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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 | |
|---|---|---|---|---|---|---|---|---|---|---|
| 3.50 | 0.53% | 666.00 | 666.50 | 667.50 | 675.00 | 659.00 | 675.00 | 48,276 | 10:30:04 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Sewerage Systems | 797.2M | 100k | 0.0004 | 16,750.00 | 1.75B |
From Apr 2019 to Apr 2024
TIDMPNN
RNS Number : 7900X
Pennon Group PLC
29 November 2017
29 November 2017
Half Year Results 2017/18
for the half year ended 30 September 2017
Delivering for our customers and communities
Chris Loughlin, Pennon Chief Executive said:
"Pennon has delivered robust performance in the first half of 2017/18 across both water and waste activities. Our priority continues to be to provide an outstanding level of service to our customers and communities, while offering a sector-leading dividend policy for our shareholders. In water, our focus on cost savings means bills are lower now than they were 8 years ago, whilst at the same time we are continuing to invest significantly in our plants and distribution network. This means we have delivered significant improvements in clean water and bathing water quality and our leakage levels have halved since privatisation. Good progress is being made to bring Viridor's remaining four energy recovery facilities in the portfolio on stream, with three in commissioning in 2017/18 and the final facility under construction. The expansion of Viridor's Energy Recovery Facility portfolio will support Pennon's earnings growth to 2020 and beyond."
Financial Highlights
Underlying(1) H1 2017/18 H1 2016/17 Change Revenue GBP723.9m GBP685.5m +5.6% EBITDA GBP253.5m GBP245.4m +3.3% Adjusted EBITDA(2) GBP285.8m GBP277.2m +3.1% Operating Profit GBP162.4m GBP153.9m +5.5% Profit Before Tax (PBT) GBP131.1m GBP128.1m +2.3% ------------------------------- ----------- ----------- -------- Non-underlying items before (GBP1.3m) (GBP25.7m) - tax(3) Statutory Profit Before Tax GBP129.8m GBP102.4m +26.8% Tax (GBP17.5m) (GBP13.3m) (31.6%) Statutory Profit After Tax (PAT) GBP112.3m GBP89.1m +26.0% Earnings per share(4) 25.3p 23.6p +7.2% Statutory Earnings per share 21.8p 17.7p +23.2% Dividend per share(5) 11.97p 11.09p +7.9% -- Underlying PBT up +2.3% following:
o higher Water revenues driven by customer demand
o final Bournemouth Water integration phase complete, GBP12 million synergies delivered in 18 months, with GBP27 million cumulative expected to 2020
o growth at Viridor driven by strong performance from Energy Recovery Facilities (ERFs), availability at >90%(6) for H1 2017/18
o continuing group efficiencies with GBP11 million p.a. of the c.GBP17 million p.a. expected from 2019 already secured
-- Strong operating cashflows, reflecting robust operational performance
-- Maintaining momentum with cumulative Return on Regulated Equity (RORE) at 11.8%(7) , unique WaterShare mechanism to share transparently the benefits of outperformance in period
-- Sustainable, low cost funding position underpinning continuing capital investment -- Perpetual capital securities issuance delivering balance sheet flexibility -- Statutory PBT up 26.8% to GBP129.8 million -- Statutory earnings per share growth of +23.2% to 21.8p -- Interim dividend per share +7.9% to 11.97p.
Operational Highlights
-- Continued strong performance in water, customers at the heart of our delivery plans
o Sharing outperformance with South West Water customers, cumulatively benefiting from GBP68 million to H1 2017/18
-- Maintaining momentum on ODIs (Outcome Delivery Incentives) delivering against 33 of 36(8) . Cumulative net ODI reward of GBP7.0 million(9) to H1 2017/18
-- Continued strong focus on efficiency, cumulative K6 TOTEX outperformance reaches GBP159 million
-- Pennon Water Services, one of only four associated retailers to have achieved net growth in the new competitive non-household market. Focused on value enhancing contracts
-- ERFs performing well, average availability continues to be greater than 90%, with operational ERFs delivering in excess of base case expectations
-- Recycling self-help measures continue, success in new Asian markets (partially mitigating impacts of China's changing quality requirements) - cautious about recycling pricing in H2 2017/18
-- Long-term partnership with Greater Manchester Waste Disposal Authority continues - satisfactory financial outcome reached
-- Securing further growth to support earnings
o Three ERFs in commissioning:
- Glasgow's Recycling and Renewable Energy Centre(10) . First generated electricity at the end of February 2017 with the Materials Recycling Facility (MRF) and Anaerobic Digestion (AD) plant operating through the year and ERF in final commissioning
- Beddington and Dunbar in commissioning
o One ERF (Avonmouth) in early stages of construction:
- Progressing well with work on the foundations underway.
Presentation of Results
A presentation for City audiences will be held today, Wednesday 29 November 2017, at 09.30am at the London Stock Exchange, 10 Paternoster Square, London, EC4M 7LS.
A live webcast of the presentation can also be accessed using the following link:
http://www.pennon-group.co.uk/investor-information
For further information, please contact:
Hot Features
Premium
Chief Financial Officer - Pennon
Susan Davy Director of Corporate Affairs & Investor } 01392 443
Sarah Heald Relations - Pennon } 401
James Murgatroyd 020 7251
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 GBP6.0 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.
Since 1989 South West Water has invested around GBP7 billion to improve water and wastewater services. This investment means that we will supply some of the best quality drinking water in the UK and have achieved record bathing water quality in recent years.
South West Water was awarded enhanced status for its 2015-2020 Business Plan, and has the highest potential returns in the water sector to 2020.
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 Water Services provides water and wastewater retail services to over 160,000 non-household customer accounts across Great Britain, and is an 80:20 venture with South Staffordshire Group.
Upcoming Events
26 March 2018 Trading Statement 25 May 2018 Full Year Results 2017/18 5 July 2018 Annual General Meeting 24 September 2018 Trading Statement 27 November 2018 Half Year Results 2018/19
10 year sector-leading dividend policy
Pennon's long established 10 year dividend policy of 4% year-on-year growth above RPI inflation to 2020 results in an expected doubling of dividend over 10 years (2010-2020)(11) . This policy reflects the Board's confidence in our long term strategy and 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.
For H1 2017/18, the Board has recommended an interim dividend of 11.97p, up 7.9%. The interim dividend will be paid on 4 April 2018 to shareholders on the register on 26 January 2018.
Following a review of the Group's capital structure and the successful refinancing of the perpetual capital securities the Board has decided to withdraw the scrip dividend alternative and, in its place, is offering shareholders the opportunity to invest their dividend in a Dividend Reinvestment Plan (DRIP).
Interim Dividend Payment Information:
12 January 2018 Posting of interim dividend DRIP alternative 25 January 2018 Ex-dividend date 26 January 2018 Record date 9 March 2018 Final date for receipt of DRIP applications 4 April 2018 Interim dividend payment date
PENNON BUSINESS REVIEW
Pennon's focus is on providing an outstanding level of service to our customers and communities, while creating value for our shareholders. Pennon is investing significantly in its UK water and waste infrastructure and expects capital expenditure of c. GBP1.7 billion between 2015 and 2020. The Group generates strong operating cash flows, and has a strong liquidity and balance sheet position, underpinning a well established sector-leading dividend policy.
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. In waste, growth is predominantly coming from the portfolio of Energy Recovery Facilities and we continue to expect demand in the residual waste market to exceed capacity into the long-term. In the water business, incremental growth is being achieved through the successful merger of Bournemouth Water with combined licences and operations and a new retail venture for business customers with South Staffs/Cambridge Water which was launched on 1 April 2017.
Robust operational & financial performance in water and waste businesses
The Group has performed well in H1 2017/18, and is on track to deliver in line with management expectations for the full year 2017/18.
South West Water, including the merged Bournemouth Water, continues to deliver and outperform the sector leading business plan targets. In the 18 months since the merger GBP12 million of net synergies has been delivered and we are on track to deliver the c.GBP27 million anticipated by 2020, with back office costs reduced by c.25%, and shared best practice delivering operational improvements across the combined business.
The water business is on track to deliver against all business plan commitments, including those under financial ODIs, by 2020 and is striving for ever greater efficiency to reduce costs for customers. Totex outperformance has already achieved cumulative savings of GBP159 million and financing outperformance has delivered GBP83 million in the first half of the K6 (2015-2020) regulatory period. This focus on cost efficiency has resulted in South West Water's average bills for the year being below where they were 8 years ago. Strong operational and financial performance underpins our sector-leading RORE, which is consistently tracking above 11%. We are sharing the benefits of outperformance with our water customers through a unique 'WaterShare' mechanism with GBP68 million identified for sharing with customers to date.
Viridor is performing well and the fundamentals in the UK waste market are strong with demand for ERFs expected to continue to exceed capacity into the long term. Viridor has negotiated a reset to the contract with the Greater Manchester Waste Disposal Authority (GMWDA), which had a mutually satisfactory outcome(12) . The operational ERF portfolio is consistently achieving availability at >90%(13) with the operational performance of the facilities above management's base case expectations. Three of the four remaining ERFs are in commissioning and construction is progressing with the fourth remaining ERF at Avonmouth.
The business is retaining flexibility in its landfill strategy as competitors' sites have closed across the country and with under capacity in the UK ERF market, Viridor continues to see demand for landfill across the UK, particularly as ERFs are still being completed. Viridor is retaining flexibility with respect to its site closure strategy, keeping sites open for longer and investing in new cells where it is commercially attractive and necessary for appropriate waste disposal.
Recycling 'self-help' measures continue to deliver results with margins increasing by GBP1/tonne in H1 2017/18, despite lower volumes arising from the optimisation of the asset base, higher costs from China's increased quality requirements and shipping costs due to uncertainty in the shipping market. Success in new Asian markets will assist in partially mitigating the impacts from the changes in the Chinese market, although Pennon anticipates pressure on recyclate pricing in H2 2017/18.
Striving for ever greater cost efficiency across the Group, benefitting customers
Pennon remains focused on driving greater synergies and savings across the Group, sharing best practice and ensuring it is well placed to capitalise on emerging opportunities.
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.
The cost savings and synergy targets of c.GBP17 million p.a. from 2019, identified by the Shared Services Review, is on track and the run rate is already at c.GBP11 million p.a.
In the water business in particular, we see consolidation as a sustainable way to deliver greater efficiency, lower bills and delivering benefits for customers. This has been demonstrated through the Bournemouth Water acquisition with c.GBP27 million of cumulative synergies targeted by 2020, of which GBP12 million have already been delivered through a 25% reduction in back office costs and sharing best practise improving performance.
Energy hedging
Pennon has adopted a group portfolio management approach to energy hedging, and has the ability to hedge its market position for periods up to five years ahead, further helping to protect revenues.
The Group is fully hedged for its energy (generation net of internal usage of electricity) for the remainder of the financial year and c.66% hedged for the three years to 2020. 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.
Driving growth
New non-household retail venture with South Staffordshire Plc
Pennon Water Services, the separate legal entity providing retail services to non-household customers across Great Britain, is one of only four retailers previously associated with the water sector to have successfully grown its customer base since entering the retail market on 1 April 2017.
Now serving over 160,000 customer accounts across 17 different wholesale regions, Pennon Water Services has achieved net growth of c.5,100(14) customer accounts, and has facilitated around seven per cent of all switches in the market.
Step up in earnings from ERFs under construction
Viridor anticipates generating significant growth in EBITDA over the coming years, with a step up expected from 2018/19 as the additional facilities come on stream. The focus for the ERF portfolio remains on optimising operational performance and efficient, effective maintenance schedules.
Focused on PR19, innovating for the future
PR19 will be a challenging Price Review, but South West Water is well-placed to respond and deliver outstanding services to customers. The Ofwat Methodology for PR19 published in July 2017 indicates a relatively more prescriptive price review than PR14. South West Water is focused on ensuring plans will continue to reflect the priorities of customers in the South West and Bournemouth areas and will be tested with customers, stakeholders and regulators.
In September 2017 we published our WaterFuture 2050 plan which sets out South West Water's vision and strategy over the long term. We anticipate that significant investment will be at least comparable to historic levels with c.GBP6 billion to c.GBP9 billion estimated investment required over the 30 years to 2050. This investment is informed by Defra's guidance to Ofwat, direct engagement with Ofwat and customer and stakeholder engagement. Key areas of investment are:
-- Resilience -- Environmental protection and enhancement -- Security of supply -- Flood protection -- Transformational improvement to customer service
The WaterFuture 2050 plan also addresses ambitious, transformational service improvements which build on stretching improvements in our 'enhanced' PR14 plan, focusing on customers' priorities.
South West Water is supportive of Ofwat's approach for greater incentives for outperformance, particularly in those areas customers value the most. The focus on customers is clear and South West Water is extending its exemplary approach to customer engagement delivered during the last price review and raising the bar further using new interactive tools and techniques for greater customer participation. We anticipate that our range of approaches will result in over half of our customers actively providing feedback on our plan.
In addition South West Water is continuing to focus on affordable bills and tailored support for those customers in vulnerable circumstances with an extensive range of affordability measures which we will be expanding further over the next period.
South West Water continues to lead the sector in a number of areas delivering RORE outperformance across Totex savings, financing with the lowest effective rates in the industry and delivering net ODI rewards. The business is focused on maintaining this momentum over the remaining K6 regulatory period and is confident in its ability to remain at the frontier of cost efficiency for the water sector. This is a positive platform as we develop our plans for the next regulatory period 2020-25.
PENNON FINANCIAL PERFORMANCE
Pennon Group
Underlying(15) H1 2017/18 H1 2016/17 Change Revenue GBP723.9m GBP685.5m +5.6% EBITDA GBP253.5m GBP245.4m +3.3% Adjusted EBITDA(16) GBP285.8m GBP277.2m +3.1% Depreciation and amortisation (GBP91.1m) (GBP91.5m) +0.4% Operating Profit GBP162.4m GBP153.9m +5.5% Net interest (GBP36.6m) (GBP28.6m) (28.0%) Share of JV PAT GBP5.3m GBP2.8m +89.3% Profit Before Tax (PBT) GBP131.1m GBP128.1m +2.3% ------------------------------------- ------------- ------------ ---------- Non-underlying items before (GBP1.3m) (GBP25.7m) - tax(17) Statutory Profit Before Tax GBP129.8m GBP102.4m +26.8% Tax (GBP17.5m) (GBP13.3m) (31.6%) Statutory Profit After Tax (PAT) GBP112.3m GBP89.1m +26.0% PAT (attributable to holders of hybrid capital) GBP21.5m GBP16.2m +32.7% PAT (attributable to minority (GBP0.1m) - - interests) PAT (attributable to shareholders) GBP90.9m GBP72.9m +24.7% Earnings per share(18) 25.3p 23.6p +7.2% Statutory Earnings per share 21.8p 17.7p +23.2% Dividend per share(19) 11.97p 11.09p +7.9%
Capital investment(20) GBP245.1m GBP183.3m +33.7%
South West Water GBP97.6m GBP79.7m +22.5%
Viridor GBP147.1m GBP103.6m +42.0%
Other GBP0.4m - -
30 September 31 March Change
2017 2017
Net debt GBP2,790.9m GBP2,664.9m +4.7%
Business Systems and Capital Investment
Non-underlying items for the half year total a charge of GBP1.3 million before tax (H1 2016/17 GBP25.7 million(21) ) and net non-underlying items after tax result in a credit of GBP3.0 million (H1 2016/17 GBP8.3 million charge). The net charge before tax for H1 2017/18 is a result of:
-- The movement in the fair value of long-dated derivatives associated with South West Water's 2040 bond of GBP7.8 million charge (H1 2016/17 GBP15.0 million(22) )
-- Reset of Viridor's Greater Manchester contracts - credit of GBP6.5 million, representing a gain on the re-profiling of cash flows (GBP22.5 million), favourable settlement of all construction related claims (GBP3.2 million) net of a write down of shareholder loans (GBP19.2 million).
The tax impact of these non-underlying items is a credit of GBP4.3 million.
As a result of the reset, all external bank debt loaned into Viridor Laing and TPSCo has been repaid by the GMWDA, lower ongoing gate fees have been agreed in respect of Runcorn I and all claims relating to construction of VLGM's assets have been settled.
On reset of the Greater Manchester contracts, ownership of Viridor Laing (Greater Manchester) Holdings Limited (Viridor Laing) passed to the Greater Manchester Waste Disposal Authority (GMWDA). Viridor Laing (Greater Manchester) Holdings Limited was previously a joint venture between Viridor (50%) and John Laing (50%).
The ownership of INEOS Runcorn (TPS) Holdings Limited (TPSCo), a joint venture between Viridor, John Laing and Inovyn Chlorvinyls Limited, remains unchanged. This joint venture owns the Runcorn I ERF.
Viridor has retained its long term operating contract for this ERF and will continue to operate the recycling and reprocessing assets, constructed by Viridor Laing, for a period of not less than 18 months. The subsequent contract will be subject to a 3 part re-procurement process, commencing later in 2017. Viridor will be eligible to bid for the new contracts with new contract terms.
South West Water
Underlying H1 2017/18 H1 2016/17(23) Change Revenue GBP292.2m GBP284.9m +2.6% Operating costs (GBP105.1m) (GBP103.0m) (2.0%) EBITDA GBP187.1m GBP181.9m +2.9% Depreciation and amortisation (GBP56.4m) (GBP55.8m) (1.1%) Operating Profit GBP130.7m GBP126.1m +3.6% Net interest (GBP34.5m) (GBP30.2m) (14.2%) Profit Before Tax GBP96.2m GBP95.9m +0.3%
Viridor
Underlying H1 2017/18 H1 2016/17 Change
Revenue(24) GBP407.0m GBP397.9m +2.3%
EBITDA GBP66.6m GBP63.3m +5.2%
ERFs GBP51.7m GBP50.5m +2.4%
Landfill GBP3.3m GBP3.2m +3.1%
Landfill Gas GBP9.2m GBP12.9m (28.7%)
Recycling GBP10.6m GBP11.0m (3.6%)
Contracts, Collections &
Other GBP20.0m GBP16.0m +25.0%
Indirect Costs (GBP28.2m) (GBP30.3m) +6.9%
Share of JV EBITDA GBP25.4m GBP23.0m +10.4%
IFRIC 12 Interest Receivable GBP6.9m GBP8.8m (21.6%)
Adjusted EBITDA(25) GBP98.9m GBP95.1m +4.0%
Depreciation and amortisation (GBP34.2m) (GBP35.6m) +3.9%
Profit Before Tax GBP30.6m GBP23.1m +32.5%
Pennon Water Services
H1 2017/18(26)
Revenue GBP83.5m
EBITDA GBP0.5m
Depreciation and amortisation (GBP0.3m)
Operating Profit GBP0.2m
Net interest (GBP0.7m)
Profit Before Tax (GBP0.5m)
Underlying performance on track to meet management expectations for 2017/18
Group revenue in H1 2017/18 increased by 5.6%(27) (GBP38.4 million) to GBP723.9 million. GBP22 million of this increase relates to non-household customer accounts including the retail book acquired from South Staffordshire by Pennon Water Services (our new retail venture with South Staffordshire, owned 80:20). Revenue from South West Water increased by 2.6% (GBP7.3 million) due to tariff increases (2.5%), customer demand increasing by 1.1%, from the drier weather and increased infrastructure connections. Viridor revenues increased by 2.3% (GBP9.1 million) primarily due to higher IFRIC 12 construction revenues and higher ERF power generation.
Group EBITDA and adjusted EBITDA were ahead of the same period last year by 3.3% and 3.1% respectively, with both South West Water and Viridor ahead of H1 2016/17.
South West Water's EBITDA and operating profit increased by 2.9% and 3.6% respectively. Tariff rises and increased customer demand (up 1.1% from H1 last year) net of meter switchers has driven an increase in revenue however operating costs for the first half of the year have increased reflecting higher inflation (3.9% at September 2017) and other cost increases net of targeted efficiencies and other savings. In addition, South West Water's bad debt performance remains strong with a charge of 0.9% as a percentage of revenues reduced from 1.7% at March 2015. This continues to be driven by efficient collections as we work with our customers to manage their debt and supporting those customers in vulnerable situations with affordability challenges.
South West Water's interest costs have risen, reflecting higher RPI on index-linked debt, resulting in profit before tax remaining broadly consistent with the prior period at GBP96.2 million (H1 2016/17 GBP95.9 million). With the highest potential returns in the sector for K6, South West Water is outperforming its sector leading business plan, resulting in a cumulative Return on Regulated Equity of 11.8%.
Pennon Water Services has successfully gained new customers since the opening of the non-household retail market to competition on 1 April 2017. During H1 2017/18, service investment and set up costs of c.GBP1.5 million have been recognised relating to the successful migration to a single billing system and customer service operation for those customers previously served by South West Water and South Staffs Water. Overall EBITDA for the period is a loss of GBP0.5 million.
Viridor has delivered an increase in EBITDA of 5.2% to GBP66.6 million (H1 2016/17 GBP63.3 million) through improved performance of existing assets and a focus on quality and efficiency.
The ERFs have performed strongly during the period as expected with availability in excess of 90%(28) . ERF EBITDA was GBP51.7 million (H1 2016/17 GBP50.5 million) with underlying performance improvements across the portfolio. Our ERFs are outperforming the base case indications we have previously published.
Landfill EBITDA has increased since H2 2016/17 as demand for landfill solutions remains, with prices and margins increasing. Landfill EBITDA at GBP3.3 million is 3.1% higher than in the prior period (H1 2016/17 GBP3.2 million).
We are investing in our landfill gas business to enhance the long term reliability of our assets. Landfill gas EBITDA for the period is GBP9.2 million, down 28.7% from the prior period (H1 2016/17 GBP12.9 million) as a result of lower generation volumes. Power generation has reduced more steeply in the period as a result of the higher maintenance activities. This rate of decrease is not expected to continue.
At GBP10.6 million, recycling EBITDA is GBP0.4 million lower than last period (H1 2016/17 GBP11.0 million). In line with market demands Viridor has focused on product quality in the period, whilst volumes have reduced. However, EBITDA margin per tonne has increased by GBP1 per tonne to GBP14 per tonne (H1 2016/17 GBP13 per tonne). We are cautious about future recyclate pricing, with the impact of Chinese import policy likely to prevent any significant increases. Our focus remains on 'self-help' measures to drive margin improvement, opening opportunities in Asian markets and looking to share commodity risk and opportunities with our clients.
We also continue to work with our customers to improve performance levels and are incentivised to work together to find mutually beneficial solutions through income sharing mechanisms, in particular with our long term local authority clients.
Rationalising a contract in H1 2017/18 has contributed towards a positive outcome for Viridor as well as the customer, and has contributed to an increase of 25.0% in EBITDA in the period from Contracts, Collections and Other of GBP4.0 million to GBP20.0 million.
Indirect costs are down 6.9% to GBP28.2 million (H1 2016/17 GBP30.3 million) as we continue to focus on delivering efficiencies, including those arising from shared services activities across the Group.
Our share of joint venture EBITDA has increased to GBP25.4 million (H1 2016/17 GBP23.0 million). This increase is driven by strong performance at the Lakeside and TPSCo ERFs. IFRIC 12 interest receivable has reduced to GBP6.9 million (H1 2016/17 GBP8.8 million) as the financial assets are paid down through the operational phase of the contracts.
Net Finance Costs
Underlying net finance costs of GBP36.6 million are GBP8.0 million higher than last half year (H1 2016/17 GBP28.6m). This includes a reduction of GBP4.1 million in other finance income following the unwind of the 2011 Peninsula MB Limited (PMB) derivative in February 2017, higher RPI (3.9% at September 2017) and higher net debt from continuing capital investments.
We have secured funding at a cost that is efficient and effective. RPI funding represents 20%, as inflation rates have risen interest costs have increased accordingly but we are still expected to be sector leading at 3.7% (H1 2016/17 3.3%).
The effective interest rate is calculated after adjusting for capitalised interest of GBP7.8 million, notional interest items totalling GBP5.7 million, interest received from shareholder loans to joint ventures of GBP5.5 million and IFRIC 12 interest receivable of GBP6.9 million. The effective interest rate for South West Water in the period was 3.5% (H1 2016/17 3.2%).
Profit before tax
Group underlying profit before tax was GBP131.1 million, an increase of 2.3%, compared with the prior half year (H1 2016/17 GBP128.1 million). Included in profit before tax is our share of joint venture profit after tax of GBP5.3 million (H1 2016/17 GBP2.8 million). Joint venture profit before tax is benefitting from improved performance at Lakeside and Runcorn I ERFs. On a statutory basis, profit before tax was GBP129.8 million (H1 2016/17 GBP102.4 million) reflecting non-underlying charges before tax of GBP1.3 million (H1 2016/17 GBP25.7 million).
Taxation
The Group's underlying mainstream UK corporation current tax charge for the half year (before prior year adjustments) was GBP14.3 million, reflective of an effective tax rate of 10.9% (H1 2016/17 GBP23.1 million, 18.1%). The lower effective tax rate reflects the level of capital allowances claims available to Viridor given the increased capital expenditure. The H1 2016/17 effective tax rate included a charge for the 2011 Peninsula MB derivative. There was a prior year current tax credit of GBP4.3 million recognised for the period (H1 2016/17 GBP0.3 million). In addition there is a non-underlying GBP3.0 million current tax credit relating to non-underlying items.
Underlying deferred tax for the half year (before prior year adjustments) was a charge of GBP10.2 million (H1 2016/17 GBP9.5 million). The charge for H1 2017/18 primarily reflects capital allowances, including on ERFs, in excess of depreciation charge. There was a prior year deferred tax charge related to GBP1.6 million recognised for the half year (H1 2016/17 GBP1.6 million credit). In the first half of last year there was 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.
Overall the total tax charge for the half year was GBP17.5 million (H1 2016/17 GBP13.3 million).
Earnings per share
Earnings per share on both a statutory and underlying basis before deferred tax, and adjusted proportionately to reflect the half year impact of the first perpetual capital securities periodic return on the 2017 issuance, were ahead of H1 last year, up 23.2% at 21.8p (H1 2016/17 17.7p) and up 7.2% at 25.3p (H1 2016/17 23.6p) respectively, reflecting higher profits.
Strong cash inflow from operations, continuing investment in future growth
The Group's operational cash inflows in H1 2017/18 remained consistent at GBP260 million(29) (H1 2016/17 GBP258 million). 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 with 2017/18 following 2016/17 as peak years of investment. This investment has resulted in higher Group net debt.
Contributions into the Group's pension schemes for the half year were GBP4.8 million, and corporation tax payments were GBP10.4 million. Total tax payments reflecting all taxes borne by the Group in H1 2017/18 were GBP59 million(30) .
During the period the Company continued to see cashflow benefits from offering a scrip dividend alternative. GBP41.7 million of potential cash dividend for the 2016/17 dividends were retained in the business (H1 2016/17 GBP6.9 million) resulting in the issuance of 5,223,089 shares.
Strong funding position underpinning capital investment
The Group has a strong liquidity and funding position with GBP1,246 million cash and committed facilities at 30 September 2017. This consists of cash and deposits of GBP571 million (including GBP228 million of restricted funds representing deposits with lessors against lease obligations) and undrawn facilities of GBP675 million. At 30 September 2017 the Group's borrowings totalled GBP3,362 million.
In March 2013 the group issued GBP300 million of perpetual capital securities recognised as equity. This was refinanced in September 2017 by issuing another GBP300 million of perpetual capital securities which are also recognised as equity in the financial statements. The new issue achieved a coupon rate of 2.875% (and was four times oversubscribed) and supports an increase in investible capacity to c.GBP800 million. For the closure of the 2013 perpetual capital securities there was a take up of approximately 95% to the offer of 103% of par plus accrued periodic returns, resulting in cash outflow of GBP8 million net of the new issuance. The remaining 2013 perpetual capital securities were called at par plus accrued periodic returns with a cash outflow of approximately GBP15 million settled in October 2017.
As a result of the refinance of the perpetual capital securities, statutory earnings per share is reduced driven by:
-- GBP15.7 million (after tax) periodic return on the 2013 issuance, due 8 March 2018, which has effectively been paid to bond holders through accrued payments to the refinance date and the premium to par.
-- GBP5.8 million(31) reflecting the periodic return due on the new issuance payable in May 2018. It has been recognised in accordance with the terms of the securities as an ordinary dividend has been paid in the 12 months preceding May 2018.
The impact of the refinancing of the perpetual capital securities on underlying earnings per share, is consistent with previous periods(32) , and is reduced by the GBP15.7 million (after tax) periodic return on the 2013 issuance, due 8 March 2018, which has effectively been paid to bond holders through accrued payments to the refinance date and the premium to par.
The costs of issuing the 2013 perpetual capital securities of GBP5.2 million have been reclassified from the perpetual capital securities reserve to retained earnings. The costs of issuance for the 2017 perpetual capital securities of GBP3.3 million have been recognised directly in the perpetual capital securities reserve.
In addition to the refinancing of the perpetual capital securities, during this half year GBP150 million of new and renewed facilities have been signed, GBP125 million in Pennon Group plc and GBP25 million in South West Water. Following EIB / Government discussions, previous EIB approved transactions are being progressed.
Following these financing initiatives, Pennon has cash and committed facilities covering the remainder of planned K6 capital spend and our ERF investment programme.
However, funding will be sourced over K6 to:
-- maintain an appropriate headroom of cash and committed facilities, including replacing maturing finance
-- prepare for the next regulatory period, this will also include sourcing alternative financing to EIB funding.
Efficient long-term financing strategy
The Group has a diversified funding mix of fixed (GBP1,812 million, 65%), floating (GBP427 million, 15%) and index-linked borrowings (GBP552 million, 20%). The Group's debt has a maturity of up to 40 years with a weighted average maturity of 20 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 at least 50% of funding fixed before the start of a regulatory period.
GBP496.6 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. Around two thirds of the water business net debt is from finance leases to provide a long maturity profile. Interest payable benefits from the fixed credit margins, which were secured at the inception of each lease. A quarter of the net funding for the water business is RPI linked below Ofwat's notional level of 33% leaving headroom for RPI to CPIH transition.
Net debt position
In the first half of 2017/18 the Group's net debt increased by GBP126 million to GBP2,791 million. Cash inflow from operations was a strong GBP260 million. Cash outflows relating to the capital programme totalled GBP236 million, with 2016/17 and 2017/18 representing peak years for the Group's capital expenditure. The gearing ratio at 30 September 2017, being the ratio of net debt to (equity plus net debt) was 64.8% (31 March 2017 63.8%, 30 September 2016 65.2%) and is expected to reduce by the year end.
The combined South West Water and Bournemouth Water debt to RCV ratio is 62.1%(33) (31 March 2017 61.8%, 30 September 2016 62.2%) which aligns with Ofwat's K6 target for efficient gearing of 62.5%.
Group net debt includes GBP1,270 million of investment in wholly-owned ERFs (Runcorn II, Oxford, Exeter, Cardiff, Glasgow, Dunbar, South London and Avonmouth). In addition, the amount invested in joint ventures, through shareholder loans is GBP49 million primarily for TPSCo (which together represents 47% of Group net debt).
The shareholder loans to joint ventures, has reduced to GBP49 million from GBP87 million at 31 March 2017, following the Greater Manchester contract reset which resulted in GBP24 million of the outstanding GBP43 million shareholder loan to Viridor Laing being repaid, with the balance being written off.
Following the Greater Manchester contract reset where all external debt related to Viridor Laing and TPSCo was repaid, Pennon's share of Lakeside's non-recourse net debt from third parties (excluding shareholder loans) stands at GBP32 million.
Capital investment focused on regulatory expenditure and ERF build out
Viridor's capital investment in the period was GBP147 million, GBP43 million higher than the same period last year.
The majority of Viridor's capital investment continues to relate to the delivery of the ERF portfolio, with GBP129 million of the GBP147 million total spend in Viridor relating to the four ERFs under construction. Beddington, Dunbar and Avonmouth are all expected to be completed on budget. Good progress has been made with the new contractor Doosan Babcock at Glasgow, and we are on track to complete the work in line with the revised timetable established following the termination of the contract with Interserve last year.
Landfill demand has remained strong and new cells have been constructed at three sites during the period.
South West Water's capital expenditure in the first half of the year rose to GBP97.6 million compared to GBP79.7 million in H1 2016/17 and reflects the increased activity of some key large schemes from last year including:
-- the innovative Mayflower Water Treatment Works at North Plymouth with c.GBP20 million of expenditure in H1 2017/18 (H1 2016/17 c.GBP9 million)
-- investment in Plymouth Bathing Waters, delivering targeted improvement to maintain the high level of bathing water quality in that area
-- improvements at three water treatment works including the installation of GAC filtration improving water quality
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 2017 the Group's pension schemes showed an aggregate deficit (before deferred tax) of GBP55.9 million (March 2017 GBP68.0 million), a reduction of GBP12.1 million. Pension liabilities decreased by GBP24.4 million mainly due to higher corporate bond yields, while asset values decreased marginally by GBP12.3 million, principally due to assets which are held to offset movements in yields.
The net aggregate liabilities of GBP46 million (after deferred tax) represented around 1% of the Group's market capitalisation at 30 September 2017.
OPERATIONAL PERFORMANCE
Strong performance in Water
We are focused on providing water and wastewater services to the highest standards possible in the most efficient and sustainable way, meeting the needs of those we serve and our responsibilities to the environment. Innovation, new technologies and the pioneering of a holistic approach to water and wastewater management underpins our commitment to delivering service improvements and long-term value.
Outperforming our Final Determination Return on Regulated Equity (RORE) range
South West Water has continued to deliver sector-leading outperformance and has confidence in its 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 cumulative Return on Regulated Equity (RORE)(34) of 11.8%. Of the 11.8%, 6.0% is the base return, 2.6% reflects Totex savings and efficiencies, 0.3% reflects a net reward on Outcome Delivery Incentives (ODIs) and 2.9% reflects the difference between actual and assumed financing costs using a cumulative forecast RPI over K6 of 2.8% and is consistent with the approach adopted for calculating our innovative WaterShare mechanism.
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 GBP159 million of cumulative Totex savings to H1 2017/18 (GBP30 million delivered in the first half of the year) compared to the Final Determination allowances. These savings are being driven by:
-- continuing advantages from our strategic alliances including a new water distribution framework and the H5O capital alliance in place since 2010
-- continued efficiencies from the Bournemouth integration, including delivery of key capital schemes in the region
-- ensuring efficient capital investment through the use of data analytics optimising capital and operating solutions and promoting efficient off-site build techniques
-- utilising new technology and equipment to increase the resources needed to deliver wastewater improvement, real-time pressure management and network modelling targeting efficient interventions
Delivering net ODI reward
South West Water is committed to delivering for our customers and communities and is on track to deliver against all water business plan commitments by 2020. We are delivering 33(35) of our 36 financial ODIs across both regions. 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 was based on delivery to 30 September 2017 of a net ODI reward of GBP1.5 million(36) (GBP7.0 million(31) cumulatively for K6) reflecting RORE outperformance of 0.3% for the half year. Good asset reliability with stable serviceability across all water and wastewater areas has been maintained. Rewards were delivered across bathing water quality, water restrictions with external sewer flooding showing improvements from last year with no penalty currently expected for the year.
The cumulative net reward of GBP7.0 million to H1 2017/18 comprises GBP12.2 million of total rewards and GBP5.2 million of total penalties.
Pollution events in wastewater continue to be higher than committed levels and this remains an area of focus for improvement over the remaining regulatory period.
Financing investment efficiently
Alongside strong operational outperformance, South West Water is confident that the efficient and effective financing strategy in place will continue to deliver cumulative K6 financing outperformance, with GBP83 million delivered in the K6 period to 30 September 2017. The effective interest rate in South West Water has increased slightly in the first half of the year reflecting higher RPI on index-linked facilities. There is a continued 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.
Delivering for our customers and communities
South West Water's overall customer satisfaction continues to be strong at 89% with value for money satisfaction at an all time high for the second quarter of the year.
Improving customer service is at the heart of our delivery plans with our best ever customer service score (SIM) in 2016/17. 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 2016/17, confirmed at 81.6, is our best yet and continues the improving trend of recent years. Bournemouth Water's SIM score at 86.3 remains at the frontier as one of the best in the industry.
Written complaints continue to fall in the first half of the year building on the c.30% reduction across both the South West Water and Bournemouth Water regions last year, with complaints over halved since 2011.
South West Water is also focused on affordable bills and providing tailored support for customers who find themselves in vulnerable circumstances. We have a range of established approaches with c.51,000 customers already supported through our existing schemes including a new social tariff which has been rolled out in the Bournemouth region for 2017/18.
South West Water places a strong focus on sharing transparently financial benefits with customers, including financing rates on new debt, through our innovative WaterShare mechanism with GBP68 million of total cumulative benefits(37) to H1 2017/18. This reflects GBP50 million of Totex savings, GBP7 million of net ODI benefits and GBP11 million of other benefits. The other benefits are available to share with customers during the regulatory period. GBP3.1 million of which has been re-invested in improving services to customers including additional helpline staff who are focused on billing and affordability support resulting in over 90% of calls now answered in less than 1 minute and increased social housing support activities. The independent WaterShare customer panel has recommended that the GBP4.0 million benefit identified for 2016/17 should be deferred with investments planned later in the regulatory period. The H1 2017/18 benefit of GBP3.4 million will be considered by the panel after the 2017/18 year end.
Whilst cumulative ODIs are a net reward, GBP2.1 million of ODI penalties which apply within the regulatory period will be 'passed back to customers' through a reduction to customer bills of c.GBP3 in 2018/19.
Drinking water quality expected to be in upper quartile
Drinking water quality remains a top priority for South West Water and we continue to maintain high standards achieved last year.
South West Water's leakage reduced to 82 megalitres per day resulting in an ODI reward and through continued investment in real-time pressure management and additional network monitoring we are confident of meeting or exceeding our leakage target - ensuring delivery every year since inception. Despite the continued increase in customer demand, water resources in the South West region remained unrestricted for a twenty-first 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 has remained consistent with last year and is expected to meet our committed levels for the year. Where an interruption does occur we aim to restore supplies as quickly as possible and keep customers informed of progress. In the Bournemouth region targets remain on track for the year to date.
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. Investment and activity during the first half of the year are a continuation of key projects including:
-- ongoing expenditure for a new GBP60 million state-of-the-art North Plymouth water treatment works, as well as mains improvement in the area
-- improved water treatment processes with continuing investment in Granular Activated Carbon (GAC) filters being installed at Northcombe and Tolliford Water Treatment Works
-- real-time pressure management and network modelling technology targeting interventions efficiently
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 2016/17 performance at 98.4% - our highest levels ever achieved.
Whilst South West Water continues to invest in improving our impact on the environment the number of significant pollution incidents (Category 1-2) and the number of minor incidents remains consistent with last year and is expected to result in a penalty for the year. Improving performance in this area remains our top priority in the wastewater area and a programme of improvements and further investment is being implemented.
Key areas of wastewater investment and activity during H1 2017/18 included:
-- investment to improve bathing waters in the Plymouth area, including investments in sixty thousand cubic metres of storm storage in the sewage network
-- improvements in water quality targeted at eight shellfish catchments on key estuaries in Devon and Cornwall
-- continuing investment to meet increasing capacity and resilience at our wastewater treatment works, including Hayle in Cornwall
-- enhanced monitoring of our network during weather events
Our legacy of major investment to protect bathing waters continues to be reflected in extremely positive results for the 2017 bathing water season, which was assessed under tougher new EU standards. Of the 143 bathing waters tested in the South West Water region, 140 (c.98%) were classified 'sufficient' or better, with more than 75% classified as 'excellent'. None of the three bathing waters rated as 'poor' were attributed to any failure of South West Water's assets.
Good performance at Viridor
H1 2017/18 H1 2016/17 H2 2016/17
Total Waste Inputs (million
tonnes (MT)) 3.9 4.0 3.6
ERFs(38) 1.1 1.1 1.1
Landfill 0.9 0.9 0.8
Recycling and Other 1.9 2.0 1.7
Recycling Volumes Traded 0.7 0.9 0.7
ERF availability(39) >90% 90% >90%
ERFs continuing to perform strongly
The number of ERFs in operation during H1 2017/18 is consistent with H1 2016/17. The good operational performance delivering higher EBITDA, in line with our expectations, results from our focus on optimisation of the facilities, particularly through greater turbine efficiency and we anticipate an H2 weighting in our ERF EBITDA. Our ERFs are outperforming the base case indications we have previously published.
Availability has averaged in excess of 90% for the half year(37) . Maintenance is currently running at c.2% of capital spend. This is expected to increase over the life of the assets to an average of c.3.5%.
The operational ERFs have a capacity of 2.1 million tonnes of waste and 178 megawatts (MW) per annum (including joint ventures). This is in line with the same period last year. This will extend to 2.9 million tonnes and 242 MW in 2018/19 and 3.2 million tonnes of waste and 276 MW by 2021.
At Glasgow the Materials Recycling Facility (MRF) and Anaerobic Digestion (AD) facility have operated throughout the period and are being optimised. The Advanced Combustion Facility (ACF) is in final commissioning. Completion of the construction has required a somewhat higher level of remediation than previously expected. However, Viridor is contractually entitled to recover incremental construction costs from the original EPC contractor, Interserve. To date the expenditure in excess of original budget is GBP45 million and we anticipate spend to completion will be GBP32 million. Spend in excess of the original budget will be subject to a contractual claims process with Interserve.
Final commissioning is underway at Beddington and Dunbar is in early commissioning. Both are expected to be completed on budget. Progress at Avonmouth is on schedule and budget, with piling of the site and foundations progressing well. Total remaining capital expenditure for completion of the ERF portfolio is GBP268 million(40) , bringing the total investment in ERFs to GBP1.5 billion(40) .
Flexible landfill strategy
During the first half of the financial year, Viridor has operated 11 landfill sites, two fewer than in the same period last year, though no sites have closed during the period. Compared with the second half of last year, with the same number of sites open, landfill volumes have increased slightly as demand continues, and pricing has held up.
Viridor's average gate fees increased by 4.5% to GBP21.83 (H1 2016/17 GBP20.88).
We have previously stated that we expect our open landfill sites to reduce to a small number of strategic sites by 2020, however, as demand has exceeded our previous expectations, we continue to make decisions on the future of our landfill sites based on a dynamic assessment of local market conditions. New cells have been constructed at three sites during the first half of 2017/18.
Consented landfill capacity reduced from 42 million cubic metres (mcm) to 41 mcm in the 6 months to September 2017, reflecting usage during the period. As previously provided for c.34 mcm of Viridor's consented landfill capacity may not be utilised.
Our landfill energy business continues to be 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's landfill gas site contribute 96MW of landfill gas capacity, a slight decrease from last year of 99MW, reflecting the replacement of some engines with more efficient smaller engines as the gas volumes gradually reduce. Viridor has a PV capacity of 2.4 MW.
During the period, cells at certain sites have been reopened to landfill, resulting in a short term reduction in the volumes of gas captured. In addition, higher engine maintenance has been performed, as part of an engine replacement programme. This has resulted in a onetime larger reduction in landfill gas power generation output in H1 2017/18, down 17.7% to 218 gigawatt hours (Gwh). This level of reduction is not expected to recur. Average revenue per Megawatt hour (Mwh) was marginally higher at GBP80.86 (H1 2016/17 GBP80.35). Average operating costs increased 11.7% to GBP39.45 per Mwh (H1 2016/17 GBP35.33) reflecting the lower generation and the higher maintenance cost.
Recycling performance in line with prior year
Viridor has focused on product quality and identifying new output markets following changes in import regulations in China. Viridor is developing export markets in India, Vietnam and South Korea to mitigate the reduction in the Chinese Market.
During the period, recycling EBITDA has remained broadly in line with the prior year at GBP10.6 million. Volumes have reduced as Viridor has focused on quality and margin, although EBITDA per tonne has increased by 7.7% year on year to GBP14 as a result of higher pricing (H1 2016/17 GBP13).
Revenue per tonne is up 11.5% to GBP97 (H1 2016/17 GBP87), reflecting higher gate fees as well as market pricing.
Total operating costs are broadly in line with the prior year, but costs per tonne have increased as we have responded to higher quality requirements. Shipping costs have increased GBP3 per tonne to GBP5 per tonne following the administration of one of the larger shipping carriers last year reducing capacity.
Contracts and Collections securing waste inputs
We continue to work with our customers to identify mutually beneficial enhancements to our contracts. We have sharing mechanisms in place in our long term local authority contracts where returns exceed contractual hurdle levels, demonstrating a commitment to partnership and working for a common goal.
The contract to operate the recycling assets on behalf of the Greater Manchester Waste Disposal Authority (GMWDA) has entered a 'run off' period of no less than 18 months from 1 October 2017 whilst GMWDA run a tender process for a new contract expected to commence in 2019. Performance on this contract and the other major local authority contracts has been in line with expectations.
Our collections business continues to provide a valuable service to our customers and secures volume for our ERF, landfill and recycling assets. The increase in performance in H1 2017/18 reflects the rationalisation of a contract.
Joint Ventures continue to perform strongly
Viridor Laing Greater Manchester (VLGM), a joint venture between Viridor and John Laing, performed in line with expectations during the period. As part of the contract exit, the company was sold to GMWDA at the end of September and as a result is no longer a joint venture. On disposal of the joint venture, of the GBP42.7 million outstanding shareholder loans GBP23.5 million was repaid resulting in a write-down of GBP19.2 million.
The TPSCo joint venture (between Viridor, John Laing and Inovyn) remains in place and has performed strongly during the half year. As part of the wider contract reset, GMWDA provided finance to the joint venture to enable the repayment of external bank debt. This change in cash flows resulted in the recognition of income in this joint venture, with an amount deferred relating to the lower ongoing gate fee. The overall share of profit after tax, in H1 2017/18, related to the reset is GBP22.5 million.
In addition the contract to operate VLGM's assets will continue for at least 18 months on a reset basis. All claims relating to construction of VLGM's assets have been settled, resulting in a net benefit to Viridor of GBP3.2 million in the period. Viridor's operating contract for TPSCo's Runcorn I ERF remains unchanged.
Following the changes in contractual arrangements it is anticipated that, future annual earnings will reflect:
-- No further finance income or share of profit after tax will be recognised from Viridor Laing, as the entity is no longer part of the Group
-- A non material reduction in profit after tax and finance income from TPSCo shareholder loans, due to a re-profiling of cash flows
-- Improved earnings from the recycling asset operations contract over the 18 month run-off period
The joint venture at Lakeside ERF (a 50:50 joint venture with Grundon Waste Management) continues to perform strongly. In its eighth year of operation it continues to outperform its original targets for both waste processing and power generation.
Growth and compliance in new Water Retail market
We have seen a successful start to the new non-household water retail market, which opened on 1 April 2017. Our retailer, Pennon Water Services (PWS), which is an 80:20 venture with South Staffordshire Plc has performed strongly in the new market, delivering net customer(41) and revenue growth during the period and consistently leading the market in performance standards as measured by the market operator, MOSL.
We continue to focus on delivering customer service that reflects the needs of our business customers. Set up costs and service investment of c.GBP1.5 million are reflected in the EBITDA performance for the half year, resulting from our successful migration to a single billing system and customer service operation for those customers previously served by South West Water and South Staffs Water. This initial investment will result in delivery of increased efficiencies in service throughout the second half of the year.
Throughout this period, PWS has regularly achieved industry leading standards showing strong compliance with required market performance as measured by MOSL, with average performance of c.99%. Financial penalties for poor performance will be introduced during 2018/19, with PWS already having established a solid base to minimise potential penalties.
Board matters
Jonathan Butterworth was appointed as an Independent Non-Executive Director of South West Water Limited on 28 September 2017.
Chris Loughlin
Group Chief Executive Officer
29 November 2017
Financial Timetable
12 January 2018 Posting of interim dividend DRIP alternative 25 January 2018 Ordinary shares quoted ex-dividend 26 January 2018 Record date for interim dividend 9 March 2018 Final date for receipt of DRIP applications 26 March 2018 Trading Statement 4 April 2018 Interim dividend paid 25 May 2018 Full Year Results 2017/18 Early June 2018 Annual Report & Accounts published 5 July 2018 Annual General Meeting 5 July 2018* Ordinary shares quoted ex-dividend 6 July 2018* Record date for final dividend 20 July 2018* Posting of final dividend DRIP alternative 13 August 2018* Final date for receipt of DRIP applications 4 September 2018* Final dividend paid 24 September 2018 Trading Statement 27 November 2018 Half Year Results 2018/19 * These dates are provisional and, in the case of the final dividend subject to obtaining shareholder approval at the 2018 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 are detailed below. These principal risks have been reconsidered against a back drop of potential wider uncertainties, including the UK leaving the EU and the evolving political views on the nationalisation of the Water industry and the associated influence on regulatory behaviour and news-flow. Whilst a lack of clarity exists with respect to their potential direct and indirect impact, these uncertainties continue to be pro-actively monitored and managed by the Group at both a strategic and operational level.
The Board considers the principal risks to be:
Law, Regulation and Finance
- Compliance with law (including tax laws), 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 - Tax compliance and contribution
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 risks.
CAUTIONARY STATEMENT IN RESPECT OF FORWARD-LOOKING STATEMENTS
This Report contains forward-looking statements relating to the Pennon Group's operations, performance and financial position based on current expectations of, and assumptions and forecasts made by, Pennon Group management which may constitute "forward-looking statements" within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are identified in this Report by words such as "anticipate", "aim", "believe", "continue", "could", "due", "estimate", "expect", "forecast", "goal", "intend", "may", "outlook", "plan", "probably", "project", "remain", "seek", "should", "target", "will", "would" and related and similar expressions, as well as statements in the future tense. All statements other than of historical fact may be forward-looking statements and represent the Group's belief regarding future events, many of which, by their nature, are inherently uncertain and outside the Group's control. Various known and unknown risks, uncertainties and other factors could lead to substantial differences between the actual future results, financial situation development or performance of the Group and the estimates and historical results given herein. Important risks, uncertainties and other factors that could cause actual results, performance or achievements of Pennon Group to differ materially from any outcomes or results expressed or implied by such forward-looking statements include, among other things, 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; tax compliance and contribution; increase in defined benefit pension scheme deficit; 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; difficulty in recruitment, retention and development of appropriate skills which are required to deliver the Group's strategy; failure or increased cost of capital projects/exposure to contract failures; and failure of 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 2017. 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 2017
Unaudited
---------------------------------------------------------------------------------------------------------
Non-underlying Non-underlying
Before items Before items
non-underlying (note Total non-underlying (note Total
items 5) half year items 5) half year
half year half year ended half year half year ended
ended 30 ended 30 ended ended 30
September 30 September September 30 September 30 September September
2017 2017 2017 2016 2016 2016
Notes GBPm GBPm GBPm GBPm GBPm GBPm
Revenue 4 723.9 3.2 727.1 685.5 - 685.5
Operating costs
Employment costs (99.1) - (99.1) (89.9) (1.1) (91.0)
Raw materials and consumables
used (60.0) - (60.0) (56.1) - (56.1)
Other operating
expenses (311.3) - (311.3) (294.1) (9.6) (303.7)
Earnings before
interest,
tax,
depreciation and
amortisation 4 253.5 3.2 256.7 245.4 (10.7) 234.7
Depreciation and amortisation (91.1) - (91.1) (91.5) - (91.5)
Operating profit 4 162.4 3.2 165.6 153.9 (10.7) 143.2
Finance income 6 13.5 - 13.5 19.7 24.4 44.1
Finance costs 6 (50.1) (27.0) (77.1) (48.3) (39.4) (87.7)
------------------------------- --- ------------------- ----------------- ------------- ---------------- ----------------- ------------------
Net finance costs 6 (36.6) (27.0) (63.6) (28.6) (15.0) (43.6)
Share of post-tax profit
from
joint ventures 5.3 22.5 27.8 2.8 - 2.8
Profit before tax 4 131.1 (1.3) 129.8 128.1 (25.7) 102.4
Taxation 7 (21.8) 4.3 (17.5) (30.7) 17.4 (13.3)
------------------- ----------------- ------------- ---------------- ----------------- ------------------
Profit for the period 109.3 3.0 112.3 97.4 (8.3) 89.1
=================== ================= ============= ================ ================= ==================
Attributable to:
Ordinary shareholders
of the
parent 87.9 3.0 90.9 81.2 (8.3) 72.9
Non-controlling interests (0.1) - (0.1) - - -
Perpetual capital security
holders 21.5 - 21.5 16.2 - 16.2
Earnings per ordinary
share
(pence per share) 8
- Basic 21.8 17.7
- Diluted 21.7 17.6
The notes on pages 38 to 55 form part of this condensed half year financial
information.
PENNON GROUP PLC
Consolidated statement of comprehensive income for the half year ended 30
September 2017
Unaudited
------------------------------------------------------------------------------------------------------------------
Non-underlying Before Non-underlying Total
Before items non-underlying items half year
non-underlying (note 5) Total items (note 5) ended
items half half year half year half half year 30 September
year ended ended ended year ended ended 30 2016
30 September 30 September 30 September 30 September September
2017 2017 2017 2016 2016
GBPm GBPm GBPm GBPm GBPm GBPm
Profit for the period 109.3 3.0 112.3 97.4 (8.3) 89.1
Other comprehensive
Income / (loss)
Items that will not
be reclassified
to profit or loss
Remeasurement of defined
benefit
obligations
(note 16) 15.3 - 15.3 (73.1) - (73.1)
Income tax on items
that will not
be reclassified (2.5) - (2.5) 14.8 (3.6) 11.2
---------------- --------------------- ------------- ---------------- ---------------------- ----------------
Total items that will
not be
reclassified to
profit
or loss 12.8 - 12.8 (58.3) (3.6) (61.9)
---------------- --------------------- ------------- ---------------- ---------------------- ----------------
Items that may be
reclassified
subsequently to
profit
or loss
Share of other
comprehensive
income from joint
ventures (3.9) - (3.9) (2.8) - (2.8)
Cash flow hedges 15.0 - 15.0 (2.7) - (2.7)
Income tax on items
that may be
reclassified (2.6) - (2.6) 0.5 (0.5) -
Total items that may
be
reclassified
subsequently
to
profit or loss 8.5 - 8.5 (5.0) (0.5) (5.5)
---------------- --------------------- ------------- ---------------- ---------------------- ----------------
Other comprehensive
Income / (loss)
for
the period net of
tax 21.3 - 21.3 (63.3) (4.1) (67.4)
---------------- --------------------- ------------- ---------------- ---------------------- ----------------
Total comprehensive
income
for the period 130.6 3.0 133.6 34.1 (12.4) 21.7
================ ===================== ============= ================ ====================== ================
Total comprehensive
income
attributable to:
Ordinary shareholders
of the
parent 109.2 3.0 112.2 17.9 (12.4) 5.5
Non-controlling
interests (0.1) - (0.1) - - -
Perpetual capital
security
holders 21.5 - 21.5 16.2 - 16.2
================ ===================== ============= ================ ====================== ================
The notes on pages 38 to 55 form part of this condensed half year financial
information.
PENNON GROUP PLC
Consolidated balance sheet at 30 September 2017
Unaudited
----------------------------
30 September 31 March
2017 2017
Notes GBPm GBPm
ASSETS
Non-current assets
Goodwill 385.0 385.0
Other intangible assets 74.2 67.1
Property, plant and equipment 4,212.8 4,103.2
Other non-current assets 295.6 308.0
Derivative financial instruments 66.1 73.6
Investments in joint ventures 5 23.0 0.1
---------------------------- -------------------
5,056.7 4,937.0
---------------------------- -------------------
Current assets
Inventories 22.2 21.3
Trade and other receivables 377.2 340.8
Derivative financial instruments 13.7 14.1
Cash and cash deposits 14 571.1 598.1
---------------------------- -------------------
984.2 974.3
---------------------------- -------------------
LIABILITIES
Current liabilities
Borrowings 14 (59.9) (146.5)
Financial liabilities at fair value
through profit (2.3) (2.4)
Derivative financial instruments (13.4) (17.3)
Trade and other payables 18 (378.7) (286.5)
Current tax liabilities (19.6) (26.8)
Provisions (35.8) (40.4)
---------------------------- -------------------
(509.7) (519.9)
---------------------------- -------------------
Net current assets 474.5 454.4
---------------------------- -------------------
Non-current liabilities
Borrowings 14 (3,302.1) (3,116.5)
Other non-current liabilities 18 (137.0) (180.7)
Financial liabilities at fair value
through profit (47.6) (48.4)
Derivative financial instruments (15.7) (25.2)
Retirement benefit obligations 16 (55.9) (68.0)
Deferred tax liabilities (285.1) (269.6)
Provisions (173.7) (173.8)
---------------------------- -------------------
(4,017.1) (3,882.2)
---------------------------- -------------------
Net assets 1,514.1 1,509.2
============================ ===================
Shareholders' Equity
Share capital 10 170.8 168.4
Share premium account 218.2 217.4
Capital redemption reserve 144.2 144.2
Retained earnings and other reserves 683.6 684.4
---------------------------- -------------------
Total shareholders' equity 1,216.8 1,214.4
---------------------------- -------------------
Non-controlling interests 0.6 -
Perpetual capital securities 12 296.7 294.8
---------------------------- -------------------
Total equity 1,514.1 1,509.2
============================ ===================
The notes on pages 38 to 55 form part of this condensed half year financial
information.
PENNON GROUP PLC
Consolidated statement of changes in equity for the half year ended 30 September
2017
Unaudited
-------------------------------------------------------------------------------------------
Share Retained Perpetual
Share premium Capital earnings Non-controlling capital
capital account redemption and interests securities Total
(note (note reserve other (note Equity
10) 11) reserves 12)
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 April 2016 167.8 213.3 144.2 667.5 - 294.8 1487.6
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
Adjustment in respect of
share-based
payments (net of tax) - - - 1.8 - - 1.8
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
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
========= ======== ============ ========= ================= =========== ===========
Unaudited
-----------------------------------------------------------------------------------------
Share Retained Perpetual
Share premium Capital earnings Non-controlling capital
capital account redemption and interests securities Total
(note (note reserve other (note Equity
10) 11) reserves 12)
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 April 2017 168.4 217.4 144.2 684.4 - 294.8 1,509.2
Profit for the period - - - 90.9 (0.1) 21.5 112.3
Other comprehensive income
for the period - - - 21.3 - - 21.3
--------- -------- ------------ --------- ----------------- ----------- -----------
Total comprehensive income
for the period - - - 112.2 (0.1) 21.5 133.6
--------- -------- ------------ --------- ----------------- ----------- -----------
Transactions with equity
shareholders:
Dividends paid - - - (149.5) - - (149.5)
Adjustment for shares issued
under the
Scrip Dividend
Alternative 2.1 (2.1) - 41.7 - - 41.7
Adjustment in respect of
share-based
payments (net of tax) - - - 1.8 - - 1.8
Issuance of perpetual capital
securities - - - - - 296.7 296.7
Redemption of perpetual
capital securities - - - (5.2) - (294.8) (300.0)
Distributions due to perpetual
capital
security holders - - - - - (25.3) (25.3)
Current tax relief on
distributions
to
perpetual capital
security
holders - - - - - 3.8 3.8
Own shares acquired by
the Pennon
Employee Share Trust
in respect of
Share options
granted 0.1 0.4 - (1.8) - - (1.3)
Proceeds from shares issued
under the
Sharesave Scheme 0.2 2.5 - - - - 2.7
Non-controlling interests
(note 20) - - - - 0.7 - 0.7
2.4 0.8 - (113.0) 0.7 (19.6) (128.7)
At 30 September 2017 170.8 218.2 144.2 683.6 0.6 296.7 1,514.1
========= ======== ============ ========= ================= =========== ===========
The notes on pages 38 to 55 form part of this condensed half year financial
information.
PENNON GROUP PLC
Consolidated statement of cash flows for the half year ended 30 September
2017
Unaudited
----------------------
Half year Half year
ended 30 ended 30
September September
2017 2016
Notes GBPm GBPm
Cash flows from operating activities
Cash generated from operations 13 211.2 243.3
Interest paid (33.2) (35.1)
Tax paid (10.4) -
Net cash generated from operating activities 167.6 208.2
---------- ----------
Cash flows from investing activities
Interest received 1.9 1.8
Dividends received 1.0 -
Loan repayments received from joint
ventures 5 23.7 4.0
Purchase of property, plant and equipment (198.1) (158.2)
Proceeds from sale of property, plant
and equipment 7.1 3.2
Purchase of intangible assets (0.5) -
Acquisition of trade receivables 20 (7.0) -
Net cash used in investing activities (171.9) (149.2)
---------- ----------
Cash flows from financing activities
Proceeds from issuance of ordinary
shares 3.2 4.2
Proceeds from the issuance of perpetual
capital securities 12 296.7 -
Redemption and periodic return of 2013
perpetual capital securities 12 (304.8) -
Disposal of non-controlling interest 20 0.7 -
(Deposit)/ return of restricted funds (3.7) 7.5
Purchase of ordinary shares by the
Pennon
Employee Share Trust (1.8) (2.6)
Proceeds from new borrowing 14 56.3 130.0
Repayment of borrowings 14 (50.1) (23.0)
Finance lease sale and leaseback 14 100.0 0.2
Finance lease principal repayments 14 (15.1) (10.9)
Dividends paid 9 (107.8) (131.6)
Net cash used in financing activities (26.4) (26.2)
---------- ----------
Net (decrease) / increase in cash and
cash
equivalents (30.7) 32.8
Cash and cash equivalents at beginning
of period 14 374.3 405.7
Cash and cash equivalents at end of
period 14 343.6 438.5
========== ==========
The notes on pages 38 to 55 form part of this condensed half year
financial information.
PENNON GROUP PLC
Notes to condensed half year financial information
1. General information
Pennon Group plc is a company registered in the United Kingdom
(UK) under the Companies Act 2006. The address of the registered
office is given on page 55. Pennon Group's business is operated
through two principal subsidiaries. South West Water Limited includes
the merged water companies of South West Water and Bournemouth
Water, providing water and wastewater services in Devon, Cornwall
and parts of Dorset and Somerset and water only services in parts
of Dorset, Hampshire and Wiltshire. Viridor Limited's business
is recycling, energy recovery and waste management. Pennon Group
is also the majority shareholder of Pennon Water Services Limited,
a company providing water and wastewater retail services to non-household
customer accounts across Great Britain.
This condensed half year financial information was approved by
the Board of Directors on
28 November 2017.
The financial information for the period ended 30 September 2017
does not constitute statutory accounts within the meaning of section
435 of the Companies Act 2006. The statutory accounts for 31 March
2017 were approved by the Board of Directors on 23 May 2017 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 2017, 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 2017, with the exception of changes in
estimates that are required in determining the half year provision
of income taxes; and judgements made in relation to establishing
the different components of revenue in respect of monies received
into our joint venture INEOS Runcorn (TPS) Limited with consideration
given to the overall contracted negotiations with the authority
and the timing of income recognition (note 5).
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
3. Accounting policies
The accounting policies adopted in this condensed half year financial
information are consistent with those applied and set out in the
Pennon Group plc Annual Report and Accounts for the year ended
31 March 2017 and are in accordance with all IFRSs and interpretations
of the IFRS Interpretations Committee expected to be applicable
for the year ended 31 March 2018 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 2017 did not have a material
impact on the net assets or results of the Group.
New standards or interpretations due to be adopted from 1 April
2018, including IFRS 15 'Revenue from contracts with customers'
and IFRS 9 'Financial instruments' are not expected to have a
material impact on the Group's net assets or results.
The tax charge for September 2017 and September 2016 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. The waste management
business is the recycling, energy recovery and waste management
services provided by Viridor. The non-household retail business
is a new segment created this period reflecting the services
provided by Pennon Water Services following the opening of
the non-household water and wastewater retail market to competition
on 1 April 2017.
Unaudited
---------------------------------
Half year Half year
ended 30 ended 30
September September
2017 2016
GBPm GBPm
Revenue
Water 292.2 284.9
Waste management 410.2 397.9
Non-household retail 83.5 68.3
Other 7.2 6.1
Less intra-segment trading (66.0) (71.7)
---------------- ---------------
727.1 685.5
---------------- ---------------
Segment result
Operating profit before depreciation,
amortisation and non-underlying items
(EBITDA)
Water 187.1 181.9
Waste management 66.6 63.3
Non-household retail 0.5 1.1
Other (0.7) (0.9)
---------------- ---------------
253.5 245.4
---------------- ---------------
Operating profit before non-underlying
items
Water 130.7 126.1
Waste management 32.4 27.7
Non-household retail 0.2 1.1
Other (0.9) (1.0)
---------------- ---------------
162.4 153.9
---------------- ---------------
Profit before tax and non-underlying
items
Water 96.2 95.9
Waste management 30.6 23.1
Non-household retail (0.5) 1.1
Other 4.8 8.0
---------------- ---------------
131.1 128.1
---------------- ---------------
Profit before tax
Water 87.2 95.4
Waste management 37.1 12.9
Non-household retail (0.5) 1.1
Other 6.0 (7.0)
---------------- ---------------
129.8 102.4
---------------- ---------------
Comparative information has been re-presented during the period
to reflect the opening of the non-household water and wastewater
retail market to competition. Comparative results for the non-household
retail segment were previously recognised in the water segment.
PENNON GROUP PLC
Notes to the condensed half year financial information (continued)
4. Segmental information (continued)
Intra-segment trading between different segments is under normal
market based commercial terms and conditions. Intra-segment
revenue of the other segment is reflected as a cost.
Factors such as seasonal weather patterns can affect sales
volumes, income and costs in both the water and waste management
segments.
Geographic analysis of revenue based on location of customers
Unaudited
---------------------------------
Half year Half year
ended 30 ended 30
September September
2017 2016
GBPm GBPm
UK 692.5 663.5
Rest of European Union 6.4 3.9
China 20.4 14.6
Rest of World 4.6 3.5
---------------- ---------------
723.9 685.5
---------------- ---------------
The UK is the Group's country of domicile and the Group generates
the majority of its revenue from external customers in the
UK. The Group's non-current assets are all located in the UK.
5. Non-underlying items
Non-underlying items are those that in the Directors' view
are required to be separately disclosed by virtue of their
size, nature or incidence to enable a full understanding of
the Group's financial performance in the period and business
trends over time.
Unaudited
---------------------------
Half year Half year
ended 30 ended 30
September September
2017 2016
GBPm GBPm
Revenue
Construction contract settlements (1a) 3.2 -
Operating costs
Restructuring costs (2) - (10.7)
Earnings before interest, tax, depreciation
and amortisation 3.2 (10.7)
Remeasurement of fair value movement
in derivatives (3) (7.8) (15.0)
Write-down of joint venture shareholder -
loans (1b) (19.2)
Refinancing of joint venture arrangement -
(1c) 22.5
Deferred tax change in rate (4) - 20.1
Tax charge arising on non-underlying
items 4.3 (2.7)
-------------- -----------
Net non-underlying credit/ (charge) 3.0 (8.3)
--------------
PENNON GROUP PLC
Notes to the condensed half year financial information (continued)
5. Non-underlying items (continued)
1 On reset of the contracts associated with the Greater
Manchester Waste Disposal Authority (GMWDA) an overall
net credit before tax of GBP6.5m has been recognised as
follows:
(a) A net amount of GBP3.2m has been recognised in revenue
following the settlement of all outstanding claims relating
to the construction of assets.
(b) On reset of the contracts associated with GMWDA, ownership
of Viridor Laing Holdings Limited passed to the GMWDA.
On transfer GBP23.5m of Viridor's shareholder loans were
repaid, resulting in the write down of the remaining financial
asset of GBP19.2m.
(c) On reset of the contracts associated with GMWDA repayment
of external bank debt in our joint venture, Ineous Runcorn
TPSCo Limited, was financed by GMWDA. This change in cash
flows resulted in the recognition of income in this joint
venture, with an amount deferred relating to a lower ongoing
gate fee. The overall share of profit after tax in the
half year related to the reset is GBP22.5 million, which
has contributed to an increase in investments in joint
ventures recognised on the balance sheet to GBP23.0m (31
March 2017 GBP0.1m).
2 Last half year a one-off charge of GBP10.7m was made relating
to restructuring costs associated with a Group-wide Shared
Services Review. The GBP10.7m charge consisted 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. The charge was considered non-underlying due
to its size and non-recurring nature.
3 In the period a charge of GBP7.8m 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. These movements are
non-underlying due to the nature of the item being market
dependant and potentially can be significant in value
(size).
In H1 2016/17 a credit of GBP24.4m was recognised relating
to non-cash derivative fair value movements associated
with derivatives that were not designated as being party
to an accounting hedge relationship. In addition, a charge
of GBP39.4m was recognised for the movement in the fair
value of another derivative arrangement relating to a
change in legislation, which impacted the derivative's
future cash flows. This derivative was terminated in February
2017.
4 Following the enactment of the Finance Act 2016 during
H1 2016/17 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 previous period.
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 2017 30 September 2016
------------------------------ -------------------------------
Finance Finance Finance Finance
cost income Total cost income Total
GBPm GBPm GBPm GBPm GBPm GBPm
Cost of servicing debt
Bank borrowings and
overdrafts (25.8) - (25.8) (24.2) - (24.2)
Interest element of
finance lease
rentals (17.1) - (17.1) (16.2) - (16.2)
Other finance costs (1.5) - (1.5) (2.2) - (2.2)
Interest receivable - 1.1 1.1 - 1.8 1.8
Interest receivable
on
shareholder loans
to joint
ventures - 5.5 5.5 - 5.0 5.0
(44.4) 6.6 (37.8) (42.6) 6.8 (35.8)
--------- -------- --------- --------- -------- ----------
Notional interest
Interest receivable
on service
concession arrangements - 6.9 6.9 - 8.8 8.8
Retirement benefit obligations (0.9) - (0.9) (0.6) - (0.6)
Unwinding of discounts
on
provisions (4.8) - (4.8) (5.1) - (5.1)
(5.7) 6.9 1.2 (5.7) 8.8 3.1
--------- -------- --------- --------- -------- ----------
Net gains on derivative
financial
instruments arising
from the combination
of non-derivative
instruments - - - - 4.1 4.1
Net finance costs before
non-underlying items (50.1) 13.5 (36.6) (48.3) 19.7 (28.6)
Non-underlying items
(note 5)
Write-down of joint
venture shareholder
loans (19.2) - (19.2) - - -
Fair value remeasurement
of
non-designated derivative
financial instruments,
providing commercial
hedges (7.8) - (7.8) (39.4) 24.4 (15.0)
(27.0) - (27.0) (39.4) 24.4 (15.0)
Net finance costs after
--------- -------- --------- --------- -------- ----------
non-underlying items (77.1) 13.5 (63.6) (87.7) 44.1 (43.6)
--------- -------- --------- --------- -------- ----------
PENNON GROUP PLC
Notes to the condensed half year financial information (continued)
7. Taxation
Before Non-underlying Total Before Non-underlying
non-underlying items (note half non-underlying items (note
items 5) year items 5) Total
half year half year ended half year half year half year
ended 30 ended 30 30 ended 30 ended ended
September September September September 30 September 30 September
2017 2017 2017 2016 2016 2016
GBPm GBPm GBPm GBPm GBPm GBPm
Analysis of charge
Current
tax charge 10.0 (3.0) 7.0 22.8 (1.3) 21.5
Deferred
tax - other 11.8 (1.3) 10.5 7.9 (16.1) (8.2)
Tax charge
for the
period 21.8 (4.3) 17.5 30.7 (17.4) 13.3
--------------- ------------------- ---------- ------------------- -------------------- --------------
UK corporation tax is calculated at 19% (H1 2016/17 20%) of
the estimated assessable profit for the year. The tax charge
for September 2017 and September 2016 has been derived by applying
the anticipated effective annual tax rate to the first half
year profit before tax.
Tax on amounts included in the consolidated statement of comprehensive
income, or directly in equity, is included in those statements
respectively.
The effective tax rate for the period before the impact of non-underlying
items was 17% (H1 2016/17 24%).
The effective tax rate for the period including the impact of
non-underlying items was 13% (H1 2016/17 13%).
PENNON GROUP PLC
Notes to the condensed half year financial information (continued)
8. Earnings per share
Basic earnings per share are calculated by dividing the earnings
attributable to ordinary shareholders by the weighted average
number of ordinary shares outstanding during the period, excluding
those held in the employee share trust which are treated as
cancelled. For diluted earnings per share, the weighted average
number of ordinary shares in issue is adjusted to include all
dilutive potential ordinary shares.
The weighted average number of shares and earnings used in the
calculations were:
Unaudited
-----------------------------------------
Half year Half year
ended 30 ended 30
September September
2017 2016
Number of shares (millions)
For basic earnings per share 416.6 412.5
Effect of dilutive potential ordinary shares
from share options 1.5 2.1
For diluted earnings per share 418.1 414.6
-------------------- -------------------
Adjusted basic and diluted earnings per ordinary share
Adjusted earnings per share are presented to provide a more
useful comparison on business trends and performance. Non-underlying
items are adjusted for by virtue of their size, nature or incidence
to enable a full understanding of the Group's financial performance
(as described in note 5). Perpetual capital returns are proportionately
adjusted to allow a more useful comparison in the period. Earnings
per share have been calculated as follows:
Unaudited
--------------------------------------------------------------------------------------
Half year ended Half year ended
30 September 2017 30 September 2016
Profit Earnings per Profit Earnings per
share share
after Basic Diluted after Basic Diluted
tax tax
GBPm p p GBPm p p
Statutory earnings 90.9 21.8 21.7 72.9 17.7 17.6
Deferred tax before
non-underlying items 11.8 2.8 2.8 7.9 1.9 1.9
Non-underlying items
(net of tax) (3.0) (0.7) (0.7) 8.3 2.0 1.9
Proportionate impact
of
perpetual capital returns
(note 12) 5.8 1.4 1.4 8.1 2.0 2.0
Earnings before non-underlying
items and deferred
tax 105.5 25.3 25.2 97.2 23.6 23.4
--------------- ---------- -------------- ------------ ----------- --------------
PENNON GROUP PLC
Notes to the condensed half year financial information (continued)
9. Dividends
Amounts recognised as distributions to ordinary equity holders
in the period:
Unaudited
-----------------------------------------
Half year Half year
ended 30 ended 30
September September
2017 2016
GBPm GBPm
Interim dividend paid for the year ended
31 March 2017 : 11.09p (2016 10.46p) per
share 45.9 43.1
Final dividend paid for the year ended
31 March 2017 : 24.87p (2016 23.12p) per
share 103.6 95.4
149.5 138.5
-------------------- -------------------
In the six months to 30 September 2017 the 2016/17 interim and
final dividends were paid resulting in a cash outflow of GBP107.8m
and the issuance of 5.2m ordinary shares.
Unaudited
-----------------------------------------
Half year Half year
ended 30 ended 30
September September
Proposed interim dividend 2017 2016
GBPm GBPm
Proposed interim dividend for the year ended
31 March 2018 : 11.97p (2017 11.09p) per
share 50.2 45.9
-------------------- -------------------
The proposed interim dividend has not been included as a liability
in this condensed half year financial information.
The proposed interim dividend for 2018 will be paid on 4 April
2018 to shareholders on the register on 26 January 2018.
PENNON GROUP PLC
Notes to the condensed half year financial information (continued)
10. Share capital
Allotted, called up and fully paid Unaudited
---------------------------------------------------------
Number of shares
-----------------------------------------
1 April 2016 to 30 September 2016 Treasury Ordinary
shares shares GBPm
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
For consideration of GBP0.0m shares
re-issued under the (1,913) 1,913 -
Company's Executive Share Option
Scheme
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 Option - 24,457 -
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
of 40.7p each 8,443 413,806,914 168.4
-------------- ------------------------- --------------
Unaudited
---------------------------------------------------------
Number of shares
-----------------------------------------
1 April 2017 to 30 September 2017 Treasury Ordinary
shares shares GBPm
At 1 April 2017 Ordinary shares of
40.7p each 8,443 413,893,293 168.4
Shares issued under the Scrip Dividend
Alternative - 5,223,089 2.1
For consideration of GBP0.5m, shares
issued
to the Pennon Employee Share Trust - 46,205 0.1
For consideration of GBP2.7m, shares
issued
in respect of the Company's Sharesave
Scheme - 449,717 0.2
At 30 September 2017 ordinary shares
of 40.7p each 8,443 419,612,304 170.8
-------------- ------------------------- --------------
Shares held as treasury shares may be sold, re-issued for any
of the Company's share schemes, or cancelled.
The weighted average market price of the Company's shares at
the date of exercise of Sharesave
Scheme options during the year was 806p (H1 2016/17 887p).
PENNON GROUP PLC
Notes to the condensed half year financial information (continued)
11. Share premium account Unaudited
-------------------
GBPm
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
-------------------
1 April 2017 to 30 September 2017
At 1 April 2017 217.4
Adjustment for shares issued under the Scrip Dividend
Alternative (2.1)
Shares issued under the Sharesave Scheme 2.5
Shares issued to the Pennon Employee Share Trust 0.4
At 30 September 2017 218.2
-------------------
PENNON GROUP PLC
Notes to the condensed half year financial information (continued)
12. Perpetual capital securities
Unaudited
-------------------------
Half year Year ended
ended 30 31 March
September 2017
2017
GBPm GBPm
GBP 300m 2.875% perpetual subordinated 296.7 -
capital securities
GBP 300m 6.75% perpetual subordinated capital
securities - 294.8
------------------------- -------------------
296.7 294.8
------------------------- -------------------
On 8 March 2013 the Company issued GBP300m perpetual capital
securities. Costs directly associated with the issue of GBP5.2m
were set off against the value of the issuance. They had no
fixed redemption date but the Company could at its sole discretion,
redeem all, but not part, of these securities at their principal
amount on 8 March 2018 or any subsequent periodic return payment
date after this. In the event the Company acquired 80% or more
of the securities it could then redeem the remainder at its
sole discretion.
On 22 September 2017 the Company purchased GBP285.8m in principal
amount of the capital securities and settled accrued periodic
returns totalling GBP19.0m for a total of GBP304.8m. On 25 September
notice was given to the remaining holders that the Company would
be exercising its option to redeem all of the remaining GBP14.2m
capital securities on 10 October 2017 at their principal amount.
The outstanding liability at 30 September 2017 of GBP14.2m,
together with accrued periodic returns of GBP0.6m is classified
as a current liability on the balance sheet.
On 22 September 2017 the Company issued GBP300m perpetual capital
securities. Costs directly associated with the issue of GBP3.3m
were set off against the value of the issuance. They have no
fixed redemption date but the Company can at its sole discretion
redeem all, but not part, of these securities at their principal
amount on 22 May 2020 or any subsequent periodic return payment
date after this.
The Company has the option to defer periodic returns on any
relevant payment date, as long as a dividend on the Ordinary
Shares has not been paid or declared in the previous 12 months.
Deferred periodic returns shall be satisfied only on redemption
or payment of dividend on Ordinary Shares, all of which only
occur at the sole discretion of the Company.
As the Company paid a dividend on 4 April 2017 the first periodic
return of GBP5.8m, scheduled 22 May 2018, is payable and consequently
has been recognised as a liability at 30 September 2017.
Profits during the period attributable to perpetual capital
security holders of GBP21.5m reflect GBP19.6m of distributions
noted above on the March 2013 perpetual capital securities,
GBP3.8m of associated corporation tax relief and GBP5.8m for
periodic returns due on 2017 perpetual capital securities (note
the newly issued securities do not qualify for corporation tax
relief).
PENNON GROUP PLC
Notes to the condensed half year financial information (continued)
13. Cash flow from operating activities
Reconciliation of profit for the period to net cash inflow from
operations:
Unaudited
-----------------------------------------
Half year Half year
ended 30 ended 30
September September
2017 2016
GBPm GBPm
Cash generated from operations
Profit for the period 112.3 89.1
Adjustments for:
Share-based payments 1.8 1.8
Profit on disposal of property, plant
and equipment - (2.0)
Depreciation charge 89.4 90.1
Amortisation of intangible assets 1.7 1.4
Non-underlying restructuring costs - 10.7
Non-underlying remeasurement of fair
value movement in derivatives (note 5) 7.8 15.0
Non-underlying GMWDA contract reset (note (6.5) -
5)
Share of post-tax profit from joint ventures (5.3) (2.8)
Finance income (before non-underlying
items) (13.5) (19.7)
Finance costs (before non-underlying
items) 50.1 48.3
Taxation charge 17.5 13.3
Changes in working capital:
Increase in inventories (0.9) (2.8)
Increase in trade and other receivables (42.9) (2.3)
Increase in service concession arrangements
receivable (16.9) (13.2)
Increase in trade and other payables 23.8 27.3
Increase in retirement benefit obligations 2.3 1.0
Decrease in provisions (9.5) (11.9)
Cash generated from operations 211.2 243.3
-------------------- -------------------
Unaudited
-----------------------------------------
Half year Half year
ended 30 ended 30
September September
2017 2016
GBPm GBPm
Total interest paid
Interest paid in operating activities 33.2 35.1
Interest paid in investing activities 7.8 6.1
Total interest paid 41.0 41.2
-------------------- -------------------
PENNON GROUP PLC
Notes to the condensed half year financial information (continued)
14. Net borrowings
Unaudited
--------------------
Half year
ended 30 Year ended
September 31 March
2017 2017
GBPm GBPm
Cash and cash deposits 571.1 598.1
Borrowings - current
Bank and other loans - (74.9)
Other current borrowings (31.9) (41.1)
Finance lease obligations (28.0) (30.5)
-------------------- -------------------
Total current borrowings (59.9) (146.5)
-------------------- -------------------
Borrowings - non-current
Bank and other loans (1,548.4) (1,439.3)
Other non-current borrowings (307.4) (323.4)
Finance lease obligations (1,446.3) (1,353.8)
-------------------- -------------------
Total non-current borrowings (3,302.1) (3,116.5)
-------------------- -------------------
Total net borrowings (2,790.9) (2,664.9)
-------------------- -------------------
PENNON GROUP PLC
Notes to the condensed half year financial information (continued)
14. Net borrowings (continued)
The movements in net borrowings during the periods presented were as follows:
Unaudited
--------------------------------------------------------------------------
Net
Net borrowings
borrowings Foreign Other at 30
at 1 April Cash flows exchange non-cash September
2016 - other adjustments movements 2016
GBPm GBPm GBPm GBPm GBPm
Cash and cash deposits 632.2 25.3 - - 657.5
Bank and other loans due
within one year - - - (24.9) (24.9)
Other current borrowings (39.0) 23.0 - (25.1) (41.1)
Finance leases due within
one year (26.0) 3.2 - (3.4) (26.2)
Bank and other loans due
after one year (1,502.5) - (7.2) 24.8 (1,484.9)
Other non-current
borrowings (234.5) (130.0) - 25.1 (339.4)
Finance leases due after
one year (1,314.6) 7.5 - - (1,307.1)
Total (2,484.4) (71.0) (7.2) (3.5) (2,566.1)
-------------- ----------- ------------- -------------- --------------
Unaudited
--------------------------------------------------------------------------
Net
Net borrowings
borrowings Foreign Other at 30
at 1 April Cash flows exchange non-cash September
2017 - other adjustments movements 2017
GBPm GBPm GBPm GBPm GBPm
Cash and cash deposits 598.1 (27.0) - - 571.1
Bank and other loans due
within one year (74.9) 25.0 - 49.9 -
Other current borrowings (41.1) 25.1 - (15.9) (31.9)
Finance leases due within
one year (30.5) 7.6 - (5.1) (28.0)
Bank and other loans due
after one year (1,439.3) (56.3) (2.6) (50.2) (1,548.4)
Other non-current
borrowings (323.4) - - 16.0 (307.4)
Finance leases due after
one year (1,353.8) (92.5) - - (1,446.3)
Total (2,664.9) (118.1) (2.6) (5.3) (2,790.9)
-------------- ----------- ------------- -------------- --------------
For the purposes of the cash flow statement cash and cash equivalents
comprise:
Unaudited
--------------------
Half year Year ended
ended 30 September 31 March
2017 2017
GBPm GBPm
Cash and cash deposits as above 571.1 598.1
Less : deposits with a maturity of three months
or more (restricted funds) (227.5) (223.8)
-------------------- -----------
343.6 374.3
-------------------- -----------
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 2017 31 March 2017
Book value Fair Book value Fair value
value
GBPm GBPm GBPm GBPm
Non-current borrowings
:
Bank and other
loans 1,548.4 1,737.7 1,439.3 1,645.3
Other non-current borrowings 307.4 265.1 323.4 282.3
Finance lease obligations 1,446.3 1,287.0 1,353.8 1,217.3
-------------- -------------- ------------------- ----------------
Total non-current borrowings 3,302.1 3,289.8 3,116.5 3,144.9
Other non-current assets 295.6 317.3 308.0 377.7
Valuation hierarchy of financial instruments carried at fair value
The Group uses the following hierarchy for determining the fair
value of financial instruments by valuation technique:
-- quoted prices (unadjusted) in active markets for identical
assets or liabilities (level 1)
-- inputs other than quoted prices included within level 1 that
are observable for the asset or liability, either directly (that
is, as prices) or indirectly (that is, derived from prices) (level
2).
The fair value of financial instruments not traded in an active
market (level 2, for example over-the-counter derivatives) is
determined by using valuation techniques. A variety of methods
and assumptions are used based on market conditions existing at
each balance sheet date. Quoted market prices or dealer quotes
for similar instruments are used for long term debt. Other techniques,
such as estimated discounted cash flows, are used to determine
fair value for the remaining financial instruments. The fair value
of interest rate swaps is calculated as the present value of the
estimated future cash flows.
The Group's financial instruments are valued principally using
level 2 measures:
Unaudited
---------------------
Half year
ended Year ended
30 September 31 March
2017 2017
GBPm GBPm
Level 2 inputs
Assets
Derivatives used for hedging 15.7 9.0
Derivatives deemed held for trading 64.1 78.7
--------------------- ----------------------
Total assets 79.8 87.7
Liabilities
Derivatives used for hedging 27.8 40.0
Derivatives deemed held for trading 1.3 2.5
--------------------- ----------------------
Total liabilities 29.1 42.5
PENNON GROUP PLC
Notes to the condensed half year financial information (continued)
16. Retirement benefit obligations
Defined benefit schemes
The principal actuarial assumptions were: the rate used to discount
schemes' liabilities and expected return on scheme assets of
2.70% (March 2017 2.55%) and the inflation assumption of 3.2%
(March 2017 3.2%).
Unaudited
-----------------------------------------------
Half year ended Year ended
30 September 2017 31 March 2017
Fair
value
Present Fair value Present of
value of of plan value plan
obligation assets Total of obligation assets Total
GBPm GBPm GBPm GBPm GBPm GBPm
At 1 April (971.4) 903.4 (68.0) (833.6) 792.7 (40.9)
Amounts recognised
in the
income statement (19.1) 11.4 (7.7) (40.9) 26.2 (14.7)
Remeasurements through
other
comprehensive
income 27.8 (12.5) 15.3 (129.6) 106.0 (23.6)
Contributions 15.7 (11.2) 4.5 32.7 (21.5) 11.2
(947.0) 891.1 (55.9) (971.4) 903.4 (68.0)
------------- -------------- ---------------- ------------------- ------- -------
17. Capital expenditure
Unaudited
------------------------
Half year
ended Year ended
30 September 31 March
2017 2017
GBPm GBPm
Property, plant and equipment
Additions 201.0 377.5
Net book value of disposals 0.7 13.3
Capital commitments
Contracted but not provided 420.1 401.1
18. Trade and other payables & other non-current liabilities
Unaudited
------------------------
Half year
ended Year ended
30 September 31 March
2017 2017
GBPm GBPm
Trade and other payables - current
Trade payables 111.3 107.4
Amounts owed to joint ventures 4.5 4.2
Other tax and social security 45.7 50.6
Accruals and other payables 196.7 124.3
Distributions due to perpetual
capital security holders 20.5 -
------------------------ ---------------------------
378.7 286.5
------------------------ ---------------------------
Other non-current liabilities
Deferred income 115.2 114.5
Other payables 21.8 66.2
------------------------ ---------------------------
137.0 180.7
------------------------ ---------------------------
During the period GBP44.3m of other payables due to Nomura Structured Holdings plc moved from non-current to current.
PENNON GROUP PLC
Notes to the condensed half year financial information (continued)
19. Contingent liabilities
Unaudited
------------------
Half year ended
30 September Year ended
2017 31 March 2017
GBPm GBPm
Performance bonds 188.0 187.5
Guarantees in respect of performance bonds are entered into in
the normal course of business. No liability is expected to arise
in respect of the guarantees.
Other contractual and litigation uncertainties
The Group establishes provisions in connection with contracts
and litigation where it has a present legal or constructive obligation
as a result of past events and where it is more likely than not
an outflow of resources will be required to settle the obligation
and the amount can be reliably estimated.
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 a Viridor employee
at Derriford, Plymouth in 2015.
20. Related party transactions
The Group's significant related parties during the period were
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 2017.
On 29 September 2017 ownership of Viridor Laing (Greater Manchester)
Limited was transferred to the Greater Manchester Disposal Authority.
In the period 1 April 2017 to the Greater Manchester contract
reset on 29 September, related party transactions were consistent
with those described at the year end. Following contract reset
on 29 September there were additional transactions as detailed
in note 5.
On 1 April 2017 Pennon Water Services Limited (PWS), a wholly
owned subsidiary of Pennon Group plc (Pennon) at the start of
the period, purchased assets, primarily trade receivables, from
South West Water Limited (SWW) and South Staffordshire plc (SS).
The amount paid to SS during the period for such assets was GBP7.0m.
The initial consideration was financed through the issuance of
new equity share capital in PWS to Pennon and SS of GBP2.8m and
GBP0.7m respectively and the issuance of loans from Pennon and
SS to PWS of GBP25.4m and GBP6.3m respectively. As a result Pennon
now holds a majority 80% equity share in PWS, with SS holding
the remaining 20% non-controlling interest.
There were no other material changes during the half year to
September 2017 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
FOOTNOTES
(1) Before non-underlying items. Underlying earnings are presented to
provide a more useful comparison of business trends and performance
(2) Underlying EBITDA plus share of Joint Venture EBITDA and IFRIC 12
interest receivable
(3) 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
(4) Before deferred tax and non-underlying items and proportionately
adjusted for the first return due on the 2017 perpetual capital securities
(hybrid) in H1 2017/18 and the periodic return due March 2017 in H1
2016/17
(5) The RPI rate used is 3.9% as of September 2017
(6) Including 100% of joint ventures, excluding Bolton ERF availability
due to fire
(7) See page 20
(8) South West Water has 26 and Bournemouth Water 10 ODIs including
SIM and those which end of AMP measures. 33 meeting target or within
appropriate tolerances.
(9) GBP7.0m cumulative net reward reflecting GBP9.1m net reward which
will be recognised at the end of the regulatory period and GBP2.1m net
penalty which can be reflected during the regulatory period
(10) Expenditure in excess of original target by GBP45m as at 30 September
2017, subject to contractual recovery from previous EPC contractor.
(11) Future dividends growth based on policy of 4% + RPI forecast to
2020
(12) There will continue to be a long term partnership with GMWDA, and
Viridor and its joint venture will continue to own and operate Runcorn
I ERF facility, as well as securing an 18 month contract to operate
the recycling facilities on improved terms
(13) Includes 100% capacity for joint ventures, excludes Bolton ERF
due to fire
(14) As at 20 November 2017. c.5,100 new accounts, net growth c.1,750
(15) Before non-underlying items
(16) Underlying EBITDA plus share of Joint Venture EBITDA and IFRIC
12 interest receivable
(17) 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
(18) Before deferred tax and non-underlying items and proportionately
adjusted for the first return due on the 2017 perpetual capital securities
in H1 2017/18 and the periodic return due March 2017 in H1 2016/17
(19) The RPI rate used is 3.9% as of September 2017
(20) Including construction spend related to service concession arrangements
(21) In the first half of 2016/17, in addition to the derivative charge
noted above, there were non-underlying charges for restructuring costs
(GBP10.7m) and a deferred tax credit of GBP20.1m relating to the enacted
reduction in the UK rate of corporation tax from 18% to 17% in 2020
(22) Includes fair value movements due to a change in legislation impacting
the 2011 PMB derivative, terminated February 2017
(23) Excludes South West Water's Non-Household retail performance now
reported in PWS, of GBP3.0m revenue and GBP1.1m in both EBITDA and profit
before tax
(24) Including landfill tax and construction spend on service concession
arrangements
(25) EBITDA plus share of Joint Venture EBITDA and IFRIC 12 interest
receivable
(26) 80:20 venture with South Staffordshire Group
(27) Revenue before acquired South Staffordshire non-household retail
book is 3.6% higher than H1 2016/17
(28) Including 100% of joint ventures, excluding Bolton ERF availability
due to fire
(29) After Other tax payments noted in footnote 30
(30) All taxes include business rates, employers national insurance,
fuel excise duty, carbon reduction commitment, environmental payments,
climate change levy and external landfill tax
(31) The new perpetual capital securities do not qualify for tax relief
(32) Including a proportionate adjustment for the periodic return on
the 2017 bonds for the 8 days from issue to 30 September 2017
(33) Based on RCV at March 2017
(34) For H1 2017/18 annual equivalent RORE of 11.1% delivered reflecting
6.0% base return, 2.0% totex savings and efficiencies, 0.3% net reward
on ODIs and 2.8% on financing outperformance. RORE based on Ofwat guidance
results in 4.1% of financing outperformance (calculated using in-year
average RPI rate of 1.1% for 2015/16, 2.1% for 2016/17 and 3.7% forecast
for 2017/18) resulting in a total RORE of 12.4% for H1 2017/18 (2016/17
2.4% and 11.0% respectively)
(35) South West Water has 26 and Bournemouth Water 10 ODIs including
SIM and those which end of AMP measures. 33 meeting target or within
appropriate tolerances.
(36) GBP1.5m split GBP1.6m (GBP9.1m cumulatively) net reward will be
recognised at the end of the regulatory period and GBP0.1m (GBP2.1m
cumulatively) net penalty which may be reflected during the regulatory
period.
(37) Delivered through bill reduction, service improvements and reinvestment
(38) Including 100% joint venture waste volumes
(39) Including 100% of joint venture availability, excludes Bolton ERF
due to fire
(40) Excluding capitalised interest and net of amounts subject to legal
contractual processes.
(41) c.1,750 net new customer accounts to 20 November 2017
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 28 November 2017.
C Loughlin S J Davy
Group Chief Executive Officer Chief Financial Officer
PENNON GROUP PLC
INDEPENDENT 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 2017 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
2017 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
28 November 2017
This information is provided by RNS
The company news service from the London Stock Exchange
END
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