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Annual Report
and Accounts
2015
Strategic report | Strategic overview
Who we are
Pennon Group Plc is one of the largest environmental and
resource management groups in the UK. We are at the
top end of the FTSE 250 and we have assets of around
£5.4 billion and a workforce of over 4,500 people.
Our businesses
Water and wastewater
services
Resource recovery, recycling
and renewable energy
Viridor Limited, one of the leading
UK resource recovery, recycling and
renewable energy businesses.
South West Water Limited,
the provider of water and wastewater
services for Devon, Cornwall and
parts of Dorset and Somerset.
Bournemouth Water Limited,
the provider of water services for
parts of Dorset and Hampshire.
Acquired April 2015.
Our vision
To be a pre-eminent developer, manager and operator of environmental and
resource infrastructure and related services. To provide a fi rst class service
to our customers. To achieve positive outcomes for the communities in
which we operate. To provide sustainable value for our shareholders.
Our mission
To enable and encourage the people and businesses we serve to be more
sustainable. To adopt sustainable practices in our management of the
environment. To invest in new and innovative technologies for the benefi t of
our businesses and stakeholders.
Our strategy
To innovate, drive out ineffi ciencies and identify opportunities for growth.
To provide high quality, reliable services and a safe working environment for
our people and the communities we serve.
OUR BUSINESS IS FOCUSED ON MEETING
THE NEEDS OF OUR CUSTOMERS, THE
COMMUNITIES WE SERVE AND THE
ENVIRONMENT. THIS IS HOW WE CREATE
SUSTAINABLE SHAREHOLDER VALUE.
2
Pennon Group Plc Annual Report 2015
Contents
Strategic report
Overview
Group highlights and key performance indicators
Group businesses
Chairman’s statement
Business model
South West Water
Highlights and achievements
Report from the Chief Executive, South West Water
Viridor
Highlights and achievements
Report from the Chief Executive, Viridor
Group
Report from the Group Director of Finance
Principal risks and uncertainties
Customer and stakeholder satisfaction
Sustainability – environmental, economic and social
Employee well-being and engagement
Governance and remuneration
Chairman’s letter to shareholders
Board of Directors
The Board and its governance framework
Internal control
Reports of the Board’s Committees
Directors’ remuneration report
Directors’ report – other statutory disclosures
4
6
8
10
12
14
20
22
28
34
40
41
50
53
56
58
61
62
72
93
Financial statements and shareholder information
96
Independent auditor’s report
100
Financial statements
157
Five year financial summary
158
Shareholder information
To view our online report visit:
www.pennonannualreport.co.uk/2015
3
www.pennonannualreport.co.uk/2015Strategic overviewSouth West WaterViridorGroupGovernanceFinancial statements
Strategic report | Strategic overview
Group highlights
Revenue
£1,357.2m +2.7%
Profit before tax
(before exceptional items)
£210.7m +1.6%
(statutory basis £197.0m)
Assets
£5.4bn
Dividend
+4.9%
£1.7bn
cash and committed
facilities to fund
capital programme
£407m
invested in key
infrastructure
Highlights of the year
• 4.9% dividend increase – consistent delivery of shareholder value
• Substantial progress in delivery of major capital programmes. Cumulative expenditure on Viridor
Energy Recovery Facility (ERF) business to date £839 million, leaving c. £460 million to invest.
Efficient capital delivery closedown for South West Water’s K5 (2010-2015) regulatory period
(6% efficiency)
• Over £1.7 billion cash/committed facilities at 31 March 2015, including £830 million new/
refinanced facilities sourced during the year – committed funding in place for South West Water
to 2017 and fully funded for build-out of the committed Viridor ERF pipeline
• Cash resources used for the Bournemouth Water acquisition on 15 April 2015 were replenished
through an equity placing raising £100.3 million.
Strategy in action
• Policy announced of annual dividend increase of 4% above RPI inflation up to 2020
• Continued focus on our environmental infrastructure businesses undertaking sustainable
activities which make a positive impact on communities and the environment
• £407 million invested in key infrastructure supporting the development of the UK economy
• Group well funded with efficient long-term financing and well positioned for the future.
4
Pennon Group Plc Annual Report 2015 Key performance indicators(1)
Profit before tax
before exceptional items (£m)
2010/11
2011/12
2012/13
2013/14
2014/15
+1.6%
Earnings per share
before exceptional items and deferred tax (pence)
2010/11
2011/12
2012/13
2013/14
2014/15
-6.6%
Dividend per share
(pence)
2010/11
2011/12
2012/13
2013/14
2014/15
+4.9%
Interest rate on average net debt
(%)
2010/11
2011/12
2012/13
2013/14
2014/15
188.5
200.5
190.0
207.3
210.7
42.3
47.3
40.3
42.6
39.8(2)
24.65
26.52
28.46
30.31
31.80
4.4
4.2
4.0
3.8
3.4
(1) These are the key performance indicators (KPIs) we use to measure the
performance of our businesses as described in our business model on page 10
(2) Basic earnings per share (statutory basis) 32.3p.
5
www.pennonannualreport.co.uk/2015Strategic overviewSouth West WaterViridorGroupGovernanceFinancial statements Strategic report | Strategic overview
Group businesses
South West Water
The water and wastewater services provider for
Cornwall, Devon and parts of Dorset and Somerset,
South West Water finished the K5 regulatory period
(2010-2015) with another year of strong operational
and financial performance.
Financial highlights
Revenue
£522.2m +0.4%
Profit before tax
(before exceptional items)
£167.9m +3.3%
(statutory basis £179.7m)
Strategy
At the core of South West Water’s strategy is the
company’s commitment to delivering the services its
customers depend upon in the most efficient way
possible while minimising its environmental impact.
Highlights of the year
• Successful K5 (2010-2015) delivery achieving
financial and efficiency outperformance
• Acceptance of Ofwat’s Final Determination following
assessment of Business Plan to 2020 as ‘enhanced’
• Well placed for K6 (2015-2020) delivery
• Accelerated investment ahead of the new
regulatory period
• Consistently high drinking water quality
• 18th consecutive year without water restrictions
• Continued improvements in customer service
• Reduction in number of pollution incidents.
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 – outperforming the regulatory
contract through resilient business decisions.
Chris Loughlin
Chief Executive,
South West Water
KPIs
EBITDA(1) (£m)
2010/11
2011/12
2012/13
2013/14
2014/15
286.8
305.2
317.1
330.9
331.3
+0.1%
Regulatory capital value As at 31 March (£m)
2011
2012
2013
2014
2015
-1.0%
Drinking water quality Mean zonal compliance (%)
2010
2011
2012
2013
2014
Customer service Service Incentive Mechanism (%)
2011/12
2012/13
2013/14
2014/15
+1.2%
Bathing water compliance (%)
2012
2012
2013
2013
2014
EU mandatory standard
Guideline standard
Wastewater treatment(2) (%)
2010
2011
2012
2013
2014
+5.1%
RIDDOR incidence rate (per 100,000 employees)
2010
2,703
2,827
2,916
2,959
2,928
99.97
99.99
99.97
99.98
99.96
66.9
70.5
73.9
74.8
91.1
60.3
99.3
91.0
99.3
86.3
99.55
99.57
99.98
94.38
99.20
2,008
1,628
565(3)
243(3)
552(3)
(1) Earnings before interest, tax, depreciation, amortisation and
exceptional items
(2) As measured through population equivalent sanitary compliance
(3) Change in Reporting of Injuries, Diseases and Dangerous Occurrences
Regulations (RIDDOR) reporting criteria (see page 51 for details).
2011
2012
2013
2014
+127.2%
6
Actual number of incidents was 7 (3 in 2013)
Pennon Group Plc Annual Report 2015 Viridor
One of the UK’s leading resource recovery, recycling and
renewable energy businesses – achieving further strong
progress in its long-term strategy built around its ‘Energy’
and ‘Recycling & Resources’ divisions.
Financial highlights
Revenue
£835.9m +4.2%
Profit before tax
(before exceptional items)
£27.7m +0.4%
(statutory basis £1.0m)
Strategy
Viridor’s stated company purpose is to give the world’s
resources new life. Viridor stands at the forefront of
transforming waste in the UK, producing energy, high quality
recyclates and raw materials.
Highlights of the year
• Five new Energy Recovery Facilities (ERFs) – Exeter, Ardley,
Cardiff and Runcorn I & II – delivered
• Construction of ERFs substantially advanced at
Peterborough and Glasgow and commenced at Dunbar;
Notice to Proceed at Beddington ERF issued
• £25 million investment in new advanced materials recycling
facilities at Newhouse and Rochester
• Three star ranking in Business in the Community Corporate
Responsibility Index.
Strategy in action
• Viridor has passed its strategic ‘point of inflexion’
• Orientation of Viridor business model around ‘Energy’ and
‘Recycling & Resources’ divisions is now delivering results
• Viridor’s ERF business is now operational with five new
ERFs delivered, adding to existing assets. Two-thirds of ERF
portfolio capacity now operational
• All operational facilities full at opening. 80% of committed
portfolio volumes contracted, of which 75% is long term
• Landfill Energy continues to provide good cash generation
– focus on reducing landfill operations, optimising energy
production and alternative uses for sites now being realised
• Clear regulatory drivers and expectations for recycling;
Viridor well placed to grow market share. Input, Throughput
and Output Optimisation (ITOO) programme giving positive
momentum for next year.
Ian McAulay
Chief Executive,
Viridor
KPIs
EBITDA and underlying EBITDA(1) (£m)
2012/13
2012/13
2013/14
2013/14
2014/15
Underlying EBITDA
Underlying EBITDA
Underlying EBITDA
Recycling volumes traded (million tonnes)
2010/11
2011/12
2012/13
2013/14
2014/15
-8.4%
Total renewable energy generation (GWh)
2010/11
2011/12
2012/13
2013/14
2014/15
+19.9%
77.7
115.9
76.3
125.9
80.4
135.3
1.7
1.8
1.9
1.8
1.7
752
760
820
778
933
2012
Total renewable energy capacity As at 31 March (MW)
136
2011
136
137
136
246
+80.9%
2015
2013
2014
Total waste inputs (million tonnes)
2010/11
2011/12
2012/13
2013/14
2014/15
-2.7%
7.6
7.3
7.2
7.4
7.2
2011/12
Share of profit from recovering value in waste (%)
46
2010/11
49
35
54
43
-20.4%
2014/15
2012/13
2013/14
RIDDOR incidence rate (per 100,000 employees)
2010
2011
2012
2013
2014
-25.7%
2,165
1,238
1,429(2)
1,197(2)
889(2)
(1) Earnings before interest, tax, depreciation, amortisation and exceptional items;
underlying EBITDA includes IFRIC 12 interest receivable and share of joint
venture EBITDA
(2) Change in RIDDOR reporting criteria (see page 51 for details).
Actual number of incidents was 28 (37 in 2013)
7
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Strategic report | Strategic overview
Chairman’s statement
Dear Shareholder
In my final report to you as Chairman of Pennon Group
prior to my retirement following the 2015 Annual General
Meeting (AGM), I can confirm that this has once again been
a successful year for the Group. I am pleased to be handing
over to Sir John Parker at a time when Pennon’s subsidiary
businesses are well positioned for strong future growth.
Since joining the Board 18 years ago there has been a
significant number of key achievements that have enabled
the Group to develop and grow to become one of the
UK’s leading utility and resource management companies.
Under the guidance of Sir John and the Board, I remain
confident in the continued success of the Group and its
long-term prospects.
Business performance
Group revenue was up by 2.7% to £1,357.2 million and
profit before tax and exceptional items increased by 1.6% to
£210.7 million(1). We continue to maintain substantial cash
resources and facilities to fund our capital programme and
we ended the year with a record level of over £1.7 billion
(including £196 million of restricted funds).
South West Water
Once again, I am pleased to report that South West Water
delivered strong operational and financial performance
and high standards of customer service. The year saw the
successful conclusion of the K5 (2010-2015) regulatory
period and Ofwat’s confirmation of ‘enhanced’ status for
South West Water’s Business Plan to 2020. South West
Water subsequently accepted the Final Determination in
December 2014. I expect this to lead to a tangible financial
benefit for Pennon. Key projects have been accelerated
and there is an opportunity to achieve the highest potential
returns on equity in the sector.
Further details of the company’s performance can be found
in the Report from the Chief Executive, South West Water on
pages 14 to 19.
Viridor
Viridor has made excellent progress in delivering its Energy
Recovery Facility (ERF) business, with operations having
started at five more ERFs and a further three plants under
construction. The ERF business is now contributing
meaningfully to growth in profits and cash flow.
Trading conditions in recycling remained under pressure
during 2014/15 and, as anticipated, revenue from landfill
continued to decline. These developments were monitored
closely by the Board throughout the year.
I am pleased to confirm to shareholders that, despite the
challenges, EBITDA(2) increased compared to the previous
year. Outperformance from the fleet of ERFs more than
offset the declining trend in landfill and the softening of
recycling markets.
A full report can be found in the Report from the
Chief Executive, Viridor on pages 22 to 27.
Dividend
In March 2015 the Board announced a continuation of its
dividend policy of year-on-year growth of 4% above RPI
inflation until 2019/20, reflecting the Board’s confidence in
the future financial performance of the Group. This amounts
to a policy for 10 consecutive years (2010-2020) of 4% real
dividend growth to shareholders.
We are recommending a final dividend per share of 21.82p,
which represents a 4.3% increase on last year’s final
dividend. This will result in a total dividend for the year of
31.80p, an increase of 4.9% (reflecting March 2015 inflation
of 0.9%) on the total dividend for 2013/14. Following
shareholder approval at last year’s AGM, we will again be
offering a Scrip Dividend Alternative to shareholders in
respect of the final dividend for which the timetable is given
on page 158.
Sustainability and governance
Environmental, social and governance (ESG) matters are
integral to the Group’s strategy and business model and the
Sustainability Committee of the Board continues to oversee
our performance in maintaining a responsible approach to
ESG. Our notable achievements during the year include
landfill restoration and biodiversity protection, completion of
sustainable catchment schemes, continued high standards
in bathing water quality and progress made in reducing the
number of pollution incidents.
Pennon considers fair treatment of its customers, employees
and other stakeholders to be an important factor in creating
a sustainable business. The Group has continued to make
good progress in achieving high standards of customer
satisfaction, increased levels of employee engagement
and good community relations. Further information on the
Group’s approach to sustainability is provided throughout the
strategic report and in the Sustainability Committee report
for the year on pages 67 to 69.
The Group’s governance arrangements continue to be
reviewed annually to ensure we develop and improve our
governance structures and practices, taking account of
market developments and new best practice guidance. The
subsidiary boards have their own governance bodies and
procedures under the Group framework. Details are set out in
the Governance section of this report, on pages 54 and 58.
(1) Statutory profit before tax £197.0m.
(2) Earnings before interest, tax, depreciation, amortisation and exceptional items.
8
Pennon Group Plc Annual Report 2015 DELIVERING SUSTAINABLE PROFIT
AND DIVIDEND GROWTH
Health and safety
Health and safety continues to be a top priority for us. The
Group’s boards and senior management teams are highly
engaged with and supportive of the various initiatives that
have been introduced throughout the year.
South West Water continuously reviews its policies and
processes in order to minimise the likelihood of an incident
and the company remains focused on developing a
proactive health and safety culture.
Viridor continues to work towards achieving a step change
in culture and attitudes, built around its ‘Stop & Think’
campaigns, and there has been a steadily improving trend
in health and safety reportable incidents over the last three
years. Tragically in early June 2015 there was an incident
which resulted in the sad death of a Viridor employee. Our
thoughts are with his family, friends and colleagues.
Board developments
In April 2015 Sir John Parker joined the Board as Deputy
Chairman and will succeed me as Chairman following the
AGM this year. Sir John is recognised as one of the most
experienced and respected business leaders in the UK, and
his previous background in the utilities and waste sectors
will be particularly valuable to Pennon and its subsidiary
companies. I wish him every success with the future
strategic development of the Group.
As announced last year, Gerard Connell, the Board’s
Senior Independent Director, will also stand down following
the AGM, marking the end of a term of office lasting 12
years. We would like to thank Gerard for his considerable
contribution to the Group’s success over the years and wish
him well in his future endeavours. Gill Rider will become the
new Senior Independent Director.
During the year we welcomed Neil Cooper to the Board as
a non-executive director. Neil has become chairman of the
Audit Committee in succession to Gerard Connell.
At the end of January we saw the retirement of David
Dupont after more than 12 years as the Group Director
of Finance during which he successfully managed the
financial affairs of the Group through a period of substantial
development and growth. I am pleased to say that
Susan Davy, who was finance and regulatory director of
South West Water, was appointed as David’s successor.
As I prepare to stand down as Chairman of the Group, I
am confident that I am leaving a strong Board with a broad
wealth of experience and knowledge that is well placed
to guide Pennon through its next phase of development
and growth.
Diversity
The Board continues to promote equality and diversity
across the Group. Prior to the year-end we achieved our
target of 25% female representation. Since then, due to
Board transition, we have fallen below this level, but I am
pleased to say we are set to achieve the target once more
following the retirements that will happen after the AGM.
More information on the Board’s diversity policy can be
found within the Nomination Committee’s report, on
page 70.
Outlook
Our priority continues to be the creation of shareholder value
through our strategic focus on water and wastewater services,
and recycling, renewable energy and resource management.
Early receipt of Ofwat’s Draft Determination by South West
Water enabled the acceleration of key projects in 2014/15
that were identified in the company’s business plan for
K6 (2015-2020). With South West Water’s track record of
efficiency and outperformance, the company has a strong
foundation to deliver its business plan and will have an
opportunity to outperform the assumed returns on equity.
In addition South West Water is well prepared for, and
supportive of, industry reform.
Viridor is making excellent progress in developing further
its ERF business with five ERFs having come on stream in
the year. These projects and associated contracts already
contribute to Viridor’s profitability and reflect the realisation
of a strategy that is expected to contribute c. £100 million to
Viridor’s EBITDA in 2016/17.
In April 2015 we acquired Bournemouth Water, one of the
highest performing water-only companies in the UK. The
Board believes the acquisition will be highly complementary
to South West Water’s business, subject to clearance from
the Competition and Markets Authority. Further detail can be
found in the Report from the Chief Executive, South West
Water on page 14.
The Group, with long-term financing, continues to be well
positioned for the future and the Board remains confident
about the future success of the Group.
Ken Harvey
Chairman
Pennon Group Plc
22 June 2015
9
www.pennonannualreport.co.uk/2015Strategic overviewSouth West WaterViridorGroupGovernanceFinancial statements Strategic report | Strategic overview
Business model
Our business model is the framework through which we deliver our
strategy: to innovate, drive out inefficiencies and identify opportunities
for growth; and to provide high quality, reliable services and a safe
working environment for our people and the communities we serve.
Shareholder
returns
Pennon Group
Strong
governance
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How we create value
We create value for our shareholders
by developing our environmental
infrastructure businesses and
by efficient financing and strong
management of the Group as a whole.
e
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W ater a
ater servic
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w
Financial
performance
Customer
and stakeholder
satisfaction
Sustainability –
environmental,
economic
and social
Employee
well-being and
engagement
10
Pennon Group Plc Annual Report 2015
How we manage our businesses to create value
We are committed to delivering sustainable shareholder returns, as reflected in our decision to continue
the previous dividend policy of year-on-year growth of 4% above RPI inflation to 2019/20, meaning a
policy for 10 consecutive years (2010-2020) of 4% real dividend growth to shareholders.
We create shareholder value by focusing on five core areas, underpinned by our commitment to
creating and maintaining a sustainable business:
Strong governance
Pennon provides oversight and support to its businesses through a strong governance
framework which includes robust processes for internal control and risk management.
More information on risk management and governance can be found below and on
pages 53-71.
Financial performance
Our Group has set challenging financial targets through a range of key performance
indicators (KPIs). These are set out on page 5.
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 28 to 33.
Customer and stakeholder satisfaction
Both South West Water and Viridor are fully committed to meeting the needs of their
customers and developing and maintaining good relationships with their stakeholders in
general. This is the key to the success of each business.
How we respond to our stakeholders’ needs and assess customer satisfaction is set out on
pages 17,19, 27 and 40.
Sustainability – environmental, economic and social
We are aware that our businesses can, and do, have a material impact on the environment
and the communities in which they operate. To address this we take a responsible and
transparent approach to environmental, social and governance matters.
Our sustainable practices not only benefit communities but enable our businesses to be
more successful. More information on our environmental, economic and social impacts is
provided on pages 41 to 49.
Employee well-being and 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.
Essential to this is our commitment to the health and safety of our workforce.
More information on the initiatives we have introduced to improve employee engagement
and health and safety in our businesses is set out on pages 18, 27, 50 and 51.
How we manage risk
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 identifying and managing 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
61 and our principal risks and uncertainties and how we mitigate them are set out on pages
34 to 39.
11
www.pennonannualreport.co.uk/2015Strategic overviewSouth West WaterViridorGroupGovernanceFinancial statements Strategic report | Report from Chief Executive, South West Water
South West Water
Investing in quality
Operational highlights
• Outstanding drinking water quality
• Consistent achievement of leakage targets
• 18th consecutive year without water restrictions
• High standards of bathing water quality
• Reduction in number of pollution incidents
• Continued improvements in levels of customer satisfaction
Revenue
(£m)
2010/11
2011/12
2012/13
2013/14
2014/15
Profit before tax
(before exceptional items)
(£m)
2010/11
2011/12
2012/13
2013/14
2014/15
448.8
474.0
498.6
520.0
522.2
128.9
141.5
146.7
162.5
167.9
+0.4%
+3.3%
1.7m
Resident
population
Our water supply network
Wistlandpound
Wimbleball
Upper Tamar
Roadford
Meldon
Kennick,
Tottiford &
Trenchford
Fernworthy
Crowdy
Colliford
Park
Siblyback
Burrator
Venford
Avon
Drift
College
Stithians
Argal
Stannon
Reservoir
Key water mains
12
Pennon Group Plc Annual Report 2015 Strategic
overview
South West
Water
Viridor
Group
Governance
Financial
statements
29
Drinking
water
treatment
works
Drinking water quality
Mean zonal compliance (%)
2010
2011
2012
2013
2014
Customer service
Service Incentive Mechanism (%)
2011/12
2012/13
2013/14
2014/15
+1.2%
Bathing water compliance
(%)
2012
2012
2013
2013
2014
EU mandatory standard
Guideline standard
Capital investment
(£m)
2010/11
2011/12
2012/13
2013/14
2014/15
+2.5%
EBITDA(1)
(£m)
2010/11
2011/12
2012/13
2013/14
2014/15
+0.1%
99.97
99.99
99.97
99.98
99.96
66.9
70.5
73.9
74.8
91.1
60.3
99.3
91.0
99.3
86.3
125.1
130.8
116.5
141.6
145.1
286.8
305.2
317.1
330.9
331.3
Notable achievements
• Assessment of Business Plan to 2020 as ‘enhanced’,
followed by acceptance of Ofwat’s Final Determination
• Preparations in place for future regulatory reform;
developed wholesale and retail strategies
• Continued significant investment in sewer network and
assets to better protect bathing waters
• Upgrade of South West Water’s largest water
treatment works
• Further initiatives to help customers with affordability,
building on the launch of the social tariff in 2013.
Strategy and performance
South West Water remains committed to its Pure Water,
Pure Service and Pure Environment vision. The company
strives to achieve the highest standards possible in
every sphere of its activities, delivering efficiency through
innovation, meeting the needs of those it serves and 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;
18th 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, 79% of customers
metered, proactive outbound contacts, 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
Robust bathing water compliance, increased capacity
for renewable energy generation, reduction in
pollution incidents.
Financial Management
Making resilient business decisions while outperforming the
regulatory contract.
Performance
Continued efficiency and rigorous cost control resulted in
increased revenue and higher profit before tax compared to
last year. Final Determination received reflecting ‘enhanced’
status achieved; the only water and wastewater company
to receive Ofwat’s top assessment.
(1) Earnings before interest, tax, depreciation,
amortisation and exceptional items.
13
www.pennonannualreport.co.uk/2015 Strategic report | Report from Chief Executive, South West Water
Report from the
Chief Executive,
South West Water
Chris Loughlin
Chief Executive,
South West Water
Overview
South West Water’s enhanced business plan, track record of
efficiency and outperformance makes the company well placed
to deliver the new 2015-2020 (K6) regulatory contract and we will
have an opportunity to beat the assumed returns on equity.
South West Water has performed strongly against the 2010-2015
regulatory contract. Despite the tariff freeze, revenue has grown and
robust cost control has resulted in cumulative cost increases over the
five years being lower than inflation. As a result of outperformance,
South West Water delivered a dividend to Pennon above the 2009
Final Determination assumptions.
In December 2014 South West Water accepted Ofwat’s Final
Determination of its Business Plan to 2020. This followed a
favourable price review process that saw South West Water’s plan
singled out for ‘enhanced’ status and subsequently fast-tracked
for early Draft Determination. Ofwat praised the high quality of the
‘WaterFuture’ plan, which had received the backing of 84% of
customers at the time of its publication in December 2013. South
West Water benefited from Ofwat’s ‘do no harm’ principle and
was able to make an early start on its K6 investment programme,
accelerating a number of key projects for the benefit of customers
and shareholders.
On 15 April 2015 Pennon acquired Bournemouth Water, a top
performing water company which is an excellent fit with South
West Water. The acquisition provides an opportunity to expand
South West Water’s wholesale capabilities whilst driving synergistic
and best practice operations. The combined business will
provide an enhanced platform for innovation and growth ahead of
market liberalisation.
Bournemouth is one of the highest performing water only companies
in the UK across a range of indicators with outstanding customer
service reflected in its Service Incentive Mechanism (SIM) scores.
In accordance with current legislation an automatic merger reference
has been made to the Competition and Markets Authority (CMA).
A decision on the merger is expected to be received from the CMA
within its usual timescales.
14
Pennon Group Plc Annual Report 2015 Strategic
overview
South West
Water
Viridor
Group
Governance
Financial
statements
Strategic review
The focus for the final year of the K5 programme was
weighted towards the maintenance of existing assets,
increasing infrastructure resilience and delivering
environmental improvements. Investments during the
year included:
• safeguarding high quality drinking water through the
completion of upgrades at two key water treatment works
• upgrades at wastewater sites to improve compliance
• innovative investments to reduce the number of
customers’ properties previously highlighted as at risk
from flooding.
Through focused planning, innovative scoping and asset
solutions and efficient delivery, capital expenditure for K5
is lower than the Capital Incentive Scheme baseline(2) and
achieved 6% outperformance against the capital expenditure
assumed within the 2009 Final Determination. Regulatory
capital value at 31 March 2015 was £2,928 million. With
an increase in net debt, this has led to gearing(3) of 62%
(2014 56%) – within Ofwat’s optimum range for K5 and
below the notional ratio assumed for K6 of 62.5%.
Business performance
As anticipated South West Water’s revenue for 2014/15 was
impacted by the tariff freeze announced last year. However
good cost control, the continued delivery of cost efficiency
and lower financing costs has resulted in an increase of
£5.4 million in profit before tax and exceptional items to
£167.9 million.
Despite the tariff freeze, revenue increased marginally
by 0.4% to £522.2 million driven by increased customer
demand and new connections, offset by the effects of
customers switching to a metered tariff. 7,600 new customer
connections contributed £2.8 million of additional revenue.
Customer demand was 0.9% higher than last year reflecting
the drier weather over the summer and some relatively
benign months over winter 2014/15. Customers switching
from unmeasured to metered or assessed charges reduced
revenue by £4.8 million. The impact of this is reducing as the
number of customers left to switch falls. 79% of South West
Water’s customers are now metered.
South West Water remained ahead of target in delivering
the required operating cost efficiencies for K5. Cumulatively
the efficiency delivered over K5 is 11% ahead of target
reflecting the benefit of front-end loading delivery in the K5
period. Annual operating costs are £27.3 million lower as
a consequence, with £5.1 million cost savings delivered
in 2014/15.
Cost efficiencies are being achieved through South West
Water’s ongoing improvement programmes with specific
initiatives this year in the areas of:
• asset investments and improvements supporting the
PUROS programme(1) – now finalised
• energy procurement and usage – continued energy
efficiency schemes alongside additional power generation
through renewable sources
• restructuring of defined benefit pension schemes
• right-sourcing and innovative contracting – tendering
to achieve the ‘right price’ including in-sourcing and
renewed K6 key and strategic contracts.
Capital expenditure in the year was broadly in line with
last year at £145.1 million (2013/14 £141.6 million). A key
element of the programme was the acceleration of K6
projects into 2014/15 to deliver early benefits to customers
and the environment. This includes asset enhancements
to deliver bathing water quality, investments targeting
wastewater compliance and preparatory expenditure on the
innovative new water treatment works for Plymouth and its
surrounding area.
(1) Phased Utilisation of Remote Operating Systems
(2) Based on current published Construction Output Price Index (COPI)
(3) South West Water net debt/regulatory capital value.
15
www.pennonannualreport.co.uk/2015 Strategic report | Report from Chief Executive, South West Water
Strategic review Continued
Pure Water
Drinking water quality
South West Water’s performance for mean zonal compliance
– the industry standard for drinking water quality – remains
strong. There was a very slight fall in this year’s score
reflecting the tightening of European Union standards.
Further targeted investment is being made in treatment
assets and processes.
Significant capital schemes were completed during the year.
These included the combined £14.5 million of investment in
water quality improvements at the water treatment works of
Restormel and Wendron, which together supply around half
of the population of Cornwall. Ultraviolet treatment was also
installed at Avon water treatment works in Devon.
South West Water also made significant progress in reducing
taste, odour and discolouration with the number of customer
contacts for such issues reaching the lowest level on record.
Water resources
South West Water customers enjoyed unrestricted drinking
water supplies for an 18th consecutive year with the
company’s prior investment in its reservoirs and supply
network ensuring adequate supplies for the region.
During 2014/15 investment in the maintenance of reservoirs
included the completion of spillway improvements at
the Kennick, Trenchford and Tottiford site in Devon and
the completion of a £10 million ‘grouting’ scheme at
Wimbleball Dam.
The company is confident of being able to achieve a healthy
surplus of water for the foreseeable future as outlined in its
Water Resources Management Plan, published June 2014.
Leakage control
The amount of water lost through leaks and bursts during
2014/15 remained in line with South West Water’s target
of 84 megalitres or less on average per day. In addition
to improving response times to any network issues, the
company has been focusing on improving its water pressure
management capabilities and using advanced diagnostic
tools to help pre-empt any problems.
Furthermore, South West Water is targeting improved leak
detection and increasing its use of innovative technologies in
the field. Additional training for staff is also helping to deliver
improvements in this area.
Upstream Thinking
South West Water’s award-winning £9 million programme
of catchment management, ‘Upstream Thinking’, is
designed to improve raw water quality and natural storage
in the landscape. Delivered in partnership with a number
of regional organisations, national park authorities,
conservation groups, landowners and the farming
community, the programme involves the restoration of
moorland and agricultural land using a range of low-cost
sustainable techniques (for example, ditch-blocking, fencing,
grassland and habitat management).
In 2014/15 the company successfully met its five year
restoration target of 2,000 hectares of dried out peatland
on Exmoor. In the same time period more than 200 farm
improvement schemes have also been implemented in
order to reduce the amount of diffuse pollution entering the
region’s watercourses.
16
Pennon Group Plc Annual Report 2015 Strategic
overview
South West
Water
Viridor
Group
Governance
Financial
statements
Business customers
South West Water provides water and wastewater services
to over 74,000 businesses and other non-household
customers, around a third of which operate within the
tourism and agricultural sectors.
The company is currently preparing for the opening of the
non-household retail market in 2017. In the past year this
has included the introduction of sector-specific business
customer specialists and a new series of tariffs for base
and enhanced levels of service (which came into effect in
April 2015). The company’s strategy is designed to retain its
South West business customer base while also exploring
opportunities for out-of-area growth.
Metering
79% of South West Water’s customers are now metered
with 7,489 installations carried out over the past year. This
represents a high level of overall metering when compared
to the rest of the industry.
During 2015-2020 the company aims to increase household
metering coverage to 85% while also testing the benefits
of SMART metering through a series of pilots at new
housing developments.
Pure Service
Customer satisfaction
Over the last five years South West Water has made
significant progress in improving its customer service and
customer satisfaction scores, as measured through SIM
(Service Incentive Mechanism) and customer satisfaction
surveys. The 2015 survey showed a 90% customer services
satisfaction rating, its highest yet. This reflects improvements
made at both an operational level and in the way the
company interacts with its customers and responds to any
issues they may have.
A key part of South West Water’s strategy for improving
customer satisfaction is to be proactive in delivering
information, advice and support. This includes making
the most of digital communications and new media (for
example, Webchat, SMS messaging and MyAccount
online, as well as WaterLive and BeachLive, which provide
real time information on operational activities and bathing
water quality), investing in the training and development
of its customer-facing staff, and ensuring that processes
for resolving any issues are as integrated and effective
as possible.
Moving into the 2015-2020 period the company is also
making greater use of customer analytics to identify how
it can further improve the experience customers receive
and providing them with more opportunities to ‘self serve’
through online platforms.
Affordability
Water bills in the South West have historically been higher
than the national average, largely due to the scale of
environmental investment required to protect the region’s
coastal waters.
In 2013 the annual £50 government payment was
introduced in acknowledgement of this situation. Customers
have subsequently benefited from plans announced as part
of South West Water’s Business Plan to 2020 to freeze
prices for 2014/15 and peg the increase in the average
household bill at below inflation to 2020.
Furthermore, to help those with affordability issues,
South West Water continues to offer a range of advice
and support services. The company was among the
first to roll out a social tariff (in 2013) and has also taken
innovative steps to engage its most economically deprived,
hard-to-reach or vulnerable customers through initiatives
delivered in partnership with housing associations,
community organisations, the Citizens' Advice Bureau and
carers' networks.
17
www.pennonannualreport.co.uk/2015 Strategic report | Report from Chief Executive, South West Water
Strategic review Continued
Pure Environment
Bathing waters
Of the 146 designated bathing waters sampled in the
South West Water region during the 2014 bathing season,
145 (99.3%) met or exceeded the European Union’s good
(mandatory) standard and 126 (86.3%) met the excellent
(guideline) standard.
The decline in the number of bathing waters reaching the
'excellent' standard can be attributed to the wetter weather
during August.
In preparation for the tighter standards introduced by the
European Union’s revised Bathing Water Directive – which
comes into effect in November 2015 – South West Water
carried out an accelerated £18.9 million programme of
targeted improvements at key wastewater assets around
the region.
Preventing pollution
In the past year South West Water has focused on
improving its maintenance schedules and procedures while
using advanced technologies to improve its capabilities
for wastewater network monitoring and analytics. The
company’s efforts have been reflected in this year’s figures
for serious or significant pollutions (Categories 1 and 2),
which are the lowest they been in the past five years. In
2014/15 there were three Category 2 (‘significant’) incidents
(2013/14 10) and no Category 1 (‘serious’) pollution
incidents (2013 nil). The number of Category 3 (‘minor’)
incidents has fallen by over a third. While these results are
favourable, further work is required in order to bring down
the total number of pollution incidents.
During 2015-2020 South West Water will carry out further
investment in its wastewater treatment processes, pumping
stations and network monitoring. This is expected to be
complemented by ‘Downstream Thinking’ – a programme
of work currently being piloted in which wastewater issues
in urban areas are tackled through a combination of ‘soft’
engineering and sustainable techniques.
Wastewater treatment standards
Since 2011 South West Water has been focusing on the
delivery of a programme of improvements at more than 90
wastewater treatment works as agreed with the Environment
Agency. Substantial capital investment, together with
improved working practices, is delivering progress in
this area.
The ‘enhanced’ status of South West Water’s Business
Plan to 2020 has allowed the company to accelerate the
delivery of a number of key capital schemes. Sites are being
prioritised for improvement as appropriate and South West
Water continues to work towards its target of 100% numeric
compliance by 2020.
Flooding
Overall, 2014/15 was a relatively benign year in terms of
heavy rainfall events. The number of properties flooded
internally was significantly fewer than the previous year and
the number of repeat floodings was below the K5 average.
To help prevent sewer flooding, South West Water invests
in increased sewer capacity, the separation of storm
water from the wastewater from properties, and other
capital schemes. In 2014/15 the company completed a
£3.5 million scheme to upgrade the sewerage network
in Truro, Cornwall, and a jointly-funded £2 million flood
alleviation scheme to protect homes in the Colebrook area
of Plymouth.
South West Water continues to work alongside lead local
flood authorities and other stakeholders to identify best
practice in the management of excess storm water.
People
South West Water prides itself on being a responsible
employer, attaching paramount value to the well-being,
training, needs and ambitions of its 1,400 employees.
Employee involvement and participation in all aspects of
business and organisational change is encouraged and
supported through the company’s ‘People Strategy’, which
is designed to attract, develop and retain a high calibre
workforce. In the past year the company has continued
to deliver skills-based programmes for operational staff, in
addition to a variety of training and development schemes
aimed at improving personal and leadership skills. A new
Finance Development Programme was also implemented
in order to build knowledge and experience among new
recruits in the finance teams.
During spring 2015 a series of Director-led ‘roadshows’ were
held at venues across the region to communicate plans for
K6 (2015-2020).
During 2014/15 South West Water’s apprenticeship
scheme grew with 14 new recruits joining the company
and bringing the total number of apprenticeships to 61.
The company has also played a key role in the creation of
a new University Technical College (UTC), which will help to
ensure a regionally based talent pool of future scientists and
engineers. Located in Newton Abbot, Devon, the college will
open its doors in autumn 2015.
18
Pennon Group Plc Annual Report 2015 Strategic
overview
South West
Water
Viridor
Group
Governance
Financial
statements
Key relationships
Regulators and others
South West Water actively engages with a wide variety of
environmental and regulatory stakeholders. The company
contributes to national policy on developing issues through
its membership of Water UK, the industry trade body, and
works with the Consumer Council for Water to ensure that
customers’ issues and concerns are addressed and a full
understanding of the company’s activities is maintained.
In preparation for the introduction of competition in the
non-household retail market in 2017, South West Water
is playing an active role in the Open Water programme,
which is responsible for delivering the market architecture
and implementation of the central market operator. The
company is a member of the Programme Delivery Board,
which comprises representatives of customers, regulators,
incumbent water companies, new market entrants and other
key stakeholders.
Procurement and suppliers
South West Water operates an innovative ‘mixed economy’
model to source its capital programme delivery partners.
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.
The company’s procurement strategy is focused on the
proactive management of relationships with around 70 key
and strategic suppliers, which account for the large majority
of expenditure. South West Water sources all its purchases
from competitive markets. The company operates strict
procurement policies, ensuring suppliers adhere to clearly
defined policies of sustainability and ethical working practice.
WaterShare panel
South West Water’s Business Plan to 2020 included an
innovative ‘WaterShare’ mechanism. Designed to share the
benefits of outperformance fairly and transparently between
customers and shareholders, it will be monitored by an
independent panel of key stakeholders and regulators.
In early 2015 recruitment began for panel members
whose responsibility will be to monitor and evaluate South
West Water’s performance against its targets for the
2015-2020 period.
Outlook
South West Water’s strong overall performance for the
K5 period and the success of its Business Plan to 2020
means the company is making a smooth and confident
transition into K6. Substantial efficiencies have been made
and the company continues to focus on innovation, new
technologies and sustainable solutions to deliver further
improvements and streamlining across the business.
For the next regulatory period South West Water’s
performance will be reported against the eight
outcomes identified in its Business Plan to 2020 (see
www.southwestwater.co.uk/waterfuture). The company
has set itself demanding targets but is well placed to
deliver for the benefit of customers and shareholders alike.
Significant investment continues in order to safeguard the
progress made to date, satisfy regulatory and legislative
obligations, meet the needs and expectations of customers
and protect the natural environment.
For 2015/16 South West Water’s areas of focus include:
• further investment to improve wastewater treatment
compliance and safeguard bathing water quality
• ongoing improvements in customer service
• rigorous cost control and outperformance with the
highest potential Return on Regulated Equity (RoRE) in
the sector
• preparation for the opening of the non-household retail
market in 2017 – this includes governance, structural
and process changes to ensure compliance with the new
market code
• continuing to ensure robust and transparent assurance.
South West Water is well placed to meet the challenges
and opportunities of the next regulatory period. The board
recognises that there are improvements still to be made
but is confident that through further investment, strong
leadership and the hard work and dedication of its people,
South West Water will remain a high performing, sustainable
and profitable business in the years ahead.
Chris Loughlin
Chief Executive, South West Water
19
www.pennonannualreport.co.uk/2015 Strategic report | Report from Chief Executive, Viridor
Viridor
Giving resources new life
Operational highlights
• Energy Recovery Facility (ERF) business now contributing significantly to
profits and cash flow. Five new ERFs delivered during the year and three
under construction
• Two-thirds of ERF portfolio capacity now operational
• Two year Input, Throughput, Output Optimisation (ITOO) programme
commenced across recycling operations
• Collections business ahead of expectations, securing increased input tonnages
• Series of local authority and commercial contract wins
• Financial performance in line with expectations
• Exceptional items of £26.7 million, primarily landfill asset impairments
(£21.4 million after tax).
Revenue
(£m)
2010/11
2011/12
2012/13
2013/14
2014/15
712.0
761.1
703.8
802.0
835.9
+4.2%
318
Operating
facilities
Total waste
inputs of
7.2m
tonnes
Where we operate
EBITDA and underlying EBITDA(1)
(£m)
2012/13
2012/13
2013/14
2013/14
2014/15
Underlying EBITDA
Underlying EBITDA
Underlying EBITDA
Operating profit plus joint ventures(2)
(£m)
2010/11
2011/12
2012/13
2013/14
2014/15 -13.1%
Profit before tax(2)
(£m)
2010/11
2011/12
2012/13
2013/14
2014/15
+0.4%
77.7
115.9
76.3
125.9
80.4
135.3
82.6
75.2
45.9
43.6
37.9
62.9
57.6
34.3
27.6
27.7
20
(1) Earnings before interest, tax, depreciation, amortisation and
exceptional items; underlying EBITDA includes IFRIC 12 interest
receivable and share of joint venture EBITDA
(2) Before exceptional items.
Pennon Group Plc Annual Report 2015 Strategic
overview
South West
Water
Viridor
Group
Governance
Financial
statements
7
Energy
recovery
facilities
30
Materials
recycling
facilities
Total renewable energy generation
(GWh)
2010/11
2011/12
2012/13
2013/14
2014/15
+19.9%
752
760
820
778
933
Notable achievements
• Strategic reorientation of business model around ‘Energy’
and ‘Recycling & Resources’
• Five new ERFs – Exeter, Ardley, Cardiff, Runcorn I & II
– delivered
Renewable energy generation capacity
As at 31 March (MW)
2011
2012
2013
2014
2015
+80.9%
Recycling volumes traded
(million tonnes)
2010/11
2011/12
2012/13
2013/14
2014/15
-8.4%
Capital investment(1)
(£m)
2010/11
2011/12
2012/13
2013/14
2014/15
-10.2%
136
136
137
136
246
1.7
1.8
1.9
1.8
1.7
77.2
145.5
322.6
292.0
262.2
• Construction of ERFs in progress at Peterborough,
Glasgow and Dunbar, with Notice to Proceed with
construction at Beddington issued
• £25 million investment in new advanced materials
recycling facilities at Newhouse and Rochester
• Three star ranking in Business in the Community’s
Corporate Responsibility Index.
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 ERF
projects, public private partnership (PPP) contracts and
focused recycling opportunities.
Performance – energy
• 246 MW of capacity at fully operational facilities
(ERFs, landfill gas, anaerobic digestion and solar)
• £33.7 million EBITDA generated by ERFs
• Landfill energy continues to provide good cash generation
• Consistent performance from joint ventures.
Performance – recycling and resources
• Recycling contribution down reflecting commodity pricing
• ITOO programme yielding productivity and quality benefits
• Strong and growing drivers and demand for recycling
services; Viridor well placed to grow market share
• Focus on growth in collections and contracts.
(1) Including construction spend on service concession arrangements.
21
www.pennonannualreport.co.uk/2015 Strategic report | Report from Chief Executive, Viridor
Report from the
Chief Executive,
Viridor
Ian McAulay
Chief Executive,
Viridor
Overview
Viridor has now passed its strategic point of inflexion, as we
continue to give more resources new life through our leading
recycling and energy recovery services. I’m pleased to confirm
that our Energy Recovery Facility (ERF) business is now
operational with five new ERFs brought on line during the year.
We remain well on track to deliver c. £100 million of EBITDA from
ERFs in 2016/17.
Despite the challenges in the recycling markets during the year,
there are strong regulatory and market drivers for growth in the
sector. Viridor is well positioned in its strategic business elements
with significant cash being generated in Landfill Energy and with
Contracts and Collection providing essential input materials for our
‘Energy’ and ‘Recycling & Resources’ divisions’ operating facilities.
Sustainability and resilience
To drive towards greater resource efficiency and energy
security in times of economic austerity and challenging
market conditions requires leadership and resolve. To
balance the needs and priorities of communities, employees
and stakeholders with the demands of the bottom line
requires a clear understanding that they are essentially one
and the same. The drive for sustainability supports growth.
Clients, customers, employees and partners demand
community benefit and responsibility in business, and Viridor
is pleased to address that demand as part of the service.
Viridor was delighted with its three star ranking in the
Business in the Community Corporate Responsibility Index,
demonstrating clear overall progress for the business.
The new strategic orientation of Viridor’s business model
around the company’s ‘Energy’ and ‘Recycling & Resources’
divisions, aligned with a clear focus on the engagement and
professional development of its employees, is now delivering
results. Viridor stands at the forefront of transforming waste
in the UK using input materials to produce high quality
recycled commodities, raw materials and energy.
22
Pennon Group Plc Annual Report 2015 Strategic
overview
South West
Water
Viridor
Group
Governance
Financial
statements
Strategic review
UK context
The UK is required under the European Union (EU) Landfill
Directive to reduce the amount of biodegradable municipal
waste going to landfill sites. This is being achieved by
a continued increase in recycling, with residual waste
increasingly being used for energy recovery. A new and
more ambitious EU Circular Economy legislative package
is expected in 2015. The previously proposed package,
withdrawn in 2014, contained 70% recycling targets, 80%
packaging recycling targets and material-specific landfill bans.
The EU Renewable Energy Directive requires the production
of 20% of energy from renewable sources by 2020. Energy
recovery from waste in all its forms has a clear role within
the Government’s UK Renewable Energy Roadmap and
continues to deliver a substantial proportion of total UK
renewable energy generated. Viridor believes that by
2020, UK energy recovery from waste could produce 15
terawatt hours (TWh) of the total forecasted UK renewable
energy generation (120 TWh), accounting for 12%. This
is particularly significant given predicted future energy
capacity shortages.
The UK’s main mechanism for diverting waste from landfill
and incentivising recycling and ERFs remains landfill tax.
The UK and Scottish Governments have confirmed that
landfill tax will rise on 1 April 2016 in line with inflation from
the current position of £82.60 per tonne. This continues to
influence the long-term economics of both recycling and
energy recovery. In addition, recyclate costs have been
typically significantly lower than the cost of using virgin
materials for manufacturers.
Viridor is clearly focused on giving resources new life through
recycling and waste-based renewable energy. Investment
in technology and operational practices continues to
enhance recyclate quality to differentiate Viridor from its
competitors and to position it strongly within a consolidating
sector. Significant progress has also been made in the
delivery of the ERF business, with a substantial asset base
now operational in conjunction with associated business
capability processes across the whole ‘source to supply’
energy from waste (EfW) cycle.
Business strategy
Viridor’s strategy, built on its purpose to give resources new
life, is to add substantial value through:
Energy
ERFs
Viridor’s strategically located network of ERFs now
provides an established and growing business serving PPP
contracts and the commercial sector. Viridor has moved
from investment to delivery with five facilities commencing
operations in 2014/15. EfW remains central to the UK’s
waste and renewable energy strategies as the low cost
alternative to landfill for treatment and disposal of residual
waste, and provider of base load electricity and heat
utilisation opportunities. Viridor expects to have c.15% EfW
market share by 2020, with its network of strategic facilities
driving the company’s long-term profit growth.
Landfill energy
The focus of the landfill energy business is to maximise
the value of landfill gas power generation across all sites;
to manage the ongoing decline in landfill inputs by closing
18 sites over the next five years and maintaining three
strategic operational sites; and to optimise returns on
the closed landfills asset base through alternative uses
such as photovoltaic installation, energy storage and
divestment opportunities.
Continued focus on growing market share in a consolidating
sector through its contracts and collections services, which
play an essential role in securing inputs for the energy and
recycling divisions, will also help to drive the delivery of the
Viridor strategy.
Recycling and resources
Clear regulatory drivers for recycling from the EU and from
UK governments, alongside expectations from leading
corporates, are ensuring strong and ongoing demand for
recycling services. Viridor has established its recycling
business over the past five years and currently handles
volumes approaching two million tonnes per annum. Viridor’s
focus on Input, Throughput, Output Optimisation (ITOO)
across its recycling activities is yielding improvements,
ensuring the production of high quality materials and
management of the cost base to mitigate impacts
on margins.
23
www.pennonannualreport.co.uk/2015 Strategic report | Report from Chief Executive, Viridor
Strategic review Continued
Business performance
Revenue was up 4.2% to £835.9 million reflecting ERFs
coming into operation and further growth in assets under
construction, partly offset by anticipated lower recycling
revenue, down £30.0 million, due to lower volumes and
prices resulting from adverse market conditions.
Before exceptional items: Viridor’s earnings before
interest, tax, depreciation and amortisation (EBITDA) was
up £4.1 million to £80.4 million (2013/14 £76.3 million);
Viridor underlying EBITDA, which includes IFRIC 12 interest
receivable and Viridor’s share of joint venture EBITDA, was
up £9.4 million to £135.3 million; profit before interest and
tax (PBIT) fell £8.6 million (28.5%) to £21.6 million; and PBIT
plus joint ventures decreased by £5.7 million (13.1%) to
£37.9 million.
Profit before tax and exceptional items increased by
£0.1 million (0.4%) to £27.7 million reflecting lower PBIT plus
joint ventures, offset by reduced interest payable, as a result
of increased equity investment in Viridor by Pennon and
higher IFRIC 12 interest receivable.
Capital expenditure including spend on service concession
arrangements for the year was £262.2 million (2013/14
£292 million) of which c. £242 million was for Viridor growth
projects (largely ERFs) with the balance being maintenance
of existing assets.
Renewable energy
Energy can be recovered essentially via two methods, either
via gas utilisation (notably landfill gas power generation and
anaerobic digestion (AD)) or via combustion in ERFs and
similar facilities, some of which may be a part of Combined
Heat and Power (CHP) schemes. Landfill gas, biodegradable
waste in ERFs and AD accounted for 25% of total UK
renewable energy fuel use in 2013 (Digest of UK Energy
Statistics 2014).
(a) Energy Recovery Facilities (ERFs) and
Anaerobic Digestion (AD)
Viridor now has 139 MW of renewable energy capacity from
its fleet of ERFs and AD facilities, which includes its share
of joint ventures at Lakeside ERF, Runcorn I ERF and the
Greater Manchester AD operations.
The company has been successfully implementing its
strategic plan to deliver the ERF business which will drive
long-term profit momentum. This includes establishing a
significant asset base of ERFs, the majority of which are now
operational. Viridor and its partners have a total operational/
committed ERF capacity of 2.8 million tonnes.
Five plants, being Runcorn I and II, Exeter, Ardley and
Cardiff, have been delivered into the operational Energy
Division, contributing underlying EBITDA of £41.9 million
during the year.
While the Runcorn plants were delayed in construction,
liquidated damages were receivable for the period post
the original contractual completion date. All other plants
were delivered within or below budget. Two further plants,
Peterborough and Glasgow, are more than halfway through
construction; Dunbar commenced construction towards the
end of the year, and Notice to Proceed with the construction
of Beddington ERF was issued after the year-end.
100% of waste inputs have been secured for all plants
at opening and Viridor has now secured c. 80% of the
required waste inputs for the portfolio of the operational
and committed plants, of which three-quarters are from
long-term contracts. Achieving a balance between long-term
local authority contracts and shorter term commercial
waste fuel inputs enables an appropriate level of control
over calorific value and therefore throughput and efficiency
optimisation, as well as enhancing gate price control.
24
Pennon Group Plc Annual Report 2015 Strategic
overview
South West
Water
Viridor
Group
Governance
Financial
statements
(c) Landfill
The business plan now being implemented for the landfill
business is reducing operations to a few strategic sites,
reflecting the fact that there will still be demand for landfilling
of certain materials for the foreseeable future. The other sites
are being run to closure and aftercare with an emphasis on
maximising the value of electricity generation from landfill
gas and reducing costs. Non-strategic sites and closed sites
are being assessed for alternative uses – both for energy
and for development potential. Three sites were closed in
2014/15 and a similar closure rate is forecast for the next
five years, taking the number of sites from 18 to three.
The business continues to be cash generative and
contributed £15.4 million to EBITDA in the year. Volumes
were slightly down at 2.5 million tonnes.
Average gate fees decreased by 13.6% to £19.92 per
tonne. Consented landfill capacity reduced from 57.7 million
cubic metres (mcm) at 31 March 2014 to 51.7 mcm at
31 March 2015, reflecting usage during the period and site
closures. As previously stated, and provided for, 39 mcm is
not expected to be used.
Landfill tax is now increasing in line with inflation and
increased on 1 April 2015 from £80 to £82.60.
(b) Landfill gas generation
Viridor’s landfill energy business is being managed to
maximise the value of landfill gas power generation, while
exploring cryogenic energy storage and solar power
developments as alternative uses for landfill sites with
existing grid connections.
Gas volumes reached peak production in 2012/13 and
have been reducing gradually. In 2014/15 the landfill gas
power generation output was marginally down to 602
gigawatt hours (GWh) (2013/14 606 GWh), reflecting a
successful output optimisation programme. Landfill gas
power generation EBITDA was £35.8 million (2013/14
£37.3 million).
Average revenue per megawatt hour (MWh) was 3.3%
higher at £92.72 (2013/14 £89.74) reflecting the higher
proportion of Renewables Obligation Certificates (ROCs).
The switch from legacy Non Fossil Fuel Obligation (NFFO)
contracts to ROCs continues with 94% of energy now sold
under the higher value ROCs. The remaining 6% NFFO
component will migrate to ROCs by 2016/17. Average
costs increased to £33.19 per MWh (2013/14 £28.13) due
to maintenance costs to improve gas capture and lower
volumes. Total landfill gas power generation operational
capacity remained at 104 MW (excluding 3 MW capacity at
sub-contract sites in Suffolk).
A 2.75 MW solar power installation at Westbury landfill was
completed during the first half of 2014/15 and an £8 million
cryogenic energy storage pilot project at Pilsworth landfill,
funded by the Department of Energy and Climate Change,
is under way. Future alternative uses for landfill sites are
also being assessed as most of Viridor’s landfill operations
accelerate into closure.
25
www.pennonannualreport.co.uk/2015 Strategic report | Report from Chief Executive, Viridor
Strategic review Continued
Recycling and resources
During the year recycling volumes traded decreased by
151,000 tonnes (8.4%) to 1.7 million tonnes. Recyclate
prices, while lower, have stabilised to some degree for most
commodities but remain under pressure, reflecting world
economic conditions and competitive markets. Overall,
average revenues per tonne from recyclate sales and gate
fees for the year fell to £86 per tonne, 7.7% lower than for
2013/14. Viridor remains cautious about future recyclate
price growth and shipping costs.
EBITDA for the year was £49.0 million (2013/14
£62.6 million).
As announced at the half year, Viridor has commenced a
two year Input, Throughput, Output Optimisation programme
(ITOO) to provide an enhanced focus on increasing margins
by taking actions across the value chain. The company
is targeting a substantial enhancement in EBITDA margin
through improvements in asset productivity.
Viridor continues to operate 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 the UK, Europe and other Far
Eastern markets.
Profits were down slightly across the 15 local authority
contracts around the UK (the more significant contracts
include Greater Manchester, Lakeside, Glasgow, Lancashire,
Somerset and West Sussex) and the Thames Water
contract. The decrease reflected lower volumes on some
contracts and the expiry of other contracts.
Additional contracts have been won since the year-end but
profits are expected to be impacted by the expiry of some
old contracts.
Profits in the collection business were ahead of expectations,
reflecting the benefits of sustained management action.
Collection remains a key focus in securing increased input
tonnages for the business.
Joint ventures
Total share of joint ventures’ EBITDA (comprising VLGM
(including IFRIC 12 interest), TPSCo and Lakeside) was
up 0.7% to £41.4 million (2013/14 £41.1 million). Total
share of joint ventures’ profit after tax was £4.9 million, up
£1.2 million from 2013/14.
(a) 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. The company is a
joint venture between Viridor and John Laing Infrastructure.
Operation of the associated facilities is being carried out on
a sub-contract basis by Viridor.
Solid recovered fuel produced from the waste is used to
generate heat and power at Runcorn I ERF, which has
been built primarily for the Greater Manchester Waste
PFI contract.
As part of the VLGM contract, a separate contractor was
mandated to construct 43 facilities. All of the facilities have
now been formally taken over by Viridor. Final acceptance of
certain facilities remains subject to fulfilment of the required
contractual terms.
Viridor’s share of VLGM’s EBITDA was £3.0 million (2013/14
£2.5 million). Viridor’s share of IFRIC 12 interest was
£12.1 million (2013/14 £12.5 million).
(b) Runcorn I (TPSCo)
Viridor’s share of TPSCo’s EBITDA was £8.2 million
(2013/14 £10.9 million) reflecting higher costs during
final commissioning.
The Runcorn I ERF was taken over in January 2015.
(c) Lakeside
Lakeside, the first of Viridor’s ERF projects, continues to
outperform its financial close assumed power generation
and waste processing targets. Viridor’s share of Lakeside’s
EBITDA was £18.1 million (2013/14 £15.2 million).
Results in 2014/15 benefited from different scheduled
outage timing (H1 2013/14 vs H1 2015/16) and continued
good performance.
26
Pennon Group Plc Annual Report 2015 Strategic
overview
South West
Water
Viridor
Group
Governance
Financial
statements
People
Viridor employs over 3,000 people across the UK. The
achievements, professionalism and innovation of its
employees remain a great source of pride to the company.
Their health, safety and welfare remain its top priority.
Health and safety
Viridor has set itself the goal of making a step change in the
way it manages health, safety and welfare, and is working
hard to promote a ‘zero incidents’ safety culture throughout
the organisation. Central to its approach are clear, effective
and regular campaigns and communications supporting
health, safety and working well, such as the high profile
‘Stop & Think’ campaign originally developed in the South
West and now rolled out across all company sites. There
was a continued fall in the RIDDOR incidence rate, with
28 reportable incidents giving a rate of 889 per 100,000
employees (2013/14 1,197).
A tragic incident which resulted in a fatality of a Viridor
employee in early June 2015 is under investigation. Our
thoughts are with his friends, family and colleagues.
Employee development
Leading organisations across the world recognise that
skills, professional development and retention are of crucial
importance, and good employee engagement is becoming
one of the key differentiators in business. Engaged
employees and high-performing teams help drive safety,
productivity, profitability and customer focus. Viridor has
renewed its focus in this area utilising the well-respected
Gallup Q12 engagement programme. Following its first
company-wide Q12 survey and a series of staff roadshows
sharing the company strategy and key business priorities,
local level action planning is now helping to drive positive
change and a focus on business improvements across
the company. This is particularly timely as the company
continues the implementation of its Enterprise Resource
Platform throughout the business.
Viridor has comprehensive programmes of training and
professional development to ensure its employees have the
skills, expertise and support to meet the demands of the
business. 5,887 training days were delivered across the
company during the year. Viridor currently has 15 full-time
apprenticeships and an additional five new apprenticeships
have been confirmed for Viridor’s ERFs. A new intake
has been confirmed for the innovative Viridor Foundation
Management Degree course, developed in partnership
with Edge Hill University. The first cohort of 15 managers
successfully graduated in 2014, with 25 due to graduate
in 2015/16.
The company continues to strive towards a workforce that is
representative of the communities in which it operates and to
ensure a pipeline of talent for the future needs of the business.
Viridor’s employee performance appraisal system incorporates
the company’s six core behavioural competencies, designed
to ensure the right managerial skill sets. Succession planning
is also underway across the business.
Key relationships
Of Viridor’s largest customer groups, local authorities
account for 39% of the company’s revenue (2013/14
31%). No individual authority accounts for more than 12%
(2013/14 12%). Viridor’s ROC energy contracts account for
7% of revenue (2013/14 7%), primarily with one customer.
The company’s operational facilities in England and Wales
require environmental permits to be issued and regulated
by the Environment Agency and Natural Resources Wales.
In Scotland similar waste management licences or pollution
prevention and control permits are issued and regulated
by the Scottish Environmental Protection Agency. Viridor
maintains a positive and proactive working relationship
with these and other regulatory bodies by means of close
ongoing liaison and active management of any issues arising
under permit conditions at either site or strategic levels. For
example, Viridor continues to share live monitoring data from
operational sites with the regulators via custom-developed
web portals to ensure a transparent and resource-saving
approach to monitoring and regulation.
Viridor has strengthened its approach to procurement and
supply chain relationships during the year with the formation
of a new procurement function and more efficient protocols.
These include a formal policy on sustainable procurement
utilising whole life costings, ensuring clear environmental and
social responsibility criteria for goods and services procured, and
delivering long-term value for Viridor and, in turn, its customers.
Outlook
Excellent progress has been achieved in the realisation and
delivery of its ERF business. Five major facilities became
operational in the financial year adding to the existing
Lakeside and Bolton operational ERF assets. Three others
are under construction and Notice to Proceed with the
construction of Beddington ERF has been issued.
The drivers and demand for recycling in the UK remain strong,
although Viridor remains appropriately cautious about the future
prospects for recyclate prices. The company is nonetheless
strongly positioned and remains focused on its ITOO
programme to maximise revenues and achieve efficiencies to
sustain margins. A further decline in recyclate prices and UK
power prices would impact profitability next year.
Viridor’s EBITDA figure in 2014/15 exceeded 2013/14 as
expected. The operational ERFs along with those that are
under construction are expected to contribute c. £100 million to
Viridor’s EBITDA in 2016/17. Viridor is also well positioned with
its recycling, contracts and collections assets and services.
Ian McAulay
Chief Executive, Viridor
27
www.pennonannualreport.co.uk/2015 Strategic report | Report from the Group Director of Finance
Report from the
Group Director of Finance
Financial review
Susan Davy
Group Director
of Finance
Pennon Group has delivered a resilient financial performance, underpinned by
strong liquidity and efficient long-term financing. This has allowed us to continue
our policy of growing dividends to shareholders at a consistent and sustainable
rate of 4% above RPI inflation.
Performance overview
The principal measures used to assess the Group’s financial performance are:
Profit before tax
before exceptional items (£m)
2010/11
2011/12
2012/13
2013/14
Earnings per share
before exceptional items and
deferred tax (pence)
188.5
200.5
190.0
207.3
2010/11
2011/12
2012/13
2013/14
42.3
47.3
40.3
42.6
2014/15(1)
+1.6%
210.7
2014/15
-6.6%
39.8
Dividend per share
(pence)
2010/11
2011/12
2012/13
2013/14
24.65
26.52
28.46
30.31
2014/15
+4.9%
31.80
Reconciliation of earnings(3)
Interest rate on average net debt(2)
(%)
2010/11
2011/12
2012/13
2013/14
2014/15
4.4
4.2
4.0
3.8
3.4
Statutory earnings
Deferred tax before
exceptional items
Exceptional items (post-tax)
Earnings before exceptional
items and deferred tax
2014/15
Profit after
tax (£m)
2014/15
Basic earnings
per share (p)
2013/14
Profit after
tax (£m)
2013/14
Basic earnings
per share (p)
126.3
18.2
11.0
155.5
32.3
4.7
2.8
39.8
142.5
(25.8)
39.7
156.4
38.8
(7.0)
10.8
42.6
(1) Statutory basis £197.0m
(2) Includes capitalised interest but excludes pensions net interest, discount unwind on provisions, IFRIC 12 contract interest receivable and interest receivable from
joint ventures
(3) Earnings per ordinary share figures in this strategic report exclude exceptional items 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.
28
Pennon Group Plc Annual Report 2015 A continuing low net interest rate was achieved,
coupled with raising cash and facilities to fund
ongoing capital investment: £1,741 million cash and
facilities at 31 March 2015, including £830 million of
new and refinanced facilities sourced during the year.
The year’s financial highlights
(before exceptional items)
Group profit before tax increased by £3.4 million (1.6%) to
£210.7 million, driven by a resilient performance across the
Group. Earnings per share before deferred tax decreased by
6.6% to 39.8p and includes the impact of the tariff freeze in
South West Water, which will be recovered on a net present
value (NPV) neutral basis over the next five year period.
South West Water recorded a strong performance against
the 2010-2015 (K5) regulatory contract and outperformed
regulatory assumptions. South West Water profit before
tax was up £5.4 million (3.3%) to £167.9 million reflecting
higher revenues, good cost control and lower average
borrowing rates, all achieved against the backdrop of in-year
tariff freezes.
Viridor earnings before interest, tax, depreciation and
amortisation (EBITDA) were up £4.1 million to £80.4 million.
Viridor underlying EBITDA, which includes IFRIC 12 interest
receivable and Viridor’s share of joint venture EBITDA,
increased by £9.4 million to £135.3 million. The increase in
earnings reflects Energy Recovery Facilities (ERFs) becoming
operational, partly offset by continuing declines in landfill and
a softening of the recycling market.
We have secured further funding to finance continuing
growth. By the year-end we had £1,741 million in cash and
facilities (including £196 million of restricted funds) in place
to fund the continuing growth in Viridor’s ERF business,
together with a significant proportion of South West Water’s
2015-2020 (K6) capital programme.
Capital investment remained significant this year at
£407 million due to continuing major investment in Viridor’s
ERFs, which are driving future growth. Two-thirds of
committed ERF capital investment is now complete. South
West Water’s capital expenditure in the year was broadly
in line with 2013/14. A key element of the programme in
the year was the acceleration of certain K6 projects into
2014/15 to deliver early outcome benefits to customers and
the environment.
We have secured funding at a cost that is relatively low in
absolute terms. The Group interest rate on average net debt
improved to 3.4% (2013/14 3.8%).
Revenue
Group revenue increased by 2.7% to £1,357.2 million. South
West Water’s revenue increased by 0.4% to £522.2 million
as a result of higher demand, new connections and higher
other revenue, partially offset by a reduction in revenue from
customers switching from unmeasured to metered charges.
Viridor’s revenue increased by 4.2% to £835.9 million due
primarily to ERFs becoming operational and increased
construction spend on service concession arrangements,
partly offset by lower recycling revenues.
Earnings before interest, tax, depreciation and
amortisation (EBITDA)
(before exceptional items)
Group EBITDA increased by 0.9% to £411.0 million with
South West Water up by 0.1% to £331.3 million and Viridor
up by 5.4% to £80.4 million. K5 outturn operational cost
efficiencies in South West Water were cumulatively 11%
ahead of the K5 Final Determination. Viridor’s EBITDA was
ahead of last year due to ERFs becoming operational, partly
offset by declines in recycling and landfill.
Net finance costs
We continued our effective management of interest rates in
2014/15 with interest payable (including capitalised interest)
net of interest receivable, on average net debt equating to
3.4% (2013/14 3.8%) which included lower interest payable
on RPI-linked debt.
Net finance costs of £40.8 million were £13.1 million lower
than last year, reflecting an £8.7 million saving due to the full
conversion of the £125 million convertible bond, £5.0 million
higher IFRIC 12 interest receivable and lower average
borrowing rates.
Interest receivable totalling £19.1 million (2013/14
£13.7 million) has been achieved from the objective of
enhancing returns on the Group’s substantial pre-funding of
£771 million.
During the year net finance costs (excluding pensions
net interest, discount unwind on provisions and IFRIC 12
contract interest receivable) were £41.1 million (2013/14
£49.1 million), covered 6.0 times (2013/14 5.2 times) by
Group operating profit.
29
www.pennonannualreport.co.uk/2015Strategic overviewSouth West WaterViridorGroupGovernanceFinancial statements Strategic report | Report from the Group Director of Finance
Financial review Continued
Profit before tax
(before exceptional items)
Profit before tax was £210.7 million, an increase of 1.6%.
Pages 12 and 20 give a detailed description of the financial
performance of South West Water and Viridor respectively.
On a statutory basis, profit before tax was £197.0 million
reflecting exceptional items of £13.7 million.
Taxation
(before exceptional items)
The Group’s UK corporation tax charge for the year was
£39.2 million (2013/14 £35.3 million) after the release of
prior year credits of £5.5 million (2013/14 £16.5 million).
The increase primarily reflects lower prior year credits, partly
offset by a reduction in the rate of corporation tax and higher
ERF capital allowances. Deferred tax for the year was a
charge of £18.2 million (2013/14 credit of £25.8 million).
The charge compared to the previous year reflects the
one-off credit of £40.1 million in 2013/14 due to the enacted
3% reduction in the future rate of UK corporation tax.
Earnings per share
(before exceptional items and deferred tax)
Earnings per ordinary share decreased by 6.6% to 39.8p
primarily reflecting South West Water’s tariff freeze, which will
be recovered over 2015-2020 (K6) on an NPV neutral basis.
The weighted average number of shares in issue during
the year was 390.9 million (2013/14 367.4 million) with the
increase largely reflecting the issuance of 20.9 million shares
from the £125 million convertible bond. Net assets per share
at book value at 31 March 2015 were 340p.
Exceptional items
Net exceptional items totalling a charge before tax of
£13.7 million have been recognised. The net charge
includes £24.3 million to write down the carrying values of
Viridor’s property, plant and equipment (net of impairment
reversals of £9.2 million), £11.0 million for a small number
of underperforming Viridor contracts, net of credits of
£14.9 million from changes made to the Group’s defined
benefit scheme and £6.7 million from the reassessment
of Viridor landfill environmental provisioning. The net
exceptional charge has no immediate cash impact.
Proposed dividends totalling £129.5 million are covered
1.2 times by net profit (before exceptional items and deferred
tax) (2013/14 1.3 times). Dividends are charged against
retained earnings in the year in which they are paid.
Dividend policy
This year we announced our dividend policy for the period
to 2019/20. The previous policy of increasing the dividend
each year by 4% above RPI has been extended to 2019/20.
This results in a 10 year (2010-2020) policy of 4% annual
dividend growth above RPI.
Operating costs
(before exceptional items)
Operating costs for the year totalled £1,111 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
197
164
162
76
61
38
34
6
Group investment
The Group’s capital expenditure on property, plant and
equipment, including service concession arrangements,
remained significant at £407 million (2013/14 £434 million).
The major categories of expenditure were:
ERF
£204m
Water
£57m
The exceptional items total a charge net of tax of £11.0 million.
Dividends and retained earnings
The statutory net profit attributable to ordinary shareholders
of £126.3 million has been transferred to reserves.
Wastewater
£88m
Recycling
£22m
The Directors recommend the payment of a final dividend of
21.82p per share for the year ended 31 March 2015. With
the interim dividend of 9.98p per share paid on 2 April 2015
this gives a total dividend for the year of 31.80p, an increase
of 4.9% over 2013/14 (reflecting 4% real growth plus March
2015 RPI of 0.9%).
Landfill
£13m
Other
£23m
30
Pennon Group Plc Annual Report 2015 Cash flow
In 2014/15 the Group once again had a strong operating
cash flow. Together with the conversion of the £125 million
convertible bond, this offset the ongoing enhanced level of
capital investment to support future growth, resulting in net
debt remaining broadly stable.
Summarised cash flow
2014/15 £m
2013/14 £m
Cash inflow from operations
Net interest paid
Tax paid
Dividends paid
Hybrid periodic return
Capital expenditure
Dividends and loan repayments
received from joint ventures
Pension contributions
Net cash outflow
Conversion of share of
convertible bond
Shares issued
Debt indexation/interest accruals
Increase in net borrowings
412
(42)
(22)
(69)
(20)
(365)
6
(28)
(128)
125
3
(3)
(3)
407
(39)
(58)
(69)
(20)
(392)
9
(18)
(180)
–
2
(7)
(185)
Major components of the Group’s
debt finance at 31 March 2015
Finance leasing
£1,336m
Bank bilateral debt
£389m
Index-linked
bond 2057
£259m
European
Investment
Bank loans
£304m
Private
placements
£547m
Bond 2040
£133m
Liquidity and debt profile
The Group has a strong liquidity and funding position
with £1,741 million cash and facilities at 31 March 2015.
This includes cash and deposits of £771 million (including
£196 million of restricted funds representing deposits with
lessors against lease obligations) and undrawn facilities of
£970 million. A total of £830 million in new or renewed debt
facilities was arranged during the year, being:
• £125 million new 17 year facility
• £130 million new Schuldschein
• £80 million new 13 year facility
• £240 million of new finance leases of which £175 million
are for Viridor ERFs, £65 million for South West Water
• £255 million of new loans and revolving credit facilities.
At 31 March 2015 the Group’s loans and finance lease
obligations totalled £2,968 million. After the £771 million
held in cash, this gives a net debt figure of £2,197 million,
an increase of £3 million during the year. Debt incurred for
the construction of Viridor’s portfolio of ERFs at Runcorn II,
Ardley, Exeter, Cardiff, Glasgow and Dunbar increased to
£844 million at 31 March 2015, which represents 38% of
Group net debt.
The Group’s debt has a maturity of up to 42 years with
an average maturity of 23 years. The Group has fixed, or
put swaps in place to fix, the interest rate on a substantial
portion of South West Water’s debt for the entire K6 period.
During the year the average rate achieved on all fixed rate
debt was 3.4% for 2014/15. For South West Water this
figure was 3.1%.
A further £393.1 million of South West Water’s debt is
index-linked at an overall real rate of 1.7%. As a result of
the aforementioned initiatives, South West Water’s cost of
finance is among the lowest in the industry.
The Group’s financing structure gives us the scope and
flexibility we need to implement our strategic objectives in
order to maximise value for our shareholders.
The Group’s interest rate on average net debt for the year
to 31 March 2015 is 3.4% (after adjusting for capitalised
interest of £22.5 million, notional interest items totalling
£0.3 million and interest received from shareholder loans to
joint ventures of £11.4 million, as detailed in note 8 to the
financial statements).
Just under half of the Group’s gross debt is finance leasing
giving us a long maturity profile. Interest payable benefits
from the fixed credit margins which were secured at the
inception of each lease.
At 31 March 2015 the fair value of the Group’s non-current
borrowings was £74 million less than its book value
(2014 £275 million) as detailed in note 28 to the financial
statements. This reflects the benefit of securing interest rates
below the current market rate.
31
www.pennonannualreport.co.uk/2015Strategic overviewSouth West WaterViridorGroupGovernanceFinancial statements Strategic report | Report from the Group Director of Finance
Financial review Continued
Capital structure – overall position
At the end of the financial year the Group’s net debt of
£2,197 million gave a gearing ratio of net debt to (equity plus
net debt) of 61.9% at 31 March 2015 (2014 64.7%).
In March 2013 the Group issued a £300 million hybrid capital
security recognised as equity as set out in note 37 to the
financial statements.
During the year the Company continued to benefit from
offering a Scrip Dividend Alternative. £48 million of potential
cash dividend was retained in the business and instead
distributed by issuing c. six million shares.
South West Water’s debt to Regulatory Capital Value (RCV)
was 62% at 31 March 2015 (2014 56%), which compares
to Ofwat’s optimum range of 55%-65% for K5 and K6 target
efficient gearing of 62.5%.
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 £920 million
(2014 £901 million), equivalent to 11.4 times EBITDA before
exceptional items (2014 11.8 times).
Treasury policies
The role of the Group’s treasury function is to ensure 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 following 12 months. These are intended to be
met for the coming year from existing cash balances, loan
facilities and operating cash flows.
Tax contribution 2014/15 – collected/paid
The Group made a net payment of £21.0 million of UK
corporation tax in the year (2013/14 £58.1 million). The
main elements of the payment were £25.3 million in relation
to 2014/15 net of refunds of £3.1 million from prior years.
No additional quarterly payments were made in relation to
2013/14. South West Water paid £36.4 million (2013/14
£44.1 million) of UK corporation tax on profit before tax of
£167.9 million (2013/14 £162.5 million).
The total tax charge for the year (before exceptional
items) of £57.4 million was greater than the charge that
would have arisen had the accounting profit before tax
and exceptional items been taxed at the statutory rate
of 21%. A reconciliation is provided in note 9 to the
financial statements.
The mainstream tax charge for the year (before deferred tax,
prior year and exceptional items) of £44.7 million results in
an effective rate of 21.2%, which is close to the statutory
rate of 21.0%.
The Group’s total tax contribution extends significantly
beyond its UK corporation tax charge:
Landfill tax
£209m
Employment taxes
£50m
Business rates
£33m
UK corporation
tax
£21m
Fuel Excise
Duty
£10m
Environmental
payments
£9m
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.
Carbon Reduction
Commitment
£4m
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.
Other
£2m
Total taxes amounted to £329 million (2013/14 £347 million)
of which a net amount of £26 million (2013/14 £6 million)
was collected on behalf of the authorities for employee
payroll taxes and VAT.
In addition to corporation tax the most significant taxes
involved, together with their profit impact, were:
• landfill tax of £204 million (2013/14 £186 million) collected
by the Group on behalf of HM Revenue & Customs (HMRC).
This amount includes £11 million (2013/14 £12 million) paid
to local environmental bodies via the Landfill Tax Credits
Scheme. Landfill tax is an operating cost that is recovered
from customers and is recognised in revenue. In addition the
Group incurred landfill tax of £5 million (2013/14 £29 million)
on the disposal of waste to third parties. The reduction of
£24 million compared to 2013/14 reflects that more waste
from the Greater Manchester contract is being deposited in
Viridor sites and is also being diverted to the Runcorn I ERF.
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
32
Pennon Group Plc Annual Report 2015 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.
Post year-end acquisition of Bournemouth Water
On 15 April 2015 Pennon acquired Sembcorp Bournemouth
Water Investments Limited from Sembcorp Holdings Limited,
including the non-regulated and regulated subsidiaries,
for a cash consideration of £100.3 million. As part of the
acquisition £86.9 million of external net debt and debt-like
items have been assumed by Pennon Group Plc.
An equity placing was undertaken to replenish Pennon’s
cash resources in respect of the acquisition and ensure
funding flexibility.
The acquisition has been accounted for in 2015/16 using the
acquisition method. Provisional goodwill of c. £66 million will
be capitalised.
The acquisition represents an incremental 5% growth in RCV
and is modestly earnings enhancing following integration.
In accordance with current legislation an automatic merger
reference has been made to the Competition and Markets
Authority (CMA). A decision is expected to be received on
the merger from the CMA within its usual timescales.
Susan Davy
Group Director of Finance
• Value Added Tax (VAT) of £9 million recovered (2013/14
£29 million recovered) by the Group from HMRC. The
reduction in the repayment is a result of the following: a
reduction in capital expenditure, an increase in revenue in
Viridor and the increase in the level of sale and leaseback
transactions. VAT has no material impact on profit
before tax
• business rates of £33 million (2013/14 £32 million) paid
to local authorities. This is a direct cost to the Group and
reduces profit before tax
• employment taxes of £50 million (2013/14 £48 million)
including employees’ Pay As You Earn (PAYE) and total
National Insurance Contributions (NICs). Employer
NICs of £14 million (2013/14 £13 million) were
charged approximately 92% to operating costs with
8% capitalised to property, plant and equipment. The
total amount of £50 million includes PAYE of £2 million
(2013/14 £2 million) on pension payments made by the
Group pension schemes
• Fuel Excise Duty of £10 million (2013/14 £10 million)
related to transport costs. This reduces profit before tax
• payments to Environment Agency and other regulatory
bodies totalling £9 million (2013/14 £10 million). This
reduces profit before tax
• Carbon Reduction Commitment (CRC) payment for the
Group of £4 million (2013/14 £1 million). This represents
the commitment payments for both carbon usage in
2013/14 and 2014/15 as phase 2 of the CRC mechanism
has commenced and payments are now made in
advance. In addition the rate has increased by 33% and
Viridor no longer receives credit for its energy generation.
This reduces profit before tax.
The corporation tax rate for 2014/15 used to calculate
the current year’s tax is 21%. The corporation tax rate has
been reduced to 20% for 2015/16 following changes in the
Finance Act 2013.
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 2015 the Group’s pension schemes showed
a deficit (before deferred tax) of £59.6 million (2013/14
£79.3 million). The decrease primarily reflects an increase in
the schemes’ asset values and an exceptional reduction in
the liability of £14.9 million (£11.9 million after tax) relating
to past service cost. This has been recognised following
changes in the Group’s main scheme benefits, particularly
the introduction of a cap on increases in pensionable pay.
Net liabilities of £48 million (after deferred tax) represented
around 2% of the Group’s market capitalisation at
31 March 2015.
The last actuarial valuation of the main scheme was as at
31 March 2013.
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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
The colouring (green, amber, red) 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.
Risk Level
Low
Medium
High
Increasing
Unchanged
Decreasing
Assessed direction of travel of risk level.
South West Water
Law and regulation
Risk
Mitigation
2013/14
2014/15
Direction
Changes in law,
regulation or decisions
by governmental
bodies or regulators.
South West Water’s PR14 (2015-2020) business plan
was assessed by Ofwat as ‘enhanced’ with confirmation
in the Final Determination in December 2014.
South West Water continues to contribute fully to
consultations with all regulators and seeks to influence
emerging changes through strong relationships with
its stakeholders.
34
Pennon Group Plc Annual Report 2015 Economic conditions
Risk
Mitigation
2013/14
2014/15
Direction
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.
A new strategy for debt collection is being implemented which
includes:
• improved processes for managing customer moves
targeting previous occupier debt;
• specific case management and utilising court claims
effectively; and
• increasing the use of charging orders to secure debt.
South West Water is one of the few companies to have
implemented a social tariff ‘WaterCare’.
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.
In future, further changes to the benefits and universal credit
system, any significant changes to personal taxation policy
implemented by UK Government as well as macro-economic
trends, such as levels of household income relative to the
cost of living, may further affect the ability of customers to pay
their bills.
Operating performance
Risk
Mitigation
2013/14
2014/15
Direction
Extreme weather
and climate change
can place pressure
on the company’s
water resources
and networks.
South West Water is well placed to cope with extreme
incidents. A key mitigation is having detailed contingency
plans, sufficient emergency resources and a capital
programme that supports ongoing efforts to manage
these risks.
In the longer term, the impacts of climate change are being
considered. The company has plans ready and will adapt
the way it conducts its business to respond effectively to the
anticipated hotter, drier summers and wetter winters.
Poor service provided
to customers.
South West Water
could incur a financial
penalty under the
regulatory regime.
The company has delivered further improvements to customer
service demonstrated across a number of measures including
improved satisfaction (value for money), reduced written
complaints and fewer water quality complaints.
South West Water has improved its relative industry measure
SIM, resulting in its best ever score in 2014/15.
While South West Water’s performance continues to
improve, the performance in the K5 period has incurred a
modest financial penalty (already incorporated in the 2014
Final Determination).
Targeted improvements are being made to further improve
customer service and the company’s relative industry standing
during the K6 period 2015-2020.
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Principal risks and uncertainties Continued
Operating performance (continued)
Risk
Mitigation
2013/14
2014/15
Direction
Non-compliance
or occurrence of
avoidable health and
safety incidents.
There are rigorous health and safety policies and procedures in
place across South West Water.
Over the past 18 months a significant review of operational
sites has been undertaken to provide up to date risk
assessments at all wastewater and drinking water treatment
sites. A programme of capital improvements has been
delivered reducing site risks further.
The company has also replaced its lone worker procedures
and equipment to utilise recent advancements of technology
and functionality. The alarm handling arrangements have
also been changed as part of the lone worker system review
with this service now being managed by an accredited
external provider.
Further details on South West Water’s approach to minimising
the number of health and safety incidents is set out on
page 51.
Significant
operational failure or
incident occurrences.
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.
36
Mitigation
2013/14
2014/15
Direction
As part of the risk management and business strategic
planning processes, the company continues to evaluate
developments and proposals for competition. Strong progress
has been made in developing our approach to the retail
market opening in 2017 and South West Water’s internal
project ‘market ready’ programme is aligned and actively
engages in the development of central market operations.
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’.
In addition, South West Water is participating in discussions
for the design of ‘Upstream reform’. ‘Upstream reform’ will
involve a mixture of market and regulatory reforms to deliver
services to customers, the environment and society effectively
and efficiently.
Pennon Group Plc Annual Report 2015 Viridor
Law and regulation
Risk
Mitigation
2013/14
2014/15
Direction
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
2013/14
2014/15
Direction
Pressure on margins in
the recycling business
as a result of local
authority austerity, poor
input quality and falling
commodity prices.
Reduction in waste
volumes to landfill
due to the long-
term trends towards
waste minimisation
and recycling, and
in the overall market
from energy recovery
from waste.
Viridor’s Input, Throughput and Output Optimisation (ITOO)
programme, which is being applied across its recycling
activities, is ensuring the production of high quality
materials. Management of the cost base is mitigating the
impact on margins of a softening in recyclate prices.
In the long term, clear regulatory drivers for recycling from the
EU and the UK Government, alongside expectations from
leading companies, are laying the foundations for a strong,
continued demand for recycling services over the next 15 years.
A central aspect of Viridor’s diversified strategy is the growth
of stable volumes in the energy recovery business to offset the
declining trend in landfill and current challenges in recycling.
In addition, Viridor is exploring alternative uses for its landfill
assets. There is also evidence of recent rising UK waste
volumes as the economic recovery continues.
Operating performance
Risk
Mitigation
2013/14
2014/15
Direction
Business interruption,
particularly in the
growing Energy
Recovery Facility (ERF)
business, through
equipment failure, fire,
power outages and
campaign groups.
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).
Downward pressure
on UK wholesale
power prices.
Viridor enters into forward sale contracts for a certain
proportion of electricity generated from landfill gas
power generation.
Non-compliance
or occurrence of
avoidable health and
safety incidents.
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, awareness campaigns, 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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Principal risks and uncertainties Continued
Capital investment
Risk
Mitigation
2013/14
2014/15
Direction
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 within 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
2013/14
2014/15
Direction
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 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 ERF 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 £82.60 per
tonne in April 2015, Viridor’s large-scale ERFs will remain one
of the low-cost ways of disposing of residual waste.
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 ERFs. Nevertheless,
amounts of SRF and RDF may continue to be exported,
especially if UK ERF capacity remains insufficient.
Overcapacity in parts
of Europe could impact
the UK ERF market.
UK waste could be
converted into solid
recovered fuel (SRF)
or refuse derived fuel
(RDF) and exported
under Environment
Agency licence for
disposal in Europe.
Business systems
Risk
Mitigation
2013/14
2014/15
Direction
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.
Some of Viridor’s
IT systems require
replacement,
development or
upgrading to meet the
growing requirements
of the business.
38
Pennon Group Plc Annual Report 2015 Group
Law and regulation, finance and funding
Risk
Mitigation
2013/14
2014/15
Direction
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 £1.7 billion of cash and facilities as at 31
March 2015 including £830 million 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 the company 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.
Robust case being made to CMA setting out anticipated net
benefits for customers from the merger.
The acquisition of Bournemouth Water
was post year-end.
Unfavourable outcome
from Competition and
Markets Authority
(CMA) review of
our acquisition of
Bournemouth Water.
Pensions
Risk
Mitigation
2013/14
2014/15
Direction
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.
During 2014/15 the Group reviewed the long-term
sustainability of its main defined benefit pension scheme
and agreed changes in benefits that reduce the cost of
future accrual.
Employee and employer contributions are kept under
review, and a formal actuarial valuation as at 31 March
2013 was concluded during the period. 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, consisting of pages 4 to 51, 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.
39
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Customer and stakeholder satisfaction
We aim:
• to engage with all stakeholders and foster good relationships
with them
• to be a good neighbour, and consult with our stakeholders in
order to understand and respond to their priorities.
South West Water
From the efforts made to reduce the impact of construction
or roadworks on local communities to the steps taken to
provide information in a proactive and easily understandable
way, South West Water strives to improve the relationships it
has with its customers and stakeholders. Progress made in
the ‘Pure Service’ pillar of the company’s strategy is covered
in the Chief Executive’s review, on page 17. Of particular
note is the significant increase in the company’s customer
satisfaction score, a result of operational improvements and
a focus on improving the customer experience.
South West Water continues to build relationships with local
communities through a number of affordability-focused
initiatives delivered alongside local councils, housing
associations, voluntary organisations and carers’
associations. In specific areas of economic deprivation,
community engagement events and face-to-face
activities are used to provide a platform for engaging with
hard-to-reach or vulnerable customers. This helps to
ensure they are receiving the right advice and support on
issues such as water efficiency, overdue payments and
benefits entitlement.
Viridor
Viridor provides high quality recycling, recovery and waste
management services to over 100 local authorities and
over 32,000 customers across all sectors throughout the
UK. An increasing proportion of our customers continue to
seek a ‘zero waste to landfill’ service and to maximise waste
reduction, recycling and recovery from their own waste in
a cost effective manner. The company looks to form close
partnerships with its clients and continuously improve its
services to meet their aspirations.
Viridor’s customers want assurance of a reliable and quality
service, financial integrity and high standards of compliance.
Increasingly they require both detailed auditing and reporting
of resource and carbon management practices and a
commitment to ongoing improvement and engagement as
part of their own supply chains. Viridor is pleased to be able
to continue to offer a progressive and collaborative approach
to service and sustainability in these challenging times.
Viridor’s achievement of a three star rank in Business in the
Community’s annual benchmark of responsible business,
the Corporate Responsibility Index (see page 45), marks
a further milestone in its drive towards productive and
sustainable partnerships with community stakeholders.
REGULATORS AND POLICYMAKERS
BOTH SOUTH WEST WATER AND VIRIDOR ENGAGE ACTIVELY
WITH ENVIRONMENTAL AND REGULATORY STAKEHOLDERS
AND TRADE ASSOCIATION BODIES. FURTHER INFORMATION
CAN BE FOUND IN THE RESPECTIVE STRATEGIC
REVIEWS OF THE SOUTH WEST WATER AND VIRIDOR
CHIEF EXECUTIVES ON PAGES 19 AND 27.
40
Pennon Group Plc Annual Report 2015 Sustainability – environmental,
economic and social
We aim to ensure that all our business activities have a
positive economic, social and environmental impact on
the communities in which we operate
Pennon Group recognises it has a responsibility to contribute
positively towards communities affected by its operations.
In addition to investing in high quality water, waste water and
resource recovery services, we create local employment,
use local suppliers, provide financial support to community
projects and protect and enhance the environment.
Pennon’s subsidiaries support communities and charities
within their operational areas. In 2014/15 South West Water
provided more than £106,000 in community sponsorship
and charitable donations. Surf Lifesaving GB, Cornwall
Wildlife Trust, Devon Wildlife Trust, Cornwall Heritage
Trust and the South West Coast Path Association were
among the organisations to receive funding for various
community-focused projects and initiatives.
Viridor distributed £12.8 million of funding in total to
environmental, amenity and community projects across
the UK, of which £12.6 million was distributed via the
Landfill Communities Fund and the remainder by way of
sponsorship and charitable donations.
In addition, Pennon, South West Water and Viridor
employees fundraise for their preferred charities including
WaterAid and the Children’s Air Ambulance.
South West Water
Community support, sponsorship and donations
(£)
2010/11
2011/12
79,671
79,858
2012/13
73,301
2013/14
2014/15
90,921
106,188
Viridor
Community support, sponsorship and donations*
(£m)
2010/11
2011/12
2012/13
2013/14
2014/15
10.1
10.4
10.7
13.5
12.8
* Including amounts distributed by the Landfill Communities Fund
41
www.pennonannualreport.co.uk/2015Strategic overviewSouth West WaterViridorGroupGovernanceFinancial statements Strategic report | Group
Sustainability – environmental,
economic and social Continued
Environmental impact
South West Water
From sustainable abstraction and award-winning catchment
management schemes to the investments made in
wastewater treatment and the steps taken to reduce
carbon emissions, South West Water plays a critical role in
protecting and enhancing the region’s natural environment.
The company’s ‘source to sea’ approach to the
management of water and wastewater favours innovation,
the use of sustainable solutions and an emphasis on
partnership working to deliver positive outcomes for the
region’s ecosystems and habitats.
As one of the three pillars of South West Water’s strategy,
an overview of the company’s ‘Pure Environment’ vision
is covered in the Chief Executive’s strategic review, on
page 18. This section of the report includes information on
progress made with Upstream Thinking, the company’s
catchment and water storage programme; bathing
water quality; pollution prevention; and wastewater
treatment standards.
Viridor
Viridor’s stated strategic purpose is to give resources new
life and its business strategy clearly focuses on transforming
waste into quality recycled materials and into essential
renewable energy. This is aligned with key long-term UK and
global trends (in policy, business and customer demand)
towards greater resource efficiency, energy security and
associated environmental benefits.
Recognising the importance of stewardship, since
2008 Viridor has also sought to restore and manage its
substantial landholdings (notably at closed landfill sites) in
accordance with the Wildlife Trusts’ Biodiversity Benchmark
Scheme (BBS).
The BBS provides a framework within which an organisation
can ensure that its impact is as positive as it possibly can
be by providing robust, independent verification of planning
and implementation of land management practices. The
benchmark is a standard for assessing and certifying an
organisation’s systems for achieving continual biodiversity
protection and enhancement on its landholdings and the
implementation of those systems.
By the end of 2014 Viridor had a total of six sites that had
achieved and retained the Biodiversity Benchmark. These
include sites of notable habitat importance such as two
heathland restorations (Tatchells and Warmwell in Dorset)
and a grassland restoration (Beddingham in Sussex).
Viridor currently has the fourth highest number of BBS
sites in the UK and is the leading company in its sector
for BBS certifications. It has set itself a target of achieving
three further accreditations, in line with its five year
biodiversity plan.
42
Pennon Group Plc Annual Report 2015 Economic impact
South West Water
Through the services it provides, the people it employs and
the suppliers it commissions, South West Water plays a
large and vital role in the regional economy.
The company has around 1,400 employees, including
engineers, scientists, customer service advisers, office staff
and other skilled workers. It also supports a further 6,000
jobs in the wider economy through the use of contractors
and other third party labour and support services.
With around eight million visitors to the region annually,
tourism is a significant industry which relies on a safe
and healthy environment. The company is committed to
delivering improvements to reduce its environmental impact,
and this year has focused on delivering bathing water
improvements ahead of new standards in 2015.
South West Water continues to operate a ‘mixed economy’
supply chain model that uses smaller specialist companies
alongside larger strategic partners. A culture of innovation
and sharing of best practice is encouraged, not least through
the company’s supplier forum and annual supplier awards.
South West Water provides dedicated and essential services
to the region’s 74,000 business and other non-household
customers and therefore has a crucial role to play in the
success of the local economy. This is underpinned by a
focus on helping individual customers make the best use of
the water they pay for, ensuring they receive a level of service
tailored to their needs and maintaining a reliable service
with minimal disruption. The company’s economic impact is
set to expand with the opening of the non-household retail
market in 2017, which will present opportunities for growth
outside the South West.
Viridor
Viridor’s committed investment programme totalling
£1.5 billion in energy recovery and materials recycling
facilities included £242 million of capital investment in
growth projects in 2014/15. During the year £217 million
was invested in vital energy recovery infrastructure and
£25 million was invested in leading-edge glass and plastics
recycling facilities at Newhouse and Rochester.
These projects continue to create significant direct and
indirect employment and training opportunities, including
construction jobs and supply chain opportunities. As
projects move from construction into operational phases,
long-term relationships are built with local companies
supplying services and contracts, which benefit the
local economy.
As an example, businesses in and around Glasgow have
already accessed £16 million in contracts and are set to
benefit from £9 million more due to the construction of
Viridor’s Glasgow Recycling and Renewable Energy Centre
(GRREC) in Polmadie. Small and medium-sized enterprises
(SMEs) and social enterprises are being encouraged to
take advantage of the opportunities on offer via a series of
business breakfasts and capacity building sessions in the
local community. The GRREC facility, incorporating recycling,
anaerobic digestion and gasification technology, is due to be
completed in 2016.
43
www.pennonannualreport.co.uk/2015Strategic overviewSouth West WaterViridorGroupGovernanceFinancial statements Strategic report | Group
Sustainability – environmental,
economic and social Continued
Social impact
South West Water
South West Water aims to have a positive impact on the
people and communities it serves.
In addition to the social benefits that stem from its
operational and service improvements, the company prides
itself on being a good neighbour and conducting itself in a
socially responsible way. This includes support for recreation
and leisure activities at its reservoirs (through the South
West Lakes Trust, an independent charity); the provision of
opportunities for members of the public to visit operational
sites; and support for education by providing educational
content, work experience opportunities and talks for various
schools, colleges and higher education centres around
the region.
The company sponsored Keep Britain Tidy’s Beach Care
project and employees were also encouraged to participate
in a series of volunteer days which included beach cleans
and support work at the CHICKS retreat on Dartmoor, which
provides respite breaks for disadvantaged children.
Through its speaker network, South West Water provided 28
presentations to schools and 11 talks to various community
groups and organisations. Over 200 customers were given
a chance to explore behind the scenes at Brokenbury Waste
Water Treatment Works in Brixham, Pynes Water Treatment
Works in Exeter and Roadford Dam as part of the national
Heritage Open Days initiative. South West Water’s ‘customer
caravan’ also attended a variety of events such as county
shows and festivals, offering a one-stop shop for customer
advice and support.
South West Water recognises that some customers struggle
to pay their bills. The company offers a range of advice and
support services and was among the first to roll out a social
tariff to support the most vulnerable customers. Further
information on affordability can be found on page 17.
44
Pennon Group Plc Annual Report 2015 The company will continue to offer and utilise its education
programmes and activities for maximum community benefit
and engagement. This will include ensuring community
access, quality, consistency and the sharing of best practice
throughout the Viridor visitor centres and educational
activities. This commitment is demonstrated at new
interactive centres at its Energy Recovery Facilities (ERFs) in
Cardiff and Ardley, and via its Go4SET flagship educational
partnership with the Engineering Development Trust
in Scotland.
Viridor also offers structured and transparent programmes
of community investment, linked to the company’s core
business. Such activities include an annually reviewed
programme of targeted charitable giving and sponsorship,
and employee volunteering opportunities.
Viridor’s achievement of a three star ranking in Business
in the Community’s CR Index recognises strong company
progress in relation to the business considering social and
environmental issues when making strategic decisions
such as investments, research and development, selection
of business partners and addressing the priorities of the
communities in which Viridor operates. Moreover, Viridor was
recognised for moves to link executive directors’ and senior
managers’ remuneration and bonuses to CR objectives and
targets, and for providing relevant CR training for employees,
senior managers and board members.
Viridor
A new community strategy has been adopted setting out
Viridor’s commitment to delivering lasting community benefit
and to meeting community priorities in service areas. The
strategy has been developed following consultation with its
community stakeholders and therefore reflects the views and
priorities of the communities in which Viridor operates, and
of which it is part. Clear progress was recognised with the
award of a three star ranking in Business in the Community’s
2015 Corporate Responsibility (CR) Index. This is a rigorous
and robust benchmarking tool which has helped hundreds
of companies measure and manage the progress they are
making to integrate responsible business practice into their
mainstream business at all levels.
For Viridor, the award marks a further milestone in its drive
towards sustainability. The three star ranking (two stars in
2013/14) also recognises the company’s significant progress
in a broad range of key areas including procurement,
partnerships, people, health, safety, energy, and
environmental management.
Feedback indicates that community stakeholders’
priorities and expectations of Viridor are broadly in areas
of employment, training and apprenticeships; community
funding; youth opportunities (including education and sport);
and reducing the risk of potential local impacts from Viridor
operations such as traffic, noise and odour.
Among its strategic community objectives, Viridor commits
to be a good neighbour at all of its operational facilities
through the maintenance of quality operations and
services, and via high levels of compliance and community
engagement. It aims to apply similar principles and
standards of customer care to community stakeholders as it
does for its customers.
VIRIDOR STREET TREES, MANCHESTER
Viridor Street Trees is Viridor’s flagship sponsorship project in its
Northern region. As part of the partnership with the environmental
charity Red Rose Forest, launched in 2011, Viridor seeks to reward
its key recycling customers in Greater Manchester and the North West
by helping them to give something back to their local communities.
The partnership also supports the Government’s national tree planting campaign, The Big Tree
Plant, which saw one million trees being planted in the UK over the past five years. Individual
trees between three and eight metres tall are planted on residential streets, with a plaque or
marker to recognise the support of Viridor, Red Rose Forest and the recycling customer. Where
practicable, these projects are undertaken in the vicinity of the recycling customer’s business
activities, maximising awareness for Viridor and its customer.
www.pennonannualreport.co.uk/2015
45
Strategic overviewSouth West WaterViridorGroupGovernanceFinancial statements Strategic report | Group
Sustainability – environmental,
economic and social Continued
We aspire to leadership in minimising emissions that contribute to
climate change and we develop climate change adaption strategies
Pennon Group Plc greenhouse gas emissions (tCO2e)(1)
Scope 1
Scope 2
Scope 3
Total gross emissions
Green tariff electricity offset
Exported renewable energy reduction (up to total amount of electricity
purchased and consumed by organisation)
Total annual net emissions
Biogenic emissions outside of scopes
2014/15
1,105,242
148,917
56,966
1,311,125
(1,018)
(147,899)
1,162,208
1,214,455
2013/14
1,069,257
136,536
55,691
1,261,484
0
(136,536)
1,124,948
1,089,605
Intensity measure: tCO2e (gross scope 1+2)/ £100,000 revenue
92 tCO2e/£100,000
revenue
91 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.
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.
Scope 3 (other indirect emissions) Emissions that are a
consequence of our actions, which occur at sources that we do not
own or control and that are not classed as Scope 2 emissions.
Notes
Change in emissions
Our overall net emissions increased by 3.3% between 2013/14 and
2014/15, largely as a result of the addition of Viridor’s new Energy
Recovery Facilities that became fully operational during the course
of the year. We also calculated a marginal increase in our emissions
intensity measure of tCO2e/£100,000 revenue as a result of the
Group’s emissions growing at a faster rate than its revenue.
Methodology and approach
We have modified the methodology we use for calculating our
emissions for 2014/15 by adopting the ‘equity share’ approach for
Viridor companies. Under the Environmental Reporting Guidelines
published by the Department for Environment and Rural Affairs in
June 2013, the ‘equity share’ method reflects the extent of the rights
a company has to the risks and rewards from an operation based
on its equity interest. For Viridor, this means that emissions from
joint venture operations can be accurately attributed to the company
in proportion to the percentage of Viridor’s equity holding. The
remaining companies within the Group continue to use the ‘financial
control’ approach. This is the conventional method for parent
companies and subsidiaries within a group that have the ability to
direct financial and operating policies and retain the majority of the
organisation’s risk and rewards.
In order to maintain comparability between reporting years, we have
rebased our 2013/14 reportable emissions to reflect the equity share
methodology for Viridor.
Quantification and reporting
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.
Organisational boundary
As explained above, the emissions listed here cover the Pennon
Group of companies using the financial control approach, with the
exception of Viridor, which uses the equity share approach.
Operational scopes
We have measured our Scope 1 and 2 emissions and certain 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 verified
by Strategic Management Consultants who tested the assumptions,
methods and procedures that are followed in the development
of the reported data and audited that data to ensure accuracy
and consistency.
Carbon offsets
We rely on self-generated renewable energy to reduce our overall
Scope 2 emissions. We supplement this with power purchase
contracts from third party renewable energy suppliers through
private wire arrangements where opportunities exist near our sites.
Renewable energy export
Pennon Group self-generates more electricity than it uses and much
of its renewable electricity generation is exported to the grid. We
account for this exported renewable electricity in our net emissions
measure where we subtract ‘emissions credits’ up to the limit of our
gross volume of Scope 2 emissions.
(1) Tonnes of carbon dioxide equivalent.
46
Pennon Group Plc Annual Report 2015 South West Water
South West Water continues to focus on reducing its carbon
emissions through a combination of asset optimisation,
renewable energy generation and energy-saving initiatives.
Overall energy use for 2014/15 at 260.68 GWh was
marginally lower than the previous year (2013/14 264.5 GWh)
despite the drier than average summer in 2014 which
increased the need for energy-intensive water pumping.
Although South West Water recorded a reduction in its
energy usage, the company’s carbon emissions rose
between 2013/14 and 2014/15. This was largely as a result
of an increase in the Government’s electricity grid average
emissions conversion factor which is used to calculate
emissions from electricity usage.
Renewable energy usage during 2014/15 was 18.5 GWh,
an improvement on the company’s output from the previous
year (2013/14 17.4 GWh). A number of renewable energy
installations were taken offline for essential maintenance
during 2014/15. The improvements made to these sites,
along with investment in new installations, means the
company is now able to generate 25 GWh – around 10% of
its annual energy needs.
Furthermore, South West Water is building links with
a number of third party renewable energy providers in
order to increase the proportion of energy it draws from
renewable sources.
Viridor
Viridor’s 2020 goal is to reduce its carbon footprint by 35%
from a 2013 baseline. This is particularly challenging for the
company as it continues with a programme of wind-down
and aftercare in the operating landfill business while bringing
a fleet of ERFs into operation. Recycling facilities are also
energy intensive.
The increase in emissions between 2013/14 and 2014/15
is primarily as a result of the addition of new ERFs that
became fully operational during 2014/15. Emissions from
Viridor’s landfill operations decreased between 2013/14
and 2014/15.
Key trends in Viridor’s operational carbon footprint include:
• recycling and energy consumption – the company’s
aspiration is to become 20% more efficient than its
2013 baseline in terms of the fossil fuel-based energy
used, and Viridor continues to lead the sector in the
implementation of the ISO 50001 Energy Management
Standard. As Viridor continues to invest in recycling
technology, its energy consumption, mainly electricity, has
continued to grow. Although energy intensive for Viridor,
the displacement of virgin materials in manufacturing
supply chains with recycled material contributes to
significant reductions in embodied carbon across product
lifecycles (although of course outside reporting scopes)
• transport emissions (road and rail) – these continue
to be reduced through fleet management activities and
greater use of rail movements where possible
• landfill – the largest contribution to Viridor’s carbon
footprint, these continue to decline as inputs reduce,
biodegradable waste is diverted and sites close
• energy generation (ERF and anaerobic digestion) –
although biogenic emissions (over 60% of ERF inputs)
are out of scope, with an increasing fleet of ERFs this
will continue to become a more significant proportion
of the company’s carbon footprint. Measured using
tCO2e per tonne of waste input, ERF treatment delivers a
step-change improvement over landfill in the long term.
47
www.pennonannualreport.co.uk/2015Strategic overviewSouth West WaterViridorGroupGovernanceFinancial statements Strategic report | Group
Sustainability – environmental,
economic and social Continued
We aspire to leadership in all aspects of waste prevention and resource efficiency
Renewable energy generation (GWh)
Viridor
South West Water
2010/11
2011/12
2012/13
2013/14
2014/15
752
760
820
778
933
13.8
14.7
19.3
17.4
18.5
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.
South West Water recycling volumes
(tonnes of dry solids)
Viridor recycling volumes traded
(million tonnes)
2010/11
2011/12
2012/13
2013/14
52,400
54,612
45,304
34,918
2014/15
41,300
2010/11
2011/12
2012/13
2013/14
2014/15
1.7
1.8
1.9
1.8
1.7
South West Water
Resource efficiency is critical to the success of South West
Water’s operations. First and foremost, the company does
everything it can to make the best use of the raw water it
treats and then distributes. The company’s achievements in
this area, which include 18 consecutive years without water
restrictions, are covered in the Chief Executive’s strategic
review on page 16.
Where appropriate, the company favours the use of
innovation and new technologies to deliver an efficient use
of resources. This spans everything from the implementation
of remote technologies to better manage assets and
employees to the adoption of low-cost sustainable
techniques in areas such as urban wastewater management
(Downstream Thinking). The company’s K6 investment
programme includes a new water treatment works for
Plymouth and its surrounding area, which will use less
energy and chemicals than its traditional counterparts. This
will be achieved through the use of cutting edge treatment
technologies that were piloted during K5.
There are inevitable by-products of South West Water’s
operations and the company does its best to recycle and
reuse where this is feasible. Sludge is recycled for use
as fertiliser on agricultural land. Strict regulations on this
practice continue to be adhered to. South West Water also
works with its contractors to ensure that any waste materials
from construction work are recycled or disposed of in a
responsible way.
Viridor
Viridor works closely with its clients and with communities
to help educate and inform residents and businesses
about waste prevention and best practice in recycling and
resource efficiency.
In Greater Manchester, an updated communications plan for
2015-2018 has been developed to drive behavioural change
and increase recycling. The communications plan will be
focused strongly on campaigns, education programmes and
online support communications to enable waste prevention
and higher levels of recycling in targeted residential areas.
These activities are all based on auditable, tested and
proven techniques, including extensive EU-funded activities
conducted between Viridor and its partner local authorities
that have further established best practice in this area. The
programme includes the ongoing and award-winning ‘Right
Stuff, Right Bin’ campaign.
In Somerset, Viridor has closely supported The Somerset
Waste Partnership’s ongoing waste awareness campaigns,
aimed at raising participation and quality levels in recycling
schemes. This has included a widely recognised incentive
scheme to encourage people to bring waste electrical
and electronic equipment (WEEE) items to Household
Waste Recycling Centres (HWRCs), and has also included
establishing an award-winning and successful reuse shop
at Priorswood HWRC. This programme continues to be
supported and augmented by the Carymoor Environmental
Education Centre (of which Viridor is the major sponsor),
which delivers a model of excellence for environmental
and waste awareness programmes for schools and
community groups.
With regard to Viridor’s own waste awareness, prevention
and recycling programme, recycling systems have been
established at 21 of its biggest sites. Roll-out to further sites
will begin later in 2015.
48
Pennon Group Plc Annual Report 2015 Energy efficiency at Pennon Group
The Group has large energy requirements so energy
efficiency plays a key role in reducing costs.
In addition to its large-scale energy business, Viridor is
keen to promote energy efficiency internally and last year
invested in a low-energy lighting solution. This has slashed
energy consumption from illumination across 26 sites. As
well as saving money, boosting light quality and reducing
maintenance requirements, Viridor’s investment in new LED
lighting has further advanced its overall commitment to
improving resource efficiency and will be paid back within
just two years. Moreover, the company is planning a second
phase of the project to install further low energy lighting
across 10 of its sites in Manchester.
Renewable energy generation by South West Water,
primarily for its own use, continues to grow through a
combination of wind, hydro, solar and combined heat
and power. 20% of the power needs for Restormel water
treatment works (the largest water treatment works in
Cornwall) were met using renewable energy during 2014/15.
In-house energy-saving initiatives and the promotion of
energy efficiency in the workplace also play their part.
Like Viridor, South West Water is moving to LED lighting,
with installation at the company’s headquarters due for
completion in the coming year.
49
www.pennonannualreport.co.uk/2015Strategic overviewSouth West WaterViridorGroupGovernanceFinancial statements Strategic report | Group
Employee well-being and engagement
We aim to develop and motivate our employees, treat them
fairly and ensure that they are fully engaged in all aspects of the
Pennon Group’s objectives
Employee engagement surveys were carried out across
the Group during the year, with responses demonstrating
positive levels of engagement in many areas within the
Group. Action plans covering areas that scored less well are
being progressed.
South West Water and Viridor have each played a key role
in establishing educational facilities and courses designed to
provide a pipeline of talented prospective employees, and
both run successful apprenticeship schemes. In total, 29
new apprenticeships have been created within the Group.
In 2014 South West Water was recognised in the prestigious
Top 100 Apprenticeship Employers list which is compiled
annually by the National Apprenticeship Service.
Pennon’s success is fundamentally down to its employees.
We seek to recruit talented and committed people and we
provide training packages to equip them with the skills they
need to deliver the Group’s objectives.
The strategies of South West Water and Viridor are designed
to attract, nurture and retain a high calibre workforce. The
companies have set out a clear commitment to training
and development, employee engagement, human rights,
equality and diversity, and ongoing support through a range
of workplace policies. These include policies covering health
and safety, equal opportunities, ethics, employee relations
and family-friendly practices such as flexible working and
parental leave, and schemes designed to promote the health
and well-being of employees. The Group’s commitment to
ensuring the human rights of its employees are not infringed
extends to those of its suppliers. Supplier codes of conduct
are in place to ensure that people are treated fairly and with
respect and dignity. Further information is provided on pages
19 and 27.
As at 31 March 2015, the gender breakdown of the
Group’s workforce was as follows:
Gender diversity (%)
women
men
Employees
924
Employees
Senior management
11
Senior management
56
Board
Board
2
19.4
3,836
80.6
16.4
83.6
25.0
75.0
6
Further information on South West Water’s and
Viridor’s people strategies and achievements
during the year can be found on pages 18 and 27.
50
Pennon Group Plc Annual Report 2015 We strive for the highest standards of health and safety in the
workplace so as to minimise accidents, incidents and lost time
The Group remains committed to achieving and maintaining improvements in
health, safety and well-being. Both South West Water and Viridor continue to make
good progress in embedding health and safety within each organisation’s culture.
South West Water
RIDDOR(1) incidence rate per
100,000 employees
Viridor
RIDDOR(1) incidence rate per
100,000 employees
2010
2011
2012
2013
565(2)
243(2)
2014
552(2)
2,008
1,628
2010
2011
2012
2013
2014
1,238
1,197(2)
1,429(2)
889(2)
2,165
Actual number of incidents was 7 (3 in 2013)
Actual number of incidents was 28 (37 in 2013)
South West Water
The health and safety of employees is paramount and South
West Water continually reviews its policies and processes in
order to minimise the number of incidents. During 2014/15 a
major review of operational sites was undertaken to risk assess
our activities and identify and prevent any potential hazards.
Viridor
Viridor has set the goal of making a step change in its health
and safety performance and in the way it manages health,
safety and welfare throughout the business. The aim is to
create and maintain a ‘zero incidents’ culture at all sites
and facilities.
The company’s accident frequency rate (measured per
100,000 man hours) has been successfully reduced over
the past 12 months. However there were seven reportable
incidents during the year, which is above the company’s
target threshold.
Work continues to reduce the likelihood and severity of any
incident, and the company remains focused on developing
a proactive health and safety culture. This includes in-house
initiatives such as TAP (‘Think, Act, Prevent’) and SEC
(‘Safety, Environment, Customer’). Furthermore, South
West Water is enhancing its health and safety management
systems to ensure the company is operating in line with
externally accredited standards of best practice at all times.
South West Water continues to promote its health and safety
strategy through a steering group comprising a cross section
of directors, managers and employee representatives who
are tasked with driving health and safety improvements
across the business.
Viridor’s ‘Stop & Think’ campaign is at the heart of its
drive to improve behavioural safety and bring down
accident rates.
Clear, high profile signage on site is but one of the elements
to help drive positive change. The ‘Stop & Think’ concept
applies to all users of Viridor’s sites, not only employees.
Health and safety compliant systems, policies and
procedures are augmented by continual training, toolbox
talks and briefings, and are overseen by qualified and
experienced health and safety advisers.
Other practical improvements such as new guards being
added to Viridor’s London collection vehicles to improve
cyclist safety, and high profile roles for the company’s
Representatives of Employee Safety (RESs), are being
implemented wherever identified.
Bournemouth Water was acquired post year-end. Its approach to conservation and the
environment is set out on their website, www.bournemouthwater.co.uk.
This strategic report consisting of pages 4 to 51 was approved by the Board on 22 June 2015.
By Order of the Board
Kenneth Woodier
Group Company Secretary
22 June 2015
(1) Reporting of Injuries, Diseases and Dangerous Occurrences Regulations
(2) Since 2012 reportable incidents have been reported on seven days’ absence;
in previous years they were reported on three days’ absence.
51
www.pennonannualreport.co.uk/2015Strategic overviewSouth West WaterViridorGroupGovernanceFinancial statements Governance and remuneration
Contents
Chairman’s letter to shareholders
Board of Directors
The Board and its governance framework
The Directors, their independence and duties
Operation of the Board in the year and its activities
Performance evaluation
Dealing with Directors’ conflicts of interest
Board Committees’ terms of reference
Internal control
Wider aspects of internal control
Risk identification and management
Internal control framework
Internal control review
Reports of the Board’s Committees
The Audit Committee
The Sustainability Committee
The Nomination Committee
The Remuneration Committee
Directors’ remuneration report
Directors’ report – other statutory disclosures
53
56
59
59
60
60
60
61
61
61
61
62
67
70
71
72
93
5252
Pennon Group Plc Annual Report 2015Governance and remunerationPennon Group Plc Annual Report 2015
Strategic
overview
South West
Water
Viridor
Group
Governance
Financial
statements
Chairman’s letter
to shareholders
Dear Shareholder
I am pleased to introduce my final corporate governance
report on behalf of the Board, covering Pennon Group’s
2014/15 financial year.
As explained on pages 10 and 11 strong governance is
one of the core areas through which we create shareholder
value and build and maintain a sustainable business. Part
of the role of the Chairman and the Board is to ensure that
Pennon Group operates to the highest standards of corporate
governance. This will continue to be a priority for the Board when
Sir John Parker takes on the role of Chairman following the 2015
Annual General Meeting.
The Annual Report continues to be the principal method of
reporting to our shareholders on the Board’s governance policies
and the practical application of the principles of good corporate
governance set out in the UK Corporate Governance Code (the
UK Code). The UK Code is published on the Financial Reporting
Council website, www.frc.org.uk. In accordance with the FRC’s
requirements, we have reported against the September 2012
version of the Code.
www.pennonannualreport.co.uk/2015
53
53
www.pennonannualreport.co.uk/2015 Chairman’s letter
to shareholders
Continued
Role of the Board and its effectiveness
My primary role as Chairman has been 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,
the communities in which we operate and other interested
stakeholders including, in particular, Ofwat, the Drinking
Water Inspectorate and the regulatory bodies responsible for
the environment in the UK.
I believe we continue to demonstrate that we have good
governance in place and that we operate effectively and
cohesively as a Board. Each year a detailed performance
evaluation is carried out of the Board and each of the
Committees as well as of the Directors and the Group
General Counsel & Company Secretary. The aim is to
identify further areas for improvement and ensure that
our knowledge, skills and methods remain relevant as the
Group’s businesses develop and grow. Further details of
the review, which was facilitated by an external governance
consultancy, are set out later in this report.
It remains vital that all Board members continue to have
appropriate up to date knowledge and understanding of
both South West Water, as it enters into a new regulatory
period following Ofwat’s Final Determination in December
2014, confirming the award of ‘enhanced’ status for the
2015-2020 business plan; and Viridor, as it implements its
strategic reorientation around its ‘Energy’ and ‘Recycling &
Resources’ businesses.
Accordingly I have ensured that the Board has received
presentations in the past year from senior management on,
among other matters, the strategy for delivery of South West
Water’s business plan for the next regulatory period and, in
respect of Viridor, developments in the recycling sector and
progress in the construction and operational performance of
its portfolio of Energy Recovery Facilities.
Governance and subsidiary boards
During the year South West Water and Viridor continued to
operate under the enhanced governance frameworks that
were put in place during 2013/14. For South West Water,
this demonstrates our continued support for Ofwat’s board
leadership, transparency and governance principles which
were published in January 2014. Our corporate governance
framework, including that of our subsidiaries, is set out on
page 58 of this governance report.
Governance and corporate reporting
Last year we revised our approach to governance and
corporate reporting in accordance with the requirements
of the UK Code and the new reporting regulations that had
come into effect. We have broadly maintained the same
methodology this year but within those parameters have
sought to move to a more integrated approach to corporate
reporting, to present a holistic view of the business and to
better reflect that sustainability is core to Pennon’s strategy,
business model and the creation of value. As such, there
is no separate sustainability report this year but rather the
structure and content of the strategic report as a whole is
derived from the strategic priorities through which the Group,
via its two businesses, creates shareholder value. These are
set out on page 11.
Bournemouth Water
Following our acquisition of Bournemouth Water we are
in discussion with the Competition and Markets Authority
regarding ongoing governance and reporting in respect of
Bournemouth Water’s business.
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overview
South West
Water
Viridor
Group
Governance
Financial
statements
Shareholder engagement
Appropriate and regular communication with our
shareholders is recognised by the Board as vital to ensuring
that we are able to explain our actions and that shareholders
provide feedback on the matters they consider to be
important and any issues which require addressing.
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 principles set out in the UK Corporate Governance
Code (the 2012 edition) with no exceptions to report.
Regular dialogue with the Company’s institutional
shareholders is maintained through a comprehensive
investor relations programme. During the year some 80
meetings and conference calls were held with institutional
shareholders and prospective shareholders. All were
attended by the Group Director of Finance and the
Company’s Investor Relations Manager. The Chief Executive
of South West Water, the Chief Executive of Viridor and I
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 shareholders.
Those shareholders who 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 2015 AGM on 30 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.
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 and
Transparency Rules 7.1 and 7.2 and cover the work of our
Board and its Committees, our internal control systems
and procedures including risk management, our corporate
governance statements relating to share capital and control,
our confirmation of the Company as a going concern and
Directors’ responsibility statements. Finally, in accordance
with reporting requirements, on page 95 the Board confirms
to shareholders that the Annual Report and 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
22 June 2015
www.pennonannualreport.co.uk/2015
55
55
www.pennonannualreport.co.uk/2015 Board of Directors
Composition*
(%)
2014
2015
Executive
43
Non-executive (inc. Chairman)
57
Executive
37.5
Non-executive (inc. Chairman)
62.5
Male
Female
14
Male
Female
25
* As at 31 March
86
75
Experience*
(%)
Industry
Finance
Governance
14
Industry
Finance
Governance
12.5
Tenure*
(%)
0-3 years
4-6 years
14
7-10+ years
0-3 years
4-6 years
12.5
7-10+ years
2014
2015
43
43
37.5
50
2014
2015
29
57
50
37.5
The Board considers each of its Non-executive Directors to be independent in accordance with the UK Corporate
Governance Code.
The Board believes its Directors have an appropriate range of experience to oversee the business of the Group.
The Board’s target to achieve 25% female representation was achieved early, before the year-end. During a period
of transition on the Board, the female representation has fallen to 22% but will increase to 29% following the AGM.
Chairman and Deputy Chairman
Sir John Parker currently serves as Deputy Chairman and Chairman Designate pending the retirement
of Ken Harvey following the 2015 AGM.
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.
Ken is due to retire following the 2015 Annual General Meeting.
Sir John Parker
GBE, FREng, DSc (Eng), ScD (Hon), DSc (Hon),
DUniv (Hon), FRINA
Deputy Chairman (Non-executive)
Appointed on 1 April 2015
Committees: Nomination
Sir John is the chairman of Anglo American Plc. He is also a
non-executive director of Carnival Corporation and Airbus Group
and deputy chairman of DP World. Sir John is a Visiting Fellow of
the University of Oxford and was president of the Royal Academy
of Engineering from 2011 to 2014. He was previously the chairman
of National Grid Plc, senior non-executive director and chair of the
Court of the Bank of England, joint chair of Mondi and chair of BVT
and P&O Plc.
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Strategic
overview
South West
Water
Viridor
Group
Governance
Financial
statements
Martin David Angle
BSc Hons, FCA, MCSI
Gerard Dominic Connell
MA
Neil Cooper
BSc Hons, FCMA
Gill Rider
CB, PhD, FCIPD
Non-executive Director
Appointed 1 September 2014
Committees: Audit (Chairman),
Sustainability, Nomination,
Remuneration
Neil is currently the group
finance director of William
Hill Plc (but is due to leave
William Hill and become the
chief financial officer of Barratt
Developments Plc on a date
yet to be determined). He was
previously group finance director
of Bovis Homes Group Plc and
also held senior finance roles
with Whitbread Plc, worked for
PricewaterhouseCoopers as a
management consultant and
held a number of roles with
Reckitt & Colman Plc.
Non-executive Director
Appointed on 1 December 2008
Committees: Audit,
Remuneration (Chairman),
Sustainability, Nomination
Martin currently holds
non-executive directorships
with Savills Plc, 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 had 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.
Executive Directors
Non-executive Director
Senior Independent
Director
Appointed on 1 October 2003
Committees: Audit, 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, a council
member of the Science &
Technology Facilities Council,
and a non-executive director
and chair of the audit committee
at the Financial Ombudsman
Service. Previously he was group
finance director of Wincanton
Plc, a director of Hill Samuel
and a managing director of
Bankers Trust.
Gerard is due to retire
following the 2015 Annual
General Meeting.
Susan Jane Davy
BSc Hons, ACA
Christopher Loughlin
BSc Hons, MICE, CEng, MBA
Ian James McAulay
BEng, CEng, MICE, MCIWEM
Group Director of Finance
Appointed on 1 February 2015
Susan was previously finance
and regulatory director of
South West Water Limited,
a position to which she was
appointed in August 2007.
Prior to joining Pennon Group
she held a number of senior
posts with Yorkshire Water
including head of regulation and
head of finance in their Waste
Water Unit and was head of
finance for Brey Utilities, a joint
venture company owned by
Yorkshire Water and Earthtech
Engineering Limited. She is
a council member of Water
UK and a graduate qualified
chartered accountant.
Chief Executive,
South West Water
Appointed on 1 August 2006
Committees: Sustainability
Chris was previously chief
operating officer with Lloyds
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 WaterAid. He is a board
member (and past president) of
the Institute of Water.
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
& Hogg in Glasgow and
subsequently Montgomery
Watson, which merged in
2001 with Harza to form MWH
Global. He is a member of the
board of the Environmental
Services Association.
Non-executive Director
Appointed on 1 September 2012
Committees: Audit,
Remuneration, Sustainability
(Chairman), Nomination
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 the 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.
Gill is due to become the
Senior Independent Director
after Gerard’s retirement.
Group Company
Secretary
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.
www.pennonannualreport.co.uk/2015
57
57
www.pennonannualreport.co.uk/2015 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’ schedule
setting out its responsibilities and each committee has a detailed terms
of reference setting out its responsibilities, accountabilities and reporting
obligations to each board and, in respect of the subsidiary board
committees, how they operate in conjunction with the corresponding
Pennon Committee. Further details of the responsibilities of the Pennon
Group Board Committees are set out in the report of each Committee
on pages 62 to 71. These, together with the risk management and
internal control frameworks described on page 61, 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:
5 Non-executive Directors
4 Executive Directors
Viridor Board
Membership:
4 Non-executive Directors
7 Executive Directors
Audit Committee
Personnel Committee
Remuneration Committee
Governance Committee
Nomination Committee
* Board and Committee membership is shown
following the retirements that are due to take place
after the 2015 AGM
Sustainability Committee
Pending the decision of the Competition
and Markets Authority in respect of the
merger reference, Bournemouth Water
has not been included in this framework.
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Strategic
overview
South West
Water
Viridor
Group
Governance
Financial
statements
Operation of the Board in the year and its activities
The Directors and their attendance at the 10 scheduled
meetings of the Board during 2014/15 are shown below:
Members
Appointment date
Attendance
Kenneth Harvey
(Chairman)
Non-executive Directors:
March 1997
10/10
Martin Angle
December 2008
Gerard Connell
October 2003
Neil Cooper
Gill Rider
Executive Directors:
Susan Davy
David Dupont*
September 2014
September 2012
February 2015
March 2002
Christopher Loughlin
August 2006
Ian McAulay
September 2013
* David Dupont retired on 31 January 2015
10/10
9/10
6/6
10/10
2/2
8/8
10/10
10/10
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.
The Directors, their independence and duties
The Board of Directors at the end of the year comprised the
Chairman, three Executive Directors and four Non-executive
Directors. All of the Non-executive Directors were considered
by the Board to be independent throughout the year. None
of the relationships or circumstances set out in provision
B.1.1 of the UK Corporate Governance Code (2012 edition)
(the UK Code) applied to them other than in respect of
Gerard Connell who, since the 2013 Annual General
Meeting, has served on the Board for more than nine years
since his first election. Neil Cooper was appointed by
the Board as Gerard’s successor on 1 September 2014.
Following a suitable handover period in respect of the Audit
Committee chairmanship in particular, Gerard Connell will
retire from the Board following this year’s Annual General
Meeting. Throughout the year, Gerard was determined by
the Board to be independent and the Board is satisfied that
he does and will continue to demonstrate independence of
character and judgement in the performance of his role on
the Board until the date of his retirement.
Sir John Parker, who was appointed to the Board on
1 April 2015 as Deputy Chairman, will succeed Ken Harvey
as Chairman following the 2015 Annual General Meeting.
The Board considers that Sir John, as a Non-executive
Director, is independent and that he will continue to meet
the independence criteria set out in the UK Code upon his
appointment as Chairman.
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 56
and 57 demonstrate collectively a broad range of business,
financial and other relevant experience. Gerard Connell is the
Senior Independent 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 will
be succeeded by Gill Rider as Senior Independent Director
following his retirement.
Neil Cooper is chairman of the Audit Committee and in
accordance with the UK Code and FCA Disclosure and
Transparency Rule 7.1.1 he has recent and relevant financial
experience (as set out in his biography on page 57). Martin
Angle is also a member of the Audit Committee and he has
relevant financial experience as set out in his biography on
page 57.
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.
Following the acquisition of Bournemouth Water,
Chris Loughlin and Gerard Connell were appointed as
non-executive directors on the Bournemouth Water board.
www.pennonannualreport.co.uk/2015
59
59
www.pennonannualreport.co.uk/2015 The Board and its governance framework
Continued
Performance evaluation
The Board has well developed internal procedures to
evaluate the performance of the whole Board, each
Committee, the Chairman, each individual Director and
the Group General Counsel & Company Secretary.
The evaluation of the performance of the Board and its
Committees was administered by an external governance
consultancy, Lintstock. All participants’ views were sought
via an online questionnaire on a range of questions which
were designed by the Chairman and the Group General
Counsel & Company Secretary in conjunction with Lintstock
to ensure objective evaluation of performance. Responses
were then analysed and summarised by Lintstock for the
Board and each Committee to consider and determine
possible improvement areas. Apart from providing services
relating to subsidiary boards’ and committees’ and pension
scheme boards’ and committees’ performance evaluation,
Lintstock has no other connection with the Company.
The Board considered the evaluation which it believed was
a thorough assessment of Board performance. Overall it
was not considered that there were any major matters which
required attention but it was recognised that at a time of
transition for the Board it was important to focus further on
strategy in conjunction with the new Chairman.
The areas for action that had been identified as a result of
the 2014 performance evaluation (namely the allocation
of more time for consideration of strategic matters, the
appointment of an additional Non-executive Director, a
review of induction arrangements for new Directors, and
developing closer links with subsidiary boards) had been
followed up appropriately during the year.
The Chairman’s performance was evaluated
separately by the Non-executive Directors, led by
the Senior Independent Director.
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’ 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 71 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.
In accordance with the governance framework set out on
page 58, the Board has a schedule of matters reserved for its
decision, some of which may be escalated by the subsidiary
boards of South West Water and Viridor for approval. The
Board delegates more detailed consideration of certain
matters to Board Committees, to the Executive Directors
or to the Group General Counsel & Company Secretary, as
appropriate. The matters reserved to the Board include:
• approval of the preliminary and half year
results announcements;
• the 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 the Board and its Committees and to the
subsidiary boards and their committees.
The Pennon Group Board and the boards of South West
Water and Viridor liaise on strategic and operational matters.
In addition the subsidiary board committees liaise with the
Pennon Committees as appropriate to ensure a consistent
Group-wide approach to governance matters.
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 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.
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.
Newly appointed Directors receive a formal induction which
includes an explanation of the Group structure, regulatory
and legal issues, the Group governance framework and
policies, the Group’s approach to risk management and
its principal risks (financial and non-financial), duties and
obligations (including protocols around conflicts of interest
and dealing in shares), and the current activities of the
Board and its Committees. 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.
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Pennon Group Plc Annual Report 2015Governance and remunerationPennon Group Plc Annual Report 2015 Strategic
overview
South West
Water
Viridor
Group
Governance
Financial
statements
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
2014/15 and up to the date of the approval of this Annual
Report and Accounts.
The Board confirms that it continues to apply procedures
in accordance with the UK Code and the ‘Guidance on
Internal Control’ (the Turnbull Guidance) which suggests
means of applying the internal control provisions of the
Code. As part of these procedures the Board has a Group
risk management policy which provides for the identification
of key risks including environmental, social and governance
(ESG) 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.
The Group’s system of internal control is being further
reviewed to take account of the FRC’s new ‘Guidance on
Risk Management, Internal Control and Related Financial
and Business Reporting’ (September 2014), which will be
reported against in next year’s Annual Report.
Risk identification and management
A full risk and control assessment is undertaken annually
by the management of each business to identify financial
and non-financial risks, including ESG 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 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.
Under the Group risk management policy, 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.
The Group also has policies covering suspected fraud,
anti-bribery and whistleblowing, and we thoroughly
investigate any allegations of misconduct and irregularity and
consider the implications for our control environment. In the
normal course of business, investigations into irregularities
may be ongoing as of the date of the approval of the
financial statements.
All of these processes serve to ensure that a culture of
effective control and risk management is embedded within
the organisation and that the Group is in a position to react
appropriately to new risks as they arise. Details of key risks
affecting the Group are set out in the strategic report on
pages 34 to 39.
Internal control framework
The Group 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.
Internal control review
An evaluation of the effectiveness of overall internal controls
and 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 2014/15 and up to the date of
approval of this Annual Report and Accounts, both the Audit
Committee and the Board were satisfied with the effectiveness
of the Group risk management policy and the internal control
framework and their operation within the Group.
Further information on the internal control review is set out in
the Audit Committee report on page 62.
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Board’s Committees
The Audit Committee
Dear Shareholder
As the new chairman of the Audit Committee since
September 2014 I am pleased to introduce the report on the
Committee’s activities during the year. I see the Committee
as an essential part of the Board’s toolkit in ensuring good
governance: overseeing the effectiveness and integrity of
Group financial reporting, internal control processes and risk
management activities.
The work of the Audit Committee has, therefore, continued
to be focused on the appropriateness of the Group’s
financial reporting, including accounting judgements, the
review of key risks across the Group and the challenging and
testing of the Group’s internal control processes including
risk management and internal audit. The Committee has
also reviewed a number of activities associated with its key
responsibilities to ensure the risk environment and levels of
risk across the Group were appropriately managed. These
included the Company’s foreign exchange policy, recyclate
trading controls, financial instruments risk appetite, treasury
risk and our subsidiaries’ information security frameworks.
Due to a change in our external auditor, during the year we
oversaw the arrangements made for the introduction of the
new auditor to the systems and processes operated within
the Group and the handover of knowledge and experience
of the retiring auditors.
As part of the year-end reporting review process we reviewed
and challenged the key judgements of management in
relation to a range of matters, including the Viridor impairment
review, bad and doubtful debt provisioning, tax provisioning
and revenue recognition. Significant matters considered by
the Committee both during the year and in relation to the
year-end financial statements are explained in this report.
Finally I would like to thank my predecessor, Gerard Connell,
for his assistance through the handover of the chairmanship
of the Committee.
Neil Cooper
Audit Committee Chairman
Audit Committee composition and meetings
The membership of the Committee, together with
appointment dates and attendance at meetings during
2014/15 is set out below:
Members
Appointment date
Attendance
Neil Cooper
(Committee Chairman)
September 2014
Gerard Connell*
October 2003
Martin Angle
December 2008
Gill Rider
September 2012
3/3
5/5
5/5
5/5
* Retiring on 31 July 2015
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 Director, South West Water
• Finance Director, Viridor
• Group Financial Controller
• Group Audit Manager
• External auditor.
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 Neil Cooper, Gerard Connell and Martin Angle all have
recent and relevant financial experience. In addition, Gerard
Connell, who has been chairman of the Audit Committee
from October 2003 until August 2014, has been determined
by the Board as continuing to be independent in character
and judgement notwithstanding his length of tenure. Details
of each Director’s significant current and prior appointments
are set out on page 57.
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.
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Significant matters considered by the Committee
The Committee’s annual calendar of business assists in ensuring that it manages its affairs efficiently and effectively
throughout the year concentrating on the key matters that affect the Group.
The most significant matters that the Committee considered and made decisions on during the year are set out below:
Financial reporting
• Monitored the integrity of the financial statements of the Group and the half year and full year results
announcements relating to the Group’s financial performance including reviewing and discussing significant
financial reporting judgements contained in the statements.
• Reviewed and recommended to the Board the approval of the 2013/14 preliminary results announcement,
the 2014 Annual Report and Accounts including the financial statements and the 2014/15 half year
results announcement.
• Considered and approved a process for confirming and recommending to the Board that the 2014/15 Annual
Report and Accounts including the financial statements is fair, balanced and understandable in accordance with
reporting requirements.
Internal control and
compliance
• Reviewed quarterly internal audit reports on audit reviews across the Group during the year including on debt
collections and credit management, transport control environment, joint venture auditing and capital expenditure
planning, scoping and costing, capital expenditure delivery, energy management and contract management.
External auditor
• Reviewed the internal control framework for the Group.
• Monitored performance on specific matters including Viridor’s Project Enterprise (business
transformation project).
• Considered the auditor’s paper on its review of the 2013/14 Annual Results focusing on key findings.
• Assessed the external auditor and its effectiveness in respect of the 2013/14 external audit process.
• Recommended to the Board the appointment of the new external auditor for 2014/15 and for approval at the
Annual General Meeting and also for the Committee to agree the external auditor’s remuneration.
• Considered and approved the 2014/15 audit plan and audit fee proposal and set performance expectations for
the external auditor.
• Agreed and monitored the provision of non-audit services for 2013/14 and during 2014/15.
Risk management
• Reviewed risk management framework and compliance with that framework during 2013/14 and after the year-
end up until the publication of the Company’s Annual Report.
• Reviewed the assessment of the risks by the Executive Directors.
• Reviewed the 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.
Governance
• 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.
• Reviewed new annual report disclosure requirements including the audit report.
• Considered and approved Group accounting policies used in the preparation of the financial statements.
• Reviewed a number of updated Group policies covering foreign exchange, whistleblowing and suspected fraud,
anti-bribery and other irregularities.
• Confirmed compliance with the UK Code.
• Regularly held separate meetings with the external auditor and the internal group audit manager without
members of management being present.
• Considered and approved a revised policy for undertaking non-audit work by the auditor.
Since the year-end, the Committee reviewed the Group’s 2014/15 results and considered the related key findings of the
external auditor, and recommended to the Board the approval of the 2014/15 preliminary results announcement. In addition
it reviewed and recommended to the Board the approval of the 2015 Annual Report and Accounts including financial
statements, considering it fair, balanced and understandable as set out on page 66.
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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 2015 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 auditor 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 auditor’s report on pages
96 to 99. In addition to the significant issues set out in the
table below, the Committee considered a range of other
matters including presentational issues, in particular relating
to the quality of earnings, exceptional item classification and
contingent liability disclosure.
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 and
Viridor bad and doubtful
debt provisions
Tax and treasury
Revenue recognition
How the issue was addressed by the Committee
The Board receives a monthly report from the Group Director of Finance on the financial performance
of the Group including forward looking assessments of covenant compliance and funding levels under
differing scenarios. The Board also regularly reviews and challenges rolling five year strategy projections
and the resultant headroom relative to borrowings. A report to the Audit Committee, prepared by the
Group Director of Finance, at each half year and year-end, focuses on the Group’s liquidity over the 15
months subsequent to a period end and the Group’s solvency over a longer period. This report provides
the basis for a detailed review and discussion of the key issues at Committee meetings. 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 and satisfies itself that it remains appropriate for
the Group to continue to adopt the going concern basis of accounting in the preparation of the 2014/15
financial statements.
There has been considerable focus at the year-end on Viridor’s environmental provisions and the carrying
value of its assets, including goodwill. 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 Committee meetings. As part of the year-end reporting to the
Committee, the Group Director of Finance presented a report summarising the key issues in relation to the
impairment review and Committee members asked questions of the Viridor Chief Executive, the Viridor
Finance Director and the Group Director of Finance and discussed the detailed sensitivity analysis in
respect of key assumptions carried out by management, which had also been reviewed as part of the year-
end audit by the external auditor.
Both the South West Water board and the Viridor board, as well as the Group Board, receive regular
updates on progress against debt collection targets. Performance is monitored regularly against South
West Water’s historical collection record and the track record of other companies in the sector. At the year-
end the external auditor reported on the work it had performed, and the Committee considered the results
of this report and asked questions of both the South West Water and the Viridor Chief Executives 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 releasing tax provisions only
when matters under discussion are expected to be cleared by HM Revenue & Customs. If any outstanding
issues are considered to be 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’s
balance sheet. Questions raised by this review were addressed at the year-end audit clearance meeting
of the Committee and the Group Director of Finance separately reported on the proposed treatment
of certain items. The Committee also considered at the year-end the tax and accounting treatment of
certain structured treasury transactions and the Group Director of Finance reported on the treatment of
these transactions. During the year the Committee gave further consideration to the Group’s policies and
activities in relation to tax and treasury and approved minor updating to these policies.
The key areas reviewed by the Committee at year-end in respect of revenue recognition related to the
accrual for metered billing within South West Water, service concession arrangements under IFRIC 12 and
accrued powergen income at Viridor. The Committee relied primarily on South West Water’s track record of
assessing an appropriate level of accrual at previous year-ends given actual outturns 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 auditor who was satisfied with the approach taken by
the companies.
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Effectiveness of the external audit process
We continue to monitor carefully the effectiveness of our
external auditor as well as its independence, bearing in mind
that it is recognised there is a need to use our external auditor’s
firm for certain 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.
A new external auditor was appointed in the year following
a comprehensive audit tender process, which was reported
on last year, and approval by shareholders at the Company’s
2014 AGM.
The new external auditor initially prepared and followed a
transition plan to ensure a good understanding of the Group
prior to review of the half year financial statements of the Group.
This was followed up with a detailed audit planning report in
preparation for the year-end financial statements. These actions
have assisted the auditor in delivering the timely audit of the
Group’s annual report and financial statements.
The effectiveness review of the external auditor is undertaken
as part of the Committee’s annual performance evaluation.
The review demonstrated that there was considerable
satisfaction with the performance of the external auditor in its
first year in the role. Accordingly the Committee considered that
it is appropriate that the external auditor be re-appointed and
and has made an appropriate recommendation to the Board.
The Committee Chairman has also met privately with the
external auditor.
Auditor independence
The Committee carefully reviews on an ongoing basis the
relationship with the external auditor to ensure that the auditor’s
independence and objectivity is fully safeguarded.
Both the previous and the new external auditor reported on
their independence during the year and confirmed to the
Committee that they have complied with the Auditing Practices
Board’s Ethical Standards and, based on their assessments,
that they were independent of the Group.
Provision of non-audit services
The Committee has a restrictive policy for the engagement of
the external auditor’s firm for non-audit work. The policy is for
non-audit fees not to exceed 70% of the audit fee for statutory
work. Where fees for non-audit work exceed 50% of the
annual audit fees (but are less than 70%), the Committee must
be notified of the assignment with a summary report on the
background and the reasons for using the auditor for the work.
In exceptional circumstances, where there is good rationale for
the auditor’s non-audit fees to exceed 70%, the Group Director
of Finance is required to set out in a report to the Committee
the reasons why the auditor’s firm should be appointed for any
work. The Committee would carefully review whether it was
necessary for the auditor’s firm to carry out such work and
would only grant approval for the firm’s appointment if it was
satisfied that the auditor’s independence and objectivity would
be fully safeguarded. If there was another accounting firm that
could 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 auditor.
The level of non-audit fees payable to the external auditor
for the past year is 10% of the audit fee, which is well within
the Group’s 70% non-audit fee limit. This represents a very
significant reduction in the level of fees for non-audit services
paid to the Company’s previous external auditors.
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 auditor’s firm for non-audit services and for audit
services are set out in note 7 to the financial statements on
page 118.
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Continued
The Audit Committee Continued
Internal audit
The internal audit activities of the Group continue to remain a
key part of the internal control and risk management functions
of the Group. At Group level there is a long-standing and
effective centralised internal audit service 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 is approved in September each
year. It takes account of the activities to be undertaken by the
external auditor and also the Group’s annual and ongoing risk
management reviews. This approach seeks to ensure that there
is a programme of internal and external audit reviews focused
on identified 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 discussions, correspondence 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 information security framework, Group
treasury log audits;
• South West Water – credit management and debt collection,
transport control environment, capital expenditure planning
and delivery, energy management; and
• Viridor – contract management, purchasing and high risk
transactions processes, TPSCo (joint venture) processes,
major contract review.
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 95, the Committee has applied
a detailed FBU framework that was prepared by the Group
Company Secretary following consultation with the Committee
Chairman and the Group Director of Finance and implemented
initially for 2013/14. This framework has been refined and
updated for the last year taking on board developments in
reporting best practice. The FBU process takes account of
the Group’s well-documented verification process undertaken
in conjunction with the preparation of the Annual Report and
Accounts. This is in addition to the formal process carried
out by the external auditor to enable the preparation of the
independent auditor’s report, which is set out on pages 96
to 99.
In preparing and finalising the 2015 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.
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Financial
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The Sustainability Committee
Dear Shareholder
I am pleased to introduce the Sustainability Committee’s
report on its annual activities. Sustainability is an integral part
of Pennon’s strategy and the Group takes this responsibility
very seriously in all its business and operational practices.
Our investment and our commitment to high levels of service
and performance will contribute to society’s needs – for
water, energy and resource management – being met in the
long term.
The role of the Sustainability Committee is to bring together
and review initiatives that drive sustainability, to approve
targets and to monitor the progress made in achieving
Pennon’s strategic sustainability objectives. Those objectives
are set out on the following page. During the year the
Committee reviewed its programme of work against the best
practice framework published by Business in the Community
(BitC), a leading business-led charity that promotes
responsible business. We concluded that BitC’s key areas
of sustainability (marketplace, workplace, community and
environment) provided a useful structure for reviewing our
programmes and the performance of both South West
Water and Viridor as they work to achieve the highest
standards of corporate responsibility.
On pages 10 and 11, we show how a sound approach to
sustainability helps us to draw together the needs of society
with the results of commercial success. To further underline
these links, this year we have integrated our sustainability
report with our strategic report and have provided
additional detail within the South West Water and Viridor
strategic reviews.
We are pleased to note the results in both businesses, which
confirm sustainability is indeed integrated in all we do.
Gill Rider
Sustainability Committee Chairman
Sustainability Committee composition
and meetings
Members
Appointment date
Attendance
Gill Rider
(Committee Chairman)
September 2012
Martin Angle
December 2008
Gerard Connell*
November 2006
Neil Cooper
September 2014
Christopher Loughlin
November 2006
Ian McAulay
September 2013
* Retiring on 31 July 2015
5/5
4/5
4/5
2/2
5/5
5/5
The Sustainability Committee works with the South West
Water sustainability committee and the Viridor board,
which direct sustainability activities for their respective
organisations, to ensure that the Group’s sustainability
objectives are met. The subsidiaries develop a range of
targets as part of their business planning processes and
monitor and report progress to their respective boards and
committees throughout the year.
As at 31 March 2015 South West Water had achieved 12 of
its 14 targets for the year and Viridor had completed eight
out of 12 of its targets. Further details will be provided in
South West Water’s annual report and Viridor’s sustainability
report, to be published in July 2015 and August
2015 respectively.
The Sustainability Committee operates 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) while at the same time
delivering strong financial performance and lasting value
for shareholders and other stakeholders. The Sustainability
Committee reviews and approves as appropriate the
strategies, policies, management, initiatives, targets and
performance of the Pennon Group companies in the areas
of occupational health and safety and security, environment,
workplace policies, responsible and ethical business
practice, customer service and engagement, and the role of
the Group in society.
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Continued
The Sustainability Committee Continued
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 at the core of our business strategy and our
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.
The key performance indicators by which we measure
shareholder value and wider stakeholder benefit are set out
on pages 5, 6 and 7.
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 its operations.
Details of the Group’s economic, social and environmental
impact can be found on pages 41 to 49.
Engage with all stakeholders and foster good
relationships with them
Pennon aims to be a good neighbour, and consults with
its stakeholders in order to understand and respond to
their priorities.
Details of the Group’s approach to stakeholder engagement
and customer satisfaction can be found on pages 17, 19, 27
and 40.
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
• pollution and compliance performance
• the Group’s approach to community engagement
and investment
• the Group’s health and safety performance and plans
• performance against the Group’s workplace policy
• sustainable procurement and practices within the
supply chain
• sustainability reporting for 2014 for the Group, South
West Water and Viridor; and the associated verifier’s
reports and his recommendations for the 2014/15 reports
• progress against the sustainability targets for 2014/15
• sustainability targets for 2015/16
• the coverage and appropriateness of Group policies
• the Group’s participation in Business in the Community
benchmarking exercises.
In addition the Committee considered:
• the results of employee engagement surveys conducted
by the Group, South West Water and Viridor
• the appointment of a new sustainability verifier, Strategic
Management Consultants Limited, for the 2014/15
reporting period
• the Committee’s performance evaluation results
• the annual review of the Committee’s terms of reference.
Strategic sustainability objectives
The Sustainability Committee has defined the following
strategic objectives, which inform the sustainability targets
set by South West Water and Viridor. Further details are
available throughout the strategic report – page references
are provided.
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Strive for the highest standards of health and safety in
the workplace so as to minimise accidents, incidents
and lost time
The Group remains committed to achieving and maintaining
improvements in health and safety. Both South West Water
and Viridor continue to endeavour to embed health and
safety within each organisation’s culture.
Details of South West Water’s and Viridor’s health and safety
performance and their future plans are provided on pages 27
and 51.
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 down to its 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.
Details of the Group’s strategies and performance around
employee engagement can be found on pages 18, 27
and 50.
Aspire to leadership in minimising emissions that
contribute to climate change, and develop climate
change adaption strategies
Pennon continues to strive for a reduction in emissions and
encourages its businesses to adopt initiatives for renewable
energy generation.
Details of the Group’s greenhouse gas emissions and climate
change strategies are provided on pages 46 and 47.
Aspire to leadership in all aspects of waste prevention
and resource efficiency
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.
Details can be found on pages 48 and 49.
Reporting and verification
In reporting on sustainability, the Company has sought to
comply with the Guidelines on Responsible Investment
Disclosure issued by the Association of British Insurers and
now maintained by The Investment Association.
Pennon’s sustainability performance and reporting has
been audited by Strategic Management Consultants
Limited (SMC), an independent management consultancy
specialising in technical assurance in the utility sector.
Pennon considers that SMC’s method of verification –
which includes testing the assumptions, methods and
procedures that are followed in the development of data
and auditing that data to ensure accuracy and consistency
– complements the best practice insight gained through
South West Water’s and Viridor’s membership of Business in
the Community.
Pennon sustainability report
Pennon’s sustainability reporting is integrated throughout the
strategic report and specifically in the following sections:
Report from the Chief Executive, South West Water, page 14
Report from the Chief Executive, Viridor, page 22
Customer and stakeholder satisfaction, page 40
Sustainability – environmental, economic and social, page 41
Employee well-being and engagement, page 50.
South West Water and Viridor
sustainability reports
The full sustainability report for Viridor will be published
in August 2015 and this year South West Water will
once again incorporate its sustainability reporting in its
annual report and accounts, which will be published in
July 2015. 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 2014/15, and their performance
against them, are given in their respective reports.
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Board’s Committees Continued
The Nomination Committee
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 Non-executive Director;
• the appointment of a new Group Director of Finance;
• the appointment of a new Group Chairman (under the
leadership of the Senior Independent Director and without
the current Chairman being present); and
• reviewed diversity and equality policies and practice
throughout the Group.
The appointment of the Non-executive Director was
undertaken with the assistance of an external search
consultant (Zygos), which had no other connection with
the Company.
An external search consultant was not engaged to assist
with the recruitment of the Group Director of Finance, due
to an exceptionally able internal candidate being available,
or the recruitment of the new Group Chairman due to the
Senior Independent Director being made aware of the
availability of an outstanding candidate with appropriate
waste management and utility experience.
Members
Appointment date
Attendance
Kenneth Harvey*
(Committee Chairman)
March 1997
Martin Angle
December 2008
Gerard Connell*
October 2003
Neil Cooper
September 2014
Gill Rider
September 2012
* Retiring on 31 July 2015
5/7
7/7
7/7
3/5
7/7
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 has endeavoured to achieve:
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.
As at 31 March 2015 and as disclosed with the Directors’
biographies on page 56, the Group had 25% female
representation at Board level. While circumstances on
occasion will result in changes in Board composition, the
Board remains committed to maintaining and possibly
exceeding the 25% level.
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 on page 50, together
with information regarding the gender breakdown of
the workforce.
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.
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The Remuneration Committee
Directors’ remuneration report
The Directors’ remuneration report for 2014/15 is set out
separately on pages 72 to 92.
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.
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 2014/15;
• reviewing final drafts of the Directors’ remuneration
report for 2013/14 and recommending it to the Board for
approval for inclusion in the 2014 Annual Report;
Members
Appointment date
Attendance
• reviewing early drafts of the Directors’ remuneration report
Martin Angle
(Committee Chairman)
December 2008
Gerard Connell*
October 2003
Neil Cooper
September 2014
Gill Rider
September 2012
11/11
9/11
5/6
11/11
* Retiring on 31 July 2015
The Committee consults with the South West Water
remuneration committee and the Viridor personnel
committee on director and senior management remuneration
within their respective terms of reference.
for 2014/15;
• review and determination of the Deputy Chairman and
new Chairman’s fee;
• determining bonuses and deferred bonus awards
pursuant to the Company’s annual incentive bonus plan in
respect of the year 2013/14;
• approving the performance and co-investment plan
awards for the year;
• reviewing the annual performance evaluation results of
the Committee;
• approving the remuneration arrangements for the new
Group Director of Finance and Executive Director of
the Board;
• approving the release of the 2011 deferred bonus share
awards and the vesting of executive share options
pursuant to the annual incentive bonus plan;
• determining the outcome of the 2011 performance and
co-investment plan awards; and
• determining subsidiary board non-executive director fees.
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Contents
Annual Statement
Annual Statement from the Chairman of the Remuneration Committee
Directors’ remuneration policy – summary
Introduction
Future policy table – Executive Directors
Future policy table – Non-executive Directors
Directors’ service contracts/letters of appointment
Annual report on remuneration
Introduction
Operation of the remuneration policy in 2015/16
Single total figure table (audited information)
Annual bonus outturn for 2014/15
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
Equivalent chief executive officer remuneration
Comparison of Executive Director remuneration to employee remuneration
Relative importance of spend on pay
Directors’ shareholding and share interests (audited information)
Shareholder dilution
Details of share awards (audited information)
Advisers to the Remuneration Committee
Statement of voting at General Meeting
73
74
74
77
77
78
78
80
81
82
83
84
84
85
85
85
86
86
86
88
89
92
92
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Group
Governance
Financial
statements
Annual Statement from Martin Angle,
Chairman of the Remuneration Committee
Dear Shareholder
Introduction
As Chairman of the Group’s Remuneration Committee and
on behalf of the Board I am pleased to present the Directors’
remuneration report for the year ended 31 March 2015. In
accordance with the remuneration reporting requirements the
report is in two parts:
• Directors’ remuneration policy – a summary of the
policy on Directors’ remuneration which was approved
by shareholders at the 2014 AGM. This is provided for
information only as approval is not required and approval is
not being sought for a revised policy at the 2015 AGM.
• Annual report on remuneration – contains the
remuneration of the Directors for the year 2014/15 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 80 to 83). It
also provides details of how our policy will be applied for
2015/16. This section of the report together with this letter is
subject to an advisory shareholder vote at this year’s AGM.
Last year the Remuneration Committee was pleased to note
that 97% and 96% of shareholders who voted approved the
remuneration policy and the 2013/14 annual remuneration
report respectively. The Committee appreciates the continuing
support of its shareholders.
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 71.
Remuneration decisions
For 2015/16 salaries were increased by 3.36% for the
Chief Executive, South West Water, reflecting market rates
and performance in the year, and by 12.68% for the Chief
Executive, Viridor, due to continuing on the glide path from
a lower salary on appointment and having gained further
experience together with performance in the role over the last
year. This is in line with our approved policy on salaries on
recruitment where 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. Given that this two year
period will have passed at the next salary review, we do not
anticipate any further increases of this nature for Ian McAulay.
The salary of the Group Director of Finance was not increased
due to Susan Davy being appointed to the position towards the
end of the 2014/15 year.
The bonus outturns for the Executive Directors for 2014/15
reflect the achievements of the Group businesses in the
year, the Company’s performance against corporate financial
targets and the Executive Directors’ performance against
individual targets. Half of the bonus is deferred into shares.
Further details of targets, measures and performance are set
out on pages 81 and 82.
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 2015 is 0% of the maximum
100%. This reflects that the Company’s total shareholder return
is estimated to be below the comparator index performance
and is expected to rank below the median of the FTSE 250.
Board changes
Neil Cooper was appointed as a Non-executive Director
from 1 September 2014 and as the chairman of the Audit
Committee. His fee was determined on the same basis as for
the other Non-executive Directors.
David Dupont, Group Director of Finance, retired from the
Board on 31 January 2015 following 23 years of service with
the Company and 12 years as the Group Director of Finance.
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 2012, 2013 and 2014 deferred share awards are due
to be released to him in accordance with the provisions of the
deferred share element of the bonus plan. His 2015 award
(in respect of his bonus for 2014/15) will be held for three years.
Awards made in 2012 and 2013 under the long-term incentive
plan were pro-rated for time and will be subject to performance
measured at the vesting date. The award made in 2014 was
forfeited due to Mr Dupont retiring before the year end.
On 1 February 2015 Susan Davy became Group Director of
Finance and joined the Board. Her remuneration package is
in line with those of the other Executive Directors, except that
her 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 Mrs Davy’s appointment was a
promotion within the Group (from being finance and regulatory
director of South West Water) her pre-existing awards and
contractual commitments will continue in accordance with their
established terms. This is in accordance with the approved
remuneration policy. No cash sign-on payments were made.
Finally in the year Sir John Parker was appointed as a
Non-executive Director and as Deputy Chairman of the Board
with effect from 1 April 2015. He was also appointed as the
successor to Ken Harvey as Chairman following his retirement
after the 2015 AGM. His fee was determined to be 50% of
the Chairman’s fee and will be increased to the same level as
the current Chairman’s fee when he becomes Chairman on
1 August 2015.
Looking forward
During the year we considered the remuneration structure
with the assistance of our independent remuneration
consultants. In accordance with the new provisions of the
UK Corporate Governance Code and good remuneration
practice we decided to introduce explicit malus and clawback
provisions under our Performance and Co-investment Plan
for awards from 2015. We introduced similar provisions in our
Annual Incentive Plan last year.
For awards from 2015, we have also introduced a further
two year holding period in respect of any shares which vest
at the end of the three year performance period under the
Performance and Co-investment Plan. This further aligns
the interests of management with the longer-term success
of the Company. No other changes have been made to our
remuneration package. In particular all maximum opportunities
will remain the same in 2015/16.
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.
Martin Angle
Remuneration Committee Chairman
www.pennonannualreport.co.uk/2015
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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.
Directors’ remuneration policy
Introduction
The remuneration policy set out in the 2014 Annual Report
was approved by shareholders at the Company’s AGM on
31 July 2014.
We are not seeking approval for our remuneration policy
at the 2015 AGM. The intention is that approval of the
remuneration policy will be sought at three year intervals in
accordance with the remuneration reporting requirements,
unless the Company wishes to make amendments to the
policy prior to then.
The remuneration policy tables for Executive and
Non-executive Directors are set out below for shareholder
information. They have been reproduced as approved
with the exception of updating to reflect Director
changes; additional wording on malus, clawback and
the holding period introduced in the year in the Group’s
Performance and Co-investment Plan; and minor and
inconsequential changes.
The Directors’ remuneration policy is displayed on the
Company’s website www.pennon-group.co.uk/about-us/
directors-remuneration-policy and is available upon
request from the Group Company Secretary.
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 the individual
and the Company; and
• other factors it
considers relevant.
There is no overall maximum.
Benefits
Benefits are provided that are
consistent with the market and
level of seniority and which aid
retention of key skills to assist in
meeting strategic objectives.
None.
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.
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
remains proportionate.
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South West
Water
Viridor
Group
Governance
Financial
statements
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 outperformance
or underperformance.
Annual bonuses are paid
following finalisation of the
financial results for the year
to which they relate and paid
usually three 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.
These provisions 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)
Maximum potential value of
the component
Description of framework
used to assess performance
Long-term incentive plan (Performance and Co-investment Plan)
Provide alignment
to shareholders
and to longer-term
Company performance.
Pension
Provides funding for
retirement and aids
retention of key skills
to assist in meeting
the Company’s
strategic objectives.
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.
Introduced for 2015/16
For grants made from 2015 onwards
malus and clawback provisions will
apply which permit shares to be
forfeited, repaid or made subject to
further conditions where the Committee
considers it appropriate in certain
circumstances. The circumstances in
which malus may be applied include (but
are not limited to) material misstatement,
serious reputational damage, or
the participant’s misconduct. The
circumstances in which clawback may
be applied are material misstatement or
serious misconduct.
In addition a further two year holding
period will apply in respect of any shares
which vest at the end of the three year
performance period.
Malus may be applied during the three
year performance period and clawback
may be applied up until the end of the
holding period.
Defined benefit pension arrangements
are closed to new entrants. Defined
contribution pension arrangements have
been 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 award is
100% of base salary.
The current performance
conditions are based on total
shareholder return (TSR) with
50% based on TSR against
the 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.
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.
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.
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South West
Water
Viridor
Group
Governance
Financial
statements
Directors’ remuneration policy Continued
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.
Benefits
Benefits for the Chairman are provided
which are consistent with the market and
level of seniority.
Total fees paid to Non-executive Directors
will remain within the limits stated in the
Articles of Association.
None.
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.
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.
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).
The retiring Chairman’s benefits include the
provision of a company vehicle, fuel and
health insurance.
Sir John Parker, who will become the
Chairman from 1 August 2015, is entitled
to expenses on the same basis as for
other Non-executive Directors and, when
appropriate for the efficient carrying out
of his duties, will be provided with a driver
and vehicle.
Directors’ Service Contracts / Letters of Appointment
The policy for Executive Directors’ service contracts is to provide for 12 months notice from either side. The policy for
Non-executive Directors’ letters of appointment is to contain three months notice from either side. The policy for the
Chairman’s letter of appointment is to contain a 12 month notice period from either side. The letter of appointment of the
new Chairman from 1 August 2015 contains a six month notice period from either side.
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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 2015/16. 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 30 July 2015.
Operation of the remuneration policy for 2015/16
During 2014/15 the Committee further 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;
• the introduction of malus and clawback arrangements in the Performance and
Co-investment Plan in accordance with best practice; and
• the introduction of a two year holding period in respect of any shares which
vest under the Performance and Co-investment Plan.
A summary of the specific remuneration arrangements for Executive Directors in 2015/16 is described below:
Base salary
2015/16 salaries are:
• Chris Loughlin: £400,000
• Ian McAulay: £400,000
• Susan Davy: £325,000.
Chris Loughlin received a salary increase of 3.36%, reflecting market rates and performance, effective
1 April 2015. Ian McAulay received a 12.68% increase to reflect his performance in the role after joining
the Company. This is in line with the Committee’s approved policy on salaries on recruitment where
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.
Given that this two year period will have passed at the next salary review, it is not anticipated that there
will be any further increases of this nature for Ian McAulay. Susan Davy, having been appointed on
1 February 2015, did not receive an increase.
Pension and benefits
No changes. Salary supplement cash allowance of between 20% and 30% from which is deducted the
employer’s contribution to the Defined Benefit or Contribution pension schemes for the Directors.
Annual bonus
Susan Davy, appointed on 1 February 2015 and having been promoted from within the Group, already
received a pension benefit equivalent to 25% of salary, in respect of which there has been no change.
No change to maximum opportunity of 100% of salary. No change to operation of deferral. 50%
of the bonus is delivered as deferred shares. No changes will be made to the overall performance
measurement framework for the annual bonus for 2015/16. Minor amendments to the role-specific
measures have been made to reflect goals for the year, as set out below:
• 30% EPS (before deferred tax and exceptional items) performance
• 30% personal strategic objectives
• 40% measures which are specific to the role including net debt, division operating profit, RoRE
(Return on Regulated Equity), Totex (Total expenditure), performance and service improvements in
South West Water (SWW), PBITDA plus JVs (profit before interest, tax, depreciation and amortisation
plus joint ventures) (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 apply as described in the summary of the
remuneration policy report.
Performance and
Co-investment Plan (PCP)
No change to maximum performance opportunity of 100% of base salary, awards being subject to
co-investment of 20% of the award, and performance measures:
• 50% TSR vs FTSE 250 (excluding investment trusts)
• 50% TSR vs a peer group index.
‘Underpin’ relating to overall Group performance.
For awards from 2015/16 both malus and clawback apply as described in the summary of the
remuneration policy report.
In addition a further two year holding period will apply in respect of any shares which vest at the end of
the three year performance period.
Shareholding guideline
No change. 100% of salary to be built up in the first five years of joining.
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Viridor
Group
Governance
Financial
statements
Forward-looking performance targets
Details of the annual bonus framework that will apply for each Executive Director for 2015/16 are set out in the table below:
Chief Executive, SWW,
Chris Loughlin
EPS*
Average SWW directors’ performance including:
(i) Operating profit
(ii) RoRE+ performance
(iii) Totex performance
(iv) Net debt
(v) Service improvement performance
Personal
30%
40%
30%
Chief Executive,
Viridor,
Ian McAulay
30%
40%
EPS*
Average Viridor
directors’
performance
including:
(i) Operating profit
(ii) Net debt
(iii) PBITDA plus JVs
Personal
30%
* EPS is before deferred tax and exceptional net items
+ RoRE is Return on Regulated Equity
Group Director
of Finance,
Susan Davy
EPS*
Net debt
Operating profit and
RoRE+ performance
of SWW and
operating profit
of Viridor
30%
20%
20%
Personal
30%
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:
Comparator 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
Threshold
(30% of maximum vests)
Maximum
(100% of maximum vests)
The comparator index will comprise:
• Shanks Group
• Severn Trent
• National Grid
• Séché Environnement
• United Utilities
• Veolia Environnement
• Suez Environnement
Non-executive Director fees
Non-executive Director fees for 2015/16 are set out below. They include an overall increase of 2.5% for the Non-executive
Directors (excluding the Chairman/Deputy Chairman) approved by the Board, effective from 1 April 2015.
Role
Chairman (retiring and successor Chairman)
Deputy Chairman
Basic Non-executive Director fee
Additional fees:
Senior Independent Director fee
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
131,200
45,500
11,600
11,600
8,500
8,500
4,000
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Annual report on remuneration Continued
Single total figure of remuneration tables (audited information)
Base salary/
fees
Benefits
(including
Sharesave)
Annual bonus
(cash and
deferred shares)
Performance and
Co-investment
Plan
(£000)
(£000)
(£000)
(£000)
Pension
(£000)
2
0
1
4
/
1
5
2
0
1
3
/
1
4
2
0
1
4
/
1
5
2
0
1
3
/
1
4
2
0
1
4
/
1
5
2
0
1
3
/
1
4
2
0
1
4
/
1
5
2
0
1
3
/
1
4
2
0
1
4
/
1
5
2
0
1
3
/
1
4
Total
remuneration
(£000)
2
0
1
4
/
1
5
2
0
1
3
/
1
4
Executive Directors
Susan Davy,
Group
Director
of Finance
(appointed
1 February
2015)
David
Dupont,
Group
Director
of Finance
(retired
31 January
2015)
Chris
Loughlin,
Chief
Executive,
South West
Water
Ian McAulay,
Chief
Executive,
Viridor
(appointed
9 September
2013)
54
–
2
–
51
–
–
–
33(i)
–
140
–
323
377
22
28
208
274
–
126
97
113
650
918
387
377
27
30
303
321
–
126
116
113
833
967
355
182
34(ii)
117(ii)
202
240(iii)
–
–
71
36
662
575
Non-executive Directors
Ken Harvey,
Chairman
Gerard
Connell
Neil Cooper
(appointed
1 September
2014)
Martin Angle
Gill Rider
262
256
24
25
63
62
37
60
60
–
59
58
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
286
281
63
62
37
60
60
–
59
58
(i) Includes legacy pension benefit accrued in the year in previous position with the Pennon Group
(ii) Benefits included a reimbursement of relocation costs (including income tax) of £107,187 in 2013/14 and £15,000 in 2014/15
(iii) For Ian McAulay £112,000 related to a buyout award as referred to on page 90.
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overview
South West
Water
Viridor
Group
Governance
Financial
statements
Annual bonus outturn for 2014/15
The performance targets set and the performance achieved in respect of the annual bonus for 2014/15 for each
Executive Director is set out below. In line with the Committee’s policy, 50% of any bonus is payable in shares.
David Dupont
David Dupont retired as Group Director of Finance on 31 January 2015. Therefore, Mr Dupont’s bonus was pro-rated to
reflect time served during the year.
Weighting
Threshold
Maximum
Actual outturn
Bonus outturn
35.3p
£215.7m
Target
39.3p
£220.1m
45.1p
£224.5m
39.8p
£225.4m
£29.4m
£30.9m
£32.4m
£21.6m
No payout for below target. Maximum payout for net debt
of 2.5% below target.*
£2,197m
Personal objectives
30%
Relating to key finance business objectives for the Group.*
–
Total outturn
* Actual targets considered commercially confidential
+ Before exceptional items
^ EPS is before deferred tax and exceptional items
Measure
EPS^
SWW
operating profit+
Viridor
operating profit+
Net debt
Ian McAulay
Measure
EPS^
Average Viridor
directors’
performance+
30%
15%
15%
10%
30%
40%
Weighting
Threshold
Maximum
Actual outturn
Bonus outturn
Target
39.3p
35.3p
45.1p
39.8p
The average of the bonus earned by the other executive directors of Viridor
including targets that related to:
• operating profit;
• net debt;*
• PBITDA plus JVs*
The average also took into account collective strategic objectives relating to
profitable revenue growth; forecasting process improvements; comparative
health and safety performance; and implementation of organisational
design.*
The operating profit targets were £29.4m at threshold, £30.9m at target and
£32.4m at maximum. Actual outturn was £21.6m.
13.65%
15%
0%
10%
26%
64.65%
13.65%
15.3%
Personal objectives
30%
Implementing Viridor strategy and projects and meeting
compliance targets.*
–
28%
Total outturn
* Actual targets considered commercially confidential
+ Before exceptional net items
^ EPS is before deferred tax and exceptional items
56.95%
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Annual report on remuneration Continued
Annual bonus outturn for 2014/15 Continued
Chris Loughlin
Weighting
Threshold
Maximum
Actual outturn
Bonus outturn
35.3p
45.1p
39.8p
Target
39.3p
Measure
EPS^
Average South
West Water
directors’
performance
30%
40%
The average of the bonus earned by the other executive
directors of South West Water in respect of targets which
related to:
• operating profit;
• net debt;*
• the position the company achieves in the
‘Service Incentive Mechanism’ of water and
wastewater companies established by Ofwat;* and
• the achievement of a range of service standards set for
the company by Ofwat.*
The operating profit targets were £215.7m to £224.5m
and were exceeded.
Personal
objectives
Total outturn
30%
Implementing South West Water’s new strategies and
projects and meeting compliance targets.*
^ EPS is before deferred tax and exceptional items
* Actual targets considered commercially confidential
13.65%
36.53%
28%
78.18%
Susan Davy
Susan Davy was Group Director of Finance for two months of the financial year. Consequently the majority of her annual
bonus for the year (relating to 10 months of the financial year) was based on the targets set relating to her previous role in
the Group. Bonus relating to the two month period was based on development in the role as new Group Director of Finance.
The bonus outturn for the full 12 months was 93.6% of the total opportunity.
Performance and Co-investment Plan outturn for 2014/15
The PCP awards made on 3 July 2012, which are due to vest on 3 July 2015, are the awards included in the single figure
table and currently it is estimated that the outturn will result in a zero vesting as set out in the table on the following page.
50% of the awards vest subject to the Company’s TSR performance measured against an index made up of the following six
listed comparator companies. These companies were considered to be the Company’s key listed comparators:
• National Grid Plc
• Shanks Group
• Séché Environnement
• Suez Environnement
• Severn Trent
• United Utilities
The remaining 50% of the awards 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 2012 to 1 April 2015) for the PCP
awards was undertaken by Deloitte LLP for the Committee.
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overview
South West
Water
Viridor
Group
Governance
Financial
statements
Threshold
(30% of maximum
vests)
Maximum
(100% of maximum
vests)
Achievement in
the period to 1
April 2015*
Vesting outturn*
Comparator index (50% of award)
Equal to index
15% above the
index
-20.0% below
the index
FTSE 250 (excluding investment trusts)
(50% of award)
TOTAL
Straight-line vesting between points.
For below threshold performance, 0% vests
Above 50th
percentile
At or above 75th
percentile
29.5%
0%
0%
0%
* 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 2015 to 30 June 2015) the achievement and the outturn is an estimate at the date of calculation (12 June 2015)
Vesting of an award is also subject to the ‘underpin’ described on page 76 which the Committee has determined to the date
of this report would be satisfied, if any award was to vest.
Total pension entitlements (audited information)
Defined benefit pension
accrued at 31 March 2015(1)
£000 p.a.
Normal retirement age
(for pension purposes)
Description of additional
benefits available to the
Director on early retirement
David Dupont
Susan Davy
143
14
Not applicable – Director retired
Not applicable – Director retired
65
None
(1) The accrued pension for Susan Davy is based on service to the year-end and final pensionable salary at that date. Since David Dupont is a pensioner member of
Pennon Group’s pension schemes the accrued pension shown is the actual pension in payment as at 31 March 2015
David Dupont was a pensioner member of the Pennon
Group’s defined benefit pension arrangements during the
year. As such no further benefits were accrued and no
employee or employer contributions were paid (other than
the employer’s deficit reduction contributions) during the
year. The increases in David Dupont’s accrued pension over
the year are solely as a result of indexation of his pension as
set out in the Schemes’ Rules.
Susan Davy receives an overall pension benefit from the
Company equivalent to 25% of her salary. She is a member
of Pennon Group’s defined benefit pension arrangements
and is entitled to normal retirement pension payable from
age 65 of broadly 1/80th of Pensionable Remuneration for
each year of Pensionable Service completed.
The employer’s contribution to the pension for Susan Davy is
deducted from the overall pension allowance.
Pensions in payment are guaranteed to increase at a rate of
5% p.a. or RPI if lower for service accrued in the period up
to 30 June 2014 and at a rate of 2.5% p.a. or CPI if lower for
service accrued in the period after this date.
If a Director dies within five years of retiring a lump sum equal
to the balance of five years’ pension payments is paid plus
a spouse’s pension of one half of the member’s pension.
Pensions may also be payable to dependants and children.
Ian McAulay is a member of Pennon Group’s defined
contribution arrangement 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 received a cash allowance of 30% of
salary in lieu of ongoing pension provision up to the date of
his retirement on 31 January 2015.
No additional benefits will become receivable by a Director
in the event that the Director retires early. Chris Loughlin
had a normal retirement date of 60 but has an 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. Susan Davy’s
normal retirement age for pension purposes is 65 which will
be reached on 17 May 2034.
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
Susan Davy*
David Dupont
Chris Loughlin*
Ian McAulay*
1 February 2015
2 January 2003
16 May 2006
2 August 2013
At age 67 (17 May 2036)
31 January 2015 (retired on this date)
No expiry date
At age 65 (25 April 2030)
* Each of the Executive Directors’ service contracts is subject to 12 months’ notice on either side
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Annual report on remuneration Continued
Non-executive Directors
Date of letter of appointment
Expiry date of appointment
Ken Harvey
Martin Angle
Neil Cooper
Gerard Connell
Sir John Parker
1 April 2005
31 July 2015 (due to retire on this date)
28 November 2008
30 November 2017
17 July 2014
30 August 2017
30 September 2003
31 July 2015 (due to retire on this date)
19 March 2015
Ongoing – subject to three months notice on either side currently
and six months notice on becoming Chairman on 1 August 2015
Gill Rider
22 June 2012
30 August 2015
The policy for Executive Directors’ service contracts is to
provide for 12 months notice from either side.
All Non-executive Directors are subject to annual re-election
and are appointed for an initial three year term.
Non-executive Directors’ letters of appointment contain three
months notice from either side and the current Chairman’s
letter of appointment contains a 12 months notice period
from either side. The letter of appointment of the new
Chairman from 1 August 2015 contains a six month notice
period from either side.
Copies of Directors’ service contracts and letters of
appointment are available for inspection at the Company’s
registered office.
Director changes – additional information
Recruitment of Neil Cooper
Neil Cooper was appointed as a Non-executive Director
with effect from 1 September 2014 and as chairman of
the Audit Committee. His fee is in line with that of other
Non-executive Directors.
Leaving arrangements – David Dupont
(audited information)
David Dupont retired on 31 January 2015. This followed
23 years of service with the Company and 12 years as the
Group Director of Finance. The Committee determined that
Mr Dupont’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 remains subject to share deferral and his other
outstanding deferred bonus awards are due to be released
to him. Under the rules of the PCP his 2012 and 2013 PCP
awards remain in force subject to performance conditions
tested at the normal time and subject to pro-rating for time.
His 2014 PCP award was forfeited due to his retirement
being before the year-end.
Mr Dupont received no payment in lieu of notice or
compensation for loss of office.
Recruitment of Susan Davy
Susan Davy joined the Board on 1 February 2015 as an
Executive Director and as Group Director of Finance.
Her remuneration package is in line with those of the other
Executive Directors, except that her 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. She also has legacy pension arrangements which will
continue to be honoured.
Recruitment of Sir John Parker
Sir John Parker was appointed as a Non-executive Director
and as Deputy Chairman of the Board on 1 April 2015.
His fee was determined to be 50% of that of the Chairman’s
fee and is due to be increased to the same level as the
current Chairman’s fee upon his taking up the appointment
as Chairman on 1 August 2015. When appropriate for the
efficient carrying out of his duties, he is provided with a driver
and vehicle. He is entitled to expenses on the same basis as
for other Non-executive Directors.
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’s and the other Non-executive Directors’
fees were increased by 2.5% for 2014/15 compared to the
previous year following an assessment of the market and
taking account of the time commitment of each Director.
The existing Chairman’s benefits comprise a company
vehicle, fuel and private health insurance.
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overview
South West
Water
Viridor
Group
Governance
Financial
statements
All employee, performance and other
contextual information
Historical TSR
The graph below shows the value, over the six year period
ending on 31 March 2015, of £100 invested in Pennon
Group on 1 April 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)
Pennon
FTSE 250
350
300
250
200
150
100
50
2009
2010
2011
2012
Year
2013
2014
2015
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)(iii)
2009/10
2010/11
2011/12
2012/13
2013/14
2014/15(i)
916
1,091
1,221
894(ii)
962
762
91.79
67.30
94.69
50.00
72.87
79.30
47.00
50.00
67.56
30.20
68.20
0.00
(i) Due to the change in the post holder of Group Director of Finance
(David Dupont to Susan Davy) in the year, the amount paid to both post
holders has been included in the average
(ii) This figure is a correction to that reported last year
(iii) The LTIP vesting percentage excludes accrued dividends which are added
on vesting.
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Annual report on remuneration Continued
Comparison of Executive Director remuneration
to employee remuneration
The table below shows the percentage change between
2013/14 and 2014/15 in base salary, benefits and annual
bonus for the average of the Executive Directors and all
employees. To enable comparison, the remuneration of
the previous Chief Executive, Viridor, for 2013/14 has been
included in the calculation of the percentage changes.
The percentage increase in average remuneration for
employees is calculated using wages and salaries (excluding
share-based payments) of £143.9 million (2013/14
£134.3 million), analysed into the three components in
the table and the average number of employees of 4,558
(2013/14 4,451) both as detailed in note 13 to the Group
financial statements.
Average Executive Director remuneration
All employees
-0.18
+4.57
-54.79(i)
-8.70
-16.41(ii)
+14.81
Percentage change in
salary
Percentage change in
benefits
Percentage change in
annual bonus
(i) This figure includes relocation costs for Ian McAulay. Without these benefits the change would have been -13.58%.
(ii) This figure includes £112,000 related to buyout awards for Ian McAulay in 2013/14. Without this the change in annual bonus would have been -4.74%.
Relative importance of spend on pay
Overall expenditure on pay(1)
Distributions to ordinary shareholders
Distributions to perpetual capital
security holders
Purchase of property, plant and
equipment (cash flow)
2014/15 (£ million)
2013/14 (£ million)
Percentage change
165.4
117.0
20.3
298.1
157.9
103.9
20.3
346.7
+4.7
+12.6
–
-14.0
(1) Excludes employer’s social security costs and exceptional items.
The above table illustrates the relative importance of spend
on pay compared with distributions to equity holders. The
purchase of property, plant and equipment (cash flow) has
also been included as this was the most significant outgoing
for the Company in the last financial year.
Share award and shareholding disclosures
(audited information)
Share awards granted during 2014/15
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 £000
Ian McAulay
PCP
100% of salary
David Dupont
Chris Loughlin
Susan Davy
Ian McAulay
David Dupont
Chris Loughlin
Susan Davy
80% of salary
Deferred bonus /
ESOS
50% of bonus
awarded
355
387(i)
387
143(ii)
64
137
161
62(ii)
Percentage
vesting at
threshold
performance
Performance
period end date
30% of maximum
31 March 2017
n/a
26 August 2017
Sharesave (SAYE) awards were also made, as detailed on the next page.
(i) Due to David Dupont’s retirement within the year, this award will be forfeited
(ii) These awards were made to Susan Davy in her previous position with the Group as finance and regulatory director, South West Water.
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Pennon Group Plc Annual Report 2015Governance and remunerationPennon Group Plc Annual Report 2015 Strategic
overview
South West
Water
Viridor
Group
Governance
Financial
statements
PCP awards were calculated using the share price at the
date of grant (14 July 2014) which was £7.98 per share.
Deferred bonus awards were calculated using the share
price at the date of grant (27 August 2014) which was £8.21.
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 three 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
2015 (or date of cessation, if earlier) and 31 March 2014
together with their shareholding guideline obligation and
interest are shown in the table below:
Share
interests
(including
connected
parties) at
31 March
2015
Share
interests
(including
connected
parties) at
31 March
2014
Shareholding
guideline
(100% to be
accrued over
five years)
Shareholding
guideline
met?
Performance
shares
(subject to
performance
conditions)
Unvested awards
SAYE
Deferred
Bonus
shares
ESOS
Buyout
award
Susan Davy(i)
38,557
30,085
20%
Yes
56,936
1,530
22,361
4,329
David Dupont
371,648
350,194
100%
No longer
applicable –
retired
71,968(ii)
–
50,519(iii)
4,329(iii)
Chris Loughlin
225,045
193,543
100%
Yes
154,420
2,788
57,180
4,329
–
–
–
Ian McAulay
–
–
20%
Yes(iv)
44,458
–
7,775
3,651
16,091
(i) Susan Davy’s unvested awards were those she received in her previous position as fnance and regulatory director, South West Water, which she will retain an interest in
following her appointment as Group Director of Finance on 1 February 2015
(ii) Following his retirement on 31 January 2015 David Dupont’s continuing interest in performance shares has been pro-rated to the period he was employed during each
restricted period save for the 2014 award which has been forfeited in its entirety
(iii) David Dupont’s deferred bonus share awards are due for release in conjunction with his ESOS award following his retirement on 31 January 2015
(iv) Ian McAulay purchased 9,045 ordinary shares in the Company on 29 May 2015.
Since 31 March 2015 3,233 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; 37 additional ordinary
shares in the Company have been acquired by Susan Davy as a result of participation in the Company’s Share Incentive
Plan; and Ian McAulay purchased 9,045 ordinary shares in the Company. There have been no other changes in the beneficial
interests or the non-beneficial interests of the above Directors in the ordinary shares of the Company between 1 April 2015
and 18 June 2015.
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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
Neil Cooper
Gill Rider
Shares held at 31 March 2015
Shares held at 31 March 2014
26,209
–
4,495
–
2,500
26,209
–
4,271
–
2,500
Since 31 March 2015 Sir John Parker has purchased 10,000
ordinary shares in the Company. There have been no other
changes in the beneficial interests or the non-beneficial
interests of the above Directors in the ordinary shares of the
Company between 1 April 2015 and 18 June 2015.
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
10 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 18 June 2015 is as
set out below:
Discretionary schemes
All schemes
Awarded
1.35%
3.72%
Headroom
3.65%
6.28%
Total 5%
Total 10%
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overview
South West
Water
Viridor
Group
Governance
Financial
statements
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
2014
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
2015
Date of end
of period for
qualifying
conditions to
be fulfilled
Susan Davy(ii)
1/7/11
3/7/12
2/7/13
14/7/14
David Dupont
1/7/11
3/7/12
2/7/13
14/7/14
Chris Loughlin
1/7/11
3/7/12
2/7/13
14/7/14
Ian McAulay
14/7/14
18,338
17,696
21,347
51,432
48,145
57,810
–
–
–
17,893
–
–
–
–
48,465
–
–
–
48,465
51,432
48,145
57,810
–
–
698.00p
768.50p
653.00p
798.50p
698.00p
768.50p
653.00p
798.50p
698.00p
768.50p
653.00p
798.50p
44,458
798.50p
6,216
–
–
–
50
–
–
–
–
30/6/14
17,696
21,347
17,893
2/7/15
1/7/16
13/7/17
17,434
140
–
30/6/14
–
–
–
–
–
–
17,434
140
–
–
–
–
–
–
–
–
41,458(iii)
30,510(iii)
–(iii)
–
48,145
57,810
48,465
2/7/15
1/7/16
13/7/17
30/6/14
2/7/15
1/7/16
13/7/17
44,458
13/7/17
(i) 30.2% of the July 2011 award shares vested on 29 August 2014 at a market
price of 804.96p 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) Susan Davy’s share awards are those she received in her previous position
as finance and regulatory director, South West Water, which she will retain
an interest in following her appointment as Group Director of Finance on
1 February 2015
(iii) Following retirement on 31 January 2015 David Dupont’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 have lapsed with the exception of
the award made on 14 July 2014 which has lapsed in its entirety due to his
retirement being before the financial year-end of the year in which the award
was made.
Payments to past Directors
As reported in last year’s remuneration report
Colin Drummond, who retired as an Executive Director of
the Company on 30 September 2013, remains entitled to a
pro rata share of any Performance and Co-investment Plan
(PCP) awards he received for the period of the restricted
period he was employed by the Company. 30.2% of the
PCP award made on 1 July 2011 vested on 29 August
2014 and Colin Drummond received this award, together
with additional shares to the value of the accrued dividends
on such shares pro-rated on the same basis as the
award shares, amounting in total to 13,076 shares valued
at £105,000.
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Annual report on remuneration Continued
Details of share awards 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
2014
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
2015
Date of end
of period for
qualifying
conditions to
be fulfilled
Susan Davy(i)
27/7/11
27/7/12
5/8/13(iii)
27/8/14
David Dupont
27/7/11
27/7/12
5/8/13(iii)
27/8/14
Chris Loughlin
27/7/11
27/7/12
5/8/13(iii)
27/8/14
Ian McAulay
30/9/13(v)
27/8/14(iii)
6,078
7,263
7,555
–
22,365
18,532
15,323
–
–
–
7,543
–
–
–
–
16,664
22,141
20,650
16,978
–
–
–
–
19,552
16,091
–
–
7,775
725.00p
754.50p
693.00p
821.50p
725.00p
754.50p
693.00p
821.50p
725.00p
754.50p
693.00p
821.50p
696.00p
821.50p
6,078(ii)
–
–
–
49
–
–
–
22,365(ii)
179
–
–
–
–
–
–
22,141(ii)
177
–
–
–
–
–
–
–
–
–
–
–
7,263
7,555
7,543
–
18,532(iv)
15,323 (iv)
16,664 (iv)
–
20,650
16,978
19,552
16,091
7,775
26/7/14
26/7/15
4/8/16
26/8/17
26/7/14
26/7/15
4/8/16
26/8/17
26/7/14
26/7/15
4/8/16
26/8/17
29/9/16
26/8/17
(i) Susan Davy’s share awards are those she received in her previous position
as finance and regulatory director, South West Water, which she will retain
an interest in following her appointment as Group Director of Finance on
1 February 2015
(ii) These shares vested on 18 August 2014 at 798.91p per share
(iii) In addition to the awards made on 5 August 2013 (and 27 August 2014 to Ian
McAulay) the Directors received options pursuant to the Company’s executive
share option scheme (ESOS), details of which are set out on page 91. These
awards were made in conjunction with the operation of the bonus plan, details
of which are set out on page 75
(iv) These shares are due to be released to David Dupont in conjunction with the
operation of the ESOS following his retirement on 31 January 2015
(v) This was a buy-out award.
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Pennon Group Plc Annual Report 2015Governance and remunerationPennon Group Plc Annual Report 2015 Strategic
overview
South West
Water
Viridor
Group
Governance
Financial
statements
During the year the Directors received dividends on the
above shares in accordance with the conditions of the bonus
plan as follows:
Susan Davy £6,334; David Dupont £17,040;
Chris Loughlin £18,116*.
*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 given for the
additional ordinary shares (40.7p each) in the Company that
he acquired since 31 March 2015 given on page 87.
(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 87.
Date of
award
Options
held at
1 April 2014
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
2015
Options
held at
31 March
2015
Maturity
date
Susan Davy(i)
5/8/13
David Dupont
5/8/13
Chris Loughlin
5/8/13
Ian McAulay
27/8/14
4,329
4,329
4,329
–
–
–
–
3,651
–
–
–
–
693.00p
693.00p
693.00p
821.50p
–
–
–
–
826.00p
4,329
5/8/16
826.00p
4,329(ii)
5/8/16
826.00p
4,329
5/8/16
826.00p
3,651
27/8/17
(i) Susan Davy’s share options are those she received in her previous position
as finance and regulatory director, South West Water, which she will retain
an interest in following her appointment as Group Director of Finance on
1 February 2015
(ii) David Dupont’s option is exercisable in conjunction with the release of his
deferred bonus share awards following his retirement on 31 January 2015.
(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
award
Options
held at
1 April
2014
Susan Davy(i)
29/6/12
1,530
Chris Loughlin
3/7/13
2,788
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
2015
Options
held at
31 March
2015
Exercise period/
maturity date
–
–
–
–
588.00p
538.00p
–
–
826.00p
1,530
1/9/15 – 28/2/16
826.00p
2,788
1/9/18 – 28/2/19
(i) Susan Davy’s share options are those she received in her previous position
as finance and regulatory director, South West Water, which she will retain
an interest in following her appointment as Group Director of Finance on
1 February 2015.
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www.pennonannualreport.co.uk/2015 Directors’ remuneration report Continued
Annual report on remuneration Continued
Advisers 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 fee level for the Deputy
Chairman. Subsequent to the year-end Deloitte LLP
provided advice to the Committee on the introduction
of malus and clawback provisions in the Company’s
Performance and Co-investment Plan and on the form
of the Directors’ remuneration report. Deloitte LLP’s
fees in respect of advice which materially assisted the
Committee during 2014/15 were £51,250. Deloitte
LLP also provided tax and share scheme advice to the
Group, and consulting, corporate finance and assurance
advisory services to Viridor. 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 it has 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 and the Directors’ remuneration policy
at the Annual General Meeting held on 31 July 2014,
including votes for, against and withheld.
For % (including votes at the Chairman’s discretion)
Against %
Withheld number
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 over
95% of shareholders who voted approved the 2013/14
Directors’ remuneration report and remuneration policy.
The Committee appreciates the continuing support of
its shareholders.
On behalf of the Board
Martin Angle
Chairman of the Remuneration Committee
22 June 2015
9292
Remuneration report
Remuneration policy
95.82
4.18
259,985
97.11
2.89
264,354
Pennon Group Plc Annual Report 2015Governance and remunerationPennon Group Plc Annual Report 2015 Strategic
overview
South West
Water
Viridor
Group
Governance
Financial
statements
Directors’ report –
other statutory disclosures
Introduction
This Directors’ report is prepared in accordance with the
provisions of the Companies Act 2006 and regulations made
thereunder. It comprises pages 53 to 71 and 93 to 95 as
well as the following matters which the Board considers
are of strategic importance and, as permitted by legislation,
has chosen to include in the strategic report rather than the
Directors’ report:
• internal control and risk management systems (page 61
of the governance report)
• likely future developments of the Company (pages 9, 19
and 27 of the strategic report)
• important post-balance sheet events (page 33 of the
strategic report and page 155 of the financial statements)
• all matters relating to sustainability, which include details
of the Group’s carbon emissions (page 46 of the strategic
report) and information relating to employee involvement
(pages 18, 27 and 50 of the strategic report, as well as
the disclosure below).
In addition, the Directors’ report includes the following
disclosures (and any other disclosures) which are
incorporated by reference:
• financial risk management (pages 110 to 112 of the notes
to the financial statements)
• financial instruments (pages 108 and 128 of the notes to
the financial statements).
Board of Directors
The Directors in office as at the date of this report (all of
whom served during the year with the exception of Sir John
Parker, who was appointed on 1 April 2015) are named
on pages 56 and 57. In addition, Mr David Dupont, who
occupied the position of Group Director of Finance, served
as a Director during the year until his retirement from the
Board on 31 January 2015.
Financial results and dividend
The Directors recommend a final dividend of 21.82p per
ordinary share to be paid on 2 October 2015 to shareholders
on the register on 7 August 2015, making a total dividend for
the year of 31.80p, the cost of which will be £129.5 million,
resulting in a reduction in reserves of £3 million. The strategic
report on pages 28 to 33 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 of Association
(‘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.
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. Information regarding the Group’s workplace policies
is provided on page 50.
The Board has a diversity policy and encourages gender
diversity in particular. Further details of the Board’s diversity
policy are set out in the report of the Nomination Committee
on page 70, and information regarding the diversity of the
workforce is provided on page 50.
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 business performance of their
employer and the financial and economic factors affecting
the performance of the Group. 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 is set out on
pages 18, 27 and 50 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.
Following shareholder approval at the 2014 AGM, these
were amended to provide for the increased savings limits
approved by government. At 31 March 2015 around 40% of
the Group’s employees were participating in these plans.
Human rights
The Group is fully supportive of the principles set out in the
UN Declaration of Human Rights, and the Group Ethics
Policy outlines the high standards of employment practice
with which everyone in Pennon Group is expected to
comply. The Group also supports the International Labour
Organisation’s core conventions for the protection and safety
of workforces wherever they may be throughout the Group.
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other statutory disclosures Continued
Research and development
Research and development within the Group involving water
and waste treatment processes amounted to £0.1 million
during the year (2013/14 £0.1 million).
with special rights regarding control of the Company. No
shares issued under the Employee Share Schemes have
rights with regard to control of the Company that are not
exercisable directly by the employees;
c) Details of significant direct or indirect holdings of
securities of the Company are set out in the shareholder
analysis on page 159. The Company is not aware of any
agreements between shareholders which may result in
restrictions on the transfer of securities or on voting rights;
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 above.
The Directors also have the authority to allot shares up
to an aggregate nominal value of: (i) £51,879,733 (such
amount to be reduced by any shares allotted or rights
granted under (ii) below in excess of £51,879,733); and
(ii) £103,759,466 by way of a rights issue (such amount
to be reduced by any shares allotted or rights granted
from (i)) above), which was approved by shareholders
at the 2014 Annual General Meeting (AGM). In addition,
shareholders approved a resolution giving the Directors
a limited authority to allot shares for cash other than pro
rata to existing shareholders. These resolutions remain
valid until the conclusion of this year’s AGM. Similar
resolutions will be proposed at this year’s AGM. The
Directors have no present intention to issue ordinary
shares other than pursuant to the Company’s employee
share schemes and the Scrip Dividend Alternative;
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; and
g) There are no agreements between the Company and its
Directors or employees providing for compensation for
loss of office or employment that occurs because of a
takeover bid.
Overseas branches
The Company has no overseas branches.
Pennon Group donations
No political donations were made or political expenditure
incurred and no contributions were made to a non-EU
political party (2013/14 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 2014), which was valid as at 31
March 2015 and remains currently valid. No purchases were
made during the year. As at 1 April 2014, 1,282,690 shares
were held in Treasury, with a nominal value of £522,055
and representing 0.34% of issued share capital. 893,175
Treasury shares representing 0.24% of issued share capital
as at 1 April 2014 were re-issued during the year under
the Company’s employee share schemes for proceeds of
£3.9 million.
Disclosures required by publicly traded companies
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 7.2.6.R of the UK Listing Authority’s Disclosure and
Transparency Rules (DTR).
As at 31 March 2015:
a) Details of the Company’s issued share capital, which
consists of ordinary shares of nominal value 40.7 pence
each, are set out in note 33 to the financial statements
on pages 146 to 148. 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,
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;
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. There are no persons
9494
Pennon Group Plc Annual Report 2015Governance and remunerationPennon Group Plc Annual Report 2015 Strategic
overview
South West
Water
Viridor
Group
Governance
Financial
statements
i) The financial statements, which have been prepared
in accordance with International Financial Reporting
Standards (IFRSs) 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.
ii) The strategic report (pages 4 to 51) and the Directors’
report (pages 53 to 95) include a fair review of the
development and performance of the business during the
year and the position of the Company and the Group at
the year end, together with a description of the principal
risks and uncertainties they face.
iii) Following receipt of advice from the Audit Committee,
that the Annual Report, taken as a whole, is fair, balanced
and understandable, and provides the information
necessary for the shareholders to assess the Group’s
performance, business model and strategy.
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.
Statement as to disclosure of information to
the auditor
i) 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 auditor is
unaware; and
ii) 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 auditor is
aware of that information.
The Directors’ report consisting of pages 53 to 71 and
93 to 95 was approved by the Board on 22 June 2015.
By Order of the Board
Kenneth Woodier
Group Company Secretary
22 June 2015
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.
Statement of Directors’ responsibilities
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 56 and 57, confirms that, to the best of his or
her knowledge:
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95
95
www.pennonannualreport.co.uk/2015 Independent auditor’s report
Independent auditor’s report to the members of Pennon Group Plc
Opinion on financial statements
In our opinion:
• the financial statements give a true and fair view of the
state of the Group’s and of the Parent Company’s affairs
as at 31 March 2015 and of the Group’s profit for the year
then ended;
• the Group financial statements have been properly
prepared in accordance with IFRSs as adopted by the
European Union;
• the Parent Company financial statements have been
properly prepared in accordance with IFRSs as adopted
by the European Union and as applied in accordance with
the provisions of the Companies Act 2006; and
• the financial statements have been prepared in
accordance with the requirements of the Companies Act
2006 and, as regards the Group financial statements,
Article 4 of the IAS Regulation.
What we have audited
We have audited the financial statements of Pennon Group
Plc for the year ended 31 March 2015 which comprise the
consolidated income statement, consolidated statement of
comprehensive income, the Group and Parent Company
balance sheets, the Group and Parent Company statements
of changes in equity, the Group and Parent Company
cash flow statements and the related notes 1 to 45. The
financial reporting framework that has been applied in their
preparation is applicable law and International Financial
Reporting Standards (IFRSs) as adopted by the European
Union and, as regards the Parent Company financial
statements, as applied in accordance with the provisions of
the Companies Act 2006.
This report is made solely to the Company’s members,
as a body, in accordance with Chapter 3 of Part 16 of the
Companies Act 2006. Our audit work has been undertaken
so that we might state to the Company’s members those
matters we are required to state to them in an auditor’s
report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility
to anyone other than the Company and the Company’s
members as a body, for our audit work, for this report, or for
the opinions we have formed.
Respective responsibilities of directors and auditor
As explained more fully in the statement of Directors’
responsibilities set out on page 95, the Directors are
responsible for the preparation of the financial statements
and for being satisfied that they give a true and fair view.
Our responsibility is to audit and express an opinion on the
financial statements in accordance with applicable law and
International Standards on Auditing (ISAs) (UK and Ireland).
Those standards require us to comply with the Auditing
Practices Board’s Ethical Standards for Auditors.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts
and disclosures in the financial statements sufficient to
give reasonable assurance that the financial statements
are free from material misstatement, whether caused by
fraud or error. This includes an assessment of: whether
the accounting policies are appropriate to the Group’s
circumstances and have been consistently applied and
adequately disclosed; the reasonableness of significant
accounting estimates made by the Directors; and the overall
presentation of the financial statements. In addition, we read
all the financial and non-financial information in the Annual
Report and Accounts to identify material inconsistencies
with the audited financial statements 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.
An overview of the scope of the audit
Full scope locations are those in which we obtain audit
coverage over all significant financial statement line items
related to that location. Specific scope locations are those
in which we obtain audit coverage over selected financial
statement line items, which are determined based upon
size and risk. The audit procedures in full and specific
scope locations are performed by audit teams based in
the corresponding locations. Other scope locations for
which the financial statement line items are determined
to be immaterial individually and in the aggregate based
on both size and risk, are subject to analytical procedures
performed by the Group audit team. The audit scopes
we have adopted are set out below. During the year, the
Senior Statutory Auditor visited key infrastructure assets
and the head office of each full scope business where she
attended meetings with management and engaged with the
audit team on the planning and execution of our work. We
included the full scope component teams in our Group audit
planning briefing and interacted regularly with component
teams where appropriate throughout the various stages of
the audit.
Business
Pennon Group Plc
Viridor
South West Water
Scope
Full scope
Full scope
Full scope
Peninsula Insurance Limited
Specific scope
All other entities
Other scope
The three full scope components, over which we performed
our audit procedures, represent the principal businesses
within the Group’s operations and account for just under
100% of the Group’s revenue and profit before tax and 95%
of the Group’s total assets. The only change to the prior year
is Peninsula Insurance Limited which has moved from ‘other’
to ‘specific scope’.
96
Pennon Group Plc Annual Report 2015Financial statements and shareholder information Our assessment of risks of material misstatement
We identified the following risks that have had the greatest
effect on the overall audit strategy; the allocation of
resources in the audit; and directing the efforts of the
engagement team. For each risk identified, we have
documented our response and audit procedures below and
these are broadly consistent with the prior year:
Risk of material misstatement
Our response to the risks of material misstatement included the
following procedures
Valuation of goodwill (Group)
The value of goodwill is £339.3 million, as included in
note 15. The recoverable value of the waste management
business, to which goodwill belongs, is sensitive to
changes in assumptions over future landfill volumes,
power generation prices and discount rates. The Group’s
annual assessment of the recoverable value requires
judgement as to the future cash flow projections and the
discount rates to be used. Audit Committee commentary
is on page 64.
Valuation of non-current assets (Viridor)
The net book value of these assets is £945.3 million, as
included in note 17. The Group is required to review the
carrying value of assets when any impairment indicators
are identified. In calculating the recoverable amounts, key
assumptions are made by management over the cash
flow forecasts, discount rates and grouping of assets into
CGUs. Audit Committee commentary is on page 64.
Landfill related provisions (Viridor)
Landfill related provisions of £193.0 million are recorded
in note 32 and consist of aftercare, restoration and
remediation provisions.
Calculation of the aftercare provision involves significant
judgement over the expected period of aftercare, the level
of costs to be incurred and the discount rate to be used.
Key areas of estimation for the restoration provision
include the expected restoration costs, the void space to
be filled and timing of site closure.
Judgement over the remedial action required to comply
with current environmental legislation, where breaches
have been identified, is key for the remediation provision.
Audit Committee commentary is on page 64.
• We validated management’s determination of cash generating units
(CGUs), through a detailed review of whether they have independent cash
flows
• We audited the underlying cash flow/ fair value models supporting the
carrying value of Viridor assets (discussed below)
• We agreed input data into the goodwill impairment model and cash flow
forecasts, to information from the Viridor business as audited by our
Viridor component team, and performed sensitivity analysis over this data,
including growth rates, volumes, costs and powergen prices
• We audited the discount rate calculation applied at Group level, using our
internal valuation experts to assist in our review of whether management’s
assumptions are within an acceptable range based on comparative
market data
• We confirmed the clerical accuracy of the models
• We assessed whether disclosures made are in accordance with IFRS.
• We evaluated the cash flow forecasts and the key assumptions,
agreeing assumptions made to supporting evidence, such as budgets
and current performance, and using our internal valuation experts to
assess management’s projection of future electricity prices and whether
management’s discount rate assumptions are within an acceptable range
based on comparative market data
• We compared the strategic plans with prior year plans and assessed
changes in these plans over time and management’s ability to forecast
• We evaluated the fair value calculations for any Fair Value Less Cost of
Disposal (FVLCD) recoverable amounts
• We performed sensitivity analysis on the key assumptions, including
growth rates, volumes, costs and powergen prices
• We reviewed the impairment model and tested it for clerical accuracy.
• We evaluated the forecast costs in the models, agreeing these to
supporting evidence such as budgets and current performance
• We assessed the reasonableness of material judgements made, including
expected gas generation and anticipated cost savings to detailed plans
and current performance
• We reviewed the reasonableness of key assumptions used in the
calculation of the provisions, including the discount rates, inflation rates,
void space and remaining lives of the sites to available market information
• We performed sensitivity analysis on these key assumptions
• We reviewed the aftercare, restoration and remediation provision models,
and ensured that the models are clerically accurate.
97
www.pennonannualreport.co.uk/2015Strategic overviewSouth West WaterViridorGroupGovernanceFinancial statements Independent auditor’s report Continued
Independent auditor’s report to the members of Pennon Group Plc
Risk of material misstatement
Our response to the risks of material misstatement included the
following procedures
Revenue recognition across the Group’s operations
The Group’s material revenue streams relate to the
provision of water and wastewater services by South West
Water and revenue generated from the renewable energy,
recycling and waste management services provided by
Viridor. ISAs (UK & Ireland) presume there is a risk of fraud
relating to revenue recognition and for the Group this risk
over revenue recognition specifically arises in the following
judgemental areas:
South West Water
• Income from measured water services requires an
estimation of the amount of unbilled charges at the
year-end. This is calculated using a combination of
system generated information, based on previous
customer volume usage, together with management
judgements as to the likely impact on usage of factors
such as recent weather patterns.
Viridor
• Calculations of accrued income on waste management
contracts and powergen revenue to be received involve
estimation by management
• Accounting for revenue from long-term service
concession arrangements under IFRIC12 requires
revenue to be recognised on construction, during
service delivery and as a capital return on the asset
• Recognition of revenue in the correct period through the
correct cut-off of invoices raised close to the balance
sheet date.
Audit Committee commentary is on page 64.
South West Water
• We tested key controls linked to system generated information and
around the estimation process
• We challenged the key assumptions and estimates made by management
in recognising revenue
• We understood the process for the supply of measured services,
meter reading and related billing in order to challenge the completeness
of adjustments to reflect the accrual or deferral of revenue. This included
considering whether contract terms and conditions were met and revenue
recognised at the correct time in accordance with IFRS
• We performed detailed analytical procedures by comparing revenue
balances for the year against expectation and obtained support for
significant variances
• We compared the accrued income to bills raised post year end for a
sample of customers, and compared management’s history of estimating
the accrued income to bills raised in the subsequent year
• In performing our journal testing, we paid increased attention to entries
impacting revenue.
Viridor
• We challenged the key assumptions and estimates made by management
in recognising revenue
• For material items we re-performed the calculation to confirm the
accuracy of the accrued income recorded by management
• In performing our journal testing, we paid increased attention to entries
impacting revenue, particularly those raised close to the balance
sheet date
• We assessed whether the revenue recognition policies adopted complied
with IFRSs, in particular the requirements of IFRIC 12 and whether
margins used to recognise revenue were appropriate
• We performed cut-off testing of invoices raised prior to and after the
balance sheet date to ensure revenue has been recognised in the
correct period.
Adequacy of the provision for doubtful debts
(South West Water)
As shown in note 22, there is a provision of £86.8 million
at the year-end against gross trade debtors of
£282.5 million.
• We tested controls over the integrity of data and the report utilised to
generate the ageing and categorisation of debt within South West Water’s
billing system
• We tested historic data on collection rates and how this data was used in
the preparation of the bad debt provision
The South West Water provision is calculated using a
combination of system generated information on historic
debt recovery rates and management’s judgement of the
future likely recovery rates. Audit Committee commentary
is on page 64.
• We challenged the assumptions used by management in determining
the amounts provided against the different categories and age of
debt, by comparing these assumptions to historic collection rates and
by considering the impact of changes in the methods adopted by
management to collect debt.
Provisions for uncertain tax positions (Group)
The Company’s current tax liability of £52.2 million shown
in note 27, includes £36.6 million in respect of open tax
computations relating to prior years, where liabilities are
yet to be agreed with HM Revenue & Customs (HMRC).
The Company establishes provisions for individual tax
items where the tax position is uncertain. Audit Committee
commentary is on page 64.
• We inspected the latest correspondence between the Group and HMRC
and reviewed details of any new enquiries that have been opened
• We reviewed and inspected any legal advice or opinion management have
obtained in the period in relation to uncertain tax positions
• We reviewed the adequacy of disclosure in the annual report
• We obtained an updated view from treasury tax specialists as to HMRC’s
current position on open matters
• We challenged the level of provision maintained for uncertain tax positions,
in light of evidence obtained
• We tested whether the tax accounting and disclosures in note 9 complied
with the requirements of IAS12 ‘Income Taxes’.
98
Pennon Group Plc Annual Report 2015Financial statements and shareholder information Our application of materiality
We apply the concept of materiality both in planning
and performing our audit, and in evaluating the effect of
misstatements on our audit and on the financial statements.
For the purposes of determining whether the financial
statements are free from material misstatement we define
materiality as the magnitude of misstatement that makes
it probable that the economic decisions of a reasonably
knowledgeable person, relying on the financial statements,
would be changed or influenced. We also determine a
level of performance materiality which we use to determine
the extent of testing needed to reduce to an appropriately
low level the probability that the aggregate of uncorrected
and undetected misstatements exceeds materiality for the
financial statements as a whole.
When establishing our overall audit strategy, we determined
a magnitude for uncorrected misstatements that we judged
would be material for the financial statements as a whole.
We determined materiality for the Group to be £10 million,
which is the same as in the prior year, and is approximately
5% of profit before taxation before exceptional items. This
provided the basis for determining the nature, timing and
extent of risk assessment procedures, identifying and
assessing the risk of material misstatement and determining
the nature, timing and extent of further audit procedures.
On the basis of our risk assessments, together with our
assessment of the Group’s overall control environment and
being our first year audit, our judgement was that overall
performance materiality for the Group should be 50% of
materiality, namely £5 million.
Audit work at individual components is undertaken based
on a percentage of our total performance materiality. The
performance materiality set for each component is based on
the relative size of the component and our view of the risk
of misstatement at that component. In the current year the
range of performance materiality allocated to components
was £1 million to £4.25 million.
We agreed with the Audit Committee that we would report to
the Committee all audit differences in excess of £0.5 million.
We also agreed to report differences below those thresholds
that, in our view, warranted reporting on qualitative grounds.
We evaluate any uncorrected misstatements against both
the quantitative measures of materiality discussed above and
in light of other relevant qualitative considerations.
Opinion on other matters prescribed by the
Companies Act 2006
In our opinion:
• the part of the Directors’ remuneration report to be
audited has been properly prepared in accordance with
the Companies Act 2006; and
• 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.
Matters on which we are required to report
by exception
Under the ISAs (UK and 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 acquired in
the course of performing our audit; or
• is otherwise misleading.
In particular, we are required to consider whether we have
identified any inconsistencies between our knowledge
acquired during the audit and the Directors’ statement
that they consider the annual report is fair, balanced and
understandable and whether the annual report appropriately
discloses those matters that we communicated to the Audit
Committee which we consider should have been disclosed.
Under the Companies Act 2006 we are required to report to
you if, in our opinion:
• adequate accounting records have not been kept, or
returns adequate for our audit have not been received
from branches not visited by us; or
• the Parent Company financial statements and the part of
the Directors’ remuneration report to be audited are not in
agreement with the accounting records and returns; or
• certain disclosures of Directors’ remuneration specified by
law are not made; or
• we have not received all the information and explanations
we require for our audit.
Under the Listing Rules we are required to review:
• the Directors’ statement, set out on page 95, in relation to
going concern; and
• the part of the corporate governance statement relating to
the Company’s compliance with the 10 provisions of the
UK Corporate Governance Code specified for our review.
Debbie O’Hanlon (Senior statutory auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditor
Reading
22 June 2015
Notes:
1. The maintenance and integrity of the Pennon Group Plc website is the
responsibility of the Directors; the work carried out by the auditors does not
involve consideration of these matters and, accordingly, the auditors accept
no responsibility for any changes that may have occurred to the financial
statements since they were initially presented on the website.
2. Legislation in the United Kingdom governing the preparation and dissemination
of financial statements may differ from legislation in other jurisdictions.
99
www.pennonannualreport.co.uk/2015Strategic overviewSouth West WaterViridorGroupGovernanceFinancial statements Before
exceptional
items
2014
£m
1,321.2
Exceptional
items
(Note 6)
2014
£m
–
Total
2014
£m
1,321.2
Consolidated income statement
For the year ended 31 March 2015
Before
exceptional
items
2015
£m
1,357.2
Exceptional
items
(Note 6)
2015
£m
–
Notes
5
7
(164.3)
(103.8)
(678.1)
411.0
(164.4)
246.6
44.0
(84.8)
(40.8)
4.9
210.7
(57.4)
153.3
137.3
16.0
14.9
–
(4.3)
10.6
(24.3)
(13.7)
–
–
–
–
(13.7)
2.7
(11.0)
(11.0)
–
5
5
8
8
8
20
5
9
11
Revenue
Operating costs
Manpower costs
Raw materials and consumables used
Other operating expenses
Earnings before interest, tax, depreciation
and amortisation
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
– Before exceptional items and deferred tax
Total
2015
£m
1,357.2
(149.4)
(103.8)
(682.4)
(161.4)
(111.6)
(640.9)
421.6
407.3
(149.8)
257.5
43.3
(97.2)
(53.9)
3.7
207.3
(9.5)
197.8
182.2
15.6
(188.7)
232.9
44.0
(84.8)
(40.8)
4.9
197.0
(54.7)
142.3
126.3
16.0
32.3
32.2
39.8
–
–
(5.7)
(5.7)
(42.9)
(48.6)
–
–
–
–
(48.6)
8.9
(39.7)
(39.7)
–
(161.4)
(111.6)
(646.6)
401.6
(192.7)
208.9
43.3
(97.2)
(53.9)
3.7
158.7
(0.6)
158.1
142.5
15.6
38.8
38.6
42.6
Consolidated statement of comprehensive income
For the year ended 31 March 2015
Notes
30
9, 31
20
9, 31
36
Profit for the year
Other comprehensive (loss)/income
Items that will not be reclassified to profit or loss
Remeasurement of defined benefit obligations
Income tax on items that will not be reclassified
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
Cash flow hedges
Income tax on items that may be reclassified
Total items that may be reclassified subsequently to
profit or loss
Other comprehensive (loss)/income for the
year net of tax
Total comprehensive income for the year
Total comprehensive income attributable to:
Ordinary shareholders of the parent
Perpetual capital security holders
Before
exceptional
items
2015
£m
Exceptional
items
(Note 6)
2015
£m
Before
exceptional
items
2014
£m
Exceptional
items
(Note 6)
2014
£m
Total
2015
£m
Total
2014
£m
153.3
(11.0)
142.3
197.8
(39.7)
158.1
(2.1)
0.4
(1.7)
1.1
(36.8)
5.7
(30.0)
(31.7)
121.6
105.6
16.0
–
–
–
–
–
–
–
–
(11.0)
(11.0)
–
(2.1)
0.4
(1.7)
26.2
(10.2)
16.0
1.1
4.8
(36.8)
32.8
5.7
(30.0)
(31.7)
110.6
94.6
16.0
(7.0)
30.6
46.6
244.4
228.8
15.6
–
–
–
–
–
–
–
–
(39.7)
26.2
(10.2)
16.0
4.8
32.8
(7.0)
30.6
46.6
204.7
(39.7)
189.1
–
15.6
The notes on pages 105 to 156 form part of these financial statements.
100
Pennon Group Plc Annual Report 2015Financial statements and shareholder information Balance sheets
At 31 March 2015
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
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
Notes
Group
Company
2015
£m
2014
£m
2015
£m
2014
£m
15
16
17
19
31
23
20
20
21
22
24
23
25
28
23
26
27
32
28
29
24
23
30
31
32
33
34
35
36
37
339.3
56.4
3,578.8
291.1
–
60.2
–
0.1
339.3
30.6
3,450.4
230.3
–
25.9
–
0.1
–
–
0.1
790.0
3.0
–
–
–
0.2
834.0
1.3
0.2
1,523.6
1,323.3
–
–
4,325.9
4,076.6
2,316.7
2,159.0
15.0
287.7
0.1
8.1
771.0
1,081.9
(113.6)
(19.5)
(277.7)
(52.2)
(32.9)
(495.9)
586.0
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
–
156.2
–
–
532.5
688.7
–
11.4
–
–
326.7
338.1
(333.9)
(407.5)
(2.9)
(5.6)
(23.8)
–
(366.2)
322.5
(2.4)
(7.4)
(1.1)
–
(418.4)
(80.3)
(2,854.5)
(2,533.2)
(885.4)
(691.3)
(110.1)
(57.3)
(46.0)
(59.6)
(235.9)
(194.4)
(3,557.8)
1,354.1
162.4
118.6
144.2
634.1
1,059.3
294.8
1,354.1
(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
1,197.6
(8.7)
(0.5)
(14.5)
(4.2)
–
–
(8.7)
–
(0.1)
(6.2)
–
–
(913.3)
1,725.9
(706.3)
1,372.4
162.4
118.6
144.2
1,005.9
1,431.1
294.8
1,725.9
151.3
4.9
144.2
777.2
1,077.6
294.8
1,372.4
The notes on pages 105 to 156 form part of these financial statements.
The financial statements on pages 100 to 156 were approved by the Board of Directors and authorised for issue on 22 June 2015 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
101
www.pennonannualreport.co.uk/2015Strategic overviewSouth West WaterViridorGroupGovernanceFinancial statements Statements of changes in equity
For the year ended 31 March 2015
Share
capital
(Note 33)
£m
Share
premium
account
(Note 34)
£m
Capital
redemption
reserve
(Note 35)
£m
149.2
7.0
144.2
Retained
earnings
and other
reserves
(Note 36)
£m
Perpetual
capital
securities
(Note 37)
£m
Total
equity
£m
476.9
142.5
46.6
189.1
(103.9)
34.5
3.8
–
–
(0.4)
2.4
294.8
1,072.1
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)
602.4
126.3
(31.7)
94.6
(117.0)
48.0
(0.5)
3.5
–
–
(0.8)
3.9
294.8
1,197.6
16.0
142.3
–
(31.7)
16.0
110.6
–
–
–
–
(117.0)
48.0
124.3
3.5
(20.3)
(20.3)
4.3
–
–
4.3
(0.8)
3.9
45.9
–
–
–
–
–
–
–
–
–
–
–
144.2
–
–
–
–
–
–
–
–
–
–
–
–
(62.9)
(16.0)
144.2
634.1
294.8
1,354.1
–
–
–
–
–
–
–
–
2.1
(2.1)
–
–
–
–
–
–
–
–
–
–
2.1
151.3
(2.1)
4.9
–
–
–
–
2.6
8.5
–
–
–
–
–
–
–
–
–
(2.6)
116.3
–
–
–
–
–
11.1
162.4
113.7
118.6
Group
At 1 April 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
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
Convertible bond – equity issuance
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 2015
The notes on pages 105 to 156 form part of these financial statements.
102
Pennon Group Plc Annual Report 2015Financial statements and shareholder information Share
capital
(Note 33)
£m
Share
premium
account
(Note 34)
£m
Capital
redemption
reserve
(Note 35)
£m
149.2
7.0
144.2
Company
At 1 April 2013
Profit for the year (note 10)
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
Profit for the year (note 10)
Other comprehensive loss for the year
Total comprehensive income for the year
Transactions with equity shareholders
Dividends paid
Adjustment for shares issued under the Scrip
Dividend Alternative
Convertible bond – equity issuance
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)
Charge in respect of share options vesting
Proceeds from treasury shares re-issued
Total transactions with equity shareholders
At 31 March 2015
The notes on pages 105 to 156 form part of these financial statements.
–
–
–
–
–
–
–
–
2.1
(2.1)
–
–
–
–
–
–
–
–
2.1
151.3
(2.1)
4.9
–
–
–
–
2.6
8.5
–
–
–
–
–
–
–
–
–
(2.6)
116.3
–
–
–
–
–
11.1
162.4
113.7
118.6
Retained
earnings
and other
reserves
(Note 36)
£m
684.8
157.9
0.7
Perpetual
capital
securities
(Note 37)
£m
Total
equity
£m
294.8
1,280.0
15.6
173.5
–
0.7
158.6
15.6
174.2
(103.9)
34.5
–
–
(103.9)
34.5
–
–
0.8
2.4
(20.3)
(20.3)
4.7
–
–
4.7
0.8
2.4
(66.2)
(15.6)
(81.8)
777.2
300.1
294.8
1,372.4
16.0
316.1
(5.9)
–
(5.9)
294.2
16.0
310.2
(117.0)
48.0
(0.5)
–
–
0.9
(0.8)
3.9
–
–
–
(117.0)
48.0
124.3
(20.3)
(20.3)
4.3
–
–
–
4.3
0.9
(0.8)
3.9
(65.5)
(16.0)
43.3
–
–
–
–
–
–
–
–
–
–
144.2
–
–
–
–
–
–
–
–
–
–
–
–
144.2
1,005.9
294.8
1,725.9
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For the year ended 31 March 2015
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
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
Purchase of ordinary shares by the
Pennon Employee Share Trust
Deposit of restricted funds
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 increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of the year
The notes on pages 105 to 156 form part of these financial statements.
Group
Company
Notes
2015
£m
2014
£m
2015
£m
2014
£m
38
38
45
20
33
37
25
25
310.9
338.0
(103.8)
(208.0)
(62.0)
(21.0)
(65.3)
(58.1)
(34.7)
15.2
(28.6)
(16.6)
227.9
214.6
(123.3)
(253.2)
20.3
26.5
6.0
–
0.3
8.5
–
0.3
(298.1)
(346.7)
5.7
5.4
50.7
311.6
(200.3)
–
(0.1)
0.1
60.3
162.1
–
–
(0.1)
–
(265.8)
(306.0)
162.0
222.3
3.9
(0.8)
(23.0)
345.0
2.4
(0.4)
(29.6)
294.0
3.9
–
1.4
2.4
–
–
345.0
171.0
(123.6)
(146.1)
(92.5)
(125.0)
160.1
(99.5)
(69.0)
(20.3)
172.8
134.9
439.9
574.8
40.5
(30.3)
(69.4)
(20.3)
40.8
(50.6)
490.5
439.9
–
–
(69.0)
(20.3)
168.5
207.2
325.3
532.5
–
–
(69.4)
(20.3)
(41.3)
(72.2)
397.5
325.3
104
Pennon Group Plc Annual Report 2015Financial statements and shareholder information 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 101. Pennon Group’s business is operated through its main subsidiaries. South West Water Limited holds the water and
wastewater services appointments for Devon, Cornwall and parts of Dorset and Somerset. Viridor Limited’s business is renewable energy,
recycling 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 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 95.
The new standards listed below, which were mandatory for the first time in the year beginning 1 April 2014, did not have a material impact
on the net assets or results of the Group.
–
IFRS 10 ‘Consolidated financial statements’. Under IFRS 10, subsidiaries are all entities over which the Group has control. The Group
controls an entity when the Group has power over an entity, is exposed to, or has rights to, variable returns from its involvement with
the entity and has the ability to affect these returns through its power over the entity.
The new standard IFRS 10 has no financial impact on the Group.
–
IFRS 11, ‘Joint arrangements’. Under IFRS 11, investments in joint arrangements are classified as joint ventures based on contractual
rights and obligations each investor has rather than the legal structure of the joint arrangement.
Under IFRS 11, entities can no longer account for an interest in a joint venture using the proportionate consolidation method and must
use the equity method in accordance with IAS 28 ‘Investments in associates’.
The new standard IFRS 11 has no financial impact on the Group. All joint ventures continue to be recognised using the equity method.
–
IFRS 12 ‘Disclosure of interests in other entities’. IFRS 12 sets out the required disclosures for entities reporting under the two new
standards noted above. The new standard requires additional disclosure in relation to subsidiaries, associates and joint arrangements.
The new standard IFRS 12 has no financial impact on the Group, although further disclosure of joint arrangements has been presented
in these financial statements.
Other standards or interpretations which were mandatory for the first time in the year beginning 1 April 2014 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,
except the following set out below:
–
–
IFRS 9 ‘Financial instruments’ addresses the classification, measurement and recognition of financial assets and financial liabilities,
including the relaxation of certain hedging requirements. The complete version of IFRS 9 was issued in July 2014. It will replace the
guidance in IAS 39 that relates to the classification and measurement of financial instruments. The standard is effective for accounting
periods beginning on or after 1 January 2018 and is subject to EU endorsement.
IFRS 15 ‘Revenue from contracts with customers’ relates to revenue recognition and establishes principles for reporting useful
information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from
an entity’s contracts with customers. The standard will replace IAS 18 ‘Revenue’ and IAS 11 ‘Construction contracts’ and related
interpretations. The standard is effective for annual periods beginning on or after 1 January 2017 and is subject to EU endorsement.
The Group is currently assessing the impact of adopting IFRS 9 and IFRS 15 on the Group’s financial reporting, which is expected to result
in increased disclosure of the Group’s revenue.
(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 is exposed to, or has rights to, variable
returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The results of joint
ventures and associate undertakings are accounted for on an equity basis.
Intra-group trading, 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.
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Notes to the financial statements
Continued
2. Principal accounting policies Continued
(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 wastewater charges includes billed amounts for estimated usage and also an estimation of the amount of
unbilled charges at the year-end based upon a defined methodology reflecting historical consumption and current tariffs.
Income from electricity generated from waste management landfill gas production during the year includes an estimation of the amount to
be received under Renewables Obligation Certificates.
Accrued income from waste management contracts at the balance sheet date is recognised using management’s expectation of amounts
to be subsequently billed for services rendered to the client in accordance with the terms of the contract.
Income from recycling activities within waste management includes amounts based upon market prices for recyclate products and industry
schemes for waste electrical and electronic equipment (‘WEEE’ notes) and packaging volumes (‘PRNs’) processed.
Revenue from long-term service concession arrangements is recognised based on the fair value of work performed. Where an arrangement
includes more than one service, such as construction and operation of waste management facilities, revenue and profit are recognised in
proportion to a fair value assessment of the total contract value split across the services provided.
(d) Landfill tax
Landfill tax is included within both revenue and operating costs.
(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 are based
primarily on business segments. The reportable business segments comprise the regulated water and wastewater 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 concessions contracts to the extent that future amounts to be
received are not certain.
Other intangible assets include assets acquired in a business combination and 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 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.
106
Pennon Group Plc Annual Report 2015Financial statements and shareholder information 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 energy recovery facilities, 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
Operational properties
Energy Recovery Facilities
(including major refurbishments)
Fixed plant
Vehicles, mobile plant and computers
Over the estimated economic lives or the
finance lease period, whichever is the shorter
40 – 80 years
25 – 30 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).
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.
107
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Continued
2. Principal accounting policies Continued
(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, foreign exchange forward contracts and cross-currency
interest rate swaps to hedge risks associated with interest rate and exchange rate fluctuations. Derivative instruments are initially
recognised at fair value on the date the derivative contract is entered into and subsequently remeasured at fair value for the reported
balance sheet.
The Group designates certain hedging derivatives as either:
– a hedge of a highly probable forecast transaction or change in the cash flows of a recognised asset or liability (a cash flow hedge) or
– a hedge of the exposure to change in the fair value of a recognised asset or liability (a fair value hedge).
The gain or loss on remeasurement is recognised to the income statement except for cash flow hedges which meet the conditions
for hedge accounting, when the portion of the gain or loss on the hedging instrument which is determined to be an effective hedge is
recognised directly in equity, and the ineffective portion in the income statement. The gains or losses deferred in equity in this way are
subsequently recognised in the income statement in the same period in which the hedged underlying transaction or firm commitment is
recognised in the income statement.
In order to qualify for hedge accounting, the Group is required to document in advance the relationship between the item being hedged
and the hedging instrument. The Group is also required to document and demonstrate an assessment of the relationship between the
hedged item and the hedging instrument which shows that the hedge will be highly effective on an ongoing basis. This effectiveness testing
is reperformed at the end of each reporting period to ensure that the hedge remains highly effective.
Where a non-derivative transaction or series of transactions with the same counterparty has the aggregate effect in substance of a
derivative instrument, the transaction or series of transactions shall be recognised as a single derivative instrument at fair value with
associated movements recorded in the income statement.
The full fair value of a hedging derivative is apportioned on a straight line basis between non-current and current assets or liabilities based
on the remaining maturity of the hedging derivative.
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.
The Group uses cross-currency swaps for some of its foreign currency denominated private placement borrowings. The swaps either
have the effect of (i) converting variable rate foreign currency borrowings into fixed rate sterling borrowings, (ii) converting fixed rate
foreign currency borrowings into fixed rate sterling borrowings, or (iii) converting fixed rate foreign currency borrowings into floating rate
sterling borrowings.
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.
108
Pennon Group Plc Annual Report 2015Financial statements and shareholder information (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 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) Underperforming 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).
(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. If the value of a plan’s assets exceeds the present value of its obligations, the
resulting surplus is only recognised if the Group has an unconditional right to that surplus.
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 in which they arise.
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Continued
2. Principal accounting policies Continued
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 to transfer the asset or liability at the balance sheet date in an orderly
transaction between market participants.
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 and repayment of principal 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.
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 28.
Refinancing risk is managed under a Group policy that permits no more than 20% of Group net borrowings to mature in any financial year.
The Group and South West Water have entered into covenants with lenders. While 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.
110
Pennon Group Plc Annual Report 2015Financial statements and shareholder information 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 2015
Non-derivative financial liabilities
Borrowings excluding finance lease liabilities
Interest payments on borrowings
Finance lease liabilities including interest
Trade and other payables
Guarantees
Derivative financial liabilities
Derivative contracts – net payments/ (receipts)
31 March 2014
Non-derivative financial liabilities
Borrowings excluding finance lease liabilities
Interest payments on borrowings
Finance lease liabilities including interest
Trade and other payables
Guarantees
Derivative financial liabilities
Derivative contracts – net payments/ (receipts)
Company
31 March 2015
Non-derivative financial liabilities
Borrowings excluding intercompany borrowings
Intercompany borrowings
Interest payments on borrowings
Trade and other payables
Guarantees
Derivative financial liabilities
Derivative contracts – net payments
31 March 2014
Non-derivative financial liabilities
Borrowings excluding intercompany borrowings
Intercompany borrowings
Interest payments on borrowings
Trade and other payables
Guarantees
Derivative financial liabilities
Derivative contracts – net payments
81.8
48.4
43.6
277.7
169.8
6.7
155.4
26.3
62.5
298.8
150.0
15.3
50.7
283.2
30.8
5.6
556.4
1.1
124.3
283.2
16.0
7.4
588.6
1.2
113.6
46.8
46.3
–
–
5.5
143.6
24.8
73.2
–
–
4.3
74.9
–
29.0
–
–
1.0
112.5
–
13.4
–
–
0.8
410.0
132.0
198.2
–
–
1,027.0
753.8
2,157.8
–
–
1,632.4
981.0
2,445.9
277.7
169.8
4.2
(105.4)
(89.0)
468.5
62.2
224.6
–
–
1,582.1
642.9
2,037.7
–
–
2,349.6
756.2
2,398.0
298.8
150.0
1.9
(43.8)
(22.3)
310.0
–
78.8
–
–
1.2
356.7
–
25.9
–
–
1.1
500.5
–
139.3
–
–
–
222.0
–
10.9
–
–
–
936.1
283.2
277.9
5.6
556.4
3.3
815.5
283.2
66.2
7.4
588.6
3.1
No liability is expected to arise in respect of the guarantees noted above. Guarantees are analysed in note 42.
(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 72% (2014 62%) of Group net borrowings were at fixed rates (including at least 50% of South West Water’s borrowings
fixed for the period to March 2016) and 18% (2014 18%) index-linked, after the impact of financial derivatives. The notional principal
amounts of the interest rate swaps are used to determine settlement under those swaps and are not therefore an exposure for the Group.
These instruments are analysed in note 23.
The interest rate for index-linked debt is based upon an RPI measure, which is also used in determining the amount of income from
customers in South West Water.
The Group has no significant interest-bearing assets upon which the net return fluctuates from market risk. Deposit interest receivable is
expected to fluctuate in line with interest payable on floating rate borrowings. Consequently the Group’s income and cash generated from
operations (note 38) are independent of changes in market interest rates.
For 2015 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 £0.4 million (2014 £1.2 million), for the equity sensitivity fair value,
derivative impacts are excluded.
For 2015 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 £1.5 million (2014 £1.4 million).
111
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Notes to the financial statements
Continued
3. Financial risk management Continued
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 22.
Counterparty risk arises from the investment of surplus funds and from the use of derivative financial instruments. The Board has agreed a
policy for managing such risk which is controlled through credit limits, counterparty approvals, and rigorous monitoring procedures.
The Group has no other significant concentration of credit risk. The Group’s surplus funds are managed by the Group’s treasury function
and are usually placed in short-term fixed interest deposits or the overnight money markets. Deposit counterparties must meet a credit
rating threshold set by the Board of P1 (Moody’s) or A1 (Standard & 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 2015 the Group had
cash and facilities, excluding restricted funds, of over £1.5 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 39 and calculated as total borrowings less cash and cash deposits. Total capital is calculated as total
shareholders’ equity plus net borrowings.
The gearing ratios at the balance sheet date were:
Net borrowings (note 39)
Total equity
Total capital
Gearing ratio
2015
£m
2,197.1
1,354.1
3,551.2
61.9%
2014
£m
2,194.0
1,197.6
3,391.6
64.7%
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 the K5 (2010-2015) regulatory period for gearing was 55%-65% and for K6 (2015-2020) Ofwat’s optimum gearing is set
at 62.5%.
Regulatory Capital Value
Net borrowings
Net borrowings/Regulatory Capital Value
2015
£m
2,928.0
1,817.5
62.1%
2014
£m
2,958.8
1,645.7
55.6%
The Group has entered into covenants with lenders and, while terms vary, these typically provide for limits on gearing and interest cover.
The Group has been in compliance with its covenants during the year.
(c) Determination of fair values
The Group uses the following hierarchy for determining the fair value of financial instruments by valuation technique:
• quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1)
• inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or
indirectly (that is, derived from prices) (level 2)
• inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3).
The Group’s financial instruments are valued principally using level 2 measures as analysed in note 23.
The fair value of financial instruments not traded in an active market (for example over-the-counter derivatives) is determined by using
valuation techniques. A variety of methods and assumptions are used based on market conditions existing at each balance sheet
date. Quoted market prices or dealer quotes for similar instruments are used for long-term debt. Other techniques, such as estimated
discounted cash flows, are used to determine fair value for the remaining financial instruments. The fair value of interest rate swaps is
calculated as the present value of the estimated future cash flows.
The carrying values, less impairment provision, of trade receivables and payables are assumed to approximate to their fair values. The fair
value of financial liabilities, principally environmental provisions, is calculated as the present value of the estimated future cash flows.
112
Pennon Group Plc Annual Report 2015Financial statements and shareholder information 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 15 and 17.
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.
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 2015 the Group’s environmental and landfill restoration provisions were £193.0 million (2014 £190.5 million) (note 32).
Where a restoration provision gives access to future economic benefits, an asset is recognised and depreciated in accordance with the
Group’s depreciation policy. As at 31 March 2015 these assets had a net book value of £17.9 million (2014 £20.8 million) (note 17).
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 such valuation of the main scheme was as at 31 March 2013.
The pension cost and liabilities under IAS 19 are assessed in accordance with Directors’ best estimates using the advice of an independent
qualified actuary and assumptions in the latest actuarial valuation. The assumptions are based on member data supplied to the actuary
and market observations for interest rates and inflation, supplemented by discussions between the actuary and management. The mortality
assumption uses a scheme-specific calculation based on CMI 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 30.
Taxation
The Group current income tax provision of £52.2 million (note 27) reflects management’s judgement of the amount of tax payable for fiscal
years with open tax computations where liabilities remain to be agreed with HM Revenue & Customs. Management periodically evaluates
items detailed in tax returns where the tax treatment is subject to interpretation. The Group establishes provisions 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.
113
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Continued
4. Critical accounting judgements and estimates Continued
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 or has constructed a competing energy recovery 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 advisers.
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 wastewater 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 2015 the Group’s current trade
receivables were £282.5 million, against which £86.8 million had been provided for impairment (note 22).
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.
114
Pennon Group Plc Annual Report 2015Financial statements and shareholder information 5. Segmental information
Operating segments are reported in a manner consistent with internal reporting provided to the Chief Operating Decision-Maker, which has
been identified as the Pennon Group Plc Board.
The water and wastewater business comprises the regulated water and wastewater services undertaken by South West Water Limited.
The waste management business is the renewable energy, recycling 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 arrangements and Group taxation liabilities. Capital expenditure comprises additions to property, plant and equipment, including
additions resulting from acquisitions through business combinations.
Revenue
Water and wastewater
Waste management
Other
Less intra-segment trading*
Segment result
Operating profit/(loss) before depreciation, amortisation and exceptional items (EBITDA)
Water and wastewater
Waste management
Other
Operating profit/(loss) before exceptional items
Water and wastewater
Waste management
Other
Profit before tax and exceptional items
Water and wastewater
Waste management
Other
Profit/(loss) before tax
Water and wastewater
Waste management
Other
2015
£m
522.2
835.9
10.9
(11.8)
2014
£m
520.0
802.0
11.2
(12.0)
1,357.2
1,321.2
331.3
80.4
(0.7)
411.0
225.4
21.6
(0.4)
246.6
167.9
27.7
15.1
210.7
179.7
1.0
16.3
197.0
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
* Intra-segment transactions between and to different segments is under normal market-based commercial terms and conditions. Intra-segment revenue of the
other segment is at cost.
115
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Continued
5. Segmental information Continued
Water and
wastewater
£m
Waste
management
£m
Other
£m
Eliminations
£m
Group
£m
Balance sheet
31 March 2015
Assets (excluding investments in joint ventures)
3,067.7
1,828.7
1,779.6
(1,268.3)
5,407.7
Investments in joint ventures
–
0.1
–
–
0.1
Total assets
Liabilities
Net assets
31 March 2014
3,067.7
1,828.8
1,779.6
(1,268.3)
5,407.8
(2,359.2)
(1,413.4)
(1,549.4)
1,268.3
(4,053.7)
708.5
415.4
230.2
–
1,354.1
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
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
Segment liabilities of the water and wastewater and waste management segments comprise operating liabilities. The other segment
liabilities include the Group taxation liabilities.
Notes
Water and
wastewater
£m
Waste
management
£m
Other
£m
Group
£m
7
17
7
7
8
8
7
17
7
7
8
8
–
145.1
105.9
–
2.8
60.3
–
141.6
103.9
–
3.0
67.5
2.7
156.3
56.1
24.3
30.6
14.0
2.7
219.1
43.4
42.9
18.8
12.0
–
–
(0.3)
–
10.6
10.5
–
0.1
(0.2)
–
21.5
17.7
2.7
301.4
161.7
24.3
44.0
84.8
2.7
360.8
147.1
42.9
43.3
97.2
Other information
31 March 2015
Amortisation of other intangible assets
Capital expenditure
Depreciation
Impairment
Finance income
Finance costs
31 March 2014
Amortisation of other intangible assets
Capital expenditure
Depreciation
Impairment
Finance income
Finance costs
116
Pennon Group Plc Annual Report 2015Financial statements and shareholder information
Geographic analysis of revenue based on location of customers
Revenue
United Kingdom
Rest of European Union
China
Rest of World
2015
£m
2014
£m
1,317.6
1,265.2
10.4
25.3
3.9
13.1
35.8
7.1
1,357.2
1,321.2
The Group’s country of domicile is the United Kingdom and is the country in which it generates the majority of its revenue. The Group’s
non-current assets are all located in the United Kingdom.
6. Exceptional items
Exceptional items are those that in the Directors’ view are required to be separately disclosed by virtue of their size or incidence to enable a
full understanding of the Group’s financial performance.
Operating credits/ (costs)
Pension costs – past service (a)
Environmental provisions (b)
Underperforming contracts (c)
Impairment of property, plant and equipment (d)
Total net operating costs
Tax credit arising on exceptional items
Net exceptional charge
Notes
30
32
32
17
9
2015
£m
14.9
6.7
(11.0)
(24.3)
(13.7)
2.7
(11.0)
2014
£m
–
(5.7)
–
(42.9)
(48.6)
8.9
(39.7)
(a) During the year an exceptional credit was recognised relating to changes made to the Group’s defined benefit scheme. Changes
implemented during the year capped pensionable pay for active members, reducing past service cost.
(b) Landfill environmental provisioning has been reassessed £6.7 million lower reflecting lower expected restoration and aftercare costs,
partly offset by a reduction in discount rate.
(c) A small number of contracts have been assessed as underperforming. On this basis a provision of £11.0 million has been established.
(d) The profitability of a small number of landfill energy sites has been impacted by higher than anticipated site costs and lower than
expected volumes due to site specific circumstances. As a result, a net exceptional impairment charge of £24.3 million has been
recognised to write down the carrying value of landfill energy property, plant and equipment. Included in the net charge are impairment
reversals of £9.2 million.
117
www.pennonannualreport.co.uk/2015Strategic overviewSouth West WaterViridorGroupGovernanceFinancial statements Notes to the financial statements
Continued
7. Operating costs
Manpower costs
Raw materials and consumables
Other operating expenses include:
Notes
13
2015
£m
149.4
103.8
2014
£m
161.4
111.6
Profit on disposal of property, plant and equipment
(3.7)
(4.2)
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:
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
22
16
15.7
9.2
0.1
12.8
13.2
8.4
0.1
10.2
125.6
109.2
36.1
24.3
2.7
2015
£000
75
471
–
–
–
57
603
17
37.9
42.9
2.7
2014
£000
136
527
303
99
843
409
2,317
19
Expenses reimbursed to the auditors in relation to the audit of the Group were £40,000 (2014 £45,000).
A description of the work of the Audit Committee is set out in its report on pages 62 to 66 which includes an explanation of how the
auditors’ objectivity and independence are safeguarded when non-audit services are provided by the auditors’ firm.
118
Pennon Group Plc Annual Report 2015Financial statements and shareholder information 8. Net finance costs
Cost of servicing debt
Bank borrowing and overdrafts
Interest element of finance lease rentals
Other finance costs
Interest receivable
Interest receivable on shareholder loans to
joint ventures
Other finance income
Investment income received
Fair value losses on derivative financial
instruments providing commercial hedges
Notional interest
Interest receivable on service
concession arrangements
Retirement benefit obligations
Unwinding of discounts in provisions
Net gains on non-designated derivative
financial instruments
Finance
cost
£m
Notes
2015
Finance
income
£m
(32.2)
(32.9)
(6.5)
–
–
(71.6)
–
–
–
–
(2.7)
(10.5)
(13.2)
–
(84.8)
30
–
–
–
11.3
11.4
22.7
–
–
–
–
–
13.5
7.8
44.0
Finance
cost
£m
2014
Finance
income
£m
(32.5)
(35.8)
(4.9)
–
–
–
–
–
5.3
9.8
Total
£m
(32.2)
(32.9)
(6.5)
11.3
11.4
Total
£m
(32.5)
(35.8)
(4.9)
5.3
9.8
(48.9)
(73.2)
15.1
(58.1)
–
–
–
(2.7)
(10.5)
0.3
7.8
–
11.3
11.3
(10.7)
(10.7)
–
(4.0)
(9.3)
(13.3)
–
–
(10.7)
11.3
0.6
8.5
–
–
8.5
8.4
8.5
(4.0)
(9.3)
(4.8)
8.4
(40.8)
(97.2)
43.3
(53.9)
13.5
13.5
Other finance income received last year reflects 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 £22.5 million (2014 £21.8 million) have been capitalised on qualifying assets included in property,
plant and equipment and other intangible assets.
9. Taxation
Before
exceptional
items
2015
£m
Exceptional
items
(Note 6)
2015
£m
Notes
Analysis of charge in year
Current tax charge
Deferred tax – other
Deferred tax arising on change of rate of
corporation tax
Total deferred tax charge/ (credit)
31
Tax charge for year
39.2
18.2
–
18.2
57.4
0.6
(3.3)
–
(3.3)
(2.7)
Before
exceptional
items
2014
£m
Exceptional
items
(Note 6)
2014
£m
35.3
14.3
–
(10.2)
Total
2015
£m
39.8
14.9
Total
2014
£m
35.3
4.1
–
(40.1)
1.3
(38.8)
14.9
54.7
(25.8)
9.5
(8.9)
(8.9)
(34.7)
0.6
UK corporation tax is calculated at 21% (2014 23%) of the estimated assessable profit for the year.
UK corporation tax is stated after release of prior year current tax credits of £5.5 million (2014 £16.5 million) and a prior year deferred tax
charge of £9.7 million (2014 £12.1 million).
The 2014 deferred tax credit includes a credit of £38.8 million reflecting a reduction in the rate of UK corporation tax.
119
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Notes to the financial statements
Continued
9. 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 (21%) from:
Profit before tax
Profit before tax multiplied by the standard rate of UK corporation tax of 21% (2014 23%)
Effects of:
Expenses not deductible for tax purposes
Other
Change in rate of corporation tax
Adjustments to tax charge in respect of prior years
Tax charge for year
2015
£m
197.0
41.4
9.2
(0.1)
–
4.2
54.7
The average applicable tax rate for the year before exceptional items was 27% (2014 5%).
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 (credit)/charge on defined benefit pension schemes
Deferred tax (credit)/charge on cash flow hedges
Amounts recognised directly in equity
Deferred tax credit on share based payments
Current tax credit on perpetual capital securities periodic return
10. Profit of the parent company
2015
£m
(0.4)
(5.7)
–
(4.3)
2014
£m
158.7
36.5
7.5
(0.2)
(38.8)
(4.4)
0.6
2014
£m
10.2
7.0
(0.5)
(4.7)
Profit attributable to ordinary shareholders’ equity dealt with in the accounts of the parent company
2015
£m
300.1
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.
11. Earnings per share
Basic earnings per share are calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of
ordinary shares outstanding during the year, excluding those held in the employee share trust (note 36), which are treated as cancelled.
For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to include all dilutive potential ordinary
shares. The Group has two types of dilutive potential ordinary shares – those share options granted to employees where the exercise price
is less than the average market price of the Company’s ordinary shares during the year; and the contingently issuable shares under the
Group’s Performance and Co-investment Plan and the deferred shares element of the Annual Incentive Bonus Plan, to the extent that the
performance criteria for vesting of the awards are expected to be met.
The 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
2015
2014
390.9
1.8
392.7
367.4
1.7
369.1
120
Pennon Group Plc Annual Report 2015Financial statements and shareholder information 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:
2015
2014
Profit
after tax
£m
Earnings per share
Diluted
Basic
p
p
Profit
after tax
£m
Earnings per share
Diluted
Basic
p
p
Statutory earnings
126.3
32.3
32.2
142.5
Deferred tax charge/ (credit) before exceptional items
Exceptional items (net of tax)
18.2
11.0
4.7
2.8
4.6
2.8
(25.8)
39.7
Earnings before exceptional items and deferred tax
155.5
39.8
39.6
156.4
38.8
(7.0)
10.8
42.6
12. Dividends
Amounts recognised as distributions to ordinary equity holders in the year:
Interim dividend paid for the year ended 31 March 2014: 9.39p (2013 8.76p) per share
Final dividend paid for the year ended 31 March 2014: 20.92p (2013 19.70p) per share
Proposed dividends
Proposed interim dividend for the year ended 31 March 2015: 9.98p per share
Proposed final dividend for the year ended 31 March 2015: 21.82p per share
2015
£m
34.8
82.2
117.0
39.8
89.7
129.5
38.6
(7.0)
10.8
42.4
2014
£m
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 2015 was paid on 2 April 2015 and the proposed final dividend is subject to approval by shareholders at
the Annual General Meeting.
13. Employment costs
Wages and salaries
Social security costs
Pension costs
Share-based payments
Exceptional items
Total employment costs
Charged:
Manpower costs (excluding exceptional items) – consolidated income statement
Exceptional items
Capital schemes – property, plant and equipment
Total employment costs
Notes
30
33
6, 30
6
2015
£m
143.9
13.8
17.9
3.5
(14.9)
164.2
164.3
(14.9)
14.8
164.2
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 14. There are no personnel, other than Directors, who as key management exercise
authority and responsibility for planning, directing and controlling the activities of the Group.
121
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Continued
13. Employment costs Continued
Employees (average full time equivalent number)
The average monthly number of employees (including Executive Directors) was:
Water and wastewater
Waste management
Other
Group totals
The total number of employees at 31 March 2015 was 4,590 (2014 4,498).
14. Directors’ emoluments
Executive Directors:
Salary
Performance-related bonus paid or payable
Share-based payments
Other emoluments, including payments in lieu of pension provision
Non-executive Directors
2015
2014
1,408
3,101
49
4,558
1,356
3,044
51
4,451
2015
£000
2014
£000
1,119
1,121
382
750
327
506
400
997
501
480
3,084
3,499
The cost of share-based payments represents the amount charged to the income statement, as described in note 33.
The aggregate gains on vesting of Directors’ share-based awards amounted to a total of £642,000 (2014 £1,576,000).
Total gains made by Directors on the exercise of share options were nil (2014 £1,000).
Total emoluments include £1,359,000 (2014 £1,599,000) payable to Directors for services as directors of subsidiary undertakings.
At 31 March 2015 one Director (2014 nil) is accruing retirement benefits under defined benefit pension schemes in respect of which the
Group contributed £5,000 (2014 nil).
At 31 March 2015 one Director (2014 one) is a member of the Group’s defined contribution pension scheme in respect of which the Group
contributed £49,700 (2014 £25,550).
At 31 March 2015 three Directors (2014 three) receive payments in lieu of full pension provision.
More detailed information concerning Directors’ emoluments (including pensions and the highest paid Director) and share interests is
shown in the Directors’ remuneration report on pages 72 to 92.
122
Pennon Group Plc Annual Report 2015Financial statements and shareholder information 15. Goodwill
Cost:
At 1 April 2013
At 31 March 2014
At 31 March 2015
Carrying amount:
At 1 April 2013
At 31 March 2014
At 31 March 2015
£m
339.3
339.3
339.3
339.3
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 the waste management segment, to which goodwill is allocated, 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 seven 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 five 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).
Long-term growth rates
0.5% applied to overheads beyond the period of the
detailed projections.
2.5% applied to other cash flows beyond the period
of the detailed projections.
Basis for assumption
Discount rates have been determined based on an estimate of the
waste management segment’s weighted average cost of capital
adjusted for the different risk profiles of the segment’s business
activities to the extent that the cash flows have not already been
adjusted. Investments in joint ventures reflect an expected equity
return only.
Ongoing efficiencies and benefits from economies of scale.
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 £561 million (‘headroom’). The headroom relative to the Company’s investment in the waste management business (note 20) is
£320 million. A reasonably possible change, with all other variables held constant, of a 0.5% increase in discount rates, or a 1.5% increase
in long-term real growth rate of overheads, or a 0.5% reduction in the long-term growth rate of other cash flows, or a 5.0% reduction in
overall net cash flows would reduce headroom by £151 million, £46 million, £49 million and £108 million respectively.
123
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Continued
16. Other intangible assets
Acquired intangible assets
Cost:
At 1 April 2013
Additions
At 31 March 2014
Additions
At 31 March 2015
Accumulated amortisation:
At 1 April 2013
Charge for year
At 31 March 2014
Charge for year
At 31 March 2015
Carrying amount:
At 1 April 2013
At 31 March 2014
At 31 March 2015
Service
concession
arrangements
£m
Customer
contracts
£m
Patents
£m
Total
£m
–
19.6
19.6
28.5
48.1
–
–
–
–
–
–
19.6
48.1
32.7
–
32.7
–
32.7
19.1
2.7
21.8
2.7
24.5
13.6
10.9
8.2
0.2
–
0.2
–
0.2
0.1
–
0.1
–
0.1
0.1
0.1
0.1
32.9
19.6
52.5
28.5
81.0
19.2
2.7
21.9
2.7
24.6
13.7
30.6
56.4
Service concession arrangements, once available for use, are amortised over the useful life of each contract. The average remaining life,
once in use, is 25 years (2014 25 years).
Customer contracts are amortised over the useful life of each contract which at acquisition ranged between two and 15 years.
The weighted average remaining life is three years (2014 four years).
Patents are amortised over their estimated useful lives which at acquisition was 13 years. The average remaining life is three years (2014
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 17.
During the year borrowing costs of £1.4 million have been capitalised on qualifying assets, at an average rate of 4.1%.
124
Pennon Group Plc Annual Report 2015Financial statements and shareholder information 17. Property, plant and equipment
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
Total
£m
Group
Cost:
At 1 April 2013
Additions
Assets adopted at fair value
Grants and contributions
Disposals
Transfers/reclassifications
461.5
16.8
–
–
–
3.6
1,570.7
633.0
1,551.2
63.4
528.4
4,808.2
13.8
1.2
5.9
(1.6)
(1.2)
21.0
–
–
(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
Additions
Assets adopted at fair value
Grants and contributions
Disposals
Transfers/reclassifications
9.7
–
–
(0.5)
2.6
11.5
3.5
6.9
(1.8)
(1.2)
17.5
–
–
(0.1)
4.9
34.8
0.1
–
(25.6)
519.8
At 31 March 2015
493.7
1,641.5
649.6
2,151.6
–
–
–
–
4.0
67.4
241.9
301.4
–
–
–
(536.8)
7.0
(1.8)
(27.4)
12.0
435.6
5,439.4
Accumulated depreciation:
At 1 April 2013
Charge for year
Impairment charge for the year
Disposals
At 31 March 2014
Charge for year
Impairment charge for the year
Disposals
259.9
156.0
191.9
893.9
27.9
13.1
39.8
–
312.8
22.7
–
(0.2)
23.8
12.0
–
(1.2)
–
(0.4)
178.6
203.5
23.9
11.7
–
(1.2)
–
(0.1)
90.8
(2.0)
(22.4)
960.3
98.7
24.3
(23.9)
9.6
5.1
–
42.6
6.9
–
–
At 31 March 2015
335.3
201.3
215.1
1,059.4
49.5
–
–
–
–
–
–
–
–
–
1,529.6
149.3
42.9
(24.0)
1,697.8
163.9
24.3
(25.4)
1,860.6
Net book value:
At 1 April 2013
At 31 March 2014
At 31 March 2015
201.6
169.1
158.4
1,414.7
1,430.0
1,440.2
441.1
437.8
434.5
657.3
662.2
1,092.2
35.5
20.8
17.9
528.4
3,278.6
730.5
3,450.4
435.6
3,578.8
Of the total depreciation charge of £163.9 million (2014 £149.3 million), £1.3 million (2014 £1.4 million) has been charged to capital
projects, £0.9 million (2014 £0.8 million) has been offset by deferred income and £161.7 million (2014 £147.1 million) has been charged
against profits.
Asset lives and residual values are reviewed annually.
During the year borrowing costs of £21.1 million (2014 £21.8 million) have been capitalised on qualifying assets, at an average borrowing
rate of 4.1%.
125
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Continued
17. Property, plant and equipment Continued
Impairment testing for property, plant and equipment and other intangible assets
Property, plant and equipment and finite lived intangible assets are reviewed for impairment when any indicators of impairment are
identified. Most of the individual assets do not generate independent cash flows and as a result, for the purposes of impairment reviews,
the assets are grouped into cash generating units (CGUs). The CGUs of the waste management segment comprise individual sites which
constitute the smallest identifiable group of assets that generate cash inflows that are largely independent of the cash inflows from other
assets or group of assets.
The carrying value of these individual sites is compared to the recoverable amount of the CGUs, which is based predominantly on
value-in-use. Value-in-use calculations use the same base cash flow projections used for testing goodwill (note 15) and are derived by
adjusting the Group’s detailed budget and strategic plan which cover a period of seven years and are approved by the Board annually. The
key assumptions are the same as for the impairment testing of goodwill (note 15).
For certain CGUs the recoverable amount is determined by reference to the fair value less costs to sell of the underlying assets using
external and internal valuations of property and equipment and management’s estimate of disposal costs.
Net impairment charges of £24.3 million (2014 £42.9 million) for property, plant and equipment has been identified in the waste
management segment relating to CGUs in landfill activities, reflecting higher than anticipated landfill energy site costs and lower than
expected volumes due to site specific circumstances. Included in the net charge are impairment reversals of £9.2 million.
The total recoverable value of CGUs impaired in the year, including cash flows from both assets and liabilities, is below zero (2014 below
zero). The total recoverable value of CGUs where there has been an impairment reversal in the year is £16.0 million.
For the purposes of disclosing the results of the impairment review the CGUs have been grouped together by business activity as each
CGU within a business activity exhibits a similar risk profile. The key assumptions in the Group’s detailed budget and strategic plan are the
same as those used for testing goodwill (note 15). The assumptions applied to these cash flow projections are:
Assumption
Discount rate
The pre-tax discount rate used for landfill is 9%.
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 rates
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 real long-term growth rate of overheads, or a 0.5% increase in discount rate,
or a 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.
126
Pennon Group Plc Annual Report 2015Financial statements and shareholder information Assets held under finance leases included above were:
Cost:
At 31 March 2014
At 31 March 2015
Accumulated depreciation:
At 31 March 2014
At 31 March 2015
Net book amount:
At 31 March 2014
At 31 March 2015
Company
Cost:
At 1 April 2013
Additions
Disposals
At 31 March 2014
Additions
Disposals
At 31 March 2015
Accumulated depreciation:
At 1 April 2013
Charge for year
Disposals
At 31 March 2014
Charge for year
Disposals
At 31 March 2015
Net book value:
At 1 April 2013
At 31 March 2014
At 31 March 2015
Asset lives and residual values are reviewed annually.
Infrastructure
assets
£m
Operational
properties
£m
Fixed and mobile
plant, vehicles
and computers
£m
Construction
in progress
£m
357.0
398.0
41.9
47.4
315.1
350.6
465.2
422.3
112.8
96.9
352.4
325.4
421.3
492.3
200.9
210.1
220.4
282.2
0.2
1.1
–
–
0.2
1.1
Total
£m
1,243.7
1,313.7
355.6
354.4
888.1
959.3
Fixed and mobile plant,
vehicles and computers
£m
0.4
0.1
(0.2)
0.3
0.1
(0.1)
0.3
0.2
0.1
(0.2)
0.1
0.1
–
0.2
0.2
0.2
0.1
127
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Continued
18. 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
Amortised cost
Derivatives
deemed held
for trading
£m
Loans and
receivables
£m
Trade
receivables and
trade payables
£m
Notes
22
19,22
23
25
28
23
26
22
19,22
23
25
28
23
26
Group
31 March 2015
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 2014
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 2015
Financial assets
Amounts owed by subsidiaries
Cash and cash deposits
19,22
25
Total
Financial liabilities
Amounts due to subsidiaries
Borrowings
Derivative financial instruments
Trade payables
Total
31 March 2014
Financial assets
26
28
23
26
Amounts owed by subsidiaries
19,22
Derivative financial instruments
Cash and cash deposits
Total
Financial liabilities
Borrowings
Derivative financial instruments
Trade payables
Total
23
25
28
23
26
128
–
–
68.1
–
68.1
–
(6.5)
–
(6.5)
–
–
20.0
–
20.0
–
(4.8)
–
(4.8)
–
–
–
–
–
(0.7)
–
(0.7)
–
–
–
–
–
–
–
–
–
–
0.2
–
0.2
–
(45.9)
–
(45.9)
–
–
8.5
–
8.5
–
(15.3)
–
(15.3)
–
–
–
–
–
(13.1)
–
(13.1)
–
0.2
–
0.2
–
(0.1)
–
(0.1)
–
–
–
–
–
–
(13.1)
–
–
300.2
–
771.0
1,071.2
(2,968.1)
–
–
(13.1)
(2,968.1)
–
–
–
–
–
–
(4.6)
–
(4.6)
–
–
–
–
–
(3.6)
–
(3.6)
–
–
–
–
–
(2.4)
–
(2.4)
–
233.7
–
613.1
846.8
(2,807.1)
–
–
(2,807.1)
945.2
532.5
1,477.7
(0.3)
(1,219.3)
–
–
(1,219.6)
843.7
–
326.7
1,170.4
(1,098.8)
–
–
(1,098.8)
Total
£m
195.7
300.2
68.3
771.0
195.7
–
–
–
195.7
1,335.2
–
–
(102.5)
(102.5)
(2,968.1)
(65.5)
(102.5)
(3,136.1)
184.5
–
–
–
184.5
233.7
28.5
613.1
184.5
1,059.8
–
–
(100.7)
(100.7)
(2,807.1)
(24.7)
(100.7)
(2,932.5)
–
–
–
–
–
–
(0.1)
(0.1)
–
–
–
–
–
–
(0.1)
(0.1)
945.2
532.5
1,477.7
(0.3)
(1,219.3)
(17.4)
(0.1)
(1,237.1)
843.7
0.2
326.7
1,170.6
(1,098.8)
(2.5)
(0.1)
(1,101.4)
Pennon Group Plc Annual Report 2015Financial statements and shareholder information 19. Other non-current assets
Non-current receivables
Amounts owed by subsidiary undertakings
Amounts owed by related parties (note 45)
Service concession arrangements
Other receivables
Non-current receivables were due:
Between 1 and 2 years
Over 2 years and less than 5 years
Over 5 years
The fair values of non-current receivables were:
Amounts owed by subsidiary undertakings
Amounts owed by related parties
Service concession arrangements
Other receivables
Group
Company
2014
£m
–
87.9
126.0
16.4
230.3
2015
£m
789.6
–
–
0.4
790.0
Group
Company
2014
£m
23.1
22.8
184.4
230.3
2015
£m
63.0
229.1
497.9
790.0
Group
Company
2014
£m
–
165.2
126.0
16.4
307.6
2015
£m
897.5
–
–
0.4
897.9
2014
£m
833.5
–
–
0.5
834.0
2014
£m
166.8
500.2
167.0
834.0
2014
£m
845.1
–
–
0.5
845.6
2015
£m
–
97.6
182.9
10.6
291.1
2015
£m
20.3
31.5
239.3
291.1
2015
£m
–
170.7
182.9
10.6
364.2
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% (2014 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 12.3% (2014 13.0%).
Other receivables include site development and pre-contract costs of £9.3 million (2014 £15.9 million).
129
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Continued
20. Investments
Subsidiary undertakings
Company
At 1 April 2013
At 31 March 2014
Additions
At 31 March 2015
Joint ventures
Group
At 1 April 2013
Share of post-tax profit
Share of other comprehensive profit
Dividends received
At 31 March 2014
Share of post-tax profit
Share of other comprehensive profit
Dividends received
At 31 March 2015
£m
1,323.3
1,323.3
200.3
1,523.6
Shares
£m
0.1
3.7
4.8
(8.5)
0.1
4.9
1.1
(6.0)
0.1
The recoverable amount of investments is determined based on value-in-use calculations, which are set out in note 15.
Details of the Group’s principal subsidiary, joint venture and unconsolidated structured entity undertakings are set out in note 40.
The Group’s joint ventures and associate listed below all have share capital consisting solely of ordinary shares which is held directly by
the Group.
Name of Entity
Place of business/ country of
incorporation
% of ownership
Measurement method
Lakeside Energy from Waste Holdings Limited(1)
England
Viridor Laing (Greater Manchester)
Holdings Limited(2)
INEOS Runcorn (TPS) Holdings Limited(3)
England
England
50
50
20
Equity
Equity
Equity
(1) Lakeside Energy from Waste Holdings Limited provides energy recovery facility services.
(2) Viridor Laing (Greater Manchester) Holdings Limited is delivering the 25 year Greater Manchester Waste PFI contract, which is a combined energy and
renewable energy project.
(3) INEOS Runcorn (TPS) Holdings Limited provides energy recovery facility services. The Group’s economic interest is 37.5% as set out in note 40.
The Group’s joint ventures and associate are all private companies and there are no quoted market prices available for their shares.
130
Pennon Group Plc Annual Report 2015Financial statements and shareholder information Summarised financial information for the Group’s joint ventures and associate:
Summarised balance sheet
2015
Lakeside
Energy from
Waste
Holdings
Limited
£m
Viridor Laing
(Greater
Manchester)
Holdings
Limited
£m
INEOS
Runcorn
(TPS)
Holdings
Limited
£m
Lakeside
Energy from
Waste
Holdings
Limited
£m
22.0
7.5
29.5
(0.1)
(6.1)
(6.2)
104.4
8.9
113.3
–
(42.4)
(42.4)
29.3
11.0
40.3
–
(20.0)
(20.0)
23.8
5.6
29.4
(0.7)
(5.9)
(6.6)
2014
Viridor Laing
(Greater
Manchester)
Holdings
Limited
£m
90.1
23.3
113.4
–
(44.3)
(44.3)
INEOS
Runcorn
(TPS)
Holdings
Limited
£m
43.4
10.7
54.1
–
(10.4)
(10.4)
130.6
328.0
297.2
137.6
338.0
276.7
Current
Cash and cash equivalents
Other current assets
Total current assets
Borrowings
Other current liabilities
Total current liabilities
Non–current
Assets
Borrowings
Other liabilities
Total non-current liabilities
Net liabilities
Net debt
Associated shareholder loans
Net debt (excluding shareholder loans)
(125.8)
(39.6)
(165.4)
(11.5)
(103.9)
18.5
(85.4)
(319.1)
(46.0)
(365.1)
(47.6)
(289.8)
84.2
(205.6)
(133.7)
(34.8)
(168.5)
(8.1)
(110.6)
19.1
(91.5)
(387.3)
(56.4)
(443.7)
(44.8)
(282.9)
114.4
(168.5)
2015
Summarised statement of comprehensive income/(loss)
Lakeside
Energy from
Waste
Holdings
Limited
£m
Viridor Laing
(Greater
Manchester)
Holdings
Limited
£m
INEOS
Runcorn
(TPS)
Holdings
Limited
£m
Lakeside
Energy from
Waste
Holdings
Limited
£m
49.6
36.2
(7.9)
(9.4)
18.9
(2.5)
16.4
(7.8)
8.6
141.4
6.0
(1.3)
(8.4)
(3.7)
1.1
(2.6)
(15.1)
(17.7)
57.0
21.8
(2.9)
(24.3)
(5.4)
–
(5.4)
(16.4)
(21.8)
48.4
30.4
(9.1)
(9.9)
11.4
(2.5)
8.9
8.0
16.9
Revenue
EBITDA
Depreciation and amortisation
Net interest charge
Pre-tax profit/ (loss)
Income tax (expense)/ income
Post-tax profit/ (loss)
Other comprehensive (loss)/ income
Total comprehensive income/ (loss)
(381.4)
(52.8)
(434.2)
(27.1)
(291.3)
101.4
(189.9)
2014
Viridor Laing
(Greater
Manchester)
Holdings
Limited
£m
123.2
5.0
(1.3)
(6.1)
(2.4)
1.4
(1.0)
15.9
14.9
(316.6)
(29.6)
(346.2)
(25.8)
(273.2)
74.9
(198.3)
INEOS
Runcorn
(TPS)
Holdings
Limited
£m
39.7
29.3
–
(30.0)
(0.7)
–
(0.7)
14.8
14.1
Dividends paid by joint venture
(12.0)
–
–
(17.0)
–
–
The information above reflects the amounts presented in the financial statements of the joint ventures and associate adjusted for
differences in accounting policies between the Group and the joint ventures and associate. The information reflects 100% of the joint
ventures and associate results and net liabilities.
131
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Continued
20. Investments Continued
Reconciliation of summarised financial information
Reconciliation of the summarised financial information presented to the carrying amount of its interest in the joint venture/associate.
2015
Lakeside
Energy from
Waste
Holdings
Limited
£m
Viridor Laing
(Greater
Manchester)
Holdings
Limited
£m
INEOS
Runcorn
(TPS)
Holdings
Limited
£m
Lakeside
Energy from
Waste
Holdings
Limited
£m
2014
Viridor Laing
(Greater
Manchester)
Holdings
Limited
£m
(8.1)
16.4
(7.8)
(12.0)
(11.5)
(5.8)
5.9
0.1
(27.1)
(2.6)
(15.1)
–
(44.8)
(22.4)
22.4
–
(25.8)
(5.4)
(16.4)
–
(47.6)
(17.9)
17.9
–
(8.0)
8.9
8.0
(17.0)
(8.1)
(4.1)
4.2
0.1
(42.0)
(1.0)
15.9
–
(27.1)
(13.6)
13.6
–
INEOS
Runcorn
(TPS)
Holdings
Limited
£m
(39.9)
(0.7)
14.8
–
(25.8)
(9.7)
9.7
–
Opening net liabilities 1 April
Profit/(loss) for the year
Other comprehensive (loss)/income
Dividends paid
Closing net liabilities
Interest in joint venture
Share of net liabilities not recognised
Carrying value
Net liabilities in excess of the Group’s interest are not recognised unless the Group has a legal or constructive obligation to
fund those liabilities.
21. Inventories
Raw materials and consumables
22. Trade and other receivables – current
Trade receivables
Less: provision for impairment of receivables
Net trade receivables
Amounts owed by related parties (note 45)
Amounts owed by subsidiary undertakings
Other receivables
Prepayments and accrued income
Group
Company
2015
£m
15.0
2014
£m
12.1
2015
£m
–
2014
£m
–
Group
Company
2015
£m
2014
£m
2015
£m
282.5
(86.8)
195.7
19.7
–
10.9
61.4
2014
£m
270.6
(86.1)
184.5
19.3
–
24.5
49.9
–
–
–
–
155.6
0.3
0.3
287.7
278.2
156.2
–
–
–
–
10.2
1.0
0.2
11.4
Trade receivables include accrued income relating to customers with water metered budget plans.
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.
132
Pennon Group Plc Annual Report 2015Financial statements and shareholder information 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
2015
£m
33.6
20.8
134.4
2014
£m
43.7
17.8
130.5
The aged trade receivables above are taken directly from aged sales ledger records before deduction of credit balances and
other adjustments.
The Group’s two principal operating businesses specifically review separate categories of debt to identify an appropriate provision for
impairment. South West Water Limited has a duty under legislation to continue to provide domestic customers with services regardless
of payment.
The movement in the allowance for impairment in respect of trade receivables was:
At 1 April
Provision for receivables impairment
Receivables written off during the year as uncollectable
Cumulative amounts previously excluded from debt
At 31 March
23. Derivative financial instruments
Derivatives used for cash flow hedging
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Derivatives used for fair value hedging
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Derivative deemed held for trading
Current liabilities
Non-current liabilities
2015
£m
86.1
12.8
(19.2)
7.1
86.8
Group
Company
2015
£m
0.2
–
(13.2)
(32.7)
60.0
8.1
(2.4)
(4.1)
(3.9)
(9.2)
2014
£m
6.7
1.8
(15.3)
–
19.2
0.8
(1.2)
(3.6)
(4.3)
(0.3)
2015
£m
–
–
(2.9)
(10.2)
–
–
–
(0.7)
–
(3.6)
2014
£m
76.4
10.2
(8.4)
7.9
86.1
2014
£m
0.2
–
–
(0.1)
–
–
–
–
(2.4)
–
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 (2014 £nil).
Interest rate swaps, primarily cash flow hedges, 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 2015 72% of Group net borrowings were at fixed rate (2014 62%).
At 31 March 2015 the Group had interest rate swaps to swap from floating to fixed rate and hedge financial liabilities with a notional value
of £1,103.0 million and a weighted average maturity of 4.4 years (2014 £1,563.0 million, with 3.7 years). The weighted average interest rate
of the swaps for their nominal amount was 2.1% (2014 2.7%).
133
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Continued
23. Derivative financial instruments Continued
Derivatives deemed held for trading includes a derivative with a fair value of £3.6 million (2014 £2.4 million) which 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 12 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.
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
Derivatives deemed held for trading
Total liabilities
2015
£m
0.2
68.1
68.3
45.9
6.5
9.5
61.9
2014
£m
8.5
20.0
28.5
15.3
4.8
2.2
22.3
2015
£m
2014
£m
–
–
–
13.1
0.7
–
13.8
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
Liabilities
Group
Company
2015
£m
2014
£m
2015
£m
2014
£m
Derivatives deemed held for trading
3.6
2.4
3.6
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
Group
Company
2015
£m
(2.4)
7.8
(9.0)
(3.6)
2014
£m
9.7
8.4
(20.5)
(2.4)
2015
£m
(2.4)
7.8
(9.0)
(3.6)
2014
£m
9.7
8.4
(20.5)
(2.4)
134
Pennon Group Plc Annual Report 2015Financial statements and shareholder information 24. Financial instruments at fair value through profit
Current assets
Non-current liabilities
Group
Company
2015
£m
0.1
(57.3)
2014
£m
0.4
(15.6)
2015
£m
–
(0.5)
2014
£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.
25. Cash and cash deposits
Cash at bank and in hand
Short-term bank deposits
Other deposits
Total cash and cash deposits (note 39)
Group
Company
2015
£m
49.6
125.0
596.4
771.0
2014
£m
90.1
145.0
378.0
613.1
2015
£m
42.4
125.0
365.1
532.5
2014
£m
85.5
90.0
151.2
326.7
Group short-term deposits have an average maturity of one day.
Group other deposits have an average maturity of 116 days.
Group other deposits include restricted funds of £186.5 million (2014 £164.1 million) to settle long-term lease liabilities (note 28) and
£9.7 million (2014 £9.1 million) relating to letters of credit. Restricted funds are available for access, subject to being replaced by an
equivalent valued security.
For the purposes of the cash flow statement cash and cash equivalents comprise:
Cash and cash deposits as above
Less: deposits with a maturity of three months or more
(restricted funds)
26. Trade and other payables – current
Trade payables
Amounts owed to subsidiary undertakings
Amounts owed to joint ventures (note 45)
Other tax and social security
Accruals and other payables
Group
Company
2015
£m
771.0
2014
£m
613.1
(196.2)
(173.2)
2015
£m
532.5
–
2014
£m
326.7
(1.4)
574.8
439.9
532.5
325.3
Group
Company
2015
£m
102.5
–
1.2
64.2
109.8
277.7
2014
£m
100.7
–
1.5
72.2
124.4
298.8
2015
£m
0.1
0.3
–
0.3
4.9
5.6
2014
£m
0.1
0.1
–
0.3
6.9
7.4
The Directors consider that the carrying amount of trade and other payables approximates to their fair value.
135
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Continued
27. Current tax liabilities
Current tax liabilities
28. Borrowings
Current
Short-term loans
Convertible bond
European Investment Bank
Amounts owed to subsidiary undertakings (note 45)
Obligations under finance leases
Total current borrowings (note 39)
Non-current
Bank and other loans
Private placements
Bond 2040
RPI index-linked bond
European Investment Bank
Obligations under finance leases
Total non-current borrowings (note 39)
Total borrowings
2015
£m
52.2
2015
£m
50.9
–
31.1
–
82.0
31.6
113.6
338.0
547.4
133.0
258.8
273.2
1,550.4
1,304.1
2,854.5
2,968.1
Group
Company
2014
£m
37.7
2015
£m
23.8
Group
Company
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
2015
£m
50.7
–
–
283.2
333.9
–
333.9
338.0
547.4
–
–
–
885.4
–
885.4
2014
£m
1.1
2014
£m
0.9
123.4
–
283.2
407.5
–
407.5
469.3
222.0
–
–
–
691.3
–
691.3
1,219.3
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 value of the equity conversion component was
determined to be £10 million and was recognised in shareholders’ equity in retained earnings. During 2014/15 all bonds were converted
into 20.9 million Pennon Group Plc shares, at the holders’ option, at the conversion price of 597.81 pence per ordinary share.
South West Water Finance Plc issued a £150 million bond in July 2010 maturing in 2040 with a cash coupon of 5.875%.
136
Pennon Group Plc Annual Report 2015Financial statements and shareholder information The fair values of non-current borrowings, valued using level 2 measures (as set out in note 23) were:
Group
Bank and other loans
Private placements
Bond 2040
RPI index-linked bond
European Investment Bank
Obligations under finance leases
Company
Bank and other loans
Private placements
2015
2014
Book value
£m
Fair value
£m
Book value
£m
Fair value
£m
338.0
547.4
133.0
258.8
273.2
1,550.4
1,304.1
2,854.5
338.0
547.4
885.4
338.0
606.9
199.9
203.4
250.6
1,598.8
1,182.0
2,780.8
337.9
606.9
944.8
469.3
222.0
132.7
253.8
304.3
1,382.1
1,151.1
2,533.2
469.3
222.0
691.3
469.3
215.9
170.0
163.7
260.1
1,279.0
978.8
2,257.8
469.3
215.9
685.2
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
2015
£m
133.7
465.2
2,255.6
2,854.5
2014
£m
174.0
560.6
1,798.6
2,533.2
2015
£m
74.9
310.0
500.5
885.4
2014
£m
112.5
356.8
222.0
691.3
The weighted average maturity of non-current borrowings was 23 years (2014 21 years).
Finance lease liabilities – minimum lease payments were:
Within 1 year
Over 1 year and less than 5 years
Over 5 years
Less: future finance charges
Present value of finance lease liabilities
Group
Company
2015
£m
50.6
251.3
2,167.6
2,469.5
2014
£m
62.5
297.8
2,037.7
2,398.0
(1,133.8)
(1,128.4)
1,335.7
1,269.6
2015
£m
2014
£m
–
–
–
–
–
–
–
–
–
–
–
–
137
www.pennonannualreport.co.uk/2015Strategic overviewSouth West WaterViridorGroupGovernanceFinancial statements Notes to the financial statements
Continued
28. Borrowings Continued
The maturity of finance lease liabilities was:
Within 1 year
Over 1 year and less than 5 years
Over 5 years
Group
Company
2015
£m
23.7
123.8
1,188.2
1,335.7
2014
£m
118.5
122.3
1,028.8
1,269.6
2015
£m
2014
£m
–
–
–
–
–
–
–
–
Included above are accrued finance charges arising on obligations under finance leases totalling £132.8 million (2014 £127.3 million), of
which £2.9 million (2014 £6.9 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 wastewater 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 certain 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, £70.7 million at 31 March 2015 (2014 £60.1 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 other 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, £115.8 million at 31 March 2015 (2014 £104.0 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
2015
£m
150.0
820.4
970.4
2014
£m
30.0
660.0
690.0
2015
£m
–
420.0
420.0
2014
£m
–
415.0
415.0
In addition, at 31 March 2015 the Group had undrawn uncommitted short-term bank facilities of £25.0 million (2014 £25.0 million) available
to the Company or South West Water Limited.
29. Other non-current liabilities
Amounts owed to subsidiary undertakings
Other payables
Group
Company
2015
£m
–
110.1
110.1
2014
£m
–
82.8
82.8
2015
£m
8.7
–
8.7
2014
£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
wastewater segment.
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.
138
Pennon Group Plc Annual Report 2015Financial statements and shareholder information 30. Retirement benefit obligations
During the year the Group operated 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 £5.4 million (2014 £4.5 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
2015
%
2.9
2.9
3.35
2.9
2014
%
3.4
3.2
4.30
3.4
2013
%
3.4
3.4
4.35
3.4
Mortality
Assumptions regarding future mortality experience are set based on actuarial advice in accordance with published statistics and
experience. The mortality assumption uses a scheme-specific calculation based on CMI 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
2015
25.0
27.2
2014
24.9
27.1
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
2015
26.4
29.5
2014
26.3
29.4
The sensitivities regarding the principal assumptions used to measure the schemes’ liabilities are:
2013
25.0
27.0
2013
25.9
28.3
Rate of increase in pensionable pay
Rate of increase in current and future pensions
Rate used to discount schemes’ liabilities
Inflation
Life expectancy
Change in assumption
Impact on
schemes’ liabilities
+/– 0.5%
+/– 0.5%
+/– 0.5%
+/– 0.5%
+/– 1 year
+/– 0.2%
+/– 6.1%
+/– 9.2%
+/– 6.3%
+/– 3.6%
139
www.pennonannualreport.co.uk/2015Strategic overviewSouth West WaterViridorGroupGovernanceFinancial statements Notes to the financial statements
Continued
30. Retirement benefit obligations Continued
The amounts recognised in the balance sheet were:
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
Group
Company
2015
£m
(742.2)
692.7
(49.5)
(10.1)
(59.6)
2014
£m
(677.4)
608.4
(69.0)
(10.3)
(79.3)
2015
£m
(50.8)
46.6
(4.2)
–
(4.2)
The movement in the net defined benefit obligation over the accounting period is as follows:
At 1 April
Current service cost
Past service cost and gains and losses on settlements*
Interest (expense)/ income
Remeasurements:
Return on plan on assets excluding amounts included in
interest expense
–
58.7
Gain/ (loss) from change in demographic assumptions
(Loss)/ gain from change in financial assumptions
Experience gains
Change in asset ceiling, excluding amounts included in
interest expense
19.0
(81.5)
1.7
–
–
–
–
–
2015
Present
value of
obligation
£m
Fair value
of plan
assets
£m
Present
value of
obligation
£m
Total
£m
2014
Fair value
of plan
assets
£m
(687.7)
608.4
(79.3)
(680.0)
580.4
(12.5)
(15.5)
(12.5)
14.6
(28.6)
(26.5)
–
–
25.9
25.9
–
–
25.1
25.1
(0.2)
(29.1)
(44.8)
–
8.0
(5.9)
9.9
15.1
(0.9)
–
–
–
–
14.6
(2.7)
(0.6)
58.7
19.0
(81.5)
1.7
–
2014
£m
(47.2)
41.0
(6.2)
–
(6.2)
Total
£m
(99.6)
(15.5)
(0.2)
(4.0)
(19.7)
8.0
(5.9)
9.9
15.1
(0.9)
Contributions:
Employers
Plan participants
Payments from plans:
Benefit payments
At 31 March
* includes exceptional credit of £14.9 million in 2015.
(60.8)
58.7
(2.1)
18.2
8.0
26.2
–
(1.2)
22.4
1.2
23.9
(23.9)
22.4
–
–
–
(1.1)
13.8
1.1
20.0
(20.0)
13.8
–
–
(752.3)
692.7
(59.6)
(687.7)
608.4
(79.3)
140
Pennon Group Plc Annual Report 2015Financial statements and shareholder information The movement in the Company’s net defined benefit obligation over the accounting period is as follows:
1 April
Current service cost
Past service cost and gains and losses on settlement
Interest (expense)/income
Remeasurements:
Return on plan on assets excluding amounts included in
interest expense
Gain/ (loss) from change in demographic assumptions
(Loss)/gain from change in financial assumptions
Experience gains
Contributions:
Employers
Payments from plans:
Benefit payments
At 31 March
2015
Present
value of
obligation
£m
Fair value
of plan
assets
£m
(47.2)
41.0
(0.4)
1.2
(2.0)
(1.2)
–
1.4
(5.8)
0.1
(4.3)
–
–
1.8
1.8
3.7
–
–
–
3.7
Present
value of
obligation
£m
(47.3)
(0.4)
–
(2.0)
(2.4)
–
(0.3)
0.9
0.4
1.0
Total
£m
(6.2)
(0.4)
1.2
(0.2)
0.6
3.7
1.4
(5.8)
0.1
(0.6)
2014
Fair value
of plan
assets
£m
39.4
–
–
1.7
1.7
0.3
–
–
–
0.3
Total
£m
(7.9)
(0.4)
–
(0.3)
(0.7)
0.3
(0.3)
0.9
0.4
1.3
–
2.0
2.0
–
1.1
1.1
1.9
(50.8)
(1.9)
46.6
–
1.5
(4.2)
(47.2)
(1.5)
41.0
–
(6.2)
Changes in the effect of the asset ceiling during the year were:
Irrecoverable asset at start of the year
Interest on irrecoverable surplus
Actuarial (losses)/ gains
Group
Company
2015
£m
10.3
0.4
(0.6)
2014
£m
2015
£m
2014
£m
8.1
0.4
1.8
–
–
–
–
–
–
The Group has two minor pension schemes which are in surplus. These surpluses are deemed irrecoverable assets in accordance with
IFRIC 14 ‘The Limit on Defined Benefit Asset, Minimum Funding Requirements and their Interaction’.
141
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Continued
30. Retirement benefit obligations Continued
The schemes’ assets were:
2015
Quoted prices
in active
market
£m
Prices not
quoted in
active market
£m
Quoted prices in
active market
£m
Fund
%
2014
Prices not
quoted in
active market
£m
240.4
106.2
123.3
71.2
44.8
95.9
681.8
–
–
–
–
1.5
9.4
10.9
35
15
18
10
7
15
288.4
84.2
115.3
69.3
38.0
4.3
100
599.5
–
–
–
–
1.4
7.5
8.9
Equities
Government bonds
Other bonds
Diversified growth
Property
Other (including cash funds)
Other assets at 31 March 2015 represented principally cash contributions received from the Group towards the year-end which was
invested during the subsequent financial year.
The Company’s share of the schemes’ assets at the balance sheet date were:
2015
Quoted prices
in active
market
£m
Prices not
quoted in
active market
£m
Quoted prices in
active market
£m
Fund
%
2014
Prices not
quoted in
active market
£m
15.4
8.2
6.4
5.7
3.6
7.3
46.6
–
–
–
–
–
–
–
33
18
14
12
8
15
19.8
5.5
6.7
5.9
3.0
0.1
100
41.0
–
–
–
–
–
–
–
Equities
Government bonds
Other bonds
Diversified growth
Property
Other
Fund
%
47
14
19
11
7
2
100
Fund
%
48
14
16
15
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
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.
Changes in bond yields
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.
Inflation risk
Life expectancy
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.
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.
142
Pennon Group Plc Annual Report 2015Financial statements and shareholder information In conjunction with its investment advisers, the trustees have structured the schemes’ investments with the objective of balancing
investment returns and levels of risk. The asset allocation for the main scheme has three principal elements:
• holdings of cash funds and bonds which are expected to be less volatile than most other asset classes and reflects market movements
in the schemes’ liabilities
• a proportion of equities, with fund managers having freedom in making investment decisions to maximise returns
• investment of a relatively small proportion of the schemes’ assets in alternative asset classes which give the potential for diversification
(currently property and diversified growth).
The liabilities of the defined benefit schemes are measured by using the projected unit credit method which is an accrued benefits valuation
method in which the scheme liabilities make allowance for projected increases in pensionable pay.
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 2013. The Group has made a deficit recovery
contribution of £11.0 million to the main scheme during the year (2014 £nil million). The Group monitors funding levels on an annual basis
and expects to pay total contributions of around £12 million during the year ended 31 March 2016.
31. Deferred tax
Deferred tax is provided in full on temporary differences under the liability method using a tax rate of 20% (2014 20%).
Movements on deferred tax were:
Liabilities/(assets) at 1 April
Charged/ (credited) to the income statement
(Credited)/ charged to equity
Liabilities/(assets) at 31 March
Group
Company
2015
£m
227.1
14.9
(6.1)
235.9
2014
£m
245.1
(34.7)
16.7
227.1
2015
£m
(1.3)
(0.1)
(1.6)
(3.0)
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 was reduced in 2014 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 took place, followed by a
further 1% reduction from 1 April 2015.
The movements in deferred tax assets and liabilities were:
Group
Deferred tax liabilities
At 1 April 2013
(Credited)/ charged to the income statement
At 31 March 2014
(Credited)/charged to the income statement
Exceptional credit
At 31 March 2015
Accelerated tax depreciation
Owned
assets
£m
256.2
(31.5)
224.7
(0.8)
(2.7)
221.2
Leased
assets
£m
15.8
(1.4)
14.4
(0.6)
–
13.8
Other
£m
23.2
5.4
28.6
18.9
–
47.5
Total
£m
295.2
(27.5)
267.7
17.5
(2.7)
282.5
143
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Continued
31. Deferred tax Continued
Deferred tax assets
At 1 April 2013
Credited to the income statement
Charged to equity
At 31 March 2014
(Credited)/ charged to the income statement
Credited to equity
Exceptional (credit)/ charge
At 31 March 2015
Net liability:
At 31 March 2014
At 31 March 2015
Company
Deferred tax assets
At 1 April 2013
Charged to the income statement
Charged to equity
At 31 March 2014
Charged/(credited) to the income statement
Credited to equity
At 31 March 2015
Provisions
£m
Retirement
benefit
obligations
£m
(8.8)
(0.3)
–
(9.1)
(0.5)
–
(3.6)
(13.2)
(22.9)
(3.2)
10.2
(15.9)
1.5
(0.4)
3.0
(11.8)
Retirement
benefit
obligations
£m
(1.8)
–
0.6
(1.2)
0.5
(0.1)
(0.8)
Other
£m
(18.4)
(3.7)
6.5
(15.6)
(0.3)
(5.7)
–
(21.6)
Other
£m
(0.3)
0.1
0.1
(0.1)
(0.6)
(1.5)
(2.2)
Deferred tax credited/(charged) to equity during the year was:
Actuarial losses/ (gains) on defined benefit schemes
Cash flow hedges
Deferred tax on other comprehensive loss/ (gain)
Share-based payments (note 36)
Group
Company
2015
£m
0.4
5.7
6.1
–
6.1
2014
£m
(10.2)
(7.0)
(17.2)
0.5
(16.7)
2015
£m
0.1
1.6
1.7
(0.1)
1.6
Total
£m
(50.1)
(7.2)
16.7
(40.6)
0.7
(6.1)
(0.6)
(46.6)
227.1
235.9
Total
£m
(2.1)
0.1
0.7
(1.3)
(0.1)
(1.6)
(3.0)
2014
£m
(0.6)
(0.1)
(0.7)
–
(0.7)
144
Pennon Group Plc Annual Report 2015Financial statements and shareholder information 32. Provisions
Group
At 1 April 2014
Charged to the income statement
Exceptional (credit)/charge (note 6)
Transfers
Utilised
At 31 March 2015
Environmental
and landfill
restoration
£m
Other
provisions
£m
190.5
18.3
(6.7)
(1.3)
(7.8)
193.0
21.8
6.2
11.0
(1.1)
(3.6)
34.3
Total
£m
212.3
24.5
4.3
(2.4)
(11.4)
227.3
The amount charged to the income statement includes £10.5 million (2014 £9.3 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
2015
£m
32.9
194.4
227.3
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 underperforming contracts and restructuring provisions. Underperforming contracts are provided
for at the net present value of the operating losses of the underperforming 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.
145
www.pennonannualreport.co.uk/2015Strategic overviewSouth West WaterViridorGroupGovernanceFinancial statements Notes to the financial statements
Continued
33. Share capital
Allotted, called-up and fully paid
Group and Company
At 1 April 2013 ordinary shares of 40.7p each
Shares issued under the Scrip Dividend Alternative
Number of shares
Treasury
shares
Ordinary
shares
£m
2,105,836
364,657,522
149.2
–
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
For consideration of £0.1 million, shares re-issued under the Executive Share Option Scheme
(69,336)
(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 issued in respect of the £125 million convertible bond
Shares issued under the Scrip Dividend Alternative
–
–
20,909,635
6,365,622
Shares re-issued under the Company’s Performance and Co-investment Plan
(131,685)
131,685
For consideration of £0.8 million, shares re-issued to the Pennon Employee Share Trust
For consideration of £0.1million, shares re-issued under the Executive Share Option Scheme
(99,455)
(5,027)
99,455
5,027
For consideration of £3.0 million, shares re-issued under the Company’s Sharesave Scheme
(657,008)
657,008
8.5
2.6
–
–
–
–
At 31 March 2015 ordinary shares of 40.7p each
389,515
398,720,708
162.4
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:
Subscription
price fully paid
Period when options
normally exercisable
Thousands of shares in respect of which
options outstanding at 31 March
2015
2014
522p
517p
386p
431p
536p
588p
538p
611p
2010 – 2014
2011 – 2015
2012 – 2016
2013 – 2017
2014 – 2018
2015 – 2017
2016 – 2018
2017 – 2019
–
6
49
205
156
561
581
772
11
8
398
217
457
611
628
–
2,330
2,330
Date granted
3 July 2007
8 July 2008
6 July 2009
28 June 2010
29 June 2011
29 June 2012
3 July 2013
14 July 2014
146
Pennon Group Plc Annual Report 2015Financial statements and shareholder information 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
2015
2014
Number of
ordinary
shares
(thousands)
Weighted
average
exercise price
per share (p)
Number of
ordinary
shares
(thousands)
Weighted
average
exercise price
per share (p)
2,330
811
(97)
(657)
(57)
2,330
515
611
559
457
550
561
2,341
658
(199)
(438)
(32)
2,330
498
538
559
436
517
515
The weighted average price of the Company’s shares at the date of exercise of Sharesave options during the year was 811p (2014 703p).
The options outstanding at 31 March 2015 had a weighted average exercise price of 561p (2014 515p) and a weighted average remaining
contractual life of 1.9 years (2014 1.7 years).
The aggregate fair value of Sharesave options granted during the year was £0.8 million (2014 £0.9 million), determined using the
Black-Scholes valuation model. The significant inputs into the valuation model at the date of issue of the options were:
Weighted average share price
Weighted average exercise price
Expected volatility
Expected life
Risk-free rate
Expected dividend yield
2015
764p
611p
2014
673p
538p
17.0%
18.0%
3.4 years
3.4 years
1.4%
4.0%
0.7%
4.2%
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:
At 1 April
Granted
Vested
Lapsed
At 31 March
2015
2014
Number of
ordinary
shares
(thousands)
Weighted
average
exercise price
per share (p)
Number of
ordinary
shares
(thousands)
Weighted
average
exercise price
per share (p)
1,200
400
(132)
(273)
1,195
711
799
698
698
744
1,322
449
(276)
(295)
1,200
669
653
546
590
711
The awards outstanding at 31 March 2015 had a weighted exercise price of 744p (2014 711p) and a weighted average remaining
contractual life of 1.3 years (2014 1.3 years).
147
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Continued
33. Share capital Continued
The aggregate fair value of awards granted during the year was £1.9 million (2014 £1.6 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
2015
799p
17.0%
1.4%
2014
653p
18.0%
0.7%
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
2015
2014
Number of
ordinary shares
(thousands)
Weighted average
exercise price per
share (p)
Number of
ordinary shares
(thousands)
Weighted average
exercise price per
share (p)
315
107
(106)
–
316
727
822
728
–
758
429
99
(211)
(2)
315
680
693
616
573
727
The awards outstanding at 31 March 2015 had a weighted average exercise price of 758p (2014 727p) and a weighted average remaining
contractual life of 1.3 years (2014 1.2 years). The Company’s share price at the date of the awards ranged from 693p to 822p.
The aggregate fair value of awards granted during the year was £0.9 million (2014 £0.7 million), determined from market value. No option
pricing methodology is applied since dividends paid on the shares are receivable by the participants in the scheme.
Further details of the plans and options granted to Directors, included above, are shown in the Directors’ remuneration report.
34. Share premium account
Group and Company
At 1 April 2013
Adjustment for shares issued under the Scrip Dividend Alternative
At 31 March 2014
Convertible bond – equity issuance
Adjustment for shares issued under the Scrip Dividend Alternative
At 31 March 2015
£m
7.0
(2.1)
4.9
116.3
(2.6)
118.6
35. Capital redemption reserve
The capital redemption reserve represents the redemption of B shares and cancellation of deferred shares arising from a capital return to
shareholders undertaken during 2006.
Group and Company
At 1 April 2013
At 31 March 2014
At 31 March 2015
148
£m
144.2
144.2
144.2
Pennon Group Plc Annual Report 2015Financial statements and shareholder information 36. Retained earnings and other reserves
Group
At 1 April 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
Profit for the year
Other comprehensive loss for the year
Transfer from hedging reserve to property, plant and equipment
Dividends paid relating to 2014
Adjustment for shares issued under the Scrip Dividend Alternative
Credit to equity 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
Convertible bond – equity issuance
Proceeds from treasury shares re-issued
Own
shares
£m
(2.3)
–
–
–
–
–
–
–
1.0
(0.4)
–
(1.7)
–
–
–
–
–
–
0.7
(0.8)
–
–
Hedging
reserve
£m
Retained
earnings
£m
Total
£m
476.9
142.5
46.0
0.6
(103.9)
34.5
3.3
0.5
–
(0.4)
2.4
602.4
126.3
(33.6)
1.9
508.9
142.5
20.8
–
(103.9)
34.5
3.3
0.5
(1.0)
–
2.4
608.0
126.3
(0.6)
–
(117.0)
(117.0)
48.0
3.5
(0.7)
–
(0.5)
3.9
48.0
3.5
–
(0.8)
(0.5)
3.9
(29.7)
–
25.2
0.6
–
–
–
–
–
–
–
(3.9)
–
(33.0)
1.9
–
–
–
–
–
–
–
At 31 March 2015
(1.8)
(35.0)
670.9
634.1
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 304,000 ordinary shares (2014 331,000 ordinary shares) held by the trust at 31 March 2015 was £2.5 million
(2014 £2.5 million).
149
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Continued
36. Retained earnings and other reserves Continued
Hedging
reserve
£m
Retained
earnings
£m
Company
At 1 April 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
Profit for the year
Other comprehensive loss for the year
Dividends paid relating to 2014
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
Convertible bond – equity issuance
Proceeds from treasury shares re-issued
At 31 March 2015
37. Perpetual capital securities
Group and Company
At 1 April 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
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 2015
Total
£m
684.8
157.9
0.7
684.8
157.9
0.7
(103.9)
(103.9)
34.5
0.8
2.4
777.2
300.1
(0.4)
(117.0)
48.0
1.0
(0.1)
(0.8)
(0.5)
3.9
34.5
0.8
2.4
777.2
300.1
(5.9)
(117.0)
48.0
1.0
(0.1)
(0.8)
(0.5)
3.9
–
–
–
–
–
–
–
–
–
(5.5)
–
–
–
–
–
–
–
(5.5)
1,011.4
1,005.9
£m
294.8
(20.3)
4.7
15.6
294.8
(20.3)
4.3
16.0
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 2015, a periodic return of £20.3 million was
paid during the year.
150
Pennon Group Plc Annual Report 2015Financial statements and shareholder information 38. Analysis of cash flows given in the statement of cash flows
Reconciliation of profit for the year to cash generated from operations:
Cash generated from operations
Continuing operations
Profit for the year
Adjustments for:
Share-based payments
Profit on disposal of property, plant and equipment
Depreciation charge
Amortisation of intangible assets
Exceptional impairment of property, plant and equipment
Exceptional provision charge
Exceptional defined benefit pension credit
Share of post-tax profit from joint ventures
Finance income
Finance costs
Dividends receivable
Taxation charge
Changes in working capital:
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
Group
Company
2015
£m
2014
£m
2015
£m
2014
£m
142.3
158.1
316.1
173.5
3.5
(3.7)
3.3
(4.2)
161.7
147.1
2.7
24.3
4.3
(14.9)
(4.9)
(44.0)
84.8
–
54.7
(2.9)
(17.1)
(71.9)
5.7
(9.6)
(4.1)
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)
1.0
–
0.1
–
–
–
(1.2)
–
(51.0)
35.6
0.8
–
0.1
–
–
–
–
–
(60.8)
44.0
(311.6)
(162.1)
11.7
5.3
–
–
(101.6)
(206.6)
–
(1.2)
(1.7)
–
–
(1.4)
(0.8)
–
Cash generated/(outflow) from operations
310.9
338.0
(103.8)
(208.0)
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
2015
£m
62.0
22.5
84.5
2014
£m
65.3
21.8
87.1
2015
£m
34.7
–
34.7
2014
£m
28.6
–
28.6
151
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Notes to the financial statements
Continued
39. Net borrowings
Cash and cash deposits
Borrowings – current
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
2015
£m
771.0
(82.0)
(31.6)
–
2014
£m
613.1
(155.4)
(118.5)
–
(113.6)
(273.9)
(338.0)
(1,212.4)
(469.3)
(912.8)
(1,304.1)
(1,151.1)
(2,854.5)
(2,533.2)
(2,197.1)
(2,194.0)
2015
£m
532.5
2014
£m
326.7
(50.7)
(124.3)
–
(283.2)
(333.9)
(338.0)
(547.4)
–
(885.4)
(686.8)
–
(283.2)
(407.5)
(469.3)
(222.0)
–
(691.3)
(772.1)
152
Pennon Group Plc Annual Report 2015Financial statements and shareholder information 40. Principal subsidiary, joint venture and associate undertakings at 31 March 2015
Country of incorporation,
registration and principal operations
Water and wastewater
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 (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
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.
153
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Notes to the financial statements
Continued
40. Principal subsidiary, joint venture and associate undertakings at 31 March 2015 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
12,000 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.
Associate
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.
Interests in unconsolidated structured entities
The Company holds 75% of the ordinary share capital of Peninsula MB Limited, a company which raises funds through the issuance
of debt instruments and third party lending, but does not control the company since it does not have the power to affect returns.
Consequently the company has not been consolidated into the Pennon Group.
Pennon Group Plc has borrowed a £200 million floating interest rate-linked loan from Peninsula MB Limited and is owed a fixed rate
£200 million obligation from Peninsula MB Limited.
41. 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
2015
£m
11.0
32.0
82.4
2014
£m
10.3
30.9
78.8
125.4
120.0
2015
£m
2014
£m
–
–
–
–
–
–
–
–
The Group leases various offices, depots and workshops under non-cancellable operating lease agreements. The leases have various
terms, escalation clauses and renewal rights. Property leases are negotiated for an average term of 44 years and rentals are reviewed on
average at five-yearly intervals.
The Group also leases plant and machinery under non-cancellable operating lease agreements.
154
Pennon Group Plc Annual Report 2015Financial statements and shareholder information 42. Contingent liabilities
Guarantees:
Borrowing facilities of subsidiary undertakings
Performance bonds
Other
Group
Company
2015
£m
–
169.8
4.0
173.8
2014
£m
–
150.0
6.9
156.9
2015
£m
386.6
169.8
4.0
560.4
2014
£m
438.6
150.0
6.9
595.5
Guarantees in respect of performance bonds are entered into in the normal course of business. No liability is expected to arise in respect
of the guarantees.
Other 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 2015 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.
43. Capital commitments
Contracted but not provided
Group
Company
2015
£m
350.3
2014
£m
373.1
2015
£m
–
2014
£m
–
44. Post balance sheet events
On 15 April 2015 Pennon Group Plc acquired 100% of the issued share capital of Sembcorp Bournemouth Water Investments Limited
(renamed ‘Bournemouth Water Investments Limited’) including its non-regulated subsidiaries from Sembcorp Holdings Limited for a cash
consideration of £100.3 million. Sembcorp Bournemouth Water Investments Limited is the holding company for Sembcorp Bournemouth
Water Limited (renamed ‘Bournemouth Water Limited’).
As part of the Acquisition, £86.9 million of external net debt and debt-like items have been assumed by Pennon Group Plc.
The acquisition has been accounted for in 2015/16 using the acquisition method, provisional goodwill of c.£66 million will be capitalised.
Pennon Group Plc replenished cash resources used for the cash consideration through a placing of 12,084,337 new ordinary shares of
40.7 pence each with institutions at a price of 830 pence per Placing Share, raising gross proceeds of £100.3 million.
In accordance with current legislation an automatic merger reference has been made to the Competition and Markets Authority (CMA). A
decision is expected to be received on the merger from the CMA within its usual timescales.
45. 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
INEOS Runcorn (TPS) Limited
Purchase of goods and services
Lakeside Energy from Waste Limited
INEOS Runcorn (TPS) Limited
Dividends received
Lakeside Energy from Waste Holdings Limited
2015
£m
99.0
5.6
12.6
1.1
6.0
2014
£m
104.6
–
9.2
–
8.5
155
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Continued
45. Related party transactions Continued
Year-end balances
Receivables due from related parties
Viridor Laing (Greater Manchester) Limited (loan balance)
Lakeside Energy from Waste Limited (loan balance)
INEOS Runcorn (TPS) Limited (loan balance)
Viridor Laing (Greater Manchester) Limited (trading balance)
Lakeside Energy from Waste Limited (trading balance)
INEOS Runcorn (TPS) Limited (trading balance)
Payables due to related parties
Lakeside Energy for Waste Limited (trading balance)
INEOS Runcorn (TPS) Limited (trading balance)
2015
£m
2014
£m
57.2
9.3
31.4
97.9
12.8
1.0
5.6
19.4
1.1
0.1
50.7
9.5
28.0
88.2
18.1
0.9
–
19.0
1.5
–
The £97.9 million (2014 £88.2 million) receivable relates to loans to related parties included within receivables and due for repayment in
instalments between 2015 and 2033. Interest is charged at an average of 13.0% (2014 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
2015
£m
9.5
0.5
35.6
0.1
2014
£m
9.7
0.5
34.9
0.1
311.6
162.1
Sales of goods and services to subsidiary undertakings are at cost. Purchases of goods and services from subsidiary undertakings are
under normal commercial terms and conditions which would also be available to unrelated third parties.
Year-end balances
Receivables due from subsidiary undertakings
Loans
Trading balances
2015
£m
936.6
8.5
2014
£m
834.1
9.6
Interest on £70.5 million of the loans has been charged at a fixed rate of 4.5%, on £332.5 million at a fixed rate of 6.0% and on £0.5 million
at a fixed rate of 1.4% (2014 £128.7 million at 4.5% and £288.4 million at 6.0%). Interest on £403.1 million of the loans is charged at
12 month LIBOR +1.5%. These loans are due for repayment in instalments over the period 2015 to 2041.
Interest on £130.0 million of the loans has been charged at 1-month LIBOR + 1.0%. This loan will be repaid in 2015/16.
During the year there were no provisions (2014 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.
2015
£m
283.2
14.6
2014
£m
283.2
14.4
156
Pennon Group Plc Annual Report 2015Financial statements and shareholder information 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/declared
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
2015
£m
2014
£m
2013
£m
2012*
£m
2011*
£m
1,357.2
1,321.2
1,201.1
1,233.1
1,159.2
246.6
(40.8)
4.9
257.5
(53.9)
3.7
210.7
207.3
(13.7)
(54.7)
(48.6)
(0.6)
142.3
158.1
126.3
16.0
129.5
142.5
15.6
117.0
245.6
(61.4)
5.8
190.0
(176.4)
7.0
20.6
20.6
–
103.9
268.8
(72.3)
4.0
260.9
(76.7)
4.3
200.5
188.5
–
(28.1)
172.4
–
(16.9)
171.6
172.4
171.6
–
96.0
–
88.2
32.3p
4.7p
2.8p
39.8p
38.8p
(7.0)p
10.8p
42.6p
5.7p
(4.0)p
38.6p
40.3p
48.1p
(0.8)p
–
48.4p
(6.1)p
–
47.3p
42.3p
Declared dividends per share
31.80p
30.31p
28.46p
26.52p
24.65p
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 wastewater business
Waste management
Other businesses
* Prior to the application of IAS 19 (Revised) ‘Employee Benefits’.
2015
£m
2014
£m
–
–
301.4
360.8
2013
£m
14.8
410.1
2012
£m
29.2
257.4
2011*
£m
25.1
199.0
4,325.9
4,076.6
3,846.0
3,592.5
3,347.6
586.0
241.9
378.5
11.8
335.7
(3,557.8)
(3,120.9)
(3,152.4)
(2,775.2)
(2,903.8)
1,354.1
1,197.6
1,072.1
829.1
779.5
1,408
3,101
49
1,356
3,044
51
1,354
3,180
50
1,335
3,148
46
1,196
3,012
44
4,558
4,451
4,584
4,529
4,252
157
www.pennonannualreport.co.uk/2015Strategic overviewSouth West WaterViridorGroupGovernanceFinancial statements Shareholder information
Financial calendar
Financial year-end
Twenty-sixth Annual General Meeting
Ex-dividend date for 2015 final dividend
Record date for 2015 final dividend
2015 final dividend payable
2015/16 half yearly results announcement
2016 interim dividend payable
2016 preliminary results announcement
Twenty-seventh Annual General Meeting
2016 final dividend payable
Scrip Dividend Alternative*
Ordinary shares quoted ex-dividend
Record date for final 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
30 July 2015
6 August 2015*
7 August 2015*
2 October 2015*
27 November 2015
April 2016
May 2016
July 2016
October 2016
6 August 2015
7 August 2015
21 August 2015
14 September 2015
1 October 2015
2 October 2015
2 October 2015
* Subject to obtaining shareholder approval at the 2015 Annual General Meeting to the payment of a final dividend for the year ended 31 March 2015
Shareholder analysis at 31 March 2015
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 +
2,483
9,052
8,741
1,173
90
273
21,812
11.38
41.50
40.07
5.38
0.41
1.25
0.02
1.21
4.77
3.28
1.58
89.14
Individuals
Companies
Trust companies (pension funds etc.)
Banks and nominees
Number of accounts
% of total accounts
% of total shares
18,031
180
7
3,594
21,812
82.67
0.82
0.03
16.48
6.94
0.85
0.01
92.20
158
Pennon Group Plc Annual Report 2015Financial statements and shareholder information Major shareholdings
The net position on 31 March 2015 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:
Number of voting rights (direct and indirect)
% of voting rights
Ameriprise Financial, Inc.
Pictet Asset Management SA
Lazard Asset Management LLC
RARE Infrastructure Limited
AXA Investment Managers SA
Invesco Ltd
UBS Investment Bank
Legal & General Group Plc
35,301,271
25,599,217
20,137,074
19,366,782
18,088,394
17,212,959
16,610,004
13,458,627
8.85%
6.42%
5.05%
4.86%
4.54%
4.32%
4.17%
3.38%
Since 31 March 2015, the following changes have been notified to
the Company:
i) On 22 April 2015, The Capital Group Companies, Inc. notified the
Company that it had crossed the 3% threshold, with an increased
total holding of 15,791,347 shares, equivalent to 3.84% of
voting rights;
ii) On 22 April 2015, Ameriprise Financial, Inc. informed the
Company that it held 20,328,154 shares (equivalent to 4.95% of
voting rights);
iii) On 1 May 2015, The Capital Group Companies, Inc. informed the
Company that it held 16,705,367 shares (equivalent to 4.06% of
voting rights).
No further changes to interests in the Company's issued share
capital have been disclosed to the Company as at 19 June 2015
(being a date not more than one month prior to the date of the
Company's Notice of Annual General Meeting).
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, Capita Asset Services,
who can be contacted as follows:
Capita Asset Services
Pennon Group Share Register,
The Registry
34 Beckenham Road, Beckenham
Kent BR3 4TU
Telephone: 0371 664 9234 (calls are charged at standard
network rates).
Lines are open 8.30am-5.30pm Monday-Friday.
Overseas telephone: +44 371 664 9234
Email: pennon@capita.co.uk
Website: capitashareportal.com
Share dealing service
The telephone share dealing service offered by Stocktrade enables
shareholders to buy and sell shares in the Company on a low-cost
basis and to make regular investments in the Company. For further
details of this service, contact 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) up 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
Shareholders may gain tax advantages by holding their shares in the
Company in an Individual Savings Account (ISA).
Scrip Dividend Alternative
Subject to obtaining shareholder approval at the 2015 Annual
General Meeting for the payment of a final dividend for the year
ended 31 March 2015, full details of the Scrip Dividend Alternative
and how to participate will be sent to shareholders on 21 August
2015. The full timetable for offering the Scrip Dividend Alternative is
given on the opposite page.
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.
159
www.pennonannualreport.co.uk/2015Strategic overviewSouth West WaterViridorGroupGovernanceFinancial statements Shareholder information Continued
Pennon’s website
www.pennon-group.co.uk provides news and details of the
Company’s activities plus links to its subsidiaries’ websites.
The Investor Information section contains up to date information
for shareholders including detailed share price information, financial
results, dividend payment dates and amounts, and stock exchange
announcements. There is also a comprehensive shareholder
services section which includes information on buying, selling
and transferring shares, and how to notify 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 FCA Warning List of unauthorised firms at
www.scamsmart.fca.org.uk.
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.
160
Pennon Group Plc Annual Report 2015Financial statements and shareholder information Notes
161
www.pennonannualreport.co.uk/2015 Notes
162
Pennon Group Plc Annual Report 2015 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/2015
Registered in England & Wales
Registered Number: 2366640
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