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RNS Number : 2552G
Pennon Group PLC
24 November 2020
24 November 2020
Half Year Results 2020/21
for the period ended 30 September 2020
Bringing water to life
Supporting the lives of people and the places they love for
generations to come
Susan Davy, Pennon Chief Executive, commented:
"I am delighted to be leading the business at this important
time in Pennon's history. The completion of the Viridor sale in
July this year has seen significant shareholder value realised,
allowing us to refocus our business on excellence in the water and
wastewater sector. It is an incredibly exciting time for the Group
as we forge ahead with our 'New Deal' plans for the K7 2020-25
period.
We will deliver our New Deal by being even closer to the people
we serve, understanding people's needs, demonstrating the positive
impacts we're making, and above all else, doing the right thing. We
are promoting social mobility, addressing racial and gender
inequality, and providing secure jobs across our regions.
This starts with our new WaterShare+ scheme, in which one in 16
of our household customers are now shareholders in the business
helping us to create a new kind of water company, closer to the
customers and communities we serve. Environmental considerations
continue to be at the heart of our decision making, and we are
focused on delivering on our commitments.
Pennon has delivered resilient operational and financial
performance through the first half of 2020/21, making good progress
in the new K7 regulatory period and against the backdrop of
COVID-19. I'd like to recognise the exceptional commitment and
resilience of all our people during this time. Since taking on the
role of CEO I have spent time out and about on our sites and have
been humbled by their dedication and professionalism that has
allowed us to continue to deliver for customers, communities and
the environment."
Reshaping the Group
-- Successful sale of Viridor
o GBP1.7 billion profit on disposal following sale of Viridor:
GBP3.7 billion net cash proceeds received
o Debt rightsizing progressing well with c.GBP0.75 billion
repaid to date
o GBP36 million contribution to Pennon's principal pension
scheme
o GBP2.7 billion headroom for investment
-- Focused on UK Water
o Sector leading dividend policy - growth of CPIH +2%,
underpinned by our sustainable strategy with expectations for
continued outperformance
A new deal for K7 - changing the nature of our relationship with
customers, communities and people
-- Driving operational excellence for customers in H1 2020/21
o Continued improvements in key customer measures with period on
period reductions in supply interruptions (down 51%), improvements
to water quality (taste and odour complaints down 18%) and written
complaints (down 5%)
o Maintaining excellent bathing water quality - 99.3% meeting
the quality standard
o Catchment and biodiversity gains through improvements on
14,000 hectares of land
o Delivering against our commitments for K7 with 80% already on
target or in reward. Key focus on improving pollutions
performance.
-- Nurturing talent with 500 apprenticeships planned over the
next 5 years and we are an early adopter of the Government's
Kickstart scheme
-- Creating a diverse and inclusive place to thrive. We are in
the top quartile for the Hampton Alexander review, our gender pay
gap is significantly below the national average and have become a
signatory to Change the Race:Ratio taking action to increase racial
and ethnic participation in our business
-- Delivered our ground breaking innovative WaterShare+ scheme
giving customers a stake and a say
o c.GBP20 million of outperformance from 2015-20 shared with
customers through unique WaterShare+ scheme
o One in 16 household customers opted to receive shares, more
than tripling the number of Pennon shareholders, demonstrating
significant customer ownership for a listed company
Financial and operational performance throughout COVID-19
remains robust
-- Resilient COVID-19 operations - limited financial impact
-- Cash collections for South West Water and Pennon Water Services remain robust
-- No requirement for the use of regulatory or market support mechanisms
-- 21,000 additional customers added to South West Water's
dedicated COVID-19 priority services register
Resilient financial results following K7 revenue reset
-- Results in line with management expectations
-- WaterShare RORE [1] of c.8.0% driven by strong totex^ and financing outperformance
o GBP34 million totex efficiency delivered to date, maintaining
momentum over K7
o 2.5% average effective interest rate^, significantly below
Ofwat's 4.2% notional cost of debt
-- GBP86.7 million Continuing Group underlying profit before
tax^ (H1 2019/20 GBP101.4 million [2] )
-- 17.9p underlying earnings per share^ for the Continuing Group (H1 2019/20 20.1p(2) )
PENNON BUSINESS REVIEW
Continuing to deliver for our customers and communities through
the ongoing COVID-19 pandemic
The COVID-19 pandemic has presented the water industry with an
unprecedented test of what it means to be sustainable and
resilient. With our responsibility for critical infrastructure
providing essential services to customers and communities,
maintaining our focus on delivering outstanding services, safely,
has never been so important. We are proud that our ongoing
commitment to do the right thing, in the right way, has continued
to deliver sustainable results.
We rapidly adapted to the operational and financial challenges
presented by COVID-19 and we are well placed to weather the ongoing
situation arising from the global pandemic. Our focus remains on
delivering for all stakeholders and making a positive contribution
in the communities we serve. We will continue to identify and
support those who are most in need of help.
In order to meet our commitments, we are advancing expenditure
including delivering two bathing water quality improvements and
earlier than planned upgrades in our network to reduce leakage.
Reshaping the Group - focused on UK water
2020 has been a landmark year for Pennon Group. On 8 July we
completed the sale of Viridor to KKR [3] for an enterprise value of
GBP4.2 billion, with net cash proceeds of GBP3.7 billion received.
The sale recognised the strategic value developed over many years,
realising significant value for Pennon shareholders.
Following the disposal, we committed to right-sizing our debt
portfolio at the Pennon company level, which is well underway with
c.GBP0.75 billion repaid to date, and we have also contributed an
additional GBP36.0 million to Pennon's principal pension
scheme.
The Group is now focused on its sector leading water and
wastewater businesses, with our environmental, social and
governance (ESG) commitments at the heart of all we do.
Creating value for shareholders and customers
We believe there is significant value potential for shareholders
from the reinvestment of the Viridor sale proceeds in the UK water
sector. The Group has significant funds available of GBP2.7 billion
and we are working extensively to narrow down the potential
opportunities. At this stage we are continuing to assess whether
any opportunities are executable and can deliver attractive
financial returns.
As we demonstrated with our acquisition of Bournemouth Water in
2015, value from any potential opportunity would be driven by our
ability to deliver totex outperformance, financial efficiencies,
synergies and growth.
The Board's highly disciplined approach to assessing all
opportunities considers a range of factors including earnings
accretion, value creation from the impact on shareholder returns
(both income and growth), and the impact on customers and other
stakeholders.
All opportunities are benchmarked against a return of capital to
shareholders. If a compelling value creating opportunity is not
available, capital will be returned to shareholders.
Our vision and purpose
The changing shape and leadership of the Group presented an
appropriate point at which to refresh our vision and purpose. Our
new vision and purpose demonstrate our ongoing focus on the UK
water sector, and reflects our deep understanding that water forms
the lifeblood of communities.
Our vision is 'Bringing water to life' and our purpose is
'Supporting the lives of people and the places they love for
generations to come'.
Our vision and purpose guide us in every aspect of our
operation, ensuring that we are focused on making a positive impact
by doing the right things, in the right way, and ultimately
delivering for our customers, the environment and shareholders.
Living our core values, operating in the public interest
We understand that water companies play a unique role in
providing a vital service for the public good. Our core values have
been embedded within our organisation over many years and underpin
our everyday operations from how we work with each other to how we
deliver exceptional results for all stakeholders:
-- Trusted - we do the right thing for our customers and stakeholders
-- Responsible - we keep our promises to our customers, communities and each other
-- Collaborative - we forge strong relationships, working together to make a positive impact
-- Progressive - we are always looking for new ways to improve and make life better.
A strong performance base - delivering on our plans
Pennon is focused on its sector leading water and wastewater
businesses operating in the attractive long-term UK water market.
Delivery of South West Water's 2020-25 (K7) business plan is well
underway following the fast start afforded by the award of
fast-track status, and we continue to lead the sector with
voluntary sharing of outperformance [4] . Driven by a strong
performance in totex and financing, we have delivered a RORE of
c.8.0% for H1 2020/21, doubling base returns [5] .
-- Totex - GBP34 million efficiency recognised to date, with the
momentum of savings in K7 comparable to those in K6, driven by
innovative and efficient solutions. One third has been delivered
through operating cost efficiency with the remaining two thirds
through capital investment saving
-- Financing - 2.5% effective interest rate^ is significantly
below Ofwat's 4.2% allowed nominal cost of debt, reflecting
locked-in efficiencies
-- ODIs [6] - 80% of our ODIs are on track or ahead of target,
and we are targeting improvements in all areas.
Pennon Water Services continues to increase its customer base in
the highly competitive retail market, winning new contracts through
its differentiated customer service proposition. The business is
well positioned for the future, through its ongoing focus on
targeting a high quality, sustainable customer base, supported by
its exceptional service offering and deep customer knowledge.
Dividend policy
The Board has evaluated the Group's dividend for H1 2020/21 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
c.GBP3.5 billion, has not received any Government support measures
and has delivered on its WaterShare+ commitment, sharing GBP20
million of outperformance with customers. c.60% of Pennon's
shareholders are UK based pension funds, charities, employees,
customers and other retail holders who rely on this income. In
addition, one in 16 household customers opted to become Pennon
shareholders through WaterShare+, marking significant customer
ownership for a listed utility and more than tripling the number of
Pennon shareholders.
Pennon announced its new sector leading dividend policy at the
full year 2019/20 results in June 2020, based on the Continuing
Group post the sale of Viridor, with growth of CPIH +2%. The
dividend policy is underpinned by our sustainable earnings and
growth strategy with expectations for continued outperformance in
K7, supporting sustainable dividend growth and cover.
For H1 2020/21 the Board has declared an interim dividend of
6.77p for the Continuing Group. The interim dividend will be paid
on 1 April 2021 to shareholders on the register on 29 January 2021.
Pennon offers shareholders the opportunity to invest their dividend
in a Dividend Reinvestment Plan (DRIP).
FINANCIAL HIGHLIGHTS
H1 2020/21 H1 2019/20 Change
(restated
Underlying ^ [7] )
Revenue GBP319.7m GBP325.8m (1.9%)
EBITDA ^ GBP174.5m GBP191.5m (8.9%)
Operating profit GBP114.8m GBP132.0m (13.0%)
Profit before tax (PBT) GBP86.7m GBP101.4m (14.5%)
----------------------------------------------------- ------------ ----------- ----------
Non-underlying items before (GBP24.8m) GBP18.0m -
tax [8]
Profit before tax GBP61.9m GBP119.4m (48.2%)
Tax (GBP11.5m) (GBP25.5m) +54.9%
Discontinued operations GBP1,720.0m GBP39.6m -
Profit for the period GBP1,770.4m GBP133.5m -
Earnings per share
* Adjusted EPS - continuing operations 17.9p 20.1p (10.9%)
* Statutory EPS - continuing and discontinued
operations 420.9p 30.1p +1,298.3%
Dividend per share [9] 6.77p 13.66p N/A
Continuing Group
Following the sale of Viridor, the Continuing Group is focused
on its water and wastewater businesses of South West Water and
Pennon Water Services. The comparatives for the half year ended 30
September 2019 have been restated to show the performance of the
Continuing Group in accordance with IFRS 5: Non-current assets held
for sale and discontinued operations.
Despite the challenges posed by COVID-19, the performance of the
business has been resilient, and the results are in line with
management expectations.
The results of the Continuing Group compared to H1 2019/20
reflect:
-- Underlying revenue down marginally, from GBP325.8 million to
GBP319.7 million due to the impact of the K7 revenue reset, a
reduction in water usage and other services by non-household
customers as a result of the COVID-19 lockdown, partially offset by
high household demand and contract wins for Pennon Water
Services
-- EBITDA lower at GBP174.5 million from GBP191.5 million
reflecting the K7 revenue reset and the impact of COVID-19,
including reduced developer activity during lockdown
-- GBP2.5 million reduction in financing costs arising primarily
from lower swap rates through K7
-- Profit before tax of GBP86.7 million (H1 2019/20 GBP101.4 million)
-- GBP20.5 million non-underlying reduction in revenue
reflecting the sharing of our success with customers through the
pioneering Watershare+ scheme
-- The Group's principal defined benefit pension scheme will be
closed to future accrual [10] resulting in non-underlying charge of
GBP4.3 million
-- Continuing Group underlying earnings per share down 10.9% to 17.9p
-- Sector leading dividend growth with dividend per share up 2.7% to 6.77p [11]
A full reconciliation of the statutory reported results is
included in Item (i) in the Alternative Performance Measures on
pages 65 to 68 of this announcement.
Viridor Disposal
-- Sale of Viridor completed on 8 July 2020 - GBP4.2 billion [12] enterprise value
-- GBP3.7 billion net cash proceeds received on completion
-- GBP1.7 billion profit from discontinued operations for the
period to 30 September 2020, including gain on disposal of
GBP1,729.3 million and non-underlying cost items of GBP57.4 million
associated with the disposal and subsequent debt retirement
costs
-- Tax exemption on sale proceeds through Substantial Shareholding Exemption
-- Debt right-sizing well progressed with c.GBP0.75 billion
repaid to date of the c.GBP0.9 billion of debt originally drawn by
Pennon to fund Viridor's investment strategy
-- GBP36.0 million contribution into the Group's principal pension scheme
-- GBP2.7 billion of available cash resources following the
disposal and retirement of certain Group borrowings
-- Statutory earnings per share from the combined Continuing
Group and discontinued operations of 420.9p resulting from
significant gain on disposal of Viridor.
Presentation of results
A presentation of these results hosted by Susan Davy, Chief
Executive Officer and Paul Boote, Group Finance Director, will be
available on our website
www.pennon-group.co.uk/investor-information at 08.00am BST, today
24 November 2020.
We will be hosting a live Q&A session from 09:00am via
conference call. Details are included below:
United Kingdom (Toll
Free) 0800 640 6441
United Kingdom (Local)
: 020 3936 2999
A ccess code 933993
For further information, please contact:
01392 443
Paul Boote Group Finance Director 168
Jennifer Cooke Group Investor Relations Manager
020 7251
James Murgatroyd Finsbury 3801
Harry Worthington
Final dividend payment information
28 January 2021 Ordinary shares quoted ex-dividend
29 January 2021 Record date for final dividend
8 March 2021 Final date for receipt of DRIP applications
1 April 2021 Final dividend payment date
Upcoming events
30 March 2021 Trading Statement
3 June 2021 Full Year Results 2020/21
22 July 2021 Annual General Meeting
28 September 2021 Trading Statement
30 November 2021 Half Year Results 2021/22
CHIEF EXECUTIVE'S REVIEW
2020 has been a landmark year for Pennon following completion of
the sale of Viridor in July, with the Group now solely focused on
its core water and wastewater businesses.
With a renewed focus on excellence in the water and wastewater
sector, this is an incredibly exciting time for the Group as we
forge ahead with our 'New Deal' plans for the next 2020-25 period.
We have set ourselves ambitious targets and are confident we can
build on past achievements to deliver for our customers and
stakeholders, further cementing our leadership within UK water,
while working in ever more innovative and sustainable ways.
A New Deal for K7 - changing the nature of our relationship with
customers, the environment, and our employees
Our New Deal business plan (2020-25) is about empowering
customers - offering them a greater stake and a say in the
business. The plan, informed by our most extensive engagement
programme to date, sets out our ambitious priorities and our
commitment to delivering outstanding service for customers, the
environment and our employees. Our fast-tracked status has given us
a head start in delivering our comprehensive capital investment
programme, which includes our biggest environmental programme for
15 years. We have also successfully commenced operations on the
Isles of Scilly following the expansion of South West Water's
licence, with essential investments already underway. Work is
underway to deliver improvements including projects to increase the
resilience of water supplies in the Plymouth area, critical
telemetry and IT infrastructure and the advanced planning of two
new water treatment works in the Bournemouth water region.
WaterShare+
A key feature of the New Deal is WaterShare+, a pioneering
scheme sharing our success with customers, and empowering them with
a stake and a say in the business. c.GBP20 million of
outperformance from 2015-20 has now been shared with customers,
equating to GBP20 per customer. Customers were invited to choose
how they would like to receive their GBP20 - as either a credit on
their bill, or as shares in Pennon Group. We were delighted with
the positive response to this trailblazing initiative, with one in
16 household customers opting to become Pennon Group shareholders.
WaterShare+ has more than tripled the number of Pennon
shareholders, representing significant customer ownership for a
listed company, and marking an important milestone on our journey
to create a new kind of water company, closer to the customers and
communities we serve.
As well as sharing success, WaterShare+ gives customers a
greater say in what South West Water does and how the company is
run. From January 2021 a series of meetings of the WaterShare+
Advisory Panel - South West Water's independent customer champions
- will be held in public every three months. The meetings will be
independently chaired by Lord Matthew Taylor of Goss Moor, at which
customers can hold the company to account on progress against its
plans. In addition, customers will have the opportunity to attend a
dedicated Customer Annual General Meeting.
Our environmental, social and governance commitments are front
and centre of what we do
We are committed to providing even greater transparency on ESG
matters going forwards. Our ESG framework is aligned with the UN
Sustainable Development Goals and centred around making a positive
impact globally and locally.
Built around our ESG framework, our sustainability strategy
helps us to focus on the positive impact we can have on the
communities we serve, and on the natural environment on which we
rely. Our strategy supports the creation of value - financial,
social and environmental - for our shareholders and other
stakeholders. A clear, strategic and long-term approach to
sustainability enhances our business performance, strengthens our
resilience and is an integral element of our risk management
processes.
Protecting the environment, natural capital stewardship
We are committed to protecting the diverse natural habitat in
which we operate for the benefit of generations to come.
-- Driving the green economy - Pennon is proud to have been
awarded the LSE Green Economy mark awarded to companies seen to be
driving the green economy, deriving over 50% or more of their
revenues from environmental solutions
-- South West Water is targeting net zero carbon by 2030 and is
working with colleagues across the sector to develop a Net Zero
Roadmap for the water industry
-- Enhancing biodiversity across the region - South West Water
has been driving improvements through innovative catchment
management initiatives since 2005, improving over 650km of rivers
and over 70,000 hectares of land over K6, with ambitious targets
for K7.
Good governance enabling investment, innovation, and sustainable
growth
Our business model is designed to deliver sustainable
shareholder value by providing high-quality environmental
infrastructure and customer service.
-- We embody a transparent corporate structure with strong
governance processes in place, with disciplined decision making
driven from Board level throughout the whole organisation - this
transparency is a cornerstone of the constructive relationships we
maintain with our regulators
-- Our pioneering Sustainable Financing Framework has raised
c.GBP900m to date and the Group continues to find a range of
products to meet our sustainable financing goals. Ensuring
sustainability is embedded at the heart of the business leaves
Pennon well placed to meet future challenges whilst continuing to
deliver essential services to customers
-- Pennon was the first water and environmental infrastructure
Group to achieve the Fair Tax Mark accreditation, demonstrating our
contribution to society through a responsible approach to tax
-- c.60% of Pennon's shareholders are UK based pension and
savings funds, charities, individuals and employees, with a recent
significant increase in customer representation on Pennon's share
register through WaterShare+.
Supporting lives and businesses
We provide positive investment and support for our communities
through a combination of services and our supply chain, along with
sponsorship, partnerships and donation programmes, education and
outreach, and employee volunteering.
-- We are proud to be a Social Mobility Pledge signatory - this
represents a powerful shift towards being a truly purpose-led
organisation, committed to social mobility
-- We are committed to addressing water poverty in our region by
2025, and our bills are now lower than they were 10 years ago
-- As the largest employer in the region we provide high quality
employment, promoting diversity and development.
Talented people doing great things for customers and each
other
Protecting employees
Our HomeSafe programme, designed to deliver improvements in our
safety performance, represents a clear, focused approach to how we
keep all of our employees safe. A core element of the programme is
supporting the mental health of our people with c.1,800 employees
having completed mental health training and we have expanded our
mental health first aider programme across the business. All of our
employees are provided 24/7 access to our employee assistance
programme providing free, confidential support including debt
management, emotional support, legal advice and personal
coaching.
Nurturing talent
We are focused on providing quality careers to the people living
in our communities. Over the next 5 years, we will deliver our
ambitious plan to create 500 new apprenticeships and our new
graduate programme launches in 2021, focused on managerial and
engineering disciplines. Additionally, we are proud to be an early
adopter of the Government's Kickstart initiative, and have
committed to providing 50 placements for young people aged between
16-24.
Since H1 2019/20, we have welcomed over 150 new employees to the
Group as we have sought to insource certain activities to bolster
our incident response capabilities, as well as enhancing our
digital technology resilience. This brings the total number of
employees across the Group to almost 2,000.
A diverse and inclusive place to thrive
Building a sustainable, agile, diverse and engaged workforce is
central to Pennon's success. We are pleased to have been recognised
as a top quartile company in the Hampton Alexander review and our
gender pay gap at 4.3% [13] remains significantly below the
national average of just over 18%. We are also the first water
company to become a signatory of the 'Change the Race Ratio',
helping society to advance ethnic diversity at all levels.
Operational Delivery
Delivering outstanding services for customers and
communities
K7 has reset the performance measurement for customer service,
with SIM replaced by C-Mex (Customer measure of experience) and
D-Mex (Developer measure of experience).
C-Mex performance is drawn from a sample survey of all
customers' experience, including those who have not had any direct
contact with the company. These surveys are conducted quarterly and
based on the first two quarters, South West Water customers who
have had direct contact with us rank our relative service twice as
high as those who have not contacted us.
In addition to improving our direct customer service by simpler
account management, enhancing our digital 'MyAccount' offering and
improving our response and resolution rates, we are also focusing
on changing our relationship with our customers and communities, of
which our Watershare+ engagement plans are the first step toward
this.
South West Water's D-Mex performance is currently above the
median position in Ofwat's comparator group [14] , reflecting our
strong proactive engagement with developers. We have re-structured
our teams to focus on providing excellent service to our
developers, with a key account manager for our larger customers. We
have also undertaken successful developer engagement, hosting
virtual events on key developments within the market including
introducing a standard Code for Adoption.
Reducing customer complaints
Our focus is on the priorities that matter most to our
customers, delivering tailored solutions which resolve issues first
time and creating more meaningful connections. This includes
reducing average wait times on our billing helplines, speeding up
visible leak repairs and introducing a case management approach
where customers have issues which need to be resolved. As a result,
written complaints have reduced by 5% in H1 2020/21 compared to the
prior period, with a cumulative reduction since H1 2015/16 of
58%.
Providing support to vulnerable customers
In response to COVID-19, South West Water was one of the first
companies to proactively expand our priority services register so
that those who may have been shielding or isolating were
identified. As a result, an additional 21,000 customers were added
to ensure priority services would be maintained in the event of an
outage. During the first lockdown, our WaterCare advisors have
completed over 2,700 virtual home visits realising c.GBP1 million
of financial support as a result of our innovative affordability
and WaterCare+ programme supporting customers to ensure they are
receiving all eligible benefits.
South West Water also continues to expand its customer tool kit
with a 17% increase in customers now benefitting from our social
tariff compared to the prior period. Cumulatively since H1 2015/16,
the number of customers on our social tariff has increased by 76%.
Over 28,000 customers now receive support through reduced tariffs,
with more than 36,500 customers supported through one or more of
our affordability schemes.
Digital improvements for customers
Digital improvements have been made to website functionality to
give customers the choice of how to engage with us in a way and a
time that is convenient to them. Improvements to the website
include increased self-service options, improved navigation and
increased webchat availability to provide customers with help and
support, quickly. As a result, 42% of customers now use our digital
platforms and we are targeting continuous improvements in this
area.
Driving operational excellence for customers
Our focus remains on ensuring the supply of clean, safe and
reliable drinking water whilst protecting the precious natural
resources within our region.
Robust water resources
Over the 6 months to 30 September 2020, whilst overall demand
has been lower than the prior half year, we have experienced two
peaks in demand driven by the hot and dry period in the spring,
coupled with an increase in 'staycations' following the lifting of
lockdown restrictions at the beginning of July. Through this
period, we have successfully managed our water resources, balancing
supply across the network to maintain safe and resilient supplies
at all times. As we head into the winter months our reservoir
levels remain robust at 74.9%, broadly in line with the prior
year.
Reducing customer interruption times
We understand the importance that our customers place on having
a reliable supply of drinking water, and the inconvenience that
supply interruptions can cause. In H1 2020/21, we achieved our
lowest ever level at 2 minutes 57 seconds, a 51% reduction on the
H1 2019/20 time of 5 minutes 59 seconds for those customers who
have an outage for more than three hours. Since the start of K6 (H1
2015/16) we have delivered a c.65% improvement in the average
duration of water supply interruptions.
A key component of our strategy to tackle supply interruptions
includes the increased use of network sensors and business
intelligence to enable us to better predict and respond to network
issues. The strategy is supported by a dedicated team, equipped
with a fleet of state of the art rapid response vehicles, our
innovative network services alliance and maximising new technology
to enable repairs to be undertaken on a pressurised network whilst
maintaining customer supplies.
Delivering sustainable leakage solutions
Our customers feel very strongly that we should prevent water
from being lost due to leakage, and we continue to invest
significantly to prevent and manage leaks on our network. South
West Water has met its leakage target every year since they were
introduced in 1998 and is on target to reduce leakage by 15% by
2025, with innovative techniques, such as the deployment of
acoustic logging technology, helping to identify and fix leaks and
bursts quickly. During H1 2020/21, leakage detection has increased
by 40% and we are achieving over 10,000 detection hours per month,
resulting in the length of time a leak is running reducing by
25%.
Improving water quality for customers
We continue to target improvements in the quality of water for
customers and have seen an 18% reduction in taste, odour and colour
contacts over H1 2020/21. This continues the momentum of
improvement we have seen over K6 with a cumulative 38% reduction
since H1 2015/16. During H1 2020/21 our new innovative Mayflower
water treatment works serving Plymouth entered operation and we
have continued to make improvements across our region, including
the completion of new GAC [15] filters at College water treatment
works, serving c.35,000 customers around Falmouth in Cornwall, and
UV [16] treatment processes at other locations. We continue to
target further improvements through our planned K7 c.GBP100 million
investment in new treatment works in the Bournemouth water region
along with the introduction of a smarter network.
Protecting the environment
We are committed to investing in biodiversity and stewardship
programmes to help boost habitat restoration.
Maintaining excellent quality bathing waters, supporting our
region's economy
We recognise the benefit that tourism brings to our region's
economy, and the significant role that bathing waters play in this.
We also appreciate the positive contribution to health and
wellbeing that beaches and rivers provide, which is why we are
passionate about protecting and enhancing them. Our bathing water
quality investments are currently two years ahead of plan with
improvements at Gorran Churchtown, Luxulyan, Seaton and Clennon
Valley underway. For 2020 we are forecasting [17] to achieve 99.3%
of beaches rated as 'sufficient' (149 out of 150), and 84.7% rated
as 'excellent' (127 out of 150). We also continue to work alongside
partners across the region to tackle bathing water quality issues
in a holistic and sustainable way.
Sector leading catchment management - increasing
biodiversity
Our award winning 'Upstream Thinking' programme has driven an
increase in the region's biodiversity since 2005, with active
catchment management in over 80% of our supply area. At H1 2020/21,
we have recognised improvements at c.14,000 hectares in key
catchments, improving both water quality and natural capital in our
region. By 2025 we aim to have over 120,000 hectares of land under
active management, including a focus on sites of special scientific
interest.
We have recently introduced a hot washdown facility to clean
boating equipment at Roadford lake, our largest reservoir, for use
before and after lake-based activities. The wastewater from this
facility is contained and passed through filtration to remove
invasive non-native species (INNS) material. This is one of the
first such facilities introduced in the UK to prevent the spread of
INNS.
We are targeting a 10% net gain in biodiversity and in H1
2020/21 we assessed the baseline at 14 new sites in South Devon and
Plymouth with management plans established to achieve improvements
associated with our environmental obligations.
We have committed to planting c.100,000 trees by 2025, with
c.50,000 planted to date, and we continue to work closely in
partnership with wildlife charities, national parks and farmers to
deliver continued environmental benefits.
Reliable wastewater services
Reducing flooding incidents
We understand the impact that sewer flooding has on customers,
and we continue to do all we can to reduce the likelihood of these
events. We have maintained our strong performance period on period,
and we are ahead of our commitment in this area. Since H1 2015/16,
we have delivered a c.35% reduction in the number of internal
flooding incidents and we continue to target improvements across
our wastewater networks. To achieve this, we have introduced a
range of measures, including enhanced sewer cleansing and
monitoring as well as educational campaigns such as 'Love Your
Loo', aimed at influencing customer behaviours.
Pollution incidents
Recognising that our performance for category 1-3 pollutions is
not where we targeted at this point, we have established a
Pollution Incident Reduction Plan, which has renewed focus in this
area to drive improvements.
The plan centres on strengthening our round the clock incident
response capacity through the introduction of an enhanced 24/7
incident recovery and data centre. We now have a dedicated task
force and are rolling out culture training and employee engagement
along with using enhanced data modelling to predict and prevent
future incidents.
We are committed to delivering a step change in our performance
in order to achieve the challenging targets set for K7.
Delivering for shareholders
Return on Regulated Equity (RORE) - doubling base returns
South West Water has performed well in H1 2020/21, with strong
performance in totex and financing contributing to a RORE of
c.8.0%. This compares well against Ofwat's maximum RORE of 8.5%
[18] within the Final Determination.
Totex
The momentum of savings in K7 is comparable to those in K6, with
GBP34 million totex efficiency recognised to date, of which one
third is through operating cost efficiencies and the remaining two
thirds from capital investment savings. Further efficiencies will
be embedded into our everyday way of working through a range of
initiatives including:
-- Outcome-driven smart design through better monitoring of
networks and asset condition, proactively targeting hot spots and
using flow monitoring and modelling to reduce the scale of
investment required
-- Investments will be delivered efficiently, through packaging
work for effective delivery, and use of offsite build technique
-- Innovation supporting delivery including the use of
artificial intelligence and machine learning alongside new
technology such as automated CCTV in sewer inspections. South West
Water is also trialling the use of I-Phyc's algae-based treatment
to sustainably remove phosphorus and micro-pollutants from
sewerage. This nature-based approach is beneficial to the
environment whilst reducing costs to operate with lower power and
chemical consumption required
-- Achieving the optimal balance between internal and external
resources to deliver the most flexible and cost-efficient delivery
route. We have continued to build on our successful relationships
with strategic suppliers and during this half year have extended
the scope with our key network operational partner, covering both
water and wastewater activity. This has increased flexibility and
out of hours responsiveness to minimise adverse impacts for
customers
-- Operational ways of working will be refined across the
business optimising activities and efficiency across our water and
wastewater sites including centralised control centres and incident
management, cross business teams to drive compliance and focusing
on water and energy efficiency of our sites
-- Reviewing the most efficient level of support and administrative services.
Financing
Our efficient financing strategy continues to drive
outperformance with South West Water's effective interest rate^ at
2.5% (H1 2019/20 3.4%), significantly lower than Ofwat's nominal
cost of debt of 4.2%. Over half of the 90 basis point reduction
from the prior year is linked to active management of our debt
portfolio in the current lower rate environment, whilst the
remainder relates to index-linked debt.
Outcome Delivery Incentives
For 2020/21, South West Water is on track to meet or exceed 80%
of its ODIs across a broad range of challenging bespoke, common and
comparative measures. For those areas not currently on track we
have introduced targeted initiatives to deliver improvements in
performance. Following the achievement of fast-track status, we
accelerated investments to focus on the most stretching targets and
we continue to target ODI net rewards over K7.
Overall, ODIs for H1 2020/21 are in small net penalty position
(GBP1.3 million) [19] . Bespoke ODIs such as biodiversity, bathing
water quality and sewer blockages have delivered GBP3.5 million net
reward. Common ODIs including leakage and water quality have
achieved a net GBP0.1 million reward and comparative ODIs of
internal flooding, supply interruptions and pollutions are in a net
penalty position of GBP4.9 million, predominantly as a result of
performance on pollution incidents.
RORE 2020/21
Base return 3.9%
Totex performance 2.2%
ODI performance (0.2%)
Financing performance 2.1%
WaterShare RORE [20] 8.0%
Ofwat RORE [21] 7.1%
Pennon Water Services - customer growth despite a challenging
environment
The largest revenue impact of COVID-19 for the Group in H1
2020/21 has been on businesses and commercial customers. Pennon
Water Services has continued to leverage its deep customer
knowledge, supporting those customers who find themselves in
financial difficulty. We have seen a decline in non-household
demand and numerous customers being identified as temporarily
vacant within the market. With the easing of restrictions over the
summer, billing recommenced and activity towards the end of H1
2020/21 returned to more normal levels.
Pennon Water Services' customer service operations and contact
centre has operated effectively through this period and we continue
to focus on cash collections, which remain robust. Pennon Water
Services has not had to take advantage of any regulatory liquidity
support mechanisms to date.
Operating costs continue to reduce through investment in our
people, processes and technology, increasing the automation of
systems and offering greater self-service to customers.
Pennon Water Services continues to grow its revenue, with its
strategy focused on high quality, sustainable customers and during
the period has won national customers such as Mars and Smurfit
Kappa. New contract wins in H1 2020/21 will deliver c.GBP15.0
million annualised revenue. This growth has helped mitigate some of
the demand reduction due to the pandemic, with a GBP10.5 million
benefit compared with the prior period. Pennon Water Services'
market leading customer service, recognised through an excellent
Trustpilot score of 4.9/5, continues to be a key
differentiator.
Growth platform in place
Broadening the base for South West Water
Earlier this year, we successfully completed our expansion to
the Isles of Scilly. Assets have been transferred, key suppliers
are in place and our operational teams are already working hard to
deliver essential water and wastewater services. Our plans over the
next 5 years include significant investment (c.GBP36 million
allowed in the Final Determination) in critical infrastructure and
improvements for both customers and the environment, with this
investment reflected in South West Water's Regulatory Capital Value
(RCV).
Building Back Better
We are passionate about the environment and pleased to support
the Government's campaign to Build Back Better through their drive
to promote a green recovery. We have been working closely with our
regulators and water sector peers over the past few months and have
identified the areas in which we believe we can bring forward some
of our planned investment in order to benefit customers, the
environment and the economy. The focus areas we have identified at
a high level are:
-- Sustainable water resources and water quality - expanding our
water resources grid and resilience, supporting the national water
resources strategy and accelerating the development of the second
water treatment works in the Bournemouth region
-- Healthier places and environment - catchment management,
transforming rivers through piloting inland bathing water
improvements, accelerating coastal bathing water investment and
proactive investigations informing long-term strategic
investment
-- Smarter, healthier homes - targeting customer side leakage,
replacing customers' lead pipes and smart meters helping customers
understand how they use water.
We look forward to engaging with Government and our regulators
to agree a programme of investment that will further deliver for
communities and the environment in addition to our base K7
plan.
Pennon Water Services
With a continued focus on securing sustainable, high quality
customers supported by their deep customer knowledge and excellent
service, Pennon Water Services continue to grow in the competitive
retail market and is well placed for the future.
Pennon Group
With GBP2.7 billion of available funds, Pennon remains focused
on creating value for shareholders and customers and believe there
is significant value potential for shareholders from the
reinvestment of the Viridor proceeds into UK water.
Our strong operational and financial performance coupled with
our track record in creating value through totex outperformance,
financial efficiency, synergies and growth provides a solid
platform from which Pennon can deliver further growth and value for
all shareholders.
Underpinned by our core values and our strong governance which
enables investment, innovation and sustainable growth, Pennon is
well placed to deliver on its commitments to customers, the
environment, and our employees.
GROUP FINANCE DIRECTOR'S REVIEW
Following the sale of Viridor, the Continuing Group comprises
South West Water and Pennon Water Services. The comparatives for
the half year ended 30 September 2019 have been restated to show
the performance of the Continuing Group in accordance with IFRS
5.
The table below provides an overview of the financial
performance for the six-month period to 30 September 2020.
Underlying ^ H1 2020/21 H1 2019/20 Change
(restated)
Revenue GBP319.7m GBP325.8m (1.9%)
Operating costs (GBP145.2m) (GBP134.3m) (8.1%)
EBITDA ^ GBP174.5m GBP191.5m (8.9%)
Depreciation and amortisation (GBP59.7m) (GBP59.5m) (0.3%)
Operating profit GBP114.8m GBP132.0m (13.0%)
Net interest charge (GBP28.1m) (GBP30.6m) +8.2%
Profit before tax GBP86.7m GBP101.4m (14.5%)
--------------------------------------------------------------- ------------- -------------- ----------
Non-underlying items before tax (GBP24.8m) GBP18.0m -
[22]
Profit before tax GBP61.9m GBP119.4m (48.2%)
Tax (GBP11.5m) (GBP25.5m) +54.9%
Discontinued operations GBP1,720.0m GBP39.6m -
Profit for the period GBP1,770.4m GBP133.5m -
Adjusted earnings per share
* Adjusted EPS - continuing operations 17.9p 20.1p (10.9%)
* Adjusted EPS - continuing and discontinued operations 29.0p 31.1p (6.8%)
Statutory earnings per share
* Basic EPS - continuing operations 12.0p 20.7p (42.0%)
* Basic EPS - continuing and discontinued operations 420.9p 30.1p +1,298.3%
Dividend per share [23] 6.77p 13.66p N/A
Capital investment GBP73.5m GBP77.6m (5.3%)
* South West Water GBP73.3m GBP77.6m (5.5%)
GBP0.2m - N/A
* Other
30 Sept 2020 31 Mar
2020
Total Group net cash/(debt) GBP37.9m (GBP3,264.0m)
Profit from discontinued operations
The sale of Viridor is the dominant feature of the results for
this period. Profit from discontinued operations for the period to
30 September 2020 was GBP1,720.0 million including the gain on
disposal of GBP1,729.3 million and non-underlying cost items
associated with the disposal of GBP57.4 million (before tax),
including costs associated with the retirement of debt.
The results for discontinued operations include a tax credit of
GBP0.7 million (H1 2019/20 GBP4.1 million charge) relating to the
trading of Viridor up to the point of disposal and subsequent
retirement of debt originally drawn to fund Viridor's investment
strategy. The gain on the sale of Viridor qualifies for the
Substantial Shareholding Exemption and as such is not subject to
corporation tax.
Resilient financial performance from the Continuing Group
Despite the challenges posed by COVID-19 the performance of the
business has been resilient, and the results are in line with
management expectations.
Underlying Continuing Group revenue has reduced by 1.9% (GBP6.1
million) to GBP319.7 million (H1 2019/20 GBP325.8 million). This
expected reduction has arisen from the transition to the new K7
regulatory period (GBP10.5 million) and the impact of COVID-19,
offset by the impact of new contract wins for Pennon Water Services
outside the South West Water region. These contract wins
contributed revenue growth of GBP10.5 million compared to the same
period last year.
The overall revenue impact of COVID-19 is a reduction of GBP10.7
million, broadly in line with our initial expectations. In South
West Water, the net impact on demand has been limited with higher
household consumption largely offsetting lower non-household usage
and developer services activity recovering from the COVID-19
lockdown and subsequent reduced levels of business activity. For
the Group as a whole, there has been an overall reduction in demand
as a result of COVID-19 due to the lower levels of non-household
usage for Pennon Water Services outside the South West region.
Statutory revenue of GBP299.2 million reflects the recognition
of the GBP20.5 million Watershare+ credit, as outlined
previously.
Underlying operating costs are GBP145.2 million (H1 2019/20
GBP134.3m) reflecting inflationary and power price impacts in South
West Water and higher wholesale charges in Pennon Water Services
from new business won outside of the South West Water region.
Cash collections in both South West Water and Pennon Water
Services have remained robust through this half year with expected
credit loss charges of GBP2.0 million (0.7% of revenue) and GBP0.3
million (0.4% of revenue), respectively, being in line with the
prior period. At 30 March 2020 the Continuing Group recognised a
non-underlying charge for expected credit losses in relation to
COVID-19 of GBP7.8 million. The vast majority of the expected
credit loss provision that was created from this charge remains in
place.
Overall profitability has been resilient with limited financial
impact from COVID-19 to date. As expected, Group EBITDA has reduced
by 8.9% to GBP174.5 million (H1 2019/20 GBP191.5 million),
reflecting the revenue impact of the K7 reset alongside the impact
of COVID-19 on non-household demand and developer activity.
The overall expectation is for revenue to be weighted towards
the first half of the financial year, with demand impacts typically
being weighted to the summer months. The impact of the K7 revenue
reset will continue, and whilst the impact of COVID-19 is expected
to be limited, this is dependent on the extent of the pandemic and
on continued government support for both our business and
residential customers.
South West Water
Underlying ^ H1 2020/21 H1 2019/20 Change
Revenue [24] GBP282.9m GBP292.9m (3.4%)
Operating Costs (GBP106.8m) (GBP102.3m) (4.4%)
EBITDA GBP176.1m GBP190.6m (7.6%)
Depreciation and amortisation (GBP59.3m) (GBP59.1m) (0.3%)
Operating profit GBP116.8m GBP131.5m (11.2%)
Net interest charge (GBP28.3m) (GBP35.3m) +19.8%
Profit before tax GBP88.5m GBP96.2m (8.0%)
South West Water revenue for H1 2020/21 has reduced by 3.4%
(GBP10.0 million) compared with the prior period. This expected
reduction has arisen from the transition to the new K7 regulatory
period, net of inflationary increases. The overall net impact of
COVID-19 for South West Water has been limited due to higher
household demand (up by c.5% compared to the same period last
year), which has largely offset lower non-household demand (down by
c.20% compared to the same period last year) and developer services
revenue as a result of reduced construction activity during
lockdown and subsequent restrictions.
Operating costs of GBP106.8 million increased by GBP4.5 million
compared to GBP102.3 million in H1 2019/20. This increase
principally reflects:
-- Cost increases including inflationary impacts of c.GBP4
million, reflecting annual pay increases, higher power costs,
reflecting our risk management policy of fixing electricity prices
to mitigate volatility and the impact of higher commodity prices
driving treatment costs
-- Expansion to the Isles of Scilly has added c.GBP0.5 million
to our operating cost base for the half year
-- Other cost increases including the impact of maintaining
supplies during peak demand and marginal increased costs for
COVID-19 (for example PPE and IT related costs) have been offset by
continued efficiency delivery.
Despite the potential future impact of COVID-19, cash
collections have remained robust compared to H1 2019/20 with bad
debt costs c.0.7% of revenue, ahead of our K7 target.
South West Water's EBITDA and operating profit reduced by 7.6%
and 11.2%, respectively, in line with our expectations.
The Group's efficient funding and hedging strategy resulted in a
reduction in net interest costs for South West Water of GBP7.0
million to GBP28.3 million (H1 2019/20 GBP35.3 million).
South West Water's capital expenditure in the first half of this
financial year was GBP73.3 million, compared to GBP77.6 million in
H1 2019/20.
In order to meet our commitments, we are advancing expenditure
including delivering two bathing water quality improvements ahead
of schedule. Significant investment continues to be advanced with
earlier than planned upgrades in our network to reduce leakage with
proactive replacement at susceptible locations and the installation
of acoustic loggers to improve monitoring.
Upgrades to water treatment works continue with the completion
of installation of GAC filters at College water treatment works and
UV filters at other locations. Improved water resilience projects
in the Plymouth area will ensure reliable supplies for the future,
adding an additional raw water source to our recently opened,
innovative Mayflower water treatment works. In line with the
advancement of our targeted Pollution Incident Reduction Plan,
additional expenditure has been incurred upgrading wastewater
treatment works and pumping stations such as upgraded inlet screens
and the replacement of pumps with newer, more efficient models, to
reduce the probability of causing pollutions.
Pennon Water Services
Underlying^ H1 2020/21 H1 2019/20 Change
Revenue GBP75.3m GBP86.6m (13.0%)
SWW wholesale elimination (GBP38.8m) (GBP53.5m) (27.5%)
Revenue - external to the Group GBP36.5m GBP33.1m +10.3%
Operating Costs [25] (GBP75.0m) (GBP85.7m) +12.5%
SWW wholesale elimination GBP38.8m GBP53.5m +27.5%
Operating Costs - external to
the Group (GBP36.2m) (GBP32.2m) (12.4%)
EBITDA GBP0.3m GBP0.9m (66.7%)
Depreciation and amortisation (GBP0.4m) (GBP0.3m) (33.3%)
Operating profit (GBP0.1m) GBP0.6m (116.7%)
Net interest charge (GBP0.8m) (GBP0.9m) +11.1%
Loss before tax (GBP0.9m) (GBP0.3m) (200.0%)
The largest revenue impact of COVID-19 has been on businesses
and commercial customers. The initial lockdown in April and May
caused a significant reduction in non-household demand, due to the
closure of numerous businesses. Demand has steadily increased over
the summer months, though overall revenues, ignoring the impact of
contract wins are down by c.20% on the same period last year.
Despite the impact of the pandemic, Pennon Water Services has
made revenue gains through tender activity with c.GBP10.5 million
of new business compared to the same period last year.
Non-wholesale operating costs have remained stable and the business
has maintained positive EBITDA despite the significant demand
reductions.
The business continues to maintain its focus on targeting high
quality, sustainable customers who will benefit from the
value-added services that form part of Pennon Water Services
differentiated service offering.
Group net finance costs
The Group continues to secure funding for South West Water
through its Sustainable Financing Framework and has efficiently
hedged c.50% of its interest rate risk through the K7 regulatory
period. As a result, the effective interest rate for South West
Water is 2.5%^, representing a 90 basis point reduction on the same
period last year.
Underlying net finance costs for the Continuing Group of GBP28.1
million are GBP2.5 million lower than last year (H1 2019/20 GBP30.6
million), benefitting from the efficient financing that has been
achieved.
Profit before tax before non-underlying items
Group underlying profit before tax is GBP86.7 million compared
with the prior year (H1 2019/20 GBP101.4 million). The reduction of
GBP14.7 million reflects the expected reduction in operating profit
of GBP17.2 million from the revenue reset and COVID-19 impact,
which has been offset by a GBP2.5 million reduction in net finance
costs, as outlined above.
Non-underlying items before tax
Non-underlying items for H1 2020/21 total a charge of GBP24.8
million (H1 2019/20 credit of GBP18.0 million). The Directors
believe excluding non-underlying items provides a more useful
comparison of business trends and performance.
The non-underlying charge of GBP24.8 million consists of:
-- GBP20.5 million reduction in revenue being the recognition in
full of Watershare+, a pioneering scheme which shares our success
with customers, empowering customers with a stake and a say in the
business. Customers were given the option to receive their share,
which equates to GBP20 per customer, as either a credit on their
bill, or as shares in Pennon Group
-- A non-underlying curtailment charge of GBP4.3 million has
been recognised in respect of the Continuing Group's principal
pension scheme which arises from the decision to close the main
defined benefit scheme to future accrual with effect from 1 July
2021.
Taxation
The overall tax charge for the Continuing Group is GBP11.5
million (H1 2019/20 GBP25.5 million). On an underlying basis, the
net tax charge for H1 2020/21 for the Continuing Group of GBP16.3
million (H1 2019/20 GBP20.7 million) consists of:
-- Current year current tax charge of GBP12.4 million,
reflecting an effective tax rate of 14.3% (H1 2019/20 GBP14.2
million, 14.0%). 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 and in recent
years
-- Current year deferred tax charge of GBP4.2 million (H1
2019/20 GBP5.3 million) primarily reflects capital allowances
across the Group in excess of depreciation charged
-- In relation to prior years, there is a:
o Current tax credit of GBP0.8 million (H1 2019/20 GBP0.8
million), as previous tax items have been clarified including
capital allowance claims
o Deferred tax charge of GBP0.5 million (H1 2019/20 GBP2.0
million credit), reflecting finalisation of capital allowance
claims.
The H1 2020/21 non-underlying items result in a GBP4.8 million
credit (H1 2019/20 GBP4.8 million charge), reflecting current tax
relief on the cost of the WaterShare+ scheme and future tax relief
available on pension contributions.
Earnings per share
Statutory earnings per share from the Continuing Group and
discontinued operations of 420.9p (H1 2019/20 30.1p) include the
profit from the sale of Viridor and non-underlying charges in
discontinued operations resulting from the restructuring of debt
that was drawn to fund Viridor's growth programme. Full details of
earnings per share movements are in note 8 of the accompanying
financial statements.
Net cash position at 30 September 2020
Cash generation has remained robust despite the potential for
disruption from COVID-19. The Continuing Group's total operational
cash inflows^ in H1 2020/21 were GBP154.6 million (H1 2019/20
GBP178.7 million) with the reduction being driven from the expected
decline in EBITDA and increased levels of pension payments. Working
capital has remained stable with significant focus on managing
collections.
These funds adequately support our effective finance structures
(net interest paid [26] GBP37.4 million) and capital investment
programme^ (GBP80.8 million). Interest payments for the Continuing
Group are higher than the net finance costs recognised in the
income statement due to the timings on interest settlements
impacting the levels of accrued interest compared to this same time
last year.
The sale of Viridor generated net cash proceeds after
transaction costs [27] of GBP3,691.2 million. The Group's net debt
was further reduced by the net debt disposed of with Viridor of
GBP201.7 million.
Other significant impacts on net debt include the Group's
decision to repay its perpetual capital securities of GBP300
million in May 2020, a GBP36.0 million contribution to its
principal pension scheme and costs incurred in restructuring debt
following the Viridor sale.
Following the above, and the payment of our interim and full
year dividends for full year 2019/20, the Group held a net cash
position at 30 September 2020 of GBP37.9 million (31 March 2020
total Group net debt GBP3,264.0 million).
Efficient long-term financing strategy
The Group is currently undertaking a review of the portfolio of
Pennon company debt following the sale of Viridor and is currently
in a net cash position.
South West Water's cost of finance, with an effective rate^ of
2.5% is among the lowest in the industry, continuing to benefit
from the use of finance leasing as the main source of funding in
the portfolio which provides long maturity at fixed margins,
secured at the inception of each lease.
South West Water has a mix of fixed/swapped (GBP1,166 million,
53%), floating (GBP467 million, 21%) and index-linked borrowings
(GBP578 million, 26%). South West Water's debt has a maturity of up
to 37 years with a weighted average maturity of c.20 years. Where
appropriate, derivatives are used to fix the rate on floating rate
debt.
South West Water's index linked debt is below Ofwat's notional
assumption of 33% and is amongst the lowest in the industry. This
gives a comparative advantage through the regulatory transition
from RPI to CPIH, given the uncertainty and volatility around
pricing of the wedge between RPI and CPI. Moving forward as the CPI
market continues to mature, we will seek to issue new index-linked
instruments linked to CPI, we issued our first such instrument in
2019/20.
The combined South West Water and Bournemouth Water debt to RCV
[28] ratio is 65.2% [29] (30 September 2019 64.2%). Gearing at
South West Water is expected to fall during this regulatory period
meeting the trajectory of Ofwat's notional structure of 60%.
Following South West Water's Final Determination, South West
Water 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 rate debt has already been
hedged through K7, taking advantage of falling swap rates, ensuring
the Group's smooth transition into the new regulatory period.
Sustainable and robust funding position
The Group has a strong liquidity and funding position with
GBP3,486 million cash and committed facilities at 30 September
2020. This consists of cash and other short-term deposits of
GBP3,071 million (including GBP230 million of restricted funds
representing deposits with lessors against lease obligations) and
GBP415 million of undrawn facilities. GBP2,772 million of the cash
holdings (including other short-term deposits of GBP651 million are
held at the Pennon company level.
During the first half of the year, the Group repaid GBP300
million perpetual capital securities, and following the sale of
Viridor, Pennon has also reduced the number of Revolving Credit
Facilities (RCFs), reflecting the current cash holdings of the
Group.
Given the current low interest rates the Group's cash is being
managed to provide flexibility and liquidity to meet any required
cashflow needs whilst ensuring appropriate security and
counterparty limits are observed.
South West Water net debt at 30 September 2020 was GBP2,211
million, in line with the previous year (H1 2019/20 GBP2,249 [30]
million). During H1 2020/21, South West Water signed GBP60 million
of new and renewed facilities. Following the continued success of
our Sustainable Financing Framework, a new GBP30 million long
funding finance lease will be allocated to sustainable projects
under the Green Loan Principles. Additionally, the renewed facility
extends the existing debt maturity providing additional support to
South West Water in the current low rate environment.
Our 2020 Sustainable Financing Impact Report was published in
October, detailing the progress we have made in this area and the
allocation of funding to our sustainable projects in water and
wastewater to support our communities.
In preparation for the cessation of LIBOR in December 2021, the
Group is following current recommendations from regulators and
looking to progress our transition plans over the coming year.
Having completed our first LIBOR to SONIA amendment for a
sustainable RCF in 2020, we are engaging with our banking
counterparties to ensure we are prepared for the transition.
Post Viridor sale debt restructuring
Immediately prior to the Viridor disposal, the implied Pennon
company borrowings, being Group borrowings not relating to South
West Water, were c.GBP1.2 billion. The significant majority of
these borrowings were originally drawn to fund the investment phase
of Viridor. It was announced following the completion of the sale
of Viridor that the Group would repay up to GBP900 million of its
debt portfolio, whilst looking to maintain a small amount of debt
at the Pennon company level, to support future opportunities.
Good progress has been made with the restructuring of debt since
the disposal, with c.GBP750 million repaid to 30 September 2020.
The majority of this debt was floating rate and has therefore been
repaid at par showing the flexible approach secured when financing
Viridor's energy recovery facility investment phase. The immediate
repayment of this debt has also resulted in minimising the cost of
carry on these instruments. There were a limited number of
derivative transactions used to maintain our interest rate risk
within the treasury policy which would no longer achieve hedge
accounting and have therefore been terminated in line with the
Group's policy to minimise income statement volatility.
The Group also retired certain fixed rate debt during H1
2020/21. Given the commitments under these fixed rate agreements
make whole costs were applicable. Through discussion, the debt was
terminated at a value accreting basis where a discount to the full
documented make whole cost was achieved. GBP56.8 million of
non-underlying charges have been reflected in the profit from
discontinued operations in respect of the costs of debt
retirement.
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.
As part of its long-term pension strategy, the Group completed
its employee consultation on plans to modernise its ongoing pension
arrangements. The outcome of the consultation has resulted in a
decision to close Pennon's principal defined benefit scheme to
future accrual with effect from 1 July 2021 with all employees
transitioning to a new defined contribution scheme offered through
a master trust arrangement. This has resulted in a non-underlying
curtailment charge of GBP4.3 million.
At 31 March 2020, the Group's pension schemes showed an
aggregate deficit (before deferred tax) of GBP8.5 million, of which
a surplus of GBP6.6 million relates to the Continuing Group and a
deficit of GBP15.1 million relates to Viridor. The deficit relating
to the Continuing Group at 30 September 2020 is GBP51.8 million
reflecting the following principal movements:
-- GBP71.1 million increase in deficit from adverse movements in
financial assumptions (notably corporate bond yields) increasing
the liabilities by c.GBP128 million being offset by asset
outperformance of c.GBP57 million largely from liability hedged
investments
-- GBP36.0 million contribution to Pennon's principal pension scheme
-- GBP21.4 million increase in net pension liabilities relating
to the transfer and settlement of certain pension obligations in
connection with Viridor, and the impact of closing the principal
defined benefit scheme to future accrual.
Since the half year market changes have continued, most notably
related to the COVID-19 pandemic and the emergence of vaccines, and
at the nearest practicable date to the report the deficit is
estimated to have halved.
The net aggregate liabilities of c.GBP42 million (after deferred
tax) represents c.1% of the Group's market capitalisation at 30
September 2020.
Technical Guidance - Full Year 2020/21
Pennon Group 2019/20 Change
Revenue GBP636.7m
* Impact of lower tariffs based on K7 Final [32]
Determination (c.GBP20m [31] )
* Reduced non-household demand and other services
(c.GBP30m including c.GBP10m impact from customers
outside of the South West Water region) partially
offset by increased household demand (c.GBP15m) as a
result of COVID-19
* Non-underlying sharing of outperformance with
customers through WaterShare+ of c.GBP20m
------------------------------------------------------------- ---------- -------
Net debt GBP1,122m
* Debt retirement of c.GBP900m from Viridor proceeds [33]
* Ongoing strategic review on use of proceeds
------------------------------------------------------------- ---------- -------
Current 15.6%
tax rate * Underlying Continuing Group's effective current tax [34]
rate lower than UK headline rate of 19% reflecting
capital allowances and relief on pension
contributions
------------------------------------------------------------- ---------- -------
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 8.5% -
* Ofwat's view of assumed potential outperformance
------------------------------------------------------------- ---------- -------
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
------------------------------------------------------------- ---------- -------
Pennon Water Services 2019/20 Change
---------- -------
Operating GBP171.6m
costs * Reduction in operating costs due to lower wholesale
charges due to COVID-19 (c.GBP10m impact from
customers outside of the South West Water region)
------------------------------------------------------------- ---------- -------
EBITDA GBP1.9m
* Impact of reduced non-household demand on margins
* Focus on continued cost efficiency with strong
collections offsetting potential bad debt impact of
COVID-19
------------------------------------------------------------- ---------- -------
COVID-19 assumptions are based on current year to date impact of
initial lockdown and expected recovery of economic activity over
the remaining part of the financial year. The impact of the second
lockdown is expected to be less marked on non-household and
business activity.
Board Matters
In July this year following the completion of the sale of
Viridor and in light of the significantly changed structure of the
Group, the Board made the decision to enact its internal succession
plan to position Pennon favourably for the next phase of its growth
strategy.
Pennon's Chairman at the time, Sir John Parker, and its Chief
Executive, Chris Loughlin, did not stand for re-election at the
Pennon AGM, and were succeeded by Gill Rider as Chair and Susan
Davy as Chief Executive Officer.
Sir John had been Chairman for five years, during which time he
oversaw the strategy to deliver value for our shareholders and to
place our customers at the heart of our business. Chris Loughlin
joined the Board in 2006 as Chief Executive of South West Water and
became Group Chief Executive in January 2016, transforming the
organisation under his leadership. Both Sir John and Chris rendered
exemplary commitment to the Group and deserve our heartfelt
thanks.
Gill Rider brings to the role of Chair significant experience of
the business following her tenure most latterly as Pennon's Senior
Independent Director and Chair of the Remuneration Committee. Gill
joined the Board in 2012 with extensive boardroom service and a
wealth of experience across several companies. She was formerly
Head of the Civil Service Capability Group in the Cabinet Office,
and prior to that held a number of senior positions with Accenture
LLP, culminating in the post of Chief Leadership Officer for the
global firm. Gill has considerable experience in leadership and
governance across a broad range of sectors including professional
services, education and government.
Susan Davy was appointed as Chief Executive Officer from her
role as Chief Financial Officer, a role she held for the past five
years. Susan initially joined the Group as Finance Director of
South West Water in 2007. Her knowledge of the industry, coupled
with her financial and regulatory expertise has underpinned the
development of Pennon's strategy, which has included the
value-creating acquisition of Bournemouth Water in 2015 and the
successful Viridor disposal process, both of which she led.
We also welcomed Paul Boote to the Board as Group Finance
Director. Paul joined Pennon in 2010 and has held a range of senior
finance positions within the Group, most recently responsible for
Pennon's Group finance functions of treasury, tax, accounting and
pensions. In his 20 years in finance, Paul has accumulated a wealth
of experience having worked across a range of sectors including
sport, construction and environmental infrastructure.
Jon Butterworth MBE was also appointed to the Board as a
Non-Executive Director and as Chair of Pennon's Health & Safety
Committee. Jon joined the Board of South West Water in 2017 and has
a distinguished track record within the utility industry that spans
over 40 years. Jon is currently Chief Executive Officer of National
Grid Ventures and a member of the National Grid Plc Executive
Committee.
Neil Cooper has been appointed as Senior Independent Director.
Neil was appointed to the Board in 2014 and remains Chair of the
Audit Committee, bringing extensive experience in a wide variety of
corporate and financial matters. As Chair of the Audit Committee,
Neil has been influential in focusing Pennon's approach on a number
of significant matters including internal control, governance and
financial reporting.
Claire Ighodaro CBE has replaced Gill Rider as Chair of the
Remuneration Committee. Claire has held a number of senior roles
and directorships of UK and international organisations and has
extensive Board experience of service on audit and governance
committees. As Chair of the Remuneration Committee, Claire will
continue to steer Pennon's approach on executive remuneration
ensuring that it is aligned with and supports the Group's
strategy.
Susan Davy
Group Chief Executive
23 November 2020
Financial Timetable
28 January 2021 Ordinary shares quoted ex-dividend
29 January 2021 Record date for interim cash dividend
8 March 2021 Final date for receipt of DRIP applications
30 March 2021 Trading Statement
1 April 2021 Interim cash dividend payment date
3 June 2021 Full Year Results 2020/21
June 2021 Annual Report & Accounts 2020/21 published
22 July 2021 Annual General Meeting
22 July 2021* Ordinary shares quoted ex-dividend
23 July 2021* Record date for final dividend
10 August 2021* Final Date for receipt of DRIP applications
2 September 2021* Final dividend payment date
28 September 2021 Trading Statement
30 November 2021 Half Year Results 2021/22
* Subject to obtaining shareholder approval at the 2021 Annual
General Meeting.
PRINCIPAL RISKS AND UNCERTAINTIES
In accordance with DTR 4.2.3 and 4.2.7 of the Disclosure and
Transparency Rules, the principal risks for the remaining six
months of the financial year have been reviewed by the Directors.
These principal risks have been reassessed and, where appropriate,
updated to reflect the focus of the Group on its water and
wastewater businesses following the sale of Viridor. As such a
small number of amendments have been made to the Group's principal
risks reported within the Risk Report of the Annual Report and
Accounts 2020.
The Group has rapidly adapted to the operational and financial
challenges arising from COVID-19 and continues to deliver essential
services for the communities that the Group serves whilst
maintaining robust arrangements to ensure the health and safety of
our customers, communities and employees.
Negotiations on a future trading agreement between Britain and
the European Union (EU) are ongoing and continues to be closely
monitored. 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.
The Group continues to the reflect the impact of macro-level
events, including COVID-19 and trade negotiations between the UK
and EU, within the individual principal risks of the Group. A
summary of Pennon Group's principal risks is detailed below.
Principal Risks
The Board considers the principal risks to be:
Law, Regulation and Finance
1. Changes in Government policy
2. Regulatory reform
3. Non-compliance with laws and regulations
4. Inability to secure sufficient finance and funding to meet ongoing commitments
5. Non-compliance or occurrence of an avoidable health and safety incident
6. Failure to pay all pension obligations as they fall due and
increased costs to the Group should the defined benefit pension
scheme deficit increase
Market and Economic Conditions
7. Non-recovery of customer debt
8. Macro-economic risks impacting inflation, interest rates and power prices
Operating Performance
9. Poor operating performance, including pollution incidents,
and an inability to meet future resource demand and supply due to
climate change
10. Failure to maintain excellent service or effective
engagement with our customers and wider stakeholders
11. Business interruption, including the inability to provide
clean drinking water or remove wastewater, due to significant
operational incidents or failure
12. Insufficient skills and resources to meet current and future
business needs and deliver the Group's strategic priorities
13. Non-delivery of regulatory outcomes and performance
commitments
Business Systems and Capital Investment
14. Inefficient or ineffective delivery of significant capital
projects
15. Inadequate technological security results in a breach of the
Group's assets, systems and data
16. Inefficient use of capital arising from the disposal of
Viridor.
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; and all other risks in the Pennon Group Annual Report
published in July 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 half year ended 30 September 2020
Unaudited
-------------------------------------------------------------------------------------------
Before
Before non-underlying Non-underlying
non-underlying Non-underlying items items
items items Total half (note Total
half (note half year 5) half half
year 5) half year ended year ended year ended
ended year ended ended 30 September 30 September 30 September
30 September 30 September 30 September (restated) (restated) (restated)
2020 2020 2020 2019* 2019* 2019*
Notes GBPm GBPm GBPm GBPm GBPm GBPm
Continuing
operations
Revenue 4 319.7 (20.5) 299.2 325.8 - 325.8
Operating costs
Employment costs (37.6) - (37.6) (35.4) - (35.4)
Raw materials and
consumables
used (8.7) - (8.7) (8.1) - (8.1)
Other operating
expenses (98.9) (4.3) (103.2) (90.8) - (90.8)
-------------- -------------- ------------ -------------- -------------- -------------
Earnings before
interest,
tax,
depreciation and
amortisation 4 174.5 (24.8) 149.7 191.5 - 191.5
Depreciation and
amortisation (59.7) - (59.7) (59.5) - (59.5)
-------------- -------------- ------------ -------------- -------------- -------------
Operating Profit 4 114.8 (24.8) 90.0 132.0 - 132.0
------------------ ----- -------------- -------------- ------------ -------------- -------------- -------------
Finance income 6 2.3 - 2.3 1.9 18.0 19.9
Finance costs 6 (30.4) - (30.4) (32.5) - (32.5)
------------------ ----- -------------- -------------- ------------ -------------- -------------- -------------
Net finance costs 6 (28.1) - (28.1) (30.6) 18.0 (12.6)
Profit before tax 4 86.7 (24.8) 61.9 101.4 18.0 119.4
Taxation 7 (16.3) 4.8 (11.5) (20.7) (4.8) (25.5)
-------------- -------------- ------------ -------------- -------------- -------------
Profit for the
period from
continuing
operations 70.4 (20.0) 50.4 80.7 13.2 93.9
Discontinued
operations
Profit for the
period from
discontinued
operations 21 39.2 1,680.8 1,720.0 37.8 1.8 39.6
Profit for the
period 109.6 1,660.8 1,770.4 118.5 15.0 133.5
============== ============== ============ ============== ============== =============
Attributable to:
Ordinary
shareholders of
the parent 109.8 1,660.8 1,770.6 111.6 15.0 126.6
Non-controlling
interests (0.2) - (0.2) (0.1) - (0.1)
Perpetual capital
security
holders - - - 7.0 - 7.0
============== ============== ============ ============== ============== =============
Earnings per
ordinary share 8
(pence per share)
From continuing
operations
* Basic 12.0 20.7
* Diluted 12.0 20.6
-------------- -------------- ------------ -------------- -------------- -------------
From continuing
and discontinued
operations
* Basic 420.9 30.1
* Diluted 418.8 30.0
-------------- -------------- ------------ -------------- -------------- -------------
* The prior year income statement has been restated to reflect the impact
of classifying the waste management activities provided by Viridor as a discontinued
operation (see note 21)
The notes on pages 45 to 62 form part of this condensed half year financial
information.
PENNON GROUP PLC
Consolidated statement of comprehensive income for the half year ended 30
September 2020
Unaudited
----------------------------------------------------------------------------------------------
Before Before
non-underlying Non-underlying non-underlying Non-underlying
items items Total items items
half (note half half (note Total
year 5) half year year 5) half half
ended year ended ended ended year ended year ended
30 September 30 September 30 September 30 September 30 September 30 September
2020 2020 2020 2019 2019 2019
GBPm GBPm GBPm GBPm GBPm GBPm
Profit for the period 109.6 1,660.8 1,770.4 118.5 15.0 133.5
Other comprehensive
income
Items that will not be
reclassified
to profit or loss
Remeasurement of
defined benefit
obligations (note 16) (87.8) - (87.8) (20.5) 12.2 (8.3)
Income tax on items
that will
not be reclassified 16.7 - 16.7 3.8 (2.3) 1.5
--------------- -------------- ------------- --------------- -------------- -------------
Total items that will
not be
reclassified to
profit or loss (71.1) - (71.1) (16.7) 9.9 (6.8)
--------------- -------------- ------------- --------------- -------------- -------------
Items that may be
reclassified
subsequently to profit
or loss
Share of other
comprehensive
income
from joint ventures - - - (0.2) - (0.2)
Cash flow hedges (6.4) - (6.4) (16.0) - (16.0)
Income tax on items
that may
be reclassified 1.5 - 1.5 2.7 - 2.7
--------------- -------------- ------------- --------------- -------------- -------------
Total items that may
be reclassified
subsequently to
profit or loss (4.9) - (4.9) (13.5) - (13.5)
--------------- -------------- ------------- --------------- -------------- -------------
Other comprehensive
income for
the period net of tax (76.0) - (76.0) (30.2) 9.9 (20.3)
Total comprehensive
income for
the period 33.6 1,660.8 1,694.4 88.3 24.9 113.2
=============== ============== ============= =============== ============== =============
Total comprehensive
income attributable
to:
Ordinary shareholders
of the
parent 33.8 1,660.8 1,694.6 81.4 24.9 106.3
Non-controlling
interests (0.2) - (0.2) (0.1) - (0.1)
Perpetual capital
security holders - - - 7.0 - 7.0
=============== ============== ============= =============== ============== =============
The notes on pages 45 to 62
form part of this condensed half year financial information.
PENNON GROUP PLC
Consolidated balance sheet at 30 September 2020
Unaudited
---------------
30 September 31 March
2020 2020
Notes GBPm GBPm
ASSETS
Non-current assets
Goodwill 42.3 42.3
Other intangible assets 1.2 1.2
Property, plant and equipment 3,187.4 3,171.8
Derivative financial instruments 4.2 4.1
Retirement benefit obligations - 6.6
--------------- --------------------
3,235.1 3,226.0
--------------- --------------------
Current assets
Inventories 5.3 4.9
Trade and other receivables 189.4 185.8
Current tax receivable 14.3 1.9
Derivative financial instruments 1.1 2.7
Other current financial assets 21 54.0 -
Other short-term deposits 14 650.5 -
Cash and cash deposits 14 2,420.1 665.9
--------------- --------------------
3,334.7 861.2
Assets held for sale - 2,675.3
--------------- --------------------
3,334.7 3,536.5
LIABILITIES
Current liabilities
Borrowings 14 (67.0) (59.9)
Financial liabilities at fair value through profit (3.0) (1.5)
Derivative financial instruments (9.4) (7.1)
Trade and other payables 18 (100.0) (115.3)
Provisions (0.6) (0.6)
--------------- --------------------
(180.0) (184.4)
--------------- --------------------
Liabilities associated with assets classified as
held for sale - (756.3)
--------------- --------------------
Net current assets 3,154.7 2,595.8
--------------- --------------------
Non-current liabilities
Borrowings 14 (2,965.7) (3,654.9)
Other non-current liabilities 18 (126.5) (122.9)
Financial liabilities at fair value through profit (40.9) (43.1)
Derivative financial instruments (32.5) (27.2)
Retirement benefit obligations 16 (51.8) -
Deferred tax liabilities (245.5) (261.6)
--------------- --------------------
(3,462.9) (4,109.7)
--------------- --------------------
Net assets 2,926.9 1,712.1
=============== ====================
Shareholder's equity
Share capital 171.7 171.3
Share premium account 230.4 227.0
Capital redemption reserve 144.2 144.2
Retained earnings and other reserves 2,380.7 872.8
--------------- --------------------
Total shareholders' equity 2,927.0 1,415.3
--------------- --------------------
Non-controlling interests (0.1) 0.1
Perpetual capital securities - 296.7
--------------- --------------------
Total equity 2,926.9 1,712.1
=============== ====================
The notes on pages 45 to 62 form part of this condensed half year financial
information.
PENNON GROUP PLC
Consolidated statement of changes in equity for the half year ended 30 September
2020
Unaudited
----------------------------------------------------------------------------------
Share Perpetual
Share premium Retained capital
capital account Capital earnings securities
(note (note redemption and other Non-controlling (note Total
10) 11) reserve reserves interests 12) equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 April 2019 171.1 223.6 144.2 843.0 1.2 296.7 1,679.8
Opening adjustment on adoption
of IFRS 16 - - - (8.0) - - (8.0)
-------- -------- ----------- ---------- --------------- ----------- -------
At 1 April 2019 (adjusted for
IFRS 16) 171.1 223.6 144.2 835.0 1.2 296.7 1,671.8
-------- -------- ----------- ---------- --------------- ----------- -------
Profit for the period - - - 126.6 (0.1) 7.0 133.5
Other comprehensive income for
the period - - - (20.3) - - (20.3)
-------- -------- ----------- ---------- --------------- ----------- -------
Total comprehensive income for
the period - - - 106.3 (0.1) 7.0 113.2
-------- -------- ----------- ---------- --------------- ----------- -------
Transactions with equity
shareholders:
Dividends paid - - - (172.6) - - (172.6)
Adjustments in respect of
share-based
payments (net of tax) - - - 2.4 - - 2.4
Distributions due to perpetual
capital
security holders - - - - - (8.6) (8.6)
Current tax relief on
distributions
to
perpetual capital security
holders - - - - - 1.6 1.6
Own shares acquired by the
Pennon
Employee
Share Trust in respect of
Share
options - - - (1.6) - - (1.6)
Proceeds from shares issues
under
the Sharesave Scheme 0.2 2.4 - - - - 2.6
-------- -------- ----------- ---------- --------------- ----------- -------
Total transactions with equity
shareholders 0.2 2.4 - (171.8) - (7.0) (176.2)
-------- -------- ----------- ---------- --------------- ----------- -------
At 30 September 2019 171.3 226.0 144.2 769.5 1.1 296.7 1,608.8
======== ======== =========== ========== =============== =========== =======
Unaudited
Share Perpetual
Share premium Retained capital
capital account Capital earnings securities
(note (note redemption and other Non-controlling (note Total
10) 11) reserve reserves interests 12) equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 April 2020 171.3 227.0 144.2 872.8 0.1 296.7 1,712.1
Profit for the period - - - 1,770.6 (0.2) - 1,770.4
Other comprehensive income for
the period - - - (75.9) - - (75.9)
-------- -------- ----------- ---------- --------------- ----------- -------
Total comprehensive income for
the period - - - 1,694.7 (0.2) - 1,694.5
-------- -------- ----------- ---------- --------------- ----------- -------
Transactions with equity
shareholders:
Dividends paid - - - (184.3) - - (184.3)
Adjustments in respect of
share-based
payments (net of tax) - - - 2.1 - - 2.1
Redemption of perpetual
capital
securities - - - (3.3) - (296.7) (300.0)
Own shares acquired by the
Pennon
Employee
Share Trust in respect of
Share
options - - - (1.3) - - (1.3)
Proceeds from shares issues
under
the Sharesave Scheme 0.4 3.4 - - - - 3.8
-------- -------- ----------- ---------- --------------- ----------- -------
Total transactions with equity
shareholders 0.4 3.4 - (186.8) - (296.7) (479.7)
-------- -------- ----------- ---------- --------------- ----------- -------
At 30 September 2020 171.7 230.4 144.2 2,380.7 (0.1) - 2,926.9
======== ======== =========== ========== =============== =========== =======
The notes on pages 45 to 62 form part of this condensed half year financial
information.
PENNON GROUP PLC
Consolidated statement of cash flows for the half year ended 30 September
2020
Unaudited
----------
Half year Half year
ended 30 ended 30
September September
2020 2019
Notes GBPm GBPm
Cash flows from operating activities
Cash generated from operations 13 126.6 244.2
Interest paid (45.4) (38.0)
Tax paid (11.5) (26.8)
Net cash generated from operating activities 69.7 179.4
---------- ----------
Cash flows from investing activities
Interest received 2.5 2.7
Loan repayments received from joint ventures 4.0 3.7
Purchase of property, plant and equipment (113.1) (194.7)
Purchase of intangible assets (0.1) -
Proceeds on disposal of subsidiaries, net of cash
disposed and transaction costs 21 3,652.2 -
Proceeds from sale of property, plant and equipment 0.1 10.6
Investment in short-term deposits (650.5) -
Deposit of restricted cash (3.8) (5.0)
---------- ----------
Net cash (used in)/received from investing activities 2,891.3 (182.7)
---------- ----------
Cash flows from financing activities
Proceeds from issuance of ordinary shares 3.8 2.6
Proceeds from derivatives early settlement - 87.2
Purchase of ordinary shares by the Pennon Employee
Share Trust (1.3) (1.6)
Proceeds from new borrowing 200.0 50.0
Repayment of borrowings (941.6) (67.2)
Cash inflows from lease financing arrangements 14 5.0 85.0
Lease principal repayments (16.9) (18.1)
Dividends paid 9 (184.3) (172.6)
Redemption of perpetual capital security (300.0) -
Perpetual capital securities periodic return (8.6) (8.6)
---------- ----------
Net cash used in financing activities (1,243.9) (43.3)
---------- ----------
Net increase/(decrease) in cash and cash equivalents 1,717.1 (46.6)
Cash and cash equivalents at beginning of period 14 472.0 365.7
Cash and cash equivalents at end of period 14 2,189.1 319.1
========== ==========
The cash flow statement above includes the entire Group, including cashflows
relating to discontinued operations. Disaggregated information relating to
the Viridor business is provided in note 21. The notes on pages 45 to 62 form
part of this condensed half year financial information.
PENNON GROUP PLC
Notes to condensed half year financial information
1. General information
Pennon Group plc is a company registered in the United Kingdom under the
Companies Act 2006. The address of the registered office is given on page
62. Pennon Group's continuing business is operated through two principal
subsidiaries. South West Water Limited includes the integrated water companies
of South West Water and Bournemouth Water, providing water and wastewater
services in Devon, Cornwall and parts of Dorset and Somerset and water
only services in parts of Dorset, Hampshire and Wiltshire. 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 8 July 2020 Pennon completed the sale
of Viridor Limited, a recycling, energy recovery and waste management business.
In accordance with IFRS 5 'Non-current assets held for sale and discontinued
operations', the net results for Viridor are presented within discontinued
operations in the Group income statement (for which the comparatives and
related notes have been restated). The balance sheet as at 30 September
2020 shows the financial position of the Continuing Group only, with comparatives
being for the full Group as it was at 31 March 2020. The effect of the
disposal on the financial position of the Group is detailed in note 21.
This condensed half year financial information was approved by the Board
of Directors on 23 November 2020.
The financial information for the period ended 30 September 2020 does not
constitute statutory accounts within the meaning of section 435 of the
Companies Act 2006. The statutory accounts for 31 March 2020 were approved
by the Board of Directors on 3 June 2020 and have been delivered to the
Registrar of Companies. The independent auditor's report on these financial
statements was unqualified and did not contain a statement under section
498 of the Companies Act 2006.
2. Basis of preparation
This condensed half year financial information has been prepared in accordance
with the Disclosure and Transparency Rules of the Financial Services Authority,
and with IAS 34 'Interim financial reporting', as adopted by the European
Union (EU). This condensed half year financial information should be read
in conjunction with the Pennon Group plc Annual Report and Accounts for
the year ended 31 March 2020, which were prepared in accordance with International
Financial Reporting Standards (IFRS) as adopted by the EU.
The going concern basis has been adopted in preparing the condensed half
year financial information (interim accounts). At 30 September 2020, the
Group has access to undrawn committed funds and cash and other short-term
deposits totalling GBP3,486 million, including cash and other short-term
deposits of GBP3,071 million and GBP415 million of undrawn facilities.
Cash and other short-term deposits includes GBP651 million of cash on short-term
deposit with maturity of greater than three months at the date of deposit
and GBP231 million of restricted funds deposited with lessors which are
available for access, subject to being replaced by an equivalent valued
security. Having considered the Group's strong funding position and prudent
financial projections prepared to 31 March 2022, which take into account
a range of possible impacts from the COVID-19 pandemic, the Directors have
a reasonable expectation that the Group has adequate resource to continue
in operational existence for the period to at least the end of the detailed
forecasting period of 31 March 2022, and that there are no material uncertainties
to disclose. For this reason, they continue to adopt the going concern
basis in preparing the interim accounts.
This condensed half year financial information has been reviewed, but not
audited, by the independent auditor pursuant to the Auditing Practices
Board guidance on the 'Review of Interim Financial Information'.
The preparation of the half year financial information requires management
to make judgements, estimates and assumptions that affect the application
of accounting policies and the reported amounts of assets and liabilities,
income and expense. Actual results may differ from these estimates. The
significant judgements made by management in applying the Group's accounting
policies and the key sources of estimation uncertainty relating to the
Continuing Group are consistent with those that applied to the consolidated
financial statements for the year ended 31 March 2020, with the exception
of determining the fair value of deferred consideration on the sale of
Viridor.
Under the Sale Agreement, deferred consideration may be receivable in future.
The Company considers that the amount of deferred consideration could be
up to GBP0.2 billion, dependent upon future actions and the outcome of
underlying events. As required under IFRS and the Company's accounting
policies, the latest available information is used to determine a range
of possible outcomes and a probability weighting for each of those outcomes,
to determine the fair value. This approach is in accordance with the Level
3 valuation technique for determining the fair value of financial instruments.
The Company has estimated the fair value of this amount to be GBP54.0 million
which has been recognised in other financial assets.
Judgements and estimates in respect of discontinued operations as disclosed
in the consolidated financial statements for the year ended 31 March 2020
were consistently applied up the date of disposal.
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
3. Accounting policies
The accounting policies adopted in this condensed half year financial information
are consistent with those applied and set out in the Pennon Group plc Annual
Report and Accounts for the year ended 31 March 2020 and are in accordance
with all IFRS and interpretations of the IFRS Interpretations Committee
expected to be applicable for the year ending 31 March 2021 in issue which
have been adopted by the EU.
New standards or interpretations which were mandatory for the first time
in the year beginning 1 April 2020 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 2021 are
not expected to have a material impact on the Group's net assets or results.
4. Segmental information
Operating segments are reported in a manner consistent with internal reporting
provided to the Chief Operating Decision-Maker (CODM), which has been identified
as the Pennon Group plc Board ('the Board'). The earnings measures below
are used by the Board in making decisions.
Following the disposal of Viridor, the Continuing Group is organised into
two operating segments. The water business comprises the regulated water
and wastewater services undertaken by South West Water. The non-household
retail business reflects the services provided by Pennon Water Services.
The comparative period segmental information has been restated to remove
Viridor. Information about the income, expenses, cash flows, net assets
and profit recognised on disposal of the Viridor business is provided in
note 21.
Unaudited
----------------------------------------------------
Half year ended Half year ended
30 September 30 September
2020 2019 (restated)
Revenue from continuing operations GBPm GBPm
Water 282.9 292.9
Non-household retail 75.3 86.6
Other 3.7 5.7
Less intra-segment trading (42.2) (59.4)
--------------- -----------------------------------
Total underlying revenue 319.7 325.8
--------------- -----------------------------------
Water non-underlying revenue (20.5) -
--------------- -----------------------------------
299.2 325.8
--------------- -----------------------------------
Segment result
Operating profit before depreciation, amortisation
and
non-underlying items (EBITDA)
Water 176.1 190.6
Non-household retail 0.3 0.9
Other (1.9) -
--------------- -----------------------------------
174.5 191.5
--------------- -----------------------------------
Operating profit before non-underlying items
Water 116.8 131.5
Non-household retail (0.1) 0.6
Other (1.9) (0.1)
--------------- -----------------------------------
114.8 132.0
--------------- -----------------------------------
Profit before tax before non-underlying items
Water 88.5 96.2
Non-household retail (0.9) (0.3)
Other (0.9) 5.5
--------------- -----------------------------------
86.7 101.4
--------------- -----------------------------------
Profit before tax
Water 64.5 114.2
Non-household retail (0.9) (0.3)
Other (1.7) 5.5
--------------- -----------------------------------
61.9 119.4
--------------- -----------------------------------
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
4. Segmental information (continued)
Intra-segment trading between different segments is under normal market
based commercial terms and conditions. Intra-segment revenue of the other
segment is reflected as a cost.
Factors such as seasonal weather patterns can affect sales volumes, income
and costs in the water segments.
The grouping of revenue streams by how they are affected by economic factors,
as required by IFRS 15, is as follows:
Unaudited
---------------------------------------------------------------------------------
Six months ended 30 September UK total
2019
(restated)
Water Non-household Other Total
retail
GBPm GBPm GBPm GBPm
Segment revenue 292.9 86.6 5.7 385.2
Inter-segment revenue (53.5) (0.4) (5.5) (59.4)
--------------------------- --------------- ----- ----------------------------
Revenue from external customers 239.4 86.2 0.2 325.8
--------------------------- --------------- ----- ----------------------------
Significant service lines
Water 239.4 - - 239.4
Non-household retail - 86.2 - 86.2
Other - - 0.2 0.2
--------------------------- --------------- ----- ----------------------------
239.4 86.2 0.2 325.8
--------------------------- --------------- ----- ----------------------------
Unaudited
---------------------------------------------------------------------------------
Six months ended 30 September UK total
2020
Water Non-household Other Total
retail
GBPm GBPm GBPm GBPm
Segment revenue (underlying) 282.9 75.3 3.7 361.9
Inter-segment revenue
(underlying) (38.8) - (3.4) (42.2)
--------------------------- --------------- ----- ----------------------------
Underlying revenue from
external
customers 244.1 75.3 0.3 319.7
--------------------------- --------------- ----- ----------------------------
Non-underlying revenue (20.5) - - (20.5)
--------------------------- --------------- ----- ----------------------------
223.6 75.3 0.3 299.2
--------------------------- --------------- ----- ----------------------------
Significant service lines
Water 223.6 - - 223.6
Non-household retail - 75.3 - 75.3
Other - - 0.3 0.3
--------------------------- --------------- ----- ----------------------------
223.6 75.3 0.3 299.2
--------------------------- --------------- ----- ----------------------------
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
5. Non-underlying items
Non-underlying items are those that in the Directors' view are required
to be separately disclosed by virtue of their size, nature or incidence
to enable a full understanding of the Group's financial performance in
the period and business trends over time.
Unaudited
----------------------------------------------------------------------------
Half year ended Half year ended
30 September 30 September
2020 2019 (restated)
GBPm GBPm
Revenue
WaterShare+ (1) (20.5) -
Operating Costs
Pension curtailment charge (2) (4.3) -
Net finance costs
Remeasurement of fair value movement
in derivatives
(3) - 18.0
Tax credit / (charge) arising on
non-underlying
items 4.8 (4.8)
------------------------------------- -------------------------------------
Net non-underlying (charge) / credit
related to
the Continuing Group (20.0) 13.2
------------------------------------- -------------------------------------
(1) In September 2020, the Group offered its WaterShare+ scheme to its customers
whereby customers can choose to accept a credit on their bill or take shares
in Pennon Group plc. The value of the rebate equates to GBP20 per customer
and the total value of GBP20.5 million has been recognised in full as a
non-underlying reduction to revenue. This item is non-underlying in nature
given its individual size and its non-recurring nature.
(2) The Group completed its employee consultation to modernise its ongoing
pension arrangements. The outcome of the consultation resulted in a decision
to close the Pennon's principal defined benefit pension scheme to future
accrual with effect from 30 June 2021. This resulted in a curtailment charge
of GBP4.3 million.
(3) In the half year ended 30 September 2019, a gain of GBP18.0 million was
recognised relating to derivative fair value movements associated with
derivatives that are not designated as being party to an accounting hedge
relationship. In the period, these instruments were early settled as the
instruments no longer met the Group's accounting hedging requirements,
and this locked in the mark to market gain.
PENNON GROUP PLC
Notes to the condensed half year financial information (continued)
6. Net finance costs
Unaudited
---------------------------------------------------------------------------------------------
Half year ended Half year ended
30 September 2020 30 September 2019
(restated)
Finance Finance Total Finance Finance Total
costs income costs income
GBPm GBPm GBPm GBPm GBPm GBPm
Cost of servicing
debt
Bank borrowings and
overdrafts (15.2) - (15.2) (11.8) - (11.8)
Interest element of
lease payments (13.6) - (13.6) (19.0) - (19.0)
Other finance costs (1.0) - (1.0) (1.2) - (1.2)
Interest receivable - 2.3 2.3 - 1.9 1.9
--------------- --------------- ------------- -------------- -------------- ------------
(29.8) 2.3 (27.5) (32.0) 1.9 (30.1)
--------------- --------------- ------------- -------------- -------------- ------------
Notional interest
Retirement benefit
obligations (0.6) - (0.6) (0.5) - (0.5)
Net finance costs
before
non-underlying items (30.4) 2.3 (28.1) (32.5) 1.9 (30.6)
--------------- --------------- ------------- -------------- -------------- ------------
Non-underlying items
(note 5)
Fair value
remeasurement of
non-designated
derivative financial
instruments,
providing
commercial hedges - - - - 18.0 18.0
Net finance costs
after
non-underlying items (30.4) 2.3 (28.1) (32.5) 19.9 (12.6)
=============== =============== ============= ============== ============== ============
In addition to the above, finance costs of GBP0.6 million have been capitalised
on qualifying assets included in property, plant and equipment (H1 2019/20
restated GBP1.6 million).
Excluded from the amounts above are net finance costs relating to discontinued
operations of GBP11.2 million (H1 2019/20 GBP14.5 million), consisting
of finance income of GBP6.0m million (H1 2019/20 GBP10.8 million) and finance
costs of GBP17.2 million (H1 2019/20 GBP25.3 million). In addition, non-underlying
finance costs of GBP56.8 million are included within discontinued operations
(note 21) in respect of the retirement of debt relating to the discontinued
operations, including early settlement payments of GBP55.2 million.
PENNON GROUP PLC
Notes to the condensed half year financial information (continued)
7. Taxation
Unaudited
----------------------------------------------------------------------------------------------
Before Before Non-underlying
non-underlying Non-underlying non-underlying items
items items Total items (note Total
half (note half half year 5) half half
year 5) half year ended year ended year ended
ended year ended ended 30 September 30 September 30 September
30 September 30 September 30 September (restated) (restated) (restated)
2020 2020 2020 2019 2019 2019
GBPm GBPm GBPm GBPm GBPm GBPm
Analysis of charge
Current tax charge 11.6 (3.9) 7.7 13.4 16.5 29.9
Deferred tax charge
/ (credit) 4.7 (0.9) 3.8 7.3 (11.7) (4.4)
Tax charge /
(credit) for the
period 16.3 (4.8) 11.5 20.7 4.8 25.5
--------------- -------------- ------------- --------------- -------------- -------------
UK corporation tax is calculated at 19% (H1 2019/20 19%) of the estimated
assessable profit for the year. The tax charge for September 2020 and September
2019 has been derived by applying the anticipated effective annual tax
rate to the first half year profit before tax.
Tax on amounts included in the consolidated statement of comprehensive
income, or directly in equity, is included in those statements respectively.
The effective tax rate for the period for the Continuing Group, including
prior year adjustments but before the impact of non-underlying items was
19% (H1 2019/20 20%).
The effective tax rate for the period for the Continuing Group including
prior year adjustments and the impact of non-underlying items was 19% (H1
2019/20 21%).
8. Earnings per share
Basic earnings per share are calculated by dividing the earnings attributable
to ordinary shareholders by the weighted average number of ordinary shares
outstanding during the period, excluding those held in the employee share
trust which are treated as cancelled. For diluted earnings per share, the
weighted average number of ordinary shares in issue is adjusted to include
all dilutive potential ordinary shares.
The weighted average number of shares and earnings used in the calculations
were:
Unaudited
----------------------------------------------------------------------------
Half year ended Half year ended
30 September 30 September
2020 2019
Number of shares (millions)
For basic earnings per share 420.7 420.0
Effect of dilutive potential ordinary
shares from
share options 2.1 1.5
For diluted earnings per share 422.8 421.5
------------------------------------- -------------------------------------
PENNON GROUP PLC
Notes to the condensed half year financial information (continued)
8. Earnings per share (continued)
Adjusted basic and diluted earnings per ordinary share
Adjusted earnings per share are presented to provide a more useful comparison
on business trends and performance. Non-underlying items are adjusted for
by virtue of their size, nature or incidence to enable a full understanding
of the Group's financial performance (as described in note 5). Perpetual
capital returns are proportionately adjusted to allow a more useful comparison
in the period. Earnings per share have been calculated as follows:
Unaudited
-----------------------------------------------------------------------------------------
Half year ended Half year ended
30 September 2020 30 September 2019
Continuing and
discontinued
operations Profit Earnings per share Profit Earnings per share
after after
tax Basic Diluted tax Basic Diluted
GBPm p p GBPm p p
Statutory earnings 1,770.6 420.9 418.8 126.6 30.1 30.0
Deferred tax before
non-underlying
items 12.3 2.9 2.9 15.6 3.8 3.8
Non-underlying items (net
of
tax) (1,660.8) (394.8) (392.8) (15.0) (3.6) (3.6)
Proportionate impact of
perpetual
capital returns (note
12) - - - 3.5 0.8 0.8
------------------ -------------- -------------- ----------- --------- -------------
Earnings before
non-underlying
items
And deferred tax 122.1 29.0 28.9 130.7 31.1 31.0
------------------ -------------- -------------- ----------- --------- -------------
Unaudited
-----------------------------------------------------------------------------------------
Half year ended Half year ended
30 September 2020 30 September 2019
Continuing operations Profit Earnings per share Profit Earnings per share
after after
tax Basic Diluted tax Basic Diluted
GBPm p p GBPm p p
Statutory earnings 50.6 12.0 12.0 87.0 20.7 20.6
Deferred tax before
non-underlying
items 4.7 1.1 1.1 7.3 1.7 1.7
Non-underlying items (net
of
tax) 20.0 4.8 4.7 (13.2) (3.1) (3.1)
Proportionate impact of
perpetual
capital returns (note
12) - - - 3.5 0.8 0.8
------------------ -------------- -------------- ----------- --------- -------------
Earnings before
non-underlying
items
And deferred tax 75.3 17.9 17.8 84.6 20.1 20.0
------------------ -------------- -------------- ----------- --------- -------------
9. Dividends
Amounts recognised as distributions to ordinary Unaudited
equity holders in the period:
--------------------------------
Half year ended Half year ended
30 September 30 September
2020 2019
GBPm GBPm
Interim dividend paid for the year ended
31 March 2020: 13.66p (2019 12.84p) per share 57.5 54.0
Final dividend paid for the year ended
31 March 2020: 30.11p (2019 28.22p) per share 126.8 118.6
For diluted earnings per share 184.3 172.6
--------------- ---------------
In the six months to 30 September 2020 the 2019/20 interim and final dividends
were paid resulting in a cash outflow of GBP184.3m.
PENNON GROUP PLC
Notes to the condensed half year financial information (continued)
9. Dividends (continued)
Unaudited
--------------------------------
Half year ended Half year ended
30 September 30 September
2020 2019
GBPm GBPm
Proposed interim dividend for the year ended
31 March 2021: 6.77p (2019 13.66p) per share 28.6 57.4
--------------- ---------------
The proposed interim dividend has not been included as a liability in this
condensed half year financial information.
The proposed interim dividend for the year ending 31 March 2021 will be
paid on 1 April 2021 to shareholders on the register on 29 January 2021.
10. Share capital
Allotted, called up and fully paid
1 April 2019 to 30 September 2019 Unaudited
-----------------------------------------
Number of shares
Treasury shares Ordinary shares GBPm
At 1 April 2019 ordinary shares of 40.7p
each 8,443 420,520,598 171.1
For consideration of GBP2.6m, shares issued
in
respect of the Company's Sharesave Scheme - 353,265 0.2
At 30 September 2019 ordinary shares of
40.7p each 8,443 420,873,863 171.3
---------------- ---------------- -----
1 April 2020 to 30 September 2020 Unaudited
-----------------------------------------
Number of shares
Treasury shares Ordinary shares GBPm
At 1 April 2020 ordinary shares of 40.7p
each 8,443 421,036,557 171.3
For consideration of GBP3.8m, shares issued
in
respect of the Company's Sharesave Scheme - 811,400 0.4
At 30 September 2020 ordinary shares of
40.7p each 8,443 421,847,957 171.7
---------------- ---------------- -----
Shares held as treasury shares may be sold, re-issued for any of the Company's
share schemes, or cancelled.
The weighted average market price of the Company's shares at the date of
exercise of share scheme options during the year was 1,051p (H1 2019/20
760p).
PENNON GROUP PLC
Notes to the condensed half year financial information (continued)
11. Share premium account
Unaudited
------------
1 April 2019 to 30 September 2019 GBPm
At 1 April 2019 223.6
Shares issued under the Sharesave Scheme 2.4
At 30 September 2019 226.0
------------
1 April 2020 to 30 September 2020
At 1 April 2020 227.0
Shares issued under the Sharesave Scheme 3.4
At 30 September 2020 230.4
------------
12. Perpetual capital securities
Unaudited
-------------------------------------
Half year ended Half year ended
30 September 30 September
2020 2019
GBPm GBPm
GBP 300m 2.875% perpetual subordinated
capital securities - 296.7
- 296.7
------------------------------------- -------------------------------------
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.
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
13. Cash flow from operating activities
Reconciliation of profit for the period Unaudited
to net
cash inflow from operations:
Half year ended Half year ended
30 September 30 September
2020 2019
GBPm GBPm
Cash generated from operations
Profit for the period 1,770.4 133.5
Adjustments for:
Share-based payments 2.6 2.0
Loss / (profit) on disposal of property, plant
and equipment 0.2 (2.5)
Profit on sale of discontinued operations (1,729.3) -
Depreciation charge 60.7 100.7
Amortisation of intangible assets 0.1 2.5
Continuing Group:
* non-underlying pension items (note 5) 4.3 -
* non-underlying remeasurement of fair value movement
in derivatives (note 5) - (18.0)
Discontinued operations:
* non-underlying pension items (note 21) (6.0) (2.2)
* non-underlying restructuring costs and share scheme
charges (note 21) 6.6 -
* non-underlying debt retirement costs (note 21) 56.8 -
Share of post-tax profit from joint ventures (4.3) (7.3)
Finance income (before non-underlying items) (8.3) (12.7)
Finance costs (before non-underlying items) 47.6 57.8
Taxation charge 10.8 29.6
Changes in working capital:
Increase in inventories (3.9) (1.9)
Increase in trade and other receivables (46.8) (2.0)
Increase in service concession arrangements receivable (3.8) (12.4)
Increase in trade and other payables 9.7 19.5
Decrease in retirement benefit obligations from
contributions (37.8) (29.3)
Decrease in provisions (3.0) (13.1)
Cash generated from operations 126.6 244.2
---------------- ---------------
Cash generated from operations comprises:
* Cash generated from discontinued operations (see note
21) 6.0 96.5
* Cash generated from the Continuing Group 120.6 147.7
---------------- ---------------
Unaudited
---------------------------------
Half year ended Half year ended
30 September 30 September
2020 2019
Total interest paid GBPm GBPm
Interest paid in operating activities 45.4 38.0
Interest paid in investing activities 1.4 6.1
Total interest paid 46.8 44.1
---------------- ---------------
The above cash flow tables reflect the entire Group, including cash flows
relating to the discontinued operations. Disaggregated information
relating
to the discontinued operations is provided in note 21.
During the period, the Group completed a number of sale and leaseback
transactions in respect of its infrastructure assets as part of its
ongoing
finance arrangements. Cash proceeds of GBP5.0 million (H1 2019/20 GBP85.0
million) were received and a gain of GBPnil (H1 2019/20 GBPnil) was
recognised.
These assets are primarily being leased back over an initial 10-year lease
term at market rentals.
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
14. Net borrowings
Unaudited
Half year ended Year ended
30 September 31 March 2020
2020
GBPm GBPm
Cash and cash deposits 2,420.1 665.9
Other short-term deposits 650.5 -
Borrowings - current
Bank and other loans (7.7) (13.7)
Other current borrowings (29.7) (27.0)
Leases (29.6) (19.2)
---------------- ---------------
Total current borrowings (67.0) (59.9)
---------------- ---------------
Borrowings - non-current
Bank and other loans (1,335.2) (1,894.8)
Other current borrowings (221.2) (340.8)
Leases (1,409.3) (1,419.3)
---------------- ---------------
Total non-current borrowings (2,965.7) (3,654.9)
---------------- ---------------
Total net borrowings 37.9 (3,048.9)
---------------- ---------------
Discontinued operations net borrowings - (215.1)
---------------- ---------------
Total Group net borrowings 37.9 (3,264.0)
---------------- ---------------
For the purposes of the cash flow statement cash and cash equivalents
comprise:
Unaudited
Half year ended Year ended
30 September 31 March 2020
2020
GBPm GBPm
Cash and cash deposits as above 2,420.1 665.9
Cash and cash deposits held in Disposal Group - 33.3
Less: deposits with a maturity of three months or
more (restricted funds) (231.0) (227.2)
2,189.1 472.0
---------------- ---------------
Restricted funds of GBP231.0 million (31 March 2020 GBP227.2 million) are
deposited with lessors which are available for access, subject to being
replaced by an equivalent valued security.
Other short-term deposits of GBP650.5 million (31 March 2020 GBPnil) comprise
cash on short-term deposit with maturity of greater than three months at
the time of deposit.
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
14. Net borrowings (continued)
The movements in net borrowings during the periods presented were as follows:
Unaudited
---------------------------------------------------------------------------------------
Net borrowing IFRS 16 Foreign Net borrowings
at 1 April transition Cash exchange Other non-cash at 30 September
2019 adjustment flows adjustments movements 2019
GBPm GBPm GBPm GBPm GBPm GBPm
Cash and cash deposits 569.6 - (41.6) - - 528.0
Bank and other loans due
within one year (59.8) - 53.6 - (4.0) (10.2)
Other current borrowings (27.0) - 13.5 - (13.5) (27.0)
Leases due within one year (63.6) (8.9) 18.1 - (33.3) (87.7)
Bank and other loans due
after one year (1,628.0) - (49.9) (1.1) 4.3 (1,674.7)
Other non-current
borrowings (373.9) - - - 16.5 (357.4)
Leases due after one year (1,496.8) (112.3) (85.0) - 27.1 (1,667.0)
-------------- ------------ ------- ------------- -------------- -----------------
Total (3,079.5) (121.2) (91.3) (1.1) (2.9) (3,296.0)
-------------- ------------ ------- ------------- -------------- -----------------
Unaudited
Transfer
Net borrowing between Net borrowings
at 1 April Cash non-current Other non-cash Viridor at 30 September
2020 flows and current movements disposal 2020
GBPm GBPm GBPm GBPm GBPm GBPm
Cash and cash deposits 665.9 1,754.2 - - - 2,420.1
Other short-term deposits - 650.5 - - - 650.5
Bank and other loans due
within one year (7.6) 4.0 (4.0) (0.1) - (7.7)
Other current borrowings (33.1) 19.6 (16.2) - - (29.7)
Leases due within one year (19.2) 7.3 (15.0) (2.7) - (29.6)
Bank and other loans due
after one year (1,894.8) 559.4 4.0 (3.8) - (1,335.2)
Other non-current borrowings (340.8) 103.4 16.2 - - (221.2)
Leases due after one year (1,419.3) (5.0) 15.0 - - (1,409.3)
------------- ------- ------------ -------------- --------- ----------------
Net (borrowings) / cash (3,048.9) 3,093.4 - (6.6) - 37.9
------------- ------- ------------ -------------- --------- ----------------
Net borrowings in Disposal
Group (215.1) 15.3 - (1.9) 201.7 -
------------- ------- ------------ -------------- --------- ----------------
Net (borrowings) / cash
in
Total Group (3,264.0) 3,108.7 - (8.5) 201.7 37.9
------------- ------- ------------ -------------- --------- ----------------
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
15. Fair value disclosure for financial instruments
Fair value of financial instruments carried at amortised cost.
Financial assets and liabilities which are not carried at an amount which
approximates to their fair value are:
Unaudited
------------------------------------------
Half year ended Year ended
30 September 2020 31 March 2020
Book value Fair value Book value Fair value
GBPm GBPm GBPm GBPm
Non-current borrowings:
Bank and other loans 1,335.2 1,572.9 1,894.8 2,141.6
Other non-current borrowings 221.2 208.3 340.8 324.3
------------------------- --------------- ---------- --------------------------
Non-current borrowings
excluding
leases 1,556.4 1,781.2 2,235.6 2,465.9
------------------------- --------------- ---------- --------------------------
Valuation hierarchy of financial instruments carried at fair value
The Group uses the following hierarchy for determining the fair value of
financial instruments by valuation technique:
* quoted prices (unadjusted) in active markets for
identical assets or liabilities (level 1)
* inputs other than quoted prices included within level
1 that are observable for the asset or liability,
either directly (that is, as prices) or indirectly
(that is, derived from prices) (level 2)
* Inputs for the asset or liability that are not based
on observable market data (that is, unobservable
inputs) (level 3).
The fair value of financial instruments not traded in an active market
(level 2, for example over-the-counter derivatives) is determined by using
valuation techniques. A variety of methods and assumptions are used based
on market conditions existing at each balance sheet date. Quoted market
prices or dealer quotes for similar instruments are used for long term
debt. Other techniques, such as estimated discounted cash flows, are used
to determine fair value for the remaining financial instruments. The fair
value of interest rate swaps is calculated as the present value of the
estimated future cash flows.
The Group's financial instruments are valued principally using level 2
measures:
Unaudited
Half year ended Year ended
30 September 31 March 2020
2020
GBPm GBPm
Level 2 inputs
Assets
Derivatives used for hedging 1.1 3.4
Derivatives deemed held for trading 4.2 3.4
Total assets 5.3 6.8
--------------- --------------------------------------
Liabilities
Derivatives used for hedging 41.9 34.1
Derivatives deemed held for trading - 0.2
--------------- --------------------------------------
Total liabilities 41.9 34.3
--------------- --------------------------------------
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
16. Retirement benefit obligations
Defined benefit schemes
The principal actuarial assumptions were: the rate used to discount schemes'
liabilities and expected return on scheme assets of 1.55% (March 2020 2.30%)
and the inflation assumption of 2.95% (March 2020 2.65%).
Unaudited
--------------------------------------------------
Half year ended Year ended
30 September 2020 31 March 2020
Present Fair value Present Fair value
value of of plan value of of plan
obligation assets Total obligation assets Total
GBPm GBPm GBPm GBPm GBPm GBPm
At beginning of period (685.3) 691.9 6.6 (994.8) 934.0 (60.8)
Amounts recognised in the
income statement (11.2) 7.9 (3.3) (29.2) 22.3 (6.9)
Remeasurements through
other
comprehensive income (127.7) 56.6 (71.1) 42.8 (25.1) 17.7
Company contributions
(including
settlement accrual) - 44.6 44.6 - 41.5 41.5
Benefits and expenses paid 17.6 (17.6) - 38.4 (38.4) -
Effect of
settlements/curtailments 55.3 (53.6) 1.7 - - -
Transfer (from) / to
liabilities
directly
associated with assets
held for sale (216.5) 186.2 (30.3) 257.5 (242.4) 15.1
----------------- ------------------ ----------- ----------------- ---------- ----------
At end of period (967.8) 916.0 (51.8) (685.3) 691.9 6.6
----------------- ------------------ ----------- ----------------- ---------- ----------
Prior to the completion of the Viridor sale, the responsibilities for certain
pension schemes that Viridor participated in transferred to Pennon Group
plc. The net liabilities of the transferred obligations were GBP30.3 million.
Certain schemes that transferred from Viridor to Pennon were in respect
of Viridor's Greater Manchester contract which ceased in May 2019. In respect
of these obligations an agreement was reached, in September 2020, to transfer
the liabilities of the active employees of the Greater Manchester contract
to the new operator's pension fund. This resulted in a gain on settlement
of GBP6.0 million which has been recognised in non-underlying items within
discontinued operations (see note 21). A settlement payment of GBP7.2 million
has been recognised in connection with this settlement and this was made
after the balance sheet date.
The Group completed its employee consultation to modernise its ongoing
pension arrangements. The outcome of the consultation resulted in a decision
to close the Pennon's principal defined benefit pension scheme to future
accrual with effect from 30 June 2021. This resulted in a curtailment charge
of GBP4.3 million, which has been included within non-underlying items
for the Continuing Group (see note 5).
The net gain of GBP1.7 million in respect of the settlement in connection
with Greater Manchester and the curtailment charge is shown in the effects
of settlements and curtailments.
17. Capital expenditure
Unaudited
Half year ended Year ended
30 September 31 March 2020(1)
2020(1)
GBPm GBPm
Property, plant and equipment
Additions 110.1 326.9
Net book value of disposals 2.5 15.4
Capital commitments
Contracted but not provided for the Continuing Group 86.2 72.0
(1) The additions and net book value of disposals in the half year to 30 September
2020 and the year ended 31 March 2020 reflect additions for the Full Group
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
18. Trade and other payables & other non-current
liabilities
Unaudited
Half year ended Year ended
30 September 31 March 2020
2020
GBPm GBPm
Trade and other payables - current
Trade payables 42.6 64.2
Contract liabilities 2.0 2.0
Other tax and social security 3.0 2.8
Accruals 31.3 15.5
Other payables 21.1 30.8
--------------- --------------
100.0 115.3
--------------- --------------
Other non-current liabilities
Contract liabilities 126.5 122.9
--------------- --------------
19. Contingencies
Contingent liabilities Unaudited
Half year ended Year ended
30 September 31 March 2020
2020
GBPm GBPm
Performance bonds - 197.1
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 related to the activities of the
Disposal Group and have been transferred on completion of the sale.
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 an outflow of resources will
be required to settle the obligation and the amount can be reliably estimated.
In previous accounting periods, there were matters where it was uncertain
that these conditions had been met in respect of discontinued operations.
Following the disposal these uncertainties do not impact the Continuing
Group.
20. Related party transactions
Up to the point of the sale of Viridor on 8 July 2020, the Group's significant
related parties during the period were its joint venture in Lakeside Energy
from Waste Holdings Limited and its joint venture in INEOS Runcorn (TPS)
Holdings Limited, for which disclosures were made in the Pennon Group plc
Annual Report and Accounts for the year ended 31 March 2020.
These joint venture interests formed part of Viridor's operations and following
the disposal these are no longer related parties to the Continuing Group.
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
21. Discontinued operations and non-current assets held for sale
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). The Viridor business which represented the entirety of the waste
operating segment was classified as a discontinued operation at that date.
Consequently, Viridor has not been presented as an operating segment in
the segment note. The sale completed on 8 July 2020 and the results of
the discontinued operation and the effect of the disposal on the financial
position of the Group were as follows:
Unaudited
----------------------------------------------------------------------------------------------
Before Non-underlying Before Non-underlying
non-underlying items(1) non-underlying items(2)
items half half year Total half items half half year Total half
year ended ended 30 year ended year ended ended 30 year ended
30 September September 30 September 30 September September 30 September
2020 2020 2020 2019 2019 2019
GBPm GBPm GBPm GBPm GBPm GBPm
Discontinued
operations
Revenue 192.2 - 192.2 386.6 - 386.6
Operating costs
Employment costs (33.9) 1.1 (32.8) (69.2) 2.2 (67.0)
Raw materials and
consumables
used (22.4) - (22.4) (49.1) - (49.1)
Other operating
expenses (81.6) (1.7) (83.3) (175.9) - (175.9)
--------------- -------------- ------------- --------------- -------------- -------------
Earnings before
interest,
tax,
depreciation and
amortisation 54.3 (0.6) 53.7 92.4 2.2 94.6
--------------- -------------- ------------- --------------- -------------- -------------
Depreciation and
amortisation - - - (43.7) - (43.7)
Operating profit 54.3 (0.6) 53.7 48.7 2.2 50.9
Finance income 6.0 - 6.0 10.8 - 10.8
Finance costs (17.2) (56.8) (74.0) (25.3) - (25.3)
Net finance costs (11.2) (56.8) (68.0) (14.5) - (14.5)
Share of post-tax
profit
from joint ventures 4.3 - 4.3 7.3 - 7.3
--------------- -------------- ------------- --------------- -------------- -------------
Profit before tax 47.4 (57.4) (10.0) 41.5 2.2 43.7
--------------- -------------- ------------- --------------- -------------- -------------
Taxation
(charge)/credit (8.2) 8.9 0.7 (3.7) (0.4) (4.1)
--------------- -------------- ------------- --------------- -------------- -------------
Profit from operating
activities,
net of tax 39.2 (48.5) (9.3) 37.8 1.8 39.6
--------------- -------------- ------------- --------------- -------------- -------------
Gain on sale of
discontinued
operation - 1,729.3 1,729.3 - - -
--------------- -------------- ------------- --------------- -------------- -------------
Profit from
discontinued
operations, net of
tax 39.2 1,680.8 1,720.0 37.8 1.8 39.6
--------------- -------------- ------------- --------------- -------------- -------------
Attributable to:
------------- -------------
Ordinary shareholders
of
the parent 1,720.0 39.6
------------- -------------
(1) In the half year ended 30 September 2020 the non-underlying items in discontinued
operations reflect employments costs (restructuring, accelerated share
scheme charges and a settlement gain on transfer of pension liabilities),
other operating restructuring costs and finance costs relating to debt
retirements.
(2) In the half year ended 30 September 2019 the non-underlying items related
to a curtailment gain on defined benefit pension commitments in respect
of employees working on the Greater Manchester contract moving from active
to deferred status.
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
21. Discontinued operations and non-current assets held for sale (continued)
Unaudited
----------------------------------------------------------------------------
Half year ended Half year ended
30 September 30 September
2020 2020
GBPm GBPm
Cash flows from / (used in)
discontinued operations
Cash generated from operations 6.0 96.5
Interest paid (13.8) (26.0)
Tax (paid) / received (4.4) 5.5
------------------------------------- -------------------------------------
Cash flows from operating activities
after interest
and tax paid (12.2) 76.0
Cash flows from investing activities (24.0) (82.0)
Cash flows from financing activities,
net of intercompany (65.1) (15.0)
Net cash flows from discontinued
operations, net
of intercompany (101.3) (21.0)
------------------------------------- -------------------------------------
Effect of disposal of the financial position of the Group
The net assets relating to the Disposal Group at the date of disposal and
the gain on disposal are shown below
Unaudited
-------------------------------------
8 July 2020
GBPm
Net assets disposed of and gain on disposal
Goodwill 340.8
Other intangible assets 86.9
Property, plant and equipment 1,619.2
Other non-current assets 266.7
Investments in joint ventures 64.4
Inventories 33.4
Trade and other receivables 321.4
Current tax asset 0.6
Cash and cash deposits 39.0
Borrowings (240.7)
Trade and other payables (158.5)
Provisions (236.8)
Other non-current liabilities (12.7)
Retirement benefit obligations 1.5
Deferred tax liabilities (109.4)
-------------------------------------
Net assets disposed of 2,015.8
-------------------------------------
Consideration received in cash, net of transaction costs 3,691.2
Deferred consideration 54.0
-------------------------------------
Gain on sale before income tax and reclassification of reserves 1,729.4
-------------------------------------
Items previously recognised in equity recycled to the income
statement (0.1)
-------------------------------------
Gain on sale of discontinued operation 1,729.3
-------------------------------------
Net cash inflow arising on disposal
Consideration received in cash and cash equivalents, net of transaction
costs 3,691.2
Less cash and cash deposits disposed of (39.0)
-------------------------------------
3,652.2
-------------------------------------
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
21. Discontinued operations and non-current assets held for sale (continued)
Deferred consideration
Under the Sale Agreement deferred consideration may be receivable in future.
The Company considers that the amount of deferred consideration could be
up to GBP0.2 billion, dependent upon future actions and the outcome of
underlying events. As required under IFRS and the Company's accounting
policies, the latest available information is used to determine a range
of possible outcomes and a probability weighting for each of those outcomes
to determine the fair value. This approach is in accordance with the Level
3 valuation technique for determining the fair value of financial instruments.
The Company has estimated the fair value of this amount to be GBP54.0 million
which has been recognised in other financial assets.
Taxation on the discontinued operations
The gain on sale of discontinued operations qualified for the Substantial
Shareholding Exemption and consequently was not subject to corporation
tax.
Pennon Group plc
Registered Office: Registered in England No 2366640
Peninsula House
Rydon Lane
Exeter
EX2 7HR
www.pennon-group.co.uk
PENNON GROUP PLC
DIRECTORS' RESPONSIBILITIES STATEMENT
The Directors named below confirm on behalf of the Board of Directors that
this unaudited condensed half year financial information has been prepared
in accordance with IAS 34 "Interim financial reporting" as adopted by the
European Union and to the best of their knowledge the interim management
report herein includes a fair review of the information required by DTR
4.2.4, DTR 4.2.7R and DTR 4.2.8R of the Disclosure and Transparency Rules,
being an indication of important events that have occurred during the period
and their impact on the unaudited condensed half year financial information;
a description of the principal risks and uncertainties for the remaining
six months of the current financial year; and the disclosure requirements
in respect of material related party transactions.
The Directors are responsible for the maintenance and integrity of the
Company's website. Legislation in the United Kingdom governing the preparation
and dissemination of financial information may differ from legislation
in other jurisdictions.
The Directors of Pennon Group plc at the date of the signing of this announcement
and statement are:
Gill Rider
Neil Cooper
Iain Evans
Claire Ighodaro
Jonathan Butterworth
Susan Davy
Paul Boote
For and on behalf of the Board of Directors who approved this half year
report on 23 November 2020.
S J Davy P M Boote
Group Chief Executive Officer Group Finance Director
PENNON GROUP PLC
INDEPENT REVIEW REPORT TO PENNON GROUP PLC
Introduction
We have been engaged by the Company to review the condensed consolidated
set of financial statements in the half-yearly financial report for the
six months ended 30 September 2020 which comprises the Consolidated income
statement, the Consolidated statement of comprehensive income, the Consolidated
balance sheet, the Consolidated statement of changes in equity, the Consolidated
statement of cash flows and related notes. We have read the other information
contained in the half yearly financial report and considered whether it
contains any apparent misstatements or material inconsistencies with the
information in the condensed set of financial statements.
This report is made solely to the company in accordance with guidance contained
in International Standard on Review Engagements 2410 (UK and Ireland) "Review
of Interim Financial Information Performed by the Independent Auditor of
the Entity" issued by the Auditing Practices Board. To the fullest extent
permitted by law, we do not accept or assume responsibility to anyone other
than the company, for our work, for this report, or for the conclusions
we have formed.
Directors' Responsibilities
The half-yearly financial report is the responsibility of, and has been
approved by, the directors. The directors are responsible for preparing
the half-yearly financial report in accordance with the Disclosure Guidance
and Transparency Rules of the United Kingdom's Financial Conduct Authority.
As disclosed in note 2, the annual financial statements of the Group are
prepared in accordance with IFRS as adopted by the European Union. The
condensed set of financial statements included in this half-yearly financial
report has been prepared in accordance with International Accounting Standard
34, "Interim Financial Reporting", as adopted by the European Union.
Our Responsibility
Our responsibility is to express to the Company a conclusion on the condensed
set of financial statements in the half-yearly financial report based on
our review.
Scope of Review
We conducted our review in accordance with International Standard on Review
Engagements (UK and Ireland) 2410, "Review of Interim Financial Information
Performed by the Independent Auditor of the Entity" issued by the Auditing
Practices Board for use in the United Kingdom. A review of interim financial
information consists of making enquiries, primarily of persons responsible
for financial and accounting matters, and applying analytical and other
review procedures. A review is substantially less in scope than an audit
conducted in accordance with International Standards on Auditing (UK) and
consequently does not enable us to obtain assurance that we would become
aware of all significant matters that might be identified in an audit.
Accordingly, we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to
believe that the condensed set of financial statements in the half-yearly
financial report for the six months ended 30 September 2020 is not prepared,
in all material respects, in accordance with International Accounting Standard
34 as adopted by the European Union and the Disclosure Guidance and Transparency
Rules of the United Kingdom's Financial Conduct Authority.
Ernst & Young LLP
Leeds
23 November 2020
PENNON GROUP PLC
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. The following APMs have been amended from
those presented previously to reflect the changing nature of the Group
following the sale of Viridor:
* The APM for Adjusted EBITDA (adjusted earnings before
interest, tax, depreciation and amortisation) has
been removed as this measure was used to adjust for
the impact of Viridor's share of EBITDA from its
joint ventures and finance income on service
concession arrangements. Following the disposal of
Viridor these adjustments to properly assess
performance are no longer required
* The Group return on capital employed measure has been
removed. Due to Pennon Group holding a net cash
position at 30 September 2020 this does not provide
suitable comparability to previous measures to allow
a meaningful assessment of performance
* The Total Group Effective interest rate has been
replaced as this measure does not provide
comparability as the Group is in a net cash position
at 30 September 2020. The more relevant measure of
the Group's management of interest rates is in
respect of South West Water Limited, which is in a
net borrowing position. The calculations have
therefore been presented for this entity
* Group dividend cover is not presented in the half
year APM disclosure. The ratio represents a measure
of full year adjusted profit and dividend performance
and cannot be calculated on a comparable basis using
half year adjusted profits and the interim dividend
* Other measures have been updated to reflect
continuing operations, rather than Total Group
measures to ensure a meaningful comparison.
(i) Underlying earnings
Underlying earnings are presented alongside statutory results as the Directors
believe they provide a more useful comparison on business trends and performance.
Note 5 in the condensed half year financial information provides more detail
on non-underlying items, and a reconciliation of underlying earnings for
the current year and the prior year is as follows:
Underlying earnings reconciliation Total Group
30 September 2020 underlying Non-underlying
(including Underlying items from
discontinued discontinued continuing Statutory Earnings
operations) operations operations results per share
GBPm GBPm GBPm GBPm p
EBITDA 228.8 54.3 (24.8) 149.7
Operating profit 169.1 54.3 (24.8) 90.0
Profit before tax 134.1 47.4 (24.8) 61.9
Taxation (24.5) (8.2) 4.8 (11.5)
------------------------------------ ------------- ------------- -------------- ---------
Profit after tax from continuing
operations 50.4
Profit after tax from
discontinued operations 1,720.0
Profit after tax (PAT) 1,770.4
Non-controlling interests 0.2
------------------------------------ ------------- ------------- -------------- --------- ----------
PAT attributable to shareholders 1,770.6 420.9
Deferred tax before non-underlying
items 12.3 2.9
Non-underlying items post tax (1,660.8) (394.8)
Underlying earnings 122.1 29.0
------------------------------------ ------------- ------------- -------------- --------- ----------
PENNON GROUP PLC
Alternative performance measures (continued)
(i) Underlying earnings (continued)
Underlying earnings reconciliation Total Group
30 September 2019 underlying Non-underlying
(including Underlying items from
discontinued discontinued continuing Statutory Earnings
operations) operations operations results per share
GBPm GBPm GBPm GBPm p
EBITDA 283.9 92.4 - 191.5
Operating profit 180.7 48.7 - 132.0
Profit before tax 142.9 41.5 18.0 119.4
Taxation (24.4) (3.7) (4.8) (25.5)
--------------------------------------- ------------- ------------- -------------- ---------
Profit after tax from continuing
operations 93.9
Profit after tax from discontinued
operations 39.6
Profit after tax (PAT) 133.5
PAT attributable to perpetual capital
holders (7.0)
Non-controlling interests 0.1
--------------------------------------- ------------- ------------- -------------- --------- ----------
PAT attributable to shareholders 126.6 30.1
Deferred tax before non-underlying
items 15.6 3.8
Non-underlying items post tax (15.0) (3.6)
Proportional adjustment on perpetual
capital securities 3.5 0.8
Underlying earnings 130.7 31.1
--------------------------------------- ------------- ------------- -------------- --------- ----------
(ii) South West Water Limited effective interest rate
A measure of the mean average interest rate payable on South West Water
Limited's net debt, which excludes interest costs not directly associated
with South West Water Limited net debt. This measure is presented to assess
and monitor the relative cost of financing for South West Water Limited.
H1 2021 H1 2020
GBPm GBPm
Net finance costs after non-underlying items 27.6 17.3
Non-underlying net finance costs - 18.0
Net interest on retirement benefit obligations - (0.4)
Capitalised interest 0.6 1.6
-------------- ---------------------
Net finance costs for effective interest rate calculation 28.2 36.5
Opening net debt 2,307.2 2,062.5
Closing net debt 2,286.6 2,272.3
-------------- ---------------------
Average net debt (opening net debt + closing net
debt divided by 2) 2,296.9 2,167.4
-------------- ---------------------
Effective interest rate (%) 2.5 3.4
-------------- ---------------------
(iii) Continuing operations interest cover
Underlying net finance costs (excluding pensions net interest cost) divided
by operating profit before
non-underlying items.
H1 2021 H1 2020
(restated)
GBPm GBPm
Net finance costs after non-underlying items 28.1 12.6
Add back: non-underlying net finance credit - 18.0
Net interest on retirement benefit obligations (0.6) (0.5)
-------------- ---------------------
Net finance costs for interest cover calculation 27.5 30.1
Operating profit before non-underlying items 114.8 132.0
-------------- ---------------------
Interest cover (times) 4.2 4.4
-------------- ---------------------
PENNON GROUP PLC
Alternative performance measures (continued)
(iv) Continuing operations capital investment
Property, plant and equipment additions. The measure is presented to
assess
and monitor the total capital investment by the Group.
H1 2021 H1 2020
(restated)
GBPm GBPm
Property, plant and equipment additions to
property,
plant and equipment 73.4 77.6
Intangible additions to property, plant
and equipment 0.1 -
------------------------------ ----------------------------------------
Capital investment 73.5 77.6
------------------------------ ----------------------------------------
(v) Continuing operations capital payments
Payments for property, plant and equipment (PPE) additions net of
proceeds
from sale of PPE. The measure is presented to assess and monitor the net
cash spend on PPE.
H1 2021 H1 2020
(restated)
GBPm GBPm
Cash flow statements: purchase of
property, plant
and equipment 113.1 194.7
Cash flow statements: purchase of
intangible assets 0.1 -
Cash flow statements: proceeds from sale
of property,
plant and equipment (0.1) (10.6)
------------------------------ ----------------------------------------
Capital payments relating to the Total
Group 113.1 184.1
Capital payments relating to discontinued
operations (32.3) (93.7)
------------------------------ ----------------------------------------
Capital payments relating to continuing
operations 80.8 90.4
------------------------------ ----------------------------------------
(vi) Continuing operations operational cash inflows and other movements
Cash generated from operations before pension contributions and other
movements.
H1 2021 H1 2020
(restated)
GBPm GBPm
Cash generated from operations per cash
flow statements 126.6 244.2
Remove: cash generated from discontinued
operations (6.0) (96.5)
------------------------------ ----------------------------------------
Cash generated from operations from the
Continuing
Group 120.6 147.7
Other movements (1) (2.0) (1.1)
Pension contributions 36.0 32.1
Operational cash inflows and other
movements 154.6 178.7
------------------------------ ----------------------------------------
(1) Other movements reflect operational movements not related to operating
cash flows, such as proceeds from share issues and share trust purchases
for the employee share schemes.
PENNON GROUP PLC
Alternative performance measures (continued)
(vii) 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.3.9% for 2021-25) 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 2021-25, the notional equity proportion
is 40.0%.
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.
(viii) Totex
Operating costs and capital expenditure of the regulated water and wastewater
business (based on the Regulated Accounting Guidelines).
(ix) Outcome Delivery Incentive (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] Annual equivalent Return on Regulated Equity (RORE)
^ Measures with this symbol ^ are defined in the Alternative
Performance Measures (APMs) as outlined on pages 65 to 68
[2] The comparatives for the half year ended 30 September 2019
have been restated to show the performance of the Continuing Group
in accordance with IFRS 5: Non-current assets held for sale and
discontinued operations
[3] Kohlberg, Kravis and Roberts and Co. L.P (KKR)
[4] South West Water has committed to share outperformance on
the cost of embedded debt with customers
[5] K7 base returns - 3.9%
[6] Outcome Delivery Incentives
^ Measures with this symbol ^ are defined in the Alternative
Performance Measures (APMs) as outlined on pages 65 to 68
[7] As noted above, the comparatives for the half year ended 30
September 2019 have been restated to show the performance of the
Continuing Group in accordance with IFRS 5: Non-current assets held
for sale and discontinued operations
[8] Non-underlying items are adjusted for by virtue of their
size, nature or incidence to enable a full understanding of
financial performance
[9] The CPIH rate used is 0.7% as of 30 September 2020
[10] Agreement was reached in H1 2020/21 to close the scheme to
future accrual from July 2021
[11] 6.59p of the interim dividend for H1 2019/20 of 13.66p
relates to the Continuing Group based on the proportionate value of
the Continuing Group to the total group including Viridor
[12] Includes GBP0.5 billion debt and debt-like items
transferred with Viridor
[13] Gender pay gap for the Continuing Group
[14] Based on quarter 1 performance
[15] GAC - Granular Activated Carbon
[16] UV - Ultraviolet
[17] 2020 forecast based on internal assessment of available
data, but formal classification may not be issued in light of
COVID-19
[18] Final Determination RORE reflected base returns of 3.9%,
with performance in the range of -1.2% to +1.2% financing, -0.8% to
+1.2% totex and -2.6% to +2.2% ODIs including C-Mex and D-Mex
[19] H1 2020/21 reflects 50% of full year assumptions
[20] WaterShare RORE financing outperformance is based on the
outturn effective interest rate on net debt, translated into an
effective real interest rate using cumulative K7 forecast RPI/CPIH
blended inflation of 2.4%
[21] Financing outperformance calculated based on full year
equivalent forecast blended inflation
^ Measures with this symbol ^ are defined in the Alternative
Performance Measures (APMs) as outlined on pages 65 to 68
[22] Non-underlying items are adjusted for by virtue of their
size, nature or incidence to enable a full understanding of
financial performance
[23] The CPIH rate used is 0.7% as of 30 September 2020
^ Measures with this symbol ^ are defined in the Alternative
Performance Measures (APMs) as outlined on pages 65 to 68
[24] Includes wholesale revenue for non-household customers
^ Measures with this symbol ^ are defined in the Alternative
Performance Measures (APMs) as outlined on pages 65 to 68
[25] Includes wholesale costs for non-household customers
[26] Total Group interest paid of GBP45.4 million less Total
Group interest received of GBP2.5 million, less net interest paid
relating to discontinued operations of GBP5.5 million
[27] Transaction costs of GBP63 million
[28] RCV as published in South West Water's Final Determination
(2020-25), recognising the omission of data not included by Ofwat
in relation to IFRS16: Leases
[29] Based on forecast regulatory capital value (RCV) at 31
March 2021 and South West Water group net debt including impact of
IFRS 16: Leases. Regulatory South West Water Limited gearing based
on forecast RCV at 31 March 2021 is 67.4% at 30 September 2020
(66.9% at 30 September 2019)
[30] Re-analysed to incorporate IFRS 16: Leases
[31] c.GBP38 million wholesale cost of capital K7 reset offset
by wholesale revenue forecasting incentive mechanism and other
regulatory true up mechanisms
[32] 2019/20 revenue for the Continuing Group
[33] GBP822 million net debt as at 31 March 2020 plus GBP300
million in perpetual securities, repaid May 2020
[34] 2019/20 effective current tax rate rebased to reflect the
Continuing Group
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IR PPGWPGUPUUUC
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November 24, 2020 02:00 ET (07:00 GMT)
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