Annual Report
and Accounts
2014
To view our online report visit:
www.pennonannualreport.co.uk/2014
Contents
Strategic report
Strategic overview
Group highlights and key performance indicators
Group businesses
Chairman’s statement
Business model
South West Water
At a glance
Strategic review
Viridor
At a glance
Strategic review
Group
Financial review
Principal risks and uncertainties
Sustainability report
Governance and remuneration
Chairman’s letter to shareholders
Board of Directors
Directors’ report
The Board and its governance framework
The Board and its committees
Corporate governance and internal control
Directors’ remuneration report
Financial statements and shareholder information
Independent auditors’ report
Financial statements
Five year financial summary
Shareholder information
2
4
6
8
10
12
18
20
24
30
36
48
52
54
56
57
59
70
97
102
159
160
Who we are
At the top end of the FTSE 250
Pennon Group Plc is one of the
largest environmental and resource
management groups in the UK.
We own South West Water Limited
and Viridor Limited. The Group has
assets of around £5.0 billion and a
workforce of around 4,500 people.
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.
1
www.pennonannualreport.co.uk/2014 Group highlights
Pennon Group
£1.3bn
cash and
committed facilities
£434m
invested
in key
infrastructure
2
2
Pennon Group Plc Annual Report 2014
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.
Financial highlights
Revenue
£1,321.2m
+10.0%
Profit before tax
(before exceptional net charges.
Statutory basis £158.7m)
£207.3m
+9.1%*
Assets
Dividend
£5.0bn
* Comparatives restated for IAS 19 (Revised)
+6.5%
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.
Highlights of the year
• Continuing delivery of shareholder value – 6.5% dividend
increase and 5.7% increase in earnings per share (before
exceptional items and deferred tax)
• Substantial progress in delivery of major capital programmes
• Strong liquidity and funding position – £1.3 billion cash and
committed facilities at 31 March 2014 (of which £173 million
were restricted funds) including £0.6 billion of new and
refinanced facilities sourced during the year
• Group businesses well positioned for the future.
Strategy in action
• 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
• £434 million invested in key infrastructure supporting the
development of the UK economy
• Group well funded with efficient long-term financing.
Strategic report - Strategic overviewPennon Group Plc Annual Report 2014 Key performance indicators*
Profit before tax
before exceptional net charges (£m)
2009/10
2010/11
2011/12
2012/13(1)
2013/14
185.8
188.5
200.5
190.0
+9.1%
207.3
Earnings per share
before exceptional net charges and deferred tax (pence)
40.8
42.3
47.3
40.3
42.6
2009/10
2010/11
2011/12
2012/13(1)
2013/14
2009/10
2010/11
2011/12
2012/13
2013/14
Creating value for
+5.7%
our shareholders by
continued development
Dividend per share
(pence)
22.55
24.65
26.52
28.46
+6.5% 30.31
Interest rate on average net debt
(%)
2009/10
2010/11
2011/12
2012/13
2013/14
4.3
4.4
4.2
4.0
3.8
Creating value
for our shareholders by
continued development
(1) Restated for IAS 19 (Revised)
* These are key performance indicators we use to measure the
performance of our businesses as described in our business model on
page 8.
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www.pennonannualreport.co.uk/2014 Group businesses
South West Water
The water and sewerage services provider
for Devon, Cornwall and parts of Dorset and
Somerset – delivering strong operational and
financial performance.
Financial highlights
Revenue
£520.0m
+4.3%
Profit before tax
£162.5m
+10.8%(1)(2)
Strategy
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
efficient way possible while minimising its
environmental impact.
Highlights of the year
• Ongoing outperformance of efficiency targets
• Improved customer satisfaction levels
• Best bathing water quality for seven years
• 17th year without water restrictions
• Outstanding drinking water quality
• Leakage control on target
• Business plan to 2020 assessed as
'enhanced'.
Strategy in action
• Pure Water – providing a reliable, clean and
safe supply of drinking water
• Pure Service – delivering responsive and
cost-effective customer services that meet
customers’ needs
• Pure Environment – protecting and enhancing
the environment through sustainable actions
and initiatives
• Financial Management – making resilient
business decisions while outperforming the
regulatory contract.
4
KPIs
Operating profit (£m)
2009/10
2010/11
2011/12
2012/13(3)
2013/14
Chris Loughlin
Chief Executive, South West Water
193.5
189.8
204.7
214.8
227.0
+5.7%
Regulatory capital value as at 31 March (£m)
2010
2011
2012
2013
2014
+1.5%
2,555
2,703
2,827
2,916
2,916
2,959
Drinking water quality Mean zonal compliance (%)
2009
99.98
2010
99.97
2011
99.99
2012
99.97
2013
99.98
Service Incentive Mechanism (SIM) (%)
2011/12
2012/13
2013/14
+4.8%
66.9
70.5
73.9
Bathing water compliance (%)
2011
2011
2012
2012
2013
2013
EU mandatory standard
Guideline standard
98.6
95.1
91.1
60.3
99.3
91.0
Population equivalent sanitary compliance (%)
99.70
2009
99.55
2010
99.57
2011
99.98
2012
2013
94.38
RIDDOR incidence rate (per 100,000 employees)
1,334
2009
2,008
2010
1,628
2011
2012
2013
565(4)
243(4)
Actual number of incidents was 3
(1) Before prior year exceptional net income
(2) Comparatives restated for IAS 19 (Revised)
(3) Restated for IAS 19 (Revised)
(4) Change in RIDDOR reporting criteria (see page 42 for details).
Strategic report - Strategic overview Pennon Group Plc Annual Report 2014 Viridor
One of the leading UK recycling, renewable
energy and waste management businesses
– achieving further significant progress in its
long-term energy from waste strategy.
Financial highlights
Revenue
£802.0m
+14.0%
Profit before tax
(before exceptional net charges.
Statutory basis loss £21.0 million)
£27.6m
-19.5%(1)
Strategy
Viridor’s stated company purpose is to give
resources new life. Its strategy remains to focus
on transforming waste – into high quality
recyclables, raw materials and energy.
Highlights of the year
• Significant developments in long-term energy
from waste (EfW) business
• Substantial recovery in recycling margins but
ongoing trend decline in landfill – aggressive
action to reduce costs
• Exceptional net charges – total £40 million net
of tax
• Four more key long-term Public Private
Partnership PPP/EfW/contract developments.
Strategy in action
• Strong progress in long-term PPP/EfW
strategy
• Landfill Energy – focus on reducing landfill
operations and maximising energy production.
(1) Comparatives restated for IAS 19 (Revised)
(2) Restated for IAS 19 (Revised)
(3) Before exceptional net charges
Ian McAulay
Chief Executive, Viridor
KPIs
Operating profit plus joint ventures(3) (£m)
2009/10
2010/11
2011/12
2012/13(2)
2013/14
-4.6%
77.0
82.6
75.2
45.9
43.6
Recycling volumes traded (million tonnes)
2009/10
2010/11
2011/12
2012/13
2013/14
-3%
Total renewable energy generation (GWh)
2009/10
2010/11
2011/12
2012/13
2013/14
-5.1%
Renewable energy generation capacity
as at 31 March (MW)
2010
2011
2012
2013
2014
Total waste inputs (million tonnes)
2010/11
2011/12
2012/13
2013/14
1.4
1.7
1.8
1.9
1.8
612
752
760
820
778
128
136
136
137
136
7.6
7.3
7.2(4)
7.4
Share of profit from recovering value in waste (%)
45
2009/10
46
2010/11
49
2011/12
35
2012/13
2013/14
54
RIDDOR incidence rate (per 100,000 employees)
2,445
2009
2,165
2010
1,238
2011
1,429(5)
2012
2013
1,197(5)
Actual number of incidents was 37
(4) Previous years restated, excluding waste not treated at
Viridor facilities
(5) Change in RIDDOR reporting criteria (see page 42 for details).
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5
www.pennonannualreport.co.uk/2014
Chairman’s statement
This has been a year of significant achievement
for the Group.
Dear Shareholder
Business performance
Group revenue was up by 10% to £1,321 million and
profit before tax(1) increased by 9.1%(2) to £207
million. We continue to maintain substantial cash
resources and facilities to fund our capital
programme and we ended the year with a record
level of £1.3 billion (including £173 million of
restricted funds).
South West Water
Despite another year of extreme weather events – a
hot dry summer followed by storms over the winter
– South West Water continued to deliver good
operational performance against the K5 (2010-2015)
regulatory contract. The company made further
improvements to customer service and continued its
delivery of efficiencies, all of which were reflected in
strong financial results.
In December 2013 the company submitted its well
evidenced and well-supported business plan, which
met or exceeded all of Ofwat’s assessment areas.
As a consequence South West Water was the only
water and sewerage company to have its business
plan assessed as ‘enhanced’, resulting in the receipt
of an early Draft Determination on 30 April 2014.
This allows the accelerated delivery of key projects.
With the company’s track record of efficiency and
outperformance, South West Water is well placed to
deliver its business plan in K6 (2015-2020) and will
have an opportunity to outperform the assumed
returns on equity.
Viridor
Financial performance before exceptional items at
Viridor has been in line with management
expectations. Notwithstanding the difficult trading
conditions, Viridor’s PBIT plus joint ventures is
broadly similar to last year.
Recycling activities are focused on the production of
high quality recyclate materials and management of
the cost base to improve margins. The focus in the
landfill energy business is to maximise the value of
landfill gas generation across all Viridor’s landfill sites,
while managing the expected decline in landfill inputs
by concentrating on strategic operational sites and
optimising returns on other sites through alternative
uses such as photovoltaic installations.
Viridor is continuing to make strong progress with
the construction of its growing Public Private
Partnership (PPP)/Energy Recovery Facilities (ERFs)
asset base with operations expected to commence
at five facilities in 2014/15. We believe ERFs are
(1) Before exceptional net charges
(2) Comparatives restated for IAS 19 (Revised)
central to the UK’s waste and renewable energy
strategies as the long-term, low-cost alternative to
landfill for disposal of residual waste. Viridor expects
to have a 15% market share by 2020 with a network
of strategic facilities which will underpin the
company’s long-term profit growth.
To align the structure of the organisation with the
strategy, the company has recently created two
operating divisions: Recycling & Resources
(comprising recycling, contracts and collection); and
Energy (including ERFs, landfill energy and other
renewable power).
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. We will review the
dividend policy for the next period following the Final
Determination for South West Water and will make
an announcement at the 2014/15 Preliminary
Results.
We are recommending a final dividend per share of
20.92p, which represents a 6.2% increase on last
year’s final dividend. This will result in a total dividend
for the year of 30.31p, an increase of 6.5%
(reflecting inflation of 2.5%) on the total dividend for
2012/13. Subject to obtaining shareholder approval
at this year’s Annual General Meeting, we will again
be offering a Scrip Dividend Alternative to
shareholders in respect of the final dividend. The
timetable is given on page 160.
Sustainability and governance
Our strategic and sustainability reports set out our
ongoing commitment to environmental, social and
governance (ESG) matters and the Sustainability
Committee of the Board continues to oversee our
performance in maintaining a responsible approach
to ESG.
Notable achievements for South West Water during
the year include best bathing water quality results for
seven years, improved customer service and
customer satisfaction levels, and the further delivery
of sustainable catchment schemes.
Viridor achieved a two star rating in the Business in
the Community (BitC) annual Corporate
Responsibility Index, and continued its strong
progress in energy and water saving initiatives in line
with its carbon reduction plan.
6
Strategic report - Strategic overviewPennon Group Plc Annual Report 2014 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.
South West Water has issued its own leadership,
transparency and governance code in accordance
with Ofwat’s principles concerning the water industry
relating to governance of boards, public trust and the
transparency of companies.
Health and safety
We continue to focus on improvements in health and
safety across our Group businesses.
Tragically, while there has been a continued reduction
in the number of reportable incidents, there was one
very sad fatality in South West Water and our thoughts
are with the family, friends and colleagues who have
been deeply affected.
There was a very significant reduction in the number of
reportable incidents in Viridor, reflecting the company’s
step-change approach to health and safety and
increased focus on improving its performance in this
area.
Board developments
During the year Ian McAulay was appointed chief
executive of Viridor and Executive Director of the
Board upon Colin Drummond’s retirement from both
positions. Colin is now the non-executive chairman of
Viridor.
Gerard Connell, the Senior Independent Director and
chairman of the Audit Committee, has now been a
Non-executive Director of the Company for over 10
years and was due to retire at this year’s Annual
General Meeting (AGM). Accordingly the Nomination
Committee has been seeking a suitable replacement
for Gerard and it is anticipated that it will be possible to
make an announcement about a successor shortly.
However the new Non-executive Director will be
unable to take up the appointment until after the AGM.
The Board is of the view that a suitable handover
period with Gerard is essential because the Company,
subject to approval at the AGM, will be changing its
external auditors and the new Non-executive Director
is expected to take up the chairmanship of the Audit
Committee. The Board therefore believes it would be
in the interests of the Company and shareholders for
Gerard to be re-appointed for a further year despite his
period of office exceeding normal corporate
governance standards. Gerard continues to
demonstrate independence of character and
judgement in the performance of his role, and his skills
and experience continue to be valuable to the Board.
Diversity
The Board continues to promote diversity across the
Group and in accordance with its diversity policy is
focused by 2015 on once again achieving at least
25% female representation on the Board, which we fell
below after Dinah Nichols's retirement at last year’s
Annual General Meeting.
Our customers
Provision of the highest possible levels of service to
our customers is vitally important for both our
businesses and is reflected in our Group strategy.
During the year South West Water was among the first
of the water companies to introduce a social tariff
aimed at its most hard-pressed customers.
Viridor continues to partner its customers across all
sectors by identifying the most robust and cost-
effective waste treatment options in a changing market
and by continuing to focus on delivering vital
infrastructure and quality services to provide essential
renewable energy, resource recovery and waste
management.
Our employees
The skills and commitment of our employees continue
to be key to the success of our Group. We continue to
engage with and provide opportunities for our
employees to develop through a number of initiatives
and strategies, details of which are given in the
strategic report. I personally thank every one of them
for their outstanding contribution to the Group and, in
particular, I should like to congratulate all those staff
involved in helping South West Water to achieve
‘enhanced’ status for its business plan, which has
resulted in the company being well placed for the K6
regulatory period.
In addition I am very grateful to my Board colleagues
for their continuing support and significant contribution
in what has been a successful twelve months.
Outlook
The Board’s priority continues to be the creation of
shareholder value through its strategic focus on water
and sewerage services; and on recycling, renewable
energy and waste management.
South West Water is continuing its strong
performance, with robust operational delivery, high
standards of customer service and financial
performance and expects to complete the successful
delivery of the K5 regulatory contract. The company
has put in place a platform to deliver further efficiencies
for K6 and, having now received its Draft
Determination for the K6 period, preparations are
underway for delivery of the K6 regulatory contract.
Viridor’s financial performance before exceptional
items over the year has been in line with management
expectations. The company continues to make
excellent progress in establishing its EfW business and
securing base-load contracts, which already
contribute to its bottom line and are expected to drive
Viridor’s long-term profit growth.
The Group, with efficient long-term financing,
continues to be well positioned for the future. We
remain confident about the future success of our
business.
Ken Harvey
Chairman
Pennon Group Plc
23 June 2014
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www.pennonannualreport.co.uk/2014 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
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.
Customer
satisfaction
Financial
performance
Employee
engagement
South West Water
The water and sewerage services provider for Devon,
Cornwall and parts of Dorset and Somerset, is focused
on delivering further efficiencies, improving operating
standards and providing a high quality service to its
customers.
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
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.
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.
8
Strategic report - Strategic overview Pennon Group Plc Annual Report 2014 How we manage our businesses to create value
Customer
satisfaction
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 12,
13, 16, 21 and 23 of
the strategic report.
Financial
performance
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
net charges),
earnings per share
(before exceptional
net charges 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 24-29.
Shareholder
returns
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.
We will announce
our dividend policy
for the next period
at the 2014/15
Preliminary Results.
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,
23, 43 and 55.
Strong
governance
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 36-47 in
our sustainability
report.
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 59 and our principal risks and uncertainties and how
we mitigate them are set out on pages 30-35.
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www.pennonannualreport.co.uk/2014 Strategic report - South West Water
South West Water
Investing in quality
642Waste water
treatment works
1.7mResident population
29Drinking water
treatment works
15,200km
15,200km
Water mains
Water mains
15,600km
15,600km
Sewers
Sewers
Our water
supply network
Wistlandpound
Wimbleball
Upper Tamar
Roadford
Meldon
Kennick,
Tottiford &
Trenchford
Fernworthy
Crowdy
Colliford
Park
Silbyback
Burrator
Stannon
Venford
Avon
Reservoir
Key water mains
Drift
College
Stithians
Argal
10
Operational highlights
• Best bathing water quality in seven years
• Improved customer satisfaction levels
• 17th consecutive year without water restrictions
• Outstanding drinking water quality
• Leakage control on target.
Revenue
(£m)
2009/10
2010/11
2011/12
2012/13
2013/14
Profit before tax
(£m)
2009/10
2010/11
2011/12
2012/13(1)
2013/14
444.2
448.8
474.0
498.6
+4.3%
520.0
129.5
128.9
141.5
146.7*
+10.8%
162.5
Drinking water quality Mean zonal compliance (%)
99.98
2009
99.97
2010
99.99
2011
99.97
2012
2013
99.98
Service Incentive Mechanism (SIM) (%)
2011/12
2012/13
2013/14
+4.8%
66.9
70.5
73.9
Bathing water compliance (%)
2011
2011
2012
2012
2013
2013
2013
2013
EU mandatory standard
Guideline standard
Operating profit (£m)
2009/10
2010/11
2011/12
2012/13(1)
2013/14
* Before exceptional net income.
(1) Restated for IAS 19 (Revised).
+5.7%
98.6
95.1
91.1
60.3
99.3
91.0
193.5
189.8
204.7
214.8
227.0
Strategic report - South West Water - HighlightsPennon Group Plc Annual Report 2014 Notable achievements
• Business plan to 2020 received 'enhanced' status from Ofwat and early Draft
Determination already received
• Largest ever customer consultation in support of the business plan
• Major investment in sewer network and assets to better protect bathing waters
• Winner of Living Wetlands Award from the Chartered Institution of Water and
Environment Management (CIWEM) for 'Upstream Thinking'
• One of the first water companies to launch a social tariff.
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 activities, 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, clean and safe supply of drinking water.
Performance
Drinking water quality among the best in the industry; 17th consecutive year without
water restrictions and leakage control on target.
Pure Service
Delivering responsive and cost-effective customer services that meet customers’ needs.
Performance
Increased customer satisfaction, 78% of customers metered, social tariff launched to
assist those who struggle to pay, increased use of digital media to improve customer
communications. Prices frozen for 2014/15.
Pure Environment
Protecting and enhancing the environment through sustainable actions and initiatives.
Performance
Bathing water quality at best standard in seven years, increased renewable energy
generation, reduction in greenhouse gas emission levels.
Financial Management
Making resilient business decisions while outperforming the regulatory contract.
Performance
Continued efficiency delivered, increased operating profit underpinned by increased
revenue and rigorous cost control. Business plan to 2020 published, ‘enhanced’ status
achieved; the only water and sewerage company to receive Ofwat's top assessment.
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Strategic review
South West Water continued to outperform its efficiency targets
for the current regulatory period, delivering strong financial
results supported by robust operational performance despite
extremes of weather, including a hot dry summer followed by
severe storms in winter 2013/14.
Business performance
Increased revenue and rigorous cost control were
underpinned by the continued delivery of efficiencies
resulting in operating profit increasing by £12.2
million to £227.0 million.
An overall reduction in demand of 1.0% and the
effect of customers switching to a metered tariff was
offset by tariff increases and new connections with
revenue rising by 4.3% to £520.0 million. Excluding
exceptional net income in 2012/13 profit before tax
increased by 10.8% to £162.5 million.
The company front-end loaded delivery of the
required 2.8% per annum average cost efficiencies.
Cumulatively the efficiency delivered for the four
years of K5 is 14% ahead of Ofwat's target as a
result of early delivery. Annual operating costs are
£22.2 million lower as a consequence with £3.6
million delivered in 2013/14 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 –
tendering to achieve the ‘right price’.
Capital expenditure for the year was £141.6 million
compared with £116.5 million in 2012/13.
* Phased Utilisation of Remote Operating Systems
12
The focus for the programme remains weighted
towards the maintenance of our existing assets,
increasing the resilience of our infrastructure and
delivering environmental improvements. Investments
during the year included:
• improvements in water quality with treatment
upgrades at two key sites (Restormel and
Wendron) which provide 50% of the water supply
for Cornwall
• investments in assets to improve bathing water
quality to meet revised European Guidelines in
2015
• delivering additional capacity to meet growth –
including supply to two new towns within the
region
• focusing on compliance at waste water sites to
manage periods of extreme weather conditions
• safeguarding water resources – upgrades to four
reservoirs across the region
• innovative investments to reduce flooding for
those customers previously highlighted as at risk.
South West Water continues
to deliver capital projects in
line with Ofwat, the Drinking
Water Inspectorate and
Environment Agency
expectations. Performance
cumulatively to date is in line
with targets.
Strategic report - South West Water - HighlightsPennon Group Plc Annual Report 2014 Pure Service
Customer satisfaction
Since the start of K5 (2010-2015) the investment
South West Water has made in its frontline customer
services has, alongside operational improvements,
resulted in a 97% increase in its customer service
score, as measured by the Service Incentive
Mechanism (which takes into account a range of
customer service aspects and the results of customer
satisfaction surveys). The number of written
complaints has also more than halved over this period.
Recognising that there is still work to be done to
improve customer satisfaction levels, the company is
targeting a range of improvements including
enhancements to the systems and processes for
dealing with queries, complaints and requests for
information.
The more integrated approach to resolving issues first
time is being complemented by the increased use of
digital media to provide better outbound
communications. This reduces the likelihood of a
customer needing to contact the company.
Metering
In 2013/14 there were fewer new meter installations
than in previous years, which reflects the already high
level of meter penetration in the region. At the year-end
the percentage of South West Water household
customers on a metered supply had increased to
78%.
Affordability
Recognising that there are customers in the region
who genuinely struggle to pay their bills, South West
Water continues to offer a range of affordability
schemes and initiatives, in addition to advice and
support on aspects such as water efficiency.
In 2013 the company was one of the first water
companies to launch a social tariff. Means-tested, the
tariff has already assisted 1,100 customers in the
region by reducing their bills to an amount they can
better afford to pay. The company also successfully
managed the implementation of the £50 Government
payment for eligible household customers.
Furthermore, and in recognition of the importance
customers attach to keeping bills as low as possible,
the company has frozen prices for 2014/15. This
announcement coincided with the publication of the
company's business plan to 2020 in December 2013
and has been well received by customers, regional
MPs, media and stakeholder groups.
Business customers
South West Water provides water and waste water
services to over 73,000 businesses and other non-
household customers such as schools and hospitals.
Many of them are small to medium-sized enterprises
with the tourism and agriculture sectors accounting for
45% of non-household water use.
Pure Water
Drinking water quality
Despite the challenges of a dry summer with high
levels of demand followed by an intensely wet winter,
South West Water continued to deliver outstanding
water quality with an official result (as measured by
Mean Zonal Compliance) of 99.98%. This reflects
investment made in water mains rehabilitation; the
maintenance and improvement of treatment works
and processes; and the efforts and expertise of
operational staff.
South West Water also took steps to improve the
aesthetic qualities (taste, smell and colour) of its water
supplies, recognising the importance of this to
customers. Significant investments during the year
included water treatment process enhancements at its
Restormel and Wendron water treatment works, both
in Cornwall.
Water resources
Despite the very dry weather over the summer months
coinciding with the peak tourist season, South West
Water continued to deliver unrestricted supplies to its
customers for the 17th consecutive year.
Building on the significant investment made in
reservoirs and the supply network in previous years,
the company’s water resources strategy is now
focused on targeting the careful management and
optimisation of water resources in order to continue to
meet its customers’ needs.
Reservoir levels reached near 100% capacity in early
2014 and consequently the company is in a healthy
resource position for the coming year.
Leakage control
South West Water’s solid track record in controlling
leakage was maintained in 2013/14 with the company
minimising leakage in line with its target of no more
than 84 megalitres lost on average per day. Improved
response times to leaks and bursts are now being
targeted alongside ongoing investment in the
maintenance of the supply network and assets.
A key part of the company’s leakage strategy is the
use of improved monitoring and control technologies.
This includes advanced diagnostic tools and remote
communication technologies in order to better predict,
and respond to, any issues on the drinking water
supply network.
Upstream Thinking
South West Water is investing circa £8 million during
2010-2015 in its award-winning catchment
management programme, known as ‘Upstream
Thinking’.
Designed to improve natural water quality and storage
in the landscape using low-impact ecologically
sensitive solutions, the two main strands of activity are
moorland restoration work and farm improvements to
reduce the impact of agricultural activity on the
region’s watercourses.
In early 2014 independent studies by the University of
Exeter confirmed that the restoration work on Exmoor
(Exmoor Mires Project) was making significant
headway in improving water quality and reducing flood
risk by easing the flow of water from the land.
‘Upstream Thinking’ won the Chartered Institution of
Water and Environment Management (CIWEM) Living
Wetlands Award in 2013.
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Strategic review Continued
Through the ‘Source for Business’ service brand, South West
Water provides additional commercial services, including
dedicated contact routes to business customer specialists;
account managers for larger organisations; water efficiency
support; and a range of innovative supplementary products and
services.
From 2017 onwards all non-household customers will be able
to choose their water and waste water service provider. South
West Water is currently preparing for these changes and
exploring the options for diversification as new opportunities
arise.
Pure Environment
Bathing waters
In 2013 the region’s bathing water quality reached the highest
standards in seven years. Out of the 145 designated bathing
waters sampled, only one failed to meet the minimum
mandatory European water quality standard while 132 or 91%
met the tighter guideline standard.
South West Water recognises the major benefits that high
quality bathing water brings to the region, both in terms of
attracting visitors and enhancing quality of life for residents. In
preparation for the more stringent standards of the European
Union’s revised Bathing Water Directive, which comes into force
in 2015, the company is investing circa £18 million on a range
of bathing water quality improvement schemes.
South West Water also continues to work alongside partner
organisations such as local councils and tourism authorities to
look at how the variety of factors that potentially affect water
quality (for example agricultural run-off, misconnections,
impurities from birds and animals) can be addressed.
Downstream Thinking
In 2013 South West Water began preparatory work on the first
of a series of pilot schemes designed to tackle the root causes
of sewer flooding and pollution.
Taking a lead from the holistic approach to catchment
management adopted for ‘Upstream Thinking’, ‘Downstream
Thinking’ spans a range of low-impact activities including
Sustainable Urban Drainage schemes (SuDs), habitat
management and the targeting of minimising misconnections.
This initiative is being led by South West Water and is set to be
rolled out in 2014/15 in partnership with a range of stakeholder
groups including the Environment Agency, local councils, the
Highways Agency and lead local flood authorities.
Waste water treatment standards
Targeted investment to raise the compliance rate of South West
Water’s waste water treatment assets continued in 2013/14.
The below target performance of two waste water treatment
works earmarked for improvement caused a noticeable drop in
compliance to 94.38% from 99.98% the previous year as
measured by the percentage of population served by works that
meet the criteria (Population Equivalent Sanitary Compliance).
Improvement work on those sites has since been carried out
and the company continues to work towards delivering
improved treatment standards in line with the revised Bathing
Water Directive.
Pollution prevention
Compared with the previous year, 2013 saw a rise in the total
number of pollutions although South West Water successfully
avoided any ‘major’ or Category 1 incidents. The number of
serious or harmful pollution incidents (which relates to both
Categories 1 & 2) did increase to 10 from four the previous year.
Of these, six related to cases in which amenities such as
beaches were closed as a precautionary measure.
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Strategic report - South West Water - HighlightsPennon Group Plc Annual Report 2014 Flooding
After the extremely wet weather of the previous year,
2013/14 saw an overall reduction in floodings. This
was despite above average rainfall and a spate of
severe storms and high seas causing disruption and
damage to infrastructure during the winter.
The number of internal floodings caused by hydraulic
overload (sewers becoming overwhelmed by the sheer
volume of water) was 50 — significantly fewer than the
previous year although above the average for the 2010
– 2015 regulatory period.
The number of floodings resulting from other causes
(for example blockages and sewer collapses) remained
below the K5 average although additional work is
required in order to reduce this number further.
Energy and carbon
In 2013/14 South West Water successfully reduced
greenhouse gas emissions. Emissions were kept at a
level lower than the company’s baseline position at the
beginning of the K5 investment period.
South West Water has maintained its investment in
renewable energy, bringing the total expenditure for K5
to over £4 million. This has included the installation of
the company’s largest solar panel array to date at its
Exeter headquarters. Along with hydro generation,
combined heat and power (CHP) and the wind turbine
at Lowermoor Water Treatment Works, South West
Water’s 34 solar panel schemes now bring the total
capacity for renewable energy generation to over
10MW.
People
Integral to the long-term success of South West Water
are the efforts and ingenuity of its 1,400-strong
workforce. In 2013/14 the company continued to
develop its ‘People Strategy’, which is designed to
attract, develop and retain a motivated and highly
skilled staff base, not least through a number of
internal development and upskilling programmes and
initiatives.
With the recruitment of 24 new apprentices, the total
number rose to 43 across the business. The
apprenticeship programme has been developed
alongside regional educational establishments. South
West Water is also playing a key role in the creation of
a new University Technical College (UTC) in the area,
which is due to open in 2015. This will help to educate
and develop the next generation of engineers and
scientists.
The company continually reviews its health and safety
standards and makes improvements as appropriate to
ensure best working practice.
In 2013/14 the number of injuries to our staff
reportable under the RIDDOR (Reporting of Injuries,
Diseases and Dangerous Occurrences Regulations)
was three.
The incident which resulted in a fatality at the
company’s Falmouth Waste Water Treatment Works
on 30 December 2013 is not included in this figure.
The coroner’s inquest to establish the cause of death
has not yet taken place. South West Water very much
regrets that this incident occurred and our thoughts
are with the family, friends and colleagues who have
been deeply affected.
South West Water wishes to thank its staff both for
their hard work over the past year and their ongoing
dedication and commitment as the company prepares
for the new regulatory period 2015-2020.
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Strategic review Continued
Key relationships
Regulators and others
South West Water actively engages with a wide range of
environmental and regulatory stakeholders. The company
ensures that communication is handled in the most appropriate
way and that the information provided is of high quality and
consistent.
A range of commercial channels including traditional and online
platforms are used to communicate with the company's
stakeholders.
The company contributes to national policy on developing
issues through its membership of Water UK, the industry trade
body, and its work with the Consumer Council for Water to
ensure that customers’ issues and concerns are addressed and
a full understanding of the company’s activities is maintained.
WaterFuture customer panel
The independent ‘challenge panel’ comprising regional
regulatory, business and consumer representatives played a key
role in scrutinising and challenging South West Water’s
proposals and customer engagement process in the run-up to
the publication in December 2013 of its business plan to 2020.
Tasked with ensuring that the business plan would meet the
needs and priorities of customers while also fulfilling legislative
and regulatory obligations, the panel met regularly with the
South West Water management and executive teams.
16
Procurement and suppliers
South West Water’s procurement strategy is focused on
partnering and strategic alliances with around 60 key suppliers
who account for the large majority of expenditure. All aspects of
sustainability are included in the procurement process and this
is a central theme of the company’s procurement strategy and
support for the regional economy.
At the start of the K5 period an innovative ‘mixed economy’
model was introduced to source capital programme suppliers.
This means using a significant number of smaller local
contractors to provide specialised services as well as
developing long-term relationships with more major supply
chain partners.
No supplier (revenue) accounts for more than 5% of the
company’s revenue and South West Water sources all its
purchases from competitive markets.
Business Plan to 2020
On 2 December 2013 South West Water submitted its K6
(2015-2020) business plan and following Ofwat's risk-based
review, on 4 April 2014 Ofwat assessed the plan as 'enhanced'.
An early Draft Determination was received on 30 April 2014.
The Final Determination will follow on 12 December 2014.
The business plan was balanced, well evidenced and well
supported and met or exceeded all of Ofwat's assessment
areas. Ofwat commended South West Water on achieving
'enhanced' status through an excellent business plan and
strong management. It acknowledged that South West Water
had risen to the challenge set by the regulatory approach for
the 2014 price review and considered the company's business
plan to be an example of good practice. The Environment
Agency also welcomed the commitment made by South West
Water to meet its environmental obligations.
The benefits received from the ‘enhanced’ assessment include
an initial financial award of £11 million reflected as an addition
to the Regulatory Capital Value with up to 50% invested. It also
includes an enhanced total expenditure (Totex) menu with an
extra 5% enhanced sharing rate and a ‘do no harm’ principle
as the company and Ofwat work towards the Final
Determination.
Water Act
The new Water Act became statute in May 2014. As well as
setting out a range of reforms for the water sector in England,
the Act enables further retail and wholesale competition.
Preparations are underway for the retail market opening in April
2017.
South West Water is fully engaged in the ‘Open Water’
programme, governed by the Department for Environment,
Food and Rural Affairs and Ofwat, which will shape market
reform in the sector. Building on the success of its ‘Source for
Business’ range of specialist advice and support measures, the
company has been awarded supply licences covering
Scotland, England and Wales, which will allow it to retail water
to customers outside the region currently served.
Strategic report - South West Water - HighlightsPennon Group Plc Annual Report 2014
Outlook for South West Water
South West Water enters the final year of the current
regulatory period in a strong and confident position.
To date the company has delivered substantial
efficiencies which benefit all stakeholders and is
focused on the continued delivery of efficiencies
through a combination of innovation, investment in
new technologies and the pioneering of cost-effective
sustainable solutions.
In 2014/15 the company will continue to target:
• outperformance of the regulatory contract
• rigorous cost control
• investment in the asset base to safeguard past
successes and prepare for the challenges and
opportunities of the future.
South West Water continues to focus on efficient
service delivery, improvements in service to customers
and the satisfaction of its regulatory and legislative
obligations. It is on track to outperform the K5
regulatory contract. Profits for 2014/15 will be
impacted by the 2014/15 tariff freeze already
announced. However, the revenues foregone have
been taken account of in the Draft Determination for
K6 on an NPV neutral basis.
With an ‘enhanced’ business plan for K6, South West
Water has already received the Draft Determination for
the 2015-2020 period. The company is engaged in
the development of Ofwat’s ongoing regulatory reform
agenda and is well positioned for future Government
legislative changes.
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www.pennonannualreport.co.uk/2014 Viridor
Giving resources new life
317Operating facilities
26Materials recycling
facilities
5Anaerobic
digestion power
plants
7.4mTonnes of
material handled
33Landfill gas
power plants
Energy recovery facilities (ERFs)
operational
3
7 under
construction
Where we operate
Operational highlights
• Financial performance before exceptional items delivered
in line with management expectations
• Strong progress in long-term Public Private Partnership
(PPP)/Energy Recovery Facilities (ERFs) strategy
• Recovery in recycling margins from low of 2012/13
• Landfill Energy – focus on managing the decline in landfill
operations and maximising energy production
• Exceptional charges of:
– £43 million landfill asset impairment
– £6 million increased landfill provisions
net of tax these totalled £40 million
Revenue
(£m)
2009/10
2010/11
2011/12
2012/13
2013/14
626.5
712.0
761.1
703.8
+14.0% 802.0
Operating profit plus joint ventures*
(£m)
2009/10
2010/11
2011/12
2012/13(1)
2013/14
-4.6%
Profit before tax*
(£m)
2009/10
2010/11
2011/12
2012/13(1)
2013/14
-19.5%
Total renewable energy generation (GWh)
2009/10
2010/11
2011/12
2012/13
2013/14
-5.1%
612
752
760
820
778
77.0
82.6
75.2
45.9
43.6
55.1
62.9
57.6
34.3
27.6
Renewable energy generation capacity as at 31 March (MW)
2010
2011
2012
2013
2014
128
136
136
137
136
-0.7%
Recycling volumes traded (million tonnes)
2009/10
2010/11
2011/12
2012/13
2013/14
-3%
1.4
1.7
1.8
1.9
1.8
* Before exceptional charges.
(1) Restated for IAS 19 (Revised).
18
Pennon Group Plc Annual Report 2014 Strategic report - Viridor Notable achievements
• Excellent continuing progress in strategic reorientation of Viridor's business model
• Significant developments in long-term EfW business:
– Runcorn Phase 1 and Exeter Energy Recovery Facilities (ERFs) – 'hot
commissioning'
– Ardley (Oxfordshire) ERF in commissioning
– Runcorn Phase 2 and Trident Park (Cardiff) ERFs – shortly to enter
commissioning
– South East Wales residual waste project (Prosiect Gwyrdd) signed
December 2013
– Glasgow and Peterborough ERFs under construction
– South London Waste Partnership PPP (Beddington) ERF – planning secured
but ‘Notice to Proceed’ delayed due to expected judicial review.
Strategy and performance
Viridor’s stated company purpose is to give resources new life. Its strategy remains
focused on transforming waste into high quality recyclables, raw materials and
energy.
The company continues to build its business through a combination of securing
long-term contracts, driving quality in recycling and growing capacity in waste-
derived renewable energy.
Long-term profit growth is expected to be driven by its PPP contracts, ERF
projects and focused recycling opportunities.
Performance – recycling and resources
• Recovery in recycling margins – although remain cautious with respect to future
prospects
• Continued focus on quality and adding value
• £25 million investment in new glass and polymers facilities in Newhouse,
Scotland and Rochester, Kent to maximise the value of recyclates processed –
both due to be operational in autumn 2014
• Profits in contracts and collection up overall.
Performance – energy
• Excellent progress in long-term PPP/EfW projects, including financial close
achieved for South East Wales, residual waste 25-year PPP (Prosiect Gwyrdd)
securing fuel for Trident Park ERF
• Lakeside ERF continuing to perform strongly
• Walpole AD facility now operational
• Landfill gas power generation profit up 26.5%
• Increase in profits for landfill gas power generation more than offset by the
continued decline in landfill.
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UK landfill diversion is being
achieved by a major increase in
recycling and energy recovery
from residual waste.
Strategy and UK context
The UK is required under the EU Landfill Directive to reduce the
amount of biodegradable municipal waste going to landfill
sites. This is being achieved by a major increase in recycling,
with residual waste increasingly being used for energy recovery.
Energy recovery from waste (both biodegradable and non-
biodegradable) accounted for 8% of total UK renewable energy
generated in 2012*. Viridor believes that by 2020 UK energy
recovery from waste could produce 15,000 GWh of the total
forecasted UK renewable energy generation (120,000 GWh),
accounting for circa 13%. This is particularly significant given
predicted capacity shortages in the energy sector.
EfW is central to the UK’s waste and renewable
energy strategies as the long-term, low-cost
alternative to landfill for disposal of residual waste.
Viridor expects to have 15% market share by 2020
with a network of strategic ERFs which will underpin
the company’s long-term profit growth.
For the landfill energy business the focus is to
maximise the value of landfill gas generation across
all sites, managing the expected decline in landfill
inputs by concentrating on strategic operational sites
and optimising returns on other sites through
alternative uses such as photovoltaic installation.
To align the structure of the organisation with its
strategy, two divisions have been created: Recycling
& Resources (comprising recycling, contracts and
collection) and Energy (comprising ERFs, landfill
energy and other renewable power).
The Government’s main mechanism for diverting
waste from landfill and incentivising recycling and
ERFs remains landfill tax. The Government has
confirmed that landfill tax will rise in line with inflation
from 1 April 2015 from the current rate of £80 per
tonne. This continues to influence the long-term
economics of both recycling and energy recovery.
In addition, recyclate costs are typically significantly
lower than the cost of using virgin materials for
manufacturers.
Viridor is giving resources new life through its focus
on recycling and waste-based renewable energy.
Investment in technology and operational practices
has been successfully made to enhance recyclate
quality to differentiate Viridor from its competitors.
This, aligned with management of the cost base,
continues to improve recycling margins.
Significant progress has also been made in the
development of the EfW business, with a substantial
asset base being constructed in conjunction with the
development of the associated business capability
processes across the whole 'source to supply' EfW
production cycle.
* Figures for 2013 not yet available
20
Pennon Group Plc Annual Report 2014 Strategic report - Viridor Business performance
Revenue was up 14% to £802 million. Landfill revenue
was up £43.1 million due to higher landfill tax revenues
and construction revenues were up reflecting growth
in assets under construction, partly offset by a
decrease in recycling revenue of £17.1 million primarily
due to lower prices.
Before exceptional charges Viridor’s earnings before
interest, tax, depreciation and amortisation (EBITDA)
for the year were broadly flat, with a small decrease of
£1.4 million (1.8%) to £76.3 million. PBIT fell £0.4
million (1.3%) to £30.2 million. PBIT plus joint ventures
decreased by £2.1 million (4.6%) to £43.6 million.
Profit before tax and exceptional charges decreased
£6.7 million (19.5%) to £27.6 million reflecting lower
PBIT plus joint ventures and the increased interest
charge from higher landfill provisions.
Exceptional charges
The profitability of the landfill business has declined
faster than anticipated due to aggressive pricing from
other landfill operators (in response to local authority
austerity and increasing levels of landfill tax) who are
competing for volume to allow closure of their sites
with suitable landforms, and higher ongoing capital
costs.
While there will always be a need for strategically
located landfill sites, Viridor expects these trends
to continue for the foreseeable future. As a result a
net pre-tax exceptional impairment charge of £42.9
million has been recognised to write-down the carrying
value of landfill property, plant and equipment. The
impairment charge has no immediate cash impact.
Landfill provisioning has been increased by £5.7 million
due to revisions to site life costings.
Investment
Investments in the future capabilities and strength of
Viridor’s business included capital investment of £292
million (2012/13 £324 million), of which £254 million
was for growth projects (largely EfW). This investment
is part of the overall £1.5 billion programme to deliver
essential infrastructure which will make a substantial
contribution to energy and resource security in the UK.
Recycling and resources
During the year recycling volumes traded decreased
marginally by 63,000 tonnes (3.0%) to 1.8 million
tonnes. Recyclate prices have stabilised to some
degree for most commodities but remain under
pressure, reflecting world economic conditions and
competitive markets and, in the near term, higher
shipping costs. Overall average revenues per tonne
from recyclate sales and gate fees for the year fell to
£93, 6.1% lower than for 2012/13.
* Figures for 2013 not yet available
Action has been, and continues to be, taken to
reduce the cost base with the average cost per tonne
reduced to £83 from last year’s total of £93, including
the benefit of circa £3 per tonne from the 2012/13
impairment charge. Allied to an emphasis on the
production of high quality recyclate, the business has
been benefitting from improvements in margins. The
company remains cautious on the prospects for
recyclate prices and therefore continues to focus on
revenue optimisation, facilities rationalisation and cost
reduction.
Investment is also being made in technology with a
new plastic/polymer separation plant at Rochester,
costing circa £15 million, and a new glass
reprocessing plant in Scotland, costing circa £10
million. These investments will enable Viridor to
enhance product quality and continue to differentiate
itself in the sector. Viridor now has the most extensive
Materials Recycling Facility (MRF) capacity in the UK
with accreditations for export to China, and is
established as a quality brand in other Asian markets.
Profits in 'Contracts & Other' were up overall across
the 15 municipal contracts around the UK (the more
significant contracts include Lancashire, Glasgow,
Lakeside, Manchester, Somerset and West Sussex)
and the Thames Water contract. The increase also
reflected higher profits on property sales. Profits in the
collection business were also ahead, reflecting
increased management action.
Additional contracts have been won since the year-
end but profits in the first half of 2014/15 are
expected to be impacted by the expiry of some old
contracts.
Energy
Energy can be recovered in two ways, either via gas
(notably landfill gas and anaerobic digestion (AD))
or combustion in ERF and similar facilities, some of
which may be a part of Combined Heat and Power
(CHP) schemes. Bio-energy (including landfill gas,
biodegradable EfW and AD) and energy recovery from
non-biodegradable waste accounted for 39% of total
renewable energy in 2012*.
(a) Landfill gas power generation
Profit contribution from gas generation was £30.1
million, an increase of 26.5% on 2012/13. Viridor’s
landfill gas power generation output fell 2% to 606
Gigawatt hours (GWh) after reaching peak output in
2012/13 and is expected to reduce gradually over the
coming years.
Average revenue per Megawatt hour (MWh) increased
by 9.2% to £89.74 reflecting the switch from Non
Fossil Fuel Obligation (NFFO) contracts to
Renewables Obligation Certificates (ROCs). Total
landfill gas power generation operational capacity
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declined by 2MW to 105MW (excluding 3MW capacity at
sub-contract sites in Suffolk). The proportion of operational
capacity eligible for ROCs increased to 85%, with the remaining
15% being on (lower priced) NFFO contracts. Further NFFOs
migrate to ROCs during 2014/15 with the balance moving
across by 2016/17.
Average costs were reduced by 8.4% to £40.05 per MWh with
a continuing focus on managing the cost base.
(b) Energy Recovery Facilities (ERFs) and Anaerobic
Digestion (AD)
As well as the 105MW of landfill gas capacity, Viridor has a
further 31MW of renewable energy capacity across its share of
the Lakeside ERF, the Bolton ERF and its AD operations.
In addition to the above operational projects, Viridor is pursuing
a number of other renewable energy opportunities. Most
notably, the company has been successfully implementing its
strategy to develop the EfW business, which will drive long-term
profit momentum. This includes establishing a significant asset
base of ERFs. Viridor and its partners have a total operational/
committed ERF capacity of 2.5 million tonnes. The company
has now secured circa 80% of the required waste inputs for the
opening of the committed ERFs, of which circa 60% is from
long-term contracts.
Five plants, being Runcorn Phases I and 2, Exeter, Ardley
(Oxfordshire) and Trident Park (Cardiff), have reached advanced
stages of build with all expected to come on-stream in financial
year 2014/15. Two others, Glasgow and Peterborough,
commenced construction in the year. 70% of spend on ERF
projects under construction is now complete.
At the start of 2014 there was a successful appeal to have the
planning restriction on road-borne waste inputs to both phases
of Runcorn lifted from 85,000 to 480,000 tonnes per annum.
Planning consent for the Beddington ERF was issued in March
2014. However the project has been delayed pending a judicial
review, which was expected.
As part of continuing to secure waste for the ERFs, the South
East Wales residual waste project (Prosiect Gwyrdd) was signed
in December 2013.
Viridor has also reached the final bid stage as one of two
bidders on the Edinburgh and Midlothian residual waste
contract.
The Walpole AD plant, which has a 1MW export capacity, is
now producing power. A further 'closed loop' opportunity to use
digestate as a biofertiliser is being assessed with the
Environment Agency.
EfW contracts and projects already contribute to the bottom line
and reflect the realisation of a strategy which is expected to
contribute around £100 million to Viridor’s EBITDA within the
next three years.
(c) Landfill
The business continues to be strongly cash generative and
contributed £33.6 million to EBITDA in the year. Volumes
increased marginally (0.8%) to 2.7 million tonnes over the year.
Average gate fees decreased by 9.0% to £23.06 per tonne.
Consented landfill capacity reduced from 61.5 million m3 at 31
March 2013 to 57.7 million m3 at 31 March 2014, reflecting
usage during the year. As previously stated and provided for last
year, around 39 million m3 is not expected to be used.
22
Future alternative uses for sites are now also being assessed in
detail. Early success has been achieved at Westbury with
planning permission granted for a 2.75MW photovoltaic
installation. Construction started in May 2014. An £8 million
partnership with, and fully funded by, the Department of Energy
and Climate Change to deliver a demonstration cryogenic
energy storage plant has been signed and construction is
scheduled to commence in the first quarter of 2014/15.
Landfill tax, which is passed directly to the customer, was £72
per tonne throughout the year and rose further to £80 per tonne
in April 2014.
Joint ventures
Total joint ventures’ contribution, which consists of interest on
shareholder loans and share of profit after tax, fell 11.3% to
£13.4 million (2012/13 £15.1 million) reflecting developments
explained below.
(a) Lakeside
Lakeside, the first of Viridor’s EfW pipeline projects, continues to
perform very strongly and is ahead of original expectations in
terms of both waste inputs and energy output. The contribution
was £5.9 million in 2013/14; comprising interest receivable on
shareholder loans unchanged at £1.4 million and share of profit
after tax from Lakeside £4.5 million (down £1.3 million on the
previous year reflecting higher outage costs). A further £2.9
million contribution came from the sub-contract profit.
(b) Viridor Laing (Greater Manchester) (VLGM)
The 25-year Greater Manchester Waste PFI contract (being
delivered through VLGM) is the UK’s largest ever combined
waste and renewable energy project. VLGM is a joint venture
between Viridor and John Laing Infrastructure. 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.
Solid recovered fuel produced from the waste will be used to
generate heat and power at a plant being built at Runcorn in
Cheshire. Runcorn Phase 1 is being built primarily for the
Greater Manchester Waste PFI contract.
As part of the VLGM contract, a separate contractor was
mandated to construct 43 facilities. As at 31 March 2014, 42 of
these facilities had been formally taken over by Viridor. The 43
facilities include four mechanical biological treatment (MBT)
plants. Three of these MBTs have been taken over and the
remaining one is substantially complete, but has not yet been
taken over due to isolated process elements not performing
satisfactorily. The delay in takeover of the remaining plant is
being addressed and is not expected to affect the financing of
the project or have a material impact on the performance of the
PFI.
Interest receivable on shareholder loans from the VLGM joint
venture was £5.3 million, up £0.2 million (2012/13 £5.1 million).
Share of results after tax from VLGM on an IFRIC 12 basis was
a loss of £0.5 million, down £0.5 million due to a reduction in
construction margin profits as construction completion is
reached.
Pennon Group Plc Annual Report 2014 Strategic report - Viridor (c) Runcorn Phase 1 (TPSCo)
Interest receivable on shareholder loans from the
Runcorn Phase 1 EfW joint venture was £3.0 million,
up £0.2 million on 2012/13. Share of profit after tax
was a loss of £0.3 million, down £0.3 million on
2012/13.
Hot commissioning has now commenced on-site. First
burn of waste occurred in March 2014. Full testing of
rail operations has been completed and rail-borne fuel
transfer from Greater Manchester is now operational.
Viridor does not expect previously reported delays to
have a material impact on the completion and
operation of the Greater Manchester PFI or TPSCo.
Key relationships
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.
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.
A full update of Viridor’s industry-leading
‘OpenSpace’ web portal, through which ‘live’ data is
shared with the regulators, was completed during the
year. This transparent and proactive approach
continues to save time and resources for all parties.
People
Recognising the importance and performance benefits
of an engaged workforce, Viridor has developed plans
to fully monitor and improve engagement across the
company. This includes a commissioned survey,
roadshows and other programmes as it rolls out its
Enterprise Resource Platform and associated business
process improvements.
Viridor has reviewed its overall approach to the health,
safety and welfare of its employees and is aiming to
achieve a step change in overall health and safety
performance. A full company-wide health and safety
survey is informing developing action plans that will be
implemented during 2014/15. There was a continued
fall in the RIDDOR incidence rate over the previous
year, with 37 reportable incidents, giving a rate of 1,197
per 100,000 employees (1,429 last year).*
The company remains committed to the ongoing
training, professional development and ‘upskilling’ of its
employees. 4,352 training days and an additional
1,001 Certificate of Professional Competence driver
training days were delivered across the company. 245
employees are participating in sustainable resource
management apprenticeships, alongside 17 current
full-time apprentices in the business. 41 managers are
enrolled in the innovative and sector-leading Viridor
Foundation Degree course, developed and delivered in
partnership with Edge Hill University.
Outlook for Viridor
Viridor continues its transformation from being
predominantly a landfill and collections operator to
becoming one of the country’s leading recycling,
renewable energy and waste management companies.
While there are some signs of improving economic
trends, the company remains appropriately cautious
about the future prospects for recyclate prices. Viridor
remains strongly focused on a stringent programme to
optimise revenues, achieve efficiencies through facilities
rationalisation and cost reduction to sustain margin
improvement.
Excellent progress has been achieved in the realisation
of the EfW business. Five major ERFs are due to
become operational in the current financial year while
two others started construction in 2013/14 and the
Beddington ERF recently gained planning permission.
Viridor’s first half year EBITDA figure in 2014/15 is
expected to be materially lower than the half year figure
for 2013/14 (primarily due to the expected continuation
of landfill decline but also the gradual decline in power
generation and the near term recycling and contracts
factors noted above). However the ERFs coming
on-stream this year are expected to increase EBITDA
in the second half of the year resulting in the full year
EBITDA for 2014/15 exceeding 2013/14. These assets
represent a strategic ERF portfolio which is already
making a significant contribution to Viridor’s bottom line
and reflect the realisation of a strategy which is
expected to contribute circa £100 million to Viridor’s
EBITDA within the next three years.
* From 2012 reportable incidents are now reported on seven days’ absence; in previous years they would have been reported
on three days’ absence.
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Financial state m ents
23
www.pennonannualreport.co.uk/2014 Group
Financial review
Pennon Group delivered revenue and profit before tax (before
exceptional net charges) around 10% ahead of last year.
Performance overview
The principal measures used 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)
Earnings per share
before exceptional net charges and deferred tax (pence)
2009/10
2010/11
2011/12
2012/13(1)
2013/14*
* Statutory basis £158.7 million.
Dividend per share
(pence)
2009/10
2010/11
2011/12
2012/13
2013/14
185.8
188.5
200.5
190.0
+9.1%
207.3
2009/10
2010/11
2011/12
2012/13(1)
2013/14
+5.7%
Interest rate on average net debt
(%)
22.55
24.65
26.52
28.46
+6.5%
30.31
2009/10
2010/11
2011/12
2012/13
2013/14
40.8
42.3
47.3
40.3
42.6
4.3
4.4
4.2
4.0
3.8
Reconciliation of earnings
2013/14
Profit after
tax (£m)
* Excluding pensions net interest, discount unwind on provisions, IFRIC 12
contract interest receivable and interest receivable form joint ventures.
2013/14
Basic earnings
per share (p)
2012/13 (1)
Profit after
tax (£m)
2012/13 (1)
Basic 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
142.5
(25.8)
39.7
156.4
38.8
(7.0)
10.8
42.6
20.6
(14.1)
140.2
146.7
5.7
(4.0)
38.6
40.3
Note: Earnings per ordinary share figures in this strategic report 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.
(1) Restated for IAS 19 (Revised)
24
Pennon Group Plc Annual Report 2014
Strategic report - Group A continuing low net interest rate was achieved, coupled with raising cash and
facilities to fund future growth: £1,303 million cash and facilities at 31 March
2014, including £640 million of new and refinanced facilities sourced during
the year.
Revenue
Group revenue increased by 10.0% to £1,321.2
million. South West Water’s revenue increased by
4.3% to £520.0 million as a result of tariff increases,
new connections and higher other revenue, partially
offset by lower demand and a reduction in revenue
from customers switching from unmeasured to
metered charges. Viridor’s revenue increased by
14.0% to £802.0 million due primarily to higher landfill
revenues and increased construction spend on service
concession arrangements, partly offset by lower
recycling revenues.
Operating profit
(before exceptional charges)
Group operating profit increased by 4.8% to £257.5
million with South West Water up by 5.7% to £227.0
million, but Viridor down by 1.3% to £30.2 million.
Ongoing operational cost efficiencies in South West
Water are cumulatively 14% ahead of the K5 target.
Viridor's overall operating profit was broadly similar to
last year, as improvements in recycling and landfill gas
generation were offset by continuing declines in landfill.
Net finance costs
(before prior year exceptional net income)
We continued our effective management of interest
rates in 2013/14 with interest payable (including
capitalised interest) net of interest receivable, on
average net debt equating to 3.8% (2012/13 4.0%)
which included lower interest payable on RPI
linked debt.
Net finance costs of £53.9 million are £7.5 million
lower than last year, reflecting an £8.2 million increase
in capitalised interest. The overall interest cost on
borrowings remained broadly unchanged compared to
last year, due primarily to net cash outflows in the year
being funded by the £300 million hybrid capital
securities issued in March 2013. The associated £15.6
million (net of tax) hybrid capital periodic return, paid in
March 2014, has been recognised directly in equity.
Investment income totalling £9.0 million (2012/13
£10.8 million) has been achieved with the objective of
enhancing returns on the Group’s substantial pre-
funding of £613 million.
During the year net finance costs (excluding pensions
net interest, discount unwind on provisions and IFRIC
12 contract interest receivable) were £49.1 million
(2012/13 £59.3 million); covered 5.2 times (2012/13
4.1 times) by Group operating profit.
David Dupont
Group Director of Finance
The year’s financial highlights
(before exceptional net charges)
Group profit before tax increased by £17.3 million
(9.1%) to £207.3 million, driven by increased profits in
South West Water. Earnings per share before deferred
tax increased by 5.7% to 42.6p.
South West Water recorded a strong performance
against the 2010-2015 regulatory contract and is well
placed to deliver outcomes and outperform
assumptions. South West Water profit before tax was
up £15.8 million (10.8%) to £162.5 million reflecting
higher revenues and good cost control.
Viridor PBIT plus joint ventures was broadly similar to
last year, slightly down by £2.1 million to £43.6 million.
Earnings before interest, tax, depreciation and
amortisation (EBITDA) was slightly down by £1.4
million to £76.3 million. This reflects continuing
declines in landfill more than outweighing growth
in landfill gas power generation and a recovery
in recycling.
We have secured further funding to finance continuing
growth. By the year end we had £1,303 million in cash
and facilities (including £173 million of restricted funds)
in place to fund the major growth in Viridor’s EfW
business, together with South West Water’s K5
(2010-2015) capital programme.
Capital investment remained significant this year at
£434 million due to continuing major investment in
Viridor’s ERFs which are expected to drive future
growth. 70% of capital expenditure is now complete
on Viridor's EfW projects under construction. South
West Water’s capital expenditure increased by 22%
during the year.
We have secured funding at a cost that is low in
absolute terms. The Group interest rate on average
net debt improved to 3.8% (2012/13 4.0%).
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25
www.pennonannualreport.co.uk/2014
Operating costs (before exceptional charges)
Operating costs for the year totalled £1,064 million. The most
significant areas of expenditure were:
Expenditure
Landfill tax
Manpower
Depreciation
Raw materials and consumables*
Transport
Power
Business rates
Abstraction and discharge consents
* Excludes elements of transport costs.
£m
192
161
147
81
65
34
32
7
Group investment
The Group’s capital expenditure on property, plant and
equipment, including service concession arrangements,
remained significant at £434 million (2012/13 £439 million)
primarily from investment in Viridor’s growth projects of £254
million. The major categories of expenditure were:
EfW/PPP
£246m
Waste water treatment works
£44m
Water distribution
£29m
Sewerage
£30m
Recycling
£12m
Landfill
£15m
Information technology
£15m
Other
£43m
Financial review Continued
A strong liquidity
and funding position to
finance growth.
Profit before tax
(before exceptional net charges)
Profit before tax was £207.3 million, an increase of 9.1%. Pages
10 and 17 give a detailed description of the financial
performance of South West Water and Viridor respectively. On a
statutory basis profit before tax was £158.7 million reflecting
exceptional net charges of £48.6 million.
Taxation
(before exceptional net charges)
The Group’s UK corporation tax charge for the year was £35.3
million (2012/13 £43.3 million) after the release of prior year
credits of £16.5 million (2012/13 £13.0 million). The decrease
primarily reflects a reduction in the rate of corporation tax and
an increase in prior year credits. Deferred tax for the year was a
credit of £25.8 million (2012/13 £14.1 million) which included a
credit of £40.1 million reflecting the enacted 3% reduction in the
future rate of UK corporation tax.
Earnings per share
(before exceptional net charges and deferred tax)
Earnings per ordinary share increased by 5.7% to 42.6p
reflecting higher underlying profit. The weighted average
number of shares in issue during the year was 367.4 million
(2012/13 363.6 million). Net assets per share at book value at
31 March 2014 were 323p.
Exceptional net charges
An exceptional net impairment charge of £42.9 million has been
recognised to write down the carrying values of property, plant
and equipment in landfill activities, to reflect reducing landfill
prices and higher ongoing capital costs. Landfill provisioning
has been increased by £5.7 million due to revisions to site life
costings. The net impairment charge has no immediate cash
impact.
The exceptional net charges total £39.7 million net of tax.
Dividends and retained earnings
The statutory net profit attributable to ordinary shareholders of
£142.5 million has been transferred to reserves.
The Directors recommend the payment of a final dividend of
20.92p per share for the year ended 31 March 2014. With the
interim dividend of 9.39p per share paid on 3 April 2014 this
gives a total dividend for the year of 30.31p, an increase of
6.5% over 2012/13 (reflecting 4% real growth plus RPI of 2.5%
for the 12 months to 31 March 2014).
Proposed dividends totalling £112.7 million are covered 1.4
times by net profit (before exceptional net charges and deferred
tax) (2012/13 1.4 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.
26
Pennon Group Plc Annual Report 2014 Strategic report - Group Cash flow
In 2013/14 the Group once again had a strong
operating cash flow. However the ongoing high level of
capital investment to support future growth resulted in
net debt increasing by £185 million.
Summarised cash flow £m
2013/14
2012/13
Cash inflow from
operations
Net interest paid
Tax paid
Dividends paid
Hybrid periodic return
407
385
(39)
(58)
(69)
(20)
(50)
(19)
(78)
–
Capital expenditure
(392)
(422)
Acquisitions/investment in
joint ventures
Loan repayments and
dividends received from
joint ventures
Pension contributions
Net cash outflow
Hybrid securities issuance
Shares issued
Debt acquired with
acquisitions
Debt indexation/interest
accruals
(Increase)/decrease in net
borrowings
–
9
(18)
(180)
–
2
–
(7)
(14)
9
(14)
(203)
295
4
(1)
1
(185)
96
Liquidity and debt profile
The Group has a strong liquidity and funding position
with £1,303 million cash and facilities at 31 March
2014. This includes cash and deposits of £613 million
(including £173 million of restricted funds representing
deposits with lessors against lease obligations) and
undrawn facilities of £690 million. A total of £640
million in new or renewed debt facilities were arranged
during the year, being:
• £235 million term loans and revolving credit facilities
renewed
• £315 million of new term loans and revolving credit
facilities
• £90 million of new finance leases.
At 31 March 2014 the Group’s loans and finance lease
obligations totalled £2,807 million. After the £613
million held in cash this gives a net debt figure of
£2,194 million, an increase of £185 million during the
year. Debt incurred for the construction in progress of
Viridor’s portfolio of ERFs at Runcorn Phase 2, Ardley
(Oxfordshire), Exeter, Trident Park (Cardiff) and
Glasgow increased to £663 million at 31 March 2014,
which represents 30% of Group net debt.
The Group’s debt has a maturity of up to 43 years with
an average maturity of 21 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 3.5%.
A further £388 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 among the lowest in the
industry.
Major components of the Group’s debt finance at 31 March 2014
Finance leasing
£1,270m
Bank bilateral debt
£470m
Index-linked bond 2057
£254m
European Investment Bank loans
£335m
Private placements
£222m
Bond 2040
£133m
Convertible bond 2014
£123m
Strategic overvie w
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27
www.pennonannualreport.co.uk/2014 Financial review Continued
The Group’s financing structure gives us the scope and flexibility
we need to implement our strategic objectives with a view to
maximising value for our shareholders.
The Group’s and South West Water’s interest rates on average
net debt for the year to 31 March 2014 are both 3.8% (after
adjusting for capitalised interest of £21.8 million, notional
interest items totalling £4.8 million and interest received from
shareholder loans to joint ventures of £9.8 million, as detailed in
note 9 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.
The £125 million convertible bond matures in August 2014. It is
expected that full conversion to equity will take place and up to
23 June 2014; notices of conversion for £61.3 million have
already been received.
At 31 March 2014 the fair value of the Group’s non-current
borrowings was £275 million less than its book value (2013
£208 million) as detailed in note 29 to the financial statements.
This reflects the benefit of securing interest rates below the
current market rate.
Capital structure – overall position
At the end of the financial year the Group’s net debt of £2,194
million gave a gearing ratio of net debt to (equity plus net debt)
of 64.7% at 31 March 2014 (2013 65.2%).
In March 2013 the Group issued a £300 million hybrid capital
security recognised as equity as set out in note 38 to the
financial statements.
During the year the Company continued to benefit from offering
a scrip dividend alternative. £34.5 million of potential cash
dividend was retained in the business and instead distributed by
issuing five million shares.
South West Water’s debt to Regulatory Capital Value (RCV) was
56% at 31 March 2014 (2013 55%) 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 £901 million (2013 £676
million) equivalent to 11.8 times EBITDA (2013 8.7 times).
Treasury policies
The role of the Group’s treasury function is to ensure that we
have the funding to meet foreseeable needs to maintain
reasonable headroom for future contingencies and to manage
interest rate risk. The Group enters into certain structured
financing transactions that have and are expected to provide an
improved return on surplus funds and overall interest rate
performance. It operates only within policies approved by the
Board and undertakes no speculative trading activity.
The Board regularly monitors expected financing needs for at
least the next 12 months. 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.
28
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 fulfil our
statutory obligations by the application of relevant tax legislation
in a reasonable way, engaging in tax planning only when it is
aligned with the commercial and economic activity of the
Company. This is in line with the principles published by the
Confederation of British Industry (CBI) in 2013.
The Group made a net payment of £58.1 million of UK
corporation tax in the year (2012/13 £18.5 million). The main
elements of the payment were £36.1 million in relation to
2013/14 and £21.3 million in relation to 2012/13. South West
Water paid £44.1 million (2012/13 £34.0 million) of UK
corporation tax on profit before tax of £162.5 million (2012/13
£159.1 million).
Tax contribution 2013/14
Landfill tax
£215m
Employment taxes
£48m
Business rates
£32m
UK corporation tax
£58m
Fuel Excise Duty
£10m
Environmental payments
£10m
Carbon Reduction
Commitment
£1m
Other
£2m
The total tax charge for the year (before exceptional net charges)
of £9.5 million was less than the charge which would have arisen
had the accounting profit before tax after exceptional net
charges been taxed at the statutory rate of 23%. A reconciliation
is provided in note10 to the financial statements.
The Group’s total tax contribution extends significantly beyond
the UK corporation tax charge.
Total taxes amounted to £347 million of which a net amount of
£6 million was collected on behalf of the authorities for employee
payroll taxes and VAT.
Pennon Group Plc Annual Report 2014 Strategic report - Group 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 2014 the Group’s pension schemes
showed a deficit (before deferred tax) of £79 million
(2012/13 £100 million), the decrease primarily
reflecting an increase in the schemes’ asset values.
Net liabilities of £63 million (after deferred tax)
represented around 2% of the Group’s market
capitalisation at 31 March 2014. The revision to IAS
19, effective in 2013/14, resulted in a net finance cost
in 2013/14 of circa £4 million (2012/13, prior to
restatement, credit of £4 million). A further circa £1
million was charged to operating profit to recognise
administration costs. Opening pension liabilities
reduced by circa £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 being finalised.
Insurance
Pennon Group manages its property and third party
liability risks through insurance policies that mainly
cover property and business interruption, motor, 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.
In addition to corporation tax the most significant
taxes involved, together with their profit impact, were:
• landfill tax of £186 million collected by the Group on
behalf of HM Revenue & Customs (HMRC). This
amount includes £12 million paid to local
environmental 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
£29 million on the disposal of waste to third parties.
This principally relates to the Manchester contract
and should reduce in future years as waste is sent
to EfWs. This is an operating cost for the Group
and reduces profit before tax. The net amount of
landfill tax paid to HMRC by the Group and via third
parties represents 17% of the total landfill receipts
of HMRC in the year
• Value Added Tax (VAT) of £29 million 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 £32 million paid to local
authorities. This is a direct cost to the Group and
reduces profit before tax
• employment taxes of £48 million including
employees’ Pay As You Earn (PAYE) and total
National Insurance Contributions (NICs). Employer
NICs of £13 million were charged approximately
96% to operating costs with 4% 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 £10 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 of £1 million; this payment includes a credit
of £0.5 million arising from Viridor energy
production. The net payment in relation to South
West Water Limited is the lowest of the water and
sewerage companies. This reduces profit before
tax.
The corporation tax rate for 2013/14 used to calculate
the current year’s tax is 23%. The corporation tax rate
has been reduced to 21% for 2014/15 and will
decrease further to 20% for 2015/16 following
changes in the Finance Act 2013.
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www.pennonannualreport.co.uk/2014 Principal risks and uncertainties
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 in our corporate governance report.
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 having a material adverse impact on the
Group and its business activities, as may factors besides those listed.
Key
Increased during year
Risk Level
Low
Unchanged during the year
Medium
Reduced during the year
High
The colouring (red, amber, green)
is our 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 may be more or less
significant than indicated.
South West Water
Law and regulation
Risk
Mitigation
Change
Changes in law, regulation or
decisions by governmental bodies
or regulators.
South West Water’s PR14 business plan is aligned with the
changes in the regulatory framework. South West Water's
business plan has been assessed by Ofwat as ‘enhanced’
and the Draft Determination for 2015-2020 has already been
received. This allows the company to begin to implement the
strategy for K6 earlier than might otherwise be possible.
South West Water continues to contribute fully to
consultations with all regulators and seeks to influence
emerging changes through strong relationships with our
stakeholders.
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Pennon Group Plc Annual Report 2014 Strategic report - Group
Economic conditions
Risk
Mitigation
Change
Non-recovery of customer debt.
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
• 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 the
WaterCare tariff from 2013/14. During the year 1,100
customers have benefited from reducing bills to an amount
they can better afford to pay.
The Government Payment reducing eligible household
customer bills by £50 per year has also been effectively
implemented and administered during the year.
In future changes to benefits and universal credits
(particularly the impact of the ‘bedroom tax’ and limiting the
total level of benefits available) may further affect the ability
of some customers to pay their bills.
Operating performance
Risk
Mitigation
Change
Extreme weather and climate
change can place pressure on the
company’s water resources and
networks.
Poor service provided to customers.
South West Water could incur a
financial penalty under Ofwat’s
Service Incentive Mechanism (SIM)
for below average customer service
performance.
Despite recent extreme weather, service to customers has
been maintained and the business continues to be well
placed to manage such situations. 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 impact of climate change is being
considered. The company has plans in place and will adapt
the way it conducts its business to respond effectively to the
anticipated hotter, drier summers and wetter winters.
The company has delivered further improvements in
customer service resulting in its best ever SIM score and
South West Water’s best ever score in the last quarter of
2013/14.
While South West Water's performance continues to
improve, a financial penalty would be incurred by the
company under Ofwat’s SIM for a below average customer
service performance.
Non-compliance or occurrence of
avoidable health and safety incident.
There are rigorous health and safety policies and procedures
in place across South West Water.
Senior management and Executive Director visits are
undertaken during the year across a number of the
company's sites and a behavioural safety programme
launched in 2012 badged ‘TAP’ has continued to be
publicised.
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www.pennonannualreport.co.uk/2014 Principal risks and uncertainties Continued
South West Water
Operating performance (continued)
Risk
Mitigation
Change
The number of accidents reportable under RIDDOR (Reporting for Injuries, Diseases
and Dangerous Occurrences Regulations) for 2013 continued to fall with three
incidents(1) reported in the year compared to seven in 2012.
South West Water continually reviews health and safety standards and makes
improvements as necessary to best working practice.
Continuous training is being provided to ensure that appropriate health and safety
working practices are embedded in the business, and the accident review panel
continues to complete thorough investigations of root causes and ensure a
consistent approach to RIDDOR management is adopted.
(1) This does not include the tragic fatality of a waste water team member at a waste
water site.
Significant operational failure or
incident occurs
South West Water has established procedures and controls in place, as well as
contingency plans and incident management procedures.
This could include: contamination
of water supplies, pollution events,
water resource restrictions and
flooding events.
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.
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.
In recent years South West Water has worked in partnership with other
representatives to identify a wide range of factors that can cause and exacerbate
flooding events.
The company has identified targeted capital investments to reduce the risk to
specific customers in key affected areas and, working alongside lead local flood
authorities, other partner agencies, developers and environmental groups, is
identifying best practice management of extreme rainfall and flooding.
Market
Risk
Uncertainty arising from market
reform.
Mitigation
Change
As part of the risk management and business strategic planning processes, the
company continues to evaluate developments and proposals for competition. With
the introduction of retail competition from 2017, South West Water is fully engaged in
Defra’s ‘Open Water’ project, which is managing the development of the central
market.
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 which it offers to commercial customers through 'Source for
Business'.
South West Water is participating in discussions for the design of Upstream reform.
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Pennon Group Plc Annual Report 2014 Strategic report - Group Viridor
Law and regulation
Risk
Mitigation
Change
Changes in law, regulation or
decisions by governmental bodies or
regulation.
Viridor operates within regulatory EU and UK established
frameworks. It engages at all levels and contributes fully to
any consultations on possible changes to the regulatory
policy, legislation and framework.
Removal or modification of renewable
energy incentives.
Existing investments that qualify for renewable obligation
certificates are protected under the ‘grandfathering’
procedure.
Economic conditions
Risk
Mitigation
Change
Reduced waste volumes to landfill
and in the overall market, due to the
long-term trend towards waste
minimisation, recycling and energy
from waste (EfW).
Viridor regularly conducts detailed forward-looking market
assessments. It has a diversified strategy focused on
growing stable volumes in recycling and EfW where margins
per tonne are much higher than in landfill.
Viridor is exploring alternative uses for its landfill assets.
Operating performance
Risk
Mitigation
Change
Business interruption, particularly in
the growing EfW business, through
equipment failure, fire, power
outages and campaign groups.
Downward pressure on UK
wholesale power prices.
Non-compliance or occurrence of
avoidable health and safety incident.
Equipment failure is being managed by more sophisticated
planned preventative maintenance regimes with improved
stocks and stores controls.
The risk from local disruption is alleviated by good public
liaison and communications.
Police are consulted regarding campaign groups and the
risk of cybercrime is being addressed as part of Project
Enterprise (see business systems risk).
Viridor enters into forward sale contracts for a certain
proportion of electricity generated from landfill gas power
generation.
To a certain extent downward pressure on power prices is
naturally offset by usage across Viridor and the wider Group.
Viridor has rigorous compliance systems, health and safety
policies and procedures in place. Professionally qualified
and highly experienced health and safety advisers are in
place for every region, reporting to the Head of Compliance.
Continual training, toolbox talks and briefings focus on key
topics. Formal health and safety qualifications are required
for line managers, senior managers and Directors. Risk
assessments are undertaken at every appropriate level. Safe
operating procedures are subject to audit and review.
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www.pennonannualreport.co.uk/2014 Principal risks and uncertainties Continued
Viridor
Capital investment
Risk
Mitigation
Change
Failure or increased costs of capital
projects and/or joint ventures not
achieving predicted revenues or
performance.
Increased skilled management resource including the establishment of ‘oversight
boards’ for each of the major projects has added additional rigour to their
delivery.
Wherever possible back-to-back agreements with, and guarantees from,
suppliers are entered into which provide a significant degree of protection.
Viridor’s experienced and dedicated project/contract teams carry out detailed
due diligence on all projects, suppliers, technologies and acquisitions prior to
commencement.
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.
Exposure to contractor failure to
deliver construction progress,
increasing costs and potentially
requiring lengthy legal action or
other redress.
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, 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.
Competitive pressures
Risk
Mitigation
Change
Reduced customer base,
increased competition affecting
prices or reduced demand for
services.
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. Viridor believes there is competitive shake-out taking place among
marginal competitors, which will in due course benefit Viridor.
Potential overcapacity in the UK
EfW market could impact demand
for Viridor’s new plants.
Viridor has fully evaluated projected demand and competing capacity for each of
its planned facilities and is confident that they can be filled profitably. As landfill tax
reached £80 per tonne in April 2014, large-scale energy from waste facilities of the
type Viridor is building will be one of the low-cost ways of disposing of residual
waste.
Overcapacity in parts of Europe
could impact the UK EfW market.
UK waste could be converted into
solid recovered fuel (SRF) or refuse
derived fuel (RDF) and exported
under EA licence for disposal in
Europe.
Business Systems
The costs of producing SRF and RDF to the required quality and of shipping it to
Europe are broadly at the cost of landfill tax. Disposal and generation of the
associated renewable energy in ERFs in the UK is generally lower cost (and better
for the UK economy). Despite the availability of export, Viridor is successfully
winning new contracts for its ERF plants. Nevertheless amounts of SRF and RDF
may continue to be exported especially if UK ERF capacity remains insufficient.
Risk
Mitigation
Change
Some of Viridor’s IT systems
require replacement, development
or upgrading to meet the growing
requirements of the business.
Project Enterprise, charged with developing a fully scalable Enterprise Resource
Planning (ERP) type platform is now well advanced and involves external
consultancy as required, with a focus on best practice and minimising
implementation risk.
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Pennon Group Plc Annual Report 2014 Strategic report - Group Group
Finance and funding
Risk
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.
The Company has robust treasury policies in place.
The Group had £1.3 billion of cash and facilities as at 31
March 2014 including around £0.6 billion of new and
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 of business.
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
Mitigation
Change
Pension costs may increase due to
higher costs for future service and
growing deficits in relation to past
service in the defined benefit
schemes.
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.
Pension trustees keep investment policies under review and
use professional investment advisers to seek to maximise
investment returns at an appropriate level of risk.
Forward-looking statements
This strategic report 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 strategic
report, 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.
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www.pennonannualreport.co.uk/2014 Sustainability report
The drive for sustainability underpins every aspect of Pennon’s
long-term environmental, social and economic strategy. As one
of the largest environmental and resource management groups
in the UK, the Group is committed to responsible business and
operational practices, minimising its impact on the environment
and having a positive effect on the communities it serves.
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.
2013/14 achievements
South West Water
• 17 consecutive years without
water restrictions; a reduction in
interruptions; industry-leading
leakage control; top quality
drinking water
• Best bathing water quality results
for seven years
Viridor
• Two star rating achieved in the
Business in the Community
Corporate Responsibility Index
2014
• Overall recycling volumes
broadly maintained, with a
sharp focus on quality
leadership in recyclates traded
• Improved customer service
• One of the first water
companies to introduce a
social tariff
• Largest ever customer
engagement programme
carried out in support of the
Business Plan to 2020.
• £13.3 million provided by
Viridor for environmental,
amenity and community
projects across the UK via the
Landfill Communities Fund.
301 projects supported.
score and customer
satisfaction levels
• Increased renewable energy
technology – solar PV and
hydro power generation
• Further delivery of sustainable
catchment schemes under
‘Upstream Thinking’
programme
• Growing contribution to UK
resource efficiency and £292
million further investment in
recycling and recovery
infrastructure
• Continued sector leadership
with 152 sites accredited to
ISO50001 standard
• Six closed landfill sites have
now attained the Wildlife
Trust’s Biodiversity Benchmark
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Pennon Group Plc Annual Report 2014 Strategic report - Group
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.
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 are designed
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 sustained its 2013 score
(4.2 out of 5) in the FTSE4Good Index –
Environmental, Social and Governance ratings
assessment.
Pennon Group
Earnings per share
before deferred tax and exceptional
net charges (pence)
2009/10
2010/11
2011/12
2012/13(1)
2013/14
South West Water
Capital Investment (£m)
2010/11
2011/12
2012/13
2013/14
Viridor
Capital Investment (£m)
2010/11
2011/12
2012/13
2013/14
40.8
42.3
47.3
40.3*
42.6
125.1
130.8
116.5
141.6
77.2
145.5
322.6
292.0
Objective:
Aim to ensure that all our business activities have
a positive economic, social and environmental
impact on the communities in which we operate.
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.
Pennon Group
Charitable donations (£)
2010/11
2011/12
2012/13
2013/14
78,678
73,992
74,998
29,881*
South West Water
Community support, sponsorship & donations (£)
79,671
2010/11
79,858
2011/12
73,301
2012/13
2013/14
90,921
Viridor
Community support, sponsorship
& donations (£m)
2010/11
2011/12
2012/13
2013/14
10.1
10.4
10.7
13.5
* In October 2013 the Pennon Charitable Donations Committee was split into two committees, one operated by South West Water, the other by
Viridor. The charitable donations amount allocated by each committee post October 2013 is included in the figure given in the ‘Community support,
sponsorship & donations’ bar charts for each company.
(1) Restated for IAS 19 (Revised)
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www.pennonannualreport.co.uk/2014 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.
Economic impact
South West Water
The major investment South West Water has
made in water and waste water services since
privatisation has helped support regional
economic growth. Key business sectors such
as agriculture and tourism have directly
benefited from the company’s efforts to
increase environmental protection (for example
in areas such as bathing water quality), and
the company continues to be one of the
largest private employers and users of third
party suppliers and contractors in the region.
Recent studies show that South West Water
supports more than 4,000 jobs in the regional
Viridor
Viridor’s investment programme totalling £1.5
billion in recycling and energy from waste
facilities includes £292 million of capital
investment in growth projects in 2013/14 and
continues to create significant direct and
indirect employment and training
opportunities, including construction jobs and
supply chain opportunities.
For example Viridor’s Trident Park ERF
construction project in central Cardiff is
generating jobs and investment in the capital
city and the wider region. Latest statistics
show that in 2013/14 an average of 565
economy, in addition to the 1,400 engineers,
technicians, scientists, office staff and other
skilled professionals in direct employment. The
company has a growing apprenticeship
scheme and is committed to support for
education. In 2013/14 this has included
playing a key role in the development of a new
Devon-based University Technical College
(UTC), which is set to open in 2015.
In 2013/14 approximately £100 million of order
value was placed with companies with a south
west base. At the start of the current
regulatory period South West Water adopted a
‘mixed economy’ supply chain model,
designed to use small specialist companies
based in the region alongside larger contract
partners. Through its supplier forum and other
cross-company initiatives South West Water
continues to encourage and promote a culture
of innovation and sharing of ideas. The
company also has stringent procurement
policies in place to ensure that supply chain
partners adhere to a shared vision of
sustainable working practices and corporate
responsibility.
operatives have been employed on-site each
month. 35 permanent skilled roles are being
created for which recruitment is underway.
in the overall £36 billion planned investment in
UK infrastructure, are being delivered by
Viridor.
Viridor’s developing sustainable procurement
policy and practice will further enhance the
overall environmental and social benefits
across the company’s supply chain.
In addition £17.5 million has been placed with
local companies for materials, plant hire and
sub-contracted work and the local economy
has benefited from an estimated additional £2
million to date. Viridor currently has seven ERF
construction projects in progress.
Viridor’s infrastructure projects were listed by
the UK Government as contributors to Britain’s
long-term plan for economic growth. A quarter
of the 20 waste management projects, listed
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Social impact
Viridor
Through its integrated contracts and
major projects, Viridor is able to
demonstrate clear community benefits
across the UK. For example in Glasgow
Viridor continues to deliver education,
training and local capacity building as
an integral service element in addition
to core recycling and waste
management services required under a
25-year waste contract. Similarly, a full
and ongoing assessment of community
benefits is conducted for its major
infrastructure construction projects.
Recognising that improved awareness
and perceptions of recycling, waste
and resource management issues
within businesses and households is
vitally important in driving further the
UK’s recycling and recovery rates, and
in attracting talent into the sector,
Viridor continues to focus its proactive
community sponsorship programmes
on education initiatives. In particular in
2013/14 it has supported Science,
Technology, Engineering and Maths
(STEM) and environmental education
initiatives. These include the Scottish
flagship educational partnership with
the Engineering Development Trust,
GO4SET (Go for Science, Engineering
and Technology).
Viridor continues to operate or support
10 education centres across the UK,
helping to promote better
understanding and best practice in
recycling and resource management.
These centres welcomed 14,000
visitors from schools, colleges and
community groups during the year.
The company encourages employees
to get involved in a wide and inspiring
range of community projects in its
areas of operation. This includes
match-funding of employee fund-
raising efforts as well as a wide
South West Water
Recognising that affordability is one of
its customers’ key concerns, South
West Water has continued to develop
its range of affordability initiatives,
partnering with consumer organisations
such as the Citizens Advice Bureau
and Age UK to provide advice and
support.
In 2013 the company was among the
first in the industry to launch a social
tariff and a pilot scheme was launched
alongside local social housing providers
to offer targeted assistance to low
income tenants. South West Water has
also frozen prices for 2014/15 and
pledged to reduce bills by up to 13% in
real terms by 2020.
South West Water seeks to have a
positive impact on the communities it
serves. This includes the steps it takes
to minimise the disruption or
disturbance caused by construction
activities (for example the repair or
replacement of sections of water and
sewerage mains). In 2013 a successful
example of this was the handling of a
major water mains replacement
scheme in Newton Poppleford, Devon.
This generated positive local press
coverage.
Beach cleans and habitat management
were among the activities carried out
by South West Water staff as part of
programme of sponsorship and
support for projects and events in local
communities. The company was
pleased to provide £178,000 of direct
community sponsorship and charitable
funding in 2013/14.
Viridor continues to provide funding to
a broad range of amenity, community
and environmental improvements
projects across the UK via the Landfill
Communities Fund. In 2013/14 Viridor
provided £13.3 million, supporting a
total of 301 projects. It is estimated that
these projects benefited some 218,000
people. Funding is distributed via Viridor
Credits, an independent Environmental
Body.
the employee volunteering programme.
The company also continued to
promote and support the health and
recreation opportunities available at
reservoir sites across the region,
including those managed on its behalf
by South West Lakes Trust.
In addition to its apprenticeship
scheme, South West Water continued
to support education through the
provision of talks and materials to local
schools, work experience, placements
and giving lectures at the regional
universities.
Case study
Stepps Park, Glasgow, a popular park in Stepps, near Glasgow, has been
transformed due to the efforts of the ‘Friends of Stepps Park’.
Consultation with regular park users informed the design of the park, with
a strong emphasis on inclusion of all members of the community. An
award of £101,000 from Viridor Credits helped towards new play
equipment, seating, access and drainage.
Case study
Meeth Quarry, a man-made quarry, has been given
over to wildlife indefinitely due to an award of
£590,000 from Viridor Credits. The award enabled
Devon Wildlife Trust to purchase the site with the aim
of protecting the ecology of the site as well as
opening it up to the public for the first time.
39
www.pennonannualreport.co.uk/2014 Sustainability report Continued
Environmental impact
South West Water
In recent years South West Water has
adopted a holistic approach to protecting the
environment. Alongside investment in the
maintenance and improvement of its
infrastructure, this includes work to identify
and pioneer ecologically sensitive sustainable
solutions, often in partnership with other
regional agencies and organisations.
In 2013/14 the company continued its
award-winning ‘Upstream Thinking’
programme of catchment management,
which is designed to improve natural water
quality and water storage in the landscape.
In early 2014 a study by Exeter University
recognised the significant progress made by
the Exmoor Mires Project (part of the wider
‘Upstream Thinking’ programme), noting how
the peat bog restoration is successfully
improving water quality while also improving
carbon retention. Additional environmental
benefits of such work include reduced
enhanced biodiversity, with several of the
restored sites now recognised as habitats for
rare species of bird and insect life. The project
is also reducing flood risk.
A similar philosophy is at the heart of South
West Water’s new ‘Downstream Thinking’
programme, which is designed to help tackle
waste water issues such as sewer flooding
and pollution through ecologically sensitive
‘soft’ engineering schemes, Sustainable Urban
Drainage schemes (SuDs), habitat
management and the targeting of
misconnections. In 2013/14 the company
carried out planning activity ahead of the
roll-out of the first pilot scheme in Cornwall in
the 2014/15 financial year.
The region’s bathing water quality reached its
highest standard in seven years with 99.3%
meeting or exceeding the minimum EU
standard and 91% meeting the tighter EU
‘guideline’ standard. South West Water
remains committed to investing in the
maintenance and improvement of its waste
water treatment assets and networks in order
to meet existing and emerging legislation. This
includes the revised Bathing Waters Directive
which comes into force in 2015.
Compared with the previous year, 2013 saw a
rise in the total number of pollution incidents
and the number of harmful pollution incidents
(Categories 1 and 2). While this is
disappointing, this year’s performance should
be seen in the context of changes in the
scope of reporting and the steps South West
Water has taken to increase its capacity to
monitor, identify and ‘self-report’ pollution
incidents when they occur.
With regard to its carbon footprint, South West
Water successfully met its target of keeping
emissions at a level lower than that of the
baseline position at the start of the current
investment period. The company also
expanded its use of renewable energy. This
included two hydro generation schemes and
the installation of a solar panel array at the
company’s Exeter-based headquarters – its
largest solar installation to date.
Viridor
Viridor is responsible for the management and
stewardship of substantial landholdings,
including 27 closed landfill sites, 19 operating
landfills and five Sites of Special Scientific
Interest. These landholdings (particularly closed
landfill sites) can have significant benefits to
plants and wildlife. In order to better
understand the potential of these sites the
company carries out detailed ecological
assessments, leading to the development of
Biodiversity Action Plans on key sites, to
enhance habitats and species of national
importance.
At these locations Viridor works in partnership
with the Wildlife Trusts, local communities and
employees to enhance amenity and
biodiversity wherever practicable. Viridor has
worked hard to manage and enhance
biodiversity on its closed sites and six have
now attained the Wildlife Trust’s Biodiversity
Benchmark standard. The next stage of
roll-out is to start working on three additional
sites in 2014. This maintains Viridor’s position
as industry leader in respect of the proportion
of sites covered by the Biodiversity
Benchmark.
40
Pennon Group Plc Annual Report 2014 Strategic report - Group 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
In support of its Business Plan to 2020
South West Water carried out its
largest ever programme of research
and engagement with customers and
stakeholders during 2013/14.
Designed to gauge priorities for future
investment, the formal research
element was supported by a region-
wide multi-platform media campaign
(including digital media).
An independent panel comprising
representatives from key consumer,
business, environmental and regulatory
stakeholder groups also helped ensure
the plan achieved a sustainable
balance of investment for the region.
The ‘WaterFuture Customer
Viridor
In its second year of participation
Viridor was awarded two stars in the
Business in the Community Corporate
Responsibility (CR) Index 2014, a step
up on its previous year’s assessment.
Developed in consultation with
business leaders, the CR Index is a
powerful tool that has helped leading
companies drive progress on corporate
responsibility for more than a decade.
Panel’ played a key role in scrutinising
and challenging South West Water’s
engagement activities and the resultant
plans.
When the plan was published in
December 2013 it had achieved 84%
acceptability and endorsement from
the WaterFuture Customer Panel.
Evidence of ‘exceptional’ customer
engagement was highlighted by Ofwat
in its subsequent assessment.
In preparation for the opening of the
retail market to business customers in
2017, the company is successfully
engaging with the business community
through ‘Source for Business’. This
offers an expansive and innovative
range of supplementary advice and
support services (for example
dedicated account managers, water
and energy audits and laboratory
services) and products designed to
improve water efficiency and ensure
non-household customers get the best
possible value for money.
At a wider level, South West Water is
taking steps to improve its
communications with customers and
stakeholders. This includes an
increased use of digital media and a
focus on improving the responsiveness
of customer services.
This year the evaluation criteria were
stricter than previously. The CR Index
is based on a detailed assessment in
the key areas of ‘Workplace’,
‘Marketplace’, ‘Environment’ and
‘Community’. Many of the company’s
achievements in these areas are
outlined elsewhere in this section of the
Annual Report.
Within this framework Viridor continues
to operate an ‘open door’ policy at its
facilities, encouraging visits and
engagement with customers,
community groups and interested
stakeholders. The company again took
part in the English Heritage Open Days,
encouraging local people to explore
Viridor’s facilities.
Viridor also continues to operate
community liaison groups at its major
facilities, including those under
construction, to ensure active and
open dialogue between the company
and its stakeholders and regulators.
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www.pennonannualreport.co.uk/2014
Sustainability report Continued
Objective:
Strive for the highest standards of health and safety in the workplace so as to minimise accidents, incidents and lost time.
South West Water
Viridor
RIDDOR incidence rate per 100,000 employees
2,008
2010
1,628
2011
565*
2012
2013
243*
Actual number of incidents was 3
RIDDOR incidence rate per 100,000 employees
2,165
2010
1,238
2011
1,429*
2012
2013
1,197*
Actual number of incidents was 37
A safe and healthy workforce will always be a top priority for the Pennon Group.
South West Water
The health and safety of employees is South
West Water’s foremost concern and the
company has rigorous health and safety
policies and procedures in place.
Tragically, on 30 December 2013 there was an
incident at Falmouth Waste Water Treatment
Works which involved the death of a member
of our waste water team.
Viridor
Viridor is committed to achieving a step change
in its health, safety and welfare performance. It
already has rigorous and comprehensive health
and safety policies, procedures and systems in
place and is now focusing on behavioural safety
and a fully engaged culture to achieve this.
A major review of health and safety
management, systems and culture was
launched in January 2014, and an HSE-
endorsed health and safety employee survey
was conducted towards the end of 2013/14.
As the coroner’s inquest to establish the
material facts relating to the death has yet to
take place, this incident is not included in our
2013/14 figures for RIDDOR (Reporting of
Injuries, Diseases and Dangerous Occurrences
Regulations).
included the introduction of an independent
occupational health service and a third-party
nurse-led absence reporting process. This
supports the reduction of absence while
providing employees with advice on specific
medical issues.
South West Water continually reviews its
health and safety standards and makes
improvements as necessary to ensure best
working practice. In recent years this has
The results will help inform action plans in this
priority area for 2014/15.
This work complements the HSE-published
Waste Industry Safety and Health (WISH)
Blueprint for Accident Reduction in the
Recycling and Waste Industry (of which Viridor
was an author). A revised health and safety
strategy was also endorsed by the Viridor
Board in January 2014.
Regrettably an HSE Improvement Notice was
issued to Viridor in October 2013 at its East
Kilbride Household Waste Recycling Centre
relating to site layout and reversing vehicles.
The notice was immediately actioned and
complied with.
HSE action is also pending in Scotland relating
to an incident at Bargeddie MRF, which is likely
to result in a prosecution. The matter, involving
serious injury to an employee, has been fully
investigated and corrective actions have been
implemented.
* From 2012 reportable incidents are reported on seven days’ absence; in previous years they were reported on three days’ absence.
42
Pennon Group Plc Annual Report 2014 Strategic report - Group
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 people and provide training packages to equip them with the skills they need to deliver the Group’s
objectives.
Both South West Water and Viridor are equal opportunities employers. Their employment policies are non-discriminatory
and every effort is made to ensure that no current or future employee is disadvantaged because of age, gender, religion, ethnic
origin, marital status, sexual orientation or disability. Employees are supported through a range of ‘family-friendly’ policies and other
benefits. Employees are also entitled to participate in Pennon Group all-employee share schemes. Any changes to policies are
communicated and consulted upon in detail.
South West Water
South West Water’s ‘People Strategy’
is designed to foster a culture of
support, motivation and reward for
staff. Comprehensive development
programmes are in place at all levels of
the business to encourage career
development. These include
management training initiatives and the
GROW programme, which focuses on
increasing business awareness and
giving employees the tools and
techniques for personal development.
During 2013/14 the company also
carried out a major upskilling
programme for operational staff.
The company prides itself on recruiting
and retaining a highly skilled workforce
and in 2013/14 its apprenticeship
programme continued to gather
momentum with 23 new recruits.
Various internal schemes are in place
to promote innovation and reward
those whose performance has
excelled. The ‘Pure Awards’,
for example, are given to those who
have made a significant contribution
towards the company vision of
delivering ‘Pure Water, Pure Service
and Pure Environment’.
Viridor
The achievements, professionalism and
commitment of its employees is a
source of pride to Viridor. The company
is continuing its transition from a
traditional waste collection and disposal
company into a sector-leading
renewable energy, recycling and
resources business. To do this it is
creating a business that is ‘future-fit’,
which means having a well-trained,
skilled and engaged workforce along
with excellent business processes and
systems.
The world’s top-performing
organisations understand that
employee engagement is a force that
drives business outcomes. Engaged
employees help to drive safety,
productivity, profitability and customer
focus. As part of Viridor’s renewed
commitment to employee engagement,
it will now be working with Gallup and
using their well-known and established
‘Q12’ employee engagement
programme, starting with the Viridor
survey.
Reflecting its ongoing focus on positive
professional development and training,
245 Viridor employees are registered
for the sustainable resource
apprenticeship and the company
currently employs a further 17
‘traditional’ apprentices. A full range of
NVQs and other training qualifications is
available to ensure the required levels of
skills and expertise across the
workforce.
As part of its innovative partnership with
Edge Hill University, Viridor’s business
leadership and management
foundation degree course continues for
its next generation of leaders. The first
Viridor Degree cohort have completed
the course and will graduate in July
2014.
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www.pennonannualreport.co.uk/2014
Sustainability report Continued
Pennon Group Plc greenhouse gas emissions
Scope 1
Scope 2
Scope 3
Total gross emissions
Carbon offsets
Netted off renewable electricity export to grid up to total amount of
electricity purchased and consumed by organisation
Total annual net emissions
Biogenic emissions outside of scopes
2013/14
1,223,568
143,478
60,080
1,427,126
0
(143,478)
1,283,648
936,133
2012/13
1,200,591
143,528
57,493
1,401,613
0
(143,528)
1,258,084
957,425
Intensity measure: tCO2e (gross Scope 1 + 2)/£100,000 revenue
103 tCO2e/£100,000 revenue
112 tCO2e/£100,000 revenue
Scope 1 (Direct emissions) Activities owned or controlled by our organisation that
release emissions straight into the atmosphere, for example the combustion of fuels
in company owned and controlled stationary equipment and transportation,
emissions from site based processes and site based fugitive emissions.
Organisational boundary
The emissions listed here cover the Pennon Group of
companies using the financial control approach.
Scope 2 (Indirect emissions) Emissions 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.
Operational scopes
We have measured our Scope 1, 2 and some Scope 3
emissions where information is available.
Intensity measurement
We have chosen an intensity measure of Scope 1 and 2 gross
emissions in tCO2e per £100,000 revenue.
External assurance statement
Our greenhouse gas emissions data has been independently
audited and verified for accuracy, completeness and
consistency by an external assurance assessor.
Carbon offsets
We do not purchase any carbon offsets, instead we rely on
self-generated renewable energy to reduce our overall
emissions.
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.
Scope 3 (Other indirect emissions) 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
Change in emissions
Our GHG emissions increased between 2012/13 and 2013/14
largely as a result of additional fugitive emissions from our
landfills. However our emissions intensity measure of
tCO2e/£100,000 revenue decreased as a result of our revenue
increasing at a faster rate than our emissions.
In order to maintain emissions comparability between reporting
years we have taken the decision to rebase our historical
emissions following a recent change in the Government’s
methodology for calculating the emissions conversion factors
associated with imported electricity usage. The Government’s
modification has resulted in an approximate 7% reduction in
emissions from imported electricity (Scope 2 emissions)
compared with the previous methodology and this has been
significant enough to prompt us to rebase our 2012/13
reportable emissions.
Our second methodological change is to remove biogenic
emissions from our Scope 1 emissions and report them
separately so that they are no longer included within our total
gross and net emissions. This accords with the latest
Government guidance on reporting emissions reductions such
as those emissions that have their origins in biological matter.
Methodology and approach
We have followed the Government’s environmental reporting
guidelines for mandatory greenhouse gas emissions reporting
published by DEFRA in June 2013. In calculating our emissions
we have used the Greenhouse Gas Protocol Corporate
Accounting and Reporting Standard (revised edition) and the
web-based conversion factors provided by DEFRA.
44
Pennon Group Plc Annual Report 2014 Strategic report - Group Objective:
Aspire to leadership in minimising emissions that contribute to climate change, and develop climate
change adaption strategies
South West Water
In 2013/14 South West Water
increased its capacity for renewable
energy and continued to invest in the
fine-tuning of its assets, systems and
working practices in order to make
them more energy efficient. Compared
with its 2009/10 baseline, carbon
emissions were successfully reduced
and energy consumption was 2.4GWh
lower than for the previous year.
Since the start of the current
investment period (2010-2015) South
West Water has improved the way it
manages energy and emission levels
through a combination of the following:
Viridor
Carbon management and energy
efficiency are now well established
disciplines within Viridor. During the
year there was continued progress with
the deployment of energy and water
saving initiatives in line with the
company’s five-year carbon reduction
and energy efficiency plan. This aims to
reduce its overall fossil fuel related
carbon footprint and improve energy
efficiency by 20% (against a 2010/11
baseline).
Through its energy recovery operations
using residual and organic wastes as
fuel, Viridor is a significant exporter of
(largely renewable power generated)
electricity to the national grid. The
company’s materials recycling
operations also make a positive
contribution towards helping reduce
embodied carbon within supply chains
(by replacing virgin materials in
manufacturing).
• optimising asset performance and
refurbishing pump systems
• renewable energy generation
• new technologies (e.g. operating
equipment and systems remotely
under the PUROS* scheme)
• promotion of energy efficiency
through the in-house Powerdown
initiative.
The company’s holistic, catchment-
based approach to the management of
water and waste water is also working
towards a reduction in carbon
emissions. This spans everything from
the carbon capture in the restored peat
bogs that have been developed as part
The largest source of Scope 1 GHG
emissions as CO2 equivalent tonnes
are landfill gas ‘fugitive’ emissions.
These continue to reduce as capture
rates improve (harnessing methane for
power generation), landfill volumes
reduce and the composition of inputs
continues to change. Thermal emission
increases with increased utilisation of
ERFs will be more than offset by the
decline in landfill emissions and
emissions that would be otherwise
generated by fossil fuel fired power
stations to provide the same amount of
energy.
Although Viridor exports almost 12
times the amount of electricity that it
uses from the national grid, it cannot
‘net’ one off against the other for
carbon reporting purposes. As an
operator of a fleet of 650 collection
trucks and 200 other company
vehicles, the company also continues
to focus on reducing its transport-
of the ‘Upstream Thinking’ initiative,
through to the more general move
away from a dependency on
engineering and energy intensive
schemes.
* Phased Utilisation of Remote Operating
Systems
related emissions through business
and technical efficiency initiatives.
These emissions reduced by 15% over
the three years since 2011. Almost half
of these reductions have been
achieved in 2013/14.
The roll-out of the first phase of a
company-wide LED lighting retrofit has
been completed at 26 of Viridor’s
largest energy-consuming facilities.
Viridor has shown continued sector
leadership with the accreditation to ISO
50001 Energy Management Standard
now at 150 of its sites. This represents
43% of the total certified sites (from all
sectors) in the UK and 2% worldwide.
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www.pennonannualreport.co.uk/2014
Sustainability report Continued
Objective:
Aspire to leadership in all aspects of waste prevention and resource efficiency.
Renewable energy generation (GWh)
2010/11
2011/12
2012/13
2013/14
752
760
820
778
13.8
14.7
19.3
17.4
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 (tonnes of dry solids)
Recycling volumes traded (million tonnes)
2010/11
2011/12
2012/13
2013/14
52,400
54,612
45,304
34,918
2010/11
2011/12
2012/13
2013/14
1.718
1.842
1.909
1.846
South West Water
South West Water has successfully avoided
water restrictions for 17 years due to its past
investment in resources and its careful
management of supplies. The company’s
water resource position is healthy and its
strategy going forwards is to invest in ways to
move water to where it is needed most rather
than developing any new reservoir sites. South
West Water continues to achieve industry-
leading leakage control and the company is
taking steps to reduce the amount of time it
takes for leaks to be fixed. This is being
delivered, in part, through increased monitoring
and investment in analytical technologies to
better predict any issues on the mains.
With regard to waste prevention, South West
Water recycles sludge using anaerobic
digestion techniques to create a biosolid
product for agricultural use. The company has
also invested in creating energy from waste
and currently has seven operational CHP
(Combined Heat and Power) plants. Part of
South West Water’s long-term strategy is to
further develop each of these activities.
South West Water is also currently working
with its supply chain partners to minimise the
amount of waste on construction sites and
make use of by-product materials such as
rock, grit, plastics and other materials. In the
past year this has included the recycling of
excavated concrete at Radford Wastewater
Treatment Works in Plymouth and the use of
recycled plastics at Ashford Waste Water
Treatment Works, North Devon.
In addition the company continues to take
steps to reduce the amount of waste sent to
landfill through the recycling and composting
of grit and screenings (solid materials extracted
in the early stage of waste water treatment). In
particular grit is being used for land restoration
activities at Park and Stannon reservoirs – the
former china clay pits (purchased for reservoir
use in 2011) that South West Water is working
alongside local authorities and conservation
groups to restore.
Viridor
Today’s business practices continue to largely
rely on increasing resource consumption to
create and drive economic growth. There is
increasing pressure on resources such as
minerals, metals and fossil fuels, and rising and
volatile prices for materials and energy
demonstrate the increasing risk of impending
‘resource crunch’. Addressing this and
changing ‘linear’ business models (‘extract,
make, consume, dispose’) requires the
adoption of the business strategies of a more
‘circular economy’. The principles of this
include higher levels of reuse and recycling,
products as services, collaborative production
and consumption, and renewable power
generation and use.
Viridor provides services in line with its stated
purpose of giving resources new life. It provides
essential waste prevention, recycling, resource
management and renewable energy services
to its clients across all sectors. The company
continues to identify and exploit economic and
policy drivers and opportunities to deliver
services contributing to greater resource
efficiency and energy security.
Despite ongoing price volatility for recycled
commodities, Viridor broadly maintained the
overall volume of material recovered for
recycling at 1.8 million tonnes in 2013/14 (1.9
million tonnes 2012/13) while focusing on
producing higher quality materials.
Renewable power generation decreased by
5.1% to 778 GWh (from 820 GWh in 2012/13).
The greatest contribution of renewable power
was from 33 landfill gas power plants, followed
by ERF plants and a modest contribution from
AD plants and solar power arrays. The
contribution from ERFs will increase
significantly as five plants are due to become
operational during 2014/15. Viridor
commissioned an additional AD facility at
Walpole during 2013/14 and installed solar
power arrays at Westbury closed landfill and at
Lakeside EfW.
A partnership between Viridor and Highview
Power Storage was awarded over £8 million in
February 2014 to spur innovation in storing
energy. The contract to build and operate a
5MW energy storage demonstration project at
a Viridor landfill site has been awarded by the
Department of Energy and Climate Change.
The company was also pleased to see the
introduction of the Materials Recycling Facilities
(MRF) Code of Conduct, introducing quality
assessment criteria for output materials at all
UK MRFs, during the year. Viridor has been
leading the call for the introduction of such
standards, and helped develop the protocols
now required by all operators.
46
Pennon Group Plc Annual Report 2014 Strategic report - Group Governance
Programmes and performance contributing to the
sustainability of the businesses are overseen by the
Pennon Sustainability Committee and in the case of
South West Water, its own sustainability committee.
Details of the Pennon Sustainability Committee are
given on page 67. 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 and South West Water
Sustainability Committees 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.
South West Water
and Viridor sustainability reports
The full sustainability report for Viridor will be
published in August and this year South West
Water will be incorporating its sustainability
reporting in its annual report and accounts which
will be published in July. Both documents 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 2013/14, and their performance
against them, are given in their respective reports.
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www.pennonannualreport.co.uk/2014 Governance and remuneration
Table of contents
Chairman's letter to shareholders
Board of Directors
Directors' report
The Board and its governance framework
The Board and its Committees
The Directors, their independence and responsibilities
Operation of the Board in the year and its activities
Performance evaluation
Dealing with Directors’ conflicts of interest
Board Committees and their terms of reference
Internal control
Wider aspects of internal control
Risk identification
Internal control framework
Internal control review
Going concern
Directors’ responsibilities statements
Corporate governance statements
The UK Corporate Governance Code – statement of compliance
Reports of each Board Committee
The Audit Committee
Letter from the chairman of the Audit Committee
Audit Committee composition and meetings
Significant matters considered by the Committee during 2013/14
Effectiveness of the external audit process
Auditor independence
Provision of non-audit services
Audit firm tendering
Internal audit
Fair, balanced and understandable (FBU) assessment
The Sustainability Committee
The Nomination Committee
Diversity policy
The Remuneration Committee
Directors' remuneration report
See separate description of contents on page 70
48
49
52
54
56
57
57
58
58
58
59
59
59
60
60
60
61
61
62
62
62
63
65
65
65
66
66
66
67
68
68
69
70
Governance and remunerationPennon Group Plc Annual Report 2014 Chairman’s letter to shareholders
Dear Shareholder
I am pleased to introduce the corporate governance report for
2014 on behalf of the Board. Part of my role, together with the
Board, is to ensure that Pennon Group operates to the highest
standards of corporate governance. This provides a framework
for the Board to deliver effectively and efficiently the Group’s
strategy to add shareholder value. This is in the interests of the
long-term success of the Company.
The Annual Report remains the principal means of reporting to
our shareholders on the Board’s governance policies and
therefore I welcome this opportunity to set out how the main
and supporting principles of good corporate governance set
out in the UK Corporate Governance Code (the UK Code),
(latest 2012 edition), have been applied in practice. The UK
Code is publicly available on the Financial Reporting Council
(FRC) website, www.frc.org.uk
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www.pennonannualreport.co.uk/2014 Chairman’s letter to shareholders Continued
Role of the Board and its effectiveness
New governance and remuneration reporting
We have revised our governance and corporate reporting
arrangements in accordance with the requirements of the
updated UK Code and the new reporting regulations which
came into effect for our 2013/14 financial reporting year. The
principal changes we have made to comply with these new
reporting requirements are:
• inclusion of a strategic report in the Annual Report this year
instead of a business review. The strategic report contains a
fair review of the Company’s business, a description of the
principal risks and uncertainties facing the Company and a
balanced and comprehensive analysis of the development
and performance of the Company’s business during the
year and the position of the Company’s business at the end
of the year. In addition we set out the main trends and
factors likely to affect the future development, performance
and position of the Company’s business, information about
environmental matters, the Company’s employees and
community issues as well as a description of the Company’s
strategy, its business model and diversity information
relating to the Group;
• additional information in the Audit Committee report setting
out the significant issues relating to the financial statements
that the Committee considered and addressed during the
year as well as the key areas of focus of the Committee
during the year; and
• a restructured and enhanced Directors’ remuneration report
including the single total figure table which relates to the
average remuneration of our three Executive Directors as
we do not have a Group chief executive officer.
My primary role as Chairman continues to be 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
including, in particular, Ofwat in relation to the business of our
subsidiary, South West Water.
I believe that we continue to demonstrate that we have good
governance in place and that we operate effectively and
cohesively as a Board. As always, there is 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. This year we decided to revert
to undertaking our review internally, which enabled us to
refresh our approach to performance evaluation and to the
searching questions we ask ourselves. The results of this
review are set out later in this report.
It remains vital that the whole Board and not just the Non-
executive Directors continue to have appropriate up-to-date
knowledge and understanding of both South West Water, as it
enters into a new regulatory period having successfully
achieved 'enhanced' status for its business plan with Ofwat,
and Viridor, as it continues to transform the business into a
recycling and resources and energy (EfW and landfill energy)
business. Accordingly I have ensured that the Board has
received presentations in the last year from senior
management on material developments including South West
Water’s business plan for the next regulatory period and
developments in respect of the Viridor EfW business.
Governance and subsidiary boards
During the last year we have enhanced the governance in our
two subsidiary boards, South West Water and Viridor, by
establishing Committees to these boards chaired by these
companies’ non-executive directors. For South West Water
this also demonstrates our support for Ofwat’s board
leadership, transparency and governance principles which
were formally published in January 2014. Our corporate
governance framework, including that of our subsidiaries, is
set out on page 56 of this governance report.
50
Governance and remunerationPennon Group Plc Annual Report 2014 Shareholder engagement
Appropriate and regular communications with our
shareholders is recognised by the Board as vital to
ensuring that we are able to explain our actions and
that shareholders are able to provide feedback on the
matters they consider to be important and any issues
which require addressing.
Before the AGM last year it became apparent that
one of our major shareholders was concerned about
the ongoing high level of non-audit fees paid to our
external auditors. As a consequence we took steps
to reassure that shareholder that we would be
reviewing our external audit arrangements in the
forthcoming year. The audit tender process we
carried out, culminating in the recommendation to the
AGM this year of the appointment of a new external
auditors, is set out in our Audit Committee report on
page 66 of this governance report.
Regular dialogue with the Company’s institutional
shareholders is maintained through a comprehensive
investor relations programme both in the UK and
Europe. During the year some 70 meetings and 11
conference calls were held with institutional
shareholders and prospective shareholders. In
addition the Company was represented at four
utilities conferences hosted by investment banks
specifically aimed at the fund management
community. All were attended by the Group Director
of Finance and the Company’s Investor Relations
Manager. I, together with 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. This ensures that the Board is fully
briefed on the views and aspirations of our
shareholders.
Those shareholders that attend our AGMs will know
that I also actively encourage their participation and
welcome questions on any business issues affecting
the Group. As usual at our 2014 AGM on 31 July 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
further explain the business of the Group.
Compliance with the UK Corporate Governance
Code and other requirements
I am once again pleased to report that throughout the
year the Company complied with the provisions and
applied the main principals set out in the UK
Corporate Governance Code (latest 2012 edition)
with no exceptions to report.
My introduction to this corporate governance report
and the following sections are made in compliance
with the UK Code, FCA Listing Rule 9.8.6 and FCA
Disclosure & 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. Finally, this year in accordance with the
new reporting requirements the Board is confirming
on page 61 to shareholders that it considers that the
Annual Report & Accounts taken as a whole are fair,
balanced and understandable and provide the
information necessary to assess the Company’s
performance, business model and strategy.
Ken Harvey
Chairman
23 June 2014
To view our online annual report:
www.pennonannualreport.co.uk/2014
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www.pennonannualreport.co.uk/2014 Governance and remuneration
Board of Directors
Composition
Executive
Non-executive
(inc. Chairman)
Male
Female
Experience
Industry
Finance
Governance
43%
57%
86%
14%
Tenure
0-3 years
4-6 years
7-10+ years
43%
43%
14%
29%
14%
57%
The Board considers each of its
Non-executive Directors to be
independent in accordance with the
UK Corporate Governance Code.
Chairman
Executive Directors
The Board has a target in its diversity
policy to achieve 25% female
representation by 2015.
The Board believes its Directors have
an appropriate range of experience to
the business of the Group.
Kenneth George Harvey
CBE, BSc
Chairman
Appointed on 1 March 1997
Committees: Nomination (Chairman)
Ken was formerly chairman and chief executive of Norweb Plc. He 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. He was until July 2013 the senior
independent director of National Grid Holdings Plc.
David Jeremy Dupont
MA, MBA
Group Director of Finance
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 South West Regional
Council and the Theatre Royal Plymouth
Development Advisory Group.
Ian James McAulay
BEng, CEng, VIWEM
Chief Executive, Viridor
Appointed on 9 September 2013
Committees: Sustainability
Ian was previously chief of global strategy
and corporate development with MWH
Global based in the US. Previously he
was the managing director, capital
programmes, at United Utilities Plc. Ian
started his career as a consulting civil
engineer and held a number of positions
with Crouch and Hogg in Glasgow and
subsequently Montgomery Watson,
which merged in 2001 with Harza to form
MWH Global.
Christopher Loughlin
BSc Hons, MICE, CEng, MBA
Chief Executive, South West Water
Appointed on 1 August 2006
Committees: Sustainability
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
and a trustee and member of the audit
committee of the global charity WaterAid.
Until June he was also president of the
Institute of Water.
52
Pennon Group Plc Annual Report 2014 Strategic overvie w
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Non-executive Directors
Martin David Angle
BSc Hons, FCA, MCSI
Non-executive Director
Appointed on 1 December 2008
Committees: Audit, Sustainability, Nomination,
Remuneration (Chairman)
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 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
Appointed on 1 October 2003
Committees: Audit (Chairman), Sustainability,
Nomination, Remuneration
Gerard currently is also a non-executive director and
chairman of the audit committee of the Defence
Science and Technology Laboratory, a non-executive
director of the Land Registry, an independent director
of the Nuclear Decommissioning Fund Company
Limited and a council member of the Science &
Technology Facilities Council. 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. Subject to re-election at
the Annual General Meeting in 2014 Gerard is due to
retire following the 2015 Annual General Meeting.
Group Company Secretary
Gill Ann Rider
CB, PhD, FCIPD
Non-executive Director
Appointed on 1 September 2012
Committees: Audit, Sustainability (Chairman with effect
from 2 August 2013), Nomination, Remuneration
Gill currently holds non-executive directorships with
Charles Taylor Plc, the Chartered Institute of Personnel
& Development where she is president and De La
Rue Plc where she is chairman of the remuneration
committee. She is also 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.
Kenneth David Woodier
Solicitor, CMA, DMS, CPE (Law)
Group General Counsel & Company Secretary
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.
53
www.pennonannualreport.co.uk/2014 Governance and remuneration
Directors’ report
Introduction
This Directors’ report is prepared in accordance with the
provisions of the Companies Act 2006 and regulations made
thereunder. It comprises the following two pages and the
matters disclosed elsewhere in this Annual Report as follows:
• list of Directors during the year (single total figure of
remuneration tables on page 84 of the Directors’
remuneration report);
• internal control and risk management systems (pages 59 and
60 of the governance report);
• likely future developments of the Company (pages 7, 17 and
23 of the strategic report);
• inclusion and diversity (page 55 of this report and page 68 of
the governance report);
• provision of information to and consultation with employees
(page 55 of this report);
• carbon emissions (page 44 of the sustainability report);
• Directors’ responsibilities statements (page 60 of the
governance report)
• financial instruments (pages 109, 110 and 130 of the notes
to the financial statements);
• important post-balance sheet events (page 157 of the
financial statements);
• governance information relating to the securities of the
Company, voting rights and in the event of a takeover bid
(page 61 of the governance report).
Financial results and dividend
The Directors recommend a final dividend of 20.92p per
Ordinary share to be paid on 3 October 2014 to shareholders
on the register on 8 August 2014, making a total dividend for
the year of 30.31p, the cost of which will be £112.7 million,(1)
leaving a transfer to reserves of £29.8 million(2). The strategic
report on pages 2 to 47 analyses the Group’s financial results in
more detail and sets out other financial information.
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 the 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.
(1) The cost of the proposed final dividend for the year ended 31 March 2014 excludes the impact of any conversion of the £125 million convertible bond between the year
end and 8 August 2014.
(2) The amount transferred to retained earnings is after a payment of £15.6 million (net of tax) to holders of the Company’s perpetual capital securities.
54
Pennon Group Plc Annual Report 2014 Research and development
Research and development within the Group involving
water and waste treatment processes amounted to
£0.1 million during the year (2012/13 £0.2 million).
Pennon Group donations
No political donations were made or political
expenditure incurred and no contributions were made
to a non-EU political party (2012/13 nil).
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 2013),
which was valid as at 31 March 2014 and remains
currently valid. Of the 2,105,836 shares held in
Treasury at 31 March 2013, 823,146 were
subsequently re-issued under the Company’s
employee share schemes for proceeds of £2.4 million.
By Order of the Board
Ken Woodier
Group General Counsel & Company Secretary
23 June 2014
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 Board also has a diversity policy and
encourages gender diversity in particular. Further
details are set out in the report of the Nomination
Committee on page 68.
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 15, 23 and 43 of
the strategic report.
The Group encourages share ownership among its
employees by operating an HM Revenue & Customs
approved Sharesave Scheme and Share Incentive
Plan which are, subject to shareholder approval at this
year’s AGM, being amended to provide for the
increased savings limits approved by Government. At
31 March 2014 around one-third of the Group’s
employees were participating in these plans.
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www.pennonannualreport.co.uk/2014 Governance and remuneration
The Board and its governance framework
The Board and its governance framework, and that of its subsidiary
boards, is set out below. Each board has a ‘matters reserved’ setting out
its responsibilities and each committee has a detailed terms of reference
setting out its responsibilities, accountabilities and reporting obligations
to each board. Together with the risk management and internal control
frameworks described on pages 59 and 60 they form an effective and
robust governance structure designed to manage and develop the
Group in accordance with the Group’s strategy to maintain and grow
shareholder value.
Pennon Group Board
Membership:
Chairman
3 Non-executive Directors
3 Executive Directors
Audit Committee
Membership:
3 Non-executive Directors
Remuneration Committee
Membership:
3 Non-executive Directors
Nomination Committee
Membership:
3 Non-executive Directors
and the Chairman
Sustainability Committee
Membership:
3 Non-executive Directors
2 Executive Directors
South West Water Board
Membership:
3 Non-executive Directors
4 Executive Directors
Viridor Board
Membership:
4 Non-executive Directors
5 Executive Directors
Audit Committee
Personnel Committee
Remuneration Committee
Governance Committee
Nomination Committee
Sustainability Committee
56
Pennon Group Plc Annual Report 2014
The Board and its Committees
The Directors, their independence
and responsibilities
Operation of the Board in the year and
its activities
The Board of Directors at the end of the year
comprised the Chairman, three Executive Directors
and three 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 (latest
2012 edition) (the UK Code) applied to them other
than in respect of Gerard Connell who, following the
Annual General Meeting last year, has served on the
Board for more than nine years since his first selection
and Dinah Nicholls who retired at last year’s AGM but
at that time had served on the Board for 10 years.
Following this year’s Annual General Meeting and
subject to re-election, Gerard will continue on the
Board for a further year for reasons explained by the
Chairman on page 7. Gerard has been determined by
the Board to be independent as was Dinah up to the
date of her retirement. The Board is satisfied that
Gerard does and will continue to demonstrate
independence of character and judgement in the
performance of his role on the Board.
All of the Non-executive Directors are considered to
have the appropriate skills, experience in their
respective disciplines and personality to bring
independent and objective judgement to the Board’s
deliberations. Their biographies on pages 52 and 53
demonstrate collectively a broad range of business,
financial and other relevant experience. Gerard Connell
is the Senior Independent Non-executive Director and
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 of principles relating to Audit Committee
membership he has recent and relevant financial
experience (as set out in his biography on page 53).
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 53.
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
subject to re-election each year in accordance with
provision B.7.1 of the UK Code.
The Directors on the Board and their attendance at
the 10 scheduled meetings of the Board during
2013/14 are shown below.
Members
Appointment date
Attendance
Kenneth Harvey
(Chairman)
March 1997
10 /10
Non-executive Directors:
Martin Angle
December 2008
Gerard Connell
October 2003
Dinah Nichols*
June 2003
Gill Rider
September 2012
Executive Directors:
Colin Drummond*
April 1992
David Dupont
March 2002
Christopher
Loughlin
August 2006
10/10
10/10
4/4
9/10
5/5
10/10
10/10
Ian McAulay
September 2013
6/6
*Dinah Nichols retired in August 2013 and Colin Drummond retired in
September 2013 from the Board.
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.
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www.pennonannualreport.co.uk/2014
Governance and remuneration
The Board and its Committees Continued
In accordance with the governance framework set out on page
56 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 the Group
General Counsel & Company Secretary, as appropriate. The
matters reserved for the Board include:
• approval of the preliminary and half year results
announcements;
• approval of the Annual Report & Accounts (including the
financial statements);
• all acquisitions and disposals;
• major items of capital expenditure;
• authority levels for other expenditure;
• risk management process and monitoring of risks;
• approval of the strategic plan and annual operating budgets;
• Group policies, procedures and delegations; and
• appointments to main and subsidiary boards.
The Board operates by receiving written reports circulated
usually in advance of the meetings from the Executive Directors
and the Group General Counsel & Company Secretary on
matters within their respective business areas of the Group.
When considered appropriate the Board also receives
presentations on key areas of the business and undertakes site
visits to gain a better understanding of the operation of the
business initiatives.
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 to facilitate the decision
making of the Board.
In addition to the governance framework, due to the Company
not having a Group Chief Executive Officer, the Chairman meets
regularly with the Executive Directors and the Group General
Counsel & Company Secretary to consider Group matters.
Directors have access to the advice and services of the Group
General Counsel & Company Secretary and the Board has an
established 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. Training
consists of attendance at external courses organised by
professional advisers and also internal presentations from senior
management.
Performance evaluation
The Board continues to have well-developed internal
procedures to evaluate the performance of the whole Board,
each Committee of the Board, the Chairman, each individual
Director and the Group General Counsel & Company Secretary.
The evaluation procedure relating to the Board and its
Committees has previously been externally facilitated. This year
the Board decided it was appropriate to revert to an internally
managed evaluation operated by the Group General Counsel &
Company Secretary. All participants’ views were sought via a
questionnaire on a range of questions which were specifically
designed to ensure objective evaluation of performance and
based on key trends followed in previous years to enable the
monitoring of performance. Responses were then summarised
and evaluated by the Group General Counsel & Company
Secretary for the Board to consider and determine whether any
changes should be made to be more effective or to improve
governance.
The Board considered the finding of the evaluation and, while
performance was again considered to be satisfactory overall, a
number of areas were identified where Board practice could be
enhanced or refocused in line with the future development of
the Group. These included:
• providing more time for consideration of strategic matters;
• considering the appointment of an additional Non-executive
Director;
• reviewing new Director induction arrangements; and
• developing of closer links with subsidiary boards.
The Board will be monitoring implementation of these action
areas 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 no longer has any significant
commitments outside the Group which could impact on his
performance in relation to his Group role.
Dealing with Directors’ conflicts of interest
In accordance with the directors’ interest provision of the
Companies Act 2006 and the Company’s Articles of Association
the Board has in place a procedure for the consideration and
authorisation of Directors’ conflicts or possible conflicts with the
Company’s interests.
Board Committees and their terms of reference
In accordance with Group policies a range of key matters are
delegated to the Board’s Committees as set out on pages 62 to
69 of this governance report.
The terms of reference of each of the Board’s Committees are
set out on the Company’s website, www.pennon-group.co.uk
or available upon request to the Group Company Secretary.
58
Pennon Group Plc Annual Report 2014 Corporate governance and internal control
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 2013/14 and up to the date of the
approval of this Annual Report & Accounts.
The Board confirms that it continues to apply
procedures in accordance with the UK Code and the
'Guidance on Internal Control' (The Turnbull Guidance)
that 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.
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 accordance with the policy. 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 strategic report on pages 30 to 35.
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,
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.
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Corporate governance and internal control Continued
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
strategic report for the Annual Report. The Group General
Counsel & Company Secretary initially carries out the evaluation
with Executive 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
2013/14 and up to the date of the approval of the Annual
Report & 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 in the
Audit Committee report on page 63.
Going concern
Having considered the Group’s funding position and financial
projections the Directors have a reasonable expectation that the
Group has adequate resource to continue in operational
existence for the foreseeable future. For this reason they
continue to adopt the going concern basis in preparing the
financial statements.
Directors' responsibilities statements
The Directors are responsible for preparing the Annual Report,
the Directors' remuneration report and the financial statements
in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial
statements for each financial year. Under that law the Directors
have prepared the Group and Company financial statements in
accordance with International Financial Reporting Standards
(IFRSs) as adopted by the European Union.
Under company law the Directors must not approve the
financial statements unless they are satisfied that they give a
true and fair view of the state of affairs of the Group and the
Company and of the profit or loss of the Group for the year.
In preparing these financial statements the Directors are
required to:
• select suitable accounting policies and then apply them
consistently
• make judgements and accounting estimates which are
reasonable and prudent
• state whether applicable IFRSs as adopted by the European
Union have been followed, subject to any material departures
disclosed and explained in the financial statements.
The Directors confirm that they have complied with the above
requirements in preparing the financial statements.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company's
transactions, and disclose with reasonable accuracy at any
time the financial position of the Group and the Company; and
enable them to ensure that the financial statements and the
Directors' remuneration report comply with the Companies Act
2006 and, as regards the Group financial statements, article 4
of the International Accounting Standards (IAS) Regulation.
They are also responsible for safeguarding the assets of the
Group and the Company and hence for taking reasonable
steps for the prevention and detection of fraud and other
irregularities.
Each of the Directors, whose names and functions are listed on
pages 52 and 53, 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 European Union, 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 54 and 55 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 www.pennon-group.co.uk
Legislation in the United Kingdom governing the preparation
and dissemination of financial statements may differ from
legislation in other jurisdictions.
60
Pennon Group Plc Annual Report 2014 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 2014:
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 34 to the
financial statements on pages 148 to 150. 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 Conduct
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 160;
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 55 '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) £49,521,023 (such amount to be
reduced by any shares allotted or rights granted
under (ii) below in excess of £49,521,023) or; (ii)
£99,042,046 by way of a rights issue (such amount
to be reduced by any shares allotted or rights
granted from (i)) above), which were approved by
shareholders at the 2013 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, Scrip Dividend Alternative
and the convertible bond referred to in the financial
review on page 28; 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. This may result in
certain funding agreements being altered or repaid
early. The impact on employees’ share plans is not
considered significant
The UK Corporate Governance Code – statement
of compliance
Upon the advice of the Audit Committee the Board
considers that the Annual Report, taken as a whole, is
fair, balanced and understandable, and provides the
information necessary for shareholders to assess the
Group’s performance, business model and strategy.
As required by the Financial Conduct Authority’s
Listing Rules, the independent auditors have
considered the Directors’ statement of compliance in
relation to those provisions of the UK Corporate
Governance Code which are specified for their review.
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Corporate governance and internal control Continued
The Audit Committee
Audit Committee composition and meetings
The membership of the Committee, together with appointment
dates and attendance at meetings during 2013/14 is set out
below:
Members
Appointment date
Attendance
Gerard Connell
(Committee chairman)
October 2003
Martin Angle
December 2008
Dinah Nichols*
June 2003
Gill Rider
September 2012
* Retired August 2013.
7/7
7/7
3/3
6/7
Other regular attendees to our meetings include:
• Group Director of Finance
• Chief Executive, South West Water
• Chief Executive, Viridor
• Group General Counsel & Company Secretary
• Finance & Regulatory Director, South West Water
• Finance Director, Viridor
• Group Financial Controller
• Group Audit Manager
• External auditors.
In addition the Chairman of the Group, Ken Harvey, has an open
invitation to attend the meetings and during the last year has
attended when the Committee has reviewed the half year and
full year financial results of the Group.
In accordance with the UK Code the Board has determined that
Gerard Connell and Martin Angle both have recent and relevant
financial experience. In addition, Gerard Connell, who has now
been a non-executive director and chairman of the Audit
Committee since October 2003, has been determined by the
Board as continuing to be independent in character and
judgement notwithstanding his length of tenure. He will step
down as chairman of the Audit Committee following the
appointment of a further non-executive director who is expected
to have recent and relevant financial experience.
All of the Committee members are also members of the
Remuneration Committee, which allows them to provide input
into both Committees on any Group performance matters and
on the management of any risk factors relevant to remuneration
matters.
Dear Shareholder
I am pleased to introduce the report on the Audit Committee’s
activities during the year. Our two key tasks have again been to
consider the integrity and balance of the Group’s financial
reporting and to discuss, challenge and test our risk assurance
processes. Our primary objectives have therefore been to seek
to ensure that our external reporting is fair, balanced and
understandable and that our risk assurance processes continue
to give clear and comprehensive oversight and control of risks
and opportunities across the business.
During the year South West Water was heavily engaged in the
regulatory review of its industry with consequent uncertainty for its
business and operations over the next regulatory period. Viridor
continued its process of transformation towards a new business
model with significant management focus on the future shape of
its organisational structure, the renewal of its business systems
and the delivery of its major capital programme.
In the course of the year we discussed and considered
developments in the subsidiary companies and Group risk
registers as a consequence of these changes, kept under review
the focus and prioritisation of our assurance activities and
challenged the executive teams to consider changes to our
existing processes and controls where we thought it necessary to
do so. As part of our year-end-work we then reflected upon
whether judgements in relation to significant issues remained valid
given developments in the year and whether any new issues of
significance had emerged which required more detailed review
and assessment. Both significant matters considered by the
Committee during 2013/14 and significant issues considered in
relation to the year-end financial statements are further explained
in this report.
This is my last report as chairman of the Group Audit Committee.
I would therefore like to thank both executive and non-executive
colleagues, our internal audit team and our external auditors for
the open, challenging and constructive nature of discussions at
the Committee. Debates have been robust and I am confident
that the Group is better positioned for resilience and growth as a
result.
Gerard Connell
Audit Committee Chairman
Senior Independent Non-executive Director
62
Pennon Group Plc Annual Report 2014 Significant matters considered by the Committee
during 2013/14
The Committee has an established annual calendar of
business which assists in ensuring that it manages its
affairs efficiently and effectively throughout the year
concentrating on the key matters which affect the
Group.
The most significant matters which the Committee
considered and made decision on during the year are
set out below:
Internal control and
compliance
Reviewed quarterly
internal audit reports on
audit reviews across
the Group during the
year including on major
contracts, site
operations and
recycling activities.
Reviewed the internal
control framework for
the Group.
Monitored the financial
performance on
specific matters
including Viridor’s
Project Enterprise
(business
transformation project).
Financial reporting
Monitored the integrity
of the financial
statements of the
Company and the half
year and full year
results announcements
relating to the
Company’s financial
performance including
reviewing significant
financial reporting
judgements contained
in the statements.
Reviewed and
recommended to the
Board the approval of
the 2012/13 preliminary
results announcement,
the 2013 Annual
Report & Accounts
including the financial
statements and the
2013/14 half year
results announcement.
Considered and
approved a process for
confirming and
recommending to the
Board that the 2013/14
Annual Report and
Accounts including the
financial statements is
fair, balanced and
understandable in
accordance with new
reporting requirements.
External auditors
Risk management
Governance
Considered the
auditors’ report on their
review of the 2012/13
Annual Results
focusing on key
findings.
Reviewed and
monitored the ratio of
audit/non-audit
expenditure during
2013/14.
Assessed the external
auditors and their
effectiveness in respect
of the 2012/13 external
audit process.
Recommended to the
Board the re-
appointment of the
external auditors for
2013/14 and for
approval at the Annual
General Meeting and
also for the Committee
to agree the external
auditor’s remuneration.
Considered and
approved the 2013/14
audit plan and audit fee
proposal and set
performance
expectations for the
external auditors.
Considered the initial
results of the 2013/14
audit.
Agreed and monitored
the provision of
non-audit services for
2013/14 by the
external auditors’ firm
in accordance with the
Group policy.
Reviewed risk
management
framework and
compliance with that
framework during
2012/13 and after the
year 2013/14.
Reviewed the
assessment of the risks
by the Executive
Directors.
Reviewed Group risk
register and considered
appropriate areas of
focus and prioritisation
for the audit work
programme for the
year.
Received as part of the
risk management
review the annual
report on any
whistleblowing.
Discussed annual
evaluation exercise of
the Committee and
agreed action plans to
further improve the
Committee’s
performance including
a review of the
Committee’s terms of
reference.
Considered and
approved new annual
report disclosure
requirements including
the audit report.
Reviewed a number of
updated Group policies
covering treasury
arrangements,
guarantees and tax.
Confirmed compliance
with the UK Code.
Regularly held separate
meetings with the
external auditors and
the internal group audit
manager without
members of
management being
present.
Considered and
approved external audit
tender process for
appointment of new
auditor firm from
2014/15. Also received
presentations from
auditor candidates and
recommended to the
Board appointment of
new auditors from
2014/15.
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Corporate governance and internal control Continued
The Audit Committee Continued
In respect of the monitoring of the integrity of the financial
statements, which is a key responsibility of the Committee
identified in the UK Code, the significant issues considered in
relation to the financial statements for the year ended 31 March
2014 are set out in the following table, together with details of
how each matter was addressed by the Committee. At the
Committee’s meetings throughout the year the Committee and
the external auditors have discussed the significant issues
arising in respect of financial reporting during the year and the
areas of particular audit focus, as reported on in the
independent auditors’ report on pages 97 to 101.
How the issue was addressed by the Committee
The Board, on a monthly basis, receives an update from the Group Finance Director on the financial
performance of the Group including forward looking assessments of covenant compliance and funding levels.
The Board also regularly reviews and challenges rolling 5-year strategy projections and the resultant
headroom relative to borrowings. A report to the Audit Committee, prepared by the Group Finance Director at
each half year and year-end, focuses on the Group’s liquidity over the 18 months subsequent to a period end
and the Group’s solvency over a longer period. This report, and the external auditors’ comments and views
on the validity of the going concern assumption which are set out in their year-end report, provide the basis
for a detailed review and discussion of the key issues at the Committee. These discussions, together with the
ongoing monitoring of the Group’s business model and financial performance, provide the evidence on which
the Committee forms its assessment.
There has again been considerable focus at this year-end on the provisions and the carrying value of assets in
the Viridor and Group balance sheets. Underlying assumptions, both in respect of markets and individual
operating sites, have been discussed and reviewed with executive management, including consideration of
external market research where appropriate, at both subsidiary and Group Board levels, before being
considered and challenged again at the Audit Committee. At our year-end audit clearance meeting, the
Group Director of Finance tabled a report summarising the key issues, and Committee members asked
questions of both the Viridor Chief Executive and the Group Director of Finance and discussed the detailed
sensitivity analysis in respect of key assumptions carried out by the external auditors in respect of both a
'base case' and a 'sensitised case'.
Both the South West Water board and the Group Board receive regular updates, and more detailed reports if
felt necessary, on progress against debt collection targets. Performance is monitored regularly against both
South West Water's historical collection record and the track record of other companies in the sector. At the
year-end the external auditors reported on the work they had performed. The Committee discussed the
results of this report at the year-end and asked questions of both the South West Water Chief Executive and
the Finance Director before forming a view on management's assessment of the year-end position.
The Group takes a prudent view of its tax position and has a general policy of only releasing tax provisions
when matters under discussion are expected to be cleared by HM Revenue & Customs. If any outstanding
issues are considered potentially material, such matters are also discussed, and challenged where necessary,
at Group Board level. Expert external legal advice is sought as and when appropriate. The external auditors
reported on the work they had performed in respect of tax provisions in the Group balance sheet. Questions
raised by this review were addressed at the year-end audit clearance meeting of the Audit Committee and the
Group Director of Finance was asked to justify the proposed treatment of certain items. The Committee also
considered at the year-end the tax and accounting treatment of certain structured treasury transactions used
to seek to enhance yield and overall interest performance on the Group's cash balances and sought the
views of both the external auditors and the Group Director of Finance. During the year the Committee
received external assurance reports on both the Group tax and treasury functions and updated policies in
certain areas as a consequence. Further consideration will be given in 2014/15 to the Group's policies and
activities in relation to tax and treasury.
The key issues reviewed by the Audit Committee at year-end in respect of revenue recognition related to the
accrual for metered billing within South West Water and service concession arrangements under IFRIC 12
at Viridor. The Committee relied primarily on South West Water’s track record of assessing appropriate levels
of accrual at previous year-ends, and Viridor's internal processes for analysing complex long-term contracts.
The Committee also considered the work in respect of these areas at the year-end by the
external auditors.
Significant issues the Committee
considered in relation to the
financial statements
Going concern basis for the
preparation of the financial
statements.
Viridor: asset impairment
and provisions.
South West Water: bad debt
provision.
Tax and treasury.
Revenue recognition.
64
Pennon Group Plc Annual Report 2014 Effectiveness of the external audit process
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 external 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.
We reported last year that our policy was to review the
provision of the external audit in accordance with best
practice and in line with the UK Code, which included
putting out to tender the external audit service at least
every 10 years. As the last review was undertaken in
2006 when the current auditors were appointed
following a comprehensive competitive tender
process, apart from the usual annual reviews, the
intention of the Committee was not to re-tender the
audit until after the rotation of the current audit partner.
However, while the Committee is satisfied with the
auditor’s independence and objectivity, following
discussion with a major shareholder and upon the
recommendation of the Committee the Board decided
to re-tender the audit a year early. The process
followed in re-tendering and the outcome of the
re-tender is reported on later in this section.
The effectiveness review of the external auditors is
undertaken as part of the Committee’s annual
performance evaluation. This includes reviewing and
testing the work of the external auditors in respect of
the audits that the auditors undertakes, the challenges
to management on financial judgements being made,
demonstrating up-to-date knowledge of technical
issues and communicating best practice and industry
trends in reporting. The performance of the external
auditors following the preparation of the financial
statements for 2012/13 was highly rated.
Auditor independence
The Committee carefully reviews on an ongoing basis
the relationship with the external auditors to ensure
that the auditors’ independence and objectivity is fully
safeguarded. This is supported by the external
auditors ensuring that the senior partner responsible
for the external audit of the Group remained
responsible for such audit for no more than five years
and that there is a quality review partner who is
involved in planning the audit and in the reviewing of
the final accounts of the Company including assessing
any significant matters which may be identified in the
audit.
The external auditors have reported on their
independence and have confirmed to the Committee
that they have complied with all relevant guidance
issued by the Auditing Practices Board and have
implemented appropriate safeguards for all non-audit
services including:
• all non-audit related services, where necessary,
being performed by personnel independent of the
audit engagement team;
• the auditors being in a position whereby they will
appropriately evaluate the results of a judgement
or service;
• 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; and
• the Committee chairman meeting with the auditors’
independent senior partner periodically to discuss
the scope and performance of their work.
Provision of non-audit services
The Committee has a new more restrictive policy for
the engagement of the external auditors’ firm for
non-audit work. The policy involves the Group Director
of Finance setting out in a report to the Committee the
reasons why the auditors’ firm should be appointed for
any material work. The Committee carefully reviews
whether it is necessary for the auditors’ firm to carry
out such work and will only grant approval for their
appointment if they are satisfied that the auditors’
independence and objectivity is fully safeguarded. Also
if there is another accounting firm which can provide
the required level of experience and expertise in
respect of non-audit services then such firm would be
chosen in preference to the external auditors.
It is once again recognised that the level of non-audit
fees payable to the Company’s audit 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 Public
Private Partnership (PPP) contract gains by Viridor,
agreed upon procedures and advisory services in
relation to South West Water's PR14 submissions and
pensions advisory services. The Committee
considered that the external auditors were best placed
to provide certain agreed upon procedures and
advisory services in connection with South West
Water's PR14 submissions because of their
knowledge of South West Water's business,
accounting policies and practices. Furthermore,
Ofwat’s best practice guidance included an
expectation of external auditors reporting in relation to
the submissions. The Committee also considered that
the external auditors were best placed to provide
Group pension advisory services because of their
relevant experience in the water sector. The
Committee carefully considers the reasons for the
engagement of the auditors’ firm in accordance with
the process described above. The external auditors’
firm has only been engaged to undertake the non-
audit work on the basis that the Committee was fully
satisfied that the continuing independence of the
external auditors was maintained due to the
safeguards followed by the auditors’ firm described in
the previous section.
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www.pennonannualreport.co.uk/2014
Governance and remuneration
Corporate governance and internal control Continued
The Audit Committee Continued
PPP and similar contracts are of vital importance to the long-
term strategic development of Viridor and it is critical that Viridor
is able to benefit from the best advice available in the market.
The number of such contract opportunities is now declining,
which would have led to a corresponding decline in fees
payable to the corporate finance arm of the current external
auditors. Nevertheless as described in the following section the
current external auditors, subject to approval at the Company’s
forthcoming AGM, will no longer be the external auditors to the
Company from August 2014.
The Group Director of Finance regularly reports to the
Committee on the extent of services provided to the Company
by the external auditors and the level of fees paid. The fees paid
to the external auditors’ firm for non-audit services and for audit
services are set out in note 8 to the financial statements on
page 120.
Audit firm tendering
Due to the decision of the Board to re-tender audit services for
the Company in the current year rather than wait until the end of
the 10-year period in 2015, the Committee approved an audit
tender process recommended by the Group Director of Finance
in September 2013. This process followed the notes on best
practice in respect of audit tenders published by the Financial
Reporting Council in July 2013. The process followed was:
• initial identification of a selection criteria and assessment
mechanism;
• consideration of the candidates to be invited to tender
including those outside the ‘Big Four’;
• discussion with the potential auditors to ensure they were free
to compete under independence rules;
• design of a detailed tender document with input from the
chairman of the Committee;
• initial review of tenders received by the Group Director of
Finance and his team involving the chairman of the
Committee;
• interviewing of the preferred candidates initially by the Group
Director of Finance and the Group Financial Controller and
then subsequently by the Committee followed by a
recommendation to the Board on the preferred appointment;
and
• allowing for sufficient time for an orderly handover and
transition involving the incoming auditors at key stages in the
prior period’s audit.
Subject to approval at the forthcoming AGM the Board
approved the appointment of Ernst & Young in February as the
incoming auditors with effect from August 2014. Since February
Ernst & Young have followed an orientation programme with key
management in the Company and attended, with the current
external auditors, the meeting of the Committee at which the
preliminary results for the year were considered and discussed
for recommendation to the Board.
Internal audit
The internal audit activities of the Group remain particularly
important to the Committee. The Group has a long-standing
and effective centralised internal audit function led by an
experienced head of function who makes a significant
contribution to the ability of the Committee to deliver its
responsibilities.
A Group internal audit plan continues to be approved in
September each year. It takes account of the activities to be
undertaken by the external auditors 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 information discussions and meetings between the
Group Audit Manager and the Committee chairman.
The areas of the business that received attention from Group
internal audit over the past year included:
• Pennon – Group treasury, Group treasury log audits, Group
taxation and Group carbon management and reporting;
• South West Water – customer service, accounts payable,
payroll and related HR processes, cash processing, credit
management and debt collection; and
• Viridor – bank and cash management; Greater Manchester
sub-contract process (Joint Venture); TPSCo (Joint Venture)
processes; capital expenditure; payroll and related HR
processes; purchasing and procurement; environmental
provisioning revisit; and Project Enterprise (business
transformation project).
Fair, balanced and understandable assessment
To enable the Committee to provide support to the
Board in making its statement that it considered that the
Company’s Annual Report and Accounts is fair, balanced and
understandable (FBU) on page 61, the Committee initially
received advice from its external auditors on an appropriate
FBU assessment process. It subsequently approved its
own FBU process which had been prepared by the Group
Company Secretary following consultation with the chairman
of the Committee and the Group Director of Finance. The
FBU process took account of the Group’s well-documented
verification process undertaken in conjunction with the
preparation of the Annual Report & Accounts. This is in addition
to the formal process carried out by the external auditors to
enable the preparation of the independent auditors’ report
which is set out on pages 97 to 101.
In preparing and finalising the 2014 Annual Report and
Accounts the Committee considered a report on the actions
taken by management in accordance with the FBU process and
an FBU assessment undertaken by the subsidiary boards. This
assisted the Committee in carrying out its own assessment and
being able to advise the Board that it considered that the
Annual Report and Accounts taken as a whole is fair, balanced
and understandable and provides the information necessary for
shareholders to assess the Company’s performance, business
model and strategy.
66
Pennon Group Plc Annual Report 2014
The Sustainability Committee
Members
Appointment date
Attendance
Dinah Nichols
(Committee
chairman)*
Gill Rider
(Committee
chairman)
November 2006
September 2012
Martin Angle
December 2008
Gerard Connell
November 2006
Colin Drummond #
November 2006
Christopher
Loughlin
November 2006
Ian McAulay
September 2013
4/4
6/6
6/6
6/6
4/4
6/6
2/2
* Retired in August 2013. Dinah Nichols was replaced as
chairman by Gill Rider in August 2013.
# Retired in September 2013.
In addition the Committee considered:
• the 2013/14 Group, South West Water and Viridor
sustainability reports; and the associated verifier's
reports for 2013/14 and his recommendations for
the 2014/15 reports
• progress against the sustainability targets for
2013/14
• sustainability targets for 2014/15
• the annual review of the coverage and
appropriateness of Group policies.
• Committee performance evaluation results
• the Group’s participation in external benchmarking
systems.
In reporting on sustainability, the Company has sought
to comply with the Association of British Insurers'
Guidelines on Responsible Investment Disclosure. The
strategic report on pages 36 to 47 contains the
Group's 2014 annual sustainability report.
The Sustainability Committee's duties, in the context
of the requirement for companies to conduct their
business in a responsible manner (in relation to
environmental, social and governance (ESG) matters),
are to review the strategies, policies, management,
initiatives, targets and performance of the Pennon
Group of companies in the areas of occupational
health and safety and security; environment;
workplace policies; non-financial regulatory
compliance and the role of the Group in society.
During the year the Committee considered a wide
range of matters in accordance with its terms of
reference including:
• developments and progress in carbon management
and reduction
• the Group’s pollution and compliance performance
• division of responsibilities between the Pennon
Group and South West Water Sustainability
Committees
• the impact of the Group's charitable donations and
community support
• the Group's health and safety performance and
plans
• the Group's workplace and other Group policies
and performance.
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Corporate governance and internal control Continued
The Nomination Committee
Diversity policy
The Board’s diversity policy confirms that the Board is
committed to:
• the search for Board candidates being conducted, and
appointments made, on merit, against objective criteria and
with due regard for the benefits of diversity on the Board,
including gender;
• satisfying itself that plans are in place for orderly succession of
appointments to the Board and to senior management to
maintain an appropriate balance of skills and experience
within the Group and on the Board and to ensure progressive
refreshing of the Board. In addition within the spirit of Principle
B.2 of the UK Code, the Board will endeavour to achieve and
subsequently maintain:-
− a minimum of 25% female representation on the Board by
2015; and
− a minimum of 25% female representation on the Group’s
senior management team by 2015.
Currently as disclosed with the Directors’ biographies on page
52 the Group has 14% female representation at Board level.
This represents a reduction from 25% when Dinah Nichols
retired from the Board on 1 August 2013. The Board remains
committed to achieving the 25% level by 2015.
In a workforce of around 4,500 at 31 March 2014 around 19%
were women.
As well as its diversity policy the Group has a number of policies
in place embracing workplace matters, including non-
discrimination and equal opportunities policies which are
reported on separately in the strategic report.
The Committee is required by the Board to review and monitor
compliance with the Board’s diversity policy and report on the
targets, achievement against those targets and overall
compliance in the Annual Report each year.
The Nomination Committee meets in accordance with an
annual calendar to consider succession planning, equality and
diversity reports and periodically as necessary to manage the
Board appointment process and recommend to the Board
suitable candidates for appointment as executive and non-
executive directors to the Board and also to the boards of
South West Water and Viridor.
It is the practice of the Committee, led by the chairman, to
appoint an external search consultancy to assist in board
appointments to ensure that an extensive and robust search
can be made for suitable candidates.
During the year the Committee considered:
• its annual performance evaluation;
• the appointment of a new Chief Executive, Viridor, and a
chairman of the Viridor board;
• reviewed succession plans throughout the Group
• reviewed diversity and equality policies and practice
throughout the Group.
The appointment of the Chief Executive, Viridor, was undertaken
with the assistance of an external search consultant (Zygos),
which had no other connection with the Company. After the
year end the same external search consultant has assisted on a
non-executive director appointment to the Board, which is
expected to culminate in an appointment shortly.
Members
Appointment date
Attendance
Kenneth Harvey
(Committee chairman)
March 1997
Martin Angle
December 2008
Gerard Connell
October 2003
Dinah Nichols*
June 2003
Gill Rider
September 2012
*Retired in August 2013.
2/2
2/2
2/2
1/1
2/2
68
Pennon Group Plc Annual Report 2014 The Remuneration Committee
Directors’ remuneration report
The Directors’ remuneration report for 2013/14 is set
out separately on pages 70 to 96.
The Remuneration Committee meets in accordance
with an annual calendar to consider remuneration
matters in respect of the Group and in particular is
responsible for:
• advising the Board on the framework of executive
remuneration for the Group; and
• determining the remuneration and terms of
engagement of the Chairman, the Executive
Directors and senior management of the Group.
Members
Appointment date Attendance
Martin Angle
(Committee
chairman)
December 2008
Gerard Connell
October 2003
Dinah Nichols*
June 2003
Gill Rider
September 2012
*Retired in August 2013.
9/9
9/9
4/5
9/9
The Committee’s activities during the
financial year
During the year the Committee dealt with the
following matters:
• annual review of the pay and benefits policies
and practices for the staff below Board level in
the Group;
• annual executive salary review;
• determining performance targets in respect of the
annual incentive bonus plan for 2013/14;
• reviewing final drafts of the Directors’ remuneration
report for 2012/13 and recommending it to the
Board for approval for inclusion in the 2013
Annual Report;
• reviewing early drafts of the Directors’ remuneration
report for 2013/14;
• review and determination of the Group
Chairman’s fee;
• determining bonuses and deferred bonus awards
pursuant to the Company’s annual incentive bonus
plan in respect of the year 2012/13;
• approving the terms of the appointment of the new
non-executive chairman of Viridor;
• approving the performance & co-investment plan
awards for the year;
• reviewing the annual performance evaluation results
of the Committee;
• approving the remuneration arrangements for the
new chief executive, Viridor, and Executive Director
of the Board;
• approving the release of the 2010 deferred bonus
share awards and the vesting of executive share
options pursuant to the annual incentive bonus plan;
• determining the outcome of the 2010 long-term
incentive plan awards;
• reviewing the operation of the annual incentive
bonus plan and determining revised performance
targets and the inclusion of malus and clawback
provisions in the plan rules; and
• determining subsidiary board non-executive
director fees.
The Board approved this governance report set out on
pages 49 to 53 and 56 to 69 on 23 June 2014.
By Order of the Board
Ken Woodier
Group General Counsel & Company Secretary
23 June 2014
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www.pennonannualreport.co.uk/2014 Directors’ remuneration report
Corporate governance and internal control
Table of contents
Annual Statement
Annual Statement from the Chairman of the Remuneration Committee
Directors’ remuneration policy
Introduction
Future policy table – Executive Directors
Performance measures and targets
Difference in remuneration policy for all employees
Non-Executive Director future policy table
Illustrations of applications of remuneration policy
Approach to recruitment remuneration
Dates of Directors’ service contracts/letters of appointment
Service contracts & policy on payment for loss of office
Statement of consideration of employment conditions elsewhere in the Company
Statement of consideration of shareholder views
Annual Report on Remuneration
Introduction
Operation of the remuneration policy in 2014/15
Single total figure table (Audited information)
Annual bonus outturn for 2013/14
Performance against performance conditions for LTIP vesting (Performance and Co-investment Plan)
Total pension entitlements (Audited information)
Director changes - additional information (Audited information)
Non-Executive Director fees and benefits
All employee, performance and other contextual information
Performance graph and table
Percentage change in remuneration of Director including the equivalent role of chief executive officer
Relative importance of spend on pay
Statement of Directors’ shareholding and share interests (Audited information)
Shareholder dilution
Scheme interests awarded during 2013/14 (Audited information)
Advisors to the Remuneration Committee
Statement of voting at General Meeting
71
72
72
76
76
76
77
78
79
80
81
81
82
82
84
85
86
87
88
88
88
88
89
90
90
92
93
96
96
70
Governance and remunerationPennon Group Plc Annual Report 2014
Annual Statement from Martin Angle,
Chairman of the Remuneration Committee
shares were of a lower value to the value he has
foregone with his previous employer. The shares will
be released on the third anniversary of the date of the
award subject to Mr McAulay remaining employed by
the Company. No cash sign-on payments were made.
Mr McAulay relocated from the US on joining the
Company and received reimbursement of relocation
costs.
Looking forward
During the year we reviewed our remuneration and
benefits structure with the assistance of our
independent remuneration consultants. To ensure that
our Executive Directors incentives were focused on
key performance targets for the Group we revised the
corporate performance objectives for the annual
incentive plan (details on page 83). We also introduced
malus and clawback provisions in our bonus
arrangements in accordance with best practice.
No other changes have been made to our
remuneration package. In particular all maximum
opportunities will remain the same in 2014/15.
Best practice reporting
The structure of our report reflects the new reporting
requirements and the sections of this remuneration
report are:
• Directors’ remuneration policy – this is the
Company’s proposed policy on Directors’
remuneration which is intended to apply from the
2014 AGM. This part of the report is subject to a
binding shareholder vote at this year’s AGM and
after that at least every third year.
• Annual report on remuneration – contains the
remuneration of the Directors for the year 2013/14
including the ‘single remuneration figure’ table
providing a value for each element of remuneration
for each Director, together with the details of the link
between Company performance and remuneration
during the year (pages 84 to 87). It also provides
details of how our policy will be applied for 2014/15.
This section of the report together with this letter is
subject to an advisory shareholder vote at this year’s
AGM.
The membership and the role of the Remuneration
Committee including how it has operated during the
year is set out separately in this Governance and
remuneration section on page 69.
Last year the Remuneration Committee was pleased
to note that 98% of shareholders approved the
2012/13 Directors’ remuneration report and the
Committee appreciates the continuing support of its
shareholders.
In conclusion I hope you find our report this year
informative and that we can rely on your vote in favour
of the Annual report on remuneration and our
proposed Directors’ remuneration policy for future
years.
Martin Angle
Remuneration Committee Chairman
Dear Shareholder
I am pleased to present the Directors’ remuneration
report, on behalf of the Board. In accordance with the
new remuneration reporting requirements this year
shareholders will be asked to vote separately on both
our remuneration policy and our annual report on
remuneration.
Remuneration decisions for the year
In April 2013 the basic salaries of the Executive
Directors increased by 2% except for the Chief
Executive of Viridor, who retired at the end of
September 2013, where his salary remained
unchanged. The salary increases were in line with
those across the organisation. For 2014/15 salaries
were increased by 2.5%. These increases were in line
with those awarded generally across the Group.
The bonus outturns for the Executive Directors for the
year were between 42.6% and 85% of salary (with half
deferred as set out on page 85). This reflects the
achievements of the Group businesses in the year, the
Company’s performance against corporate financial
targets and the Executive Directors’ individual targets.
As regards the Company’s long-term incentive plan,
the overall estimated outturn for awards vesting at the
end of the three year period ending 31 March 2014 is
28.3% of the maximum 100%. This reflects that the
Company’s total shareholder return is estimated to
exceed the waste/water comparator index
performance by 5.7% but is expected to rank below
the median of the FTSE 250.
Board changes
Colin Drummond, Chief Executive of Viridor, retired
from the Board on 30 September 2013 following 21
years of service with the Company. As a good leaver,
the Committee awarded him a part-year bonus based
on the predetermined performance measures and
targets, but pro-rated for his period of employment in
the year. His outstanding deferred share awards were
released to him. Awards under the long-term incentive
plan were pro-rated and will be subject to
performance measured at the normal time.
In September 2013 Ian McAulay became Chief
Executive of Viridor and joined the Board. His
remuneration package is in line with those of the other
Executive Directors, except that his salary has been
set at an initially lower level with a view to providing for
scope for increases depending on performance over
the next two years. As part of the recruitment he was
made an award of shares to the value of £112,000 to
compensate him for share awards forfeited from his
previous employer due to his resignation. These
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Directors’ remuneration report Continued
Directors’ remuneration policy
Introduction
The remuneration policy described in this part of the report is
intended to apply to the Company, subject to shareholder
approval, following the date of the Company’s 2014 AGM which
is scheduled to be held on 31 July 2014.
The Directors’ remuneration policy will be displayed on the
Company’s website in the investor relations section, immediately
after the 2014 AGM and will be available upon request from the
Group Company Secretary.
Future policy table – Executive Directors
The table below sets out the elements of the total remuneration
package for the Executive Directors which are comprised in this
Directors' remuneration policy.
How the components support
the strategic objectives of the
Company
How the component operates
(including provisions for
recovery or withholding of any
payment)
Maximum potential value of
the component
Description of framework used
to assess performance
Base salary
Set at a competitive level to attract
appropriate candidates to meet
Company’s strategic objectives
and to aid retention.
None, although individual and
Company performance are one of
the factors considered when
reviewing salaries.
Salaries are generally reviewed
annually and any changes are
normally effective from 1 April each
year. In normal circumstances
salary increases will not be
materially different to general
employee pay increases but there
may be exceptions such as where
there has been the recruitment of
a new executive director at an
initially lower salary.
When reviewing salaries the
Committee has regard to the
following factors:
• salary increases generally for all
employees in the Company and
the Group
• market rates
• performance of individual and
the Company; and
• other factors it considers
relevant.
There is no overall maximum.
Benefits
Benefits are provided which are
consistent with the market and
level of seniority and which aid
retention of key skills to assist in
meeting strategic objectives.
Benefits currently include the
provision of a company vehicle,
fuel, health insurance and life
assurance. Other benefits may be
provided if the Committee
considers it appropriate.
In the event that an Executive
Director is required to relocate,
relocation benefits may be
provided.
None.
The cost of insurance benefits
may vary from year to year
depending on the individual’s
circumstances.
There is no overall maximum
benefit value but the Committee
aims to ensure that the total value
of benefits remain proportionate.
72
Governance and remunerationPennon Group Plc Annual Report 2014 Directors’ remuneration policy Continued
Future policy table – Executive Directors Continued
How the components
support the strategic
objectives of the
Company
How the component
operates (including
provisions for recovery or
withholding of any
payment)
Maximum potential value
of the component
Description of framework
used to assess
performance
Annual bonus
Linked to achievement of
key performance objectives
aligned to the strategy of the
Company.
The maximum bonus
potential for each Director is
100% of base salary.
Performance targets relate to
corporate and personal
objectives which are
reviewed each year. Normally
at least 70% relates to
financial targets or
quantitative measures.
The measures, weighting
and threshold levels may be
adjusted for future
performance years.
Following the financial year
end the Committee, with
advice from the Chairman of
the Board and following
consideration of the outturn
against target by the
chairman of the Audit
Committee, assesses to
what extent the targets are
met and determines bonus
levels accordingly. In doing
so the Committee takes into
account overall Company
performance and may adjust
the bonus upwards or
downwards for any specific
factors such as exceptional
out-performance or under-
performance.
Annual bonuses are paid
following finalisation of the
financial results for the year
to which they relate and paid
usually 3 months after the
end of the financial year.
A portion of any bonus is
deferred into shares in the
Company which are normally
released after three years.
Normally 50% is deferred.
Any dividends on the shares
during this period are paid to
the Directors.
The deferred bonus plan is
operated in conjunction with
the Company’s HMRC
approved executive share
option scheme (ESOS) on
the basis that the pre-tax
value of awards under both
are the same as if the
deferred bonus plan had
operated alone.
For bonuses awarded in
respect of the 2014/15
financial year and going
forward malus and clawback
provisions apply which
permit net cash bonuses
and/or deferred bonus
shares to be forfeited, repaid
or made subject to further
conditions where the
Committee considers it
appropriate in the event of
any significant adverse
circumstances, including (but
not limited to) a material
failure of risk management,
serious reputational damage,
a financial misstatement or
misconduct. Clawback may
be applied for the period of
three years following
determination of the cash
bonus.
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Directors’ remuneration policy Continued
Future policy table – Executive Directors Continued
How the components support
the strategic objectives of the
Company
How the component operates
(including provisions for
recovery or withholding of any
payment)
Long term incentive plan
(Performance and co-investment plan)
Maximum potential value of
the component
Description of framework used
to assess performance
The current performance
conditions are based on TSR with
50% based on TSR against the
water/waste peer group index
(chosen because these
companies are regarded as the
Company’s key listed
comparators) and 50% based on
TSR against constituents of the
FTSE 250 index (excluding
investment trusts) (chosen
because this is the FTSE index to
which the Company belongs
currently). No more than 30% of
maximum vests for minimum
performance.
The “underpin” evaluation includes
consideration of environmental,
social and governance (ESG)
factors and safety performance as
well as financial performance.
The Committee will keep the
performance measures under
review and may change the
performance condition for future
awards if this were considered to
be aligned with the Company’s
interests and strategic objectives.
However, the Committee would
consult with major shareholders in
advance of any proposed material
change in performance measures.
None.
Provide alignment to shareholders
and to longer term Company
performance.
The maximum annual award is
100% of base salary.
Annual grant of conditional shares
(or equivalent). Share awards vest
dependent upon the achievement
of specific performance conditions
measured over a performance
period of no less than three years.
A grant is only made if the Director
has acquired or is due to acquire
co-investment shares equivalent
to one-fifth of the value of the
award.
Dividend equivalents (including
dividend reinvestment) may be
paid on vested awards.
An “underpin” applies which
allows the Committee to reduce or
withhold vesting if the Committee
is not satisfied with the underlying
operational and economic
performance of the Company.
Pension
Provides funding for retirement
and aids retention of key skills to
assist in meeting the Company’s
strategic objectives.
Defined benefit pension
arrangements are closed to new
entrants. Defined contribution
pension arrangements are
available to new staff since 2008.
A cash allowance may be
provided as an alternative and/or
in addition where pension limits
have been reached.
The maximum annual pension
contribution or cash allowance is
20% of salary. For Executive
Directors who commenced
employment prior to April 2013
the maximum annual pension
contribution or cash allowance is
30% of salary.
Legacy defined benefit pension
arrangements will continue to be
honoured.
Whilst one Executive Director is a
pension member there are no
further prospective accruals in
respect of defined benefit pension
arrangements.
74
Governance and remunerationPennon Group Plc Annual Report 2014 Directors’ remuneration policy Continued
Future policy table – Executive Directors Continued
How the components
support the strategic
objectives of the
Company
How the component
operates (including
provisions for recovery or
withholding of any
payment)
Maximum potential value
of the component
Description of framework
used to assess
performance
All-employee share plans
To align interests of all
employees with Company
share performance.
Executive Directors may
participate in HMRC
approved all-employee plans
on the same basis as
employees.
The maximum is as
prescribed under the relevant
HMRC legislation governing
the plans.
None.
Notes to the policy table
The Company also operates a shareholding policy.
The way in which this currently operates is set out on
page 91.
The Committee reserves the right to make any
remuneration payments and payments for loss of
office (including exercising any discretions available to
it in connection with such payments) that are not in line
with the policy set out in this report where the terms of
the payment were agreed before the policy came into
effect or at a time when the relevant individual was not
a Director of the Company and, in the opinion of the
Committee, the payment was not in consideration for
the individual becoming a Director of the Company.
For these purposes “payments” includes pension
payments under legacy defined benefit pension plans
and the satisfaction of awards of variable remuneration
and, in relation to an award over shares, the terms of
the payment are “agreed” at the time the award is
granted.
The Performance and Co-Investment Plan (PCP) will
be operated in accordance with the rules of the plan
as approved by shareholders. The deferred bonus
awards will be governed by the rules adopted by the
Board from time to time. In accordance with those
rules the Committee has discretion in the following
areas:
• awards can be granted as forfeitable shares,
conditional share awards, nil or nominal cost options
or awards in other forms it determines has a
substantially similar purpose or effect. Awards may
be settled in cash;
• the Committee may adjust the number of shares
under an award if there is a capitalisation, rights
issue, subdivision, reduction or any other variation in
the share capital, a demerger or special dividend or
any other exceptional event which in the opinion of
the Committee justifies an adjustment;
• a performance condition applicable to a PCP award
may be amended in accordance with its terms or if
an event occurs which causes the Committee to
consider that an amended performance condition
would be appropriate (taking into account the
interests of shareholders) and would be no less
difficult to satisfy had the relevant event not
occurred;
• on a change of control or voluntary winding up of
the Company, PCP awards may vest to the extent
determined by the Committee having regard to the
performance of the Company and the period of time
that has elapsed since grant. Deferred bonus
awards may vest early in full. Alternatively,
participants may have the opportunity, or be
required, to exchange their awards for equivalent
awards in another company although the
Committee may decide in these circumstances to
amend the performance conditions; and
• the Committee has the discretion to treat a
demerger, special dividend or other transaction that
may affect the current or future value of awards as
an early vesting event on the same basis as a
change of control.
The Committee may make minor amendments to the
policy (for example for regulatory, exchange control,
tax or administrative purposes or to take account of a
change in legislation) without obtaining shareholder
approval for that amendment.
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Directors’ remuneration policy Continued
Notes to the policy table Continued
Performance measures and targets
The performance conditions for the annual incentive bonus plan
are selected by the Committee each year to reflect key
performance indicators for the Company and each year key
metrics used by the Board to oversee the operation of the
businesses. These targets are determined annually by the
Committee following a review of the Company’s forecasts and
market expectations. Targets may be adjusted by the
Committee to take account of events such as significant capital
transactions.
In respect of the current long-term incentive plan performance
conditions the Committee chose the two total shareholder
return measures as it believes that performance against these
measures aligns the Executive Directors’ interests with those of
shareholders including how successful performance is
compared to both the general market and a bespoke sector
peer group.
Differences in remuneration policy for all employees
All administrative based employees of the Group are entitled to
base salary and pension provision including life assurance. In
addition all administrative staff in Pennon Group and South
West Water and all senior and middle management staff in the
operations functions in Viridor are entitled to participate in
annual bonus arrangements, the levels of which are based on
the seniority and responsibility of the role. Other benefits such
as car allowance and medical insurance are generally available
only to more senior employees at management level and above
and long-term incentive share awards are only available to
senior executives and Directors. Generally senior executives
and Directors receive a higher proportion of their total pay in the
form of variable remuneration and share awards.
Future policy table – Non-executive
Directors
The table below sets out the Company’s policy in respect of the
setting of fees for Non-executive Directors.
How the components support the
strategic objectives of the Company
How the component operates
Maximum potential value of the
component
Fees
Set at a market level to attract Non-Executive
Directors who have appropriate experience
and skills to assist in determining the Group’s
strategy.
Fees are set by the Board with the Chairman’s
fees being set by the Committee. The relevant
Directors are not present at the meetings when
their fees are being determined.
Total fees paid to Non-executive Directors will
remain within the limits stated in the Articles of
Association.
Non-executive Directors normally receive a
basic fee and an additional fee for any specific
Board responsibility such as membership or
chairmanship of a Committee or occupying the
role of Senior Independent Director.
In reviewing the fees the Board, or Committee
as appropriate, consider the level of fees
payable to Non-executive Directors in other
companies of similar scale and complexity.
Benefits
Benefits for the Chairman are provided which
are consistent with the market and level of
seniority
Expenses incurred in the performance of
non-executive duties for the Company may be
reimbursed or paid for directly by the Company
(including any tax due on the expenses).
None.
The Chairman’s benefits include the provision
of a company vehicle, fuel and health
insurance.
76
Governance and remunerationPennon Group Plc Annual Report 2014 Illustrations of applications of remuneration policy
The total remuneration for each of the Executive
Directors that could result from the proposed
remuneration policy in 2014/15 is shown below.
Minimum performance
100%
£531k
David Dupont – Group Director of Finance
Mid performance
Maximum performance
63%
40%
23%
14% £841k
30%
30%
£1,305k
Minimum performance
100%
£529k
Chris Loughlin – Chief Executive, South West Water
Mid performance
Maximum performance
63%
40%
23%
14% £839k
30%
30%
£1,303k
Minimum performance
100%
£452k
Ian McAulay – Chief Executive, Viridor
Mid performance
Maximum performance
61.5%
39%
24%
14.5%
£736k
30.5%
30.5%
£1,162k
£0k
£250k
£500k
£750k
£1,000k
£1,250k
£1,500k
Fixed remuneration
Annual variable remuneration
Long-term variable remuneration
Scenario
Assumptions
Minimum performance
Fixed pay, which constitutes base salary, pension and benefits in kind. These values are made
up of the salaries for 2014/15 (set out on page 82) and an estimate of the value of the benefits
and pension.
Mid performance
Fixed pay and 50% of the maximum annual bonus and 30% of the maximum long term
incentive award.
Maximum
Fixed pay and 100% vesting of the annual bonus and long term incentive awards.
No adjustments have been made for potential share price
growth or payment of dividends. Benefits from all-employee
schemes have also been excluded.
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Directors’ remuneration policy Continued
Approach to recruitment remuneration
When considering the appointment of Executive Directors the
Committee seeks to balance the need to offer remuneration to
attract candidates of sufficient calibre to deliver the Company’s
strategy whilst remaining mindful of the need to pay no more
than is necessary.
Where possible, salaries may be set at an initially lower level
with the intention of providing potential for higher than usual
increases over the following two years to reflect experience
gained and performance in the role. Other elements of
remuneration would be in line with the Company’s policy set out
in the in the future policy table on page 72.
The maximum variable pay opportunity on recruitment
(excluding ‘buyouts’) would be in line with the future policy table
on page 72.
The Committee may determine for the first year of appointment
that any annual bonus will be subject to different weightings or
objectives.
To facilitate recruitment it may be necessary to recompense a
new Executive Director for the expected value of incentive
rewards foregone with their previous employer (‘buyout’
awards). The Committee may make buyout awards under
LR9.4.2 of the Listing Rules. The Committee will ensure that
any such award would at a maximum match the value of the
awards granted by the previous employer and be made only
where a Director is able to demonstrate that a loss has been
incurred from leaving his or her previous employment. Any
buyout would take into account the terms of the arrangement
forfeited, including in particular any performance conditions and
the time over which they vest. The award would have time
horizons which are in line with or greater than the awards
forfeited.
For interim positions a cash supplement may be paid rather
than salary (for example a Non-executive Director taking on an
executive function on a short-term basis).
Where an employee is promoted to the position of Executive
Director (including if an Executive Director is appointed following
an acquisition or merger), pre-existing awards and contractual
commitments would be honoured in accordance with their
established terms.
Non-executive Directors fees would be in line with the policy set
out in the table on page 76.
78
Governance and remunerationPennon Group Plc Annual Report 2014 Dates of Directors’ service contracts/letters of
appointment
The dates of Directors’ service contracts and letters of
appointment and details of the outstanding term are
shown below.
Executive Directors
Date of service contract
Expiry date of service contract
Colin Drummond
5 March 1992
David Dupont*
Chris Loughlin*
Ian McAulay*
2 January 2003
16 May 2006
2 August 2013
30 September 2013
(retired on this date)
No expiry date
No expiry date
On normal retirement date at age 65
(25 April 2030)
* Each of the Executive Directors’ service contracts is subject to 12 months notice on either side.
Non-executive Directors
Date of letter of appointment
Expiry date of appointment
Ken Harvey
1 April 2005
Ongoing – subject to 12 months notice
from either side
Martin Angle
Gerard Connell
Dinah Nichols
Gill Rider
28 November 2008
30 November 2014
30 September 2003
31 July 2015
10 June 2003
22 June 2012
1 August 2013 (retired on this date)
30 August 2015
The policy is for Executive Directors’ service contracts
to provide for 12 months notice from either side.
The policy is for Non-executive Directors’ letters of
appointment to contain three months notice period
from either side and for the Chairman’s letter of
appointment to contain a 12 months’ notice period
from either side.
All Non-executive Directors are subject to annual
re-election and are appointed for an initial three-year
term.
Copies of Directors’ service contracts and letters of
appointment are available for inspection at the
Company’s registered office.
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Directors’ remuneration policy Continued
Policy on termination of service agreements and payment
for loss of office
In the event that the employment of an Executive Director is
terminated, any compensation payable will be determined by
reference to the terms of the service contract between the
Company and the employee, as well as the rules of the various
incentive plans as set out in the table below.
The Company’s policy is that Executive Directors’ service
agreements normally continue until the Director’s agreed
retirement date or such other date as the parties agree.
Otherwise they are terminable on one year’s notice and provide
no entitlement to the payment of a pre-determined amount on
determination of employment in any circumstances.
There are no liquidated damages provisions for compensation
on termination within Executive Directors’ service agreements.
Taking into account the circumstances of any termination the
Committee may determine that a payment in lieu of notice
should be made. Any such payments would be restricted to
salary and benefits. In these circumstances consideration
would be given to phasing of payments and an individual’s duty
and opportunity to mitigate losses.
The Company may meet ancillary costs, such as outplacement
consultancy and/or reasonable legal costs if the Company
terminates the Executive Director’s service contract.
Annual bonus
Normally no bonus is payable unless an Executive Director is employed on the date of payment.
In certain good leaver circumstances (death, disability, redundancy, retirement and any other circumstance at
the Committee’s discretion) a bonus may be payable. Any such bonus would be based on performance and
pro-rated to reflect the period of service with performance normally assessed at the same time as other
employees. The Committee retains discretion to adjust the timing and pro-rating of any award to take account
of any prevailing exceptional circumstances which they consider would be fair to the Company and to the
employee. Share deferral would not normally apply.
Deferred shares
(including ESOS)
Unvested awards would normally lapse upon cessation. In certain good leaver circumstances awards are
released to participants on cessation of employment.
Performance and
Co-investment Plan
Good leaver circumstances are death, injury, ill-health, disability, redundancy, retirement, the sale of the
individual’s employing business or company out of the Group and any other circumstance at the Committee’s
discretion.
Any unvested awards would normally lapse upon cessation of the individual’s employment within the Group. In
certain good leaver circumstances awards vest to the extent determined by the Committee taking into
account the extent to which the performance target has been satisfied, the extent to which the co-investment
condition has been satisfied, the period of time elapsed since grant and such other factors as the Committee
may deem relevant. Awards would normally vest on the original normal vesting date unless the Committee
determines awards should vest earlier.
Good leaver circumstances are death, ill health, injury, disability, redundancy, retirement, the sale of the
individual’s employing company or business out of the Group and any other circumstance at the Committee’s
discretion.
All awards would lapse if a participant was summarily dismissed.
All-employee awards
Leavers will be treated in accordance with the HMRC approved rules.
Other awards
Where a buyout award is made recruitment leaver provisions would be determined at the time of award. The
buyout award to Mr McAulay has the same leaver provisions as the deferred bonus plan.
80
Governance and remunerationPennon Group Plc Annual Report 2014 Statement of consideration of employment
conditions elsewhere in the Company
In setting executive remuneration the Committee not
only takes account of employment market conditions,
but also of the pay and benefits differentials across the
Group. The Committee considers annual summary
reports of workforce remuneration and the terms
and conditions of employment within each operating
company and has regard to these in setting salary and
other benefits for the Executive Directors and senior
management although these reports do not include
comparison metrics.
The Committee does not consult with employees
when drawing up the Directors’ remuneration policy
but does take account of the Group-wide policy as
described above.
Statement of consideration of shareholder views
The Committee has taken into account general good
governance, best practice and shareholder views
when formulating the remuneration policy. Where
there is a significant change to policy the Committee
would consult with major shareholders. For example
shareholders were consulted when the Performance &
Co-investment Plan was introduced. The Company’s
pay policy for Executive Directors has remained
consistent for a number of years and has enjoyed
shareholder support over that period.
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Annual report on remuneration
Introduction
This section sets out how the Company has applied its
remuneration policy in the year, and details how the policy will
be implemented for the year 2014/15. In accordance with
section 439 of the Companies Act, this section will be put to an
advisory vote at the Company’s AGM which is scheduled to be
held on 31 July 2014.
Operation of the remuneration policy for 2014/15
During 2013 the Committee reviewed the incentive framework
for Executive Directors. The key changes made were:
• adjustment of the corporate performance objectives for the
annual bonus to ensure that they were aligned with the areas
of challenge in the strategy; and
• as part of this review the Committee introduced malus and
clawback arrangements in the annual bonus in accordance
with best practice.
A summary of the specific remuneration arrangements for
Executive Directors in 2014/15 is described below;
Base salary
Salary increases of 2.5%, generally in line with increases for all employees, effective 1 April 2014 except for Ian
McAulay who received a 9.23% increase to reflect his performance in the role after joining in accordance with
the Committee’s pay policy on recruitment as set out in the Directors’ remuneration policy on page 78.
2014/15 salaries are:
• David Dupont: £387,000
• Chris Loughlin: £387,000
• Ian McAulay: £355,000
Pension and benefits
No changes. Defined contribution pension or salary supplement cash allowance of between 20% and 30%.
Annual bonus
No change to maximum opportunity of 100% of salary.
No change to operation of deferral. 50% of the bonus is delivered as deferred shares.
Following a review of the performance measures, annual bonus will be based on the following for 2014/15:
• 30% EPS (before deferred tax and exceptional net charges) performance
• 30% personal strategic objectives
• 40% measures which are specific to the role including net debt, division operating profit, SIM performance
and serviceability South West Water (SWW), EBITDA and JVs (Viridor).
More detail on the measures and weightings is provided on the following page. The objective was to ensure
alignment to measures identified as key for each role with an appropriate balance between hard financial
measures and objectives aligned to the strategic success of the business.
For bonuses from 2014/15 both malus and clawback will apply as described in the Remuneration policy report.
Performance and
Co-Investment Plan (PCP)
No changes.
Awards of 100% of base salary.
Awards subject to co-investment of 20% of the award.
Performance measures:
• 50% TSR vs FTSE 250 (excluding investment trusts)
• 50% TSR vs a Water/Waste peer group index.
“Underpin” relating to overall Group performance.
Shareholding guidelines
No change.
100% of salary to be built up in the first five years of joining.
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Forward-looking performance targets
Details of the annual bonus framework that will apply for each Executive Director for 2014/15 are set out in the
table below:
Group Director of Finance,
David Dupont
EPS*
Net debt
30%
10%
Operating profit of SWW and Viridor
30% (15% each)
Personal
30%
40%
Chief
Executive,
SWW, Chris
Loughlin
EPS*
Average SWW
Directors’
performance:
(i) operating profit
(ii) SIM performance
(iii) Serviceability
(iv) Net debt
30%
30%
40%
Chief
Executive,
Viridor, Ian
McAulay
EPS*
Average Viridor
Directors’
performance:
(i) operating profit
(ii) Net debt
(iii) EBITDA+JVs
Personal
30%
Personal
30%
*EPS is before deferred tax and exceptional net charges
The specific bonus targets are considered to be
commercially sensitive. However the Committee
intends to disclose details of the targets set
retrospectively to the extent they are not considered
commercially sensitive. For the PCP (long-term
incentive plan) the targets are set out below:
Threshold
Maximum
(30% of maximum vests)
(100% of maximum vests)
Water/Waste Index (50% of award)
Equal to index
15% above the index
FTSE 250 (excluding investment trusts) (50% of award)
Above 50th percentile
At or above 75th percentile
The Water/Waste Index will comprise:
• Shanks Group
• Séché Environnement
• Suez Environnement
Non-executive Director fees
• Severn Trent
• United Utilities
• National Grid
• Veolia Environnement
Non-executive Director fees for 2014/15 are set out
below. They include an increase of 2.5% approved by
the Committee for the Chairman and an overall 2.5%
for the other Non-executive Directors approved by the
Board, all effective from 1 April 2014.
Role
Chairman
Basic Non-executive Director fee
Additional fees:
Additional fee for Chairman of the Audit Committee
Additional fee for Chairman of the Remuneration Committee
Additional fee for Chairman of the Sustainability Committee
Committee fee
Fees £
262,400
44,500
11,000
7,900
7,900
4,000
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Annual report on remuneration Continued
Single total figure of remuneration tables (Audited information)
Base salary/fees
(£000)
Benefits
(including
Sharesave)
Annual bonus
(cash and
deferred shares)
Performance
and co-
investment plan
Pension
(£000)
Total
remuneration
(£000)
(£000)
(£000)
(£000)
2
0
1
3
/
1
4
2
0
1
2
/
1
3
2
0
1
3
/
1
4
2
0
1
2
/
1
3
2
0
1
3
/
1
4
2
0
1
2
/
1
3
(iv)
2
0
1
3
/
1
4
2
0
1
2
/
1
3
2
0
1
3
/
1
4
2
0
1
2
/
1
3
2
0
1
3
/
1
4
2
0
1
2
/
1
3
Executive Directors
Colin
Drummond,
Chief
Executive,
Viridor (retired
30
September
2013)
David
Dupont,
Group
Director of
Finance
Chris
Loughlin,
Chief
Executive,
South West
Water
Ian McAulay,
Chief
Executive,
Viridor
(appointed 9
September
2013)
185
370 (i)
13
27
79
74
94
241
55
111
426
823
377
370
28
27
274
212
126
241
113
25
918
875
377
370
30
25
321
236
126
241
113
111
967
1,179
182
–
117(ii)
–
240(iii)
–
–
36
–
575
–
Non-executive Directors
Ken Harvey,
Chairman
Gerard
Connell
Dinah Nichols
(retired 1
August 2013)
Martin Angle
Gill Rider
(appointed 1
September
2012)
256
248
25
24
62
60
20
59
57
57
58
31
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
281
272
62
60
20
59
57
57
58
31
(i) 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.
(ii) Benefits include reimbursement of relocation costs (including income tax) of £107,187.
(iii) For Ian McAulay £112,000 related to a buyout award as referred to on page 88.
(iv) Based on an estimated 28.3% vesting as referred to on page 86 and based on the Company’s share price of £7.695 as at 19 June 2014, together with an estimate of
the accrued dividends payable on the vesting shares.
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Financial state m ents
Annual bonus outturn for 2013/14
The performance targets set and the performance achieved in respect of the annual bonus for 2013/14 in
respect of each Executive Director is set out below. In line with the Committee’s policy 50% of any bonus is
payable into shares except in the case of Colin Drummond who retired during the year.
David Dupont
Measure
Weighting
Threshold
Target
Maximum
Actual
outturn
Bonus
outturn
EPS^
SWW PBT
Viridor PBT+
Net interest
40%
10%
10%
10%
35.9p
39.8p
45.8p
42.6p
27.1%
£138m
£145m
£160m
162.5m
£27.4m
£30.4m
£33.4m
£27.6m
No payout for below target. Maximum payout for
net interest of 5% below target.*
£53.9m
10%
0.4%
10%
Net debt
10%
No payout for below target. Maximum payout for
net debt of 2.5% below target.*
£2,194m
10%
Personal
objectives
Total outturn
20%
Objectives relating to key finance business
objectives for the Group.*
–
15%
72.5%
* Actual targets considered commercially confidential + Before exceptional net charges ^ EPS is before deferred tax and exceptional net charges.
Ian McAulay
Ian McAulay became Chief Executive of Viridor and joined the Board in September 2013. Ian’s employment with
the Company commenced on 9 September 2013 and the bonus percentage was paid in respect of total salary
received in the year.
Measure
Weighting
Threshold
Target
Maximum
Actual
outturn
Bonus
outturn
EPS^
Viridor PBT+
Personal
objectives
Total outturn
20%
15%
65%
35.9p
39.8p
45.8p
42.6p
14.6%
£27.4m
£30.4m
£33.4m
£27.6m
0.65%
Personal objectives relating to developing role as
new chief executive of Viridor*
–
54.75%
70%
*Actual targets considered commercially confidential + Before exceptional net charges ^ EPS is before deferred tax and exceptional net charges.
Colin Drummond
Colin Drummond retired on 30 September 2013. The bonus percentage was paid in respect of total salary
received in the year to this date.
Measure
Weighting
Threshold
Target
Maximum
Actual
outturn
Bonus
outturn
Viridor PBT
(half-year
results)
Personal
objectives
Total outturn
45%
£14.6m
£16.6m
£18.3m
£15.3m
8.6%
55%
Objectives relating to a range of targets concerning
key Viridor activities and the handover to a new chief
executive when appointed.*
–
34.0%
42.6%
*Actual targets considered commercially confidential
85
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Annual report on remuneration Continued
Annual bonus outturn for 2013/14 Continued
Chris Loughlin
Measure
Weighting
Threshold
Target
Maximum
Actual
outturn
Bonus
outturn
EPS^
40%
35.9p
39.8p
45.8p
42.6p
27.1%
The average of the bonus earned by the other Executive Directors of South West Water which
relate to:
• out-performance against operating costs;
• profit before tax, capital expenditure and net debt targets 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
40%
South West Water.*
40%
SWW PBT targets were £138 million to £160 million and were exceeded. Actual SWW PBT
performance was £162.5 million.
In considering the outcome for this element the Committee exercised discretion in relation to
the excellent performance in achieving ‘enhanced status’ for the SWW business plan with
Ofwat. The increase in outturn in relation to this achievement was 10% of salary. The benefits
of this assessment included:
• an initial financial award of £11 million as an addition to the Regulatory Capital Value; and
• an enhanced total expenditure (Totex) menu with an enhanced sharing rate.
20%
Implementing South West Waters new strategies and projects and meeting
compliance targets.*
–
18%
85.1%
SWW
performance
Personal
objectives
Total outturn
*Actual targets considered commercially confidential ^ EPS is before deferred tax and exceptional net charges.
Performance & Co-investment Plan outturn
for 2013/14
The PCP award included in the single figure table relates to the
awards made on 1 July 2011, which are due to vest on 30 June
2014.
50% of the awards will vest subject to the Company’s TSR
performance measured against an index made up of the
following six listed water and waste comparator companies.
These companies were considered to be the Company’s key
listed comparators:
• Northumbrian Water Group
• Shanks Group
• Séché Environnement
• Suez Environnement
• Severn Trent
• United Utilities
Northumbrian Water Group delisted from the London Stock
Exchange in October 2011. The Committee therefore decided
to include this company in the calculation of the index up to the
date of delisting and exclude the company from the date of
delisting.
The remaining 50% of the awards will vest subject to the
Company’s ranked TSR performance against the constituents
of the FTSE 250 (excluding investment trusts).
The calculation of TSR performance over the three year
performance period (being 1 April 2011 to 1 April 2014) for the
PCP awards was undertaken by Deloitte LLP for the
Committee.
Vesting of the award is according to the schedule on the
following page:
86
Governance and remunerationPennon Group Plc Annual Report 2014 Threshold
Maximum
(30% of maximum
vests)
(100% of maximum
vests)
Achievement in the
period to 1 April
2014*
Vesting outturn*
Water/Waste Index
Equal to index
15% above the index
5.7% out
performance
28.3%
(50% of award)
FTSE 250 (excluding
investment trusts)
(50% of award)
TOTAL
Above 50th percentile
At or above 75th
percentile
35.3%
0%
28.3 %
Straight line vesting between points.
For below threshold performance, 0% vests
* As the calculation requires averaging TSR performance over the first three months of the performance period and comparing it to the average
over the three months following the end of the performance period (1 April 2014 to 30 June 2014) the achievement and the outturn is an estimate
at the date of calculation (16 June 2014)
Vesting of the award is also subject to the ‘underpin’ described on page 74 which the Committee has
determined to the date of this report would be satisfied.
Total pension entitlements (Audited information)
Defined benefit pension
accrued at 31 March 2014(1)
£000 p.a.
Normal retirement age
Description of additional
benefits available to the
Director on early retirement
Colin Drummond
David Dupont
134
140
Not applicable – Director retired
Not applicable – Director retired
Not applicable – Director in
receipt of pension
Not applicable – Director in
receipt of pension
(1) Colin Drummond and David Dupont are both pensioner members of Pennon Group’s schemes. Therefore the accrued pension shown is the actual
pension in payment as at 31 March 2014.
No additional benefits will become receivable by a
Director in the event that the Director retires early.
David Dupont and Chris Loughlin had normal
retirement dates of 60 but they have both reached
agreement with the Company to continue in office
subject to one year’s notice on either side. Ian
McAulay’s normal retirement age is 65 which will be
reached on 25 April 2030.
Colin Drummond and David Dupont were both
pensioner members of the Pennon Group’s defined
benefit pension arrangements during the year. Neither
Director has a prospective entitlement to defined
benefits or other arrangements which include such
benefits.
Ian McAulay joined Pennon Group’s defined
contribution arrangement during the year and received
an overall pension benefit from the Company
equivalent to 20% of his salary. Chris Loughlin is not a
member of any of the Pennon Group’s pension
schemes and receives a sum in lieu of pension
entitlement equivalent to 30% of salary. David Dupont
also receives a cash allowance of 30% of salary in lieu
of ongoing pension. Colin Drummond received a
similar cash allowance of 30% of salary in lieu of
ongoing pension up to his retirement date of 30
September 2013.
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Annual report on remuneration Continued
Director changes – additional information
Leaving arrangements – Colin Drummond (Audited
information)
Colin Drummond retired on 30 September 2013. This followed
21 years of service with the Company.
resignation. These shares are of a lesser value to the value
which was forgone. The shares will be released on the third
anniversary of the date of the award subject to Mr McAulay
remaining in employment with the Company, being a longer
period that the time horizons of the awards forfeited. No cash
sign-on payments were made.
The Committee determined that Mr Drummond’s retirement
was a “good leaver” circumstance. Consequently he received a
performance related annual bonus, pro-rated for his period of
employment in the year which was not subject to share deferral
and his outstanding deferred bonus awards were released to
him. Under the rules of the PCP his PCP awards remain in force
subject to performance conditions tested at the normal time
and subject to pro-rating for time.
Mr Drummond received no payment in lieu of notice or
compensation for loss of office.
Upon his retirement as an executive director Mr Drummond was
appointed non-executive chairman of the board of Viridor
Limited. He received fees amounting to £45,000, health
insurance to the value of £465 and expenses amounting to
£1,582 in respect of this role for the remaining six months of the
year.
Recruitment of Ian McAulay
Ian McAulay joined the Board in September as an executive
director and as Chief Executive of Viridor. His remuneration
package is in line with those of the other Executive Directors,
except that his salary has been set at an initially lower level with
a view to providing for scope for increases depending on
performance over the next two years.
As part of the recruitment he was made an award of shares to
the value of £112,000 to compensate him for share awards and
bonus forfeited from his previous employment due to his
Mr McAulay also received the reimbursement of relocation costs
from the US to the value of £107,187 (including income tax).
Outside appointments
Executive Directors may accept one board appointment in
another company. Board approval must be sought before
accepting an appointment. Fees may be retained by the
Director. Currently, no Executive Directors hold outside
company appointments other than with industry bodies or
governmental or quasi governmental agencies.
Non-executive Director fees and benefits
The Chairman and the other Non-executive Directors’ fees were
increased by 3.3% for 2013/14 compared to the previous year
following an assessment of the appropriate up to date fee levels
for directors in similar positions and taking account of the time
commitment of each Director.
The Chairman’s benefits comprise of a company vehicle, fuel
and private health insurance.
All employee, performance and other
contextual information
Historical TSR and Executive Director remuneration
The graph below shows the value, over the five-year period
ending on 31 March 2014, of £100 invested in Pennon Group
on 31 March 2009 compared with the value of £100 invested in
the FTSE 250 Index. This Index is considered appropriate as it
is a broad equity market index of which the Company is a
constituent.
Total shareholder return (TSR)
TSR
Pennon
FTSE 250
2009
2010
2011
2012
2013
2014
YEAR
300
250
200
150
100
88
Governance and remunerationPennon Group Plc Annual Report 2014
Equivalent chief executive officer remuneration
As the Company does not have a Group CEO, the
Committee has decided to provide historic single
figure information in the form of the average
remuneration of the Executive Directors. Their
remuneration is considered to be the most appropriate
to use for this exercise as they are the most senior
executives in the Company.
Average Executive
Director single figure
of remuneration
(£000)
Annual bonus payout
(% of maximum)
LTIP vesting (% of
maximum)(ii)
2009/10
2010/11
2011/12
2012/13
2013/14(i)
916
1,091
1,221
959
962
91.79
94.69
72.87
47.00
67.56
67.30
50.00
79.30
50.00
28.30
(i) Due to the change in the post holder of Chief Executive, Viridor, (Colin Drummond to Ian McAulay) in the year the total paid to both post holders has
been included except the LTIP vesting which only Colin Drummond was eligible to receive.
(ii) The LTIP vesting percentage excludes accrued dividends which are added on vesting.
Comparison of Executive Director remuneration to
employee remuneration
The table below shows the percentage change
between 2012/13 and 2013/14 in base salary, benefits
and annual bonus for the average of the Executive
Directors and all employees.
The percentage increase in average remuneration for
employees is calculated using wages and salaries
(excluding share-based payments) of £134.3 million
(2012/13 £134.3 million), analysed into the three
components in the table and the average number of
employees of 4,451 (2012/13 4,584) both as detailed
in note 14 to the Group financial statements.
Percentage change in
salary
Percentage change in
benefits
Percentage change in
annual bonus
Average Executive Director
remuneration
All employees
1.08
2.76
142.31(i)
0.62
28.93
27.66
(i) This figure includes relocation costs for Ian McAulay. Without these costs the change would have been 2.5%.
Strategic overvie w
S o uth W est W ater
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Financial state m ents
89
www.pennonannualreport.co.uk/2014
Directors’ remuneration report Continued
Annual report on remuneration Continued
Relative importance of spend on pay
Overall expenditure on pay1
Distributions to Ordinary
shareholders
Distributions to perpetual/capital
security holders
Purchase of property, plant and
equipment (cash flow)
1 Excludes employer’s social security costs
2013/14
(£ million)
2012/13
(£ million)
Percentage change
157.9
103.9
20.3
346.7
155.5
96.0
–
397.2
+1.5
+8.2
N/A
-12.7
The above table illustrates the relative importance of spend on
pay compared with distributions to shareholders and other
Group outgoings. The distributions to perpetual capital security
holders and the purchase of property, plant and equipment
(cash flow) have been included as these were the most
significant outgoings for the Company in the last financial year.
Share award and shareholding disclosures
(Audited Information)
Share awards granted during 2013/14
The table below sets out details of share awards made in the
year to Executive Directors.
Executive Director
Type of interest
Basis of Award
Face value
Colin Drummond
PCP
100% of salary
David Dupont
Chris Loughlin
Colin Drummond
Deferred bonus /
ESOS
50% of bonus
awarded
David Dupont
Chris Loughlin
Ian McAulay
Buy-out award
Equivalent or lower
value to awards
forfeited
Sharesave (SAYE) awards were also made, as detailed on the next page.
£000
–
377
377
37
106
118
112
90
Percentage vesting
at threshold
performance
Performance
period end date
30% of maximum
31 March 2016
n/a
4 August 2016
n/a
29 September 2016
Governance and remunerationPennon Group Plc Annual Report 2014 PCP awards were calculated using the share price at
the date of grant (2 July 2013) which was £6.53 per
share. Deferred bonus awards were calculated using
the share price at the date of grant (5 August 2013)
which was £6.93. The buy-out award was calculated
using the share price at the deemed date of grant (30
September 2013) which was £6.96.
The deferred bonus plan is operated in conjunction
with the Company’s HMRC approved executive share
option scheme (ESOS). This is on the basis that the
aggregate pre-tax value of the awards made under
both the annual bonus and the ESOS would be the
same as they would have been if the bonus plan had
operated alone. This is achieved by requiring that an
amount of deferred shares, equal in value to any gain
made on the exercise of ESOS options, is forfeited by
the Directors at the end of the 3 year deferral period.
Directors’ shareholding and interest in shares
The Remuneration Committee believes that the
interests of Executive Directors and senior
management should be closely aligned with the
interests of shareholders. To support this, the
Committee operates shareholding guidelines. The
Executive Directors are expected to build up a
shareholding in the Company in accordance with the
Company’s shareholding guideline which amounts to a
shareholding interest equivalent to 100% of salary to
be built up within the first five years of joining the
Company at the rate of at least 20% per year by the
end of each year. This level of shareholding is then
expected to be maintained by each Director and is
revalued each year in accordance with the then
prevailing share price and the Executive Director’s
salary.
The beneficial interests of the Executive Directors in
the ordinary shares (40.7p each) of the Company as at
31 March 2014 (or date of cessation, if earlier) and 31
March 2013 together with their shareholding guideline
obligation and interest are shown in the table below:
Unvested awards
Share
interests
(including
connected
parties) at
31 March
2014
Share
interests
(including
connected
parties) at
31 March
2013
Shareholding
guideline
Shareholding
guideline
met?
Performance
shares
(subject to
performance
conditions)
SAYE
Deferred
Bonus
shares
ESOS
Buyout
award
350,061
332,841
100%
350,194
316,415
100%
193,543
150,766
100%
No longer
applicable
–retired
Yes
Yes
58,634*
157,387
–
–
–
–
56,220
4,329
157,387
2,788
59,769
4,329
–
–
–
–
–
20%
In first year
–
–
–
–
16,091
Colin
Drummond
David
Dupont
Chris
Loughlin
Ian
McAulay
* Following his retirement on 30 September 2013 Colin Drummond’s continuing interest in performance shares has been pro-rated to the period he
was employed during each restricted period.
Since 31 March 2014, 3,512 additional Ordinary shares in the Company have been acquired by Chris Loughlin as a result of participation in the
Company’s Scrip Dividend Alternative and the Company’s Share Incentive Plan; and 361 additional Ordinary shares in the Company have been
acquired by David Dupont as a result of dividend reinvestment in an ISA. There have been no other changes in the beneficial interests or the non-
beneficial interests of the Directors in the Ordinary shares of the Company between 1 April 2014 and 19 June 2014.
Strategic overvie w
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Financial state m ents
91
www.pennonannualreport.co.uk/2014
Directors’ remuneration report Continued
Annual report on remuneration Continued
Non-executive Directors’ shareholding
The beneficial interests of the Non-executive Directors,
including the beneficial interests of their spouses, civil partners,
children and step-children, in the ordinary shares (40.7p) of the
Company, are shown in the table below:
Director
Ken Harvey
Martin Angle
Gerard Connell
Dinah Nichols
Gill Rider
Shares held at 31 March 2014
Shares held at 31 March 2013
26,209
–
4,271
4,549
2,500
26,209
–
4,098
4,549
–
There is no formal shareholding guideline for the Non-executive
Directors; however they are encouraged to purchase shares in
the Company.
Shareholder dilution
The Company can satisfy awards under all of its share plans
with new issue shares or shares issued from Treasury up to a
maximum of 10% of its issued share capital in a rolling ten year
period to employees under all its share plans. Within this 10%
limit the Company can only issue (as newly issued shares or
from Treasury) 5% of its issued share capital to satisfy awards
under discretionary or executive plans. The percentage of
shares awarded within these guidelines and the headroom
remaining available as at 20 June 2014 is as set out below:
Awarded
Headroom
Discretionary schemes
All schemes
1.44%
4.01%
3.56%
5.99%
Total 5%
Total 10%
92
Governance and remunerationPennon Group Plc Annual Report 2014
Details of share awards
(a) Performance and co-investment plan (long-term
incentive plan)
In addition to the above beneficial interests, the
following Directors have or had a contingent interest
in the number of ordinary shares (40.7p each) of the
Company shown below, representing the maximum
number of shares to which they would become
entitled under the plan should the relevant criteria be
met in full:
Director
and date
of award
Conditional
awards
held at 1
April 2013
Conditional
awards
made in
year
Market
price upon
award in
year
Vesting in
year(i)
Value of
shares
upon
vesting
(before tax)
£000
Conditional
awards
held at 31
March
2014
Date of
end of
period for
qualifying
conditions
to be
fulfilled
Colin Drummond
2/7/10
1/7/11
3/7/12
David Dupont
2/7/10
1/7/11
3/7/12
2/7/13
Chris Loughlin
2/7/10
1/7/11
3/7/12
2/7/13
63,186
51,432
48,145
63,186
51,432
48,145
–
–
–
–
–
–
546.00p
35,194
241
–
1/7/13
698.00p
768.50p
–
–
–
–
38,574(ii)
30/6/14
20,060(ii)
2/7/15
546.00p
35,194
241
–
1/7/13
698.00p
768.50p
–
–
–
–
–
–
51,432
30/6/14
48,145
2/7/15
57,810
1/7/16
–
57,810
653.00p
63,186
51,432
48,145
–
–
–
698.00p
768.50p
–
57,810
653.00p
546.00p
35,194
241
–
1/7/13
–
–
–
–
–
–
51,432
30/6/14
48,145
2/7/15
57,810
1/7/16
(i) 50% of the July 2010 award shares vested on 8 August 2013 at a market price of 683.55p per share. The total number of shares that vested
included additional shares equivalent in value to such number of shares as could have been acquired by reinvesting the dividends which would
otherwise have been received on the vested shares during the restricted period of three years. The balance of the award lapsed.
(ii) Following retirement on 30 September 2013 Colin Drummond’s award shares have been pro-rated to the period of the restricted period he was
employed by the Company. The remainder of the awards lapsed.
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G overnance
Financial state m ents
93
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Directors’ remuneration report Continued
Annual report on remuneration Continued
(b) Annual incentive bonus plan – deferred bonus shares (long-
term incentive element)
The following Directors had or 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
have or 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
Conditional
awards held
at 1 April
2013
Conditional
awards made
in year
Market price
upon award
in year
Vesting in
year
Value of
shares upon
vesting
(before tax)
£000
Conditional
awards held
at 31 March
2014
Date of end
of period for
qualifying
conditions to
be fulfilled
Colin Drummond
27/7/10
27/7/11
27/7/12
5/8/13
David Dupont
27/2/10
27/7/10
27/7/11
27/7/12
5/8/13(1)
Chris Loughlin
27/2/10
27/7/10
27/7/11
27/7/12
5/8/13(1)
Ian McAulay
30/9/13(3)
27,091
23,079
12,823
–
–
–
572.50p
27,091(4)
725.00p
23,079(2)
754.50p
12,823(2)
–
5,339
693.00p
5,339(2)
755
25,938
22,365
18,532
–
–
–
–
524.50p
755(4)
572.50p
25,938(4)
725.00p
754.50p
–
15,323
693.00p
524.50p
1,261(4)
572.50p
25,133(4)
9
177
1,261
25,133
22,141
20,650
–
–
–
–
–
–
725.00p
754.50p
16,978
693.00p
16,091
696.00p
191
161
90
37
5
183
–
–
–
–
–
–
26/7/13
26/7/14
26/7/15
4/8/16
26/2/13
26/7/13
22,365
26/7/14
18,532
26/7/15
15,323
4/8/16
–
–
26/2/13
26/7/13
22,141
26/7/14
20,650
26/7/15
16,978
4/8/16
16,091
29/9/16
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(1) In addition to the awards made on 5 August 2013 the Directors also received options pursuant to the Company’s executive share option scheme (ESOS), details of
which are set out on page 95. These awards were made in conjunction with the operation of the bonus plan, details of which are set out on page 73.
(2) Following Colin Drummond’s retirement on 30 September 2013 these awards vested early at £6.992 per share as explained on page 88.
(3) This was a buy-out award to Ian McAulay following his appointment on 9 September 2013 as explained on page 88.
(4) These shares vested on 2 August 2013 at £7.052 per share.
94
Governance and remunerationPennon Group Plc Annual Report 2014 During the year the Directors received dividends on the
above shares in accordance with the conditions of the
bonus plan as follows:
given for the additional ordinary shares (40.7p each) in
the Company that he acquired since 31 March 2014
given on page 91.
Colin Drummond £8,124; David Dupont £16,354;
Chris Loughlin £17,387.*
*Chris Loughlin received his dividend in the form of
ordinary shares (40.7p each) in the Company as a
result of participation in the Company’s scrip dividend
alternative and these shares are included in the figure
(c) Executive Share Option Scheme (ESOS)
The following Directors had a contingent interest in the
number of options shown in the ordinary shares (40.7p
each) of the Company pursuant to the Company’s
ESOS. Further details relating to the operation of the
scheme are set out on page 91.
Date of
award
Options
held at 1
April 2013
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
2014
Maturity
Date
Options
held at 31
March
2014
David Dupont
5/8/13
Chris Loughlin
5/8/13
–
–
4,329
4,329
–
–
693.00p
693.00p
–
–
742.50p
4,329
5/8/16
742.50p
4,329
5/8/16
(d) Sharesave scheme
Details of options to subscribe for ordinary shares
(40.7p each) of the Company under the all-employee
sharesave scheme were:
Date of
grant
Options
held at 1
April 2013
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
2014
Options
held at 31
March
2014
Exercise
period/
maturity
date
Colin Drummond*
29/6/12
1,530
–
807
588.00p
756.00p
–
–
–
Chris Loughlin
3/7/13
–
2,788
–
538.00p
–
742.50p
2,788
1/9/18
– 28/2/19
* Option exercised early due to retirement. The balance has lapsed.
Strategic overvie w
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Financial state m ents
95
www.pennonannualreport.co.uk/2014 Directors’ remuneration report Continued
Annual report on remuneration Continued
Advisors to the Remuneration Committee
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, Ken Woodier, Group General Counsel & Company
Secretary, and from the following advisors who were appointed
directly by the Committee:
• Deloitte LLP on calculating the Company’s total shareholder
return compared with two comparator groups for the
Company’s long-term incentive plan, on remuneration trends
and on the Committee’s review of the Executive Directors’
annual incentive bonus plan performance targets and
subsequent to the year-end Deloitte LLP provided advice to
the Committee on the form of the Directors’ remuneration
report. Deloitte LLP’s fees in respect of advice which
materially assisted the Committee during 2013/14 was
£24,550. Deloitte LLP also provided tax, consulting and share
scheme advice to the Company during the year. Deloitte LLP
is a member of the Remuneration Consultants’ Group and as
such voluntarily operates under the code of conduct in
relation to executive remuneration consulting in the UK. The
Committee is satisfied that the advice they have received from
Deloitte LLP has been objective and independent.
Statement of Voting at General Meeting
The table below sets out the voting by the Company’s
shareholders on the resolution to approve the Directors’
remuneration report at the Annual General Meeting held on
1 August 2013, including votes for, against and withheld.
For
Against
Total votes cast
Withheld
Total number of votes
% of votes cast
227,613,968
3,732,980
231,346,948
1,622,724
98.39%
1.61%
100%
–
A vote withheld is not counted in the calculation of the
proportion of votes ‘for’ and ‘against’ a resolution.
The Remuneration Committee is pleased to note that 98.39% of
shareholders approved the 2012/13 Directors’ remuneration
report. The Committee appreciates the continuing support of its
shareholders.
On behalf of the Board
Martin Angle
Chairman of the Remuneration Committee
23 June 2014
96
Governance and remunerationPennon Group Plc Annual Report 2014
Independent auditors’ report
Independent auditors’ report to the members of
Pennon Group Plc
Report on the financial statements
In our opinion:
• the financial statements, defined below, give a true
and fair view of the state of the Group’s and of the
Parent Company’s affairs as at 31 March 2014 and
of the Group’s profit and of the Group’s and Parent
Company’s cash flows for the year then ended;
• the Group financial statements have been properly
prepared in accordance with International Financial
Reporting Standards (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 IAS Regulation.
This opinion is to be read in the context of what we
say in the remainder of this report.
What we have audited
The Group financial statements and Parent Company
financial statements (the “financial statements”), which
are prepared by Pennon Group Plc, comprise:
• the Group and Parent Company balance sheets as
at 31 March 2014;
• the consolidated income statement and statement
of comprehensive income for the year then ended;
• the Group and Parent Company statements of
changes in equity and cash flows statements for the
year then ended; and
• the notes to the financial statements, which include
a summary of significant accounting policies and
other explanatory information.
The financial reporting framework that has been
applied in their preparation comprises applicable law
and IFRSs as adopted by the European Union and, as
regards the Parent Company, as applied in
accordance with the provisions of the Companies Act
2006.
What an audit of financial statements involves
We conducted our audit in accordance with
International We conducted our audit in accordance
with International Standards on Auditing (UK and
Ireland) (ISAs (UK & Ireland)). 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 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 (the
“Annual Report”) to identify material inconsistencies
with the audited financial statements and to identify
any information that is apparently materially incorrect
based on, or materially inconsistent with, the
knowledge acquired by us in the course of performing
the audit. If we become aware of any apparent
material misstatements or inconsistencies we consider
the implications for our report.
Overview of our audit approach
Materiality
We set certain thresholds for materiality. These
helped us to determine the nature, timing and extent
of our audit procedures and to evaluate the effect of
misstatements, both individually and on the financial
statements as a whole.
Based on our professional judgement, we determined
materiality for the Group financial statements as a
whole to be £10 million. This represents 5% of the
profit before tax adjusted for exceptional items, which
in our view was the most relevant measure of the
business’s operations.
We agreed with the Audit Committee that we would
report to them misstatements identified during our
audit above £0.5 million as well as misstatements
below that amount that, in our view, warranted
reporting for qualitative reasons.
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www.pennonannualreport.co.uk/2014 Independent auditors’ report Continued
Independent auditors’ report to the members
of Pennon Group Plc
Overview of the scope of our audit
The Group is structured as two business operations, being
water and sewage and waste management. The Group financial
statements are a consolidation of three reporting units,
comprising the Group’s two operating businesses and
centralised functions.
In establishing the overall approach to the Group audit, we
determined the type of work that needed to be performed at the
reporting units to be able to conclude whether sufficient
appropriate audit evidence had been obtained as a basis for our
opinion on the Group financial statements as a whole.
Accordingly we identified that, in our view, both of the Group’s
operating businesses required an audit of their complete
financial information due to their size, together with the Group
centralised functions. These accounted for 100 percent of
Group revenue and Group profit before tax adjusted for
exceptional items.
The component audit teams working on the operating
businesses were both led by the Group engagement partner,
and work on the centralised functions was performed directly by
the Group engagement team.
Areas of particular audit focus
In preparing the financial statements, the directors made a
number of subjective judgements, for example in respect of
significant accounting estimates that involved making
assumptions and considering future events that are inherently
uncertain. We primarily focused our work in these areas by
assessing the directors’ judgements against available evidence,
forming our own judgements, and evaluating the disclosures in
the financial statements.
In our audit, we tested and examined information, using
sampling and other auditing techniques, to the extent we
considered necessary to provide a reasonable basis for us to
draw conclusions. We obtained audit evidence through testing
the effectiveness of controls, substantive procedures or a
combination of both.
We considered the following areas to be those that required
particular focus in the current year. This is not a complete list of
all risks or areas of focus identified by our audit. We discussed
these areas of focus with the Audit Committee. Their report on
those matters that they considered to be significant issues in
relation to the financial statements is set out on page 64.
Area of focus
How the scope of our audit addressed the area of focus
Impairment of goodwill, investment and long-lived
assets of Viridor
We focused on this area because, as set out in the critical
accounting judgements and estimates in note 4, the
determination of whether or not an impairment charge of either
the investment in the waste management business, the long
lived assets within the waste management business, or the
associated goodwill was necessary involved complex and
significant judgements about the future results of the waste
management business.
The goodwill arose principally from a series of acquisitions in
the waste business. The waste management segment is
considered to be an integrated business and this is the lowest
level to which goodwill is allocated, monitored and tested by
management.
The directors recorded an impairment charge of £42.9 million
to the assets within the waste management business, which
was treated as an exceptional item.
We needed to obtain evidence for the remaining assets and
the associated £339.3 million of goodwill in this part of the
business.
We evaluated the directors’ future cash flow forecasts, and the process by which
they were drawn up, including comparing them to the latest Board approved budgets
and strategic plans, and testing the underlying calculations. We challenged:
• the directors’ key assumptions for short-term growth rates in the forecasts by
comparing them to historical results and the prospects for the business and
industry;
• the directors’ key assumptions for long-term growth rates in the forecasts by
comparing them to historical results, economic and industry forecasts; and
• the discount rate by assessing the cost of capital for the company and
comparable organisations, forming a view of risk premiums as appropriate.
We also performed sensitivity analysis on the key assumptions including recyclate
margins, electricity prices, discount rates, the level of corporate overheads and landfill
capital expenditure.
Having ascertained the extent of change in those assumptions that either individually
or collectively would be required for the investments, assets and goodwill to be
impaired, we considered the likelihood of such a movement in those key assumptions
arising.
We discussed the progress of the construction and takeover of waste plants under
construction and any potential exposure, being landfill diversion penalties and claims
from and against the contractors, with senior Group management and the in-house
legal experts.
We also needed to assess the carrying value of the investment
carried in the Parent Company balance sheet.
We evaluated the appropriateness of the associated disclosures including the
treatment of the impairment charge as an exceptional item.
Environmental provisions
As noted in the critical accounting estimates in note 4,
estimates are made for aftercare and restoration costs for each
landfill site.
We focused on this area because the associated costs are
material to the financial statements and require judgement in
assessing the appropriate accounting treatment for this year.
An increase of £5.7 million to the provision was treated as an
exceptional item.
We used our specialist knowledge of environmental issues to evaluate the directors’
future cost assumptions, detailed plans for capital expenditure and to test the
underlying calculations.
The key areas of challenge included:
• the directors’ assumptions for the provision of aftercare and restoration; and
• the inflation and discount rates used.
We also challenged the treatment of the additional aftercare provision as an
exceptional item due to its size and nature.
98
Financial statements and shareholder informationPennon Group Plc Annual Report 2014 Area of focus
Accounting for service concession arrangements
We focused on this area within the waste management business
as the accounting for long term projects under IFRIC 12 ‘service
concession arrangements’ can be complex.
As the Group expands the EfW portfolio within the waste
business it is required to review the associated long-term
contracts to assess whether these fall within the scope of IFRIC
12 which could mean that the Group recognises the
consideration received from the local authority as either a
financial asset or intangible asset rather than recognising a
tangible fixed asset under construction.
The amounts are material and significant judgements are
required in assessing the appropriate accounting treatment for
the recording of revenue and associated assets.
Bad debt provisions
As noted in the critical accounting estimates in note 4, estimates
are made for the level of bad debts.
We focused on this because the provisions for bad debts within
the water and sewage business are material to the financial
statements and require judgement in assessing the appropriate
level of provision.
Provision for tax liabilities
As noted in the critical accounting estimates in note 4, estimates
are made with respect to the tax position for prior fiscal years not
yet agreed with the tax authorities.
We focused on this area because there are historical open tax
positions that are both material to the financial statements and
require judgement in assessing the appropriate accounting
treatment for this year.
Fraud in revenue recognition
ISAs (UK & Ireland) presume there is a risk of fraud in revenue
recognition because of the pressure management may feel to
achieve the planned results. We focused on this area because,
as set out in note 4 on critical accounting judgements and
estimates, there is a significant level of judgement in areas such
as estimating the level of revenue for metered customers in the
water and sewage business and in relation to long-term
contracts in the waste management business.
Risk of management override of internal controls
ISAs (UK & Ireland) require that we consider this.
How the scope of our audit addressed the area of
focus
We evaluated the Group’s process for applying IFRIC 12 and
reviewed the associated contracts to assess whether these
fall within the scope of IFRIC 12 and where necessary tested
the associated IFRIC 12 accounting models.
We assessed the impact of any significant short term
changes in the construction or operating phases on the long
term assumptions in the models. We focused in particular on
the allocation of revenue and profit margin between the
various phases of the contracts.
We identified and challenged the key assumptions and
judgements made by management in their calculation of the
bad debt provision.
The key area of challenge being the level of provision applied
to different customer payment profile categories which we
have challenged based on historical collection rates, industry
experience, macro-economic factors and through sensitivity
analysis of provision rates.
We requested and read the latest correspondence between
the Group and HM Revenue and Customs.
We discussed the potential tax exposure with senior Group
management, including the basis and evidence for their
positions with the Group’s in-house tax specialists.
We used our experience and specialist tax knowledge to
independently challenge the evidence described above.
As the foundation of the evidence we obtained regarding the
revenue recognised during the year, we evaluated the
relevant IT systems and tested the internal controls over the
completeness, accuracy and timing of revenue recognised in
the financial statements. We also tested journal entries
posted to revenue accounts to identify unusual or irregular
items.
For metered revenue we evaluated the assumptions, being
that average past usage is indicative of current unbilled usage
and tested the methodology including seasonality
adjustments as well as considering accuracy of previous
judgements.
For a sample of long-term contracts we read the relevant
contracts and checked the models used to calculate the
revenue recorded.
For all other revenue, we tested a sample back to supporting
documentation for revenue recognition.
We assessed the overall control environment of the Group,
including the arrangements for staff to “whistle-blow”
inappropriate actions, and interviewed senior management
and the Group’s internal audit function. We examined the
significant accounting estimates and judgements relevant to
the financial statements for evidence of bias by the directors
that may represent a risk of material misstatement due to
fraud. In addition we carried out unpredictable audit
procedures in areas that may be susceptible to fraud. We
also tested a sample of journal entries.
Strategic overvie w
S o uth W est W ater
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G overnance
Financial state m ents
99
www.pennonannualreport.co.uk/2014 Independent auditors’ report Continued
Independent auditors’ report to the members
of Pennon Group Plc
Other matters on which we are required to
report by exception
Adequacy of accounting records and information and
explanations received
Under the Companies Act 2006 we are required to report to
you if, in our opinion:
• we have not received all the information and explanations we
require for our audit; or
• 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.
We have no exceptions to report arising from this responsibility.
Directors’ remuneration
Under the Companies Act 2006 we are required to report to
you if, in our opinion, certain disclosures of directors’
remuneration specified by law have not been made. We have
no exceptions to report arising from this responsibility.
Going Concern
Under the Listing Rules we are required to review the directors’
statement, set out on page 60, in relation to going concern. We
have nothing to report having performed our review.
As noted in the directors’ statement, the directors have
concluded that it is appropriate to prepare the Group’s and
Parent Company’s financial statements using the going concern
basis of accounting. The going concern basis presumes that
the Group and Parent Company have adequate resources to
remain in operation, and that the directors intend them to do so,
for at least one year from the date the financial statements were
signed. As part of our audit we have concluded that the
directors’ use of the going concern basis is appropriate.
However, because not all future events or conditions can be
predicted, these statements are not a guarantee as to the
Group’s and the Parent Company’s ability to continue as a
going concern.
Opinions on matters prescribed by the
Companies Act 2006
In our opinion:
• the information given in the Strategic Report and the
Directors’ Report for the financial year for which the financial
statements are prepared is consistent with the financial
statements;
• the part of the Directors’ Remuneration Report to be audited
has been properly prepared in accordance with the
Companies Act 2006; and
• the information given in the Corporate Governance Statement
set out on pages 59 to 61 in the Annual Report with respect
to internal control and risk management systems and about
share capital structures is consistent with the financial
statements.
100
Financial statements and shareholder informationPennon Group Plc Annual Report 2014 Corporate Governance Statement
Under the Companies Act 2006, we are required to
report to you if, in our opinion a corporate governance
statement has not been prepared by the Parent
Company. We have no exceptions to report arising
from this responsibility.
Under the Listing Rules we are required to review the
part of the Corporate Governance Statement relating
to the Company’s compliance with nine provisions of
the UK Corporate Governance Code (‘the Code’). We
have nothing to report having performed our review.
On page 61 of the Annual Report, as required by the
Code Provision C.1.1, the directors state that they
consider the Annual Report taken as a whole to be fair,
balanced and understandable and provides the
information necessary for members to assess the
Group’s performance, business model and strategy.
On page 64, as required by C.3.8 of the Code, the
Audit Committee has set out the significant issues that
it considered in relation to the financial statements, and
how they were addressed. Under ISAs (UK & Ireland)
we are required to report to you if, in our opinion:
• the statement given by the directors is materially
inconsistent with our knowledge of the Group
acquired in the course of performing our audit; or
• the section of the Annual Report describing the work
of the Audit Committee does not appropriately
address matters communicated by us to the Audit
Committee.
We have no exceptions to report arising from this
responsibility.
Other information in the Annual Report
Under ISAs (UK & Ireland), we are required to report to
you if, in our opinion, information in the Annual Report
is:
• materially inconsistent with the information in the
audited financial statements; or
• apparently materially incorrect based on, or
materially inconsistent with, our knowledge of the
Group and Parent Company acquired in the course
of performing our audit; or
• is otherwise misleading.
We have no exceptions to report arising from this
responsibility.
Responsibilities for the financial
statements and the audit
Our responsibilities and those of the directors
As explained more fully in the Directors’
Responsibilities Statement set out on page 60, the
directors are responsible for the preparation of the
Group and Parent Company 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 Group and Parent Company financial
statements in accordance with applicable law and
ISAs (UK & 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.
David Charles (Senior Statutory Auditor) for and on
behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Bristol
23 June 2014
Strategic overvie w
S o uth W est W ater
Virid or
Gro u p
G overnance
Financial state m ents
101
www.pennonannualreport.co.uk/2014 Consolidated income statement
For the year ended 31 March 2014
Before
exceptional
items
2014
£m
1,321.2
Notes
6
8
(161.4)
(111.6)
(640.9)
(149.8)
257.5
43.3
(97.2)
(53.9)
3.7
207.3
(9.5)
197.8
182.2
15.6
6
9
9
9
21
6
10
12
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
Attributable to:
Ordinary shareholders of the parent
Perpetual capital security holders
Earnings per ordinary share
(pence per share)
– Basic
– Diluted
Exceptional
items
(Note 7)
2014
£m
Before
exceptional
items 2013
(Restated
note 5)
£m
Exceptional
items
(Note 7)
2013
£m
Total
2014
£m
1,321.2
1,201.1
–
–
–
(161.4)
(111.6)
(5.7)
(646.6)
(42.9)
(48.6)
–
–
–
–
(192.7)
208.9
43.3
(97.2)
(53.9)
3.7
(48.6)
158.7
8.9
(0.6)
(39.7)
158.1
–
–
–
(104.9)
(84.0)
(188.9)
15.4
(2.9)
12.5
–
(176.4)
36.2
(140.2)
(159.3)
(125.2)
(521.8)
(149.2)
245.6
95.3
(156.7)
(61.4)
5.8
190.0
(29.2)
160.8
(39.7)
142.5
–
15.6
160.8
(140.2)
–
–
38.8
38.6
Total
2013
(Restated
note 5)
£m
1,201.1
(159.3)
(125.2)
(626.7)
(233.2)
56.7
110.7
(159.6)
(48.9)
5.8
13.6
7.0
20.6
20.6
–
5.7
5.7
Consolidated statement of comprehensive income
For the year ended 31 March 2014
Before
exceptional
items
2014
£m
Exceptional
items
(Note 7)
2014
£m
Notes
Before
exceptional
items 2013
(Restated
note 5)
£m
Total
2014
£m
Exceptional
items
(Note 7)
2013
£m
Total
2013
(Restated
note 5)
£m
Profit for the year
197.8
(39.7) 158.1
160.8
(140.2)
20.6
Other comprehensive income/ (loss)
Items which will not be reclassified to profit or loss
Actuarial gains/(losses) relating to retirement
benefit obligations
Income tax on items that will not be reclassified
31
10, 32
Total items that will not be reclassified to profit or loss
Items that may be reclassified subsequently to profit or loss
Share of other comprehensive income from joint ventures
21
Cash flow hedges
Income tax on items that may be reclassified
10, 32
Total items that may be reclassified subsequently to profit or loss
Other comprehensive income/ (loss) for the
year net of tax
37
Total comprehensive income for the year
Total comprehensive income attributable to:
Ordinary shareholders of the parent
Perpetual capital security holders
The notes on pages 107 to 158 form part of these financial statements.
26.2
(10.2)
16.0
4.8
32.8
(7.0)
30.6
46.6
244.4
228.8
15.6
102
–
–
–
–
–
–
–
–
26.2
(10.2)
16.0
4.8
32.8
(7.0)
30.6
46.6
(6.0)
–
(6.0)
2.7
(0.9)
0.7
2.5
(3.5)
–
–
–
–
2.9
(0.7)
2.2
2.2
(39.7) 204.7
157.3
(138.0)
(6.0)
–
(6.0)
2.7
2.0
–
4.7
(1.3)
19.3
(39.7) 189.1
–
15.6
157.3
(138.0)
19.3
–
–
–
Financial statements and shareholder informationPennon Group Plc Annual Report 2014 Balance sheets
At 31 March 2014
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
Shareholders’ equity
Share capital
Share premium account
Capital redemption reserve
Retained earnings and other reserves
Total shareholders’ equity
Perpetual capital securities
Total equity
16
17
18
20
32
24
21
21
22
23
25
24
26
29
24
27
28
33
29
30
25
24
31
32
33
34
35
36
37
38
Group
2013
(Restated
note 5)
£m
2012
(Restated
note 5)
£m
Notes
2014
£m
339.3
30.6
3,450.4
230.3
–
25.9
–
0.1
339.3
13.7
326.5
22.0
3,278.6
3,083.6
183.3
138.4
–
31.0
–
0.1
–
21.9
–
0.1
Company
2013
(Restated
note 5)
£m
2012
(Restated
note 5)
£m
–
–
0.2
502.5
2.1
–
–
–
0.2
352.0
4.4
–
2014
£m
–
–
0.2
834.0
1.3
0.2
1,323.3
1,323.3
1,172.1
–
–
–
4,076.6
3,846.0
3,592.5
2,159.0
1,828.1
1,528.7
12.1
278.2
0.4
2.6
–
613.1
906.4
(273.9)
(20.8)
(298.8)
(37.7)
(33.3)
(664.5)
241.9
10.5
267.6
1.2
10.5
–
634.5
924.3
(138.6)
(21.7)
(276.7)
(66.9)
(41.9)
(545.8)
378.5
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
–
11.4
–
–
–
326.7
338.1
–
136.3
–
9.7
–
398.9
544.9
–
91.7
–
8.9
2.6
158.9
262.1
(407.5)
(357.1)
(534.4)
(2.4)
(7.4)
(1.1)
–
(418.4)
(80.3)
–
(7.7)
(18.9)
–
(383.7)
161.2
–
(10.8)
–
–
(545.2)
(283.1)
(2,533.2)
(2,504.6)
(2,204.4)
(691.3)
(692.7)
(356.8)
(77.9)
(23.0)
(31.5)
(99.6)
(245.1)
(170.7)
(76.9)
(16.7)
(32.0)
(89.4)
(279.5)
(76.3)
(8.7)
–
(0.1)
(6.2)
–
–
(8.7)
(8.7)
–
–
–
–
(7.9)
(6.9)
–
–
–
–
(3,152.4)
(2,775.2)
1,072.1
829.1
(706.3)
1,372.4
(709.3)
1,280.0
(372.4)
873.2
149.2
7.0
144.2
476.9
777.3
294.8
148.2
8.0
144.2
528.7
829.1
–
151.3
4.9
144.2
777.2
1,077.6
294.8
1,372.4
149.2
7.0
144.2
684.8
985.2
294.8
148.2
8.0
144.2
572.8
873.2
–
1,280.0
873.2
1,197.6
1,072.1
829.1
(82.8)
(15.6)
(3.9)
(79.3)
(227.1)
(179.0)
(3,120.9)
1,197.6
151.3
4.9
144.2
602.4
902.8
294.8
The notes on pages 107 to 158 form part of these financial statements.
The financial statements on pages 102 to 158 were approved by the Board of Directors and authorised for issue on 23 June 2014 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
103
www.pennonannualreport.co.uk/2014Strategic overviewSouth West WaterViridorGroupGovernanceFinancial statements
Statements of changes in equity
For the year ended 31 March 2014
Group
At 1 April 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
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
Profit for the year
Other comprehensive income for the year
Total comprehensive income for the year
Transactions with equity shareholders
Dividends paid
Adjustment for shares issued under the Scrip
Dividend Alternative
Adjustment in respect of share-based payments
(net of tax)
Distributions to perpetual capital security holders
Current tax relief on distributions to perpetual
capital security holders
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 2014
Share
capital
(Note 34)
£m
Share
premium
account
(Note 35)
£m
Capital
redemption
reserve
(Note 36)
£m
Retained
earnings
and other
reserves
(Note 37)
(Restated
note 5)
£m
Perpetual
capital
securities
(Note 38)
£m
Total
equity
(Restated
note 5)
£m
148.2
8.0
144.2
528.7
–
–
–
–
–
–
–
–
1.0
(1.0)
–
–
–
–
–
–
–
–
1.0
149.2
(1.0)
7.0
–
–
–
–
–
–
–
–
2.1
(2.1)
–
–
–
–
–
–
–
–
–
–
2.1
151.3
(2.1)
4.9
–
–
–
–
–
–
–
829.1
20.6
(1.3)
19.3
(96.0)
18.1
3.1
294.8
294.8
–
–
(0.9)
4.6
20.6
(1.3)
19.3
(96.0)
18.1
3.1
–
(0.9)
4.6
–
–
–
–
–
–
–
–
–
–
(71.1)
294.8
223.7
144.2
476.9
294.8
1,072.1
–
–
–
–
–
–
–
–
–
–
–
142.5
46.6
189.1
(103.9)
34.5
3.8
–
–
(0.4)
2.4
15.6
158.1
–
46.6
15.6
204.7
–
–
–
(103.9)
34.5
3.8
(20.3)
(20.3)
4.7
4.7
–
–
(0.4)
2.4
(63.6)
(15.6)
(79.2)
144.2
602.4
294.8
1,197.6
The notes on pages 107 to 158 form part of these financial statements.
104
Financial statements and shareholder informationPennon Group Plc Annual Report 2014 Company
Share
capital
(Note 34)
£m
Share
premium
account
(Note 35)
£m
Capital
redemption
reserve
(Note 36)
£m
At 1 April 2012
148.2
8.0
144.2
Profit for the year (note 11)
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
Profit for the year (note 11)
Other comprehensive income for the year
Total comprehensive income for the year
Transactions with equity shareholders
Dividends paid
Adjustment for shares issued under the Scrip
Dividend Alternative
Distributions to perpetual capital security
holders
Current tax relief on distributions to perpetual
capital security holders
Adjustment in respect of share-based payments
(net of tax)
Proceeds from treasury shares re-issued
Total transactions with equity shareholders
At 31 March 2014
–
–
–
–
–
–
–
–
1.0
(1.0)
–
–
–
1.0
149.2
–
–
–
–
–
–
–
(1.0)
7.0
–
–
–
–
2.1
(2.1)
–
–
–
–
–
–
–
–
2.1
151.3
(2.1)
4.9
The notes on pages 107 to 158 form part of these financial statements.
Retained
earnings
and other
reserves
(Note 37)
(Restated
note 5)
£m
572.8
185.3
(0.8)
184.5
(96.0)
18.1
0.8
–
4.6
Perpetual
capital
securities
(Note 38)
£m
Total
equity
(Restated
note 5)
£m
–
–
–
–
–
–
–
873.2
185.3
(0.8)
184.5
(96.0)
18.1
0.8
294.8
294.8
–
4.6
(72.5)
294.8
222.3
684.8
157.9
0.7
158.6
(103.9)
34.5
–
–
0.8
2.4
294.8
1,280.0
15.6
173.5
–
0.7
15.6
174.2
–
–
(103.9)
34.5
(20.3)
(20.3)
4.7
–
–
4.7
0.8
2.4
(66.2)
(15.6)
(81.8)
–
–
–
–
–
–
–
–
–
144.2
–
–
–
–
–
–
–
–
–
–
144.2
777.2
294.8
1,372.4
105
www.pennonannualreport.co.uk/2014Strategic overviewSouth West WaterViridorGroupGovernanceFinancial statements Cash flow statements
For the year ended 31 March 2014
Group
Company
Notes
2014
£m
2013
£m
2014
£m
2013
£m
(208.0)
(205.2)
(28.6)
(16.6)
(23.4)
26.7
(253.2)
(201.9)
338.0
(65.3)
(58.1)
214.6
26.5
8.5
–
–
0.3
341.1
(75.8)
(18.5)
246.8
26.0
8.5
(14.8)
–
0.3
(346.7)
(397.2)
5.4
4.5
60.3
162.1
–
–
–
(0.1)
–
(306.0)
(372.7)
222.3
2.4
–
(0.4)
(29.6)
294.0
(146.1)
40.5
(30.3)
(69.4)
(20.3)
40.8
(50.6)
490.5
439.9
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
2.4
–
–
–
171.0
(125.0)
–
–
(69.4)
(20.3)
(41.3)
(72.2)
397.5
325.3
30.3
177.6
–
(151.2)
–
(0.1)
–
56.6
4.6
294.8
–
–
409.9
(246.1)
–
–
(77.9)
–
385.3
240.0
157.5
397.5
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
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
Perpetual capital securities periodic return
Net cash received from/(used in) financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of the year
The notes on pages 107 to 158 form part of these financial statements.
39
39
46
21
37
38
38
26
26
106
Financial statements and shareholder informationPennon Group Plc Annual Report 2014
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 103. 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 certain financial instruments 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 60.
The following standards have been adopted by the Group for the first time for the financial year beginning on 1 April 2013 and
have a material impact on the Group:
–
IAS 19 (revised) ‘Employee Benefits’ adopted by the Group with effect from 1 April 2013, has been applied retrospectively in
accordance with the transition provision in the standard. The impacts of the revised standard resulted in a net finance cost
in the year of circa £4 million (2013, prior to restatement, credit circa £4 million). A further circa £1 million was charged to
operating costs. The comparative financial information has been restated accordingly (see note 5).
The following standards have been adopted by the Group for the first time for the financial year beginning on 1 April 2013 and
have an impact on disclosure:
–
IAS 1 (amended) ‘Financial statement presentation’ changes the grouping of items presented in the Group’s Statement of
Comprehensive Income so that items which may be reclassified to profit or loss in the future are presented separately from
items that will never be reclassified. The amendment affects presentation only and has no impact on the Group’s financial
position or performance.
–
IFRS 13 ‘Fair Value Measurement’ adopted by the Group with effect from 1 April 2013, requires additional disclosures on fair value
measurement and categorisation. These financial statements have been prepared under the revised disclosure requirements.
Other standards or interpretations which were mandatory for the first time in the year beginning 1 April 2013 did not have a
material impact on the net assets or results of the Group.
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.
(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.
107
www.pennonannualreport.co.uk/2014Strategic overviewSouth West WaterViridorGroupGovernanceFinancial statements Notes to the financial statements
Continued
2. Principal accounting policies Continued
(d) Landfill tax
Landfill tax is included within both revenue and operating costs.
(e) Segmental reporting
Each of the Group’s business segments provides services which are subject to risks and returns which are different from those
of the other business segments. The Group’s internal organisation and management structure and its system of internal financial
reporting is based primarily on business segments. The 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 are recognised in relation to long-term service concession contracts to the extent that future amounts to be
received are not certain.
Other intangible assets include 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).
108
Financial statements and shareholder informationPennon Group Plc Annual Report 2014 The assets’ residual values and useful lives are reviewed annually, and adjusted if appropriate.
Gains and losses on disposal are determined by comparing sale proceeds with carrying amounts. These are included in the
income statement.
(i) Leased assets
Assets held under finance leases are included as property, plant and equipment at the lower of their fair value at commencement
or the present value of the minimum lease payments, and are depreciated over their estimated economic lives or the finance lease
period, whichever is the shorter. The corresponding liability is recorded as borrowings. The interest element of the rental costs is
charged against profits using the actuarial method over the period of the lease.
Rental costs arising under operating leases are charged against profits in the year they are incurred.
(j) Impairment of non-financial assets
Assets with an indefinite useful life are not subject to amortisation and are tested annually for impairment, or whenever events or
changes in circumstance indicate that the carrying amount may not be recoverable.
Assets subject to amortisation or depreciation are tested for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable.
An impairment loss is recognised for the amount by which an asset’s carrying amount exceeds its recoverable amount. The
recoverable amount is the higher of an asset’s fair value, less costs to sell, and value in use. For the purposes of assessing
impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units).
Value in use represents the present value of projected future cash flows expected to be derived from a cash-generating unit,
discounted using a pre-tax discount rate which reflects an assessment of the market cost of capital of the cash-generating unit.
Impairments are charged to the income statement in the year in which they arise.
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) Financial assets arising from 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.
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.
109
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Continued
2. Principal accounting policies Continued
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).
110
Financial statements and shareholder informationPennon Group Plc Annual Report 2014 (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
The liability recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit
obligation at the end of the year less the fair value of plan assets. The defined benefit obligation is calculated by independent
actuaries who advise on the selection of Directors’ best estimates, using the projected unit credit method. The present value of
the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high quality
corporate bonds, and that have terms to maturity approximating to the terms of the related pension obligation. 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.
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 adjustments and changes in actuarial assumptions are charged or credited to
equity in the statement of comprehensive income in the period of which they arise.
Defined contribution scheme
Costs of the defined contribution pension scheme are charged to the income statement in the year in which they arise. The Group
has no further payment obligations once the contributions have been paid.
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. Any associated
tax impacts are recognised directly in equity.
(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.
111
www.pennonannualreport.co.uk/2014Strategic overviewSouth West WaterViridorGroupGovernanceFinancial 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 and foreign currency risk) and
credit 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 facilities are provided in note 29.
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
Group
31 March 2014
Non-derivative financial liabilities
Borrowings excluding finance lease liabilities
Interest payments on borrowings
Finance lease liabilities including interest
Derivative financial liabilities
155.4
26.3
62.5
143.6
24.8
73.2
468.5
62.2
224.6
1,582.1
642.9
2,037.7
2,349.6
756.2
2,398.0
Derivative contracts – net payments/(receipts)
15.3
4.3
1.9
(43.8)
(22.3)
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
Company
31 March 2014
Non-derivative financial liabilities
Borrowings
Interest payments on borrowings
Derivative financial liabilities
97.0
24.5
60.7
19.1
216.5
21.8
70.1
440.8
47.6
247.8
1,397.7
630.4
2,068.4
2,152.0
724.3
2,447.0
26.3
26.3
8.6
80.3
124.3
16.0
112.5
13.4
356.7
25.9
222.0
10.9
815.5
66.2
Derivative contracts – net payments
1.2
0.8
1.1
–
3.1
31 March 2013
Non-derivative financial liabilities
Borrowings
Interest payments on borrowings
112
75.9
15.3
185.4
12.5
347.5
19.2
160.2
12.8
769.0
59.8
Financial statements and shareholder informationPennon Group Plc Annual Report 2014
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 62% (2013 54%) of Group net borrowings were at fixed rates (including at least 50% of South
West Water’s borrowings fixed for the period to March 2015) and 18% (2013 19%) 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 24.
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 39) are independent of changes in market interest rates.
For 2014 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 £1.2 million (2013 £2.0 million).
For 2014 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 (2013 £1.4 million).
Foreign currency risk occurs at transactional and translation level from borrowings and transactions in foreign currencies. These
risks are managed through 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 exposure to customers, including
outstanding receivables. Further information on the credit risk relating to trade receivables is given in note 23.
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 a minimum of 12 months pre-funding of projected capital expenditure. At 31 March 2014 the Group
had cash and facilities excluding restricted funds of over £1 billion, meeting this objective.
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 40 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 40)
Total equity
Total capital
Gearing ratio
2014
£m
2,194.0
1,197.6
3,391.6
2013
£m
2,008.7
1,072.1
3,080.8
64.7%
65.2%
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
2014
£m
2,958.8
1,645.7
2013
£m
2,915.7
1,600.3
55.6%
54.9%
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.
113
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Continued
3. Financial risk management Continued
(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 24.
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 an integrated business and this is the lowest
level to which goodwill is allocated, monitored and tested 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 16 and 18 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 are based on landfill site operating lives, taking
account of the anticipated decline in landfill activity.
During the year to 31 March 2013 the estimate of the aftercare period rose to 60 years after site closure, previously 30 years, to
align with updated technical assessment using independent external advice.
The provisions are based on latest assumptions reflecting 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 2014 the Group’s environmental and landfill restoration provisions were £190.5 million (2013 £185.5 million)
(note 33).
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 2014 these assets had a net book value of £20.8 million (2013 £35.5 million)
(note 18).
114
Financial statements and shareholder informationPennon Group Plc Annual Report 2014 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 and the 31 March 2013
valuation is being finalised.
The pension cost and liabilities under IAS 19 (Revised) 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 2013 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 31 of the financial statements.
Taxation
The Group current income tax provision of £37.7 million (note 28) 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 or other intangible assets, depending upon the right to receive cash from the asset. Consideration relating to contract
receivables is 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.
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, the 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.
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 2014 the Group’s current trade
receivables were £206.4 million, against which £86.1 million had been provided for impairment (note 23).
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.
115
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Continued
5. Restatements
IAS 19 (revised) ‘Employee Benefits’ has been applied retrospectively in accordance with the transition provision in the standard;
comparative information has been restated accordingly.
At 31 March 2013 the accounting for the acquisition of JWT Holdings Limited (renamed Viridor Waste (Atherton) Limited) was
provisional. In addition at 31 March 2013 the accounting for the acquisition of Pulp Friction Limited (renamed Viridor (Erith) Limited)
and the trade and assets of SBS Paper LLP, a related business, was also provisional. The completion of the accounting for these
acquisitions has resulted in changes to comparative amounts.
The impact of these changes are as follows:
Consolidated Income Statement
Manpower costs
Operating Profit
Finance income
Finance costs
Profit before tax
Taxation – deferred tax
Profit for the year
Earnings per ordinary share (pence per share)
– Basic
– Diluted
Consolidated Statement of Comprehensive Income
Other comprehensive loss (net of tax)
Total comprehensive income
2013
2013
Previously
reported
£m
Application of
IAS 19R
£m
Restated
now reported
£m
(158.6)
57.4
143.0
(184.4)
21.8
32.8
26.9
7.4
7.4
(8.4)
18.5
(159.3)
56.7
110.7
(159.6)
13.6
34.7
20.6
5.7
5.7
(1.3)
19.3
(0.7)
(0.7)
(32.3)
24.8
(8.2)
1.9
(6.3)
(1.7)
(1.7)
7.1
0.8
2012
Previously
reported
£m
Application
of IAS 19R
£m
Acquisitions
restatements
£m
Restated
now
reported
£m
Previously
reported
£m
Application
of IAS 19R
£m
Restated
now
reported
£m
Balance sheet
Group
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Current assets
Trade and other receivables
Current liabilities
Trade and other payables
Current tax
Provisions
Non-current liabilities
Retirement benefit obligations
Deferred tax
Equity
Retained earnings and other reserves
469.1
7.8
Company
Non-current assets
Deferred tax
Non-current liabilities
Retirement benefit obligations
Equity
Retained earnings and other reserves
2.3
(0.2)
(8.7)
684.2
0.8
0.6
116
0.3
1.2
339.3
13.7
326.5
22.0
(1.0)
3,278.6
3,083.6
(0.1)
267.6
238.5
(276.7)
(242.5)
(66.9)
(41.9)
(60.3)
(26.3)
339.0
12.5
3,279.6
267.7
(277.2)
(67.0)
(40.6)
(109.7)
(243.1)
–
–
–
–
–
–
–
10.1
(2.3)
–
–
–
–
–
–
–
326.5
22.0
3,083.6
238.5
(242.5)
(60.3)
(26.3)
(89.4)
(279.5)
0.5
0.1
(1.3)
–
0.3
–
–
–
–
(99.6)
(245.1)
(98.6)
(277.3)
9.2
(2.2)
476.9
521.7
7.0
528.7
2.1
4.6
(0.2)
4.4
(7.9)
(7.8)
0.9
(6.9)
684.8
572.1
0.7
572.8
Financial statements and shareholder informationPennon Group Plc Annual Report 2014 6. 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
(Restated
note 5)
£m
498.6
703.8
10.8
(12.1)
2014
£m
520.0
802.0
11.2
(12.0)
1,321.2
1,201.1
330.9
76.3
0.1
407.3
227.0
30.2
0.3
257.5
162.5
27.6
17.2
207.3
162.5
(21.0)
17.2
158.7
317.1
77.7
–
394.8
214.8
30.6
0.2
245.6
146.7
34.3
9.0
190.0
159.2
(154.6)
9.0
13.6
* 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.
117
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Continued
6. Segmental information Continued
Water and
sewerage
£m
Waste
management
£m
Other
£m
Eliminations
£m
Group
£m
Balance sheet
31 March 2014
Assets (excluding investments in joint ventures)
3,051.5
1,659.6
1,472.5
(1,200.7)
4,982.9
Investments in joint ventures
–
0.1
–
–
0.1
Total assets
Liabilities
Net assets
31 March 2013 (Restated note 5)
3,051.5
1,659.7
1,472.5
(1,200.7)
4,983.0
(2,215.8)
(1,377.5)
(1,392.8)
1,200.7
(3,785.4)
835.7
282.2
79.7
–
1,197.6
Assets (excluding investments in joint ventures)
2,922.6
1,450.4
1,347.9
(950.7)
4,770.2
Investments in joint ventures
–
0.1
–
–
0.1
Total assets
Liabilities
2,922.6
1,450.5
1,347.9
(950.7)
4,770.3
(2,150.7)
(1,108.1)
(1,390.1)
950.7
(3,698.2)
Net assets/(liabilities)
771.9
342.4
(42.2)
–
1,072.1
Segment liabilities of the water and sewerage and waste management segments comprise operating liabilities. The other segment
liabilities include the Group taxation liabilities.
Water and
sewerage
£m
Waste
management
£m
Notes
Other
£m
Group
£m
17
18
18
9
9
17
18
17,18
9
9
–
141.6
103.9
–
3.0
67.5
–
116.5
102.3
–
18.9
74.5
2.7
219.1
43.4
42.9
18.8
12.0
3.7
308.3
43.4
84.0
16.1
6.6
–
0.1
(0.2)
–
21.5
17.7
–
0.1
(0.2)
–
75.7
78.5
2.7
360.8
147.1
42.9
43.3
97.2
3.7
424.9
145.5
84.0
110.7
159.6
Other information
31 March 2014
Amortisation of other intangible assets
Capital expenditure (including acquisitions)
Depreciation
Impairment
Finance income
Finance costs
31 March 2013 (Restated note 5)
Amortisation of other intangible assets
Capital expenditure (including acquisitions)
Depreciation
Impairment
Finance income
Finance costs
118
Financial statements and shareholder informationPennon Group Plc Annual Report 2014
Geographic analysis of revenue based on location of customers
Revenue
United Kingdom
Rest of European Union
China
Rest of World
2014
£m
2013
£m
1,265.2
1,142.1
13.1
35.8
7.1
11.2
39.7
8.1
1,321.2
1,201.1
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.
7. 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
18
33
9
10
2014
£m
(42.9)
(5.7)
–
(48.6)
–
–
–
(48.6)
8.9
(39.7)
2013
£m
(78.2)
(90.1)
(20.6)
(188.9)
15.4
(2.9)
12.5
(176.4)
36.2
(140.2)
(a) The 2014 impairment charge relates to a write-down of the carrying values of property, plant and equipment in landfill,
reflecting reduced prices and higher ongoing capital costs.
The 2013 impairment charge related to a write-down of the carrying values of property, plant and equipment in landfill and
recycling activities reflecting reduced landfill volumes and recyclate prices. The 2013 impairment charge was 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.
In 2014 provisioning has been increased by £5.7 million due to revisions to site life costings. The 2013 provision
reassessments additionally reflected a change in the estimate of the aftercare period to 60 years after site closure, previously
30 years,
to align with updated technical assessment using independent external advice.
(c) Onerous contracts principally arise from long-term contractual obligations to purchase materials for recycling at input prices,
which in 2013, lead to an expected loss after reflecting directly attributable and unavoidable costs of processing.
(d) In 2013 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 of 23% (2013 24%) due to tax relief falling
due in the future when the corporation tax rate will be 20% and tax relief not being available on ineligible expenditure on which
no deferred tax has previously been accounted for (principally land and buildings).
119
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Notes to the financial statements
Continued
8. Operating costs
Manpower costs
Raw materials and consumables
Other operating expenses include:
Notes
14
2013
(Restated
note 5)
£m
159.3
125.2
2014
£m
161.4
111.6
Profit on disposal of property, plant and equipment
(4.2)
(1.8)
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
– Impairment of property, plant and equipment
Amortisation of other intangible assets
Fees payable to the Company’s auditors in the year were:
23
17
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
13.2
8.4
0.1
10.2
109.2
37.9
42.9
2.7
2014
£000
136
527
303
99
843
409
12.9
8.9
0.2
9.9
107.8
37.7
84.0
3.7
2013
£000
124
597
172
361
880
177
2,317
2,311
19
27
Expenses reimbursed to the auditors in relation to the audit of the Group were £45,000 (2013 £45,000).
In 2013 audit related fees of £65,000 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 62 and 66 which includes an explanation of how
the auditors’ objectivity and independence are safeguarded when non-audit services are provided by the auditors’ firm.
120
Financial statements and shareholder informationPennon Group Plc Annual Report 2014 9. 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
2014
Finance
income
£m
(32.5)
(35.8)
(4.9)
–
–
–
–
–
5.3
9.8
2013 (Restated note 5)
Finance
cost
£m
Finance
income
£m
(40.0)
(39.8)
(5.4)
–
–
–
–
–
5.8
9.3
Total
£m
(40.0)
(39.8)
(5.4)
5.8
9.3
Total
£m
(32.5)
(35.8)
(4.9)
5.3
9.8
(73.2)
15.1
(58.1)
(85.2)
15.1
(70.1)
–
11.3
11.3
–
66.8
66.8
(10.7)
–
(10.7)
(63.4)
–
(63.4)
(10.7)
11.3
0.6
(63.4)
66.8
3.4
Notional interest
Interest receivable on service concession
arrangements
Retirement benefit obligations
31
Unwinding of discounts in liabilities
Net gains on non-designated derivative
financial instruments
–
8.5
8.5
(4.0)
(9.3)
(13.3)
–
–
–
8.5
8.4
(4.0)
(9.3)
(4.8)
8.4
(97.2)
43.3
(53.9)
Exceptional items
7
–
–
–
–
(3.8)
(4.3)
(8.1)
–
(156.7)
(2.9)
6.0
–
–
6.0
7.4
95.3
15.4
6.0
(3.8)
(4.3)
(2.1)
7.4
(61.4)
12.5
(97.2)
43.3
(53.9)
(159.6)
110.7
(48.9)
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.
In addition to the above, finance costs of £21.8 million (2013 £13.6 million) have been capitalised on qualifying assets included in
property, plant and equipment.
10. Taxation
Before
exceptional
items
2014
£m
Exceptional
items
(Note 7)
2014
£m
Total
2014
£m
Notes
Before
exceptional
items 2013
(Restated
note 5)
£m
Exceptional
items
(Note 7)
2013
£m
Total
2013
(Restated
note 5)
£m
Analysis of charge/(credit) 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
32
35.3
14.3
(40.1)
(25.8)
9.5
–
(10.2)
35.3
4.1
43.3
(0.5)
(15.6)
(21.5)
27.7
(22.0)
1.3
(38.8)
(13.6)
0.9
(12.7)
(8.9)
(8.9)
(34.7)
0.6
(14.1)
29.2
(20.6)
(36.2)
(34.7)
(7.0)
Current tax is calculated at 23% (2013 24%) of the estimated assessable profit for the year.
Included in deferred tax is a non-recurring credit of £38.8 million (2013 £12.7 million) arising from a 3% reduction (2013 1%) in
the rate of corporation tax from April 2014. From 1 April 2014 a 2% reduction will take place, followed by a further 1% reduction
from 1 April 2015.
121
www.pennonannualreport.co.uk/2014Strategic overviewSouth West WaterViridorGroupGovernanceFinancial statements
Notes to the financial statements
Continued
10. Taxation Continued
The tax for the year differs from the theoretical amount which would arise using the standard rate of corporation tax in the UK
(23%) from:
Profit before tax
Profit before tax multiplied by the standard rate of UK corporation tax of 23% (2013 24%)
Effects of:
Expenses not deductible for tax purposes
Other
Change in rate of corporation tax
Adjustments to tax charge in respect of prior years
Tax charge/(credit) for year
2013
(Restated
note 5)
£m
13.6
3.3
8.5
4.6
(12.7)
(10.7)
(7.0)
2014
£m
158.7
36.5
7.5
(0.2)
(38.8)
(4.4)
0.6
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 expected.
The average applicable tax rate for the year before exceptional items was 5% (2013 15%).
In addition to the amounts recognised in the income statement the following tax charges and credits were also recognised:
Amounts recognised directly in other comprehensive income
Deferred tax charge on defined benefit pension schemes
Deferred tax charge on cash flow hedges
Amounts recognised directly in equity
Deferred tax (credit)/charge on share based payments
Current tax credit on perpetual capital securities periodic return
11. Profit of the parent company
Profit attributable to ordinary shareholders’ equity dealt with in the accounts of the parent company
2013
(Restated
note 5)
£m
–
–
0.5
–
2013
(Restated
note 5)
£m
185.3
2014
£m
10.2
7.0
(0.5)
(4.7)
2014
£m
157.9
As permitted by Section 408 of the Companies Act 2006 no income statement or statement of comprehensive income is
presented for the Company.
12. 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 37), 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
122
2014
2013
367.4
1.7
369.1
363.6
2.2
365.8
Financial statements and shareholder informationPennon Group Plc Annual Report 2014 Basic and diluted earnings per share
Earnings per ordinary 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, since deferred tax reflects distortive effects of changes in
corporation tax rates and the level of long-term capital investment. Earnings per share have been calculated:
2014
2013 (Restated note 5)
Profit
after tax
£m
Earnings per share
Diluted
p
Basic
p
Profit
after tax
£m
Earnings per share
Diluted
Basic
p
p
Statutory earnings
Deferred tax credit (before exceptional items)
Exceptional items (net of tax)
Earnings before exceptional items and deferred tax
142.5
(25.8)
39.7
156.4
38.8
(7.0)
10.8
42.6
38.6
(7.0)
10.8
42.4
20.6
(14.1)
140.2
146.7
5.7
(4.0)
38.6
40.3
5.7
(3.9)
38.3
40.1
13. Dividends
Amounts recognised as distributions to ordinary equity holders in the year:
Interim dividend paid for the year ended 31 March 2013: 8.76p (2012 8.22p) per share
Final dividend paid for the year ended 31 March 2013: 19.70p (2012 18.30p) per share
Proposed dividends
Proposed interim dividend for the year ended 31 March 2014: 9.39p (2013 8.76p) per share
Proposed final dividend for the year ended 31 March 2014: 20.92p (2013 19.70p) per share
2014
£m
2013
£m
31.9
72.0
103.9
34.8
77.9
112.7
29.7
66.3
96.0
31.9
72.0
103.9
The proposed interim and final dividends have not been included as liabilities in these financial statements.
The proposed interim dividend for 2014 was paid on 3 April 2014 and the proposed final dividend is subject to approval by
shareholders at the Annual General Meeting.
The amount of the proposed final dividend for the year ended 31 March 2014 excludes the impact of any conversions of the
£125 million convertible bond, after the balance sheet date.
14. Employment costs
Wages and salaries
Social security costs
Pension costs
Share-based payments
Total employment costs
Charged:
Manpower costs – consolidated income statement
Capital schemes – property, plant and equipment
Total employment costs
Notes
31
34
2013
(Restated
note 5)
£m
134.3
13.1
17.6
3.6
168.6
159.3
9.3
168.6
2014
£m
134.3
13.1
20.2
3.3
170.9
161.4
9.5
170.9
Details of Directors’ emoluments are set out in note 15. 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.
123
www.pennonannualreport.co.uk/2014Strategic overviewSouth West WaterViridorGroupGovernanceFinancial statements Notes to the financial statements
Continued
14. Employment costs Continued
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 2014 was 4,498 (2013 4,511).
15. 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
2014
2013
1,356
3,044
51
4,451
1,354
3,180
50
4,584
2014
£000
2013
£000
1,121
400
997
501
480
3,499
1,110
261
1,147
324
477
3,319
The cost of share-based payments represents the amount charged to the income statement, as described in note 34.
The aggregate gains on vesting of Directors’ share-based awards amounted to a total of £1,576,000 (2013 £1,644,000).
Total gains made by Directors on the exercise of share options were £1,000 (2013 £69,000).
Total emoluments include £1,594,000 (2013 £1,541,000) payable to Directors for services as directors of subsidiary undertakings.
At 31 March 2014 there were no Directors accruing retirement benefits under defined benefit pension schemes (2013 nil).
At 31 March 2014 one Director (2013 nil) is a member of the Group’s defined contribution pension scheme. During the year three
Directors received payments in lieu of pension provision (2013 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 70 to 96.
124
Financial statements and shareholder informationPennon Group Plc Annual Report 2014 16. Goodwill
Cost:
At 1 April 2012
Recognised on acquisition of subsidiaries
At 31 March 2013
Recognised on acquisition of subsidiaries
At 31 March 2014
Carrying amount:
At 1 April 2012
At 31 March 2013
At 31 March 2014
(Restated
note 5)
£m
326.5
12.8
339.3
–
339.3
326.5
339.3
339.3
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 and tested.
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 7.5% to 10%
(across the segment’s business activities).
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.
Long-term growth rates
0.5% applied to overheads beyond the period of the detailed
projections.
Ongoing efficiencies and benefits from economies of scale.
2.5% applied to other cash flows beyond the period of the
detailed projections
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 £488 million (“headroom”). The headroom relative to the Company’s investment in the waste management
business (note 21) is £246 million. A reasonably possible change, with all other variables held constant, of a 0.5% increase in
discount rates, a 1.5% increase in the long-term growth rate of overheads, a 0.5% reduction in the long-term growth rate of other
cash flows or a 5.0% reduction in overall net cash flows, as a result of movements in key assumptions, would reduce “headroom”
by £128 million, £59 million, £67 million and £83 million respectively.
125
www.pennonannualreport.co.uk/2014Strategic overviewSouth West WaterViridorGroupGovernanceFinancial statements Notes to the financial statements
Continued
17. Other intangible assets
Acquired intangible assets
Cost:
At 1 April 2012
Recognised on acquisition of subsidiaries
At 31 March 2013
Additions
At 31 March 2014
Accumulated amortisation:
At 1 April 2012
Charge for year
Impairment charge for year
At 31 March 2013
Charge for year
At 31 March 2014
Carrying amount:
At 1 April 2012
At 31 March 2013
At 31 March 2014
Service
concession
arrangements
£m
Customer
contracts
(Restated
note 5)
£m
Total
(Restated
note 5)
£m
Patents
£m
–
–
–
19.6
19.6
–
–
–
–
–
–
–
–
19.6
31.5
1.2
32.7
–
32.7
9.6
3.7
5.8
19.1
2.7
21.8
21.9
13.6
10.9
0.2
–
0.2
–
0.2
0.1
–
–
0.1
–
0.1
0.1
0.1
0.1
31.7
1.2
32.9
19.6
52.5
9.7
3.7
5.8
19.2
2.7
21.9
22.0
13.7
30.6
Service concession arrangements are amortised over the useful economic life of each contract. The average remaining life is
25 years.
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 four years.
Patents are amortised over their estimated useful economic lives which at acquisition was 13 years. The average remaining life
is four 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 18 of the financial statements.
126
Financial statements and shareholder informationPennon Group Plc Annual Report 2014 18. Property, plant and equipment
Land and
buildings
(Restated
note 5)
£m
Infrastructure
assets
£m
Operational
properties
£m
Fixed and mobile
plant, vehicles
and computers
(Restated
note 5)
£m
Landfill
restoration
£m
Construction
in progress
£m
Total
(Restated
note 5)
£m
Group
Cost:
At 1 April 2012
440.4
1,541.0
621.0
1,468.8
55.0
264.4
4,390.6
Arising on acquisitions
Additions
Assets adopted at fair value
Other
Grants and contributions
Disposals
2.8
7.5
–
–
–
–
–
11.7
3.3
–
(1.0)
(1.2)
–
1.4
–
–
–
-
Transfers/reclassifications
10.8
16.9
10.6
4.8
32.9
–
–
–
(9.6)
54.3
–
–
–
8.4
–
–
–
–
7.6
356.6
410.1
–
–
–
–
3.3
8.4
(1.0)
(10.8)
(92.6)
-
At 31 March 2013
461.5
1,570.7
633.0
1,551.2
63.4
528.4
4,808.2
Additions
Assets adopted at fair value
Grants and contributions
Disposals
16.8
–
–
–
Transfers/reclassifications
3.6
13.8
5.9
(1.6)
(1.2)
21.0
1.2
–
–
(0.4)
7.5
30.8
0.1
–
(23.6)
64.0
–
–
–
–
–
298.2
360.8
–
–
–
6.0
(1.6)
(25.2)
(96.1)
–
At 31 March 2014
481.9
1,608.6
641.3
1,622.5
63.4
730.5
5,148.2
Accumulated depreciation:
At 1 April 2012
Charge for year
Impairment charge for the year
Disposals
190.3
134.2
181.0
781.7
19.8
17.9
51.7
–
23.0
–
(1.2)
10.9
–
–
98.9
20.2
(6.9)
1.8
6.3
–
At 31 March 2013
259.9
156.0
191.9
893.9
27.9
Charge for year
Impairment charge for the year
Disposals
13.1
39.8
–
23.8
–
(1.2)
12.0
–
(0.4)
90.8
(2.0)
(22.4)
9.6
5.1
–
At 31 March 2014
312.8
178.6
203.5
960.3
42.6
–
–
–
–
–
–
–
–
–
1,307.0
152.5
78.2
(8.1)
1,529.6
149.3
42.9
(24.0)
1,697.8
Net book value:
At 1 April 2012
At 31 March 2013
250.1
201.6
1,406.8
1,414.7
At 31 March 2014
169.1
1,430.0
440.0
441.1
437.8
687.1
657.3
662.2
35.2
35.5
20.8
264.4
3,083.6
528.4
3,278.6
730.5
3,450.4
127
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Continued
18. Property, plant and equipment Continued
Of the total depreciation charge of £149.3 million (2013 £152.5 million), £1.4 million (2013 £1.4 million) has been charged to capital
projects, £0.8 million (2013 £0.8 million) has been offset by deferred income and £147.1 million (2013 £150.3 million) has been
charged against profits.
Asset lives and residual values are reviewed annually.
During the year borrowing costs of £21.8 million (2013 £13.6 million) have been capitalised on qualifying assets, at an average
borrowing rate of 4.3%.
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 16) 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 16).
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 £42.9 million (2013 £78.2 million) for property, plant and equipment and £nil (2013 £5.8 million) for
intangible assets have been identified in the waste management segment relating to CGUs in landfill activities reflecting lower
revenues and higher ongoing capital costs. 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 16). The
assumptions applied to these cash flow projections are:
Assumption
Discount rate
The pre-tax discount rate used for landfill is 8%.
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
0.5% applied to overheads beyond the period of the
detailed projections.
2.5% applied to other cash flows beyond the strategic
plan period up to the end of the life of the assets on
projected volumes.
Ongoing efficiencies and benefits from economies of scale.
Based on forecasts of growth in waste management markets and
the UK economy.
Using management cash flow projections a 1.5% increase in the long-term growth rate of overheads, with all other variables
held constant, would increase the impairment charge by £6.5 million. A 0.5% increase in discount rate; or 0.5% reduction in the
long-term growth rate of other cash flows; or a 5% reduction in overall net cash flows, with all other variables held constant, would
not have a material impact on the impairment charge.
128
Financial statements and shareholder informationPennon Group Plc Annual Report 2014 Assets held under finance leases included above were:
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
36.6
41.9
320.4
315.1
465.2
465.2
104.9
112.8
360.3
352.4
383.8
421.3
180.3
200.9
203.5
220.4
–
–
–
–
–
–
0.3
0.2
–
–
0.3
0.2
Total
£m
1,206.3
1,243.7
321.8
355.6
884.5
888.1
Fixed and mobile plant,
vehicles and computers
£m
Cost:
At 31 March 2013
At 31 March 2014
Accumulated depreciation:
At 31 March 2013
At 31 March 2014
Net book amount:
At 31 March 2013
At 31 March 2014
Company
Cost:
At 1 April 2012
Additions
Disposals
At 31 March 2013
Additions
Disposals
At 31 March 2014
Accumulated depreciation:
At 1 April 2012
Charge for year
Disposals
At 31 March 2013
Charge for year
Disposals
At 31 March 2014
Net book value:
At 1 April 2012
At 31 March 2013
At 31 March 2014
Asset lives and residual values are reviewed annually.
0.4
0.1
(0.1)
0.4
0.1
(0.2)
0.3
0.2
0.1
(0.1)
0.2
0.1
(0.2)
0.1
0.2
0.2
0.2
129
www.pennonannualreport.co.uk/2014Strategic overviewSouth West WaterViridorGroupGovernanceFinancial statements Notes to the financial statements
Continued
19. Financial instruments by category
The accounting policies for financial instruments have been applied to the line items:
Derivatives
used for
fair value
hedging
£m
Fair value
Derivatives
used for
cash flow
hedging
£m
Derivatives
deemed
held for
trading
£m
Amortised cost
Trade
receivables
and trade
payables
£m
Loans and
receivables
£m
–
–
20.0
–
20.0
–
(4.8)
–
(4.8)
–
–
31.0
–
31.0
–
(9.2)
–
(9.2)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
8.5
–
8.5
–
(15.3)
–
(15.3)
–
–
0.8
–
0.8
–
(41.1)
–
(41.1)
–
0.2
–
0.2
–
(0.1)
–
(0.1)
–
–
–
–
–
–
–
–
–
–
–
–
–
(4.6)
–
(4.6)
–
–
9.7
–
9.7
–
(2.9)
–
(2.9)
–
–
–
–
–
(2.4)
–
(2.4)
–
9.7
–
9.7
–
–
–
–
233.7
–
613.1
846.8
(2,807.1)
–
–
(2,807.1)
–
181.0
–
634.5
815.5
(2,643.2)
–
–
(2,643.2)
843.7
–
326.7
1,170.4
(1,098.8)
–
–
(1,098.8)
637.0
–
398.9
1,035.9
(1,049.8)
–
(1,049.8)
120.3
–
–
–
120.3
–
–
(100.7)
(100.7)
136.0
–
–
–
136.0
–
–
(86.9)
(86.9)
–
–
–
–
–
–
(0.1)
(0.1)
–
–
–
–
–
(0.4)
(0.4)
Total
£m
120.3
233.7
28.5
613.1
995.6
(2,807.1)
(24.7)
(100.7)
(2,932.5)
136.0
181.0
41.5
634.5
993.0
(2,643.2)
(53.2)
(86.9)
(2,783.3)
843.7
0.2
326.7
1,170.6
(1,098.8)
(2.5)
(0.1)
(1,101.4)
637.0
9.7
398.9
1,045.6
(1,049.8)
(0.4)
(1,050.2)
Notes
23
20,23
24
26
29
24
27
23
20,23
24
26
29
24
27
Group
31 March 2014
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 2013
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 2014
Financial assets
Amounts owed by subsidiaries
20,23
Derivative financial instruments
Cash and cash deposits
Total
Financial liabilities
Borrowings
Derivative financial instruments
Trade payables
Total
31 March 2013
Financial assets
24
26
29
24
27
Amounts owed by subsidiaries
20,23
Derivative financial instruments
Cash and cash deposits
Total
Financial liabilities
Borrowings
Trade payables
Total
130
24
26
29
27
Financial statements and shareholder informationPennon Group Plc Annual Report 2014 20. Other non-current assets
Non-current receivables
Amounts owed by subsidiary undertakings
Amounts owed by related parties (note 46)
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
183.3
2014
£m
833.5
–
–
0.5
834.0
2013
£m
502.0
–
–
0.5
502.5
Group
Company
2013
£m
21.0
24.4
137.9
183.3
2014
£m
166.8
500.2
167.0
834.0
2013
£m
126.2
376.3
–
502.5
Group
Company
2013
£m
–
161.6
90.1
13.3
265.0
2014
£m
845.1
–
–
0.5
845.6
2013
£m
509.2
–
–
0.5
509.7
2014
£m
–
87.9
126.0
16.4
230.3
2014
£m
23.1
22.8
184.4
230.3
2014
£m
–
165.2
126.0
16.4
307.6
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% (2013 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% (2013 13.0%).
Other receivables include site development and pre-contract costs of £15.9 million (2013 £12.8 million).
131
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Notes to the financial statements
Continued
21. Investments
Subsidiary undertakings
Company
At 1 April 2012
Additions
At 31 March 2013
At 31 March 2014
Joint ventures
Group
At 1 April 2012
Share of post-tax profit
Share of other comprehensive loss
Dividends received
At 31 March 2013
Share of post-tax profit
Share of other comprehensive profit
Dividends received
At 31 March 2014
£m
1,172.1
151.2
1,323.3
1,323.3
Shares
£m
0.1
5.8
2.7
(8.5)
0.1
3.7
4.8
(8.5)
0.1
The recoverable amount of investments is determined based on value-in-use calculations which are set out in note 16 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
68.8
14.7
(81.4)
(2.0)
24.0
4.5
241.3
8.9
(197.2)
(53.0)
62.0
(0.5)
103.7
20.3
(120.1)
(3.9)
16.3
(0.3)
73.8
19.5
(86.1)
(7.2)
25.2
5.8
175.2
39.5
(188.9)
(25.8)
63.6
95.0
22.3
(117.1)
(0.2)
1.3
–
–
4.0
0.5
0.3
2.7
–
–
2014
Lakeside Energy from
Waste Holdings Limited
Viridor Laing (Greater
Manchester) Holdings Limited
INEOS Runcorn (TPS) Holdings
Limited
2013
Lakeside Energy from
Waste Holdings Limited
Viridor Laing (Greater
Manchester) Holdings Limited
INEOS Runcorn (TPS) Holdings
Limited
132
Financial statements and shareholder informationPennon Group Plc Annual Report 2014 22. Inventories
Raw materials and consumables
23. Trade and other receivables – current
Trade receivables
Less: provision for impairment of receivables
Net trade receivables
Amounts owed by related parties (note 46)
Amounts owed by subsidiary undertakings
Other receivables
Prepayments and accrued income
Group
Company
2014
£m
12.1
2013
£m
10.5
2014
£m
–
2013
£m
–
Group
Company
2013
(Restated
note 5)
£m
212.4
(76.4)
136.0
11.0
–
8.0
112.6
267.6
2014
£m
206.4
(86.1)
120.3
19.3
–
24.5
114.1
278.2
2014
£m
2013
£m
–
–
–
–
10.2
1.0
0.2
11.4
–
–
–
–
135.0
1.1
0.2
136.3
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
2014
£m
43.7
17.8
130.5
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.
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
2014
£m
76.4
10.2
(8.4)
7.9
86.1
2013
£m
67.0
9.9
(9.5)
9.0
76.4
133
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Continued
24. 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
Group
Company
2014
£m
6.7
1.8
(15.3)
–
19.2
0.8
(1.2)
(3.6)
–
(4.3)
(0.3)
2013
£m
0.2
0.6
(18.0)
(23.1)
30.8
0.2
(2.3)
(6.9)
9.7
(1.4)
(1.5)
2014
£m
0.2
–
–
(0.1)
–
–
–
–
–
(2.4)
–
2013
£m
–
–
–
–
–
–
–
–
9.7
–
–
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 (2013 £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 2014 62% of Group net borrowings were at fixed rate (2013 54%).
At 31 March 2014 the Group had interest rate swaps to swap from floating to fixed rate and hedge financial liabilities with a
notional value of £1,563.0 million and a weighted average maturity of 3.7 years (2013 £1,135.0 million, with 4.0 years). The
weighted average interest rate of the swaps for their nominal amount was 2.7% (2013 2.7%).
The derivative deemed held for trading does not qualify for hedge accounting under IAS 39, but is designed to improve the
Group’s overall interest rate performance. This derivative arises from 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 13 years.
Valuation hierarchy
The Group uses the following hierarchy for determining the fair value of financial instruments by valuation technique:
• quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1)
•
inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as
prices) or indirectly (that is, derived from prices) (level 2)
•
inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3).
The fair value of financial instruments not traded in an active market (level 2, for example over-the-counter derivatives) is
determined by using valuation techniques. A variety of methods and assumptions are used based on market conditions existing
at each balance sheet date. Quoted market prices or dealer quotes for similar instruments are used for long-term debt. Other
techniques, such as estimated discounted cash flows, are used to determine fair value for the remaining financial instruments. The
fair value of interest rate swaps is calculated as the present value of the estimated future cash flows.
134
Financial statements and shareholder informationPennon Group Plc Annual Report 2014
The Group’s financial instruments are valued principally using level 2 measures:
Level 2 inputs
Group
Company
Assets
Derivatives used for cash flow hedging
Derivatives used for fair value hedging
Total assets
Liabilities
Derivatives used for cash flow hedging
Derivatives used for fair value hedging
Derivative deemed held for trading
Total liabilities
2014
£m
8.5
20.0
28.5
15.3
4.8
2.2
22.3
2013
£m
0.8
31.0
31.8
41.1
9.2
2.9
53.2
2014
£m
2013
£m
0.2
–
0.2
0.1
–
–
0.1
–
–
–
–
–
–
–
Financial instruments valued using level 3 measures are valued by the counterparty using cash flows discounted at prevailing mid-
market rates. The fair value of such financial instruments is not significantly sensitive to unobservable inputs.
Level 3 inputs
Group
Company
Assets
Derivative deemed held for trading
Liabilities
Derivative deemed held for trading
2014
£m
–
2.4
2013
£m
9.7
–
2014
£m
–
2.4
The following table presents the changes in level 3 financial instruments for the year:
Level 3 inputs
At 1 April
Gains and losses recognised in net finance costs
Settlement of recognised gains
At 31 March
25. Financial instruments at fair value through profit
Current assets
Non-current liabilities
Group
Company
2013
£m
2.3
7.4
-
9.7
2014
£m
9.7
8.4
(20.5)
(2.4)
Group
Company
2013
£m
1.2
(23.0)
2014
£m
–
–
2014
£m
9.7
8.4
(20.5)
(2.4)
2014
£m
0.4
(15.6)
2013
£m
9.7
–
2013
£m
2.3
7.4
-
9.7
2013
£m
–
–
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.
135
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Notes to the financial statements
Continued
26. Cash and cash deposits
Cash at bank and in hand
Short-term bank deposits
Other deposits
Total cash and cash deposits (note 40)
Group
Company
2014
£m
90.1
145.0
378.0
613.1
2013
£m
86.6
159.0
388.9
634.5
2014
£m
85.5
90.0
151.2
326.7
2013
£m
58.4
159.0
181.5
398.9
Group short-term deposits have an average maturity of one day.
Group other deposits have an average maturity of 157 days.
Group other deposits include restricted funds of £164.1 million (2013 £135.9 million) to settle long-term lease liabilities (note 29)
and £9.1 million (2013 £7.7 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 29)
Less: deposits with a maturity of three months or more
(restricted funds)
27. Trade and other payables – current
Trade payables
Amounts owed to subsidiary undertakings
Amounts owed to joint venture (note 46)
Other tax and social security
Accruals and other payables
Group
Company
2014
£m
613.1
–
613.1
2013
£m
634.5
(0.4)
634.1
(173.2)
(143.6)
439.9
490.5
2014
£m
326.7
–
326.7
(1.4)
325.3
2013
£m
398.9
–
398.9
(1.4)
397.5
Group
Company
2013
(Restated
note 5)
£m
86.9
–
0.2
70.8
118.8
276.7
2014
£m
100.7
–
1.5
72.2
124.4
298.8
2014
£m
0.1
0.1
–
0.3
6.9
7.4
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.
136
Financial statements and shareholder informationPennon Group Plc Annual Report 2014
28. Current tax liabilities
Current tax liabilities
29. Borrowings
Current
Bank overdrafts
Short-term loans
Convertible bond
European Investment Bank
Amounts owed to subsidiary undertakings (note 46)
Obligations under finance leases
Total current borrowings (note 40)
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 40)
Total borrowings
2014
£m
37.7
2014
£m
–
0.9
123.4
31.1
–
155.4
118.5
273.9
469.3
222.0
132.7
253.8
–
304.3
1,382.1
1,151.1
2,533.2
2,807.1
Group
Company
2013
(Restated
note 5)
£m
66.9
2014
£m
1.1
2013
£m
18.9
Group
Company
2014
£m
2013
£m
2013
£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
–
0.9
123.4
–
283.2
407.5
–
407.5
469.3
222.0
–
–
–
–
–
75.9
–
–
281.2
357.1
–
357.1
410.0
162.3
–
–
120.4
–
692.7
–
692.7
1,049.8
1,282.9
1,221.7
2,504.6
2,643.2
691.3
–
691.3
1,098.8
The Company issued a £100 million private placement in July 2007 maturing in 2022. Interest is payable at a fixed rate of 3.3%.
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 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%.
137
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Notes to the financial statements
Continued
29. Borrowings Continued
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
2014
2013
Book value
£m
Fair value
£m
Book value
£m
Fair value
£m
469.3
222.0
132.7
253.8
–
304.3
469.3
215.9
170.0
163.7
–
260.1
410.0
162.3
132.5
247.3
120.4
210.4
410.0
156.5
175.1
166.7
145.9
189.5
1,382.1
1,279.0
1,282.9
1,243.7
Obligations under finance leases
1,151.1
978.8
1,221.7
1,053.3
Company
Bank and other loans
Private placements
Convertible bond
2,533.2
2,257.8
2,504.6
2,297.0
469.3
222.0
–
691.3
469.3
215.9
–
685.2
410.0
162.3
120.4
692.7
410.0
156.5
145.9
712.4
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
Group
Company
2014
£m
174.0
560.6
1,798.6
2,533.2
2013
£m
259.1
593.9
1,651.6
2,504.6
2014
£m
112.5
356.8
222.0
691.3
2013
£m
185.2
345.2
162.3
692.7
The weighted average maturity of non-current borrowings was 21 years (2013 22 years).
Finance lease liabilities – minimum lease payments were:
Group
Company
2014
£m
62.5
297.8
2,037.7
2,398.0
(1,128.4)
1,269.6
2013
£m
56.6
291.0
2,045.3
2,392.9
(1,130.0)
1,262.9
2014
£m
2013
£m
–
–
–
–
–
–
–
–
–
–
–
–
Within 1 year
Over 1 year and less than 5 years
Over 5 years
Less: future finance charges
Present value of finance lease liabilities
138
Financial statements and shareholder informationPennon Group Plc Annual Report 2014
The maturity of finance lease liabilities was:
Within 1 year
Over 1 year and less than 5 years
Over 5 years
Group
Company
2014
£m
118.5
122.3
1,028.8
1,269.6
2013
£m
34.0
170.1
1,058.8
1,262.9
2014
£m
2013
£m
–
–
–
–
–
–
–
–
Included above are accrued finance charges arising on obligations under finance leases totalling £127.3 million (2013 £130.8
million), of which £6.9 million (2013 £14.4 million) is repayable within one year.
Within obligations under finance leases, South West Water Limited has utilised finance lease facilities of £180.0 million for certain
water and sewerage business property, plant and equipment which are secured by bank letters of credit issued by United Kingdom
financial institutions. These letters of credit, covering the full period of the finance leases, are renewable between the financial
institutions and South West Water Limited at five-yearly intervals, the next being March 2016.
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, £60.1 million at 31 March 2014 (2013 £52.3 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, £104.0 million at 31 March 2014 (2013
£83.6 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
2014
£m
30.0
660.0
690.0
2013
£m
190.0
325.0
515.0
2014
£m
–
415.0
415.0
2013
£m
25.0
220.0
245.0
In addition the Group had, at 31 March 2014, undrawn uncommitted short-term bank facilities of £25.0 million (2013 £25.0 million)
available to the Company or South West Water Limited.
30. Other non-current liabilities
Amounts owed to subsidiary undertakings
Other payables
Group
Company
2014
£m
–
82.8
82.8
2013
£m
–
77.9
77.9
2014
£m
8.7
–
8.7
2013
£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.
139
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Notes to the financial statements
Continued
31. 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 £4.5 million (2013 £2.8 million).
Defined benefit schemes
Assumptions
The principal actuarial assumptions at 31 March were:
Rate of increase in pensionable pay
Rate of increase for current and future pensions
Rate used to discount schemes’ liabilities and expected return on schemes’ assets
Inflation
2014
%
3.4
3.2
4.30
3.4
2013
%
3.4
3.4
4.35
3.4
2012
%
3.5
3.3
4.73
3.3
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 2013 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
2014
24.9
27.1
2013
25.0
27.0
2012
24.9
27.0
The average life expectancy in years of a future pensioner retiring at age 62, 20 years after the balance sheet date, is projected as:
Male
Female
2014
26.3
29.4
2013
25.9
28.3
2012
25.8
28.2
The sensitivities regarding the principal assumptions used to measure the schemes’ liabilities are:
Change in
assumption
Impact on
schemes’
liabilities
+/– 0.5%
+/– 1.3%
+/– 0.5%
+/– 6.4%
+/– 0.5%
+/– 8.9%
+/– 0.5%
+/– 6.9%
+/– 1 year
+/– 3.5%
Rate of increase in pensionable pay
Rate of increase in current and future pensions
Rate used to discount schemes’ liabilities
Inflation
Life expectancy
140
Financial statements and shareholder informationPennon Group Plc Annual Report 2014 The amounts recognised in the balance sheet were:
Group
Company
Present value of financial obligations
Fair value of plan assets
Deficit of funded plans
Impact of minimum funding asset ceiling
Net liability recognised in the balance sheet
2013
(Restated
note 5)
£m
(671.9)
580.4
(91.5)
(8.1)
(99.6)
2014
£m
(677.4)
608.4
(69.0)
(10.3)
(79.3)
The movement in the net defined benefit obligation over the accounting period is as follows:
2013
(Restated
note 5)
£m
(47.3)
39.4
(7.9)
–
(7.9)
2014
£m
(47.2)
41.0
(6.2)
–
(6.2)
2013
At 1 April
Current service cost
Interest (expense)/ income
Past service cost and gains and losses on
settlements
Remeasurements:
Return on plan assets excluding amounts
included in interest expense
Loss from change in demographic
assumptions
Gain/(loss) from change in financial
assumptions
Experience gains
Change in asset ceiling, excluding amounts
included in interest expense
Contributions:
Employers
Plan participants
Payments from plans:
Benefit payments
At 31 March
2014
Present
value of
obligation
£m
Fair value
of plan
assets
£m
(680.0)
580.4
–
25.1
(15.5)
(29.1)
(0.2)
Total
£m
(99.6)
(15.5)
(4.0)
–
(0.2)
Present
value of
obligation
(Restated
note 5)
£m
Fair value
of plan
assets
£m
Total
(Restated
note 5)
£m
(606.6)
517.2
(14.4)
(28.2)
(0.4)
–
24.4
–
(89.4)
(14.4)
(3.8)
(0.4)
(44.8)
25.1
(19.7)
(43.0)
24.4
(18.6)
–
8.0
8.0
–
–
(52.6)
1.3
0.7
44.6
44.6
–
–
–
–
–
(52.6)
1.3
0.7
–
–
–
–
(5.9)
9.9
15.1
(0.9)
8.0
26.2
(50.6)
44.6
(6.0)
(5.9)
9.9
15.1
(0.9)
18.2
–
(1.1)
13.8
1.1
13.8
–
–
–
(1.2)
14.4
1.2
21.4
(21.4)
14.4
–
–
20.0
(20.0)
(687.7)
608.4
79.3
(680.0)
580.4
(99.6)
141
www.pennonannualreport.co.uk/2014Strategic overviewSouth West WaterViridorGroupGovernanceFinancial statements
Notes to the financial statements
Continued
31. Retirement benefit obligations Continued
The movement in the Company’s net defined benefit obligation over the accounting period is as follows:
2014
2013
Present
value of
obligation
£m
Fair value
of plan
assets
£m
(47.3)
39.4
(0.4)
(2.0)
(2.4)
–
1.7
1.7
Total
£m
(7.9)
(0.4)
(0.3)
(0.7)
–
0.3
0.3
(0.3)
0.9
0.4
1.0
–
–
–
0.3
(0.3)
0.9
0.4
1.3
Present
value of
obligation
(Restated
note 5)
£m
Fair value
of plan
assets
£m
Total
(Restated
note 5)
£m
(42.3)
35.4
(0.5)
(2.0)
(2.5)
–
–
(4.0)
–
(4.0)
–
1.7
1.7
2.8
–
–
–
2.8
(6.9)
(0.5)
(0.3)
(0.8)
2.8
–
(4.0)
–
(1.2)
–
1.1
1.1
–
1.0
1.0
1.5
(47.2)
(1.5)
41.0
–
(6.2)
1.5
(47.3)
(1.5)
39.4
–
(7.9)
1 April
Current service cost
Interest (expense)/income
Remeasurements:
Return on plan assets excluding amounts
included in interest expense
Loss from change in demographic
assumptions
Gain/(loss) from change in financial
assumptions
Experience gains
Contributions:
Employers
Payments from plans:
Benefit payments
At 31 March
Changes in the effect of the asset ceiling during the year were:
Irrecoverable asset at start of the year
Interest on irrecoverable surplus
Actuarial gains/ (losses)
Group
Company
2013
(Restated
note 5)
£m
8.8
0.4
(1.1)
2014
£m
8.1
0.4
1.8
2014
£m
–
–
–
2013
£m
–
–
–
The Group has two minor pension schemes which are in surplus. However these surpluses are deemed irrecoverable assets in
accordance with IFRIC 14 ‘The Limit on Defined Benefit Asset, Minimum Funding Requirements and their Interaction’.
142
Financial statements and shareholder informationPennon Group Plc Annual Report 2014
The schemes’ assets were:
Equities
Government bonds
Other bonds
Diversified growth
Property
Other
2014
Quoted
prices
in active
market
£m
Prices not
quoted
in active
market
£m
288.4
84.2
115.3
69.3
38.0
4.3
599.5
–
–
–
–
1.4
7.5
8.9
Quoted
prices
in active
market
£m
314.0
89.6
96.0
38.6
34.0
4.4
Fund
%
47
14
19
11
7
2
100
576.6
2013
Prices not
quoted
in active
market
£m
–
–
–
–
1.3
2.5
3.8
Fund
%
54
15
6
17
6
2
100
Other assets at 31 March 2014 represented principally cash contributions received from the Group towards the year-end which
were invested during the subsequent financial year.
The Company’s share of the schemes’ assets at the balance sheet date were:
Equities
Government bonds
Other bonds
Diversified growth
Property
Other
2014
Quoted
prices
in active
market
£m
Prices not
quoted
in active
market
£m
19.8
5.5
6.7
5.9
3.0
0.1
41.0
–
–
–
–
–
–
–
Quoted
prices
in active
market
£m
20.3
3.1
6.9
6.2
2.7
0.2
Fund
%
48
14
16
15
7
–
100
39.4
2013
Prices not
quoted
in active
market
£m
–
–
–
–
–
–
–
Fund
%
51
8
18
16
7
–
100
Through its defined benefit pension plans, the Group is exposed to a number of risks, the most significant of which are detailed
below:
Asset volatility
Changes in bond yields
Inflation risk
The liabilities are calculated using a discount rate set with reference to corporate bond
yields; if assets underperform this yield, this will create a deficit. The schemes hold a
significant proportion of growth assets (equities and diversified growth funds) which are
expected to outperform corporate bonds in the long-term, but can give rise to volatility
and risk in the short-term. The allocation to growth assets is monitored such that it is
suitable with the schemes’ long-term objectives.
A decrease in corporate bond yields will increase the schemes’ liabilities, although this
will be partially offset by an increase in the value of the schemes’ bond holdings.
The majority of the schemes’ benefit obligations are linked to inflation, and higher
inflation will lead to higher liabilities (although, in most cases, caps on the level of
inflationary increases are in place to protect against extreme inflation). The majority of
the assets are either unaffected by or loosely correlated with inflation, meaning that an
increase in inflation will also increase the deficit.
Life expectancy
The majority of the schemes’ obligations are to provide benefits for the life of the
member, so increases in life expectancy will result in an increase in the liabilities.
143
www.pennonannualreport.co.uk/2014Strategic overviewSouth West WaterViridorGroupGovernanceFinancial statements Notes to the financial statements
Continued
31. Retirement benefit obligations Continued
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 schemes’ liabilities make allowance for projected increases in pensionable pay.
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 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 (2013 £nil million) since all payments up to 31 March 2015 under the
existing schedule of contributions have been made. The schedule of contributions is due to be revised following the completion
of the 31 March 2013 triennial actuarial valuation. 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 2015.
32. Deferred tax
Deferred tax is provided in full on temporary differences under the liability method using a tax rate of 20% (2013 23%).
Movements on deferred tax were:
Liabilities/(assets) at 1 April
(Credited)/charged to the income statement
Charged/(credited) to equity
Arising on acquisitions
Liabilities/(assets) at 31 March
Group
Company
2013
(Restated
note 5)
£m
279.5
(34.7)
0.5
(0.2)
245.1
2014
£m
245.1
(34.7)
16.7
–
227.1
2013
(Restated
note 5)
£m
(4.4)
2.5
(0.2)
–
(2.1)
2014
£m
(2.1)
0.1
0.7
–
(1.3)
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 £34.1 million to recognise the changes in the rate of corporation tax
enacted on 17 July 2013 to reduce the rate from 1 April 2014 from 23% to 20%. From 1 April 2014 2% of the reduction will take
place, followed by a further 1% reduction from 1 April 2015.
144
Financial statements and shareholder informationPennon Group Plc Annual Report 2014
The movements in deferred tax assets and liabilities were:
Group
Deferred tax liabilities
At 1 April 2012
(Credited)/ charged to the income statement
Arising on acquisitions
At 31 March 2013
(Credited)/charged to the income statement
At 31 March 2014
Deferred tax assets
At 1 April 2012
(Credited)/charged to the income statement
Charged to equity
Arising on acquisitions
At 31 March 2013
Credited to the income statement
Charged to equity
At 31 March 2014
Net liability:
At 31 March 2013
At 31 March 2014
Accelerated tax depreciation
Owned
assets
(Restated
note 5)
£m
293.9
(37.6)
(0.1)
256.2
(31.5)
224.7
Leased
assets
£m
15.8
–
–
15.8
(1.4)
14.4
Retirement
benefit
obligations
(Restated
note 5)
£m
Provisions
(Restated
note 5)
£m
(8.1)
(0.6)
–
(0.1)
(8.8)
(0.3)
–
(9.1)
(21.4)
(1.5)
–
–
(22.9)
(3.2)
10.2
(15.9)
Other
£m
21.2
2.0
–
23.2
5.4
28.6
Other
£m
(21.9)
3.0
0.5
–
(18.4)
(3.7)
6.5
(15.6)
Total
(Restated
note 5)
£m
330.9
(35.6)
(0.1)
295.2
(27.5)
267.7
Total
(Restated
note 5)
£m
(51.4)
0.9
0.5
(0.1)
(50.1)
(7.2)
16.7
(40.6)
245.1
227.1
145
www.pennonannualreport.co.uk/2014Strategic overviewSouth West WaterViridorGroupGovernanceFinancial statements Notes to the financial statements
Continued
32. Deferred tax Continued
Company
Deferred tax assets
At 1 April 2012
Charged to the income statement
Credited to equity
At 31 March 2013
Charged to the income statement
Charged to equity
At 31 March 2014
Deferred tax (charged)/credited to equity during the year was:
Actuarial (gains)/ losses on defined benefit schemes
Cash flow hedges
Deferred tax on other comprehensive (gain)/ loss
Share-based payments (note 34)
Retirement
benefit
obligations
(Restated
note 5)
£m
(1.6)
–
(0.2)
(1.8)
–
0.6
(1.2)
Total
(Restated
note 5)
£m
(4.4)
2.5
(0.2)
(2.1)
0.1
0.7
(1.3)
Other
£m
(2.8)
2.5
–
(0.3)
0.1
0.1
(0.1)
Group
Company
2013
(Restated
note 5)
£m
–
–
–
(0.5)
(0.5)
2014
£m
(10.2)
(7.0)
(17.2)
0.5
(16.7)
2013
(Restated
note 5)
£m
0.2
–
0.2
–
0.2
2014
£m
(0.6)
(0.1)
(0.7)
–
(0.7)
146
Financial statements and shareholder informationPennon Group Plc Annual Report 2014
33. Provisions
Group
At 1 April 2013
Charged/(credited) to the income statement
Exceptional charges (note 7)
Utilised
At 31 March 2014
Environmental and
landfill restoration
(Restated note 5)
£m
Other
provisions
£m
Total
(Restated
note 5)
£m
185.5
10.2
5.7
(10.9)
190.5
27.1
(1.7)
–
(3.6)
21.8
212.6
8.5
5.7
(14.5)
212.3
The amount charged to the income statement includes £9.3 million (2013 £3.8 million) charged to finance costs as the unwinding
of discounts in provisions.
The analysis of provisions between current and non-current is:
Current
Non-current
2013
(Restated
note 5)
£m
41.9
170.7
212.6
2014
£m
33.3
179.0
212.3
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. 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.
147
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Continued
34. Share capital
Allotted, called-up and fully paid
Group and Company
At 1 April 2012 Ordinary shares of 40.7p each
Shares issued under the Scrip Dividend Alternative
Number of shares
Treasury
shares
Ordinary
shares
£m
3,632,705
360,588,466 148.2
–
2,542,187
1.0
Shares re-issued under the Company’s Performance and Co-investment Plan
(493,217)
493,217
For consideration of £0.9 million, shares re-issued to the Pennon Employee Share Trust
(113,957)
113,957
For consideration of £0.4 million, shares re-issued under the Executive Share Option Scheme
(76,415)
76,415
For consideration of £3.3 million, shares re-issued under the Company’s Sharesave Scheme
(843,280)
843,280
–
–
–
–
At 31 March 2013 Ordinary shares of 40.7p each
2,105,836
364,657,522 149.2
Shares issued under the Scrip Dividend Alternative
–
5,071,608
2.1
Shares re-issued under the Company’s Performance and Co-investment Plan
(304,374)
304,374
For consideration of £0.4 million, shares re-issued to the Pennon Employee Share Trust
(69,336)
For consideration of £0.1 million, shares re-issued under the Executive Share Option Scheme
(11,134)
69,336
11,134
For consideration of £1.9 million, shares re-issued under the Company’s Sharesave Scheme
(438,302)
438,302
–
–
–
–
At 31 March 2014 Ordinary shares of 40.7p each
1,282,690
370,552,276 151.3
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:
Date
granted and
subscription
price fully
paid
358p
522p
517p
386p
431p
536p
588p
538p
Period
when
options
normally
exercisable
2009 – 2013
2010 – 2014
2011 – 2015
2012 – 2016
2013 – 2017
2014 – 2018
2015 – 2017
2016 – 2018
Thousands of shares in
respect of which options
outstanding at 31 March
2014
2013
–
11
8
398
217
457
611
628
38
11
75
406
563
502
746
–
2,330
2,341
4 July 2006
3 July 2007
8 July 2008
6 July 2009
28 June 2010
29 June 2011
29 June 2012
3 July 2013
148
Financial statements and shareholder informationPennon Group Plc Annual Report 2014 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
2014
2013
Number of
Ordinary
shares
(thousands)
Weighted
average
exercise price
per share (p)
Number of
Ordinary shares
(thousands)
Weighted
average
exercise price
per share (p)
2,341
658
(199)
(438)
(32)
2,330
498
538
559
436
517
515
2,608
779
(157)
(843)
(46)
2,341
437
588
494
394
496
498
The weighted average price of the Company’s shares at the date of exercise of Sharesave options during the year was 703p (2013
731p). The options outstanding at 31 March 2014 had a weighted average exercise price of 515p (2013 498p) and a weighted
average remaining contractual life of 1.7 years (2013 2.1 years).
The aggregate fair value of Sharesave options granted during the year was £0.9 million (2013 £0.8 million), determined using the
Black-Scholes valuation model. The significant inputs into the valuation model at the date of issue of the options were:
Weighted average share price
Weighted average exercise price
Expected volatility
Expected life
Risk-free rate
Expected dividend yield
2014
673p
538p
2013
735p
588p
18.0%
19.0%
3.4 years
3.4 years
0.7%
4.2%
0.4%
4.0%
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:
2014
2013
Number of
Ordinary shares
(thousands)
Weighted
average exercise
price per share
(p)
Number of Ordinary
shares (thousands)
Weighted average
exercise price per
share (p)
1,322
449
(276)
(295)
1,200
669
653
546
590
711
1,407
424
(493)
(16)
1,322
573
768
486
486
669
At 1 April
Granted
Vested
Lapsed
At 31 March
The awards outstanding at 31 March 2014 had a weighted exercise price of 711p (2013 669p) and a weighted average remaining
contractual life of 1.3 years (2013 1.2 years).
149
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Continued
34. Share capital Continued
The aggregate fair value of awards granted during the year was £1.6 million (2013 £1.9 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
2014
653p
18.0%
0.7%
2013
768p
19.0%
0.4%
Expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous two years.
iii) Annual Incentive Bonus Plan – Deferred Shares
Awards under the plan to Executive Directors and senior management involve the release of Ordinary shares in the Company to
participants. There is no performance condition since vesting is conditional upon continuous service with the Group for a period of
three years from the award. The number and weighted average price of shares in the Annual Incentive Bonus Plan are:
At 1 April
Granted
Vested
Lapsed
At 31 March
2014
2013
Number of
Ordinary shares
(thousands)
Weighted average
exercise price per
share (p)
Number of
Ordinary shares
(thousands)
Weighted average
exercise price per
share (p)
429
99
(211)
(2)
315
680
693
616
573
727
427
120
(93)
(25)
429
602
754
473
473
680
The awards outstanding at 31 March 2014 had a weighted average exercise price of 727p (2013 680p) and a weighted average
remaining contractual life of 1.2 years (2013 1.3 years). The Company’s share price at the date of the awards ranged from 725p to
754p.
The aggregate fair value of awards granted during the year was £0.7 million (2013 £0.9 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.
35. Share premium account
Group and Company
At 1 April 2012
Adjustment for shares issued under the Scrip Dividend Alternative
At 31 March 2013
Adjustment for shares issued under the Scrip Dividend Alternative
At 31 March 2014
£m
8.0
(1.0)
7.0
(2.1)
4.9
36. 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 2012
At 31 March 2013
At 31 March 2014
150
£m
144.2
144.2
144.2
Financial statements and shareholder informationPennon Group Plc Annual Report 2014 37. Retained earnings and other reserves
Group
At 1 April 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
Profit for the year
Other comprehensive income for the year
Transfer from hedging reserve to property, plant and equipment
Dividends paid relating to 2013
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 2014
Own
shares
£m
Hedging
reserve
£m
Retained
earnings
(Restated
note 5)
£m
Total
(Restated
note 5)
£m
(1.8)
(31.7)
562.2
528.7
–
–
–
–
–
–
–
–
0.4
(0.9)
–
(2.3)
–
–
–
–
–
–
–
1.0
(0.4)
–
(1.7)
–
(3.9)
2.9
3.0
–
–
–
–
–
–
–
(29.7)
–
25.2
0.6
–
–
–
–
–
–
–
20.6
(3.3)
–
–
(96.0)
18.1
3.6
(0.5)
(0.4)
–
4.6
508.9
142.5
20.8
–
20.6
(7.2)
2.9
3.0
(96.0)
18.1
3.6
(0.5)
–
(0.9)
4.6
476.9
142.5
46.0
0.6
(103.9)
(103.9)
34.5
3.3
0.5
(1.0)
–
2.4
34.5
3.3
0.5
–
(0.4)
2.4
(3.9)
608.0
602.4
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 331,000 Ordinary shares (2013 457,000 Ordinary shares) held by the trust at 31 March 2014 was £2.5 million
(2013 £2.8 million).
151
www.pennonannualreport.co.uk/2014Strategic overviewSouth West WaterViridorGroupGovernanceFinancial statements Notes to the financial statements
Continued
37. Retained earnings and other reserves Continued
Company
At 1 April 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
Profit for the year
Other comprehensive income for the year
Dividends paid relating to 2013
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 2014
38. Perpetual capital securities
Group and Company
At 1 April 2012
Issue of GBP 300m 6.75% perpetual subordinated capital securities
At 31 March 2013
Distributions to perpetual capital security holders
Current tax relief on distributions to perpetual capital security holders
Profit for the year attributable to perpetual capital security holders
At 31 March 2014
Retained
earnings
(Restated
note 5)
£m
Total
(Restated
note 5)
£m
573.1
185.3
(1.1)
(96.0)
18.1
0.8
4.6
684.8
157.9
0.7
572.8
185.3
(0.8)
(96.0)
18.1
0.8
4.6
684.8
157.9
0.7
(103.9)
(103.9)
34.5
0.8
2.4
34.5
0.8
2.4
777.2
777.2
Hedging
reserve
£m
(0.3)
–
0.3
–
–
–
–
–
–
–
–
–
–
–
–
£m
–
294.8
294.8
(20.3)
4.7
15.6
294.8
On 8 March 2013 the Company issued £300 million perpetual capital securities. Costs directly associated with the issue of
£5.2 million are set off against the value of the issuance. They have no fixed redemption date but the Company may, at its sole
discretion, redeem all, but not part, of these securities at their principal amount on 8 March 2018 or any subsequent periodic
return payment date after this.
The Company has the option to defer periodic returns on any relevant payment date, as long as a dividend on the Ordinary
Shares has not been paid or declared in the previous 12 months. Deferred periodic returns shall be satisfied only on redemption or
payment of dividend on Ordinary Shares, all of which only occur at the sole discretion of the Company.
As the Company paid a dividend in the 12 months prior to the periodic return date of 8 March, a periodic return of £20.3 million
was paid during the year.
152
Financial statements and shareholder informationPennon Group Plc Annual Report 2014 39. 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 charge/ (credit)
Changes in working capital (excluding the effect of acquisition of subsidiaries):
Increase in inventories
Increase in trade and other receivables
Increase in service concession arrangements receivable
Increase/(decrease) in trade and other payables
Decrease/ (increase) in retirement benefit obligations from contributions
Decrease in provisions
Cash generated/(outflow) from operations
Reconciliation of 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
(Restated
note 5)
£m
2014
£m
2013
(Restated
note 5)
£m
2014
£m
158.1
20.6
173.5
185.3
3.3
(4.2)
3.6
(1.8)
147.1
145.5
0.8
–
0.1
–
–
–
–
–
0.8
–
0.1
–
–
–
–
–
(60.8)
44.0
(106.3)
97.5
(162.1)
(177.6)
5.3
0.9
–
–
(206.6)
(195.1)
–
(1.4)
(0.8)
–
–
(10.3)
(0.5)
–
3.7
69.8
111.5
7.6
(5.8)
(110.7)
159.6
–
(7.0)
(1.5)
(27.7)
(31.3)
11.8
0.4
(7.2)
2.7
42.9
5.7
–
(3.7)
(43.3)
97.2
–
0.6
(1.6)
(13.2)
(47.5)
7.3
1.9
(15.3)
338.0
2014
£m
65.3
21.8
87.1
341.1
(208.0)
(205.2)
Group
Company
2013
£m
75.8
13.6
89.4
2014
£m
28.6
–
28.6
2013
£m
23.4
–
23.4
153
www.pennonannualreport.co.uk/2014Strategic overviewSouth West WaterViridorGroupGovernanceFinancial statements
Notes to the financial statements
Continued
40. 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
2014
£m
613.1
–
(155.4)
(118.5)
–
2013
£m
634.5
(0.4)
(97.0)
(41.2)
–
(273.9)
(138.6)
2014
£m
326.7
–
(124.3)
–
(283.2)
(407.5)
2013
£m
398.9
–
(75.9)
–
(281.2)
(357.1)
(1,077.8)
(1,072.5)
(691.3)
(692.7)
(304.3)
(1,151.1)
(2,533.2)
(2,194.0)
(210.4)
(1,221.7)
(2,504.6)
(2,008.7)
–
–
(691.3)
(772.1)
–
–
(692.7)
(650.9)
154
Financial statements and shareholder informationPennon Group Plc Annual Report 2014
41. Principal subsidiary, joint venture and associate undertakings at 31 March 2014
Country of incorporation, registration
and principal operations
Water and sewerage
South West Water Limited*
South West Water Finance Plc
Source Contact Management Limited
Waste management
Viridor Limited*
Viridor Waste Limited
Viridor Waste Exeter Limited
Viridor Waste Suffolk Limited
Viridor Waste (West Sussex) Limited
Viridor Waste Management Limited
Viridor EnviroScot Limited
Viridor Resource Management Limited
Viridor Waste Kent Limited
Viridor Oxfordshire Limited
Viridor EfW (Runcorn) Limited
Viridor Waste (Landfill Restoration) Limited
Viridor Waste (Atherton) Limited
Viridor Waste (Somerset) Limited
Viridor Waste (Thames) Limited
Viridor Waste (Greater Manchester) Limited
Viridor Polymer Recycling Limited
Viridor Trident Park Limited
Viridor (Glasgow) Limited
Viridor (Lancashire) Limited
Viridor Peterborough Limited
Viridor South London Limited
Other
Peninsula Insurance Limited *, 1
England
England
England
England
England
England
England
England
England
Scotland
England
England
England
England
England
England
England
England
England
England
England
Scotland
England
England
England
Guernsey
* Indicates the shares are held directly by Pennon Group Plc, the Company
1 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.
155
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Notes to the financial statements
Continued
41. Principal subsidiary, joint venture and associate undertakings at 31 March 2014 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
2014
£m
2013
£m
2014
£m
2013
£m
10.3
30.9
78.8
120.0
9.4
28.3
77.8
115.5
–
–
–
–
–
–
–
–
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.
156
Financial statements and shareholder informationPennon Group Plc Annual Report 2014
43. Contingent liabilities
Guarantees:
Borrowing facilities of subsidiary undertakings
Performance bonds
Other
Group
Company
2014
£m
–
150.0
6.9
156.9
2013
£m
–
116.2
6.9
123.1
2014
£m
438.6
150.0
6.9
595.5
2013
£m
297.1
116.2
6.9
420.2
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 479A of the Companies Act 2006 the Company has
guaranteed all the outstanding liabilities as at 31 March 2014 of certain of its subsidiaries: Pennon Power Limited, Exe Continental
and Viridor Waste 2 Limited since these companies qualify for the exemption.
The Group is subject to litigation from time to time as a result of its activities. The Group establishes provisions in connection with
litigation where it has a present legal or constructive obligation as a result of past events and where it is more likely than not an
outflow of resources will be required to settle the obligation and the amount can be reliably estimated.
44. Capital commitments
Contracted but not provided
Group
Company
2014
£m
373.1
2013
£m
391.2
2014
£m
–
2013
£m
–
45. Post balance sheet events
In respect of the £125 million convertible bond due to mature in August 2014, between the year-end and 23 June 2014 notices of
conversion for £61.3 million have been received requiring 10.3 million shares to be issued.
46. Related party transactions
During the year Group companies entered into the following transactions with joint ventures and associate related parties who are
not members of the Group:
Sales of goods and services
Viridor Laing (Greater Manchester) Limited
Purchase of goods and services
Lakeside Energy from Waste Limited
Dividends received
Lakeside Energy from Waste Holdings Limited
2014
£m
2013
£m
104.6
9.2
8.5
83.0
10.9
8.5
157
www.pennonannualreport.co.uk/2014Strategic overviewSouth West WaterViridorGroupGovernanceFinancial statements
Notes to the financial statements
Continued
46. 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
Lakeside Energy for Waste Limited (trading balance)
2014
£m
50.7
9.5
28.0
88.2
18.1
0.9
19.0
2013
£m
45.4
9.7
25.0
80.1
9.6
1.2
10.8
1.5
0.2
The £88.2 million (2013 £80.1 million) receivable relates to loans to related parties included within receivables and due for
repayment in instalments between 2014 and 2033. Interest is charged at an average of 13.0% (2013 13.0%).
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
Interest payable
Dividends received
2014
£m
9.7
0.5
34.9
0.1
162.1
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
2014
£m
834.1
9.6
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 £288.4 million at a fixed rate of 6.0%
(2013 £128.7 million, 4.5% and £199.4 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
2015 to 2019. During the year there were no provisions (2013 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.
2014
£m
283.2
14.4
2013
£m
281.2
14.4
158
Financial statements and shareholder informationPennon Group Plc Annual Report 2014 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 (charge)/credit
Profit for the year
Attributable to:
Ordinary shareholders of the parent
Perpetual capital security holders
Dividends proposed
Earnings per ordinary 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
* Prior to the application of IAS 19 (Revised) ‘Employee Benefits’.
2013
(Restated
note 5)
£m
2014
£m
2012*
£m
2011*
£m
2010*
£m
1,321.2
1,201.1
1,233.1
1,159.2
1,068.9
257.5
(53.9)
3.7
207.3
(48.6)
(0.6)
158.1
142.5
15.6
112.7
245.6
268.8
260.9
266.3
(61.4)
(72.3)
(76.7)
(81.6)
5.8
4.0
4.3
1.1
190.0
200.5
188.5
185.8
(176.4)
–
–
–
7.0
20.6
(28.1)
(16.9)
(44.3)
172.4
171.6
141.5
20.6
172.4
171.6
141.5
–
103.9
–
96.0
–
88.2
–
79.6
38.8p
(7.0)p
10.8p
42.6p
30.31p
5.7p
48.1p
48.4p
40.4p
(4.0)p
(0.8)p
(6.1)p
0.4p
38.6p
–
–
–
40.3p
47.3p
42.3p
40.8p
28.46p
26.52p
24.65p
22.55p
2013
(Restated
note 5)
£m
2012
(Restated
note 5)
£m
2011*
£m
2010*
£m
14.8
29.2
25.1
9.3
410.1
257.4
199.0
192.2
3,846.0
3,592.5
3,347.6
3,189.4
378.5
11.8
335.7
162.1
(3,152.4)
(2,775.2)
(2,903.8)
(2,688.6)
1,072.1
829.1
779.5
662.9
1,354
3,180
50
1,335
3,148
46
1,196
3,012
44
1,191
2,853
43
4,584
4,529
4,252
4,087
2014
£m
–
360.8
4,076.6
241.9
(3,120.9)
1,197.6
1,356
3,044
51
4,451
159
www.pennonannualreport.co.uk/2014Strategic overviewSouth West WaterViridorGroupGovernanceFinancial statements Shareholder information
Financial Calendar
Financial year-end
Twenty-fifth Annual General Meeting
Ex-dividend date for 2014 Final dividend
Record date for 2014 Final dividend
2014 Final dividend payable
2014/15 Half yearly financial report announcement
2015 Interim dividend payable
2015 Preliminary results announcement
Twenty-sixth Annual General Meeting
2015 Final dividend payable
Scrip Dividend Alternative#
Ordinary shares quoted ex-dividend
Record date for final cash dividend
Posting of Scrip dividend offer
Final date for receipt of Forms of Mandate
Posting of dividend cheques and share certificates
Final cash dividend payment date
First day of dealing in the new Ordinary shares
31 March
31 July 2014
6 August 2014 *
8 August 2014 *
3 October 2014 *
November 2015
April 2015
May 2015
July 2015
October 2015
6 August 2014
8 August 2014
22 August 2014
15 September 2014
2 October 2014
3 October 2014
3 October 2014
* These dates are subject to obtaining shareholder approval at the 2014 Annual General Meeting to the payment of a final dividend for the year
ended 31 March 2014.
# The offer of the Scrip Dividend Alternative is subject to obtaining shareholder approval at the 2014 Annual General Meeting.
Shareholder Analysis at 31 March 2014
Range of shares held
Holding of Shares
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
2,473
9,260
9,021
1,187
73
239
22,253
11.11
41.61
40.54
5.33
0.33
1.08
100
0.02
1.33
5.27
3.59
1.36
88.43
100
Individuals
Companies
Trust companies (pension funds etc)
Banks and nominees
Number of accounts
18,631
197
11
3,414
22,253
% of total accounts
83.72
% of total shares
7.67
0.89
0.05
15.34
100
1.20
0.02
91.11
100
Major Shareholdings
The net position on 31 March 2014 of investors who have notified interests in the issued share capital of the Company pursuant to the
Financial Conduct Authority’s Disclosure and Transparency Rules is as follows:
Ameriprise Financial Inc
Pictet Asset Management SA
Rare Infrastructure Limited
AXA Investment Managers SA
Invesco Ltd
Legal & General Group Plc
Norges Bank
9.53%
6.91%
4.95%
4.88%
4.65%
3.63%
3.04%
No changes to the above interests in the issued share capital of the Company have been disclosed to the Company between 31 March
2014 and 16 June 2014 (being a date not more than one month prior to the date of the Company’s Notice of Annual General Meeting).
160
Pennon Group Plc Annual Report 2014 Financial statements and shareholder information
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 Asset Services, can be
contacted as follows:
Capita Asset Services
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@capita.co.uk
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 +44 (0) 131 240 0414 and
quote: Pennon Group Dial & Deal Service.
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 registrar,
Capita Asset Services.
Individual Savings Accounts
By holding their shares in the Company in
an Individual Savings Account (ISA),
shareholders may gain tax advantages.
Scrip Dividend Alternative
Subject to obtaining shareholder approval
at the 2014 Annual General Meeting both
to the Company offering a Scrip Dividend
Alternative and for the payment of a final
dividend for the year ended 31 March
2014, full details of the Scrip Dividend
Alternative, including how to join, will be
sent out to shareholders on 22 August
2014. The full timetable for offering the
Scrip Dividend Alternative is given on page
160. The Scrip Dividend Alternative
provides shareholders with an opportunity
to invest 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.
Online portfolio service
The online portfolio service provided by
Capita Asset Services 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
Asset Services’ 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.
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.
Beware of share fraud
The following is taken from the "Beware of
share fraud" leaflet produced by the
Financial Conduct Authority:
Fraudsters use persuasive and high-
pressure tactics to lure investors into scams.
They may offer to sell shares that turn out to
be worthless or non-existent, or to buy
shares at an inflated price in return for an
upfront payment.
While high profits are promised, if you buy
or sell shares in this way you will probably
lose your money.
How to avoid share fraud
1. Keep in mind that firms authorised
by the Financial Conduct Authority
(FCA) are unlikely to contact you out
of the blue with an offer to buy or sell
shares.
2. Do not get into a conversation, note the
name of the person and firm contacting
you and then end the call.
3. Check the Financial Services Register
from www.fca.org.uk to see if the
person and firm contacting you is
authorised by the FCA.
4. Beware of fraudsters claiming to
be from an authorised firm, copying
its website or giving you false
contact details.
5. Use the firm’s contact details listed on
the Register if you want to call it back.
6. Call the FCA on 0800 111 6768 if the
firm does not have contact details on
the Register or you are told they are
out of date.
7. Search the list of unauthorised firms to
avoid at www.fca.org.uk/scams
8. Consider that if you buy or sell shares
from an unauthorised firm you will
not have access to the Financial
Ombudsman Service or Financial
Services Compensation Scheme.
9. Think about getting independent
financial and professional advice before
you hand over any money.
10. Remember: if it sounds too good to be
true, it probably is!
5,000 people contact the Financial Conduct
Authority about share fraud each year, with
victims losing an average of £20,000
Report a scam
If you are approached by fraudsters please tell
the FCA using the share fraud reporting form at
www.fca.org.uk/scams where you can find
out more about investment scams.
You can also call the FCA Consumer Helpline on
0800 111 6768.
If you have already paid money to share
fraudsters you should contact Action Fraud on
0300 123 2040.
161
www.pennonannualreport.co.uk/2014Strategic overviewSouth West WaterViridorGroupGovernanceFinancial statements
Notes
162
Pennon Group Plc Annual Report 2014 Financial statements and shareholder information 163
www.pennonannualreport.co.uk/2014Strategic overviewSouth West WaterViridorGroupGovernanceFinancial statements Notes
164
Pennon Group Plc Annual Report 2014 Financial statements and shareholder information Mix
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Pennon Group Plc
Peninsula House
Rydon Lane
Exeter
Devon
England EX2 7HR
www.pennon-group.co.uk
To view our online annual report:
www.pennonannualreport.co.uk/2014
Registered in England & Wales
Registered Number: 2366640
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