Annual Report
and Accounts 2013
Contents
Directors’ report (incorporating business review)
Group overview
4 Group highlights
6 Key performance indicators
8 Chairman’s statement
10 Our business model
12 Strategic Q&A
South West Water
16 At a glance
18
The business
Viridor
22 At a glance
24
The business
Financial review
Group
30
36 Principal risks and uncertainties
48 Sustainability report
58 Other statutory information
Governance
60 Chairman’s introduction to corporate governance
62 Board of Directors
64 Corporate governance and internal control
72 Directors’ remuneration report
84
Independent auditors’ report
Financial statements and shareholder information
86
Financial statements
143 Five-year financial summary
144 Shareholder information
To view our online report visit:
www.pennonannualreport.co.uk/2013
2
Pennon Group Plc Annual Report 2013 G
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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 £4.7 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.
As one of the largest environmental and resource management
groups in the UK, Pennon’s business is all about sustainability.
3
South West WaterViridorGroupGovernanceFinancial statementsPennon Group Plc Annual Report 2013
Directors’ report - Business review - Group overview
Group highlights
Pennon Group
We create value for our shareholders
by continuing to develop our two
environmental utility infrastructure
businesses, South West Water
and Viridor, and by the efficient
financing and strong management
of the Group as a whole.
South West Water
The water and sewerage services
provider in Devon, Cornwall
and parts of Dorset and Somerset
– delivering strong operational
and financial performance.
Viridor
One of the leading UK recycling,
renewable energy and waste
management businesses –
achieving further significant progress
in its long-term contract and energy
from waste activities.
4
Financial highlights
Revenue
£1,201.1m
-2.6%
Assets
£4.7bn
Dividend
+7.3%
Profit before tax*
£198.2m
-1.1%
* Before exceptional net charges.
Statutory basis £21.8 million.
Financial highlights
Revenue
£498.6m
+5.2%
Profit before tax*
£152.1m
+7.5%
* Before exceptional net income.
Statutory basis £164.6 million.
Financial highlights
Revenue
£703.8m
-7.5%
Profit before tax*
£36.5m
-36.6%
* Before exceptional charges.
Statutory basis loss £152.4 million.
Pennon Group Plc Annual Report 2013
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Highlights of the year
Strategy
Strategy in action
• In a challenging year, delivered profit
before tax (before exceptional items)
only marginally below the previous year
• Group capital expenditure up 61%
to £439 million
• £300 million hybrid capital issue
provides substantial additional funding
and strengthens balance sheet
• Group businesses well positioned
for the future.
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.
• Committed to an annual dividend increase
of 4% above inflation up to 2014/15
• Continued focus on our two
environmental utility infrastructure
businesses undertaking sustainable
activities which make a positive impact
on communities and the environment
• £439 million invested in key infrastructure
supporting the development
of the UK economy
• Group well funded with efficient
long-term financing.
Highlights of the year
Strategy
Strategy in action
• Ongoing outperformance
of efficiency targets
• Strong operational performance
despite extreme weather events
• 88% improvement in Service
Incentive Mechanism (SIM) score
since the opening K5 position
• £60 million reinvested to enhance
protection for bathing waters,
private sewers and help customers
in most need.
At the core of South West Water’s strategy
is the company’s commitment to delivering
the services its customers depend on in
the most cost-effective and sustainable way.
• 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
• Pure Environment – protecting
and enhancing the environment
• Financial Management – outperforming
the regulatory contract, rigorously controlling
costs underpinned by efficient funding.
Highlights of the year
Strategy
Strategy in action
• Strong progress in long-term
Public Private Partnership (PPP)/
energy from waste (EfW) strategy
• Significant current headwinds
in recycling and ongoing trend
decline in landfill - aggressive action
to reduce costs
• Exceptional charges - total £150 million
net of tax
• Four more key long-term PPP/EfW
contract developments.
Viridor’s strategy is to transform
waste, adding value through recycling
and renewable energy generation.
• Substantial further progress during
2012/13 in the development and roll-out
of Viridor’s PPP/EfW pipeline
• Capital expenditure of £292 million
on Viridor growth projects, mainly EfW
• Recyclate traded increased by 5.6%
to 1.9 million tonnes.
5
South West WaterViridorGroupGovernanceFinancial statementsPennon Group Plc Annual Report 2013
Directors’ report - Business review - Group overview
Key performance indicators*
1
2
4
5
3
6
1 Energy from waste (EfW) facility,
Lakeside, near Slough
2 Viridor customer waste collection
3 ‘Upstream Thinking’ catchment
management project
4 Tunnel under Roadford Dam,
Devon
5 Viridor graduate management
scheme employee,
Hannah Kirkpatrick
6 Laboratory, Countess Wear waste
water treatment works, Exeter
* These are key performance indicators we use to measure the performance of our
businesses as described in our business model on page 11.
6
Pennon Group
Profit before tax
before exceptional net
charges (£m)
5
.
0
0
2
2
.
8
9
1
8
.
5
8
1
5
.
8
8
1
4
.
9
5
1
Earnings per share
before exceptional net
charges and deferred tax
(pence)
3
.
7
4
6
.
2
4
3
.
2
4
8
.
0
4
9
.
6
3
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
1
/
2
1
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
1
/
2
1
0
2
£198.2m
-1.1%
42.6p
-9.9%
Dividend per share
(pence)
Interest rate
on average net debt
(%)
6
4
.
8
2
2
5
6
2
.
8
4
.
1
.
4
1
.
4
9
.
3
5
3
.
5
6
4
2
.
5
5
2
2
.
0
0
.
1
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
1
/
2
1
0
2
28.46p
+7.3%
1
1
/
0
1
0
2
2
1
/
1
1
0
2
3
1
/
2
1
0
2
9
0
/
8
0
0
2
0
1
/
9
0
0
2
3.5%
Pennon Group Plc Annual Report 2013 South West Water
Viridor
Operating profit
(£m)
.
2
5
1
2
7
.
4
0
2
.
5
3
9
1
8
.
9
8
1
.
6
6
8
1
Regulatory
capital value
as at 31 March
(£m)
6
1
9
2
,
7
2
8
2
,
3
0
7
,
2
5
5
5
,
2
1
6
4
2
,
Drinking water
quality Mean
Zonal compliance
(%)
8
9
.
9
9
8
9
.
9
9
7
9
.
9
9
8
9
.
9
9
7
9
.
9
9
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
1
/
2
1
0
2
£215.2m
+5.1%
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
8
0
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
£2,916m
+3.1%
99.97%
Bathing water
compliance
(%)
6
.
8
9
5
.
6
9
1
.
5
9
3
.
0
9
1
1
.
1
9
3
.
0
6
Population
Equivalent
Sanitary
Compliance
(%)
0
7
.
9
9
5
5
.
9
9
7
5
.
9
9
0
5
.
9
9
8
9
.
9
9
Operating profit
plus joint
ventures
(£m)
.
6
2
8
.
0
7
7
.
2
5
7
7
.
3
6
1
9
.
5
4
3
1
/
2
1
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
£45.9m
–39.0%
Recyclate
traded
(million tonnes)
8
.
1
7
.
1
9
.
1
4
.
1
4
1
.
Total renewable
energy
generation
(GWh)
0
2
8
2
5
7
0
6
7
2
1
6
4
0
5
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
1
/
2
1
0
2
1.9m tonnes
+5.6%
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
1
/
2
1
0
2
820GWh
+7.9%
Renewable
energy generation
capacity
as at 31 March
(MW)
6
3
1
6
3
1
7
3
1
8
2
1
1
0
1
Total waste
inputs
(million tonnes)
7
.
7
6
.
7
3
.
7
2
2
.
7
Share of profit
from recovering
value in waste
(%)
9
4
5
4
6
4
1
4
5
3
0
1
0
2
0
1
0
2
1
1
0
2
1
1
0
2
2
1
0
2
2
1
0
2
8
0
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
0
1
/
9
0
0
2
1
1
/
0
1
0
2
2
1
/
1
1
0
2
3
1
/
2
1
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
1
/
2
1
0
2
EU Mandatory
Standard
Guideline Standard
99.98%
137MW
7.2m tonnes
35%
RIDDOR
incidence rate
(per 100,000
employees)
5
4
4
,
2
5
6
1
,
2
5
0
5
,
1
3
9
2
4
,
1
8
3
2
1
,
8
0
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
Actual no. 45
1 Before exceptional charges.
2 Previous years restated, excluding waste
not treated at Viridor facilities.
3 Change in RIDDOR reporting criteria
(see page 53 for details).
7
1 Change in reporting standard for 2012 bathing
season (UK rather than EU criteria).
2 Change in RIDDOR reporting criteria
(see page 53 for details).
Service
Incentive
Mechanism
(SIM)
5
.
0
7
9
.
6
6
1
.
8
5
1
1
/
0
1
0
2
2
1
/
1
1
0
2
3
1
/
2
1
0
2
70.5%
+5.3%
RIDDOR
incidence rate
(per 100,000
employees)
4
2
0
,
2
8
0
0
,
2
4
3
3
,
1
8
2
6
,
1
2
8
6
5
2
1
0
2
8
0
0
2
9
0
0
2
0
1
0
2
1
1
0
2
Actual no. 7
Group overviewSouth West WaterViridorGroupGovernanceFinancial statementsPennon Group Plc Annual Report 2013 Directors’ report - Business review - Group overview
Chairman’s statement
In a challenging year
for both South West Water
and Viridor, the Group
has achieved a profit before
tax* only marginally below
the previous year.
Dear shareholder
Business performance
Group revenue was down by 2.6%
to £1,201 million and profit before tax*
decreased by 1.1% to £198 million.
We continue to maintain substantial
cash resources and facilities and we ended
the year with a record level of £1.15 billion.
Despite the extreme weather events
of 2012/13 impacting on aspects of its
operations South West Water performed
well, achieving further advances in operating
efficiency and customer service. It is on
target to outperform the K5 (2010-2015)
regulatory contract. The company has front-
end loaded delivery of the operating cost
efficiencies required by Ofwat and is now
sharing the benefit of its K5 outperformance
to date with customers by reinvesting around
£60 million in further improvements
to services.
Viridor experienced a mixed year.
Trading was significantly down on last
year, with declines in recycling and landfill
outweighing the continued growth in joint
ventures. The company has responded
aggressively to these near-term challenges
which have necessitated site rationalisations,
headcount reductions and exceptional
charges in relation to asset impairments
and provisions.
* Before exceptional net charges.
8
On the positive side, Viridor has continued
to make very strong progress on its growing
Public Private Partnership (PPP) and energy
from waste (EfW) pipeline with major new
contracts having been signed and key
planning permissions obtained. These
and similar projects are expected to drive
Viridor’s long-term profit growth.
Dividend
The Board is committed to its policy
to grow dividends for shareholders by 4%
above inflation per annum up to the end
of 2014/15. This reflects our continued
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 19.70p, which represents
a 7.7% increase on last year’s final dividend.
This will result in a total dividend for the year
of 28.46p, an increase of 7.3% (reflecting
inflation of 3.3%) on the total dividend for
2011/12. We will again be offering a Scrip
Dividend Alternative to shareholders
in respect of the final dividend for which
the timetable is given on page 144.
Sustainability and governance
The Sustainability Committee of the Board
continues to oversee our performance
in maintaining a responsible approach
to environmental, social and governance
(ESG) matters. The business review
and the sustainability report set out more
fully our commitment to ESG and our
notable achievements during the year which
include carbon reduction, enhancements
to water security, water catchment
management and resource security
and efficiency.
In addition Viridor was ranked ‘Bronze’
in the Business in the Community (BitC)
annual Corporate Responsibility Index,
a major achievement given that it was
the company’s first year in the Index.
It was also the first company in its sector
to achieve ISO 50001 (Energy Management
System) accreditation.
South West Water won both an inaugural
Institute of Chartered Accountants
in England and Wales (ICAEW) Finance
for the Future Award (large business
category) and the Environmental Award
at the Utility Industry Achievement Awards
for its flagship programme of work
to improve raw water quality and natural
water storage, ‘Upstream Thinking’.
Pennon Group Plc Annual Report 2013 The Group’s governance arrangements
continue to be reviewed annually to ensure
we develop and improve our governance
structures and practices taking account
of market developments and new best
practice guidance. The corporate
governance report on pages 60-71
sets out the developments in the year
which include continued improvement
of processes and controls, including IT
systems, to meet the increasingly
complex needs of our businesses.
Health and safety
We continue to strive towards achieving
our goal of zero accidents across the Group.
We are pleased to see a significant reduction
in the number of reportable accidents
in South West Water, although we are
disappointed that 2012 saw an increase
for Viridor. The company is redoubling
its efforts to drive down the number
of accidents. Health and safety initiatives
during the year have included prioritising
employee engagement and training
alongside the Group’s ongoing focus
on fundamental risk assessment systems
and safety management procedures.
Board succession
As I mentioned in last year’s Annual
Report, after 10 years as a Non-executive
Director of the Company, Dinah Nichols
will be retiring from the Board at the Annual
General Meeting (AGM). I thank Dinah for
her considerable contribution to the Board
over the years including her chairmanship
of the Sustainability Committee which has
managed very successfully an increasingly
complex ESG agenda. Gill Rider joined us
as a Non-executive Director on 1 September
2012 and we plan to appoint a further Non-
executive Director in due course who will
succeed Gerard Connell when he retires
at the 2014 AGM, after some 10 years
as a Non-executive Director.
After 20 years as Chief Executive of Viridor,
Colin Drummond has announced his
retirement from both that position and as an
Executive Director of the Board. I am pleased
that he has agreed to take up the position
of non-executive Chairman of Viridor once
his successor has been appointed. This is
expected to be by the end of September
2013. I thank Colin for the tremendous
contribution he has made to the success of
Viridor and Pennon over the last 20 years.
Diversity
Following on from introducing last year
a Boardroom Equality & Diversity Policy,
which incorporated the recommendations
of the Davies Review ‘Women on Boards’,
the Board has continued to promote equality
and diversity across the Group. We have
had during most of the year 25% female
representation on the Board but we
recognise that this will not be maintained,
at least for a period, whilst the Board
transition referred to above takes place.
We will still endeavour to achieve a minimum
of 25% female representation on the Board
by 2015 and a minimum of 25% female
representation in our senior management.
Our customers
Vitally important for both our businesses
is the provision of the highest possible
levels of service to our customers,
which is reflected in our Group strategy.
During the year South West Water has
further developed its affordability toolkit
for customers who are struggling to pay
their water bills and has a new social tariff
for 2013/14 which is aimed at its most
hard-pressed customers. The company
has also established new partnerships
with Age UK to target support for older
customers and with housing associations
to engage with low income customers.
Viridor continues to assist its customers
in identifying the most robust and cost-
effective waste treatment options in
a changing market as landfill diversion
increases. It also helps customers to identify
the carbon saving benefits of recycling,
recovery and good waste and resource
management, with its carbon reporting
tool which is scheduled to be updated
further this summer.
Our employees
We know that the skills, commitment
and hard work of our employees continue
to be key to the success of our Group.
We are focused on rewarding, recognising
and developing our employees through
a number of initiatives and strategies, details
of which are given in the business review.
I would like personally 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 in what
has been a challenging year.
Outlook
The Board’s priority continues to be
the creation of shareholder value through
its strategic focus on water and sewerage
services; and on transforming waste
through recycling and waste-based
renewable energy generation.
South West Water continues to focus
on efficient service delivery, improvements
in service to customers and the satisfaction
of its regulatory and legislative obligations.
As a consequence it is well on track
to outperform the K5 regulatory contract.
The company is preparing for the next
regulatory review (PR14) and is well
positioned for the Government’s
legislative changes.
Viridor faces near-term headwinds
in recycling and the ongoing trend decline
in landfill. The company continues to focus
on quality in recycling and delivery of its PPP/
EfW pipeline which is expected to drive
the company’s long-term profit growth.
Notwithstanding the current challenges,
I remain confident about the future success
of our business. The Group has strong
liquidity and funding and is well positioned
for future growth in the best interests
of our shareholders and other stakeholders.
Ken Harvey
Chairman
Pennon Group Plc
25 June 2013
9
Group overviewSouth West WaterViridorGroupGovernanceFinancial statementsPennon Group Plc Annual Report 2013 Directors’ report - Business review - Group overview
Our business model
How we generate and preserve value
Pennon’s business model is driven by its strategy of promoting the success of the Group
for the benefit of shareholders, customers and other stakeholders through its 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.
Shareholder
returns
Pennon Group
Strong
governance
South West Water
Viridor
Customer
satisfaction
Financial
performance
Employee
engagement
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
Viridor
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.
Focused on transforming waste into a resource, having
developed from being a traditional waste management company
to a leading UK recycling, renewable energy and waste
management business.
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 maximising sale of high quality recyclate, growing its EfW
and PPP operations and exploiting the huge potential inherent
in waste-based renewable energy generation.
10
Pennon Group Plc Annual Report 2013 How we manage our businesses to create value
Customer
satisfaction
Financial
performance
Shareholder
returns
Strong
governance
We are committed to
delivering sustainable
shareholder returns.
An example of this
is our policy to grow
the Group dividend
by 4% above inflation
per annum up to the
end of 2014/15.
Both South West
Water and Viridor
are fully committed
to meeting the needs
of their customers.
This is key to the
success of each
business.
How we respond
to our customers’
needs and assess
customer satisfaction
is set out on pages
19, 20, 21, 24 and 28
of the business review.
Our Group has set
challenging financial
targets against which
performance is
measured through
a range of key
performance indicators
(KPIs). These KPIs
include profit before tax
(before exceptional items),
earnings per share
(before exceptional
items and deferred tax),
dividend per share
and the interest rate
on average net debt.
Our focus in setting
such targets is to
achieve sustainable
performance over the
short and long-term.
Our financial
performance is set
out in more detail
on pages 30-35.
We are aware that
our businesses can,
and do, have a
material impact
on the environment
and communities
in which they operate.
To address this
we take a responsible
and transparent
approach to
environmental, social
and governance
(ESG) matters.
Our sustainable
practices not only
benefit communities,
but enable our
businesses to be
more successful.
More information
on our sustainability
activities are set out
on pages 48-57.
Employee
engagement
We know 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 employee
well-being, retention,
efficiency and
productivity.
More information
on the initiatives
we have introduced
to improve employee
engagement in each
of our businesses
is set out on pages 15,
20, 28, 54 and 59.
How we operate and manage risks
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.
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 70 and our principal risks
and uncertainties and how we mitigate them are set out
on pages 36-47.
11
Group overviewSouth West WaterViridorGroupGovernanceFinancial statementsPennon Group Plc Annual Report 2013 Directors’ report - Business review - Group overview
Strategic Q&A
Delivering on our strategy
2012/13 was a challenging 12 months for Pennon. Group Director of Finance David Dupont,
South West Water Chief Executive Chris Loughlin and Viridor Chief Executive Colin Drummond
discuss performance and outline their strategic approach to the main challenges they face.
The Group policy is to grow
the dividend by 4% above RPI
up to the end of 2014/15.
David Dupont, Group Director of Finance
Pennon Group
What were the highlights of the year
and how do they reflect Group strategy?
David Dupont
South West Water continued to perform
strongly both operationally and financially
towards achieving its target for the K5 period,
which is in line with its strategy. While Viridor’s
results were impacted by the significant
reduction in recyclate prices, reflecting world
economic conditions, it has made substantial
progress in pursuing strategic development
of its energy from waste (EfW)/Public Private
Partnership (PPP) pipeline.
To support this investment, the Group
raised a record amount of new funding during
the year – £782 million in total – including
a £300 million hybrid capital instrument
which strengthens the Group’s balance
sheet as well as providing additional funding.
The Group ended the year with a record level
of cash and facilities totalling £1.15 billion.
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 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 Price
Determination and projected growth from
Viridor’s long-term contracts and EfW 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 £1.15 billion (including
12
£143 million restricted cash) with £782 million
of new/renewed facilities secured during
the year. The construction phase of Viridor’s
committed EfW plants is now substantially
funded and we are continuing to talk
to a wide range of finance providers
to source the remaining funding required
on a timely basis.
Our PUROS* project, which uses remote
technologies to manage processes
and operational staff from a central hub,
continues to help us improve our efficiency.
Meanwhile our investment in renewable
energy is also bearing fruit with the amount
of energy generated through renewable
sources – most notably our hydro turbines –
reaching its highest ever level.
South West Water achieved a strong
operational performance last year.
What were the key highlights
and how did you achieve them?
Chris Loughlin
Through our ongoing investment
in our assets and networks we continued
to deliver outstanding drinking water quality,
meet our leakage target and reduce
the average length of water supply
interruptions per customer.
On the waste water side of the business
a targeted programme of investment
at 96 sites meant we achieved our
best ever compliance rates for waste
water treatment. Also, whilst there was
an increase in Category 3 or ‘minor’
incidents, improvements in our monitoring
systems and response times helped
us to successfully avoid any Category 1
or ‘serious’ pollution incidents and we
also saw a reduction in the number
of Category 2 or ‘significant’ incidents.
* Phased Utilisation of Remote Operating Systems.
2012 started with environmental drought
conditions, but for most of the year
the South West experienced extreme
wet weather. How did this impact
on South West Water’s operations
and how were they managed?
CL
Thanks to the use of pumped storage
during the prior winter, investment
in the supply system in 2011 and careful
resource management, South West Water
was able to avoid any water restrictions
for the 16th consecutive year. This was
despite the environmental drought
that was declared in April 2012
by the Environment Agency.
In stark contrast April 2012 through
to March 2013 has been classified as
a ‘one in one hundred years’ wet weather
event. This had various implications for
our operations including increased energy
usage due to the need for more waste
water pumping activity and an increase
in the number of sewer flooding incidents.
David Dupont, Group Director of Finance, Pennon Group
Pennon Group Plc Annual Report 2013 Spillway at Roadford Reservoir, Devon
Chris Loughlin, Chief Executive, South West Water
In the case of the latter South West
Water worked alongside partner agencies,
including councils and emergency
services, to minimise any disruption caused.
In the long term it is our intention to invest
in a holistic approach to the management
of waste water and flooding. This will include
traditional engineering-based solutions
alongside cost effective steps to manage
excess surface water or rain water through
innovation in areas such as sustainable urban
drainage and ecosystem management.
The wet weather also highlighted the
importance of investment in resilience,
such as flood defences. In 2011 we installed
flood protection measures at Pynes Water
Treatment Works which serves Exeter.
This proved invaluable during the deluge
in the run-up to Christmas 2012 which saw
the closure of the adjacent railway mainline.
Why has South West Water
decided to embark on a £60 million
reinvestment programme to fund
further improvements to services
for customers? What will it involve
and where will the company get the
money from to fund this investment?
CL
We want to share the benefits of our good
financial performance with our customers
by investing more where it is most needed.
Investing now in our network and treatment
works to protect bathing water quality,
will help minimise the risk of these vital
beaches losing their status, which would
have a serious knock-on effect on one
of the region’s main industries – tourism.
So the aim of our reinvestment programme
is to protect bathing water quality at key
tourist beaches, maintain nearly six
thousand kilometres of former private
sewers and help customers in the most
need. This investment initially will be funded
from the efficiency savings that South West
Water has made in the current regulatory
period, having no impact on the average
household bill, which is reduced in 2013/14
following the implementation in April
of the Government’s £50 reduction
on household bills.
How are you preparing for the price
review which takes effect from 2015?
What do you expect to be the key
investment drivers for the five-year
period from 2015-2020?
CL
Extensive customer and stakeholder
research and a range of on and offline
engagement activity has been carried out
as part of South West Water’s ‘WaterFuture’
campaign in order to find out their priorities
for the future. This helped inform our
25-year WaterFuture outlook which was
published in December 2012 to outline
our long-term aims and some of the steps
we plan on taking during the next K period
(2015-2020).
The main investment drivers for that period
arise from further improvements to and
protection of bathing waters; the revised
Water Framework Directive legislation;
the adaptation to and mitigation of extreme
weather and climate change; the need
to maintain our asset base; and the supply
and demand pressures from the population
growth forecast for our region.
Consultation is ongoing and our business
plan is being developed further in time for
submission to Ofwat in December 2013.
We are also targeting a holistic
approach to the prevention of pollution
and sewer flooding.
How is South West Water responding
to the points raised by Jonson Cox,
the new Chairman of Ofwat, in his
lecture ‘Observations on the regulation
of the water sector’?
CL
Mr Cox’s particular focus was on corporate
governance and transparency in respect
of companies in the private sector. South
West Water is one of only a few listed water
companies and, as such is already subject
to disclosure on corporate governance
through, and in close operation with,
the Pennon Group Board. To further promote
good governance and transparency, South
West Water has established its own audit
committee of the South West Water Board
and is reviewing in detail the points raised
by Mr Cox in his lecture to ascertain whether
the company needs to undertake any further
actions to address the issues raised.
South West Water was able
to avoid any water restrictions
for the 16th consecutive year.
Chris Loughlin, Chief Executive
South West Water
13
Group overviewSouth West WaterViridorGroupGovernanceFinancial statementsPennon Group Plc Annual Report 2013 Directors’ report - Business review - Group overview
Strategic Q&A
Continued
Colin Drummond, Chief Executive, Viridor
Trident Park EfW, Cardiff, under construction
There were significant exceptional
charges in respect of Viridor in 2012/13.
Does this imply that there is a change
in strategy or that the previous strategy
was wrong?
CD
No. The exceptional charges primarily
flow from our strategy and also reflect our
speedy response to greater than expected
weakness in UK and world economic
conditions. Our strategy recognises that
landfill is a declining business; this is the
basis for our growth in recycling, where we
are now the UK leading operator of materials
recycling facilities (MRFs), and in EfW
projects, where our pipeline of projects
is expected to make us a UK market leader
with over 15% market share by 2020.
As a result we have recognised a non
cash impairment to reflect declining landfill
volumes and the fact that some of our
landfills will not now be filled to the degree
previously envisaged – indeed on three
of them (Ardley, Beddington and Dunbar)
we plan to build EfW facilities. We have
also increased our landfill provisions
to reflect both the revised final landforms
now projected and the latest Environment
Agency guidance. In addition, though
we had expected a decline in commodity
prices, the actual fall was much more severe
than we (and perhaps many others) had
expected. This has necessitated closure
of certain uneconomic MRFs, redundancies
and non cash asset impairment in our
recycling business.
Viridor has made significant progress
in growing its pipeline of energy from
waste projects. Do you see a danger
of over-capacity in the UK?
CD
We have carefully evaluated projected
demand and competing capacity for
each of our planned EfW facilities and are
confident that we will fill them profitably.
With landfill tax set to reach £80 per tonne
in April 2014, large scale EfW facilities
of the type we are building will be the low
cost way of disposing of residual waste.
They will also be the UK’s lowest cost source
of base-load distributed renewable energy
which will assist in addressing the UK’s
increasing energy shortage.
In total we estimate that, on the basis
of government policies and trends
in recycling, there will be a need for around
20 million tonnes of EfW capacity in the UK
by 2020. When we review current competing
projects and take account of planning
barriers, financing difficulties and the lack
of further large base-load municipal
contracts, we calculate that there will
be a capacity shortfall of up to 25%.
Of the 2.5 million tonnes capacity we
are committed to operating by 2020,
more than half (1.3 million tonnes) is already
backed by long-term municipal contracts.
You have indicated that the long-term
growth from Viridor’s EfW/PPP
pipeline is expected to start to flow
in from 2014/15. What do you expect
for 2013/14 given the ongoing trend
decline in profits from landfill and the
current uncertainties in recycling?
Colin Drummond
Trading conditions for Viridor between
October to December 2012 were particularly
tough and results for the second half
of 2012/13 were down on the first half.
Whilst recyclate prices have recovered
somewhat from the lows of October
to December we remain cautious about
any further substantial increase.
We believe we have faced up to the situation
head on and undertaken the necessary
actions to ensure that we are well placed
to manage future challenges to the business
going forward. Our 2013/14 results will
progressively show the benefit of the cost
reductions we have implemented in recycling,
whilst our landfill gas power generation
business will benefit in the second half
from the transfer of more of our historic
Non Fossil Fuel Obligation (NFFO) contracts
to higher priced Renewables Obligation
(RO) contracts.
Viridor’s EfW/PPP pipeline
is expected to drive the company’s
long-term profit growth.
Colin Drummond, Chief Executive
Viridor
14
Pennon Group Plc Annual Report 2013 This is illustrated by our obtaining
ISO 9001, ISO 14001 and OHSAS 18001
accreditations and in 2012/13 achieving
ISO 50001 energy management
accreditation and being ranked ‘Bronze’
in the Business in the Community (BitC)
annual Corporate Responsibility Index.
We have created jobs, increasing
from around 200 employees to over
3,000 (in addition to the substantial
numbers employed by our contractors
and subcontractors in our £1.5 billion
capital investment programme), though
we have had to implement some painful
redundancies over the past year.
Our health and safety performance has
generally improved but more is still to be
done to achieve our goal of zero accidents.
We have made significant progress
in employee development with our extensive
apprenticeships, a very successful graduate
programme and most recently the Viridor
in-house degree (inconceivable in the waste
industry a few years ago). However, together
with the rest of our sector, we lag behind
in gender diversity with few women
employed at senior levels in the company
and none on the Viridor Board. We have
plans in place to address this.
Do you see risks in delivering
the large energy from waste pipeline?
CD
We have an enviable pipeline of EfW/PPP
contracts. The main challenge is delivery.
Our policy is to have well protected
and carefully constructed, fixed-price
contracts with established contractors
providing proven technology. We recognise
that as our pipeline increases so does
the absolute level of risk and we have grown
our organisation accordingly, including
the appointment in 2012/13 of a Capital
Projects and Engineering Director
(previously a director in the nuclear industry).
The main risk we see is delay on the part
of our contractors, against which we have
contractual protection which we will call
upon if we have to.
Are you sorry to be retiring
as Chief Executive and why now?
CD
I am sorry to be retiring but now is the right
time for me and for the company. Over
the past few years Viridor has won the
major EfW/PPP contracts and achieved
the associated planning permissions which
are expected to grow its EBITDA by £100
million over the next four years. At the
same time we have been implementing
a management succession plan to manage
the retirement of a number of highly skilled
and long serving directors; Viridor now
has a new team of five experienced
executive directors in addition to myself,
alongside three non-executive directors
with significant relevant skills. I am two
years beyond my normal retirement date
and therefore my retirement is now
appropriate. However, I am delighted
and privileged to be able to continue
to contribute to Viridor in the different
role of chairman of the Viridor Board.
What have been the major changes
in Viridor over the past 20 years?
CD
Viridor has been transformed from a local
South West waste collection and landfill
company to one of the UK’s leading
recycling, renewable energy and waste
management companies. During the first
ten years we established and capitalised
on our position as a leading player in
the landfill market in key regions of the UK.
From 2002, whilst landfill remained a very
profitable business, we were able to achieve
significant further profit growth from the sale
of renewable energy generated from
the gas produced by our landfills, growing
our associated generation capacity from
28MW to a current 107MW. In 2005,
with projected steep rises in landfill tax,
we recognised the commercial opportunity
represented by the UK’s move towards
greater recycling and gradually established
ourselves as the UK’s leading operator
of MRFs.
More recently we have focused on providing
an alternative to landfill for final disposal
of residual waste which cannot be
recycled; this is the basis of our investment
programme which will see Viridor become
one of the largest operators of EfW facilities
in the UK and a major supplier of renewable
energy with a total capacity of over 300MW.
We have become a more sustainable
business in environmental, social
and economic terms, embedding
the care and enhancement of the
environment and community benefit
into our business.
EfW/Combined Heat and Power (CHP) facility, Runcorn, under construction
15
Group overviewSouth West WaterViridorGroupGovernanceFinancial statementsPennon Group Plc Annual Report 2013 Directors’ report - Business review
South West Water
Focused on operational excellence
Operational highlights
• 16 consecutive years without water restrictions
• Leakage control on target
• Excellent drinking water quality
• Improved customer service
• Best ever waste water treatment performance
• Highest ever renewable energy output
Revenue
(£m)
2
.
4
4
4
8
.
8
4
4
7
.
1
3
4
6
.
8
9
4
0
.
4
7
4
*
1
.
2
5
1
Profit before tax*
(£m)
5
.
1
4
1
5
.
9
2
1
9
.
8
2
1
9
.
6
1
1
Notable achievements
• £60 million of reinvestment announced
• New Customer Relationship Management
System rolled out
• Expansion of services for business customers
• Winner of the ICAEW Finance for the Future
Award (large business category) and the
Environmental Award at the Utility Industry
Achievements Awards
• Extensive customer and stakeholder
engagement ahead of 2014 Price Review
(WaterFuture)
• Pioneered advanced drinking water
treatment technology
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
1
/
2
1
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
1
/
2
1
0
2
£498.6m
+5.2%
£152.1m
+7.5%
* Before exceptional net income.
Where we operate
Reservoir
Key Water Mains
Wistlandpound
Wimbleball
Upper Tamar
Roadford
Meldon
Kennick,
Tottiford &
Trenchford
Fernworthy
Crowdy
Colliford
Park
Silbyback
Burrator
Venford
Avon
Stannon
Drift
College
Stithians
Argal
1.68m
Resident population
29
Drinking water
treatment works
641
Waste water
treatment works
15,200km
Water mains
15,600km
Sewers
16
Pennon Group Plc Annual Report 2013
Strategy and performance
South West Water remains committed to its Pure Water, Pure Service and Pure Environment
vision. The company strives to achieve the highest standards possible in every sphere
of its activity, delivering efficiency through innovation, meeting the needs of those it serves and
meeting its responsibilities to the environment, while keeping its costs as low as possible.
Pure Water
Providing a reliable supply
of safe, clean drinking water.
Performance
Top quality drinking water
and leakage control and a 16th
consecutive year without
drinking water restrictions.
Pure Service
Delivering responsive
and cost-effective services
that meet customers’ needs.
Pure Environment
Protecting the world around
us through sustainable actions
and initiatives.
Financial
Making resilient business
decisions while outperforming
the regulatory contract.
Performance
Improved customer satisfaction,
expansion of business services
under ‘Source for Business’
and metering over 75%
of domestic customers.
Robustness of asset base
illustrated in the maintenance
of ‘stable serviceability’.
Performance
Best ever waste water treatment
compliance rates*, renewable
energy generation at a record
high, zero major pollution
incidents and a reduction
in serious pollution incidents.
Performance
Efficiency targets exceeded.
Operating profit increased and
rigorous cost control achieved.
Capital programme efficiencies
remain on track.
Drinking water quality
Mean Zonal Compliance
(%)
8
9
.
9
9
7
9
.
9
9
8
9
.
9
9
7
9
.
9
9
5
9
.
9
9
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
99.97%
Service Incentive
Mechanism
(SIM)
Population Equivalent
Sanitary Compliance
(%)
Operating profit
(£m)
5
.
0
7
9
.
6
6
1
.
8
5
1
1
/
0
1
0
2
2
1
/
1
1
0
2
3
1
/
2
1
0
2
70.5%
+5.3%
0
7
.
9
9
0
5
.
9
9
5
5
.
9
9
7
5
.
9
9
8
9
.
9
9
2
.
5
1
2
7
.
4
0
2
6
.
6
8
1
5
.
3
9
1
8
.
9
8
1
8
0
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
99.98%
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
1
/
2
1
0
2
£215.2m
+5.1%
G
r
o
u
p
o
v
e
r
v
e
w
i
S
o
u
t
h
W
e
s
t
W
a
t
e
r
V
i
r
i
d
o
r
G
r
o
u
p
G
o
v
e
r
n
a
n
c
e
* Before exceptional net income.
* Population Equivalent Sanitary Compliance 2012/13: 99.98% (2011/12: 99.57%).
Numeric Compliance 2012/13: 97.1% (2011/12: 92.1%).
To view our online annual report:
www.pennonannualreport.co.uk/2013
s
t
a
t
e
m
e
n
t
s
Pennon Group Plc Annual Report 2013
17
i
F
n
a
n
c
a
i
l
Directors’ report - Business review - South West Water
Business review
Business performance
Against a backdrop of extreme weather events ranging from environmental drought to flooding,
South West Water continued to deliver solid operational performance and strong financial results
in the year while raising its standards of customer service.
Increased revenue and rigorous cost
control were underpinned by the continued
delivery of efficiencies resulting in operating
profit increasing by £10.5 million to £215.2
million. An overall reduction in demand
of almost 3% and the effect of customers
switching to a metered tariff was offset
by tariff increases and new connections
with revenue rising by 5.2% to £498.6 million.
Profit before tax (excluding exceptional net
income) increased by 7.5% to £152.1 million.
The company has front-end loaded delivery
of the required 2.8% per annum average
cost efficiencies with an average 4.1%
per annum delivered in the first three years
of this K period (2010-2015). The K5
efficiencies to date total £18.6 million
with £3.5 million of that total delivered in the
year through a combination of the following:
• improved operational ways of working
from the integration of customer services
management and asset improvements
through the PUROS* programme
• energy procurement and usage –
energy efficiency schemes alongside
additional power generation through
renewable sources
• rationalising administration
and support services
• right-sourcing and innovative
contracting – continued tendering
to achieve the ‘right price’.
Capital expenditure for the year was
£116.5 million compared with £130.8
million in 2011/12.
Major investments were made in the
improvement of waste water treatment
works in order to achieve compliance,
sewer rehabilitation, and clean water network
improvements targeting reliability, water
quality and security of supply. The private
sewer adoption in October 2011 – which
increased South West Water’s sewer
network by 50% – also necessitated
£6.7 million of additional expenditure.
South West Water’s main investment
focus continues to be on the maintenance
of existing assets alongside improvements
necessary to:
• enhance high standards of water
and sewerage services that meet
customer expectations
• increase the resilience of the infrastructure
• deliver environmental improvements
• meet emerging legislative
and regulatory obligations
• enhance sustainability
of water resources.
* Phased Utilisation of Remote Operating Systems
In previous K periods South West Water
has historically shared the benefits of financial
outperformance with customers through
reinvestment of efficiencies and accelerating
capital expenditure. The company’s strong
operational and financial outperformance
in K5 to date will enable it to reinvest
around £60 million on improving services to
customers through:
• upgrading assets in key bathing waters
by accelerating capital investment
• maintaining and enhancing sewers
that were adopted as part of the private
sewer transfer in October 2011
• tackling customer affordability through
debt initiatives.
South West Water continued
its upward trend of customer
service improvement
as measured by Ofwat’s
Service Incentive Mechanism.
Chris Loughlin, Chief Executive
South West Water
UV treatment at Waste Water Treatment Works, Brokenbury
Construction of storm storage tank at Lostwithiel, Cornwall
18
Pennon Group Plc Annual Report 2013
Operational performance
Pure Water
Drinking water quality
In 2012 South West Water once again
achieved a near perfect standard
(99.97%) for the quality of its drinking
water as measured by the Drinking Water
Inspectorate’s Mean Zonal Compliance
(MZC) measure. This success can be
attributed to the company’s ongoing
investment in the maintenance and
improvement of both drinking water
treatment processes and the mains network.
South West Water is also committed to
addressing any taste, odour or discolouration
issues – in 2012/13 this included pioneering
steps taken to utilise advanced oxidisation
processes at Drift Water Treatment Works
in West Cornwall, a first in the UK.
Water resources
Despite some of the driest conditions in
decades (a state of ‘environmental drought’
was declared in mid April 2012 by the
Environment Agency), South West Water
was able to continue delivering unrestricted
supplies to its customers for the 16th
consecutive year.
Reservoir levels remained healthy
throughout the dry period as a result
of pumped storage during winter 2011/12,
investment in the supply system in 2011
and careful resource management.
The extreme wet weather that followed
from April 2012 to early 2013 resulted
in reservoir storage levels subsequently
reaching near full capacity. South West
Water is therefore confident that no water
restrictions will need to be put in place
during 2013/14.
Leakage control
South West Water’s performance in
minimising leakage remained on target.
The company expanded its pressure
management activity to reduce the risk
of failures in the network, increased its use
of remote technologies to improve
the efficiency of its leak detection teams
and took steps to improve the analysis
of flow data in order that potential problems
could be identified more quickly.
Upstream Thinking:
sustainable water management
South West Water’s flagship programme
to improve raw water quality and natural
water storage in the landscape continued
in the year. The ‘Upstream Thinking’
initiatives, which target a reduction in water
treatment costs, include the restoration
of wetland areas on the region’s moors
and schemes to reduce the impact
of farming and industrial activity on specific
catchment areas. The actions delivered
by the programme in K5 to date include:
• over 300 hectares of land restored
• working with farmers across the
catchments, supporting investment at
161 farms
• 17 studies/investigations
completed on further catchment areas
to inform future investments at 2014
Periodic Review.
The project has won several awards
since its inception. In 2012 these included
an inaugural Institute of Chartered
Accountants in England and Wales
(ICAEW) ‘Finance for the Future’ Award
(large business category) and the
‘Environmental Award’ at the Utility
Industry Achievement Awards.
Pure Service
Customer satisfaction
South West Water continued its upward
trend of customer service improvement
as measured by Ofwat’s Service Incentive
Mechanism (SIM) with a 5% increase
on the previous year (2011/12: 66.9,
2012/13: 70.5). SIM takes into account
a range of customer service aspects
including the number of written complaints
received and the results of customer
satisfaction surveys. This year’s score
represents an 88% improvement since
the start of K5.
The number of written complaints has halved
during K5 and the number of escalated
complaints has been reduced by 84%.
The results reflect both improvements
made at an operational level and steps
taken to improve customers’ experience –
in July 2012 South West Water introduced
a new Customer Management System
to enhance customer satisfaction.
Metering
During the year South West Water
installed over 12,800 meters, taking
the total percentage of domestic customers
who are metered to over 75%.
As part of its metering strategy South West
Water began a programme of SMART
metering in 2012/13. These transmit real-
time information about water usage, thereby
improving the accuracy and efficiency
of the billing system while also giving
customers a better understanding
of how much water they are using.
The £50 Government Payment
First announced in autumn 2011
and implemented for 2013/14 charges,
the £50 Government Payment – an annual
bill reduction of £50 for all eligible household
customers – is a recognition of the historic
‘unfairness’ to customers associated
with the bill impact of South West Water’s
environmental clean-up over the past
two decades in a region that has one third
of the UK’s beaches but only around 3%
of its resident population.
The announcement was welcomed
by customers, regional media and MPs,
many of whom had actively campaigned,
alongside South West Water, for Government
action on this issue.
Business customers
South West Water continued to expand
its relationships with commercial and
other non-domestic customers (e.g. local
councils, hospitals and other public bodies).
Against the backdrop of difficult economic
circumstances, the advice and assistance
provided by South West Water available
through its ‘Source for Business’ initiative
has been well received by the region’s
business community.
The Source for Business services include
dedicated contact routes to business
customer specialists; bill validation;
a named account manager for larger
organisations; project management;
laboratory and analytical services; water
and process efficiency advice; and advice
on capital solutions.
Pennon Group Plc Annual Report 2013
19
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Directors’ report - Business review - South West Water
Business review
Continued
Pure Environment
Waste water treatment
In 2012 South West Water’s long-
standing endeavours to raise
the standard of the waste water it
returns to the environment were reflected
in its best ever compliance score of 99.98%
for the percentage of population served
by waste water treatment works meeting
the required criteria (Population Equivalent
Sanitary Compliance).
Another Ofwat measure that looks
at a much wider range of compliance
parameters is Numeric Compliance
of waste water treatment works
(which gives equal weighting to small
and large treatment works).
South West Water performed similarly
well against this compliance measure,
achieving a record high of 97.1%.
This improvement in performance can
be attributed to a programme of targeted
investment in waste water treatment
processes at 98 of the company’s
operational sites over the past 18 months.
Bathing waters
Despite the extreme wet weather
and its associated run-off and floodings,
133 out of 146 bathing waters (91%)
achieved the European mandatory
or ‘good’ standard and 88 bathing waters
(60%) achieved the guideline or ‘excellent’
standard for the 2012 bathing season.
South West Water is committed
to delivering sustainable environmental
improvements to the region’s bathing waters.
In 2012/13 investments in this area included
storm tanks, filtration improvements
and cleaning process enhancements.
In 2012 South West Water’s
long-standing endeavours
to raise the standard of the waste
water it returns to the environment
were reflected in its best ever
compliance score.
Chris Loughlin, Chief Executive
South West Water
20
Pennon Group Plc Annual Report 2013
Pollution
The impact of flooding and extreme
wet weather contributed to an increase
in the total number of pollution incidents
compared with the previous year. However,
while there was a rise in the number of Ofwat
minor (Category 3) incidents, South West
Water saw a significant reduction in the
number of significant (Category 2) incidents
compared with the previous calendar year
(2012: 4, 2011: 15).
It is South West Water’s aim to ensure
that no harmful pollution incidents occur.
It therefore continues to invest in the
maintenance and improvements
necessary to reduce the risk of pollution.
Flooding
In a year of abnormally wet weather,
river flows and groundwater levels both
reached exceptionally high levels, increasing
the likelihood of flooding for many homes
and businesses.
The number of internal sewer flooding
incidents (an incident in which sewage
enters a property) totalled 266. Inevitably
a high proportion of these incidents were
caused by the sewerage system becoming
overwhelmed by the sheer volume
of rain water.
Renewable energy
In 2012/13 excellent progress was made
towards increasing renewable energy
generation, with more power from renewable
sources generated than ever before.
In total, 19.3GWh was harnessed from
a combination of solar, wind, hydro
and combined heat and power (CHP)
from waste.
The extreme wet weather, while serving
to increase energy demand, was highly
advantageous for South West Water’s
hydro power sites. The company continues
to invest in renewable technology.
People
Once again the dedication, professionalism
and support of all South West Water’s
employees has been vital in achieving
a successful outcome in a challenging
year. The company expresses its gratitude
to every employee for their contribution
to the business during the year.
South West Water developed a new
‘People Strategy’, focused on attracting,
retaining and developing its workforce.
The company’s aim is to be the ‘Employer
of Choice’ in the South West and it provides
employees with the opportunity to develop
their careers through a number of schemes.
These include supplementary training through
its Management Academy, customer
service skills training, NVQ programmes
and a development programme for
the senior management group.
Eight new apprentices were recruited
through South West Water’s apprenticeship
programme, developed in partnership
with South Devon College.
The company also made headway with
improving its health and safety record,
achieving its lowest ever RIDDOR incidence
rate (Reporting of Injuries, Diseases,
and Dangerous Occurrences) of 568
per 100,000 employees for 2012
compared with 1,628 for 2011*.
Key relationships
Regulators and others
South West Water actively engages
with a wide range of environmental
and regulatory stakeholders. It takes steps
to ensure that communication is handled
in the most appropriate way and that
the information the company provides
is high quality and consistent. It uses a range
of commercial channels including traditional
and online platforms to communicate with
its stakeholders.
The company contributes to developing
issues through its membership of Water
UK, the industry trade body, and works
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 achieved.
* Change in RIDDOR reporting criteria
(see page 53 for details).
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South West Water apprentice, Joe Farrant
Meldon Reservoir, Devon
WaterFuture customer panel
As part of the 2014 Periodic Review
process, following guidance from Ofwat,
South West Water has 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
the company’s business plan adequately
reflects an understanding of customers’
priorities and that its planned activities
are socially, economically and
environmentally sustainable.
Procurement and suppliers
South West Water’s procurement
strategy is focused on partnering
and strategic alliances with 60 key
suppliers who account for the large majority
of expenditure. The company includes all
aspects of sustainability in its procurement
processes and this is a central theme
of its procurement strategy for its supply
chains and support of the regional economy.
With the start of the K5 regulatory period
the company introduced an innovative
‘mixed economy’ model to source its capital
programme. This means using a significant
number of smaller local contractors
to provide specialised services as well
as developing long-term relationships
with larger 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
South West Water is well placed
to continue delivering improvements
in operational efficiency and customer
service for the remainder of the K5 period.
The company is currently preparing for
the 2014 Price Review which will determine
the investment programme and associated
charges for 2015-2020.
In December 2012 the company published
its 25-year outlook statement which was
designed to provide context to the steps
it plans to take in 2015-2020. Published
online and widely distributed to customers
and stakeholder groups, it was published
in two formats – ‘What’s in the Pipeline 2015-
2040’ (a consumer-orientated overview)
and ‘WaterFuture: Our Vision 2015-2040’
(an extended version for audiences requiring
more specific detail).
An independently-chaired ‘WaterFuture’
Customer Challenge Panel’ is also being
consulted on South West Water’s 25-year
outlook statement. The Panel comprises
consumer representatives and customer
and community stakeholders. Its role
is to ensure that the company’s final business
plan reflects a sound understanding
of customer and stakeholder opinion
and that the proposals for the 2015-2020
period are economically, socially
and environmentally sustainable.
The 25-year outlook statement reflects the
results of the research to date on customer
and stakeholder priorities. It also explores
key investment drivers for the 2015-2020
period. These include:
• responding to changes in legislation,
including improvements to protect key
bathing waters in the region and meeting
the required standards of the Water
Framework Directive
• the importance of ensuring assets
and networks can cope with extreme
weather and climate change
• the need to maintain and replace assets,
where necessary, to prevent fault or failure
• the need for a holistic approach
to the prevention of pollution
and sewer flooding
• future supply and demand needs.
South West Water’s 2015-2020
business plan will be submitted
to Ofwat in December 2013.
For further information visit:
www.southwestwater.co.uk/waterfuture
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Pennon Group Plc Annual Report 2013
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Directors’ report - Business review
Viridor
Investing in renewable energy and resource efficiency
Revenue
(£m)
0
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2
1
7
5
.
6
2
6
0
.
8
2
5
1
.
1
6
7
8
.
3
0
7
Profit before tax
(£m)
9
.
2
6
6
.
7
5
1
.
5
5
9
.
9
3
*
5
.
6
3
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
1
/
2
1
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
1
/
2
1
0
2
£703.8m
-7.5%
* Before exceptional charges.
£36.5m
-36.6%
Where we operate
Operational highlights
• Strong progress in long-term Public Private
Partnership (PPP)/energy from waste (EfW) strategy
• Significant headwinds in recycling and ongoing
trend decline in landfill affecting 2012/13 results
• Aggressive action to reduce costs
• Exceptional charges of:
– £99 million asset impairment (primarily landfill)
and onerous contracts
– £90 million increased landfill provisions
These totalled £150 million net of tax
Notable achievements
• Financial close achieved for Glasgow Design,
Build, Finance & Operate (DBFO) project
and planning permission gained for associated
Recycling and Renewable Energy Centre –
construction commenced
• Financial close achieved for South London
Waste Partnership PPP and planning permission
gained for associated Beddington EfW
• Planning approval and financial close achieved
for Peterborough PPP – construction to start imminently
• Dunbar EfW planning enhanced to cover all of Scotland
• Preferred bidder status achieved for South East Wales,
residual waste PPP (Prosiect Gwyrdd) – associated
Trident Park EfW construction underway
327
Operating facilities
27
Materials recycling
facilities
7.2
Million tonnes
of material handled
34
Landfill gas power plants
3 operational/6 under construction
Energy from waste (EfW) plants
22
Pennon Group Plc Annual Report 2013
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Strategy and performance
Viridor is at the forefront of transforming waste. The company aims to impress
its customers by showing them how it can put waste into action, transforming
it into high quality recyclate, raw materials and energy. It will do this
by empowering all Viridor people to be safe, professional and enterprising
within a business always striving to be environmentally, economically
and socially sustainable.
Viridor’s strategy is focused on transforming waste
The company is building its business through a combination of securing long-term contracts,
driving quality (and hence price realisation) in recycling and growing capacity in waste-
derived renewable energy.
Long-term profit growth is expected to be driven by its PPP contracts and EfW projects.
Performance – contracts and energy from waste
Major progress in long-term PPP/EfW projects including:
• Glasgow City 25-year Residual Waste Treatment Services
DBFO, Peterborough and South London PPP contracts
secured and Preferred Bidder for ‘Prosiect Gwyrdd’
(South East Wales) PPP
• Runcorn Phases 1 and 2, Ardley, Exeter, Trident Park (Cardiff)
and Glasgow EfWs and Walpole Anaerobic Digestion (AD) facility
– all under construction
• Lakeside EfW performing above expectations.
Performance – recycling
• Significant current headwinds in recycling prices
• Aggressive action to reduce costs
• Focus on quality and adding value.
Total renewable
energy generation
(GWh)
Renewable energy
generation capacity
as at 31 March (MW)
0
2
8
0
6
7
2
5
7
2
1
6
6
3
1
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3
1
7
3
1
8
2
1
1
0
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Recyclate traded
(million tonnes)
9
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8
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1
7
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1
4
.
1
4
.
1
4
0
5
9
0
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8
0
0
2
0
1
/
9
0
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2
1
1
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0
1
0
2
2
1
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1
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0
2
3
1
/
2
1
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
820GWh
+7.9%
137MW
+0.7%
1.9m tonnes
+5.6%
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To view our online annual report:
www.pennonannualreport.co.uk/2013
Pennon Group Plc Annual Report 2013
23
Directors’ report - Business review - Viridor
Business review
Strategy and UK context
European and UK waste and resource management strategies and policies are focused
on the principles of resource efficiency, maximising recycling and recovery, and landfill
diversion. EU member countries have increasingly tough targets for the diversion
of biodegradable municipal waste from landfill sites. This will be achieved in the UK
by continued increases in local authority and commercial and industrial recycling rates
and by energy recovery from residual waste. The latter is predominantly a form of biomass
and is a significant form of renewable energy. Waste already accounts for approaching
2% of total UK electricity production (through landfill gas power generation and energy
from waste facilities).
Viridor believes that up to 6%
of UK electricity could come
from waste sources by 2020.
Colin Drummond, Chief Executive
Viridor
The UK Government’s main mechanism
for diverting both municipal and commercial
and industrial wastes from landfill
and incentivising recycling and energy
recovery, remains Landfill Tax. The Government
has confirmed the continuation of the increase
in landfill tax of £8 a year, rising to a total
of £80 per tonne from 1 April 2014.
This increase will further enhance the long-
term economics of recycling and energy
recovery and is supported by a range
of other policy and legislative measures.
Within the wider sustainability agenda,
many businesses and other organisations are
also looking to improve their environmental
and business performance through increased
recycling and resource efficiency.
All of these elements underline the key service
objectives and long-term trends in the UK
resource and waste management sector
and the clear customer demand that Viridor
has been anticipating, upon which it has
proactively strengthened its business
strategy and services.
Viridor’s clearly stated strategy within this
context is to add value by transforming
waste through recycling and waste-based
renewable energy generation. Viridor has
substantially increased its recycling business
over the past five years to a total of around
two million tonnes per annum. The next
phase of its strategy involves substantial
growth in EfW capacity. Viridor is targeting
over 15% market share by 2020 with
a network of strategic facilities in operation,
under construction or planned. At present
there is about six million tonnes of EfW
capacity in the UK and it is estimated that
20 million tonnes of capacity will be required
by 2020 to meet the Government’s landfill
diversion targets. There is likely to be
significant under capacity in the UK by 2020
compared with projected demand. Viridor
believes that up to 6% of UK electricity
could come from waste sources by 2020.
EfW facility, Exeter, under construction
Viridor Polymers recycling facility, Skelmersdale
24
Pennon Group Plc Annual Report 2013
Business performance
Revenue was down 7.5% to £704 million.
Before exceptional charges Viridor’s
earnings before interest, tax, depreciation
and amortisation (EBITDA) for the year
decreased by £32.4 million (29.4%) to £77.9
million. PBIT fell £32.9 million to £30.8
million. PBIT plus joint ventures decreased
by £29.3 million (39.0%) to £45.9 million
as the increased contribution from joint
ventures was more than offset by the decline
in landfill and recycling. Profit before tax
and exceptional charges decreased £21.1
million to £36.5 million, including the benefit
of reduced interest from intra group funding.
From 2007/08 until the first half of 2011/12,
the fast growth in profits from recycling
had more than offset the decline in annual
landfill profits. As noted previously, however,
recyclate prices have fallen back sharply
from the peak reached in the first half
of 2011/12 reflecting world economic
conditions including weakness in the
Eurozone economies and uncertainty
about the speed of growth in China.
Viridor responded swiftly with an aggressive
restructuring programme particularly in its
recycling business and in 2012/13 closed/
mothballed six of its facilities and made
152 redundancies. This and other items
generated savings of about £13 million
across all recycling operations which were
enough to offset about 35% of the price
decline. In tandem with the significant
downturn in recycling profits UK landfill
volumes continue to decline, in line with
the ongoing trend, as a result of Government
policy and a weak UK economy. Recycling
revenues per tonne have recovered a little
from their lows of October to December
2012; however they remain significantly
below the first half of 2011/12 levels.
On the positive side Viridor has continued
to make very strong progress on its strategic
expansion into the energy from waste (EfW)
and Public Private Partnership (PPP) market.
EfW will represent the low-cost solution
for disposing of residual waste (which
is currently landfilled) when landfill tax
reaches £80 per tonne in April 2014.
It will also be one of the UK’s lowest cost
and most effective sources of base-load,
distributed renewable energy at a time
when the UK is facing an increasing energy
shortage and projected long-term energy
price rises. During the year major new
contracts were signed for South London,
Glasgow and Peterborough and Viridor
was appointed as preferred bidder for
the South East Wales PPP. Six EfW projects
are currently under construction and a new
Capital Projects and Engineering Director
has been appointed to lead the delivery
of the programme.
Capital expenditure for the year, including
construction spend on service concession
arrangements, was £323 million (2011/12:
£143 million) of which £292 million was
for Viridor growth projects (largely EfW)
with the balance being maintenance
of existing assets.
PPP and EfW projects already enhance
the bottom line and committed projects
are expected to contribute more than £100
million to Viridor’s EBITDA within four years.
Despite the continuing challenging UK
and global economic conditions, Viridor
remains convinced that embracing the
sustainability agenda is an effective driver
for long-term growth. The company
is confident that its strategy will continue
to drive long-term growth and produce value
for Viridor and its stakeholders. Recycling
will be key to Viridor’s profits in the next
couple of years, with long-term growth
expected to be driven by a growing PPP
contract and EfW pipeline.
Exceptional charges
As a result of the continued weakness
in recyclate prices and the continuing
reduction in landfill volumes Viridor has
reviewed the carrying values of some
of its assets. The company has also
re-assessed the expected costs
of landfill provisions.
In response to landfill trends and its own
EfW development programme (including
EfW plants at its Ardley, Beddington
and Dunbar landfills), Viridor reviewed
its long-term site lives. Post 2020 it expects
to have a network of three strategically
located landfills. Of the current 61.5 million
cubic metres (m3) of landfill void, it is expected
that around 39 million m3 (including Ardley,
Beddington and Dunbar) will no longer
be filled.
An exceptional charge of £99 million
has been recognised to write-down
the carrying values of property, plant
and equipment, primarily in landfill, but
also reflecting the company’s expectations
on recyclate prices and the impact
of onerous contracts. This charge has
no cash impact.
The company has also reviewed its landfill
aftercare and restoration provisioning costs
to reflect revised final land forms and has
made a re-assessment of the aftercare
period (increased from 30 to 60 years)
based upon independent external advice.
This resulted in an increase in provisions
of £90 million, which has no immediate
cash impact.
The exceptional charges above totalled
£150 million net of tax.
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Ardley EfW, Oxfordshire, under construction
Pennon Group Plc Annual Report 2013
25
Directors’ report - Business review - Viridor
Business review
Continued
Investment
Investments in the future capabilities
and strength of Viridor’s business included
capital expenditure of £323 million, of which
£292 million was for growth projects (largely
EfW). This investment is part of the ongoing
£1.5 billion programme committed to
delivering essential infrastructure which
will make a substantial contribution
to energy and resource security in the UK.
Viridor continued to invest in targeted
acquisitions in 2012/13 and purchased
two companies, JWT Holdings Limited
and Pulp Friction Limited, for a combined
value of around £15.0 million. These
acquisitions will add value and support the
company’s recycling and EfW strategies.
Recycling
The recycling market in the UK is reaching
maturity and is affected by world commodity
prices. Difficult trading conditions are resulting
in a competitive shake-out taking place and
Viridor is well positioned to benefit from this.
During the year recycling volumes
traded increased by 5.6% to 1.9 million
tonnes (71,000 tonnes of the increase
from acquisitions). The average recycling
revenue of £99 per tonne from gate fees
and recyclate sales in 2012/13 was
significantly down on last year’s figure
of £118 per tonne which benefited
particularly from last year’s strong first half.
Recyclate revenues per tonne appear
to have stabilised, having recovered
a little from their lows of October to
December 2012, but remain significantly
below first half 2011/12 levels.
The outcome of a recent judicial review
confirms DEFRA’s interpretation of EU
recycling regulatory requirements, supporting
commingled collection and centralised
processing at materials recycling facilities
(MRFs) where most practicable and where
there are the appropriate quality controls.
This is in line with the predominant Viridor
service model. Viridor now has the largest
MRF capacity in the UK.
In addition to the above operational projects,
Viridor is pursuing a number of other
EfW opportunities to provide a long-term
alternative to landfill disposal of residual
waste as noted above. These will also
provide significant amounts of renewable
energy. Six EfW plants are already under
construction on fixed price contracts –
Runcorn Phases 1 and 2 , Cardiff, Exeter,
Ardley, Oxfordshire and Glasgow; and one is
due to start imminently in Peterborough.
Viridor and its partners have a total
operational, under construction
and committed capacity of 2.5 million tonnes,
of which 1.3 million tonnes is backed by
long-term base-load municipal contracts.
It has a further 0.6 million tonnes of capacity
with planning permission.
Since the start of 2012/13 Viridor has made
significant further progress in developing its
pipeline of long-term PPP and EfW projects:
• financial close achieved for the
Glasgow Design Build Finance Operate
project (July 2012) and planning
application for the associated Recycling
and Renewable Energy Centre approved
(January 2013) - construction commenced
• financial close achieved for the South
London Waste Partnership PPP
(November 2012) and planning
permission achieved for the associated
Beddington EfW facility (May 2013)
• planning approval (January 2013)
and financial close (February 2013)
achieved for the Peterborough PPP:
construction of the EfW facility
to start imminently
• preferred bidder achieved for the South
East Wales residual waste project (Prosiect
Gwrydd) (March 2013)
• Dunbar EfW planning enhanced to cover
all of Scotland (October 2012).
Contracts and collection
Profits were stable across the 16
municipal contracts (the more significant
ones include Lancashire, Glasgow, Lakeside,
Manchester, Somerset, West Sussex
and Bedfordshire (last full year)) and the
Thames Water contract.
Profits in the collection business were
down reflecting reduced volumes and price
pressure due to current market conditions.
Viridor’s commercial and industrial collection
fleet plays an increasing role in feeding
the company’s recycling and EfW plants.
Renewable energy
Energy can be viably recovered from waste
in two ways, either via gas utilisation (notably
landfill gas and through anaerobic digestion
(AD)) or controlled combustion (in EfW plants
and similar facilities, some of which may be
a part of combined heat and power (CHP)
schemes). Energy recovery from waste
currently accounts for around 20% of total
UK renewable energy (the bulk from landfill
gas and the balance from combustion)
equating to approaching 2% of total UK
electricity production.
Viridor’s landfill gas power generation output
increased by a further 7% to 618 Gigawatt
hours (GWh) (2011/12 576GWh), reflecting
intensive management focus and is now
at its peak. Average prices fell slightly
reflecting the reduced Renewables Obligation
Buyout Recycle (ROBOR) fund payment
element of Renewables Obligation Certificate
(ROC) prices. Total landfill gas power
generation operational capacity remained
unchanged at 107MW, (excluding 3MW
capacity at sub-contract sites in Suffolk). The
proportion of operational capacity eligible for
ROCs remained at 74% with the remaining
26% being on (lower priced) NFFO contracts.
Viridor’s NFFO contracts end in tranches
after which the capacity for all Viridor’s sites
will transfer to ROCs (about 60% will move
across in 2013/14 with the balance in the
period up to 2016/17).
As well as the 107MW of landfill gas capacity,
Viridor has a further 30MW of renewable
energy capacity across its Bolton EfW facility
and its share of the Lakeside EfW facility and
Greater Manchester AD operations.
26
Pennon Group Plc Annual Report 2013
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Landfill
The landfill market is being replaced by
recycling and EfW as local capacity becomes
available, in line with government policies.
Reflecting this trend, Viridor’s landfill disposal
volumes decreased by 0.4 million tonnes
(12.7%) to 2.7 million tonnes in 2012/13
in line with the market more generally.
Average gate fees increased by 8.1% to £25
per tonne but costs also increased by 8.1%
reflecting the impact of reduced volumes on
fixed costs. Consented landfill void reduced
from 65.4 million m3 at 31 March 2012 to
61.5 million m3 at 31 March 2013 reflecting
usage during the period.
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Pennon Group Plc Annual Report 2013
27
‘Trio’ recycling collection vehicle, Salford
Landfill gas power plant, Dorset
Joint ventures
Total joint ventures’ contribution (comprising
both Lakeside and Viridor Laing (Greater
Manchester) (VLGM)), which consists
of interest on shareholder loans and share
of profit after tax, rose 31% to £15.1 million
(2011/12: £11.5 million).
Lakeside
The first of Viridor’s EfW projects continues
to perform very strongly and is ahead of
management expectations. The 2012/13
contribution was £7.2 million (2011/12 £5.1
million); interest receivable on shareholder
loans was unchanged at £1.4 million;
and the share of profit after tax from
Lakeside was £5.8 million (up £2.1 million on
the previous year) reflecting strong
waste inputs and electricity generation.
Viridor Laing (Greater Manchester)
The 25-year Greater Manchester Waste
PFI contract (being delivered through
VLGM) is the UK’s largest ever combined
waste and renewable energy project.
The company is a joint venture between
Viridor and John Laing Infrastructure.
As part of the VLGM contract a separate
contractor was mandated to construct 43
facilities. Operation of the associated facilities
(both existing facilities and those which
are to be developed) is being carried out
on a sub-contract basis by Viridor. At 31
March 2013, 41 of the 43 facilities planned
had been formally taken over by Viridor.
Solid recovered fuel produced from the waste
will be used to generate heat and power
at a plant being built at the Runcorn Phase 1
EfW facility in Cheshire.
Phase 1 is being built primarily for the Greater
Manchester Waste PFI contract by TPSCo,
a joint venture between Ineos, John Laing
Infrastructure and Viridor. Phase 2 is 100%
owned by Viridor and will be available for
the market generally as steeply rising landfill
tax drives residual waste disposal away from
landfill towards recycling and EfW.
The ongoing delays in takeover of the
remaining mechanical biological treatment
(MBT) plant and the delay in completing
the Runcorn Phase 1 EfW facility could
have the potential to impact the VLGM
and also the TPSCo credit agreements.
Runcorn is around nine months behind
schedule, but TPSCo and Viridor have
contractual protection, including via liquidated
damages. Viridor is continuing commercial
discussions with its joint venture partners
and the contractors to resolve the
construction issues and protect its
and TPSCo’s financial position. At this point
in time, based on available information,
Viridor does not expect this matter to have
a material impact on the completion and
operation of the Greater Manchester PFI
or TPSCo.
Interest receivable on shareholder loans
from the VLGM joint venture was £7.9 million,
up £1.8 million due to the increased average
balance on shareholder loans (loans fully
drawn during 2011/12). Share of profit after
tax from VLGM on an IFRIC 12 basis was
nil, down £0.3 million (£4.4 million profit UK
GAAP, down £0.2 million).
Directors’ report - Business review - Viridor
Business review
Continued
Key relationships
All recycling and waste management
operations in England and Wales require
Environmental Permits issued and regulated
by the Environment Agency (EA) and Natural
Resources Wales. In Scotland the Scottish
Environmental Protection Agency issues
and regulates similar waste management
licences or pollution, prevention and control
(PPC) permits. Viridor maintains a positive
working relationship with these and other
relevant regulatory bodies by means
of proactive liaison and management
of any issues at both site and strategic levels.
Viridor has pioneered an innovative
online data sharing portal, known as
‘OpenSpace’, with the EA, embracing
latest data management practice to supply
environmental monitoring data effectively
live online to the regulator. This replaces
the need to supply huge volumes of written
quarterly and annual reports, thus saving
significant time and resources for all parties.
OpenSpace has been further developed
during the year between Viridor and the EA
to explore the application of such systems
in other regulated sectors.
1 Viridor and ‘Metal Matters’ recycling
campaign partnership
2 Viridor and West Sussex partnership waste,
electrical and electronic equipment (WEEE)
recycling campaign
3 Materials recycling facility (MRF),
Trafford Park, Manchester
4 EfW facility, Runcorn,
under construction
5 Viridor support services
People
With regard to Viridor’s largest customer
groups, local authorities account for 31%
of the company’s revenue, although no
individual authority accounts for more
than 12%. Viridor’s ROC energy contracts
account for 7% of revenue, primarily with
one customer.
The achievements, commitment
and professionalism of its employees,
particularly in the ongoing challenging
market conditions, remains a source of pride
to Viridor. The company values and thanks
them all for their contributions and continued
hard work and innovation.
No supplier accounts for more than 5%
of the company’s revenue and the company
sources from competitive markets.
A safe, healthy workforce and the continued
professional development of employees,
remain the top operational priorities for
Viridor. Whilst there was a disappointing
increase in the RIDDOR incidence rate over
the previous year (45 reportable incidents,
giving a rate of 1,429 per 100,000 employees
compared with 1,238 in 2011/12*),
a reduction of 42% in the rolling three-year
incidence rate confirms progress is being
made in this vital area.
Almost 4,000 training days were delivered
across Viridor during the year, underlining
the company’s commitment to the training
and development of employees throughout
the business. Around 200 employees
are participating in apprenticeship
programmes and 40 managers
are enrolled on the innovative Viridor
Foundation Degree course, developed
and delivered in partnership with Edge
Hill University.
* Change in RIDDOR reporting criteria
(see page 53 for details).
1
28
Pennon Group Plc Annual Report 2013
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5
3
Outlook for Viridor
Viridor has successfully transformed itself over the last decade to be one of the UK’s leading recycling,
renewable energy and waste management companies. The company continues to face near-term
headwinds in recycling and the ongoing trend decline in landfill. Although recyclate levels per tonne
appear to have stabilised, and indeed have recovered a little from their lows of October to December
2012, they remain significantly below the first half of 2011/12 levels. The company remains cautious
about the prospects for further recovery in prices in the short-term.
Strong progress has been made on Viridor’s PPP/EfW pipeline this year and these projects are already
making a significant contribution to Viridor’s bottom line. The growing pipeline of current and future
projects is expected to drive the company’s long-term profit growth.
The UK Government has set out guidance
for local authorities on the infrastructure
required to meet the requirements
of the revised EU Waste Framework
Directive. It has also published its Waste
and Resources Evidence Plan setting out
policy priorities and how the sector can
contribute to sustainable economic growth,
alongside new regulations and guidance
on recycling quality and the important
contribution of EfW.
Within this policy framework and changing
market demands, Viridor continues to focus
on delivering vital infrastructure and quality
services to provide essential renewable
energy, resource recovery and waste
management for its customers across
all sectors.
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Pennon Group Plc Annual Report 2013
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Directors’ report - Business review
Group
Financial review
Notwithstanding current challenges, the Group has delivered
overall profit before tax (before exceptional net charges)
broadly in line with last year.
Performance overview
The principal measures we use to assess the Group’s financial performance are profit
before tax and earnings per share (both before exceptional net charges and deferred tax)
and the interest rate on average net debt.
Profit before tax
before exceptional net
charges (£m)
5
.
0
0
2
.
*
2
8
9
1
8
.
5
8
1
5
.
8
8
1
.
4
9
5
1
Earnings per share
before exceptional net
charges and deferred tax
(pence)
.
3
7
4
6
.
2
4
.
3
2
4
8
.
0
4
.
9
6
3
Dividend per share
(pence)
Interest rate
on average net debt
(%)
6
4
.
8
2
2
5
.
6
2
8
.
4
1
4
.
1
4
.
9
3
.
5
.
3
5
6
.
4
2
5
5
.
2
2
0
0
.
1
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
1
/
2
1
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
1
/
2
1
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
1
/
2
1
0
2
£198.2m
-1.1%
42.6p
-9.9%
* Statutory basis £21.8 million.
Reconciliation of earnings
28.46p
+7.3%
1
1
/
0
1
0
2
2
1
/
1
1
0
2
3
1
/
2
1
0
2
9
0
/
8
0
0
2
0
1
/
9
0
0
2
3.5%
2012/13
2012/13
2011/12
2011/12
Profit after tax (£m)
Earnings per share (p)
Profit after tax (£m)
Earnings per share (p)
Statutory earnings
Deferred tax before exceptional net charges
Exceptional net charges (post tax)
Earnings before exceptional net charges and deferred tax
26.9
(12.2)
140.2
154.9
7.4
(3.4)
38.6
42.6
172.4
(2.8)
–
169.6
48.1
(0.8)
–
47.3
Note: Earnings per share figures in this business review exclude exceptional net charges and deferred tax. The Directors believe
excluding deferred tax provides a more useful comparison on business trends and performance. Deferred tax distorts earnings
per share through the effects of changes in corporation tax rates and the level of long-term capital investment.
Continuing interest outperformance coupled with raising cash and facilities to fund future growth:
£1,150 million cash and facilities at 31 March 2013, including £782 million of new (including hybrid
capital issuance) and refinanced facilities sourced during the year.
30
Pennon Group Plc Annual Report 2013
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The year’s financial highlights
South West Water recorded a strong performance against the 2010-2015 regulatory
contract and is well placed to deliver outcomes and outperform assumptions.
Viridor had a mixed year with trading significantly down on last year from declines
in recycling and landfill more than outweighing continued growth in joint ventures.
We have secured further funding
to finance continuing growth, including
a £300m hybrid capital issuance in March
2013 which strengthens the Group balance
sheet as well as providing funding.
By the year-end we had £1,150 million
in cash and facilities in place to fund
the major growth in Viridor’s projects under
construction and EfW/PPP pipeline, together
with South West Water’s K5 (2010-2015)
capital programme.
Capital investment increased by 61%
to £439 million due to the major investment
in Viridor’s energy from waste plants which
are expected to drive future growth.
We have secured funding at a cost that
is low in absolute terms. The Group interest
rate on average net debt improved to 3.5%
(2011/12 3.9%).
Revenue
Group revenue decreased by 2.6%
to £1,201.1 million. South West Water’s
revenue increased by 5.2% to £498.6
million as a result of tariff increases
and new connections, partially offset
by lower demand and a reduction in revenue
from customers switching from unmeasured
to metered charges. Viridor’s revenue
was down by 7.5% to £703.8 million
due primarily to the declines in recycling
and landfill operations.
Operating profit
(before exceptional charges)
Group operating profit decreased by 8.4%
to £246.3 million with South West Water
up by 5.1% to £215.2 million, but Viridor
down by 51.6% to £30.8 million.
Net finance costs
(before exceptional net income)
We continued our effective management
of interest rates in 2012/13 with net interest
payable on average net debt equating
to 3.5% (2011/12 3.9%). During the year
net finance costs (excluding pensions,
net interest, discount unwind on provisions
and IFRIC 12 contract interest receivable)
were £59.3 million (2011/12 £74.9 million)
covered 4.2 times (2011/12 3.6 times)
by Group operating profit. Investment income
totalling £10.8 million (2011/12 £5.7 million)
has been achieved with the objective of
enhancing returns on the Group’s substantial
pre-funding of around £500 million.
Profit before tax
(before exceptional net charges)
Profit before tax was £198.2 million, a
decrease of 1.1%. Pages 18 and 25
give a detailed description of the financial
performance of South West Water and
Viridor respectively. On a statutory basis
profit before tax was £21.8 million reflecting
exceptional net charges of £176.4 million.
Taxation
(before exceptional net charges)
The Group’s UK corporation tax charge
for the year was £43.3 million (2011/12
£30.9 million) after release of prior year
credits of £13.0 million (2011/12 £16.2
million). The increase primarily reflects
the absence of tax relief of around £9 million
on 2011/12’s accelerated pension deficit
recovery contribution. Deferred tax for
the year was a credit of £12.2 million
(2011/12 £2.8 million) which included
a credit of £13.6 million from the impact
of the introduction of the 23% corporation
tax rate from April 2013.
Earnings per share
(before exceptional net charges
and deferred tax)
Earnings per share were down by 9.9%
to 42.6p reflecting the higher corporation
tax charge. The weighted average number
of shares in issue during the year was
363.6 million (2011/12 358.7 million).
Net assets per share at book value
at 31 March 2013 were 292p.
Exceptional net charges
During the year South West Water terminated
a lease facility and received a consent fee
arising from the sale of a finance lease
between financial institutions, which resulted
in a net exceptional gain of £12.5 million.
An exceptional impairment charge
of £78.2 million has been recognised to
write-down the carrying values of property,
plant and equipment, primarily in landfill
activities, to reflect reducing landfill volumes
and our expectations on recyclate prices.
The impairment charge has no cash impact.
In addition £20.6 million has been provided
against onerous contracts (principally from
recycling activities) and other items.
An exceptional charge of £90.1 million
has been recognised for environmental
provisions, primarily landfill aftercare costs,
where we have increased the expected
period of aftercare to 60 years (2012 30
years) following a reassessment based
upon independent external advice.
This also has no immediate cash impact
and reflects the present value of costs
expected to be incurred at individual
sites over the 60 year period.
The exceptional net charges total
£140 million net of tax.
To view our online annual report:
www.pennonannualreport.co.uk/2013
Pennon Group Plc Annual Report 2013
31
Directors’ report - Business review - Group
Financial review
Continued
Dividends and retained earnings
The statutory net profit of £26.9 million
has been transferred to reserves.
The Directors recommend the payment
of a final dividend of 19.70p per share
for the year ended 31 March 2013.
With the interim dividend of 8.76p per
share paid on 4 April 2013 this gives a total
dividend for the year of 28.46p, an increase
of 7.3% over 2011/12 (reflecting 4% real
growth plus RPI of 3.3% for the twelve
months to 31 March 2013).
Proposed dividends totalling £103.8 million
are covered 1.5 times by net profit (before
exceptional net charges and deferred tax)
(2011/12 1.8 times). Dividends are charged
against retained earnings in the year in which
they are paid.
Dividend policy
The Group’s policy is to increase the dividend
each year by 4% above inflation up to 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
(before exceptional charges)
Operating costs for the year totalled
£955 million. The most significant areas
of expenditure were:
Expenditure
Manpower
Depreciation
Landfill tax
Raw materials and consumables*
Transport
Power
Business rates
£m
159
146
143
93
59
31
29
Group investment
The Group’s capital expenditure on property,
plant and equipment, including service
concession arrangements, increased
by 61% to £439 million (2011/12 £273
million) primarily from investment in Viridor’s
growth projects of £292 million. The major
categories of expenditure were:
EfW/PPP
£277m
Waste water treatment works
£38m
Water distribution
£22m
Sewerage
£21m
Recycling
£19m
Landfill
£16m
Information technology
£10m
Other
£36m
Cash flow
In 2012/13 the Group once again had
a strong operating cash flow. Net borrowings
reduced by £96 million primarily due
to the issuance of the hybrid securities,
partially offset by further capital investment.
Summarised cash flow £m
Cash inflow from operations
Net interest paid
Dividends and tax paid
Capital expenditure
Acquisitions/investment in joint ventures
Loan repayments and dividends received from joint ventures
Pension contributions
Abstraction and discharge consents 7
Net cash outflow
* Excludes elements of transport costs.
Hybrid securities issuance
Shares issued
Debt acquired with acquisitions
Debt indexation/interest accruals
Decrease/(increase) in net borrowings
2012/13
2011/12
385
(50)
(97)
(422)
(14)
9
(14)
(203)
295
4
(1)
1
96
390
(61)
(111)
(274)
(43)
4
(49)
(144)
–
2
–
(29)
(171)
32
Pennon Group Plc Annual Report 2013
Liquidity and debt profile
The Group has a strong liquidity
and funding position with £1,150 million
cash and facilities at 31 March 2013.
This includes cash and deposits of £635
million (including £143 million of restricted
funds representing deposits with lessors
against lease obligations) and undrawn
facilities of £515 million. A total of £782
million in new or renewed debt facilities were
arranged during the year, being:
• £304 million term loans and revolving
credit facilities renewed
• £178 million of new term loans
and Revolving Credit Facilities
• £300 million hybrid capital issuance.
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 2013 the Group’s loans
and finance lease obligations totalled £2,644
million. After the £635 million held in cash this
gives a net debt figure of £2,009 million, a
reduction of £96 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, Exeter,
Cardiff and Glasgow increased to £438
million at 31 March 2013.
A strong liquidity and funding
position to finance growth.
David Dupont, Group Director of Finance
Pennon Group
Major components of the Group’s
debt finance at 31 March 2013
Finance leasing
£1,263m
Bank bilateral debt
£485m
Index-linked bond 2057
£247m
European Investment Bank loans
£232m
Private placements
£163m
Bond 2040
£132m
Convertible bond 2014
£120m
Other
£2m
The Group’s debt has a maturity of up to 44
years with an average maturity of 22 years.
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 at an average interest rate of 3.4%.
A further £382 million of South West Water’s
debt is index-linked to 2041-2057 at an
overall real rate of 1.7%. As a result of these
initiatives South West Water’s cost of finance
is amongst the lowest in the industry.
The Group’s and South West Water’s interest
rates on average net debt for the year
to 31 March 2013 were 3.5% and 4.1%
respectively (after adjusting for capitalised
interest of £13.6 million and notional interest
items totalling £5.4 million, as detailed in note
8 to the financial statements).
Just under half of the Group’s gross debt
is finance leasing giving us a long maturity
profile. Interest payable benefits from
the fixed credit margins which were
secured at the inception of each lease.
At 31 March 2013 the fair value
of the Group’s non-current borrowings
was £208 million less than its book value
(2012 £200 million) as detailed in note
28 to the financial statements.
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Pennon Group Plc Annual Report 2013
33
Directors’ report - Business review - Group
Financial review
Continued
Capital structure – overall position
At the end of the financial year the Group’s
net debt of £2,009 million gave a gearing
ratio of net debt to (equity plus net debt)
of 65.4% at 31 March 2013 (2012 71.9%)
with the reduction attributable to the £300
million hybrid capital issuance.
South West Water’s debt to Regulatory
Capital Value (RCV) was 55% at 31 March
2013 (2012 56%) which compares to 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 £676 million (2012 £517 million)
equivalent to 8.7 times EBITDA (2012 4.7
times). During the year Viridor’s equity base
was increased by £151 million through
revised intragroup funding.
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. These 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.
34
Pennon Group Plc Annual Report 2013
Internal borrowing
South West Water’s funding is treated
for regulatory purposes as 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.
Taxation objectives and policies
Our tax strategy, as approved by the
Board, is to ensure we do not engage in
any practices which avoid paying tax at the
appropriate levels. We manage the taxes
we pay having regard to the interests of our
shareholders and 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 2012/13
Landfill tax
£162m
Employment taxes
£51m
Business rates
£29m
UK corporation tax
£19m
Fuel Excise Duty
£11m
Environmental payments
£10m
Carbon Reduction Commitment
£1m
Other
£3m
The Group made a net payment of
£18.5 million of UK corporation tax in
the year (2011/12 £41.4 million) which
reflects settlement of previous years’
tax computations and tax relief on the
exceptional charge for aftercare costs.
South West Water paid £34.0 million
(2011/12 £28.5 million) of UK corporation
tax on profit before tax of £164.6 million
(2011/12 £141.5 million).
The total tax charge for the year (before
exceptional net charges) of £31.1 million
was less than the charge which would have
arisen had the accounting profit before tax
of £198.2 million been taxed at the statutory
rate of 24%. A reconciliation is provided
in note 9 to the financial statements.
The Group’s total tax contribution extends
significantly beyond the UK corporation
tax charge.
Total taxes amounted to £261 million
of which £39 million was collected on behalf
of the authorities for employee payroll taxes.
In addition to corporation tax the most
significant taxes involved, together with their
profit impact, were:
• Landfill tax of £139 million was collected
by the Group on behalf of HM Revenue
& Customs (HMRC). This amount includes
£10 million paid to local environment
bodies via the Landfill Tax Credits Scheme.
Landfill tax is an operating cost which
is recovered from customers and is
recognised in revenue. In addition
the Group incurred landfill tax of £23 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 £25 million
was recovered by the Group from HMRC.
The repayment has arisen chiefly as
a result of the large capital expenditure
incurred by Viridor on EfW plants. VAT
has no material impact on profit before tax
• business rates of £29 million paid
to local authorities. This is a direct cost
to the Group and reduces profit before tax
• employment taxes of £51 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.
This amount includes PAYE of £2 million
on pension payments made by the Group
pension scheme
• Fuel Excise Duty of £11 million related
to transport costs. This reduces profit
before tax
• payments to Environment Agency
and other regulatory bodies total £10
million. This reduces profit before tax
• Carbon Reduction Commitment payment
for the Group was £1 million; this payment
includes a credit of £1 million arising from
Viridor energy production. This reduces
profit before tax.
The corporation tax rate for 2012/13 used
to calculate the current year’s tax is 24%.
The corporation tax rate has been reduced
to 23% for 2013/14 and is expected to fall
further, subject to legislation being enacted,
to 20% from 1 April 2015.
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.
At 31 March 2013 the Group’s pension
schemes showed a deficit (before deferred
tax) of £110 million (2011/12 £99 million),
the increase primarily reflecting a reduction
in the long-term net discount rate of 0.53%,
the main factor being lower AA bond yields.
Net liabilities of £85 million (after deferred
tax) represented around 4% of the Group’s
market capitalisation at 31 March 2013.
The revision to IAS 19, to be implemented
in 2013/14, is expected to result in a
net finance cost in 2013/14 of £4 million
(2012/13 credit of £4 million). A further
£1 million is expected to be charged to
operating profit to recognise administration
costs as they are incurred. Pension liabilities
will reduce by £10 million as at 31 March
2013 as a result of the change.
South West Water’s cash contributions
to the schemes remain within Ofwat’s
Final Determination for the K5 period.
The last actuarial valuation of the main
scheme was at 31 March 2010 and the
triennial valuation at 31 March 2013 is
currently under way. The deficit is expected
to be higher than IAS 19 due to the lower
gilt rates used to discount liabilities.
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.
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Pennon Group Plc Annual Report 2013
35
Directors’ report - Business review - Group
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 70 of our corporate governance report.
Key
Increased during year
Unchanged during the year
Reduced during the 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.
South West Water
Law and regulation
Risk
Commentary
Mitigation
Change
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 material adverse effect on
South West Water. Examples of
legal and regulatory change include:
The general direction of travel of
UK Government policy is known
and South West Water is actively
involved in consultations
on regulatory changes.
Uncertainty arising from
regulatory reform
Legislative and regulatory compliance
DEFRA issued its Strategic Policy
Statement to Ofwat (the Economic
Regulator) in March 2013 outlining
direction and priorities. Within
that context Ofwat is reforming
the regulatory approach.
2012/13 has seen the modification
of company operating licences
in preparation for the next price
review and a number of methodology
change proposals.
As a regulated business South
West Water is subject to numerous
and changing obligations.
South West Water has contributed fully
to the consultation on regulatory reform
and has had dialogue with regulators
and stakeholders in order to effectively
portray its views.
Methodology changes will continue
to be considered over the coming
months in the lead into the next
price review.
Performance against key regulatory
outputs is reported to the Board on
a monthly basis and where performance
falls short corrective programmes are
developed and implemented to target
recovery in a specific area.
36
Pennon Group Plc Annual Report 2013
Risk
Commentary
Mitigation
Change
Internal monitoring and assurance
programmes are undertaken through
the year. Annual data is supported
by external verification to provide
assurance on the company’s
compliance with its obligations.
South West Water continues to manage
cost pressures as they arise in addition
to achieving operating cost efficiencies
and managing inflationary increases.
New regulations, obligations
and standards could increase costs
Issues are addressed through the five-
year regulatory price review mechanism;
obligations which arise within price
control periods such as private sewers
and bathing water obligations are
funded through future adjustments
to price limits.
Economic conditions
Risk
Commentary
Mitigation
Change
Economic conditions could
materially affect South West
Water’s revenues and profitability.
South West Water has exposure
to reduced economic activity
and inflation/deflation.
South West Water’s revenues
are economically regulated through the
price review mechanism.
Non-recovery of customer debt
Customer debt and affordability are
key areas of focus given the continued
challenging economic conditions.
In addition to existing strategies, which
are kept under review, South West Water
continues to implement new initiatives to
improve and secure cash collection through:
• use of third party collection agencies
• external trace data to track down
previous occupiers
• developing a new strategy for
previous and earlier debt collections
• working with social housing partners
• continued use of property
charging orders.
The company has also continued to fund
and promote ways to help customers
struggling to pay bills (WaterCare, Restart,
Fresh Start Fund) which seek to reduce
bad debt exposure.
South West Water is one of the few
companies to have implemented a social
tariff following the introduction of its
WaterCare tariff from 2013/14. This tariff
is designed to assist around 10,000
households in the region by reducing
their bills to an amount they can better
afford to pay.
The Government’s commitment to tackle
the ‘unfairness’ issue for South West Water
customers, in which around 3%
of the population are effectively paying
for a third of the UK’s bathing waters,
has resulted in a household customer’s
bill being reduced by £50 per annum
from 2013/14.
Pennon Group Plc Annual Report 2013
37
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Directors’ report - Business review - Group
Principal risks and uncertainties
South West Water (continued)
Economic conditions (continued)
Risk
Loss of revenue
Financial loss arising from insolvency
of a major supplier
Operating performance
Commentary
Mitigation
Change
South West Water revenue can be
impacted by changes in customer
demand and other income streams.
The company has around 75% of its
customer base metered and as a result
the revenue from metered charges can
be volatile from changes in customer
usage which can be affected by:
• abnormal weather impacts
• increased water efficiency
• recession impacting
commercial customers.
South West Water does not have
material exposure to payment before
receipt of goods and services.
The financial impact of changes
in customer demand is mitigated
through the Revenue Correction
Mechanism whereby shortfalls
in revenue in one five-year regulatory
pricing period are adjusted
in the following period.
The company uses third party credit
monitoring services to identify changes
to major suppliers’ financial status
and creditworthiness to supplement
an annual risk review of key
and strategic suppliers.
Risk
Commentary
Mitigation
Change
Poor operating performance
or a failure or interruption
of 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.
Poor operating performance
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 and
eventually reduced demand for
services and increased fixed costs.
South West Water monitors
its operating performance
through a wide range of systems
and management reviews
and invests as appropriate
to maintain target performance.
Non-compliance or avoidable
health and safety incident occurrences
South West Water is committed
to achieving the appropriate level
of health and safety compliance.
This year has seen the continued
delivery of the behavioural safety
programme including safety leadership
training for a number of staff, as well
as innovative behaviour training.
In addition senior management visits
were completed during the year across
a number of sites.
The number of RIDDOR accidents
for 2012 has fallen by over 50%.
Continuous training is being
provided to ensure that appropriate
health and safety working practices
are embedded and this reducing
trend continues.
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Pennon Group Plc Annual Report 2013
Risk
Commentary
Mitigation
Change
Operational failure at clean
and waste water sites
Due to the nature of South West
Water’s business there are continued
risks arising during the normal course
of business, including risk of failure
of assets, processes or systems which
could otherwise impact on the health,
safety and security of the company’s
people or customers, or on its financial
position and reputation.
The company is able to monitor
its significant assets by automated
and remote operation and has routine
controls and operating procedures
in place that are constantly kept under
review. Asset management techniques
are employed to pre-empt the failure
of assets.
Contamination of water supplies
South West Water has established
procedures and controls in place,
as well as contingency plans
and incident management procedures.
Where issues do arise there are
appropriate contingency plans
to deal with such instances
and these are updated through
experience of such events.
It 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.
Extreme weather and climate change
Increased flooding incidents
Pollution events
Water resources adequacy
2012 has been a challenging
year in terms of weather impacts.
The continued dry weather from 2011
into the early part of 2012 placed
pressure on the company’s water
resources. This was followed by
a period of extreme rain – South West
Water’s wettest spring/summer in
100 years – which placed significant
pressure on its network and resulted in
higher levels of flooding incidents.
The business is well placed to manage
such extreme incidents. Key mitigation
is having detailed contingency plans,
sufficient emergency resources
and a capital programme that supports
ongoing efforts to manage these
risks. In the longer term the impacts
of climate change are being considered.
The company has plans ready and will
adapt the way it conducts its business
to respond effectively to climate changes.
The extreme wet weather during
the year resulted in a significant
increase in the number of flooding
incidents, both for customers
and at South West Water sites.
South West Water is committed
to minimising the impact
on the environment.
South West Water has a number
of schemes in place to maintain water
resources (such as pumped storage
for certain reservoirs) and promotes
conservation measures and customer
water efficiency measures.
The company has identified targeted
capital investments to reduce the risk to
specific customers in key affected areas.
As a result of the extreme weather during
the year the number of acute pollution
incidents has increased from the prior
year. Whilst this is regrettable the number
of more serious incidents has fallen from
the prior year.
Whilst there has been a strong recovery
in the company’s water resources, as a
result of the extremely wet weather seen
over spring/summer 2012, the company
continues to monitor reservoir levels to
maintain sufficient water resources
for drier periods such as those seen
in recent years.
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Pennon Group Plc Annual Report 2013
39
Directors’ report - Business review - Group
Principal risks and uncertainties
South West Water (continued)
Operating performance (continued)
Risk
Commentary
Mitigation
Change
South West Water also considers
the longer term resource situation.
It prepares a new Water Resources
Management Plan every five years
and reviews it annually for a range
of climate change and demand
scenarios. The Draft Water Resources
Management Plan for 2015-2040
has recently been submitted to
DEFRA and will be publicly available
later in the year. The plan indicates
that the company has a surplus
of resources through to the horizon
of 2040. However investment is needed
to develop the overall trunk main
infrastructure, to expand treatment
capacity and to enhance certain
pumped storage facilities.
The company has delivered significant
improvements in customer service
during K5 with a 51% reduction in
written complaints and an 88% increase
in the Service Improvement Mechanism
(SIM) score. Continued improvement
is being targeted.
While the company has seen
improvements in customer service
particularly through reduced written
complaints, South West Water’s
relative position will remain unclear
until industry data is published.
There is an ongoing strategy
to improve customer service further.
Poor service provided to customers
Customer service remains
paramount to South West Water
and the company focuses on improving
customer satisfaction and reducing
customer complaints.
South West Water could incur a financial
penalty under Ofwat’s Service Incentive
Mechanism (SIM) for below average
customer service performance.
Failure to deliver operating
cost efficiencies
In line with its track record South West
Water remains confident of delivering
Ofwat’s assumed operating cost savings.
The company has delivered cumulative
operating cost efficiencies ahead
of K5 targets.
Capital investment
Risk
Commentary
Mitigation
Change
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 South West Water’s
financial position and reputation.
South West Water may not deliver
its capital programme within the
price limits and with the efficiencies
determined by Ofwat.
South West Water has a track record
of delivering its capital programme
in accordance with regulatory
requirements and progress is regularly
monitored and reviewed.
40
Pennon Group Plc Annual Report 2013
Business systems
Risk
Commentary
Mitigation
Change
Major failure of IT systems.
Market
Risk
Uncertainty arising from
market reform.
Reputation
Risk
Loss of key stakeholder
support and prolonged
negative media campaign.
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.
South West Water has well developed
IT systems and continuity systems
in place. These include a geographically
separate alternative data centre,
which is hosted by a third party
communications provider. This reduces
the impact of any failure or disruption.
Commentary
Mitigation
Change
Whilst the Draft Water Bill recognised
an approach to reform that was
‘evolutionary’ rather than ‘revolutionary’
the development of greater competition
in the water industry could reduce
South West Water’s revenues.
As part of the risk management
and business strategic planning
processes the company continues
to evaluate developments and
proposals for competition.
South West Water is prepared
for the development of retail competition
for non-household customers during
the next regulatory period and has
developed enhanced services offered
to commercial customers through
‘Source for Business’.
Commentary
Mitigation
Change
South West Water has a number
of key stakeholders, including
customers, and aims to balance
their needs with environmental
responsibilities and legislative
and regulatory obligations.
The company is committed
to engaging with key stakeholders
for both South West Water’s long-
term strategy and coming regulatory
period through its independently
chaired WaterFuture Customer
Challenge Panel which includes
representatives from stakeholder
organisations.
In addition South West Water actively
manages communications with
customers and stakeholders both
online and through social media.
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Pennon Group Plc Annual Report 2013
41
Directors’ report - Business review - Group
Principal risks and uncertainties
Viridor
Law and regulation
Risk
Commentary
Mitigation
Change
Changes in law, regulation
or decisions by governmental
bodies or regulators could have
a material adverse effect
on Viridor’s financial results
or operations.
Landfill diversion and recycling
targets could increase costs/
reduce profitability
There is a wide range of laws
and regulations and policy decisions
of government and regulators
which could have a materially
adverse effect on Viridor.
It remains possible that government
policies and regulations may
change in unforeseen ways
which adversely affect Viridor.
The UK has landfill diversion,
recycling and recovery targets
which, together with the impact
of 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.
Higher regulatory standards
could increase costs
The ever increasing demand for higher
standards, in areas such as health
and safety, environmental performance
and employee welfare, increases costs.
The general direction of travel of
UK Government policy is known
and Viridor is actively involved
in consultations on regulatory
changes. It maintains a transparent
and proactive relationship
with regulators.
Viridor policy is to meet or exceed
regulatory requirements which
represents a potential competitive
advantage for the company.
Viridor’s strategy is to grow in recycling
and energy from waste where margins
per tonne are much higher than in
landfill. Escalating landfill tax increases
the economic attractiveness of recycling
and energy from waste. The resource
efficiency agenda from the EU and the
UK Government’s attention to resource
and energy security are expected
to provide further opportunities for
Viridor. Reflecting the above Viridor
has undertaken a thorough review
of landfill site lives on a prudent basis,
and has written down landfill asset
values accordingly.
Wherever possible Viridor passes
on these higher costs through
contractual arrangements with waste
authorities and other customers
(via legislation and technical clauses).
However as government cutbacks
continue to bite, local authorities
(via austerity measures) are looking
for price reductions for already
contracted waste streams.
Continually improved management
controls and investment in its business
management systems help Viridor to
keep the cost base as low as possible
whilst maintaining compliance. 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.
42
Pennon Group Plc Annual Report 2013
Economic conditions
Risk
Commentary
Mitigation
Change
Economic conditions could
materially affect Viridor’s revenues
and profitability.
Viridor has exposure to reduced
economic activity, inflation/deflation,
the impact of the current Eurozone
uncertainties and any potential slow
down in the Chinese economy.
Reduced waste volumes could impact
Viridor revenue/profit
Reduced recyclate prices could impact
Viridor revenues/profit
Viridor enters into long-term
contracts which potentially subject
the company to contract performance
risk for many years
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,
Viridor Resource Management, 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. China’s recent ‘Green Fence’
initiative, effectively banning certain
waste streams from the country, has
placed further burdens on exporters
to that country.
The Government’s ongoing spending
review is putting increased pressure on
local authority services, including waste
management, and creating an ongoing
search for efficiencies.
Poor performance in the contract
or poor initial pricing at the tender stage
could impact on the company’s long-
term profitability and financial condition.
Viridor has a diversified revenue
stream which includes domestic
sales as well as exports to countries
such as China and India and the rest
of the EU. Nevertheless Viridor remains
exposed to general weakening in
worldwide economic conditions.
Viridor’s strategy is focused on growing
in recycling and energy from waste
where margins per tonne are much
higher than in landfill.
Viridor has attempted to mitigate this
price reduction via customer supply
contracts and by extensive cost control
and other management actions. Closure/
mothballing of sites has now taken place
and an asset impairment charge has been
recognised accordingly.
Viridor provides best value services
and competitive procurement bids
to its public sector customers and is
protected by the terms of its contracts
which run for periods of up to 25 years.
Some local authorities are seeking price
reductions. Viridor’s position remains that
it will consider renegotiation of contracts
where appropriate to mutual benefit.
Nevertheless Viridor remains exposed
to such pressures particularly when
contracts come to an end.
The company’s strategy of identifying
long-term profitable contracts includes
a full evaluation of the benefits from a
mix of responses to the requirements
of client organisations ensuring that
profit is recognised at each stage
of the supply chain.
The company has strict contract
authorisation procedures which reflect
the size, duration and potential risks
of different types of contract. Authorisation
of long-term contracts is given at Board
or senior management level.
Pennon Group Plc Annual Report 2013
43
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Directors’ report - Business review - Group
Principal risks and uncertainties
Viridor (continued)
Economic conditions (continued)
Risk
Commentary
Mitigation
Change
The company has recognised that
certain historic contracts, particularly from
acquired businesses, have unsatisfactory
pricing structures and where appropriate
has recognised a diminution in value.
Operating performance
Risk
Commentary
Mitigation
Change
Poor operating performance
or a failure or interruption
of Viridor’s operations may have
a material adverse impact
on both its financial position
and reputation.
Poor operating performance
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 and, eventually, reduced
demand for services and increased
fixed costs.
Regulatory performance is subject
to continued and extensive internal
and external inspection, including
business management systems
and compliance policy.
Environmental provisioning
Risk
Commentary
Mitigation
Change
Landfill aftercare and restoration
liabilities are long-term in nature
and could increase which may
have a material adverse impact
on Viridor’s financial position.
The high cost of moving landfills
from active operation, through
restoration and into aftercare,
continues to increase.
This is compounded by shorter
remaining landfill lives (due
to reduced tonnages).
Extensive modelling work has been
undertaken with the assistance of
outside professional advisers to fully
understand the true cost of restoration
and aftercare. This has resulted in
the period of provision having been
increased to 60 years and provisions
having increased accordingly.
Capital investment
Risk
Commentary
Mitigation
Change
The failure or increased costs
of capital projects, and acquisitions
or joint ventures not achieving
predicted revenues or performance,
could have a material adverse effect
on both Viridor’s financial position
and reputation.
Within Viridor there are risks
of project delays, cost overruns
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.
This has been recognised as a key
risk and systems and procedures
are in place to address it. More
recently the Viridor board has been
strengthened by the appointment
of a Capital Projects and Engineering
Director. The establishment of ‘oversight
boards’ for each of the major projects
has added additional rigour to their
delivery. Nevertheless the scale
of the investment has increased
significantly and the quantum of risk
has accordingly risen.
With the increase in Viridor’s project
pipeline, Viridor recognises that this risk
is increasing and is addressing it.
Viridor’s experienced and dedicated project/
contract teams carry out detailed due diligence
on all projects, suppliers, technologies and
acquisitions prior to commencement.
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Pennon Group Plc Annual Report 2013
Risk
Commentary
Mitigation
Change
Wherever possible back-to-back
agreements with, and guarantees from,
suppliers are entered into which provide
a significant degree of protection.
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.
Viridor, through its Capital Projects
and Engineering Director, proactively
manages its contractors. It has enhanced
its team, both from internal and external
resources, to reflect the increased scale
of its capital programme.
Contractor failing to deliver progress
could increase Viridor’s costs
Despite extensive due diligence
and significant protection of back-to-
back contracts and/or penalty clauses
in contracts to deliver new technologies
on time and on budget, Viridor remains
exposed to contractors’ failure to deliver
new projects which may in extreme
circumstances require lengthy legal
action or other redress.
The Runcorn EfW/CHP plant is believed
to have fallen about nine months behind
schedule and such delay without an
increase in liquidated damages would
have an adverse effect on Viridor’s
associated joint ventures and ultimately
on Viridor itself.
Competitive pressures
Risk
Commentary
Mitigation
Change
A reduced customer base,
increased competition
affecting prices or reduced
demand for services could
have a material adverse impact
on Viridor’s financial position.
As a result of current weak
economic conditions compounded
by the recent spike in global
commodity prices, Viridor is
experiencing increased competitive
pressures in a number of areas of
its business, including in particular
recyclate volumes 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 businesses who are now
competing aggressively for volume
leading to depressed prices.
Over capacity in the UK EfW market
could impact demand for Viridor’s
new plants.
There is significant consented EfW
capacity in the UK which has yet
to be built.
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. In general terms Viridor’s
strategy is to establish a long-term
sustainable competitive advantage
in the business in which it operates;
this is designed to protect long-term
shareholder returns.
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. We believe there is
competitive shake-out taking place among
marginal competitors which will in due
course benefit Viridor as a market leader.
Viridor has fully evaluated projected
demand and competing capacity for each
of its planned facilities and is confident that
they can be filled profitably. With landfill
tax to reach £80 per tonne in April 2014,
large scale energy from waste facilities
of the type Viridor is building will be the low
cost way of disposing of residual waste.
Pennon Group Plc Annual Report 2013
45
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Principal risks and uncertainties
Viridor (continued)
Competitive pressures (continued)
Risk
Commentary
Mitigation
Change
Reflecting government policies and trends
there will be a need for around 20 million
tonnes of capacity in the UK in 2020.
When reviewing current competing projects
and take account of planning barriers,
financing difficulties and the lack of further
large base load municipal contracts, it is
expected that there will be a capacity shortfall
of up to 25%. Of the 2.5 million tonnes capacity
Viridor is committed to operating by 2020 more
than half (1.3 million tonnes) is already backed
by long-term municipal contracts.
The costs of producing SRF to the required
quality and of shipping it to Europe are
significant. Disposal and generation of the
associated renewable energy in EfWs in the UK
is generally lower cost (and better for the UK
economy). Nevertheless small amounts of SRF
may continue to be exported especially if UK
EfW capacity remains insufficient.
Over capacity in parts of Europe could
impact the UK EfW market.
Some waste is being converted
into solid recovered fuel (SRF) and,
in the absence of sufficient EfW capacity
in the UK, is being sent under EA
licence for disposal in adjacent parts
of Northern Europe where there
is currently surplus capacity.
Business systems
Risk
Commentary
Mitigation
Change
Information technology
and business continuity systems
and processes may fail which
may cause material disruption
to Viridor’s business and could have
a material adverse impact on both
its financial position and reputation.
Some of Viridor’s IT systems
require replacement, development
or upgrading to meet the growing
requirements of the business.
In some areas new technology being
introduced may not operate or perform
according to stated specification
requirements.
Existing systems are beginning to prove
inadequate or are unsupported which
may lead to an inability to perform key
business functions.
Pennon Group
Group
Finance and funding
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.
Nevertheless Viridor recognises the risks
associated with IT upgrades.
Project Enterprise, charged with developing
a fully scaleable Enterprise Resource Planning
(ERP) type platform is now well advanced,
led by the Director of Business Transformation
with external professional assistance as required.
Nevertheless this is a major project which,
as with all IT systems, carries risks.
Project Enterprise is significantly addressing
these issues as a matter of priority.
Risk
Commentary
Mitigation
Change
The Group may be unable
to raise sufficient funds to finance
its activities or such funds may
be only available at higher cost.
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.
The Company has robust treasury
policies in place.
46
Pennon Group Plc Annual Report 2013
Risk
Commentary
Mitigation
Change
The Group had £1.15 billion of cash
and facilities as at 31 March 2013
including around £0.8 billion of new/
refinanced facilities sourced during
the year.
Policies include always having pre-funded
at least one year’s estimated cash flow
through cash and/or committed facilities
and ensuring no more than 20% of net
borrowings 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 with 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.
Pensions
Risk
Pension costs may increase
due to higher costs for future
service and growing deficits
in relation to past service in the
defined benefit schemes.
Succession planning
Commentary
Mitigation
Change
All defined benefit schemes (apart
from the Greater Manchester Waste
PFI scheme) have been closed
to new entrants since April 2008.
Employee and employer contributions
are kept under review and a formal
actuarial valuation is being undertaken
as at 31 March 2013.
Indications are that the actuarial deficit
has increased since the last valuation
in 2010.
Pension trustees keep investment
policies under review and use professional
investment advisers to seek to maximise
investment returns at an appropriate
level of risk.
Risk
Commentary
Mitigation
Change
Pennon’s employees are
the cornerstone to its success
and further development. High
quality, well motivated, trained
and competent people at all
levels must be in place to ensure
sustained business development.
Ensuring the right people in the right
places at the right time does not happen
by accident; it needs careful planning.
Succession plans are in place for Board
Directors and senior management,
and further down the organisation
as appropriate. These are normally
updated annually.
Both South West Water and Viridor
have introduced training and development
programmes including apprenticeships,
graduate training and management
development.
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 section on principal risks and uncertainties.
Pennon Group Plc Annual Report 2013
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Directors’ report - Business review - Group
Sustainability report
As one of the largest environmental and resource management groups
in the UK, Pennon’s business is all about sustainability. We deliver high quality
water and sewerage services and recycling, renewable energy and waste
management services that are essential to the well-being of our society.
South West Water provides high quality drinking water, together with effective waste water treatment
for Devon, Cornwall and parts of Dorset and Somerset.
Viridor is one of the leading UK recycling, renewable energy and waste management businesses.
Our ongoing investment, and our commitment to continuously improving levels of service
and operational performance, will help society meet its fundamental requirements in water
and resource management services in the long-term.
2012/13 achievements
South West Water
• 16 consecutive years without water restrictions, industry-leading leakage control,
top quality drinking water and best ever waste water treatment performance
• Two further awards won for ‘Upstream Thinking’, South West Water’s flagship catchment
management initiative
• Park Lake, the former china clay quarry now used as a water storage resource, and awarded
County Wildlife Status following the company’s work to enhance the landscape and habitat
• Community engagement strengthened with South West Water’s employee volunteering
programme and support for the successful bid for a University Technical College in South Devon
• South West Water customer service score improved
• Introduction of a new social tariff for customers in 2013/14.
Viridor
• Viridor announced as a ‘Bronze’ company in the Business in the Community Corporate
Responsibility Index
• Viridor first in its sector to achieve ISO 50001 (Energy Management System) accreditation
• Viridor’s groundbreaking ‘OpenSpace’ web portal used for ‘live reporting’ of environmental
compliance data further developed and used by the Environment Agency as model of best practice
for other regulated industries
• 40 employees enrolled on Viridor Foundation Degree course designed for future company leaders
and around 200 on a variety of apprenticeships
• Viridor won Best Practice in Health & Safety and Best Communications Campaign titles
at Chartered Institution of Wastes Management Awards 2012
• £10.5 million provided by Viridor and distributed for environmental and amenity projects
across the UK via the Landfill Communities Fund.
48
Pennon Group Plc Annual Report 2013
We are pleased to report our performance against our strategic sustainability objectives and KPIs.
Objective: Manage Pennon Group as a sustainable and successful business for the benefit
of shareholders and other stakeholders.
Capital
Investment
(£m)
.
8
0
3
1
.
1
5
2
1
5
.
6
1
1
1
1
/
0
1
0
2
2
1
/
1
1
0
2
3
1
/
2
1
0
2
South West
Water
As a well managed and responsible Group, with sustainability
driving its business strategy and at the core of its operations,
we aim to deliver strong performance and lasting value for
all our stakeholders. Our services and methods of operation
at all times look to provide clear community benefits
and to protect and enhance the environment.
In addition to our long-term investment performance,
Pennon was pleased to have increased its 2013 score
in the FTSE4Good Index – Environmental, Social
and Governance ratings assessment to 4.2 out of 5 (2012: 3.8).
Earnings per share
before deferred tax
and exceptional net
charges (pence)
Capital
Investment
(£m)
3
.
7
4
0
6
.
2
4
3
.
2
4
8
.
0
4
0
1
/
9
0
0
2
1
1
/
0
1
0
2
2
1
/
1
1
0
2
3
1
/
2
1
0
2
*
3
2
3
.
5
5
4
1
2
1
/
1
1
0
2
3
1
/
2
2
1
1
0
0
2
2
.
2
7
7
0
0
1
1
0
0
2
2
1
1
/
* Includes investment in contracts in which local authorities
have a residual interest. Previous years restated.
Pennon Group
Viridor
Objective: Aim to ensure that all our business activities have a positive economic,
social and environmental impact on the communities in which we operate.
Community
support,
sponsorship
& donations
(£)
1
7
6
,
9
7
6
5
8
,
9
7
1
0
3
,
3
7
1
1
/
0
1
0
2
2
1
/
1
1
0
2
3
1
/
2
1
0
2
Pennon recognises it has a responsibility to contribute
positively towards communities affected by our operations.
In addition to investing in a high quality water and waste
management service, we create local employment, use local
supply chains, provide financial support to community projects
and enhance the environment.
Pennon Group and its subsidiaries support communities
and charities within their operational areas and Viridor continues
to provide substantial funding to environmental and community
projects via the Landfill Communities Fund. Viridor and South
West Water also both fundraise for their preferred charities:
WaterAid, the Cystic Fibrosis Trust and Trees for Cities.
Charitable
donations
(£)
8
7
6
,
8
7
2
9
9
,
3
7
8
9
9
,
4
7
Community
support,
sponsorship
& donations
(£m)
7
.
0
1
4
.
0
1
1
.
0
1
1
1
/
0
1
0
2
2
1
/
1
1
0
2
3
1
/
2
1
0
2
1
1
/
0
0
1
1
0
0
2
2
2
1
/
1
1
0
2
3
1
/
2
2
1
1
0
0
2
2
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Wakeboarding at Siblyback Lake, Cornwall
Community mural in Slough featuring Lakeside EfW
Pennon Group Plc Annual Report 2013
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Directors’ report - Business review - Group
Sustainability report
Continued
Objective: Aim to ensure that all our business activities have a positive economic,
social and environmental impact on the communities in which we operate.
Continued
Economic impact
South West Water
The company has introduced an innovative ‘mixed economy’ model
for the current regulatory period to source its capital programme.
This means using a significant number of smaller local contractors
to provide specialised services, so providing inward investment
into the local economy. Research compiled by Plymouth University
Business School in February 2013 suggests that the company
generates over 4,500 jobs in the region.
South West Water’s £2 billion investment in ‘Clean Sweep’ has
delivered improved waste water treatment around the coast,
improving the amenity of beaches and bathing waters, which
is fundamental to the success of the tourist industry in Devon
and Cornwall.
Since privatisation of the water industry in 1989, around 3% of
the country’s population who live in the South West have effectively
been paying for the clean-up and protection of one third of the
nation’s bathing waters. Following four years of close work alongside
MPs of all parties and consumer groups, South West Water has been
delighted to see the UK Government funding a £50 per annum bill
reduction to all household customers in the region, which is
designed to address this historic unfairness. This arrangement
was implemented for 2013/14 charges and is planned to run until
at least 2020.
Social impact
South West Water
South West Water has further developed its affordability toolkit
for customers who are struggling to pay their water bills.
The company has introduced a new social tariff for 2013/14
to help its most hard-pressed customers, and established new
partnerships with Age UK to target support for older customers
and with housing associations to engage with low income customers.
‘Battle the Bills’ sessions have provided advice on water and energy
use to the all important small businesses in the region.
South West Water’s expanding apprenticeship scheme continues
to identify and nurture talent in the region. The company is proud
to have supported the successful bid for a University Technical
College in South Devon, which will provide students with relevant
skills in water, environment and engineering. Recognising that this
sector plays a significant part in female participation rates, some of
the company’s female scientists and engineers have visited schools
to encourage girls to study science, technology, engineering
and mathematics (STEM).
50
Pennon Group Plc Annual Report 2013
Viridor
Viridor’s current programme of investment of around £1.5 billion
in recycling and energy from waste facilities, including £292 million
of capital investment in growth projects in 2012/13, is creating
significant employment and training opportunities. These include
construction jobs (for example, around 1,000 people were employed
at the Runcorn energy from waste (EfW) development site alone
at the turn of the year) and jobs in its supply chain, as well as
the long-term employment opportunities for plant managers,
operatives and technicians. Both Viridor and its construction
partners are providing training and apprenticeship programmes
on these projects.
Viridor
Viridor continues its programmes of proactive community
sponsorship, focusing on environmental and science, technology,
engineering and maths (STEM) – focused education initiatives
in its areas of operation.
The company also continues to provide funding to Viridor Credits,
an independent Environmental Body and registered charity,
via the Landfill Communities Fund. In 2012/13 Viridor provided
£10.5 million for amenity and environmental improvement projects
in the vicinity of permitted landfill sites across the UK.
Approximately 275 projects were supported and it is estimated
these benefited some 200,000 people.
Some of the major service contracts signed during 2012/13,
such as those with Glasgow City Council and Peterborough City
Council, include significant community benefit packages whereby
Viridor is committed to delivering education, training and local
‘capacity building’ services to complement the core waste
treatment requirements.
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South West Water contracts the provision of conservation, access
and recreation at its reservoir sites to South West Lakes Trust.
The public can participate in quiet recreation, such as camping,
walking, cycling and fishing, or take part in a wide range of boating
and watersports activities. The company has further developed
its community engagement strategy by providing opportunities for
employee volunteering. During summer 2012 teams of employees
participated in a series of beach cleans around the region, in
conjunction with Keep Britain Tidy.
Complementing its sponsorship in STEM education in schools
and colleges, Viridor also operates or supports 10 education
centres on or near its sites. These help to promote understanding
and best practice in waste prevention, recycling, recovery
and resource management, as well as wider issues of sustainability.
During 2012/13 the centres welcomed 15,792 visitors from schools,
colleges and community groups. All Viridor centres hold the ‘Learning
Outside the Classroom Quality Badge’, the nationally recognised
indicator of good quality educational provision.
Environmental impact
South West Water
Following the acquisition of Park and Stannon china clay pits from Imerys,
South West Water is now restoring the landscape and wildlife amenity
at these sites. In recognition of the significant improvements at Park,
Cornwall County Council has awarded the site County Wildlife Status.
The extreme wet weather in the latter half of 2012 and the start
of 2013 caused widespread flooding in the south west of England.
The number of internal and external sewer flooding incidents
increased as a direct result. South West Water worked in partnership
to minimise the impact of these events. Steps have been taken
to improve resilience to extreme weather; for example the £2 million
investment in flood defences at Pynes Water Treatment Works
in Exeter.
South West Water experienced four Category 2 or ‘significant’
pollution incidents in 2012.
In 2012 the company was the subject of 17 prosecution cases
brought by the Environment Agency for pollution incidents in 2010
and 2011. South West Water regrets the increase in prosecutions,
but is confident that the targeted programme of action over the last
two years is delivering significant improvements in performance.
Viridor
Viridor continues to proactively create, assist and manage quality
habitats on both its own sites and in the vicinity of its operations.
The company is now implementing its biodiversity strategy
which will look to prioritise biodiversity enhancement opportunities
and to implement good stewardship practice on all relevant
sites. Viridor is the industry leader in achieving the Wildlife Trust’s
Biodiversity Benchmark at around 30% of its closed landfills
and is working to extend this list as further sites come into closure.
The unusually wet weather in 2012 caused local management
challenges especially at landfill sites, associated with the collection
and disposal of leachate. Over 90% of the company’s major
operational facilities have been developed and managed in
a manner that has demonstrated climate change resilience in line
with the Environment Agency’s best practice guidance which Viridor
has also helped to develop.
A Category 1 or ‘major’ pollution incident occurred at Viridor’s Lean
Quarry Landfill in Cornwall, whereby a quantity of leachate was
released into the local water course as a result of vandalism out
of hours. Due to Viridor’s swift and effective corrective actions, the
Environment Agency is considering civil sanctions rather than a formal
prosecution and fine.
The South West has more designated bathing waters than
any other region in England and Wales and in the past two
decades South West Water has made significant advances
in helping to improve bathing water quality.
The summer of 2012 was the wettest on record for 100 years.
Bad weather can adversely affect bathing water quality because
heavy rain impacts on urban drainage and agricultural run-off.
Heavy storms can also trigger the operation of combined sewer
overflows (CSOs) in the sewerage system.
Following this and changes to the way in which guideline standards
were recorded in line with new bathing water quality standards, 93%
of England’s bathing waters met the ‘good’ (mandatory) European
standard, with over 58% meeting the tighter ‘excellent’ (guideline)
standard. Of the 146 bathing waters in the South West region,
133 or 91% met the ‘good’ standard and 88 or 60% achieved
the ‘excellent’ standard.
Despite the wet weather, fewer than half the year’s failures occurred
during the operation of CSOs. This illustrates why the company
continues to work with its partners to tackle all the other issues that
can affect bathing water quality – urban drainage, agricultural run-off,
birds and other wildlife, private sewers and misconnections (homes
wrongly connected to surface drainage instead of to public foul
sewers). South West Water is proud that in 2013 its service area
was awarded 14 Blue Flags and 18 Seaside Awards notwithstanding
the tougher standards introduced by the awarding body last year.
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Landfill Communities Fund biodiversity improvement project, Denge and Pennypot, Kent
Pennon Group Plc Annual Report 2013
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Directors’ report - Business review - Group
Sustainability report
Continued
Objective: Engage with all our stakeholders and foster good relationships with them.
Pennon aims to be a good neighbour, and liaises with its stakeholders in order to determine and respond to their priorities.
Both subsidiaries are actively engaging with stakeholders via social media, developing their online presence to enable customer
and community queries and issues to be raised and addressed in this way.
South West Water
As part of preparing its 2015-2020 business plan South West Water
has commissioned extensive independent research to ascertain
customer priorities, future service and investment. It has established
a WaterFuture Customer Challenge Panel comprising regulators and
representatives from domestic customers, the business community
and environmental groups to ensure the company’s business plan
reflects stakeholders’ opinions.
The company’s ‘Upstream Thinking’ project includes extensive
stakeholder engagement, liaising with regulators, the charitable
sector, landowners and universities. This approach was recognised
when the company won the Environment Award at the Utility Industry
Achievements Awards.
South West Water’s Twitter feed has helped improve scope for
communicating in real time with the public: for example during
the flooding in December 2012. 94,000 of its household customers
have registered with the ‘My account’ web page and approximately
4,000 customers are using the company’s mobile ‘App’.
The number of beaches covered by ‘BeachLive’ has been increased.
This online service provides real time information on the operation
of Combined Sewer Overflows and their impact on over 40 beaches
in the region.
Viridor
Viridor registered its first submission in Business in the Community’s
(BitC) Corporate Responsibility Index (CR Index), an annual
benchmarking of responsible business management. The company
was pleased to be ranked as Bronze within the Index, a very
creditable performance for a first entry.
The CR Index is the UK’s leading and most in-depth voluntary
benchmark of corporate responsibility, helping companies
to accurately measure and manage all aspects of their social
and environmental performance and improve corporate responsibility
throughout their business operations, and benchmark themselves
against competitors.
There is room for improvement within the community investment
and marketplace sections and these will be looked at carefully
in the coming months to see where progress can be made.
On all counts Viridor scored well within sight of the averages
for both its sector and the Index as a whole.
During the year Viridor further developed its ‘OpenSpace’ web
portal – one of the most ground-breaking projects between
the Environment Agency and the waste industry, embracing
contemporary data management practice to enable timely review
of the environmental performance of regulated facilities. In addition
the Scottish Environment Protection Agency is trialling the system.
Advice being given by Source for Business
Pilsworth landfill restoration scheme, Bury
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Pennon Group Plc Annual Report 2013
Objective: Strive for the highest standards of health and safety in the workplace
so as to minimise accidents, incidents and lost time.
RIDDOR incidence rate
per 100,000 employees
A safe and healthy workforce will always be a top priority
for the Pennon Group.
RIDDOR incidence rate
per 100,000 employees
8
0
0
,
2
8
2
6
,
1
*
8
6
5
2
1
0
2
0
1
0
2
1
1
0
2
Actual number 7
* Reportable incidents are now reported over seven days absence
(2011, after three days absence).
5
6
1
,
2
*
9
2
4
,
1
8
3
2
1
,
0
0
1
1
0
0
2
2
1
1
0
2
2
2
1
1
0
0
2
2
Actual number 45
South West Water
South West Water is pleased to report further improvement
in its health and safety performance during 2012. The total number
of RIDDOR reportable incidents for the calendar year 2012 was 7,
compared with 20 in 2011. Innovative behavioural training has been
rolled out to employees during the year.
South West Water employs an independent occupational health
service which provides a range of services such as health surveillance
for shift workers and field staff. The company has introduced a third
party nurse-led absence reporting process to support the reduction
of absence and to provide employees with advice on specific medical
issues when they report absence from work.
Viridor
Viridor achieved a 42% reduction in its three-year rolling RIDDOR
incidence rate since 2009, against a target of a 10% reduction.
However, the company’s performance in 2012 saw an increase
in this incidence rate over the previous year (from 1,238 per
100,000 employees in 2011 to 1,429 in 2012). This increase is very
disappointing and Viridor is redoubling its efforts to continue to drive
down the number of accidents.
The company continues its strenuous efforts to ensure a genuine
‘health and safety culture’ throughout the organisation. It is giving top
priority to a range of employee engagement and training initiatives,
alongside ongoing focus on fundamental risk assessment systems
and safety management procedures, following last year’s full review.
Viridor won the Health and Safety Best Practice Award
at the Chartered Institution of Wastes Management Awards
for Environmental Excellence 2012.
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Water treatment works, Tottiford
Landfill restoration and habitat management at Dimmer, Somerset
Pennon Group Plc Annual Report 2013
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Sustainability report
Continued
Objective: Develop and motivate our employees, treat them fairly and ensure that they
are fully engaged in all aspects of the Pennon Group’s objectives.
Pennon’s success is fundamentally due to the quality and diligence of our employees. We recruit talented and committed
personnel and provide training packages to equip them with the skills they need to deliver the Group’s objectives.
South West Water
South West Water has silver status in the Investors in People
standard. The company’s equal opportunities policy is regularly
updated to reflect current legislation and good practice.
The company’s recruitment procedures ensure objectivity
and focus on appointing the best person for the job, without
diversity bias.
South West Water is training supervisors in strong leadership
skills to facilitate behaviour change, and operators are being
upskilled through the acquisition of NVQs. This approach
is helping to ensure that its employees have the necessary
skills to support the introduction of remote operating systems,
known as ‘PUROS’*. Further training programmes are developing
current and future managers.
* Phased Utilisation of Remote Operating Systems
Viridor
Viridor reviewed its employment and workplace policies during
2012/13 and its employment handbook and management
guide are made available to all employees to help them understand
and interpret company policies and ensure consistency
and fairness in their application. HR training courses (such as those
on investigations, absence management and performance
management) support new managers and contribute to the
consistency of application across the company’s business
regions. The company continues to expand its Investors
in People registrations in certain parts of the country.
The company has a structured approach to assessment
and training throughout the business and nearly 4,000 training
days were delivered in 2012/13. Over 200 employees are taking
the sustainable waste management apprenticeship, which Viridor
helped to design, and 15 other apprenticeships are also underway.
The innovative Viridor Foundation Degree course, developed with
Edge Hill University and focused on professional development
for the company’s future leaders, started in April 2012 and currently
has 40 employees enrolled. Viridor also plans to implement its new
Employee Engagement and Internal Communications Strategy
and Plan during 2013/14.
Colliford Lake, Cornwall
Environmental data management at Longley Lane MBT facility, Manchester
54
Pennon Group Plc Annual Report 2013
Objective: Aspire to leadership in minimising emissions that contribute to climate change,
and develop climate change adaption strategies.
For many years, Pennon has recognised the need to manage its carbon emissions and adapt to the consequences of climate change.
With a score of 71 in the internationally recognised Carbon Disclosure Project (CDP) in 2012, Pennon moved slightly down
the rankings to 96th place out of 240 respondents from the FTSE 350. Pennon is working with CDP and their scoring partner,
PricewaterhouseCoopers, to identify and implement areas for further improvement.
Pennon Group continued to comply with the Carbon Reduction Commitment Energy Efficiency Scheme, which was evidenced
by a successful audit during the middle of 2012 covering the first compliance year.
South West Water
South West Water’s energy strategy is designed to limit
greenhouse gas emissions through a combination of energy
efficiency and renewable energy schemes.
The company remains committed to its ambitious long-term target
to reduce its carbon emissions by 80% by 2050. Consequently
the company set a stretching target to be achieved by 2014/15.
In 2012/13 its greenhouse gas emissions remained below the
2009/10 baseline, but the extreme weather meant the company
was unable to maintain the downward trend of the previous
two years. South West Water remains focused on delivering
improvements towards its carbon reduction target. The company
continues to be accredited to the Certified Emissions Measurement
and Reduction Scheme (CEMARS).
South West Water’s award winning ‘Upstream Thinking’ programme
is revolutionising the water industry’s approach to catchment
management. The company is undertaking scientific research
in conjunction with universities to assess how land management
practices impact on raw water quality and working in partnership
to deliver changes which will deliver a more secure and sustainable
water supply and improve resilience against climate change.
South West Water’s work focuses on moorland restoration
in the uplands, which capitalises on the water storing capacity
of peat, and encourages farmers to implement measures which
benefit adjacent water courses. During the year this project won
the large company category of the inaugural Institute of Chartered
Accountants in England and Wales (ICAEW) Finance for the Future
Awards and the environmental category of the Utility Industry
Achievement Awards.
Viridor
In March 2013 Viridor became the first recycling and waste
management company in the UK to receive ISO 50001 certification
from the British Standards Institute for its energy management
systems. This followed a number of years developing energy
management systems (including procedures, databases
and metering systems). ISO 50001 now provides Viridor with
a continual improvement framework for reducing its energy
consumption and greenhouse gas emissions in both the short
and long-term.
Viridor has set an objective of reducing its energy consumption
relative to its growth by 20% over five years from 2010 and has
reached the end of the second year of its plan. There were a number
of energy efficiency projects implemented throughout 2012/13,
including voltage optimisation schemes and energy efficient LED
lighting installations at a number of the company’s processing
facilities. Successful pilot projects have resulted in a national level
project being implemented in early 2013 to install LED lighting at the
majority of its MRFs and transfer stations. This should see significant
carbon savings accrue throughout the third year of the reduction plan.
South West Water continues to target energy efficiency through
its programme of pump refurbishments and replacements at both
drinking water and waste water treatment sites. The optimisation
of its assets and networks is complemented by the use of remote
technologies to control processes and equipment from a central
hub as part of the PUROS project.
During 2012/13, an energy efficiency technical group was
established to pull together technical expertise from across
the business. The focus of the group is to identify projects for Board
approval for rapid implementation at scale across the business.
Further training will be provided to Viridor personnel as energy
efficiency workshops are rolled out across the regions.
In addition South West Water’s ‘Powerdown’ energy efficiency
campaign promotes company-wide energy efficiency. An example
of this in 2012/13 was the saving of 1.1GWh through lighting
refits at several of its largest sites.
Viridor continues, with its carbon reporting tool, to assist its customers
in identifying the carbon saving benefits of recycling, recovery
and good waste and resource management. In 2012 an updated
second version of the reporting tool was made available to
customers, with a third update scheduled for summer 2013.
Pennon Group Plc Annual Report 2013
55
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Directors’ report - Business review - Group
Sustainability report
Continued
Pennon Group Greenhouse gas emissions
Scope 11
Scope 22
Scope 33
Total gross emissions
Carbon offsets
Netted off renewable electricity export to grid up to total amount
of electricity purchased and consumed by organisation
tCO2e
2011/12
1,967,935
159,360
45,970
2,173,265
0
(159,360)
2012/13
1,934,332
164,712
43,948
2,142,992
0
(164,712)
Total annual net emissions
2,013,905
1,978,280
Intensity measure: tCO2e (scope 1+2)/£100,000 revenue
173 tCO2e/£100,000 revenue
175 tCO2e/£100,000 revenue
1 Scope 1 (Direct emissions)
Activities owned or controlled by our organisation
that release emissions straight into the atmosphere.
These are direct emissions.
2 Scope 2 (Energy indirect)
Emissions being released into the atmosphere associated
with our consumption of purchased electricity, heat,
steam and cooling. These are indirect emissions that
are a consequence of our activities but which occur
at sources we do not own or control.
3 Scope 3 (Other indirect)
Emissions that are a consequence of our actions,
which occur at sources which we do not own or control
and which are not classed as scope 2 emissions.
Notes
1 Change in emissions
Our reported emissions fell between 2011/12
and 2012/13 largely as a result of fewer
fugitive emissions recorded from Viridor’s
landfill sites.
2 Methodology and approach
We have followed the Government’s
Guidance on how to measure and report
your greenhouse gas emissions. We
have used the GHG Protocol Corporate
Accounting and Reporting Standard (revised
edition) and GHG conversion factors
published by DECC/DEFRA.
3 Organisational boundary
The emissions listed here cover
the Pennon Group of companies
using the financial control approach.
4 Operational scopes
We have measured our scope 1, 2
and some scope 3 emissions where
information is available.
5 Intensity measurement
We have chosen an intensity measure
of scope 1 and 2 gross emissions in tCO2e
per £100,000 revenue.
6 Carbon offsets
We do not purchase any carbon offsets,
instead we rely on self-generated renewable
energy to reduce our overall emissions.
7 Green tariffs/renewable energy export
We do not purchase green tariff electricity;
instead we can reduce our net emissions
by exporting our self-generated renewable
energy to other users.
Objective: Aspire to leadership in all aspects of waste prevention and resource efficiency.
Recycling
volumes
(tonnes
of dry
solids)
2
1
6
,
4
5
0
0
4
,
2
5
4
0
3
,
5
4
1
1
/
0
1
0
2
2
1
/
1
1
0
2
3
1
/
2
1
0
2
Renewable
energy
generation
(GWh)
3
.
9
1
0
2
8
7
.
4
1
0
6
7
8
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3
1
2
5
7
1
1
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0
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1
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0
2
2
2
1
/
1
1
0
2
3
1
/
2
2
1
1
0
0
2
2
South West
Water
Viridor
Pennon is delivering solutions for society to address
the environmental challenge of depleting natural resources
by maximising the value of residual materials, transforming waste
and improving energy efficiency.
Recycling
volumes
(million
tonnes)
9
0
9
.
1
2
4
8
.
1
8
1
7
.
1
1
1
/
0
0
1
1
0
0
2
2
2
1
/
1
1
0
2
3
1
/
2
2
1
1
0
0
2
2
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Pennon Group Plc Annual Report 2013
South West Water
South West Water’s goal is to have 30GWh of its energy
usage supplied from renewable sources by 2015. In 2012/13
excellent progress was made, with more power from renewables
generated than ever before. In total, 19.3GWh was harnessed
from a combination of solar, wind, hydro and combined heat
and power (CHP) from sewage sludge.
The company’s 25 existing solar PV installations performed well
and an additional seven schemes were installed, five of which were
operational by the year-end, with the other two becoming operational
in April 2013. The wind turbine at Lowermoor water treatment works
also outperformed its generation target for the year.
Following the success of the grit and screenings composting trial,
South West Water is now rolling this process out across the region,
in order to reduce volumes of waste sent to landfill.
Governance
Programmes and performance contributing to the sustainability
of the businesses are overseen by the Pennon Sustainability
Committee. Details are given on page 68. The subsidiaries develop a
range of targets as part of their business planning processes
and monitor and report progress to their respective boards
and to the Pennon Sustainability Committee throughout the year.
Verification
Pennon’s sustainability performance and reporting has been
audited by Carnstone Partners LLP, an independent management
consultancy, specialising in corporate responsibility and sustainability.
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Viridor
Viridor provides waste prevention, recycling, resource efficiency
and renewable energy generation best practice audits, advice
and services to clients across the public and private sectors.
The amount of material recovered (via re-use, recycling or energy
recovery) as a proportion of total waste inputs handled by the
company rose to 37% in 2012/13 (2011/12: 35%) and a total
of 2.6 million tonnes of material was recovered. This was an increase
of 8% on the previous year and included 340,463 tonnes of organic
(food and garden) waste composted.
A total of 1,909,000 tonnes of dry recyclates were processed,
producing high quality recycled commodities to be sold to customers
in the UK, Europe and globally for remanufacturing, thus making
a significant contribution towards greater overall resource efficiency.
Viridor, in partnership with the Greater Manchester Waste Disposal
Authority, was pleased to win the Best Communications Campaign
at the 2012 Chartered Institution of Wastes Management Awards
for Environmental Excellence for its innovative work promoting
waste prevention and recycling through the ‘Recycle for Greater
Manchester’ initiative.
The provision of renewable energy from waste sources also makes
a substantial contribution to energy security and resource efficiency
in the UK. During 2012/13 Viridor’s output of renewable power
from landfill gas, energy from waste and anaerobic digestion facilities
rose to 820 gigawatt hours (GWh) from 760GWh in 2011/12.
South West Water
and Viridor sustainability reports
The full sustainability reports for South West
Water and Viridor will be published in July
and August respectively and will be available to view
at www.pennon-group.co.uk and also on the
subsidiaries’ websites. Full details of the sustainability
targets for South West Water and Viridor for
2012/13, and their performance against them,
are given in their respective sustainability reports.
Bodmin Moor in spring
Materials recycling facility, Manchester
Pennon Group Plc Annual Report 2013
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Directors’ report - Other statutory information
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,
renewable energy and waste management.
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 4 to 57 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 (2010 Edition)
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 38, 39, 44 and 47. Further information
on ESG aspects of the Group’s business are
included in the Group sustainability report
on pages 48 to 57. The principal subsidiaries
of the Company are listed in note 41 to the
financial statements on pages 139 to 140.
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 60, 61 and 64 to 71 of this Annual
Report which are hereby included within
this Directors’ report by reference.
Financial results and dividend
Group profit after taxation and exceptional
items on ordinary activities after taxation
was £26.9 million. The Directors recommend
a final dividend of 19.70p per Ordinary
share to be paid on 4 October 2013
to shareholders on the register on 9 August
2013, making a total dividend for the year
of 28.46p, the cost of which will be £103.8
million, leaving a transfer from reserves
of £76.9 million. The business review
on pages 30 to 35 analyses the Group’s
financial results in more detail and sets
out other financial information.
Directors
In accordance with the provisions of the
UK Corporate Governance Code (2010
Edition) (the Code) all Directors are offering
themselves up for re-election (or, in respect
of Gill Rider, election) at this year’s Annual
General Meeting (AGM) with the exception
of Dinah Nichols who will be retiring as
a Non-executive Director at the end
of the AGM having completed in excess
of nine years as a Director.
The Board continues to believe that each
Director standing for re-election or election
makes an effective and valuable contribution
to the Board, demonstrating continued
commitment to his or her role. The Non-
executive Directors, Martin Angle and Gill
Rider, are considered to be independent in
accordance with the provisions of the Code.
Gerard Connell, subject to his 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 Gerard remains independent as he
demonstrates independence of character
and judgement in his conduct of matters
with the Board. The Non-executive Directors
do not have service contracts; they have
contracts for services terminable upon
three months’ notice.
The Chairman, Ken Harvey, similarly has
a contract for services, which is terminable
upon 12 months’ notice. David Dupont,
Executive Director, has a service contract
which is due to expire when he reaches
age 60 (June 2014). David’s contract is
expected to continue subject to 12 months’
notice when he reaches age 60. In respect
of Chris Loughlin, who has reached age 60,
his contract now continues subject to 12
months’ notice and Colin Drummond who
had previously reached age 60 and had a
contract continuing subject to 12 months’
notice will now retire from being an Executive
Director when a successor is appointed,
currently expected to be by the end of
September 2013.
Formal resolutions for the above Directors’
re-election or election, as appropriate, will
be proposed at the Annual General Meeting.
The Directors’ biographies are set out
on pages 62 and 63.
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
78. Further details relating to the Directors
and their service agreements or contracts
for services are set out on pages 76
and 77 and details of the Directors’
interests in shares of the Company
are given on pages 79 to 82.
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 himself or herself 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 financial statements on pages
96 to 98.
58
Pennon Group Plc Annual Report 2013
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
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 69.
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 cascades information
monthly to all employees to provide them
with important and up to date information
about key events and to obtain feedback
from them.
Further information about employment
matters relating to the Group are set out
on pages 20, 28 and 54 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 2013 around one-third of the Group’s
employees was participating in these plans.
Research and development
Research and development within the
Group involving water and waste treatment
processes amounted to £0.2 million during
the year (2011/12 £0.2 million).
Pennon Group donations
During the year the Company and its
subsidiaries made charitable donations of
£83,301 (2011/12 £73,992) divided between
environmental purposes (£3,700) and
social and community purposes (£79,601).
In addition some £10.5 million was provided
via the Landfill Communities Fund for
environmental and community projects.
Further details are included on page 49 of
the Group sustainability report. No political
donations were made or political expenditure
incurred and no contributions were made
to a non-EU political party (2011/12 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 2014 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 2012/13 and the amount owed
to its trade creditors at 31 March 2013,
was 43 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 2012) which
was valid as at 31 March 2013 and remains
currently valid. Of the 3,632,705 shares held
in Treasury at 31 March 2012, 1,526,869
were subsequently re-issued under the
Company’s employee share schemes
for proceeds of £4.6 million.
Major shareholdings
Details of major shareholdings notified
to the Company in accordance with FSA
Disclosure and Transparency Rule 5 are set
out on page 144 ‘Shareholder information’.
Independent auditors
PricewaterhouseCoopers LLP were
appointed auditors until the conclusion
of the twenty-fourth 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-fourth Annual General Meeting
of the Company will be held at the Sandy
Park Conference Centre, Sandy Park Way,
Exeter, Devon EX2 7NN on 1 August 2013
at 11.00am. Details of the resolutions
are summarised below 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
25 June 2013
2013 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 and Mr C Loughlin
and elect Ms G A Rider, 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).
Pennon Group Plc Annual Report 2013
59
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Governance
Corporate governance report
Chairman’s introduction
The Board recognises that the highest standards of corporate governance are key
to managing Pennon Group successfully in the best interests of its shareholders
and other stakeholders.
Dear shareholder
I am pleased to introduce the corporate governance report for
2013 on behalf of the Board.
The Annual Report continues to be 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 (2010 Edition) have been applied in practice. The Code is
publicly available on the Financial Reporting Council (FRC) website
www.frcpublications.com.
Ken Harvey, Chairman, Pennon Group Plc
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.
This year the Board has received
presentations from senior management
on material developments in the businesses
including waste and renewable energy
policy developments; our energy from
waste plant projects; and regulatory
and legislative changes proposed by
Ofwat and Government. The Board has
also visited new plants under construction
in the Greater Manchester area to obtain
first hand knowledge of the projects.
I continue to 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 again facilitated by an external
governance consultancy, 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.
Remuneration
The Board and the Remuneration
Committee remain mindful of shareholder
and Government concerns regarding
companies’ remuneration practices.
We have always pursued a remuneration
policy of setting pay at a level which
is adequate 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 that no
changes are necessary to 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 70
meetings with institutional shareholders
and 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 and the Chief Executive
of Viridor also participated when appropriate.
The Group Director of Finance continues
to report 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 2013 Annual
General Meeting on 1 August all our Directors
intend 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.
60
Pennon Group Plc Annual Report 2013 To view our online annual report:
www.pennonannualreport.co.uk/2013
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 (2010 Edition) with no exceptions
to report. The Code was revised in
September 2012 to apply to companies’
financial years beginning on or after
1 October 2012. We believe we are also
compliant with the revised Code but
it will not formally apply to our reporting
to shareholders until next year.
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
25 June 2013
Contents of the corporate
governance report
62 The Board of Directors
64 The Board and its Committees
64 The Directors, their independence and responsibilities
64 How the Board operates
65 Performance evaluation
65 Dealing with Directors’ conflicts of interest
65 Board Committees
65 Board Committees’ Terms of Reference
66 The Audit Committee
68 The Sustainability Committee
69 The Nomination Committee
69 The Board’s diversity policy
70 Internal control
70 Wider aspects of internal control
70 Risk identification
70 Internal control framework
70 Internal control review
70 Going concern
70 Directors’ responsibilities statements
71 Corporate governance statements
72 Directors’ remuneration report
73 Remuneration policy for Executive
Directors, including incentive plans,
pensions and service contracts
73 Elements of remuneration
77 Total shareholder return
77 Remuneration policy for the Chairman
and Non-executive Directors, including
contracts for services
78 Implementation of the remuneration policy
79 Executive Directors’ pensions
79 Directors’ share interests
83 Single total figure table
83 Basis of preparation
84 Independent auditors’ report
61
South West WaterViridorGroupFinancial statementsPennon Group Plc Annual Report 2013GovernanceGroup overview
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.
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. Chris started his
career as a chartered engineer working
in both the consulting and contracting
sectors and subsequently held a number
of senior positions with British Nuclear
Fuels. Between April 2008 and March 2012
he was chairman of Water UK. Currently
Chris is vice-chairman of the Cornwall
Local Enterprise Partnership, President
of the Institute of Water and a trustee
and member of the audit committee
of the global charity, WaterAid.
Colin Irwin John Hamilton Drummond
OBE, MA, MBA, LTCL, HonFSE
Chief Executive, Viridor
Committees: Sustainability, Executive
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.
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.
Colin is due to retire from the Board
when a successor has been appointed
which is expected to be around the end
of September 2013. At that time Colin
will become the chairman of the board
of Viridor Limited and will retain his
directorship of that company.
62
Pennon Group Plc Annual Report 2013
Non-executive Directors
Company Secretary
Martin David Angle BSc Hons, FCA, MCSI
Non-executive Director
Committees: Audit, Sustainability,
Nomination, Remuneration (Chairman)
Appointed on 1 December 2008.
Martin currently holds non-executive
directorships with Savills Plc, OAO Severstal,
Shuaa Capital psc and The National
Exhibition Group 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.
Gerard Dominic Connell MA
Senior Independent
Non-executive Director
Committees: Audit (Chairman),
Sustainability, Nomination, Remuneration
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. He is also
a governor of King’s College School,
Wimbledon. Gerard is due to retire from
the Board at the conclusion of the Annual
General Meeting in 2014.
Kenneth David Woodier,
Solicitor, CMA, DMS, CPE (Law)
Group General Counsel & Company
Secretary
Committees: Executive
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.
Dinah Alison Nichols CB, BA Hons
Non-executive Director
Committees: Audit, Sustainability (Chairman),
Nomination, Remuneration
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,
chair of Keep Britain Tidy and an external
member of council of the National Trust.
Dinah is due to retire from the Board
at the conclusion of the Annual General
Meeting on 1 August 2013.
Gill Ann Rider CB, PhD, FCIPD
Non-executive Director
Committees: Audit, Sustainability
(Chairman with effect from 2 August 2013),
Nomination, Remuneration
Appointed on 1 September 2012. Gill currently
holds non-executive directorships with Charles
Taylor Consulting Plc, the Chartered Institute
of Personnel & Development where she is
president, De La Rue Plc where she is chairman
of the remuneration committee and she is chair
of council of the University of Southampton.
Formerly Gill was head of the Civil Service
Capability Group in the Cabinet Office reporting
to the Cabinet Secretary and prior to that held
a number of senior positions with Accenture
culminating in the post of chief leadership
officer for the global firm.
Pennon Group Plc Annual Report 2013
63
South West WaterViridorGroupFinancial statementsGovernanceGroup overview Governance
Corporate governance and internal control
The Board and its Committees
The Board
The Directors, their independence
and responsibilities
The Board of Directors at the end of the year
comprised the Chairman, three Executive
Directors and four Non-executive Directors.
All of 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
(2010 Edition) (the Code) applied to them
other than in respect of Dinah Nichols who,
following the Annual General Meeting last
year, had served on the Board for more than
nine years since her first election. Following
this year’s Annual General Meeting and
subject to re-election, Gerard Connell will
also have served on the Board for more than
nine years since his first election. However
Dinah and Gerard have been determined by
the Board to be independent. The Board
is satisfied that they do and will continue
to demonstrate independence of character
and judgement in the performance of their
roles on the Board.
In accordance with the Board’s planned
succession process, as reported last
year, Dinah Nichols will be retiring from
the Board at the close of the Annual General
Meeting this year and Gerard Connell will
retire at the close of the Annual General
Meeting in 2014.
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 62
and 63 demonstrate collectively a broad
range of business, financial and other
relevant 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 63). Martin Angle
is also a member of the Audit Committee
and he has relevant financial experience
as set out in his biography, also on page 63.
64
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 Board
The Directors on the Board and their
attendance at the 11 scheduled meetings of
the Board during 2012/13 are shown below:
Board membership
Chairman
Kenneth Harvey
Non-executive Directors
Martin Angle
Gerard Connell
Dinah Nichols
Gill Rider
Executive Directors
Colin Drummond
David Dupont
Christopher Loughlin
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.
Appointment date
Attendance
March 1997
December 2008
October 2003
June 2003
September 2012
April 1992
March 2002
August 2006
11/11
11/11
10/11
11/11
7/7
11/11
11/11
11/11
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 and 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 Board’s performance
evaluation process each year.
Pennon Group Plc Annual Report 2013 Board Committees’
Terms of Reference
The Terms of Reference of each of the Audit,
Remuneration, Nomination and Sustainability
Committees are set out on the Company’s
website www.pennon-group.co.uk or
available upon request to the Group
Company Secretary.
The Remuneration
Committee
Details of the Remuneration Committee
and the Directors’ remuneration report
can be found on pages 72 to 83.
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
corporate governance report on pages
66 to 69 and the Directors’ remuneration
report on pages 72 and 73.
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
once again administered 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.
The Board considered the findings of the
evaluation and, while performance was
again considered to be satisfactory overall,
a number of areas were identified where
enhancements to Board practice could be
made. These included more liaison with
subsidiary boards and allocating more time
for strategic discussion and presentations
from management on key business issues.
The Board will be monitoring implementation
of these enhancements over the coming
months to ensure that they are successfully
implemented.
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 did not
change during the year and the Board
was satisfied that such commitments did
not prejudice the Chairman’s performance
in relation to his Group role. He will be
relinquishing his non-executive directorship
on the Board of National Grid in July 2013.
65
South West WaterViridorGroupFinancial statementsPennon Group Plc Annual Report 2013GovernanceGroup overview Governance
Corporate governance and internal control
Continued
The Audit Committee
Turnbull Recommendations. Deloitte
undertook a full review and, whilst concluding
that the Group’s risk culture and processes
were generally satisfactory, made a number
of recommendations to enable more focused
attention on key risks at Board level. As part
of the Group’s risk review process the key
areas of sensitivity to the Group have been
reassessed and these are set out on pages
36 to 47. We have concentrated on the
high level key risks to the Group and have,
where appropriate, 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 an ongoing need to use our auditors’
firm for non-audit services.
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 and in line
with the latest edition (September 2012)
UK Corporate Governance Code it is now
our policy to review the external auditor
appointment by putting it out to tender
at least every 10 years. 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.
Appointment date
Meeting attendance
October 2003
December 2008
June 2003
September 2012
6/6
6/6
6/6
4/4
the appropriateness and prudence of
management estimates. Key issues
debated included discount rates and the
determination of cash generating units.
At Group level the ‘going concern’
position was reviewed and it was
concluded that there was a reasonable
expectation that the Group had adequate
resources to continue its operations
for the foreseeable future.
In South West Water the emphasis has been
on continuing to improve the efficiency of its
systems 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
reviewed and refreshed its risk assessment
and internal control processes during
the year in preparation for revised reporting
protocols to Ofwat and its next Periodic
Review in 2015.
Gerard Connell, Audit Committee Chairman
Committee membership
Committee Chairman
Gerard Connell
Members
Martin Angle
Dinah Nichols
Gill Rider
Our activities during the year
A continuing focus has been reviewing
the systems and controls in place in Viridor
to manage its complex and regionalised
businesses across the UK. Viridor has been
re-assessing and enhancing its processes
and controls, including planning for the
development of a new suite of IT systems,
to manage the strong growth expected from
its energy from waste plants, its recycling
businesses and its major contracts with
waste authorities. The Committee was
pleased to note, for example, that audit
review of the self-assessment processes
implemented at site level and a focus on
the control responsibilities of local business
managers have together contributed to
an enhancement of the quality of the risk
assessment and monitoring within Viridor’s
regional activities.
Towards the year-end there was particular
focus on the impairment review in Viridor.
The Committee reviewed and challenged
the key assumptions on which cashflow
projections were based and considered
a number of alternative scenarios with
appropriate sensitivity analysis, to test
66
We also re-assessed our overall Group risk
review processes during the year bearing in
mind that it was 12 years since the Group
introduced detailed risk management policies
and procedures in accordance with the
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
Pennon Group Plc Annual Report 2013 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’ independent senior
partner periodically to discuss the scope
and performance of their work.
Set out on page 103 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 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 their specialist
knowledge and the limited number of
consultants with the expertise to undertake
such engagements.
These PPP 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 contract
opportunities is now declining which should
lead to a corresponding decline in corporate
finance fees payable.
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 led by an experienced
head of function who makes a significant
contribution to the ability of the Audit
Committee to deliver its responsibilities.
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
ongoing risk management reviews. This
approach seeks to ensure that there is a
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 and there are
regular informal discussions and meetings
between the Group Audit Manager
and the Audit Committee Chairman.
The areas of the business that received
attention from Group Internal Audit over the
past year included:
• Pennon - group treasury
and group insurance
• Viridor - acquisitions and due
diligence; recycling including trading
and foreign exchange management;
Lakeside EfW; core sales processes
including landfill and collections;
and environmental provisions
• South West Water - core income
and billing processes; bank payment
processes; developer services and new
connections; business development
& sales ledger; reactive maintenance;
and credit management.
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 the 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
• Reviewing 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.
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 respective audits.
67
South West WaterViridorGroupFinancial statementsPennon Group Plc Annual Report 2013GovernanceGroup overview
In addition the Committee considered:
• The 2012/13 Group, South West Water
and Viridor sustainability reports; and
the associated verifier’s reports for
2012/13 and his recommendations
for the 2013/14 Reports
• Progress against the sustainability
targets for 2012/13
• Sustainability targets for 2013/14
• The annual review of the coverage
and appropriateness of Group policies.
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 48 to 57 contains the Group’s
2013 annual sustainability report.
Governance
Corporate governance and internal control
Continued
The Sustainability Committee
Dinah Nichols, Sustainability Committee Chairman
Committee membership
Appointment date
Meeting attendance
Committee Chairman
Dinah Nichols
Members
Martin Angle
Gerard Connell
Colin Drummond
Christopher Loughlin
Gill Rider
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.
November 2006
December 2008
November 2006
November 2006
November 2006
September 2012
6/6
6/6
5/6
6/6
6/6
2/2
During the year the Committee considered
a wide range of matters in accordance
with its Terms of Reference including:
• developments and progress in carbon
management and reduction
• driving sustainability through
the Group’s supply chains
• increasing the sustainability of the Group’s
transport fleet and operations
• the impact of the Group’s charitable
donations and community support
• the Group’s health and safety
performance and plans
• the Group’s workplace policies
and performance, including diversity
and equality of opportunity, employee
training and development, opportunities
including apprenticeship schemes
and the Viridor in-house degree.
68
Pennon Group Plc Annual Report 2013
The Nomination Committee
Ken Harvey, Nomination Committee Chairman
Committee membership
Committee Chairman
Kenneth Harvey
Members
Martin Angle
Gerard Connell
Dinah Nichols
Gill Rider
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 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.
The Board’s diversity policy
In accordance with the UK Corporate
Governance Code (2010 edition) the
Committee is pleased to report that the
Board has 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.
Appointment date
Meeting attendance
In addition, within the spirit of Principle B.2
March 1997
December 2008
October 2003
June 2003
September 2012
5/5
5/5
4/5
5/5
2/2
During the year the Committee considered
the annual performance evaluation
results for the Committee; considered
and approved the appointment of an
executive director to the Viridor board
and a non-executive director to the Board,
both with the assistance of external search
consultants (KORN/FERRY Whitehead
Mann and Norman Broadbent respectively)
who have no other connection with
the Company; reviewed succession plans
throughout the Group; and commenced
the process, with the assistance of an
external search consultant, (Zygos) which
has no other connection with the Company,
for the appointment of a successor
to the Chief Executive, Viridor, who is due
to retire from his post when an appointment
has been made (currently expected to be
September 2013).
of the Code, the Board will endeavour
to achieve and subsequently maintain:
– A minimum of 25% female
representation on the Board by 2015
– A minimum of 25% female
representation on the Group’s senior
management team by 2015.
Currently the Group has 25% female
representation at Board level although
this will reduce to 14% when Dinah Nichols
retires from the Board after this year’s Annual
General Meeting. In a workforce of around
4,500 at 31 March 2013 around 16% were
women. In senior/middle management
executive positions the female representation
was around 16%.
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.
69
South West WaterViridorGroupFinancial statementsPennon Group Plc Annual Report 2013GovernanceGroup overview
Governance
Corporate governance and internal control
Continued
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
2012/13 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 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 Policy 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
in respect of their own areas of responsibility.
In addition the Group Director of Finance
is responsible for monitoring the Group Risk
Register and for reporting on key risks and
how they are managed at regular intervals
to the Audit Committee and to the Board.
70
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 36 to 47.
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 2012/13 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 Group Risk
Management Policy and the internal control
framework and their operation within
the Group.
Further information on the internal control
review is set out on page 66 in relation
to the Audit Committee.
Going concern
Having considered the Group’s funding
position and financial projections the
Directors have a reasonable expectation
that the Group has 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.
Pennon Group Plc Annual Report 2013
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 62 and
63, confirms that, to the best of his or her
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 4 to 59 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 2013:
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 33 to the financial statements
on pages 131 to 133. 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 144;
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 59 ‘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) £49,141,234 (such amount to be
reduced by any shares allotted or rights
granted under (ii) below in excess
of £49,141,234) or; (ii) £98,282,468
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 2012 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, hybrid capital securities
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
25 June 2013
71
South West WaterViridorGroupFinancial statementsPennon Group Plc Annual Report 2013GovernanceGroup overview
Governance
Directors’ remuneration report
Martin Angle, Remuneration Committee Chairman
The Remuneration Committee
Committee membership
Committee Chairman
Martin Angle
Members
Gerard Connell
Dinah Nichols
Gill Rider
Appointment date Meeting attendance
December 2008
October 2003
June 2003
September 2012
4/4
4/4
4/4
1/1
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, remuneration consultants, on calculating the Company’s
total shareholder return compared with two comparator groups for
the Company’s Performance and Co-investment Plan and subsequent
to the year-end Deloitte provided advice to the Committee on the form
of the Directors’ remuneration report and on remuneration trends.
Deloitte also provided tax and corporate structure and risk management
review advice to the Company during the year
• Aon Hewitt Limited, pensions and remuneration consultants, on providing
advice on pension benefits. Aon Hewitt also provided actuarial advice
to the Company and to the Trustees of the Group’s pension schemes.
72
Dear shareholder
I am pleased to present the remuneration
report for 2013 on behalf of the Board.
We will be presenting this report for your
approval at our Annual General Meeting
on 1 August 2013.
We appreciate that there continues
to be investor concern relating to executive
director remuneration generally and that
there is a need for all sectors to continue
to take account of this concern in reviewing
and setting their remuneration policies
and overall remuneration practice.
We have once again reviewed our
remuneration levels and benefits structure
with the assistance of our remuneration
consultants 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. Our current remuneration
arrangements have been in place without
amendment for the past six years.
We have been following the Department
for Business, Innovation & Skills (BIS)
consultations and draft regulations
on reporting of executive remuneration.
Whilst the regulations are not in force
and final guidance has not yet been issued
we have decided to adopt some of the
new requirements earlier than necessary
to further enhance our reporting of
remuneration matters. Therefore this year,
based on the requirements of the new
regulations, we have divided the report
into two distinct sections, these being:
1) Remuneration Policy which sets out
the components of our reward package,
how they are designed to support our
business strategy and how they apply
to each Executive Director and also
to the Chairman and the Non-executive
Directors (pages 73 to 77); and
2) Implementation of the Remuneration
Policy which contains the remuneration
of the Executive Directors for the year
2012/13 including the ‘single remuneration
figure’ table showing each element in value
terms of remuneration for each Executive
Director (pages 78 to 83). (This section
also contains the information required
to be reported under current regulations).
We believe this demonstrates our
commitment to transparent reporting and
highlights our approach to remuneration.
Pennon Group Plc Annual Report 2013
In setting executive remuneration
the Committee not only takes account
of employment market conditions,
but also of pay and benefits differentials
across the Group. The Committee
considers annual summary reports
of relevant workforce remuneration
and terms and conditions of employment
within each operating company from the
Executive Directors and the Group Company
Secretary and has regard to these in setting
salary and other benefits for 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. Where appropriate individual
performance objectives specifically relate
to achieving non-financial, including ESG,
targets (as outlined on page 74).
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 in accordance with the
Shareholding Guideline.
The essential elements of our remuneration
package and their purpose continue
to be as set out below.
Remuneration policy
- Executive Directors
The Group’s remuneration policy
which will be applied in 2013/14,
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. 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 and ensure
that remuneration is directly linked
to the Group’s strategy
• 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 ensuring base
salaries for Executive Directors do
not form the majority part of the total
reward opportunity
• Have a remuneration package which
is fair and consistent with other companies
in the sector and which provides incentives
for outperformance.
Elements of remuneration
Type of remuneration
Fixed
Basic salary
Pension
Variable
Short-term – annual
Annual Incentive Bonus Plan –
Maximum 100% of basic salary –
up to 50% paid in cash and up to 50%
in shares deferred for three years.
Long-term – three years
Performance and Co-investment
Plan (PCP) – future performance
over three years.
Description
Purpose
Details on pages
Annual salary set at a competitive level
appropriate for role and based on
individual skills, experience
and performance.
Final salary (defined benefit) for existing
Directors and defined contribution
benefits for any new appointees or
cash alternative commensurate with
market level pension arrangements.
Assessed against Group
and business financial performance
and individual personal achievements
relating to a range of operational
and compliance targets.
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.
Rewards appropriately for the role
undertaken and assists in retention
and recruitment.
74 and 78
Assists in retention and recruitment.
76 and 79
Incentive for annual performance
across the Group at individual
and team level. The deferred element
also assists in retention and recruitment.
74 and 81
A long-term reward which aligns
Directors’ performance to shareholder
value and which drives sustainable
practices and assists in retention
and recruitment.
75 and 80
73
South West WaterViridorGroupFinancial statementsPennon Group Plc Annual Report 2013GovernanceGroup overview
Governance
Directors’ remuneration report
Continued
Remuneration policy
Continued
The following is a detailed summary
of the elements of remuneration:
(i) Basic salary and benefits
These are set out on page 78 for each
Executive Director and are not performance
related. The Committee reviews salaries
annually taking account of market data
available from independent remuneration
consultants. 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 include a
maximum of 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 2012/13 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 48 to 57 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.
The Committee also has discretion
to moderate any performance-related bonus
awards in the event of any extenuating
circumstances arising during the year.
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. Those options were exercised by
the Executive Directors at the end of the
three-year restricted period in September
2012. Details of the options are set out
in the table in paragraph (d) on page 82.
No further options were granted in 2012/13
but it is anticipated that they will once
again be granted in 2013/14 to the value of
£30,000 in conjunction with the Bonus Plan.
Set out below is a summary of the
performance targets determined by
the Committee for each Executive Director
for 2013/14. These are similar to the targets
applied for 2012/13.
Executive Director
Colin Drummond
David Dupont
Chris Loughlin
74
Performance targets
Out-performance of:
• Group earnings per share against budget
• Profit before tax and net debt budgets of Viridor
• Personal objectives relating to key business targets for Viridor.
Out-performance of:
• Group earnings per share against budget
• Profit before tax of South West Water and Viridor
• Net debt and net interest of the Group
• Personal objectives relating to Group financing and other Group initiatives.
Out-performance of:
• Group earnings per share against budget
• Average of the bonus earned by the other Executive Directors of South West Water
(which relate to out-performance 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)
• Personal objectives relating to implementing South West Water’s new strategies
and projects and meeting compliance targets.
Pennon Group Plc Annual Report 2013 The achievements of the Executive Directors
against their 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 benefit of advice from the Chairman
of the Company, Ken Harvey, and also
a report from the chairman of the Audit
Committee on the outcome of the financial
performance of the Group.
(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 2012
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 2012 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 2011 and July 2010. 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:
Water/waste index measure
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:
• National Grid
• Shanks Group
• Séché Environnement
• Suez Environnement
• Severn Trent
• United Utilities
These companies are regarded as the Company’s key listed comparators.
For the PCP awards made in July 2010 and July 2011 the comparator group
was the same as set out above with the exception of National Grid which replaced
Northumbrian Water Group following its delisting from the London Stock Exchange
in October 2011. The Committee in respect of the July 2010 and July 2011 awards,
at the end of the three-year Restricted Period in respect of each award, 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 that date onwards, or adopt an
alternative approach.
Level of vesting
Above the index + 15%
Equal to the index
Straight-line vesting in between above positions
Below the index
50%
15%
0%
FTSE 250 Index* measure
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.
Level of vesting
At or above the 75th percentile
Above 50th percentile
Straight-line vesting in between above positions
At or below the 50th percentile
* Excluding investment trusts.
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.
75
South West WaterViridorGroupFinancial statementsPennon Group Plc Annual Report 2013GovernanceGroup overview
Governance
Directors’ remuneration report
Continued
For the PCP awards made in July 2009
the same performance measures were
used as set out on the previous page except
that Northumbrian Water Group was included
in the sector comparator group (instead
of National Grid). As this company was
delisted from the London Stock Exchange
in October 2011 the Committee included
the company in the calculation of the index
up to the date of delisting and excluded
it from that date onwards.
The calculation of TSR performance
over the three-year performance period
(being 1 April 2009 to 1 April 2012)
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*
Total vesting
* Excluding investment trusts.
Portion of award
Performance
Percentile rank
Final vesting level
50%
47.7% out-
performance
against index
–
50%
71 out of 178
60.5%
50.0%
29.3%
79.3%
The Committee was satisfied that the ‘Underpin’ condition referred to overleaf had been
met and therefore approved the vesting of 79.3% of the July 2009 award as calculated by
Deloitte with the remaining 20.7% lapsing. Shares equivalent to the value of the dividends
declared during the Restricted Period were then added to the shares that vested in
accordance with the terms of the Plan.
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:
Colin Drummond
David Dupont
Chris Loughlin
5 March 1992
2 January 2003
16 May 2006
Previously Colin Drummond and David
Dupont participated in the Group’s defined
benefit pension schemes. Their benefits from
these schemes are set out in the table
on page 79.
In determining remuneration arrangements
for Executive Directors, it is the policy of
the Committee to give full consideration to
their impact on the pension schemes’ funds
and costs of providing individual pension
arrangements.
(vi) Provision for pensions
Colin Drummond and Chris Loughlin
receive an annual payment (payable
by monthly instalments) equivalent to 30%
of each of their basic salaries in lieu of the
provision of pension benefits. David Dupont
from 3 March 2012 has also been entitled
to receive a similar benefit but, with
the agreement of the Company, had
his pension accrued benefit augmented
by the sum of £94,062 met by the Company
which has been deducted from the annual
payment payable in lieu of pension benefit.
(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
service contract is due to expire when he
reaches his normal retirement age of 60.
However it is expected that his contract
will be extended by agreement between
him and the Company. Colin Drummond
and Chris Loughlin reached their normal
retirement dates on 22 February 2011
and 20 August 2012 respectively, and have
continued in employment with the Company
each in the same position as Chief
Executives of their respective businesses
and as Directors of the Pennon Group
Board. Colin Drummond will be retiring
upon the appointment of his successor
which is currently expected to be at the end
of September 2013. His service contract
will terminate at that time and he will then
become non-executive Chairman of the
Viridor board. Chris Loughlin’s service
contract with the Company continues
subject to one year’s notice.
76
Pennon Group Plc Annual Report 2013
Total shareholder return (TSR)
TSR
200
175
150
125
100
75
50
2008
2009
2010
2011
2012
2013
Year
Non-executive Directors
and the Chairman
The Non-executive Directors’ remuneration
(excluding that of the Chairman, Ken Harvey)
consisting of fees only as set out in the
Implementation Section on page 78,
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. For this and subsequent
years the policy expected to be applied
in respect of Non-executive Directors’ fees
will be to set fees at a fair level compared
with the market, which the Board believes
is appropriate to attract and retain suitably
experienced non-executive directors.
The Chairman’s remuneration is set by
the Remuneration 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. 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 terminable on three
months’ notice and subject to the Articles
of Association of the Company. They may
be extended by agreement between
the Company and the Non-executive
Directors. No provision is made for any
termination payment under these contracts.
Director
Martin Angle
Gerard Connell
Dinah Nichols
Gill Rider
Date of contract
28 November 2008
30 September 2003
10 June 2003
22 June 2012
Pennon
FTSE 250
This graph shows the value, over the
five-year period ending on 31 March 2013,
of £100 invested in Pennon Group on
31 March 2008 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 has been
produced in accordance with regulations
made pursuant to Section 421 of the
Companies Act 2006.
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:
Expiry date of contract
30 November 2014
31 July 2014
1 August 2013
30 August 2015
77
South West WaterViridorGroupFinancial statementsPennon Group Plc Annual Report 2013GovernanceGroup overview
Governance
Directors’ remuneration report
Continued
Implementation of the remuneration policy
Emoluments of Directors
The salaries/fees of Directors in 2012/13
were increased by approximately 3%.
The emoluments of individual Directors
holding office during the period were:
Director
Salary/
fees
(£000)
Performance related
bonus payable1
(£000)
Other emoluments2
(£000)
Total 2013
Year to 31 March
(£000)
Total 2012
Year to 31 March
(£000)
–
37
106
118
–
–
–
–
261
3 In 2012/13 Colin Drummond decided
to forego his salary increase in the year
and arranged for an equivalent sum
(£11,000) to be paid into the Viridor staff
welfare fund. The salary he received was
therefore £359,000.
No expense allowances chargeable to tax
or termination or compensation payments
were made during the year.
24
136
52
136
–
–
–
–
348
272
543
528
624
57
60
57
31
263
588
618
647
55
58
55
–
2,172
2,284
The base Non-executive Director fee
in the year was £42,000 per annum.
The Audit, Remuneration and Sustainability
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.
Chairman
Ken Harvey
Executive Directors
Colin Drummond
David Dupont
Chris Loughlin
Non-executive Directors
Martin Angle
Gerard Connell
Dinah Nichols
Gill Rider
Total
248
370 3
370
370
57
60
57
31
1,563
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 81.
2 Other emoluments are car benefit,
health cover and cash payments
in lieu of pension provision equivalent
to 30% of basic salary for each Executive
Director. David Dupont’s cash payment
was reduced in the year by £86,000 to take
account of the balance of the £94,062
augmentation to his pension entitlement
which he received in 2011/12 and which
was reported in last year’s Annual Report.
78
Pennon Group Plc Annual Report 2013
Executive Directors’ pensions
Defined benefit pensions accrued
and payable on retirement for Executive
Directors holding office during 2012/13 were:
Director
Increase/
decrease
in accrued
pension
during
2012/13
(£000)
Accrued
pension at
31 March
2013
(£000)
Transfer
value of the
accrued
pension at
31 March
2013
(£000)
Transfer
value of the
accrued
pension at
31 March
2012
(£000)
Increase
in transfer
value
(net of
Directors’
contributions)
(£000)
Increase/
decrease in
accrued
pension
during
2012/13
(net of
inflation)
(£000)
Increase
in pension
since the date
the pension
first became
payable
(£000)
Increase/
decrease
in transfer
value of
accrued
pension
during
2012/13
(net of
inflation and
Directors’
contributions)
(£000)
Colin Drummond
David Dupont
a
3
-1
b
6
2
c
130
135
d
3,621
4,086
e
3,379
3,918
241
168
f
90
-41
9
2
Colin Drummond and David Dupont were
both pensioner members of the Pennon
Group’s pension schemes during the year.
As such no further benefits were accrued
and no employee or employer pension
contributions were paid (other than the
employer’s deficit reduction contributions).
The accrued pensions at 31 March 2013
(column c) therefore show the actual
pensions in payment at 31 March 2013.
The increases in accrued pensions over
the year (column b) are solely as a result
of indexation of the pensions as set out
in the Schemes’ Rules.
The increase in transfer value over
the year (column f) is as a result of a small
fall in gilt yields between 31 March 2012
and 31 March 2013 and because actual
pension increases awarded in the year
in accordance with the Schemes’ Rules
were higher than assumed.
Directors’ share interests
(a) Shareholdings
The number of Ordinary shares of the
Company in which Directors held beneficial
interests (including those of their connected
persons) were:
Director
Ken Harvey
Colin Drummond
David Dupont
Chris Loughlin
Martin Angle
Gerard Connell
Dinah Nichols
Gill Rider
Ordinary shares
(40.7p each)
at 31 March 2013
Ordinary shares
(40.7p each)
at 31 March 2012
26,209
332,841
316,415
150,766
–
4,098
4,549
–
26,209
288,163
262,671
97,745
–
4,000
4,549
–
Since 31 March 2013, 1,946 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, 276
additional Ordinary shares (40.7p each)
in the Company have been acquired
by David Dupont as a result of dividend
reinvestment in an ISA and 53 additional
Ordinary shares (40.7p each) in the Company
have been acquired by Gerard Connell
as a result of participation in the Company’s
Scrip Dividend Alternative.
There have been no other changes
in beneficial interests or the non-beneficial
interests of the Directors in the Ordinary
shares of the Company between 1 April
2013 and 24 June 2013.
79
South West WaterViridorGroupFinancial statementsPennon Group Plc Annual Report 2013GovernanceGroup overview
Governance
Directors’ remuneration report
Continued
Implementation of the remuneration policy
Continued
(b) Performance and Co-investment
Plan (long-term incentive plan)
In addition to the above beneficial interests,
the following Directors have or have 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
or the number of shares which have vested
under the plan, as appropriate:
Director
and date
of award
Colin Drummond
1/7/09
2/7/10
1/7/11
3/7/12
David Dupont
1/7/09
2/7/10
1/7/11
3/7/12
Chris Loughlin
1/7/09
2/7/10
1/7/11
3/7/12
Conditional
awards
held at
1 April 2012
Conditional
awards
made
in year
Market price
upon award
of each
share in year
Vesting
in year*
Market price
of each
share upon
vesting
Conditional
awards
held at
31 March
2013
Date of end
of period for
qualifying
conditions to
be fulfilled
67,831
63,186
51,432
–
–
–
–
48,145
67,831
63,186
51,432
–
–
–
–
48,145
64,748
63,186
51,432
–
–
–
–
48,145
486.50p
546.00p
698.00p
768.50p
486.50p
546.00p
698.00p
768.50p
486.50p
546.00p
698.00p
768.50p
60,437
758.18p
–
–
–
–
–
–
60,437
758.18p
–
–
–
–
–
–
57,690
758.18p
–
–
–
–
–
–
–
63,186
51,432
48,145
–
63,186
51,432
48,145
–
63,186
51,432
48,145
30/6/12
1/7/13
30/6/14
2/7/15
30/6/12
1/7/13
30/6/14
2/7/15
30/6/12
1/7/13
30/6/14
2/7/15
* 79.3% of the July 2009 award shares
vested on 6 August 2012 as explained
in the section (iii) ‘Long-term incentive plan’
on page 75 of this report at a market price
of 758.18p per share. 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 were then added
to the total number of shares that vested
and are included within the vested figures.
The balance of the award lapsed.
80
Pennon Group Plc Annual Report 2013
(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
29/9/091
27/7/10
27/7/11
27/7/12
David Dupont
29/9/091
27/2/10
27/7/10
27/7/11
27/7/12
Chris Loughlin
29/9/091
27/2/10
27/7/10
27/7/11
27/7/12
Conditional
awards
held at
1 April 2012
Conditional
awards
made in
year
Market price
of each
share upon
award
in year
Vesting
in year
Market price
of each
share upon
vesting
Conditional
awards
held at
31 March
2013
Date of end
of period for
qualifying
condition to
be fulfilled
16,730
27,091
–
–
17,880
755
25,938
–
–
19,562
1,261
25,133
–
–
–
–
23,079
12,823
–
–
–
22,365
18,532
–
–
–
22,141
20,650
473.40p
572.50p
725.00p
754.50p
473.40p
524.50p
572.50p
725.00p
754.50p
473.40p
524.50p
572.50p
725.00p
754.50p
14,545
614.37p
–
–
–
–
–
–
15,695
614.37p
–
–
–
–
–
–
–
–
17,377
614.37p
–
–
–
–
–
–
–
–
–
27,091
23,079
12,823
–
755
25,938
22,365
18,532
–
1,261
25,133
22,141
20,650
28/9/12
26/7/13
26/7/14
26/7/15
28/9/12
26/2/132
26/7/13
26/7/14
26/7/15
28/9/12
26/2/132
26/7/13
26/7/14
26/7/15
1 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 82.
These awards were made in conjunction
with the operation of the Bonus Plan.
These ESOS options were exercised
by the Directors on 29 September 2012
and shares from the Bonus Plan equivalent
in value to the gain on the ESOS
options were 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 74.
2 The qualifying condition in respect of these
awards has been met and the awards
are in the process of being released.
During the year the Directors received
dividends on the above shares in accordance
with the conditions of the Bonus Plan
as follows:
Colin Drummond – £20,088
David Dupont – £21,143
Chris Loughlin – £21,838.
Chris Loughlin received Ordinary shares
(40.7p each) in the Company as a result
of participation in the Company’s Scrip
Dividend Alternative. All 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 2013 given on page 79.
A further conditional award of shares
will be made in 2013/14 to the value
of the amount of the performance-related
cash bonus shown in the Emoluments
of Directors table on page 78. Paragraph
(ii) ‘Performance-related bonus’ on page
74 sets out the provisions relating
to the conditional award of shares
pursuant to the Bonus Plan.
81
South West WaterViridorGroupFinancial statementsPennon Group Plc Annual Report 2013GovernanceGroup overview
Governance
Directors’ remuneration report
Continued
Implementation of the remuneration policy
Continued
(d) Executive Share Option Scheme
The following Directors had 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 74.
Director
and date
of award
Options
held at
1 April 2012
Granted
in year
Exercised
in year
Exercise
price per
share
Market
price of
each
share on
exercising
Market
value of
each
share at
31 March
2013
Maturity
date
Options
held at
31 March
2013
Colin Drummond
29/9/09
David Dupont
29/9/09
Chris Loughlin
29/9/09
6,337
6,337
6,337
–
–
–
6,337*
473.40p
722.50p
6,337*
473.40p
722.50p
6,337*
473.40p
722.50p
–
–
–
–
–
–
–
–
–
* All three Executive Directors exercised
their options during the year realising
a gain of £15,785 each.
(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 award
Options
held at
1 April 2012
Granted
in year
Exercised
in year
Exercise
price per
share
Market
price of
each
share on
exercising
Market
value of
each
share at
31 March
2013
Options
held at
31 March
2013
Exercise
period/
Maturity
date
Colin Drummond
6/7/09
29/6/12
David Dupont
3/7/07
Chris Loughlin
3/7/07
2,351
–
2,3511
–
1,530
–
386.00p
588.00p
735.00p
–
–
–
–
623.00p
1,530
1/9/15 - 28/2/16
3,136
3,136
–
–
3,1362
522.00p
736.50p
3,1363
522.00p
739.50p
–
–
–
–
–
–
1 Colin Drummond’s gain on the exercise of his option was £8,205.
2 David Dupont’s gain on the exercise of his option was £6,727.
3 Chris Loughlin’s gain on the exercise of his option was £6,821.
(f) Share price
The market price of the Ordinary shares (40.7p
each) of the Company at 31 March 2013 was
623.00p (2012 711.50p) and the range during
the year was 598.00p to 796.00p (2011/12
620.00p to 737.50p).
82
Pennon Group Plc Annual Report 2013
Single Total Figure Table (£000)
The information below is not provided
for the Chairman or the other Non-executive
Directors due to them not being participants
in any of the Group’s incentive plans
(as permitted by the latest draft of the
new remuneration reporting regulations
(‘the draft regulations’)). The information
provided is based upon the Company’s
interpretation of the draft regulations.
Director
(
i
(£000)
ii
(£000)
iii
(£000)
iv
(£000)
v
(£000)
Total 2013
Year to 31 March
(£000)
Executive Directors
Colin Drummond
David Dupont
Chris Loughlin
370
370
370
25
27
25
111
25
111
37
106
118
583
591
582
1,126
1,119
1,206
The headings i to v above are as follows:
i Total amount of salary and fees.
ii All taxable benefits.
iii All pension related benefits (cash
in lieu of pension).
iv Money or other assets received
or receivable as a result of achievement
of performance conditions in 2012/13
only (cash bonus).
v Money or other assets received
or receivable in 2012/13 or shortly
thereafter relating to 2012/13
and previous reporting periods (cash
in lieu of dividend on Deferred Bonus
Shares; 2009 Deferred Bonus Shares
and PCP vesting; and ESOS exercise).
Basis of preparation
The Directors’ 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 Directors’ 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 85.
The other sections are not subject to audit nor are the pages referred to from within the audited sections.
The Directors’ remuneration report was approved by the Board of Directors and signed on its behalf by:
Martin Angle
Chairman of the Remuneration Committee
25 June 2013
83
South West WaterViridorGroupFinancial statementsPennon Group Plc Annual Report 2013GovernanceGroup overview
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 2013
which comprise the 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 parent 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 on pages 70 to 71, 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 parent 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 parent company’s affairs as at 31 March 2013
and of the Group’s profit and Group’s and parent 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 parent 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.
84
Pennon Group Plc Annual Report 2013 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 Report set out on pages 60 to 61 and with respect to internal control and risk
management systems set out on pages 64 to 71 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 parent company, or returns adequate for our audit have not been received from
branches not visited by us; or
• The parent 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 parent company.
Under the Listing Rules we are required to review:
• The Directors’ statement, set out on page 70, 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
25 June 2013
85
South West WaterViridorGroupFinancial statementsPennon Group Plc Annual Report 2013GovernanceGroup overview
Financial Statements
Consolidated income statement
For the year ended 31 March 2013
Revenue
Operating costs
Manpower costs
Raw materials and consumables used
Other operating expenses
Depreciation, amortisation and impairment
Operating profit
Finance income
Finance costs
Net finance costs
Share of post-tax profit from joint ventures
Profit before tax
Taxation (charge)/credit
Profit for the year
Profit attributable to ordinary shareholders’ equity
Earnings per share (pence per share)
– Basic
– Diluted
Before
exceptional
items
2013
£m
1,201.1
Notes
5
7
(158.6)
(125.2)
(521.8)
(149.2)
246.3
127.6
(181.5)
(53.9)
5.8
198.2
(31.1)
167.1
167.1
5
8
8
8
20
5
9
11
Exceptional
items
(Note 6)
2013
£m
–
–
–
(104.9)
(84.0)
(188.9)
15.4
(2.9)
12.5
–
(176.4)
36.2
(140.2)
(140.2)
Consolidated statement of comprehensive income
For the year ended 31 March 2013
Notes
30
20
9, 31
36
Before
exceptional
items
2013
£m
Exceptional
items
(Note 6)
2013
£m
167.1
(140.2)
(15.1)
(0.9)
2.7
2.7
(10.6)
156.5
156.5
–
2.9
–
(0.7)
2.2
(138.0)
(138.0)
Profit for the year
Other comprehensive loss
Actuarial losses on defined benefit pension schemes
Cash flow hedges
Share of other comprehensive profit/(loss) from joint ventures
Deferred tax credit/(charge) on items taken directly to or transferred
from equity
Other comprehensive (loss)/gain for the year net of tax
Total comprehensive income for the year
Total comprehensive income attributable to ordinary shareholders’ equity
The notes on pages 91 to 142 form part of these financial statements.
86
Total
2013
£m
2012
£m
1,201.1
1,233.1
(158.6)
(125.2)
(626.7)
(233.2)
57.4
143.0
(184.4)
(41.4)
5.8
21.8
5.1
26.9
26.9
7.4
7.4
Total
2013
£m
26.9
(15.1)
2.0
2.7
2.0
(8.4)
18.5
18.5
(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
48.1
47.8
2012
£m
172.4
(51.7)
(24.7)
(5.4)
16.0
(65.8)
106.6
106.6
Pennon Group Plc Annual Report 2013
Balance sheets
At 31 March 2013
Assets
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Other non-current assets
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
Equity
Share capital
Share premium account
Capital redemption reserve
Retained earnings and other reserves
Total ordinary shareholders’ equity
Perpetual capital securities
Total equity
Group
Company
Notes
2013
£m
2012
(Restated
note 40)
£m
2013
£m
2012
£m
15
16
17
19
31
23
20
20
21
22
24
23
27
25
28
23
26
27
32
28
29
24
23
30
31
32
33
34
35
36
37
339.0
12.5
3,279.6
183.3
–
31.0
–
0.1
3,845.5
10.5
267.7
1.2
10.5
–
634.5
924.4
(138.6)
(21.7)
(277.2)
(67.0)
(40.6)
(545.1)
379.3
(2,504.6)
(77.9)
(23.0)
(31.5)
(109.7)
(243.1)
(170.7)
(3,160.5)
1,064.3
149.2
7.0
144.2
469.1
769.5
294.8
1,064.3
326.5
22.0
3,083.6
138.4
–
21.9
–
0.1
3,592.5
9.0
238.5
0.5
9.7
–
425.3
683.0
(325.5)
(16.6)
(242.5)
(60.3)
(26.3)
(671.2)
11.8
(2,204.4)
(76.9)
(16.7)
(32.0)
(98.6)
(277.3)
(76.3)
(2,782.2)
822.1
148.2
8.0
144.2
521.7
822.1
–
822.1
–
–
0.2
502.5
2.3
–
1,323.3
–
1,828.3
–
136.3
–
9.7
–
398.9
544.9
(357.1)
–
(7.7)
(18.9)
–
(383.7)
161.2
(692.7)
(8.7)
–
–
(8.7)
–
–
(710.1)
1,279.4
149.2
7.0
144.2
684.2
984.6
294.8
1,279.4
–
–
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
–
872.5
The notes on pages 91 to 142 form part of these financial statements.
The financial statements on pages 86 to 142 were approved by the Board of Directors and authorised for issue on 25 June 2013 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
87
South West WaterViridorGroupGovernancePennon Group Plc Annual Report 2013Financial statementsGroup overview
Retained
earnings
and other
reserves
(Note 36)
£m
Perpetual
capital
securities
(Note 37)
£m
479.1
172.4
(65.8)
106.6
(88.2)
19.1
3.5
(0.3)
1.9
(64.0)
521.7
26.9
(8.4)
18.5
(96.0)
18.1
3.1
–
(0.9)
4.6
(71.1)
469.1
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
294.8
–
–
294.8
294.8
Total
equity
£m
779.5
172.4
(65.8)
106.6
(88.2)
19.1
3.5
(0.3)
1.9
(64.0)
822.1
26.9
(8.4)
18.5
(96.0)
18.1
3.1
294.8
(0.9)
4.6
223.7
1,064.3
–
–
–
–
–
–
–
–
–
144.2
–
–
–
–
–
–
–
–
–
–
144.2
Share
capital
(Note 33)
£m
147.0
Share
premium
account
(Note 34)
£m
Capital
redemption
reserve
(Note 35)
£m
9.2
144.2
Financial Statements
Statements of changes in equity
For the year ended 31 March 2013
Group
At 1 April 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
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
–
–
–
–
–
–
–
–
1.2
(1.2)
–
–
–
1.2
148.2
–
–
–
–
–
–
–
(1.2)
8.0
–
–
–
–
1.0
(1.0)
Adjustment in respect of share-based payments (net of tax)
Issue of perpetual capital securities
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 2013
–
–
–
–
1.0
149.2
The notes on pages 91 to 142 form part of these financial statements.
–
–
–
–
(1.0)
7.0
88
Pennon Group Plc Annual Report 2013 Company
At 1 April 2011
Profit for the year (note 10)
Other comprehensive loss for the year
Total comprehensive income for the year
Transactions with equity shareholders
Dividends paid
Share
capital
(Note 33)
£m
147.0
Share
premium
account
(Note 34)
£m
Capital
redemption
reserve
(Note 35)
£m
9.2
144.2
Retained
earnings
and other
reserves
(Note 36)
£m
Perpetual
capital
securities
(Note 37)
£m
–
–
–
–
–
–
–
–
Adjustment for shares issued under the Scrip
Dividend Alternative
1.2
(1.2)
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
Profit for the year (note 10)
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)
Issue of perpetual capital securities
Proceeds from treasury shares re-issued
Total transactions with equity shareholders
At 31 March 2013
The notes on pages 91 to 142 form part of these financial statements.
–
–
1.2
148.2
–
–
–
–
–
–
(1.2)
8.0
–
–
–
–
1.0
(1.0)
–
–
–
1.0
149.2
–
–
–
(1.0)
7.0
–
–
–
–
–
–
–
–
144.2
–
–
–
–
–
–
–
–
–
144.2
525.8
116.3
(3.6)
112.7
(88.2)
19.1
0.8
1.9
(66.4)
572.1
185.7
(1.1)
184.6
(96.0)
18.1
0.8
–
4.6
(72.5)
684.2
Total
equity
£m
826.2
116.3
(3.6)
112.7
(88.2)
19.1
0.8
1.9
(66.4)
872.5
185.7
(1.1)
184.6
(96.0)
18.1
0.8
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
294.8
294.8
–
294.8
294.8
4.6
222.3
1,279.4
89
South West WaterViridorGroupGovernancePennon Group Plc Annual Report 2013Financial statementsGroup overview Group
Company
Notes
2013
£m
2012
£m
2013
£m
2012
£m
38
38
45
40
20
33
37
25
25
341.1
(75.8)
(18.5)
246.8
26.0
8.5
(14.8)
–
–
0.3
324.7
(74.5)
(41.4)
208.8
13.2
–
(29.2)
–
(13.4)
3.6
(397.2)
(262.2)
4.5
4.6
(372.7)
(283.4)
4.6
294.8
(0.9)
(21.0)
409.9
(267.2)
85.0
(103.1)
(77.9)
324.2
198.3
292.2
490.5
1.9
–
(0.3)
(0.1)
25.0
(71.0)
79.5
(14.0)
(69.1)
(48.1)
(122.7)
414.9
292.2
(205.2)
(23.4)
26.7
(201.9)
30.3
177.6
–
18.9
(22.7)
2.6
(1.2)
23.3
117.5
–
(151.2)
(140.1)
–
–
(0.1)
–
56.6
4.6
294.8
–
–
409.9
(246.1)
–
–
(77.9)
385.3
240.0
157.5
397.5
–
–
–
–
0.7
1.9
–
–
–
25.0
(35.0)
–
–
(69.1)
(77.2)
(77.7)
235.2
157.5
Financial Statements
Cash flow statements
For the year ended 31 March 2013
Cash flows from operating activities
Cash generated/(outflow) from operations
Interest paid
Tax (paid)/repaid
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
Proceeds from issue of perpetual capital securities
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 received from/(used in) financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of the year
The notes on pages 91 to 142 form part of these financial statements.
90
Pennon Group Plc Annual Report 2013
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 87. 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 notes (b), (v) and (n) respectively) and in accordance with International
Financial Reporting Standards (IFRS) and interpretations of the IFRS Interpretations Committee 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 70.
New or revised standards or interpretations which were mandatory for the first time in the year beginning 1 April 2012 did not have a material impact
on the net assets or results of the Group.
For the preparation of these financial statements IFRS 11 Joint Arrangements and IAS 19 (Revised) Employee Benefits were in issue, but not yet
effective. 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 (Revised) Employee Benefits on 1 April 2013 will have a material impact on the financial statements
of the Group. In the year to 31 March 2014 the revised standard is expected to result in a net finance cost of £4 million and a further £1 million is
expected to be charged to operating profit to recognise administration costs as they are incurred. Pension liabilities will reduce by £10 million as at
31 March 2013 as a result of the change.
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.
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 (note 40).
(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.
(d) Landfill tax
Landfill tax is included within both revenue and operating costs.
91
South West WaterViridorGroupGovernancePennon Group Plc Annual Report 2013Financial statementsGroup overview Financial statements
Notes to the financial statements
Continued
2. Principal accounting policies Continued
(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 reportable 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, less any subsequent impairment charges.
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 allocated and monitored at the reportable 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.
(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
and impairment charges. 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
30 – 60 years
Land and buildings – Leasehold buildings
Over the estimated economic lives or the
finance lease period, whichever is the shorter
Operational properties
Fixed plant
Vehicles, mobile plant and computers
40 – 80 years
20 – 40 years
3 – 10 years
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. Assets transferred from customers are recognised at fair value as set out in accounting policy (v).
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.
92
Pennon Group Plc Annual Report 2013 (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.
Non-financial assets other than goodwill that have been impaired are reviewed for possible reversal of the impairment at each reporting date.
(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.
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) 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.
93
South West WaterViridorGroupGovernancePennon Group Plc Annual Report 2013Financial statementsGroup overview Financial statements
Notes to the financial statements
Continued
2. Principal accounting policies Continued
v) 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 deemed held for trading 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.
vi) Financial instruments at fair value through profit
Financial instruments 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 instruments 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.
The Group includes a number of companies, including the parent company, which are part of a tax group for certain aspects of the tax legislation. One
of these aspects relates to group relief whereby current tax liabilities can be offset by current tax losses arising in other companies within the same tax
group. Payment for group relief is made equal to the tax benefit and amounts are included within the current tax disclosures.
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.
(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 specific provisions 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.
Further provisions required after the operational life of a site are recognised immediately in the income statement.
iii) Onerous contracts
Where the unavoidable costs of meeting a contract’s obligations exceed the economic benefits derived from that contract, the unavoidable costs,
less revenue anticipated under the terms of the contract, are recognised as a provision and charged to the income statement. An impairment loss
on any assets dedicated to that contract is also recognised as described in accounting policy (j).
94
Pennon Group Plc Annual Report 2013 (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 as past service cost in the income statement.
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.
(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) 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.
(w) 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.
(x) Perpetual capital securities
Perpetual capital securities are issued securities that qualify for recognition as equity. Accordingly any periodic returns are accounted for as dividends
and recognised directly in equity and as a liability at the time the Company becomes obligated to pay the periodic return. This reflects the nature of the
periodic returns being only made at the Company’s discretion.
(y) Exceptional items
Exceptional items are those that in the Directors’ view are required to be separately disclosed by virtue of their size or incidence to enable
a full understanding of the Group’s financial performance.
95
South West WaterViridorGroupGovernancePennon Group Plc Annual Report 2013Financial statementsGroup overview Financial statements
Notes to the financial statements
Continued
3. Financial risk management
(a) Financial risk factors
The Group’s activities expose it to a variety of financial risks: liquidity risk, market risk (interest rate 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 liquidity, 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) 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 bank facilities are provided in note 28.
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.
Contractual undiscounted cash flows, including interest payments, at the balance sheet date were:
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
97.0
24.5
56.6
19.1
284.8
28.4
63.8
15.9
75.9
15.3
253.2
18.2
216.5
21.8
63.0
440.8
47.6
228.0
1,397.7
630.4
2,045.3
2,152.0
724.3
2,392.9
26.3
26.3
8.6
80.3
96.1
18.2
60.8
14.0
185.4
12.5
75.0
7.6
274.8
40.8
232.2
15.7
347.5
19.2
181.6
9.5
1,371.4
642.3
2,214.3
2,027.1
729.7
2,571.1
–
45.6
160.2
12.8
100.0
15.0
769.0
59.8
609.8
50.3
Group
31 March 2013
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 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
Company
31 March 2013
Non-derivative financial liabilities
Borrowings
Interest payments on borrowings
31 March 2012
Non-derivative financial liabilities
Borrowings
Interest payments on borrowings
96
Pennon Group Plc Annual Report 2013
ii) 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 54% (2012 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 19% (2012 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 note 23.
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 cash generated from operations (note 38)
are independent of changes in market interest rates.
For 2013 if interest rates on variable net borrowings had been on average 0.5% higher/lower with all other variables held constant, post-tax profit
for the year and equity would have decreased/increased by £2.0 million (2012 £1.3 million).
For 2013 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
and equity would have decreased/increased by £1.4 million (2012 £1.3 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.
iii) Credit risk
Credit counterparty risk arises from cash and cash deposits, derivative financial instruments and deposits with banks 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 22.
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).
(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.
The Group’s policy is to have 12 months pre-funding of projected capital expenditure. At 31 March 2013 the Group had cash and facilities,
excluding restricted funds, of £1 billion.
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 39 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 39)
Total equity
Total capital
Gearing ratio
2013
£m
2,008.7
1,064.3
3,073.0
2012
£m
2,104.6
822.1
2,926.7
65.4%
71.9%
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
2013
£m
2,915.7
1,600.3
2012
£m
2,826.7
1,584.9
54.9%
56.1%
97
South West WaterViridorGroupGovernancePennon Group Plc Annual Report 2013Financial statementsGroup overview Financial statements
Notes to the financial statements
Continued
3. Financial risk management Continued
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 Group’s financial instruments are valued principally using level 2 measures as analysed in note 23.
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.
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. Estimates are based on factors including historical experience
and expectations of future events that management believe to be reasonable. However, given the judgemental nature of such estimates,
actual results could be different from the assumptions used.
Impairment of non-financial assets and goodwill
In order to determine whether impairments are required the Group estimates the recoverable amount of an individual asset or assets grouped
at the lowest level for which there are separately identifiable cash flows (cash generating units). For the purposes of assessing impairment
of goodwill, the waste management segment is considered to be a single cash generating unit as it is an integrated business and this
is the lowest level to which goodwill is allocated and monitored by management.
Impairment calculations are based on projections of future cash flows for the cash generating unit and the use of a terminal value to incorporate
expectations of growth after the period covered by specific plans. The cash flows are discounted by the weighted average cost of capital
appropriate to the business activity which is reviewed on an annual basis.
If the cash flow or discount rate assumptions were to change because of market conditions, the level of impairment could be different
and could result in the impairment being increased or reversed, in part or in full, at a future date.
The principal assumptions used to assess impairment are set out in notes 15 and 17 of the financial statements.
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.
Environmental and landfill restoration provisions
Environmental control and aftercare costs are incurred during the operational life of each landfill site and for a considerable period thereafter.
The period of aftercare post-closure and the level of costs expected are uncertain and can vary significantly from site to site. Key factors
are the type of waste, the speed at which it decomposes, the volume of leachate requiring treatment and regulatory requirements specific
to the site. The amounts expected to be incurred have been re-assessed, re-estimated and aligned to the revised landfill site operating lives
established from the anticipated decline in landfill activity. The revised provision includes a change in the estimate of the aftercare period to 60
years after site closure (2012 30 years) to align with updated technical assessment using independent external advice, as well as incorporating
updated assumptions based on recent historic data and future cost estimates.
The provisions are recognised in the financial statements at the net present value of the estimated future expenditure required to settle
the Group’s obligations. A discount rate 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 2013 the Group’s environmental and landfill restoration provisions were £184.2 million (note 32).
Where a restoration provision gives access to future economic benefits, an asset is recognised and depreciated in accordance with the Group’s
depreciation policy. As at 31 March 2013 these assets had a net book value of £35.5 million (note17).
98
Pennon Group Plc Annual Report 2013 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 30 of the financial statements.
Taxation
The Group current income tax provision of £67.0 million (note 27) 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 the tax position is assessed as 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. In estimating the
operational life of a landfill site consideration is given to the expected ongoing decline in the landfill market. Where Viridor plans to build a
competing energy from waste facility at certain existing landfill sites, void which consequently is no longer expected to be used is excluded from
the calculation of operational life. 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.
Useful economic lives of property, plant and equipment
The carrying value of property, plant and equipment as at 31 March 2013 was £3,279.6 million (note 17) and the Group’s accounting policy
is set out in note 2(h). In the year ended 31 March 2013 additions totalled £410.1 million and the depreciation charge was £147.7 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, the 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, except for assets subject to impairment, 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 year-end.
Estimated usage is based on historic data, judgement and assumptions.
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.
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. As at 31 March 2013 the Group’s current trade receivables
were £212.4 million, against which £76.4 million had been provided for impairment (note 22).
99
South West WaterViridorGroupGovernancePennon Group Plc Annual Report 2013Financial statementsGroup overview Financial statements
Notes to the financial statements
Continued
5. Segmental information
Operating segments are reported in a manner consistent with internal reporting provided to the Chief Operating Decision-Maker, which has been
identified as the Pennon Group Plc Board.
The water 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, amortisation and exceptional items (EBITDA)
Water and sewerage
Waste management
Other
Operating profit before exceptional items
Water and sewerage
Waste management
Other
Profit before tax and exceptional items
Water and sewerage
Waste management
Other
Profit/(loss) before tax
Water and sewerage
Waste management
Other
2013
£m
2012
£m
498.6
703.8
10.8
(12.1)
474.0
761.1
9.8
(11.8)
1,201.1
1,233.1
317.5
77.9
0.1
395.5
215.2
30.8
0.3
246.3
152.1
36.5
9.6
198.2
164.6
(152.4)
9.6
21.8
305.2
110.3
0.3
415.8
204.7
63.7
0.4
268.8
141.5
57.6
1.4
200.5
141.5
57.6
1.4
200.5
* 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.
100
Pennon Group Plc Annual Report 2013
Water and
sewerage
£m
Waste
management
£m
Other
£m
Eliminations
£m
Group
£m
Balance sheet
31 March 2013
Assets (excluding investments in joint ventures)
2,922.6
1,450.0
1,347.9
(950.7)
4,769.8
Investments in joint ventures
–
0.1
–
–
0.1
Total assets
Liabilities
Net assets/(liabilities)
31 March 2012 (Restated note 40)
2,922.6
1,450.1
1,347.9
(950.7)
4,769.9
(2,157.0)
(1,108.5)
(1,390.8)
950.7
(3,705.6)
765.6
341.6
(42.9)
–
1,064.3
Assets (excluding investments in joint ventures)
2,938.2
1,214.3
912.2
(789.3)
4,275.4
Investments in joint ventures
Total assets
Liabilities
–
0.1
2,938.2
1,214.4
–
912.2
(2,159.6)
(830.8)
(1,252.3)
–
(789.3)
789.3
0.1
4,275.5
(3,453.4)
Net assets/(liabilities)
778.6
383.6
(340.1)
–
822.1
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.
Other information
31 March 2013
Amortisation of other intangible assets
Capital expenditure (including acquisitions)
Depreciation
Impairment
Finance income
Finance costs
31 March 2012
Amortisation of other intangible assets
Capital expenditure (including acquisitions)
Depreciation
Finance income
Finance costs
Notes
16
16,17
8
8
16
8
8
Water and
sewerage
£m
Waste
management
£m
Other
£m
Group
£m
–
116.5
102.3
–
41.1
91.7
–
130.8
100.5
59.3
122.5
3.7
308.3
43.4
84.0
24.3
24.4
1.4
155.8
45.2
23.2
33.2
–
0.1
(0.2)
–
77.6
68.3
–
–
(0.1)
36.8
35.9
3.7
424.9
145.5
84.0
143.0
184.4
1.4
286.6
145.6
119.3
191.6
101
South West WaterViridorGroupGovernancePennon Group Plc Annual Report 2013Financial statementsGroup overview
Financial statements
Notes to the financial statements
Continued
5. Segmental information Continued
Geographic analysis of revenue based on location of customers
Revenue
United Kingdom
Rest of European Union
China
Rest of World
2013
£m
2012
£m
1,142.1
1,162.4
11.2
39.7
8.1
13.3
51.0
6.4
1,201.1
1,233.1
The Group’s country of domicile is the United Kingdom and is the country in which it generates the majority of its revenue.
The Group’s non-current assets are all located in the United Kingdom.
6. Exceptional items
Exceptional items are those that in the Directors’ view are required to be separately disclosed by virtue of their size or incidence to enable
a full understanding of the Group’s financial performance.
Operating costs
Impairment of property, plant and equipment (a)
Environmental and landfill restoration provisions (b)
Onerous contracts and other (c)
Net finance costs
Receipt on transfer and subsequent termination of lease (d)
Fair value loss on associated interest rate swap transferred from equity on termination of lease (d)
Loss before tax
Tax credit arising on exceptional items (e)
Loss for the year
Notes
17
32
8
9
2013
£m
2012
£m
(78.2)
(90.1)
(20.6)
(188.9)
15.4
(2.9)
12.5
(176.4)
36.2
(140.2)
–
–
–
–
–
–
–
–
–
–
a)
The impairment charge relates to the write-down of the carrying values of property, plant and equipment in landfill and recycling activities
reflecting reduced landfill volumes and recyclate prices. The impairment charge is net of a credit arising from the reassessment of landfill
site residual values linked to gas production at landfill sites post-closure.
(b) Environmental control and aftercare costs are incurred during the operational life of each landfill site and for a considerable period thereafter.
The period of aftercare post-closure and the level of costs expected are uncertain and can vary significantly from site to site. Key factors
are the type of waste, the speed at which it decomposes, the volume of leachate requiring treatment and regulatory requirements specific
to the site. The amounts expected to be incurred have been re-assessed, re-estimated and aligned to the revised landfill site operating
lives established from the anticipated decline in landfill activity. The revised provision includes a change in the estimate of the aftercare
period to 60 years after site closure (2012 30 years) to align with updated technical assessment using independent external advice,
as well as incorporating updated assumptions based on recent historical data and future cost estimates. This exceptional charge reflects
only the incremental change in the assessment of the provisions.
(c) Onerous contracts principally arise from long-term contractual obligations to purchase materials for recycling at input prices which lead
to an expected loss after reflecting directly attributable and unavoidable costs of processing.
(d) South West Water Limited received a consent fee related to the transfer and subsequent termination of a lease arising from the sale
of a finance lease between financial institutions.
(e) The total tax credit on exceptional items is below the current rate of corporation tax (24%) due to tax relief not being available
on ineligible expenditure on which no deferred tax has previously been accounted for (principally land and buildings).
102
Pennon Group Plc Annual Report 2013
7. 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 and its associates for the audit of parent Company
and consolidated financial statements
Fees payable to the Company’s auditors and its associates for other services:
The audit of Company’s subsidiaries
Audit related assurance services
Tax advisory services
Corporate finance services
Other non-audit services
Total fees
Fees payable to the Company’s auditors in respect of Pennon Group pension schemes:
Audit
Notes
13
22
16
2013
£m
158.6
125.2
2012
£m
155.4
133.9
(1.8)
(2.8)
12.9
8.9
0.2
9.9
107.8
37.7
3.7
2013
£000
124
597
172
361
880
177
6.6
8.0
0.2
9.2
110.5
35.1
1.4
2012
£000
73
410
76
242
707
97
2,311
1,605
27
26
Expenses reimbursed to the auditors in relation to the audit of the Group were £45,000 (2012 £37,000).
Corporate finance services related to corporate finance advice on a number of EfW and PPP projects.
Audit related fees of £65,000 (2012 nil) were recognised directly in equity relating to the issuance cost of the perpetual capital securities.
A description of the work of the Audit Committee is set out in its report on pages 66 and 67 which includes an explanation of how the auditor’s
objectivity and independence are safeguarded when non-audit services are provided by the auditors’ firm.
103
South West WaterViridorGroupGovernancePennon Group Plc Annual Report 2013Financial statementsGroup overview Financial statements
Notes to the financial statements
Continued
8. 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
Finance
cost
£m
Notes
2013
Finance
income
£m
(40.0)
(39.8)
(5.4)
–
–
–
–
–
5.8
9.3
Finance
cost
£m
2012
Finance
income
£m
(50.0)
(38.8)
(5.5)
–
–
–
–
–
6.2
7.5
Total
£m
(40.0)
(39.8)
(5.4)
5.8
9.3
Total
£m
(50.0)
(38.8)
(5.5)
6.2
7.5
(85.2)
15.1
(70.1)
(94.3)
13.7
(80.6)
–
66.8
66.8
–
67.3
67.3
(63.4)
–
(63.4)
(63.9)
–
(63.9)
(63.4)
66.8
3.4
(63.9)
67.3
3.4
Notional interest
Interest receivable on service concession arrangements
–
Retirement benefit obligations
30
(28.6)
Unwinding of discounts in liabilities
Net gains on non-designated derivative financial
instruments
(4.3)
(32.9)
–
6.0
32.3
–
38.3
7.4
6.0
3.7
(4.3)
5.4
7.4
–
(29.1)
(4.3)
(33.4)
–
3.3
32.7
–
36.0
2.3
3.3
3.6
(4.3)
2.6
2.3
Exceptional items
6
(2.9)
15.4
12.5
–
–
–
(181.5)
127.6
(53.9)
(191.6)
119.3
(72.3)
(184.4)
143.0
(41.4)
(191.6)
119.3
(72.3)
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.
9. Taxation
Analysis of charge in year
Current tax charge/(credit)
Deferred tax – other
Deferred tax arising on change of rate of corporation tax
Total deferred tax credit
Tax charge/(credit) for year
104
Before
exceptional
items
2013
£m
Exceptional
items
(Note 6)
2013
£m
Notes
Total
2013
£m
2012
£m
43.3
(15.6)
27.7
30.9
1.4
(13.6)
(12.2)
31.1
(21.5)
0.9
(20.6)
(36.2)
(20.1)
(12.7)
(32.8)
(5.1)
23.6
(26.4)
(2.8)
28.1
31
Pennon Group Plc Annual Report 2013 Current tax is calculated at 24% (2012 26%) of the estimated assessable profit for the year.
Included in deferred tax is a non-recurring credit of £12.7 million (2012 £26.4 million) arising from a 1% reduction (2012 2%) 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 (24%) from:
Profit before tax
Profit before tax multiplied by the standard rate of UK corporation tax of 24% (2012 26%)
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 (credit)/charge for year
2013
£m
21.8
5.2
8.5
4.6
(12.7)
(10.7)
(5.1)
2012
£m
200.5
52.1
3.5
(0.6)
(26.4)
(0.5)
28.1
Credit adjustments to the 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 before exceptional items was 16% (2012 14%).
In addition to the amount recognised in the income statement, a deferred tax credit relating to actuarial gains on defined benefit pension schemes of
£2.0 million (2012 £10.2 million) have been credited directly to other comprehensive income. In 2012 a deferred tax credit relating to losses on cash
flow hedges of £5.8 million was also recognised. A deferred tax charge relating to share-based payments of £0.5 million (2012 £0.1 million) has been
recognised directly to equity.
10. Profit of the parent company
Profit attributable to ordinary shareholders’ equity dealt with in the accounts of the parent company
2013
£m
185.7
2012
£m
116.3
As permitted by Section 408 of the Companies Act 2006 no income statement or statement of comprehensive income is presented
for the Company.
11. 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 36), 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 statutory 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
2013
2012
363.6
2.2
365.8
358.7
2.2
360.9
105
South West WaterViridorGroupGovernancePennon Group Plc Annual Report 2013Financial statementsGroup overview Earnings per share
Diluted
Basic
p
p
Financial statements
Notes to the financial statements
Continued
11. Earnings per share Continued
Basic and diluted earnings per share
Earnings per share before exceptional items and deferred tax are presented as the Directors believe that this measure provides a more useful
comparison on business trends and performance. 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:
2013
2012
Statutory earnings
Deferred tax credit (before exceptional items)
Exceptional items (net of tax)
Earnings before exceptional items and deferred tax
12. Dividends
Profit
after tax
£m
Earnings per share
Diluted
p
Basic
p
26.9
(12.2)
140.2
154.9
7.4
(3.4)
38.6
42.6
7.4
(3.3)
38.2
42.3
Profit
after tax
£m
172.4
(2.8)
–
169.6
Amounts recognised as distributions to ordinary equity holders in the year:
Interim dividend paid for the year ended 31 March 2012: 8.22p (2011 7.50p) per share
Final dividend paid for the year ended 31 March 2012: 18.30p (2011 17.15p) per share
Proposed dividends
Proposed interim dividend for the year ended 31 March 2013: 8.76p (2012 8.22p) per share
Proposed final dividend for the year ended 31 March 2013: 19.70p (2012 18.30p) per share
48.1
(0.8)
–
47.3
2013
£m
29.7
66.3
96.0
31.9
71.9
103.8
The proposed interim and final dividends have not been included as liabilities in these financial statements.
The proposed interim dividend for 2013 was paid on 4 April 2013 and the proposed final dividend is subject to approval by shareholders
at the Annual General Meeting.
47.8
(0.8)
–
47.0
2012
£m
26.8
61.4
88.2
29.7
66.3
96.0
2012
£m
130.9
12.6
16.6
3.6
Notes
30
33
2013
£m
134.3
13.1
16.9
3.6
167.9
163.7
158.6
9.3
167.9
155.4
8.3
163.7
13. Employment costs
Wages and salaries
Social security costs
Pension costs
Share-based payments
Total employment costs
Charged:
Manpower costs
Capital schemes
Total employment costs
106
Pennon Group Plc Annual Report 2013 Details of Directors’ emoluments are set out in note 14. 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 2013 was 4,511 (2012 4,592).
14. Directors’ emoluments
Executive Directors:
Salary
Performance-related bonus paid or payable
Share-based payments
Other emoluments, including payments in lieu of pension provision
Non-executive Directors
2013
2012
1,354
3,180
50
4,584
1,335
3,148
46
4,529
2013
£000
2012
£000
1,110
261
1,147
324
477
1,077
393
1,094
383
431
3,319
3,378
The cost of share-based payments represents the amount charged to the income statement, as described in note 33.
The aggregate gains on vesting of Directors’ share-based awards amounted to a total of £1,644,000 (2012 £1,002,000).
Total gains made by Directors on the exercise of share options were £69,000 (2012 nil).
Total emoluments include £1,541,000 (2012 £1,570,000) payable to Directors for services as directors of subsidiary undertakings.
At 31 March 2013 there were no Directors accruing retirement benefits under defined benefit pension schemes (2012 nil).
No pension contributions were payable to defined contribution schemes but three Directors received payments in lieu of pension provision
(2012 three).
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 72 to 83.
107
South West WaterViridorGroupGovernancePennon Group Plc Annual Report 2013Financial statementsGroup overview Financial statements
Notes to the financial statements
Continued
15. Goodwill
Cost:
At 1 April 2011
Recognised on acquisition of subsidiaries
At 31 March 2012
Recognised on acquisition of subsidiaries (note 40)
At 31 March 2013
Carrying amount:
At 1 April 2011
At 31 March 2012
At 31 March 2013
(Restated
note 40)
£m
300.4
26.1
326.5
12.5
339.0
300.4
326.5
339.0
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 and this is the lowest level at which goodwill
is monitored.
Impairment testing of goodwill
The Group tests goodwill for impairment annually, or more frequently if there are any indications that impairment may have arisen.
The recoverable amount of goodwill is determined based on value-in-use calculations which, under IAS 36 ‘Impairment of Assets’, require
the use of base cash flow projections that reflect reasonable and supportable assumptions with specific restrictions on the estimates to be
used. These include limitations on reflecting cash flows to take account of future cost restructuring, or improvement or enhancement of asset
performance. Uncommitted projects are excluded. Discount rates are required to be derived independently of the Group’s capital structure
and reflect management’s prudent estimate of a rate that investors would require if they were to choose a similar investment.
The base cash flow projections have been derived by prudently adjusting key assumptions underlying the Group’s detailed budget and strategic
plan projections. These cover a period of 7 years and are prepared as part of the annual planning cycle. This period is believed to lead
to a more realistic estimate of future cash flows than 5 years.
These plans are based on detailed market-by-market forecasts of projected volumes, prices and costs for each business activity.
These forecasts reflect, on an individual operational site basis, numerous assumptions and estimates. The key assumptions include:
anticipated changes in market size and volumes; recyclate prices; energy selling prices; gate fees; the level of future landfill tax; and cost
inflation. Management has determined the value assigned to each assumption based on historical experience, market surveys, industry
analysis and current legislation. For business activities with an indefinite life a terminal growth rate has been used.
The key assumptions which management has applied to the cash flow projections include:
Assumption
Discount rate
Pre-tax discount rates used range from 8% to 11% (across the segment’s
business activities)
Long term growth rate
2.5% applied to periods beyond the period of the detailed projections
Basis for assumption
Discount rates have been determined based on an estimate
of the waste management segment’s weighted average cost
of capital adjusted for the different risk profiles of the segment’s
business activities to the extent that the cash flows have not already
been adjusted. Investments in joint ventures reflect an expected
equity return only.
Based on forecasts of growth in waste management markets
and the UK economy.
Using management’s cash flow projections on the above basis, the value-in-use of the waste management business exceeds the carrying
amount by £400 million (“headroom”). The headroom relative to the Company’s investment in the waste management business (note 20) is
£197 million. A reasonably possible change, with all other variables held constant, of a 0.5% increase in discount rates, a 0.5% reduction in the
long-term growth rate or a 5.0% reduction in overall net cash flows, as a result of movements in key assumptions, would reduce headroom by
£133 million, £60 million and £70 million respectively.
108
Pennon Group Plc Annual Report 2013 16. Other intangible assets
Acquired intangible assets
Cost:
At 1 April 2011
Recognised on acquisition of subsidiaries
At 31 March 2012 and 31 March 2013
Accumulated amortisation:
At 1 April 2011
Charge for year
At 31 March 2012
Charge for year
Impairment charge for year
At 31 March 2013
Carrying amount:
At 1 April 2011
At 31 March 2012
At 31 March 2013
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 five 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.
The principal assumptions used to assess impairment are set out in note 17 of the financial statements.
Customer
contracts
(Restated
note 40)
£m
Total
(Restated
note 40)
£m
Patents
£m
12.5
19.0
31.5
8.3
1.3
9.6
3.7
5.8
19.1
4.2
21.9
12.4
0.2
–
0.2
–
0.1
0.1
–
–
0.1
0.2
0.1
0.1
12.7
19.0
31.7
8.3
1.4
9.7
3.7
5.8
19.2
4.4
22.0
12.5
109
South West WaterViridorGroupGovernancePennon Group Plc Annual Report 2013Financial statementsGroup overview Financial statements
Notes to the financial statements
Continued
17. Property, plant and equipment
Land and
buildings
(Restated
note 40)
£m
Infrastructure
assets
£m
Operational
properties
£m
Fixed and mobile
plant, vehicles
and computers
(Restated note 40)
£m
Landfill
restoration
£m
Construction
in progress
£m
Total
(Restated
note 40)
£m
Group
Cost:
At 1 April 2011
441.1
1,467.9
614.2
1,369.9
53.4
146.5
4,093.0
Arising on acquisitions
Additions
Assets adopted at fair value
Other
Grants and contributions
Disposals
0.3
17.0
–
–
–
–
Transfers/reclassifications
(18.0)
–
14.9
46.7
–
(1.6)
(0.9)
14.0
–
1.7
–
–
–
(0.1)
5.2
1.4
19.0
–
–
–
(11.6)
90.1
–
–
–
1.6
–
–
–
–
204.8
–
–
–
–
(86.9)
1.7
257.4
46.7
1.6
(1.6)
(12.6)
4.4
At 31 March 2012
440.4
1,541.0
621.0
1,468.8
55.0
264.4
4,390.6
Arising on acquisitions (note 40)
Additions
Assets adopted at fair value
Other (note 32)
Grants and contributions
Disposals
Transfers/reclassifications
At 31 March 2013
Accumulated depreciation:
At 1 April 2011
Charge for year
Disposals
Transfers/reclassifications
At 31 March 2012
Charge for year
Impairment charge for year
Disposals
0.2
7.5
–
–
–
–
10.8
458.9
188.8
16.6
–
(15.1)
190.3
15.2
51.7
–
–
11.7
3.3
–
(1.0)
(1.2)
16.9
1,570.7
–
1.4
–
–
–
–
10.6
633.0
3.6
32.9
–
–
–
(9.6)
54.3
–
–
–
8.4
–
–
–
–
356.6
–
–
–
–
(92.6)
3.8
410.1
3.3
8.4
(1.0)
(10.8)
–
1,550.0
63.4
528.4
4,804.4
112.9
170.2
680.6
22.2
(0.9)
–
134.2
23.0
–
(1.2)
10.9
(0.1)
–
181.0
10.9
–
–
95.8
(9.8)
15.1
781.7
96.8
20.2
(6.9)
17.8
2.0
–
–
19.8
1.8
6.3
–
27.9
35.6
35.2
35.5
–
–
–
–
–
–
–
–
–
1,170.3
147.5
(10.8)
–
1,307.0
147.7
78.2
(8.1)
1,524.8
146.5
264.4
528.4
2,922.7
3,083.6
3,279.6
At 31 March 2013
257.2
156.0
191.9
891.8
Net book value:
At 1 April 2011
At 31 March 2012
At 31 March 2013
110
252.3
250.1
201.7
1,355.0
1,406.8
1,414.7
444.0
440.0
441.1
689.3
687.1
658.2
Pennon Group Plc Annual Report 2013 Of the total depreciation charge of £147.7 million (2012 £147.5 million), £1.4 million (2012 £1.4 million) has been charged to capital projects,
£0.8 million (2012 £0.5 million) has been offset by deferred income and £145.5 million (2012 £145.6 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 nil million (2012 £4.4 million).
During the year borrowing costs of £13.6 million (2012 £3.0 million) have been capitalised on qualifying assets, at an average borrowing rate
of 4.5%.
Impairment testing for property, plant and equipment and other intangible assets
Property, plant and equipment and finite lived intangible assets are reviewed for impairment when any indicators of impairment are identified.
Most of the individual assets do not generate independent cash flows and as a result, for the purposes of impairment reviews, the assets
are grouped into cash generating units (CGUs). The CGUs of the waste management segment comprise individual sites which constitute
the smallest identifiable group of assets that generate cash inflows that are largely independent of the cash inflows from other assets or group
of assets.
The carrying value of these individual sites is compared to the recoverable amount of the CGUs, which is based predominantly on value-in-use.
Value-in-use calculations use the same base cash flow projections used for testing goodwill (note 15) and are derived by adjusting the Group’s
detailed budget and strategic plan which cover a period of 7 years and are approved by the Board annually. The key assumptions are the same
as for the impairment testing of goodwill (note 15).
For certain CGUs the recoverable amount is determined by reference to the fair value less costs to sell of the underlying assets using external
and internal valuations of property and equipment and management’s estimate of disposal costs.
Impairment charges of £78.2 million for property, plant and equipment and £5.8 million for other intangible assets have been identified in the
waste management segment relating to certain CGUs, principally landfill (£43.3 million) and recycling (£31.4 million) activities, to reflect reduced
landfill volumes and recyclate prices. For the purposes of disclosing the results of the impairment review the CGUs have been grouped together
by business activity as each CGU within a business activity exhibits a similar risk profile. The key assumptions in the Group’s detailed budget
and strategic plan are the same as those used for testing goodwill (note 15). The assumptions applied to these cash flow projections are:
Assumption
Discount rate
Pre-tax discount rates used are 8% for landfill and 8.5% for recycling
Basis for assumption
Discount rates have been determined based on an estimate of
the waste management segment’s weighted average cost of
capital adjusted for the different risk profiles of the segment’s
business activities to the extent that the cash flows have not
already been adjusted.
Long-term growth rate
2.5% applied to periods beyond the strategic plan period up to the end of
the life of the assets for recycling. For landfill activities a finite life has been
identified based on projected volumes.
Based on forecasts of growth in waste management markets and
the UK economy.
Using management cash flow projections a 0.5% increase in the discount rate or a 0.5% decrease in the estimated long-term growth rate,
with all other variables held constant, would not have a material impact on the impairment charge.
111
South West WaterViridorGroupGovernancePennon Group Plc Annual Report 2013Financial statementsGroup overview Financial statements
Notes to the financial statements
Continued
17. Property, plant and equipment Continued
Assets held under finance leases included above were:
Cost:
At 31 March 2012
At 31 March 2013
Accumulated depreciation:
At 31 March 2012
At 31 March 2013
Net book amount:
At 31 March 2012
At 31 March 2013
Company
Cost:
At 1 April 2011
At 31 March 2012
Additions
Disposals
At 31 March 2013
Accumulated depreciation:
At 1 April 2011
Charge for year
At 31 March 2012
Charge for year
Disposals
At 31 March 2013
Net book value:
At 1 April 2011
At 31 March 2012
At 31 March 2013
Land and
buildings
£m
Infrastructure
assets
£m
Operational
properties
£m
Fixed and mobile
plant, vehicles and
computers
£m
Landfill
restoration
£m
Construction
in progress
£m
–
–
–
–
–
–
357.0
357.0
31.3
36.6
325.7
320.4
465.2
465.2
97.0
104.9
368.2
360.3
379.9
383.8
189.0
180.3
190.9
203.5
–
–
–
–
–
–
0.3
0.3
–
–
0.3
0.3
Total
£m
1,202.4
1,206.3
317.3
321.8
885.1
884.5
Fixed and mobile plant,
vehicles and computers
£m
0.4
0.4
0.1
(0.1)
0.4
0.1
0.1
0.2
0.1
(0.1)
0.2
0.3
0.2
0.2
Asset lives and residual values are reviewed annually.
112
Pennon Group Plc Annual Report 2013 18. Financial instruments by category
The accounting policies for financial instruments have been applied to the line items:
Notes
22
19,22
23
25
28
23
26
22
19,22
23
25
28
23
26
Group
31 March 2013
Financial assets
Trade receivables
Other receivables
Derivative financial instruments
Cash and cash deposits
Total
Financial liabilities
Borrowings
Derivative financial instruments
Trade payables
Total
31 March 2012
Financial assets
Trade receivables
Other receivables
Derivative financial instruments
Cash and cash deposits
Total
Financial liabilities
Borrowings
Derivative financial instruments
Trade payables
Total
Company
31 March 2013
Financial assets
Amounts owed by subsidiaries
19,22
Derivative financial instruments
Cash and cash deposits
Total
Financial liabilities
Borrowings
Trade payables
Total
31 March 2012
Financial assets
23
25
28
26
Amounts owed by subsidiaries
19,22
Derivative financial instruments
Cash and cash deposits
Total
Financial liabilities
Borrowings
Trade payables
Total
23
25
28
26
Fair value
Amortised cost
Derivatives
used for fair
value hedging
£m
Derivatives
used for cash
flow hedging
£m
Derivatives
deemed held
for trading
£m
Loans and
receivables
£m
Trade receivables
and trade payables
(Restated note 40)
£m
Total
(Restated
note 40)
£m
–
–
31.0
–
31.0
–
(9.2)
–
(9.2)
–
–
22.7
–
22.7
–
(6.5)
–
(6.5)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
0.8
–
0.8
–
(41.1)
–
(41.1)
–
–
6.6
–
6.6
–
(42.1)
–
(42.1)
–
–
–
–
–
–
–
–
6.6
–
6.6
–
–
–
–
–
9.7
–
9.7
–
(2.9)
–
–
181.0
–
634.5
815.5
(2,643.2)
–
–
(2.9)
(2,643.2)
–
–
2.3
–
2.3
–
–
–
–
–
9.7
–
9.7
–
–
–
–
2.3
–
2.3
–
–
–
–
140.0
–
425.3
565.3
(2,529.9)
–
–
(2,529.9)
637.0
–
398.9
1,035.9
(1,049.8)
–
(1,049.8)
441.7
–
158.9
600.6
(891.2)
–
(891.2)
136.0
–
–
–
136.0
–
–
(86.9)
(86.9)
121.4
–
–
–
121.4
–
–
(87.2)
(87.2)
–
–
–
–
–
(0.4)
(0.4)
–
–
–
–
–
(0.1)
(0.1)
136.0
181.0
41.5
634.5
993.0
(2,643.2)
(53.2)
(86.9)
(2,783.3)
121.4
140.0
31.6
425.3
718.3
(2,529.9)
(48.6)
(87.2)
(2,665.7)
637.0
9.7
398.9
1,045.6
(1,049.8)
(0.4)
(1,050.2)
441.7
8.9
158.9
609.5
(891.2)
(0.1)
(891.3)
113
South West WaterViridorGroupGovernancePennon Group Plc Annual Report 2013Financial statementsGroup overview Financial statements
Notes to the financial statements
Continued
19. Other non-current assets
Non-current receivables
Amounts owed by subsidiary undertakings
Amounts owed by related parties (note 45)
Service concession arrangements
Other receivables
Non-current receivables were due:
Between 1 and 2 years
Over 2 years and less than 5 years
Over 5 years
The fair values of non-current receivables were:
Amounts owed by subsidiary undertakings
Amounts owed by related parties
Service concession arrangements
Other receivables
Group
Company
2013
£m
–
79.9
90.1
13.3
2012
£m
–
69.0
58.8
10.6
183.3
138.4
2013
£m
502.0
–
–
0.5
502.5
2012
£m
350.9
–
–
1.1
352.0
Group
Company
2013
£m
21.0
24.4
137.9
183.3
2012
£m
15.5
15.9
107.0
138.4
2013
£m
126.2
376.3
–
2012
£m
89.2
262.8
–
502.5
352.0
Group
Company
2013
£m
–
2012
£m
–
161.6
147.7
90.1
13.3
58.8
10.6
265.0
217.1
2013
£m
509.2
–
–
0.5
509.7
2012
£m
354.7
–
–
1.1
355.8
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% (2012 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 13.0% (2012 14.0%).
Other receivables include site development and pre-contract costs of £12.8 million (2012 £9.6 million).
114
Pennon Group Plc Annual Report 2013
20. Investments
Subsidiary undertakings
Company
At 1 April 2011
Additions
At 31 March 2012
Additions
At 31 March 2013
Joint ventures
Group
At 1 April 2011
Share of post-tax profit
Share of other comprehensive loss
At 31 March 2012
Share of post-tax profit
Share of other comprehensive profit
Dividends received
At 31 March 2013
£m
1,032.0
140.1
1,172.1
151.2
1,323.3
£m
1.5
4.0
(5.4)
0.1
5.8
2.7
(8.5)
0.1
The recoverable amount of investments is determined based on value-in-use calculations which are set out in note 15 of the financial statements.
Details of the Group’s principal subsidiary and joint venture undertakings are set out in note 41.
The Group’s share of the results, assets and liabilities in its principal joint ventures and associate, 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/(loss)
£m
2013
Lakeside Energy from
Waste Holdings Limited
Viridor Laing (Greater
Manchester) Holdings Limited
INEOS Runcorn (TPS)
Holdings Limited
2012
Lakeside Energy from
Waste Holdings Limited
Viridor Laing (Greater
Manchester) Holdings Limited
INEOS Runcorn (TPS)
Holdings Limited
73.8
19.5
(86.1)
(7.2)
175.2
39.5
(188.9)
(25.8)
95.0
22.3
(117.1)
(0.2)
78.2
13.7
(89.9)
171.3
15.9
(168.3)
76.0
8.2
(84.0)
(2.0)
(18.9)
(0.2)
25.2
63.6
1.3
23.2
46.8
–
5.8
2.7
–
–
3.7
0.3
–
–
–
(5.1)
(0.3)
–
115
South West WaterViridorGroupGovernancePennon Group Plc Annual Report 2013Financial statementsGroup overview
Financial statements
Notes to the financial statements
Continued
21. Inventories
Raw materials and consumables
22. Trade and other receivables – current
Trade receivables
Less: provision for impairment of receivables
Net trade receivables
Amounts owed by related parties (note 45)
Amounts owed by subsidiary undertakings
Other receivables
Prepayments and accrued income
Group
Company
2013
£m
10.5
2012
£m
9.0
2013
£m
–
2012
£m
–
Group
Company
2013
£m
2012
£m
2012
(Restated
note 40)
£m
188.5
(67.0)
121.5
12.2
–
13.0
91.8
2013
£m
212.4
(76.4)
136.0
11.0
–
8.0
112.7
267.7
–
–
–
–
135.0
1.1
0.2
238.5
136.3
–
–
–
–
90.8
0.7
0.2
91.7
2012
£m
37.3
13.0
97.4
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
2013
£m
51.3
13.8
115.6
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.
116
Pennon Group Plc Annual Report 2013
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
At 31 March
23. Derivative financial instruments
Derivatives used for cash flow hedging
Non-current assets
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
Current liabilities
Non-current liabilities
2013
£m
67.0
9.9
(9.5)
9.0
76.4
Group
Company
2013
£m
0.2
0.6
(18.0)
(23.1)
30.8
0.2
(2.3)
(6.9)
9.7
(1.4)
(1.5)
2012
£m
–
6.6
(15.3)
(26.8)
21.9
0.8
(1.3)
(5.2)
2.3
–
–
2013
£m
–
–
–
–
–
–
–
–
9.7
–
–
2012
£m
58.2
9.2
(7.1)
6.7
67.0
2012
£m
–
6.6
–
–
–
–
–
–
2.3
–
–
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 hedging relationships was nil (2012 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 2013 54% of Group net borrowings were at fixed rate (2012 56%).
At 31 March 2013 the Group had interest rate swaps to swap from floating to fixed rate and hedge financial liabilities with a notional value of £1,135.0
million and a weighted average maturity of 4.0 years (2012 £855.0 million, with 4.0 years). The weighted average interest rate of the swaps for their
nominal amount was 2.7% (2012 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. The weighted average interest rate of the swaps was 3.7%.
This cross-currency interest rate swap matured during the year.
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 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 £7.4 million (2012 £2.3 million) fair value movement in the derivative has been recognised in net finance costs in the income statement.
117
South West WaterViridorGroupGovernancePennon Group Plc Annual Report 2013Financial statementsGroup overview
Financial statements
Notes to the financial statements
Continued
23. Derivative financial instruments Continued
Valuation hierarchy
The amounts of financial instruments carried at fair value by valuation method were:
Level 2 inputs
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
Derivative deemed held for trading
Total liabilities
Group
Company
2013
£m
2012
£m
2013
£m
0.8
31.0
31.8
41.1
9.2
2.9
53.2
6.6
22.7
29.3
42.1
6.5
–
48.6
–
–
–
–
–
–
–
2012
£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
Group
Company
2013
£m
2012
£m
2013
£m
2012
£m
Derivative deemed held for trading
9.7
2.3
9.7
2.3
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).
24. Financial instruments at fair value through profit
Financial assets at fair value through profit
Current assets
Financial liabilities at fair value through profit
Non-current liabilities
Group
Company
2013
£m
2012
£m
2013
£m
2012
£m
1.2
0.5
(23.0)
(16.7)
–
–
–
–
Financial instruments 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.
118
Pennon Group Plc Annual Report 2013
25. Cash and cash deposits
Cash at bank and in hand
Short-term bank deposits
Other deposits
Total cash and cash deposits (note 39)
Group short-term deposits have an average maturity of one day.
Group other deposits have an average maturity of 134 days.
Group
Company
2013
£m
86.6
159.0
388.9
634.5
2012
£m
18.3
67.1
339.9
425.3
2013
£m
58.4
159.0
181.5
398.9
2012
£m
58.4
47.1
53.4
158.9
Group other deposits include restricted funds of £135.9 million (2012 £108.4 million) to settle long-term lease liabilities (note 28) and £7.7 million (2012 £14.2
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 28)
Less: deposits with a maturity of three months or more (restricted funds)
26. Trade and other payables – current
Trade payables
Amounts owed to subsidiary undertakings
Amounts owed to joint venture (note 45)
Other tax and social security
Accruals and other payables
2013
£m
634.5
(0.4)
634.1
(143.6)
490.5
2013
£m
86.9
–
0.2
71.3
118.8
277.2
Group
Company
2012
£m
425.3
(10.5)
414.8
(122.6)
292.2
2013
£m
398.9
–
398.9
(1.4)
397.5
2012
£m
158.9
–
158.9
(1.4)
157.5
Group
Company
2012
£m
87.2
–
7.0
41.2
107.1
242.5
2013
£m
0.4
0.1
–
0.3
6.9
7.7
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. Further disclosures have not been provided
in accordance with IAS 37 paragraph 92.
2012
£m
0.1
5.7
–
0.3
4.7
10.8
119
South West WaterViridorGroupGovernancePennon Group Plc Annual Report 2013Financial statementsGroup overview
Financial statements
Notes to the financial statements
Continued
27. Current tax liabilities/(recoverable)
Current tax liabilities/(recoverable)
28. Borrowings
Current
Bank overdrafts
Short-term loans
European Investment Bank
Amounts owed to subsidiary undertakings (note 45)
Obligations under finance leases
Total current borrowings (note 39)
Non-current
Bank and other loans
Private placements
Bond 2040
RPI index-linked bond
Convertible bond
European Investment Bank
Obligations under finance leases
Total non-current borrowings (note 39)
Total borrowings
Group
Company
2012
(Restated
note 40)
£m
60.3
2013
£m
67.0
2013
£m
18.9
2012
£m
(2.6)
Group
Company
2013
£m
2012
£m
2013
£m
2012
£m
0.4
75.9
21.1
–
97.4
41.2
138.6
410.0
162.3
132.5
247.3
120.4
210.4
1,282.9
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
–
75.9
–
281.2
357.1
–
–
253.2
–
281.2
534.4
–
357.1
534.4
410.0
162.3
–
–
139.3
99.9
–
–
120.4
117.6
–
–
692.7
356.8
1,221.7
1,243.5
–
2,504.6
2,204.4
692.7
2,643.2
2,529.9
1,049.8
–
356.8
891.2
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 3.1% (2012 3.2%).
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 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 and has been recognised in shareholders’ equity in retained earnings.
South West Water Finance Plc issued a £150 million bond in July 2010 maturing in 2040 with a cash coupon of 5.875%.
120
Pennon Group Plc Annual Report 2013
The fair values of non-current borrowings were:
Group
Bank and other loans
Private placements
Bond 2040
RPI index-linked bond
Convertible bond
European Investment Bank
2013
2012
Book value
£m
Fair value
£m
Book value
£m
Fair value
£m
410.0
162.3
132.5
247.3
120.4
210.4
410.0
156.5
175.1
166.7
145.9
189.5
1,282.9
1,243.7
139.3
99.9
132.3
240.3
117.6
231.5
960.9
139.3
92.3
157.5
159.5
161.7
205.8
916.1
Obligations under finance leases
1,221.7
1,053.3
1,243.5
1,088.1
Company
Bank and other loans
Private placements
Convertible bond
2,504.6
2,297.0
2,204.4
2,004.2
410.0
162.3
120.4
692.7
410.0
156.5
145.9
712.4
139.3
99.9
117.6
356.8
139.3
92.3
161.7
393.3
Where market values are not available, fair values of borrowings have been calculated by discounting expected future cash flows at prevailing interest rates.
The maturity of non-current borrowings was:
Between 1 and 2 years
Over 2 years and less than 5 years
Over 5 years
The weighted average maturity of non-current borrowings was 22 years (2012 23 years).
Finance lease liabilities – minimum lease payments were:
Within 1 year
Over 1 year and less than 5 years
Over 5 years
Less: future finance charges
Present value of finance lease liabilities
Group
Company
2013
£m
259.1
593.9
2012
£m
130.3
432.9
1,651.6
1,641.2
2,504.6
2,204.4
2013
£m
185.2
345.2
162.3
692.7
2012
£m
74.6
182.3
99.9
356.8
Group
Company
2013
£m
56.6
291.0
2,045.3
2,392.9
2012
£m
61.7
292.9
2,216.5
2,571.1
(1,130.0)
(1,286.9)
1,262.9
1,284.2
2013
£m
2012
£m
–
–
–
–
–
–
–
–
–
–
–
–
121
South West WaterViridorGroupGovernancePennon Group Plc Annual Report 2013Financial statementsGroup overview
Financial statements
Notes to the financial statements
Continued
28. Borrowings Continued
The maturity of finance lease liabilities was:
Within 1 year
Over 1 year and less than 5 years
Over 5 years
Group
Company
2013
£m
34.0
170.1
1,058.8
1,262.9
2012
£m
31.0
133.9
1,119.3
1,284.2
2013
£m
2012
£m
–
–
–
–
–
–
–
–
Included above are accrued finance charges arising on obligations under finance leases totalling £130.8 million (2012 £135.5 million), of which
£14.3 million (2012 £12.6 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.
The period for repayment of these leases includes an agreement to deposit with the lessor group amounts equal to the difference between
the original and revised payments due. The accumulated deposits, £52.3 million at 31 March 2013 (2012 £41.9 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.
The period for repayment of certain existing leases includes an agreement to deposit with the lessor group amounts equal to the difference between
the original and revised payments due. The accumulated deposits, £83.6 million at 31 March 2013 (2012 £66.5 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 were:
Floating rate:
Expiring within 1 year
Expiring after 1 year
Group
Company
2013
£m
190.0
325.0
515.0
2012
£m
247.5
411.0
658.5
2013
£m
25.0
220.0
245.0
2012
£m
127.5
141.0
268.5
In addition the Group had, at 31 March 2013, undrawn uncommitted short-term bank facilities of £25.0 million (2012 £50.0 million) available
to the Company or South West Water Limited.
29. Other non-current liabilities
Amounts owed to subsidiary undertakings
Other payables
Group
Company
2013
£m
–
77.9
77.9
2012
£m
–
76.9
76.9
2013
£m
8.7
–
8.7
2012
£m
8.7
–
8.7
Other payables include deferred income resulting from the adoption at fair value of assets transferred from customers in the water and sewerage segment.
122
Pennon Group Plc Annual Report 2013
30. 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 £2.8 million (2012 £2.7 million).
Defined benefit schemes
Assumptions
The principal actuarial assumptions at 31 March were:
Expected return on schemes’ assets
Rate of increase in pensionable pay
Rate of increase for current and future pensions
Rate used to discount schemes’ liabilities
Inflation
2013
%
2012
%
4.3
3.4
3.4
4.3
3.4
6.3
3.5
3.3
4.7
3.3
For 2013/14 IAS 19 (Revised) Employee Benefits will be implemented which requires the expected return on schemes’ assets to be the same as the rate
used to discount liabilities.
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 as:
Male
Female
The average life expectancy in years of a future pensioner retiring at age 62, 20 years after the balance sheet date, is projected as:
Male
Female
The sensitivities regarding the principal assumptions used to measure the schemes’ liabilities are:
2013
25.0
27.0
2013
25.9
28.3
2012
24.9
27.0
2012
25.8
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
Impact on
schemes’
liabilities
+/– 0.5%
+/– 1.3%
+/– 0.5%
+/– 6.6%
+/– 0.5%
+/– 9.2%
+/– 0.5%
+/– 8.3%
+/– 1 year
+/– 3.6%
123
South West WaterViridorGroupGovernancePennon Group Plc Annual Report 2013Financial statementsGroup overview Financial statements
Notes to the financial statements
Continued
30. 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
The actual return on schemes’ assets was a profit of £69.0 million (2012 £32.0 million).
The amounts recognised in the statement of comprehensive income were:
Actuarial losses 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
The schemes’ assets were:
Equities
Bonds
Diversified growth
Property
Other
Group
Company
2013
£m
(13.7)
(0.4)
(14.1)
32.3
(28.6)
3.7
(10.4)
2012
£m
(12.9)
(1.0)
(13.9)
32.7
(29.1)
3.6
(10.3)
2013
£m
(0.5)
–
(0.5)
2.2
(2.0)
0.2
(0.3)
Group
Company
2013
£m
(15.1)
2012
£m
(51.7)
2013
£m
(1.6)
Group
Company
2012
£m
517.2
(615.8)
(98.6)
2013
£m
39.4
(48.1)
(8.7)
2013
2012
Fund
%
54
32
7
6
1
Value
£m
269.9
168.8
–
35.4
43.1
2013
£m
580.4
(690.1)
(109.7)
Value
£m
315.9
185.1
38.6
36.2
4.6
2012
£m
(0.8)
–
(0.8)
2.2
(2.1)
0.1
(0.7)
2012
£m
(3.9)
2012
£m
35.4
(43.2)
(7.8)
Fund
%
52
33
–
7
8
580.4
100
517.2
100
Other assets at 31 March 2012 represented principally cash contributions received from the Group towards the year-end which were invested
during the subsequent financial year.
124
Pennon Group Plc Annual Report 2013
The Company’s share of the schemes’ assets at the balance sheet date were:
Equities
Property
Bonds
Other
2013
£m
20.4
2.7
13.1
3.2
39.4
2012
£m
17.8
2.7
11.8
3.1
35.4
The expected return on schemes’ assets for 2012/13 was 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 reflected long-term rates of return experienced
in the respective markets. Expected yields on fixed interest investments were based on gross redemption yields as at the balance sheet date.
In conjunction with its investment advisors, 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 in alternative asset classes which give the potential for diversification
(currently property and diversified growth).
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 increases in pensionable pay.
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 gains/(losses)
Members’ contributions
Benefits paid
Employer contributions
At 31 March
Group
Company
2012
£m
(85.8)
(10.3)
(51.7)
49.2
(98.6)
2013
£m
(7.8)
(0.3)
(1.6)
1.0
(8.7)
Group
Company
2012
£m
454.2
32.7
(0.7)
1.2
(19.4)
49.2
517.2
2013
£m
35.4
2.2
2.3
–
(1.5)
1.0
39.4
2013
£m
(98.6)
(10.4)
(15.1)
14.4
(109.7)
2013
£m
517.2
32.3
36.7
1.2
(21.4)
14.4
580.4
2012
£m
(6.8)
(0.7)
(4.0)
3.7
(7.8)
2012
£m
30.7
2.2
0.2
–
(1.4)
3.7
35.4
125
South West WaterViridorGroupGovernancePennon Group Plc Annual Report 2013Financial statementsGroup overview
Financial statements
Notes to the financial statements
Continued
30. Retirement benefit obligations Continued
Movements in the present value of schemes’ defined benefit obligations were:
At 1 April
Service cost
Interest cost
Actuarial losses
Members’ contributions
Benefits paid
At 31 March
Group
Company
2013
£m
2012
£m
(615.8)
(540.0)
(14.1)
(28.6)
(51.8)
(1.2)
21.4
(13.9)
(29.1)
(51.0)
(1.2)
19.4
2013
£m
(43.2)
(0.5)
(2.0)
(3.9)
–
1.5
2012
£m
(37.5)
(0.8)
(2.1)
(4.2)
–
1.4
(690.1)
(615.8)
(48.1)
(43.2)
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:
2013
£m
2012
£m
2011
£m
2010
£m
2009
£m
Group
Fair value of schemes’ assets
580.4
517.2
454.2
402.4
Present value of defined benefit obligations
Net liability recognised
Experience gains/(losses) on schemes’ assets
(690.1)
(109.7)
(615.8)
(98.6)
(540.0)
(85.8)
(510.3)
(107.9)
276.4
(342.4)
(66.0)
Amount (£m)
36.7
(0.7)
5.3
65.7
(101.6)
Percentage of schemes’ assets
6.3%
(0.1)%
1.2% 16.3%
(36.7)%
Experience gains/(losses) on defined benefit obligations
Amount (£m)
0.1
(0.4)
0.8
2.3
34.8
Percentage of defined benefit obligations
–
(1.0)%
0.1% 0.4%
10.2%
The cumulative actuarial losses recognised in the Group statement of comprehensive income at 31 March 2013 were £172.6 million (2012 £157.5 million).
126
Pennon Group Plc Annual Report 2013
Company
Fair value of schemes’ assets
39.4
35.4
30.7
37.3
29.6
2013
£m
2012
£m
2011
£m
2010
£m
2009
£m
Present value of defined benefit obligations
Net liability recognised
Experience gains/(losses) on schemes’ assets
(48.1)
(8.7)
(43.2)
(7.8)
(37.5)
(6.8)
(49.0)
(11.7)
(36.9)
(7.3)
Amount (£m)
2.3
0.2
(10.4)
6.3
(9.6)
Percentage of schemes’ assets
5.8% 0.5% (33.9)% 16.9%
(32.4)%
Experience (losses)/gains on defined benefit obligations
Amount (£m)
Percentage of defined benefit obligations
–
–
(0.4)
14.0
0.4
1.6
(1.0)% 37.3% 0.8% 4.3%
The cumulative actuarial losses recognised in the Company statement of comprehensive income at 31 March 2013 were £12.7 million
(2012 £11.1 million).
The last triennial actuarial valuation of the principal defined benefit scheme was at 31 March 2010. The Group paid no deficit recovery contributions
to the main scheme during the year (2012 £35 million) since all payments up to 31 March 2015 under the existing schedule of contributions have
been made. The Group monitors funding levels on an annual basis and expects to pay total contributions of around £14 million during the year ended
31 March 2014.
31. Deferred tax
Deferred tax is provided in full on temporary differences under the liability method using a tax rate of 23% (2012 24%).
Movements in deferred tax were:
Liabilities/(assets) at 1 April
(Credited)/charged to the income statement
Credited to equity
Arising on acquisitions
Liabilities/(assets) at 31 March
Group
Company
2012
(Restated
note 40)
£m
292.5
(2.8)
(15.9)
3.5
2013
£m
277.3
(32.8)
(1.5)
0.1
243.1
277.3
2013
£m
(4.6)
2.6
(0.3)
–
(2.3)
2012
£m
(4.2)
0.5
(0.9)
–
(4.6)
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 £10.6 million to recognise the changes in the rate of corporation tax enacted on 17 July 2012
to reduce the rate from 1 April 2013 from 24% to 23%. This credit includes a credit of £12.7 million recognised in the income statement and a debit
of £2.1 million recognised in the statement of comprehensive income. If the Government proposals contained in the Financial Bill 2013 to reduce the rate
of corporation tax by a further 2% for the financial year 2014 and a further 1% for the financial year 2015 had been enacted at the balance sheet date,
the impact would have been a further reduction of approximately £32 million.
127
South West WaterViridorGroupGovernancePennon Group Plc Annual Report 2013Financial statementsGroup overview
Financial statements
Notes to the financial statements
Continued
31. Deferred tax Continued
The movements in deferred tax assets and liabilities were:
Group
Deferred tax liabilities
At 1 April 2011
Credited to the income statement
Arising on acquisitions
At 31 March 2012
(Credited)/charged to the income statement
Arising on acquisitions
At 31 March 2013
Deferred tax assets
At 1 April 2011
Charged to the income statement
Credited to equity
Arising on acquisitions
At 31 March 2012
(Credited)/charged to the income statement
(Credited)/charged to equity
At 31 March 2013
Net liability:
At 31 March 2012
At 31 March 2013
128
Accelerated tax depreciation
Owned
assets
£m
305.6
(11.7)
–
293.9
(37.6)
0.1
256.4
Provisions
(Restated
note 40)
£m
(10.0)
2.1
–
(0.2)
(8.1)
(0.6)
–
(8.7)
Leased
assets
£m
16.4
(0.6)
–
15.8
–
–
15.8
Other
(Restated
note 40)
£m
Total
(Restated
note 40)
£m
20.4
(2.9)
3.7
21.2
2.0
–
23.2
342.4
(15.2)
3.7
330.9
(35.6)
0.1
295.4
Retirement
benefit
obligations
£m
Other
(Restated
note 40)
£m
Total
(Restated
note 40)
£m
(22.2)
8.8
(10.2)
–
(23.6)
0.4
(2.0)
(17.7)
1.5
(5.7)
–
(21.9)
3.0
0.5
(49.9)
12.4
(15.9)
(0.2)
(53.6)
2.8
(1.5)
(25.2)
(18.4)
(52.3)
277.3
243.1
Pennon Group Plc Annual Report 2013 Company
Deferred tax assets
At 1 April 2011
Charged/(credited) to the income statement
Credited to equity
At 31 March 2012
Charged to the income statement
Credited to equity
At 31 March 2013
Deferred tax credited/(charged) to equity during the year was:
Actuarial losses on defined benefit schemes
Cash flow hedges
Deferred tax on other comprehensive loss
Share-based payments (note 36)
Retirement
benefit
obligations
£m
(1.8)
0.8
(0.8)
(1.8)
0.1
(0.3)
(2.0)
Other
£m
(2.4)
(0.3)
(0.1)
(2.8)
2.5
–
(0.3)
Group
Company
2013
£m
2.0
–
2.0
(0.5)
1.5
2012
£m
10.2
5.8
16.0
(0.1)
15.9
2013
£m
–
0.3
0.3
–
0.3
Total
£m
(4.2)
0.5
(0.9)
(4.6)
2.6
(0.3)
(2.3)
2012
£m
0.8
0.1
0.9
–
0.9
129
South West WaterViridorGroupGovernancePennon Group Plc Annual Report 2013Financial statementsGroup overview
Financial statements
Notes to the financial statements
Continued
32. Provisions
Group
At 1 April 2012
Charged to the income statement
Exceptional charges (note 6)
Landfill restoration (note 17)
Utilised
At 31 March 2013
Environmental and
landfill restoration
(Restated
note 40)
£m
Other
provisions
£m
Total
(Restated
note 40)
£m
93.4
4.5
90.1
8.4
(12.2)
184.2
9.2
5.9
13.0
–
(1.0)
27.1
102.6
10.4
103.1
8.4
(13.2)
211.3
The amount charged to the income statement includes £3.8 million (2012 £3.7 million) charged to finance costs as the unwinding of discounts
in provisions.
The addition to landfill restoration provision of £8.4 million recognised in the year has been matched with an addition to property, plant
and equipment (note 17).
The analysis of provisions between current and non-current is:
Current
Non-current
2012
(Restated
note 40)
£m
26.3
76.3
102.6
2013
£m
40.6
170.7
211.3
Environmental and landfill restoration provisions are incurred during the operational life of each landfill site and for a considerable period thereafter.
The period of aftercare post-closure and the level of costs expected are uncertain and can vary significantly from site to site. Key factors are the type
of waste, the speed at which it decomposes, the volume of leachate requiring treatment and regulatory requirements specific to the site. Environmental
and landfill restoration provisions are expected to be substantially utilised throughout the operational life of a site and for landfill sites within 60 years of
closure (2012 30 years). The provisions have been established assuming current waste management technology based upon estimated costs at future
prices which have been discounted to present value.
Other provisions comprise principally of onerous contracts and restructuring provisions. Onerous contracts are provided for at the net present value
of the operating losses of the onerous contracts and are to be utilised over the remaining period of the contract to which they relate. The restructuring
provision relates principally to severance costs and will be utilised within one year.
130
Pennon Group Plc Annual Report 2013 33. Share capital
Allotted, called-up and fully paid
Group and Company
At 1 April 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
Shares issued under the Scrip Dividend Alternative
Shares re-issued under the Company’s Performance and Co-investment Plan
For consideration of £0.9 million, shares re-issued to the Pennon Employee Share Trust
For consideration of £0.4 million, shares re-issued under the Executive Share Option Scheme
For consideration of £3.3 million, shares re-issued under the Company’s Sharesave Scheme
Number of shares
Treasury
shares
Ordinary
shares
£m
4,309,567
356,970,298
147.0
–
2,941,306
1.2
(246,793)
(44,667)
(385,402)
246,793
44,667
385,402
–
–
–
3,632,705
360,588,466
148.2
–
2,542,187
1.0
(493,217)
(113,957)
(76,415)
(843,280)
493,217
113,957
76,415
843,280
–
–
–
–
At 31 March 2013 Ordinary shares of 40.7p each
2,105,836
364,657,522
149.2
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:
5 July 2005
4 July 2006
3 July 2007
8 July 2008
6 July 2009
28 June 2010
29 June 2011
29 June 2012
Date
granted and
subscription
price fully
paid
270p
358p
522p
517p
386p
431p
536p
588p
Period
when
options
normally
exercisable
2008 – 2012
2009 – 2013
2010 – 2014
2011 – 2015
2012 – 2016
2013 – 2017
2014 – 2018
2015 – 2017
Thousands of shares in
respect of which options
outstanding at 31 March
2013
2012
–
38
11
75
406
563
502
746
30
39
88
79
1,184
608
580
–
2,341
2,608
131
South West WaterViridorGroupGovernancePennon Group Plc Annual Report 2013Financial statementsGroup overview
Financial statements
Notes to the financial statements
Continued
33. 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
2013
2012
Number of
Ordinary
shares
(thousands)
Weighted
average
exercise price
per share (p)
Number of
Ordinary
shares
(thousands)
Weighted
average
exercise price
per share (p)
2,608
779
(157)
(843)
(46)
2,341
437
588
494
394
496
498
2,564
593
(123)
(385)
(41)
2,608
409
536
438
405
439
437
The weighted average price of the Company’s shares at the date of exercise of Sharesave options during the year was 731p (2012 656p).
The options outstanding at 31 March 2013 had a weighted average exercise price of 498p (2012 437p) and a weighted average remaining
contractual life of 2.1 years (2012 3.0 years).
The aggregate fair value of Sharesave options granted during the year was £0.8 million (2012 £0.9 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
2013
735p
588p
2012
670p
536p
19.0%
27.4%
3.4 years
3.9 years
0.4%
4.0%
1.4%
4.3%
Expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous two years.
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:
2013
2012
Number of
Ordinary shares
(thousands)
Weighted average
exercise price per
share (p)
Number of
Ordinary shares
(thousands)
Weighted average
exercise price per
share (p)
1,407
424
(493)
(16)
1,322
573
768
486
486
669
1,559
454
(247)
(359)
1,407
550
698
637
586
573
At 1 April
Granted
Vested
Lapsed
At 31 March
132
Pennon Group Plc Annual Report 2013 The awards outstanding at 31 March 2013 had a weighted exercise price of 669p (2012 573p) and a weighted average remaining contractual life
of 1.2 years (2012 1.3 years).
The aggregate fair value of awards granted during the year was £1.9 million (2012 £2.0 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
2013
768p
19.0%
0.4%
2012
698p
27.4%
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:
2013
2012
Number of
Ordinary shares
(thousands)
Weighted average
exercise price per
share (p)
Number of
Ordinary shares
(thousands)
Weighted average
exercise price per
share (p)
At 1 April
Granted
Vested
Lapsed
At 31 March
427
120
(93)
(25)
429
602
754
473
473
680
459
175
(202)
(5)
427
The awards outstanding at 31 March 2013 had a weighted average exercise price of 680p (2012 602p) and a weighted average remaining contractual
life of 1.3 years (2012 1.5 years). The Company’s share price at the date of the awards ranged from 572p to 754p.
The aggregate fair value of awards granted during the year was £0.9 million (2012 £1.2 million), determined from market value. No option pricing
methodology is applied since dividends paid 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.
34. Share premium account
Group and Company
At 1 April 2011
Adjustment for shares issued under the Scrip Dividend Alternative
At 31 March 2012
Adjustment for shares issued under the Scrip Dividend Alternative
At 31 March 2013
557
725
608
522
602
£m
9.2
(1.2)
8.0
(1.0)
7.0
133
South West WaterViridorGroupGovernancePennon Group Plc Annual Report 2013Financial statementsGroup overview Financial statements
Notes to the financial statements
Continued
35. 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 2011
At 31 March 2012
At 31 March 2013
36. Retained earnings and other reserves
Group
At 1 April 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
Profit for the year
Other comprehensive loss for the year
Transfer from hedging reserve to income statement
Transfer from hedging reserve to property, plant and equipment
Dividends paid relating to 2012
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 2013
£m
144.2
144.2
144.2
Total
£m
479.1
172.4
(65.8)
(88.2)
19.1
3.6
(0.1)
–
(0.3)
1.9
521.7
26.9
(14.3)
2.9
3.0
(96.0)
18.1
3.6
(0.5)
–
(0.9)
4.6
Own
shares
£m
Hedging
reserve
£m
Retained
earnings
£m
(2.2)
(13.0)
–
(18.7)
–
–
–
–
–
–
–
(31.7)
–
(3.9)
2.9
3.0
–
–
–
–
–
–
–
494.3
172.4
(47.1)
(88.2)
19.1
3.6
(0.1)
(0.7)
–
1.9
555.2
26.9
(10.4)
–
–
(96.0)
18.1
3.6
(0.5)
(0.4)
–
4.6
–
–
–
–
–
–
0.7
(0.3)
–
(1.8)
–
–
–
–
–
–
–
–
0.4
(0.9)
–
(2.3)
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 457,000 Ordinary shares (2012 433,000 Ordinary shares) held by the trust at 31 March 2013 was £2.8 million (2012 £3.1 million).
134
(29.7)
501.1
469.1
Pennon Group Plc Annual Report 2013 Hedging
reserve
£m
Retained
earnings
£m
Company
At 1 April 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
Profit for the year
Other comprehensive loss for the year
Dividends paid relating to 2012
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 2013
37. Perpetual capital securities
Group and Company
At 1 April 2011
At 31 March 2012
Issue of £300m 6.75% perpetual subordinated capital securities
At 31 March 2013
–
–
(0.3)
–
–
–
–
(0.3)
–
0.3
–
–
–
–
–
On 8 March 2013 the Company issued £300m perpetual capital securities. They have no fixed redemption date but the Company may,
at its sole discretion, redeem all, but not part, of these securities at their principal amount on 8 March 2018 or any subsequent periodic return
payment date after this.
The Company has the option to defer periodic returns on any relevant payment date, as long as a dividend on the Ordinary Shares has not been paid
or declared in the previous 12 months. Deferred periodic returns shall be satisfied only on redemption or payment of dividend on Ordinary Shares,
all of which only occur at the sole discretion of the Company.
Costs directly associated with the issue of £5.2 million are set off against the value of the issuance.
525.8
116.3
(3.3)
(88.2)
19.1
0.8
1.9
572.4
185.7
(1.4)
(96.0)
18.1
0.8
4.6
684.2
684.2
Total
£m
525.8
116.3
(3.6)
(88.2)
19.1
0.8
1.9
572.1
185.7
(1.1)
(96.0)
18.1
0.8
4.6
£m
–
–
294.8
294.8
135
South West WaterViridorGroupGovernancePennon Group Plc Annual Report 2013Financial statementsGroup overview Financial statements
Notes to the financial statements
Continued
38. Analysis of cash flows given in the statement of cash flows
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
Exceptional impairment of property, plant and equipment
Exceptional provision charge
Other non cash exceptional charge
Share of post-tax profit from joint ventures
Finance income
Finance costs
Dividends receivable
Taxation (credit)/charge
Changes in working capital (excluding the effect of acquisition of subsidiaries):
Increase in inventories
(Increase)/decrease in trade and other receivables
Increase in service concession arrangements receivable
Increase/(decrease) in trade and other payables
Decrease in retirement benefit obligations from contributions
Decrease in provisions
Group
Company
2013
£m
2012
£m
2013
£m
2012
£m
26.9
172.4
185.7
116.3
3.6
(1.8)
145.5
3.7
69.8
111.5
7.6
(5.8)
(143.0)
184.4
–
(5.1)
(1.5)
(27.7)
(31.3)
11.8
(0.3)
(7.2)
3.6
(2.8)
145.6
1.4
–
–
–
(4.0)
(119.3)
191.6
–
28.1
(1.7)
(9.4)
(17.9)
(13.2)
(35.3)
(14.4)
0.8
–
0.1
–
–
–
–
–
0.8
–
0.1
–
–
–
–
–
(103.3)
94.0
(59.7)
60.6
(177.6)
(117.5)
1.1
–
(195.1)
–
(10.3)
(0.6)
–
2.1
–
25.0
–
(5.7)
(3.1)
–
Cash generated/(outflow) from operations
341.1
324.7
(205.2)
18.9
Reconciliation of profit for the year to cash generated from operations:
Total interest paid
Interest paid in operating activities
Interest paid in investing activities (purchase of property, plant and equipment)
Total interest paid
Group
Company
2013
£m
75.8
13.6
89.4
2012
£m
74.5
3.0
77.5
2013
£m
23.4
–
23.4
2012
£m
22.7
–
22.7
136
Pennon Group Plc Annual Report 2013
39. 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
2013
£m
634.5
(0.4)
(97.0)
(41.2)
–
2012
£m
425.3
(10.5)
(274.3)
(40.7)
–
(138.6)
(325.5)
(1,072.5)
(210.4)
(729.4)
(231.5)
(1,221.7)
(1,243.5)
(2,504.6)
(2,204.4)
(2,008.7)
(2,104.6)
2013
£m
398.9
2012
£m
158.9
–
–
(75.9)
(253.2)
–
(281.2)
(357.1)
–
(281.2)
(534.4)
(692.7)
(356.8)
–
–
(692.7)
(650.9)
–
–
(356.8)
(732.3)
137
South West WaterViridorGroupGovernancePennon Group Plc Annual Report 2013Financial statementsGroup overview
Financial statements
Notes to the financial statements
Continued
40. Acquisitions
On 5 July 2012 the entire issued share capital of JWT Holdings Limited (renamed Viridor Waste (Atherton) Holdings Limited) was acquired
by Viridor Waste Management Limited for a cash consideration of £6.6 million. The acquisition has been accounted for using the acquisition method.
Provisional goodwill arising of £4.8 million has been capitalised.
On 8 October 2012 Viridor Waste Management Limited acquired the entire issued share capital of Pulp Friction Limited (renamed Viridor (Erith) Limited)
and the trade and assets of SBS Paper LLP, a related business, for a cash consideration of £8.5 million. The acquisition has been accounted for using
the acquisition method. Provisional goodwill arising of £7.7 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.
Fair values on acquisition
Property, plant and equipment
Receivables
Cash and cash deposits
Payables
Taxation – current
Taxation – deferred
Leases
Net assets acquired
Goodwill
Total consideration
Satisfied by:
Cash
Cash and cash deposits acquired
Net cash outflow arising on acquisition
Revenue for the period since acquisition to 31 March 2013
Loss before tax for the period since acquisition to 31 March 2013
Directly attributable costs included in other operating expenses
JWT
Holdings
£m
Pulp
Friction
£m
2.4
2.1
0.1
(1.1)
(0.5)
(0.1)
(1.1)
1.8
4.8
6.6
6.6
(0.1)
6.5
2.5
(1.0)
0.2
1.0
1.2
0.2
(1.6)
–
–
(0.4)
0.4
3.9
4.3
4.3
(0.2)
4.1
5.2
(0.4)
0.4
SBS
Paper LLP
£m
0.4
–
–
–
–
–
–
0.4
3.8
4.2
4.2
–
4.2
–
–
0.1
Total
£m
3.8
3.3
0.3
(2.7)
(0.5)
(0.1)
(1.5)
2.6
12.5
15.1
15.1
(0.3)
14.8
7.7
(1.4)
0.7
If all the acquisitions had occurred on 1 April 2012 Group revenues for the year would have been £1,207.7 million and profit before tax and exceptional
items for the year would have been £197.4 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 2012 the accounting for the following acquisitions was provisional:
• JWS Churngold Limited (renamed Viridor (Lancashire) Limited)
• Veolia’s trade waste collection interests in Cornwall and North Devon
• Community Waste Holding Limited (renamed Viridor (Community Recycling MKH) Limited)
Completion of the accounting for the acquisitions has resulted in a decrease to goodwill of £0.6 million, an increase to other intangible assets of £4.5
million, an increase in property, plant and equipment of £0.8 million, an increase in trade and other receivables of £0.1 million, an increase in current tax
payable of £0.6 million, an increase in deferred tax of £3.5 million and an increase of £0.7 million in provisions.
138
Pennon Group Plc Annual Report 2013 41. Principal subsidiary, joint venture and associate undertakings at 31 March 2013
Country of incorporation, registration
and principal operations
Water and sewerage
South West Water Limited1
South West Water Finance Plc
Source Contact Management Limited
Source Collections Limited
Waste management
Viridor Limited1
Viridor Waste Limited
Viridor Waste Exeter Limited
Viridor Waste Suffolk Limited
Viridor Waste (West Sussex) Limited
Viridor Waste Management Limited
Viridor EnviroScot Limited
Viridor Resource Management Limited
Viridor Waste Kent Limited
Viridor Oxfordshire Limited
Viridor EfW (Runcorn) Limited
Viridor Waste (Landfill Restoration) Limited
Viridor Waste (Atherton) Holdings Limited
Viridor Waste (Atherton) Limited
Viridor Waste (Somerset) Limited
Viridor (Erith) Limited
Viridor Waste (Thames) Limited
Viridor Waste (Greater Manchester) Limited
Viridor Parkwood Holdings Limited2
Viridor Polymer Recycling Limited
Viridor Trident Park Limited
Viridor (Glasgow) Limited
Viridor (Lancashire) Limited
Other
Peninsula Insurance Limited 1, 3
1 Indicates the shares are held directly by Pennon Group Plc, the Company
2 The company carries out its operations in England and is resident in the UK for tax purposes
3 Captive insurance company established with the specific objective of financing risks emanating from within the Group
The subsidiary undertakings are wholly-owned and all shares in issue are Ordinary shares. All companies above are consolidated
in the Group financial statements.
England
England
England
England
England
England
England
England
England
England
Scotland
England
England
England
England
England
England
England
England
England
England
England
British Virgin Islands
England
England
Scotland
England
Guernsey
139
South West WaterViridorGroupGovernancePennon Group Plc Annual Report 2013Financial statementsGroup overview
Financial statements
Notes to the financial statements
Continued
41. Principal subsidiary, joint venture and associate undertakings at 31 March 2013 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
Joint ventures
Lakeside Energy from Waste Holdings Limited
1,000,000 A Ordinary shares
1,000,000 B Ordinary shares
–
100%
Lakeside Energy from Waste Limited
Waste management
Shares in Lakeside Energy from Waste Holdings Limited are held by Viridor Waste Management Limited.
Viridor Laing (Greater Manchester) Holdings Limited
2 Ordinary shares
50%
Viridor Laing (Greater Manchester) Limited
Waste management
Shares in Viridor Laing (Greater Manchester) Holdings Limited are held by Viridor Waste Management Limited.
Associates
INEOS Runcorn (TPS) Holdings Limited
1,000 A Ordinary shares
186,750 B1 Ordinary shares
62,250 B2 Ordinary shares
20%
50%
–
INEOS Runcorn (TPS) Limited
Waste management
Shares in INEOS Runcorn (TPS) Holdings Limited are held by Viridor Waste Management Limited.
The Group’s economic interest in INEOS Runcorn (TPS) Holdings Limited is 37.5%, as returns from the investment are based on holdings
of B1 and B2 Ordinary shares.
42. Operating lease commitments
The future aggregate minimum lease payments under non-cancellable operating
leases are:
Within 1 year
Over 1 year and less than 5 years
Over 5 years
Group
Company
2013
£m
9.4
28.3
77.8
2012
£m
8.8
26.1
75.5
115.5
110.4
2013
£m
2012
£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.
140
Pennon Group Plc Annual Report 2013
43. Contingent liabilities
Guarantees:
Borrowing facilities of subsidiary undertakings
Performance bonds
Other
Group
Company
2013
£m
2012
£m
2013
£m
2012
£m
–
116.2
6.9
123.1
–
117.4
6.9
124.3
297.1
116.2
6.9
420.2
359.9
117.4
6.9
484.2
Guarantees in respect of performance bonds are entered into in the normal course of business. No liability is expected to arise in respect
of the guarantees.
Other 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.
In connection with the application of the audit exemption under Section 479C of the Companies Act 2006 the Company has
guaranteed all the outstanding liabilities as at 31 March 2013 of certain of its subsidiaries: Pennon Power Limited, Exe Continental
and Viridor Waste 2 Limited since these companies qualify for the exemption.
44. Capital commitments
Contracted but not provided
45. Related party transactions
Group
Company
2013
£m
391.2
2012
£m
545.8
2013
£m
–
2012
£m
–
During the year Group companies entered into the following transactions with joint ventures and associate related parties which 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
Dividends received
Lakeside Energy from Waste Holdings Limited
2013
£m
2012
£m
83.0
80.4
10.9
10.7
8.5
–
141
South West WaterViridorGroupGovernancePennon Group Plc Annual Report 2013Financial statementsGroup overview
Financial statements
Notes to the financial statements
Continued
45. Related party transactions Continued
Year-end balances
Receivables due from related parties
Viridor Laing (Greater Manchester) Holdings Limited (loan balance)
Lakeside Energy from Waste Holdings Limited (loan balance)
INEOS Runcorn (TPS) Holdings 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)
The £80.1 million (2012 £72.6 million) receivable relates to loans to related parties included within receivables and due for repayment in instalments
between 2013 and 2033. Interest is charged at an average of 13.0% (2012 14.0%).
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
Dividends received
2013
£m
9.3
0.5
25.2
177.6
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.
Year-end balances
Receivables due from subsidiary undertakings
Loans
Trading balances
2013
£m
628.2
8.8
Interest on £128.7 million of the loans has been charged at a fixed rate of 4.5% and on £199.4 million at a fixed rate of 6.0% (2012 £204.3 million,
4.5% and £29.6 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 2014
to 2018. During the year there were no provisions (2012 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.
2013
£m
281.2
14.4
142
2013
£m
2012
£m
45.4
9.7
25.0
80.1
9.6
1.2
10.8
–
0.2
40.3
10.0
22.3
72.6
7.6
1.0
8.6
7.0
–
2012
£m
8.4
0.5
19.6
117.5
2012
£m
439.8
1.9
2012
£m
281.2
14.4
Pennon Group Plc Annual Report 2013 Five-year financial summary
Income statement
Revenue
Operating profit before exceptional items
Net finance costs before exceptional items
Share of profit in joint ventures
Profit before tax and exceptional items
Net exceptional items before tax
Taxation credit/(charge)
Profit for the year
Dividends proposed
Earnings per share (basic):
From continuing operations
Earnings per share
Deferred tax before exceptional items
Exceptional items (net of tax)
Earnings per share before exceptional items and 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
246.3
(53.9)
5.8
198.2
(176.4)
5.1
26.9
103.8
7.4p
(3.4)p
38.6p
42.6p
28.46p
2013
£m
14.8
410.1
2013
£m
2012
£m
2011
£m
2010
£m
1,201.1
1,233.1
1,159.2
1,068.9
268.8
(72.3)
4.0
200.5
–
(28.1)
172.4
96.0
260.9
(76.7)
4.3
188.5
–
(16.9)
171.6
88.2
266.3
(81.6)
1.1
185.8
–
(44.3)
141.5
79.6
2009
£m
958.2
250.8
(92.2)
0.8
159.4
–
(69.6)
89.8
73.4
48.1p
(0.8)p
–
48.4p
(6.1)p
–
40.4p
0.4p
–
25.8p
11.1p
–
47.3p
42.3p
40.8p
36.9p
26.52p
24.65p
22.55p
21.00p
2012
£m
29.2
257.4
2011
£m
25.1
199.0
2010
£m
9.3
192.2
2009
£m
3.4
231.8
3,845.5
3,592.5
3,347.6
3,189.4
3,036.3
379.3
11.8
335.7
162.1
40.5
(3,160.5)
(2,782.2)
(2,903.8)
(2,688.6)
(2,476.2)
1,064.3
822.1
779.5
662.9
600.6
1,354
3,180
50
4,584
1,335
3,148
46
4,529
1,196
3,012
44
4,252
1,191
2,853
43
4,087
1,227
2,154
41
3,422
143
South West WaterViridorGroupGovernancePennon Group Plc Annual Report 2013Financial statementsGroup overview Shareholder information
Financial Calendar
Financial year-end
Twenty-fourth Annual General Meeting
Ex-dividend date for 2013 Final dividend
Record date for 2013 Final dividend
2013 Final dividend payable
2013/14 Half yearly financial report announcement
2014 Interim dividend payable
2014 Preliminary results announcement
Twenty-fifth Annual General Meeting
2014 Final dividend payable
Scrip Dividend Alternative timetable*
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
31 March
1 August 2013
7 August 2013*
9 August 2013*
4 October 2013*
November 2013
April 2014
May 2014
July 2014
October 2014
7 August 2013
9 August 2013
23 August 2013
16 September 2013
3 October 2013
4 October 2013
4 October 2013
*These dates are subject to obtaining shareholder approval at the 2013 Annual General Meeting to the payment
of a final dividend for the year ended 31 March 2013.
Shareholder Analysis at 31 March 2013
Range of shares held
Number of shareholders
% of total shareholders
% of Ordinary shares
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
2,465
9,596
9,472
1,257
74
254
23,118
19,380
209
12
3,517
23,118
10.66
41.51
40.97
5.44
0.32
1.10
100.00
83.83
0.91
0.05
15.21
100.00
0.02
1.40
5.54
3.94
1.50
87.60
100.00
8.09
2.43
0.02
89.46
100.00
Major Shareholdings
The position on 31 March 2013 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 was as follows:
Ameriprise Financial Inc
Pictet Asset Management SA
AXA Investment Managers SA
Invesco Ltd
Legal & General Group Plc
Norges Bank
9.68%
7.02%
4.96%
4.72%
3.69%
3.06%
No changes to the above interests in the issued share capital of the Company were disclosed to the Company between
31 March 2013 and 25 June 2013 (being a date not more than one month prior to the date of the Company’s Notice of Annual
General Meeting) except for the following:
i) on 17 May 2013 Norges Bank notified the Company that on 16 May 2013 its interests in the issued share capital
of the Company had fallen below the 3% threshold;
ii) on 22 May 2013 RARE Infrastructure Limited notified the Company that as at 2 May 2013 it held 18,325,407 Ordinary
shares in the Company representing 5.06% of the issued share capital of the Company at that date.
144
Pennon Group Plc Annual Report 2013
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 2013 Annual General
Meeting to the payment of a final dividend for the
year ended 31 March 2013, full details of the Scrip
Dividend Alternative, including how to join, will
be sent out to shareholders on 23 August 2013.
The full timetable for offering the Scrip Dividend
Alternative is given on page 144.
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 www.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 www.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 email
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 www.capitashareportal.com. Shareholders who
register an email preference will not receive
a paper proxy form. Instead they will receive an
email 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 www.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 RNS 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 www.pennon-group.co.uk
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 www.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 www.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.
145
South West WaterViridorGroupGovernancePennon Group Plc Annual Report 2013Financial statementsGroup overview
146
Pennon Group Plc Annual Report 2013 Mix
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