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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 | |
|---|---|---|---|---|---|---|---|---|---|---|
| -6.50 | -0.98% | 656.00 | 657.50 | 659.00 | 675.00 | 651.00 | 675.00 | 717,101 | 16:35:16 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Sewerage Systems | 797.2M | 100k | 0.0004 | 16,475.00 | 1.72B |
From Apr 2019 to Apr 2024
TIDMPNN
RNS Number : 5511I
Pennon Group PLC
27 November 2018
27 November 2018
Half Year Results 2018/19
for the period ended 30 September 2018
Delivering for customers, communities and shareholders
Chris Loughlin, Pennon Chief Executive said:
"Momentum for Pennon continues with a strong performance in the first half of 2018/19 across both water and waste. We are delivering on our promises to customers and communities and our investment across the Group is driving tangible and positive results.
In water, we demonstrated our service resilience in extreme weather conditions, with the aftermath of the exceptional cold weather in March followed by the hottest summer on record. Our focus on customers has been reflected in South West Water's best ever customer service score for this half year. With a relentless focus on efficiency and cost savings, average bills are lower than they were 9 years ago, with a further 11% decrease expected in the next regulatory period 2020-2025 under our new business plan. Customers will be empowered as part of a New Deal giving them a tangible stake and say in South West Water.
The focus for Viridor is UK recycling and residual waste processing and transformation. Waste market dynamics are favourable, with the 'Blue Planet' effect spurring action, and we are optimistic that positive changes will be announced in the Government's Resources & Waste Strategy later this year enabling a UK recycling system fit for the future. The operating fleet of Energy Recovery Facilities (ERFs) is performing well, transforming waste into electricity and heat. Progress continues bringing Viridor's remaining four ERFs in the portfolio on stream, with three now in operational ramp up and the final facility under construction. We have further consolidated our position through increasing our holding in one of our joint venture ERFs, Runcorn I. The development of Viridor's ERF portfolio will support Pennon's earnings growth to 2020 and beyond".
Financial Highlights
Underlying[1] H1 2018/19 H1 2017/18 Change Revenue GBP746.7m GBP723.9m +3.1% EBITDA[2] GBP274.0m GBP253.5m +8.1% Adjusted EBITDA[3] GBP294.7m GBP285.8m +3.1% Operating profit GBP178.5m GBP162.4m +9.9% Profit before tax (PBT) GBP142.5m GBP131.1m +8.7% ------------------------------- ----------- ----------- ------- Non-underlying items before (GBP8.9m) (GBP1.3m) - tax[4] Statutory profit before tax GBP133.6m GBP129.8m +2.9% Tax (GBP17.6m) (GBP17.5m) (0.6%) Statutory profit after tax (PAT) GBP116.0m GBP112.3m +3.3% Earnings per share[5] 30.0p 25.3p +18.6% Statutory earnings per share 25.6p 21.8p +17.4% Dividend per share[6] 12.84p 11.97p +7.3%
Pennon Group
-- Pennon is on track to meet management expectations for full year 2018/19 -- Underlying PBT up +8.7% following:
o Higher revenues and EBITDA at South West Water reflecting increased customer demand over the summer
o Continued cost saving focus, leading to Total Expenditure (Totex) outperformance, at South West Water, a key component to RORE[7]. On track for continued outperformance for 2018/19
o EBITDA growth of +17.7% at Viridor supported by the build out of new ERFs
o Momentum in group efficiencies maintained with c.GBP15 million p.a of the GBP17 million p.a expected from 2019 already secured
-- Statutory PBT up +2.9% to GBP133.6 million -- Statutory earnings per share growth of +3.8p to 25.6p -- Interim dividend per share up +7.3% to 12.84p
-- Cash flow from operations reflecting robust operational performance, whilst significant capital investment continues
-- Development of our sustainable financing framework, with GBP350 million of GBP480 million secured linked to the sustainable nature of the business, reducing our cost and reflecting our environmental and social credentials
South West Water
-- Strong performance, demonstrating service resilience through extreme climatic conditions
o Highest ever Customer Service (SIM) score achieved with South West Water now ranked 2(nd) overall in England and Wales in H1 2018/19[8]
o Cumulative Return on Regulated Equity (RORE) at 11.8%[9] - WaterShare delivering c.GBP100 million of outperformance for sharing with customers to date
-- On track to deliver all our business plan commitments by 2020
o Cumulative net ODI reward of GBP9.3 million[10] to H1 2018/19
o Continued strong focus on efficiency, on track to deliver the c.GBP300 million Totex outperformance to 2020 - GBP209 million delivered cumulatively to H1 2018/19
-- New Deal launched in our Business Plan to Ofwat for the next five year period 2020-2025 (K7), giving customers a tangible stake and say in the business
o Operational delivery preparations already underway
Viridor
-- Focused on UK recycling and residual waste processing and transformation -- Favourable recycling market dynamics
o Public perception, 'Blue Planet' effect - driving Government support for recycling
o Recovery in recycling markets since H2 2017/18 - EBITDA of GBP7.4 million in H1 2018/19 ahead of GBP4.4 million achieved in H2 2017/18
-- Strong residual waste market opportunities
o Build out of ERFs supporting strong growth in EBITDA of +17.7%[11]
o Operational ERFs outperforming base case. On track for full year availability >90%[12] with planned maintenance weighted to H1
o The three new ERFs at Glasgow, Beddington and Dunbar are all processing waste. Optimisation is ongoing and operations will ramp up over the next 18 months as has previously occurred at the other ERFs in our portfolio
o Further consolidated our position through increasing the holding in Viridor's joint venture (TPSCo)[13] which owns Runcorn I ERF
-- Maximising value from landfill energy
o Robust landfill demand forecast into the medium term.
o 10 sites open to waste arisings, with volumes and gate fees holding up well
o Investing in landfill gas for improved longer term yields
Pennon Water Services
-- Pennon Water Services, one of only five associated retailers to have achieved net growth in the new competitive non-household market. Focused on value enhancing contracts and future cost base efficiencies.
Presentation of Results
A presentation for City audiences will be held today, Tuesday 27 November 2018, at 09.00am at the ICAEW (The Auditorium), One Moorgate Place, London, EC2R 6EA.
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:
Susan Davy Chief Financial Officer - Pennon } 01392 443 Jennifer Cooke Investor Relations Officer - Pennon } 168 James Murgatroyd 020 7251 Faeth Birch Finsbury 3801
About Pennon Group
Pennon is one of the largest environmental infrastructure FTSE 250 groups in the UK with assets of around GBP6.2 billion and a workforce of around 5,000 people. Around 63% of Pennon's shareholders are UK pensions, savings, charities, individuals and employees, with two thirds of South West Water's employees being shareholders.
The integrated 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 and residual waste processing and transformation business 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 Plc.
10 year sector-leading dividend policy
Pennon's purpose is bringing resources to life. We aim to protect the environment, provide an outstanding service to customers and communities, while creating value for our shareholders. Pennon is investing significantly in its UK water and waste infrastructure and estimates capital expenditure of c.GBP1.7 billion between 2015 and 2020, with GBP1.3 billion invested to date. The Group generates robust operating cash flows, and has a strong liquidity and balance sheet position, underpinning a well established sector leading dividend policy.
South West Water has delivered further benefits for customers through our innovative WaterShare mechanism with around GBP100 million of benefits achieved since 2015. Customers will continue to benefit from reinvestment in services and lower bills into the next period.
Whilst delivering on our promises to customers and communities for investors 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)([14]) . This policy reflects the Board's confidence in our sustainable 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 2018/19, the Board has recommended an interim dividend of 12.84p, up 7.3%. The interim dividend will be paid on 4 April 2019 to shareholders on the register on 25 January 2019.
Pennon now offers shareholders the opportunity to invest their dividend in a Dividend Reinvestment Plan (DRIP).
Interim dividend payment information
24 January 2019 Ex-dividend date 25 January 2019 Record date 8 March 2019 Final date for receipt of DRIP applications 4 April 2019 Interim dividend payment date
Upcoming Events
January 2019 Viridor Waste Capital Markets Day 25 March 2019 Trading Statement 4 June 2019 Full Year Results 2018/19 25 July 2019 Annual General Meeting September 2019 Trading Statement 26 November 2019 Half Year Results 2019/20
PENNON BUSINESS REVIEW
We know that inspiring trust and delivering transparency are fundamental to our strong relationship with customers and communities. Our vision and core values: 'Trusted, Collaborative, Responsible, Progressive' emphasise to employees and external stakeholders that we strive to be a trusted and responsible Company delivering high quality resilient services in a safe, reliable and sustainable manner. As a UK-listed Company, Pennon has a transparent corporate structure. Our Board is focused on strong financial control, sound administration and good governance.
Delivering on our promises for customers and communities
We know that delivering a resilient service in South West Water is a key promise to our customers. Despite the periods of extreme weather during 2018 with the 'freeze and thaw' in March and the hot dry summer, giving rise to unprecedented demand, we continued to deliver an excellent service to our customers. This has been reflected in our best ever quality service score in H1 2018/19, with South West Water ranked 2(nd) out of all water and sewerage companies in England and Wales.
South West Water has delivered further benefits for customers through our innovative WaterShare mechanism with around GBP100 million of benefits achieved since 2015. Customers will continue to benefit from reinvestment in services and lower bills into the next period.
Viridor continues to expand the ERF portfolio with three new facilities Glasgow, Beddington and Dunbar all processing waste with operations due to ramp up over the next 18 months. We continue to work closely with our key customers and partners across our whole portfolio to deliver service in line with expectations.
Delivering strong sustainable financial performance across the Group
Confidence in our financial resilience is driven by robust operating cash flows, a strong liquidity and balance sheet position and a diversified mix of low cost and flexible funding which underpins a sector leading dividend policy.
Pennon through its operating businesses performed well in H1 2018/19 and is on track to be in line with management expectations for 2018/19.
Earnings growth for 2018/19 has been driven by ERF portfolio growth, weather related higher revenue in South West Water, and a strong focus on cost savings, benefitting both customers and shareholders.
The cost savings and synergy targets of c.GBP17 million p.a. from 2019, identified through our targeted overhead review in 2015/16, are on track with c.GBP15 million p.a. delivered to date.
South West Water continues to deliver sector leading Totex outperformance and is on track to deliver c.GBP300 million over the 2015-2020 regulatory period. Together with delivery of net ODI rewards and outperformance in our cost of financing, momentum of delivery has been maintained with a cumulative Return on Regulated Equity (RORE) of 11.8%[15] to H1 2018/19.
The build out of the ERF portfolio is supporting growth in Viridor and the recycling activities have recovered from the challenging position in H2 2017/18. Viridor has continued to focus on cost savings with initiatives delivering indirect cost efficiencies of 17% in real terms since 2015/16.
Balanced business plan for 2020-2025
In September South West Water submitted its business plan for 2020-2025 (K7). As a responsible and transparent water business a fundamental part of our proposals is for a New Deal which signals a new way of doing business for our customers and stakeholders. This approach is focused on empowering our customers by giving them the option of a tangible financial stake and a share in the business and the power to hold us to account, with a say in our business through a Customer AGM.
The initial assessment of the business plan by Ofwat is expected at the end of January 2019. Given customer acceptance of our plan was at 88% preparations are already underway for a fast start in K7, with key supply chain delivery partnerships in place, pilot trials for new water treatment technology completed and preparatory work for taking on the expanded licence area of the Isles of Scilly is in progress.
Leading, responsible and sustainable UK waste operator
Viridor is focused on delivering UK recycling and residual waste processing and transformation. We believe there are continued favourable waste market dynamics in both recycling and residual waste.
Whilst the recycling market has been challenging, Viridor has delivered improvements to its recycling performance in H1 2018/19 compared with H2 2017/18, with EBITDA increasing from GBP4.4 million to GBP7.4 million. With Government support for recycling and the UK Plastics Pact outlining a roadmap with targets to 2025 we believe there are opportunities for growth. The 'Blue Planet' effect continues to encourage action and we expect positive changes to be announced in the Government's Resources & Waste Strategy when published.
We continue to expect UK residual waste market dynamics to be favourable with demand for ERFs exceeding capacity into the long term. We anticipate the capacity gap to be greater than seven million tonnes (mT) by 2030. Household waste arisings have increased annually since 2012 and expenditure on waste services is up c.16%[16] from 2008/09. The operational ERF portfolio is on track to achieve availability in excess of 90%[17] in 2018/19 with the operational performance of the facilities above management's initial base case expectations which assume a real post tax IRR (internal rate of return) of 8%. EBITDA margin in H1 2018/19 was 60%. Three of the four remaining ERFs are processing waste with operational ramp up over the next 18 months. Construction is progressing well at Avonmouth near Bristol.
We see further opportunities to deliver capacity expansion at existing facilities, having secured planning permissions and permits for additional capacity at Cardiff (75,000 tonnes) and Ardley (27,000 tonnes), as well as an increase in power output at Runcorn II.
We have further consolidated our position through increasing our holding in Viridor's joint venture (TPSCo)[18], which owns Runcorn I ERF, from 37.5% to 75.0% of the economic interest.
We believe our landfill portfolio complements the combustible residual waste strategy, with a requirement for a landfill solution into the medium term.
We also continue to consider further expansion and investment, with development of energy park opportunities across the landfill and ERF portfolio capitalising on the potential of existing grid connections.
Pennon continues to seek and identify further growth opportunities within the UK, assessing the long-term viability of the markets in which we operate and achieving an appropriate risk/reward balance and is confident of delivering sustainable, long-term returns from water and waste.
Pennon Group
Hot Features
Premium
Underlying[19] H1 2018/19 H1 2017/18 Change
Revenue GBP746.7m GBP723.9m +3.1%
EBITDA GBP274.0m GBP253.5m +8.1%
Adjusted EBITDA[20] GBP294.7m GBP285.8m +3.1%
Depreciation and amortisation (GBP95.5m) (GBP91.1m) (4.8%)
Operating profit GBP178.5m GBP162.4m +9.9%
Net interest (GBP40.8m) (GBP36.6m) (11.5%)
Share of JV profit after
tax GBP4.8m GBP5.3m (9.4%)
Profit before tax GBP142.5m GBP131.1m +8.7%
------------------------------------- ------------- ------------ ----------
Non-underlying items before (GBP8.9m) (GBP1.3m) -
tax[21]
Statutory profit before
tax GBP133.6m GBP129.8m +2.9%
Tax (GBP17.6m) (GBP17.5m) (0.6%)
Statutory profit after tax
(PAT) GBP116.0m GBP112.3m +3.3%
PAT (attributable to holders
of hybrid capital) GBP8.6m GBP21.5m (60.0%)
PAT (attributable to minority (GBP0.1m) (GBP0.1m) -
interests)
PAT (attributable to shareholders) GBP107.5m GBP90.9m +18.3%
Earnings per share[22](,[23]) 30.0p 25.3p +18.6%
Statutory earnings per share(23) 25.6p 21.8p +17.4%
Dividend per share[24] 12.84p 11.97p +7.3%
Capital investment[25] GBP200.6m GBP222.3m (9.8%)
South West Water GBP68.6m GBP97.6m (29.7%)
Viridor[26] GBP131.9m GBP124.3m +6.1%
Other GBP0.1m GBP0.4m (75.0%)
30 September 31 March Change
2018 2018
Net debt[27] GBP3,041.9m GBP2,801.5m +8.6%
Non-underlying Items
There is one non-underlying item in H1 2018/19 which arises as a result of the movement in the fair value of long-dated derivatives associated with South West Water's 2040 bond. This results in a charge of GBP8.9 million (H1 2017/18 charge of GBP7.8 million). The tax impact of this non-underlying item is a credit of GBP1.7 million, resulting in an after tax position of GBP7.2 million.
In the prior period, the net charge before tax for H1 2017/18 was GBP1.3 million and included a GBP6.5 million credit as a result of the reset of the Greater Manchester contracts as well as the GBP7.8 million charge for the movement in the fair value of long-dated derivatives associated with South West Water's 2040 bond. Net non-underlying items after tax for the prior period resulted in a GBP3.0 million credit.
South West Water
Underlying H1 2018/19 H1 2017/18 Change Revenue[28] GBP301.5m GBP292.2m +3.2% Operating costs (GBP106.8m) (GBP105.1m) (1.6%) EBITDA GBP194.7m GBP187.1m +4.1% Depreciation and amortisation (GBP58.8m) (GBP56.4m) (4.3%) Operating profit GBP135.9m GBP130.7m +4.0% Net interest (GBP35.6m) (GBP34.5m) (3.2%) Profit before tax GBP100.3m GBP96.2m +4.3%
Viridor
Underlying H1 2018/19 H1 2017/18 Change
Revenue[29] GBP422.3m GBP407.0m +3.8%
EBITDA GBP78.4m GBP66.6m +17.7%
ERFs GBP66.6m GBP51.7m +28.8%
Landfill GBP3.8m GBP3.3m +15.2%
Landfill gas GBP8.1m GBP9.2m (12.0%)
Recycling GBP7.4m GBP10.6m (30.2%)
Contracts, Collections &
Other GBP20.3m GBP20.0m +1.5%
Indirect costs (GBP27.8m) (GBP28.2m) +1.4%
Depreciation and amortisation (GBP36.2m) (GBP34.2m) (5.8%)
Share of JV profit after
tax GBP4.8m GBP5.3m (9.4%)
Net interest (GBP10.8m) (GBP7.1m) (52.1%)
Profit before tax GBP36.2m GBP30.6m +18.3%
Share of JV EBITDA GBP13.4m GBP25.4m (47.2%)
IFRIC 12 interest receivable GBP7.3m GBP6.9m +5.8%
Adjusted EBITDA[30] GBP99.1m GBP98.9m +0.2%
Pennon Water Services
H1 2018/19 H1 2017/18 Change
Revenue GBP84.1m GBP83.5m +0.7%
EBITDA GBP0.9m GBP0.5m +80.0%
Depreciation and amortisation (GBP0.4m) (GBP0.3m) (33.3%)
Operating profit GBP0.5m GBP0.2m +150.0%
Net interest (GBP1.0m) (GBP0.7m) (42.9%)
Profit before tax (GBP0.5m) (GBP0.5m) -
Strong Group underlying financial performance
Group revenue in H1 2018/19 increased by 3.1% (GBP22.8 million) to GBP746.7 million.
Revenue from South West Water increased by 3.2% (GBP9.3 million) to GBP301.5 million due to customer demand increases of 2.7%, from the hot and dry weather over the summer, tariff increases of 1.0% and increased infrastructure connections. Viridor revenues increased by 3.8% (GBP15.3 million) to GBP422.3 million primarily due to the ERF build out (net of reduced construction IFRIC 12 revenue).
Group EBITDA and adjusted EBITDA were ahead of the same period last year by 8.1% and 3.1% respectively, with South West Water, Viridor and Pennon Water Services all ahead of H1 2017/18. The gap between EBITDA and adjusted EBITDA narrowed in the period as expected due to reduced share of JV EBITDA following the reset of the Greater Manchester waste contract in 2017/18.
South West Water's EBITDA and operating profit increased by 4.1% and 4.0% respectively. Strong cost management and efficiency delivery has resulted in lower than inflation cost increases, despite the increased costs required to meet higher customer demand of c.GBP3 million in H1 2018/19. In addition, South West Water's bad debt performance remains strong with a charge of 0.6% of revenues (H1 2017/18 0.9%) 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 strive to support those customers in vulnerable circumstances with affordability challenges.
Viridor's EBITDA for the first half of 2018/19 increased by 17.7% (GBP11.8 million) compared with H1 2017/18.
The ERF business has performed strongly during the period, in line with expectations. The EBITDA generated from our portfolio was 28.8% higher at GBP66.6 million (H1 2017/18 GBP51.7million) reflecting financial contributions from Beddington and Dunbar. We are on track to deliver another year of availability for our current operational assets in excess of 90%[31] across the portfolio (including Joint Ventures). As we continue to optimise our performance, more of our planned maintenance outages have been completed in the first half of this financial year, when electricity demand and pricing is lower. Planned maintenance has been performed at all major sites during the half year and as a result availability during H1 2018/19 was 89%.
Landfill EBITDA has increased by 15.2% to GBP3.8 million since H1 2017/18 (GBP3.3 million). Volumes and pricing have held up, with cost savings contributing to the higher EBITDA. We continue to see demand for a landfill solution into the medium term, and have sites well positioned to meet these demands, with 11 sites operational for H1 2018/19. As part of the planned closure profile, one site (Rigmuir) closed in September leaving 10 operational sites.
In our landfill gas business we are currently progressing our engine replacement strategy, including investing in maintenance and more efficient engines. This is improving reliability and securing generation for the longer term, whilst optimising the generating capacity potential at our sites. EBITDA for the period at GBP8.1 million, is down 12.0% from the prior year (H1 2017/18 GBP9.2 million). This has been driven by higher planned maintenance activities during the summer period to secure reliable generation during the winter and a natural decline in gas volumes produced from sites (although at 4% this is at a lower rate than previous years). The benefit of higher year on year hedged electricity prices has helped support the overall performance.
Recycling EBITDA at GBP7.4 million is GBP3.0 million higher than H2 2017/18, with EBITDA margin increasing by GBP5 per tonne to GBP12 per tonne reflecting some recovery in the global recycling markets following import restrictions by China in H2 2017/18. EBITDA is GBP3.2 million lower than the first half of last year (H1 2017/18 GBP10.6 million) which was before the Chinese restrictions were implemented, consequently EBITDA margin per tonne has decreased from GBP14 (H1 2017/18) to GBP12 (H1 2018/19). Market led quality demands have remained challenging, and we have continued to face challenges with poor input quality. We have continued to focus on producing high quality outputs which has contributed to an increase in revenue per tonne to GBP110 (H2 2017/18 GBP97; H1 2017/18 GBP97). We have seen an overall reduction in recyclate volumes sold, higher waste output and an increase in costs of production. Our focus continues to be on the production of higher quality recyclates as well as adopting 'self-help' measures to create margin improvement. To help mitigate our exposure to recyclate price volatility we continue to share commodity risks and rewards with our customers.
In the period Contracts, Collections and Other EBITDA was broadly comparable with the prior period at GBP20.3 million (H1 2017/18 GBP20.0 million). Following last year's reset, the Greater Manchester run off contract financial results are in line with our expectations. In November 2018 Viridor withdrew from the Greater Manchester waste operating contract tender process and we expect the run-off contract to cease in early 2019/20. The financial impact of not continuing with this operational contract is not material to the Group, and our position with the ERFs at Runcorn is unaffected.
Viridor's indirect costs have continued to fall, marginally down this period to GBP27.8 million from GBP28.2 million in H1 2017/18, and are 17% lower in real terms than 2015/16.
Joint venture EBITDA has reduced from GBP25.4 million in H1 2017/18 to GBP13.4 million. This is a result of the contract reset at Greater Manchester in September last year. This saw both the disposal of our Viridor Laing joint venture and the introduction of a lower contractual EBITDA for our TPSCo joint venture following the repayment of external debt as part of the reset. Interest savings mean that TPSCo profit after tax was not significantly impacted by the reset. TPSCo continues to deliver strong operational and financial performance.
Planned maintenance profiling in H1 2018/19 at our Lakeside joint venture has resulted in financial performance slightly below last year, however, underlying operational and financial performance has remained strong, again exceeding our original expectations, for both waste processing and power generation.
IFRIC 12 interest receivable at GBP7.3 million is broadly comparable with H1 2017/18 of GBP6.9 million.
Pennon Water Services has continued to successfully gain new customers during its second year of trading. Overall EBITDA for the first half is GBP0.9 million (H1 2017/18 GBP0.5 million), with a focus on improving operating cost efficiencies.
Group efficiencies achieved as a result of the Shared Services initiatives have delivered a further GBP2 million of cost savings and synergy benefits during the first half of the year bringing the cumulative position to c.GBP15 million p.a. to date, and we are on track for the cumulative c.GBP17 million p.a. targeted from 2019.
Net Finance Costs
Underlying net finance costs of GBP40.8 million are GBP4.2 million higher than last half year (H1 2017/18 GBP36.6 million). This is attributable to higher net debt from continuing capital investments and lower interest receivable on shareholder loans following the Greater Manchester contract reset.
We have secured funding at a cost that is efficient and effective with the effective interest rate reducing marginally to 3.6% (H1 2017/18 3.7%), remaining sector leading.
The effective interest rate is calculated after adjusting for capitalised interest of GBP8.3 million, notional interest items totalling GBP6.3 million, interest received from shareholder loans to joint ventures of GBP2.5 million and IFRIC 12 interest receivable of GBP7.3 million. The effective interest rate for South West Water in the period was 3.5% (H1 2017/18 3.5%).
During H1 2018/19 underlying net finance costs (excluding pensions net interest costs of GBP0.9 million, discount unwind of provisions of GBP5.4 million and IFRIC 12 notional interest receivable of GBP7.3 million) were GBP52.6 million, covered 4.3 times by Group operating profit (H1 2017/18 GBP51.1 million and 4.3 times).
Profit before tax
Group underlying profit before tax was GBP142.5 million, an increase of 8.7%, compared with the prior half year (H1 2017/18 GBP131.1 million). Included in profit before tax is our share of joint venture profit after tax of GBP4.8 million (H1 2017/18 GBP5.3 million). On a statutory basis, profit before tax was GBP133.6 million (H1 2017/18 GBP129.8 million) reflecting a non-underlying charge before tax of GBP8.9 million (H1 2017/18 GBP1.3 million).
Taxation
The Group's underlying mainstream UK corporation current tax charge for the half year (before prior year adjustments) was GBP15.6 million, reflective of an effective tax rate of 10.9% (H1 2017/18 GBP14.3 million, 10.9%). The lower effective rate versus the UK's mainstream corporation tax rate of 19% reflects the accelerated level of capital allowance claims available to the Group compared to the Group depreciation charge. There was a prior year credit of GBP3.2 million recognised for the period (H1 2017/18 credit of GBP4.3 million), the credits reflect the resolution of minor outstanding tax items with HMRC.
Underlying deferred tax for the period (before prior year adjustments) was a charge of GBP12.2 million (2017/18 H1 charge GBP10.2 million). The charge for H1 2017/18 primarily reflects capital allowances across the Group in excess of depreciation charged. There was a prior year deferred tax credit of GBP5.3 million recognised for the period (H1 2017/18 GBP1.6 million charge), reflecting finalisation of capital allowance claims.
In addition, in H1 2018/19 there is a non-underlying GBP1.7 million current year deferred tax credit (2017/18 H1 GBP1.3 million deferred tax credit) relating to the non-underlying movement in the fair value of long-dated derivatives associated with South West Water's 2040 bond. There was also a GBP3.0 million non-underlying current tax credit in H1 2017/18 (relating to the reset of the Greater Manchester Contract); there is no current tax effect of the non-underlying items in H1 2018/19.
Overall the total tax charge for the period was GBP17.6 million (H1 2017/18 GBP17.5 million).
Earnings per share
Earnings per share on both a statutory and underlying basis before deferred tax has been positively impacted by a reduction in hybrid costs[32] period on period in addition to increased profits. As a consequence earnings per share on both a statutory and underlying basis has increased by 17.4% at 25.6p (H1 2017/18 21.8p) and 18.6% at 30.0p (H1 2017/18 25.3p) respectively.
Robust cash inflow from operations, continuing investment in future growth
The Group's operational cash inflows in H1 2018/19 were GBP266.6 million[33] (H1 2017/18 GBP308.9 million). These funds have been put to use in efficiently financing the Group's capital structure and investing in future growth. This investment has resulted in higher Group net debt.
Contributions into the Group's pension schemes for the half year were GBP8.5 million, and corporation tax payments were GBP12.2 million. Included in other movements of GBP48.0 million is the 2017 unwind settlement of the PMB derivative. Total tax payments reflecting all taxes borne by the Group in H1 2018/19 were GBP63.4 million[34] (H1 2017/18 GBP59.0 million).
Sustainable funding position underpinning investment
The Group has a strong liquidity and funding position with GBP1,056 million cash and committed facilities at 30 September 2018. This consists of cash and deposits of GBP406 million (including GBP186 million of restricted funds representing deposits with lessors against lease obligations) and undrawn facilities of GBP650 million. At 30 September 2018 the Group's borrowings totalled GBP3,448 million.
Pennon has pioneered a sustainable financing framework to integrate commitments to environmental and social objectives into a variety of funding opportunities across the Group. The framework allows Pennon to access future funding opportunities aligned with the green loan principles, green bond principles and social bond principles. The framework has been certified by DNV GL a leading sustainability verifier. Pennon is committed to continuous annual improvements in sustainability ratings and KPIs which may lead to improved interest rate margins.
During the period, GBP480 million of new and renewed facilities have been signed, GBP340 million in Pennon Group plc and GBP140 million in South West Water. In total, GBP350 million of the new facilities signed in the half year are linked to the sustainable nature of the business. Included in these facilities is an inaugural Pennon Group loan from the EIB[35].
Pennon has cash and committed facilities for the remainder of South West Water's planned K6 capital programme and our ERF investments. Further 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.
Efficient long-term financing strategy
The Group has a diversified funding mix of fixed (GBP1,771 million, 58%), floating (GBP708 million, 23%) and index-linked borrowings (GBP563 million[36], 19%). The Group's debt has a maturity of up to 39 years with a weighted average maturity of c.20 years. 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 for this regulatory period to have at least 50% of funding fixed.
South West Water's cost of finance is amongst the lowest in the industry. Around two thirds of South West Water's net debt is from finance leases which provide a long maturity profile. Interest payable benefits from the fixed credit margins which are secured at the inception of each lease. GBP563 million (c.25%) of South West Water's debt is index-linked at an overall real rate under 2.0%. This represents a quarter of the net funding for South West Water, a level below Ofwat's notional level of 33%, which we believe gives an advantageous position given the RPI to CPIH transition.
Following the submission of the South West Water business plan the Group is looking to align the hedging for the next regulatory period with the changed regulatory methodology. A proportion of new debt will be hedged in K7 on a rolling ten year basis whilst still maintaining flexibility within the overall portfolio. Embedded debt hedging will be aligned with the regulatory delivery period.
Net debt position
In the first half of 2018/19 the Group's net debt increased by GBP240 million to GBP3,042 million. Cash inflow from operations was GBP267 million. Cash outflows relating to the capital programme totalled GBP192 million[37], slightly reduced as expected from the peak years of the Group's capital expenditure in 2016/17 and 2017/18. The gearing ratio at 30 September 2018, being the ratio of net debt to (equity plus net debt) was 65.5% (31 March 2018 63.1%, 30 September 2017 64.8%) and is expected to reduce by the year end.
The combined South West Water and Bournemouth Water debt to RCV ratio is 62.1%[38] (31 March 2018 60.3%, 30 September 2017 62.1%) which broadly aligns with Ofwat's K6 target for efficient gearing of 62.5%.
Group net debt includes GBP2,125 million for South West Water with the remaining GBP917 million supporting investment in Viridor growth and expansion including the amount invested in joint ventures, through shareholder loans of GBP41 million for TPSCo and Lakeside.
Capital investment focused on regulatory expenditure and ERF build out
Group capital investment was GBP201 million[39] in H1 2018/19 compared with GBP222 million(39) in H1 2017/18.
Viridor
Viridor's capital spend(39) in the period was GBP131.9 million (H1 2017/18 GBP124.3 million), an increase of GBP7.6 million over H1 2017/18.
The majority of capital investment continues to relate to the delivery of the ERF fleet[40], with GBP103 million of total spend relating to the three ERFs in operational ramp up and Avonmouth under construction. Our ERFs at Glasgow, Beddington and Dunbar are all processing waste.
Other capital expenditure included lifecycle capital expenditure on our operational ERF fleet and development of our Clyde Valley ERF fuel supply facility. On-going restoration and remediation programmes continue for our landfill assets, ensuring we meet or exceed our environmental duties and responsibilities.
South West Water
South West Water's capital expenditure in the first half of the year was GBP68.6 million, compared with GBP97.6 million in H1 2017/18 with the profile aligned with the K6 capital plan reflecting the completion of specific large investment programmes at Mayflower Water Treatment Works and the bathing and shellfish water improvements.
Key areas of drinking water investment and activity during H1 2018/19 included:
-- Completion of the new state-of-the-art Mayflower water treatment works which has entered commissioning, with c.GBP6 million of expenditure in H1 2018/19 (H1 2017/18 c.GBP19 million)
-- Investment in our infrastructure to reduce the number of bursts and leakage impacted by the 'freeze and thaw' in March 2018 and costs associated with the hot dry summer (c.GBP6 million).
Key areas of wastewater investment and activity during H1 2018/19 included:
-- Finalisation and completion of the Plymouth bathing water scheme -- Continued improvements at wastewater treatment works including flood resilience -- Investment for growth in order to meet increases in supply and demand.
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 2018 the Group's pension schemes showed an aggregate deficit (before deferred tax) of GBP44.8 million (March 2018 GBP49.5 million), a reduction of GBP4.7 million. Pension liabilities decreased by GBP3.8 million mainly due to higher corporate bond yields, while asset values increased marginally by GBP0.9 million.
The net aggregate liabilities of GBP37 million (after deferred tax) represented around 1% of the Group's market capitalisation at 30 September 2018.
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.
Forward hedges have been put in place in the liquid market with the Group c.80% hedged until March 2020 and c.55% hedged until 2021 for its energy (generation net of internal usage of electricity). 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.
The energy portfolio management team continues to actively manage the Group net energy generation position in liquid markets.
SOUTH WEST WATER
OPERATIONAL PERFORMANCE
Delivering a resilient service for customers - excellent management of operational challenges
Despite the challenges of extreme weather, South West Water has continued to deliver a resilient service to its customers. During the exceptional cold weather[41] in March, with the first red weather warning for snow in the South West, our proactive planning and management ensured we were able to manage the impacts of the 'freeze and thaw' effectively. We have also supported customers with leak repair activity and focused on fixing visible leaks within two days.
Alongside this increased activity we have maintained supplies to customers despite the unprecedented demand over the hot dry summer. This has been the hottest summer on record and water through our network has increased c.6.0% from last year. This increased demand has been further challenged with the significant increase in visitors to the region over the summer period (c.20% increase). Despite this, 2018 has been our 22(nd) year without water restrictions and supply interruptions have reduced this period. In addition, we have supported the Isles of Scilly over the summer months to maintain supplies in that area when water levels fell to extreme lows.
Customers at the heart of our delivery
Improving customer service is at the heart of our delivery plans. South West Water achieved its best ever quality service score in H1 2018/19, ranked 2(nd) out of all water and sewerage companies in England and Wales. Our customer service score (SIM) increased again and is now expected to be above average for the industry this year, with no penalty forecast for the K6 period. The SIM score is calculated against a qualitative element (based on a customer survey) and a quantitative element that takes into account, amongst other things, the number of complaints received in writing or by phone, which continue to fall.
The improvement in service is driven by a range of activities including enhanced 'customer journeys', which have been developed jointly with customers, increasing customer resolution as well as improving the channels with which customers can contact us, such as online and social media.
South West Water has been leading the way for the last 10 years in providing support to customers who find themselves in vulnerable circumstances or who struggle to pay their bills. We have continued to focus on this and are targeting to eliminate water poverty in our 2020-2025 Business Plan. Preparation for these additional activities is already underway and those currently receiving support through reduced tariffs has increased to c.23,000 customers, the highest proportion in the industry[42], and over 55,000 customers are supported through other programmes.
Since the opening of the non-household retail market in April 2017, South West Water has operated successfully with 19 different retailers and our wholesale service desk has been operating effectively.
Maintaining momentum - continued sector leading outperformance
South West Water has performed well in H1 2018/19, and has delivered in line with management expectations. Strong operational and financial performance underpins our sector leading RORE[43], which has been consistently above 11%[44] annually and remains 11.8% cumulatively since the start of the K6 business plan period. Of the 11.8%, 6.0% is the base return, 2.6%[45] reflects Totex savings and efficiencies, 0.3% reflects a net reward on Outcome Delivery Incentives (ODIs) and 2.9%[46] reflects the difference between actual and assumed financing costs using a cumulative forecast RPI over K6 of 2.8%, which is consistent with the approach adopted for calculating our innovative WaterShare mechanism. Cumulatively the WaterShare RORE outperformance over K6 is consistent with the approach adopted by Ofwat.
H1 2018/19[47] K6 to date
Base return 6.0% 6.0%
Totex outperformance(45) 2.6% 2.6%
ODI outperformance(47) 0.2% 0.3%
Financing Outperformance(46) 2.8% 2.9%
WaterShare RORE 11.6% 11.8%
Ofwat RORE(44) 12.3% 11.8%
Totex efficiency reducing customer bills
South West Water is striving for ever greater efficiency. Totex outperformance has already achieved cumulative savings of GBP209 million[48] to H1 2018/19 and we are on track to deliver c.GBP300 million of Totex savings by 2020, which are embedded into our 2020-2025 business plan.
These savings are being driven by:
-- Managing upward cost pressures, with actual net price rises being below annual average inflation rates
-- Continuing advantages from our strategic alliances and driving efficiency from our procurement processes
-- Reducing customer debt through enhanced collections activities and increasing our affordability schemes (such as social tariffs), with the cost of bad debt now below the level assumed within the 2014 Final Determination
-- Efficiencies from the Bournemouth Water integration, including delivery of key capital schemes in the region, with c.GBP19 million of net synergies delivered to date
-- Ensuring efficient capital investment through the use of data analytics, optimising capital and operating solutions and promoting efficient off-site build techniques.
This focus on cost efficiency is reducing bills for customers, and our 2020-2025 business plan continues to target cost efficiency, supporting an 11% real reduction in customer bills by 2025.
ODIs continue to deliver net reward
Operational performance for the half-year based on delivery by 30 September 2018 resulted in a net ODI reward of GBP1.2 million[49] (GBP9.3 million cumulatively for K6) reflecting RORE outperformance of 0.2%[50], a slight reduction from last year. Good asset reliability with stable serviceability across all water and wastewater areas has been maintained. Rewards were delivered across bathing water quality and water restrictions, as well as significant improvements in external and internal sewer flooding, which continue to deliver rewards. The cumulative net reward of GBP9.3 million to H1 2018/19 comprises GBP15.4 million of total rewards and GBP6.1 million of total penalties. ODI penalties which apply within the regulatory period will reduce customer bills as they are 'passed back'. ODI net penalties of GBP2.1 million have been adjusted in customer bills for 2018/19 and GBP0.3 million will be adjusted in the 2019/20 tariffs.
Whilst the overall net value of ODI reward has fallen in 2018/19, this is a result of the profile of ODI rewards over the current regulatory period. South West Water is forecasting to meet all its ODI commitments this year with a number of areas moving out of penalty.
-- Pollution incidents
Pollution incidents in the year have continued to fall, with only one significant pollution incident in the calendar year so far. This would result in zero penalties for the year (compared to the cumulative penalty of GBP3.6 million).
-- Flooding
Continuing the strong performance in 2017/18, the number of flooding incidents in H1 2018/19 has reduced and based on this performance is expected to result in further rewards this year.
-- 22(nd) consecutive year without water restrictions
Despite the unprecedented increase in customer demand over the hot dry summer, water resources in the South West Water region remained unrestricted for a twenty-second consecutive year and the Bournemouth water region maintained its position of having no water restrictions since privatisation. As the weather continues to remain drier than usual South West Water is actively managing our water resources and may implement storage schemes to protect future supplies.
-- Bathing water quality - c.99% achieving sufficient quality, over 78% excellent
Our legacy of major investment to protect bathing waters continues to be reflected in extremely positive results for the 2018 bathing water season. Of the 151 bathing waters tested in the South West Water region, 149 (c.99%) were classified 'sufficient' or better, with more than 78% classified as 'excellent'. Neither of the two bathing waters rated as 'poor' were attributed to any failure of South West Water's assets.
-- Leakage
The impact of the 'freeze and thaw' in March 2018 has seen leakage levels increase along with the number of bursts in the region. South West Water is targeting investment and operational resources to meet our leakage target of 84 megalitres per day in 2018.
-- Supply interruptions - meeting targets
Demand over the summer months placed pressure on both our treatment works and network to meet customer demand. Despite this the average duration of supply interruptions per property for South West Water remains on track to meet the target for the year based on performance in H1 2018/19.
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 GBP115 million delivered in the K6 period to date. Since the year end a GBP60 million lease has been agreed under the Pennon sustainable financing framework, specifically linked to the new innovative Mayflower water treatment works. Gearing levels remain aligned with Ofwat's current notional level and South West Water is the only UK water company to share the benefits of lower interest rates with customers.
Sharing outperformance between customers and shareholders
South West Water is sharing the benefits of business outperformance between customers and shareholders through our unique WaterShare mechanism. Since 2015 c.GBP100 million of cumulative benefits([51]) have been identified to share with customers through investment in services and lower future bills. This reflects GBP71 million of Totex savings, GBP9 million of net ODI benefits and GBP16 million of other benefits (including financing). These Totex savings and efficiencies (including the forecast to 2020) have been reflected in the 2020-2025 business plan, lowering bills for customers over the next regulatory period. The other savings identified in recent years and expected out to 2020 will provide the basis for delivering the New Deal for customers.
New Deal 2020-2025 - delivery preparations underway
Empowering customers through a New Deal
The key focus for our 2020-2025 business plan is empowering customers through a New Deal. It will ensure customers are sharing in our success and having a say through a Customer AGM, which will allow customers to hold us directly to account. In addition, the option for customers to have a shareholding gives them a tangible stake in our business through the outperformance delivered and will further ensure customers are at the heart of our business.
The business plan proposes new benchmarks for service and efficiency, with a key target being to eliminate water poverty by 2025.
Delivery preparations underway
The next regulatory period includes specific comparative service and environmental targets which will be measured consistently across the whole industry every year. Based on existing performance South West Water is already delivering above average performance in 10 ODIs[52].
A successful part of our delivery has been our commitment to strong partnerships. For the next regulatory period we have already put in place a number of key partnerships, including our capital investment partners who will transition to our capital alliance H5O. In addition we have secured a number of other partners including universities, housing associations, customer advocates and environmental charities.
South West Water has also focused on preparing for operational excellence and early planning of our investment programme. This includes pilot trials of new water treatment technology in Bournemouth and supporting the Isles of Scilly operations over the summer months with preparatory work for take-over already in progress.
VIRIDOR
Confident outlook for Viridor in the waste sector
Viridor is focused on UK recycling and residual waste processing and transformation.
Recycling
The Government's Resource & Waste Strategy is expected to confirm the fundamentals of the waste market and provide a stimulus to recycling. The 'Blue Planet' effect continues to drive Government action and there are potential opportunities arising from Brexit which also require consideration.
The UK Plastics Pact (a unique pact between governments, businesses, local authorities, NGOs and citizens) is seeking to transform the UK's plastics system. The pact has targets including:
-- 100% of plastic packaging to be reusable or recyclable -- 70% of plastic packaging effectively recycled (from current 43%) -- Problematic or unnecessary single-use plastics eliminated -- 30% average recycled content across all plastic packaging.
EPR & PRN[53] reform is also recommended by the National Audit Office and is expected to improve the returns from investments in recycling, a key factor being standardised collections increasing household waste quality.
Viridor's 2018 Recycling Index Report shows that over 80% of the public is worried about plastics in the oceans, and over 60% of consumers were more likely to buy products with packaging made from recycled materials.
Residual waste activities (ERFs and Landfill)
The market fundamentals for ERFs remain strong, with the gap between combustible residual waste arisings and ERF capacity forecast to remain over 7 million tonnes (mT) per annum to 2030. In addition the Autumn Budget noted that 'the Government recognises the important role incineration currently plays in waste management in the UK...'.
The Viridor portfolio processes a fifth of the UK ERF combustible waste tonnage and continues to optimise its assets through capacity expansions, heat transfer and offtake opportunities.
Viridor recognises that the landfill portfolio complements its residual waste strategy. We continue to foresee a requirement for a landfill solution into the medium term. As landfill sites close over the coming years, parts of the country will experience a shortage of capacity. Viridor's landfill sites are well positioned to support future market requirements. Available void on operating sites is c.30 million cubic metres, equivalent to c.15 years overall capacity at current run rates, with 5 sites having capacity to 2030 and beyond.
Strong operational focus
H1 2018/19 H1 2017/18
Total Waste Inputs (mT) 3.5 3.9
ERFs 1.0 1.1
Landfill 0.9 0.9
Recycling and Other 1.6 1.9
Recycling Volumes Traded 0.6 0.7
ERF availability[54] 89% 90%
ERFs continuing to perform strongly
Our ERFs have delivered strong operational performance in the first half of 2018/19.
We are on track to deliver another year of availability in excess of 90% across our operational portfolio (including joint ventures). As we continue to optimise our performance, more of our planned maintenance outages have been completed in the first half of the financial year, when electricity demand and pricing is lower. Planned maintenance has been performed at all major sites during the half year. Cumulatively to date maintenance is running at c.2.1% of capital expenditure. This is expected to increase over the life of the assets with an underlying future average rate of c.3.5%.
Glasgow, Beddington and Dunbar are all processing waste. Optimisation is ongoing and operations will ramp up over the next 18 months, as has previously occurred at the other ERFs in our portfolio.
As previously reported, completion of construction of our Glasgow Recycling and Renewable Energy Centre has required a higher level of remediation and expenditure than predicted. This has been driven by the high level of non-conformances that have required rectification for work performed by our previous Engineering, Procurement and Construction (EPC) contractor. Viridor is contractually entitled to recover incremental costs from the original principal contractor, Interserve, under certain circumstances. Discussions with Interserve are ongoing with regard to the contractual settlement. The gross receivable is GBP72 million, after taking into account an assessment of market indicators of credit risk for the EPC contractor, a provision of GBP8 million has been recognised resulting in a net receivable of GBP64 million at 30 September 2018.
Construction work progresses at Avonmouth and is on track for takeover in line with the planned costs and timetable. Processing equipment is now being erected within the structural steel frame.
With the new facilities burning waste, our operational design capacity has increased to 2.9 million tonnes of waste and 242 megawatts (MW) per annum, including joint ventures. This will extend to 3.2 million tonnes of waste and 276 MW by 2021.
Responding to recycling markets
Following the impact that import restrictions imposed by China had on global recycling markets in H2 2017/18, we have seen some recovery in H1 2018/19. Paper prices have improved from their low point, and pricing on other commodities are slightly ahead of last year.
We have continued to focus on producing higher quality recyclates to fulfil market demands and revenue per tonne has increased 13.4% to GBP110 (H1 2017/18 GBP97, H2 2017/18 GBP97). This increase in quality requirement has resulted in increased costs of production and a reduction in volumes being produced.
We remain confident that our recycling business is on track for full year results in line with our expectations.
We have made good progress with our FMCG[55] customers in the period in developing 'closed-loop' solutions, providing high quality recycled plastics and polymers. Utilising innovative technology and processes we are creating value from the requirement for recycled materials, to replace virgin material in premium consumer packaging.
Landfill portfolio complements residual waste strategy
Viridor continued to operate 11 landfill sites in H1 2018/19, with one site at Rigmuir (Glasgow) closed in September as part of the planned closure profile leaving 10 operational sites. Consented landfill capacity reduced from 40.5 million cubic metres (mcm) to 30 mcm in the 6 months to September 2018, reflecting usage during the period and the closure of Rigmuir. We have a track record of effectively restoring our sites and repurposing these for alternative uses with 3 closed landfill sites repurposed for development in recent years.
Landfill volumes and average gate fees are comparable with H1 last year at 0.9 million tonnes and GBP22 per tonne. Our landfill energy business continues to be managed to maximise the value of landfill gas power generation. We continue to explore alternative commercial development opportunities and other renewable energy solutions at our landfill sites, such as photovoltaic (PV) and energy storage.
At present, Viridor's landfill gas engines contribute 86MW of landfill gas generation capacity, a decrease from 88MW at March 2018. This reflects the replacement of larger older engines with smaller more efficient engines designed to optimise the gas volumes produced at the sites. Viridor also has a PV capacity of 3.2MW. We currently have surplus grid connection capacity at some sites, which presents an opportunity for growth subject to suitable capital investment. Investment opportunities to create energy parks, including private wire connections to local industry and developments are being assessed.
Average revenue per Megawatt hour (MWh) increased by 7.4% to GBP87 (H1 2017/18 GBP81). Average operating costs increased 23.1% to GBP48 per MWh (H1 2017/18 GBP39) reflecting increased investment in planned preventative maintenance to secure reliable generation, including for the upcoming winter period.
Revenue during the period has increased by 2.8% compared to H1 2017/18, with a 4% reduction in gas volumes in H1 2018/19 being offset by the higher energy prices.
Contracts and Collections
The run-off contract to operate the recycling assets of the Greater Manchester Combined Authority has delivered in line with expectations. In November 2018 Viridor withdrew from the Greater Manchester waste operating contract tender process and we expect the run-off contract to cease in early 2019/20. The financial impact of not continuing with an operational contract is not material to the Group, and our position with the ERFs at Runcorn is unaffected.
Our Contract and Collections business continues to provide a valuable service to all our customers and secures the volume of input materials needed to operate our ERF, landfill and recycling assets.
Joint Ventures continue to perform strongly
The joint venture at Lakeside ERF (a 50:50 joint venture with Grundon Waste Management) has had another strong half year. In its ninth year of operation it continues to outperform its original targets for both waste processing and power generation.
The TPSCo joint venture (between Viridor, John Laing Investments and Inovyn) has also performed strongly during the half year.
In November 2018, Viridor exercised its pre-emption rights and agreed a GBP54.5 million cash consideration to acquire John Laing Investments Limited's 37.5% economic interest and 20% voting rights in the Runcorn I ERF. The acquisition consolidates further Viridor's leading market position in UK Energy Recovery and results in an increase to Pennon's economic interest in INEOS Runcorn (TPS) Holdings Limited from 37.5% to 75.0%, with the associated voting rights moving from 20% to 40%.
PENNON WATER SERVICES
Focus on delivering operating cost efficiencies
Pennon Water Services (PWS), our 80:20 retail venture with South Staffordshire Plc, continues to deliver net customer[56] and revenue growth during its second year of operation, with continued success with the dual service position.
Serving over 160,000 customer accounts across 18 different wholesale regions, Pennon Water Services has c.10,000(56) new customer accounts generating around GBP31 million of new revenue, with 100% new contract renewal rate to date.
We continue to focus on delivering customer service that reflects the needs of our business customers with satisfaction scores increasing in the period. We are now implementing further strategies to improve operating cost efficiency within the competitive market including within billing and cash management.
Board Matters
As previously announced and in line with governance best practice, Martin Angle, Non-Executive Director and chairman of the Remuneration Committee, who has been a Director for nine years, will stand down from the Board on 31 December 2018. Iain Evans has been appointed as his successor and joined the Board in September 2018. We thank Martin for his considerable contribution to the Group's success and strong governance over the years.
Chris Loughlin
Group Chief Executive Officer
27 November 2018
Financial Timetable
24 January 2019 Ex-dividend date 25 January 2019 Record date January 2019 Viridor Waste Capital Markets Day 8 March 2019 Final date for receipt of DRIP applications 25 March 2019 Trading Statement 4 April 2019 Interim dividend payment date 4 June 2019 Full Year Results 2018/19 Early June 2019 Annual Report & Accounts published 25 July 2019 Annual General Meeting 25 July 2019* Ordinary shares quoted ex-dividend 26 July 2019* Record date for final dividend 12 August 2019* Final date for receipt of DRIP applications 3 September 2019* Final dividend paid September 2019 Trading Statement 26 November 2019 Half Year Results 2019/20
* These dates are provisional and, in the case of the final dividend subject to obtaining shareholder approval at the 2019 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 and the associated residual risk exposure for the remaining six months of the financial year have been reviewed by the Directors and are considered to be unchanged from those reported on pages 55 to 60 of the Annual Report and Accounts 2018. A summary of Pennon Group's principal risks is detailed below.
These principal risks have been reconsidered against a continued back drop of broader macro political and economic uncertainties; including the potential renationalisation of the water industry in the event of a change in Government and ongoing negotiations between the UK and the EU on any withdrawal agreement.
Specifically, the Board has considered the potential implications of a 'no deal' scenario between the UK and the EU on the Group's principal risks, which was informed by guidance documentation issued by the UK Government. Appropriate mitigation strategies have been developed in order to minimise any potential impact on the Group.
The Board considers the principal risks to be:
Law, Regulation and Finance
-- Changes in Government Policy - renationalisation -- Changes in Government Policy - single use plastics -- Regulatory reform -- Compliance with laws and regulations -- Maintaining sufficient finance and funding to meet ongoing commitments -- Non-compliance or occurrence of avoidable health and safety incidents -- Tax compliance and contribution -- Increase in the defined benefit pension scheme deficit
Market and Economic Conditions
-- Non-recovery of customer debt
-- Macro-economic risks arising from global and UK economic downturn impacting commodity and power prices
Operating Performance
-- Poor operating performance due to extreme weather or climate change -- Poor customer service and/or increased competition leading to loss of customer base -- Business interruption or significant operational failures/ incidents
-- Difficulty in recruitment, retention and development of 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, changes in Government policy on renationalisation and use of single use plastics; regulatory reform; compliance with laws and regulations; maintaining sufficient finance and funding to meet ongoing commitments; non-compliance or occurrence of avoidable health and safety incidents; tax compliance and contribution; increase in defined benefit pension scheme deficit; non-recovery of customer debt; poor operating performance due to extreme weather or climate change; macro-economic risks impacting commodity and power; poor service and/or increased competition leading to loss of customers; business interruption or significant operational failure/incidents; difficulty in recruitment, retention and development of skills; 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 2018. 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 2018
Unaudited
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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
2018 2018 2018 2017 2017 2017
Notes GBPm GBPm GBPm GBPm GBPm GBPm
Revenue 4 746.7 - 746.7 723.9 3.2 727.1
Operating costs
Employment costs (101.5) - (101.5) (99.1) - (99.1)
Raw materials and consumables
used (70.2) - (70.2) (60.0) - (60.0)
Other operating
expenses (301.0) - (301.0) (311.3) - (311.3)
Earnings before
interest,
tax,
depreciation and
amortisation 4 274.0 - 274.0 253.5 3.2 256.7
Depreciation and amortisation (95.5) - (95.5) (91.1) - (91.1)
Operating profit 4 178.5 - 178.5 162.4 3.2 165.6
Finance income 6 11.5 - 11.5 13.5 - 13.5
Finance costs 6 (52.3) (8.9) (61.2) (50.1) (27.0) (77.1)
----------------------------------- ------- --------------- ------------------------- ----------- ---------------- ------------------ --------------
Net finance costs 6 (40.8) (8.9) (49.7) (36.6) (27.0) (63.6)
Share of post-tax profit
from
joint ventures 4.8 - 4.8 5.3 22.5 27.8
Profit before tax 4 142.5 (8.9) 133.6 131.1 (1.3) 129.8
Taxation 7 (19.3) 1.7 (17.6) (21.8) 4.3 (17.5)
--------------- ------------------------- ----------- ---------------- ------------------ --------------
Profit for the period 123.2 (7.2) 116.0 109.3 3.0 112.3
=============== ========================= =========== ================ ================== ==============
Attributable to:
Ordinary shareholders
of the
parent 114.7 (7.2) 107.5 87.9 3.0 90.9
Non-controlling interests (0.1) - (0.1) (0.1) - (0.1)
Perpetual capital security
holders 8.6 - 8.6 21.5 - 21.5
Earnings per ordinary
share
(pence per share) 8
- Basic 25.6 21.8
- Diluted 25.5 21.7
The notes on pages 39 to 58 form part of this condensed half year financial
information.
PENNON GROUP PLC
Consolidated statement of comprehensive income for the half year ended 30
September 2018
Unaudited
---------------------------------------------------------------------------------------------------------------------
Non-underlying Before Non-underlying Total
Before items Total non-underlying items half year
non-underlying (note 5) half year items (note 5) ended
items half half year ended half half year 30 September
year ended ended 30 year ended ended 30 2017
30 September 30 September September 30 September September
2018 2018 2018 2017 2017
GBPm GBPm GBPm GBPm GBPm GBPm
Profit for the period 123.2 (7.2) 116.0 109.3 3.0 112.3
Other comprehensive
income
Items that will not
be reclassified
to profit or loss
Remeasurement of
defined
benefit obligations
(note 16) 7.6 - 7.6 15.3 - 15.3
Income tax on items
that will not
be reclassified (1.3) - (1.3) (2.5) - (2.5)
-------------------- ------------------------- ----------- ---------------- ------------------ -----------------
Total items that will
not be
reclassified to
profit
or loss 6.3 - 6.3 12.8 - 12.8
-------------------- ------------------------- ----------- ---------------- ------------------ -----------------
Items that may be
reclassified
subsequently to
profit
or loss
Share of other
comprehensive
income from joint
ventures 0.7 - 0.7 (3.9) - (3.9)
Cash flow hedges 4.1 - 4.1 15.0 - 15.0
Income tax on items
that may be
reclassified (1.1) - (1.1) (2.6) - (2.6)
Total items that may
be
reclassified
subsequently
to
profit or loss 3.7 - 3.7 8.5 - 8.5
-------------------- ------------------------- ----------- ---------------- ------------------ -----------------
Other comprehensive
income for the period
net of tax 10.0 - 10.0 21.3 - 21.3
-------------------- ------------------------- ----------- ---------------- ------------------ -----------------
Total comprehensive
income
for the period 133.2 (7.2) 126.0 130.6 3.0 133.6
==================== ========================= =========== ================ ================== =================
Total comprehensive
income
attributable to:
Ordinary shareholders
of the
parent 124.7 (7.2) 117.5 109.2 3.0 112.2
Non-controlling
interests (0.1) - (0.1) (0.1) - (0.1)
Perpetual capital
security
holders 8.6 - 8.6 21.5 - 21.5
==================== ========================= =========== ================ ================== =================
The notes on pages 39 to 58 form part of this condensed half year financial
information.
PENNON GROUP PLC
Consolidated balance sheet at 30 September 2018
Unaudited
-----------------------------
30 September 31 March
2018 2018
Notes GBPm GBPm
ASSETS
Non-current assets
Goodwill 385.0 385.0
Other intangible assets 73.0 72.6
Property, plant and equipment 4,412.3 4,310.6
Other non-current assets 266.2 263.5
Derivative financial instruments 60.0 70.5
Investments in joint ventures 28.3 22.8
----------------------------- ------------------
5,224.8 5,125.0
----------------------------- ------------------
Current assets
Inventories 30.2 24.6
Trade and other receivables 483.2 416.0
Derivative financial instruments 10.1 12.9
Cash and cash deposits 14 405.7 585.3
----------------------------- ------------------
929.2 1,038.8
----------------------------- ------------------
LIABILITIES
Current liabilities
Borrowings 14 (109.4) (209.8)
Financial liabilities at fair value
through profit (2.6) (2.6)
Derivative financial instruments (9.5) (9.4)
Trade and other payables 18 (311.1) (342.0)
Current tax liabilities (24.6) (24.4)
Provisions (41.3) (38.0)
----------------------------- ------------------
(498.5) (626.2)
----------------------------- ------------------
Net current assets 430.7 412.6
----------------------------- ------------------
Non-current liabilities
Borrowings 14 (3,338.2) (3.177.0)
Other non-current liabilities 18 (148.0) (140.1)
Financial liabilities at fair value
through profit (45.6) (46.6)
Derivative financial instruments (4.6) (8.2)
Retirement benefit obligations 16 (44.8) (49.5)
Deferred tax liabilities (303.1) (295.6)
Provisions (172.6) (181.5)
----------------------------- ------------------
(4,056.9) (3,898.5)
----------------------------- ------------------
Net assets 1,598.6 1,639.1
============================= ==================
Shareholders' Equity
Share capital 10 171.0 170.8
Share premium account 11 222.3 218.8
Capital redemption reserve 144.2 144.2
Retained earnings and other reserves 763.0 807.1
----------------------------- ------------------
Total shareholders' equity 1,300.5 1,340.9
----------------------------- ------------------
Non-controlling interests 1.4 1.5
Perpetual capital securities 12 296.7 296.7
----------------------------- ------------------
Total equity 1,598.6 1,639.1
============================= ==================
The notes on pages 39 to 58 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
2018
Unaudited
---------------------------------------------------------------------------------------------------------------------
Share Retained Perpetual
Share premium Capital earnings Non-controlling capital
capital account redemption and other interests securities Total
(note (note reserve reserves (note Equity
10) 11) 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 - - - - 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
========= ======== ======================= ================ ==================== ================= ========
Unaudited
-----------------------------------------------------------------------------------------------------------------
Share Retained Perpetual
Share premium Capital earnings Non-controlling capital
capital account redemption and other interests securities Total
(note (note reserve reserves (note Equity
10) 11) 12)
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 April 2018 170.8 218.8 144.2 807.1 1.5 296.7 1,639.1
Profit for the period - - - 107.5 (0.1) 8.6 116.0
Other comprehensive income
for the period - - - 10.0 - - 10.0
--------- -------- ----------------------- ---------------- -------------------- ----------------- --------
Total comprehensive income
for the period - - - 117.5 (0.1) 8.6 126.0
--------- -------- ----------------------- ---------------- -------------------- ----------------- --------
Transactions with equity
shareholders:
Dividends paid - - - (162.0) - - (162.0)
Adjustment in respect of
share-based
payments (net of tax) - - - 1.9 - - 1.9
Distributions due to
perpetual
capital
security holders - - - - - (8.6) (8.6)
Own shares acquired by
the Pennon
Employee Share
Trust
in respect of
Share options
granted - - - (1.5) - - (1.5)
Proceeds from shares issued
under the
Sharesave Scheme 0.2 3.5 - - - - 3.7
0.2 3.5 - (161.6) - (8.6) (166.5)
55
At 30 September 2018 171.0 222.3 144.2 763.0 1.4 296.7 1,598.6
========= ======== ======================= ================ ==================== ================= ========
The notes on pages 39 to 58 form part of this condensed half year financial
information.
PENNON GROUP PLC
Consolidated statement of cash flows for the half year ended 30 September
2018
Unaudited
------------------------------------------
Half year Half year
ended 30 ended 30
September September
2018 2017
Notes GBPm GBPm
Cash flows from operating activities
Cash generated from operations 13 151.7 211.2
Interest paid (31.4) (33.2)
Tax paid (12.2) (10.4)
Net cash generated from operating activities 108.1 167.6
-------------------- ---------------------------
Cash flows from investing activities
Interest received 4.4 1.9
Dividends received - 1.0
Loan repayments received from joint
ventures 2.0 23.7
Purchase of property, plant and equipment (181.9) (198.1)
Proceeds from sale of property, plant
and equipment 0.5 7.1
Purchase of intangible assets - (0.5)
Acquisition of subsidiary undertakings - (7.0)
Deposit of restricted cash (3.7) -
-------------------- ---------------------------
Net cash used in investing activities (178.7) (171.9)
-------------------- ---------------------------
Cash flows from financing activities
Proceeds from issuance of ordinary
shares 3.7 3.2
Proceeds from the issuance of perpetual
capital securities - 296.7
Redemption and periodic return of 2013
perpetual capital securities - (304.8)
Disposal of non-controlling interest - 0.7
Deposit of restricted funds - (3.7)
Purchase of ordinary shares by the
Pennon
Employee Share Trust (1.5) (1.8)
Proceeds from new borrowing 14 50.0 56.3
Repayment of borrowings 14 (16.1) (50.1)
Finance lease sale and leaseback 14 35.0 100.0
Finance lease principal repayments 14 (16.0) (15.1)
Dividends paid 9 (162.0) (107.8)
Perpetual capital securities periodic (5.8) -
return
-------------------- ---------------------------
Net cash used in financing activities (112.7) (26.4)
-------------------- ---------------------------
Net decrease in cash and cash
equivalents (183.3) (30.7)
Cash and cash equivalents at beginning
of period 14 403.0 374.3
Cash and cash equivalents at end of
period 14 219.7 343.6
==================== ===========================
The notes on pages 39 to 58 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 58. 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 26 November 2018.
The financial information for the period ended 30 September 2018
does not constitute statutory accounts within the meaning of section
435 of the Companies Act 2006. The statutory accounts for 31 March
2018 were approved by the Board of Directors on 24 May 2018 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 2018, 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 2018, with the exception of changes in
estimates that are required in determining the half year provision
of income taxes.
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
3. Accounting policies
Other than the revised policy on revenue as a result of the application
of IFRS 15, as set out in note 21 below, the accounting policies
adopted in this condensed half year financial information are
consistent with those applied and set out in the Pennon Group
plc Annual Report and Accounts for the year ended 31 March 2018
and are in accordance with all IFRSs and interpretations of the
IFRS Interpretations Committee expected to be applicable for the
year ending 31 March 2019 in issue which have been adopted by
the EU.
The tax charge for September 2018 and September 2017 has been
derived by applying the anticipated effective annual rate to the
first half year profit before tax.
New standards or interpretations which were mandatory for the
first time in the year beginning 1 April 2018 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
2019, including IFRS 16 'Leases' are not expected to have a material
impact on the Group's net assets or results. Existing borrowing
covenants are not impacted by changes in accounting standards.
As disclosed in the Pennon Group plc Annual Report and Accounts
for the year ended 31 March 2018 the Directors anticipate the
adoption of IFRS 16 on 1 April 2019 will affect primarily the
accounting for the Group's operating leases. At 31 March 2018
the Group had non-cancellable operating lease commitments of GBP163
million. These predominantly relate to leases of properties occupied
by the Group in the course of carrying out its businesses. If
the standard had been adopted for the year ended 31 March 2018
it is estimated that this would have resulted in the Group recognising
an asset in use and corresponding lease liability figure in the
region of GBP115 million. This would have resulted in a minimal
impact of profit before tax but an estimated increase of around
GBP7 million to EBITDA which would be replaced by increased charges
for depreciation and finance costs.
Initial adoption of IFRS 15 Revenue from Contracts with Customers
The Group adopted the standard with effect from 1 April 2018 using
the full retrospective approach to transition. As the impact of
the new standard has not had a material effect on the Group's
reported revenues, net assets or any specific financial statement
line, there has been no restatement of prior year figures.
The disaggregation of revenue information required by IFRS 15
is given below within note 4 (Segmental information) for the six
month periods ended 30 September 2018 and 30 September 2017.
The revised accounting policy on revenue following implementation
of IFRS 15 is set out below in note 21.
Initial adoption of IFRS 9 Financial Instruments
IFRS 9, which applies from 1 April 2018, requires the Group to
evaluate and recognise expected credit losses on financial assets
and to ensure changes in credit risk are assessed at regular intervals,
and to make suitable adjustments for expected credit losses where
applicable.
As disclosed within note 4 Critical accounting judgements and
estimates in the Pennon Group Plc Annual Report and Accounts for
the year ended 31 March 2018, at the balance sheet date each subsidiary
evaluates the collectability of trade receivables and records
provisions for doubtful debts based on experience including comparisons
of the relative age of accounts and consideration of actual write-off
history. On adoption of IFRS 9 the evaluation has been extended
to include the forward-looking assessment of expected credit losses
and changes in credit risk. Adoption of the new approach has not
had a material impact on the impairment of trade receivables.
PENNON GROUP PLC
Notes to the condensed half year financial information (continued)
4. Segmental information
Operating segments are reported in a manner consistent with
internal reporting provided to the Chief Operating Decision-Maker,
which has been identified as the Pennon Group plc Board.
The water business comprises the regulated water and wastewater
services undertaken by South West Water. The waste management
business is the recycling, energy recovery and waste management
services provided by Viridor. The non-household retail business
reflects the services provided by Pennon Water Services 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
2018 2017
GBPm GBPm
Revenue
Water 301.5 292.2
Waste management 422.3 410.2
Non-household retail 84.1 83.5
Other 10.6 7.2
Less intra-segment trading (71.8) (66.0)
------------ ----------------------------
746.7 727.1
------------ ----------------------------
Segment result
Operating profit before depreciation,
amortisation and non-underlying
items (EBITDA)
Water 194.7 187.1
Waste management 78.4 66.6
Non-household retail 0.9 0.5
Other - (0.7)
------------ ----------------------------
274.0 253.5
------------ ----------------------------
Operating profit before non-underlying
items
Water 135.9 130.7
Waste management 42.1 32.4
Non-household retail 0.5 0.2
Other - (0.9)
------------ ----------------------------
178.5 162.4
------------ ----------------------------
Profit before tax and non-underlying
items
Water 100.3 96.2
Waste management 36.2 30.6
Non-household retail (0.5) (0.5)
Other 6.5 4.8
------------ ----------------------------
142.5 131.1
------------ ----------------------------
Profit before tax
Water 91.2 87.2
Waste management 36.2 37.1
Non-household retail (0.5) (0.5)
Other 6.7 6.0
------------ ----------------------------
133.6 129.8
------------ ----------------------------
PENNON GROUP PLC
Notes to the condensed half year financial information (continued)
4. Segmental information (continued)
Intra-segment trading between different segments is under normal
market based commercial terms and conditions. Intra-segment
revenue of the other segment is reflected as a cost.
Factors such as seasonal weather patterns can affect sales
volumes, income and costs in both the water and waste management
segments.
The grouping of revenue streams by how they are affected by
economic factors, as required by IFRS 15, is as follows:
Non-Household
Retail
Water Waste Management (WM) Other
------- -------------------------------------------------------- --------------- ----------
Six months ended 30 Rest Rest WM Total
September 2018 UK UK of EU China of World UK Total UK Total
Unaudited Total Total
------- ------ ------------ ------- ------------ ----------- --------------- ---------- -------
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Segment revenue 301.5 400.1 6.6 10.6 5.0 422.3 84.1 10.6 818.5
Inter-segment revenue (59.9) - - - - - (1.3) (10.6) (71.8)
------- ------ ------------ ------- ------------ ----------- --------------- ---------- -------
Revenue from external
customers 241.6 400.1 6.6 10.6 5.0 422.3 82.8 - 746.7
------- ------ ------------ ------- ------------ ----------- --------------- ---------- -------
Significant service
lines
Water 241.6 - - - - - - - 241.6
Non-household retail - - - - - - 82.8 - 82.8
Waste management
services - 342.8 - - - 342.8 - - 342.8
Energy - 26.0 - - - 26.0 - - 26.0
Recyclate - 31.3 6.6 10.6 5.0 53.5 - - 53.5
241.6 400.1 6.6 10.6 5.0 422.3 82.8 - 746.7
------- ------ ------------ ------- ------------ ----------- --------------- ----------
Non-Household
Retail
Water Waste Management (WM) Other
------- -------------------------------------------------------- --------------- ----------
Rest Rest WM Total
Six months ended 30 UK UK of EU China of World UK Total UK Total
September 2017 Unaudited Total Total
------- ------ ------------ ------- ------------ ----------- --------------- ---------- -------
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Segment revenue 292.2 378.8 6.4 20.4 4.6 410.2 83.5 7.2 793.1
Inter-segment revenue (57.8) - - - - - (1.0) (7.2) (66.0)
------- ------ ------------ ------- ------------ ----------- --------------- ---------- -------
Revenue from external
customers 234.4 378.8 6.4 20.4 4.6 410.2 82.5 - 727.1
------- ------ ------------ ------- ------------ ----------- --------------- ---------- -------
Significant service
lines
Water 234.4 - - - - - - - 234.4
Non-household retail - - - - - - 82.5 - 82.5
Waste management
services - 324.5 - - - 324.5 - - 324.5
Energy - 23.3 - - - 23.3 - - 23.3
Recyclate - 31.0 6.4 20.4 4.6 62.4 - - 62.4
234.4 378.8 6.4 20.4 4.6 410.2 82.5 - 727.1
------- ------ ------------ ------- ------------ ----------- --------------- ----------
PENNON GROUP PLC
Notes to the condensed half year financial information (continued)
5. Non-underlying items
Non-underlying items are those that in the Directors' view
are required to be separately disclosed by virtue of their
size, nature or incidence to enable a full understanding of
the Group's financial performance in the period and business
trends over time.
Unaudited
-----------------------------------------------------------------
Half year Half year
ended 30 ended 30
September September
2018 2017
GBPm GBPm
Revenue
Construction contract
settlements (1a) - 3.2
Earnings before interest, tax,
depreciation
and amortisation - 3.2
Remeasurement of fair value
movement
in derivatives (2) (8.9) (7.8)
Write-down of joint venture
shareholder
loans (1b) - (19.2)
Refinancing of joint venture
arrangement
(1c) - 22.5
Tax credit arising on
non-underlying
items 1.7 4.3
------------------------------- --------------------------------
Net non-underlying (charge) /
credit (7.2) 3.0
-------------------------------
1 Last year, on reset of the contracts associated with the
Greater Manchester Waste Disposal Authority (GMWDA) an
overall net credit before tax of GBP6.5m was recognised
as follows:
(a) A net amount of GBP3.2m was 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, INEOS 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 was GBP22.5m, which contributed
to an increase in investments in joint ventures recognised
on the balance sheet to GBP23.0m (31 March 2017 GBP0.1m).
2 In the period a charge of GBP8.9m was recognised relating
to non-cash derivative fair value movements associated
with derivatives that are not designated as being party
to an accounting hedge relationship (H1 2017/18 GBP7.8m).
These movements are non-underlying due to the nature of
the item being market dependant and potentially can be
significant in value (size).
PENNON GROUP PLC
Notes to the condensed half year financial information (continued)
6. Net finance costs
Unaudited
-----------------------------------------------------------
Half year ended Half year ended
30 September 2018 30 September 2017
--------------------------- ------------------------------
Finance Finance Finance Finance
cost income Total cost income Total
GBPm GBPm GBPm GBPm GBPm GBPm
Cost of servicing debt
Bank borrowings and
overdrafts (25.0) - (25.0) (25.8) - (25.8)
Interest element of
finance lease
rentals (19.6) - (19.6) (17.1) - (17.1)
Other finance costs (1.4) - (1.4) (1.5) - (1.5)
Interest receivable - 1.7 1.7 - 1.1 1.1
Interest receivable
on
shareholder loans
to joint
ventures - 2.5 2.5 - 5.5 5.5
(46.0) 4.2 (41.8) (44.4) 6.6 (37.8)
-------- -------- ------- --------- -------- ---------
Notional interest
Interest receivable
on service
concession arrangements - 7.3 7.3 - 6.9 6.9
Retirement benefit obligations (0.9) - (0.9) (0.9) - (0.9)
Unwinding of discounts
on
provisions (5.4) - (5.4) (4.8) - (4.8)
(6.3) 7.3 1.0 (5.7) 6.9 1.2
-------- -------- ------- --------- -------- ---------
Net finance costs before
non-underlying items (52.3) 11.5 (40.8) (50.1) 13.5 (36.6)
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 (8.9) - (8.9) (7.8) - (7.8)
(8.9) - (8.9) (27.0) - (27.0)
Net finance costs after
-------- -------- ------- --------- -------- ---------
non-underlying items (61.2) 11.5 (49.7) (77.1) 13.5 (63.6)
-------- -------- ------- --------- -------- ---------
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 Total
items 5) year items 5) half year
half year half year ended half year half year ended
ended 30 ended 30 30 ended 30 ended 30
September September September September 30 September September
2018 2018 2018 2017 2017 2017
GBPm GBPm GBPm GBPm GBPm GBPm
Analysis of charge
Current
tax charge 12.4 - 12.4 10.0 (3.0) 7.0
Deferred
tax 6.9 (1.7) 5.2 11.8 (1.3) 10.5
Tax charge
for the
period 19.3 (1.7) 17.6 21.8 (4.3) 17.5
--------------- --------------- ---------- --------------- ------------------- ----------
UK corporation tax is calculated at 19% (H1 2017/18 19%) of
the estimated assessable profit for the year. The tax charge
for September 2018 and September 2017 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 14% (H1 2017/18 17%).
The effective tax rate for the period including the impact of
non-underlying items was 13% (H1 2017/18 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
2018 2017
Number of shares (millions)
For basic earnings per share 419.3 416.6
Effect of dilutive potential ordinary shares
from share options 1.1 1.5
For diluted earnings per share 420.4 418.1
---------- -------------------
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 2018 30 September 2017
Profit Earnings per Profit Earnings per
share share
after Basic Diluted after Basic Diluted
tax tax
GBPm p p GBPm p p
Statutory earnings 107.5 25.6 25.5 90.9 21.8 21.7
Deferred tax before
non-underlying items 6.9 1.7 1.7 11.8 2.8 2.8
Non-underlying items
(net of tax) 7.2 1.7 1.7 (3.0) (0.7) (0.7)
Proportionate impact
of
perpetual capital returns
(note 12) 4.3 1.0 1.0 5.8 1.4 1.4
Earnings before non-underlying
items and deferred
tax 125.9 30.0 29.9 105.5 25.3 25.2
--------------- ---------- --------------- ---------- ------- ----------
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
2018 2017
GBPm GBPm
Interim dividend paid for the year ended
31 March 2018 : 11.97p (2017 11.09p) per
share 50.2 45.9
Final dividend paid for the year ended
31 March 2018 : 26.62p (2017 24.87p) per
share 111.8 103.6
162.0 149.5
---------- -------------------
In the six months to 30 September 2018 the 2017/18 interim and
final dividends were paid resulting in a cash outflow of GBP162.0m.
Unaudited
-------------------------------
Half year Half year
ended 30 ended 30
September September
Proposed interim dividend 2018 2017
GBPm GBPm
Proposed interim dividend for the year ended
31 March 2019 : 12.84p (2018 11.97p) per
share 54.0 50.2
---------- -------------------
The proposed interim dividend has not been included as a liability
in this condensed half year financial information.
The proposed interim dividend for 2019 will be paid on 4 April
2019 to shareholders on the register on 25 January 2019.
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 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
--------------- ------------------- ----------
Unaudited
------------------------------------------------
Number of shares
------------------------------------
1 April 2018 to 30 September 2018 Treasury Ordinary
shares shares GBPm
At 1 April 2018 Ordinary shares of
40.7p each 8,443 419,743,183 170.8
For consideration of GBP3.7m, shares
issued
in respect of the Company's Sharesave
Scheme - 563,592 0.2
At 30 September 2018 ordinary shares
of 40.7p each 8,443 420,306,775 171.0
--------------- ------------------- ----------
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 753p (H1 2017/18 806p).
PENNON GROUP PLC
Notes to the condensed half year financial information (continued)
11. Share premium account Unaudited
-------------------
GBPm
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
-------------------
1 April 2018 to 30 September 2018
At 1 April 2018 218.8
Shares issued under the Sharesave Scheme 3.5
At 30 September 2018 222.3
-------------------
12. Perpetual capital securities
Unaudited
---------------------------
Half year Year ended
ended 30 31 March
September 2018
2018
GBPm GBPm
GBP 300m 2.875% perpetual subordinated
capital securities 296.7 296.7
296.7 296.7
--------------------------- -------------------
On 22 September 2017 the Company issued GBP300m perpetual capital
securities. Costs directly associated with the issue of GBP3.3m
were set off against the value of the issuance. They have no
fixed redemption date but the Company can at its sole discretion
redeem all, but not part, of these securities at their principal
amount on 22 May 2020 or any subsequent periodic return payment
date after this.
The Company has the option to defer periodic returns on any
relevant payment date, as long as a dividend on the Ordinary
Shares has not been paid or declared in the previous 12 months.
Deferred periodic returns shall be satisfied only on redemption
or payment of dividend on Ordinary Shares, all of which only
occur at the sole discretion of the Company.
As the Company paid a dividend on 4 April 2018 the periodic
return of GBP8.6m, scheduled 22 May 2019, is payable and consequently
has been recognised as a liability at 30 September 2018.
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
2018 2017
GBPm GBPm
Cash generated from operations
Profit for the period 116.0 112.3
Adjustments for:
Share-based payments 1.9 1.8
Profit on disposal of property, plant (0.2) -
and equipment
Depreciation charge 93.0 89.4
Amortisation of intangible assets 2.5 1.7
Non-underlying remeasurement of fair
value movement in derivatives (note 5) 8.9 7.8
Non-underlying GMWDA contract reset (note
5) - (6.5)
Share of post-tax profit from joint ventures (4.8) (5.3)
Finance income (before non-underlying
items) (11.5) (13.5)
Finance costs (before non-underlying
items) 52.3 50.1
Taxation charge 17.6 17.5
Changes in working capital:
Increase in inventories (5.6) (0.9)
Increase in trade and other receivables (66.0) (42.9)
Increase in service concession arrangements
receivable (1.3) (16.9)
(Decrease) / Increase in trade and other
payables (42.3) 23.8
Increase in retirement benefit obligations
from contributions 2.0 2.3
Decrease in provisions (10.8) (9.5)
Cash generated from operations 151.7 211.2
---------- -------------------
Unaudited
-------------------------------
Half year Half year
ended 30 ended 30
September September
2018 2017
GBPm GBPm
Total interest paid
Interest paid in operating activities 31.4 33.2
Interest paid in investing activities 8.3 7.8
Total interest paid 39.7 41.0
---------- -------------------
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
2018 2018
GBPm GBPm
Cash and cash deposits 405.7 585.3
Borrowings - current
Bank and other loans (52.7) (149.6)
Other current borrowings (29.5) (32.0)
Finance lease obligations (27.2) (28.2)
---------- -------------------
Total current borrowings (109.4) (209.8)
---------- -------------------
Borrowings - non-current
Bank and other loans (1,556.3) (1,408.8)
Other non-current borrowings (277.9) (291.4)
Finance lease obligations (1,504.0) (1,476.8)
---------- -------------------
Total non-current borrowings (3,338.2) (3,177.0)
---------- -------------------
Total net borrowings (3,041.9) (2,801.5)
---------- -------------------
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 borrowings Foreign Net borrowings
at 1 April Cash flows exchange Other non-cash at 30 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)
--------------- ----------- ------------- ---------------- ----------------
Unaudited
-------------------------------------------------------------------------------
Net borrowings Foreign Net borrowings
at 1 April Cash flows exchange Other non-cash at 30 September
2018 - other adjustments movements 2018
GBPm GBPm GBPm GBPm GBPm
Cash and cash deposits 585.3 (179.6) - - 405.7
Bank and other loans due
within one year (149.6) - - 96.9 (52.7)
Other current borrowings (32.0) 16.1 - (13.6) (29.5)
Finance leases due within
one year (28.2) 28.9 - (27.9) (27.2)
Bank and other loans due
after one year (1,408.8) (50.0) (0.9) (96.6) (1,556.3)
Other non-current
borrowings (291.4) - - 13.5 (277.9)
Finance leases due after
one year (1,476.8) (35.0) - 7.8 (1,504.0)
Total (2,801.5) (219.6) (0.9) (19.9) (3,041.9)
--------------- ----------- ------------- ---------------- ----------------
For the purposes of the cash flow statement cash and cash equivalents
comprise:
Unaudited
----------------
Half year
ended 30 Year ended
September 31 March
2018 2018
GBPm GBPm
Cash and cash deposits as above 405.7 585.3
Less : deposits with a maturity of three months
or more (restricted funds) (186.0) (182.3)
---------------- ----------------
219.7 403.0
---------------- ----------------
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 2018 31 March 2018
Book value Fair Book value Fair value
value
GBPm GBPm GBPm GBPm
Non-current borrowings
:
Bank and other
loans 1,556.3 1,701.3 1,408.8 1,578.1
Other non-current borrowings 277.9 239.7 291.4 251.5
Finance lease obligations 1,504.0 1,364.4 1,476.8 1,350.0
----------- ---------- ----------------------- -----------
Total non-current borrowings 3,338.2 3,305.4 3,177.0 3,179.6
Other non-current assets 266.2 286.8 263.5 294.7
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 Year
ended ended
30 September 31 March
2018 2018
GBPm GBPm
Level 2 inputs
Assets
Derivatives used for hedging 12.4 11.1
Derivatives deemed held for trading 57.7 72.3
----------------------- -----------
Total assets 70.1 83.4
Liabilities
Derivatives used for hedging 14.1 16.7
Derivatives deemed held for trading - 0.9
----------------------- -----------
Total liabilities 14.1 17.6
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
2.85% (March 2018 2.70%) and the inflation assumption of 3.25%
(March 2018 3.15%).
Unaudited
------------------------------------------------------
Half year ended Year ended
30 September 2018 31 March 2018
Fair
Fair Present value
Present value value of
value of of plan of plan
obligation assets Total obligation assets Total
GBPm GBPm GBPm GBPm GBPm GBPm
At 1 April (948.0) 898.5 (49.5) (971.4) 903.4 (68.0)
Amounts
recognised
in the
income statement (18.2) 10.9 (7.3) (38.7) 22.5 (16.2)
Remeasurements
through
other
comprehensive
income 4.7 2.9 7.6 30.2 (5.7) 24.5
Contributions 17.3 (12.9) 4.4 31.9 (21.7) 10.2
(944.2) 899.4 (44.8) (948.0) 898.5 (49.5)
----------------- ---------- ----------------------- ----------- ------- -------
17. Capital expenditure
Unaudited
-----------------------------------
Half year
ended Year
30 September ended
31 March
2018 2018
GBPm GBPm
Property, plant and equipment
Additions 192.6 389.0
Net book value of disposals 0.4 1.5
Capital commitments
Contracted but not provided 244.0 287.7
18. Trade and other payables & other non-current liabilities
Unaudited
----------
Half year
ended Year ended
30 31 March
September
2018 2018
GBPm GBPm
Trade and other payables - current
Trade payables 114.9 98.2
Amounts owed to joint ventures 3.7 3.7
Other tax and social security 38.2 48.4
Accruals and other payables 154.3 191.7
311.1 342.0
---------- ------------------------------------
Other non-current liabilities
Deferred income 123.5 118.5
Other payables 24.5 21.6
---------- ------------------------------------
148.0 140.1
---------- ------------------------------------
PENNON GROUP PLC
Notes to the condensed half year financial information (continued)
19. Contingencies
Contingent liabilities
Unaudited
-------------------------
Half year ended Year ended
30 September 31 March
2018 2018
GBPm GBPm
Performance bonds 215.7 185.1
Guarantees in respect of performance bonds are entered into
in the normal course of business. No liability is expected to
arise in respect of the guarantees.
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.
Contingent assets
In addition to contractual recoveries related to our construction
contracts in respect of Glasgow Recycling and Renewable Energy
Centre that are reflected in the financial statements, there
are further possible recoveries that are contingent on events
in the future that are not wholly within the Group's control.
These contingent assets have not been recognised as at 30 September
2018.
20. Related party transactions
The Group's significant related parties during the period were
its joint venture in Lakeside Energy from Waste Holdings Limited
and its 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 2018.
There were no material changes during the half year to September
2018 in the nature of transactions with these related parties.
21. Accounting policy on revenue recognition
IFRS 15 provides a single, principles based five-step model to
be applied to all sales contracts. It is based on the transfer
of control of goods and services to customers and replaces the
separate models for goods, services and construction contracts
previously included in IAS 11 Construction Contracts and IAS
18 Revenue. Under IFRS 15, revenue is recognised at an amount
that reflects the consideration to which an entity expects to
be entitled in exchange of fulfilling its performance obligations
to a customer.
The implementation of the new standard has not had a material
effect on the Group's reported revenues, net assets or any specific
financial statement line, but the Group has reviewed and amended
its accounting policy in line with the concepts and terminology
used in the standard. The revised policy is as follows:
Revenue recognition
Group revenue is recognised following delivery of performance
obligations and an assessment of when control over the product
or service is transferred to the customer. Revenue is only recognised
when collection of consideration is highly probable.
Revenue is recognised either when the performance obligation
in the contract has been performed ('point in time' recognition)
or 'over time' as the performance obligations to the customer
are satisfied. For each obligation satisfied over time, the Group
applies a revenue recognition method that accurately reflects
performance in transferring control of the services to the customer.
PENNON GROUP PLC
Notes to the condensed half year financial information (continued)
21. Accounting Policy on revenue recognition (continued)
Where a contract with a customer includes more than one performance
obligation revenue is allocated to each obligation in proportion
to a fair value assessment of the total contract sales value
split across the services provided.
At the inception of a contract the total transaction price is
estimated, being the fair value to which the Group expects to
be entitled under the contract, including any variable consideration.
Variable consideration is based on the most likely outcome of
the performance obligations.
Revenue excludes value added tax, trade discounts and revenue
arising from transactions between Group companies. Revenue includes
landfill tax.
Water (domestic and non-household retail)
For most of the services provided to domestic customers, contract
terms are implied through statute and regulation in the absence
of formal, written contracts. South West Water has a duty under
legislation to provide domestic customers with services regardless
of payment and is not permitted to disconnect domestic customers
for non-payment of bills. Charges are set via the periodic review
price-setting process, regulated by Ofwat.
In respect of ongoing, continuous services to customers, such
as the provision of drinking water and waste water services,
revenue is recognised over time in line with customer usage of
those services.
Customers with an unmeasured supply are billed at the start of
the year for the full amount of the annual charge but typically
take advantage of a choice of payment arrangements to pay by
regular instalments.
Customers with a metered supply are sent up to four bills per
year, based either on actual meter readings or estimated usage.
For these customers, revenue includes an estimation of the amount
of unbilled usage at the period end. Payment options for domestic
customers include an annual Meter Payment Plan where customers
agree to pay a fixed amount per month which is adjusted to reflect
actual consumption at the end of the year.
A range of regulated services is offered to property developers
and owners who require connection to the water and sewerage networks
or need the networks to be extended or altered. Typically, these
customers pay an estimate of the charges in advance as a deposit,
which is treated as a contract liability and are billed or refunded
the difference between the estimate and actual costs on completion
of the work.
Where the performance obligation relates solely to a connection
to the network, revenue is recognised at the point of connection
when the customer is deemed to obtain control.
Where assets are constructed or provided by the Group or assets
transferred to the Group, it is considered that there is an explicit
or implied performance obligation to provide an ongoing water
and / or waste water service, with the result that revenue is
recognised over a time no longer than the economic life of assets
provided by or transferred to the Group.
Pennon Water Services provides specialist retail water and waste
water services to business customers. It raises bills and recognises
revenue in accordance with its contracts with customers and in
line with the limits established for the non-household periodic
price-setting process where applicable.
PENNON GROUP PLC
Notes to the condensed half year financial information (continued)
21. Accounting Policy on revenue recognition (continued)
Energy sales
The Group receives revenue from the sale of electricity from
generating assets. These assets include solar, anaerobic digestion,
gas from landfill and Energy Recovery facilities. Revenue from
the sale of electricity from the Group's generating assets is
measured based upon metered output delivered at rates specified
under contract terms or prevailing market rates. Revenue is recognised
at a 'point in time', being the point of distribution to the
grid. Typically, invoices are raised monthly with standard payment
terms.
Waste Management Services
In respect of single services with fixed fees, such as the receipt
of gate and collection fees, revenue is recognised at the time
the service is provided.
The Group also delivers other waste management services for which
revenue is recognised 'over time' in accordance with contracts
with customers. The nature of contracts and/or performance obligations
includes management fees to operate local authority recycling
centres and energy recovery facilities, multi service contracts
including collections and gate fees.
Revenue from other services can be fixed (i.e. management fees)
or variable (i.e. gate fees).
Gate fee revenue, derived from the Group's operational assets,
is recognised as customer waste is deposited and is based on
tonnage received.
In respect of waste collection services, revenue is recognised
at the point of collection from customer premises.
A majority of waste management customers are invoiced monthly
for services provided within the monthly billing period. Payments
are made on an end of month following invoice basis. Alternative
billing and/or payment terms are agreed in exceptional circumstances.
The Group transfers control of such waste management services
prior to invoicing. Receipt of payment following invoice is based
solely on the passage of time. A trade receivable is recognised
until payment is made and/or refund issued.
Where the Group has entered into service concession arrangements
it accounts for these contracts in accordance with IFRIC12. Consideration
is treated as contract assets or other intangible assets, depending
upon the right to receive cash from the asset. Consideration
is split between construction of assets, operation of the service
and provision of finance recognised as interest receivable.
Revenue in respect of construction services is recognised over
time and is based on the fair value of work performed, with reference
to the total sales value and the stage of completion of those
services, as this best reflects the manner in which control passes
to the customer. In accordance with IFRIC 12 an amount equal
to the revenue recognised is split between costs recoverable
from construction activities disclosed within other intangible
assets when the concession grantor has not provided a contractual
guarantee in respect of the recoverable amount regardless of
the service use by customers, and/or within other non-current
assets when the concession grantor contractually guarantees the
payment of amounts determined in the contract or the shortfall,
if any, between amounts received from users of the public service
and amounts specified or determined in the contract. No payments
are received during construction.
In respect of operating services, revenue is recognised over
time in line with delivery of operational services in accordance
with the contract with the local authority.
PENNON GROUP PLC
Notes to the condensed half year financial information (continued)
21. Accounting Policy on revenue recognition (continued)
Once the operational phase commences the Group has a right to
receive consideration for the construction and operational services
delivered. Invoicing occurs monthly and payments are due by the
end of the month following date of invoice.
Recyclate
The Group transforms waste into recyclate ready for resale. Revenue
is measured at the agreed transaction price per tonne of recyclate
under the contract with the customer. Revenue recognition occurs
when control over the recyclate assets has been transferred to
the customer.
In respect of UK sales, the Group's performance obligation is
satisfied at the point of collection by the customer. This is
the point in time when an invoice is issued and revenue is recognised
Payment terms are typically end of month following invoice date.
Overseas sales are predominantly agreed under a letter of credit.
Goods are despatched at the point the letter of credit is accepted
by the customers bank. Payment is released when the customer
confirms satisfactory receipt of the recyclate. This is the point
legal title (i.e. control) passes to the customer and revenue
is recognised.
22. Post balance sheet events
On 26 October 2018, the High Court of Justice of England and
Wales issued a judgement in a claim between Lloyds Banking Group
Pension Trustees Limited (claimant) and Lloyds Bank plc and others
(defendants) regarding the rights of female members of certain
pension schemes to equality of treatment in relation to pension
benefits (GMP equalisation). The judgement concluded that the
claimant is under a duty to amend the schemes in order to equalise
benefits for men and women in relation to guaranteed minimum
pension benefits.
The judgement also provided comments on the method to be adopted
in order to equalise benefits, on the period during which a member
can claim in respect of previously underpaid benefits, and on
what should be done in relation to benefits that have been transferred
into, and out of, the relevant schemes. The issues determined
by the judgement arise in relation to many other occupational
pension schemes. The extent to which the judgement will increase
the liabilities of the Group's defined benefit pension schemes
is under consideration. The Group expect to recognise a past
service cost amount in the income statement in the range of GBP2-4m
in the second half of 2018/19, following a detailed assessment
of the GMP equalisation impact.
On 16 November 2018, Viridor Waste Management Limited exercised
its pre-emption rights to acquire John Laing Investments Limited's
37.5% economic interest and 20% voting rights in INEOS Runcorn
(TPS) Holdings Limited for a cash consideration of GBP54.52m,
following a decision by John Laing to sell its holding in the
joint venture.
The acquisition will increase Viridor's economic interest in
INEOS Runcorn (TPS) Holdings from 37.5% to 75%, with the associated
voting rights moving from 20% to 40%.
Pennon Group plc
Registered Office : Registered in England No 2366640
Peninsula House
Rydon Lane
Exeter
EX2 7HR
pennon-group.co.uk
PENNON GROUP PLC
DIRECTORS' RESPONSIBILITIES STATEMENT
The Directors named below confirm on behalf of the Board of Directors
that this unaudited condensed half year financial information has been
prepared in accordance with IAS 34 "Interim financial reporting" as
adopted by the European Union and to the best of their knowledge the
interim management report herein includes a fair review of the information
required by DTR 4.2.4, DTR 4.2.7R and DTR 4.2.8R of the Disclosure and
Transparency Rules, being an indication of important events that have
occurred during the period and their impact on the unaudited condensed
half year financial information; a description of the principal risks
and uncertainties for the remaining six months of the current financial
year; and the disclosure requirements in respect of material related
party transactions.
The Directors are responsible for the maintenance and integrity of the
Company's website. Legislation in the United Kingdom governing the preparation
and dissemination of financial information may differ from legislation
in other jurisdictions.
The Directors of Pennon Group plc at the date of the signing of this
announcement and statement are:
Sir John Parker
Martin Angle
Gill Rider
Neil Cooper
Iain Evans
Chris Loughlin
Susan Davy
For and on behalf of the Board of Directors who approved this half year
report on 26 November 2018.
C Loughlin S J Davy
Group Chief Executive Officer Chief Financial Officer
INDEPENT REVIEW REPORT TO PENNON GROUP PLC
Introduction
We have been engaged by the Company to review the condensed
consolidated set of financial statements in the half-yearly
financial report for the six months ended 30 September 2018
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 2018 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
26 November 2018
[1] Before non-underlying items. Underlying earnings are presented to provide a more useful comparison on business trends and performance.
[2] Earnings before interest, tax, depreciation and amortisation (EBITDA)
[3] Underlying EBITDA plus share of Joint Venture EBITDA and IFRIC 12 interest receivable
[4] Non-underlying items are adjusted for by virtue of their size, nature or incidence to enable a full understanding of financial performance
[5] EPS before deferred tax, non-underlying items and proportionately adjusted for the return on the perpetual capital securities (Note 8)
[6] The RPI rate used is 3.3% as of September 2018
[7] RORE - Return on Regulated Equity
[8] Ranked 2(nd) Water and Sewerage Company (WASC) for H1 2018/19 quality score based on two waves of Customer Experience Surveys (CES), a key element of SIM (Service Incentive Mechanism)
[9] See page 20
[10] GBP9.3 million cumulative net reward reflecting GBP11.6 million net reward which will be recognised at the end of the regulatory period and GBP2.3 million net penalty which can be reflected during the regulatory period
[11] ERF earnings include contractual compensation in the form of liquidated damages of H1 2018/19 GBP25.2 million (H1 2017/18 GBP2.6 million) when construction completed post original contractual completion date, offsetting this is a provision for amounts recognised against the Interserve contractual receivable
[12] Forecast average ERF availability is weighted by site capacity, includes 100% of joint venture availability, excludes Bolton
[13] TPSCo - INEOS Runcorn (TPS) Holdings Limited which owns Runcorn I ERF
[14] Future dividends growth based on policy of 4% + RPI forecast to 2020
[15] See page 20
[16] Source: Tolvik, Defra, SEPA, NRW, MSW and Viridor analysis based on 2016/17 latest local authority data available
[17] Average ERF availability is weighted by site capacity, includes 100% of joint venture availability, excludes Bolton
[18] TPSCo - INEOS Runcorn (TPS) Holdings Limited which owns Runcorn I ERF
[19] Before non-underlying items
[20] Underlying EBITDA plus share of Joint Venture EBITDA and IFRIC 12 interest receivable
[21] 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
[22] EPS before deferred tax, non-underlying items and proportionately adjusted for the return due on the perpetual capital securities
[23] Weighted average number of shares for H1 2018/19 of 419.3 million (H1 2017/18 416.6 million)
[24] The RPI rate used is 3.3% as of September 2018
[25] Including construction spend related to service concession arrangements net of amounts subject to legal contractual process Comparator reanalysed on a consistent basis with the 2017/18 year end reporting - H1 2017/18 reported capital investment of GBP245.1 million adjusted by GBP22.8 million to reflect the amounts subject to legal contractual process
[26] Including construction spend related to service concession arrangements net of amounts subject to legal contractual process. Comparator reanalysed on a consistent basis with the 2017/18 year end reporting - H1 2017/18 reported capital investment of GBP147.1 million adjusted by GBP22.8 million to reflect the amounts subject to legal contractual process
[27] Net debt - total borrowings less cash and cash deposits
[28] Includes wholesale revenue for non-household customers
[29] Including landfill tax and construction spend on service concession arrangements
([30]) EBITDA plus share of Joint Venture EBITDA and IFRIC 12 interest receivable
[31] Forecast average ERF availability is weighted by site capacity, includes 100% of joint venture availability, excludes Bolton
[32] Perpetual capital securities (hybrid). H1 2018/19 adjusted hybrid cost of GBP4.3 million (H1 2017/18 GBP15.7 million). H1 2018/19 statutory hybrid costs of GBP8.6 million (H1 2017/18 GBP21.5 million)
[33] Before construction spend on service concession agreements of GBP11 million (H1 2017/18 GBP44 million), pension contributions of GBP9 million (H1 2017/18 GBP5 million), GBP44 million for the 2017 unwind settlement of the PMB derivative and other tax payments of GBP51 million (H1 2017/18 GBP49 million). Working capital movements include higher metered accrued income resulting from increased demand over the summer and timing of payments on local authority contracts
[34] Total tax includes corporation tax, business rates, employers' national insurance, fuel excise duty, carbon reduction commitment, environmental payments, climate change levy and external landfill tax
[35] EIB - European Investment Bank
[36] Includes GBP137 million of index-linked finance leasing
[37] Including service concession construction spend of GBP11 million (2017/18 GBP44 million)
[38] Based on RCV at March 2018
[39] Including construction spend related to service concession arrangements, capitalised interest (GBP8 million in H1 2018/19 of which GBP7 million was within Viridor), ERF maintenance expenditure, net of amounts subject to legal contractual process. Comparator reanalysed on a consistent basis with the 2017/18 year end reporting - H1 2017/18 reported capital investment of GBP245.1 million adjusted by GBP22.8 million to reflect the amounts subject to legal contractual process
[40] Total ERF portfolio forecast expenditure to completion of GBP1,529 million excluding capitalised interest, net of amounts subject to legal contractual process
[41] Reflecting a 1 in 60 year event
[42] English operational water companies, (excluding Welsh Water), normalised per 10,000 customers (based on 2017/18 data)
[43] RORE reflects base plus outperformance. It is calculated using actual results before non-underlying items (deflated into 2012/13 prices) and compared against the Final Determination allowances and based on notional gearing, annual average RCV and reflecting the value of tax impacts at the actual annual effective tax rate for the year
[44] H1 2018/19 full year equivalent RORE of 11.6% delivered reflecting 6.0% base return, 2.6% totex savings and efficiencies, 0.2% net reward on ODIs and 2.8% on financing outperformance. RORE based on Ofwat guidance results in 3.5% of financing outperformance (calculated using in-year average RPI rate of 1.1% for 2015/16, 2.1% for 2016/17, 3.7% for 2017/18 and 3.3% for H1 2018/19) resulting in a total RORE of 12.3% for H1 2018/19 (2017/18 4.1% and 12.4% respectively)
([45]) Includes integration synergies already delivered. Phasing of actual expenditure compared to the planned programme has been reflected. Outperformance includes a reduction in the RCV run-off for the RCV element of Totex outperformance calculated based on the Final Determination pay-as-you-go (PAYG). Tax impacts reflect actual effective tax rates
([46]) Interest outperformance is based on the outturn effective interest rate on net debt, translated into an effective real interest rate using cumulative K6 forecast RPI of 2.8%, notional debt gearing of 62.5%, and actual effective tax rates
([47]) Annual equivalent percentage for the period to 30 September 2018
[48] Delivered around two thirds from capital expenditure and one third from operating cost savings
[49] GBP1.2 million (GBP9.3 million cumulatively) net ODI reward; GBP1.2 million (GBP11.6 million cumulatively) net reward will be recognised at the end of the regulatory period and GBPnil (GBP2.3 million cumulatively) net penalty which may be reflected during the regulatory period
[50] Annual equivalent RORE benefit at H1 2018/19
[51] Benefits delivered through future bill reductions (Totex savings), ODI service improvements and reinvestment
[52] Common ODIs - 12 financial and 2 reputational measures for 2020-2025
[53] EPR - Extended Producer Responsibility; PRN - Packaging Recovery Note
[54] Rebasing planned maintenance on a consistent basis, H1 2018/19 availability would be >90%
[55] FMCG - Fast Moving Consumer Goods
[56] As at 19 November 2018. c.10,000 new accounts, net growth of c.2,000 accounts
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
END
IR UNAARWWAAUUA
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November 27, 2018 02:01 ET (07:01 GMT)
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