Investing
for quality
Annual Report and Accounts 2012
Investing for
future growth
Introduction
Who we are
Pennon Group Plc is an environmental utility infrastructure
company at the top end of the FTSE 250 which owns
South West Water Limited and Viridor Limited. The Group
has assets of around £4.3 billion and a workforce of over
4,500 people.
Group strategy
Our strategy is to promote the success of the Group
for the benefit of our shareholders, customers and other
stakeholders through our focus on water and sewerage
services, recycling, renewable energy and waste
management. We aim to be a pre-eminent provider
of customer services to high standards of quality,
efficiency and reliability.
What we do
We carry out our business through:
South West Water Limited – the provider of water
and sewerage services for Devon, Cornwall and
parts of Dorset and Somerset.
Viridor Limited – one of the leading UK recycling,
renewable energy and waste management
businesses.
To view our online report visit:
pennonannualreport2012.co.uk
Cover photos
Top: Porthcurno beach, West Cornwall
Bottom: Greater Manchester mechanical biological treatment facility
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Pennon Group
We create value for our shareholders by developing our
two environmental utility infrastructure businesses,
South West Water and Viridor, and by efficient financing
and strong management of the Group as a whole.
Key Group facts
Assets
£4.3bn
Employees
4,500
Financial highlights
Revenue
£1,233.1m
+6.4%
Profit before tax
£200.5m
+6.4%
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Our strategy is to promote the success of the Group for the benefit of our shareholders,
customers and other stakeholders through our focus on water and sewerage services,
recycling, renewable energy and waste management. We aim to be a pre-eminent
provider of customer services to high standards of quality, efficiency and reliability.
Highlights of the year
• continued to deliver shareholder value – 7.6% dividend increase
• further reduction in interest cost from the Group’s effective management
of interest rates
• over £1 billion cash and facilities at 31 March 2012 including over £0.5 billion new/
refinanced facilities sourced during the year
• winner of the ‘Achievement in Sustainability’ award at the 2012 PLC Awards.
Strategy in action
We are committed to an annual dividend increase of 4% above inflation up to at least
the end of 2014/15
We have strong sustainability credentials which make a positive impact on
communities and the environment
We maintain high standards of ethical business conduct
We foster open and positive relationships with suppliers, customers and other
stakeholders
We seek to protect and promote the interests of all our employees.
Further details on page 24
South West Water
Viridor
The water and sewerage services provider
in Devon, Cornwall and parts of Dorset
and Somerset, delivering industry-leading
operational performance.
One of the leading UK recycling,
renewable energy and waste
management businesses.
Financial highlights
Revenue
£474.0m
+5.6%
Profit before tax
£141.5m
+9.8%
Financial highlights
Revenue
£761.1m
+6.9%
Profit before tax
£57.6m
-8.4%
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Strategy
Strategy
South West Water is committed to its vision of ‘Pure Water,
Pure Service and Pure Environment’, underpinned by a
strategy of striking the right balance between:
Viridor’s strategy is to add value by:
• growing in recycling
• investing to improve service
• customer affordability
• the needs of stakeholders.
• growing in Public Private Partnerships (PPPs)/energy from
waste (EfW)
• capitalising in the long-term on its strong position in the
landfill market.
Highlights of the year
Highlights of the year
• industry-leading performance in tackling leakage
• investing for future growth – capital expenditure and
• 15th consecutive year without water restrictions
(16th expected in 2012/13)
• repeated best ever drinking water quality at 99.98%
• further improvements in Service Incentive Mechanism
(SIM) performance – customer complaints halved over
two years
• record percentage (95.1%) of bathing waters achieved
EU Guideline standard (excellent status).
investment in joint ventures of £140 million mainly to deliver
additional renewable power generation and recycling
capacity
• acquisition of five high quality recycling, collection and
transport businesses for around £40 million
• volumes of recyclate traded increased by 7.2% to over
1.8 million tonnes with continuing improvement in the
quality and value mix
• total renewable energy production increased to 760GWh.
Strategy in action
Strategy in action
Pure Water – providing safe and reliable water supplies
Pure Service – increasing levels of customer satisfaction
and maintaining reliability of assets to protect the service
improvements made over the last 20 years
Contribution to profits from recovering the value in waste
grew to around 50% as landfill fell to 18% (from 69% in 2001)
Viridor consolidated its position as the UK’s largest operator
of materials recycling facilities (MRFs)
Pure Environment – protecting and enhancing the
environment
Construction of Runcorn combined heat and power (CHP)
EfW project on schedule
Financial Management – outperforming the regulatory
contract and rigorously controlling costs with efficient
funding.
Further details on page 12
Construction commenced on Ardley (Oxfordshire) and Exeter
EfWs and on Walpole anaerobic digestion (AD) facility in
Somerset
Announced as preferred bidder for South London, Glasgow
and South Lanarkshire† PPP contracts.
† subject to legal challenge.
Further details on page 18
C
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Directors’ report
Business review
Group overview
Group performance – Key performance indicators
Chairman’s statement
Business model
Strategic Q&A
South West Water
At a glance
The business
Viridor
At a glance
The business
Group
Financial review
Principal risks and uncertainties
Sustainability report
Other statutory information
Governance
Chairman’s introduction to governance
Board of Directors
Corporate governance and internal control
Directors’ remuneration report
Independent auditors’ report
Financial statements and shareholder information
Financial statements
Five-year financial summary
Shareholder information
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112
113
Pennon Group Plc Annual Report and Accounts 2012 1
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Directors’ report – Business review Performance
Key performance indicators
Pennon Group Plc
Profit before tax
£m
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£200.5m
+6.4%
South West Water
Operating profit
£m
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£204.7m
+7.9%
Viridor
Operating profit
plus joint ventures
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£75.2m
-9.0%
Earnings per share
before deferred tax
pence
Dividend per share
pence
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47.3p
+11.8%
Regulatory
Capital Value
£bn as at 31 March
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£2.827bn
+4.6%
Interest rate on
average net debt
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26.52p
+7.6%
Drinking water quality
% Mean Zonal Compliance
(MZC) calendar year
Service Incentive
Mechanism (SIM)
%
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99.98%
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66.9
+15%
Profits from recovering
value in waste
%
Recyclates traded
million tonnes
Total renewable
energy generation
GWh
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1.8m tonnes
+7.2%
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760GWh
+1.1%
2 Pennon Group Plc Annual Report and Accounts 2012
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Bathing water compliance with
EU Mandatory and Guideline
standards % calendar year
Population equivalent
sanitary compliance
% calendar year
RIDDOR incidence rate
per 100,000 employees
calendar year
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Mandatory
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99.57%
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Actual
number
20
Renewable energy
generation capacity
MW as at 31 March
Total waste handled
million tonnes
RIDDOR incidence rate
per 100,000 employees
calendar year
6
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136MW
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8.1m tonnes
* 2010/11 figure reassessed.
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Actual
number
39
Pennon Group Plc Annual Report and Accounts 2012 3
Directors’ report – Business review
Chairman’s statement
Dear shareholder
Our Group financial performance for the year has again
been strong notwithstanding the challenging economic
environment.
Financial review
Group revenue rose by 6.4% to £1,233.1 million and our profit
before tax increased by 6.4% to £200.5 million. Our earnings
per share before deferred tax increased by 11.8% to 47.3p.
The Group has substantial cash resources and undrawn facilities
and is well positioned for the future.
South West Water’s Regulatory Capital Value (RCV) grew by a
further 4.6% during 2011/12 to £2.83 billion. RCV has grown by an
average of around 5% per annum since the beginning of the K4
(2005-2010) period. Viridor’s profit before tax at £57.6 million was
a reduction of 8.4% on the previous year. Around 50% of Viridor’s
profit contribution came from recovering the value in waste.
Dividend
The Board is committed to delivering consistent returns for our
shareholders and to this end continues with its progressive
dividend policy to grow the Group dividend by 4% above inflation
per annum up to at least the end of 2014/15. This reflects our
confidence that Pennon Group remains well positioned to deliver
strong growth in the medium and long-term.
We are recommending a final dividend per share of 18.30p, which
represents a 6.7% increase on last year’s final dividend. This will
result in a total dividend for the year of 26.52p, an increase of
7.6% (reflecting inflation of 3.6%) on the total dividend for 2010/11.
We will also once again offer a Scrip Dividend Alternative to
shareholders in respect of the final dividend. The timetable for the
Scrip Dividend Alternative is given on page 113.
Business performance
South West Water continued its strong operational performance
against the 2010-2015 regulatory contract with further advances in
operating efficiency and customer service. The company is front-
end loading delivery of the operating cost efficiencies required by
Ofwat (an average 2.8% per annum over the five-year period) with
an average 5.1% per annum delivered in the first two years. These
efficiencies are being achieved through improving operational
ways of working, right-sourcing and innovative contracting
arrangements, energy procurement and reduced usage, and the
rationalisation of administration and support services.
Viridor grew its profits from recycling, contracts and joint ventures,
offset by a reduction in the contribution from landfill plus increased
bid costs associated with its developing project pipeline. Recyclate
prices fell in the second half of 2011/12 compared with the first
half year peak, reflecting world economic conditions. More than
50% of the impact was mitigated by actions taken by Viridor to
address costs and, although we are cautious about the prospect
for a recovery in recyclate prices in the short-term, Viridor’s
growing Public Private Partnership (PPP) pipeline and energy
from waste (EfW) planning successes will form the basis for future
growth. Renewable energy generation will also remain a significant
contributor to profits.
Ken Harvey
Chairman, Pennon Group Plc
Revenue
£m
Profit before tax
£m
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£1,233.1m
+6.4%
£200.5m
+6.4%
4 Pennon Group Plc Annual Report and Accounts 2012
Health and safety
We continue to focus on the safety and well-being of all our
employees. There have been a number of initiatives during the
year, such as our TAP (Think, Act, Prevent) behavioural safety
campaign for Pennon and South West Water staff and Viridor’s
Safety Information Database, both of which are designed to
ensure high standards of safety across the businesses. We are
pleased to see a reduction in the reportable number of incidents
within both South West Water and Viridor. The Board, together
with the Boards of South West Water and Viridor, remains
committed to fostering a culture and working environment where
accidents are unacceptable. The Group’s goal is zero accidents.
Sustainability and governance
Our businesses demonstrate a responsible approach to
environmental, social and governance (ESG) matters. This was
recognised when we received the prestigious ‘Achievement in
Sustainability’ award at the annual PLC Awards for our sustainable
activities which include renewable energy generation at waste
water treatment works, landfill gas control and significant funding
being provided for community and environmental projects through
the Pennon Environmental Fund and Viridor Credits Environmental
Body. The Business review and our Group Sustainability report set
out more fully our commitment to ESG and the highlights during
the year which include carbon reduction, water security, water
catchment management and resource security and efficiency.
The Board has an annual programme which is focused on
continuing to develop and improve our governance structures
and practices. This ensures that we apply best practice to enable
us to operate in the best interests of our shareholders and other
stakeholders.
Our business model
One of our key objectives is to ensure that we are at the forefront
of company reporting. Overleaf we have set out our business
model to assist shareholders in understanding how we generate
and preserve value in our businesses. I hope it is a useful
introduction to this year’s Business review and succinctly explains
how our business strategy is followed through into action.
Diversity
The Board is committed to promoting equality and diversity and a
culture that actively values difference and recognises that people
from different backgrounds and experiences can bring valuable
insights to the workplace at all levels and enhance the way we
work. We have an established Workplace Policy which provides
for equal opportunity and diversity throughout the Group. In
support of this policy and of the recommendations of the Davies
Review ‘Women on Boards’, the Board has also established
a Boardroom Equality & Diversity Policy. We will endeavour to
achieve a minimum of 25% female representation on the Board
by 2015 (whilst maintaining our current 14% representation in the
meantime) and achieve a minimum of 25% female representation
in our senior management team by 2015.
Board succession
Two of our three Non-executive Directors are coming towards
the end of their nine-year tenure. The Board wishes to ensure a
seamless transition and does not wish to lose the considerable
knowledge and experience of the departing Directors, particularly
as it is satisfied that they remain independent in character and
judgement while continuing in their role on the Board. It is therefore
intended that Dinah Nichols will retire from the Board at the 2013
Annual General Meeting (AGM) and Gerard Connell, the Senior
Independent Director, will retire from the Board at the 2014 AGM.
The search for one new Non-executive Director is well under way
and a further Non-executive Director will be sought during 2013.
This process will ensure that the new members, of what is a small
board, are fully acquainted with the Company’s practices and
procedures before the two retiring Non-executive Directors leave
the Board.
Our customers
A key priority for both our businesses is providing the highest
possible levels of services to our customers. This is also reflected
in our Group strategy.
Over the year South West Water has successfully moved into
new territory in meeting the demand for information, advice
and assistance from its household and business customers.
The ‘Source for Business’ service is providing extra support for
commercial customers. South West Water is now providing online
accounts, a smartphone app and web-based services for all
customers. The company recognises that affordability is an issue
for a number of our customers and we continue to provide advice
and assistance through a number of schemes.
Within Viridor there is a particular need to meet the changing
requirements of our customers where the focus is increasingly on
recycling, energy recovery and the reduction of waste to landfill to
meet Government targets. The fact that around 50% of Viridor’s
profits are now from recovering the value in waste demonstrates
that Viridor is living up to its new branding ‘transforming waste’.
Our employees
We know that our success continues to be due to the talent,
commitment and hard work of our employees, and I would like
to thank every one of them for their outstanding contribution to
the Group.
In addition I am very grateful to my Board colleagues for their
continuing support and significant contribution to another
successful year.
Outlook
The Board’s priority continues to be the creation of shareholder
value through its strategic focus on water and sewerage services,
recycling, renewable energy and waste management.
South West Water has continued its excellent start to K5 with
robust operational delivery, high standards of customer service
and a strong financial performance.
Viridor is successfully leading the way in exploiting opportunities
arising from the Government’s landfill diversion, recycling and
renewable energy targets – around 50% of its profits already come
from recovering value in waste. Although we are cautious about
the prospect for a recovery in recyclate prices in the short-term,
the company’s strong PPP pipeline and major EfW successes
underpin its expected long-term profit momentum from 2013/14
onwards and are already making a significant contribution to
Viridor’s profitability.
I am therefore confident that Pennon is well positioned to continue
to succeed in its chosen business areas for the benefit of our
shareholders and other stakeholders.
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Ken Harvey
Chairman
Pennon Group Plc
18 June 2012
Pennon Group Plc Annual Report and Accounts 2012 5
Directors’ report – Business review
Our business model
How we generate and preserve value
Our Group business model is driven by our strategy of promoting
the success of the Group for the benefit of our shareholders,
customers and other stakeholders through our focus on the
business areas of water and sewerage services, recycling,
renewable energy generation and waste management. We aim to
be a pre-eminent provider of customer services to high standards
of quality, efficiency and reliability, and to provide value for our
shareholders.
How we create value
We create value for our shareholders by developing our two environmental utility infrastructure businesses, South West Water and Viridor,
and by efficient financing and strong management of the Group as a whole.
South West Water, the water and sewerage services
provider for Devon, Cornwall and parts of Dorset
and Somerset, is focused on delivering further
efficiencies, improving operating standards and
providing a high quality service to its customers.
Viridor is focused on transforming waste into a
resource, having developed from being a traditional
waste management company to a leading UK
recycling, renewable energy and resource
management business.
South West Water
Viridor
Provides water and sewerage services in Devon,
Cornwall and parts of Dorset and Somerset.
One of the leading UK recycling, renewable energy
generation and waste management businesses.
South West Water’s business model is based
on delivering its ‘Pure Water, Pure Service
and Pure Environment’ strategy while ensuring
long-term profitability, resilience and sustainability.
Viridor’s business model is based on growing and adding
value by proactively expanding its recycling operations,
growing its EfW and PPP operations and exploiting the
huge potential inherent in waste-based renewable energy
generation, whilst capitalising in the long-term on its
strong position in landfill waste disposal.
6 Pennon Group Plc Annual Report and Accounts 2012
How we manage our businesses to create value
To achieve our strategy we are focused on the key areas of customer satisfaction, financial performance, maximising shareholder returns,
strong governance and employee engagement.
Customer
satisfaction
Financial
performance
Maximising
shareholder
returns
Strong
governance
Employee
engagement
We are committed to
maximising shareholder
returns, including our policy
to grow the Group dividend
by 4% above inflation per
annum up to at least the
end of 2014/15.
Both South West Water and
Viridor are fully committed
to meeting the needs of
their customers which
are key to the success of
each business. How we
respond to the needs of
our customers and assess
customer satisfaction is set
out on pages 15, 17, 22 and
36 of the Business review.
Our Group has set itself
challenging financial targets.
Financial performance is
measured through a range of
key performance indicators
including profit before tax,
dividend per share, earnings
per share before deferred
tax and the interest rate on
average net debt. Our focus
on setting such targets
is to achieve sustainable
performance over the short,
medium and long-term.
Pages 24 to 27 explain in
more detail our financial
performance.
We are aware that our
businesses can, and do,
have a material impact
on the environment and
communities in which
they operate. We take a
responsible and transparent
approach to environmental,
social and governance (ESG)
matters. Our sustainable
practices not only benefit
communities, but also enable
our businesses to be more
successful. More information
on our sustainability targets
and our achievements over
the past twelve months are
set out on pages 34 to 39
in the Group’s Sustainability
report.
We are aware that the
success of our Group is due
to the talent, commitment
and hard work of our
employees and we aim to
be a responsible employer.
We are focused on ensuring
workforce well-being,
continuity, efficiency and
productivity and we carefully
manage the successful
integration of employees into
Viridor following acquisitions.
More information on the
initiatives we have introduced
to improve employee
engagement in each of our
businesses is set out on
pages 17, 23, 40 and 41 of
the Business review.
Our operating framework and risk management
Essential to achieving our strategic aims and creating value within our businesses is our operating framework which is based on the
principles of good governance as described in the Governance section.
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Our operating framework includes a comprehensive and fully embedded risk management process which
assists us in managing our risks and opportunities to deliver the Group’s strategy and the other essential
elements of our business model.
Further information on our control and risk management environment is described on page 30.
Our principal risks and uncertainties and how we mitigate them are set out on pages 28 to 33.
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Pennon Group Plc Annual Report and Accounts 2012 7
Directors’ report – Business review
Strategic Q&A
Delivering on our strategy
Overall 2011/12 was another successful twelve months for Pennon.
Group Director of Finance David Dupont, South West Water
Chief Executive Chris Loughlin and Viridor Chief Executive Colin
Drummond discuss a year of achievement and outline their strategic
approach to the main challenges they face.
In tougher economic times, how
vulnerable are South West Water and
Viridor to an economic downturn?
DD
While neither business is immune, both
businesses have demonstrated their
resilience in recent difficult conditions.
South West Water experienced a small
reduction in demand, but this reflected the
trend in recent years as more customers
switch to meters and our larger users, with
our assistance, focus on improving their
water use efficiency. The bad debt charge
increased slightly in the first half of the year
but has since stabilised.
As expected, the full year profits for Viridor
were below those of last year because
the company was impacted by lower
recyclate prices in the second half of the
year, reflecting world economic conditions.
We took action to recover more than
50% of the impact of this through cost
reductions and, while we are cautious
about the recovery of recyclate prices in
the short-term, Viridor’s recent contract
wins and long-term investment are laying
the foundation for significant growth in
subsequent years.
What were the highlights of the year
and how do they reflect the Group
strategy?
David Dupont
Group financial performance was once
again very strong, notwithstanding tough
economic conditions. South West Water’s
profit increase reflected further substantial
efficiency gains and while Viridor’s profits
were a little lower than last year, this was
in part due to higher bid costs linked to its
growing pipeline of future projects. Viridor
achieved some notable contract wins
during the year which lay the foundation for
significant growth in the future. The Group
continued to effectively manage financing
costs which outturned at a lower level than
the previous year despite higher average
net debt.
Overall the results demonstrate the
successful Group strategy of developing
its infrastructure utility businesses,
with South West Water continuing to
outperform the targets set by its regulator
and Viridor building its business through
a combination of long-term contract wins
and construction now under way on four
significant energy from waste plants.
“ The Group policy is to grow the
dividend by 4% above RPI up
to at least the end of 2014/15.”
David Dupont, Group Finance Director
Pennon Group
8 Pennon Group Plc Annual Report and Accounts 2012
Your dividend continues to be very
strong in the sector. How long can
you sustain this performance?
DD
The Group policy is to grow the dividend
by 4% above RPI up to at least the end
of 2014/15. This policy reflects the actual
and expected financial performance of
both South West Water and Viridor. As
usual the Board expects to review the
dividend policy at the start of the next
South West Water regulatory review
period taking account of Ofwat’s next
price Determination, and the expected
growth from Viridor’s long-term contracts
and energy from waste plants which are
expected to come on stream around
this time.
There is very substantial
investment going into Viridor.
How will you fund it?
DD
At the year-end the Group had cash
and facilities of £1,084 million, including
£123 million restricted cash, with
£566 million of new/renewed facilities
secured during the year. These provide
very substantial resources to support the
investment in Viridor over the next few
years. We are continuing to talk to a wide
range of finance providers and expect to
source the remaining funding required on
a timely basis.
South West Water achieved a strong
operational performance last year.
What were the key highlights and how
did you achieve them?
Chris Loughlin
South West Water achieved its best ever
leakage control results and maintained
its 15th consecutive year without water
restrictions. We had repeated best ever
drinking water quality and saw a record
number of the region’s bathing waters
meeting the EU’s highest compliance
standard.
We were able to exceed our leakage
control targets through early detection
and swift response times. In addition our
new remote working system allowed our
leak detection inspectors to work more
dynamically in the field by substantially
reducing the amount of time needed to
process leakage reports.
South West Water’s ongoing programme
of capital investment in water resources
meant we had adequate supplies to prevent
a water shortage. Similarly, our investment
in both drinking and waste water treatment
ensured continued high standards.
Alongside our strong operational
performance we achieved a significant
increase in customer service levels. Our
Service Incentive Mechanism score –
which includes the number of written
“ South West Water achieved
its best ever leakage control
results and maintained its 15th
consecutive year without water
restrictions.”
Chris Loughlin, Chief Executive
South West Water
complaints and the results of customer
satisfaction surveys – indicated a 15%
improvement on the year before and a
78% improvement over the last two years.
Earlier this year there was a lot of
commentary in the press about likely
water shortages in England in 2012.
How are you placed in the South
West?
CL
Based on our current position we are
confident of a 16th consecutive summer
without water restrictions. As would be
expected, South West Water is monitoring
the situation and will make the best use of
its resources accordingly.
Last year we avoided any shortages
through a combination of utilising new
resources such as Park and Stannon
reservoirs – both former china clay pits –
and careful resource planning. The region
did experience a drier winter than average
but we tackled this through the use of
pumped storage schemes. This involves
abstracting water from rivers while levels
are healthy to supplement the natural
inflow to our reservoirs.
The recent national concerns over drought
serve to highlight the importance of
efficient water use. South West Water is
committed to a strategy that optimises
its use of supplies and assets and we
continue to raise awareness with our
customers about how to use water wisely.
What has been the impact of the
adoption of private sewers so far?
Do you expect further investment
over the next couple of years?
CL
On 1 October 2011 the Private Sewer
Transfer legislation resulted in South West
Water’s sewer network increasing by more
than 50%. This had a knock-on benefit for
the majority of our customers who are no
longer at risk of high sewer maintenance
costs and now are only responsible for
drains located within, and serving, their
properties.
Pennon Group Plc Annual Report and Accounts 2012 9
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Directors’ report – Business review Strategic Q&A
continued
The company was well placed to manage
the transfer. Operational plans to manage
customer contacts and deliver service
to our customers through two new
contractors were implemented smoothly
and activity has been at the lower end
of the expected range.
South West Water will continue to maintain
and improve the adopted network over
the coming years starting with a capital
investment programme focused on
problematic assets. The operating and
capital costs incurred so far have been
over £3 million; these efficiently incurred
costs will be funded through future
adjustments to price limits, with the
submission of an application to Ofwat for
an Interim Determination of K anticipated
in 2013.
How will the funds promised
by Government to help support
customer bills from 2013/14 be paid?
Will shareholders lose out in any way?
CL
Legislation first proposed in December
2011 will enable South West Water to
receive funding from the Government so
that we can cut all household bills by £50
per year until at least the end of the next
spending review period.
We welcome the reduction which is due
to come into force in April 2013. It directly
benefits customers – it will be passed
straight through to them and as such
there is no impact on the interests of our
shareholders.
What is South West Water’s position
on targeted efficiency savings?
CL
The Company is targeted with achieving a
step-change in operational cost efficiency
for K5. As planned, delivery of the Ofwat
efficiency targets of an average of 2.8%
per annum is front-end loaded with an
average 5.1% per annum delivered in the
first two years of this K period.
How will industry reforms, as
signalled by the Government, affect
South West Water?
CL
The direction of Government policy and
Ofwat’s regulatory reform proposals will
provide new opportunities, challenges and
responsibilities. There is a clear emphasis
on the efficient use of water resources,
providing sustainable solutions to water
pollution problems through catchment-
based approaches, the removal of barriers
to competition, secure and stable financing
and customer-centred activity. In each
case South West Water’s long-term
strategy and successes to date mean we
are well placed to deliver these proposals.
The signals are that industry reform will
be evolutionary rather than revolutionary,
with timescales for change over a
period to 2025 and beyond. To date,
the details of reforms have been limited.
However draft legislation is anticipated for
2012/13 with an initial focus on extending
competition for commercial customers.
We are preparing for the development of
competition in this area and have recently
extended our new ‘Source for Business’
activities, offering enhanced services to
our commercial customers.
How are you preparing for the 2014
Periodic Review?
CL
Having already reviewed our long-term
strategy as part of the 2009 Periodic
Review, South West Water is well placed
for the 2014 Periodic Review (PR14). We
have already rolled out our initial phases of
customer engagement and work is under
way to determine investment scenarios
for the next period. Our dedicated PR14
team is continuing to raise awareness
both internally and externally about the
review process.
A new development has been the recent
implementation of our ‘WaterFuture’
customer challenge panel which
comprises representatives from various
stakeholder and consumer groups.
Designed to ensure our customers’
priorities are kept central to our plans, the
panel’s involvement will help shape our
forthcoming updated Strategic Direction
Statement which will provide a long-term
context for the five-year, 2015-2020
business plan.
What are the key trends currently
impacting Viridor?
Colin Drummond
We are seeing an intensification of the
long-term trends which have been evident
for the past number of years and upon
which Viridor’s strategy is built. The total
amount of waste generated in the UK is
falling, impacted by Government policies,
public pressure to reduce waste and
current weak economic conditions. More
importantly for Viridor, within the total
amount of waste, the proportion being
recycled and the demand for recycling
services continue to grow. At the same
time it is becoming increasingly clear that
the most economic and environmentally
beneficial solution for the residues which
cannot be recycled is provided by EfW
facilities.
The year’s results were impacted by
lower prices for recyclates. What are
the prospects for the coming year
and how do you manage volatility
in this area?
CD
Viridor has seen substantial trend growth in
its recyclate prices over the past five years
as it continues to improve quality, and
customers increasingly recognise the value
of recyclate as a low-cost raw material.
2011/12 was a year of two halves as far
as recyclate prices were concerned. The
first half saw recyclate prices well above
long-term trends and, as I commented
at the time, this was not sustainable in a
weakening world economy. In the second
half prices did indeed fall back, reflecting
weakness in the Eurozone economies and
slightly slower growth in China. We were
able to offset more than 50% of the impact
of reduced recyclate prices under the
terms of our customer supply contracts
and from other cost reductions. However
we are cautious about any recovery
in recyclate prices in the short-term as
Eurozone worries continue.
What have been the key
achievements this year in developing
your project pipeline?
CD
We have had a series of major wins in
our pipeline of long-term Public Private
Partnership (PPP) contracts and EfW
facilities. The final legal challenge to
10 Pennon Group Plc Annual Report and Accounts 2012
What is the scope of the remaining
opportunities with county councils
and other municipal authorities?
What proportion have not entered
into long-term contracts to manage
their waste?
CD
Municipal contracts provide the base
load for facilities which can also serve the
somewhat larger commercial and industrial
(C&I) market. Much of the long-term
municipal procurement for residual waste
treatment has either already taken place
or is under way. I have already mentioned
some of our recent successes. We are on
track in five years’ time to have a network
of strategic EfW facilities, mainly backed by
municipal contracts with surplus capacity
for the C&I market, in most of the major
regions in the UK (including London and
the South East, the North West, the South
West, South Wales, and the central belt of
Scotland).
Do you have the capacity to take on
many more of these projects?
CD
The key question with any project is how
to create shareholder value. We believe we
have already targeted many of the most
attractive contracts where the market is
large and we can establish a competitive
advantage. If we identify similar further
opportunities to create shareholder
value, we have the management
resources in place and can continue
to procure additional consultancy
expertise as required.
What will be the impact on Viridor’s
profitability when all of the current
projects come on stream?
CD
Within the next five years our project
pipeline could more than double
Viridor’s EBITDA.
Around 50% of Viridor’s profits are
now from transforming waste. Do you
expect this percentage to increase in
the coming years?
CD
Yes, this percentage is likely to increase.
Viridor’s strategy is to transform waste
into a resource. Recycling and renewable
energy are good for the environment, for
the UK economy and for our shareholders.
our planned EfW facility at Ardley was
successfully resolved and construction
has commenced meeting the needs of
the Oxfordshire PPP contract. The Exeter
PPP contract was signed and construction
of the associated EfW is under way.
We have signed the Engineering
Procurement and Construction (EPC)
contract for our planned EfW plant in
Cardiff and construction will commence
shortly. The final legal challenge against
planning permission for our proposed
EfW facility at Avonmouth has also been
successfully resolved.
We have become preferred bidder for three
further major waste PPPs. These are for
the South London Waste Partnership, for
Glasgow and, subject to legal challenge,
for South Lanarkshire. We are down to
one of two shortlisted bidders on five
other waste PPPs.
Viridor has been very successful
at securing contracts to build and
operate new EfW facilities. When will
Runcorn come on stream and is it on
target? More generally, how do you
ensure that these new projects are
brought to completion on time and
on budget?
CD
These are major construction contracts
and we are fully aware of the challenges
involved and have planned accordingly.
Our general policy is to invest in modern
robust and proven technologies and to use
high quality suppliers without putting too
much business with any individual one of
them. We ensure clear contract terms on
a fixed price basis passing back relevant
risks to our suppliers and back this up
with careful contract management and
independent certification. This approach
worked well on our highly successful
Lakeside joint venture project and we are
following a similar policy for Runcorn. We
are on track to take over the first phase of
Runcorn by March 2013 with the second
phase following in mid 2014. We are taking
a similar approach on the other projects in
our pipeline.
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“ We have had a series of major wins
in our pipeline of long-term PPP
contracts and EfW facilities.”
Colin Drummond, Chief Executive
Viridor
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Pennon Group Plc Annual Report and Accounts 2012 11
Directors’ report – Business review
South West Water
Investing in quality
Key facts and figures
Revenue
£m
Profit before tax
£m
.
0
4
7
4
.
2
4
4
4
.
8
8
4
4
.
7
1
3
4
.
0
1
2
4
.
5
6
1
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.
5
9
2
9 1
6
1
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.
.
5
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9
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£474.0m
+5.6%
8
0
/
7
0
0
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2
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/
9
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£141.5m
+9.8%
Operational highlights
• strong performance against 2010-2015 regulatory contract
• a 15th consecutive summer without water restrictions in 2011
and a 16th anticipated in 2012
• best ever leakage results
• repeated best ever drinking water quality (99.98%)
• record percentage (95.1%) of bathing waters achieving EU
Guideline standard (excellent status)
• increased customer service (written customer complaints down
25% and Service Incentive Mechanism score up 15% from
2010/11)
• accelerated pace of delivery for targeted operating cost
reductions and capital programme efficiencies
• high levels of drinking water and sewerage services maintained
(stable serviceability).
2011/12 notable achievements
• smooth transition of private sewers adoption on 1 October 2011.
Estimated network length increased by over 50%
• introduction of specialist ‘Source for Business’ service
• Government support for household customer bills from
2013/14 welcomed
• Water Industry Achievement Awards for ‘Upstream Thinking’
(Partnership Initiative of the Year) and ‘BeachLive’ (Community
Project of the Year).
Where we operate
Wistlandpound
Wimbleball
Reservoir
Key water
mains
Upper Tamar
Lake
Roadford
Meldon
Crowdy
Colliford
Siblyback
Park
Stannon
Fernworthy
Venford
Kennick/
Tottiford/
Trenchford
Burrator
Avon
Drift
Stithians
College
Argal
12 Pennon Group Plc Annual Report and Accounts 2012
resident population
1.67m
15,146km
of water mains
of sewers
14,710km
39
drinking water treatment works
645
waste water treatment works
Strategy and performance
The company’s vision of ‘Pure Water, Pure Service and Pure Environment’ represents our
ongoing ambition to achieve and sustain the highest standards possible in every sphere of our
activity. We see innovation and forward-thinking investment as key to our long-term success
and we remain committed to a strategy that values our business, our customers and the world
around us in equal measure.
Strategy
Pure Water
Providing safe and reliable
water supplies
Performance
Repeated best ever drinking
water quality and a 15th
consecutive year without
water restrictions. Best ever
and industry-leading leakage
control performance
Pure Service
Increased levels of
customer satisfaction
Performance
Increased average level of
customer satisfaction score
with 25% fewer written
complaints than the previous
year. ‘Source for Business’
launched
‘Stable serviceability’
maintained
Pure Environment
Protecting and enhancing
the environment
Performance
Record high in the number
of bathing waters meeting
the EU’s highest standard.
Renewable energy generation
increased with the installation
of additional solar, hydro and
wind turbine schemes
Financial
Outperformance of the
regulatory contract
Performance
Outperformance of the
targeted operating cost
reductions alongside
increased operating profit
and efficient funding
Capital programme efficiencies
remain on track to achieve 5%
outperformance
KPI
Drinking water quality
% Mean Zonal Compliance
(MZC) calendar year
KPI
Customer service
score Service Incentive
Mechanism (SIM) %
5
9
.
9
9
8
9
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9
8
9
.
9
9
7
9
.
9
9
8
9
.
9
9
9
.
6
6
1
.
8
5
KPI
Bathing water compliance
with EU Mandatory and
Guideline standards %
calendar year
5
.
6
9
5
.
6
3 9
.
0
9
6
.
8
9
1
.
5
9
0
.
4
8
KPI
Operating profit
£m
7
.
4
0
2
5
.
3
9
1
8
.
9
8
1
6
.
6
8
1
0
.
1
8
1
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7
0
0
2
8
0
0
2
9
0
0
2
0
1
0
2
1
1
0
2
99.98%
1
1
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0
1
0
2
2
1
/
1
1
0
2
66.9
+15%
9
0
0
2
9
0
0
2
0
1
0
2
0
1
0
2
1
1
0
2
1
1
0
2
Mandatory
Guideline
8
0
/
7
0
0
2
9
0
/
8
0
0
2
0
1
/
9
0
0
2
1
1
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0
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2
1
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1
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2
£204.7m
+7.9%
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Pennon Group Plc Annual Report and Accounts 2012 13
Directors’ report – Business review South West Water
continued
Financial strength and
operational excellence
Business performance
South West Water has continued its excellent start to K5 with
strong operational delivery and high standards of customer
service coupled with strong financial performance. The company
continues to outperform targeted operating cost reductions and
capital programme efficiencies.
An increase in revenue and good operational cost control has
resulted in South West Water’s operating profit increasing by
£14.9 million. With consistently low financing costs, profit before
tax has increased 9.8% from last year.
The company is front-end loading delivery of the required 2.8%
per annum average operating cost efficiencies with 5.1% per
annum delivered in the first two years of this K period (2010-2015).
This is being achieved through changing operational ways of
working; right-sourcing and innovative contracting arrangements;
energy procurement and reduced usage; and the rationalisation of
administration and support services.
Capital expenditure in the year was £131 million, a 5% increase
on last year. The main focus of investment remains on the
maintenance of existing assets. The reliability of our network is
illustrated by our operating assets achieving ‘stable serviceability’(1)
for all operational areas. Other key areas are: increasing our water
resource availability and ensuring the resilience of our network
even in extreme weather conditions; improving drinking water
quality; delivering environmental improvements; and achieving high
standards of bathing water quality.
Efficiency performance on the K5 capital programme remains
on track to deliver 5%(2) outperformance of the Ofwat 2009 Final
Determination.
Pure Water
Drinking water quality
South West Water prides itself on achieving industry-leading water
quality results. In 2011 the quality of our water, as measured by
Mean Zonal Compliance (MZC), was equal to its best ever. This
marks the third year out of the past five in which a score of 99.98%
has been attained.
The continued high standards of our drinking water can be
directly attributed to our ongoing investment and innovation
in our treatment processes. In addition our water quality has
benefited from a rigorous mains improvement programme
and the implementation of a taste and odour strategy.
In 2011/12 South West Water made significant investments in
drinking water quality, including upgrades to water treatment
works at Drift (Cornwall) and Tottiford (Devon).
Leakage control
South West Water has maintained its exemplary industry-leading
performance in leakage control, as it has done every year since
targets were introduced. In 2011/12 we successfully surpassed our
previous record to achieve a record low of 81.3 megalitres lost on
(1) ‘Serviceability’ is the capability of a system of assets to deliver a reference level of service to
customers and to the environment now and into the future. Serviceability is deemed to be stable
when the assessment of trends in a defined set of service and asset performance indicators
demonstrates that service is in line with the reference level of service and, by inference, is likely
to remain so into the future.
(2) Using 2009 Final Determination estimates of Construction Output Price Index (COPI).
Top: Construction under way on the new Coswarth Reservoir,
near Newquay, Cornwall.
Bottom: Mel Selvester, one of our leakage inspectors, checks the
status of mains on Plymouth seafront.
14 Pennon Group Plc Annual Report and Accounts 2012
South West Water continues
to outperform targeted
operating cost reductions
and capital programme
efficiencies while investing
in the long-term resilience
of its network assets.
average per day over a twelve month period. In addition we have
beaten the rolling three-year average.
The strong leakage control performance has been due to a
number of combined factors including swift leak detection and
response times; the efficiency of our remote Phased Utilisation
of Remote Operating Systems (PUROS); and improved
communication with our customers using both traditional and
web-based platforms.
Water resources
Despite below average rainfall last year, South West Water avoided
putting water restrictions in place for a 15th consecutive summer.
This was achieved primarily as a result of strategic investment in
expanding our reservoir system and distribution network. Now fully
operational, Park and Stannon lakes in Cornwall played a key role
in ensuring resources were maintained during 2011/12.
In addition South West Water also made use of pumped storage
schemes at Wimbleball, Stithians and Colliford reservoirs. This
involves abstracting water from rivers, while levels are healthy,
to supplement the natural inflow to our reservoirs.
South West Water’s resource network has been further expanded
in the past year, most notably through the addition of Coswarth
service reservoir, near Newquay, Cornwall which will supply
around 9,000 homes. South West Water is also developing its
first new borehole in 18 years at Greatwell, East Devon.
Our 2012 position
The national concerns over drought in 2012 serve to highlight
the importance of efficient water use. South West Water is
committed to a strategy that maximises the yield of its supplies
and assets and we continue to raise awareness about how to
use water wisely.
Based on our current position we are confident of a 16th
consecutive summer without water restrictions. As would be
expected, South West Water is monitoring the situation and will
make the best use of its resources accordingly.
Pure Service
Customer satisfaction
At the core of South West Water’s ‘Pure Service’ strategy are the
needs of our customers. Since 2010/11 customer satisfaction has
been measured by the Service Incentive Mechanism (SIM). This
takes into account various customer service measures including
the number of written complaints and the results of customer
satisfaction surveys.
South West Water achieved a 15% improvement in customer
service between 2010/11 and 2011/12 based on its SIM score
(2010/11: 58.1, 2011/12: 66.9) and a 78% improvement over two
years.
There were 25% fewer written complaints than the previous year.
Over the last two years written customer complaints have halved.
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Top: Stannon Lake, Cornwall.
Bottom: Eleanor Dodd, helping a customer at the Source
customer contact centre at Peninsula House, Exeter, Devon.
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Pennon Group Plc Annual Report and Accounts 2012 15
Directors’ report – Business review South West Water
continued
Private sewers
On 1 October 2011 the Government transferred the ownership of
the majority of private sewers to water and sewerage companies.
As a result South West Water’s sewer network increased by
over 50%. This had a knock-on benefit for the majority of our
customers who are no longer at risk of high sewer maintenance
costs and are now only responsible for drains located within and
serving their properties.
South West Water is continuing to evaluate the impact of the
private sewer transfer. We are confident that our smooth transition
into the new role was the result of careful planning, an effective
communications strategy and efficient operational activity.
£50 bill reduction for South West Water customers
Since privatisation in 1989 South West Water customers have
effectively been paying for the protection and upkeep of a third of
the nation’s bathing waters. Highlighted in the 2009 Walker Review
and pursued vigorously by South West Water alongside regional
MPs, consumer groups and media organisations, this sensitive
regional issue was addressed by the Government in late 2011, with
a pledge to reduce household bills in the region by £50 per year.
This reduction is due to come into effect in April 2013.
Pure Environment
2011/12 was a year of continued investment in environmental
projects and initiatives. In addition to the refurbishment of a
number of waste water treatment works South West Water has
successfully trialled grit and screenings composting to reduce
the amount of waste sent to landfill.
We also expanded our use of renewable energy through solar,
wind and hydro power schemes at more than 20 of our sites
and we continue to promote energy saving through in-house
campaigns such as ‘PowerDown’.
Coastal waters
The quality of beaches and bathing waters in the South West
plays a key role in the region’s economy, culture and lifestyle.
With 144 designated bathing waters along more than 500 miles
of coastline, South West Water’s activities have a potential effect
on more bathing waters than any other water company in England
or Wales.
The number of bathing waters in our region now achieving the
EU’s highest standard is at an all time high. 95.1% of our beaches
are achieving the EU Guideline standard (excellent status) with
98.6% obtaining the Mandatory standard (good status).
South West Water continues to work with a number of partner
organisations to protect the coastal environment. In June 2011
the company launched its ‘BeachLive’ website to provide live
information on bathing water quality around the region.
Energy generation
In 2011/12 our investment in renewable energy included the
installation of solar panels at 23 of our sites (nineteen 50kW
schemes and four 100kW schemes) and the development of
hydro-electric schemes at Colliford Dam, Cornwall and Avon
Dam, Devon.
Top: South West Water’s bathing water results reached a record
high last year. Bedruthan Steps, Cornwall.
Bottom: Joe Colton-Dyer, one of South West Water’s new
apprentices.
16 Pennon Group Plc Annual Report and Accounts 2012
Our continuing focus for K5
is to strike the right balance
for customers, investors and
other stakeholders.
At Lowermoor water treatment works in North Cornwall we
erected a single 100kW wind turbine which is expected to
generate approximately 60% of the site’s power needs.
Our goal is to generate 30GWh from renewable sources by 2015.
Ultimately South West Water aims to source 50% of its energy
from renewables by 2050.
Upstream Thinking
Focused on improving raw water quality in river catchments in
order to reduce treatment costs, ‘Upstream Thinking’ is an award-
winning South West Water-led initiative that seeks to maintain and
improve the ecological health of our region’s river network.
During 2011/12 South West Water has continued to work with
partner organisations, the agricultural community, landowners,
researchers from the region’s universities and other stakeholders
to implement a range of projects that target water quality
and water storage at its natural source. These include farm
management improvements and engagement with farmers;
habitat management; and landscape restoration in specific river
catchment areas.
In March 2012 ‘Upstream Thinking’ won the ‘Partnership Initiative
of the Year’ category at the Water Industry Achievement Awards.
Our employees
South West Water attaches considerable value to the safety and
training needs and ambitions of its employees.
In addition to rigorous attention to health and safety, the company
provides thorough training and support with opportunities for staff
to develop their careers through a number of schemes. These
include our internal graduate development programme (GROW)
and our Management Academy.
South West Water is a key player in the local economy and we
remain committed to nurturing fresh talent for the future. During
2011/12 our apprenticeship scheme has gathered momentum
and our strategic investment in both people and technology – in
the form of our centrally-operated remote PUROS system and
other innovations – means we are reaping the rewards of improved
productivity delivered by a highly trained and motivated workforce.
Key relationships
Regulators and others
South West Water actively engages with a wide range of
environmental and regulatory stakeholders. We take steps to
ensure that communication is handled in the most appropriate
way and that the information we provide is high quality and
consistent. We use a range of commercial channels including
traditional and online platforms to communicate with our
stakeholders.
The company contributes to national policy on developing issues
through its membership of Water UK, the industry trade body,
and we work with the Consumer Council for Water to ensure
that customers’ issues and concerns are addressed and a full
understanding of the company’s activities is maintained.
WaterFuture customer panel
As part of the 2014 Periodic Review process, following guidance
from Ofwat, we have created an independent ‘WaterFuture’
customer challenge panel, comprising a group of representatives
from various regulatory, stakeholder and public bodies. Its role in
the coming year will be to ensure our business plan adequately
reflects an understanding of our customers’ priorities and that our
planned activities are socially, economically and environmentally
sustainable.
Procurement and suppliers
Our procurement strategy is focused on partnering and strategic
alliances with 60 key suppliers who account for the large
majority of expenditure. We include all aspects of sustainability
in our procurement processes and this is a central theme of our
procurement strategy for our supply chains and support of the
regional economy. With the start of the K5 regulatory period we
introduced an innovative ‘mixed economy’ model to source our
capital programme. This means using a significant number of
smaller local contractors to provide specialised services as well
as developing long-term relationships with more major supply
chain partners. No supplier (revenue) accounts for more than 5%
of the company’s revenue and South West Water sources all its
purchases from competitive markets.
Looking ahead
In December 2011 the ‘Water for Life’ White Paper outlined
the Government’s vision for a resilient, customer-focused and
environmentally sustainable water sector. South West Water
welcomed this commitment from Government and we believe that
both our long-term strategy and successes to date are already
making headway in realising these ambitions.
The company has delivered substantial efficiencies which
benefit all stakeholders and is focusing on continued delivery of
efficiencies while satisfying regulatory and legislative obligations
and improving services to customers. Specifically the strategy:
• targets outperformance of the regulatory contract
• continues to rigorously control costs
• delivers investment in the asset base to secure improvements
made over the last 20 plus years while preparing for the next
20 plus years.
The company is working towards the next Price Review, (PR14),
and is actively engaged in the development of Ofwat’s regulatory
reform agenda.
We have already rolled out our initial phases of customer
engagement and work is under way to determine investment
scenarios for the next period.
Our ‘WaterFuture’ customer challenge panel will assist in ensuring
customers’ priorities are kept central to our plans. The panel’s
involvement will help shape our forthcoming Strategic Direction
Statement which will provide a long-term context for the next
business plan.
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Pennon Group Plc Annual Report and Accounts 2012 17
Directors’ report – Business review
Viridor
Investing for future growth
Key facts and figures
Revenue
£m
Profit before tax
£m
.
1
1
6
7
.
9
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£57.6m
-8.4%
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£761.1m
+6.9%
Where we operate
18 Pennon Group Plc Annual Report and Accounts 2012
2011/12 operational highlights:
• profit before tax decreased by 8.4% to £57.6 million, with
performance less strong in the second half of 2011/12 than in
the first half of the year reflecting world economic conditions
• contribution to profits of recovering the value in waste grew to
around 50%, as landfill fell to 18% (from 69% in 2001)
• volumes of recyclate traded increased by 7.2% to over 1.8 million
tonnes, with continuing improvements in quality and value mix
• total renewable energy production increased to 760GWh
(752GWh 2010/11)
• revenue increased by 6.9% to £761.1 million
• capital expenditure and investment in joint ventures of £140
million mainly to deliver additional renewable power generation
and recycling capacity.
2011/12 notable achievements:
• acquisition of five high-quality recycling, collection and
transport businesses for around £40 million, strategically
sited to complement existing UK operations and international
recyclate sales
• announced as preferred bidder for South London, Glasgow and
South Lanarkshire* PPP contracts, and one of last two bidders
for five others
• by the year-end 39 of the 43 new facilities for the Greater
Manchester joint venture PFI contract were operational
• phases one and two of the construction of the combined heat
and power (CHP) energy from waste (EfW) plant at Runcorn
on schedule
• construction commenced on Ardley (Oxfordshire) and Exeter
EfW projects and on Walpole anaerobic digestion facility in
Somerset
• construction contract signed on Cardiff EfW project and
final planning consent achieved on Avonmouth EfW and
recycling facility
• Lakeside joint venture EfW plant, near Heathrow airport,
announced as winner of 2011 Chartered Institution of
Wastes Management ‘Peel People’s Cup’ for best run waste
management facility in the UK, and of ‘EfW Facility of the Year’
and ‘Best Designed Renewable Energy Facility’ at the UK
Renewable Infrastructure Awards.
* subject to legal challenge.
Viridor’s network of recycling, renewable energy and waste
management operations is strategically located across the UK, with
particular strengths in the South West; South East and North West
of England, East Anglia, South East Wales, and Central Scotland.
The company sells its high-quality recyclate in the UK and
internationally, with established relationships across Europe and
in Asian countries including China, Indonesia and India.
operating facilities
327
25
landfill gas power plants
34
3
materials recycling facilities (MRFs)
energy from waste (EfW) plants
8.1
million tonnes of material handled
in 2011/12
Strategy and performance – transforming waste
Viridor’s strategy is to add value by:
• growing recycling capacity and services
• growing energy from waste capacity and
services
• selectively gaining more PPP contracts
• capitalising on its long-term strong position
in the landfill market.
Viridor consolidated its position as the UK’s
largest operator of materials recycling facilities
(MRFs) in 2011/12. The company made five
further acquisitions of recycling, collection and
transfer businesses during the year.
In the short-term Viridor’s financial performance
will continue to be influenced by trends in
recycling and landfill.
Recycling remains a very profitable business
for Viridor and the roll-out of its EfW pipeline
(operations commencing 2013/14 onwards)
could more than double EBITDA within five
years.
Strategy
Transforming waste: to grow Viridor’s recycling capacity and services
Performance
Volumes of traded recyclate increased by 7.2% with continuing
improvement in quality and value mix. Revenue per tonne was
up 6.8% year on year although prices fell back in the second half
of the year. Further acquisitions strengthened recycling capacity
and volume
Performance
Runcorn, Exeter and Ardley EfW facilities and Walpole AD plant
under construction. Construction contract signed for Cardiff EfW
plant. Total power generation output increased to 760GWh
KPI
Recyclates traded
million tonnes
KPI
Profits from recovering
value in waste %
KPI
Renewable energy
generation capacity
MW as at 31 March
KPI
Total renewable energy
generation
GWh
8
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+7.2%
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49%
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136MW
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760GWh
Pennon Group Plc Annual Report and Accounts 2012 19
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Directors’ report – Business review Viridor
continued
A year of investment and progress
Strategy
The UK is required under the EU Landfill Directive to reduce the
amount of biodegradable municipal waste going to landfill sites.
This is being achieved by a major increase in recycling, with
residual waste increasingly being used for energy recovery. The
Government’s main mechanism for diverting waste from landfill
and providing incentives for recycling and energy recovery is
landfill tax, supported by a range of other policy and legislative
measures. Many leading corporate organisations are also looking
to improve environmental and business performance through
recycling and resource efficiency. All of these factors underline
the key aims and long-term trends in UK waste management that
Viridor has been pre-empting and responding to in its services
and continued business transformation. The strategic position and
ability of the company to capitalise on these favourable trends is
therefore strong.
Business performance
Viridor’s revenue increased by £49.1 million to £761.1 million.
Acquisitions accounted for £23.1 million of this, while existing
business increased by £26.0 million (including an increase in
landfill tax of £17.8 million).
Since 2007/08 and up until the first half of 2011/12 our strong
growth in recycling profits had been more than offsetting the
decline in annual landfill profits. However, recyclate prices fell in
the second half of the year reflecting world economic conditions,
although Viridor was able to offset more than 50% of the impact
of this fall under the terms of its customer supply contracts and
by other cost reductions. The year on year growth in recycling
profits, combined with strong performances in contracts and
joint ventures, was unable to offset the on-going decline in
landfill coupled with increased contract bid costs associated
with Viridor’s expanding PPP/EfW pipeline. Notwithstanding this
the company produced a robust performance during a year of
continuing difficult economic conditions. The proportion of our
profits that come through recovering the value in waste continues
to grow, and was around 50% in 2011/12. This compares with just
16% eleven years ago.
Despite the challenging UK and global economic climate, Viridor
remains convinced that embracing the environmental agenda
has been an effective driver for long-term growth. Being green is
good for business. We are confident that our strategy will continue
to drive long-term growth and produce value for Viridor and its
stakeholders. Recycling will be key to profits in the next couple of
years, with long-term momentum underpinned by our growing
PPP and EfW pipeline.
Investment and awards
2011/12 was a year of major long-term investment from Viridor,
including the completion of a further five acquisitions for a total
of around £40 million, complementing the existing business and
in line with the company’s recycling and collection strategies.
These comprised the acquisition of Community Waste Recycling
Limited for a total of £18.5 million, JWS Churngold Limited for
£14.3 million, Storm Recycling Limited for £1.7 million, and two
separate acquisitions of trade waste collection interests of Veolia
in the South West of England for a combined sum of £8.2 million,
the latter bringing excellent synergistic opportunities for Viridor’s
business in that region.
Top: Lakeside energy from waste facility.
Bottom: Viridor collection services.
20 Pennon Group Plc Annual Report and Accounts 2012
Viridor continues its
transformation into a
progressive recycling-led
resource management
business, with a growing
focus on recovering the value
in waste through materials
recycling and the generation
of renewable energy from
waste sources.
Investments in the future capabilities and strength of our business
included capital expenditure and investment in joint ventures of
£140 million, of which £93 million was for new projects in EfW,
recycling and waste treatment infrastructure. This included
£58.3 million on Phase II of the Runcorn EfW combined heat and
power (CHP) facility. An additional £13.4 million was invested in
joint ventures.
During the year Viridor’s Lakeside EfW joint venture, near
Heathrow airport, won the Chartered Institution of Wastes
Management’s Peel Peoples Cup for the best run waste
management facility in the UK. Lakeside also won the ‘EfW Facility
of the Year’ and ‘Best Designed Renewable Energy Facility’
categories at the Renewable Infrastructure Awards 2011. Viridor,
along with West Sussex County Council, Horsham District Council
and sub-contractor, Olus, also won the Association for Organic
Recycling’s Partnership Award.
These awards, and the robust position and performance of the
business, are recognition of the commitment, professionalism,
innovation and hard work of our employees, for which we
thank them.
Recycling
Year on year growth in recycling volumes and profits continued,
reflecting organic growth, acquisitions and an improved mix
between higher and lower value recyclates produced.
Volumes of recyclate traded during the year increased by 124,000
tonnes (7.2%) to 1.84 million tonnes. Higher value recyclate
volumes increased by 198,000 tonnes (17.4%), including 110,000
tonnes through acquisitions, while lower value recyclates
decreased by 74,000 tonnes (12.8%). Viridor continues to focus
on investments and operational improvements to ensure the
highest possible quality of output from its recycling activities. This
strengthens our long-term relationships with customers via our
global trading platform (Viridor Resource Management) and allows
flexibility in changing market conditions.
The acquisition of Community Waste Recycling Limited included
two MRFs, in Milton Keynes and Oxfordshire, and a business
processing up to 90,000 tonnes of recyclates. Storm Recycling
Limited brought an additional 20,000 tonnes of quality recyclates
into the business in the North West of England. The acquisition
of two trade waste collection businesses of Veolia in parts of the
South West reflected the increasing role that Viridor’s collection
fleet has in feeding the company’s recycling operations.
The long-term economics of recycling (and energy recovery) are
enhanced by the rate of landfill tax increasing by £8 a year from
the current £64 per tonne to £80 per tonne by 1 April 2014. The
profit per tonne in recycling remains appreciably higher than the
level in landfill operations. Quality recyclates also remain attractively
priced commodities when compared with virgin materials.
Contracts and joint ventures
2011/12 was the third year of operation of the 25-year Greater
Manchester Waste PFI contract, a joint venture that remains the
UK’s largest combined recycling-focused waste and renewable
energy project. Some 39 out of the 43 now planned facilities
required to service the contract are now operational. The project
aims to recycle over 50% of Greater Manchester’s waste and
divert at least 75% from landfill.
Phase I of the Runcorn EfW CHP plant, which is being
constructed to treat solid recovered fuel produced from Greater
Manchester’s residual waste, is on schedule to open at the end of
2012/13. Phase II of the Runcorn facility is also under construction
and is scheduled to open during 2014. This additional capacity
is designed to serve the North West market more generally.
Runcorn will be one of the largest and most efficient EfW CHP
plants in Europe.
Towards the end of the year Viridor completed its £45 million
investment in infrastructure to serve the West Sussex County
Council recycling and waste handling PFI contract. The opening
of the final recycling site at East Grinstead completed a seven
year programme to deliver a network of modern recycling facilities
across the county. The contract is on track to deliver its target of a
45% recycling rate, three years ahead of schedule. The acquisition
of JWS Churngold Limited strengthened contract services in the
North West.
2011/12 was the second full year of operation of the Lakeside EfW
plant, a joint venture with Grundon Waste Management, with a
capacity to treat 410,000 tonnes of residual waste a year and an
electricity generation capacity of 37MW. This is the first of Viridor’s
pipeline of EfW plants and it has performed consistently strongly
in terms of its electrical output and its on-going profitability, with
a total contribution of £7.8 million.
The total contribution from Viridor joint ventures increased by 4.5%
to £11.5 million.
Landfill gas power generation
Viridor has 34 landfill gas power plants generating renewable
power by harnessing methane produced as organic material
which is anaerobically broken down in contained landfill cells.
The total power generated by these plants in 2011/12 rose
slightly to 576GWh (from 566GWh in 2010/11). The average price
achieved per MWh was also up slightly (1%) at £83.50 but this
was offset by unit cost increases, leaving profits flat year on year.
Viridor estimates that its landfill gas power generation is
approaching peak output. The company had an overall generating
capacity of 107MW1 on 31 March 2012. Electricity produced is
sold under the Government’s Renewables Obligation Certificates
(ROCs), or the older Non-Fossil Fuel Obligation (NFFO) schemes.
The proportion of electricity generated at Viridor plants sold under
the higher value ROCs, increased from 69% to 74% during the
year, with the remaining 26% sold under NFFO contracts. Around
60% of the NFFO component will migrate to ROCs in 2013/14,
with the remaining balance migrating by 2016/17.
1 Excludes 3MW capacity at sub-contract sites in Suffolk.
Landfill and collection services
Landfill continues to provide an important disposal option for
a significant – but declining – proportion of UK wastes. Total
volumes received at Viridor sites decreased by 0.4 million tonnes
(11.4%) to 3.1 million tonnes, broadly in line with the UK market.
Approximately half of this decline in volume was accounted for by
the closure of Horton landfill in West Sussex, with the remainder
from reduced third party industrial and commercial inputs.
Pennon Group Plc Annual Report and Accounts 2012 21
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Directors’ report – Business review Viridor
continued
Average gate fees at Viridor sites increased by 5.8% to £23
per tonne, but the gain was offset by increased costs on lower
volumes. Consented landfill capacity fell from 69.0 million cubic
metres at 31 March 2011 to 65.4 million cubic metres at 31 March
2012, reflecting usage during the year.
Profits from collection services were flat year on year. Two
acquisitions during the year (of Veolia trade waste collection
businesses) strengthened capacity in core service areas. This
reflects our drive for controlled growth in industrial and commercial
collection within key areas, to provide materials for our recycling
and EfW operations.
Renewable energy developments
Viridor believes that there is potential for the UK to generate up
to 6% of its total electricity from energy derived from waste as
fuel (from current contribution approaching 2%). Energy security
remains a vitally important issue for the UK and utilising waste to
generate renewable power presents opportunities for diversity
of supply, with the additional benefits of landfill diversion and
carbon reduction. Viridor currently has a generating capacity
of 136MW and is confident that it can grow this capacity to
over 300MW in four years. This would represent 3-4% of
UK renewable energy supply.
To that end, Viridor’s strong pipeline of opportunities in the EfW
and renewable energy sector continues to progress. The Runcorn
facility, for example, will have a total capacity of 750,000 tonnes a
year and a CHP capacity of 120MW (a proportion of which will be
provided under joint venture).
During the year Viridor secured planning consent for its Ardley EfW
facility. Construction has now begun on this plant which will largely
serve the Oxfordshire PPP contract, treating 300,000 tonnes of
residual waste a year with an electricity generating capacity of
24MW. The construction of the Exeter EfW facility also began
during the year. It is designed to treat 60,000 tonnes of residual
waste for Devon County Council with a generating capacity
of 3MW.
At the end of the year Viridor signed an EPC contract for the
Trident Park EfW scheme in Cardiff, with construction beginning
in the first half of 2012/13. This facility will have a waste treatment
capacity of 350,000 tonnes a year, and an electricity generating
capacity of 28MW. The company also has planning consent for
two further EfW projects in Dunbar and Avonmouth and is seeking
consent for a further plant at Beddington in South London.
Towards the end of the year a contract was signed for the
construction of an anaerobic digestion (AD) facility at Walpole
in Somerset. This plant will be capable of treating up to 30,000
tonnes of organic waste, mostly sourced from the existing
PPP contract with Somerset Waste Partnership, and will
have an electricity generating capacity of over 1MW. Viridor
is commissioning four other AD plants as part of the Greater
Manchester waste PFI contract.
PPP pipeline
Viridor’s bidding team for long-term PPP contracts has performed
strongly in recent years. During 2011/12 we were announced
as preferred bidder for the South London Waste Partnership’s
25-year PPP residual waste contract for the treatment of up to
200,000 tonnes of residual waste. Similarly the company achieved
preferred bidder status for the Glasgow PPP contract requiring
treatment and disposal of up to 200,000 tonnes of residual waste
a year via an energy recovery facility.
Viridor was also named preferred bidder for the South Lanarkshire
PPP contract (currently subject to legal challenge) and is one of
the last two bidders for contracts in Peterborough (for recycling
and for residual waste), West Lothian (residual waste), South East
Wales (residual waste), Central Bedfordshire (residual waste) and
Edinburgh and Midlothian (food waste).
Key relationships
Environmental permits are required for all waste and recycling
facilities in England and Wales, with waste management licences
or pollution, prevention and control (PPC) permits required in
Scotland. These are issued and monitored by the Environment
Agency and the Scottish Environment Protection Agency
respectively. Viridor maintains a positive working relationship
with the regulators by means of proactive liaison and issues
management, at both a site and strategic level.
The company has developed an innovative data sharing portal
named ‘Openspace’, with the Environment Agency in England,
which supplies online environmental monitoring data live to the
regulator, replacing the need to supply huge volumes of written
quarterly and annual reports. This ground-breaking project is part
of the Agency’s ‘better regulation’ agenda and has substantial cost
and resource saving potential.
Local authorities remain Viridor’s largest single customer group
accounting in total for 32% of the company’s revenue, although
no individual authority accounts for more than 11%. Viridor’s
ROC energy contracts account for 6% of revenue, primarily
with one customer.
No supplier accounts for more than 5% of Viridor’s revenue.
The company sources from competitive markets.
Our employees
We are proud of the achievements of our employees. Viridor’s
operational priority remains the safety, health and positive
professional development of our employees. It is the on-going
commitment, motivation and professionalism of our employees
that enables the company to continue to grow, develop and
deliver results. Particular attention has been paid during the year
to improving further training capacity and personal development
opportunities and to health and safety. Our overall RIDDOR
incidence rate has fallen by 43% during the year.
The company continues to focus on supporting new employees
joining Viridor to ensure quick and effective integration into our
company culture, especially our health and safety and business
management systems. This also enables all new employees to
contribute to the company’s success from the beginning of their
Viridor career.
22 Pennon Group Plc Annual Report and Accounts 2012
Looking ahead we intend
to increase further the
proportion of profits
generated by recovering
the value in waste.
Recycling operations will
be key to profits in the
short-term with Viridor’s
pipeline of PPP/EfW projects
underpinning its long-term
profit momentum.
Looking ahead
During the year the UK Government completed its Waste Policy
Review for England – with similar themes enshrined in the Scottish
and Welsh ‘zero waste’ strategies and plans. These underline
the governments’ commitment to moving towards a ‘zero waste
economy’ via higher levels of recycling, energy recovery and
resource efficiency. Viridor awaits with interest the National Waste
Management Plan (due in 2013) setting out updated guidance
on the delivery of waste infrastructure. There has already been
good progress in the delivery of planning consents for recycling
and waste facilities and we believe that the current market-friendly
approach to recycling and generating energy form waste should
continue to be encouraged.
The seventh Environment Action Programme (EAP) is also due
to be adopted by the European Commission (EC) in 2012. This
will emphasise the need for waste prevention, recycling and
greater resource efficiency, as well as better implementation
of environmental legislation at all levels – including waste
management.
Within the context of EC policy and legislative trends, we believe
that Viridor is well placed to benefit from additional requirements
to increase renewable energy generation, carbon reduction and
overall resource efficiency.
The waste sector will continue to be driven by a regulatory
environment in which Viridor has been able to take an
entrepreneurial approach. As we target further growth, particularly
in our recycling and EfW businesses, we believe it is important
that the current light touch is maintained to give us the operational
freedoms we need to benefit our clients, the environment at large
and our investors.
Looking ahead we intend to increase further the proportion of
profits generated by recovering value in waste. The company
strategy has been successful to date and recycling operations
will be key to profits in the short-term. Long-term profit momentum
will be underpinned by our growing PPP and EfW pipeline. This
gives us confidence that Viridor can continue to deliver long-term
growth in shareholder value.
Profit contribution by segment
2011/12
Collection 6%
JVs 9%
Collection 6%
Landfill 18%
JVs 9%
Landfill 18%
Contracts and
other 20%
Recycling 27%
Recycling 27%
Power
generation 20%
Around 50% of profits from recovering value in waste (including
Contracts and
more than 2% energy generation/recycling in JVs and Contracts
other 20%
and other).
Collection 6%
Power
generation 20%
JVs 9%
2010/11
Collection 6%
JVs 9%
Landfill 23%
Landfill 23%
Contracts and
other 18%
Contracts and
other 18%
Recycling 24%
Recycling 24%
Power
generation 20%
Power
generation 20%
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Anaerobic digestion facility, Greater Manchester.
Pennon Group Plc Annual Report and Accounts 2012 23
Directors’ report – Business review
Financial review
Pennon Group continued to deliver revenue and profit
growth in 2011/12
Performance overview
Profit before tax
£m
Earnings per share before
deferred tax pence
5
.
0
0
2
5
.
8
8
1
8
.
5
8
4 1
.
9
5
1
3
.
2
5
1
8
0
/
7
0
0
2
9
0
/
8
0
0
2
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9
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1
1
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0
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2
2
1
/
1
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2
£200.5m
+6.4%
3
.
7
4
3
.
2
4
8
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9 4
.
6
3
3
.
6
3
8
0
/
7
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2
9
0
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2
1
1
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2
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2
47.3p
+11.8%
Interest rate on
average net debt
%
2
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5
8
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4
1
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4
1
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4
9
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3
8
0
/
7
0
0
2
9
0
/
8
0
0
2
0
1
/
9
0
0
2
1
1
/
0
1
0
2
2
1
/
1
1
0
2
3.9%
Dividend per share
pence
2
5
.
6
2
5
6
.
4
2
5
5
.
2
2
0
0
.
1
2
1
8
.
9
1
8
0
/
7
0
0
2
9
0
/
8
0
0
2
0
1
/
9
0
0
2
1
1
/
0
1
0
2
2
1
/
1
1
0
2
26.52p
+7.6%
Viridor capital expenditure
South West Water capital expenditure
Contracts and other
£2m
Landfill £19m
Collection £8m
Power generation £3m
Recycling £10m
Other £18m
Information
technology
£9m
Waste water
treatment
works
£31m
EfW plants
£85m
Water
distribution
£29m
Water
resources
£10m
Water
treatment
works £11m
Sewerage
£23m
Reconciliation of earnings per share
Earnings per share – pence
Statutory earnings per share
Deferred tax
Earnings per share before deferred tax – pence
2011/12
p
2010/11
p
Growth
%
48.1
(0.8)
47.3
48.4
(6.1)
42.3
(0.6)
11.8
Note: Earnings per share figures in this Business review exclude deferred tax. The Directors believe that this measure provides a more useful comparison on business trends and performance
since deferred tax distorts earnings per share through the effects of changes in corporation tax rates and the level of long-term capital investment.
24 Pennon Group Plc Annual Report and Accounts 2012
Continuing interest outperformance coupled with
raising cash and facilities to fund future growth:
£1,084 million cash and facilities at 31 March 2012,
including £566 million of new/refinanced facilities
sourced during the year.
The year’s financial highlights
Pennon Group performed well overall. South West Water recorded
a strong performance compared with the 2010-2015 regulatory
contract. Continuing growth in Viridor recycling, contracts and
joint ventures was offset by a reduction in landfill contribution plus
increased bid costs associated with its developing project pipeline.
During the year we secured further funding to finance continuing
growth. By the year-end we had £1,084 million in cash and
facilities in place to fund major growth in Viridor’s project pipeline
and South West Water’s K5 (2010-2015) capital programme.
We have secured funding at a cost that is low in absolute terms. The
Group interest rate on average net debt improved to 3.9% (2010/11
4.1%). In addition South West Water’s interest rate of 4.1% (pre-tax,
nominal) is substantially lower than the 6.2% assumed by Ofwat
for the 2010-2015 regulatory period. This is a significant advantage
compared with a number of our competitors which will help drive
value for the Group and our shareholders for years to come.
The principal measures we use to assess the Group’s financial
performance are profit before tax, earnings per share before
deferred tax and the interest rate on average net debt.
Revenue
Group revenue increased by 6.4% to £1,233.1 million.
South West Water’s revenue rose by 5.6% to £474.0 million as
a result of tariff increases and new connections, partially offset
by a further reduction in revenue from customers switching from
unmeasured to metered charges and from lower demand.
Viridor’s revenue rose by 6.9% to £761.1 million. Approximately half
of the increase was accounted for by acquisitions.
Operating profit
Group operating profit increased by 3.0% to £268.8 million with
South West Water up by 7.9% to £204.7 million, but Viridor down
by 11.0% to £63.7 million.
Net finance costs
We continued our effective management of interest rates in
2011/12 with net interest payable on average net debt equating to
3.9% (2010/11 4.1%). During the year net finance costs (excluding
pensions, net interest, discount unwind on provisions and IFRIC 12
contract interest receivable) were £74.9 million (2010/11 £77.2 million)
covered 3.6 times (2010/11 3.4 times) by Group operating profit.
Profit before tax
Profit before tax was £200.5 million, an increase of 6.4%. Pages 12
and 18 give a detailed description of the financial performance of
each company.
Taxation
The Group’s UK corporation tax charge for the year was £30.9
million (2010/11 £38.6 million). Deferred tax for the year was a
credit of £2.8 million (2010/11 credit £21.7 million), which included
a credit of £26.4 million from the impact of the reduction in the rate
of corporation tax from April 2012.
Earnings per share
Earnings per share before deferred tax increased by 11.8% to
47.3p. The weighted average number of shares in issue during the
year was 358.7 million (2010/11 354.6 million). Net assets per share
at book value at 31 March 2012 were 228p.
Dividends and retained earnings
The statutory net profit of £172.4 million has been transferred
to reserves.
The Directors recommend the payment of a final dividend of 18.30p
per share for the year ended 31 March 2012. With the interim
dividend of 8.22p per share paid on 3 April 2012, this gives a total
dividend for the year of 26.52p, an increase of 7.6% over 2010/11
(reflecting 4% real growth plus RPI of 3.6% at March 2012).
Proposed dividends totalling £95.9 million are covered 1.8 times by
net profit (excluding deferred tax) (2010/11 1.7 times). Dividends are
charged against retained earnings in the year in which they are paid.
Dividend policy
The Board’s previously announced intention is to increase the
dividend each year by 4% above inflation up to at least the end
of 2014/15. The Group is well positioned to meet future challenges
and to continue delivering shareholder value. We remain
committed to this increase.
Operating costs
Operating costs for the year totalled £964 million. The most
significant areas of expenditure were:
Expenditure
Landfill tax
Manpower
Depreciation
Raw materials and consumables1
Transport
Power
Business rates
Abstraction and discharge consents
1 Excludes elements of transport costs.
£m
166
155
146
102
63
27
27
8
Asset value opinion
In the opinion of the Directors, the current market value of the
Group’s land and buildings is not significantly different from the
holding cost shown in the financial statements.
Group investment
During the year the Group’s capital expenditure on property,
plant and equipment increased by 29% to £257 million (2010/11
£199 million). The major categories of expenditure for both main
businesses are shown on page 24.
Pennon Group Plc Annual Report and Accounts 2012 25
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Directors’ report – Business review Financial review
continued
The Group has fixed or put swaps in place to fix the interest rate
on at least 50% of South West Water’s debt for the entire K5
period up to 2015, at an average interest rate of 3.4%. A further
24% of South West Water’s debt is index-linked to 2041-2057, at
an overall real rate of 1.66%. As a result of these initiatives, South
West Water’s cost of finance is amongst the lowest in the industry.
During the year the Group recorded fair value losses of
£25 million on swaps (2011 nil), as indicated in the Statement of
comprehensive income on page 63. These swaps are expected to
be held to maturity and hence these losses will reverse over time.
Pennon Group Plc’s and South West Water’s interest rates on
average net debt for the year to 31 March 2012 were 3.9% and
4.1% respectively.
Just over half of the Group’s gross debt is finance leasing, giving
us a long maturity profile with interest payable benefiting from
the fixed credit margins which were secured at the inception
of each lease.
At 31 March 2012 the fair value of the Group’s non-current
borrowings was £200 million less than its book value (2010/11
£261 million) as detailed in note 26 to the financial statements.
Capital structure – overall position
At the end of the financial year the Group’s net debt of £2,105
million gave a ratio of net debt to (equity plus net debt) of 71.9%
(2010/11 71.3%).
South West Water’s debt to Regulatory Capital Value (RCV) was
56.1% at 31 March 2012 (2010/11 57.1%) which is within Ofwat’s
optimum range of 55% – 65%.
Viridor is funded by a combination of Pennon Group equity and
debt (raised by Pennon Group) and direct borrowing by Viridor.
At the year-end Viridor’s net debt was £517 million (2010/11 £487
million) equivalent to 4.7 times EBITDA (2010/11 4.2 times).
Treasury policies
The role of the Group’s treasury function is to ensure that we have
the funding to meet foreseeable needs to maintain reasonable
headroom for future contingencies and to manage interest
rate risk. The Group enters into certain structured financing
transactions that have and are expected to provide an improved
return on surplus funds and overall interest rate performance.
It operates only within policies approved by the Board and
undertakes no speculative trading activity.
The Board regularly monitors expected financing needs for at least
the next 12 months which are intended to be met for the coming
year from existing cash balances, loan facilities and operating
cash flows.
The Group has considerable financial resources and a broad
spread of business activities. The Directors therefore believe that
it is well placed to manage its business risks despite the ongoing
uncertainties of the current economic environment.
Internal borrowing
South West Water’s funding is treated for regulatory purposes as
effectively ring-fenced. This means that funds raised by, or for, the
company are not available as long-term funding for other areas of
the Group.
Going concern
The Directors have a reasonable expectation that the Group has
adequate resources to continue its operational existence for the
foreseeable future. They therefore have continued to adopt the
going concern basis in preparing the financial statements.
Cash flow
In 2011/12 the Group once again had a strong operating cash flow.
Net borrowings increased by £171 million primarily due to capital
investments and acquisitions.
Summarised cash flow
Cash inflow from operations
Pension contributions
Net cash inflow from operations
Net interest paid
Dividends and tax paid
Capital expenditure
Acquisitions/investment in joint ventures
Loan repayments received from joint ventures
Net cash outflow
Shares issued
Debt acquired with acquisitions
Debt indexation/interest accruals
Increase in net borrowings
2011/12
£m
374
(49)
325
(61)
(111)
(258)
(43)
4
(144)
2
–
(29)
(171)
2010/11
£m
412
(36)
376
(64)
(100)
(186)
(38)
4
(8)
2
(22)
(11)
(39)
Liquidity and debt profile
The Group has a strong liquidity and funding position with £1,084
million cash and facilities at 31 March 2012. This includes cash and
deposits of £425 million (including £123 million of restricted funds
representing deposits with lessors against lease obligations) and
undrawn facilities of £659 million. These totals include £566 million
in new or renewed debt facilities arranged during the year, being:
• £125 million European Investment Bank loan for South
West Water
• £205 million leasing facilities
• £181 million of new term loans and Revolving Credit Facilities
• renewal of £55 million Revolving Credit Facility.
The Group’s financing structure gives us the scope and flexibility
we need to implement our strategic objectives and maximise value
for our shareholders.
At 31 March 2012 the Group’s loans and finance lease obligations
totalled £2,530 million. After the £425 million held in cash this gives
a net debt figure of £2,105 million, up by £171 million during the
year.
Debt incurred for the construction in progress of Viridor’s portfolio
of EfW plants at Runcorn Phase II, Ardley – Oxfordshire PPP and
Exeter increased by £97 million to £143 million at 31 March 2012.
Major components of the Group’s debt finance at
31 March 2012
Convertible bond
£118m
Private placements
£100m
Bond 2040 £132m
Index-linked
bond 2057
£240m
European
Investment Bank
loans £253m
Bank bilateral debt
£384m
Other £19m
Finance
leasing
£1,284m
The Group’s debt has a maturity of up to 45 years, with an
average maturity of 23 years.
26 Pennon Group Plc Annual Report and Accounts 2012
Taxation objectives and policies
Our tax strategy, as approved by the Board, is to enhance
shareholder value by legally minimising the taxes we pay while
having regard to our long-term relationship with the tax authorities.
We will consider bona fide arrangements which are integral to our
business and which qualify for tax exemption or relief.
Tax contribution 2011/12
Other £3m
UK corporation tax
£41m
Employment taxes
£47m
Fuel Excise Duty
£12m
Business rates £27m
VAT £21m
Landfill tax
£188m
The total tax charge for the year of £28.1 million was less than
the charge which would have arisen from the accounting profit
before tax of £200.5 million taxed at the statutory rate of 26%.
A reconciliation is provided in note 8 to the financial statements.
The Group made a net payment of £41.4 million of UK corporation
tax in the year (2010/11 £43.2 million).
The Group’s total tax contribution extends significantly beyond
the UK corporation tax charge.
Total taxes amounted to £339 million of which £55 million was
collected on behalf of the authorities for net VAT and employee
payroll taxes.
In addition to corporation tax the most significant taxes involved
together with their profit impact were:
• landfill tax of £166 million was collected by the Group on behalf
of HM Revenue & Customs (HMRC). Landfill tax is an operating
cost which is recovered from customers and is recognised in
revenue. In addition the Group incurred landfill tax of £22 million
on the disposal of waste to third parties. This is an operating
cost for the Group and reduces profit before tax
• Value Added Tax (VAT) of £21 million (net) collected by the
Group and paid to HMRC; VAT has no material impact on profit
before tax
• business rates of £27 million paid to local authorities. This is a
direct cost to the Group and reduces profit before tax
• employment taxes of £47 million including employees’ Pay As
You Earn (PAYE) and total National Insurance Contributions
(NICs). Employer NICs of £13 million were charged
approximately 94% to operating costs with 6% capitalised to
property, plant and equipment
• Fuel Excise Duty of £12 million related to transport costs.
This reduces profit before tax.
The corporation tax rate for 2011/12 used to calculate the current
year’s tax is 26%. The corporation tax rate, as enacted into law
on 26 March 2012, has been reduced to 24% for 2012/13 and is
expected to fall by a further 1% per annum until the financial year
2014/15 when the rate will be 22%.
Pensions
The Group operates defined benefit pension schemes for certain
employees of Pennon Group, South West Water and Viridor.
The main schemes were closed to new entrants on or before
1 April 2008.
Funding raised to support ongoing capital investment
Top: Sewage treatment works, Polperro, Cornwall.
Bottom: Mechanical biological treatment facility, Greater
Manchester.
At 31 March 2012 the Group’s pension schemes showed a deficit
(before deferred tax) of £99 million (2010/11 £86 million). Net
liabilities of £75 million (after deferred tax) represented less than
3% of the Group’s total market capitalisation at 31 March 2012.
The last actuarial valuation of the main scheme was at 31 March
2010. South West Water’s cash contributions to the scheme
remain within Ofwat’s Final Determination for the K5 period.
During the year the Group recorded losses of £52 million (2011
gain of £2 million) in the Statement of comprehensive income on
page 63 from changes in actuarial assumptions, being principally
the reduction in the net discount rate of 0.63%, reflecting lower
AA bond yields.
Insurance
Pennon Group manages its property and third party liability risks
through insurance policies that mainly cover property, motor,
business interruption, public liability, environmental pollution and
employers’ liability.
The Group uses three tiers of insurance to cover operating risks:
• self-insurance – Group companies pay a moderate excess on
most claims
• cover by the Group’s subsidiary (Peninsula Insurance Limited)
of the layer of risk between the self-insurance and the cover
provided by external insurers
• cover provided by the external insurance market, arranged
by our brokers with insurance companies which have good
credit ratings.
Pennon Group Plc Annual Report and Accounts 2012 27
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Directors’ report – Business review
Principal risks and uncertainties
The risks and uncertainties set out in this section have
been identified from our risk management process as
potentially having a material adverse effect on our business,
financial condition, results of operations and reputation.
They are managed as described but are not wholly within
our control and may still result in a material adverse impact
on the Group. Factors beside those listed could also have a
material adverse effect on our business activities.
How we manage risk
We operate a well established and fully embedded Group wide risk management process from which we seek to identify significant risks
at the earliest possible stage and determine whether they are acceptable risks which we can manage and mitigate satisfactorily. More
detail on our risk management process is set out on Page 50 in our Corporate Governance Report.
Risk
Commentary
Mitigation
Change
Law and regulatory
Changes in law, regulation or
decisions by Governmental
bodies or regulators could
have a material adverse effect
on our financial results or
operations.
There is a wide range of laws and
regulations and policy decisions of
government and regulators which
could have a materially adverse
effect on the results of operations of
both South West Water and Viridor.
Examples of laws and regulatory
changes include:
The transfer of private sewers to
South West Water which took place
on 1 October 2011 and the further
adoption of private pumping stations
which is due to take place up to 2016.
The general direction of travel of
Government policy in both business areas
is known and each company is actively
involved in consultations on regulatory
changes.
Operational plans to manage customer
contacts and deliver service to customers
were implemented smoothly and activity
has been at the lower end of the range.
Appropriate risk management activities
are undertaken to monitor progress and
a strategy is in place to manage for the
further adoption of pumping stations.
Operating and capital costs incurred
efficiently will be funded by future
adjustments to price limits.
Key
Unchanged during year
Increased during year
Reduced during year
Risk Level
Green – Low
Amber – Medium
Red – High
The colouring (red, amber, green) is the
Group’s estimate of the inherent risk level to
the Group after mitigation. It is important to
note that risks are difficult to estimate with
accuracy and therefore the risks may be
more or less significant than indicated.
28 Pennon Group Plc Annual Report and Accounts 2012
Risk
Commentary
Mitigation
Performance of South West Water
against key regulatory outputs.
The Government’s Water White Paper
signals an evolutionary approach
to market and regulatory reform
over a period to 2025 and beyond.
Legislation is required for a number
of the changes and draft legislation
is anticipated in 2012/13. The
development of greater competition
in the water industry could reduce
South West Water’s revenues.
Climate change and resulting
increased regulatory standards could
increase costs for South West Water.
The UK has landfill diversion,
recycling and recovery targets which,
together with the impact of both
WEEE Regulations, higher Producer
Responsibility obligations and pre-
treatment requirements, plus rising
landfill tax, will continue to further
reduce landfill volumes for Viridor
and potentially, over time, landfill
asset values.
The ever increasing demand for higher
standards, in areas such as health and
safety, environmental performance
and employee welfare increase costs
for both South West Water and Viridor.
They are monitored on a monthly basis
and where performance falls short,
corrective programmes are developed
and implemented to target recovery in
specific areas. Internal monitoring and
assurance programmes are undertaken
through the year and annual data is
supported by external verification through
the South West Water external auditors to
provide assurance on compliance.
As part of its risk management and
business strategic planning processes,
the company evaluates developments
and proposals for competition which
could provide opportunities for business
expansion. South West Water is prepared
for the development of retail competition,
with the launch of ‘Source for Business’,
offering enhanced services to commercial
customers. The company has evaluated
proposals for regulatory reform and
contributed fully to the Ofwat consultations
on regulatory price setting and other
forms of dialogue with regulators and
stakeholders in order to effectively convey
its views.
The company has plans ready and will
adapt the way it conducts its business
to respond effectively to the changing
weather conditions.
Viridor’s strategy is to grow in recycling
and energy from waste where margins
per tonne are much higher than in landfill.
Increasing landfill tax increases the
economic attractiveness of recycling and
energy from waste. The new Resource
Efficiency Agenda emanating from the
EU and the UK Government’s attention
to resource and electricity security are
expected to provide further opportunities
for Viridor.
These issues for South West Water are
addressed in the five-year regulatory
price review mechanism through future
adjustments to price limits but there is a
risk that some additional costs will not be
funded immediately, in part or at all.
Within Viridor higher costs are sometimes
but not always recovered through
contractual arrangements with waste
authorities and other customers.
Additionally Viridor continues to develop
its Business Management Systems
to address costs and maintain high
standards of compliance by improving
its management controls. Viridor also
maintains a close interest in industry
developments via the waste sector trade
association and therefore is often at the
forefront of planned changes.
Change
Pennon Group Plc Annual Report and Accounts 2012 29
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Directors’ report – Business review Principal risks and uncertainties
continued
Risk
Commentary
Mitigation
Change
Economic conditions
Economic conditions could
materially affect the Group’s
revenues and profitability.
The Group does have exposure to
reduced economic activity, inflation/
deflation and the impact of the current
Eurozone uncertainties. However
South West Water’s revenues are
economically regulated through the
price review mechanism and Viridor
has a diversified revenue stream which
includes exports to countries such as
China and India whose economies
are more buoyant than the UK and
Europe. Examples of specific areas
of impact are:
South West Water’s revenues can be
impacted by higher bad debts and
customer affordability.
South West Water has 73.4% of its
domestic customer base metered
and as a result the revenue from
these customers can be more volatile
from changes in usage which can
be affected by a number of factors
including:
– abnormal weather impacts
– increased water efficiency
– recession impacting commercial
customers.
Viridor has seen residual waste landfill
and collection volumes reduce due
to the recession and the long-term
trend towards recycling and energy
from waste.
Viridor’s commodity trading arm
(VRM) trades where the market is
most favourable. However, Viridor
remains susceptible to global
economic demands and the
weakness of the Eurozone is having
a depressing effect on the prices
of internationally traded recyclates.
A breakdown of the Eurozone would
intensify the downward pressure on
prices. In addition competition for
recyclables from other contractors
via aggressive pricing has been
a recent trend.
30 Pennon Group Plc Annual Report and Accounts 2012
In addition to existing debt reduction
strategies (such as WaterCare+, Restart
and the Fresh Start Fund), which are kept
under review, the company continues
to implement new initiatives to improve
and secure cash collection, including the
use of third party collection agencies and
introduction of a new billing and collection
business ‘Source Contact Management’.
The Government’s commitment to tackle
‘unfairness’ issues for the company’s
bill payers, where 3% of the population
pay for 30% of the UKs bathing waters,
has also moved forward with legislation
passed for a £50 reduction in bills for
householders from 2013/14.
The financial impact of changes in
customer demand are mitigated through
the regulatory Revenue Correction
Mechanism, whereby shortfalls in revenue
in one five year regulatory pricing period
are adjusted in the following period.
A number of the company’s other income
streams are vulnerable to downturns
in economic activity, particularly in
the property market affecting new
connections, searches and mains
diversion activity.
Viridor’s strategy is focused on growing
in recycling and energy from waste where
margins per tonne are much higher than
in landfill.
Under the terms of its customer supply
contracts and by management action
Viridor has been able to offset more than
50% of the impact of price reductions in
recyclates.
Change
Viridor provides best value services and
competitive procurement bids to its public
sector customers.
The Company has robust treasury policies
in place which include always having pre-
funded surplus cash and/or committed
facilities to cover at least one year’s
estimated cash flow and arranging for no
more than 20% of net borrowing to mature
in any one year. In addition in respect of
South West Water the economic regulator
has a statutory duty to ensure that it is
able to finance its functions in the normal
course. The Group has to date obtained
funding at lower effective average interest
rates compared to many other companies
in its sector and is well placed to meet the
funding requirements of both South West
Water and Viridor in the foreseeable future.
The Group had £1 billion of cash and
facilities as at 31 March 2012 including
over £0.5 billion of new/refinanced facilities
sourced during the year.
Risk
Commentary
Mitigation
Finance and funding
Access to finance and funding
costs may be adversely
affected by perceived credit
rating and prolonged periods
of market volatility or liquidity.
There are covenant limits
and restrictive obligations
on borrowing and debt
arrangements.
Operating performance
Poor operating performance
or a failure or interruption of
our operating systems or the
inability to carry out network
operations or damage to
infrastructure may have a
material adverse impact on
both our financial position
and reputation.
The Government’s spending Review
has put pressure on local authority
services, including household waste
recycling centre operations which is
expected to have a short-term impact.
The Group may be unable to raise
sufficient funds to finance its activities
or such funds may be only available at
higher cost.
Poor operating performance for
both South West Water or Viridor
could result in enforcement action,
prosecutions, loss of permits and civil
action which could all result in negative
publicity, regulatory penalties, loss
of customer confidence due to poor
performance and eventually, reduced
demand for services and increased
fixed costs.
Within South West Water a major
network failure or interruption may
be suffered or the company may not
be able to carry out critical network
operations. Operational performance
could be materially adversely affected
by a failure to maintain the health of
the system or network which could
cause South West Water to fail agreed
standards of service or specified
quality standards.
Specific measures taken by South West
Water include:
• a number of schemes in place to
maintain water resources (such as
pumped storage for certain reservoirs)
and the promotion of conservation
measures and customer water
efficiency measures
• a Water Resources Plan prepared
every five years and which is reviewed
annually for a range of climate change
and demand scenarios. The current
Water Resources Plan indicates that no
new reservoirs are required before the
planning horizon of 2035. However, due
to the impacts of climate change, this
position is reviewed frequently
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Pennon Group Plc Annual Report and Accounts 2012 31
Directors’ report – Business review Principal risks and uncertainties
continued
Risk
Commentary
Mitigation
Change
• established procedures and controls
in place, as well as contingency plans
and incident management procedures.
The company also maintains insurance
policies in relation to these risks,
although there can be no assurance
that all or any of the costs associated
with these risks would be covered
or that coverage will continue to be
available in the future
• monitoring of significant assets by
automated and remote operation
and routine controls and operating
procedures that are constantly kept
under review. Asset management
techniques are employed to pre-empt
the failure of assets to maintain stable
serviceability and avoid regulatory
penalties.
While the company has seen
improvements in customer service
particularly through reduced written
complaints, there is uncertainty over
South West Water’s relative position in
the industry. However there is a strategy
for 2012/13 in place to improve customer
service further.
Sound policies and accredited procedures
are in place with internal and external
inspections, to maintain operations and
achieve performance standards set.
The company does have a track record
of delivering its capital programme in
accordance with regulatory requirements
and progress is regularly monitored and
reviewed.
The company has experienced and
dedicated project/contract teams; detailed
due diligence on all projects, supplies,
technologies and acquisitions is carried
out by experienced and qualified staff;
and wherever possible back-to-back
agreements with and guarantees from
suppliers are entered into. There is also
regular monthly reporting on performance
on major contracts and post project
appraisals are carried out which all
assist in being able to improve future
performance.
From 2011/12 a financial reward/
penalty could be applied to South
West Water at the next price review
under Ofwat’s Service Incentive
Mechanism (SIM). This depends on
South West Water’s customer service
performance relative to the industry
average over the remaining K5
regulatory period.
Viridor operates in a competitive
marketplace where price and service
are key precursors to success.
South West Water may not carry
out its capital programme within the
price limits and with the efficiencies
determined by Ofwat.
Within Viridor there are risks of project
delays, cost over-runs or contract
failure which could be as a result of
failure or insolvency on the part of
contractors or their subcontractors,
or due to a new technology failing
performance requirements. There
is also a risk of overpaying for an
acquisition. With the increase in
Viridor’s project pipeline, Viridor
recognises that this risk is increasing
and is addressing it.
Capital investment
The failure or increased
costs of capital projects or
acquisitions or joint ventures
not achieving predicted
revenues or performance could
have a material adverse effect
on both our financial position
and reputation.
32 Pennon Group Plc Annual Report and Accounts 2012
Risk
Commentary
Mitigation
Competitive pressures
A reduced customer base,
increased competition affecting
prices or reduced demand for
services could have a material
adverse impact on our financial
position.
Business systems
Information technology and
business continuity systems
and processes may fail which
may cause material disruption
to the Group’s businesses and
could have a material adverse
impact on both our financial
position and reputation.
Viridor is experiencing increased
competitive pressures in a number
of areas of its business including
in particular on recyclate volume
and prices, landfill gate fees and
bidding for Public Private Partnership
contracts (PPPs). Recycling has
been recognised as an attractive
business by an increasing number
of competitors.
Competitive pressures in respect of
South West Water are referred to in
the first risk set out at the beginning
of this section.
There always remains a risk of
interruption, failure or third party
intervention that could have a material
adverse impact on the operations of
South West Water’s business.
Some of Viridor’s IT systems
require replacement, development
or upgrading to meet the growing
requirements of the business and
in some areas new technology
being introduced may not operate
or perform according to stated
specification requirements.
Change
Viridor provides recycling and waste
management services which are locally
delivered services from locally managed
facilities and a significant proportion
of its revenue is contracted over the
medium or long-term. With regard to
major competitive projects being pursued
there are barriers to entry due to planning
permissions being difficult to obtain and
significant investment requirements.
The company has well developed
IT systems and continuity systems
in place. The further impact of a
system failure or disruption to the
company has been reduced with the
refurbishment of the data centre at its
head office and the establishment of a
geographically separate alternative data
centre, which is hosted by a third party
communications provider.
Viridor has increased its IT management
and technical resources accordingly. It
also has a comprehensive development
programme and plans in place to address
the deficiencies identified and seek to
ensure business continuity in the event
of failure.
Forward-looking statements
This Business review contains forward-looking statements regarding the financial position; results of operations; cash flows; dividends;
financing plans; business strategies; operating efficiencies; capital and other expenditures; competitive positions; growth opportunities;
plans and objectives of management; and other matters. These forward-looking statements, including, without limitation, those relating
to the future business prospects, revenues, working capital, liquidity, capital needs, interest costs and income in relation to Pennon Group
and its subsidiaries, wherever they occur in this Business review, are necessarily based on assumptions reflecting the views of Pennon
Group and its subsidiary companies, as appropriate. They involve a number of risks and uncertainties that could cause actual results
to differ materially from those suggested by the forward-looking statements. Such forward-looking statements should, therefore, be
considered in the light of relevant factors, including those set out in this ‘Group risk review’ section.
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Pennon Group Plc Annual Report and Accounts 2012 33
Directors’ report – Business review
Sustainability report
Pennon is one of the largest environmental and resource
management groups in the UK. Sustainability is at the
heart of our business. The provision of high quality water
and waste management services is fundamental to the
well-being and sustainability of our society. Ensuring the
availability of plentiful clean water which is used wisely and
not wasted, together with effective waste water treatment,
is South West Water’s business. Transforming waste into a
resource by recycling and generating renewable energy is
Viridor’s business.
Substantial investment in our water and sewerage activities
and infrastructure enables us to deliver both high levels of
performance and service, as well as long-term security of supply.
In our recycling and waste management business we continue
to invest in facilities and services to transform waste into quality
recycled materials and renewable energy, helping customers from
all sectors to meet their own recycling and waste management
objectives, while addressing the longer term strategic imperatives
of resource efficiency, protecting the environment and preserving
natural resources.
We believe that a well-managed and responsible Group, with
sustainability both at the core of its operations and fundamental
to its business philosophy, will deliver strong performance and
lasting value for our stakeholders. We contribute to the well-being
of the communities that we serve, and of the environment in which
we operate. Our commitment to sustainability is embedded in
our operational and business practices, our relationships with our
stakeholders, and in our long-term strategy.
Pennon was delighted that this commitment was recognised
when the Group won the ‘Achievement in Sustainability’ award
at the annual PLC Awards in February 2012. This award
recognises accomplishments in key areas of economic,
environmental and social sustainability. Judges highlighted our
performance in renewable energy power generation at our waste
water treatment works and landfill gas control, as well as our
funding for community and environmental projects.
Our commitment to economic, social and environmental
sustainability is embedded in our strategic objectives to:
• manage Pennon Group as a sustainable and successful
business for the benefit of shareholders and other stakeholders
• aim to ensure that all our business activities have a positive
economic, social and environmental impact on the communities
in which we operate
• engage with all our stakeholders and foster good relationships
with them
• strive for the highest standards of health and safety in the
workplace so as to minimise accidents, incidents and lost time
• develop and motivate our employees, treat them fairly and
ensure that they are fully engaged in all aspects of the Pennon
Group’s objectives
• aspire to leadership in minimising emissions that contribute
to climate change, and develop climate change adaptation
strategies
• aspire to leadership in all aspects of waste prevention and
resource efficiency.
Key environmental issues
Climate change and resource efficiency
Climate change and excessive resource use are two fundamental
challenges for society which are being addressed by developments
in the UK’s water, waste and renewable energy policies. Pennon
is proactively approaching these key issues with strategies that
underpin the sustainable performance of the business.
Group programmes increase the resilience of both South West
Water and Viridor by protecting our assets, reducing emissions,
harnessing renewable energy and maximising materials recovery.
Demand for safe drinking water and water security, and for
recycling, renewable energy and resource efficiency will continue
to grow as climate change impacts start to make themselves felt.
Renewable energy and carbon reduction
Both subsidiaries have detailed energy efficiency and carbon
reduction plans in place. Viridor’s five-year plan aims to increase
energy efficiency by more than 20% by 2016, equivalent to an
overall reduction of 4% in total emissions per annum. South
West Water’s energy and carbon management strategies to
2030 include plans for a structured energy efficiency programme
and ambitions to further develop and exploit opportunities
34 Pennon Group Plc Annual Report and Accounts 2012
Green energy
generated
Gigawatt hours
(GWh)
On-site
electricity use in
Pennon Group
Gigawatt hours
(GWh)
Carbon
Disclosure
Project score
%
9
7
3
1
.
.
0
0
2
5
7
2
7
4
1
.
.
0
0
0
6
7
0
8
4
1
.
.
0
2
7
3
6
4
0
7
1
.
.
7
0
9
9
4
7
0
8
1
.
.
2
0
5
0
5
6
7
2
7
5
6
0
5
6
2
.
.
*
3
9
5
5
2
7
0
8
4
.
.
*
5
6
2
5
2
5
7
2
6
.
.
1
4
8
4
2
4
9
0
1
.
.
*
5
5
5
5
2
0
0
9
1
.
.
*
6
8
7
5
2
8
0
/
7
0
0
2
9
0
/
8
0
0
2
0
1
/
9
0
0
2
1
1
/
0
1
0
2
2
1
/
1
1
0
2
8
0
/
7
0
0
2
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0
/
8
0
0
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/
9
0
0
2
1
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/
0
1
0
2
2
1
/
1
1
0
2
9
0
0
2
0
1
0
2
1
1
0
2
South West Water
South West Water
Viridor
Viridor
* Reassessed to include all imported electricity used and self-supplied renewable energy used on
South West Water sites.
for renewable energy schemes. The company’s 2015 carbon
reduction target is to cut operational emissions from energy use
by 18% compared with 2009/10 levels, with further reductions
targeted in the longer term in line with national strategy.
Pennon participates in the UK Government’s Carbon Reduction
Commitment and has an ambitious strategy and programmes
in place to continuously improve energy efficiency across the
business. In the first year of audited performance, we were ranked
230th out of 2,013 participating companies.
Pennon also voluntarily participates in the internationally
recognised Carbon Disclosure Project, coming 53rd out of the
236 FTSE 350 companies that responded, with an improving
percentage score.
Pennon is a net producer of renewable energy, largely due to
Viridor’s power generation from its landfill gas and energy from
waste (EfW) operations. In 2011 around 30% of renewable energy
generated in the UK was derived from landfill gas and municipal
solid waste combustion. Viridor’s landfill gas power generation
is now approaching peak capacity and will be replaced by
increasing contributions from EfW and anaerobic digestion (AD)
facilities. South West Water is also increasing its renewable power
generation capacity using hydro-electric, combined heat and
power (CHP) from biogas, and solar and wind installations. This
overall generation capacity will continue to offset the Group’s
energy use.
Viridor invested £93 million in renewable energy and recycling
plants during 2011/12. It now has a generating capacity of
136MW. It plans to have 300MW of installed capacity by 2016.
The Runcorn EfW plant currently under construction will be the
largest waste-generated CHP plant in the UK, with high energy
efficiency levels.
As Viridor continues to expand its recycling capacity, so a growing
proportion of its operations rely on energy-intensive processing
equipment – though recycling generally provides net carbon and
energy benefits.
South West Water’s core operations also require considerable
amounts of energy to treat both drinking and waste water to
high standards and to pump it around the region. The cost of
South West Water’s energy use is around £20 million a year, and
around 80% of the company’s carbon emissions are associated
with energy use, underlining the importance of energy efficiency
in the business. The company’s ongoing pump efficiency and
‘PowerDown’ programmes are helping to reduce energy use.
During the year Viridor achieved its target of three accreditations to
the Carbon Saver Gold Standard, most notably one for the whole
of its Scottish operating region. This reflected the achievement of
a 10% absolute reduction in energy-related carbon emissions in
Scotland over the last three calendar years.
South West Water continues its accreditation to the Certified
Emissions Measurement and Reduction Scheme (CEMARS).
Resource security
In spite of two years of significantly reduced rainfall, resulting in
the Environment Agency declaration of an environmental drought
in April 2012, South West Water has ensured security of supply
by investing in its ability to transfer water and converting two
former china clay pits into reservoirs. This, together with our
industry-leading leakage control, has led to the 15th year without
water restrictions.
South West Water liaises extensively with Defra, other regulators
and landowners to promote catchment management as a tool to
improve raw water quality. The company’s flagship environmental
project ‘Upstream Thinking’ includes moorland restoration
projects on Exmoor and Dartmoor, and catchment sensitive
farming programmes to improve land management, delivered
in partnership with the Westcountry Rivers Trust and the Devon
and Cornwall Wildlife Trusts. Defra endorsed the company’s
approach in its Water White Paper published in December 2011,
and ‘Upstream Thinking’ won the ‘Partnership Initiative of the
Year’ category at the Water Industry Achievement Awards in
March 2012.
Viridor’s range of services has changed to ensure they are aligned
to the waste hierarchy that is enshrined in European and UK waste
policy legislation. This reflects the overall environmental benefits
in the priority options for managing waste. It gives top priority
to waste prevention, followed by re-use and recycling. Disposal
by landfill is the least favoured option. Viridor now transforms
waste into valuable, high quality commodities wherever possible,
using a range of treatment technologies, including advanced
materials recycling facilities, mechanical-biological treatment,
composting and household waste recycling sites, often combining
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Peat bog restoration under way on Exmoor as part of South West
Water’s award-winning ‘Upstream Thinking’ initiative.
Pennon Group Plc Annual Report and Accounts 2012 35
Directors’ report – Business review Sustainability report
continued
The Waste Hierarchy
Waste Prevention
& Reuse
Recycling/
Composting
Energy
Recovery
Treatment &
Disposal
Top: Billingshurst household waste recycling centre, West Sussex.
Bottom: Customer service at a Viridor household waste
recycling centre.
36 Pennon Group Plc Annual Report and Accounts 2012
the provision of these facilities in integrated waste management
contracts. It subsequently looks to recover energy from non-
recyclable and residual wastes using energy from waste and
anaerobic digestion technologies to offset fossil-fuel based
energy generation.
During the year Viridor continued to increase its recycling capacity
through both acquisition and organic growth, recycling 2.3 million
tonnes of material (2.1 million tonnes in 2010/11), with 1.8 million
being traded recyclates (1.7 million tonnes in 2010/11).
Key social issues
Commitment to communities
Pennon Group recognises that it is part of, and has a
responsibility towards, the communities in which it operates and
it strengthened its community relations and investment policy
during the year. It aims to ensure that business activities have
overall positive community benefits. The Group recognises the
importance of developing open and transparent engagement
with communities and other organisations and its employees
take part in a range of volunteer projects. Sponsorships and
partnerships with community organisations also help deliver on
our commitment in this important area, such as the ‘Keep Britain
Tidy’ ‘BeachCare’ initiative.
Bathing water quality is vitally important to local communities and
visitors across the region. Since privatisation in 1989, South West
Water has invested £2 billion in 140 new waste water treatment
works via our ‘Clean Sweep’ programme. As a result 98.6% of
our 144 EU-designated bathing waters now meet or exceed the
EU’s ‘Good’ standard compared with 96.5% in 2010 and 95.1%
are deemed ‘Excellent’ compared with 90.3% in 2010.
In 2011 South West Water launched its ‘BeachLive’ website.
This award-winning initiative was developed in partnership with
Surfers Against Sewage and others, and enables beach users
to check real-time bathing water information at 21 Blue Flag or
popular beaches in Devon and Cornwall every day. The number
of beaches covered is being extended in 2012/13.
The investment required to deliver the bathing water
improvements has resulted in higher bills than in other regions.
The company understands that some customers have problems
paying, and has developed an industry-leading ‘Affordability
Toolkit’ comprising a range of practical measures, including a
free debt helpline, payment plans, and water meter and water
conservation advice. Its ‘WaterCare+’ scheme has helped
its 10,000th customer since it was established in 2007. The
company has also established a ‘FreshStart’ fund of up to
£1 million, administered by Plymouth Citizens Advice Bureaux
(CAB), to help those in financial crisis due to circumstances such
as bereavement. South West Water partners with charities and
agencies such as local Citizens Advice Bureaux and Age UK
to find and help those in the most need. Our work in this area
was recognised in the CAB publication, ‘How to do the Right
Thing’. The company is supporting the business community by
sponsoring local ‘Battle the Bills’ sessions which help up to 1,000
small and medium-sized businesses by offering advice on water
and energy use.
Challenging economic conditions lead Viridor’s local authority
and business customers to scrutinise costs and demand value
for money in all aspects of service. Economic drivers such as
the Landfill Tax, public and private sector procurement practices,
as well as Viridor’s customer service partnerships and provision of
waste audits, ensure that the company remains keenly competitive
for the benefit of its customers.
In 2011/12 Viridor (via an independent distributive Environmental
Body, Viridor Credits) provided £10.3 million of funding for
community, amenity and environmental projects in areas close
to its landfill facilities through the Landfill Communities Fund.
The company also provides direct sponsorship and community
support in its operational areas.
Viridor has active community liaison groups at all of its major
operational facilities, ensuring effective dialogue with local
community representatives. It also consults extensively with local
communities and stakeholders when looking to develop new
facilities, in order to keep people informed and to enable their
full involvement in the planning process. During the year Viridor
opened another two education centres in Greater Manchester,
helping to promote understanding and best practice in waste
prevention, recycling, recovery and resource management. The
company now operates or supports 10 such centres across the
UK and welcomed more than 13,000 visitors during the year.
Viridor and South West Water are responsible for the management
and stewardship of substantial landholdings, particularly at
reservoirs and landfill sites, including 26 closed landfill sites and 17
Sites of Special Scientific Interest. These areas can have significant
benefits and the companies work in partnership with the Wildlife
Trusts, local communities and employees to enhance biodiversity.
Five Viridor sites have now attained the Wildlife Trust’s Biodiversity
Benchmark standard, with one awaiting accreditation. Three sites
of low biodiversity have been identified for five-year improvement
plans and a biodiversity strategy covering all sites will be
developed during 2012/13. South West Water’s reservoir sites
are managed by the South West Lakes Trust, the region’s largest
combined environmental and recreational charity, which delivers
a wide range of facilities, such as visitor centres and watersports
facilities. These amenities attract around two million visits every
year. Four flagship sites have received the gold standard in the
Green Tourism Business Scheme’s prestigious awards.
Engaging with other stakeholders
Pennon and its subsidiaries aim to be open and collaborative,
fostering positive relationships with stakeholders and delivering
long-term benefits and added-value. South West Water’s Chief
Executive has just completed four years as Chair of Water UK.
He is now Chair of the Cornwall and Isles of Scilly Local Enterprise
Partnership, and the Vice President of the Institute of Water.
Viridor’s Chief Executive is currently Chair of the Government’s
Living with Environmental Change Business Advisory Board and
of the Environmental Sustainability Knowledge Transfer Network.
Both companies inform Government policy in respect of pertinent
industry issues. For Viridor in 2011/12 this included liaison and
responses to consultations on the Waste Policy Review for
England and Wales, Scotland’s Zero Waste Plan and regulation,
and the London Waste Strategies. Viridor’s ‘OpenSpace’
innovative data-sharing portal has been developed with the
Environment Agency in England, meeting their ‘better regulation’
agenda. This ground-breaking project to supply environmental
monitoring data live to the regulator has substantial cost and
resource saving potential going forward.
The 2009 Walker Review highlighted the huge environmental
costs water customers in the South West of England, making up
just 3% of the UK population, have been paying for the clean-up
and protection of 30% of the nation’s bathing waters since 1989.
St Helens waste electricals recycling facility.
For four years, South West Water has worked closely alongside
MPs of all parties and consumer groups to press the South West’s
case at the highest levels. In November 2011 the Chancellor of the
Exchequer confirmed that the Government will be reducing the
annual bills of household customers in the company’s service area
by £50 each, until at least 2020.
During the year South West Water embarked on a comprehensive
research and engagement programme with customers,
community and environmental representatives as part of its
preparation for the 2015-2020 business plan and price setting.
The WaterFuture Customer Panel has been established to assist
with this process.
Commitment to employees
Employees are at the heart of the work we undertake at Pennon
Group. Aiming for best practice in recruitment, training and
development, talent management, health and well-being, retention
and succession planning is therefore of crucial importance for the
health and sustainability of the business. Both companies aim
to be good employers and recognise that employees make the
difference which helps us to achieve our corporate goals.
Both subsidiaries have a range of family friendly policies, equal
opportunity policies and policies to ensure a healthy work-life
balance. The companies undertake regular employee surveys
to obtain feedback on employee satisfaction and to identify key
issues for improvement. Viridor conducted a survey in 2011/12
focusing in particular on its health and safety culture. This showed
good levels of employee satisfaction and identified important areas
for improvement including internal communications, procedures
and training. Employee representation is facilitated through trade
union membership and, for South West Water, by an elected
Staff Council.
A safe and healthy workforce will always be a priority for the
Pennon Group. Group companies’ health and safety policies and
procedures are delivered through programmes which integrate
with other areas of the business including operations, compliance,
human resources and quality. For example South West Water
introduced its Think, Act, Prevent (TAP) campaign in 2011, which
delivered behavioural safety training to its employees. ‘RIDDOR’
incident rates in both companies reduced during the year,
although neither company is complacent and zero accidents
is our goal.
Pennon encourages talented people to join the Group, and to stay,
by matching the right people to the right roles and by ensuring
professional development opportunities throughout their careers
within the Group. We have a range of training programmes aimed
Pennon Group Plc Annual Report and Accounts 2012 37
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Directors’ report – Business review Sustainability report
continued
Governance
The Pennon Sustainability Committee (previously Corporate
Responsibility Committee) is chaired by a Non-executive Director
and comprises the Chief Executives of South West Water and
Viridor plus two further Non-executive Directors. It is served
and attended by senior management from both subsidiaries.
The Committee oversees the Pennon Group’s requirement to
conduct its business in a responsible manner. Consequently
the Committee reviews the strategies, policies, management,
initiatives, objectives, targets and performance of the Pennon
Group of companies in respect of environmental, social and
governance aspects. During 2011/12 the Committee developed
a new community relations and investment policy, scrutinised
both companies’ approach to carbon management, examined
sustainability in supply chains, and maintained its focus on
improving health and safety.
Both subsidiaries develop annual sustainability targets as part of
business planning and budgeting, putting sustainability at the core
of the business. Performance against these targets is reviewed
quarterly at executive management meetings, and by the Pennon
Group Sustainability Committee.
Delivery of sustainability targets forms part of the remuneration
package of Pennon’s senior executives and employees throughout
the Group.
Verification
Pennon’s sustainability performance for 2011/12 has been
audited by Acona Partners LLP, an independent management
consultancy that specialises in the areas of sustainability and
corporate responsibility.
South West Water and Viridor Sustainability reports
The full 2012 Sustainability Reports for South West Water
and Viridor will be published in July and August respectively
and will be available to view at pennon-group.co.uk and also
on the subsidiaries’ websites.
at different levels across the organisation. For example South
West Water’s ‘Managing for Success’ programme and Viridor’s
‘Fundamentals of Management’ and subsequent ‘Management to
Leadership’ programmes, try to equip our managers of the future
with the necessary skills.
South West Water and Viridor appointed 22 apprentices and
graduate trainees during 2011, and South West Water will be
creating 20 more apprenticeships in 2012, at a time when youth
unemployment is growing.
Key economic issues
Commitment to regional economies
Pennon’s investment for long-term sustainable growth is delivering
value for shareholders and stakeholders. The Group companies
provide significant support for regional economies by working with
hundreds of local suppliers to deliver essential infrastructure and to
deliver and improve services for customers.
As one of the largest employers in the region, South West Water
employs 1,400 people, both directly and through its contact
centre subsidiary, Source Contact Management Limited. South
West Water supports regional employment through a variety of
external contracts with a particular focus on small businesses,
as well as large service providers. Through its £2 billion Clean
Sweep investment, undertaken since privatisation, the company
has added significant value to the region’s tourism industry by
enhancing the natural environment.
South West Water’s PUROS programme enables remote
management of assets and centralised planning. PUROS has
helped the company to deliver operational efficiencies and
outperform Ofwat’s Final Determination, the price limits and
expenditure plans determined by Ofwat for South West Water
for a five-year period.
Viridor’s operations and continued growth also provide significant
regional economic and community benefits throughout the UK.
The company directly employs over 3,000 people and provides
significant supplier opportunities. Viridor’s investment programme
– to gradually replace landfill services with increased recycling and
renewable energy generation – creates greater value in terms of
jobs and skills. For example, the Runcorn EfW facility will directly
employ and provide training for up to 70 highly skilled people in the
North West (compared with around 15 people required to landfill
the equivalent waste volume). The construction of the project has
employed a daily average of 325 people on site, rising to 700 at its
peak, and many more through the supply chain.
Achievements
In addition to the 2012 PLC Sustainability Award, and to the
achievements listed under each subsidiary company’s business
review, Pennon is listed in the FTSE4Good index. In March 2012
the Group scored 3.8 out of 5 in the FTSE4Good Environmental,
Social and Governance ratings assessment. It was also the top
ranked utility in four categories of the 2011 ‘Britain’s Most Admired
Company’ awards.
In January 2012 Pennon was listed as one of the 100 most
sustainable companies in the world by Corporate Knights the
company for clean capitalism.
38 Pennon Group Plc Annual Report and Accounts 2012
Trigon landfill restoration, Dorset.
Reed bed at West Penwith.
Sustainability KPIs
South West Water
Renewable
energy
generation
GWh
Greenhouse gas
emissions data
tCO2e
Recycling
volumes
tonnes of
dry solids
Community
support,
sponsorship
and donations
£
RIDDOR
incidence rate
per 100,000
employees
calendar year
Capital
investment
£m
8
.
3
1
1
1
/
0
1
0
2
7
.
4
1
2
1
/
1
1
0
2
Viridor
Renewable
energy
generation
GWh
2
5
7
0
6
7
9
5
6
,
7
2
1
2
,
9
8
8
5
3
7
,
,
1
1
1
/
0
1
0
2
2
1
/
1
1
0
2
1
1
/
0
1
0
2
2
1
/
1
1
0
2
2
1
6
,
4
5
0
0
4
,
2
5
1
1
/
0
1
0
2
2
1
/
1
1
0
2
*
3
6
9
,
7
6
1
3
8
5
,
4
6
1
1
1
/
0
1
0
2
2
1
/
1
1
0
2
* Reassessed to include
all imported electricity
used and self-supplied
renewable energy used on
South West Water sites.
1
7
6
,
9
7
6
5
8
,
9
7
1
1
/
0
1
0
2
2
1
/
1
1
0
2
8
0
0
,
2
8
2
6
,
1
0
1
0
2
1
1
0
2
Actual
number
20
8
.
0
3
1
1
.
5
2
1
1
1
/
0
1
0
2
2
1
/
1
1
0
2
Greenhouse gas
emissions data
tCO2e
Recycling
volumes
million tonnes
Community
support,
sponsorship
and donations
£m
RIDDOR
incidence rate
per 100,000
employees
calendar year
Capital
investment
£m
2
4
8
1
.
8
1
7
1
.
1
1
/
0
1
0
2
2
1
/
1
1
0
2
.
4
0
1
1
.
0
1
5
6
1
2
,
7
3
2
,
1
0
1
0
2
1
1
0
2
Actual
number
39
1
1
/
0
1
0
2
2
1
/
1
1
0
2
6
.
6
2
1
2
1
/
1
1
0
2
.
7
3
7
1
1
/
0
1
0
2
Pennon Group Plc Annual Report and Accounts 2012 39
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Directors’ report Other statutory information
Principal activities
and business review
The principal activities of the Company and its subsidiaries
(‘the Group’) are the provision of water and sewerage services,
recycling, waste management and renewable energy. Information
regarding the Group, including events and its progress during the
year, events since the year-end and likely future developments is
contained in the Business review set out on pages 2 to 39 of this
Directors’ report.
In addition the Business review contains a fair and balanced review
of the business of the Group, including its position and prospects,
Key Performance Indicators and a description of the principal
risks and uncertainties facing the Group in accordance with the
requirements of the UK Corporate Governance Code and Section
417 of the Companies Act 2006. In addition in accordance with
the ABI Corporate Social Responsibility Guidelines, statements are
included on any significant environmental, social and governance
(ESG) risks and the actions taken in mitigating these risks within
the Business review on pages 28 and 29. Further information on
ESG aspects of the Group’s business are included in the Group
Sustainability report on pages 34 to 39. The principal subsidiaries
of the Company are listed in note 38 to the financial statements on
page 108.
Corporate governance and Directors’ responsibilities
statements
The Directors’ responsibilities statements, a report on the review
of, and a statement on, the Group’s system of internal controls
and the disclosures required by Part 6 of Schedule 7 of the Large
and Medium-sized Companies and Groups (Accounts & Reports)
Regulations 2008 and FSA Disclosure and Transparency Rule
7.2 are set out in the Company’s Corporate governance and
internal control report on pages 42, 43 and 46 to 51 of this Annual
Report which are hereby included within this Directors’ report
by reference.
Financial results and dividend
Group profit on ordinary activities after taxation was £172.4 million.
The Directors recommend a final dividend of 18.3p per Ordinary
share to be paid on 5 October 2012 to shareholders on the
register on 10 August 2012, making a total dividend for the year
of 26.25p, the cost of which will be £95.9 million, leaving a credit
to reserves of £76.5 million. The Business review on pages 24 to
27 analyses the Group’s financial results in more detail and sets
out other financial information, including the Directors’ opinion on
asset values on page 25.
Directors
In accordance with the provisions of the UK Corporate
Governance Code (the Code) all Directors are offering themselves
up for re-election at this year’s Annual General Meeting. The
Board continues to believe that each Director makes an
effective and valuable contribution to the Board, demonstrating
continued commitment to his or her role. The Non-executive
Directors, Gerard Connell and Martin Angle, are considered to be
independent in accordance with the provisions of the Code. Dinah
Nichols, subject to her re-election at this year’s Annual General
Meeting, will have served as a Non-executive Director for more
than nine years. The Board has determined that Dinah remains
independent as she demonstrates independence of character and
judgement in her conduct of matters with the Board. The Non-
executive Directors do not have service contracts. The Chairman,
Ken Harvey, also does not have a service contract but he does
have a contract for services which is terminable upon 12 months’
notice. The Executive Directors, David Dupont and Chris Loughlin,
have service contracts which are due to expire when they reach
age 60 (the unexpired term for David Dupont and Chris Loughlin
is until 10 June 2014 and 20 August 2012 respectively). In respect
of Colin Drummond, who has reached age 60, his contract now
continues subject to 12 months’ notice. The other Executive
Directors’ contracts are also expected to continue after they reach
age 60. Formal resolutions for the above Directors’ re-election
will be proposed at the Annual General Meeting. The Directors’
biographies are set out on pages 44 and 45.
No Director has, or has had, a material interest, directly or
indirectly, at any time during the year under review in any contract
significant to the Company’s business. A list of all the Directors
during the year is set out in the emoluments table on page
57. Further details relating to the Directors and their service
agreements or contracts for services are set out on pages 55
and 57 and details of the Directors’ interests in shares of the
Company are given on pages 58 to 60.
Directors’ insurance and indemnities
The Directors have the benefit of the indemnity provisions
contained in the Company’s Articles and the Company has
maintained throughout the year Directors’ and Officers’ liability
insurance for the benefit of the Company, the Directors and its
Officers. The Company has entered into qualifying third party
indemnity arrangements for the benefit of all its Directors in a form
and scope which comply with the requirements of the Companies
Act 2006 and which were in force throughout the year and remain
in force.
Statement as to disclosure of information to auditors
a) So far as each of the Directors in office at the date of the signing
of the report is aware, there is no relevant audit information of
which the Company’s auditors are unaware; and
b) Each of the Directors has taken all the steps each Director
ought to have taken individually as a director in order to make
themselves aware of any relevant audit information and to
establish that the Company’s auditors are aware of that
information.
Financial instruments
Details of the financial risk management objectives and policies of
the Group and the exposure of the Group to price, credit, liquidity
and cash flow risks are set out in the Business review on pages 26
and 27.
Employment policies and employee involvement
The Group has a culture of continuous improvement through
investment in people at all levels within the Group. The Group is
committed to pursuing equality and diversity in all its employment
activities including recruitment, training, career development and
promotion and ensuring there is no bias or discrimination in the
treatment of people. In particular, applications for employment
are welcomed from persons with disabilities and special
arrangements and adjustments as necessary are made to ensure
that applicants are treated fairly when attending for interview or for
40 Pennon Group Plc Annual Report and Accounts 2012
2012 Annual General Meeting business
In addition to routine business, resolutions will be proposed at the Annual General Meeting to:
• renew the existing authorities to issue a limited number of shares and to purchase up to 10% of the issued share capital
of the Company
• seek authority to make political donations under the Political Parties, Elections and Referendums Act 2000, as
amended. (It is not the Group’s policy to make political donations. This is a precautionary measure which is followed
by many companies to ensure that there is no inadvertent breach of the law)
• re-elect Mr K G Harvey, Mr M D Angle, Mr G D Connell, Mr C I J H Drummond, Mr D J Dupont, Mr C Loughlin and
Ms D A Nichols as Directors of the Company
• seek authority to continue to call general meetings other than an annual general meeting on not less than 14 clear days’
notice (Pursuant to the EU Shareholder Rights Directive shareholder authority is required to continue to call meetings
on at least 14 clear days’ notice. Such authority would only be exercised by the Directors in exceptional circumstances
and if they considered that it was in the best interests of shareholders and the Company as a whole to do so).
pre-employment aptitude tests. Wherever possible the opportunity
is taken to retrain people who become disabled during their
employment in order to maintain their employment within the
Group. The Group also has a Boardroom Diversity Policy and
encourages gender diversity in particular. Further details are set
out in the report of the Nomination Committee on page 49.
Employees are consulted regularly about changes which
may affect them either through their trade union appointed
representatives or by means of the elected Staff Council which
operates in South West Water for staff employees.
These forums, together with regular meetings with particular
groups of employees, are used to ensure that employees are
kept up to date with the operating and financial performance
of their employer.
The Group also uses a monthly information cascade process
to provide employees with important and up to date information
about key events and to receive feedback from employees.
Further information about employment matters relating to
the Group are set out on pages 17, 23, 37 and 38 of the
Business review.
The Group encourages share ownership amongst its employees
by operating an HM Revenue & Customs approved Sharesave
Scheme and Share Incentive Plan. At 31 March 2012 around one-
third of the Group’s employees participated in these plans.
Research and development
Research and development activities within the Group involving
water and waste treatment processes amounted to £0.2 million
during the year (2010/11 £0.2 million).
Pennon Group donations
During the year donations amounting to £73,992 (2010/11
£78,678) were made. Further details are included on page 37 of
the Group Sustainability report. No political donations were made
(2010/11 nil).
Tax status
The Company is not a close company within the meaning of the
Income and Corporation Taxes Act 1988.
Payments to suppliers
It is the Group’s payment policy for the year ending 31 March
2013 to follow the Code of The Better Payment Practice Group
on supplier payments. Information about the Code can be
obtained from the website payontime.co.uk The Company will
agree payment terms with individual suppliers in advance and
abide by such terms. The ratio, expressed in days, between the
amount invoiced to the Company by its suppliers during 2011/12
and the amount owed to its trade creditors at 31 March 2012, was
16 days.
Purchase of own Ordinary shares
The Company has authority from shareholders to purchase up
to 10% of its own Ordinary shares (as renewed at the Annual
General Meeting in 2011) which was valid as at 31 March 2012 and
remains currently valid. Of the 4,309,567 shares held in Treasury at
31 March 2011, 676,862 were subsequently re-issued under the
Company’s employee share schemes for proceeds of £1.9 million.
Major shareholdings
Details of major shareholdings notified to the Company in
accordance with the FSA Disclosure and Transparency Rules 5
are set out on page 113 ‘Shareholder Information’.
Independent auditors
PricewaterhouseCoopers LLP were appointed auditors until
the conclusion of the twenty-third Annual General Meeting. A
resolution for their re-appointment upon the recommendation of
the Audit Committee of the Board will be proposed at the Annual
General Meeting.
Appointed business
South West Water Limited is required to publish additional
financial information relating to the ‘appointed business’ as water
and sewerage undertaker in accordance with the Instrument of
Appointment from the Secretary of State for the Environment.
A copy of this information is available on the website
southwestwater.co.uk or upon application to the Group Company
Secretary at Peninsula House, Rydon Lane, Exeter EX2 7HR.
Annual General Meeting
The twenty-third Annual General Meeting of the Company will
be held at the Sandy Park Conference Centre, Sandy Park Way,
Exeter, Devon EX2 7NN on 26 July 2012 at 11.00am. Details
of the resolutions are summarised above and set out in the
separate Notice of Annual General Meeting which is circulated
to shareholders with this Annual Report or provided by electronic
communication via the Company’s website pennon-group.co.uk
Information required by Section 311A of the Companies Act 2006
is also on the Company’s website.
By Order of the Board
Ken Woodier
Group General Counsel & Company Secretary
18 June 2012
Pennon Group Plc Annual Report and Accounts 2012 41
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Governance
Chairman’s introduction
to governance
The Board is committed to the highest standards
of corporate governance in the best interests of its
shareholders and other stakeholders.
Dear shareholder
I am pleased to introduce the Corporate Governance Report for
2012 on behalf of the Board.
The Annual Report remains the principal means of reporting to
our shareholders on the Board’s governance policies. This
Report sets out how the main and supporting principles of good
corporate governance set out in the UK Corporate Governance
Code (June 2010) have been applied in practice. The Code is
publicly available on the Financial Reporting Council (FRC) website
frcpublications.com
Role of the Board and its effectiveness
My primary role as Chairman is to provide leadership to the Board
and to provide the right environment to enable the Directors
and the Board as a whole to perform effectively to promote the
success of the Company for the benefit of its shareholders.
In doing so we take account of the interests of our customers,
employees, suppliers, communities in which we operate and
other interested stakeholders.
I firmly believe that we have good governance in place and that we
operate effectively as a Board. However there is always room for
improvement and each year we carry out a detailed performance
evaluation of the Board and each of the Committees as well as
of the Directors and the Group General Counsel & Company
Secretary. Further details of the review, which was facilitated by
an external governance consultancy for the first time, are set out
later in this report. I remain mindful of the need to ensure that
the Non-executive Directors continue to have appropriate up to
date knowledge and understanding of both South West Water
and Viridor as they develop and pursue new initiatives. Last year
the Board had a number of visits to key sites within both South
West Water and Viridor and met and discussed the then current
issues with managers and employees across the Group. This
year the Board has concentrated on receiving presentations from
senior management on material developments in the businesses
including our energy from waste plant projects; landfill gas
management; energy production from landfill; and regulatory and
legislative changes proposed by Ofwat and Government.
Ken Harvey
Chairman,
Pennon Group Plc
42 Pennon Group Plc Annual Report and Accounts 2012
Remuneration
The Board and the Remuneration Committee remain mindful of
shareholder and the Government’s concerns regarding some
companies’ remuneration practices.
We have always pursued a remuneration policy of setting pay
at a level which is just sufficient to attract and retain high calibre
management and providing incentives which are fully aligned
with creating shareholder value. We have reviewed our pay and
benefits practice again this year and are satisfied no changes are
necessary to maintain this policy.
Shareholder engagement
The Directors and I recognise the importance and value of
regular communications with our shareholders. This ensures that
we understand their needs and wishes and hopefully that we
provide them with confidence that we have the right governance
structures, processes and systems in place to assist us in
achieving our stated objectives.
A regular dialogue with the Company’s institutional shareholders
is maintained through a comprehensive investor relations
programme. During the year some 60 meetings with institutional
shareholders (including with prospective shareholders) were
held and attended by the Group Director of Finance and the
Company’s Investor Relations Manager. The Chief Executive
of South West Water, the Chief Executive of Viridor and I also
participated when appropriate. The Group Director of Finance
reports to the Board regularly on major shareholders’ views about
the Group and every six months the Company’s Brokers give a
presentation to the Board on equity market developments and
shareholder perceptions.
I also actively encourage the participation of shareholders at our
Annual General Meeting and as usual at our 2012 Annual General
Meeting on 26 July all our Directors aim to be present together
with a number of directors and executives of South West Water
and Viridor to meet with shareholders to discuss the business of
the Group.
Compliance with UK Corporate Governance Code
and other requirements
I am pleased to report that throughout the year the Company
complied with the provisions and applied the main principles set
out in the UK Corporate Governance Code with no exceptions
to report.
My introduction to this Corporate Governance Report and the
following sections are made in compliance with the UK Corporate
Governance Code, FSA Listing Rule 9.8.6 and FSA Disclosure and
Transparency Rules 7.1 and 7.2 and cover the work of our Board
and its Committees; our internal control systems and procedures
including risk management; our corporate governance statements
relating to share capital and control; and our Going concern and
Directors’ responsibilities statements.
Ken Harvey
Chairman
18 June 2012
Guide to the contents
of the Governance report
p47
p47
p49
p49
p46
p50
p46
p46
Directors’ biographies
p44
Board Directors’ independence and responsibilities
How the Board operates
Performance evaluation
Dealing with conflicts of interest
Audit Committee
Sustainability Committee
Nomination Committee
Internal control and risk identification
Going concern statement
Directors’ responsibilities statement
Corporate governance statements
Remuneration Committee
Elements of remuneration
Remuneration policy for Executive Directors including
incentive plans, pensions and service contracts
p53
Total shareholder return graph
Remuneration policy, including fee levels and contracts for
services, for the Chairman and Non-executive Directors
Emoluments of Directors’ table
Executive Directors’ pensions table
Directors’ share interests
p51
p51
p52
p52
p56
p57
p57
p51
p58
p56
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Pennon Group Plc Annual Report and Accounts 2012 43
Governance
Board of Directors
Chairman
Executive Directors
Kenneth George Harvey CBE, BSc
Chairman
Committees
Nomination (Chairman)
Appointed on 1 March 1997. Ken was formerly chairman and chief
executive of Norweb Plc. He was chairman of National Grid Holdings
in 1995 and was previously deputy chairman of London Electricity and
earlier its engineering director. He has also been chairman of a number
of limited and private equity funded companies. Currently he is the senior
independent non-executive director of National Grid Plc.
Colin Irwin John Hamilton Drummond OBE, MA, MBA, LTCL, CCMI
Chief Executive, Viridor
Committees
Sustainability, Executive
Appointed on 1 April 1992. Prior to joining the Company Colin was
a divisional chief executive of Coats Viyella, having previously been
corporate development director of Renold plc, a strategy consultant with
the Boston Consulting Group and an official of the Bank of England.
He is chairman of the Government’s Living with Environmental Change
Business Advisory Board and of the Environmental Sustainability
Knowledge Transfer Network. He is a senior visiting research fellow in
Earth Sciences at Oxford University and a Past Master of the Worshipful
Company of Water Conservators.
Non-executive Directors
Martin David Angle BSc Hons, FCA, MCSI
Non-executive Director
Committees
Audit, Sustainability, Nomination, Remuneration (Chairman)
Gerard Dominic Connell MA
Senior Independent Non-executive Director
Committees
Audit (Chairman), Sustainability, Nomination, Remuneration
Appointed on 1 December 2008. Martin currently holds non-executive
directorships with Savills plc, OAO Severstal, Shuaa Capital PSC and
The National Exhibition Centre where he is Chairman. In addition he
sits on the Board of the FIA Foundation where he is a vice-chairman.
Formerly he held senior positions with Terra Firma Capital Partners and
various of its portfolio companies, including the executive chairmanship
of Waste Recycling Group Limited. Before that he was the group finance
director of TI Group plc and held a number of senior investment banking
positions with SG Warburg & Co Ltd, Morgan Stanley and Dresdner
Kleinwort Benson.
Appointed on 1 October 2003. Gerard currently is also a non-executive
director and chairman of the audit committee of the Defence Science
and Technology Laboratory and the independent director, finance and
investment, of the Nuclear Decommissioning Fund Company Limited.
He was previously group finance director of Wincanton Plc. Before that
he was a director of Hill Samuel and a managing director of Bankers
Trust, having trained originally at Price Waterhouse. In addition he has
held other corporate finance and business development positions
in the City and in industry. He is also a governor of King’s College
School, Wimbledon.
44 Pennon Group Plc Annual Report and Accounts 2012
Executive Directors
Non-executive Directors
David Jeremy Dupont MA, MBA
Group Director of Finance
Committees
Executive
Appointed on 2 March 2002. David was formerly regulatory and finance
director of South West Water Limited, having joined Pennon Group Plc
(then South West Water Plc) in 1992 as strategic planning manager.
Previously he held business planning and development roles with
Gateway Corporation. He is a member of the CBI Environmental Affairs
Committee and the CBI South West Regional Council.
Christopher Loughlin BSc Hons, MICE, CEng, MBA
Chief Executive, South West Water
Committees
Sustainability, Executive
Appointed on 1 August 2006. Chris was previously chief operating
officer with Lloyd’s Register and earlier in his career was an executive
director of British Nuclear Fuels Plc and executive chairman of Magnox
Electric Plc. He was also a senior diplomat in the British Embassy, Tokyo,
working in both the consulting and contracting sectors. Chris started
his career as a chartered engineer and subsequently held a number
of senior positions with British Nuclear Fuels. Between April 2008
and March 2012 he was chairman of Water UK and currently is vice-
chairman of the Cornwall Local Enterprise Partnership and a member
of the audit committee of the charity, WaterAid.
Company Secretary
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Dinah Alison Nichols CB, BA Hons
Non-executive Director
Committees
Audit, Sustainability (Chairman), Nomination, Remuneration
Kenneth David Woodier, Solicitor, CMA, DMS, CPE (Law)
Group General Counsel & Company Secretary
Committees
Executive
Appointed on 12 June 2003. Dinah was formerly Director General
Environment at the Department for Environment, Food and Rural Affairs
and previously held various senior appointments within Government,
including being head of the water directorate during the period of water
privatisation. She is also a Crown Estate Counsellor, a non-executive
director of the Land Trust and Keep Britain Tidy and, until recently,
a director of Aberdeen Smaller Companies High Investment Trust.
Appointed company secretary to the Board in March 1998. Ken was
formerly the head of group legal services at Pennon Group Plc (then
South West Water Plc) from February 1990. Previously he held senior
legal positions with H.P. Bulmer (Holdings) Plc, Investors in Industry Plc
(3i) and Severn Trent Water. He is a director of the Devon & Somerset
Law Society and a member of its governance committee.
Pennon Group Plc Annual Report and Accounts 2012 45
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Governance
Corporate governance
and internal control
The Board and its Committees
The Board
The Directors, independence and responsibilities
The Board of Directors at the end of the year comprised the
Chairman, three Executive Directors and three Non-executive
Directors. The Non-executive Directors were considered by
the Board to be independent throughout the year. None of the
relationships or circumstances set out in provision B.1.1 of the
UK Corporate Governance Code (the Code) applied to them.
Following this year’s Annual General Meeting and subject to
re-election, Dinah Nichols will have served on the Board for more
than nine years since her first election. However Dinah has been
determined by the Board to be independent. The Board is satisfied
that she does and will continue to demonstrate independence of
character and judgement in the performance of her role on the
Board. All of the Non-executive Directors are considered to have
the appropriate skills, experience in their respective disciplines
and personality to bring independent and objective judgement to
the Board’s deliberations. Their biographies on pages 44 and 45
demonstrate a broad range of business and financial experience.
Gerard Connell is the Senior Independent Non-executive
Director. His duties include leading the annual evaluation of the
performance of the Chairman by the Non-executive Directors and
being available as an additional point of contact on the Board for
shareholders. Gerard is also chairman of the Audit Committee
and in accordance with the Code’s principles relating to audit
committee membership he has recent and relevant financial
experience (as set out in his biography on page 44). Martin Angle
is also a member of the Audit Committee and he has relevant
financial experience as set out in his biography on page 44.
There is a clear division of responsibilities between the roles of
Chairman and the Chief Executives of South West Water and
Viridor as recorded in the descriptions of the roles approved by
the Board. All Directors are now subject to re-election each year in
accordance with provision B.7.1 of the Code.
The search for an additional non-executive director is well under
way. The intention is to appoint a director who is considered to
be independent and who will be a member of the Remuneration,
Audit, Nomination and Sustainability committees.
The Directors on the Board and their attendance at the 11
scheduled meetings of the Board during 2011/12 are shown below:
Board
Members
Kenneth Harvey
(Chairman)
Non-executive Directors:
Martin Angle
Gerard Connell
Dinah Nichols
Executive Directors:
Colin Drummond
David Dupont
Appointment date
Attendance
March 1997
11/11
December 2008
October 2003
June 2003
April 1992
March 2002
11/11
11/11
11/11
11/11
11/11
11/11
Christopher Loughlin
August 2006
All Directors are equally accountable for the proper stewardship
of the Group’s affairs, with the Non-executive Directors having
a particular responsibility for ensuring that strategies proposed
for the development of the business are critically reviewed. The
Non-executive Directors also critically examine the operational and
financial performance of the Group and fulfil a key role in corporate
accountability through their membership of the Committees of
the Board. In addition the Chairman holds meetings with the
Non-executive Directors, without the Executive Directors present,
to discuss performance and strategic issues.
How the Board operates
In accordance with Group policies the Board has a schedule of
matters reserved for its decision and delegates more detailed
consideration of certain matters to Board Committees; to
the subsidiary boards of South West Water and Viridor; to
the Executive Directors; and to the Group General Counsel &
Company Secretary, as appropriate. The matters reserved to the
Board include the approval of financial statements; acquisitions
and disposals; major items of capital expenditure; authority levels
for other expenditure; risk management; and approval of the
strategic plan and annual operating budgets.
The Board operates by receiving written reports circulated in
advance of its meetings from the Executive Directors and the
Group General Counsel & Company Secretary on matters within
their respective business areas in the Group. Under the guidance
of the Chairman, all matters before the Board are discussed
openly and presentations and advice are received frequently from
other senior executives within the Group or from external advisers.
Directors have access to the advice and services of the Group
General Counsel & Company Secretary and the Board has
established a procedure whereby Directors, in order to fulfil
their duties, may seek independent professional advice at the
Company’s expense.
The training needs of Directors are reviewed as part of the
performance evaluation process.
Performance evaluation
The Board has well developed internal procedures to evaluate
the performance of the whole Board, each Committee, the
Chairman, each individual Director and the Group General
Counsel & Company Secretary. The evaluation procedure relating
to the Board and its Committees was administered this year by
an external governance consultancy, Lintstock. All participants’
views were sought via an online questionnaire on a range of
questions which were specifically designed by the Chairman
and the Group General Counsel and Company Secretary in
conjunction with Lintstock to ensure objective evaluation of
performance. Responses were then summarised and evaluated
by Lintstock for the Board and each Committee to consider and
determine whether any changes should be made to be more
effective. A meeting between the Chairman, the Group General
Counsel & Company Secretary and Lintstock was then held to
discuss the high level findings of the evaluation and to consider
them in the context of governance developments generally. While
performance was again considered to be satisfactory, there were
a number of suggestions made to refine the overall effectiveness
of the Board which the Board agreed should be introduced over
46 Pennon Group Plc Annual Report and Accounts 2012
the following months when appropriate. For example it was agreed
that performance could be improved further through a number of
minor changes to Board reports and discussions at the beginning
of each meeting on topical issues.
The Chairman’s performance was evaluated separately by the
Non-executive Directors, led by the Senior Independent Non-
executive Director. The Chairman’s other significant commitments
outside the Group have not changed during the year and the
Board is satisfied that such commitments do not prejudice the
Chairman’s performance in relation to his Group role.
Gerard Connell, Audit Committee Chairman
Appointment date
Attendance
The Audit Committee
Members
Gerard Connell
(Chairman)
Martin Angle
Dinah Nichols
June 2003
October 2003
December 2008
6/6
6/6
6/6
Our activities during the year
A continuing focus this year has been reviewing the systems
and controls in place in Viridor to manage its increasingly
complex and regionalised businesses across the UK.
It is important to ensure that Viridor continues to have
appropriate processes and controls in place to manage the
strong growth expected from its energy from waste plants,
its developing recycling businesses and the major contracts
with waste authorities. The Committee was pleased to note
that plans are also being developed to deliver significant
enhancements and upgrading of IT systems and that
regular internal audits at local sites are demonstrating that
new controls and systems put in place have been working
satisfactorily.
In South West Water the emphasis has been on continuing
to manage systems in place as efficiently as possible
whilst ensuring that risks are being appropriately assessed
and controls in place are operating satisfactorily. The
Committee was pleased to note that South West Water’s risk
assessment and internal control processes remain robust.
We decided to review our risk review process this year
bearing in mind that it is 12 years since the Group introduced
detailed risk management policies and procedures in
accordance with the Turnbull Recommendations. We
appointed Deloitte to undertake a full review; to date we have
received a valuable interim report which is to be followed
up shortly by a presentation to the Committee and the
Board to enable us to consider any changes which may
be appropriate to existing processes.
Dealing with Directors’ conflicts of interest
The Board has in place a procedure for the consideration
and authorisation of Directors’ conflicts or possible conflicts
with the Company’s interests. This is in accordance with the
Directors’ interests provisions of the Companies Act 2006 and
the Company’s Articles of Association which grants to Directors
authority to approve such conflicts subject to appropriate
conditions.
Board committees
Group policies allocate the tasks of giving detailed consideration
to specified matters, to monitoring executive actions and to
assessing reward, to the Board Committees as set out in the
remaining sections of this Governance Report and the Directors’
Remuneration Report on pages 52 and 53.
As part of the Group’s risk review process this year we
have once again assessed the key areas of sensitivity to
the Group and these are set out on pages 28 to 33. We
have concentrated on the high level key risks to the Group
and have provided an indication of how the level of risk has
changed over the past year.
As reported in previous Annual Reports we continue to
monitor carefully the effectiveness of our external auditors
as well as their independence, bearing in mind that it is
recognised there is a need to use our auditors’ firm for non-
audit services from time to time. We have full regard to the
Auditing Practices Board’s Ethical Standards and ensure
that our procedures and safeguards meet these standards.
Periodically a detailed review of the provision of external
auditors is undertaken in accordance with best practice.
The last such review was undertaken in 2006 when the
current auditors were appointed following a comprehensive
competitive tender process. In addition the auditors’
appointment is reviewed annually by the Committee.
As part of this annual review the Committee considers
the tenure, quality and fees of the auditors.
Our policy for the engagement of the auditors’ firm for non-
audit work involves the Group Director of Finance setting
out in a report to the Committee the reasons for appointing
the auditors’ firm for any material work and obtaining the
approval of the Committee. We carefully review whether it
is necessary for the auditors’ firm to carry out such work
and we will only grant approval for their appointment
if we are satisfied that the auditors’ independence and
objectivity are fully safeguarded.
The Company’s auditors assist in this process by ensuring
that the senior partner responsible for the external audit of
the Group remains responsible for such audit for no more
than five years and that there is a Quality Review Partner
who is involved in planning the audit and in the reviewing
of the final accounts of the Company including assessing
any critical matters which may be identified in the audit.
The auditors have also confirmed to the Committee that
they have complied with all relevant guidance issued
by the Auditing Practices Board and have implemented
appropriate safeguards including:
• all non-audit related services, where necessary, being
performed by personnel independent of the audit
engagement team
• no work being undertaken that would require the
auditors to act in a capacity as an advocate
• no aspect of the auditing engagement partner’s
performance being assessed on the level of non-audit
fees charged to the Company
• the Committee Chairman meeting with the auditors’
Quality Review Partner periodically to discuss the scope
and performance of their work.
Pennon Group Plc Annual Report and Accounts 2012 47
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Governance Corporate governance and internal control
continued
The Audit Committee continued
Set out on page 80 is the level of fees paid to the Company’s
auditors’ firm for audit services, or audit-related services
and non-audit services following the guidance proposed by
the Auditing Practices Board’s Ethical Standards Guidance
for Auditors. It is recognised that the level of non-audit fees
payable to the Company’s auditors’ firm in the past year was
in excess of the audit fee paid. This was primarily due to fees
paid to the corporate finance arm of the auditors’ firm in
relation to the major new PPP/PFI contract gains by Viridor.
We considered carefully the reasons for the engagement of
the auditors’ firm in accordance with the process described
above. Of paramount importance was the continuing
independence of the auditors which the Committee was
satisfied was maintained due to the safeguards followed
by the auditors’ firm as described above. We were also
satisfied that it was appropriate to appoint the auditors’
firm to undertake such work because of the auditors’ firm’s
specialist knowledge and the limited number of consultants
with the expertise to undertake such engagements. These
PPP/PFI contracts are of vital importance to the long-term
strategic development of Viridor and it is critical that Viridor
should be able to benefit from the best advice available in
the market. The number of PPP/PFI contract opportunities
is expected to decline from 2012/13 onwards leading to a
corresponding decline in corporate finance fees payable.
The Committee also acknowledged that the absolute level
of non-audit fees payable to the Company’s auditors is
consistent with the level of non-audit fees incurred by many
companies within the FTSE 100.
Another area of particular importance to the Committee is
the internal audit activities of the Group. The Group has a
longstanding and effective centralised internal audit function
together with separate reviews undertaken within both
South West Water and Viridor. A Group Internal Audit Plan
is approved in September each year. It takes account of the
activities to be undertaken by the external auditor and also
the Group’s annual and regular interim risk management
reviews. This approach seeks to ensure that there is an
ongoing programme of internal and external audit reviews
focused on key risk areas throughout the Group. The Group
Audit Manager reports quarterly to the Committee on audit
reviews undertaken and their findings.
The areas of the business of the Group which received
audit attention over the past year included Group treasury
processes; business continuity management; information
security and IT risks; Viridor site practices; credit
management and debt collection; and core systems
and processes.
We have also considered a range of matters during the year
in accordance with our established calendar of business and
Terms of Reference including in particular:
• reviewing the accounting policies and reporting
judgements adopted by the Group in preparing its financial
statements. We were satisfied that they were appropriate
to provide a fair assessment of the financial performance
of the Group
• agreeing the external auditors’ strategy for carrying out the
audit during the past financial year
• carrying out a review of the Half Yearly Report with the
external auditors
• considering a report from the external auditors on the
review of the financial year-end and meeting them in the
absence of management to discuss their remit and any
issues arising from the audit, including management’s
treatment of significant judgements which the auditors had
confirmed (following discussion with management) were
considered to be satisfactory
• considering an internal control report from the external
auditors which reviewed the co-ordination of activities with
the Group’s internal audit function
• keeping under review the effectiveness of the Group’s
internal controls, including all material financial, operational
and compliance controls and risk management systems
• monitoring and reviewing the effectiveness of the Group’s
internal audit function and approving the annual internal
audit plan
• reviewing the findings of the internal audit function and
reviewing and monitoring management’s responsiveness
to such findings
• overseeing the relationship with the external auditors
including their appointment, remuneration, re-appointment
and the monitoring of their independence and objectivity
particularly having regard to the supply of any non-audit
services by the auditors’ firm
• reviewing the level of audit and non-audit fees paid
• an updated fraud, anti-bribery and other irregularities policy
and procedure to take account of the provisions of the
new Bribery Act, which was subsequently approved by
the Board.
After consideration of the reports provided by the external
auditors, and our assessment of the performance and
independence of the auditors during the year in conjunction
with the Group Director of Finance, we consider that it is
appropriate that the external auditors be re-appointed and
will make an appropriate recommendation to shareholders
at the Annual General Meeting.
It is our practice as an additional assurance, at the end of
meetings of the Committee, to hold separate meetings with
the external auditors and the internal Group Audit Manager
without management present to discuss their respective
areas of activity during the previous period and any issues
arising from their audits.
48 Pennon Group Plc Annual Report and Accounts 2012
Dinah Nichols, Sustainability Committee Chairman
Ken Harvey, Nomination Committee Chairman
Sustainability Committee1
The Nomination Committee
Members
Appointment date
Attendance
Dinah Nichols
(Chairman)
Gerard Connell
Martin Angle
November 2006
November 2006
December 2008
Colin Drummond
November 2006
Christopher Loughlin November 2006
5/5
5/5
4/5
4/5
5/5
The Sustainability Committee’s duties, in the context of the
requirement for companies to conduct their business in a
responsible manner (in relation to environmental, social and
governance (ESG) matters), are to review the strategies,
policies, management, initiatives, targets and performance
of the Pennon Group of companies in the areas of
occupational health and safety and security; environment;
workplace policies; non-financial regulatory compliance
and the role of the Group in society.
During the year the Committee considered a wide range
of matters in accordance with its Terms of Reference
including:
• the 2011/12 Group Sustainability Report and the
associated Verifier’s Report
• the South West Water and Viridor Sustainability Reports
• the Group’s health and safety performance and plans
• the Verifier’s recommendations for the next Sustainability
Reports
• progress against the Sustainability targets for 2011/12
• Sustainability targets for 2012/13
• the annual review of Group policies
• a new community relations and investment policy
• developments and progress in carbon reduction driving
sustainability within the Group supply chains.
In reporting on sustainability, the Company has sought to
comply with the Association of British Insurers’ Guidelines
on Responsible Investment Disclosure. The Business
review on pages 34 to 39 contains the Group’s 2012 Annual
Sustainability Report.
1 (formerly Corporate Responsibility Committee).
Board committees’ terms of reference
The Terms of Reference of the Audit, Remuneration,
Nomination and Sustainability Committees are available
upon request to the Group General Counsel & Company
Secretary and are also set out on the Company’s website
pennon-group.co.uk
Members
Kenneth Harvey
(Chairman)
Gerard Connell
Martin Angle
Dinah Nichols
Appointment date
Attendance
March 1997
October 2003
December 2008
June 2003
3/3
3/3
3/3
3/3
The Nomination Committee meets as and when required
to select and recommend to the Board suitable candidates
for appointment as Executive and Non-executive Directors
to the Board and as executive directors to the Viridor
and South West Water boards, determine the nomination
process and review succession plans. It is the practice of
the Committee, led by the Chairman, to appoint an external
search consultancy to assist in any Board appointments.
During the year the Committee considered the annual
performance evaluation results for the Committee;
considered and approved the appointments of an
executive director and a non-executive director to the
Viridor board; reviewed equality and diversity arrangements
throughout the Group; and commenced the process,
with the assistance of external search consultants,
for the appointment of a further Non-executive Director
to the Board taking account of the recommendations
of the Lord Davies Review, ‘Women on Boards’.
Gender Diversity – The Board’s policy
In accordance with the Lord Davies Review
recommendations and the expected changes to the UK
Corporate Governance Code (the Code) the Committee
is pleased to report that the Board has adopted
a Boardroom Diversity Policy which confirms that
the Board is committed to:
• the search for Board candidates being conducted, and
appointments made, on merit, against objective criteria
and with due regard for the benefits of diversity on the
Board, including gender
• satisfying itself that plans are in place for orderly
succession of appointments to the Board and to senior
management to maintain an appropriate balance of skills
and experience within the Group and on the Board and to
ensure progressive refreshing of the Board.
In addition, within the spirit of Principle B.2 of the Code,
the Board will endeavour to achieve and subsequently
maintain:
• a minimum of 25% female representation on the Board by
2015 (and maintain the current 14% representation until
the higher percentage is achieved)
• a minimum of 25% female representation on the Group’s
senior management team by 2015.
Pennon Group Plc Annual Report and Accounts 2012 49
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Governance Corporate governance and internal control
continued
Currently the Group has 14% female representation at Board
level and in a workforce of circa 4,500 some 16% are women.
In senior/middle management executive positions the female
representation is circa 18%.
As well as its Boardroom Diversity Policy the Group has a
number of policies embracing workplace matters, including
non-discrimination and equal opportunities policies.
The Committee is required by the Board to review and
monitor compliance with the Boardroom Diversity Policy and
report on the targets, achievement against those targets and
overall compliance in the Annual Report each year.
The Remuneration Committee
Details of the Remuneration Committee and the Directors’
remuneration report can be found on pages 52 to 60.
Internal control
Wider aspects of internal control
The Board is responsible for maintaining the Group’s system of
internal control to safeguard shareholders’ investment and the
Group’s assets and for reviewing its effectiveness. The system
is designed to manage rather than eliminate the risk of failure to
achieve business objectives and can only provide reasonable
and not absolute assurance against material misstatement or
loss. There is an ongoing process for identifying, evaluating and
managing the significant risks faced by the Group that has been
in place throughout the financial year 2011/12 and up to the date
of the approval of this Annual Report and Accounts.
The Board confirms that it continues to apply procedures in
accordance with the UK Corporate Governance Code and the
‘Guidance on Internal Control’ (The Turnbull Guidance) which
suggests means of applying the internal control part of the
Code. As part of these procedures the Board has a Group Risk
Management Policy (GRMP) which provides for the identification
of key risks in relation to the achievement of the business
objectives of the Group, monitoring of such risks and annual
evaluation of the overall process, as described in more detail
below. The GRMP is applied by all business units within the
Group in accordance with an annual timetable.
Risk identification
A full risk and control assessment is undertaken annually by the
management of each business to identify financial and non-
financial risks which are then regularly updated. Each business
compiles (as part of regular management reports) an enhanced
and focused assessment of key risks against corporate objectives.
At each meeting the Board receives from the Executive Directors
details of any new high-level risks identified and how they are to
be managed, together with details of any changes to existing risks
and their management. The subsidiary boards of South West
Water and Viridor also receive at each meeting similar reports
50 Pennon Group Plc Annual Report and Accounts 2012
in respect of their own areas of responsibility. All Executive
Directors and senior managers are required to certify on an annual
basis that they have effective controls in place to manage risks and
to operate in compliance with legislation and Group procedures.
We also have a Whistleblowing policy and we thoroughly
investigate any allegations of misconduct and irregularity and
consider the implications for our control environment. In the normal
course of business investigations into irregularities may be ongoing
as of the date of the approval of the financial statements.
All of these processes serve to ensure that a culture of effective
control and risk management is embedded within the organisation
and that the Group is in a position to react appropriately to new
risks as they arise. Details of key risks affecting the Group are set
out in the Business review on pages 28 to 33.
Internal control framework
The Group also has a well established internal control framework
which is operated and which applies in relation to the process for
preparing the Group’s consolidated accounts.
This framework comprises:
• a clearly defined structure which delegates an appropriate
level of authority, responsibility and accountability, including
responsibility for internal financial control, to management of
operating units
• a comprehensive budgeting and reporting function with an
annual budget approved by the Board of Directors, which also
monitors the financial reporting process, monthly results and
updated forecasts for the year against budget
• documented financial control procedures. Managers of
operating units are required to confirm annually that they have
adequate financial controls in operation and to report all material
areas of financial risk. Compliance with procedures is reviewed
and tested by the Company’s internal audit function
• an investment appraisal process for evaluating proposals for
all major capital expenditure and acquisitions, with defined
levels of approval and a system for monitoring the progress
of capital projects
• a post-investment evaluation process for major capital
expenditure and acquisitions to assess the success of the
project and learn any lessons to be applied to future projects.
Internal control review
An evaluation of the effectiveness of overall internal control
compliance by the Group is undertaken in respect of each
financial year (and subsequently up to the date of this report)
to assist the Audit Committee in considering the Group internal
audit plan for the forthcoming financial year and also the Business
review for the Annual Report. The Group General Counsel
& Company Secretary initially carries out the evaluation with
Directors and senior management for consideration by the Audit
Committee and subsequently for final evaluation by the Board.
In addition the Audit Committee regularly reviews the operation
and effectiveness of the internal control framework and annually
reviews the scope of work, authority and resources of the
Company’s internal audit function. The Committee reports and
makes recommendations to the Board on such reviews. For
2011/12 and up to the date of the approval of the Annual Report
and Accounts, both the Audit Committee and the Board were
satisfied with the effectiveness of the GRMP and the internal
control framework and their operation within the Group.
Further information on the internal control review is set out on page
47 in relation to the Audit Committee.
Going concern
The Directors consider, after making appropriate enquiries, that
the Company and the Group have adequate resources to continue
in operational existence for the foreseeable future. For this reason
they continue to adopt the going concern basis in preparing the
financial statements.
Directors’ responsibilities statements
The Directors are responsible for preparing the Annual Report, the
Directors’ Remuneration Report and the financial statements in
accordance with applicable law and regulations.
Company law requires the Directors to prepare financial
statements for each financial year. Under that law the Directors
have prepared the Group and Company financial statements
in accordance with International Financial Reporting Standards
(IFRSs) as adopted by the European Union. Under company law
the Directors must not approve the financial statements unless
they are satisfied that they give a true and fair view of the state of
affairs of the Group and the Company and of the profit or loss of
the Group for the year.
In preparing these financial statements the Directors are required to:
• select suitable accounting policies and then apply them
consistently
• make judgements and accounting estimates which are
reasonable and prudent
• state whether applicable IFRSs as adopted by the European
Union have been followed, subject to any material departures
disclosed and explained in the financial statements.
The Directors confirm that they have complied with the above
requirements in preparing the financial statements.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company’s
transactions and disclose with reasonable accuracy at any time
the financial position of the Group and the Company and enable
them to ensure that the financial statements and the Directors’
remuneration report comply with the Companies Act 2006
and, as regards the Group financial statements, article 4 of the
International Accounting Standards (IAS) Regulation. They are
also responsible for safeguarding the assets of the Group and
the Company and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
Each of the Directors, whose names and functions are listed on
pages 44 and 45, confirms that, to the best of their knowledge:
a) the financial statements, which have been prepared in
accordance with International Financial Reporting Standards
(IFRS) as adopted by the EU, give a true and fair view of the
assets, liabilities, financial position and profit of the Group and
of the Company and
b) the Directors’ report contained on pages 2 to 41 includes a fair
review of the development and performance of the business
and position of the Company and the Group, together with a
description of the principal risks and uncertainties they face.
The Directors are responsible for the maintenance and integrity
of the Company’s website pennon-group.co.uk Legislation in the
United Kingdom governing the preparation and dissemination
of financial statements may differ from legislation in other
jurisdictions.
Corporate governance statements
The following disclosures are made pursuant to Part 6 of Schedule
7 of the Large and Medium-sized Companies and Groups
(Accounts & Reports) Regulations 2008 and Rule 7.2.3.R of the
UK Listing Authority’s Disclosure and Transparency Rules (DTR).
As at 31 March 2012:
a) details of the Company’s issued share capital, which consists of
Ordinary shares of nominal value 40.7 pence each, are set out
in note 31 to the financial statements on pages 101 to 103. All of
the Company’s issued shares are fully paid up, rank equally in
all respects and are listed on the Official List and traded on the
London Stock Exchange. The rights and obligations attaching
to the Company’s shares, in addition to those conferred on
their holders by law, are set out in the Company’s Articles
of Association (‘Articles’), copies of which can be obtained
from Companies House in the UK or by writing to the Group
Company Secretary at the Company’s registered office.
The holders of the Company’s shares are entitled to receive
the Company’s reports and accounts and in relation to general
meetings of the Company they have the right to attend and
speak, exercise voting rights and appoint proxies;
b) there are no restrictions on the transfer of issued shares of
the Company or on the exercise of voting rights attached to
them, except where the Company has exercised its right to
suspend their voting rights or to prohibit their transfer following
the omission of their holder or any person interested in them
to provide the Company with information requested by it in
accordance with Part 22 of the Companies Act 2006 or where
their holder is precluded from exercising voting rights by the
Financial Services Authority’s Listing Rules or the City Code
on Takeovers and Mergers;
c) details of significant direct or indirect holdings of securities of the
Company are set out in the shareholder analysis on page 113;
d) the Company’s rules about the appointment and replacement
of Directors are contained in the Articles and accord with usual
English company law provisions. The powers of directors are
determined by UK legislation and the Articles in force from
time to time. Changes to the Articles must be approved by the
Company’s shareholders by passing a special resolution;
e) the Directors have the power to make purchases of the
Company’s own shares in issue as set out in the Directors’
report on page 41 ‘Purchase of own Ordinary shares’. No such
purchases have been made during the year. The Directors also
have the authority to allot shares up to an aggregate nominal
value of (i) £48,541,689 (such amount to be reduced by any
shares allotted or rights granted under (ii) below in excess of
£48,541,689) or (ii) £97,083,378 by way of rights issue (such
amount to be reduced by any shares allotted or rights granted
from (i)) above) which were approved by shareholders at the
2011 Annual General Meeting (AGM). In addition, shareholders
approved a resolution giving the Directors a limited authority to
allot shares for cash other than pro rata to existing shareholders.
These resolutions remain valid until the conclusion of this year’s
AGM. Similar resolutions will be proposed at this year’s AGM.
The Directors have no present intention to issue Ordinary
shares other than pursuant to the Company’s employee share
schemes and Scrip Dividend Alternative; and
f) there are a number of agreements which take effect, alter or
terminate upon a change of control of the Company following
a takeover bid, such as bank loan agreements, Eurobond
documentation, private placement debt and employees’ share
plans. None of these is considered to be significant in terms of
their potential impact on the business of the Group as a whole.
By Order of the Board
Ken Woodier
Group General Counsel & Company Secretary
18 June 2012
Pennon Group Plc Annual Report and Accounts 2012 51
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Governance
Directors’ remuneration report
Dear shareholder
I am pleased to present the remuneration report for 2012 on behalf
of the Board. We will be presenting this report for your approval at
our Annual General Meeting in July.
This report is designed to provide you with details of:
• the Remuneration Committee
• the Group’s Remuneration policy
• Directors’ remuneration
• specific remuneration disclosures required by the Directors’
Remuneration Report Regulations, which are audited.
We appreciate that there remains investor concern relating to
executive director remuneration generally and, whilst focus has
been on the financial sector primarily, it is fully recognised that
there is a need for other sectors to continue to take account of
this concern in reviewing and setting their remuneration policies
and overall remuneration practice. This is why we asked our
remuneration consultants recently to undertake a review of our
incentive benefits to ensure that they continue to be aligned with
creating shareholder value and only provide rewards to Directors
commensurate with the achievements of the Group. I am pleased
to say that our consultants confirm that this is the position. As
a result we do not propose any changes to our remuneration
arrangements which have been in place without amendment for
the past five years.
The essential elements of our remuneration package and their
purpose therefore continue to be as set out below.
Martin Angle, Remuneration Committee Chairman
The Remuneration Committee
Members
Martin Angle
(Chairman)
Gerard Connell
Dinah Nichols
Appointment date
Attendance
December 2008
October 2003
June 2003
3/4
4/4
4/4
Elements of remuneration
Type of Remuneration
Fixed
Base Salary
Pension
Description
Purpose
Annual salary set by reference to market level
appropriate for role and based on individual
skills, experience and performance
Rewards appropriately for the role
undertaken and assists in key person
retention and recruitment
Final Salary (Defined Benefit) for existing
Directors/ Defined Contributions for any new
appointees or cash alternative commensurate
with market level pension arrangements
Assists in key person retention and
recruitment
Variable
Short-term – Annual:
Annual Incentive Bonus Plan – Maximum
100% of basic salary with 50% paid in cash
and 50% in shares deferred for three years
Long-term – three years:
Performance and Co-investment Plan (PCP)
– future performance over three years
Assessed against corporate financial
performance and individual personal
achievements relating to a range of
operational and compliance targets
Incentive for annual performance across
the Group at individual and team level. The
deferred element also assists in key person
retention and recruitment
Total shareholder return performance criteria
– 50% linked to water and waste comparator
group and 50% linked to relative FTSE 250
with an underpin relating to operational and
economic performance
A long-term reward which aligns Directors’
performance to shareholder value and
which drives sustainable practices and
assists in key person retention and
recruitment.
52 Pennon Group Plc Annual Report and Accounts 2012
The Committee’s Terms of Reference include:
• advising the Board on the framework of executive
remuneration for the Group
• determining the remuneration and terms of engagement
of the Chairman, the Executive Directors and Senior
Management of the Group.
No Director or any other attendee participates in any
discussion on, or determination of, his or her own
remuneration.
During the year the Committee received advice or services
which materially assisted the Committee in the consideration
of remuneration matters from Ken Harvey, Chairman of
the Company, and from the following advisors who were
appointed directly by the Committee:
• Ken Woodier, Group General Counsel & Company
Secretary, on remuneration and share scheme matters.
He also provides legal advice and company secretarial
services to the Company
• Deloitte LLP, auditing and remuneration consultants,
on calculating the Company’s total shareholder return
compared with two comparator groups for the Company’s
Performance and Co-investment Plan. Deloitte also provide
financial, tax and risk management review advice to the
Company
• Aon Hewitt Limited, pensions and remuneration
consultants, on providing advice on pension benefits. Aon
Hewitt also provided actuarial and investment advice to
the Company and to the Trustees of the Group’s pension
schemes
• Towers Watson UK Limited, remuneration consultants,
on the Company’s Director and senior management annual
incentive benefits framework.
Remuneration policy
The Group’s remuneration policy which will be applied in 2012/13, and is also currently intended to be applied in each subsequent year,
continues to be to provide a remuneration package for Executive Directors which is adequate to attract, retain and motivate good quality
executives and which is commensurate with the remuneration packages provided by companies of similar size and complexity. The key
guiding principles of this policy are to:
• design an overall package to be competitive and to take account of the markets in which the Group’s businesses operate
• support the overarching business strategy for the Group
• adopt incentive arrangements designed to reward performance and align the interests of the Executive Directors with those
of shareholders
• reinforce the incentive element of the package by maintaining base salaries for Executive Directors at the relevant market median
• have a remuneration package which is fair and consistent with other companies in the sector and which provides incentives for
outperformance.
The policy in respect of Non-executive Directors’ fees is set out on page 56 in the Non-executive Directors’ remuneration section.
In setting executive remuneration the Committee not only takes account of employment market conditions, but seeks to ensure that
there are coherent pay and benefit structures across the Group which are consistent with the remuneration packages of the Executive
Directors and senior management. From summary reports on workforce remuneration and terms and conditions of employment by
the Executive Directors with regard to their respective business areas, the Committee has regard to the general levels of responsibility,
qualifications and experience required throughout the Group in setting salary and other benefits of the Executive Directors and senior
management. The Committee also ensures that the incentive structures do not raise environmental, social or governance (ESG) risks
by inadvertently motivating irresponsible behaviour. A number of individual performance objectives specifically relate to achieving
non-financial, including ESG, targets (as outlined on page 54).
The balance between maximum performance-related remuneration receivable and direct remuneration (i.e. excluding pensions,
car benefit and health cover) is the same as last year with one-third direct and two-thirds performance-related. This is expected to
continue for the foreseeable future. The Company also has a Shareholding Guideline which applies to Executive Directors and Senior
Management. It is structured to demonstrate their commitment to the future success of the Group. Executive Directors are expected
to build up their shareholding over a five-year period to a value which is at least equivalent to their basic annual salary.
The following is a detailed summary of the elements of remuneration:
(i) Basic salary and benefits – these are set out on page 57 for each Executive Director and are not related to performance. The
Committee reviews salaries annually taking account of market data available from independent remuneration consultants. Last year
the general increase was 4.0%. When reviewing base salaries the Committee takes account of the performance of the individual
Executive Directors which the Committee assesses with the advice of Ken Harvey, Chairman of the Company. Other benefits,
not mentioned below, include four times salary life assurance cover; a fully expensed car or a cash alternative; and health cover.
(ii) Performance-related bonus – annual performance related bonuses are awarded in accordance with the Group’s Annual Incentive
Bonus Plan (the Bonus Plan) and are based on the achievement by the Executive Directors of overall corporate and individual
objectives set by the Committee. The maximum bonus achievable under the Bonus Plan for Executive Directors for 2011/12 was
100% of basic salary. To achieve the maximum percentage bonus allocated in respect of the corporate targets of earnings per
share and profit before tax it is necessary for the Company to achieve a specified level of superior outperformance. Half of any
bonus awarded is in the form of Ordinary shares in the Company which must usually be held for a period of three years before
release (Deferred Bonus Shares). During this period the Directors, in respect of the Deferred Bonus Shares, are entitled to receive
any dividends declared by the Company. No additional performance conditions applicable to the release of the Deferred Bonus
Shares, apart from maintaining continuous service with the Company, are considered appropriate by the Committee in view of the
stretching performance conditions applicable to achieve the initial award of the Deferred Bonus Shares. The Committee, in setting the
performance objectives for Executive Directors, takes account of corporate performance on environmental, social and governance
(ESG) matters. Objectives set embrace appropriate ESG parameters which are important to the success of the Group and which
seek to ensure that the Group meets a number of its ESG targets as set out in the Group Sustainability report on pages 34 to 39 of
the Business review. The Committee in setting such objectives and in determining its remuneration policy overall ensures that the
relevant incentives to Directors and senior management aligns their interests with shareholders and raise no ESG risks by inadvertently
motivating irresponsible behaviour.
Pennon Group Plc Annual Report and Accounts 2012 53
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Governance Directors’ remuneration report
continued
The Bonus Plan is also operated in conjunction with the Company’s Executive Share Option Scheme (ESOS) on the basis that the
aggregate pre-tax value of the awards made under both the Bonus Plan and the ESOS would be the same as they would have been
if the Bonus Plan had been operated alone, which was the position prior to 2009/10. This is achieved by providing for Deferred Bonus
Shares awarded to be forfeited by the Directors up to the same value as that of any gain made in respect of options exercised by
the Directors pursuant to the ESOS at the end of the three-year restricted period. Only the HMRC approved part of the ESOS was
operated in 2009/10 which enabled options over Ordinary shares in the Company to be granted to Directors to the value of £30,000
at the then prevailing price. No further options will be granted to the Executive Directors pursuant to the Bonus Plan until the existing
options either are exercised or lapse at the end of the three-year restricted period in September this year. Details of the options are set
out in the table in paragraph (d) on page 60.
Set out below is a summary of the performance targets determined by the Committee for each Executive Director for 2012/13. These
are similar to the targets applied for 2011/12.
Colin Drummond – A bonus of up to 40% for outperformance of Group earnings per share against budget; up to 40% calculated by
reference to outperformance of the profit before tax and net debt budgets of Viridor; and up to 20% for personal objectives relating to
key business targets for Viridor.
David Dupont – A bonus of up to 40% for outperformance of Group earnings per share against budget; up to 40% for
outperformance against budget relating to net debt and net interest of the Group and profit before tax of South West Water and
Viridor; and up to 20% for personal objectives relating to Group financing and other Group initiatives.
Chris Loughlin – A bonus of up to 40% for outperformance of Group earnings per share against budget; up to 20% for personal
objectives relating to implementing South West Water’s new strategies and projects and meeting compliance targets; and up to
40% calculated by reference to the average bonus earned by the other Executive Directors of South West Water (which relate
to outperformance against the operating costs, profit before tax, capital expenditure and net debt budgets of the company; the
position the company achieves in the ‘Service Incentive Mechanism’ of water and sewerage companies established by Ofwat; the
achievement of a range of service standards set for the company by Ofwat; and personal objectives relating to key initiatives, projects
and compliance targets for South West Water).
The achievements of the Executive Directors against their individual performance objectives are assessed by the Committee following
the financial year-end when the audited results of the Company and performance against the parameters set are known. This enables
the Committee to apply largely objective criteria in determining the level of bonus (if any) which should be awarded, with the advice of
the Chairman of the Company, Ken Harvey.
(iii) Long-term incentive plan – A Performance and Co-investment Plan (PCP) was operated by the Company during the year for
Executive Directors and senior management.
The purpose of the PCP is to award shares to participants subject to the achievement of stretching performance conditions measured
over three years. Awards under the PCP, in the form of a conditional right over Ordinary shares in the Company, were made by the
Committee in July 2011 and, for Executive Directors, the award was over shares worth 100% of basic salary. In accordance with its
discretion pursuant to the rules of the PCP, the Committee made the vesting of the awards also subject to the fulfilment of a co-
investment condition whereby Executive Directors were required to invest and hold shares in the Company equal to 20% of the value
of their award over the Restricted Period (being a period of three years from the date of the award). The percentage requirement for
senior management was suitably scaled back. The number of shares subject to each award in the event of vesting will be increased
by such number of shares as could have been acquired by reinvesting the dividends which would otherwise have been received on
those shares prior to vesting or exercise.
The PCP awards made in July 2011 will vest based on the Company’s total shareholder return (TSR) performance over the Restricted
Period against two different comparator groups as set out below. This is the same performance criteria that was applied to the PCP
awards made in July 2010 and July 2009. TSR measures the value created for shareholders through increases in share price and
the payment of dividends and was applied by the Committee because, based upon advice received from remuneration consultants,
Deloitte LLP, it believes that this is an appropriate measure to align the interests of the Executive Directors with those of shareholders:
54 Pennon Group Plc Annual Report and Accounts 2012
• up to 50% of an award will vest according to the Company’s TSR performance measured against an index made up of the following
six listed water and waste comparator companies:
Northumbrian Water Group*
Séché Environnement
Severn Trent
Shanks Group
Suez Environnement
United Utilities
These companies are regarded as the Company’s key listed comparators.
* As Northumbrian Water Group was delisted from the London Stock Exchange in October 2011 the Committee in respect of the July 2011 award
at the end of the three-year Restricted Period will have discretion to include this company in the calculation of the index up to the date of delisting
(or other earlier date at its discretion) and exclude the company from the date onwards or adopt an alternative approach.
Water/Waste index
Above the index + 15%
Equal to the index
Straight-line vesting in between above positions
Below the index
Vesting
50%
15%
0%
• up to 50% of an award will vest according to the Company’s ranked TSR performance against the constituents of the FTSE 250
index (excluding investment trusts). This is the FTSE Index to which the Company belonged at the time of the award.
FTSE 250 Index (excluding investment trusts)
At or above the 75th percentile
Above 50th percentile
Straight-line vesting in between above positions
At or below the 50th percentile
Vesting
50%
15%
0%
In addition to the above TSR conditions, before any award is capable of vesting, there is an ‘Underpin’ condition whereby the
Committee needs to be satisfied that the underlying operational and economic performance of the Company is at a satisfactory level.
This evaluation includes consideration of ESG factors and safety performance, as well as financial performance. Whilst the Committee
intends currently to apply similar performance conditions including the ‘Underpin’ to any future PCP awards, they are reviewed on an
annual basis to ensure that the conditions continue to be appropriate and suitably stretching for future awards.
For the PCP awards made in August 2008 the same performance measures were used as set out above except that Suez
Environnement was listed part-way through the performance period on 21 July 2008 and was included In the calculation of the index
value from that date onwards. The calculation of TSR performance over the three-year performance period (being 1 April 2008 to
1 April 2011) for these PCP awards was undertaken by Deloitte LLP for the Committee. The table below summarises the calculation:
Comparator group
Waste/Water index
FTSE 250 (excluding investment trusts)
Total vesting
Portion of
award
50%
50%
Rank
17.2% outperformance
against index
103rd out of 186
Percentile rank
Final vesting level
–
44.9%
50.0%
0.0%
50.0%
The Committee was satisfied that the ‘Underpin’ condition referred to above had been met and therefore approved the vesting of
50.0% of the award as calculated by Deloitte (together with shares equivalent to the value of dividends declared during the Restricted
Period on such shares) with the remaining 50.0% lapsing.
(iv) Other share schemes – Executive Directors are entitled to participate in the Company’s Sharesave Scheme and Share Incentive
Plan. Both are all-employee plans to which performance conditions do not apply.
(v) Service contracts – In accordance with Company policy, all Executive Directors have service contracts subject to one year’s notice.
David Dupont’s and Chris Loughlin’s service contracts are due to expire when they reach their normal retirement age of 60. However it
is expected that they will be extended by agreement between each Director and the Company. Colin Drummond reached his normal
retirement date on 22 February 2011 and has continued in employment with the Company in the same position as Chief Executive,
Viridor, and as a Director of the Pennon Group Board. His service contract with the Company continues subject to one year’s notice.
No provision is made for termination payments under the service contracts. In the event of an early termination of a Director’s service
contract, the Committee’s policy is to ensure that any compensation payable (whether share-based or cash) reflects the Director’s
performance and the circumstances of the termination. The dates of the contracts are:
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David Dupont
Chris Loughlin
5 March 1992
2 January 2003
16 May 2006
Pennon Group Plc Annual Report and Accounts 2012 55
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Governance Directors’ remuneration report
continued
Total shareholder return (TSR)
TSR
150
120
90
60
30
2007
2008
2009
2010
2011
2012
Pennon
FTSE 250
Calendar year
The graph above shows the value, over the five-year period ending on 31 March 2012, of £100 invested in Pennon Group on 31 March
2007 compared with the value of £100 invested in the FTSE 250 Index. The other points plotted are the values at intervening financial
year-ends. This Index is considered appropriate as it is a broad equity market index of which the Company has been a constituent over
most of the period covered. The graph above has been produced in accordance with regulations made pursuant to Section 421 of the
Companies Act 2006.
(vi) Provision for pensions – During the year David Dupont participated in the Pennon Group Pension Scheme and the Pennon Group
Executive Pension Scheme until 3 March 2012 when he decided to take his benefits early. These are funded defined benefit schemes
which, dependent on length of service at normal retirement date, could amount to two-thirds of final pensionable pay up to an
Earnings Cap which ceased to apply in the Executive Scheme from 6 April 2006.
David Dupont had been provided with additional pension benefits under an unapproved funded Supplementary Pension Scheme of
the Company in order to bring his pension benefits up to a level which would have been provided under the other schemes as if the
Earnings Cap had not applied. With effect from 6 April 2006 the statutory Earnings Cap no longer applied to pension schemes as part
of the simplification of taxation of pensions legislation. The Committee accordingly decided to provide future service pension benefits
above the Earnings Cap level from the Pennon Group Executive Pension Scheme to Directors who were members of that Scheme.
The Supplementary Pension Scheme was therefore closed and the accrued benefits were paid out to its members in April 2006.
The pensionable pay for David Dupont consisted of the highest basic salary in any consecutive twelve-month period of service within
five years of retirement. Bonuses are not included in pensionable pay.
Colin Drummond and Chris Loughlin receive an annual payment (payable by monthly instalments) equivalent to 30% of each of their
annual basic salaries in lieu of the provision of pension benefits. David Dupont from 3 March 2012 is also entitled to receive a similar
benefit but, with the agreement of the Company, has had his pension accrued benefit augmented by the sum of £94,062 paid for by
the Employer which will be deducted from the annual payment to be paid in lieu of pension benefit.
In determining remuneration arrangements for Executive Directors, the Committee gives full consideration to their impact on the
pension schemes’ funds and costs of providing individual pension arrangements or payments in lieu of pension provision.
Non-executive Directors and the Chairman
Non-executive Directors’ remuneration (excluding that of the Chairman, Ken Harvey) consisting of fees only as set out below, is
determined by the Board of Directors, including the Chairman, but in the absence of the other Non-executive Directors. It is usually
reviewed each year to take account of market changes in Non-executive Directors’ fees. In reviewing the fees, the Board takes into
account market information on Non-executive Directors’ fees. The fees were reviewed last year and increased by between 4.5% and
4.76%. The base Non-executive Director fee in the year was £40,000 per annum. The Audit, Remuneration and Corporate Responsibility
Committee chairs were paid fees of £10,000, £7,000 and £7,000 per annum respectively and members of these committees received
£4,000 each. For this and subsequent years the policy expected to be applied in respect of Non-executive Director fees will be to set fees
around the median level compared with the market, which the Board believes is appropriate to attract and retain suitably experienced
Non-executive Directors.
56 Pennon Group Plc Annual Report and Accounts 2012
The Chairman’s remuneration is set by the Remuneration Committee. The Chairman’s fee was reviewed last year and increased by 4.4%
by the Committee.
The policy of the Committee to be applied to the Chairman’s fee for this and in subsequent years is the same as that for the Non-
executive Directors as set out above. In addition to a fee the Chairman receives a fully-expensed car benefit and health cover. No other
benefits or remuneration are received by the Chairman.
The Non-executive Directors (excluding the Chairman) have contracts for services setting out their terms and conditions of appointment
which are subject to the Articles of Association of the Company and which may be extended by agreement between the Company and
the Non-executive Directors. No provision is made for any termination payment under these contracts.
The Chairman has a contract for services dated 1 April 2005 which is subject to 12 months’ notice to provide the Company with
reasonable security with regard to his ongoing service. No provision is made for any termination payments under this contract.
The contracts for services of the Chairman and the Non-executive Directors reflect corporate governance best practice and,
together with the Executive Directors’ service contracts, are available for inspection at the Company’s registered office during
normal business hours.
The dates of the Non-executive Directors’ contracts are:
Director
Date of contract
Expiry date of contract
Martin Angle
Gerard Connell
Dinah Nichols
28 November 2008
30 September 2003
10 June 2003
30 November 2014
31 July 2014
25 July 2013
The above contracts do not contain any notice periods.
The information set out below and on the remaining pages of this Remuneration Report (pages 58 to 60) has been audited by the
Group’s independent auditors, PricewaterhouseCoopers LLP.
Emoluments of Directors
The emoluments of individual Directors holding office during 2011/12 were:
Director
Chairman:
Ken Harvey
Executive Directors:
Colin Drummond
David Dupont
Chris Loughlin
Non-executive Directors:
Martin Angle
Gerard Connell
Dinah Nichols
Total
Salary/fees
£000
Performance
related bonus
payable1
£000
Other
emoluments2
£000
Payment in
lieu of
pension3
£000
Total 2012
Year to
31 March
£000
Total 2011
Year to
31 March
£000
240
359
359
359
55
58
55
1,485
–
97
140
156
–
–
–
393
23
24
25
24
–
–
–
96
–
108
94*
108
–
–
–
310
263
588
618
647
55
58
55
2,284
253
546
531
632
52
55
52
2,121
1 In addition to the performance-related cash bonus, Executive Directors are due to receive a conditional award of shares as referred to in a note to (c)
‘Annual Incentive Bonus Plan – Deferred Bonus Shares (long-term incentive element)’ on page 59.
2 Other emoluments are car benefit and health cover.
3 In lieu of any pension provision by the Company, Colin Drummond, David Dupont (from 3 March 2012) and Chris Loughlin received cash payments
equivalent to 30% of each of their annual basic salaries. * David Dupont’s cash payment of £94,062 represents in part a pre-payment as set out in ‘(vi)
Provision for pensions’ on page 56 which has augmented his pension entitlement and is included in the pension benefit figures set out below in the
Executive Directors’ pensions table.
No expense allowances chargeable to tax or termination or compensation payments were made during the year.
Executive Directors’ pensions
Defined benefit pensions accrued and payable on retirement for Executive Directors holding office during 2011/12 were:
G
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n
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n
c
e
Decrease in
accrued
pension
during
2011/12
(net of
inflation)
£000
a
(3)
(19)
Increase/
decrease in
accrued
pension
during
2011/12
£000
b
3
(11)
Accrued
pension at
31 March
2012
£000
c
124
134
Transfer
value
at
31 March
2012
£000
d
3,379
3,918
Transfer
value
at
31 March
2011
£000
e
2,710
3,150
Increase in
transfer
value
(net of
Directors’
con-
tributions)
£000
f
670
739
Decrease in
transfer
value
of Column a
(net of
Directors’
con-
tributions)
£000
g
(92)
(573)
Director
Colin Drummond
David Dupont
Pennon Group Plc Annual Report and Accounts 2012 57
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Governance Directors’ remuneration report
continued
The headings a) to g) above are as follows:
a) increase/decrease in accrued pension during 2011/12 (net of inflation)
b) increase/decrease in accrued pension during 2011/12
c) accrued pension at 31 March 2012 payable at normal retirement age
d) transfer value of the accrued pension in c) as at 31 March 2012
e) transfer value of the accrued pension at the end of the previous financial year on 31 March 2011
f) increase/decrease in transfer value during the year (net of Directors’ contributions)
g) increase/decrease in transfer value of column a) (net of Directors’ contributions).
Colin Drummond was a pensioner member of the Pennon Group’s pension schemes during the year. As such no further benefits were
accrued and no employee or employer contributions were paid (other than the employer’s deficit reduction contributions). The accrued
pension at 31 March 2012 (column c) therefore shows the actual pension in payment at 31 March 2012. The increase in Colin’s accrued
pension over the year (column b) is solely as a result of indexation of his pension as set out in the schemes’ rules.
The accrued pension at 31 March 2012 (column c) for David Dupont is lower than the pension amount quoted in the 31 March 2011
accounts as David decided to draw his pension from the Pennon Group’s pension schemes early from 3 March 2012. On taking his
benefits David made a tax payment of £287,880 which was deducted from his accrued benefit. The accrued pension figure at 31 March
2012 (column c) therefore reflects the residual pension in payment at that date.
The increase in transfer value over the year (column f) is mainly as a result of the large fall in gilt yields between 31 March 2011 and
31 March 2012.
Directors’ share interests
(a) Shareholdings
The number of Ordinary shares of the Company in which Directors held beneficial interests at 31 March 2012 and 31 March 2011 were:
Director
Martin Angle
Gerard Connell
Colin Drummond
David Dupont
Ken Harvey
Chris Loughlin
Dinah Nichols
2012 Ordinary shares
(40.7p each)
2011 Ordinary shares
(40.7p each)
–
4,000
288,163
262,671
26,209
97,745
4,549
–
4,000
263,225
237,945
18,209
58,534
4,549
Since 31 March 2012 1,991 additional Ordinary shares (40.7p each) in the Company have been acquired by Chris Loughlin as a result of
participation in the Company’s Scrip Dividend Alternative and the Company’s Share Incentive Plan and 212 additional Ordinary shares
(40.7p each) in the Company have been acquired by David Dupont as a result of dividend reinvestment in an ISA. There have been no
other changes in the beneficial interests or the non-beneficial interests of the Directors in the Ordinary shares of the Company between
1 April 2012 and 8 June 2012.
58 Pennon Group Plc Annual Report and Accounts 2012
b) Performance and Co-investment Plan (long-term incentive plan)
In addition to the above beneficial interests, the following Directors have or had a contingent interest in the number of Ordinary shares
(40.7p each) of the Company shown below, representing the maximum number of shares to which they would become entitled under
the plan should the relevant criteria be met in full:
Director and
date of award
Colin Drummond
10/7/08
1/7/09
2/7/10
1/7/11
David Dupont
10/7/08
1/7/09
2/7/10
1/7/11
Chris Loughlin
10/7/08
1/7/09
2/7/10
1/7/11
Conditional
awards
held at
1 April 2011
Conditional
awards
made in
year
Market
price upon
award in
year
Vesting in
year
Value of
shares upon
vesting
(before tax)
£000
Conditional
awards
held at
31 March 2012
Date of end
of period for
qualifying
conditions to
be fulfilled
51,764
67,831
63,186
–
51,764
67,831
63,186
–
49,411
64,748
63,186
–
–
–
–
51,432
–
–
–
51,432
–
–
–
51,432
637.50p
486.50p
546.00p
698.00p
637.50p
486.50p
546.00p
698.00p
637.50p
486.50p
546.00p
698.00p
29,118*
–
–
–
29,118*
–
–
–
27,795*
–
–
–
199
–
–
–
199
–
–
–
190
–
–
–
–
67,831
63,186
51,432
–
67,831
63,186
51,432
–
64,748
63,186
51,432
9/7/11
30/6/12
1/7/13
1/7/14
9/7/11
30/6/12
1/7/13
1/7/14
9/7/11
30/6/12
1/7/13
1/7/14
* 50.0% of the 10 July 2008 award shares vested on 10 July 2011 as explained in the section (iii) ‘Long-term incentive plan’ on page 54 of this report at
a market price of £6.85 per share. The total number of shares that vested included additional shares equivalent in value to such number of shares as
could have been acquired by reinvesting the dividends which would otherwise have been received on the vested shares during the Restricted Period
of three years. The balance of the award lapsed.
(c) Annual Incentive Bonus Plan – Deferred Bonus Shares (long-term incentive element)
The following Directors have a contingent interest in the number of Ordinary shares (40.7p each) of the Company shown below,
representing the total number of shares to which they would become entitled under the deferred bonus element of the Annual Incentive
Bonus Plan (the Bonus Plan) at the end of the relevant qualifying period:
Director and
date of award
Colin Drummond
27/6/08
29/9/09*
27/7/10
27/7/11
David Dupont
27/6/08
29/9/09*
27/2/10
27/7/10
27/7/11
Chris Loughlin
27/6/08
29/9/09*
27/2/10
27/7/10
27/7/11
Conditional
awards
held at
1 April 2011
Conditional
awards
made in
year
Market
price upon
award in
year
Vesting in
year
Value of
shares upon
vesting
(before tax)
£000
Conditional
awards
held at
31 March 2012
Date of end
of period for
qualifying
conditions to
be fulfilled
22,838
16,730
27,091
–
21,145
17,880
755
25,938
–
18,806
19,562
1,261
25,133
–
–
–
–
23,079
–
–
–
–
22,365
–
–
–
–
22,141
620.00p
473.40p
572.50p
725.00p
620.00p
473.40p
524.50p
572.50p
725.00p
620.00p
473.40p
524.50p
572.50p
725.00p
22,838*
–
–
–
21,145*
–
–
–
–
18,806*
–
–
–
–
151
–
–
–
139
–
–
–
–
124
–
–
–
–
–
16,730
27,091
23,079
–
17,880
755
25,938
22,365
–
19,562
1,261
25,133
22,141
26/6/11
28/9/12
26/7/13
26/7/14
26/6/11
28/9/12
26/2/13
26/7/13
26/7/14
26/6/11
28/9/12
26/2/13
26/7/13
26/7/14
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* In addition to the awards made on 29 September 2009 the Directors also received options pursuant to the Company’s Executive Share Option
Scheme (the ESOS), details of which are set out in the table of paragraph (d) on page 60. These awards were made in conjunction with the operation
of the Bonus Plan. In the event that the ESOS options are exercised by the Directors, shares from the Bonus Plan equivalent in value to the gain on
the ESOS options will be forfeited. Further details of the operation of the ESOS in relation to the Bonus Plan are set out in paragraph (ii) ‘Performance-
related bonus’ on page 53.
During the year the Directors received dividends on the above shares in accordance with the conditions of the Bonus Plan as follows:
Colin Drummond £16,473; David Dupont £16,409; Chris Loughlin £16,536.
Chris Loughlin also received Ordinary shares (40.7p each) in the Company as a result of participation in the Company’s Scrip Dividend
Alternative and these shares are included in the figure given for the additional Ordinary shares (40.7p each) in the Company that he
acquired since 31 March 2012 given on page 58.
A further conditional award of shares will be made in 2012/13 to the value of the amount of the performance-related cash bonus shown
in the Emoluments of Directors table on page 57. Paragraph (ii) ‘Performance-related bonus’ on page 53 sets out the provisions relating
to the conditional award of shares pursuant to the Bonus Plan.
Pennon Group Plc Annual Report and Accounts 2012 59
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Governance Directors’ remuneration report
continued
(d) Executive Share Option Scheme
The following Directors have a contingent interest in the number of options in the Ordinary shares (40.7p each) of the Company pursuant
to the Company’s Executive Share Option Scheme shown below. Further details relating to the operation of the Scheme are set out in
paragraph (ii) ‘Performance-related bonus’ on page 54.
Director and
date of grant
Colin Drummond
29/9/09
David Dupont
29/9/09
Chris Loughlin
29/9/09
Options
held at
1 April 2011
Granted in
year
Exercised
in year
6,337
6,337
6,337
–
–
–
–
–
–
Exercise
price per
share
473.40p
473.40p
473.40p
Market
price of
each
share on
exercising
Market
value of
each
share at
31 March
2012
Options
held at
31 March
2012
Maturity
date
–
–
–
711.50p
6,337
28/9/12
711.50p
6,337
28/9/12
711.50p
6,337
28/9/12
(e) Sharesave Scheme
Details of options to subscribe for Ordinary shares (40.7p each) of the Company under the all-employee Sharesave Scheme were:
Director and
date of grant
Colin Drummond
6/7/09
David Dupont
3/7/07
Chris Loughlin
3/7/07
Options
held at
1 April 2011
Granted
in year
Exercised
in year
2,351
3,136
3,136
–
–
–
–
–
–
Exercise
price per
share
386.00p
522.00p
522.00p
Market
price of
each
share on
exercising
Market
value
of each
share at
31 March
2012
Options
held at
31 March
2012
Exercise period/
maturity date
–
–
–
711.50p
2,351
1/9/12 – 28/2/13
711.50p
3,136
1/9/12 – 28/2/13
711.50p
3,136
1/9/12 – 28/2/13
(f) Share price
The market price of the Ordinary shares (40.7p each) of the Company at 31 March 2012 was 711.50p (2011 625.00p) and the range
during the year was 620.00p to 737.50p (2010/11 482.90p to 650.00p).
Basis of preparation
The Remuneration report has been prepared in accordance with the Companies Act 2006 and The Large and Medium-sized
Companies and Groups (Accounts and Reports) Regulations 2008 (the Regulations) and meets the relevant requirements of the FSA
Listing Rules. In accordance with the Regulations, the following sections of the Remuneration report are subject to audit: Emoluments of
Directors; Executive Directors’ Pensions; and Directors’ Share Interests (including long-term incentive plan and bonus plan awards and
their vesting criteria and executive share options and sharesave) for which the independent auditors’ opinion thereon is expressed on
page 61. The other sections are not subject to audit nor are the pages referred to from within the audited sections.
The Remuneration report was approved by the Board of Directors and signed on its behalf by
Martin Angle
Chairman of the Remuneration Committee
18 June 2012
60 Pennon Group Plc Annual Report and Accounts 2012
Governance
Independent auditors’ report
Independent auditors’ report to the members of Pennon Group Plc
We have audited the financial statements of Pennon Group Plc for the year ended 31 March 2012 which comprise Consolidated income
statement, the Consolidated statement of comprehensive income, the Group and Company Balance sheets, the Group and Company
Statements of changes in equity, the Group and Company Cash flow statements and the related notes. The financial reporting framework
that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the
European Union and, as regards the Company financial statements, as applied in accordance with the provisions of the Companies
Act 2006.
Respective responsibilities of directors and auditors
As explained more fully in the Directors’ Responsibilities Statement set out on page 51, the directors are responsible for the preparation
of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion
on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards
require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Chapter 3
of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for
any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed
by our prior consent in writing.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable
assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an
assessment of: whether the accounting policies are appropriate to the Group’s and the Company’s circumstances and have been
consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the
overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report
and accounts to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material
misstatements or inconsistencies we consider the implications for our report.
Opinion on financial statements
In our opinion:
• the financial statements give a true and fair view of the state of the Group’s and of the Company’s affairs as at 31 March 2012 and
of the Group’s profit and Group’s and Company’s cash flows for the year then ended;
• the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union;
• the Company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and
as applied in accordance with the provisions of the Companies Act 2006; and
• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the
Group financial statements, Article 4 of the lAS Regulation.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion:
• the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006;
• the information given in the Directors’ report for the financial year for which the financial statements are prepared is consistent with the
financial statements; and
• the information given in the corporate governance statement set out on pages 42 to 43 and 46 to 51 with respect to internal control
and risk management systems and about share capital structures is consistent with the financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following:
Under the Companies Act 2006 we are required to report to you if, in our opinion:
• adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been received from
branches not visited by us; or
• the Company financial statements and the part of the Directors’ remuneration report to be audited are not in agreement with the
accounting records and returns; or
• certain disclosures of directors’ remuneration specified by law are not made; or
• we have not received all the information and explanations we require for our audit; or
• a corporate governance statement has not been prepared by the Company.
Under the Listing Rules we are required to review:
• the Directors’ statement, set out on page 26, in relation to going concern;
• the parts of the corporate governance statement relating to the Company’s compliance with the nine provisions of the UK Corporate
Governance Code specified for our review; and
• certain elements of the report to shareholders by the Board on directors’ remuneration.
David Charles (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors
Bristol
18 June 2012
Pennon Group Plc Annual Report and Accounts 2012 61
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Financial statements
Consolidated income statement
For the year ended 31 March 2012
Revenue
Operating costs
Manpower costs
Raw materials and consumables used
Other operating expenses
Depreciation and amortisation
Operating profit
Finance income
Finance costs
Net finance costs
Share of post-tax profit from joint ventures
Profit before tax
Taxation
Profit for the year
Profit attributable to equity shareholders
Earnings per share (pence per share)
– Basic
– Diluted
The notes on pages 67 to 111 form part of these financial statements.
2012
£m
1,233.1
2011
£m
1,159.2
Notes
5
6
(155.4)
(133.9)
(528.0)
(147.0)
268.8
119.3
(191.6)
(72.3)
4.0
200.5
(28.1)
172.4
172.4
(148.3)
(121.6)
(486.7)
(141.7)
260.9
45.1
(121.8)
(76.7)
4.3
188.5
(16.9)
171.6
171.6
48.1
47.8
48.4
48.1
5
7
7
7
19
5
8
10
62 Pennon Group Plc Annual Report and Accounts 2012
Financial statements
Consolidated statement of comprehensive income
For the year ended 31 March 2012
Profit for the year
Other comprehensive loss
Actuarial (losses)/gains on defined benefit pension schemes
Net fair value losses on cash flow hedges
Share of other comprehensive loss from joint ventures
Deferred tax credit/(charge) on items taken directly to or transferred from equity
Other comprehensive loss for the year net of tax
Total comprehensive income for the year
Total comprehensive income attributable to equity shareholders
The notes on pages 67 to 111 form part of these financial statements.
Notes
28
19
8, 29
34
2012
£m
172.4
(51.7)
(24.7)
(5.4)
16.0
(65.8)
106.6
106.6
2011
£m
171.6
2.4
(0.1)
(3.0)
(3.3)
(4.0)
167.6
167.6
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Pennon Group Plc Annual Report and Accounts 2012 63
Financial statements
Balance sheets
At 31 March 2012
Assets
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Other non-current assets
Financial assets at fair value through profit
Deferred tax assets
Derivative financial instruments
Investments in subsidiary undertakings
Investments in joint ventures
Current assets
Inventories
Trade and other receivables
Financial assets at fair value through profit
Derivative financial instruments
Current tax recoverable
Cash and cash deposits
Liabilities
Current liabilities
Borrowings
Derivative financial instruments
Trade and other payables
Current tax liabilities
Provisions
Net current assets/(liabilities)
Non-current liabilities
Borrowings
Other non-current liabilities
Financial liabilities at fair value through profit
Derivative financial instruments
Retirement benefit obligations
Deferred tax liabilities
Provisions
Net assets
Shareholders’ equity
Share capital
Share premium account
Capital redemption reserve
Retained earnings and other reserves
Total shareholders’ equity
Group
Company
Notes
2012
£m
14
15
16
18
29
22
19
19
20
21
22
25
23
26
22
24
25
30
26
27
22
28
29
30
31
32
33
34
327.1
17.5
3,082.8
138.4
–
–
21.9
–
0.1
3,587.8
9.0
238.4
0.5
9.7
–
425.3
682.9
(325.5)
(16.6)
(242.5)
(59.7)
(25.6)
(669.9)
13.0
(2,204.4)
(76.9)
(16.7)
(32.0)
(98.6)
(273.8)
(76.3)
(2,778.7)
822.1
148.2
8.0
144.2
521.7
822.1
2011
(Restated
note 37)
£m
300.4
4.4
2,922.7
116.0
2.6
–
–
–
1.5
3,347.6
7.2
219.0
0.9
6.9
–
555.5
789.5
(99.2)
(5.3)
(253.5)
(79.5)
(16.3)
(453.8)
335.7
(2,390.1)
(30.4)
–
(16.3)
(85.8)
(292.5)
(88.7)
(2,903.8)
779.5
147.0
9.2
144.2
479.1
779.5
2012
£m
2011
£m
–
–
0.2
352.0
–
4.6
–
1,172.1
–
1,528.9
–
91.7
–
8.9
2.6
158.9
262.1
(534.4)
–
(10.8)
–
–
(545.2)
(283.1)
(356.8)
(8.7)
–
–
(7.8)
–
–
(373.3)
872.5
148.2
8.0
144.2
572.1
872.5
–
–
0.3
367.7
–
4.2
–
1,032.0
–
1,404.2
–
92.7
–
6.6
1.7
236.6
337.6
(316.1)
–
(11.1)
–
–
(327.2)
10.4
(572.9)
(8.7)
–
–
(6.8)
–
–
(588.4)
826.2
147.0
9.2
144.2
525.8
826.2
The notes on pages 67 to 111 form part of these financial statements.
The financial statements on pages 62 to 111 were approved by the Board of Directors and authorised for issue on 18 June 2012 and
were signed on its behalf by:
K G Harvey
Chairman
Pennon Group Plc
Registered Office: Peninsula House, Rydon Lane, Exeter, Devon, England EX2 7HR. Registered in England Number 2366640
64 Pennon Group Plc Annual Report and Accounts 2012
Financial statements
Statements of changes in equity
For the year ended 31 March 2012
Group
At 1 April 2010
Profit for the year
Other comprehensive loss for the year
Total comprehensive income for the year
Transactions with equity shareholders
Dividends paid
Adjustment for shares issued under
the Scrip Dividend Alternative
Adjustment in respect of share-based payments (net of tax)
Transfer from hedging reserve to property,
plant and equipment
Proceeds from treasury shares re-issued
Total transactions with equity shareholders
At 31 March 2011
Profit for the year
Other comprehensive loss for the year
Total comprehensive income for the year
Transactions with equity shareholders
Dividends paid
Adjustment for shares issued under
the Scrip Dividend Alternative
Adjustment in respect of share-based payments (net of tax)
Own shares acquired by the Pennon Employee Share Trust
in respect of share options granted
Proceeds from treasury shares re-issued
Total transactions with equity shareholders
At 31 March 2012
Company
At 1 April 2010
Profit for the year
Other comprehensive income for the year
Total comprehensive income for the year
Transactions with equity shareholders
Dividends paid
Adjustment for shares issued under
the Scrip Dividend Alternative
Adjustment in respect of share-based payments (net of tax)
Proceeds from treasury shares re-issued
Total transactions with equity shareholders
At 31 March 2011
Profit for the year
Other comprehensive loss for the year
Total comprehensive income for the year
Transactions with equity shareholders
Dividends paid
Adjustment for shares issued under
the Scrip Dividend Alternative
Adjustment in respect of share-based payments (net of tax)
Proceeds from treasury shares re-issued
Total transactions with equity shareholders
At 31 March 2012
Share
capital
(Note 31)
£m
145.3
–
–
–
–
1.7
–
–
–
1.7
147.0
–
–
–
–
1.2
–
–
–
1.2
148.2
Share
capital
(Note 31)
£m
145.3
–
–
–
–
1.7
–
–
1.7
147.0
–
–
–
–
1.2
–
–
1.2
148.2
The notes on pages 67 to 111 form part of these financial statements.
Share
premium
account
(Note 32)
£m
10.9
–
–
–
Capital
redemption
reserve
(Note 33)
£m
144.2
–
–
–
Retained
earnings and
other reserves
(Note 34)
£m
362.5
171.6
(4.0)
167.6
Total
equity
£m
662.9
171.6
(4.0)
167.6
–
(1.7)
–
–
–
(1.7)
9.2
–
–
–
–
(1.2)
–
–
–
–
–
–
–
144.2
–
–
–
–
–
–
–
–
(1.2)
8.0
Share
premium
account
(Note 32)
£m
10.9
–
–
–
–
–
–
144.2
Capital
redemption
reserve
(Note 33)
£m
144.2
–
–
–
(79.6)
(79.6)
22.8
3.9
0.3
1.6
(51.0)
479.1
172.4
(65.8)
106.6
22.8
3.9
0.3
1.6
(51.0)
779.5
172.4
(65.8)
106.6
(88.2)
(88.2)
19.1
3.5
(0.3)
1.9
(64.0)
521.7
Retained
earnings and
other reserves
(Note 34)
£m
487.4
90.1
2.7
92.8
19.1
3.5
(0.3)
1.9
(64.0)
822.1
Total
equity
£m
787.8
90.1
2.7
92.8
–
(1.7)
–
–
(1.7)
9.2
–
–
–
–
(1.2)
–
–
(1.2)
8.0
–
(79.6)
(79.6)
–
–
–
–
144.2
–
–
–
22.8
0.8
1.6
(54.4)
525.8
116.3
(3.6)
112.7
22.8
0.8
1.6
(54.4)
826.2
116.3
(3.6)
112.7
–
(88.2)
(88.2)
–
–
–
–
144.2
19.1
0.8
1.9
(66.4)
572.1
19.1
0.8
1.9
(66.4)
872.5
Pennon Group Plc Annual Report and Accounts 2012 65
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Financial statements
Cash flow statements
For the year ended 31 March 2012
Cash flows from operating activities
Cash generated/(outflow) from operations
Interest paid
Tax (paid)/received
Net cash generated/(outflow) from operating activities
Cash flows from investing activities
Interest received
Dividends received
Acquisition of subsidiary undertakings
(net of cash acquired)
Investments in subsidiary undertakings
Loans advanced to joint ventures
Loan repayments received from joint ventures
Purchase of property, plant and equipment
Proceeds from sale of property, plant and equipment
Net cash (used in)/received from investing activities
Cash flows from financing activities
Proceeds from treasury shares re-issued
Purchase of Ordinary shares by the Pennon
Employee Share Trust
Deposit of restricted funds (net)
Proceeds from new borrowing
Repayment of borrowings
Finance lease sale and lease back
Finance lease principal repayments
Dividends paid
Net cash (used in)/received from financing activities
Net (decrease)/increase in cash and cash
equivalents
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of the year
Notes
35
37
Group
2012
£m
324.7
(74.5)
(41.4)
208.8
13.2
–
(29.2)
–
(13.4)
3.6
(262.2)
4.6
(283.4)
2011
£m
376.2
(78.2)
(43.2)
254.8
14.4
–
(25.1)
–
(12.5)
3.5
(190.3)
4.7
(205.3)
Company
2012
£m
18.9
(22.7)
2.6
(1.2)
23.3
117.5
–
(140.1)
–
–
–
–
0.7
2011
£m
(44.2)
(22.0)
(0.3)
(66.5)
20.9
93.1
–
–
–
–
(0.2)
–
113.8
31
1.9
1.6
1.9
1.6
(0.3)
(0.1)
25.0
(71.0)
79.5
(14.0)
(69.1)
(48.1)
(122.7)
414.9
292.2
–
(30.8)
187.0
(104.6)
–
(20.5)
(56.8)
(24.1)
25.4
389.5
414.9
–
–
25.0
(35.0)
–
–
(69.1)
(77.2)
(77.7)
235.2
157.5
–
–
139.9
(70.0)
–
–
(56.8)
14.7
62.0
173.2
235.2
23
23
The notes on pages 67 to 111 form part of these financial statements.
66 Pennon Group Plc Annual Report and Accounts 2012
Financial statements
Notes to the financial statements
1. General information
Pennon Group Plc is a company registered in the United Kingdom under the Companies Act 2006. The address of the registered office
is given on page 64. Pennon Group’s business is operated through two main subsidiaries. South West Water Limited holds the water and
sewerage services appointments for Devon, Cornwall and parts of Dorset and Somerset. Viridor Limited’s business is recycling, renewable
energy and waste management.
2. Principal accounting policies
The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been
consistently applied to all the years presented.
(a) Basis of preparation
These financial statements have been prepared on the historical cost accounting basis (except for fair value items, principally acquisitions,
transfers of assets from customers and derivatives as described in accounting policy note (b), (w) and (n) respectively) and in accordance
with International Financial Reporting Standards (IFRS) and International Financial Reporting Standards Interpretations Committee
interpretations as adopted by the European Union, and with those parts of the Companies Act 2006 applicable to companies reporting
under IFRS. A summary of the principal accounting policies is set out below, together with an explanation where changes have been
made to previous policies on the adoption of new accounting standards and interpretations in the year.
The going concern basis has been adopted in preparing these financial statements as stated by the Directors on page 51.
New or revised standards or interpretations which were mandatory for the first time in the year beginning 1 April 2011 did not have
a material impact on the net assets or results of the Group.
At the date of approval of these financial statements IFRS 11 Joint Arrangements and IAS 19 (Revised) Employee Benefits were in issue,
but not yet effective. Other standards and interpretations in issue, but not yet effective, are not expected to have a material effect on the
Group’s net assets or results.
IFRS 11 is relevant to the Group, but it is not expected to have a material effect on the results or net assets, as the Group currently
consolidates joint ventures on an equity basis.
The Directors anticipate that the adoption of IAS 19 ‘Employee benefits’ revised, expected on 1 April 2013, will potentially have a material
impact, dependent upon market conditions, on the financial statements of the Group. The revised standard is expected to increase net
finance costs and operating costs. The extent of this impact is currently being assessed.
The preparation of financial statements in conformity with IFRS requires the use of estimates and assumptions which affect the reported
amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Although these estimates are based on management’s best assessment of the amounts, actual events or actions and
results may ultimately differ from those estimates.
(b) Basis of consolidation
The Group financial statements include the results of Pennon Group Plc and its subsidiaries, joint ventures and associate undertakings.
The results of subsidiaries, joint ventures and associate undertakings are included from the date of acquisition or incorporation, and
excluded from the date of disposal. The results of subsidiaries are consolidated where the Group has the power to control the financial
and operating policies of a subsidiary. The results of joint ventures and associate undertakings are accounted for on an equity basis.
Intra-group trading and loan balances and transactions are eliminated on consolidation.
The acquisition method of accounting is used to account for the purchase of subsidiaries. The excess of the value transferred to the seller
in return for control of the acquired business, together with the fair value of any previously held equity interest in that business over the
Group’s share of the fair value of the identifiable net assets, is recorded as goodwill.
(c) Revenue recognition
Revenue represents the fair value of consideration receivable, excluding value added tax, trade discounts and inter company sales,
in the ordinary course of business for goods and services provided.
Revenue is recognised once the services or goods have been provided to the customer.
Income from main water and waste water charges includes billed amounts for estimated usage and also an estimation of the amount
of unbilled charges at the year-end based upon a defined methodology reflecting historical consumption and current tariffs.
Income from electricity generated from waste management landfill gas production during the year includes an estimation of the amount
to be received under Renewables Obligation Certificates.
Accrued income from waste management contracts at the balance sheet date is recognised using management’s expectation of amounts
to be subsequently billed for services rendered to the client in accordance with the terms of the contract.
Income from recycling activities within waste management includes amounts based upon market prices for recyclate products and
industry schemes for waste electrical and electronic equipment (‘WEEE’ notes) and packaging volumes (‘PRNs’) processed.
Revenue from long-term service concession arrangements is recognised based on the fair value of work performed. Where an
arrangement includes more than one service, such as construction and operation of waste management facilities, revenue and profit
are recognised in proportion to a fair value assessment of the total contract value split across the services provided.
Pennon Group Plc Annual Report and Accounts 2012 67
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Financial statements Notes to the financial statements
continued
2. Principal accounting policies continued
(d) Landfill tax
Landfill tax is included within both revenue and operating costs.
(e) Segmental reporting
Each of the Group’s business segments provides services which are subject to risks and returns which are different from those of the
other business segments. The Group’s internal organisation and management structure and its system of internal financial reporting is
based primarily on business segments. The principal business segments comprise the regulated water and sewerage services undertaken
by South West Water Limited and the waste management business of Viridor Limited. Segmental revenue and results include transactions
between businesses. Inter-segmental transactions are eliminated on consolidation.
(f) Goodwill
Goodwill arising on consolidation from the acquisition of subsidiary and joint venture undertakings represents the excess of the purchase
consideration over the fair value of net assets acquired.
Goodwill is recognised as an asset and reviewed for impairment at least annually. Any impairment is recognised immediately in the income
statement and is not subsequently reversed. For the purpose of impairment testing, goodwill acquired in a business combination is
allocated to each of the cash generating units or group of cash generating units, that is expected to benefit from the synergies of the
combination. Each unit or group of units to which goodwill is allocated represents the lowest level within the entity at which the goodwill is
monitored for internal reporting purposes. Goodwill is monitored at the operating segment level. Further details are contained in accounting
policy (j).
When a subsidiary or joint venture undertaking is sold, the profit or loss on disposal is determined after including the attributable amount
of unamortised goodwill.
Goodwill arising on acquisitions before 1 April 2004 (the Group’s date of transition to IFRS) has been retained at the previous UK GAAP
amounts, subject to annual testing for impairment. Goodwill written-off to reserves under UK GAAP prior to 1998 was not reinstated on
transition to IFRS and will not be included in determining any subsequent profit or loss on disposal.
(g) Other intangible assets
Other intangible assets acquired in a business combination are capitalised at fair value at the date of acquisition. Following initial
recognition, finite life intangible assets are amortised on a straight-line basis over their estimated useful economic lives, with the expense
charged to the income statement through operating costs.
(h) Property, plant and equipment
i) Infrastructure assets (being water mains and sewers, impounding and pumped raw water storage reservoirs, dams, pipelines
and sea outfalls)
Infrastructure assets were included at fair value on transition to IFRS and subsequent additions are recorded at cost less accumulated
depreciation. Expenditure to increase capacity or enhance infrastructure assets is capitalised where it can be reliably measured and it is
probable that incremental future economic benefits will flow to the Group. The cost of day-to-day servicing of infrastructure components
is recognised in the income statement as it arises.
Infrastructure assets are depreciated evenly over their useful economic lives, and are principally:
Dams and impounding reservoirs
Water mains
Sewers
200 years
40 – 100 years
40 – 100 years
Assets in the course of construction are not depreciated until commissioned.
ii) Landfill sites
Landfill sites are included within land and buildings at cost less accumulated depreciation. Cost includes acquisition and development
expenses. The cost of a landfill site is depreciated to its residual value (which is linked to gas production at the site post-closure) over
its estimated operational life taking account of the usage of void space.
iii) Landfill restoration
Where the obligation to restore a landfill site is an integral part of its future economic benefits, a non-current asset within property, plant
and equipment is recognised. The asset recognised is depreciated based on the usage of void space.
iv) Other assets (including property, overground plant and equipment)
Other assets are included at cost less accumulated depreciation.
Freehold land is not depreciated. Other assets are depreciated evenly to their residual value over their estimated economic lives, and
are principally:
Land and buildings – Freehold buildings
Land and buildings – Leasehold buildings
Operational properties
Fixed plant
Vehicles, mobile plant and computers
30 – 60 years
Over their estimated economic lives or the finance lease period, whichever
is the shorter
40 – 80 years
20 – 40 years
3 – 10 years
68 Pennon Group Plc Annual Report and Accounts 2012
2. Principal accounting policies continued
(h) Property, plant and equipment continued
Assets in the course of construction are not depreciated until commissioned.
The cost of assets includes directly attributable labour and overhead costs which are incremental to the Group. Borrowing costs directly
attributable to the construction of a qualifying asset (an asset necessarily taking a substantial period of time to be prepared for its intended
use) are capitalised as part of the asset.
Asset lives and residual values are reviewed annually.
Gains and losses on disposal are determined by comparing sale proceeds with carrying amounts. These are included in the
income statement.
(i) Leased assets
Assets held under finance leases are included as property, plant and equipment at the lower of their fair value at commencement or
the present value of the minimum lease payments, and are depreciated over their estimated economic lives or the finance lease period,
whichever is the shorter. The corresponding liability is recorded as borrowings. The interest element of the rental costs is charged against
profits using the actuarial method over the period of the lease.
Rental costs arising under operating leases are charged against profits in the year they are incurred.
(j) Impairment of non-financial assets
Assets with an indefinite useful life are not subject to amortisation and are tested annually for impairment, or whenever events or changes
in circumstance indicate that the carrying amount may not be recoverable.
Assets subject to amortisation or depreciation are tested for impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable.
An impairment loss is recognised for the amount by which an asset’s carrying amount exceeds its recoverable amount. The recoverable
amount is the higher of an asset’s fair value, less costs to sell, and value in use. For the purposes of assessing impairment, assets are
grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Value in use represents the
present value of projected future cash flows expected to be derived from a cash-generating unit, discounted using a pre-tax discount
rate which reflects an assessment of the market cost of capital of the cash-generating unit.
Impairments are charged to the income statement in the year in which they arise.
(k) Investment in subsidiary undertakings
Investments in subsidiary undertakings are initially recorded at cost, being the fair value of the consideration paid. Subsequently,
investments are reviewed for impairment on an individual basis annually or if events or changes in circumstances indicate that the carrying
value may not be fully recoverable.
(l) Investment in joint ventures
Joint ventures are entities over which the Group exercises joint control. Investments in joint ventures are accounted for using the equity
method of accounting. Any excess of the cost of acquisition over the Group’s share of the fair values of the identifiable net assets of the
joint venture at the date of acquisition is recognised as goodwill and is included in the carrying value of the investment in the joint venture.
The carrying value of the Group’s investment is adjusted for the Group’s share of post-acquisition profits or losses recognised in the
income statement and statement of comprehensive income. Losses of a joint venture in excess of the Group’s interest are not recognised
unless the Group has a legal or constructive obligation to fund those losses.
(m) Cash and cash deposits
Cash and cash deposits comprise cash in hand and short-term deposits held at banks. Bank overdrafts are shown within current
borrowings.
(n) Derivatives and other financial instruments
The Group classifies its financial instruments in the following categories:
i) Loans and receivables
All loans and borrowings are initially recognised at fair value, net of transaction costs incurred. Following initial recognition interest-bearing
loans and borrowings are subsequently stated at amortised cost using the effective interest method.
Gains and losses are recognised in the income statement when the instruments are derecognised or impaired. Premia, discounts and
other costs and fees are recognised in the income statement through the amortisation process.
Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least
12 months after the balance sheet date.
The fair value of the liability component of a convertible bond is determined using the market interest rate for an equivalent non-convertible
bond. This amount is recorded as a liability on an amortised cost basis using the effective interest method until extinguished on conversion
or maturity of the bonds. The remainder of the proceeds are allocated to the conversion option. This is recognised in shareholders’ equity.
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Pennon Group Plc Annual Report and Accounts 2012 69
Financial statements Notes to the financial statements
continued
2. Principal accounting policies continued
(n) Derivatives and other financial instruments continued
ii) Trade receivables
Trade receivables do not carry any interest receivable and are recognised initially at fair value and subsequently at amortised cost using
the effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is
objective evidence that the Group will not be able to collect all amounts due in accordance with the original terms of the receivables.
iii) Trade payables
Trade payables are not interest-bearing and are recognised initially at fair value and subsequently measured at amortised cost using
the effective interest method.
iv) Derivative financial instruments and hedging activities
The Group uses derivative financial instruments, principally interest rate swaps and foreign exchange forward contracts, to hedge risks
associated with interest rate and exchange rate fluctuations. Derivative instruments are initially recognised at fair value on the date the
derivative contract is entered into and subsequently remeasured at fair value for the reported balance sheet.
The Group designates certain hedging derivatives as either:
– a hedge of a highly probable forecast transaction or change in the cash flows of a recognised asset or liability (a cash flow hedge) or
– a hedge of the exposure to change in the fair value of a recognised asset or liability (a fair value hedge).
The gain or loss on remeasurement is recognised to the income statement except for cash flow hedges which meet the conditions
for hedge accounting, when the portion of the gain or loss on the hedging instrument which is determined to be an effective hedge
is recognised directly in equity, and the ineffective portion in the income statement. The gains or losses deferred in equity in this way
are subsequently recognised in the income statement in the same period in which the hedged underlying transaction or firm commitment
is recognised in the income statement.
In order to qualify for hedge accounting the Group is required to document in advance the relationship between the item being hedged
and the hedging instrument. The Group is also required to document and demonstrate an assessment of the relationship between the
hedged item and the hedging instrument which shows that the hedge will be highly effective on an ongoing basis. This effectiveness
testing is reperformed at the end of each reporting period to ensure that the hedge remains highly effective.
Where a non-derivative transaction or series of transactions with the same counterparty has the aggregate effect in substance of a
derivative instrument, the transaction or series of transactions shall be recognised as a single derivative instrument at fair value with
associated movements recorded in the income statement.
The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the hedged item
is more than one year, and as a current asset or liability when the remaining maturity of the hedged item is less than one year.
Derivative financial instruments which do not qualify for hedge accounting are classified as a current asset or liability with any change
in fair value recognised immediately in the income statement.
v) Financial assets at fair value through profit
Financial assets at fair value through profit reflect the fair value movement of the hedged risk on a hedged item which has been designated
in a fair value hedging relationship. The fair values of these financial assets are initially recognised on the date the hedging relationship
is entered into and subsequently remeasured at each subsequent balance sheet date. The gain or loss on remeasurement for the period
is recognised in the income statement.
(o) Taxation including deferred tax
The tax charge for the year comprises current and deferred tax. Tax is recognised in the income statement, except to the extent that it
relates to items recognised in the statement of comprehensive income or directly in equity. In this case the tax is also recognised in the
statement of comprehensive income or directly in equity.
Current tax is calculated on the basis of tax laws enacted or substantively enacted at the balance sheet date. Management periodically
evaluates tax items subject to interpretation and establishes full provisions on individual tax items where in the judgement of management
the position is uncertain.
Deferred tax is provided in full on temporary differences between the carrying amount of assets and liabilities in the financial statements and
the tax base, except if it arises from initial recognition of an asset or liability in a transaction, other than a business combination, that at the
time of the transaction affects neither accounting nor taxable profit or loss. Deferred tax assets are recognised only to the extent that it is
probable that future taxable profits will be available against which the assets can be realised. Deferred tax is determined using the tax rates
enacted or substantively enacted at the balance sheet date, and expected to apply when the deferred tax liability is settled or the deferred
tax asset is realised.
70 Pennon Group Plc Annual Report and Accounts 2012
2. Principal accounting policies continued
(p) Provisions
Provisions are made where there is a present legal or constructive obligation as a result of a past event and it is probable that there will be
an outflow of economic benefits to settle this obligation and a reliable estimate of this amount can be made. Where the effect of the time
value of money is material the current amount of a provision is the present value of the expenditures expected to be required to settle
obligations. The unwinding of the discount to present value is included as notional interest within finance costs.
The Group’s policies on provisions for specific areas are:
i) Landfill restoration costs
Provisions for the cost of restoring landfill sites are made when the obligation arises. Where the obligation recognised as a provision gives
access to future economic benefits, an asset in property, plant and equipment is recognised. Provisions are otherwise charged against
profits based on the usage of void space.
ii) Environmental control and aftercare costs
Environmental control and aftercare costs are incurred during the operational life of each landfill site and for a considerable period
thereafter. Provision for all such costs is made over the operational life of the site and charged to the income statement on the basis
of the usage of void space at the site.
iii) Restructuring costs
Provisions for restructuring costs are recognised when a detailed formal plan for the restructuring has been communicated to
affected parties.
(q) Share capital and treasury shares
Ordinary shares are classified as equity.
Where the Company purchases the Company’s equity share capital (treasury shares) the consideration paid, including any directly
attributable costs, is deducted from equity until the shares are cancelled or re-issued. Where such shares are subsequently re-issued
any consideration received, net of any directly attributable transaction costs, is included in equity.
The Group balance sheet includes the shares held by the Pennon Employee Share Trust, relating to employee share-based payments,
which have not vested at the balance sheet date. These are shown as a deduction from shareholders’ equity until such time as they vest.
(r) Dividend distributions
Dividend distributions are recognised as a liability in the financial statements in the period in which the dividends are approved by the
Company’s shareholders. Interim dividends are recognised when paid; final dividends when approved by shareholders at the Annual
General Meeting.
(s) Employee benefits
i) Retirement benefit obligations
The Group operates defined benefit and defined contribution pension schemes.
Defined benefit pension schemes
Defined benefit pension scheme assets are measured using bid price. Defined benefit pension scheme liabilities are measured by
independent actuaries who advise on the selection of Directors’ best estimates. The projected unit credit method is employed and liabilities
discounted at the current rate of return on high quality corporate bonds of equivalent term to the liabilities. The increase in liabilities of the
Group’s defined benefit pension schemes expected to arise from employee service in the year is charged against operating profit.
The expected return on scheme assets and the increase during the year in the present value of scheme liabilities are shown in notional
interest within finance income and cost.
Changes in benefits granted by the employer are recognised immediately in income, in past service cost.
Actuarial gains and losses arising from experience items and changes in actuarial assumptions are charged or credited to equity in the
statement of comprehensive income.
Defined contribution scheme
Costs of the defined contribution pension scheme are charged to the income statement in the year in which they arise.
ii) Share-based payment
The Group operates a number of equity-settled share-based payment plans for employees. The fair value of the employee services
required in exchange for the grant is recognised as an expense over the vesting period of the grant.
Fair values are calculated using an appropriate pricing model. Non market-based vesting conditions are adjusted for in assumptions
as to the number of shares which are expected to vest.
(t) Pre-contract and development costs
Pre-contract and development costs including bid costs are expensed as incurred, except where it is probable that the contract will be
awarded or the development completed, in which case they are recognised as an asset which is amortised to the income statement over
the life of the contract.
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Pennon Group Plc Annual Report and Accounts 2012 71
Financial statements Notes to the financial statements
continued
2. Principal accounting policies continued
(u) Fair values
The fair value of interest rate swaps is based on the market price of comparable instruments at the balance sheet date if they are
publicly traded.
The fair values of short-term deposits, loans and overdrafts with a maturity of less than one year are assumed to approximate to their book
values. In the case of non-current bank loans and other loans the fair value of financial liabilities for disclosure purposes is estimated by
discounting the future contractual cash flows at the current market interest rate available to the Group for similar financial instruments.
(v) Service concession arrangements
Where the provision of waste management services is performed through a contract with a public sector entity which controls a significant
residual interest in asset infrastructure at the end of the contract, then consideration is treated as contract receivables, split between
profit on the construction of assets, operation of the service and the provision of finance which is recognised in notional interest within
finance income.
(w) Transfers of assets from customers
Where an item of property, plant and equipment that must be used to connect customers to the network is received from a customer,
or where cash is received from a customer for the acquisition or construction of such an item, that asset is recorded and measured on
initial recognition at its fair value. The credit created by the recognition of the asset is recognised in the income statement. The period
over which the credit is recognised depends upon the nature of the service provided, as determined by the agreement with the customer.
Where the service provided is solely a connection to the network, the credit is recognised at the point of connection. If the agreement
does not specify a period, revenue is recognised over a period no longer than the economic life of the transferred asset used to provide
the ongoing service.
The fair value of assets on transfer from customers is determined using a cost valuation approach allowing for depreciation.
(x) Foreign exchange
Transactions denominated in foreign currencies are translated at the exchange rate at the date of the transaction. Monetary assets and
liabilities denominated in a foreign currency are translated at the closing balance sheet rate. The resulting gain or loss is recognised in the
income statement.
72 Pennon Group Plc Annual Report and Accounts 2012
3. Financial risk management
(a) Financial risk factors
The Group’s activities expose it to a variety of financial risks: market risk (interest rate risk), liquidity risk, credit risk and foreign currency risk.
The Group’s treasury function seeks to ensure that sufficient funding is available to meet foreseeable needs, maintains reasonable
headroom for contingencies and manages inflation and interest rate risk.
The principal financial risks faced by the Group relate to interest rate and credit counterparty risk.
These risks and treasury operations are managed by the Group Director of Finance in accordance with policies established by the
Board. Major transactions are individually approved by the Board. Treasury activities are reported to the Board and are subject to review
by internal audit.
Financial instruments are used to raise finance, manage risk, optimise the use of surplus funds and manage overall interest rate
performance. The Group does not engage in speculative activity.
i) Market risk
The Group has a policy of maintaining at least 50% of interest-bearing liabilities at fixed rates. The Group uses a combination of fixed rate
and index-linked borrowings and fixed rate interest swaps as cash flow hedges of future variable interest payments to achieve this policy.
At the year-end 56% of Group net borrowings were at fixed rates (including 50% of South West Water’s borrowings fixed for the period
to March 2015) and 18% index-linked, after the impact of financial derivatives. The notional principal amounts of the interest rate swaps
are used to determine settlement under those swaps and are not therefore an exposure for the Group. These instruments are analysed
in notes 22 and 26.
The interest rate for index-linked debt is based upon an RPI measure which is also used in determining the amount of income from
customers in South West Water.
The Group has no significant interest-bearing assets upon which the net return fluctuates from market risk. Deposit interest receivable is
expected to fluctuate in line with interest payable on floating rate borrowings. Consequently the Group’s income and operating cash flows
are largely independent of changes in market interest rates.
For 2012 if interest rates on net borrowings had been on average 0.5% higher/lower with all other variables held constant, post-tax profit
for the year would have decreased/increased by £1.3 million (2011 £1.1 million).
For 2012 if RPI on index-linked borrowings had been on average 0.5% higher/lower with all other variables held constant, post-tax profit
for the year would have decreased/increased by £1.8 million (2011 £1.8 million).
Foreign currency risk occurs at transactional and translation level from borrowings and transactions in foreign currencies. These risks are
managed through cross-currency interest rate swaps and forward contracts which provide certainty over foreign currency risk.
ii) Liquidity risk
The Group actively maintains a mixture of long-term and short-term committed facilities which are designed to ensure the Group has
sufficient available funds for operations and planned expansions equivalent to at least one year’s forecast requirements at all times. Details
of undrawn committed facilities and short-term facilities are provided in note 26.
Refinancing risk is managed under a Group policy that permits no more than 20% of Group net borrowings to mature in any financial year.
The Group and South West Water have entered into covenants with lenders. Whilst terms vary, these typically provide for limits on gearing
(primarily based on South West Water Limited’s Regulatory Capital Value and Viridor Limited’s EBITDA) and interest cover.
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Pennon Group Plc Annual Report and Accounts 2012 73
Financial statements Notes to the financial statements
continued
3. Financial risk management continued
(a) Financial risk factors continued
ii) Liquidity risk continued
Contractual undiscounted cash flows, including interest payments, were:
Group
31 March 2012
Non-derivative financial liabilities
Borrowings excluding finance lease liabilities
Interest payments on borrowings
Finance lease liabilities including interest
Derivative financial liabilities
Derivative contracts – net payments
31 March 2011
Non-derivative financial liabilities
Borrowings excluding finance lease liabilities
Interest payments on borrowings
Finance lease liabilities including interest
Derivative financial liabilities
Derivative contracts – net payments/(receipts)
Company
31 March 2012
Non-derivative financial liabilities
Borrowings
Interest payments on borrowings
31 March 2011
Non-derivative financial liabilities
Borrowings
Interest payments on borrowings
Due within
1 year
£m
Due between
1 and 2 years
£m
Due between
2 and 5 years
£m
Over
5 years
£m
Total
£m
284.8
28.4
63.8
96.1
18.2
60.8
274.8
40.8
232.2
1,371.4
642.3
2,214.3
2,027.1
729.7
2,571.1
15.9
14.0
15.7
–
45.6
74.5
35.4
47.9
8.1
266.6
35.2
57.0
314.8
65.4
215.0
1,093.7
569.3
2,239.2
1,749.6
705.3
2,559.1
4.9
(1.9)
7.9
19.0
253.2
18.2
75.0
7.6
34.9
19.2
245.1
17.5
181.6
9.5
228.5
10.7
100.0
15.0
99.7
12.0
609.8
50.3
608.2
59.4
iii) Credit risk
Credit and counterparty risk arises from cash and cash deposits, derivative financial instruments and deposits with bank and financial
institutions, as well as exposure to customers, including outstanding receivables. Further information on the credit risk relating to trade
receivables is given in note 21.
Counterparty risk arises from the investment of surplus funds and from the use of derivative financial instruments. The Board has agreed
a policy for managing such risk which is controlled through credit limits, counterparty approvals, and rigorous monitoring procedures.
The Group has no other significant concentration of credit risk. The Group’s surplus funds are managed by the Group’s treasury function
and are usually placed in short-term fixed interest deposits or the overnight money markets. Deposit counterparties must meet a credit
rating threshold set by the Board of P1 (Moody’s) or A1 (Standard and Poor’s).
74 Pennon Group Plc Annual Report and Accounts 2012
3. Financial risk management continued
(b) Capital risk management
The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide
returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to minimise the cost of capital.
In order to maintain or adjust the capital structure the Group seeks to maintain a balance of returns to shareholders through dividends
and an appropriate capital structure of debt and equity for each business segment and the Group.
The Group monitors capital on the basis of the gearing ratio. This ratio is calculated as net borrowings divided by total capital. Net
borrowings are analysed in note 36 and calculated as total borrowings less cash and cash deposits. Total capital is calculated as total
shareholders’ equity plus net borrowings.
The gearing ratios at the balance sheet date were:
Net borrowings (note 36)
Total shareholders’ equity
Total capital
Gearing ratio
2012
£m
2,104.6
822.1
2,926.7
2011
£m
1,933.8
779.5
2,713.3
71.9%
71.3%
South West Water Limited is also monitored on the basis of the ratio of its net borrowings to Regulatory Capital Value. Ofwat’s optimum
range for gearing is 55% – 65%.
Regulatory Capital Value
Net borrowings
Net borrowings/Regulatory Capital Value
2012
£m
2,826.7
1,584.9
2011
£m
2,703.5
1,542.8
56.1%
57.1%
The Group has entered into covenants with lenders and, whilst terms vary, these typically provide for limits on gearing and interest cover.
The Group has been in compliance with its covenants during the year.
(c) Determination of fair values
The Group uses the following hierarchy for determining the fair value of financial instruments by valuation technique:
• quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1)
• inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices)
or indirectly (that is, derived from prices) (level 2)
• inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3).
The majority of the Group’s financial instruments are valued using level 2 measures as analysed in note 22.
The fair value of financial instruments not traded in an active market (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 carrying values, less impairment provision, of trade receivables and payables are assumed to approximate to their fair values. The fair
value of financial liabilities, principally environmental provisions, is estimated by discounting the future contractual cash flows at the current
market interest rate available to the Group for similar financial instruments.
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Pennon Group Plc Annual Report and Accounts 2012 75
Financial statements Notes to the financial statements
continued
4. Critical accounting judgements and estimates
The Group’s principal accounting policies are set out in note 2. Management is required to exercise significant judgement and make use
of estimates and assumptions in the application of these policies.
Environmental and landfill restoration provisions
Restoration and aftercare provisions are recognised in the financial statements at the net present value of the estimated future expenditure
required to settle the Group’s restoration and aftercare obligations. A discount is applied to recognise the time value of money and is
unwound over the life of the provision. This is included in the income statement as a financial item within finance costs. As at 31 March
2012 the Group’s environmental and landfill restoration provisions were £92.7 million (note 30).
Where a provision gives access to future economic benefits, an asset is recognised and depreciated in accordance with the Group’s
depreciation policy.
Retirement benefit obligations
The Group operates defined benefit pension schemes for which actuarial valuations are carried out as determined by the trustees
at intervals of not more than three years. The last valuation of the main scheme was at 31 March 2010.
The pension cost and liabilities under IAS 19 are assessed in accordance with Directors’ best estimates using the advice of an
independent qualified actuary and assumptions in the latest actuarial valuation. The assumptions are based on member data supplied to
the actuary and market observations for interest rates and inflation, supplemented by discussions between the actuary and management.
The mortality assumption uses a scheme-specific calculation based on CMI 2009 actuarial tables with an allowance for future longevity
improvement. The principal assumptions used to measure schemes’ liabilities, sensitivities to changes in those assumptions and future
funding obligations are set out in note 28 of the financial statements.
Cash-generating units
For the purposes of assessing impairment of goodwill, assets are grouped at the lowest levels for which there are separately identifiable
cash flows (cash-generating units). The waste management segment is considered to be a single cash-generating unit as it is an
integrated business. The principal assumptions used to assess impairment are set out in note 14 of the financial statements.
Taxation
The Group corporation tax provision of £59.7 million reflects management’s judgement of the amount of tax payable for fiscal years with
open tax computations where liabilities remain to be agreed with HM Revenue & Customs. Management periodically evaluates items
detailed in tax returns where the tax treatment is subject to interpretation. The Group establishes provisions on a full basis for individual tax
items where, in the judgement of management, the tax position is uncertain.
Service concession arrangements
Consideration from public sector entities for the operation of waste management service concessions is treated as contract receivables,
split between profit on the construction of assets, operation of the service and provision of finance recognised as interest receivable.
Management’s allocation between these three elements is assessed to reflect external market conditions according to the type of
service provided.
Site development costs
The development of waste management facilities for new projects (such as Energy from Waste plants) are subject to obtaining planning
permissions. Development costs are capitalised using management’s assessment of the likelihood of a successful outcome for each
project. To the extent that planning permission is not received any capitalised development costs are expensed.
Landfill costs
The estimation of landfill reserves is of particular importance in assessing landfill costs, since the projected cost of a landfill site is
depreciated over its estimated operational life taking into account the usage of void space and gas production at the site post-closure.
The estimates of landfill reserves are regularly reviewed and updated during the financial year for usage and other events (for example
site extensions). Estimates are also subject to physical review by external advisors.
A number of factors impact on the depreciation of landfill reserves including the available void space, future capital expenditure and
operating costs. The assumptions are revised as these factors change.
The estimate of gas production at landfill sites post-closure reduces the depreciation of landfill reserves. An assessment is undertaken
for individual sites of the historic profile of gas production during landfilling activity and the projected generation post-closure according
to the type of waste contained in the landfill and expected profile of gas production over time.
76 Pennon Group Plc Annual Report and Accounts 2012
4. Critical accounting judgements and estimates continued
Carrying value of property, plant and equipment
The carrying value of property, plant and equipment as at 31 March 2012 was £3,082.8 million and the Group’s accounting policy is
set out in note 2. In the year ended 31 March 2012 additions totalled £257.4 million and the depreciation charge was £147.5 million.
Estimated useful economic lives of property, plant and equipment are based on management’s judgement and experience. When
management identifies that actual useful lives differ materially from the estimates used to calculate depreciation, that charge is adjusted
prospectively. Due to the significance of capital investment to the Group, variations between actual and estimated useful lives could impact
operating results both positively and negatively. Asset lives and residual values are reviewed annually and historically changes to remaining
estimates of useful lives have not been material.
Revenue recognition
The Group recognises revenue at the time of delivery of services. Payments received in advance of services delivered are recorded
as a liability.
South West Water raises bills and recognises revenue in accordance with its entitlement to receive revenue in line with the limits
established by the Periodic Review price-setting process. For water and waste water customers with water meters, revenue recognised is
dependent upon the volume supplied including an estimate of the sales value of units supplied between the date of the last meter reading
and the financial year-end. Estimated usage is based on historic data, judgement and assumptions; actual results could differ from these
estimates which would result in revenue being adjusted in the period in which the revision of the estimates is determined.
Viridor estimates income from certain contractual revenue streams based on tonnages, cost and historic data which are dependent on
agreement with the customer after the delivery of the service. Actual results could differ from these estimates which would result in revenue
being adjusted in the period in which the revision of the estimate is determined.
Provision for doubtful debts
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.
The actual level of debt collected may differ from the estimated levels of recovery and could impact future operating results positively
or negatively. As at 31 March 2012 the Group’s current trade receivables were £188.4 million, against which £67.0 million had been
provided for impairment.
Impairment of intangible assets
The Group records all assets and liabilities acquired in business acquisitions, including goodwill, at fair value. Intangible assets which have
an indefinite useful life, principally goodwill, are assessed at least annually for impairment.
The initial goodwill recorded and subsequent impairment analysis require management to make estimations of future cash flows, terminal
values and an assessment of the long-term pre-tax discount rate to be applied to those cash flows which reflects an assessment of the
cost of capital of the cash-generating unit.
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Pennon Group Plc Annual Report and Accounts 2012 77
Financial statements Notes to the financial statements
continued
5. Operating segments
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 and sewerage business comprises the regulated water and sewerage services undertaken by South West Water Limited. The
waste management business is the recycling, renewable energy and waste management services provided by Viridor Limited. Segment
assets include goodwill and other intangible assets, property, plant and equipment, inventories, trade and other receivables and cash and
cash deposits. Segment liabilities comprise operating liabilities and exclude taxation. The other segment liabilities include the Company’s
financing of business acquisitions and Group taxation liabilities. Capital expenditure comprises additions to property, plant and equipment,
including additions resulting from acquisitions through business combinations.
Revenue
Water and sewerage
Waste management
Other
Less intra-segment trading*
Segment result
Operating profit before depreciation and amortisation (EBITDA)
Water and sewerage
Waste management
Other
Operating profit
Water and sewerage
Waste management
Other
Profit before tax
Water and sewerage
Waste management
Other
2012
£m
2011
£m
474.0
761.1
9.8
(11.8)
1,233.1
448.8
712.0
9.5
(11.1)
1,159.2
305.2
110.3
0.3
415.8
204.7
63.7
0.4
268.8
141.5
57.6
1.4
200.5
286.8
116.5
(0.7)
402.6
189.8
71.6
(0.5)
260.9
128.9
62.9
(3.3)
188.5
*
Intra-segment trading between and to other segments by the water and sewerage and waste management segments is under normal
commercial terms and conditions that would also be available to unrelated third parties. Intra-segment revenue of the other segment is
at cost.
78 Pennon Group Plc Annual Report and Accounts 2012
5. Operating segments continued
Balance sheet
31 March 2012
Assets (excluding investments in joint ventures)
Investments in joint ventures
Total assets
Liabilities
Net assets/(liabilities)
31 March 2011 (Restated note 37)
Assets (excluding investments in joint ventures)
Investments in joint ventures
Total assets
Liabilities
Net assets/(liabilities)
Water and
sewerage
£m
Waste
management
£m
Other
£m
Eliminations
£m
Group
£m
2,938.2
–
2,938.2
(2,159.6)
778.6
2,845.5
–
2,845.5
(2,036.1)
809.4
1,209.5
0.1
1,209.6
(826.0)
383.6
1,076.6
1.5
1,078.1
(811.4)
266.7
912.2
–
912.2
(1,252.3)
(340.1)
1,002.8
–
1,002.8
(1,299.4)
(296.6)
(789.3)
–
(789.3)
789.3
–
(789.3)
–
(789.3)
789.3
–
4,270.6
0.1
4,270.7
(3,448.6)
822.1
4,135.6
1.5
4,137.1
(3,357.6)
779.5
Segment liabilities of the water and sewerage and waste management segments comprise operating liabilities. The other segment liabilities
include the Company’s financing of business acquisitions before 1999 and Group taxation liabilities.
Water and
sewerage
£m
Waste
management
£m
Notes
Other
£m
Group
£m
Other information
31 March 2012
Amortisation of other intangible assets
Capital expenditure (including acquisitions)
Depreciation
Finance income
Finance costs
31 March 2011
Amortisation of other intangible assets
Capital expenditure (including acquisitions)
Depreciation
Finance income
Finance costs
15
7
7
15
7
7
–
130.8
100.5
59.3
122.5
–
125.1
97.0
22.6
83.5
1.4
155.8
45.2
23.2
33.2
0.7
98.8
44.2
21.4
34.3
Geographic analysis of revenue based on location of customers
Revenue
United Kingdom
Rest of European Union
China
Rest of World
–
–
(0.1)
36.8
35.9
–
0.2
(0.2)
1.1
4.0
1.4
286.6
145.6
119.3
191.6
0.7
224.1
141.0
45.1
121.8
2012
£m
2011
£m
1,162.4
13.3
51.0
6.4
1,233.1
1,091.8
11.1
49.5
6.8
1,159.2
The Group’s country of domicile is the United Kingdom and is the country in which it generates the majority of its revenue. The Group’s
non-current assets are all located in the United Kingdom.
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Pennon Group Plc Annual Report and Accounts 2012 79
Financial statements Notes to the financial statements
continued
6. Operating costs
Manpower costs
Raw materials and consumables
Other operating expenses include:
Profit on disposal of property, plant and equipment
Operating lease rentals payable:
– Plant and machinery
– Property
Research and development expenditure
Trade receivables impairment
Depreciation of property, plant and equipment:
– Owned assets
– Under finance leases
Amortisation of other intangible assets
Fees payable to the Company’s auditors in the year were:
Fees payable to the Company’s auditors for the statutory audit of the Group
Other services pursuant to legislation:
Regulatory reporting
Interim review
Other audit services
Total fees for statutory audit and audit related services
Tax services
Corporate finance transactions
Other services
Total fees
Fees payable to the Company’s auditors in respect of Pennon Group pension schemes:
Audit
Notes
12
21
15
2012
£m
155.4
133.9
2011
£m
148.3
121.6
(2.8)
(2.3)
6.6
8.0
0.2
9.2
110.5
35.1
1.4
2012
£000
446
30
30
16
76
522
242
707
97
1,046
1,568
7.4
6.1
0.2
8.4
106.4
34.6
0.7
2011
£000
400
30
30
47
107
507
150
988
170
1,308
1,815
26
26
Fees payable to the Company’s auditors for the statutory audit of the Group include fees payable for the statutory audit of the Company
of £48,000 (2011 £47,000) and fees payable for the audit of the Company’s subsidiaries of £398,000 (2011 £353,000).
Expenses reimbursed to the auditors in relation to the audit of the Group were £37,000 (2011 £35,000).
Corporate finance services in 2012 related to corporate finance advice on a number of EfW and PPP projects.
Corporate finance services in 2011 included fees of circa £0.5 million relating to corporate finance advice on the Runcorn Phase II EfW
project which is under construction.
A description of the work of the Audit Committee is set out in its report on pages 47 and 48 which includes an explanation of how the
auditor’s objectivity and independence are safeguarded when non-audit services are provided by the auditors’ firm.
80 Pennon Group Plc Annual Report and Accounts 2012
7. Net finance costs
Cost of servicing debt
Bank borrowing and overdrafts
Interest element of finance lease rentals
Other finance costs
Interest receivable
Interest receivable on shareholder loans to joint ventures
Other finance income
Investment income received
Fair value losses on derivative financial instruments providing
commercial hedges
Notional interest
Interest receivable on service concession arrangements
Retirement benefit obligations
Unwinding of discounts in provisions
Finance
cost
2012
Finance
income
Notes
£m
£m
(50.0)
(38.8)
(5.5)
–
–
(94.3)
–
–
–
6.2
7.5
13.7
Total
£m
(50.0)
(38.8)
(5.5)
6.2
7.5
(80.6)
–
67.3
67.3
(63.9)
(63.9)
–
67.3
(63.9)
3.4
Finance
cost
2011
Finance
income
£m
£m
(55.5)
(30.6)
(3.9)
–
–
(90.0)
–
–
–
–
–
–
6.1
6.7
12.8
–
–
–
Total
£m
(55.5)
(30.6)
(3.9)
6.1
6.7
(77.2)
–
–
–
28
–
(29.1)
(4.3)
(33.4)
3.3
32.7
–
36.0
3.3
3.6
(4.3)
2.6
–
(27.8)
(4.0)
(31.8)
2.9
29.4
–
32.3
2.9
1.6
(4.0)
0.5
Net gains on non-designated derivative financial instruments
–
2.3
2.3
–
–
–
Other finance income represents enhanced yields from investment income received on short-term deposits held partially offset by fair
value losses on derivative financial instruments which provided commercial hedges against these short-term structured deposits. These
transactions commenced and matured during the year.
(191.6) 119.3
(72.3)
(121.8)
45.1
(76.7)
8. Taxation
Analysis of charge in year
UK corporation tax
Deferred tax – other
Deferred tax arising on change of rate of corporation tax
Total deferred tax
Tax charge for year
Notes
29
2012
£m
30.9
23.6
(26.4)
(2.8)
28.1
2011
£m
38.6
3.4
(25.1)
(21.7)
16.9
UK corporation tax is calculated at 26% (2011 28%) of the estimated assessable profit for the year.
The deferred tax credit for the year is due to a non-recurring credit of £26.4 million (2011 £25.1 million) arising from a 2% reduction in the
rate of corporation tax.
The tax for the year differs from the theoretical amount which would arise using the standard rate of corporation tax in the UK (26%) from:
Profit before tax
Profit before tax multiplied by the standard rate of UK corporation tax of 26% (2011 28%)
Effects of:
Expenses not deductible for tax purposes
Other
Change in rate of corporation tax
Adjustments to tax charge in respect of prior years
Tax charge for year
2012
£m
200.5
52.1
3.5
(0.6)
(26.4)
(0.5)
28.1
2011
£m
188.5
52.8
1.7
(1.1)
(25.1)
(11.4)
16.9
Pennon Group Plc Annual Report and Accounts 2012 81
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Financial statements Notes to the financial statements
continued
8. Taxation continued
Credit adjustments to tax charge in respect of prior years include amounts released from the prior year current tax liability where
a reassessment of a number of tax items indicates that a tax deduction is now certain.
The average applicable tax rate for the year was 14% (2011 9%).
In addition to the amount debited to the income statement, a deferred tax credit relating to actuarial gains on defined benefit pension
schemes of £10.2 million (2011 charge of £2.9 million) and a deferred tax credit relating to losses on cash flow hedges of £5.8 million
(2011 charge of £0.4 million) have been credited directly to equity. A deferred tax charge relating to share-based payments of £0.1 million
(2011 credit of £0.5 million) has been recognised directly to equity.
9. Profit of parent company
Profit attributable to equity shareholders dealt with in the accounts of the parent company
2012
£m
116.3
2011
£m
90.1
As permitted by Section 408 of the Companies Act 2006 no income statement or statement of comprehensive income is presented
for the Company.
10. Earnings per share
Basic earnings per share are calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number
of Ordinary shares outstanding during the year, excluding those held in the employee share trust (note 34), 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 Group has two types of dilutive potential Ordinary shares – those share options granted to employees where the exercise
price is less than the average market price of the Company’s Ordinary shares during the year; and the contingently issuable shares under
the Group’s Performance and Co-investment Plan and the deferred shares element of the Annual Incentive Bonus Plan, to the extent that
the performance criteria for vesting of the awards are expected to be met. The convertible bonds issued in August 2009 did not have a
dilutive effect on earnings per share during the year.
The weighted average number of shares and earnings used in the calculations were:
Number of shares (millions)
For basic earnings per share
Effect of dilutive potential Ordinary shares from share options
For diluted earnings per share
2012
2011
358.7
2.2
360.9
354.6
2.0
356.6
Basic and diluted earnings per share
Earnings per share before deferred tax are presented as the Directors believe that this measure provides a more useful comparison on
business trends and performance since deferred tax reflects distortive effects of changes in corporation tax rates and the level of long-term
capital investment. Earnings per share have been calculated:
Statutory earnings per share
Deferred tax credit
Earnings per share before deferred tax
11. Dividends
Profit
after tax
£m
172.4
(2.8)
169.6
2012
Earnings per share
Basic
p
48.1
(0.8)
47.3
Diluted
p
47.8
(0.8)
47.0
Profit
after tax
£m
171.6
(21.7)
149.9
Amounts recognised as distributions to equity holders in the year:
Interim dividend paid for the year ended 31 March 2011: 7.50p (2010 6.95p) per share
Final dividend paid for the year ended 31 March 2011: 17.15p (2010 15.60p) per share
Proposed dividends
Proposed interim dividend for the year ended 31 March 2012: 8.22p (2011 7.50p) per share
Proposed final dividend for the year ended 31 March 2012: 18.30p (2011 17.15p) per share
2011
Earnings per share
Basic
p
48.4
(6.1)
42.3
2012
£m
26.8
61.4
88.2
29.6
66.3
95.9
Diluted
p
48.1
(6.1)
42.0
2011
£m
24.5
55.1
79.6
26.8
61.4
88.2
The proposed interim and final dividends have not been included as liabilities in these financial statements.
The proposed interim dividend for 2012 was paid on 3 April 2012 and the proposed final dividend is subject to approval by shareholders
at the Annual General Meeting.
82 Pennon Group Plc Annual Report and Accounts 2012
12. Employment costs
Wages and salaries
Social security costs
Pension costs
Share-based payments
Total employment costs
Charged:
Manpower costs
Capital schemes
Total employment costs
2012
£m
130.9
12.6
16.6
3.6
163.7
155.4
8.3
163.7
2011
£m
122.7
11.4
20.5
3.4
158.0
148.3
9.7
158.0
Details of Directors’ emoluments are set out in note 13. There are no personnel, other than Directors, who as key management exercise
authority and responsibility for planning, directing and controlling the activities of the Group.
Employees (average number)
The average monthly number of employees (including Executive Directors) was:
Water and sewerage
Waste management
Other
Group totals
The total number of employees at 31 March 2012 was 4,592 (2011 4,354).
13. Directors’ emoluments
Executive Directors:
Salary
Performance-related bonus paid or payable
Share-based payments
Other emoluments
Payment in lieu of pension provision
Non-executive Directors
2012
2011
1,335
3,148
46
4,529
2012
£000
1,077
393
1,094
73
310
431
3,378
1,196
3,012
44
4,252
2011
£000
1,035
490
984
70
114
412
3,105
The cost of share-based payment represents the amount charged to the income statement, as described in note 31.
The aggregate gains on vesting of Directors’ share-based awards amounted to a total of £1,002,000 (2011 £677,000).
Total gains made by Directors on the exercise of share options were nil (2011 nil).
Total emoluments include £1,570,000 (2011 £1,418,000) payable to Directors for services as directors of subsidiary undertakings.
At 31 March 2012 there were no Directors accruing retirement benefits under defined benefit pension schemes (2011 one).
No pension contributions were payable to defined contribution schemes but three Directors received payments in lieu of pension provision
(2011 two).
More detailed information concerning Directors’ emoluments (including pensions and the highest paid Director) and share interests
is shown in the Directors’ remuneration report on pages 52 to 60.
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Pennon Group Plc Annual Report and Accounts 2012 83
Financial statements Notes to the financial statements
continued
14. Goodwill
Cost:
At 1 April 2010
Recognised on acquisition of subsidiaries
At 31 March 2011
Recognised on acquisition of subsidiaries (note 37)
At 31 March 2012
Carrying amount:
At 31 March 2011
At 31 March 2012
(Restated
note 37)
£m
257.4
43.0
300.4
26.7
327.1
300.4
327.1
Goodwill acquired in a business combination is allocated at acquisition to the cash-generating unit (CGU) expected to benefit from that
business combination. All of the carrying amount of goodwill is allocated to the waste management segment.
Goodwill is reviewed annually or when other events or changes in circumstance indicate that the carrying amount may not be fully
recoverable.
The recoverable amount of the waste management segment is determined from fair value less costs to sell calculations. The fair value
of the CGU has been estimated using an earnings multiple informed by recent market data from purchases of similar business.
15. Other intangible assets
Acquired intangible assets
Cost:
At 1 April 2010
At 31 March 2011
Recognised on acquisition of subsidiaries (note 37)
At 31 March 2012
Accumulated amortisation:
At 1 April 2010
Charge for year
At 31 March 2011
Charge for year
At 31 March 2012
Carrying amount:
At 31 March 2011
At 31 March 2012
Customer
contracts
£m
Patents
£m
12.5
12.5
14.5
27.0
7.6
0.7
8.3
1.3
9.6
4.2
17.4
0.2
0.2
–
0.2
–
–
–
0.1
0.1
0.2
0.1
Total
£m
12.7
12.7
14.5
27.2
7.6
0.7
8.3
1.4
9.7
4.4
17.5
Customer contracts are amortised over the useful economic life of each contract which at acquisition ranged between two and 15 years.
The average remaining life is six years.
Patents are amortised over their estimated useful economic lives which at acquisition was 13 years. The average remaining life is
six years.
The carrying values of other intangible assets are reviewed annually or when events or changes in circumstance indicate that the carrying
amounts may not be fully recoverable.
84 Pennon Group Plc Annual Report and Accounts 2012
16. Property, plant and equipment
Group
Cost:
At 1 April 2010
Arising on acquisitions
Additions
Assets adopted at fair value
Other (note 30)
Grants and contributions
Disposals
Transfers/reclassifications
At 31 March 2011
Arising on acquisitions (note 37)
Additions
Assets adopted at fair value
Other (note 30)
Grants and contributions
Disposals
Transfers/reclassifications
At 31 March 2012
Accumulated depreciation:
At April 2010
Charge for year
Disposals
At 31 March 2011
Charge for year
Disposals
Transfers/reclassifications
At 31 March 2012
Net book value:
At 1 April 2010
At 31 March 2011
At 31 March 2012
Land and
buildings
(Restated
note 37)
£m
Infrastructure
assets
£m
Operational
properties
£m
Fixed and
mobile plant,
vehicles and
computers
(Restated
note 37)
£m
Landfill
restoration
£m
Construction
in progress
£m
Total
(Restated
note 37)
£m
418.2
7.7
15.5
–
–
–
(1.2)
0.9
441.1
0.2
17.0
–
–
–
–
(18.0)
440.3
172.5
16.3
–
188.8
16.6
–
(15.1)
190.3
1,419.1
–
17.8
12.4
–
(1.2)
(1.8)
21.6
1,467.9
–
14.9
46.7
–
(1.6)
(0.9)
14.0
1,541.0
93.2
21.5
(1.8)
112.9
22.2
(0.9)
–
134.2
245.7
252.3
250.0
1,325.9
1,355.0
1,406.8
606.4
–
0.3
0.6
–
–
(4.4)
11.3
614.2
–
1.7
–
–
–
(0.1)
5.2
621.0
163.8
10.8
(4.4)
170.2
10.9
(0.1)
–
181.0
442.6
444.0
440.0
1,322.4
9.6
29.2
1.7
–
–
(59.3)
66.3
1,369.9
0.7
19.0
–
–
–
(11.6)
90.1
1,468.1
647.8
90.9
(58.1)
680.6
95.8
(9.8)
15.1
781.7
674.6
689.3
686.4
48.7
–
–
–
4.7
–
–
–
53.4
–
–
–
1.6
–
–
–
55.0
15.0
2.8
–
17.8
2.0
–
–
19.8
33.7
35.6
35.2
103.2
–
136.2
–
–
–
–
(92.9)
146.5
–
204.8
–
–
–
–
(86.9)
264.4
–
–
–
–
–
–
–
–
3,918.0
17.3
199.0
14.7
4.7
(1.2)
(66.7)
7.2
4,093.0
0.9
257.4
46.7
1.6
(1.6)
(12.6)
4.4
4,389.8
1,092.3
142.3
(64.3)
1,170.3
147.5
(10.8)
–
1,307.0
103.2
146.5
264.4
2,825.7
2,922.7
3,082.8
Of the total depreciation charge of £147.5 million (2011 £142.3 million), £1.4 million (2011 £1.3 million) has been charged to capital
projects, £0.5 million (2011 nil) has been offset by deferred income and £145.6 million (2011 £141.0 million) has been charged
against profits.
Asset lives and residual values are reviewed annually.
Asset transfers/reclassifications include assets transferred from other non-current assets of £4.4 million (2011 £7.2 million).
During the year borrowing costs of £3.0 million (2011 £1.1 million) have been capitalised on qualifying assets.
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Pennon Group Plc Annual Report and Accounts 2012 85
Financial statements Notes to the financial statements
continued
16. Property, plant and equipment continued
Assets held under finance leases included above were:
Land and
buildings
£m
Infrastructure
assets
£m
Operational
properties
£m
–
–
–
–
–
–
357.0
357.0
465.0
465.2
26.0
31.3
89.2
97.0
331.0
325.7
375.8
368.2
Fixed and
mobile plant,
vehicles and
computers
£m
312.3
379.9
175.9
189.0
136.4
190.9
Landfill
restoration
£m
Construction
in progress
£m
Total
£m
–
–
–
–
–
–
0.5
0.3
1,134.8
1,202.4
–
–
0.5
0.3
291.1
317.3
843.7
885.1
Fixed and mobile plant,
vehicles and computers
£m
0.4
0.2
(0.2)
0.4
0.4
0.2
0.1
(0.2)
0.1
0.1
0.2
0.2
0.3
0.2
Cost:
At 31 March 2011
At 31 March 2012
Accumulated depreciation:
At 31 March 2011
At 31 March 2012
Net book amount:
At 31 March 2011
At 31 March 2012
Company
Cost:
At 1 April 2010
Additions
Disposals
At 31 March 2011
At 31 March 2012
Accumulated depreciation:
At 1 April 2010
Charge for year
Disposals
At 31 March 2011
Charge for year
At 31 March 2012
Net book value:
At 1 April 2010
At 31 March 2011
At 31 March 2012
Asset lives and residual values are reviewed annually.
86 Pennon Group Plc Annual Report and Accounts 2012
17. Financial instruments by category
The accounting policies for financial instruments have been applied to the line items:
Fair value
Amortised cost
Derivatives
used for fair
value
hedging
£m
Derivatives
used for
cash
flow hedging
£m
Derivatives
deemed held
for trading
£m
Notes
Loans and
receivables
£m
Trade
receivables
and trade
payables
(Restated
note 37)
£m
21
22
23
26
22
24
21
22
23
26
22
24
22
23
26
24
22
23
26
24
–
22.7
–
22.7
–
(6.5)
–
(6.5)
–
–
–
–
–
(3.5)
–
(3.5)
–
–
–
–
–
–
–
–
–
–
–
–
–
6.6
–
6.6
–
(42.1)
–
(42.1)
–
6.9
–
6.9
–
(18.1)
–
(18.1)
6.6
–
6.6
–
–
–
6.6
–
6.6
–
–
–
–
2.3
–
2.3
–
–
–
–
–
–
–
–
–
–
–
–
2.3
–
2.3
–
–
–
–
–
–
–
–
–
–
–
425.3
425.3
(2,529.9)
–
–
(2,529.9)
–
–
555.5
555.5
(2,489.3)
–
–
(2,489.3)
–
158.9
158.9
(891.2)
–
(891.2)
–
236.6
236.6
(889.0)
–
(889.0)
121.4
–
–
121.4
–
–
(87.2)
(87.2)
136.9
–
–
136.9
–
–
(87.3)
(87.3)
–
–
–
–
(0.1)
(0.1)
–
–
–
–
(0.1)
(0.1)
Total
(Restated
note 37)
£m
121.4
31.6
425.3
578.3
(2,529.9)
(48.6)
(87.2)
(2,665.7)
136.9
6.9
555.5
699.3
(2,489.3)
(21.6)
(87.3)
(2,598.2)
8.9
158.9
167.8
(891.2)
(0.1)
(891.3)
6.6
236.6
243.2
(889.0)
(0.1)
(889.1)
Group
31 March 2012
Financial assets
Trade receivables
Derivative financial instruments
Cash and cash deposits
Total
Financial liabilities
Borrowings
Derivative financial instruments
Trade payables
Total
31 March 2011
Financial assets
Trade receivables
Derivative financial instruments
Cash and cash deposits
Total
Financial liabilities
Borrowings
Derivative financial instruments
Trade payables
Total
Company
31 March 2012
Financial assets
Derivative financial instruments
Cash and cash deposits
Total
Financial liabilities
Borrowings
Trade payables
Total
31 March 2011
Financial assets
Derivative financial instruments
Cash and cash deposits
Total
Financial liabilities
Borrowings
Trade payables
Total
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Financial statements Notes to the financial statements
continued
18. Other non-current assets
Non-current receivables
Amounts owed by subsidiary undertakings
Amounts owed by related parties (note 42)
Other receivables
Non-current receivables were due:
Between 1 and 2 years
Between 2 and 5 years
Over 5 years
The fair values of non-current receivables were:
Amounts owed by subsidiary undertakings
Amounts owed by related parties
Other receivables
Group
Company
2012
£m
–
69.0
69.4
138.4
2011
£m
–
56.6
59.4
116.0
2012
£m
350.9
–
1.1
352.0
Group
Company
2012
£m
15.5
15.9
107.0
138.4
2011
£m
20.0
5.9
90.1
116.0
2012
£m
89.2
262.8
–
352.0
Group
Company
2012
£m
–
147.7
69.4
217.1
2011
£m
–
126.7
59.4
186.1
2012
£m
354.7
–
1.1
355.8
2011
£m
366.8
–
0.9
367.7
2011
£m
90.6
277.1
–
367.7
2011
£m
372.8
–
1.0
373.8
The fair value of amounts owed by related parties is based on cash flows using a rate based on the borrowings rate of 2.5% (2011 2.5%).
The discount rate is equal to London Interbank Offered Rate plus an allowance to reflect an appropriate credit margin.
The effective interest rate on amounts owed by related parties was 14.0% (2011 14.0%).
Other receivables include site development and pre-contract costs of £9.6 million (2011 £17.6 million).
88 Pennon Group Plc Annual Report and Accounts 2012
19. Investments
Subsidiary undertakings
Company
At 1 April 2010
At 31 March 2011
Additions
At 31 March 2012
Joint ventures
Group
At 1 April 2010
Share of post-tax profit
Share of other comprehensive loss
At 31 March 2011
Share of post-tax profit
Share of other comprehensive loss
At 31 March 2012
£m
1,032.0
1,032.0
140.1
1,172.1
Shares
£m
0.2
4.3
(3.0)
1.5
4.0
(5.4)
0.1
Details of the Group’s principal subsidiary and joint venture undertakings are set out in note 38.
The Group’s share of the results, assets and liabilities in its joint ventures, which are equity accounted in these financial statements, is:
Assets
Liabilities
Income
Non–current
£m
Current
£m
Non–current
£m
Current
£m
Revenue
£m
Profit
£m
Other
comprehensive
income
£m
2012
Lakeside Energy from
Waste Holdings Limited
Viridor Laing (Greater
Manchester) Holdings Limited
2011
Lakeside Energy from
Waste Holdings Limited
Viridor Laing (Greater
Manchester) Holdings Limited
20. Inventories
Raw materials and consumables
78.2
13.7
(89.9)
(2.0)
171.3
15.9
(168.3)
(18.9)
82.0
9.5
(87.8)
(2.2)
181.5
10.4
(146.1)
(45.8)
23.2
46.8
21.6
61.7
3.7
0.3
3.6
0.7
Group
Company
2011
(Restated
note 37)
£m
7.2
2012
£m
9.0
2012
£m
–
(5.1)
(0.3)
(2.3)
(0.7)
2011
£m
–
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Financial statements Notes to the financial statements
continued
21. Trade and other receivables – current
Trade receivables
Less: provision for impairment of receivables
Net trade receivables
Amounts owed by related parties (note 42)
Amounts owed by subsidiary undertakings
Other receivables
Prepayments and accrued income
Group
Company
2012
£m
188.4
(67.0)
121.4
12.2
–
13.0
91.8
238.4
2011
(Restated
note 37)
£m
195.1
(58.2)
136.9
8.8
–
8.5
64.8
219.0
2012
£m
–
–
–
–
90.8
0.7
0.2
91.7
2011
£m
–
–
–
–
91.7
0.8
0.2
92.7
The Directors consider that the carrying amounts of trade and other receivables approximate to their fair value.
There is no concentration of credit risk in trade receivables. The Group has a large number of customers who are dispersed and there is
no significant loss on trade receivables expected that has not been provided for. The Group has created IAS 39 portfolio provisions, but
cannot practicably identify which receivables specifically are the ones impaired. It is Group policy to consider a receivable in a portfolio to
which an impairment has been allocated on a collective basis as not being impaired for the purposes of IFRS 7 disclosures until the loss
can be specifically identified with the receivable.
The ageing of trade receivables which are past due but not specifically impaired was:
Group
Past due 1 – 30 days
Past due 31 – 120 days
More than 120 days
2012
£m
37.3
13.0
97.4
2011
£m
36.1
11.9
84.5
The aged trade receivables above are taken directly from aged sales ledger records before deduction of credit balances and
other adjustments.
The Group’s two principal operating businesses specifically review separate categories of debt to identify an appropriate provision for
impairment. South West Water Limited has a duty under legislation to continue to provide domestic customers with services regardless
of payment.
The movement in the allowance for impairment in respect of trade receivables was:
At 1 April
Provision for receivables impairment
Receivables written-off during the year as uncollectable
Cumulative amounts previously excluded from debt
Arising on acquisitions
At 31 March
2012
£m
58.2
9.2
(7.1)
6.7
–
67.0
2011
£m
50.6
8.4
(8.3)
7.3
0.2
58.2
90 Pennon Group Plc Annual Report and Accounts 2012
22. Derivative financial instruments
Derivatives used for cash flow hedging
Current assets
Current liabilities
Non-current liabilities
Derivatives used for fair value hedging
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Derivative deemed held for trading
Current assets
Group
2012
£m
6.6
(15.3)
(26.8)
21.9
0.8
(1.3)
(5.2)
2.3
2011
£m
6.9
(4.4)
(13.7)
–
–
(0.9)
(2.6)
–
Company
2012
£m
6.6
–
–
–
–
–
–
2.3
2011
£m
6.6
–
–
–
–
–
–
–
The fair value of hedging derivatives is split between current and non-current assets or liabilities based on the maturity of the cash flows.
The ineffective portion recognised in the income statement arising from cash flow hedges was nil (2011 nil).
Interest rate swaps and fixed rate borrowings are used to manage the mix of fixed and floating rates to ensure at least 50% of Group net
borrowings are at fixed rate. At 31 March 2012, 56% of Group net borrowings were at fixed rate (2011 53%).
At 31 March 2012 the Group had interest rate swaps to swap from floating to fixed rate and hedge financial liabilities with a notional value
of £855.0 million and a weighted average maturity of 4.0 years (2011 £605.0 million, with 4.0 years). The weighted average interest rate
of the swaps for their nominal amount was 3.2% (2011 3.2%).
At 31 March 2012 the Company had cross-currency interest rate swaps to swap from floating to fixed rate and hedge financial liabilities,
relating to a borrowing of 70 million Australian dollars, with a weighted average maturity of 1.0 years (2011 70 million Australian dollars,
with 2.0 years). The weighted average interest rate of the swaps was 3.7% (2011 3.7%).
The derivative deemed held for trading does not qualify for hedge accounting under IAS 39, but is designed to improve the Group’s
overall interest rate performance. This derivative arises from of a combination of non-derivative instruments entered into during the
year that when combined result in a derivative instrument. Included in the derivative instrument is a £200 million floating interest
rate-linked loan from Peninsula MB Limited to the Company and a fixed rate £200 million obligation due to the Company from Peninsula
MB Limited. This derivative has an expected life of 15 years. The £2.3 million fair value movement in the derivative has been recognised
in the income statement.
Valuation hierarchy
The amounts of financial instruments carried at fair value by valuation method were:
Level 2 inputs
Group
Company
Assets
Derivatives used for cash flow hedging
Derivatives used for fair value hedging
Total assets
Liabilities
Derivatives used for cash flow hedging
Derivatives used for fair value hedging
Total liabilities
2012
£m
6.6
22.7
29.3
42.1
6.5
48.6
2011
£m
6.9
–
6.9
18.1
3.5
21.6
2012
£m
6.6
–
6.6
–
–
–
2011
£m
6.6
–
6.6
–
–
–
The amounts above are the fair value of financial instruments using level 2 – inputs that are observable for the asset or liability, either directly
(that is, as prices) or indirectly (that is, derived from prices). The fair values of these swaps are based on the market value of equivalent
instruments at the balance sheet date.
Level 3 inputs
Assets
Derivative deemed held for trading
Group
Company
2012
£m
2.3
2011
£m
–
2012
£m
2.3
2011
£m
–
The amount above is the fair value of financial instruments using level 3 – inputs for asset or liability that are not based on observable
market data (that is, unobservable market data).
Pennon Group Plc Annual Report and Accounts 2012 91
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Financial statements Notes to the financial statements
continued
23. Cash and cash deposits
Cash at bank and in hand
Short-term bank deposits
Other deposits
Total cash and cash deposits (note 36)
Group
Company
2012
£m
18.3
67.1
339.9
425.3
2011
£m
15.9
121.8
417.8
555.5
2012
£m
58.4
47.1
53.4
158.9
2011
£m
39.3
95.8
101.5
236.6
Group short-term deposits have an average maturity of one day.
Group other deposits have an average maturity of 115 days.
Group other deposits include restricted funds of £108.4 million (2011 £80.2 million) to settle long-term lease liabilities (note 26) and
£14.2 million (2011 £40.0 million) relating to letters of credit.
For the purposes of the cash flow statement cash and cash equivalents comprise:
Cash and cash deposits as above
Bank overdrafts (note 26)
Less: deposits with a maturity of three months or more
(restricted funds)
24. Trade and other payables – current
Trade payables
Amounts owed to subsidiary undertakings
Amounts owed to joint venture (note 42)
Other tax and social security
Accruals and other payables
Group
Company
2012
£m
425.3
(10.5)
414.8
(122.6)
292.2
2011
£m
555.5
(18.1)
537.4
(122.5)
414.9
2012
£m
158.9
–
158.9
(1.4)
157.5
Group
Company
2011
(Restated
note 37)
£m
87.3
–
8.5
53.0
104.7
253.5
2012
£m
87.2
–
7.0
41.2
107.1
242.5
2012
£m
0.1
5.7
–
0.3
4.7
10.8
2011
£m
236.6
–
236.6
(1.4)
235.2
2011
£m
0.1
6.4
–
0.3
4.3
11.1
The Directors consider that the carrying amount of trade and other payables approximates to their fair value.
Included in accruals and other payables are amounts provided by the Group in relation to claims received which are considered by the
Directors and the management of the Group to be the best estimate of the amounts that might be finally settled.
25. Current tax liabilities/(recoverable)
UK corporation tax
Group
Company
2011
(Restated
note 37)
£m
79.5
2012
£m
59.7
2012
£m
(2.6)
2011
£m
(1.7)
92 Pennon Group Plc Annual Report and Accounts 2012
26. Borrowings
Current
Bank overdrafts
Short-term loans
European Investment Bank
Amounts owed to subsidiary undertakings
Obligations under finance leases
Total current borrowings (note 36)
Non-current
Bank and other loans
Private placement
Bond 2040
RPI index-linked bond
Convertible bond
European Investment Bank
Obligations under finance leases
Total non-current borrowings (note 36)
Total borrowings
Group
2012
£m
10.5
253.2
21.1
–
284.8
40.7
325.5
139.3
99.9
132.3
240.3
117.6
231.5
960.9
1,243.5
2,204.4
2,529.9
2011
£m
18.1
35.3
21.1
–
74.5
24.7
99.2
372.6
99.9
132.1
228.8
115.0
252.5
1,200.9
1,189.2
2,390.1
2,489.3
Company
2012
£m
–
253.2
–
281.2
534.4
–
534.4
139.3
99.9
–
–
117.6
–
356.8
–
356.8
891.2
2011
£m
–
34.9
–
281.2
316.1
–
316.1
358.0
99.9
–
–
115.0
–
572.9
–
572.9
889.0
The Company issued £125 million 4.625% convertible bonds in August 2009. The bonds mature five years from the issue date at their
nominal value of £125 million or can be converted into shares, at the holders’ option, at the maturity date at the conversion price of 597.81
pence per Ordinary share. The value of the equity conversion component was determined to be £10 million has been recognised in
shareholders’ equity in retained earnings.
The Company issued a £100 million private placement in July 2007 maturing in 2022. Interest is payable at a floating rate based on the
performance of an interest rate-linked index. The interest rate payable in the year was 3.2% (2011 4.3%).
South West Water Finance Plc issued a £150 million Bond in July 2010 maturing in 2040 with a cash coupon of 5.875%.
South West Water Finance Plc issued a £200 million RPI index-linked bond in July 2008 maturing in 2057 with a cash coupon of 1.99%.
The fair values of non-current borrowings were:
Group
Bank and other loans
Private placement
Bond 2040
RPI index-linked bond
Convertible bond
European Investment Bank
Obligations under finance leases
Company
Bank and other loans
Private placement
Convertible bond
2012
2011
Book value
£m
Fair value
£m
Book value
£m
Fair value
£m
139.3
99.9
132.3
240.3
117.6
231.5
960.9
1,243.5
2,204.4
139.3
99.9
117.6
356.8
139.3
92.3
157.5
159.5
161.7
205.8
916.1
1,088.1
2,004.2
139.3
92.3
161.7
393.3
372.6
99.9
132.1
228.8
115.0
252.5
1,200.9
1,189.2
2,390.1
358.0
99.9
115.0
572.9
372.6
82.7
147.0
182.4
161.8
219.5
1,166.0
962.7
2,128.7
358.0
82.7
161.8
602.5
Where market values are not available, fair values of borrowings have been calculated by discounting expected future cash flows at
prevailing interest rates.
Pennon Group Plc Annual Report and Accounts 2012 93
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Financial statements Notes to the financial statements
continued
26. Borrowings continued
The maturity of non-current borrowings was:
Between 1 and 2 years
Between 2 and 5 years
Over 5 years
Group
Company
2012
£m
130.3
432.9
1,641.2
2,204.4
2011
£m
291.8
418.7
1,679.6
2,390.1
2012
£m
74.6
182.3
99.9
356.8
2011
£m
243.9
229.1
99.9
572.9
The weighted average maturity of non-current borrowings was 23 years (2011 24 years).
Finance lease liabilities – minimum lease payments:
Within 1 year
Between 2 and 5 years
Over 5 years
Less: future finance charges
Finance lease liabilities – present value of minimum lease payments:
Within 1 year
Between 2 and 5 years
Over 5 years
Group
Company
2012
£m
61.7
292.9
2,216.5
2,571.1
(1,286.9)
1,284.2
2011
£m
47.9
272.0
2,239.2
2,559.1
(1,345.2)
1,213.9
2012
£m
–
–
–
–
–
–
Group
Company
2012
£m
61.7
264.1
1,022.2
1,348.0
2011
£m
47.9
245.5
1,010.4
1,303.8
2012
£m
–
–
–
–
2011
£m
–
–
–
–
–
–
2011
£m
–
–
–
–
Included above are accrued finance charges arising on obligations under finance leases totalling £135.5 million (2011 £130.8 million),
of which £12.6 million (2011 £6.4 million) is repayable within one year.
Within obligations under finance leases, South West Water Limited has utilised finance lease facilities of £180.0 million for certain water
and sewerage business property, plant and equipment which are secured by bank letters of credit issued by United Kingdom financial
institutions. These letters of credit, covering the full period of the finance leases, are renewable between the financial institutions and
South West Water Limited at five-yearly intervals, the next being March 2016.
During 2007 the period for repayment of these leases was extended with an agreement to deposit with the lessor group amounts equal
to the difference between the original and revised payments due. The accumulated deposits, £41.9 million at 31 March 2012 (2011
£32.4 million) are being held to settle the lease liability over the period from the end of the original lease term. The deposits are subject
to a registered charge given as security to the lessor for the balance outstanding.
During 2010 the period for repayment of certain existing leases was extended with an agreement to deposit with the lessor group
amounts equal to the difference between the original and revised payments due. The accumulated deposits, £66.5 million at 31 March
2012 (2011 £47.8 million) are being held to settle the lease liability at the end of the lease term, subject to rights to release by negotiation
with the lessor.
Undrawn committed borrowing facilities at the balance sheet date:
Floating rate:
Expiring within 1 year
Expiring after 1 year
Group
2012
£m
247.5
411.0
658.5
2011
£m
50.0
160.0
210.0
Company
2012
£m
127.5
141.0
268.5
2011
£m
–
90.0
90.0
In addition the Group has, at 31 March 2012, undrawn uncommitted short-term bank facilities of £50.0 million (2011 £50.0 million)
available to the Company or South West Water Limited.
94 Pennon Group Plc Annual Report and Accounts 2012
27. Other non-current liabilities
Amounts owed to subsidiary undertakings
Other payables
Group
Company
2012
£m
–
76.9
76.9
2011
£m
–
30.4
30.4
2012
£m
8.7
–
8.7
2011
£m
8.7
–
8.7
Other payables include deferred income resulting from the adoption at fair value of assets transferred from customers.
28. Retirement benefit obligations
The Group operates a number of defined benefit pension schemes and also a defined contribution section within the main scheme.
The assets of the Group’s pension schemes are held in separate trustee administered funds. The trustees of the funds are required to act
in the best interest of the funds’ beneficiaries. The appointment of schemes’ trustees is determined by the schemes’ trust documentation.
The Group has a policy for the main fund that one-half of all trustees, other than the Chairman, are nominated by members of the
schemes, including pensioners.
Defined contribution schemes
Pension costs for defined contribution schemes were £2.7 million (2011 £2.8 million).
Defined benefit schemes
Assumptions
The principal actuarial assumptions at 31 March were:
Expected return on scheme assets
Rate of increase in pensionable pay
Rate of increase for current and future pensions
Rate used to discount schemes’ liabilities
Inflation
2012
%
6.3
3.5
3.3
4.7
3.3
2011
%
7.3
3.9
3.4
5.5
3.4
Mortality
Assumptions regarding future mortality experience are set based on actuarial advice in accordance with published statistics and
experience. The mortality assumption uses a scheme-specific calculation based on CMI 2009 actuarial tables with an allowance for future
longevity improvement.
The average life expectancy in years of a member having retired at age 62 on the balance sheet date is projected at:
Male
Female
2012
24.9
27.0
The average life expectancy in years of a future pensioner retiring at age 62, 20 years after the balance sheet date, is projected at:
Male
Female
The sensitivities regarding the principal assumptions used to measure the schemes’ liabilities are:
2012
25.8
28.2
2011
24.9
26.9
2011
25.7
28.2
Rate of increase in pensionable pay
Rate of increase in current and future pensions
Rate used to discount schemes’ liabilities
Inflation
Life expectancy
Change in
assumption
+/– 0.5%
+/– 0.5%
+/– 0.5%
+/– 0.5%
+/– 1 year
Impact on
schemes’
liabilities
+/– 1.3%
+/– 6.0%
+/– 8.5%
+/– 7.6%
+/– 3.4%
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Pennon Group Plc Annual Report and Accounts 2012 95
Financial statements Notes to the financial statements
continued
28. Retirement benefit obligations continued
The amounts recognised in the income statement were:
Current service cost
Past service cost
Total included in employment costs
Expected return on pension schemes’ assets
Interest cost on retirement benefit obligations
Total included within net finance costs
Total charge
Group
Company
2012
£m
(12.9)
(1.0)
(13.9)
32.7
(29.1)
3.6
(10.3)
2011
£m
(15.0)
(2.7)
(17.7)
29.4
(27.8)
1.6
(16.1)
2012
£m
(0.8)
–
(0.8)
2.2
(2.1)
0.1
(0.7)
2011
£m
(1.0)
–
(1.0)
2.7
(2.7)
–
(1.0)
The actual return on schemes’ assets was a profit of £32.1 million (2011 £34.7 million).
The amounts recognised in the statement of comprehensive income were:
Actuarial (losses)/gains recognised in the year
The amounts recognised in the balance sheet were:
Fair value of schemes’ assets
Present value of defined benefit obligations
Net liability recognised in the balance sheet
Group
2012
£m
(51.7)
2011
£m
2.4
Company
2012
£m
(3.9)
2011
£m
3.3
Group
Company
2012
£m
517.2
(615.8)
(98.6)
2011
£m
454.2
(540.0)
(85.8)
2012
£m
35.4
(43.2)
(7.8)
The schemes’ assets and the expected long-term rates of return at the year-end were:
Equities
Property
Bonds
Other
2012
2011
Expected
return
%
8.1
7.8
3.7
4.0
Value
£m
269.9
35.4
168.8
43.1
517.2
Expected
return
%
8.5
8.2
4.8
4.4
Fund
%
52
7
33
8
100
Value
£m
262.0
18.6
133.4
40.2
454.2
Other assets principally represent cash contributions received from the Group towards the year-end which are invested during the
subsequent financial year.
96 Pennon Group Plc Annual Report and Accounts 2012
2011
£m
30.7
(37.5)
(6.8)
Fund
%
58
4
29
9
100
28. Retirement benefit obligations continued
The Company’s share of the schemes’ assets at the balance sheet date were:
Equities
Property
Bonds
Other
2012
£m
17.8
2.7
11.8
3.1
35.4
2011
£m
17.6
1.3
9.0
2.8
30.7
The expected return on schemes’ assets is determined by considering the long-term returns and the balance between risk and reward
on the various categories of investment assets held. Expected returns on equity and property investments reflect long-term rates of return
experienced in the respective markets. Expected yields on fixed interest investments are based on gross redemption yields as at the
balance sheet date.
In conjunction with its investment advisers, the trustees have structured the schemes’ investments with the objective of balancing
investment returns and levels of risk. The asset allocation for the main scheme has three principal elements:
• holding of bonds which is expected to be less volatile than most other asset classes and reflects the schemes’ liabilities
• a proportion of equities, with fund managers having freedom in making investment decisions to maximise returns
• investment of a relatively small proportion of the schemes’ assets (circa 10%) in alternative asset classes which give the potential
for diversification (currently property).
The liabilities of the defined benefit schemes are measured by using the projected unit credit method which is an accrued benefits
valuation method in which the scheme liabilities make allowance for projected earnings.
Movements in the net liability were:
At 1 April
Income statement
Statement of comprehensive income
Employer contributions
At 31 March
Movements in the fair value of schemes’ assets were:
At 1 April
Expected return on schemes’ assets
Actuarial (losses)/gains
Members’ contributions
Benefits paid
Employer contributions
At 31 March
Group
Company
2012
£m
(85.8)
(10.3)
(51.7)
49.2
(98.6)
2011
£m
(107.9)
(16.1)
2.4
35.8
(85.8)
2012
£m
(6.8)
(0.7)
(4.0)
3.7
(7.8)
Group
Company
2012
£m
454.2
32.7
(0.7)
1.2
(19.4)
49.2
517.2
2011
£m
402.4
29.4
5.3
1.0
(19.7)
35.8
454.2
2012
£m
30.7
2.2
0.2
–
(1.4)
3.7
35.4
2011
£m
(11.7)
(1.0)
3.3
2.6
(6.8)
2011
£m
37.3
2.7
(10.4)
–
(1.5)
2.6
30.7
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Pennon Group Plc Annual Report and Accounts 2012 97
Financial statements Notes to the financial statements
continued
28. Retirement benefit obligations continued
Movements in the present value of schemes’ defined benefit obligations were:
At 1 April
Service cost
Interest cost
Actuarial (losses)/gains
Members’ contributions
Benefits paid
At 31 March
Group
Company
2012
£m
(540.0)
(13.9)
(29.1)
(51.0)
(1.2)
19.4
(615.8)
2011
£m
(510.3)
(17.7)
(27.8)
(2.9)
(1.0)
19.7
(540.0)
2012
£m
(37.5)
(0.8)
(2.1)
(4.2)
–
1.4
(43.2)
2011
£m
(49.0)
(1.0)
(2.7)
13.7
–
1.5
(37.5)
The future cash flows arising from the payment of the defined benefits are expected to be settled primarily in the period between 15 and
40 years from the balance sheet date.
The five-year history of experience adjustments is:
Group
Fair value of schemes’ assets
Present value of defined benefit obligations
Net liability recognised
Experience (losses)/gains on schemes’ assets
Amount (£m)
Percentage of schemes’ assets
Experience (losses)/gains defined benefit obligations
Amount (£m)
Percentage of defined benefit obligations
2012
£m
517.2
(615.8)
(98.6)
(0.6)
(0.1)%
(0.4)
(1.0)%
2011
£m
454.2
(540.0)
(85.8)
5.3
1.2%
0.8
0.1%
2010
£m
402.4
(510.3)
(107.9)
2009
£m
2008
£m
276.4
(342.4)
(66.0)
331.5
(357.8)
(26.3)
65.7
16.3%
(101.6)
(36.7)%
2.3
0.4%
34.8
10.2%
(44.7)
(13.5)%
49.8
13.9%
The cumulative actuarial losses recognised in the Group statement of comprehensive income at 31 March 2012 were £157.5 million
(2011 £105.8 million).
Company
Fair value of schemes’ assets
Present value of defined benefit obligations
Net liability recognised
Experience gains/(losses) on schemes’ assets
Amount (£m)
Percentage of schemes’ assets
Experience (losses)/gains on defined benefit obligations
Amount (£m)
Percentage of defined benefit obligations
2012
£m
35.4
(43.2)
(7.8)
0.2
0.5%
(0.4)
(1.0)%
2011
£m
30.7
(37.5)
(6.8)
(10.4)
(33.9)%
14.0
37.3%
2010
£m
37.3
(49.0)
(11.7)
6.3
16.9%
0.4
0.8%
2009
£m
29.6
(36.9)
(7.3)
(9.6)
(32.4)%
1.6
4.3%
2008
£m
33.9
(36.8)
(2.9)
4.0
11.8%
(5.3)
(14.4)%
The cumulative actuarial losses recognised in the Company statement of comprehensive income at 31 March 2012 were £11.1 million
(2011 £7.2 million).
The last triennial actuarial valuation of the principal defined benefit scheme was at 1 April 2011. The Group has made deficit recovery
contributions of £35 million during the year (2011 £21 million). The Group monitors funding levels on an annual basis and expects to pay
total contributions of £15 million during the year ended 31 March 2013.
98 Pennon Group Plc Annual Report and Accounts 2012
29. Deferred tax
Deferred tax is provided in full on temporary differences under the liability method using a tax rate of 24% (2011 26%).
Movements on deferred tax were:
Liabilities/(assets) at 1 April
(Credited)/charged to the income statement
(Credited)/charged to equity
Arising on acquisitions
Liabilities/(assets) at 31 March
Group
Company
2011
(Restated
note 37)
£m
312.2
(21.7)
2.8
(0.8)
292.5
2012
£m
292.5
(2.8)
(15.9)
–
273.8
2012
£m
(4.2)
0.5
(0.9)
–
(4.6)
2011
£m
(5.0)
(0.2)
1.0
–
(4.2)
Deferred tax assets have been recognised in respect of all temporary differences giving rise to deferred tax assets because it is probable
that these assets will be recovered.
The majority of the Group’s deferred tax liability is expected to be recovered over more than one year.
The majority of the Company’s deferred tax asset is expected to be recovered over more than one year.
All deferred tax assets and liabilities within the same jurisdiction are offset.
The deferred tax balance has been reduced by a credit of £22.8 million to recognise the changes in the rate of corporation tax enacted
on 19 July 2011 and 26 March 2012 to reduce the rate from 1 April 2012 from 26% to 24%. This credit includes a credit of £26.4 million
recognised in the income statement and a debit of £3.6 million recognised in the statement of comprehensive income. If the published
Government proposals to reduce the rate of corporation tax by a further 1% for each financial year until 2014/15 had been enacted
at the balance sheet date, the total impact would have been a further reduction of circa £23 million.
The movements in deferred tax assets and liabilities were:
Group
Deferred tax liabilities
At 1 April 2010
Credited to the income statement
Arising on acquisitions
At 31 March 2011
Credited to the income statement
At 31 March 2012
Deferred tax assets
At 1 April 2010
(Credited)/charged to the income statement
Charged/(credited) to equity
Arising on acquisitions
At 31 March 2011
Charged to the income statement
Credited to equity
At 31 March 2012
Net deferred tax liability:
At 31 March 2011
At 31 March 2012
Accelerated tax depreciation
Owned assets
(Restated
note 37)
£m
323.7
(18.2)
0.1
305.6
(11.7)
293.9
Provisions
(Restated
note 37)
£m
(8.3)
(0.2)
–
(1.5)
(10.0)
2.1
–
(7.9)
Leased
assets
£m
17.0
(0.6)
–
16.4
(0.6)
15.8
Retirement
benefit
obligations
£m
(30.2)
5.1
2.9
–
(22.2)
8.8
(10.2)
(23.6)
Other
(Restated
note 37)
£m
22.3
(2.9)
1.0
20.4
(2.9)
17.5
Other
(Restated
note 37)
£m
(12.3)
(4.9)
(0.1)
(0.4)
(17.7)
1.5
(5.7)
(21.9)
Total
(Restated
note 37)
£m
363.0
(21.7)
1.1
342.4
(15.2)
327.2
Total
(Restated
note 37)
£m
(50.8)
–
2.8
(1.9)
(49.9)
12.4
(15.9)
(53.4)
292.5
273.8
Pennon Group Plc Annual Report and Accounts 2012 99
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Financial statements Notes to the financial statements
continued
29. Deferred tax continued
Company
Deferred tax assets
At 1 April 2010
Charged/(credited) to the income statement
Charged to equity
At 31 March 2011
Charged/(credited) to the income statement
Credited to equity
At 31 March 2012
Deferred tax credited/(charged) to equity during the year was:
Actuarial losses/(gains) on defined benefit schemes
Net fair value losses/(gains) on cash flow hedges
Deferred tax on other comprehensive loss
Share-based payments (note 34)
30. Provisions
Group
At 1 April 2011
Charged to the income statement
Transferred
Arising on acquisition
Landfill restoration
Utilised during year
At 31 March 2012
Retirement
benefit
obligations
£m
(3.2)
0.4
1.0
(1.8)
0.8
(0.8)
(1.8)
Other
£m
(1.8)
(0.6)
–
(2.4)
(0.3)
(0.1)
(2.8)
Group
Company
2012
£m
10.2
5.8
16.0
(0.1)
15.9
2011
£m
(2.9)
(0.4)
(3.3)
0.5
(2.8)
2012
£m
0.8
0.1
0.9
–
0.9
Total
£m
(5.0)
(0.2)
1.0
(4.2)
0.5
(0.9)
(4.6)
2011
£m
(1.0)
(0.1)
(1.1)
0.1
(1.0)
Environmental
and landfill
restoration
(Restated
note 37)
£m
102.1
3.2
–
0.1
1.6
(14.3)
92.7
Restructuring
£m
Other
provisions
£m
2.7
2.5
–
–
–
(1.5)
3.7
0.2
–
5.3
–
–
–
5.5
Total
(Restated
note 37)
£m
105.0
5.7
5.3
0.1
1.6
(15.8)
101.9
The amount charged to the income statement includes £3.7 million (2011 £4.0 million) charged to finance costs as the unwinding
of discounts in provisions.
The addition to landfill restoration provision of £1.6 million recognised in the year has been matched with an addition to property, plant
and equipment.
Provisions totalling £5.3 million (2011 nil) have been transferred from other payables.
The analysis of provisions between current and non-current is:
Current
Non-current
2011
(Restated
note 37)
£m
16.3
88.7
105.0
2012
£m
25.6
76.3
101.9
Environmental and landfill restoration provisions are expected to be substantially utilised throughout the operational life of a site and for
landfill sites within 30 years of closure. The provisions have been established assuming current waste management technology based
upon estimated costs at future prices which have been discounted to present value.
The restructuring provision related principally to severance costs and will be utilised within one year.
100 Pennon Group Plc Annual Report and Accounts 2012
31. Share capital
Group and Company
Authorised
429,975,270 Ordinary shares of 40.7p each
Allotted, called-up and fully paid
Group and Company
At 1 April 2010 Ordinary shares of 40.7p each
Shares issued under the Scrip Dividend Alternative
Shares re-issued under the Company’s Performance and Co-investment Plan
For consideration of £1.6 million, shares re-issued under the Company’s
Sharesave Scheme
At 31 March 2011 Ordinary shares of 40.7p each
Shares issued under the Scrip Dividend Alternative
Shares re-issued under the Company’s Performance and Co-investment Plan
For consideration of £0.3 million, shares re-issued to the Pennon Employee Share Trust
For consideration of £1.6 million, shares re-issued under the Company’s
Sharesave Scheme
At 31 March 2012 Ordinary shares of 40.7p each
2012
£m
2011
£m
175.0
175.0
Number of shares
Treasury
shares
Ordinary
shares
5,092,574 352,058,253
4,129,038
328,240
–
(328,240)
(454,767)
454,767
4,309,567 356,970,298
2,941,306
246,793
44,667
–
(246,793)
(44,667)
(385,402)
385,402
3,632,705 360,588,466
£m
145.3
1.7
–
–
147.0
1.2
–
–
–
148.2
Shares held as treasury shares may be sold or re-issued for any of the Company’s share schemes, or cancelled.
Employee share schemes
The Group operates a number of equity-settled share plans for the benefit of employees. Details of each plan are:
i) Sharesave Scheme
An all-employee savings related plan is operated that enables employees, including Executive Directors, to invest up to a maximum of
£250 per month for three or five years. These savings can then be used to buy Ordinary shares, at a price set at a 20% discount to the
market value at the start of the savings period, at the third, fifth or seventh year anniversary of the option being granted. Options expire
six months following the exercise date and, except for certain specific circumstances such as redundancy, lapse if the employee leaves
the Group before the option exercise period commences.
Outstanding options to subscribe for Ordinary shares of 40.7p each under the Company’s share option schemes are:
6 July 2004
5 July 2005
4 July 2006
3 July 2007
8 July 2008
6 July 2009
28 June 2010
29 June 2011
Date granted
and
subscription
price fully paid
200p
270p
358p
522p
517p
386p
431p
536p
Period when
options normally
exercisable
2007 – 2011
2008 – 2012
2009 – 2013
2010 – 2014
2011 – 2015
2012 – 2016
2013 – 2017
2014 – 2018
Thousands of shares in
respect of which options
outstanding at 31 March
2011
70
33
160
101
275
1,242
683
–
2,564
2012
–
30
39
88
79
1,184
608
580
2,608
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Pennon Group Plc Annual Report and Accounts 2012 101
Financial statements Notes to the financial statements
continued
31. Share capital continued
i) Sharesave Scheme continued
The number and weighted average exercise price of Sharesave options are:
At 1 April
Granted
Forfeited
Exercised
Expired
At 31 March
2012
2011
Number of
Ordinary
shares
(thousands)
2,564
593
(123)
(385)
(41)
2,608
Weighted
average
exercise price
per share (p)
409
536
438
405
439
437
Number of
Ordinary
shares
(thousands)
2,472
699
(119)
(455)
(33)
2,564
Weighted
average
exercise price
per share (p)
396
431
429
361
450
409
The weighted average price of the Company’s shares at the date of exercise of Sharesave options during the year was 656p (2011 478p).
The options outstanding at 31 March 2012 had a weighted average exercise price of 437p (2011 409p) and a weighted average
remaining contractual life of 3.0 years (2011 2.4 years).
The aggregate fair value of Sharesave options granted during the year was £0.9 million (2011 £0.8 million), determined using the Black-
Scholes valuation model. The significant inputs into the valuation model at the date of issue of the options were:
Weighted average share price
Weighted average exercise price
Expected volatility
Expected life
Risk-free rate
Expected dividend yield
2012
670p
536p
27.4%
3.9 years
1.4%
4.3%
2011
539p
431p
29.0%
4.1 years
1.4%
4.5%
Expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous two years.
102 Pennon Group Plc Annual Report and Accounts 2012
31. Share capital continued
ii) Performance and Co-investment Plan
Executive Directors and senior management receive a conditional award of Ordinary shares in the Company and are also required
to hold a substantial personal shareholding in the Company. The eventual number of shares, if any, which vest is dependent upon the
achievement of conditions of the plan over the restricted period, being not less than three years.
The number and price of shares in the Performance and Co-investment Plan are:
At 1 April
Granted
Vested
Lapsed
At 31 March
2012
2011
Number of
Ordinary
shares
(thousands)
1,559
454
(247)
(359)
1,407
Weighted
average
exercise price
per share (p)
550
698
637
586
573
Number of
Ordinary
shares
(thousands)
1,465
530
(328)
(108)
1,559
Weighted
average
exercise price
per share (p)
554
546
557
557
550
The awards outstanding at 31 March 2012 had a weighted exercise price of 573p (2011 550p) and a weighted average remaining
contractual life of 1.3 years (2011 1.3 years).
The aggregate fair value of awards granted during the year was £2.0 million (2011 £2.1 million) determined using a Monte-Carlo simulation
model. The significant inputs into the valuation model at the date of the share awards were:
Weighted average share price
Expected volatility
Risk-free rate
2012
698p
27.4%
1.4%
2011
546p
29.0%
1.4%
Expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous two years.
iii) Annual Incentive Bonus Plan – Deferred Shares
Awards under the plan to Executive Directors and senior management involve the release of Ordinary shares in the Company to
participants. There is no performance condition since vesting is conditional upon continuous service with the Group for a period of three
years from the award. The number and weighted average price of shares in the Annual Incentive Bonus Plan are:
At 1 April
Granted
Vested
Lapsed
At 31 March
2012
2011
Number of
Ordinary
shares
(thousands)
459
175
(202)
(5)
427
Weighted
average
exercise price
per share (p)
557
725
608
522
602
Number of
Ordinary
shares
(thousands)
291
175
(7)
–
459
Weighted
average
exercise price
per share (p)
547
572
529
–
557
The awards outstanding at 31 March 2012 had a weighted average exercise price of 602p (2011 557p) and a weighted average
remaining contractual life of 1.5 years (2011 1.5 years). The Company’s share price at the date of the awards ranged from 473p to 725p.
The aggregate fair value of awards granted during the year was £1.2 million (2011 £1.0 million), determined from market value. No option
pricing methodology is applied since dividends declared on the shares are receivable by the participants in the scheme.
Further details of the plans and options granted to Directors, included above, are shown in the Directors’ remuneration report.
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Pennon Group Plc Annual Report and Accounts 2012 103
Financial statements Notes to the financial statements
continued
32. Share premium account
Group and Company
At 1 April 2010
Adjustment for shares issued under the Scrip Dividend Alternative
At 31 March 2011
Adjustment for shares issued under the Scrip Dividend Alternative
At 31 March 2012
£m
10.9
(1.7)
9.2
(1.2)
8.0
33. Capital redemption reserve
The capital redemption reserve represents the redemption of B shares and cancellation of Deferred shares arising from a capital return
to shareholders undertaken during 2006.
Group and Company
At 1 April 2010
At 31 March 2011
At 31 March 2012
34. Retained earnings and other reserves
Group
At 1 April 2010
Profit for the year
Other comprehensive loss for the year
Dividends paid relating to 2010
Adjustment for shares issued under the Scrip Dividend Alternative
Credit to equity in respect of share-based payments
Transfer from hedging reserve to property, plant and equipment
Deferred tax in respect of share-based payments
Proceeds from treasury shares re-issued
At 31 March 2011
Profit for the year
Other comprehensive loss for the year
Dividends paid relating to 2011
Adjustment for shares issued under the Scrip Dividend Alternative
Credit to equity in respect of share-based payments
Deferred tax in respect of share-based payments
Charge in respect of share options vesting
Own shares acquired by the Pennon Employee Share Trust in respect
of share options granted
Proceeds from treasury shares re-issued
At 31 March 2012
Own shares
£m
Hedging
reserve
£m
Retained
earnings
£m
(2.2)
–
–
–
–
–
–
–
–
(2.2)
–
–
–
–
–
–
0.7
(0.3)
–
(1.8)
(12.9)
–
(0.4)
–
–
–
0.3
–
–
(13.0)
–
(18.7)
–
–
–
–
–
–
–
(31.7)
377.6
171.6
(3.6)
(79.6)
22.8
3.4
–
0.5
1.6
494.3
172.4
(47.1)
(88.2)
19.1
3.6
(0.1)
(0.7)
–
1.9
555.2
£m
144.2
144.2
144.2
Total
£m
362.5
171.6
(4.0)
(79.6)
22.8
3.4
0.3
0.5
1.6
479.1
172.4
(65.8)
(88.2)
19.1
3.6
(0.1)
–
(0.3)
1.9
521.7
The own shares reserve represents the cost of Ordinary shares in Pennon Group Plc issued to or purchased in the market and held by
the Pennon Employee Share Trust to satisfy awards under the Group’s Annual Incentive Bonus Plan.
The market value of the 433,000 Ordinary shares (2011 589,000 Ordinary shares) held by the trust at 31 March 2012 was £3.1 million
(2011 £3.7 million).
104 Pennon Group Plc Annual Report and Accounts 2012
34. Retained earnings and other reserves continued
Company
At 1 April 2010
Profit for the year
Other comprehensive income for the year
Dividends paid relating to 2010
Adjustment for shares issued under the Scrip Dividend Alternative
Credit to equity in respect of share-based payments
Deferred tax in respect of share-based payments
Proceeds from treasury shares re-issued
At 31 March 2011
Profit for the year
Other comprehensive loss for the year
Dividends paid relating to 2011
Adjustment for shares issued under the Scrip Dividend Alternative
Credit to equity in respect of share-based payments
Proceeds from treasury shares re-issued
At 31 March 2012
35. Cash flow from operating activities
Reconciliation of profit for the year to cash generated from operations:
Cash generated from operations
Continuing operations
Profit for the year
Adjustments for:
Share-based payments
Profit on disposal of property, plant and equipment
Depreciation charge
Amortisation of intangible assets
Share of post-tax profit from joint ventures
Finance income
Finance costs
Dividends receivable
Taxation charge/(credit)
Changes in working capital (excluding the effect of acquisition
of subsidiaries):
Increase in inventories
(Increase)/decrease in trade and other receivables
(Decrease)/increase in trade and other payables
Decrease in retirement benefit obligations from contributions
Decrease in provisions
Cash generated/(outflow) from operations
Hedging
reserve
£m
Retained
earnings
£m
(0.3)
–
0.3
–
–
–
–
–
–
–
(0.3)
–
–
–
–
(0.3)
487.7
90.1
2.4
(79.6)
22.8
0.7
0.1
1.6
525.8
116.3
(3.3)
(88.2)
19.1
0.8
1.9
572.4
Group
2012
£m
2011
£m
Company
2012
£m
172.4
171.6
116.3
3.6
(2.8)
145.6
1.4
(4.0)
(119.3)
191.6
–
28.1
(1.7)
(27.3)
(13.2)
(35.3)
(14.4)
324.7
3.4
(2.3)
141.0
0.7
(4.3)
(45.1)
121.8
–
16.9
(0.6)
(25.5)
30.3
(18.1)
(13.6)
376.2
0.8
–
0.1
–
–
(59.7)
60.6
(117.5)
2.1
–
25.0
(5.7)
(3.1)
–
18.9
Total
£m
487.4
90.1
2.7
(79.6)
22.8
0.7
0.1
1.6
525.8
116.3
(3.6)
(88.2)
19.1
0.8
1.9
572.1
2011
£m
90.1
0.7
–
0.1
–
–
(23.6)
26.6
(93.1)
(0.4)
–
(37.4)
(5.8)
(1.4)
–
(44.2)
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Financial statements Notes to the financial statements
continued
36. Net borrowings
Cash and cash deposits
Borrowings – current
Bank overdrafts
Other current borrowings
Finance lease obligations
Amounts owed to subsidiary undertakings
Total current borrowings
Borrowings – non-current
Bank and other loans
Other non-current borrowings
Finance lease obligations
Total non-current borrowings
Total net borrowings
Group
Company
2012
£m
425.3
(10.5)
(274.3)
(40.7)
–
(325.5)
(729.4)
(231.5)
(1,243.5)
(2,204.4)
(2,104.6)
2011
£m
555.5
(18.1)
(56.4)
(24.7)
–
(99.2)
(948.4)
(252.5)
(1,189.2)
(2,390.1)
(1,933.8)
2012
£m
158.9
–
(253.2)
–
(281.2)
(534.4)
(356.8)
–
–
(356.8)
(732.3)
2011
£m
236.6
–
(34.9)
–
(281.2)
(316.1)
(572.9)
–
–
(572.9)
(652.4)
37. Acquisitions
On 6 June 2011 the entire issued share capital of Storm Recycling Limited (renamed Viridor (Winsford) Limited) was purchased by Viridor
Waste Management Limited for a cash consideration of £1.7 million. The acquisition has been accounted for using the acquisition method.
Provisional goodwill of £1.8 million has been capitalised.
On 17 November 2011 the entire issued share capital of JWS Churngold Limited (renamed Viridor (Lancashire) Limited) was purchased by
Viridor Waste Management Limited for a cash consideration of £14.3 million. The acquisition has been accounted for using the acquisition
method. Provisional goodwill of nil has been capitalised.
On 29 November 2011 the entire issued share capital of Community Waste Holding Limited (renamed Viridor (Community Recycling MKH)
Limited) was purchased by Viridor Waste Management Limited for a consideration of £18.5 million. Community Waste Recycling Limited
(renamed Viridor (Community Recycling MK) Limited) is a wholly owned subsidiary of Viridor (Community Recycling MKH) Limited. The
acquisition has been accounted for using the acquisition method. Provisional goodwill of £16.7 million has been capitalised.
On 31 October 2011 Viridor Waste Management Limited acquired Veolia’s trade waste collection interests in Cornwall and North Devon
for £0.6 million. On 1 January 2012 Viridor Waste Management Limited acquired Veolia’s industrial and commercial collection interests in
Devon and Somerset for £7.6 million. The acquisition of these trades has been accounted for using the acquisition method. Provisional
goodwill of £8.2 million has been capitalised.
The residual excesses over the net assets acquired in each business combination has been recognised as goodwill. The provisional
goodwill from each business combination is attributed to the profitability of the acquired business.
106 Pennon Group Plc Annual Report and Accounts 2012
37. Acquisitions continued
Fair values on acquisition
Intangible assets
Property, plant and equipment
Inventories
Receivables
Cash and cash deposits
Payables
Taxation – current
Leases
Provisions
Net (liabilities)/assets acquired
Goodwill
Total consideration
Satisfied by:
Cash
Unsecured loan notes
Deferred consideration
Net cash outflow arising on acquisition
Cash consideration
Cash and cash deposits acquired
Revenue for the period since acquisition to 31 March 2012
Profit/(loss) before tax for the period since acquisition to
31 March 2012
Directly attributable costs included in other operating expenses
Storm
Recycling
£m
–
0.1
–
0.5
0.2
(0.7)
(0.1)
–
(0.1)
(0.1)
1.8
1.7
JWS
Churngold
£m
14.5
–
–
1.0
0.5
(1.5)
(0.2)
–
–
14.3
–
14.3
Community
Recycling
£m
–
0.8
0.1
1.8
3.6
(3.8)
(0.6)
(0.1)
–
1.8
16.7
18.5
1.7
–
–
1.7
(0.2)
1.5
0.8
0.1
–
14.3
–
–
14.3
(0.5)
13.8
2.1
0.6
0.2
9.3
8.3
0.9
9.3
(3.6)
5.7
1.9
(0.9)
0.8
Veolia
Trade
£m
–
–
–
–
–
–
–
–
–
–
8.2
8.2
8.2
–
–
8.2
–
8.2
1.1
–
0.5
Total
£m
14.5
0.9
0.1
3.3
4.3
(6.0)
(0.9)
(0.1)
(0.1)
16.0
26.7
42.7
33.5
8.3
0.9
33.5
(4.3)
29.2
5.9
(0.2)
1.5
If all the acquisitions had occurred on 1 April 2011 Group revenues for the year would have been £1,248.9 million and profit before tax
for the year would have been £202.7 million. These amounts have been calculated after applying the Group’s accounting policies and
adjusting the results to reflect the provisional fair value adjustments.
Restatements
At 31 March 2011 the accounting for the following acquisitions was provisional:
• Oakley Waste Management Limited (renamed Viridor Waste (Corby) Limited) and Basecall Limited, acquired from Reconomy
(Acquisitions) Limited
• Pearsons Group Holdings Limited
• Adapt Recycling Limited (renamed Viridor Waste (Adapt) Limited)
• Swinnerton Environmental Limited (renamed Viridor Waste (Bury) Limited)
• Martock Waste Paper Company Limited (renamed Viridor (Martock) Limited).
Completion of the accounting for the acquisitions has resulted in an increase to goodwill of £8.0 million, a decrease in property, plant and
equipment of £4.8 million, a decrease in inventories of £0.2 million, a decrease in trade and other receivables of £1.6 million, a decrease in
trade and other payables of £5.4 million, an increase in current tax payable of £0.1 million, a decrease in deferred tax of £1.3 million and an
increase of £8.0 million in provisions.
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Pennon Group Plc Annual Report and Accounts 2012 107
Financial statements Notes to the financial statements
continued
38. Principal subsidiary, joint venture and associate undertakings at 31 March 2012
Water and sewerage
South West Water Limited*
South West Water Finance Plc
Source Contact Management Limited
Source Collections Limited
Waste management
Viridor Limited*
Viridor Waste Limited
Viridor Waste Exeter Limited
Viridor Waste Suffolk Limited
Viridor Waste (West Sussex) Limited
Viridor Waste Management Limited
Viridor EnviroScot Limited
Pearsons Group Holdings Limited
Viridor Waste (Thetford) Limited
Viridor Resource Management Limited
Viridor Waste Kent Limited
Viridor (Martock) Limited
Viridor Oxfordshire Limited
Handside Limited
Viridor EfW (Runcorn) Limited
Viridor Waste (Landfill Restoration) Limited
Viridor Waste (Somerset) Limited
Viridor Waste (Thames) Limited
Viridor Waste (Greater Manchester) Limited
Viridor Parkwood Holdings Limited
Viridor Polymer Recycling Limited
Viridor (Community Recycling MKH) Limited
Viridor (Community Recycling MK) Limited
Viridor (Winsford) Limited
Viridor Trident Park Limited
Viridor (Glasgow) Limited
Viridor (Lancashire) Limited
Viridor (Cheshire) Limited
Other
Peninsula Insurance Limited*
Country of incorporation,
registration and principal
operations
England
England
England
England
England
England
England
England
England
England
Scotland
England
England
England
England
England
England
England
England
England
England
England
England
British Virgin Islands†
England
England
England
England
England
England
England
England
Guernsey
*
Indicates the shares are held directly by Pennon Group Plc, the Company
† Operations are carried out in England
The subsidiary undertakings are wholly-owned and all shares in issue are Ordinary shares. All companies above are consolidated in the
Group financial statements.
108 Pennon Group Plc Annual Report and Accounts 2012
38. Principal subsidiary, joint venture and associate undertakings at 31 March 2012 continued
Joint ventures and associate
All joint ventures, the associate and the subsidiary undertakings of Lakeside Energy from Waste Holdings Limited, Viridor Laing (Greater
Manchester) Holdings Limited and INEOS Runcorn (TPS) Holdings Limited are incorporated and registered in England which is also their
country of operation.
Share capital in issue
Percentage held
Principal activity
Lakeside Energy from Waste Holdings Limited
1,000,000 A Ordinary shares
1,000,000 B Ordinary shares
–
100%
Lakeside Energy from Waste Limited
Shares in Lakeside Energy from Waste Holdings Limited are held by Viridor Waste Management Limited.
Waste management
Viridor Laing (Greater Manchester) Holdings Limited
Viridor Laing (Greater Manchester) Limited
Shares in Viridor Laing (Greater Manchester) Holdings Limited are held by Viridor Waste Management Limited.
2 Ordinary shares
50%
Waste management
INEOS Runcorn (TPS) Holdings Limited
1,000 A Ordinary shares
186,750 B1 Ordinary shares
62,250 B2 Ordinary shares
INEOS Runcorn (TPS) Limited
Shares in INEOS Runcorn (TPS) Holdings Limited are held by Viridor Waste Management Limited.
39. Operating lease commitments
20%
50%
–
Waste management
The future aggregate minimum lease payments under non-cancellable
operating leases are:
Within 1 year
Between 2 and 5 years
Over 5 years
Group
2012
£m
8.8
26.1
75.5
110.4
2011
£m
8.7
23.1
82.3
114.1
Company
2012
£m
2011
£m
–
–
–
–
–
–
–
–
The Group leases various offices, depots and workshops under non-cancellable operating lease agreements. The leases have various
terms, escalation clauses and renewal rights. Property leases are negotiated for an average term of 25 years and rentals are reviewed
on average at five-yearly intervals.
The Group also leases plant and machinery under non-cancellable operating lease agreements.
40. Contingent liabilities
Guarantees:
Borrowing facilities of subsidiary undertakings
Contractors’ claims on capital schemes
Performance bonds
Other
Group
2012
£m
–
–
117.4
6.9
124.3
2011
£m
–
0.3
107.8
6.9
115.0
Company
2012
£m
359.9
–
117.4
6.9
484.2
2011
£m
371.8
–
107.8
6.9
486.5
Guarantees in respect of performance bonds are entered into in the normal course of business. No liability is expected to arise in respect
of the guarantees.
Viridor Waste Management Limited has given a commitment to supply 160,000 tonnes of waste per annum (or pay market price based
compensation) to the energy from waste plant of the joint venture in Lakeside Energy from Waste Holdings Limited. The Directors consider
that the committed waste volume will be available in the ordinary course of business.
Other contingent liabilities relate to a possible obligation to pay further consideration in respect of a previously acquired business when the
outcome of planning applications is known.
Pennon Group Plc Annual Report and Accounts 2012 109
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Financial statements Notes to the financial statements
continued
41. Capital commitments
Contracted but not provided
Group
Company
2012
£m
545.8
2011
£m
218.3
2012
£m
–
42. Related party transactions
During the year, Group companies entered into the following transactions with related parties who are not members of the Group:
Sales of goods and services
Viridor Laing (Greater Manchester) Limited
Purchase of goods and services
Lakeside Energy from Waste Limited
Year-end balances
Receivables due from related parties
Viridor Laing (Greater Manchester) Limited (loan balance)
Lakeside Energy from Waste Limited (loan balance)
INEOS Runcorn (TPS) Limited (loan balance)
Viridor Laing (Greater Manchester) Limited (trading balance)
Lakeside Energy from Waste Limited (trading balance)
Payables due to related parties
Viridor Laing (Greater Manchester) Limited (trading balance)
Lakeside Energy for Waste Limited (trading balance)
2012
£m
80.4
10.7
2012
£m
40.3
10.0
22.3
72.6
7.6
1.0
8.6
7.0
–
2011
£m
–
2011
£m
82.0
9.4
2011
£m
32.0
13.6
11.0
56.6
8.8
–
8.8
7.0
1.5
The £72.6 million (2011 £56.6 million) receivable relates to loans to related parties included within receivables and due for repayment
in instalments between 2012 and 2033. Interest is charged at an average of 14.0% (2011 14.0%).
The £7.0 million payable relates to consortium relief due to Viridor Laing (Greater Manchester) Limited.
Company
The following transactions with subsidiary undertakings occurred in the year:
Sales of goods and services (management fees)
Purchase of goods and services (support services)
Interest receivable (loans)
Dividends received
2012
£m
8.4
0.5
19.6
117.5
2011
£m
7.8
0.5
18.9
93.1
Sales of goods and services to subsidiary undertakings are at cost. Purchases of goods and services from subsidiary undertakings are
under normal commercial terms and conditions which would also be available to unrelated third parties.
110 Pennon Group Plc Annual Report and Accounts 2012
42. Related party transactions continued
Year-end balances
Receivables due from subsidiary undertakings
Loans
Trading balances
2012
£m
439.8
1.9
2011
£m
457.4
1.1
Interest on £204.3 million of the loans has been charged at a fixed rate of 4.5% and on £29.6 million at a fixed rate of 6.0%
(2011 £104.8 million, 5% and £120.5 million, 6.0%).
Interest on the balance of the loans is charged at 12 month LIBOR +1.5%. The loans are due for repayment in instalments over the period
2013 to 2017. During the year there were no further provisions (2011 nil) in respect of loans to subsidiaries not expected to be repaid.
Payables due to subsidiary undertakings
Loans
Trading balances
The loans from subsidiary undertakings are unsecured and interest-free without any terms for repayment.
2012
£m
281.2
14.4
2011
£m
281.2
15.1
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Pennon Group Plc Annual Report and Accounts 2012 111
Financial statements
Five-year financial summary
Income statement
Revenue
Operating profit
Net finance costs
Share of profit in joint ventures
Profit before tax
Taxation
Profit for the year
Dividends proposed
Earnings per share (basic):
From continuing operations
Earnings per share
Deferred tax
Earnings per share before deferred tax
Declared dividends per share
Capital expenditure
Acquisitions
Property, plant and equipment
Balance sheet
Non-current assets
Net current assets
Non-current liabilities
Net assets
Number of employees (average for year)
Water and sewerage business
Waste management
Other businesses
2012
£m
2011
£m
2010
£m
1,233.1
268.8
(72.3)
4.0
200.5
(28.1)
172.4
95.9
48.1p
(0.8)p
47.3p
26.52p
2012
£m
29.2
257.4
3,587.8
13.0
(2,778.7)
822.1
1,335
3,148
46
4,529
1,159.2
260.9
(76.7)
4.3
188.5
(16.9)
171.6
88.2
48.4p
(6.1)p
42.3p
24.65p
2011
£m
25.1
199.0
3,347.6
335.7
(2,903.8)
779.5
1,196
3,012
44
4,252
1,068.9
266.3
(81.6)
1.1
185.8
(44.3)
141.5
79.6
40.4p
0.4p
40.8p
22.55p
2010
£m
9.3
192.2
3,189.4
162.1
(2,688.6)
662.9
1,191
2,853
43
4,087
2009
£m
958.2
250.8
(92.2)
0.8
159.4
(69.6)
89.8
73.4
25.8p
11.1p
36.9p
21.00p
2009
£m
3.4
231.8
3,036.3
40.5
(2,476.2)
600.6
1,227
2,154
41
3,422
2008
£m
879.4
237.7
(85.6)
0.2
152.3
(16.4)
135.9
69.1
38.9p
(2.6)p
36.3p
19.81p
2008
£m
89.0
207.7
2,931.0
199.7
(2,485.2)
645.5
1,276
2,059
42
3,377
112 Pennon Group Plc Annual Report and Accounts 2012
Shareholder information
Financial calendar
Financial year-end
Twenty-third Annual General Meeting
Ex-dividend date for 2012 Final dividend
Record date for 2012 Final dividend
2012 Final dividend payable
2012/13 Half yearly financial report announcement
2013 Interim dividend payable
2013 Preliminary results announcement
Twenty-fourth Annual General Meeting
2013 Final dividend payable
31 March
26 July 2012
8 August 2012*
10 August 2012*
5 October 2012*
November 2012
April 2013
May 2013
July 2013
October 2013
* These dates are subject to obtaining shareholder approval at the 2012 Annual General Meeting to the payment of a final dividend for the year ended 31 March 2012.
Scrip Dividend Alternative
8 August 2012
10 August 2012
24 August 2012
17 September 2012
4 October 2012
5 October 2012
5 October 2012
Shareholder analysis at 31 March 2012
Ordinary shares quoted ex dividend
Record date for final dividend
Posting of Scrip dividend offer
Final date for receipt of Forms of Election/Mandate
Posting of dividend cheques and share certificates
Final dividend payment date
First day of dealing in the new Ordinary shares
Range of shares held
1-100
101-1,000
1,001-5,000
5,001-50,000
50,001-100,000
100,001-HIGHEST
Individuals
Companies
Trust companies (pension funds etc)
Banks and nominees
Number of
shareholders
2,451
9,468
9,389
1,222
101
264
Percentage
of total
shareholders
10.71
41.35
41.01
5.34
0.44
1.15
Percentage
of Ordinary
shares
0.02
1.37
5.51
3.77
2.02
87.31
22,895
19,622
217
12
3,044
22,895
100.00
85.70
0.95
0.05
13.30
100.00
100.00
8.15
2.13
0.02
89.70
100.00
Major shareholdings
The net position on 31 March 2012 of investors who have notified interests in the issued share capital of the Company pursuant to the
Financial Services Authority’s Disclosure and Transparency Rules is as follows:
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Pictet Asset Management SA
Prudential Plc group of companies
AXA SA and its Group Companies
Invesco Ltd
Legal & General Group Plc
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9.79%
7.10%
5.54%
5.52%
4.77%
3.73%
No changes to the above interests in the issued share capital of the Company have been disclosed to the Company between 31 March
2012 and 16 June 2012 (being a date not more than one month prior to the date of the Company’s Notice of Annual General Meeting).
Pennon Group Plc Annual Report and Accounts 2012 113
Shareholder information
continued
Shareholder services
Registrar
All enquiries concerning shareholdings including notification of change of address, loss of a share certificate or dividend payments should
be made to the Company’s registrar. The Company’s registrar, Capita Registrars, can be contacted as follows:
Capita Registrars
Pennon Group Share Register
The Registry
34 Beckenham Road
Beckenham
Kent
BR3 4TU
Telephone: 0871 664 9234 (calls cost 10p per minute plus network extras) Lines are open 8.30am-5.30pm Monday-Friday.
Overseas telephone: +44 800 141 2951
Email: pennon@capitaregistrars.com
Share dealing service
The telephone share dealing service offered by Stocktrade enables shareholders to buy and sell shares in the Company on a low-cost
basis and to make regular investments in the Company. Telephone Stocktrade on 0845 601 0995 and quote: LOW CO107. Commission
is 0.5% (subject to a minimum charge of £17.50) to £10,000, then 0.2% thereafter.
Share gift service
Through Sharegift, an independent charity share donation scheme, shareholders who only have a small number of shares with a value
that makes it uneconomical to sell them, can donate such shares to charity. Donations can be made by completion of a simple share
transfer form which is available from the Company’s registrars, Capita Registrars.
Individual Savings Accounts
By holding their shares in the Company in an Individual Savings Account (ISA), shareholders may gain tax advantages.
Scrip Dividend Alternative
The Company operates a Scrip Dividend Alternative. The Scrip Dividend Alternative provides shareholders with an opportunity to invest
the whole of, or part of, the cash dividend they receive on their Pennon Group Plc shares to buy further shares in the Company without
incurring stamp duty or dealing expenses. Subject to obtaining shareholder approval at the 2012 Annual General Meeting to the payment
of a final dividend for the year ended 31 March 2012, full details of the Scrip Dividend Alternative, including how to join, will be sent out to
shareholders on 24 August 2012. The full timetable for offering the Scrip Dividend Alternative is given on page 113.
Online portfolio service
The online portfolio service provided by Capita Registrars gives shareholders access to more information on their investments. Details of
the portfolio service are available online at capitashareportal.com
Electronic communications
The Company has passed a resolution which allows it to communicate with its shareholders by means of its website.
Shareholders currently receiving a printed copy of the Annual Report who now wish to sign up to receive all future shareholder
communications electronically, can do so by registering with Capita Registrars’ share portal. Go to capitashareportal.com to register,
select ‘Account Registration’ and then follow the on-screen instructions by inputting your surname, your Investor Code (which can be
found on your Form of Proxy) and your postcode as well as entering an e-mail address and selecting a password.
By registering to receive your shareholder communications electronically, you will also automatically receive your Dividend Tax Vouchers
electronically.
Electronic Proxy voting
Shareholders also have the opportunity to register the appointment of a proxy for any general meeting of the Company once notice of
the meeting has been given and may do so via capitashareportal.com Shareholders who register an e-mail preference will not receive
a paper proxy form. Instead they will receive an e-mail alert advising them of general meetings of the Company, with links to the Notices
of Meetings and annual and half yearly financial reports.
The Pennon website
Pennon’s website pennon-group.co.uk provides news and details of the Company’s activities plus links to its business websites. The
Investor Information section contains up-to-date information for shareholders including comprehensive share price information; financial
results; dividend payment dates and amounts; and Stock Exchange announcements. There is also a comprehensive share services
section on the website which includes information on buying, selling and transferring shares; and on the action to be undertaken by
shareholders in the event of a change in personal circumstances, for example, a change of address.
Further shareholder information may be found at pennon-group.co.uk
114 Pennon Group Plc Annual Report and Accounts 2012
Share fraud warning
Share fraud includes scams where investors are called out of the blue and offered shares that often turn out to be worthless or non-
existent, or are offered an inflated price for shares that they own. These calls come from fraudsters operating in ‘boiler rooms’ that
are mostly based abroad; often they imply a connection to the company concerned and they can be very persistent and extremely
persuasive. Whilst high profits are promised, those who buy or sell shares in this way usually lose their money. The Financial Services
Authority (FSA) has found most share fraud victims are experienced investors who lose an average of £20,000, with around £200
million lost in the UK each year.
Protect yourself
If you are offered unsolicited investment advice, discounted shares, a premium price for shares you own, or free company or research
reports, you should take these steps before handing over any money:
1. Get the name of the person and organisation contacting you.
2. Check the FSA Register at fsa.gov.uk/fsaregister to ensure that they are authorised.
3. Use the details on the FSA Register to contact the firm.
4. Call the FSA Consumer Helpline on 0845 606 1234 if there are no contact details on the FSA Register or you are told that the
Register is out of date.
5. If the calls persist, hang up.
6. REMEMBER: if it sounds too good to be true, it probably is!
If you use an unauthorised firm to buy or sell shares or other investments, you will not have access to the Financial Ombudsman
Service or Financial Services Compensation Scheme (FSCS) if things go wrong.
Details of any share dealing facilities that the Company endorses will be included in Company mailings.
Report a scam
If you are approached about a share scam you should tell the FSA using the share fraud reporting form at fsa.gov.uk/scams,
where you can find out about the latest investment scams. You can also call the Consumer Helpline on 0845 606 1234.
If you have already paid money to share fraudsters you should contact Action Fraud on 0300 123 2040.
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Pennon Group Plc Annual Report and Accounts 2012 115
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116 Pennon Group Plc Annual Report and Accounts 2012
Pennon Group Plc
Registered Office:
Peninsula House
Rydon Lane
Exeter
Devon
England
EX2 7HR
pennon-group.co.uk
Registered in England No. 2366640