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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Pennon Group Plc | LSE:PNN | London | Ordinary Share | GB00BNNTLN49 | ORD 61 1/20P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 664.50 | 668.00 | 670.00 | 670.00 | 660.00 | 665.00 | 528,937 | 16:35:23 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Sewerage Systems | 797.2M | 100k | 0.0004 | 16,700.00 | 1.75B |
From Apr 2019 to Apr 2024
TIDMPNN
RNS Number : 1299Q
Pennon Group PLC
25 November 2016
25 November 2016
Half Year Results 2016/17
for the period ended 30 September 2016
Building Momentum, Driving Growth
Chris Loughlin, Pennon Chief Executive said:
"Pennon has delivered a good performance in the first half of 2016/17 across its water and waste businesses. South West Water continues to achieve a sector-leading RORE([1]) at 11.7% as it outperforms for its customers, and is expecting momentum and delivery to continue. Viridor is on track to contribute the targeted c.GBP100 million of EBITDA from its ERF([2]) portfolio this year while self-help measures are driving improved EBITDA margins in recycling.
We are continuing to invest for growth. Following a review, we have taken the decision to commit to a GBP252 million ERF at Avonmouth, expanding our portfolio to twelve plants. This is a significant investment in the UK's environmental infrastructure and will add to the already expected significant increase in EBITDA from our ERF portfolio once all facilities are fully operational. In water, we are announcing a new retail venture for business customers with South Staffs/Cambridge Water.
We remain focused on driving value through efficiency. South West Water has delivered GBP80 million of Totex savings since the beginning of K6 (2015-2020), while our recently completed Shared Services Review will increase total Group cost savings from the c.GBP11 million previously announced to c.GBP17 million p.a from 2019.
We believe Pennon is well positioned for the future and is on track to meet management expectations for the full year 2016/17. Our performance underpins our sector-leading dividend policy of 4% growth per annum above RPI inflation to 2020."
Financial Highlights
Underlying([3]) H1 2016/17 H1 2015/16 Change Revenue GBP685.5m GBP689.1m (0.5%) EBITDA GBP245.4m GBP231.7m +5.9% Adjusted EBITDA([4]) GBP277.2m GBP261.6m +6.0% Operating Profit GBP153.9m GBP135.3m +13.7% Profit Before Tax GBP128.1m GBP106.8m +19.9% Tax (GBP30.7m) (GBP21.9m) +40.2% Earnings per share([5]) 23.6p 23.2p +1.7% Dividend per share([6]) 11.09p 10.46p +6.0% Underlying Profit After Tax (PAT) to Statutory PAT Underlying PAT GBP97.4m GBP84.9m +14.7% Non-underlying Items (GBP8.3m) - - (Profit After Tax) PAT (attributable to (GBP16.2m) (GBP16.2m) - holders of hybrid capital) PAT (attributable to shareholders) GBP72.9m GBP68.7m +6.1%
-- Underlying earnings 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
-- Underlying operating profit and PBT up +13.7% and +19.9% respectively following higher revenues and cost savings at South West Water and growth at Viridor driven by the Energy Recovery Facilities (ERFs) and recycling 'self-help' initiatives, net of an expected decline in landfill activities
-- Return on Regulated Equity at 11.7%, unique WaterShare mechanism benefiting customers -- Sustainable, low cost funding position underpinning continuing capital investment -- Interim dividend per share +6.0% to 11.09p -- On track to meet management expectations for the full year 2016/17
Operational Highlights
-- Water business outperforming the regulatory contract, on track to deliver a net ODI reward for 2016/17, and a cumulative net ODI reward for the performance to date([7])
-- Eight operational ERFs performing well, focus on increasing average availability, expected to be c.90% for 2016/17
o Construction of three further ERFs ongoing - Dunbar and South London (Beddington) progressing to budget
o Commissioning has commenced at parts of Glasgow's Recycling and Renewable Energy Centre, though contractor delays mean takeover of the centre is now expected in 2017. The project will now be completed by an experienced team assembled by Viridor with contractual remedies supporting completion
-- c.80%([8]) of existing ERF portfolio volumes (and associated price) contracted long-term -- Recycling 'self-help' measures driving increased EBITDA, commodity risk sharing with clients
-- Driving value through efficiency - integrating, sharing best practice, reducing costs through a Shared Service Review
-- Secured further growth opportunities
o New non-household retail venture with South Staffs / Cambridge Water
o Committed to 12(th) ERF at Avonmouth - expected to be completed in 2020/21
o Over 50% of inputs to Avonmouth are already agreed
Presentation of Results
A presentation for City audiences will be held today, Friday 25 November 2016, at 10am at the London Stock Exchange, 10 Paternoster Square, London, EC4M 7LS.
A live videocast of the presentation can also be accessed using the following link:
www.pennon-group.co.uk/investor-information
For further information, please contact:
Hot Features
Premium
Chief Financial Officer - Pennon }
Susan Davy Director of Corporate Affairs 01392 443
Sarah Heald & Investor Relations - Pennon } 401
James Murgatroyd Finsbury 0207 251
Faeth Birch Finsbury 3801
About Pennon Group
As one of the largest environmental infrastructure groups in the UK, Pennon is at the top end of the FTSE 250. Pennon has assets of around GBP5.8 billion and a workforce of around 5,000 people.
The merged water company of South West Water and Bournemouth Water provides water and wastewater services to a population of c.1.7 million in Cornwall, Devon and parts of Dorset and Somerset and water only services to c.0.5 million in parts of Dorset, Hampshire and Wiltshire. South West Water was awarded enhanced status for its 2015-2020 Business Plan, and has the highest potential returns in the water sector.
Viridor is a leading UK recycling, energy recovery and waste management company, providing services to more than 150 local authorities and major corporate clients as well as over 32,000 customers across the UK.
Pennon currently has a sector leading dividend policy of 4% year-on-year growth above RPI inflation to 2020. This is underpinned by the highest potential Return on Regulated Equity in the water sector over K6 (2015-2020) and the growth in earnings being delivered by Viridor's ERFs.
Upcoming Events
9 February 2017 Trading Statement 24 May 2017 Full Year Results 2016/17 6 July 2017 Annual General Meeting September 2017 Trading Statement 29 November 2017 Half Year Results 2017/18
Interim Dividend Payment Information:
2 February 2017 Ex-dividend date 3 February 2017 Record date 13 March 2017 Scrip election date 4 April 2017 Payment date
PENNON BUSINESS REVIEW
Pennon's priority continues to be the creation of shareholder value through its focus on UK environmental infrastructure across water and waste sectors.
The Group has performed robustly in H1 2016/17, and results for the full year 2016/17 are on track to meet management expectations. Pennon generates significant operating cash flows, and has a strong liquidity and balance sheet position.
Pennon continues to seek and identify further growth opportunities within the UK, assessing the long-term viability of the market and achieving an appropriate risk/reward balance. Pennon has now committed to a further ERF at Avonmouth near Bristol, taking the portfolio to twelve ERFs and is a significant infrastructure investment post-Brexit. Pennon is also announcing a new retail venture for business customers with South Staffs/Cambridge Water.
Strong water and waste businesses
The merged water business of South West Water and Bournemouth Water is well-prepared to take opportunities in a changing regulatory environment, looking at options for future consolidation and growth while continuing to deliver and outperform the business plans. South West Water's RORE has been 11.7% since the start of the regulatory period and is expected to continue to be at a sector-leading level through to 2020.
Viridor's ERF portfolio is performing well and is on track to deliver c.GBP100 million of EBITDA in 2016/17. We expect demand for ERFs to continue to exceed capacity into the long term. With four ERFs now under construction or committed we will generate significant growth in EBITDA over the next few years as the plants come on stream. The focus for the ERF portfolio remains on increasing the operational performance with average availability now expected to reach c.90% in 2016/17.
Recycling 'self-help' measures are supporting an increasing EBITDA, with the market shift to sharing commodity risk/opportunity with customers improving the dynamics of the contracts. Good progress has been made in contract renegotiations to date with a further opportunity as over half of contracts are still to review on renewal. The focus on reducing costs and simplifying the organisation is also contributing to the improved performance. We expect further opportunities to increase returns through improving asset utilisation and rationalising the portfolio.
Cost efficiency a continued focus
South West Water continues to strive for ever greater efficiency, with Totex outperformance resulting in cumulative savings of GBP80 million and financing outperformance of GBP48 million in the first eighteen months of K6 (2015-2020). South West Water is focused on maintaining this momentum over the full K6 regulatory period and is confident in its ability to remain at the frontier of cost efficiency for the water sector.
South West Water is targeting c.GBP27 million of net synergies over K6 following the integration of Bournemouth Water. Support functions and operational structures have been aligned across the regions.
Pennon has also focused on cost savings across the group, with the c.GBP11 million of cost savings and synergy plans announced last year now increased to c.GBP17 million p.a. from 2019 following the successful conclusion of the Shared Services Review. The review has resulted in the planned centralisation of key corporate services and operational functions, including Corporate Affairs and Communications, Facilities, Finance, HR, Information Services, Logistics, Procurement and SHEQ([9]) . Combining these activities is expected to create annual savings of c.GBP6 million. As a result of this review a restructuring provision of GBP1.2 million has been provided and an asset value of GBP9.5 million has been de-recognised, relating to a Viridor IT system which will no longer be used as the Group standardises its processes and systems.
Driving growth
Avonmouth ERF Committed
In line with Pennon's growth ambitions, the Board has made the decision to commit to a further GBP252 million ERF at Avonmouth near Bristol to be completed in 2020/21, taking the portfolio to twelve plants. Once completed, the plant will have a capacity of 320,000 tonnes per annum and will deliver 33MW of electricity which equates to c.260,000MWh per year. Viridor is confident in filling capacity on opening with over 50% of fuel already agreed. This includes c.35% of total capacity secured through a long term contract for the life of the plant with Somerset Waste Partnership which is in the final stages of negotiation. There are further contracts in the pipeline, in addition to our own collections fleet and strong regional commercial and industrial (C&I) demand. This project will be completed by an experienced construction and consulting team.
Combustible waste market under-capacity in the West of England matches the UK trend, stretching out to 2030 and beyond. Viridor is confident of its market projections, which are also supported by independent third party analysis. The waste arisings in the area surrounding Avonmouth ERF substantially exceed the plant's capacity and available capacity in neighbouring facilities. In addition to the contracts already secured, a further c.800,000 tonnes is available in the area surrounding the ERF from a combination of municipal and commercial & industrial sources. Avonmouth ERF will offer a cost effective solution relative to other disposal methods and is well placed to secure the waste tonnages to fill the plant at competitive prices.
New non-household retail venture with South Staffs/Cambridge Water
Pennon Water Services, the separate legal entity operated from Bournemouth providing retail services for our existing non-household retail brands, along with South West Water's wholesale operations successfully entered the shadow market on 3 October 2016.
A key part of our non-household strategy has been to retain our existing customer base of c.85,000 customers and to capitalise on Viridor's national footprint, its commercial culture, order book, expertise and existing customer relationships.
Pennon has always recognised the need to achieve scale in order to compete within this market and as a result a new retail non-household venture arrangement with South Staffordshire Plc Group (incorporating South Staffs and Cambridge Water) has been agreed, with Pennon retaining an 80% share and the operations being merged in Bournemouth. The activities will be merged from April 2017(([10]) () and will benefit from strong customer service and a common IS platform which will continue to be supported by the South Staffordshire Group.
The combined business will have c.GBP170 million of revenue, c.8% of the non-household retail market share and is expected to be the 4(th) largest retailer.
Well prepared for regulatory and market developments
Engaged in Water 2020
South West Water is fully engaged in Water 2020 as we prepare and position ourselves for PR19. The company is in a very good position to anticipate and influence future regulatory reforms and is working hard to play its part in shaping the future of the industry, including engagement with Ofwat's process for licence changes.
The debt consultation which Ofwat published in October 2016 confirmed a number of areas already expected and South West Water led the way at the last price review in adopting our pain/gain mechanism WaterShare which already shares benefits with customers. In addition, South West Water has always strived to remain efficiently financed and is comparable with the notional structures and gearing levels set by Ofwat.
The changes in approach to indexation along with the expected market reforms within the water resources and bio-resources (sludge) areas were previously signalled and the impact on South West Water's Regulatory Capital Value (RCV) is relatively less at c.4% and c.2% respectively of RCV currently included within these areas.
South West Water continues to deliver its operations and capital schemes effectively and with our strong strategic alliances and innovative planning and scoping techniques we see opportunities within the direct procurement proposals.
Household Retail competition
South West Water was fully engaged with Ofwat, helping in their assessment of costs and benefits through customer research and the Water UK "Market Place for Ideas".
The government is expected to make a decision in late 2016 and this will influence the Water 2020 approach to retail.
PENNON FINANCIAL PERFORMANCE
Pennon Group
Underlying([11]) H1 2016/17 H1 2015/16 Change
Revenue GBP685.5m GBP689.1m (0.5%)
EBITDA GBP245.4m GBP231.7m +5.9%
Adjusted EBITDA([12]) GBP277.2m GBP261.6m +6.0%
Operating Profit GBP153.9m GBP135.3m +13.7%
Profit Before Tax GBP128.1m GBP106.8m +19.9%
Tax (GBP30.7m) (GBP21.9m) +40.2%
Capital investment([13]) GBP183.3m GBP165.9m +10.5%
South West Water GBP79.7m GBP58.0m +37.4%
Viridor GBP103.6m GBP107.9m (4.0%)
Earnings per share([14]) 23.6p 23.2p +1.7%
Dividend per share([15]) 11.09p 10.46p +6.0%
30 September 31 March Change
2016 2016
Net debt GBP2,566.1m GBP2,484.4m +3.3%
South West Water
H1 2016/17 H1 2015/16 Change
Revenue GBP287.9m GBP279.3m +3.1%
EBITDA(11) GBP183.0m GBP173.6m +5.4%
Operating Profit(11) GBP127.2m GBP117.7m +8.1%
Profit Before Tax(11) GBP97.0m GBP87.0m +11.5%
Viridor
H1 2016/17 H1 2015/16 Change
Revenue([16]) GBP397.9m GBP410.1m (3.0%)
EBITDA([17]) GBP63.3m GBP61.0m +3.8%
ERFs GBP50.5m GBP43.8m +15.3%
Landfill GBP3.2m GBP4.5m (28.9%)
Landfill Gas GBP12.9m GBP16.0m (19.4%)
Recycling GBP11.0m GBP7.2m +52.8%
Contracts, Collections
& Other GBP16.0m GBP20.1m (20.4%)
Indirect Costs (GBP30.3m) (GBP30.6m) (1.0%)
Share of JV EBITDA GBP23.0m GBP21.6m +6.5%
IFRIC 12 Interest Receivable GBP8.8m GBP8.3m +6.0%
Adjusted EBITDA(17) GBP95.1m GBP90.9m +4.6%
Profit Before Tax(17) GBP23.1m GBP12.9m +79.1%
Underlying performance ahead of last year and in-line with management expectations
Group revenue was broadly in line with last half year at GBP685.5 million. Revenue from the water business was up by 3.1% to GBP287.9 million as a result of 1.3% higher demand, tariff increases of 1.4% (with RPI of 1.1%) and increased new connections but is within regulatory tolerances for revenue controls. Viridor's revenue decreased by 3.0% to GBP397.9 million due to the expected decrease in construction spend on service concession arrangements as plants come on stream and lower landfill volumes, partly offset by the growing contribution of operational ERFs. Excluding the impact of construction revenue, Group revenue would have increased in the period.
Group EBITDA and adjusted EBITDA were ahead of H1 2015/16 up 5.9% at GBP245.4 million (H1 2015/16 GBP231.7 million) and 6.0% to GBP277.2 million (H1 2015/16 GBP261.6 million) respectively. Operating profit increased by 13.7% to GBP153.9 million (H1 2015/16 GBP135.3 million) and profit before tax increased by 19.9% to GBP128.1 million (H1 2015/16 GBP106.8 million). This has been achieved through an increase in profits from Viridor, together with continuing strong South West Water financial performance and efficient ongoing finance costs across the Group.
Following the merger of Bournemouth Water into South West Water the water business recorded strong performances against the K6 regulatory contracts, outperforming regulatory assumptions. The water business' underlying profit before tax increased by GBP10.0 million, or 11.5%, to GBP97.0 million (H1 2015/16 GBP87.0 million) reflecting tariff increases, increased demand of 1.3% and a reduction in operating costs of GBP0.8 million, or 0.8%, to GBP104.9 million (H1 2015/16 GBP105.7 million). With the highest potential returns in the sector for K6, South West Water is outperforming its business plan, resulting in a cumulative return on regulated equity of 11.7%([18]) .
South West Water's EBITDA increased during the period due to higher revenue and cost efficiencies along with other cost reductions. While average RPI has been increasing (2.0% as at September 2016), total operating costs in H1 2016/17 fell compared to the same period last year, with savings arising from operational maintenance, synergies from the company mergers as well as targeted efficiencies contributing to cost performance. In addition, South West Water's bad debt charge continues to fall, down by over a quarter since the end of K5, to 1.1% as a percentage of revenues (1.7% at the end of K5). This was driven by strong collections as we work with our customers to manage their debt with the operations continually updating their approaches in targeting those customers with the means to pay whilst supporting those who have genuine affordability challenges.
At Viridor, the portfolio of operational ERFs continues to perform well, with the six most recently delivered ERFs ramping up as Viridor optimises each plant. As a result, Viridor's EBITDA increased by 3.8% to GBP63.3 million (H1 2015/16 GBP61.0 million) whilst H1 2016/17 adjusted EBITDA increased 4.6% to GBP95.1 million (H1 2015/16 GBP90.9 million). Viridor has three further ERFs under construction. Dunbar and Beddington (South London) are progressing well and to budget with steps being taken to ensure construction of Glasgow ERF is completed successfully.
Viridor's EBITDA was ahead of last half year due to the ramping up of the existing ERF portfolio and recycling self-help measures, where significant progress has been made in reducing the cost base and improving the utilisation of assets, net of anticipated declines in landfill earnings primarily due to expected lower volumes. Our ERF activities delivered EBITDA of GBP50.5 million (H1 2015/16 GBP43.8 million), a significant increase compared to H1 2015/16. We remain on track to deliver our target of c.GBP100 million of EBITDA from ERFs by 2016/17 (before IFRIC 12 interest receivable and our share of joint venture EBITDA). Joint venture EBITDA increased to GBP23.0 million (H1 2015/16 GBP21.6 million) due to continuing strong EBITDA from Lakeside and higher EBITDA from Runcorn I reflecting improved operational performance. This resulted in a share of joint venture profit after tax of GBP2.8 million (H1 2015/16 GBP1.0 million).
Recycling and resources EBITDA, comprising recycling, collection and contracts and other, was broadly in line with last half year at GBP27.0 million (H1 2015/16 GBP27.3 million), despite lower profits from asset sales, which has been offset by higher recycling EBITDA. Recycling revenue at GBP87 per tonne (recyclate sales plus gate fees) (H1 2015/16 GBP87 per tonne) is in line with last half year. Average costs fell by GBP5 per tonne to GBP74 per tonne (H1 2015/16 GBP79 per tonne) as a result of self-help measures including the Input, Throughput and Output Optimisation (ITOO) programme, and therefore the recycling EBITDA margin increased by GBP5 per tonne to GBP13 per tonne (H1 2015/16 GBP8 per tonne). Although the short term outlook for recyclate prices is relatively stable, we remain cautious about future recyclate price growth and are not relying on a near term recovery. We are instead focusing on 'self-help' measures to drive margin improvement and to look to share commodity risk/ opportunity with our clients.
Landfill earnings from waste disposal and power generation are down compared to last half year by GBP1.3 million and GBP3.1 million respectively. The decrease in earnings is primarily due to expected lower volumes, which are in line with management expectations, and lower power prices.
Interest
Underlying net finance costs of GBP28.6 million were GBP0.9 million lower than last half year, predominantly reflecting higher capitalised interest due to continuing ERF capital investment, in addition to lower average net borrowing rates.
We have secured funding at a cost that is efficient and effective. The Group interest rate on average net debt for H1 2016/17 has reduced to 3.3% (H1 2015/16 3.4%).
Tax
The Group's underlying mainstream UK corporation current tax charge for the half year (before prior year) was GBP23.1 million, reflecting an effective tax rate of 18.0% (H1 2015/16 GBP18.5 million, 17.3%); the increase is primarily driven by higher profits. There was a prior year credit of GBP0.3 million recognised for the half year (H1 2015/16 credit of GBP14.7 million). The larger credit in the prior period of GBP14.7 million reflects the clarification of uncertain tax positions, which resulted in a lower tax charge than the original assessment. In addition there is a non-underlying GBP1.3m current tax credit relating to non-underlying items.
Underlying deferred tax for the half year (before prior year) was a charge of GBP9.5 million (H1 2015/16 GBP6.4 million). The charge for H1 2016/17 primarily reflects capital allowances, including on ERFs, in excess of depreciation charge. There was a prior year deferred tax credit of GBP1.6 million recognised for the half year (H1 2015/16 GBP11.7 million charge) reflecting the impact of the clarification of uncertain tax items. In addition there is a non-underlying GBP20.1 million deferred tax credit relating to the enacted reduction in the UK rate of corporation tax to 17% in 2020 and a GBP4.0 million deferred tax charge relating to other non-underlying items.
This resulted in a total tax charge for the half year of GBP13.3 million (H1 2015/16 GBP21.9 million).
Underlying profit before tax growth from previous half year
Underlying profit before tax was GBP128.1 million, an increase of 19.9%, compared with the prior half year (H1 2015/16 GBP106.8 million). On a statutory basis, profit before tax was GBP102.4 million (H1 2015/16 GBP106.8 million) reflecting non-underlying charges of GBP25.7 million.
Earnings per share before deferred tax, non-underlying items and adjusted proportionately to reflect the half year impact of the annual hybrid periodic return, was comparable with the prior half year, up 1.7% to 23.6p (H1 2015/16 23.2p). The impact from higher underlying group profits before tax is largely offset by higher corporation tax charges, with last half year's charge including a GBP14.7million prior year credit (H1 2016/17 GBP0.5 million charge).
The interim dividend of 11.09p per share reflects an increase of 6.0%([19]) , in line with our dividend policy of RPI +4%. This will see dividends per share almost doubling over 10 years to 2020.
The dividend will be paid on 4 April 2017 to shareholders on the register on 3 February 2017. The Company is also offering a scrip dividend alternative. The final date for receipt of Forms of Election Mandate in respect of the scrip dividend alternative for the interim dividend will be 13 March 2017.
Non-underlying Items
Net non-underlying items totalling a charge after tax of GBP8.3 million have been recognised (H1 2015/16 GBPnil). The net charge is a result of:
-- restructuring costs - GBP10.7 million charge relating to restructuring costs from the Group wide Shared Services Review and migration to a Group IT platform (including a GBP9.5m non-cash de-recognition of an existing IT asset)
-- taxation - GBP17.4 million credit predominantly arising from the enacted reduction in the UK rate of corporation tax from 18% to 17% in 2020.
-- derivative movements - GBP15.0([20]) million charge reflecting non-cash movements as a result of a change in legislation and market movements on our long-dated floating rate vanilla swaps
The vanilla floating rate swaps are held over South West Water's long-term 2040 Bond and as market rates have fallen the value of the derivative asset has increased, offset by;
A derivative entered into in 2011 designed to improve the Group's overall interest rate performance (c.GBP8m p.a. benefit, cash settled).
This derivative arises from a combination of non-derivative instruments; included in the instrument is a GBP200m floating interest rate-linked loan from Peninsula MB Ltd to Pennon and a fixed rate GBP200m obligation to Pennon from Peninsula MB Ltd. In combination this arrangement is targeted at providing an index-linked([21]) return.
Whilst Peninsula MB Ltd is not consolidated for accounting purposes, it does fall within Pennon's corporation tax group. Following a change in legislation, the fair value of the derivative at H1 2016/17 results in a liability recognised in Pennon of GBP39.5m (H1 2015/16 asset GBP0.6m).
Pennon has the ongoing option to transfer the financial instrument from Nomura to Pennon on which interest payments are owed by Peninsula MB Ltd and acquire 100% controlling interest in Peninsula MB. At this point all balances relating to this arrangement would be within Pennon Group.
Through the fair value recognition of the instruments and appropriate tax provisioning, financial exposure to Pennon of this arrangement is minimised.
Strong funding position underpinning capital investment
The Group has a strong liquidity and funding position with GBP1,603 million cash and facilities at 30 September 2016. This includes cash and deposits of GBP658 million (including GBP219 million of restricted funds representing deposits with lessors against lease obligations) and undrawn facilities of GBP945 million. At 30 September 2016 the Group's loans and finance lease obligations totalled GBP3,224 million.
During the first six months of the 2016/17 accounting period the Group has drawn the South West Water EIB funding of GBP130 million signed H1 2015/16.
Following the Press release in March 2016 after a visit to Cardiff's Trident Park Energy Recovery Facility the EIB confirmed its intention to provide funding to Viridor for its ERF programme, we can confirm that the final documentation has now been agreed for the GBP110m loan to Pennon Group Plc. The funding provides support to Viridor's ERF Programme by the way of long term financing which matches the profile of the project's cash flows.
Following the signing of the contract we are also looking to continue our strong relationship with the EIB with negotiations already underway to secure additional funding for South West Water. The investment in Avonmouth ERF will be corporately financed and options are being considered, including a new hybrid, to continue the Group's diversified funding position.
Net debt position
The Group's net debt has increased by GBP82 million to GBP2,566 million, with the increase reflecting significant capital investment. The Group's gearing ratio at 30 September 2016, being the ratio of net debt to (equity plus net debt) was 65.3% (31 March 2016 62.5%), reflecting continuing capital investment, advancement of the 2015/16 final dividend and the increase in the pension accounting deficit.
The combined South West Water and Bournemouth Water debt to RCV([22]) ratio is 62.2% (31 March 2016 59.7%), which aligns with Ofwat's K6 target for efficient gearing of 62.5%.
Group net debt includes GBP1,055 million of investment in wholly-owned ERFs (Runcorn II, Oxford, Exeter, Cardiff, Glasgow, Dunbar and South London) and GBP82 million of funding for investments in joint ventures through shareholder loans (which together represents 44% of Group net debt). In addition the joint ventures have non-recourse net debt from third parties (excluding shareholder loans) of which Pennon's share is GBP200 million. c.85% of ERF and joint venture funding is from corporate finance.
Strong cash inflow from operations, reflecting continuing investment
The Group's operational cash inflows in H1 2016/17 were up GBP39 million to GBP258 million (H1 2015/16 GBP219 million) including the benefit of higher earnings. These funds have been put to use in efficiently financing the Group's capital structure and investing in future growth, through our substantial continuing capital investment programme. This investment has resulted in higher Group net debt.
The total value of dividends paid in H1 2016/17 is higher than the prior half year which reflects the payment of both the 2015/16 interim and final dividend due to the advancement of the 2015/16 final results and Annual General Meeting. In addition, during the period the Company continued to benefit from offering a scrip dividend alternative. GBP6.9 million of potential cash dividend was retained in the business (H1 2015/16 GBP6.3 million) and resulted in issuing 771,563 shares.
Efficient long-term financing strategy
The Group has a diversified funding mix of fixed, floating and index-linked borrowings. The Group's debt has a maturity of up to 41 years with a weighted average maturity of 21 years matching the asset base. Much of the Group's debt is floating rate and derivatives are used to fix the rate on that debt. The Group has fixed, or put swaps in place to fix, the interest rate on a substantial portion of the existing water business debt for the entire K6 period, in line with the Group's policy to have hedging in place before the start of a regulatory period.
GBP486.3 million of South West Water's debt is index-linked at an overall real rate under 2.0%. As a result of the aforementioned initiatives, South West Water's cost of finance is among the lowest in the industry. Two thirds of the water business debt is finance leases giving a long maturity profile. Interest payable benefits from the fixed credit margins, which were secured at the inception of each lease. Bournemouth Water was successfully integrated into South West Water on 1 April 2016 and as a result a quarter of the gross funding for the water business is RPI linked consistent with Ofwat's notional level.
The Group's interest rate on average net debt for the period to 30 September 2016 is 3.3% (after adjusting for capitalised interest of GBP6.1 million, notional interest items totalling GBP3.1 million and interest received from shareholder loans to joint ventures of GBP5.0 million). For South West Water this figure was 3.2%.
During the period underlying net finance costs (excluding pensions net interest, discount unwind on provisions and IFRIC 12 contract interest receivable) were GBP31.7 million (H1 2015/16 GBP30.8 million), covered 4.9 times (H1 2015/16 4.4 times) by Group operating profit.
Capital investment focused on regulatory expenditure and ERF build out
Group capital investment([23]) was GBP183.3 million in H1 2016/17 compared to GBP165.9 million in H1 2015/16.
South West Water's capital expenditure was GBP79.7 million compared to GBP58.0 million in H1 2015/16. The beginning of the new regulatory period reflects a change in the nature and extent of capital activity and an increase in activity in year 2.
As anticipated the largest single project for South West Water's spending is the development of the innovative Mayflower water treatment works at North Plymouth. Construction works are well advanced and the formation of the process elements is underway with over 5km water pipeline and effluent pipes already installed. Advanced techniques have been used to limit the impact on the surrounding area including micro tunnelling under a major road into Plymouth. In addition investment has been targeted to improve wastewater compliance with process upgrades and improvements at 6 sites.
Viridor's capital investment of GBP103.6 million was broadly in line with H1 2015/16 (GBP107.9 million). The majority of expenditure this period reflects the ongoing ERF programme, with significant expenditure at South London, Dunbar and Glasgow ERFs.
The infrastructure at Dunbar is nearing completion with a significant element of the process plant having been delivered to site prior to installation. The plant is expected to be operational in H2 2017/18. Construction at Beddington is progressing to plan with access routes to the site being improved and the core infrastructure under construction. Operations are expected to commence in H1 2018/19.
Whilst contractor delays and underperformance are delaying the full completion of Glasgow ERF, commissioning of parts of the facility have begun and the project will now be completed by an experienced team assembled by Viridor.
Pensions
The Group operates defined benefit pension schemes for certain employees of Pennon Group. The main schemes were closed to new entrants on or before 1 April 2008.
At 30 September 2016 the Group's pension schemes showed an aggregate deficit (before deferred tax) of GBP115.6 million (March 2016 GBP40.9 million). The deficit has increased due to the post-Brexit fall in bond yields, increasing the valuation of liabilities. However, over half of the increase in the valuation of liabilities has been offset by increases in asset values.
The net aggregate liabilities of GBP93 million (after deferred tax) represented around 3% of the Group's market capitalisation at 30 September 2016.
The 31 March 2016 actuarial valuation of the main scheme is currently underway, and our expectations are that the outcome will not be materially different than expected at the 2013 valuation and contributions are currently in line with Final Determination (FD) allowances.
OPERATIONAL PERFORMANCE
Pennon - evolving for the future
Driving benefits from a combined group
Pennon is focused on driving greater synergies and savings across the Group, sharing best practice and ensuring it is well placed to capitalise on emerging opportunities.
As part of the evolution in Pennon's structure, a Shared Services Review was undertaken and has resulted in the centralisation of a number of corporate functions including corporate affairs and communications, human resources, finance, information services and SHEQ([24]) , as well as operational functions including procurement, logistics and facilities. This will result in a cost saving of c.GBP6.0 million per annum from 2019. In addition, Pennon is targeting savings through a group-wide procurement approach.
Both Viridor and South West Water have a breadth and depth of experience in managing large asset bases and in using engineering excellence, technology and innovation to deliver efficiency and effectiveness. By sharing knowledge across the Group and harnessing our combined skills we can provide even better services to our extensive customer base of local authorities, major corporate clients, businesses and household customers.
For example, through the Group's portfolio management approach to energy hedging, Pennon now has the ability to hedge its market position for periods up to five years ahead, further helping to protect revenues.
c.90% of energy (generation net of internal usage of electricity) is hedged for 2016/17 and over 60% is hedged out to 2019/20. Pennon's hedging was largely completed in H2 2015/16, with further trading in early H1 2016/17. In addition, the Group has a natural hedging opportunity which represents one third of Viridor's energy generation, as South West Water is a net user of electricity.
Good operational and financial performance in Water
We are focused on providing water and wastewater services in the most efficient and sustainable way possible. Innovation, new technologies, and the pioneering of a holistic approach to water and wastewater management are playing a key role in delivering service improvements and long-term value.
Outperforming our Final Determination Return on Regulated Equity (RORE) range
South West Water has continued the momentum in delivering outperformance and has confidence in our ability to deliver outperformance throughout the 2015-20 (K6) regulatory period. As a result of our targeted approach to efficiency South West Water has delivered a cumulative indicative annual equivalent Return on Regulated Equity (RORE)([25]) of 11.7% arising from base, financing and operational returns. Of the 11.7%, 6.0% is the base return, 2.3%([26]) reflects Totex savings and efficiencies, 0.3% reflects a net reward on Outcome Delivery Incentives (ODIs) and 3.1%([27]) reflects the difference between actual and assumed financing costs.
Totex - securing outperformance
South West Water is striving for ever greater efficiency and is confident in maintaining the momentum achieved in K6 to date with GBP80 million of cumulative Totex savings delivered up to H1 2016/17. These savings are being driven by:
-- continuing advantages from our strategic alliances including a new water distribution framework and the H(5) O capital alliance in place since 2010, now delivering efficient schemes within the Bournemouth region
-- ensuring efficient capital investment through the use of data analytics optimising the capital and operating solution and promoting efficient off-site build techniques
-- changing ways of working through our iOps programme including utilising new technology and equipment to increase the resources needed to deliver wastewater improvement, real-time pressure management targeting efficient interventions
-- delivering Bournemouth Water synergies with GBP27 million of synergies targeted over K6 and further support function efficiencies.
Delivering net ODI reward
South West Water has 23 ODIs and Bournemouth Water 10 ODIs, including SIM, which have potential financial rewards or penalties. Incentives for performance are recognised in the year of delivery, whether the measure is recovered in period or as a regulatory true-up at the end of the period. Operational performance for the half year has continued to improve and based on performance to 30 September 2016 a net ODI reward of GBP1.7 million is delivered (GBP3.8 million cumulatively) reflecting RORE outperformance of 0.3% for K6 to date. Good asset reliability with stable serviceability across all four areas has been maintained. Rewards are forecast across bathing water quality and water restrictions with interruptions to supply and leakage also expected to yield a reward - a significant improvement from the 2015/16 position.
The cumulative net reward of GBP3.8 million comprises GBP5.7 million of net rewards recognised at the end of the regulatory period and GBP1.9 million of net penalty which could be adjusted during the regulatory period.
Whilst penalties are currently forecast for significant pollution events (Category 1 and 2) and external flooding wastewater continues to be an area of focus performance to date has improved from last year.
Financing investment efficiently
Alongside strong operational outperformance, South West Water is confident that the efficient and effective financing strategy in place will continue to deliver cumulative K6 financing outperformance, with GBP48 million delivered in the K6 period to 30 September 2016. The focus on maintaining efficient gearing levels, having a good balance of fixed and floating rate debt and continuing to implement cost efficient debt through finance leasing all contribute to South West Water having one of the lowest effective interest rates in the industry.
Drinking water quality expected to be in upper quartile
Drinking water quality remains a top priority for South West Water and is forecast to maintain the very high standards achieved in 2015/16. The Drinking Water Inspectorate's (DWI) report published in July 2016 (for 2015/16 performance), confirmed South West Water to be in the top quartile, and Bournemouth Water was top of the table at 100%.
South West Water has met its leakage target every year since its inception and through investment in real-time pressure management and additional network monitoring, leakage for 2016 is expected to outperform its target and deliver an ODI reward. Water resources in the South West region remained unrestricted for a twentieth consecutive year and the Bournemouth water region maintained its position of having no water restrictions since privatisation.
The average duration of supply interruptions per property for South West Water for the first half of the year has reduced significantly compared to 2015/16 and based on current performance would result in a small reward for the year (compared to the penalty incurred in 2015/16). Where an interruption does occur we aim to restore supplies as quickly as possible and keep customers informed of progress.
Significant investment in drinking water
Customers regard a clean and safe supply of drinking water as their top service priority and therefore maintaining water resources and reducing supply interruptions are essential to meeting customer expectations. Key areas of investment and activity during H1 2016/17 included:
-- ongoing expenditure for a new GBP60 million state-of-the-art North Plymouth water treatment works
-- improved water treatment processes at two more water treatment works across the region
-- real-time pressure management and network modelling technology targeting interventions efficiently
-- continued investment in the 'Upstream Thinking' programme of catchment management working in partnership with a range of stakeholder groups including wildlife trusts and river authorities.
SIM continuing to improve
South West Water's overall customer satisfaction is tracking ahead of the prior year at 90% with value for money satisfaction at an all time high for the second quarter of the year.
A key indicator of customer service performance for the water business is the service incentive mechanism (SIM), which Ofwat uses to compare the performance of water companies. The SIM score is calculated against a qualitative element (based on a customer survey) and a quantitative element that takes into account, among other things, the number of complaints received in writing or by phone. South West Water's SIM score for 2015/16 was confirmed at 78.6 and is forecast to increase for 2016/17 continuing the improving trend of recent years. Bournemouth Water's SIM score at 86.2 remains at the frontier as one of the highest in the industry for 2015/16 and is maintaining this trend for H1 2016/17.
In this half year written complaints have fallen by 28% in South West Water and 20% in Bournemouth Water (compared to the same period last year). In addition the customer experience quality scores for the first half of the year have improved across both regions. We are continuing to focus on delivering improvement in the customer experience through faster resolution of issues and lower call waiting times.
South West Water is also focused on providing support for customers and a new employee training and development programme has been implemented extending the support specifically for vulnerable customers. In addition, to further support those customers with affordability issues, a social tariff will be rolled out in the Bournemouth region from 2017/18.
Wastewater improvements
We aim to ensure the safe and efficient removal and disposal of wastewater while minimising the likelihood of sewer flooding or pollution affecting homes, businesses or the environment.
South West Water continues to focus on a targeted programme of wastewater treatment improvements while also working to prevent potential failure through increased monitoring. The targeted investment in high risk sites and change in operational approach has resulted in a significant improvement in numeric compliance (the percentage of wastewater treatment works deemed compliant) with current performance at c.98% compared to the 95.8% in the previous year.
Both the total number of pollution incidents (Categories 1-4) and significant incidents (Categories 1-2) continue to fall. However, the cumulative number of significant incidents at 11 is higher than target and will result in a penalty for the K6 period to date. Improving performance in this area remains our top priority in the wastewater area.
Key areas of wastewater investment and activity during H1 2016/17 included:
-- process improvements and upgrades at four key sites including increasing filters and additional treatments
-- investing in supply demand schemes increasing capacity at our wastewater treatment works, specifically at Fluxton in Devon and Hayle in Cornwall
-- improvements in the sewerage network reducing the impact of saline infiltration.
Bathing water improvement, despite tougher EU standard
Our legacy of major investment to protect bathing waters continues to be reflected in extremely positive results for the 2016 bathing water season, which was assessed under tougher new EU standards. Of the 143 bathing waters tested in the South West Water region, 141 (98.6%) were classified 'sufficient' or better, with more than 81% classified as 'excellent'. Of the two bathing waters rated as 'poor' these were not attributed to any failure of South West Water's assets.
Targeting investment to reduce sewer flooding
Whilst the number of external flooding incidents has reduced, (and are forecast to fall by c.5% from last year), a penalty is still expected to be incurred. South West Water continues to invest in improvement schemes, ongoing capital maintenance, and we are working to improve our response times to flooding incidents. In addition to the significant schemes completed last year at three key catchments, further investments in flooding improvements continue in H1 2016/17 across a number of smaller areas including St Columb in Cornwall.
Furthermore South West Water has also invested over GBP1 million supporting the Exeter Flood Defence Scheme at our Countess Wear wastewater treatment works.
Good operational and financial performance in Viridor
H1 2016/17 H1 2015/16
Total Waste Inputs
(MT) 3.8 3.8
ERFs 0.9 0.8
Landfill 0.9 1.0
Recycling and
Other 2.0 2.0
Recycling Volumes
Traded 0.9 0.9
ERFs Driving Growth
We are successfully establishing a significant asset base of ERFs, with eight plants now in operation. Our focus is now on optimisation of the operational plants and increasing performance and average availability, which is expected to be at c.90% for 2016/17.
The operational ERFs are working at a capacity of 2.1 million tonnes of waste inputs and 178 megawatts (MW) per annum including our share of joint ventures. This will extend to 3.2 million tonnes of waste, generating 275 MW by 2021.
Overall, Viridor expects to export over 1 Terawatt hour (TWh) of power to the national grid in 2016/17.
Construction of three further ERFs progressing, committed to new Avonmouth ERF
Of the three ERFs under construction, Dunbar and Beddington ERFs are progressing well and to budget. Glasgow's Recycling and Renewable Energy Centre is receiving waste and the Materials Recycling Facility (MRF) is in commissioning. The Anaerobic Digestion (AD) facility is ready to enter commissioning and the Advanced Combustion Facility (ACF) is c.85% complete, though contractor delays mean full takeover of the centre is now expected in 2017. These delays have resulted in Viridor terminating the construction contract with Interserve. The project will be completed by an experienced team assembled by Viridor with contractual remedies supporting completion. The client (Glasgow CIty Council) has been consulted throughout this period of change, and is supportive of Viridor's actions and the revised plan for completion.
In addition, the Avonmouth ERF near Bristol is now committed and is expected to be completed in 2020/21. Following the commitment to build the Avonmouth ERF the number of ERFs in the portfolio will rise to twelve, eight of which are already in operation. Before capitalised interest, cumulative ERF investment to date is GBP991 million, excluding the GBP72 million spent on the Peterborough ERF, which was local authority financed. This leaves c.GBP460 million left to invest in the ERF programme; c.GBP80 million in H2 2016/17, c.GBP180 million in 2017/18, c.GBP140 million in 2018/19 and c.GBP60 million in 2019/20.
Maximising value from landfill gas
Our landfill energy business is being managed to maximise the value of landfill gas power generation, whilst exploring alternative commercial development opportunities and other energy uses such as photovoltaic (PV) and energy storage at our landfill sites.
At present, Viridor operates a network of landfill gas power generation sites, contributing 99MW of landfill gas capacity. As the volume of gas declines over time, the actual generation is below the capacity, giving rise to the alternative generation opportunities. In H1 2016/17 the landfill gas power generation output was only marginally down to 263 gigawatt hours (GWh) (H1 2015/16 287 GWh).
Average revenue per Megawatt hour (MWh) was 10.7% lower at GBP80.35 (H1 2015/16 GBP89.93) reflecting the lower market prices. The switch from legacy Non Fossil Fuel Obligation (NFFO) contracts to ROCs continues with 93% of energy now sold under the higher value ROCs. We still have NFFO eligibility on one remaining site, equivalent to 7% of energy sold, this will migrate to ROCs in December 2016. Average operating costs increased slightly to GBP35.33 per MWh (H1 2015/16 GBP34.76).
Landfill sites being managed for cash and alternative use
Viridor continues its strategy of delivering cash flow from landfill sites. We anticipate the continued reduction of operational landfill capacity in line with government policy, closing or mothballing uneconomic sites. Viridor closed two sites during the half year, bringing the total number of operational sites to thirteen, as part of a planned move to a forecasted retention of a handful of strategic sites by 2020.
While sites are being wound down to closure and aftercare, our emphasis is on reducing costs and we continue to review our approach, optimising the profile to closure as the market for waste arising for this area moves.
The landfill business continues to be cash generative. Viridor's average gate fees increased by 1.3% to GBP20.88 per tonne in H1 2016/17 (H1 2015/16 GBP20.62 per tonne). Consented landfill capacity reduced from 47.4 million cubic metres (mcm) to 45.4 mcm in the 6 months to September 2016, reflecting usage and site closures during the period. As previously provided for, c.33 mcm of Viridor's consented landfill capacity is not expected to be used.
Recycling self-help increasing EBITDA
During the period, recycling volumes traded remained consistent with last period at 0.9 million tonnes.
Overall recyclate prices remained flat, but under pressure, with fluctuations accross commodities, reflecting world economic conditions and competitive markets.
Across the period, ongoing self-help measures continued to drive improved margins with EBITDA margin increasing by GBP5 per tonne, from GBP8 per tonne in H1 2015/16 to GBP13 per tonne in H1 2016/17.
Viridor has intensified its Input, Throughput and Output Optimisation (ITOO) programme. In addition to an intensified focus on input quality, including contract renegotiation where required, Viridor has continued to drive cost improvements from further organisational simplification, cost and overhead reduction, with costs reducing by GBP5 per tonne. Further work is ongoing to improve asset utilisation and rationalise sites.
In line with previous reporting, Viridor continues to observe a new economic realism as the market continues to realign to a model focused on material quality, sharing commodity risk and opportunity between partners. Good progress has been made in contracts renegotiated to date with further opportunities for improvement as over half of contracts are still to be reviewed on renewal.
With the most extensive Material Recycling Facility (MRF) capacity in the UK, focused on resource quality, established markets across the UK, Europe and Asia (including China), where it holds accreditations for export and continued regulatory and societal drivers, Viridor's outlook remains stable.
Contracts and Collections securing waste inputs and ERF fuel
Performance across our major local authority contracts around the UK (the more significant contracts include Greater Manchester, Glasgow, Lancashire, Somerset and West Sussex) and the Thames Water contract remains broadly in line with last period.
We have begun operating our 25-year contracted service for Tomorrow's Valley in Wales (where four local authorities have come together to create a GBP190 million residual waste contract for 90,000 tonnes per annum) securing fuel for Trident Park ERF.
The performance of the collection business reflects the continued importance of the business in securing increased input tonnages for the business.
Joint Ventures
All three of Viridor's joint ventures continue to perform well.
The joint venture at Lakeside ERF (a 50/50 joint venture with Grundon Waste Management) is in its seventh year of operation and continues to outperform its original power generation and waste processing targets. The second half performance of the asset will be impacted by the timing of a planned shut down.
Viridor Laing Greater Manchester (VLGM), a joint venture between Viridor and John Laing Infrastructure, is delivering the 25-year Greater Manchester Waste PFI. The recycling, recovery and waste management facilities serving the contract are operated by Viridor on a sub-contract basis.
Solid recovered fuel produced from the residual waste from Greater Manchester is used to generate heat and power at Runcorn 1 ERF (TPSCo, a joint venture between Viridor, John Laing Infrastructure and Inovyn) which has operated well since it came on line in 2015.
As planned, at this stage of the joint venture arrangements, a significant proportion of Viridor's income from joint ventures is in the way of finance income on shareholder loans into the projects.
Brexit
As with all major decisions and changes that affect our business, Pennon conducted a thorough analysis of the possible implications of a vote to leave the EU. Pennon did not take a public stance on the EU Referendum as Pennon's Board of Directors believed that the vote itself was a personal decision.
It is too early to know the technical implications of the vote to leave, which will only become clear once the political negotiations are complete. Pennon continues to be well-placed to deliver for customers and shareholders.
Board matters
With effect from 1(st) September 2016 Phil Piddington was appointed Managing Director of Viridor. Phil joined Viridor in 2014 as Chief Operating Officer to lead the energy division. Since joining the Group, Phil has played a key role in delivering Viridor's portfolio of Energy Recovery Facilities.
Chris Loughlin
Group Chief Executive Officer
25 November 2016
Financial Timetable
(YEARED 31 MARCH 2017 AND UPCOMING EVENTS)
2 February 2017 Ordinary shares quoted ex-dividend
3 February 2017 Record date for interim dividend
9 February 2017 Trading Statement
13 March 2017 Scrip election date for interim
dividend
4 April 2017 Interim cash dividend paid
and Scrip shares issued
24 May 2017 Full Year Results 2016/17
Early June 2017 Annual Report & Accounts
published
6 July 2017 Annual General Meeting
6 July 2017* Ordinary shares quoted ex-dividend
7 July 2017* Record date for final dividend
14 August 2017* Scrip election date for final
dividend
1 September 2017* Final cash dividend paid
and Scrip shares issued
September 2017 Trading Statement
29 November 2017 Half Year Results 2017/18
* These dates are provisional and, in the case of
the final dividend subject to obtaining shareholder
approval at the 2017 Annual General Meeting.
PRINCIPAL RISKS AND UNCERTAINTIES
In accordance with DTR4.2.3 and 4.2.7 of the Disclosure & Transparency Rules the principal risks for the remaining six months of the financial year which could have a material adverse affect on the Group have been reconsidered, including the potential uncertainties arising from the UK leaving the EU. The Board considers that the principal risks remain in line with those outlined in our 2016 Annual Report, summarised as follows:
Law, Regulation and Finance
-- Compliance with law, regulation or decisions by Government and regulators, including water industry market reform
-- Maintaining sufficient finance and funding to meet ongoing commitments -- Non-compliance or occurrence of avoidable health and safety incidents -- Uncertainty arising from open tax computations where liabilities remain to be agreed
Market and Economic Conditions
-- Non-recovery of customer debt
-- Macro-economic risks arising from global and UK economic downturn impacting commodity and power prices
-- Increase in defined benefit pension scheme deficit
Operating Performance
-- Poor operating performance due to extreme weather or climate change -- Poor customer service and/or increased competition leading to loss of customer base -- Business interruption or significant operational failures/ incidents
-- Difficulty in recruitment, retention and development of appropriate skills required to deliver the Group's strategy
Business Systems and Capital Investment
-- Failure or increased cost of capital projects and/or exposure to contract failures -- Failure of information technology systems, management and protection including cyber
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, compliance with law, regulation or decisions by Government and regulators, including water industry reform; maintaining sufficient finance and funding to meet ongoing commitments; non-compliance or occurrence of avoidable Health and Safety incidents; uncertainty arising from open tax computations where liabilities remain to be agreed; non-recovery of customer debt; poor operating performance due to extreme weather and climate change; macro-economic risks arising from the Global and UK economic downturn impacting commodity and power prices; poor customer service/increased competition leading to loss of customer base; business interruption or significant operational failures/incidents; talent management and succession planning in place to meet business requirements; failure or increased cost of capital projects/exposure to contract failures and information technology systems, management and protection including cyber risks. These risks were described in greater detail in the Pennon Group Annual Report published at the beginning of June 2016. Such forward looking statements should therefore be construed in light of such risks, uncertainties and other factors 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 2016
Unaudited
--------------------------------------------------------------
Before Non-underlying
non-underlying items Total
half year
items ended half Half
half year year
year
ended 30 September ended ended
30 September 2016 30 September 30 September
2016 (note 2016 2015
5)
Note GBPm GBPm GBPm GBPm
Revenue 4 685.5 - 685.5 689.1
Operating costs
Manpower costs (89.9) (1.1) (91.0) (89.7)
Raw materials and consumables
used (56.1) - (56.1) (55.8)
Other operating expenses (294.1) (9.6) (303.7) (311.9)
Earnings before interest,
tax, depreciation
and amortisation 4 245.4 (10.7) 234.7 231.7
Depreciation and amortisation (91.5) - (91.5) (96.4)
Operating profit 4 153.9 (10.7) 143.2 135.3
Finance income 6 19.7 24.4 44.1 22.0
Finance costs 6 (48.3) (39.4) (87.7) (51.5)
--------------------------------- ----- --------------- --------------- ------------- -------------
Net finance costs 6 (28.6) (15.0) (43.6) (29.5)
Share of post-tax profit
from joint ventures 2.8 - 2.8 1.0
Profit before tax 4 128.1 (25.7) 102.4 106.8
Taxation 7 (30.7) 17.4 (13.3) (21.9)
--------------- --------------- ------------- -------------
Profit for the period 97.4 (8.3) 89.1 84.9
=============== =============== ============= =============
Attributable to:
Ordinary shareholders
of the parent 81.2 (8.3) 72.9 68.7
Perpetual capital security
holders 16.2 - 16.2 16.2
=============== =============== ============= =============
Earnings per ordinary
share (pence per share) 8
- Basic 17.7 16.8
- Diluted 17.6 16.7
- Before non-underlying
items, deferred tax
and adjusted proportionately
to reflect the
half year impact
of annual hybrid
periodic
return 23.6 23.2
The notes on pages 36 to 50 form part of this condensed
half year financial information.
PENNON GROUP PLC
Consolidated statement of comprehensive income for
the half year ended 30 September 2016
Unaudited
--------------------------------------------------------------
Before Non-underlying
non-underlying items Total
half year
items ended half Half
half year year
year
ended 30 September ended ended
30 September 2016 30 September 30 September
2016 (note 2016 2015
5)
GBPm GBPm GBPm GBPm
Profit for the period 97.4 (8.3) 89.1 84.9
Other comprehensive
loss:
Items that will not
be reclassified to
profit or loss
Remeasurement of defined
benefit obligations (73.1) - (73.1) (8.6)
Income tax on items
that will not be reclassified 14.8 (3.6) 11.2 1.8
Total items that will
not be reclassified
to
profit or loss (58.3) (3.6) (61.9) (6.8)
--------------- --------------- ------------- -------------
Items that may be reclassified
subsequently
to profit or loss
Share of other comprehensive
income from
joint ventures (2.8) - (2.8) (1.0)
Cash flow hedges (2.7) - (2.7) 7.4
Income tax on items
that may be reclassified 0.5 (0.5) - (1.5)
Total items that may
be reclassified
subsequently to profit
or loss (5.0) (0.5) (5.5) 4.9
--------------- --------------- ------------- -------------
Other comprehensive
loss for
the period net of
tax (63.3) (4.1) (67.4) (1.9)
--------------- --------------- ------------- -------------
Total comprehensive
income for the period 34.1 (12.4) 21.7 83.0
=============== =============== ============= =============
Total comprehensive
income attributable
to:
Ordinary shareholders
of the parent 17.9 (12.4) 5.5 66.8
Perpetual capital security
holders 16.2 - 16.2 16.2
=============== =============== ============= =============
The notes on pages 36 to 50 form part of this condensed
half year financial information.
PENNON GROUP PLC
Consolidated balance sheet at 30 September 2016
Unaudited
--------------
30 September 31 March
2016 2016
Note GBPm GBPm
ASSETS
Non-current assets
Goodwill 385.0 385.0
Other intangible assets 65.1 63.8
Property, plant and equipment 17 3,970.6 3,897.3
Other non-current assets 279.7 267.8
Derivative financial instruments 90.3 62.7
Investments in joint ventures 0.1 0.1
-------------- ----------
4,790.8 4,676.7
-------------- ----------
Current assets
Inventories 23.4 20.6
Trade and other receivables 333.9 323.5
Derivative financial instruments 13.4 9.5
Cash and cash deposits 14 657.5 632.2
-------------- ----------
1,028.2 985.8
-------------- ----------
LIABILITIES
Current liabilities
Borrowings 14 (92.2) (65.0)
Financial liabilities at
fair value through profit (1.3) (2.2)
Derivative financial instruments (30.8) (17.4)
Trade and other payables (327.5) (264.6)
Current tax liabilities (54.5) (37.1)
Provisions (58.7) (50.4)
-------------- ----------
(565.0) (436.7)
-------------- ----------
Net current assets 463.2 549.1
-------------- ----------
Non-current liabilities
Borrowings 14 (3,131.4) (3,051.6)
Other non-current liabilities (113.4) (113.2)
Financial liabilities at
fair value through profit (51.9) (51.0)
Derivative financial instruments (66.9) (38.5)
Retirement benefit obligations (115.6) (40.9)
Deferred tax liabilities (252.7) (272.0)
Provisions (157.2) (171.0)
-------------- ----------
(3,889.1) (3,738.2)
-------------- ----------
Net assets 1,364.9 1,487.6
============== ==========
Shareholders' equity
Share capital 10 168.4 167.8
Share premium account 11 216.9 213.3
Capital redemption reserve 144.2 144.2
Retained earnings and other
reserves 540.6 667.5
-------------- ----------
Total shareholders' equity 1,070.1 1,192.8
-------------- ----------
Perpetual capital securities 12 294.8 294.8
-------------- ----------
Total equity 1,364.9 1,487.6
============== ==========
The notes on pages 36 to 50 form part of this condensed
half year financial information.
PENNON GROUP PLC
Consolidated statement of changes in equity
Unaudited
---------------------------------------------------------------------------------------------------------------
Share Retained Perpetual
Share premium Capital earnings capital
capital account redemption and securities Total
other
(note (note reserve reserves (note equity
10) 11) 12)
GBPm GBPm GBPm GBPm GBPm GBPm
At 1 April 2015 162.4 118.6 144.2 634.1 294.8 1,354.1
Profit for the
period - - - 68.7 16.2 84.9
Other comprehensive
loss for the period - - - (1.9) - (1.9)
---------------- ----------------- ----------------- ----------------- ----------------- -----------------
Total comprehensive
income for the
period - - - 66.8 16.2 83.0
---------------- ----------------- ----------------- ----------------- ----------------- -----------------
Transactions with
equity shareholders
Dividends paid or
approved - - - (129.5) - (129.5)
Adjustment for
shares
issued
under the scrip
dividend
alternative 0.3 (0.3) - 6.3 - 6.3
Equity issuance 4.9 95.4 - - - 100.3
Distributions due
to perpetual capital
security holders - - - - (20.3) (20.3)
Current tax relief
on distributions
to
perpetual capital
security holders - - - - 4.1 4.1
Adjustment in
respect
of share-based
Payments - - - 2.4 - 2.4
Own shares acquired
by the Pennon
Employee Share
Trust
in respect of
share options
granted - - - (1.1) - (1.1)
Proceeds from
treasury
shares re-issued - - - 2.5 - 2.5
Proceeds from shares
issued under the
Sharesave Scheme 0.2 1.4 - - - 1.6
Equity issuance
related
costs - (2.3) - - - (2.3)
----------------
5.4 94.2 - (119.4) (16.2) (36.0)
At 30 September 2015 167.8 212.8 144.2 581.5 294.8 1,401.1
================ ================= ================= ================= ================= =================
Unaudited
---------------------------------------------------------------------------------------------------------------
Share Retained Perpetual
Share premium Capital earnings capital
capital account redemption and securities Total
other
(note (note reserve reserves (note equity
10) 11) 12)
GBPm GBPm GBPm GBPm GBPm GBPm
At 1 April 2016 167.8 213.3 144.2 667.5 294.8 1,487.6
Profit for the
period - - - 72.9 16.2 89.1
Other comprehensive
loss for the period - - - (67.4) - (67.4)
---------------- ----------------- ----------------- ----------------- ----------------- -----------------
Total comprehensive
income for the
period - - - 5.5 16.2 21.7
---------------- ----------------- ----------------- ----------------- ----------------- -----------------
Transactions with
equity shareholders
Dividends paid - - - (138.5) - (138.5)
Adjustment for
shares
issued
under the
scrip
dividend
alternative 0.3 (0.3) - 6.9 - 6.9
Distributions due
to perpetual capital
security
holders - - - - (20.3) (20.3)
Current tax relief
on distributions
to
perpetual capital
security holders - - - - 4.1 4.1
Adjustment in
respect
of share-based
Payments - - - 1.8 - 1.8
Own shares acquired
by the Pennon
Employee Share
Trust
in respect of
share options
granted 0.1 1.2 - (2.6) - (1.3)
Proceeds from shares
issued under the
Sharesave Scheme 0.2 2.6 - - - 2.8
Proceeds from shares
issued under the
Executive Share
Option Scheme - 0.1 - - - 0.1
0.6 3.6 - (132.4) (16.2) (144.4)
At 30 September 2016 168.4 216.9 144.2 540.6 294.8 1,364.9
================ ================= ================= ================= ================= =================
The notes on pages 36 to 50 form part of this condensed
half year financial information.
PENNON GROUP PLC
Consolidated statement of cash flows for the half year
ended 30 September 2016
Unaudited
-------------------------------------------------------------
Half Half
year year
ended ended
30 September 30 September
2016 2015
Note GBPm GBPm
Cash flows from operating
activities
Cash generated from operations 13 243.3 206.4
Interest paid (35.1) (41.4)
Tax paid - (9.5)
Net cash generated from
operating activities 208.2 155.5
---------------------- ---------------------------------
Cash flows from investing
activities
Interest received 1.8 4.5
Loan repayments received
from joint ventures 4.0 19.5
Acquisitions, net of
cash acquired - (90.0)
Purchase of property,
plant and equipment (158.2) (141.4)
Proceeds from sale of
property, plant
and equipment 3.2 2.7
Net cash used in investing
activities (149.2) (204.7)
---------------------- ---------------------------------
Cash flows from financing
activities
Proceeds from issuance
of ordinary shares 4.2 99.6
Proceeds from treasury
shares re-issued 10 - 2.5
Release/(deposit) of
restricted funds 7.5 (14.9)
Purchase of ordinary
shares by the Pennon
Employee Share Trust (2.6) (1.1)
Proceeds from new borrowing 130.0 130.0
Repayment of borrowings (23.0) (95.1)
Finance lease sale and
leaseback 0.2 0.9
Finance lease principal
repayments (10.9) (15.0)
Dividends paid (131.6) (37.7)
Net cash (used)/received
from financing
Activities (26.2) 69.2
Net increase in cash and
cash equivalents 32.8 20.0
Cash and cash equivalents
at beginning of period 14 405.7 574.8
Cash and cash equivalents
at end of period 14 438.5 594.8
====================== =================================
The notes on pages 36 to 50 form part of this condensed
half year financial information.
PENNON GROUP PLC
Notes to the 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
50. Pennon Group's business is operated through
two main subsidiaries. South West Water Limited
includes the merged water companies of South West
Water and Bournemouth Water, holding the water
and wastewater services appointments for Devon,
Cornwall and parts of Dorset and Somerset and the
water appointments for parts of Dorset, Hampshire
and Wiltshire. Viridor Limited's business is waste,
recycling and recovery.
This condensed half year financial information
was approved by the Board of Directors on
24 November 2016.
The financial information for the period ended
30 September 2016 does not constitute statutory
accounts within the meaning of section 435 of the
Companies Act 2006. The statutory accounts for
31 March 2016 were approved by the Board of Directors
on 24 May 2016 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
2016, which were prepared in accordance with International
Financial Reporting Standards (IFRSs) as adopted
by the EU.
Having made enquiries, the Directors consider that
the Company and its subsidiary undertakings have
adequate resources to continue in business for
the foreseeable future, and that it is therefore
appropriate to adopt the going concern basis in
preparing the condensed half year financial information.
This condensed half year financial information
has been reviewed but not audited by the independent
auditor pursuant to the Auditing Practices Board
guidance on the "Review of Interim Financial Information".
The preparation of the half year financial information
requires management to make judgements, estimates
and assumptions that affect the application of
accounting policies and the reported amounts of
assets and liabilities, income and expense. Actual
results may differ from these estimates. The significant
judgements made by management in applying the Group's
accounting policies and the key sources of estimation
uncertainty are consistent with those that applied
to the consolidated financial statements for the
year ended 31 March 2016, with the exception of
changes in estimates that are required in determining
the half year provision of income taxes.
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 2016 and are in accordance with all IFRSs
and interpretations of the IFRS Interpretations
Committee expected to be applicable for the year
ended 31 March 2017 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
2016 did not have a material impact on the net
assets or results of the Group.
The tax charge for September 2016 and September
2015 has been derived by applying the anticipated
effective annual rate to the first half year profit
before tax.
PENNON GROUP PLC
Notes to the condensed half year financial information
(continued)
4. Segmental information
Operating segments are reported in a manner consistent
with internal reporting provided to the Chief Operating
Decision-Maker, which has been identified as the
Pennon Group Plc Board.
The water business comprises the regulated water
and wastewater services undertaken by South West
Water and the regulated water services undertaken
by Bournemouth Water. The waste management business
is the waste recycling and recovery services provided
by Viridor Limited.
Unaudited
--------------------------------------------
Half year Half
year
ended ended
30 September 30 September
2016 2015
GBPm GBPm
Revenue
Water 287.9 279.3
Waste management 397.9 410.1
Other 6.1 6.1
Less intra-segment trading (6.4) (6.4)
685.5 689.1
--------------------- ---------------------
Segment result
Operating profit before
depreciation, amortisation
and non-underlying items
(EBITDA)
Water 183.0 173.6
Waste management 63.3 61.0
Other (0.9) (2.9)
245.4 231.7
--------------------- ---------------------
Operating profit before
non-underlying items
Water 127.2 117.7
Waste management 27.7 20.5
Other (1.0) (2.9)
--------------------- ---------------------
153.9 135.3
--------------------- ---------------------
Profit before tax and non-underlying
items
Water 97.0 87.0
Waste management 23.1 12.9
Other 8.0 6.9
--------------------- ---------------------
128.1 106.8
--------------------- ---------------------
Profit before tax
Water 96.5 87.0
Waste management 12.9 12.9
Other (7.0) 6.9
--------------------- ---------------------
102.4 106.8
--------------------- ---------------------
Intra-segment transactions between and to other
segments are under normal commercial terms and
conditions. Intra-segment revenue or interest receivable
of one segment is a cost or interest payable of
another.
Factors such as seasonal weather patterns can affect
sales volumes, income and costs in both the water
and waste management segments.
PENNON GROUP PLC
Notes to the condensed half year financial information
(continued)
4. Segmental information (continued)
Geographic analysis of revenue based
on location of customers
Unaudited
----------------------------------
Half year Half year
ended ended
30 September 30 September
2016 2015
GBPm GBPm
UK 663.5 664.2
Rest of European Union 3.9 4.5
China 14.6 12.2
Rest of World 3.5 8.2
---------------- ----------------
685.5 689.1
---------------- ----------------
The Group's country of domicile is the United Kingdom
and is the country in which it generates the majority
of its revenue. The Group's non-current assets
are located in the United Kingdom.
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.
Unaudited
-----------------------------------------------------------
Half year Half year
ended ended
30 September 30 September
2016 2015
GBPm GBPm
Operating costs
Shared services restructuring (10.7) -
cost (a)
---------------------------- ---------------------------
Total net operating costs (10.7) -
Remeasurement of fair (15.0) -
value movement in derivatives
(b)
Deferred tax change in 20.1 -
rate (c)
Tax charge arising on (2.7) -
non-underlying items
Net non-underlying charge (8.3) -
---------------------------- ---------------------------
(a) During the period a one-off charge of GBP10.7m
was made relating to restructuring costs associated
with the Group-wide Shared Services Review.
The GBP10.7m charge consists of a GBP9.5m non-cash
charge to other operating expenses relating
to a rationalisation of systems leading to an
asset de-recognition, and a GBP1.1m charge to
manpower costs and a GBP0.1m charge to other
operating costs in relation to restructuring
provisions.
(b) In the period a credit of GBP24.4m was recognised
relating to non-cash derivative fair value movements
associated with derivatives that are not designated
as being party to an accounting hedge relationship.
In addition, a charge of GBP39.4m was made to
recognise the movement in the fair value of
another derivative arrangement relating to a
change in legislation, which impacts the derivative's
future cash flows.
(c) Following the enactment during the period the
rate of corporation tax reduced from 18% to
17% from April 2020, resulting in a one-off
credit of GBP20.1m being recognised in the income
statement. In addition a charge of GBP4.1m has
been recognised in the statement of comprehensive
income.
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 2016 30 September 2015
Finance Finance Finance Finance
cost income Total cost income Total
GBPm GBPm GBPm GBPm GBPm GBPm
Cost of servicing
debt
Bank borrowings
and overdrafts (24.2) - (24.2) (25.4) - (25.4)
Interest element
of finance lease
rentals (16.2) - (16.2) (17.4) - (17.4)
Other finance costs (2.2) - (2.2) (2.0) - (2.0)
Interest receivable - 1.8 1.8 - 3.8 3.8
Interest receivable
on shareholder
loans to joint
ventures - 5.0 5.0 - 5.7 5.7
(42.6) 6.8 (35.8) (44.8) 9.5 (35.3)
--------------- -------- -------- -------- -------- ---------------
Notional interest
Interest receivable
on service
concession arrangements - 8.8 8.8 - 8.3 8.3
Retirement benefit
obligations (0.6) - (0.6) (1.2) - (1.2)
Unwinding of discounts
on
provisions (5.1) - (5.1) (5.5) - (5.5)
(5.7) 8.8 3.1 (6.7) 8.3 1.6
--------------- -------- -------- -------- -------- ---------------
Net gains on derivative
financial
instruments arising
from the combination
of non-derivative
instruments - 4.1 4.1 - 4.2 4.2
Net finance costs
before
non-underlying
items (48.3) 19.7 (28.6) (51.5) 22.0 (29.5)
--------------- -------- -------- -------- -------- ---------------
Non-underlying
items (note 5)
Fair value remeasurement
of
non-designated
derivative financial
instruments (39.4) 24.4 (15.0) - - -
--------------- -------- -------- -------- -------- ---------------
Net finance costs
after
non-underlying
items (87.7) 44.1 (43.6) (51.5) 22.0 (29.5)
--------------- -------- -------- -------- -------- ---------------
PENNON GROUP PLC
Notes to the condensed half year financial information
(continued)
7. Taxation
Unaudited
----------------------------------------------------------------------
Before Non-underlying
items
non-underlying half year Total
items half
half year ended year Half year
ended 30 September ended ended
30 September 2016 30 September 30 September
(note
2016 5) 2016 2015
GBPm GBPm GBPm GBPm
Analysis of charge
:
Current tax charge 22.8 (1.3) 21.5 3.8
Deferred tax charge/(credit) 7.9 (16.1) (8.2) 18.1
Tax charge for the
year 30.7 (17.4) 13.3 21.9
=============== ================== ================== =============
UK corporation tax is calculated at 20% (H1
2015/16 20%) of the estimated assessable profit
for the year. The tax charge for September 2016
and September 2015 has been derived by applying
the anticipated effective annual tax rate to
the first half year profit before tax.
Tax on amounts included in the consolidated
statement of comprehensive income, or directly
in equity, is included in those statements respectively.
The effective tax rate for the period before
the impact of non-underlying items was 24% (H1
2015/16 21%).
PENNON GROUP PLC
Notes to the condensed half year financial information
(continued)
8. Earnings per share
Basic earnings per share are calculated by dividing
the earnings attributable to ordinary shareholders
by the weighted average number of ordinary shares
outstanding during the period, excluding those
held in the employee share trust which are treated
as cancelled. For diluted earnings per share the
weighted average number of ordinary shares is adjusted
to include all dilutive potential ordinary shares.
The weighted average number of shares and earnings
used in the calculations were:
Unaudited
------------------------------------
Half year Half year
ended ended
30 September 30 September
2016 2015
Number of shares (millions)
For basic earnings per
share 412.5 409.9
Effect of dilutive potential
ordinary shares from
share options 2.1 1.6
For diluted earnings per
share 414.6 411.5
================= =================
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). The annual
perpetual capital return is recognised in full
at the half year, so is proportionately adjusted
to allow a more useful comparison at the half year.
Earnings per share have been calculated:
Unaudited
----------------------------------------------------
Half year ended Half year ended
30 September 2016 30 September 2015
Earnings Earnings
per per
Profit ordinary Profit ordinary
share share
after Basic Diluted after Basic Diluted
tax tax
GBPm p p GBPm p p
Statutory earnings 72.9 17.7 17.6 68.7 16.8 16.7
Deferred tax charge
before non-underlying
items
(note 7) 7.9 1.9 1.9 18.1 4.4 4.4
Non-underlying
items (net of tax)
(note 5) 8.3 2.0 1.9 - - -
Proportionate impact
of
perpetual capital
returns
(note 12) 8.1 2.0 2.0 8.1 2.0 2.0
Adjusted earnings 97.2 23.6 23.4 94.9 23.2 23.1
======= ====== ======== ======= ====== ========
PENNON GROUP PLC
Notes to the condensed half year financial information
(continued)
9. Dividends to ordinary shareholders
Amounts recognised as distributions to ordinary
shareholders in the period :
Unaudited
------------------------------
Half year Half year
ended ended
30 September 30 September
2016 2015
GBPm GBPm
Interim dividend paid
for the year ended
31 March 2016 : 10.46p
(2015 9.98p) per share 43.1 39.8
Final dividend approved
for the year ended
31 March 2016 : 23.12p
(2015 21.82p) per
share 95.4 89.7
138.5 129.5
============== ==============
Proposed interim dividend Unaudited
------------------------------
Half year Half year
ended ended
30 September 30 September
2016 2015
GBPm GBPm
Proposed interim dividend
for the year ended
31 March 2017 : 11.09p
(2016 10.46p) per share 45.9 43.1
============== ==============
The proposed interim dividend of 11.09p per share
will be paid on 4 April 2017 to shareholders
on the register on 3 February 2017.
The proposed interim dividend has not been included
as a liability in this condensed half year financial
information.
PENNON GROUP PLC
Notes to the condensed half year financial information
(continued)
10. Share capital
Allotted, called up and fully paid
Unaudited
--------------------------------
1 April 2015 to 30 September Number of shares
2015
Treasury Ordinary GBPm
shares shares
At 1 April 2015 ordinary
shares of 40.7p each 389,515 398,720,708 162.4
Shares issued in respect
of the equity issuance - 12,084,337 4.9
Shares issued under the
scrip dividend alternative - 236,033 0.1
Shares re-issued under
the Company's
Executive Share Option
Scheme (8,305) 8,305 -
For consideration of
GBP1.1m, shares re-issued
to the Pennon Employee
Share Trust (143,538) 143,538 -
For consideration of
GBP1.4m, shares re-issued
under the Company's Sharesave
Scheme (227,316) 227,316 -
For consideration of
GBP1.6m, shares issued
in respect of the Company's
Sharesave Scheme - 280,090 0.2
At 30 September 2015
ordinary shares in issue
of 40.7p each 10,356 411,700,327 167.6
Shares to be issued under
the scrip dividend alternative - 524,593 0.2
10,356 412,224,920 167.8
---------- ------------ ------
Unaudited
--------------------------------
1 April 2016 to 30 September Number of shares
2016
Treasury Ordinary GBPm
shares shares
At 1 April 2016 ordinary
shares of 40.7p each 10,356 412,340,597 167.8
Shares issued under the
scrip dividend alternative - 771,563 0.3
Shares re-issued under
the Company's
Executive Share Option
Scheme (1,913) 1,913 -
For consideration of
GBP1.3m, shares issued
to the
Pennon Employee Share
Trust - 143,479 0.1
For consideration of
GBP0.1m, shares issued
under the
Company's Executive Share - 24,457 -
Option Scheme
For consideration of
GBP2.8m, shares issued
in respect of the Company's
Sharesave Scheme - 524,905 0.2
At 30 September 2016
ordinary shares in issue
---------- ------------ ------
of 40.7p each 8,443 413,806,914 168.4
---------- ------------ ------
Shares held as treasury shares may be sold, re-issued
for any of the Company's share schemes, or cancelled.
The weighted average market price of the Company's
shares at the date of exercise of Sharesave Scheme
options during the half year was 887p (H1 2015/16
767p).
PENNON GROUP PLC
Notes to the condensed half year financial information
(continued)
11. Share premium account
Unaudited
---------------------------------
GBPm
1 April 2015 to September 2015
At 1 April 2015 118.6
Equity placing 95.4
Adjustment for shares issued
under the scrip dividend alternative (0.3)
Shares issued under the Sharesave
Scheme 1.4
Equity issuance related costs (2.3)
At 30 September 2015 212.8
---------------------------------
1 April 2016 to 30 September
2016
At 1 April 2016 213.3
Adjustment for shares issued
under the scrip dividend alternative (0.3)
Shares issued under the Sharesave
Scheme 2.6
Shares issued under the Executive
Share Option Scheme 0.1
Shares issued to the Pennon Employee
Share Trust 1.2
At 30 September 2016 216.9
---------------------------------
12. Perpetual capital securities
Unaudited
--------------
Half year Year
ended ended
30 September 31 March
2016 2016
GBPm GBPm
GBP 300m 6.75% perpetual
subordinated
capital securities 294.8 294.8
On 8 March 2013 the Company issued GBP300m perpetual
capital securities. They have no fixed redemption
date but the Company may, at its sole discretion,
redeem all, but not part, of these securities
at their principal amount on 8 March 2018 or
any subsequent periodic return payment date after
this.
The Company has the option to defer periodic
returns on any relevant payment date, as long
as a dividend on the Ordinary Shares has not
been paid or declared in the previous 12 months.
Deferred periodic returns shall be satisfied
only on redemption or payment of dividend on
Ordinary Shares, all of which only occur at the
sole discretion of the Company.
As the Company paid a dividend on 1 April 2016
the periodic return of GBP20.3m scheduled 8 March
2017 is payable and consequently has been recognised
as a liability at 30 September 2016.
PENNON GROUP PLC
Notes to the condensed half year financial information
(continued)
13. Cash flow from operating activities
Reconciliation of profit to net cash inflow from
operating activities:
Unaudited
------------------------------
Half year Half year
ended ended
30 September 30 September
2016 2015
GBPm GBPm
Cash generated from operations
Profit for the period 89.1 84.9
Adjustments for:
Share-based payments 1.8 2.4
Profit on disposal
of property, plant
and equipment (2.0) (4.1)
Depreciation charge 90.1 94.6
Amortisation of intangible
assets 1.4 1.8
Non-underlying restructuring 10.7 -
costs
Non-underlying movement 15.0 -
in derivatives
Share of post-tax profit
from joint ventures (2.8) (1.0)
Finance income (19.7) (22.0)
Finance costs 48.3 51.5
Taxation charge 13.3 21.9
Changes in working capital
:
Increase in inventories (2.8) (5.0)
(Increase)/ decrease
in trade and other
receivables (2.3) 2.3
Increase in service
concession
arrangements receivable (13.2) (13.4)
Increase in trade and
other payables 27.3 0.5
Increase in retirement
benefit obligations 1.0 0.9
Decrease in provisions (11.9) (8.9)
Cash generated from operations 243.3 206.4
============== ==============
Unaudited
Half year Half year
ended ended
30 September 30 September
2016 2015
Total interest paid GBPm GBPm
Interest paid in operating
activities 35.1 41.4
Interest paid in investing
activities 6.1 4.0
Total interest paid 41.2 45.4
============== ==============
PENNON GROUP PLC
Notes to the condensed half year financial information
(continued)
14. Net borrowings
Unaudited
Half year
ended Year
30 September ended
31 March
2016 2016
GBPm GBPm
Cash and cash deposits 657.5 632.2
Borrowings - current
Bank and other loans (24.9) -
Other current borrowings (41.1) (39.0)
Finance lease obligations (26.2) (26.0)
--------------- ------------
Total current borrowings (92.2) (65.0)
--------------- ------------
Borrowings - non-current
Bank and other loans (1,484.9) (1,502.5)
Other non-current borrowings (339.4) (234.5)
Finance lease obligations (1,307.1) (1,314.6)
--------------- ------------
Total non-current borrowings (3,131.4) (3,051.6)
--------------- ------------
Total net borrowings (2,566.1) (2,484.4)
=============== ============
For the purposes of the cash flow statement cash
and cash equivalents comprise:
Unaudited
Half year
ended Year
30 September ended
31 March
2016 2016
GBPm GBPm
Cash and cash deposits
as above 657.5 632.2
Less : deposits with a
maturity of three months
or more (restricted
funds) (219.0) (226.5)
438.5 405.7
=============== ============
Restricted funds are available for access, subject
to being replaced by an equivalent valued security.
PENNON GROUP PLC
Notes to the condensed half year financial information
(continued)
15. Fair value disclosure for financial instruments
Fair value of financial instruments carried at
amortised cost
Financial assets and liabilities which are not
carried at an amount which approximates to their
fair
value are:
Unaudited
-------------------------
Half year ended Year ended
30 September 31 March 2016
2016
Book value Fair Book Fair
value value value
GBPm GBPm GBPm GBPm
Non-current
borrowings
:
Bank and other
loans (1,484.9) (1,694.5) (1,502.5) (1,566.2)
Other non-current
borrowings (339.4) (300.5) (234.5) (209.3)
Finance lease
obligations (1,307.1) (1,188.0) (1,314.6) (1,163.0)
------------ ----------- ----------- -----------
Total non-current
borrowings (3,131.4) (3,183.0) (3,051.6) (2,938.5)
Other non-current
assets 279.7 348.4 267.8 334.9
Compared to 31 March 2016 balances the difference
between the book value and fair value of the
Group's non-current borrowings and assets relates
to a decrease in the underlying interest rates
used to calculate the fair value.
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.
PENNON GROUP PLC
Notes to the condensed half year financial information
(continued)
15. Fair value disclosure for financial instruments
(continued)
Valuation hierarchy of financial instruments carried
at fair value (continued)
The Group's financial instruments are valued principally
using level 2 measures:
Unaudited
-----------------
Half
year Year
ended ended
30 September 31 March
2016 2016
GBPm GBPm
Level 2 inputs
Assets
Derivatives used for cash
flow hedging 18.0 3.4
Derivatives used for fair
value hedging - 1.8
Derivatives not in a hedge
accounting relationship 85.7 67.0
----------------- --------------
Total assets 103.7 72.2
Liabilities
Derivatives used for cash
flow hedging 53.6 46.9
Derivatives used for fair - -
value hedging
Derivatives not in a hedge
accounting relationship 4.6 4.8
----------------- --------------
Total liabilities 58.2 51.7
Financial instruments valued using level 3 measures
are valued by the counterparty using cash flows
discounted at prevailing mid-market rates. The
fair value of such financial instruments is not
significantly sensitive to unobservable inputs.
Level 3 inputs
Liabilities
Derivatives deemed held for
trading 39.5 4.2
----------------- --------------
The fair value of level 3 inputs is determined
using the Black-Scholes valuation model with reference
to prevailing mid-market rates and a propriety
Nomura index.
The table below shows the summary of changes in
the fair value of the Group's level 3 financial
instruments:
Unaudited
-----------------
Half
year Year
ended ended
30 September 31 March
2016 2016
GBPm GBPm
Opening liability (4.2) (3.6)
(Losses) and gains recognised
in net
finance costs (35.3) 8.4
Settlement of recognised
gains - (9.0)
----------------- --------------
Closing liability (39.5) (4.2)
----------------- --------------
PENNON GROUP PLC
Notes to be 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 2.35% (March
2016 3.30%) and the inflation assumption of 3.0%
(March 2016 2.9%).
Unaudited
-------------------------------
Half year ended Year ended
30 September 2016 31 March 2016
Fair Fair
Present value Present value
value of plan value of plan
of obligation assets Total of obligation assets Total
GBPm GBPm GBPm GBPm GBPm GBPm
At 1 April (833.6) 792.7 (40.9) (752.3) 692.7 (59.6)
Arising on
acquisition - - - (86.6) 88.5 1.9
Amounts recognised
in the
income statement (20.8) 13.0 (7.8) (39.9) 25.5 (14.4)
Remeasurements
through
other
comprehensive
income (168.5) 95.4 (73.1) 17.1 (19.7) (2.6)
Contributions 13.7 (7.5) 6.2 28.1 5.7 33.8
(1,009.2) 893.6 (115.6) (833.6) 792.7 (40.9)
--------------- -------------- -------- --------------- --------- -------
The deficit has increased during the period due
to the post-Brexit fall in bond yields, increasing
the valuation of liabilities. Over half of the
increase in the valuation of liabilities has been
offset by increases in asset values.
17. Capital expenditure
Unaudited
------------------------
Half year
ended Year ended
30 September 31 March
2016 2016
GBPm GBPm
Property, plant and
equipment
Additions 173.9 284.2
Net book value of disposals 10.7 11.3
Capital commitments
Contracted but not provided 355.7 374.4
PENNON GROUP PLC
Notes to the condensed half year financial
information (continued)
18. Contingent liabilities
Unaudited
--------------
Half year
ended Year ended
30 September 31 March
2016 2016
GBPm GBPm
Performance bonds 187.5 159.7
Other 4.0 4.0
191.5 163.7
-------------- -------------
Performance bonds are entered into in the normal
course of business. No liability is expected
to arise in respect of the bonds.
The Group is subject to litigation from time
to time as a result of its activities, including
a prosecution from the Health and Safety Executive
in relation to the fatality of an employee at
Falmouth wastewater treatment works in 2013.
The Group establishes provisions in connection
with litigation where it has a present legal
or constructive obligation as a result of a
past event and where it is more likely than
not an outflow of resources will be required
to settle the obligation and the amount can
be reliably estimated.
19. Related party transactions
The Group's significant related parties are
its joint ventures in Lakeside Energy from Waste
Holdings Limited and Viridor Laing (Greater
Manchester) Holdings Limited and its associate
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 2016.
There were no material changes during the half
year to September 2016 in the nature of transactions
with these related parties.
Pennon Group Plc
Registered Office : Registered in England No
2366640
Peninsula House
Rydon Lane
Exeter
EX2 7HR
pennon-group.co.uk
PENNON GROUP PLC
DIRECTORS' RESPONSIBILITIES STATEMENT
The Directors named below confirm on behalf of the Board
of Directors that this unaudited condensed half year
financial information has been prepared in accordance
with IAS 34 "Interim financial reporting" as adopted
by the European Union and to the best of their knowledge
the interim management report herein includes a fair
review of the information required by DTR 4.2.4, DTR
4.2.7R and DTR 4.2.8R of the Disclosure and Transparency
Rules, being an indication of important events that
have occurred during the period and their impact on
the unaudited condensed half year financial information;
a description of the principal risks and uncertainties
for the remaining six months of the current financial
year; and the disclosure requirements in respect of
material related party transactions.
The Directors are responsible for the maintenance and
integrity of the Company's website. Legislation in the
United Kingdom governing the preparation and dissemination
of financial information may differ from legislation
in other jurisdictions.
The Directors of Pennon Group Plc at the date of the
signing of this announcement and statement are:
Sir John Parker
Martin Angle
Gill Rider
Neil Cooper
Chris Loughlin
Susan Davy
For and on behalf of the Board of Directors who approved
this half year report on 24 November 2016.
C Loughlin S J Davy
Group Chief Executive Officer Chief Financial Officer
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 2016 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 and Transparency
Rules of the United Kingdom's Financial Conduct Authority.
As disclosed in note 2, the annual financial statements
of the Group are prepared in accordance with IFRSs
as adopted by the European Union. The condensed set
of financial statements included in this half-yearly
financial report has been prepared in accordance with
International Accounting Standard 34, "Interim Financial
Reporting", as adopted by the European Union.
Our Responsibility
Our responsibility is to express to the Company a
conclusion on the condensed set of financial statements
in the half-yearly financial report based on our review.
Scope of Review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410,
"Review of Interim Financial Information Performed
by the Independent Auditor of the Entity" issued by
the Auditing Practices Board for use in the United
Kingdom. A review of interim financial information
consists of making enquiries, primarily of persons
responsible for financial and accounting matters,
and applying analytical and other review procedures.
A review is substantially less in scope than an audit
conducted in accordance with International Standards
on Auditing (UK and Ireland) 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 consolidated
set of financial statements in the half-yearly financial
report for the six months ended 30 September 2016
is not prepared, in all material respects, in accordance
with International Accounting Standard 34 as adopted
by the European Union and the Disclosure and Transparency
Rules of the United Kingdom's Financial Conduct Authority.
Ernst & Young LLP
Reading
24 November 2016
[1] Return on Regulated Equity (RORE)
[2] Energy Recovery Facility (ERF)
[3] Before non-underlying items
[4] Statutory EBITDA plus share of Joint Venture EBITDA and IFRIC 12 interest receivable
[5] Before deferred tax and adjusted proportionately to reflect the half year impact of the annual hybrid periodic return. Basic earnings per share (statutory basis) 17.7p
[6] The RPI rate used is 2.0% as of September 2016
[7] GBP3.8m net cumulative reward reflecting GBP5.7m net reward which will be recognised at the end of the regulatory period and GBP1.9m net penalty which can be reflected during the
regulatory period
[8] Excluding Avonmouth
[9] Safety, Health, Environment and Quality
[10]Subject to competition clearance
[11] Before non-underlying items
[12] Statutory EBITDA plus share of Joint Venture EBITDA and IFRIC 12 interest receivable
[13] Including construction spend on service concession arrangements
[14] Before deferred tax and adjusted proportionately to reflect the half year impact of the annual hybrid periodic return. Basic earnings per share (statutory basis) 17.7p
[15] The RPI rate used is 2.0% as of September 2016
[16] Including landfill tax and construction spend on service concession arrangements
[17] Before non-underlying items
[18] RORE reflects the Ofwat regulatory guidance of Base RORE plus Outperformance. It is calculated using actual results before non-underlying items (deflated into 2012/13
prices) and compared against the Final Determination allowances sourced from Ofwat published models and based on notional gearing and annual average RCV.
[19] The RPI rate used is 2.0% as of September 2016
[20] Two arrangements are accounted for in non-underlying derivative movements
[21] Proprietary Nomura Index
[22] Based on RCV at March 2017 assuming RPI of 2.5%
[23] Including construction spend on service concession arrangements and GBP6.1 million of capitalised interest
[24] Safety, health, environment and quality
[25] RORE reflects the Ofwat regulatory guidance of Base RORE plus Outperformance. It is calculated using actual results before non-underlying items (deflated into 2012/13
prices) and compared against the Final Determination allowances sourced from Ofwat published models and based on notional gearing and annual average RCV. Reflects cumulative performance for the 18 months to 30 September 2016. GBP24m Totex savings delivered in H1 2016/17.
[26] Includes integration synergies already delivered. Phasing of actual expenditure compared to the planned programme has been reflected. Outperformance includes a reduction
in the RCV run-off for the RCV element of Totex outperformance calculated based on the Final Determination PAYG. Tax impacts reflect actual effective tax rates.
[27] Interest outperformance is based on the outturn effective interest rate using the expected K6 RPI of 2.8%, aligned with the long term RPI assumptions, notional debt gearing of
62.5%, and a notional tax impact of 20%.
This information is provided by RNS
The company news service from the London Stock Exchange
END
IR LIFFILRLEFIR
(END) Dow Jones Newswires
November 25, 2016 02:00 ET (07:00 GMT)
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