest,
tax, depreciation and amortisation (7.9) 3.8 (4.1) 3.9 (29.6) (25.7)
Remeasurement of fair value
movement in derivatives (5) 18.0 - 18.0 5.8 - 5.8
Net tax credit arising on
non-underlying items above (1.9) (0.7) (2.6) (0.7) 5.7 5.0
Deferred tax change in rate
(6) (30.3) (10.3) (40.6) - - -
------------ ------------ ------- --------------- ------------ --------
Net non-underlying (charge)/credit (22.1) (7.2) (29.3) 9.0 (23.9) (14.9)
------------ ------------ ------- --------------- ------------ --------
PENNON GROUP PLC
Notes (continued)
5. Non-underlying items (continued)
(1) Upon cessation of the Greater Manchester contract, Viridor
employees delivering 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 GBP4.9 million (2019 GBPnil) reflects
curtailment and other gains resulting from transferring employees
moving from an active to deferred status in these schemes.
(2) In response to the COVID-19 pandemic a detailed expected credit
loss review has been undertaken. Economic and credit conditions
are worsening, however the UK government continue to implement
economic measures to support the wider economy, as a result
of the review a Group provision of GBP9.0 million has been
recognised. The charge is considered non-underlying due to
its size and non-recurring nature.
(3) On 26 October 2019, the High Court of Justice of England and
Wales issued a judgment in a claim regarding the rights of
female members of certain pension schemes to equality of treatment
in relation to pension benefits (Guaranteed Minimum Payment
(GMP) equalisation). The judgment concluded that the claimant
is under a duty to amend the schemes in order to equalise benefits
for men and woman in relation to GMP benefits. The issues determined
by the judgment arise in relation to many other occupational
pension schemes.
The Group estimates, with advice from the Group's corporate
actuary, that scheme liabilities will increase by an estimated
GBP3.0 million as a result of the judgment. The cost has been
recognised as a past service cost in the income statement for
the year ended 31 March 2019. The charge is considered non-underlying
due to size and non-recurring nature.
(4) The financial statements recognise a gross receivable of GBP72.0
million from Interserve Construction Limited in relation to
rectifications and completion costs for Glasgow Recycling Renewable
Energy Centre (GRREC). During the financial year ended 31 March
2019, Interserve Plc (holding company of Interserve Construction
Limited) entered into administration. The operating company,
Interserve Construction Limited with whom we contracted, is
currently continuing to trade. As a result of the lack of certainty
around the future of Interserve's business, and in accordance
with IFRS 9, we have sought to make an appropriate market-based
credit assessment using the latest public information available.
Consequently, a provision of GBP22.7 million was recognised
in 2018/19 against the receivable, resulting in a total cumulative
provision at 31 March 2019 of GBP28.7 million. The charge is
considered non-underlying due to its size and non-recurring
nature. The financial stability of Interserve Construction
Limited is judged to be outside the control of Pennon Group.
(5) In the year a gain of GBP18.0 million has been recognised relating
to non-cash derivative fair value movements associated with
derivatives that are not designated as being party to an accounting
hedge relationship (2019 gain of GBP5.8 million). In the year
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
dependent and potentially can be significant in value (size).
(6) Following the Chancellor's Budget on 11 March 2020, the UK
headline corporation tax rate will remain at 19%. It was previously
set to reduce to 17% from 1 April 2020 and that change has
now been cancelled. All deferred tax assets and liabilities
have therefore been recalculated to crystallise at 19%, resulting
in a non-underlying deferred tax charge in the year of GBP40.6
million. The change was substantively enacted on 17 March 2020.
PENNON GROUP PLC
Notes (continued)
6. Net finance costs
2020 2019 (restated)
----------------------------- ---------------------------------
Finance Finance Finance Finance
cost income Total cost income Total
GBPm GBPm GBPm GBPm GBPm GBPm
Cost of servicing debt
Bank borrowings and
overdrafts (28.1) - (28.1) (23.1) - (23.1)
Interest element of
finance lease
rentals (35.6) - (35.6) (35.4) - (35.4)
Other finance costs (2.7) - (2.7) (2.4) - (2.4)
Interest receivable - 4.1 4.1 - 3.5 3.5
(66.4) 4.1 (62.3) (60.9) 3.5 (57.4)
------------ ------- ------ ------- ------------ ----------
Notional interest
Retirement benefit
obligations (0.2) - (0.2) (1.0) - (1.0)
(0.2) - (0.2) (1.0) - (1.0)
------------ ------- ------ ------- ------------ ----------
Net finance costs before
non-underlying
items (66.6) 4.1 (62.5) (61.9) 3.5 (58.4)
Non-underlying items
(note 5)
Fair value remeasurement
of
non-designated
derivative
financial
instruments,
providing
commercial
hedges 18.0 - 18.0 5.8 - 5.8
Net finance costs after
non-underlying
items (48.6) 4.1 (44.5) (56.1) 3.5 (52.6)
------------ ------- ------ ------- ------------ ----------
In addition to the above, finance costs of GBP2 million have been
capitalised on qualifying assets included in property, plant and
equipment (2019 restated GBP2.9 million).
Excluded from the amounts above are net finance costs relating
to discontinued operations of GBP26.2 million (2019 GBP24.8 million),
consisting of finance income of GBP22.5 million (2019 GBP20.0 million)
and finance costs of GBP48.7 million (2019 GBP44.8 million).
PENNON GROUP PLC
Notes (continued)
7. Taxation
Before Non-underlying Before Non-underlying
non-underlying items non-underlying items
(note (note
items 5) Total items 5) Total
2020 2020 2020 2019 2019 2019
Analysis of
charge GBPm GBPm GBPm GBPm GBPm GBPm
Current tax
charge/(credit) 18.8 15.3 34.1 29.4 (5.5) 23.9
Deferred tax charge 33.2 27.9 61.1 13.3 0.5 13.8
Tax charge/(credit)
for the year 52.0 43.2 95.2 42.7 (5.0) 37.7
============== ============== ======== =============== ============== ========
Continuing Discontinued Proforma Continuing Discontinued Proforma
operations operations Total operations operations Total
2020 2020 2020 2019 2019 2019
GBPm GBPm GBPm GBPm GBPm GBPm
Current tax
charge/(credit) 43.8 (9.7) 34.1 29.6 (5.7) 23.9
Deferred tax charge 26.8 34.3 61.1 3.2 10.6 13.8
Tax charge for the
year 70.6 24.6 95.2 32.8 4.9 37.7
============== ============== ======== =============== ============== ========
UK corporation tax is calculated at 19% (2019 19%) of the estimated
assessable profit for the year.
UK corporation tax is stated after a credit relating to prior
year current tax of GBP9.2 million (2019 credit of GBP3.0 million)
and a prior year deferred tax charge of GBP6.5 million (2019
credit of GBP9.9 million).
PENNON GROUP PLC
Notes (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 year, 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:
2020 2019
Number of shares (millions)
For basic earnings per share 420.2 419.6
Effect of dilutive potential ordinary shares
from share options 1.9 1.3
For diluted earnings per share 422.1 420.9
=========================== =======
Adjusted basic and diluted earnings per ordinary share
Earnings per ordinary share before non-underlying items, deferred
tax and adjusted to annualise depreciation and amortisation in
the Disposal Group are presented as the Directors believe that
this measure provides a more useful year on year comparison on
business trends and performance. Deferred tax is excluded as
the Directors believe it reflects a distortive effect of changes
in corporation tax rates and the level of long-term capital investment.
Following the announcement of the sale of Viridor on 18 March
2020, the assets and liabilities of the Disposal Group have been
transferred to assets held for sale and in accordance with IFRS
5, the property plant and equipment and intangible assets have
not been depreciated or amortised from that date. The Directors
believe that to aid comparison of earnings year on year, it is
appropriate to reflect a full year's depreciation and amortisation
consistent with all other revenues and costs recognised for the
full year in the Disposal Group. Earnings per share have been
calculated as follows:
2020 2019
---------------------------- ------------------------------------
Continuing and discontinued Earnings per Earnings per
operations Profit share Profit share
after Basic Diluted after Basic Diluted
tax tax
GBPm p p GBPm p p
Statutory earnings 200.4 47.7 47.5 214.3 51.1 50.9
Deferred tax before non-underlying
items 33.2 7.9 7.8 13.3 3.1 3.1
Non-underlying items (net
of tax) 29.3 6.9 6.9 14.9 3.6 3.6
Non-controlling interests'
share
of non-underlying items (1.0) (0.2) (0.2) - - -
Adjustment for full year
depreciation charge in
the Disposal Group (2.6) (0.6) (0.6) - - -
Adjusted earnings 259.3 61.7 61.4 242.5 57.8 57.6
PENNON GROUP PLC
Notes (continued)
8. Earnings per share (continued)
2020 2019
----------------------------------- ----------------------------------
Continuing operations Earnings per share Earnings per
Profit Profit share
after Basic Diluted after Basic Diluted
tax tax
GBPm p p GBPm p p
Statutory earnings 116.6 27.7 27.6 160.3 38.2 38.1
Deferred tax before non-underlying
items 10.1 2.4 2.4 2.5 0.6 0.6
Non-underlying items (net
of tax) 22.1 5.3 5.2 (9.0) (2.1) (2.2)
Non-controlling interests'
share
of non-underlying items (1.0) (0.2) (0.2) - - -
Adjusted earnings 147.8 35.2 35.0 153.8 36.7 36.5
9. Dividends
Amounts recognised as distributions to ordinary equity holders
in the year:
2020 2019
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
=========== =====================
Proposed dividends
Proposed interim dividend for the year ended
31 March 2020: 13.66p per share 57.5 54.0
Proposed final dividend for the year ended
31 March 2020: 30.11p per share 126.8 118.7
184.3 172.7
=========== =====================
The proposed interim and final dividends have not been included
as liabilities in these financial
statements.
The proposed interim dividend for 2020 was paid on 3 April 2020
and the proposed final dividend is subject to approval by shareholders
at the Annual General Meeting.
PENNON GROUP PLC
Notes (continued)
10. Share capital
Allotted, called up and fully paid
Number of shares
---------------------------
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 GBP5.1m, shares
issued
in respect of the Company's Sharesave
Scheme - 777,415 0.3
At 31 March 2019 ordinary shares of
40.7p each 8,443 420,520,598 171.1
For consideration of GBP3.6m, shares
issued
in respect of the Company's Sharesave
Scheme - 515,959 0.2
At 31 March 2020 ordinary shares
of 40.7p eac h 8,443 421,036,557 171.3
-------------- ----------- ---------------------
Shares held as treasury shares may be sold or re-issued for
any of the Company's share schemes, or cancelled.
2020 2019
GBPm GBPm
11. Perpetual capital securities
GBP 300m 2.875% perpetual subordinated capital
securities 296.7 296.7
296.7 296.7
----------- ---------------------
On 22 September 2017 the Company issued GBP300 million 2.875%
perpetual capital securities. Costs directly associated with
the issue of GBP3.3 million were set off against the value of
the issuance. They had no fixed redemption date but the Company
could 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 in the 12 months prior to the
periodic return date of 22 May 2020, a periodic return of GBP8.6
million (2019 GBP8.6 million) has been recognised as a financial
liability at the year end.
PENNON GROUP PLC
Notes (continued)
12. Cash flow from operating activities
Reconciliation of profit for the year to net cash inflow from
operations:
2020 2019
GBPm GBPm
Cash generated from operations
Profit for the year 206.3 222.6
Adjustments for:
Share-based payments 3.4 3.6
Profit on disposal of property, plant
and equipment (2.5) (3.9)
Depreciation charge 197.2 190.0
Amortisation of intangible assets 4.7 5.2
Non-underlying increase in customer debt
provisions 9.0 -
Non-underlying past service credit (4.9) -
Non-underlying remeasurement of fair value
movement in (18.0) (5.8)
derivatives
Share of post-tax profit from joint ventures (14.8) (12.4)
Finance income (before non-underlying
items) (26.6) (23.5)
Finance costs (before non-underlying items) 115.3 106.7
Taxation charge 95.2 37.7
Changes in working capital:
Increase in inventories (6.0) (4.2)
Decrease/(increase) in trade and other receivables 32.6 (46.4)
(Increase)/decrease in service concession
arrangements
receivable (17.4) 6.8
Decrease in trade and other payables (19.2) (47.7)
Decrease in retirement benefit obligations
from
contributions (30.8) (7.3)
Decrease in provisions (7.2) (21.6)
Cash generated from operations 516.3 399.8
=================== ===================
2020 2019
GBPm GBPm
Total interest paid
Interest paid in operating activities 97.7 83.9
Interest paid in investing activities 10.6 15.2
Total interest paid 108.3 99.1
=================== ===================
The above includes the entire Group, including cash flows relating
to the discontinued operations business. Disaggregated information
relating to the discontinued operations business is provided in note
16.
During the year, the Group completed a number of sale and leaseback
transactions in respect of its infrastructure assets as part of its
ongoing financing arrangements. Cash proceeds of GBP115.0 million were
received and a gain of GBPnil was recognised. These assets are primarily
being leased back over an initial term of 10-year lease term at market
rentals.
PENNON GROUP PLC
Notes (continued)
13. Net borrowings
2020 2019
GBPm GBPm
Cash and cash deposits 665.9 569.6
Borrowings - current
Bank and other loans (13.7) (59.8)
Other current borrowings (27.0) (27.0)
Lease obligations (IAS17 finance) (18.2) (63.6)
Lease obligations (IAS17 operating) (1.0) -
Total current borrowings (59.9) (150.4)
------------------- -------------------
Borrowings - non-current
Bank and other loans (1,894.8) (1,628.0)
Other non-current borrowings (340.8) (373.9)
Lease obligations (IAS17 finance) (1,384.2) (1,496.8)
Lease obligations (IAS17 operating) (35.1) -
------------------- -------------------
Total non-current borrowings (3,654.9) (3,498.7)
------------------- -------------------
Total net borrowings (3,048.9) (3,079.5)
------------------- -------------------
Net borrowings in Disposal Group (215.1) -
------------------- -------------------
Total borrowings in total Group (3,264.0) (3,079.5)
=================== ===================
For the purposes of the cash flow statement cash and cash equivalents
comprise:
2020 2019
GBPm GBPm
Cash and cash deposits as above 665.9 569.6
Cash and cash deposits held in the Disposal
Group 33.3 -
Less: deposits with a maturity of three months
or more (restricted funds) (227.2) (203.9)
472.0 365.7
=================== ===================
PENNON GROUP PLC
Notes (continued)
14. Contingencies
2020 2019
Contingent liabilities GBPm GBPm
Performance bonds 197.1 201.7
197.1 201.7
============ ===========
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. All of the performance bonds relate
to the Disposal Group.
In connection with the application of the audit exemption under
Section 479A of the Companies Act 2006 the Company has guaranteed
all the outstanding liabilities as at 31 March 2020 of Viridor
Waste 2 Limited since this company qualifies for the exemption.
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 potential prosecutions
from the Health and Safety Executive.
15. 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 (IBR).
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 GBP195.7 million. 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 GBP132.2 million
* prepayments - decrease by GBP0.5 million
* lease liabilities - increase by GBP145.7 million
* accruals - decrease by GBP4.2 million
* deferred tax liabilities - increase by GBP1.8 million
* retained earnings - decrease by GBP8.0 million
PENNON GROUP PLC
Notes (continued)
15. Change in accounting policy on leases (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 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.
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 0.5
Less: Impact of discounting at weighted average
discount rate of 3.6% (48.8)
--------
Operating Lease liabilities recognised at 31 March
2019 145.7
Add: finance lease liabilities recognised at 31
March 2019 1,560.4
--------
IFRS 16 lease liability as at 1 April 2019 1,706.1
--------
Of which:
Current lease liabilities 19.4
Non-current lease liabilities 1,686.7
--------
1,706.1
--------
Associated right-of-use assets for selected land and building
leases were measured on a retrospective basis as if 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 16 145.7
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
16 132.2
------
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
* accounting 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 GBP8.0 million. 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
Cash outflows in respect of leasing relate to principal repayments
of GBP142.8 million and interest repayments of GBP37.7 million,
in addition to inflows from lease financing arrangements of GBP115.0
million.
PENNON GROUP PLC
Notes (continued)
15. Change in accounting policy on leases (continued)
A summary of opening and closing right-of-use assets are shown
below:
As at 1
April
2020 2019
GBPm GBPm
Land and buildings 112.6 119.7
Infrastructure assets 326.6 360.2
Operational properties 346.5 344.4
Fixed and mobile plant, vehicles
and computers 365.9 373.0
Construction in progress - 5.2
Transferred to assets held for sale (207.5) -
-------- --------
Total 944.1 1,202.5
-------- --------
The total value of right-of-use assets at 1 April 2019 and 31
March 2020 includes GBP1,070.7 million and GBP1,029.1 million
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 for the Continuing Group the impact
on profit for the year ended 31 March 2020 was a reduction in
profit after tax of GBP0.6 million, resulting from:
* an increase in EBITDA of GBP1.9 million
* an increase in depreciation of GBP1.4 million
* an increase in finance costs of GBP1.2 million; and
* a reduction in corporation tax of GBP0.1 million.
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 cash flows increased under IFRS 16 as the element
of cash paid attributable to the repayment of principal is included
in financing cash flows. The net increase/decrease in cash and
cash equivalents remains unchanged.
Lease accounting policy
All 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 12 months or less.
Contracts previously classified as 'operating leases' under IAS
17 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. 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 reassesses 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
PENNON GROUP PLC
Notes (continued)
15. Change in accounting policy on leases (continued)
made to the carrying value of the right-of-use asset, with the
revised carrying amount being amortised over the remaining (revised)
lease term.
Measurement and recognition of assets and liabilities previously
accounted for as 'finance leases' under IAS 17 continue to apply
following the adoption of IFRS 16. Assets continue to be included
as property, plant and equipment as right-of-use assets at the
lower of their fair value at commencement or the present value
of the minimum lease payments and are depreciated over their
estimated economic lives or the finance lease period, whichever
is the shorter. The corresponding liability is recorded as borrowings.
The interest element of the rental costs is charged against profits
using the actuarial method over the period of the lease.
The Group regularly uses sale and lease back transactions to
finance its capital programme. A sale and leaseback transaction
is where the Group sells an asset and immediately reacquires
the use of the asset by entering into a lease with the buyer.
Each transaction is assessed as to whether it meets the criteria
within IFRS 15 'Revenue from contracts with customers' for a
sale to have occurred. As a result, a lease liability is recognised,
the associated property, plant and equipment asset is derecognised,
and a right-of-use asset is recognised at the proportion of the
carrying value relating to the right retained. Any gain or loss
arising relates to the rights transferred to the buyer.
PENNON GROUP PLC
Notes (continued)
16. Discontinued operations and non-current assets held for resale
On 18 March 2020, the Group entered into a formal sale agreement
to dispose of Viridor Limited to Planets UK Bidco Limited (Bidco),
a newly formed company established by funds advised by Kohlberg
Kravis Roberts & Co. L.P. (KKR). In accordance with IFRS 5 'Non-current
assets held for sale and discontinued operations', the assets
and liabilities related to Viridor were classified as a Disposal
Group held for sale at 31 March 2020. The sale is conditional
on approval by the Group's shareholders, merger control clearance
from the European Commission and certain other conditions and
is expected to complete in the summer 2020.
The GBP3.7 billion estimated fair value less costs to sell exceeds
the carrying value of Viridor's net assets, and accordingly no
impairment losses have been recognised on reclassification as
a Disposal Group.
The tables below show the results of the discontinued operations
which are included in the Group income statement and cash flow
statement for the year ended 31 March 2020, together with the
classes of assets and liabilities comprising the operations held
for sale in the Group balance sheet as at 31 March 2019.
Non-underlying Non-underlying
items items
Before Before
non-underlying (note non-underlying (note
items 5) Total items 5) Total
2020 2020 2020 2019 2019 2019
Notes GBPm GBPm GBPm GBPm GBPm GBPm
------------------- ------ ---------------- ---------------- -------- ---------------- --------------- --------
Discontinued
operations
Revenue 4 753.2 - 753.2 845.6 - 845.6
Operating costs
Employment costs (130.4) 4.9 (125.5) (138.6) (0.9) (139.5)
Raw materials and
consumables
used (87.2) - (87.2) (94.3) - (94.3)
Other operating
expenses (337.5) (1.1) (338.6) (433.8) (28.7) (462.5)
------------------- ------ ---------------- ---------------- -------- ---------------- --------------- --------
Earnings before
interest,
tax, depreciation
and
amortisation 4 198.1 3.8 201.9 178.9 (29.6) 149.3
Depreciation and
amortisation (82.1) - (82.1) (78.0) - (78.0)
------------------- ------ ---------------- ---------------- -------- ---------------- --------------- --------
Operating profit 4 116.0 3.8 119.8 100.9 (29.6) 71.3
Finance income 6 22.5 - 22.5 20.0 - 20.0
Finance costs 6 (48.7) - (48.7) (44.8) - (44.8)
------------------- ------ ---------------- ---------------- -------- ---------------- --------------- --------
Net finance costs 6 (26.2) - (26.2) (24.8) - (24.8)
Share of post-tax
profit
from joint
ventures 14.8 - 14.8 12.4 - 12.4
------------------- ------ ---------------- ---------------- -------- ---------------- --------------- --------
Profit before tax 4 104.6 3.8 108.4 88.5 (29.6) 58.9
Taxation
(charge)/credit 7 (13.6) (11.0) (24.6) (10.6) 5.7 (4.9)
------------------- ------ ---------------- ---------------- -------- ---------------- --------------- --------
Profit for the
year 91.0 (7.2) 83.8 77.9 (23.9) 54.0
Attributable to:
Ordinary
shareholders
of the parent 83.8 54.0
PENNON GROUP PLC
Notes (continued)
16. Discontinued operations and non-current
assets held for resale (continued)
2020 2019
GBPm GBPm
Cashflows from operating activities 149.1 69.2
Cashflows from investing activities (133.0) (255.6)
Cashflows from financing activities (23.1) (73.1)
-------- ---------
Net cash flows from discontinued operations,
net of intercompany (7.0) (259.5)
-------- ---------
The net assets relating to the Disposal Group
at 31 March 2020 in the Group balance sheet are
shown below:
2020
GBPm
Assets of the Disposal Group
Goodwill 340.8
Other intangible assets 86.9
Property, plant and equipment 1,584.9
Other non-current assets 261.5
Investments in joint ventures 60.1
Inventories 29.9
Trade and other receivables 277.9
Cash and cash deposits 33.3
---------
Total assets 2,675.3
---------
Liabilities of the Disposal Group
Borrowings (248.4)
Trade and other payables (141.7)
Current tax liabilities (1.0)
Provisions (237.6)
Other non-current liabilities (14.3)
Retirement benefit obligations (15.1)
Deferred tax liabilities (98.2)
---------
Total liabilities (756.3)
Net assets 1919.0
---------
At 31 March 2020 trade and other receivables include a
net other receivable of GBP43.7 million (2019 GBP43.3 million)
relating to gross contractual compensation amounts due
totalling GBP72.0 million (2019 GBP72.0 million) arising
from additional costs incurred in the construction of the
Glasgow Recycling and Renewable Energy Centre (GRREC).
A full credit risk appraisal has been carried out on this
receivable and a provision of GBP28.3 million (2019 GBP28.7
million) has been recognised for expected credit losses.
PENNON GROUP PLC
Notes (continued)
16. Discontinued operations and non-current assets held for
resale (continued)
Provisions include environmental and landfill restoration
provisions relating to landfill sites totalling GBP201.2
million at 31 March 2020.
Included in other provisions are amounts provided by the
Group in relation to the expected economic outflow of resources
required to settle claims associated with ongoing litigation.
These amounts are considered by the Directors and the management
of the Group to be the best estimate of the amounts that
might be finally settled. Further disclosures have not
been provided in accordance with IAS 37 paragraph 92, as
the Group believes they are commercially sensitive and
doing so would be seriously prejudicial to the Group's
position.
17. Events after the reporting period
Repayment of perpetual capital securities
On 6 May 2020, the Company exercised its sole discretionary
right to redeem all of the GBP300 million perpetual capital
securities at their principal amount on 22 May 2020, this
being the first available date to exercise this right.
Disposal of Viridor
On 18 March 2020 the Group announced the sale of Viridor
to KKR subject to shareholder, competition authority approval
and other conditions. The first two of these conditions
have now been met and the final condition can be waived
at Pennon's discretion, giving the Group control of the
timetable to complete the transition during early summer
2020.
Impact of COVID-19
The World Health Organization (WHO) announced that COVID-19
was a global pandemic on 11 March 2020 and the UK Government
announced its wide-ranging lockdown restrictions on 23
March 2020. Given these events took place prior to the
Group and Company's financial year end of 31 March 2020,
the Directors have taken the impact of these events into
account when making its key judgements and estimates at
the balance sheet date, up to the date of approving the
annual report and accounts.
The Group's operational response to COVID-19 is set out
in on page 6 of this document.
In assessing its going concern and viability the impacts
of COVID-19 on these assessments has been considered in
full.
Pennon Group plc
Registered Office : Registered in England No 2366640
Peninsula House
Rydon Lane
Exeter
EX2 7HR
pennon-group.co.uk
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 6 in the Annual
Report and Accounts 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 2020
GBPm Total Group Underlying Non-underlying Statutory Earnings
underlying discontinued items from results per share
(incl discontinued operations continuing (p)
operations) operations
EBITDA (see below) 563.4 198.1 (7.9) 357.4
Operating profit 361.5 116.0 (7.9) 237.6
Profit before tax 287.6 104.6 10.1 193.1
Taxation (52.0) (13.6) (32.2) (70.6)
---------------------------- -------------------- -------------- --------------- ----------
Profit after tax from
continuing operations 122.5
Profit after tax from
discontinued operations 83.8
Profit after tax (PAT) 206.3
PAT attributable to
perpetual capital holders (7.0)
Non-controlling interests 1.1
---------------------------- -------------------- -------------- --------------- ---------- -----------
PAT attributable to
shareholders 200.4 47.7
Deferred tax before
non-underlying items 33.2 7.9
Non-underlying items
post tax 29.3 6.9
Non-controlling interests'
share of non-underlying
items (1.0) (0.2)
Adjustment for full
year depreciation charge
in Disposal Group (2.6) (0.6)
Underlying earnings 259.3 61.7
---------------------------- -------------------- -------------- --------------- ---------- -----------
PENNON GROUP PLC
Alternative Performance Measures (continued)
(i) Underlying earnings (continued)
Underlying earnings reconciliation 2019
GBPm Total Group Underlying Non-underlying Statutory Earnings
underlying discontinued items from results per share
(incl discontinued operations continuing (p)
operations) operations
EBITDA (see below) 546.2 178.9 3.9 371.2
Operating profit 351.0 100.9 3.9 254.0
Profit before tax 280.2 88.9 9.7 201.4
Taxation (42.7) (10.6) (0.7) (37.7)
---------------------------- -------------------- -------------- --------------- ----------
Profit after tax from
continuing operations 168.6
Profit after tax from
discontinued operations 54.0
Profit after tax (PAT) 222.6
PAT attributable to
perpetual capital holders (8.6)
Non-controlling interests 0.3
---------------------------- -------------------- -------------- --------------- ---------- -----------
PAT attributable to
shareholders 214.3 51.1
Deferred tax before
non-underlying items 13.3 3.1
Non-underlying items
post tax 14.9 3.6
Underlying earnings 242.5 57.8
---------------------------- -------------------- -------------- --------------- ---------- -----------
(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
2020 2019
GBPm Total Discontinued Continuing Total Discontinued Continuing
Group operations operations Group operations operations
underlying underlying
(incl. (incl.
discontinued discontinued
operations) operations)
Statutory EBITDA 559.3 201.9 357.4 520.5 149.3 371.2
Non-underlying
items 4.1 (3.8) 7.9 25.7 29.6 (3.9)
-------------- ------------- ------------ -------------- ------------- ------------
Underlying EBITDA 563.4 198.1 365.3 546.2 178.9 367.3
IFRIC 12 interest
receivable(1) 15.1 15.1 - 14.6 14.6 -
Joint venture EBITDA(1) 41.3 41.3 - 31.9 31.9 -
-------------- ------------- ------------ -------------- ------------- ------------
Adjusted EBITDA 619.8 254.5 365.3 592.7 225.4 367.3
-------------- ------------- ------------ -------------- ------------- ------------
(1) These adjustments relate to the waste management business, resulting
in adjusted waste management EBITDA of GBP254.5 million (2019 GBP225.4
million).
PENNON GROUP PLC
Alternative Performance Measures (continued)
(iii) Total Group 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.
2020 2019
GBPm GBPm
Net finance costs after non-underlying items 70.7 77.4
Non-underlying net finance costs 18.0 5.8
Interest receivable on shareholder loans to
joint ventures 5.3 5.3
Net interest on retirement benefit
obligations (0.8) (1.4)
Unwinding of discounts on provisions (8.2) (11.1)
Interest receivable on service concession
arrangements 15.1 14.6
Capitalised interest 11.0 15.2
-------------------------------- --------------------------------
Net finance costs for effective interest
rate
calculation 111.1 105.8
Opening net debt 3,079.5 2,801.5
Closing net debt 3,264.0 3,079.5
-------------------------------- --------------------------------
Average net debt (opening net debt + closing
net debt divided by 2) 3,171.8 2,940.5
-------------------------------- --------------------------------
Effective interest rate 3.5% 3.6%
-------------------------------- --------------------------------
(iv) Total Group 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.
2020 2019
GBPm GBPm
Net finance costs after non-underlying items 70.7 77.4
Non-underlying net finance costs 18.0 5.8
Net interest on retirement benefit obligations (0.8) (1.4)
Unwinding of discounts in provisions (8.2) (11.1)
Interest receivable on service concession
arrangements 15.1 14.6
----------------------------- ---------------------------------
Net finance costs for interest cover
calculation 94.8 85.3
Operating profit before non-underlying items 361.5 351.0
----------------------------- ---------------------------------
Interest cover (times) 3.8 4.1
----------------------------- ---------------------------------
PENNON GROUP PLC
Alternative Performance Measures (continued)
(v) Total Group Dividend cover
Proposed dividends divided by profit for the year before
non-underlying items and deferred tax.
2020 2019
GBPm GBPm
Proposed dividends 184.3 172.7
Profit for the year attributable to ordinary
shareholders 200.4 214.3
Deferred tax charge before non-underlying
items 33.2 13.3
Non-underlying items after tax in profit for
the year 29.3 14.9
Non-controlling interests' share of non-underlying
items (1.0) -
Adjustment for full year depreciation charge
in the Disposal Group (2.6) -
----------------------------- ----------------------------
Adjusted profit for dividend cover calculation 259.3 242.5
Dividend cover (times) 1.4 1.4
----------------------------- ----------------------------
(vi) Total Group 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.
2020 2019
GBPm GBPm
Additions to property, plant and equipment 326.8 387.2
Additions to intangible assets 0.6 -
Landfill restoration asset (5.3) (22.8)
IFRIC 12 additions to other intangible
assets
- service concession arrangements - 24.7
IFRIC 12 additions to other non-current
assets
- service concession arrangements 17.1 6.8
IFRIC 12 additions to current trade and
other
receivables - prepayments and accrued
income - 3.3
Less IFRIC 12 additions subject to legal
contractual
process - (3.3)
------------------------------ -----------------------------------
Capital investment 339.2 395.9
------------------------------ -----------------------------------
Following the adoption of IFRS 16 Property, plant and equipment
additions in 2020 including right-of-use assets GBP6.2 million
(2019 GBPnil million). These assets are directly associated
with leases previously classified as operating leases under
IAS 17. In 2019, operating leases and associated assets
were not held on the balance sheet.
(vii) Total Group 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.
2020 2019
GBPm GBPm
Cash flow statements: purchase of property,
plant and equipment 332.8 356.0
Cash flow statements: purchase of
intangible
assets 0.6 -
Cash flow statements: proceeds from sale of
property, plant and equipment (10.6) (6.3)
IFRIC 12 additions to other intangible
assets
- service concession arrangements - 24.7
IFRIC 12 additions to non-current assets -
service concession arrangements 17.1 6.8
IFRIC 12 additions to current trade and
other
receivables - prepayments and accrued
income - 3.3
-------------------------------- -----------------------------
Capital payments 339.9 384.5
-------------------------------- -----------------------------
PENNON GROUP PLC
Alternative Performance Measures (continued)
(viii) Total Group Return on capital employed
The total of underlying operating profit, joint venture
profit after tax and joint venture interest receivable
divided by capital employed (net debt plus total equity
invested). An average value for this metric is part of
the long-term incentive plan for Directors.
2020 2019
GBPm GBPm
Underlying operating profit 361.5 351.0
Underlying joint venture profit after tax 14.8 12.4
Joint venture interest receivable 5.3 5.3
-------------------------------- -----------------------------
Adjusted profit for return on capital
employed
calculation 381.6 368.7
Values at year end:
Net debt 3,264.0 3,079.5
Share capital 171.3 171.1
Share premium account 227.0 223.6
Capital redemption reserve 144.2 144.2
Perpetual capital securities 296.7 296.7
-------------------------------- -----------------------------
Capital employed for return on capital
employed
calculation 4,103.2 3,915.1
Return on capital employed 9.3% 9.4%
-------------------------------- -----------------------------
(ix) Total Group Operating cash inflows
Cash generated from operations before construction spend
on service concession arrangements , pension contributions
and other tax payments. Other taxes include business rates,
employer's national insurance, fuel excise duty, carbon
reduction commitment, environmental payments, climate change
levy and external landfill tax.
2020 2019
GBPm GBPm
Cash generated from operations per cash flow
statements 516.3 399.8
IFRIC 12 additions to other intangible assets
- service concession arrangements - 24.7
IFRIC 12 additions to non-current assets -
service concession arrangements 17.1 6.8
IFRIC 12 additions to current trade and other
receivables - prepayments and accrued income - 3.3
Pension contributions 48.1 32.2
Other tax payments 147.1 137.9
Payment in respect of terminated synthetic
derivative, related to a prior period
non-underlying
charge - 44.3
------------------------------- -------------------------------
Operational cash inflows 728.6 649.0
------------------------------- -------------------------------
PENNON GROUP PLC
Alternative Performance Measures (continued)
(x) RoRE
This is a key regulatory metric which represents the returns
to shareholders expressed as a percentage of regulated
equity.
Returns are made up of a base return (set by Ofwat, the
water business regulator, at c.6.0% for 2015-20) plus totex
outperformance, financing outperformance and ODI outperformance.
Returns are calculated post tax and post sharing (only
a proportion of returns are attributed to shareholders
and shown within RoRE). The three different types of return
calculated and added to the base return are:
* Totex outperformance - totex is defined below and
outperformance is the difference between actual
reported results for the regulated business compared
to the Final Determination (Ofwat published document
at the start of a regulatory period), in a constant
price base
* Financing outperformance - is based on the difference
between a company's actual effective interest rate
compared with Ofwat's allowed cost of debt
* ODI outperformance - the net reward or penalty a
company earns based on a number of different key
performance indicators, again set in the Final
Determination
Regulated equity is a notional proportion of regulated
capital value (RCV which is set by Ofwat at the start of
every five-year regulatory period, adjusted for actual
inflation). For 2015-20, the notional equity proportion
is 37.5%
Further information on this metric can be found in South
West Water's annual performance report and regulatory reporting,
published in July each year. The most recent can be found
at: www.southwestwater.co.uk/about-us/how-are-we-performing.
(xi) Totex
Operating costs and capital expenditure of the regulated
water and wastewater business (based on the Regulated Accounting
Guidelines).
(xii) ODI
ODIs are designed to incentivise companies to deliver improvements
to service and outcomes based on customers' priorities
and preferences. If a company exceeds these targets a reward
can be earned through future higher revenues. If a company
fails to meet them, they can incur a penalty through lower
future allowed revenues.
[1] Return on Regulated Equity
[2] A measure of inflation which includes housing costs
[3] Planets UK Bidco Limited (Bidco), a newly formed company
established by funds advised by Kohlberg Kravis Roberts & Co.
L.P. (KKR)
[4] Based on Viridor's 2018/19 Adjusted EBITDA of GBP225.4
million
[5] Taking into account customary deductions for costs related
to the Disposal and assumes a completion date of 31 May 2020 which
has been chosen for illustrative purposes only
^ Measures with this symbol ^ are defined in the Alternative
Performance Measures (APMs) as outlined on pages 67 to 72
[6] Non-underlying items are adjusted for by virtue of their
size, nature or incidence to enable a full understanding of
financial performance
[7] EPS before deferred tax and non-underlying items
[8] The RPI rate used is 2.6% as of 31 March 2020.
[9] Rescheduled from previously published date of 23 July
2020
^ Measures with this symbol ^ are defined in the Alternative
Performance Measures (APMs) as outlined on pages 67 to 72.
[10] Non-underlying items are adjusted for by virtue of their
size, nature or incidence to enable a full understanding of
financial performance
[11] EPS before deferred tax and non-underlying items
[12] The RPI rate used is 2.6% as of 31 March 2020
[13] Including construction spend related to service concession
arrangements net of amounts subject to legal contractual
process
[14] GBP15.3 million current tax charge and GBP27.9 million
deferred tax charge
[15] 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
[16] Total tax includes business rates, employers' national
insurance, fuel excise duty, carbon reduction commitment,
environmental payments, climate change levy and external landfill
tax
[17] Includes net proceeds from sale of property, plant and
equipment and spend on service concession arrangements (before
amounts subject to legal contractual process)
[18] Before the impact of IFRS 16. Group Gearing including the
impact of IFRS 16 is 65.6% (64.7% at 31 March 2019)
[19] Based on regulatory capital value (RCV) at 31 March 2019
and South West Water group net debt (excluding the impact of IFRS
16). Regulatory South West Water Limited gearing including IFRS 16
is 64.6% at 31 March 2020 (58.9% at 31 March 2019)
[20] Outcome Delivery Incentives - ODIs
[21] Includes wholesale revenue for non-household customers
[22] Net tariff increase reflects the net position post
Wholesale Revenue Forecast Incentive Mechanism (WRFIM) pass back of
GBP17.5 million for 2019/20
[23] Based on 2018/19 reported Service Incentive Mechanism
(SIM)
[24] CCW - previously Consumer Council for Water - ombudsman for
customers
[25] RORE reflects base plus outperformance. It is calculated
using actual results before non-underlying items (deflated into
2012/13 prices) and compared against the Final Determination
allowances and based on notional gearing, annual average RCV and
reflecting the value of tax impacts at the actual annual effective
tax rate for the year
[26] WaterShare RORE financing outperformance is based on the
outturn effective interest rate on net debt, translated into an
effective real interest rate using cumulative K6 forecast RPI of
2.8%.
[27] Ofwat's definition of financing outperformance is
calculated based on average RPI of 1.1% for 2015/16, 2.1% for
2016/17, 3.7% for 2017/18 and 3.1% for 2018/19, and 2.6% for
2019/20
[28] GBP2.0 million (GBP13.3 million cumulatively) net ODI
reward; GBP3.0 million (GBP17.4 million cumulatively) net reward
will be recognised at the end of the regulatory period and GBP1.0
million (GBP4.1 million cumulatively) net penalty which will be
reflected during the regulatory period
[29] ODI net rewards excluding the impact of SIM penalty
confirmed in South West Water Final Determination of GBP2.9
million
[30] GBP3.1m of benefits in 2015/16 previously reinvested for
customers
[31] Includes wholesale costs for non-household customers
[32] Including landfill tax and construction spend on service
concession arrangements
[33] Contractual compensation of GBP4.1 million received in the
form of liquidated damages arising where construction is completed
post the original contractual compensation date
[34] Availability is an average weighted by site capacity,
including 100% of joint ventures and excluding Glasgow due to
different technology
[35] Availability is an average weighted by site capacity,
including 100% of joint ventures and excluding Glasgow due to
different technology
[36] Availability is an average weighted by site capacity,
including 100% of joint ventures and excluding Glasgow due to
different technology
[37] 2019/20 revenue for the Continuing Group
[38] GBP822m net debt as at 31 March 2020 plus GBP300m in perpetual securities, repaid May 2020
[39] Re-based to reflect changes in returns and approach in
K7
[40] Rescheduled from previously published date of 23 July
2020
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR EADKDESDEEAA
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