ANNUAL REPORT
AND ACCOUNTS 2016
DELIVERING FOR CUSTOMERS
AND SHAREHOLDERS
STRATEGIC REPORT | OVERVIEW
WHO WE ARE
As one of the largest environmental infrastructure groups
in the UK, we are at the top end of the FTSE 250.
We have assets of around £5.7 billion and a workforce of
over 4,800 people.
OUR BUSINESSES
WATER AND WASTEWATER
SOUTH WEST WATER
Providing water and wastewater services to a population of c.1.7 million in
Cornwall, Devon and parts of Dorset and Somerset. South West Water was
awarded enhanced status for its 2015-2020 Business Plan, and has the highest
potential returns in the water sector.
BOURNEMOUTH WATER
Providing water services to a population of c.0.5 million in areas of Dorset,
Hampshire and Wiltshire. Bournemouth Water was acquired in April 2015
and has been substantially integrated with South West Water to deliver
synergies and savings.
WASTE RECYCLING AND RECOVERY
VIRIDOR
A leading UK recycling, energy recovery and waste management company,
providing services to more than 150 local authorities and major corporate
clients as well as over 32,000 customers across the UK.
OUR VISION
• To be a pre-eminent developer, manager and operator of environmental
infrastructure and related services
• To provide first class services 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 benefit of our businesses
and stakeholders.
OUR STRATEGY
• To innovate, drive efficiencies and identify opportunities for growth
• To provide high quality, reliable services and a safe working environment for
our people and the communities we serve.
PENNON GROUP PLC ANNUAL REPORT 2016 CONTENTS
STRATEGIC
REPORT
OVERVIEW
GROUP
PERFORMANCE
GOVERNANCE
AND
REMUNERATION
Group financial highlights
Group operational highlights
Chairman’s statement
Business model
Group Chief Executive Officer’s overview
Chief Financial Officer’s report
Our operations
Water and wastewater
Waste recycling and recovery
Customers and communities
Our environment
Our people
Risk report
Chairman’s letter to shareholders
Board of Directors
The Board and its governance framework
Board Committees’ reports
Directors’ remuneration report
Directors’ report – other statutory disclosures
FINANCIAL
STATEMENTS
AND
SHAREHOLDER
INFORMATION
Independent auditor’s report
Financial statements
Five-year financial summary
Shareholder information
To view our online report visit:
www.pennonannualreport.co.uk/2016
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6
8
10
14
18
26
28
32
36
42
48
51
58
60
62
66
77
99
104
114
172
173
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OVERVIEWGROUP PERFORMANCEGOVERNANCEFINANCIAL STATEMENTSwww.pennonannualreport.co.uk/2016 STRATEGIC REPORT | OVERVIEW
STRATEGIC REPORT
OVERVIEW
OVERVIEW
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6
8
GROUP FINANCIAL HIGHLIGHTS
GROUP OPERATIONAL HIGHLIGHTS
CHAIRMAN’S STATEMENT
10
BUSINESS MODEL
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PENNON GROUP PLC ANNUAL REPORT 2016 STRONG FINANCIAL
PERFORMANCE
BENEFITING CUSTOMERS
AND SHAREHOLDERS
SECTOR-LEADING
DIVIDEND POLICY:
+4% GROWTH OVER RPI
YEAR ON YEAR TO 2020
GROWTH AT VIRIDOR:
ENERGY RECOVERY
ACTIVITIES
PERFORMING WELL
STRONG START
TO K6 (2015-2020):
OUTPERFORMING
REGULATORY
CONTRACT
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OVERVIEWGROUP PERFORMANCEGOVERNANCEFINANCIAL STATEMENTSwww.pennonannualreport.co.uk/2016 STRATEGIC REPORT | OVERVIEW
GROUP FINANCIAL
HIGHLIGHTS
HIGHLIGHTS OF
THE YEAR
• Strong start to the new regulatory period for the
water business delivering a RoRE of 11.7%(3)
• Group results benefiting from growth:
− £90 million of EBITDA delivered from Energy
Recovery Facilities (ERFs) in 2015/16, up 166%.
ERFs on track to deliver targeted c.£100 million
of EBITDA(1) in 2016/17 despite pressure
on power prices and the removal of Levy
Exemption Certificates (LECs)
− Bournemouth Water acquired on 15 April
licence and trade and assets merged
2015, with key aspects of the integration with
South West Water delivered:
-
- shared services combined
- debt transferred and security removed
• Group efficiency initiatives underway, expected to
deliver future cost savings of c.£11 million p.a.
STRATEGY IN ACTION
• Dividend increased by 5.6% in line with
sector-leading policy of 4% year-on-year growth
over RPI
• Group remains well funded with efficient
long-term financing
• Continued focus on sustainable investment and
activities that make a positive impact on
communities and the environment
• Implementing improvements in recycling activities.
REVENUE
£1,352.3m -0.4%
ADJUSTED EBITDA(1) before non-underlying items
£508.4m +9.1%
PROFIT BEFORE TAX before non-underlying items
£211.3m +0.3%
(statutory basis £206.3m)
DIVIDEND
33.58p +5.6%
SHAREHOLDER PROFITS(2) (£m)
Profit before tax and non-underlying items
Non-underlying items impacting profit before tax
Tax charge
Profit attributable to perpetual capital holders
Profit after tax attributable to shareholders
211.3
(5.0)
(38.0)
(16.2)
152.1
(1) Earnings before interest, tax, depreciation, amortisation and non-underlying items (EBITDA).
(Adjusted EBITDA includes IFRIC 12 interest receivable and share of joint venture EBITDA –
see notes 8 and 20 to the financial statements)
(2) Reconciliation of profit before tax and non-underlying items to profit after tax attributable
to shareholders
(3) Return on regulated equity. See page 28 for further details.
4
PENNON GROUP PLC ANNUAL REPORT 2016 ASSETS
£5.7bn
CASH AND COMMITTED
FACILITIES TO FUND
CAPITAL PROGRAMME
INVESTMENT IN KEY
INFRASTRUCTURE
£317m
£1.7bn
KEY PERFORMANCE INDICATORS(1)
REVENUE (£m)
DIVIDEND PER SHARE (pence)
2011/12
2012/13
2013/14
2014/15
2015/16
1,233.1
1,201.2
1,321.2
1,357.2
1,352.3
2011/12
2012/13
2013/14
2014/15
2015/16
-0.4%
26.52
28.46
30.31
31.80
33.58
+5.6%
ADJUSTED EBITDA(2)
before non-underlying items (£m)
INTEREST RATE ON ANNUAL NET DEBT (%)
2011/12
2012/13
2013/14
2014/15
2015/16
430.8
433.0
456.9
465.9
508.4
2011/12
2012/13
2013/14
2014/15
2015/16
+9.1%
4.2
4.0
3.8
3.4
3.3
PROFIT BEFORE TAX before non-underlying items (£m)
REGULATORY CAPITAL VALUE as at 31 March (£m)
2011/12
2012/13
2013/14
2014/15
2015/16
200.5
190.0
207.3
210.7
211.3
2012
2013
2014
2015
2016
+0.3%
EARNINGS PER SHARE
before non-underlying items and deferred tax (pence)
GROUP ASSETS as at 31 March (£bn)
2011/12
2012/13
2013/14
2014/15
2015/16
47.3
40.3
42.6
39.8
39.5(3)
2012
2013
2014
2015
2016
-0.8%
(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) Earnings before interest, tax, depreciation, amortisation and non-underlying items (EBITDA). (Adjusted
EBITDA includes IFRIC 12 interest receivable and share of joint venture EBITDA)
(3) Basic earnings per share (statutory basis) 37.0p.
2,827
2,916
2,959
2,928
3,150
4.3
4.8
5.0
5.4
5.7
+7.6%
+5.6%
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OVERVIEWGROUP PERFORMANCEGOVERNANCEFINANCIAL STATEMENTSwww.pennonannualreport.co.uk/2016 STRATEGIC REPORT | OVERVIEW
GROUP OPERATIONAL
HIGHLIGHTS
TOTAL RENEWABLE ENERGY GENERATION
1,496GWh
DRINKING WATER QUALITY
(mean zonal compliance)
SOUTH WEST WATER
BOURNEMOUTH WATER
99.97%
100%
BATHING WATER COMPLIANCE(1)
(‘sufficient quality’ or higher)
97.2%
TOTAL WASTE MATERIAL INPUTS
7.8 million tonnes
ERF AVAILABILITY
RECYCLING VOLUMES
TRADED (million tonnes)
85%
1.8
RIDDOR INCIDENCE RATE
(per 100,000 employees)
822
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HIGHLIGHTS OF
THE YEAR
• High quality drinking water maintained (mean zonal
compliance was 99.97% for South West Water and
100% for Bournemouth Water)
• No water restrictions for customers and leakage
targets met
• Increase in customer service score in the
water business
• 97% of bathing waters in the South West
Water region meeting tougher new bathing
water standards
• Two-thirds of ERF portfolio now on line
• Recycling and Resources £0.6 million (1%) ahead
of 2014/15 EBITDA despite ongoing challenging
commodity prices and market conditions.
STRATEGY IN ACTION
• Group-wide focus on health and safety to drive
cultural and behavioural change
• Investment in new technologies and innovation
helping to improve performance in water business
• Construction underway on new £60 million
drinking water treatment works for the Plymouth
area – first of its kind in the UK
• Merger of South West Water and Bournemouth
Water bringing efficiency benefits and sharing of
best practice
• New company, Pennon Water Services, established
as part of our non-household retail strategy
• Long-term revenue streams for ERFs helping
secure consistent risk profile
• Input, Throughput and Output Optimisation
(ITOO) programme continuing to deliver
further efficiencies and financial benefits in
waste management
• New operating model implemented at Viridor
to provide a platform for growth in line with
business strategy.
(1) New standards introduced in 2015 under the EU’s revised Bathing
Water Directive. The classifications are ’poor quality’, ’sufficient
quality’ (the new minimum standard), ’good quality’ and ’excellent
quality’ (the new guideline standard). Prior years not restated.
PENNON GROUP PLC ANNUAL REPORT 2016 KEY PERFORMANCE INDICATORS(1)
DRINKING WATER QUALITY
mean zonal compliance (%)
TOTAL WASTE MATERIAL INPUTS
(million tonnes)
2012
2013
2014
2015
2016
South West Water
2016
Bournemouth Water
99.99
99.97
99.98
99.96
99.97
100.00
2011/12
2012/13
2013/14
2014/15
3.1 0.7
2.7 0.7
2.7 0.7
2.5
1.2
2015/16
2.0
2.1
3.8
4.1
4.3
3.8
3.7
7.6
7.5
7.7
7.5
7.8
Landfill
ERFs
Recycling and other
CUSTOMER SERVICE service incentive mechanism (%)
RECYCLING VOLUMES TRADED (million tonnes)
2011/12
2012/13
2013/14
2014/15
2015/16
South West Water
2015/16
Bournemouth Water
66.9
70.5
73.9
74.8
78.6
86.2(3)
2011/12
2012/13
2013/14
2014/15
2015/16
Viridor
+7.3%
BATHING WATER COMPLIANCE (%)
ERF INPUT CAPACITY(4) (million tonnes)
2013
2013
2014
2014
2015
South West Water
2015
South West Water
EU minimum standard
Guideline standard
RIDDOR INCIDENTS(5)
2011
2012
2013
2014
2015
Pennon Group
+20%
99.3
91.0
99.3
86.3
97.2(2)
70.3(2)
59
52
40
35
42
2011/12
2012/13
2013/14
2014/15
2015/16
Viridor
+79%
TOTAL RENEWABLE ENERGY
GENERATION (GWh)
2011/12
2012/13
2013/14
2014/15
2015/16
Pennon Group
+57.6%
1.8
1.9
1.8
1.7
1.8
0.8
0.8
0.8
1.4
2.5
775
839
795
949
1,496
(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
(4) Processing capacity available in the year including joint ventures
(5) Incidents involving employees under the Reporting of Injuries, Diseases and
(2) See footnote on previous page
(3) Bournemouth Water’s service incentive mechanism (SIM) score for 2014/15 was 85.6
Dangerous Occurrences Regulations. Change in RIDDOR reporting criteria from
2012. See page 48 for details of each company’s performance.
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OVERVIEWGROUP PERFORMANCEGOVERNANCEFINANCIAL STATEMENTSwww.pennonannualreport.co.uk/2016
STRATEGIC REPORT | OVERVIEW
CHAIRMAN’S
STATEMENT
DEAR SHAREHOLDER
In my first annual statement to you as
Chairman of Pennon Group, I am pleased to
report another year of strong performance
and solid financial results, which translate
directly to shareholder value.
Following my appointment as Chairman in August 2015, I took
time to familiarise myself with the Group’s operations and
the strengths of the business, and concluded that a strong
platform exists upon which we can further build to achieve a
successful future. It was clear to me that Pennon was ready to
move to the next phase; South West Water had embarked on
a new five-year regulatory cycle whilst working towards the
full integration of Bournemouth Water’s business acquired in
April 2015, and Viridor was progressing from ‘construction’ to
‘operation’, with eight Energy Recovery Facilities (ERFs) operating
successfully and the construction of three more progressing well.
In addition, I found talented and committed people throughout
the organisation, with a very strong executive leadership team
in place. The autumn of 2015 was therefore a natural time for
reflection in terms of the Group’s strategic priorities.
Whilst this strategic review has not given rise to a ‘new’ Group
strategy, it has led to differences of nuance and focus. In particular,
we identified that with the maturity of Viridor’s business, as it
moves away from waste disposal to landfill, greater commonality
exists between the Group’s businesses. We also recognised that
we were able to move towards a more homogeneous risk profile
across the two businesses, with Pennon’s investment proposition
now premised on an increased proportion of contracted
long-term, index-linked revenues over a long-lived asset base.
As part of the strategic review, the Board decided to create a new
role of Group Chief Executive Officer, a position to which Chris
Loughlin (who was Chief Executive of South West Water at the
time) was appointed with effect from 1 January 2016. Chris has
been tasked with driving forward our strategy, which will involve
looking across the business at how we can share best practice,
deliver synergies and capitalise on emerging opportunities. Both
Viridor and South West Water have a breadth and depth of
experience in managing large asset bases and in using engineering
excellence, technology and innovation to deliver efficiency
and effectiveness. By sharing knowledge across the Group and
harnessing our combined skills we can provide even better service
to our wide customer base of local authorities, major corporate
clients and household customers throughout the UK. By driving
integration across the Group we will also be able to extract
tangible efficiencies and synergies.
SIR JOHN PARKER, CHAIRMAN
HEALTH AND SAFETY
I have been impressed by the level of commitment of the Board
and the senior management teams to the health, safety and
wellbeing of our people. As reported last year, tragically there was
an incident in June 2015 involving a Viridor vehicle, which resulted
in the death of a Viridor employee. The Group continues to work
with the authorities in relation to this incident.
Reflecting the Board’s desire for a consistent and effective
Group-wide approach, we have created a new role of director
of Safety, Health, Environment, Quality and Sustainability
(SHEQS), and recruitment is underway. The Group has strategic
improvement plans in place and continues to invest in
programmes and initiatives to further embed the change in
culture and attitudes necessary to achieve its target of zero
accidents and incidents.
SUSTAINABILITY
Environmental, social and governance (ESG) matters are integral
to our strategy and business model. The Sustainability Committee
of the Board continues to oversee our performance in maintaining
a responsible approach to business operations. The Group’s
notable achievements include another year of high quality drinking
water, benefits to local economies as a direct result of our
investment in energy recovery infrastructure, strong performance
against new EU bathing water standards, preliminary work on
a new water treatment works with cutting edge technology
for the Plymouth area, investment in further customer service
improvements, further work to reduce the risk of sewer flooding,
recognition for our apprenticeship programmes, and acclaimed
education programmes and community engagement activities
across the Group.
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 70 to 73.
DIVIDEND
I am pleased to report that the Board is recommending a final
dividend per share of 23.12p, representing a 6.0% increase on
last year’s final dividend. This will result in a total dividend for
the year of 33.58p, an increase of 5.6%, which is in line with our
dividend policy of year-on-year growth of 4% above RPI inflation
to 2019/20 and reflects the Board’s confidence in the future
financial performance of the Group. 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 173.
8
PENNON GROUP PLC ANNUAL REPORT 2016 BUILDING ON A
STRONG PLATFORM
DELIVERING
SUSTAINABLE PROFIT AND
DIVIDEND GROWTH
DIVERSITY
The Board continues to promote equality and diversity across the
Group in all areas, including gender and ethnicity. I am pleased to
say we exceeded our target of 25% female representation on the
Board by 2015.
We remain committed to ensuring our Board pursues a
progressive diversity agenda and you will find further details in
our Nomination Committee report on page 74.
MANAGEMENT AND EMPLOYEES
The success of any company is down to the quality of its
leadership, not just in the boardroom, but throughout the
organisation. The strong and effective leadership we have
along with well-trained and skilled personnel, including our
award-winning apprenticeship schemes, underpin the success of
Pennon Group.
May I take this opportunity to express my thanks and that of
our Board to all our employees who make the difference to our
performance and to the service we render to our communities
every day.
LOOKING TO THE FUTURE
With its refreshed strategy Pennon will continue to capitalise on
strategic opportunities, whilst developing our people, protecting
the environment, helping the communities in which we operate
and enhancing shareholder value. We have built a solid foundation
for the future.
Sir John Parker
Chairman
Pennon Group Plc
24 May 2016
NEW GOVERNANCE FRAMEWORK
On my appointment, I was pleased to see that a strong
commitment to the three essential pillars of a successful board –
strong financial control, sound administration and good governance
– was in evidence in the boardroom. To ensure we are well placed
to continue to deliver solid growth and efficiency, I reviewed
our Board structures, in consultation with the Non-executive
Directors, and identified opportunities for streamlining the Group’s
governance framework and decision-making processes. Changes
were implemented after agreement with Ofwat in respect of South
West Water and Bournemouth Water governance arrangements.
This involved simplifying the subsidiary board structure to achieve
more efficient governance whilst preserving the regulatory ring
fence around the water and wastewater business. Further details
are provided in the governance report on page 62.
OTHER BOARD DEVELOPMENTS
Ken Harvey, our long-serving and distinguished Chairman of 18
years, retired at last year’s AGM. The success of Pennon Group
today is in no small measure due to his professional leadership
and integrity. Our Senior Independent Director, Gerard Connell,
also stepped down at the AGM and we acknowledge the
significant contribution he made to our Board during his 12 years
of service. We also wish both a happy retirement. I am pleased
to report that Gill Rider has been appointed as our new Senior
Independent Director.
As reported above, Chris Loughlin was appointed to the new
role of Group Chief Executive Officer on 1 January 2016. Prior to
that, Chris served as an Executive Director of Pennon Group Plc
in his capacity as Chief Executive of South West Water. Stephen
Bird was promoted to the position of Managing Director of South
West Water with effect from the same date. As at 1 April 2016,
Susan Davy’s title changed from Group Director of Finance to
Chief Financial Officer.
Changes to the governance structure, which were implemented on
1 April 2016, have seen our existing independent Non-executive
Directors, Martin Angle, Neil Cooper and Gill Rider, additionally
being appointed as non-executive directors of South West Water
Limited. I continue to serve as chairman of South West Water,
an office to which I was appointed on 31 July 2015. In addition,
the Board has been pleased to welcome three non-executive
directors of South West Water, Martin Hagen, Steve Johnson
and Lord Matthew Taylor, to participate in plenary sessions of the
Pennon Group Board and its Committees. Steve Johnson resigned
subsequent to the year end due to taking up another appointment.
Ken Woodier, our Group General Counsel and Company Secretary,
decided to retire in the year. He has served the Board in a diligent,
professional and committed way for some 18 years. We thank
him and wish him well in the future. He is succeeded by Helen
Barrett-Hague from Alent Plc and we welcome her to Pennon.
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OVERVIEWGROUP PERFORMANCEGOVERNANCEFINANCIAL STATEMENTSwww.pennonannualreport.co.uk/2016 STRATEGIC REPORT | OVERVIEW
BUSINESS MODEL
Our business model is the framework through which we deliver our strategy and
shareholder value: to innovate, drive efficiencies 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.
PENNON GROUP
STRONG GOVERNANCE
WATER AND
WASTEWATER
WASTE RECYCLING
AND RECOVERY
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.
Our commitment to sustainable shareholder returns is
reflected through our 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.
RISK
MANAGEMENT
FINANCIAL
PERFORMANCE
CUSTOMERS
AND
COMMUNITIES
OUR
ENVIRONMENT
OUR
PEOPLE
10
PENNON GROUP PLC ANNUAL REPORT 2016 HOW WE MANAGE OUR BUSINESSES TO CREATE VALUE
We create shareholder value by focusing on six 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 decision-making and oversight of the Group’s performance.
More information on governance can be found on pages 58 to 76.
RISK
MANAGEMENT
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 risk management framework and control environment is provided on pages 51 and 65, and our
principal risks and uncertainties and how we mitigate them are set out on pages 52 to 54.
FINANCIAL
PERFORMANCE
We have 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 18 to 25.
CUSTOMERS
AND
COMMUNITIES
The Group is fully committed to meeting the needs of its customers and developing and maintaining good relationships with
the wider community and stakeholders in general. This is the key to the success of each of our businesses.
How we respond to our stakeholders’ needs and assess customer satisfaction is set out on pages 36 to 41.
OUR
ENVIRONMENT
We are aware that our businesses can, and do, have a material impact on the environment in which they operate. To address
this we take a responsible and transparent approach to environmental matters.
Our sustainable practices ensure the long-term success of our businesses. More information on our environmental impacts
is provided on pages 42 to 47.
OUR
PEOPLE
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 wellbeing, retention, training and development, 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 48 to 50.
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OVERVIEWGROUP PERFORMANCEGOVERNANCEFINANCIAL STATEMENTSwww.pennonannualreport.co.uk/2016 STRATEGIC REPORT
GROUP PERFORMANCE
GROUP PERFORMANCE
14 GROUP CHIEF EXECUTIVE OFFICER’S OVERVIEW
18 CHIEF FINANCIAL OFFICER’S REPORT
26 OUR OPERATIONS
28
32
WATER AND WASTEWATER
WASTE RECYCLING AND RECOVERY
36 CUSTOMERS AND COMMUNITIES
42 OUR ENVIRONMENT
48 OUR PEOPLE
51
RISK REPORT
12
PENNON GROUP PLC ANNUAL REPORT 2016STRATEGIC REPORT | GROUP PERFORMANCE STRONG RESULTS
BENEFITING FROM
GROWTH
MAINTAINING AND
GROWING OUR
ASSET BASE
DRIVING VALUE
THROUGH EFFICIENCY
WELL PREPARED FOR
THE FUTURE
13
www.pennonannualreport.co.uk/2016OVERVIEWGROUP PERFORMANCEGOVERNANCEFINANCIAL STATEMENTS GROUP CHIEF
EXECUTIVE
OFFICER’S
OVERVIEW
The year 2015/16 has been transformative
for Pennon Group. While continuing to
deliver market-leading performance in
many areas of our businesses, we have
been fine-tuning our strategic focus
to meet the changing demands of our
sector, evolving our governance and
internal structures and beginning to draw
new synergistic benefits from the closer
alignment of our subsidiaries.
(1) Oxera modelling for South West Water and Bournemouth Water submission to
the Competition and Markets Authority. This estimate provides the probability
of the merged company, with synergy savings, being within the UQ (the efficiency
benchmark as used by Ofwat in PR14) at PR19.
(2) As measured by mean zonal compliance.
14
CHRIS LOUGHLIN, GROUP CHIEF EXECUTIVE OFFICER
As the new Group Chief Executive Officer I am pleased to report
that Pennon has performed very well in 2015/16.
South West Water is outperforming its regulatory contract having
begun the K6 (2015-2020) period in a position of confidence
following a successful Price Review, which saw its business plan
deemed best-in-class. The drive towards further efficiency and
improved performance has been complemented by the successful
acquisition and merger with Bournemouth Water. Integration
is substantially complete and the bringing together of these two
good companies is allowing for substantial efficiency savings, the
sharing of best practice and operational synergies. The combined
water business is well placed for the regulatory changes ahead,
including the opening of the non-household retail market in
2017, and there is a 94% probability it will set the efficiency
frontier at the 2019 Price Review(1).
In waste management, Viridor has also performed well. The
company has made a clear transition from landfill to a greater
focus on recycling and the recovery of energy from waste. Eight
of the 11 committed Energy Recovery Facilities (ERFs) are now
on stream with the remainder under construction (at Glasgow,
Dunbar and Beddington).
The ERF portfolio is being progressively de-risked with
demand expected to exceed capacity over the long term.
Approximately 80% of the total ERF portfolio volumes have been
secured under long-term, index-linked contracts with short and
medium-term contracts in place for the remaining 20%.
As Viridor completes its move from the investment phase to the
delivery phase with the completion of the ERF portfolio, we are
moving towards a more homogeneous risk profile across the
Group. We are increasing the predictability and visibility of our
revenues over the long term and putting Pennon in the strongest
position possible to capitalise on future growth opportunities.
STRONG OPERATIONAL PERFORMANCE
Both South West Water and Bournemouth Water have made
considerable progress on their K6 business plan commitments.
At South West Water, drinking water quality remains high (99.97%
compliance(2)), customer service continues to increase, and accelerated
investment in bathing water improvements has helped the region
perform very well against the revised EU standards, which came
into force in 2015. Of the 145 bathing waters tested, 141 met the
required standard. The failure of the other four was unrelated to the
performance of any South West Water asset.
Bournemouth Water achieved 100% compliance with drinking
water quality standards and continued to deliver customer service
improvements, building on its already impressive track record
of customer service excellence. In both the South West Water
and Bournemouth Water service areas leakage rates were kept
within target levels and there were no water restrictions placed
on customers.
PENNON GROUP PLC ANNUAL REPORT 2016STRATEGIC REPORT | GROUP PERFORMANCE In the waste management sector, Viridor has been a consistent
leader and is well on track to increase Pennon’s future earnings
growth. This is being achieved through the delivery and ramp-up
of ERFs, which are expected to contribute c.£100 million to
Viridor’s EBITDA in 2016/17.
In landfill energy, Viridor continues to maximise value from its
assets, managing the ongoing reduction in inputs and moving from
the 14 remaining operational sites to a smaller number of strategic
sites by 2020. Landfill gas will remain a significant earnings stream
after the sites have closed to waste inputs, and the company is
maximising opportunities to use existing grid connections.
DRIVING VALUE THROUGH EFFICIENCY
South West Water is striving for ever greater efficiency in K6,
building on its strong track record from K5. Recognised by Ofwat
as delivering industry-leading cost efficiency, it was awarded an
enhanced business plan assessment with the largest element of
potential operational outperformance over K6 coming from total
expenditure (Totex) savings.
Plans to merge Bournemouth Water with South West Water
were given unconditional clearance by the Competition and
Markets Authority (CMA) in November 2015. The merger
became official on 1 April 2016 and the integration process has
been progressing well with a new management structure in place.
AREAS OF FOCUS
South West Water delivered a step change in customer service
performance during K5 (2010-2015) through a combination
of operational improvements and initiatives to improve the
customer service experience, including a more proactive
approach to communications.
In 2015/16 the company’s customer service score(1) continued
to increase, and further improvements are anticipated as best
practice is shared with Bournemouth Water (which consistently
delivers SIM performance in the upper quartile of the industry).
In wastewater services, areas for operational improvement
remain, particularly with regards to reducing the risk of flooding
and pollution. South West Water is working resolutely towards
its 2020 targets, making the most of new techniques in activities
such as forecasting and monitoring, and working closely alongside
its supply chain partners to deliver the necessary enhancements.
In recycling, Viridor is accelerating the optimisation and
rationalisation of its assets and contracts through the Input,
Throughput and Output Optimisation (ITOO) programme (see
page 33). By moving towards a more efficient cost base and more
profitable activity, this is designed to overcome lower commodity
prices. The programme is targeting a substantial enhancement
in the company’s EBITDA margin through restructuring and
improvements in source material quality (including contract
renegotiation where required), asset efficiency, productivity and
yield, and specific quality control of outputs.
A number of input contracts have been successfully renegotiated
to enhance value and the quality of inputs. New recycling
contracts reflect the sharing of recyclate price risks with
customers through better gate fees and a better specified quality
of inputs.
(1) As measured by service incentive mechanism (SIM).
During K6 (2015-2020) c.£27 million of synergies
(net of restructuring costs) is set to be achieved through
a combination of:
• the merging of the two companies’ wholesale and
retail operations
• the creation of a single, centralised support function
• the sharing of best practice to form common
systems and processes
• supply chain efficiencies.
A new single legally separate company, Pennon Water Services,
has been created which will provide retail and water management
services for our c.85,000 non-household customers, who will be
eligible for the new water retail market in 2017. The new market
will move into a period of shadow operation in October 2016 prior
to formal opening in April 2017.
In addition to Viridor’s operational delivery, overheads are
being streamlined as part of the announced reorganisation and
restructuring. This is expected to deliver c.£9 million a year of
enduring financial benefits from 2018/19.
A TRANSFORMATIVE
YEAR FOR
PENNON GROUP
15
www.pennonannualreport.co.uk/2016OVERVIEWGROUP PERFORMANCEGOVERNANCEFINANCIAL STATEMENTS GROUP CHIEF
EXECUTIVE OFFICER’S
OVERVIEW CONTINUED
GROUP-WIDE SYNERGY
Pennon is focused on driving greater synergies and savings across
the Group, sharing best practice and ensuring it is well placed to
capitalise on emerging opportunities.
Both Viridor and South West Water have a breadth and depth of
experience in managing large asset bases and in using engineering
excellence, technology and innovation to deliver efficiency
and effectiveness. By sharing knowledge across the Group and
harnessing our combined skills we can provide even better
services to our extensive customer base of local authorities,
major corporate clients and household customers.
A more joined-up Group brings benefits in a variety of ways.
Looking ahead to the opening of the non-household retail
market for water services, a key differentiator for Pennon is the
link that can be forged between Pennon Water Services and
Viridor’s customer base. By capitalising on Viridor’s commercial
relationships and culture we can add value and improve our
service offering.
Furthermore, as part of the evolution in Pennon’s structure,
a shared services review is underway, assessing where we can
unlock opportunities to create additional value through integrating
back office functions.
IN A CHANGING
SECTOR PENNON
IS EVOLVING WITH
CONFIDENCE
AND AMBITION
16
SUSTAINABLE AND RESPONSIBLE BUSINESS
Through innovation, the use of new technologies and the
application of best practice, we continue to focus on sustainability.
By improving the efficiency and effectiveness of our business
activities we ensure sustainable value for both shareholders and
customers while minimising our environmental impacts. This
spans everything from our holistic approach to water and
wastewater management at catchment level (see Upstream
Thinking and Downstream Thinking on pages 29 and 31) to
our strategic purpose of giving resources new life.
At a community level we do our best to be a ‘good
neighbour’ through community engagement, high operational
standards, support for education and the provision of access
and recreation.
South West Water continues to offer an industry-leading range
of affordability schemes to those customers who genuinely
struggle to pay. We continue to provide a social tariff and expand
our innovative work with housing providers to help reduce
customer debt.
At Viridor, a network of active community liaison groups
continues to ensure close dialogue with people living and working
in areas close to our major operational sites, enabling focused
community benefit programmes.
In 2015 both South West Water and Viridor were recognised
as responsible businesses within Business in the Community’s
Corporate Responsibility (CR) Index. Pennon Group also retained
its inclusion in the FTSE4Good Index following independent
assessment in 2015 of its Environmental, Social and Governance
(ESG) performance.
PROUD OF OUR PEOPLE
Pennon has more than 4,800 employees. Their health and safety
remains our top priority and we continue to refine our policies
and make enhancements where necessary in order to protect
their wellbeing and comply with best practice. Further detail can
be found on page 48.
Across the Group we are focused on attracting, nurturing
and retaining a high calibre workforce. South West Water, a
significant employer in the south west of England, is ranked as a
top 100 apprenticeship employer nationally, and has recruited 85
apprentices since 2011.
Meanwhile at Viridor, there is a growing focus on
apprenticeships with 23 apprentices in the business today and a
commitment to expand this at each of the ERFs.
The efforts and achievements of our employees have made 2015/16
a successful year and I would like to take this opportunity to thank
them for their ongoing professionalism and dedication.
PENNON GROUP PLC ANNUAL REPORT 2016STRATEGIC REPORT | GROUP PERFORMANCE OUTLOOK
As an environmental infrastructure business, Pennon is continually
looking to the future to anticipate, influence and manage
regulatory change and the policy environment. This is crucial to
our success.
Through Viridor, we are well positioned with services
reflecting the waste hierarchy, leading with reduction and
recycling, through to energy recovery and finally to disposal.
We expect demand for ERFs to continue to exceed capacity
into the long term. The option to commit to an additional ERF
at Avonmouth remains and would take the total portfolio to 12
plants nationwide.
We remain cautious about future recyclate price growth but are
not relying on a near-term price recovery and are instead driving
forward self-help measures through Viridor’s ITOO programme,
which is delivering margin improvement. We continue to target
new long-term and medium-term commercial and industrial
recycling and recovery contracts.
In the water industry we are well placed to capitalise on
structural changes and resilience challenges, making the
most of opportunities for future consolidation and growth
while continuing to deliver our business plans effectively. As
Bournemouth Water becomes fully integrated with South
West Water, we anticipate further synergistic benefits together
with performance improvements derived from the sharing of
best practice.
At a wider industry level South West Water is fully engaged in
Water 2020 as we prepare and position ourselves for PR19. The
company is in an extremely good position to anticipate and
influence future regulatory reforms and is working hard to ensure
involvement in shaping the future of the industry.
In a changing sector Pennon is evolving with confidence and
ambition. We continue to build on a strong platform, recognising
areas for further improvement and efficiencies while
remaining focused on delivering sustainable business value.
Chris Loughlin
Group Chief Executive Officer
Pennon Group Plc
17
www.pennonannualreport.co.uk/2016OVERVIEWGROUP PERFORMANCEGOVERNANCEFINANCIAL STATEMENTS STRATEGIC REPORT | GROUP PERFORMANCE
STRATEGIC REPORT | GROUP PERFORMANCE
STRATEGIC REPORT | GROUP PERFORMANCE
CHIEF
FINANCIAL
OFFICER’S
REPORT
SUSAN DAVY, CHIEF FINANCIAL OFFICER
FINANCIAL REVIEW
Pennon Group delivered a strong financial performance, underpinned by
a robust funding position, continuing to support our dividend policy of 4%
growth above RPI inflation to 2020.
PERFORMANCE OVERVIEW
The principal measures used to assess the Group’s financial performance are:
ADJUSTED EBITDA(1)
before non-underlying items (£m)
EARNINGS PER SHARE
before non-underlying items and deferred tax (pence)
2011/12
2012/13
2013/14
2014/15
2015/16
430.8
433.0
456.9
465.9
508.4
2011/12
2012/13
2013/14
2014/15
2015/16
+9.1%
-0.8%
PROFIT BEFORE TAX before non-underlying items (£m)
DIVIDEND PER SHARE (pence)
2011/12
2012/13
2013/14
2014/15
2015/16
200.5
190.0
207.3
210.7
211.3(2)
2011/12
2012/13
2013/14
2014/15
2015/16
+0.3%
RECONCILIATION OF EARNINGS(3)
47.3
40.3
42.6
39.8
39.5
26.52
28.46
30.31
31.80
33.58
+5.6%
Statutory earnings attributable to shareholders
Deferred tax before non-underlying items
Non-underlying items (post-tax)
Earnings before non-underlying items and deferred tax
2015/16 Profit
after tax
£m
2015/16 Basic
earnings per
share
p
2014/15 Profit
after tax
£m
2014/15 Basic
earnings per
share
p
152.1
39.2
(29.1)
162.2
37.0
9.5
(7.0)
39.5
126.3
18.2
11.0
155.5
32.3
4.7
2.8
39.8
(1) Earnings before interest, tax, depreciation, amortisation and non-underlying items (EBITDA); adjusted EBITDA includes IFRIC 12 interest receivable and share of joint
venture EBITDA
(2) Statutory basis £206.3m
(3) Earnings per ordinary share in this strategic report exclude non-underlying items and deferred tax. The Directors believe excluding non-underlying items and 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.
18
18
PENNON GROUP PLC ANNUAL REPORT 2016
PENNON GROUP PLC ANNUAL REPORT 2016
Group EBITDA is ahead of 2014/15, reflecting
growth from Viridor’s ERF business and the
acquisition of Bournemouth Water. The growth
across the Group has mitigated to a large extent the
expected water business regulatory revenue reset.
FINANCIAL KPIs FOR OUR BUSINESSES
WATER BUSINESS
WASTE BUSINESS
REVENUE (£m)
REVENUE (£m)
2011/12
2012/13
2013/14
2014/15
2015/16
474.0
498.6
520.0
522.2
547.0
2011/12
2012/13
2013/14
2014/15
2015/16
+4.7%
EBITDA(1)
before non-underlying items (£m)
EBITDA(1) before non-underlying items (£m)
2011/12
2012/13
2013/14
2014/15
2015/16
305.2
317.1
330.9
331.3
335.2
2011/12
2012/13
2013/14
2014/15
2015/16
+1.2%
761.1
703.8
802.0
835.9
806.2
110.3
77.7
76.3
80.4
116.5
-3.6%
+44.9%
PROFIT BEFORE TAX before non-underlying items (£m)
PROFIT BEFORE TAX before non-underlying items (£m)
2011/12
2012/13
2013/14
2014/15
2015/16
141.5
146.7
162.5
167.9
165.7
2011/12
2012/13
2013/14
2014/15
2015/16
-1.3%
+10.8%
CAPITAL INVESTMENT (£m)
CAPITAL INVESTMENT (£m)
2011/12
2012/13
2013/14
2014/15
2015/16
130.8
116.5
141.6
145.1
134.1
2011/12
2012/13
2013/14
2014/15
2015/16
-7.6%
-30.3%
(1) Earnings before interest, tax, depreciation, amortisation and non-underlying items.
57.6
34.3
27.6
27.7
30.7
145.5
322.6
292.0
262.2
182.8
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www.pennonannualreport.co.uk/2016OVERVIEWGROUP PERFORMANCEGOVERNANCEFINANCIAL STATEMENTS
STRATEGIC REPORT | GROUP PERFORMANCE
STRATEGIC REPORT | GROUP PERFORMANCE
CHIEF FINANCIAL
OFFICER’S REPORT
CONTINUED
THE YEAR’S FINANCIAL PERFORMANCE
(before non-underlying items)
Group EBITDA and adjusted EBITDA were ahead of 2014/15 at
£448.4 million (by 9.1%) and £508.4 million (by 9.1%) respectively.
Profit before tax was broadly in line at £211.3 million. This has
been achieved against the backdrop of reduced allowed returns
in our water business for the K6 regulatory period (2015-2020),
with strong contributions from Viridor’s growing portfolio of
operational Energy Recovery Facilities (ERFs) and having acquired
Bournemouth Water during the year.
Both our water businesses recorded strong performances against
their new K6 regulatory contracts, outperforming regulatory
assumptions. The water business’s profit before tax was
marginally down by £2.2 million (1.3%) to £165.7 million, reflecting
South West Water’s expected revenue reset, largely offset by
the additional earnings from Bournemouth Water (acquired in
April 2015), good cost control and lower average borrowing rates.
With the highest potential returns in the sector for K6, South
West Water is outperforming its business plan. Combined with
Bournemouth Water outperformance, this results in a water
business Return on Regulated Equity (RoRE) of 11.7%.
At Viridor, the portfolio of operational ERFs continues to
perform well, with the six most recently delivered ERFs ramping
up as Viridor optimises each plant. Peterborough ERF became
operational in December 2015, having been delivered on time
and on budget, bringing the total number of operational ERFs
to eight. As a result, Viridor’s adjusted EBITDA increased 30.5%
compared to the previous year, driven by the full-year effect of its
expanded fleet of ERFs.
Earnings per share were broadly in line with the prior year, down
0.8% to 39.5p. Overall, weighted average shares outstanding
increased by c.20 million to 410.9 million reflecting the placing
of c.12 million new shares, which were issued to replenish cash
resources following the acquisition of Bournemouth Water.
Dividend per share increased by 5.6% on a sustainable basis
to 33.58p.
We continue to maintain a strong liquidity and funding position
to support our ongoing capital investment growth programme.
We had £1,707 million of cash resources and committed funding
(including £226.5 million of restricted funds) as at 31 March
20
2016, having raised or renewed £470 million of facilities over
the year. These funds support the continuing growth in Viridor’s
ERF business, together with a significant proportion of the water
business’s 2015-2020 (K6) capital programme.
Capital investment remained significant this year at £316.9 million
due to continuing major investment in Viridor’s ERFs, which
is driving future growth. Over two-thirds of committed ERF
capital investment is now complete. The water business capital
expenditure in the year was slightly down on 2014/15, reflecting
the acceleration last year of certain K6 projects to deliver early
outcome benefits to customers and the environment.
We have secured funding at a cost that is efficient and effective.
The Group interest rate on average net debt improved to 3.3%
(2014/15 3.4%).
REVENUE
Group revenue was broadly in line with last year at £1,352.3 million.
Revenue from the water business was up by 4.7% to £547.0 million
as a result of the Bournemouth Water acquisition and new
customers connecting to our network, offset by the revenue reset
and the reduction in revenue as a result of customers switching
from unmeasured to metered charges. Viridor’s revenue decreased
by 3.6% to £806.2 million due to the expected decrease in
construction spend on service concession arrangements (as plants
come on stream) and lower landfill volumes, partly offset by the
full-year contribution of operational ERFs.
ADJUSTED EBITDA (before non-underlying items)
Group adjusted EBITDA, which consists of EBITDA of
£448.4 million, IFRIC 12 interest receivable of £16.7 million and
our share of joint venture EBITDA of £43.3 million, increased by
9.1% to £508.4 million, with the water business up by 1.2% to
£335.2 million and Viridor up by 30.5% to £176.5 million.
Our water business EBITDA was boosted by the acquisition
of Bournemouth Water, which contributed £17.4 million,
offsetting the reduction in South West Water’s allowed returns.
While average RPI rose 1.1%, both South West Water’s and
Bournemouth Water’s operating costs in 2015/16 fell compared
to the previous year, with significant savings in operational
maintenance, as well as targeted efficiencies contributing to
cost performance. In addition South West Water’s bad debt
charges also fell to 1.5% as a percentage of revenues from 1.7%
in 2014/15. At Bournemouth Water bad debt charges fell to 0.4%
from 0.8% in 2014/15 which was driven by a strong collections
performance. Total operating costs before depreciation for the
water business were £211.8 million for the year (£322.5 million
including depreciation).
Viridor’s EBITDA was ahead of last year due predominantly to
the full-year impact of operational ERFs. Our ERF activities
delivered EBITDA of £89.7 million (2014/15 £33.7 million),
a significant increase compared to 2014/15. We remain on track
to deliver our target of c.£100 million of EBITDA from ERFs
by 2016/17 (before IFRIC 12 interest receivable and our share
of joint venture EBITDA). Joint venture EBITDA increased to
£43.3 million (2014/15 £41.4 million) due to continuing strong
EBITDA from Lakeside and higher EBITDA from Runcorn I,
reflecting a full year of operations, despite Lakeside planned
maintenance. This resulted in a share of joint venture profit after
tax of £3.6 million (2014/15 £4.9 million).
PENNON GROUP PLC ANNUAL REPORT 2016 PROFIT BEFORE TAX
Underlying profit before tax was £211.3 million, an increase of
0.3%. On a statutory basis, profit before tax was £206.3 million,
reflecting non-underlying items of £5.0 million.
TAXATION
The Group’s underlying UK corporation tax charge for the
year was £32.9 million (2014/15 £39.2 million) including a
prior-year credit of £1.4 million (2014/15 credit of £5.5 million).
The decrease of £6.3 million primarily reflects the reduction in
the UK rate of corporation tax and higher ERF capital allowances.
The £1.4 million credit relating to prior years includes a charge
of £30 million for an uncertain tax item relating to a financial
transaction. This is largely offset by an updated assessment of
other uncertain tax items, following discussions with HM Revenue
and Customs (HMRC) on complex tax legislation relating to the
deductibility of financial arrangements, relief claims for capital
expenditure, and submission of the prior-year tax returns
resulting in lower tax being due compared to the assessment
made for the 2014/15 charge.
Underlying deferred tax for the year was a charge of £39.2 million
(2014/15 £18.2 million). The higher charge this year reflects higher
ERF capital allowances.
EARNINGS PER SHARE
(before non-underlying items and deferred tax)
Earnings per ordinary share were broadly comparable with prior
year, down 0.8% at 39.5p. This reflects the weighted average
number of shares in issue during the year increasing to 410.9
million (2014/15 390.9 million) driven by the equity placing
of 12.1 million shares at the start of the year and the full year
impact of the conversion of 20.9 million shares last year from the
£125 million convertible bond. Net assets per share at book value
at 31 March 2016 were 361p.
In addition, there is a £33.1 million deferred tax credit relating to
the enacted reduction in the UK rate of corporation tax and a
£1.0 million tax credit relating to other non-underlying items. This
results in a total tax charge for the year of £38.0 million (2014/15
£54.7 million).
Recycling and resources EBITDA, comprising recycling, collection
and contracts and ‘other’(1), was broadly in line with last year at
£49.6 million (2014/15 £49.0 million), despite lower recyclate prices
and therefore lower average revenues at £85 per tonne (recyclate
sales plus gate fees) (2014/15 £86 per tonne). Average costs fell by
£2 per tonne to £77 per tonne (2014/15 £79 per tonne) as a result
of self-help measures under the Input, Throughput and Output
Optimisation (ITOO) programme, and therefore the recycling
EBITDA margin increased by £1 per tonne to £8 per tonne (2014/15
£7 per tonne). Although the short term outlook for recyclate prices
is relatively stable, we remain cautious about future recyclate price
growth and are not relying on a near term recovery. We are instead
focusing on ‘self-help’ measures to drive margin improvement.
Landfill gas power generation EBITDA of £31.5 million (2014/15
£35.8 million) was impacted by the removal of Levy Exemption
Certificates and lower volumes. As expected, landfill EBITDA was
down to £6.3 million (2014/15 £15.4 million) due to the continuing
planned landfill wind-down and aftercare programme. Three sites
were closed to waste arisings during the year and one following
the year end.
Through the Group’s portfolio management approach to energy
hedging, c.90% of energy (generation net of internal usage of
electricity) is hedged into 2016/17 and over 50% is hedged out
to 2019/20.
NET FINANCE COSTS (before non-underlying items)
We continued our effective management of interest rates in
2015/16 with net finance costs (including capitalised interest, but
before pensions interest, discount unwind on provisions, IFRIC 12
finance income and joint venture finance income) net of interest
receivable on average net debt equating to 3.3% (2014/15 3.4%)
which included lower interest payable on RPI-linked debt and
lower rates on interest rate swaps.
Net finance costs of £54.1 million were £13.3 million higher than
last year, reflecting a £13.1 million decrease in capitalised interest
following a number of ERFs becoming operational towards the
end of 2014/15, together with higher borrowings associated with
the ongoing ERF capital expenditure programme, partly offset by
lower average borrowing rates and £3.2 million higher IFRIC 12
interest receivable.
Interest receivable (before IFRIC 12 finance income and
joint venture finance income) totalling £14.7 million (2014/15
£19.1 million) has been achieved from the objective of enhancing
returns on the Group’s substantial pre funding of £632 million.
During the year net finance costs (excluding pensions net interest,
discount unwind on provisions and IFRIC 12 contract interest
receivable) were £59.6 million (2014/15 £41.1 million), covered
4.4 times (2014/15 6.0 times) by Group operating profit.
(1) Includes £2.4m operating profit on disposal of Whitehead landfill site.
www.pennonannualreport.co.uk/2016
21
21
www.pennonannualreport.co.uk/2016OVERVIEWGROUP PERFORMANCEGOVERNANCEFINANCIAL STATEMENTS STRATEGIC REPORT | GROUP PERFORMANCE
STRATEGIC REPORT | GROUP PERFORMANCE
CHIEF FINANCIAL
OFFICER’S REPORT
CONTINUED
NON-UNDERLYING ITEMS
Net non-underlying items totalling a charge before tax of
£5.0 million have been recognised. The net charge includes a
£10.2 million charge for restructuring provisions and a £5.2 million
credit relating to the non-cash fair value movement on our
long-dated derivatives, with the commercial hedged position
unchanged. In addition, there is a £33.1 million deferred tax credit
relating to the enacted reduction in the UK rate of corporation
tax and a £1.0 million tax credit relating to non-underlying items
noted above.
During the year the Group reviewed the allocation of Viridor’s
long-lived assets to cash generating units (CGUs) to ensure
they remained consistent with Viridor’s operations and the
waste market it serves. This review concluded the need
for updated allocations with assets now considered part of
integrated regional CGUs, which resulted in a £60.9 million
impairment of non-strategic landfill sites and a £60.9 million
reversal of previous impairments. Details of the review are set out
in note 17 to the financial statements.
The non-underlying items total a credit after tax of £29.1 million.
EBITDA after non-underlying items was £438.2 million
(2014/15 £421.6 million). Profit after tax and non-underlying
items attributable to shareholders, was £152.1 million (2014/15
£126.3 million).
DIVIDENDS AND RETAINED EARNINGS
The statutory net profit attributable to ordinary shareholders of
£151.9 million has been transferred to reserves.
The Directors recommend the payment of a final dividend of
23.12p per share for the year ended 31 March 2016. With the
interim dividend of 10.46p per share paid on 1 April 2016 this gives
a total dividend for the year of 33.58p, an increase of 5.6% over
2014/15 (reflecting 4% real growth plus March 2016 RPI of 1.6%).
Proposed dividends totalling £138.5 million are covered 1.1 times
by net profit (before non-underlying items and deferred tax)
(2014/15 1.2 times). Dividends are charged against retained
earnings in the year in which they are paid.
DIVIDEND POLICY
The Group’s policy is to increase the dividend each year by 4% above
inflation up to the end of 2019/20. The Group is well positioned to
continue delivering shareholder value.
OPERATING COSTS (before non-underlying items)
Operating costs for the year totalled £1,090 million. The most
significant areas of expenditure were:
Expenditure
Landfill tax
Employment costs
Depreciation
Raw materials and consumables*
Transport
Power
Business rates
Abstraction and discharge consents
* Excludes transport costs
22
£m
160
180
183
79
57
39
37
8
GROUP CAPITAL INVESTMENT
Group capital investment was £316.9 million in 2015/16 compared
to £407.3 million in 2014/15, reflecting lower spend on ERFs as the
investment programme moves from construction to operation.
South West Water and Bournemouth Water capital expenditure
was £134.1 million compared to £145.1 million for South West
Water in 2014/15. The beginning of the new regulatory period
reflects a change in the nature and extent of capital activity.
South West Water has also delivered efficiency savings through
innovative planning and scoping of schemes, and maximising
benefits during construction and through the supply chain.
South West Water’s spending has focused on preparations for
the innovative new water treatment works at North Plymouth,
schemes to improve water quality and investment in digital
infrastructure. Bournemouth Water has focused on continued
pressure management and commissioning two ultraviolet
treatment plants at Beaulieu and Knapp Mill. Both South West
Water and Bournemouth Water have made a good start to
delivering their K6 capital programme.
Viridor’s capital investment was £182.8 million compared to
£262.2 million in 2014/15, predominantly driven by expenditure
on ERFs. This reduction reflected reduced capital expenditure
on ERFs as eight of the eleven plants in the portfolio are now
on stream, and reduced capital investment in recycling as
2014/15 included expenditure on the Scottish Newhouse glass
recycling facility in North Lanarkshire, which came on-stream
during 2015/16. Before capitalised interest, cumulative ERF
expenditure to date is £910 million, excluding the £72 million
spent on Peterborough ERF, which was local authority financed.
This leaves £295 million left to invest on the ERF programme;
around £185 million in 2016/17, around £100 million in 2017/18
and around £10 million in 2018/19. So far, Viridor has realised
£22 million of efficiencies across the ERF capital investment
programme and is targeting further savings. The Group’s capital
expenditure on property, plant and equipment, including
service concession arrangements, remained significant at
£316.9 million (2014/15 £407.3 million). The major categories of
expenditure were:
ERF
£139m
Water
£59m
Wastewater
£75m
Recycling
£7m
Landfill energy
£12m
Other
£25m
PENNON GROUP PLC ANNUAL REPORT 2016 CASH FLOW
The Group had operational cash inflows in 2015/16 of
£418 million (2014/15 £412 million). These funds have been put
to use in efficiently financing the Group’s capital structure and
investing in future growth, through our continuing substantial
capital investment programme. This investment together with
non-cash movements, associated with assuming the fair value of
Bournemouth Water’s debt, has resulted in higher Group net
debt. In April 2015, Pennon acquired Bournemouth Water for
a cash consideration of £100.3 million. An equity placing was
undertaken to replenish our cash resources in respect of the
acquisition and ensure funding flexibility.
Summarised cash flow
Cash inflow from operations
Net interest paid
Tax paid
Dividends paid (net of scrip)
Hybrid periodic return
Capital expenditure
Dividends and loan repayments received
from joint ventures
Pension contributions
Equity placing and other share issues
Acquisitions (net of cash acquired)
Net cash outflow
Fair value of debt acquired from
Bournemouth Water
Conversion of share of convertible bond
Debt indexation/interest accruals
Increase in net borrowings
2015/16
£m
2014/15
£m
418
(64)
(45)
(123)
(20)
(291)
34
(34)
102
(91)
(114)
(160)
–
(13)
(287)
412
(42)
(22)
(69)
(20)
(365)
6
(28)
3
–
(125)
–
125
(3)
(3)
Finance leasing
£1,339m
Bank bilateral debt
£403m
Index-linked
bond 2057
£413m
European
Investment
Bank loans
£273m
Private
placements
£554m
Bond 2040
£133m
MAJOR COMPONENTS OF THE GROUP’S DEBT FINANCE
AT 31 MARCH 2016
LIQUIDITY AND DEBT PROFILE
The Group has a strong liquidity and funding position, with
£1,707 million cash and facilities at 31 March 2016. This includes
cash and deposits of £632 million (including £227 million of
restricted funds representing deposits with lessors against lease
obligations) and undrawn facilities of £1,075 million. A total of
£470 million in new or renewed debt facilities was arranged
during the year, being:
• £130 million new European Investment Bank facility
• £100 million new 20-year facility
• £100 million of new finance leases in South West Water
• £140 million of term loans and revolving credit facilities.
At 31 March 2016 the Group’s loans and finance lease obligations
totalled £3,116 million. After the £632 million held in cash,
this gives a net debt figure of £2,484 million, an increase of
£287 million during the year.
The Group’s debt has a maturity of up to 41 years with an
average maturity of 22 years. Much of the Group’s debt is floating
rate and derivatives are used to fix the rate on that debt. The
Group has fixed, or put swaps in place to fix, the interest rate on
a substantial portion of the existing water business debt for the
entire K6 period.
£395.7 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. Two thirds of the water business debt is
finance leases giving us a long maturity profile. Interest payable
benefits from the fixed credit margins, which were secured at the
inception of each lease.
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 2016 is 3.3% (after adjusting for capitalised interest
of £9.4 million, notional interest items totalling £5.5 million and
interest received from shareholder loans to joint ventures of
£10.7 million, as detailed in note 8 to the financial statements).
For South West Water this figure was 3.1%.
At 31 March 2016 the fair value of the Group’s non-current
borrowings was £114 million less than its book value (2015
£74 million) as detailed in note 28 to the financial statements.
This reflects the benefit of securing interest rates below the
current market rate.
23
www.pennonannualreport.co.uk/2016OVERVIEWGROUP PERFORMANCEGOVERNANCEFINANCIAL STATEMENTS STRATEGIC REPORT | GROUP PERFORMANCE
STRATEGIC REPORT | GROUP PERFORMANCE
CHIEF FINANCIAL OFFICER’S
REPORT CONTINUED
CAPITAL STRUCTURE – OVERALL POSITION
The Group’s net debt has increased by £287 million to
£2,484 million, with the increase in part reflecting the net
debt assumed in the acquisition of Bournemouth Water. The
Group’s gearing ratio at 31 March 2016, being the ratio of net
debt to (equity plus net debt), was 62.5% (2015 61.9%).
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. £6.3 million (2014/15 £48.0 million) of
potential cash dividend was retained in the business and resulted
in the issuance of 760,626 shares.
Group net debt includes £978 million of funding for our wholly
owned ERFs (Runcorn II, Oxford, Exeter, Cardiff, Glasgow,
Dunbar and South London) and £81 million of funding for our
investments in our joint ventures through shareholder loans.
(which represents 40% of Group net debt). In addition, our joint
ventures have net debt from third parties (excluding shareholder
loans) of £212 million.
South West Water’s Regulatory Capital Value (RCV), including
Bournemouth Water’s RCV of £152.9 million, rose 7.6% to
£3,150 million at 31 March 2016. This resulted in a combined debt
to RCV ratio of 59.7% (2015 62.1%), of which South West Water
was 59.8% and Bournemouth Water was 56.7%, which compares
to Ofwat’s K6 target efficient gearing of 62.5%.
REGULATORY CAPITAL VALUE (£m) as at 31 March
2012
2013
2014
2015
2016
2,827
2,916
2,959
2,928
3,150
+7.6%
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.
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.
INTERNAL BORROWING
South West Water’s and Bournemouth Water’s funding is treated
for regulatory purposes as ring-fenced. This means that funds
raised by, or for, either company are not available as long-term
funding for other areas of the Group.
TAXATION STRATEGY
Our tax strategy, reaffirmed by the Board in April 2016, is to
fulfil our statutory obligations by the application of relevant tax
legislation in a reasonable way, engaging in tax planning only
when it is aligned with the commercial and economic activity of
the Company. This is in line with the principles published by the
Confederation of British Industry (CBI) in 2013. The Group engages
with HMRC in an open and transparent way, identifying potential
areas of uncertainty on a timely basis. Due to the complexity of
tax legislation, the Group and tax authorities may sometimes have
differing opinions on the treatment of certain tax items. The Group
manages this risk and accrues for areas of tax uncertainty in line
with accounting standards requirements, where appropriate. The
Board is regularly updated on tax matters, and any tax implications
of commercial activities are highlighted to the Board with the use of
a risk matrix to assess the appropriateness of a proposal.
TAX CONTRIBUTION 2015/16 – COLLECTED/PAID
The Group made a net payment of £45.0 million of UK
corporation tax in the year (2014/15 £21.0 million). The main
element of the payment was £25.4 million in relation to 2015/16
net of refunds of £0.2 million from prior years. £9.3 million was
paid in relation to the 2014/15 quarterly instalments; in addition
£10.3 million was paid for earlier years.
The total tax charge for the year (before non-underlying items)
of £72.1 million was greater than the charge that would have
arisen had the accounting profit before tax and non-underlying
items been taxed at the statutory rate of 20%. A reconciliation is
provided in note 9 to the financial statements.
The mainstream tax charge for the year (before deferred tax,
prior-year and non-underlying items) of £34.3 million results
in an effective rate of 16.2%, which is lower than the statutory
rate of 20.0% due to capital allowances received on ERF
capital expenditure.
Landfill tax £167m
Employment taxes
£54m
UK corporation tax
£45m
Business rates
£42m
Environmental
payments
£11m
Fuel Excise Duty
£8m
VAT
£8m
Carbon Reduction
Commitment £4m
Other £3m
24
PENNON GROUP PLC ANNUAL REPORT 2016
PENSIONS
The Group operates defined benefit pension schemes for certain
employees of Pennon Group. The main schemes were closed to
new entrants on or before 1 April 2008.
At 31 March 2016 the Group’s pension schemes showed an
aggregate deficit (before deferred tax) of £40.9 million (2014/15
£59.6 million). The decrease primarily reflects an acceleration of
deficit recovery payments totalling £22.6 million and the addition
of the Bournemouth Water’s defined benefit scheme, which is in
surplus, offsetting adverse movements in asset market conditions
and continuing low bond rates used in the discounting of the
schemes’ liabilities.
Net liabilities of £33 million (after deferred tax) represented
around 1% of the Group’s market capitalisation at 31 March 2016.
The last actuarial valuation of the main scheme was as at
31 March 2013. The 31 March 2016 valuation is underway.
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 that have good
credit ratings.
Susan Davy
Chief Financial Officer
Pennon Group Plc
The Group’s total tax contribution extends significantly beyond its
UK corporation tax charge. Total taxes amounted to £342 million
(2014/15 £329 million) of which a net amount of £62 million
(2014/15 £26 million) was collected on behalf of the authorities
for employee payroll taxes and Value Added Tax (VAT).
In addition to corporation tax, the most significant taxes involved,
together with their profit impact, were:
• Landfill tax of £167 million includes £166 million (2014/15
£204 million) collected by the Group on behalf of HMRC.
This amount includes £11 million (2014/15 £11 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. The Group incurred
landfill tax of £1 million (2014/15 £5 million) on the disposal of
waste to third parties. The reduction of £4 million compared
to 2014/15 reflects the level of waste that is being diverted to
ERFs rather than going to landfill. 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.
• VAT of £8 million paid (2014/15 £9 million recovered) by the
Group to HMRC. The movement in VAT from recovered to
paid is a result of a reduction in the capital expenditure and
the increase in Group operating profit. VAT has no material
impact on profit before tax.
• Business rates of £42 million (2014/15 £33 million) paid to local
authorities. This is a direct cost to the Group and reduces
profit before tax.
• Employment taxes of £54 million (2014/15 £50 million)
including employees’ Pay As You Earn (PAYE) and total
National Insurance contributions (NICs). Employer NICs of
£15 million (2014/15 £14 million) were charged approximately
92% to operating costs with 8% capitalised to property, plant
and equipment. The total amount of £54 million includes PAYE
of £3 million (2014/15 £2 million) on pension payments made
by the Group pension schemes.
• Fuel excise duty of £8 million (2014/15 £10 million) related to
transport costs. This reduces profit before tax.
• Payments to the Environment Agency and other regulatory
bodies totalling £11 million (2014/15 £9 million). This reduces
profit before tax.
• Carbon Reduction Commitment payment for the Group of
£4 million (2014/15 £4 million). This reduces profit before tax.
The corporation tax rate for 2015/16 used to calculate the current
year’s tax is 20% and will reduce to 19% for the year ended 2018
and to 18% for the year ended 2021.
25
www.pennonannualreport.co.uk/2016OVERVIEWGROUP PERFORMANCEGOVERNANCEFINANCIAL STATEMENTS OUR OPERATIONS
WATER AND WASTEWATER
STRATEGY
We are focused on providing water and
wastewater services in the most efficient and
sustainable way possible. Innovation, new
technologies, and the pioneering of a holistic
approach to water and wastewater management
are playing a key role in delivering service
improvements and long-term value.
SOUTH WEST WATER
BOURNEMOUTH WATER
Wistlandpound
Wimbleball
Upper Tamar
Roadford
Meldon
Crowdy
Stannon
Fernworthy
Kennick,
Tottiford &
Trenchford
Colliford
Siblyback
Burrator
Venford
Park
Avon
Drift
Stithians
College
Argal
Longham Lakes
KEY FACTS
• 2.2 million total population served
• 996,929 customers
• 23 raw water reservoirs
• 18,131km of drinking water mains network
• 688 treatment works with 66 ultraviolet (UV) treatment facilities
• 15,600km wastewater mains network*
• 900 wastewater pumping stations*
• 145 bathing waters and 24 shellfish waters.*
* South West Water region only
Reservoir
Key water mains
South West Water has delivered further improvements in line
with our Business Plan to 2020, ensuring we are well placed to
meet the changing demands of our sector. The integration of
Bournemouth Water is progressing well and provides further
scope for performance improvement, operational efficiency
and sharing best practice.
STEPHEN BIRD, MANAGING DIRECTOR, SOUTH WEST WATER
26
PENNON GROUP PLC ANNUAL REPORT 2016STRATEGIC REPORT | GROUP PERFORMANCE
Viridor continues to develop and improve its recycling
and recovery and facilities for clients and partners throughout
the UK. Driven by a clear purpose and strategy, this year
we’ve seen further investment in our essential recycling
and energy recovery infrastructure, and in our people and
processes, to deliver future growth, better UK resource
efficiency and a quality service for our customers.
WASTE RECYCLING AND RECOVERY
VIRIDOR
IAN McAULAY, CHIEF EXECUTIVE, VIRIDOR
STRATEGY
Our purpose is to give the world’s resources new life.
We remain at the forefront of the resource sector in
the UK, transforming waste into energy, high quality
recyclates and raw materials.
KEY FACTS
• Eight energy recovery facilities in operation and three more
under construction across the UK
• Produces enough energy to power over 330,000 homes
• Over 150 local authority and major corporate clients, as well
as over 32,000 customers across the UK
• Network of 313 recycling, energy recovery and waste
management facilities
• Over 7.5 million tonnes of recyclates and resources
managed each year, of which 1.8 million tonnes are recycled
(including organics)
• A fleet of 650 waste collection vehicles.
Operational
facilities
27
www.pennonannualreport.co.uk/2016OVERVIEWGROUP PERFORMANCEGOVERNANCEFINANCIAL STATEMENTS OUR OPERATIONS CONTINUED
WATER AND WASTEWATER
OUR PERFORMANCE AGAINST THE K6
REGULATORY CONTRACT (2015-2020)
South West Water has the highest
potential rewards in the sector for K6.
At 31 March 2016 the combined water
business (South West Water and
Bournemouth Water) has delivered
an 11.7% Return on Regulated Equity
(RoRE)(1) arising from base, operational
and financing returns.
2015/2016 RoRE
2
3
4
1) Base – 6.0%
2) Totex outperformance
– 2.5%
3) ODI outperformance
– 0.2%
1
4) Financing outperformance
– 3.0%(2)
TOTAL – 11.7%
(1) RoRE reflects the Ofwat regulatory guidance of Base RoRE plus Outperformance.
It is calculated using actual results before non-underlying items (deflated into 2012/13
prices) and compared against the Final Determination allowances sourced from
Ofwat published models and based on notional gearing and annual average regulatory
capital vehicle (RCV).
(2) Interest outperformance is based on the outturn effective interest rate (aligned
with Regulatory Accounting Guidelines and adjusted for one-off credits) using the
expected K6 RPI of 2.8%, aligned with the 2014 Final Determination cost of capital
assumptions, notional debt gearing of 62.5%, and a notional tax impact of 20%.
TOTEX STRATEGY – SECURING OUTPERFORMANCE
South West Water is striving for ever greater efficiency in K6,
building on a strong track record from K5. The company was
deemed to be at the frontier of cost efficiency when it was
awarded an enhanced Business Plan assessment with the largest
element of potential operational outperformance over K6
coming from total expenditure (Totex) savings and efficiencies.
Bournemouth Water is one of the top performing water-only
companies and was deemed to be mid-table for efficiency. The
combined water business is ‘front-end-loading’ efficiencies and
savings to allow early and more certain delivery of outperformance.
£56m of Totex savings(3) have been delivered in 2015/16, despite
costs of delivering growth. These Totex savings reflect changes in
the timing of delivery from those planned in the determinations.
ODI REWARDS SECURED
South West Water has 23 outcome delivery incentives (ODIs),
including SIM, which have potential financial rewards or penalties.
Incentives for performance are recognised in the year of delivery,
whether the measure is recovered in period or as a regulatory
true-up at the end of the period.
Operational performance for the year, which is covered in more
detail below, has resulted in an ODI reward. Rewards were
secured across bathing water quality, odour complaints and water
restrictions. Improved performance is being targeted in areas
where penalties were received such as pollutions and interruptions
to supply. Bournemouth Water has 10 ODIs, including the service
incentive mechanism (SIM), which have financial rewards and
penalties. Rewards were achieved in leakage and reducing large
scale interruptions. Combined ODI rewards result in a £2.1m
benefit and reflects RoRE outperformance of 0.2%.
WATERSHARE
South West Water has in place a unique WaterShare mechanism
to share net benefits with customers through reinvestment
options, future bill reductions and service improvements
exceeding planned targets.
WaterShare reflects the established mechanism for sharing
Totex outperformance but also allows customers to share in
financing outperformance(4) from movements in the market
on new debt instruments. In addition specific items are also
shared with customers – with differing rates depending on the
company delivery.
This WaterShare mechanism has identified c.£3.1million of
benefits to customers this year and following discussions with
our independent WaterShare panel it has been decided that this
would be earmarked for reinvestment, rather than a targeted
reduction in customer bills. This equates to a RoRE of 0.3% .
(3) £53m from South West Water, £3m from Bournemouth Water including integration synergies already
delivered. Phasing of actual expenditure compared to the planned programme has been reflected.
Outperformance includes a reduction in the RCV run-off for the RCV element of Totex outperformance
calculated based on the Final Determination PAYG. Tax impacts reflect actual effective tax rates.
(4) Financing outperformance is based on comparing average iBoxx rates, adjusted by notional Final Determination
RPI of 2.8% and compared to the cost of debt assumed of 2.75%. This is applied to an assumed new debt
proportion of 25% and adjusted for the tax impact.
28
PENNON GROUP PLC ANNUAL REPORT 2016STRATEGIC REPORT | GROUP PERFORMANCE DRINKING WATER QUALITY
(mean zonal compliance)
SOUTH WEST WATER
BOURNEMOUTH WATER
99.97%
100%
DRINKING WATER
South West Water continued to deliver high quality drinking
water in 2015, achieving 99.97%,(1) a slight improvement on
the previous year. Leakage was kept within target levels, water
resources were unrestricted for a 19th consecutive year and there
was a 14% reduction in customer contacts regarding taste, odour
or discolouration issues.
Bournemouth Water achieved a perfect score for drinking water
quality, with 100% of compliance tests(1) carried out meeting the
required standard, and there was a further substantial reduction
in the amount of water lost through leaks and bursts. The number
of customer contacts regarding taste, odour or discolouration
issues was well within the target threshold, and less than 1% of
customers experienced an interruption to their water supply
lasting three hours or more.
The average duration of supply interruptions per property
for South West Water regrettably was up by 2 minutes to 25
minutes in 2015/16. This was largely due to two large trunk main
bursts affecting customers’ supplies; at St Blazey in Cornwall in
October 2015 and in Plymouth in December 2015. In each case
we took immediate steps to restore supplies as quickly as possible
and keep customers informed.
We have further developed our strategies to prevent and
mitigate the impact of such occurrences in future. These are
being supported by the use of innovative techniques for network
pressure management and monitoring, together with investment
in advanced repair technologies.
Recognising that customers regard a clean and safe supply
of drinking water as their top service priority, key areas of
investment and activity during 2015/16 included:
South West Water
• Development expenditure for a new £60 million
state-of-the-art North Plymouth water treatment works
• Detailed design of improved water treatment processes such as
granular activated carbon (GAC) filtration and UV disinfection
at five water treatment works across the region
• Mains rehabilitation and flushing
• Pressure management and network modelling
• Investment in digital infrastructure, including improvements
in retail engagement targeting a proactive and positive
customer experience.
Bournemouth Water
• Mains replacement schemes and new mains development
• Water treatment upgrades including GAC replacement and
the addition of UV treatment at three sites
• Improvements to the disinfection process at Alderney water
treatment works.
Furthermore, improved drinking water quality and drinking water
treatment efficiency continue to be targeted through South
West Water’s award-winning ‘Upstream Thinking’ programme of
catchment management.
Delivered in partnership with a range of stakeholder groups,
including wildlife trusts and river authorities, Upstream Thinking’s
combination of moorland restoration initiatives and agricultural
improvement schemes seeks to reduce the level of man-made
and natural contaminants in the region’s watercourses.
Building on the programme’s success in K5 (2010-2015), South
West Water is investing around £10 million between 2015
and 2020 to deliver improvements in 11 additional catchment
areas. This will include 700 farm improvement schemes and the
restoration of c. 1,300 hectares of moorland.
At Bournemouth Water catchment management work has
commenced with our partner Natural England and Catchment
Sensitive Farming, working with farmers in the River Stour
catchment area to educate them about the effects of their activity
on raw water quality.
(1) As measured by mean zonal compliance, the recognised industry measure for overall
drinking water quality.
29
www.pennonannualreport.co.uk/2016OVERVIEWGROUP PERFORMANCEGOVERNANCEFINANCIAL STATEMENTS OUR OPERATIONS CONTINUED
WATER AND WASTEWATER
WASTEWATER
We aim to ensure the safe and efficient removal and disposal of
wastewater while minimising the likelihood of sewer flooding or
pollution affecting homes, businesses or the environment.
During K5 (2010-2015) South West Water focused on a targeted
programme of wastewater treatment improvements while also
working to prevent potential failure through increased monitoring.
In 2015 the company’s score for numeric compliance (the
percentage of wastewater treatment works deemed compliant)
at 95.8% remained above the K5 average but was slightly below
that of the previous year (2014 96.1%). This highlights the need for
further enhancements as we strive to achieve 100% compliance
by 2020.
Our legacy of major investment to protect bathing waters,
in addition to accelerated bathing water quality schemes
implemented during 2014/15, was reflected in extremely positive
results for the 2015 bathing water season, which was assessed
under tougher new EU standards. Of the 145 bathing waters
tested in the South West Water region, 141 (97.2%) were
classified ‘sufficient’ or better, with more than 70% classified
as ‘excellent’.
Four bathing waters were rated as ‘poor’; however this was
not attributed to any failure of South West Water’s assets. We
recognise that bathing water quality is dependent on a wide range
of factors and work continues, alongside partners including local
councils, community groups, landowners and conservationists, to
tackle bathing water quality issues in a holistic and sustainable way.
South West Water had zero ‘serious’ (Category 1) pollution
incidents in 2015 and made a substantial reduction in the number
of pollution incidents overall (Categories 1-4). However, there
were seven ’significant’ (Category 2) incidents compared with
three in 2014.
A comprehensive performance review was undertaken that
identified blockages on the network as the largest pollution risk.
To improve the robustness of the wastewater network and
assets, a strategy is being implemented to increase monitoring
and maintenance. We also continue to raise customer awareness
about sewer misuse.
These improvements will also help to reduce the risk of sewer
flooding. While the annual level of rainfall was relatively normal
for the year, the number of internal and external sewer floodings
was higher than the previous year as a result of extended periods
of heavy rainfall in the winter of 2015/16.
30
PENNON GROUP PLC ANNUAL REPORT 2016STRATEGIC REPORT | GROUP PERFORMANCE In addition to capital maintenance and improvement schemes, we
are working to improve our response times to flooding incidents.
In the longer term, a reduction in sewer flooding is also being
targeted through our ‘Downstream Thinking’ programme of work
to improve urban drainage using low-cost sustainable techniques
including landscaping and sustainable drainage systems (SuDS).
In 2015/16 this included:
• Aveton Gifford, Devon (pictured, below) – tackling sewer
flooding in a joint project alongside the parish council, the
school, county council and householders to reduce the amount
of surface water entering combined sewers
• Exmouth, Devon – locations have been identified where SuDS
would be most beneficial. Community engagement and initial
designs are planned for 2016/17
• Kingsbridge, Devon – the development of an Integrated Urban
Drainage Model in partnership with the Environment Agency
and Devon County Council.
Furthermore, we continue to work with organisations including
the Environment Agency and local councils on flood alleviation
projects. In 2015/16 this included the completion of a £2 million
scheme to protect homes in the Colebrook area of Plymouth
and support for the proposed Environment Agency and Cornwall
Council-led £20 million flood alleviation and regeneration scheme
around St Austell (for which a funding bid has been submitted
to the EU). South West Water is also providing financial support
for the Exeter Flood Defence Scheme.
Technology to
improve sewer
network monitoring
The use of new technologies is a key
part of South West Water’s approach
to improve both efficiency and
sustainability. During 2015/16 we trialled
the use of SewerBatt – innovative pipe
inspection technology that uses sound
to assess the condition of sewers. It is
hoped that the roll-out of SewerBatt will
allow for improved sewer cleansing by
identifying blockages and other potential
causes of pollution much more quickly
than traditional methods.
31
www.pennonannualreport.co.uk/2016OVERVIEWGROUP PERFORMANCEGOVERNANCEFINANCIAL STATEMENTS OUR OPERATIONS CONTINUED
WASTE RECYCLING AND RECOVERY
ENERGY RECOVERY FACILITIES (ERFs)
We are successfully establishing a significant asset
base of ERFs, with eight plants, representing
more than two-thirds of the committed portfolio
capacity, now in operation. Peterborough ERF was
completed and became operational in December
2015. The process of ramping up towards
operational optimisation continues at the six
most recently delivered ERFs.
Around 80% of the committed ERF portfolio is expected to be operational
by the end of 2016/17, and is on track to deliver c.£100 million of EBITDA in
2016/17. We expect to have c.18% ERF market share by 2020, with a network
of strategic facilities driving Viridor’s longer-term profit growth.
Currently we have 142 megawatts (MW) of renewable energy capacity
from our eight operational ERFs, including our share of joint ventures, and
the Greater Manchester and Walpole anaerobic digestion (AD) plants. We,
together with our joint venture partners, have a total operational/committed
ERF capacity of over 2.8 million tonnes. Approximately 80% of inputs
required across the ERF portfolio (operational and those under construction)
are now secured under long-term contracts, helping to secure revenue
streams and move to a more homogeneous risk profile across the Group.
Of the three ERFs under construction, Dunbar and Beddington ERFs are
progressing as planned. The Glasgow gasification plant is expected to enter
commissioning in H1 2016/17. All three remain on budget.
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PENNON GROUP PLC ANNUAL REPORT 2016STRATEGIC REPORT | GROUP PERFORMANCE ENERGY
Viridor’s total energy capacity is changing in scale and across its
energy division; currently we have 277MW of operating capacity
from ERFs, AD and landfill gas (including joint ventures) and
expect to export over one terawatt hour (TWh) of power to the
national grid in 2016/17. Once the total committed ERF portfolio
is completed in 2018/19, ERFs alone will provide 242MW of
energy generation capacity.
We have developed a portfolio management strategy to
help realise the full potential of this growth, with a team of
experienced energy market professionals to actively manage our
market position. We have also implemented framework contracts
to enable us to ‘hedge out’ market risk where appropriate in the
longer term. The business now has the ability to hedge its market
position for periods up to five years ahead. In addition, the Group
has a natural hedging opportunity which represents one third of
Viridor’s energy generation, as South West Water is a net user
of electricity.
RECYCLING AND RESOURCES
During the year, our recycling volumes traded increased
by 121,000 tonnes (7.3%) to 1.8 million tonnes. Recyclate prices
were lower for the year of 2015/16 compared to 2014/15. Prices
have now stabilised to some degree for most commodities but
remain under pressure, reflecting world economic conditions and
competitive markets.
Through the Input, Throughput and Output Optimisation (ITOO)
programme, we are targeting improvements in source material
quality (involving contract renegotiation where required),
restructuring, asset efficiency, productivity and yield, and specific
quality control of outputs. A number of contracts have been
successfully renegotiated enhancing value and quality of inputs.
Where new recycling contracts have been secured, better gate
fees reflect the sharing of recyclate price risks with customers
and secure a better specified quality of inputs. These self-help
measures have resulted in marginal increases compared to the
prior year.
During the period, Levy Exemption Certificates (LECs) were
discontinued with a modest impact on Viridor. There have also
been changes to the Renewable Obligation Certificates (ROCs)
regime. However, Viridor’s ROC accreditations are unaffected
by these changes. Energy generation continues to be a profitable
business for us.
Opportunities for decentralised energy and heat utilisation
(combined heat and power) at selective ERF and landfill gas
power generation sites are being developed.
We continue to operate the most extensive Material Recycling
Facility (MRF) capacity in the UK. Viridor is established as a
quality brand in the UK, European and Asian markets including
China, where it holds accreditations for export. There are clear
long-term regulatory drivers for recycling from the EU and UK
Government, alongside expectations from clients, including local
authorities, leading corporates and the business community.
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WASTE RECYCLING AND RECOVERY
LANDFILL GAS POWER GENERATION
Our landfill energy business is being managed to maximise the
value of landfill gas power generation, while exploring alternative
commercial development opportunities and other energy uses
such as photovoltaics (PV) and energy storage at our landfill sites.
At present we have 99MW of landfill gas capacity (excluding
3MW capacity at sub-contract sites in Suffolk). Gas volumes
reached peak production in 2012/13 and have been reducing
gradually, partially offset by improved gas capture efficiency.
In 2015/16 the landfill gas power generation output was
only marginally down to 562 gigawatt hours (GWh)
(2014/15 602GWh), reflecting a continued successful output
optimisation programme.
Average revenue per megawatt hour (MWh) was 2.2% lower at
£90.72 (2014/15 £92.72), reflecting the withdrawal of LECs. 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 in 2016/17. Average costs increased slightly to
£34.76 per MWh (2014/15 £33.19).
LANDFILL SITES BEING MANAGED FOR CASH
AND ALTERNATIVE USE
We have a strategy in place for landfill that will see the business
reduce the number of sites taking new waste inputs from 18
at the end of 2014/15 to a small number of strategic sites by
2020. Three landfills closed during the year with a fourth site
closing just after the year end. This is in line with legislative moves
and economic drivers to divert waste away from landfill.
While sites are being wound down to closure and aftercare,
our emphasis remains on maximising the value of electricity
generation from landfill gas, reducing costs and developing
opportunities for alternative uses for sites, or divestment.
We completed the divestment of Whitehead landfill and its
associated environmental liability, generating an operating profit
on disposal of £2.4 million (recorded within asset sales), and
continue to promote similar opportunities for other sites with
development potential.
The business continues to be cash generative as the wind-down
and aftercare programme accelerates. Viridor’s average gate fees
increased by 1% to £20.14 per tonne. Consented landfill capacity
reduced from 51.7 million cubic metres (mcm) at 31 March 2015
to 47.4 mcm, reflecting usage during the period and a disposal.
As previously provided for, c.34mcm of Viridor’s consented landfill
capacity is not expected to be used.
Landfill tax continues to increase in line with inflation and rose to
£84.40 per tonne on 1 April 2016.
At Pilsworth landfill in Greater Manchester,
Viridor is hosting an £8 million cryogenic
energy storage pilot project, funded by
the Department of Energy and Climate
Change, which is due to become operational
shortly. Landfill sites have very good potential
as energy reservoirs as most already have
established grid connections, making them
valuable for energy generation and storage.
Novel energy storage options are being
assessed through Viridor’s Technology and
Innovation Forum.
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PENNON GROUP PLC ANNUAL REPORT 2016STRATEGIC REPORT | GROUP PERFORMANCE CONTRACTS AND COLLECTIONS
Performance across our major local authority contracts
around the UK (the more significant contracts include
Greater Manchester, Glasgow, Lancashire, Somerset and
West Sussex) and the Thames Water contract remains broadly
in line with last year.
Our large-scale contract successes in 2015/16 include a 25-year
contracted service for Tomorrow’s Valley in Wales (where four
local authorities have come together to create a £190 million
residual waste contract for 90,000 tonnes per annum), a 10-year
contract with South Lanarkshire Council (with a potential 5-year
extension) for treatment of 80,000 tonnes per annum of residual
waste via Dunbar ERF, and Clyde Valley in Scotland (where five
local authorities have come together to create a £450 million
residual waste contract for 190,000 tonnes per annum over
25 years).
The solid performance of the collection business reflected the
benefits of sustained management action. Collection remains a
key focus in securing increased input tonnages for the business.
JOINT VENTURES
All three of Viridor’s joint ventures continue to perform well.
Viridor Laing Greater Manchester (VLGM), a joint venture
between Viridor and John Laing Infrastructure, is delivering the
25-year Greater Manchester Waste PFI. Now in its eighth year,
this remains the UK’s largest ever combined waste and energy
project. The recycling, recovery and waste management facilities
serving the contract, which handle in excess of one million
tonnes of material per annum, are operated by Viridor on a
sub-contract basis.
Solid recovered fuel produced from the residual waste from
Greater Manchester is used to generate heat and power at
Runcorn 1 ERF (TPSCo, a joint venture between Viridor, John
Laing Infrastructure and Inovyn), which has operated well since it
came on line in 2015.
The third joint venture at Lakeside ERF (a 50/50 joint venture with
Grundon Waste Management) is in its sixth year of operation and
continues to outperform its original power generation and waste
processing targets.
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COMMUNITIES
Pennon aims to be a good neighbour and
consults with its stakeholders in order
to understand and respond to their
priorities. We aspire to have a positive
effect on quality of life, communities and
regional economies.
CUSTOMER SATISFACTION
Pennon’s water businesses maintained their previous high levels
of customer satisfaction during the year. South West Water’s
overall customer satisfaction remained broadly stable at 89%
(2014/15 90%), with satisfaction regarding value for money at
59%, 1% higher than last year. For 16 years Bournemouth Water
has retained the biennial Customer Service Excellence Award,
which it last received in 2014. This national award recognises
service excellence across the measures of timeliness, quality of
information, professionalism and employee attitude.
PENNON’S CUSTOMER STRATEGY
Central to our strategy is the management of the Group as
a sustainable and successful business for the benefit of all of
our stakeholders. We recognise that consultation with our
customers, a key stakeholder group, is imperative in order to
understand their priorities and deliver the level of service that
they require. In turn, this helps us to build a solid reputation for
high quality customer service, which contributes to the creation of
shareholder value.
South West Water’s customer strategy will be realised through
delivery of its Business Plan to 2020, which places customer
priorities at the heart of all its services and activities, aiming to
deal with customer requests, problems and queries quickly and
efficiently, and ensuring that the service provided represents value
for money for all customers, whether residential or business.
Bournemouth Water’s strong customer service ethos and
impressive track record of service excellence means it is well
placed to support the delivery of Pennon’s customer strategy
through the sharing of best practice.
For Viridor, the focus is on a programme of initiatives to enhance
the customer experience across its large and diverse range of
large corporate, commercial and local authority clients, while
ensuring a consistent and transparent approach.
A key indicator of customer service performance for the water
businesses is the service incentive mechanism (SIM), which Ofwat
uses to compare the performance of water companies. The
SIM score is calculated against a qualitative element (based on
a customer survey) and a quantitative element that takes into
account, among other things, the number of complaints received
in writing or by phone. South West Water’s SIM score for the
year was 78.6 (continuing the improving trend of recent years),
and Bournemouth Water’s SIM score at 86.2 remains one of the
highest in the industry.
Viridor also conducted an extensive customer research survey in
2015, involving over 1,000 customers in sectors including retail,
education, food production and construction, as well as our
local authority clients. The output of the research will help us to
take smarter business decisions in order to meet our customers’
needs, deliver customer benefits and drive business growth.
RESPONSIVE TO CUSTOMERS’ NEEDS
Household water customers expect to have a choice of
communication methods through which queries can be raised;
they expect their issues to be resolved on the first contact and
as quickly as possible. In order to meet this expectation, our
approach is to focus on recruitment, training and employee
development, and enhance and promote the services we
offer online.
South West Water saw an improvement in first time resolution
of contacts from customers during the year, reflecting both
operational improvements and ongoing work to improve
customer service through the proactive delivery of information,
advice and support. This includes the availability of self-service
options and real time information through digital platforms such
as MyAccount, WaterLive and BeachLive. A revamped web
presence is also in development for 2016/17.
Over time, we intend to migrate Bournemouth Water to South
West Water’s technology and systems to give customers more
choice and flexibility. This will include providing an online billing
and account management facility, increasing use of electronic
communication channels and introducing social media.
Our waste recovery and recycling services have been developed
in response to customer demands for ‘zero waste’ recycling-led
services that reflect the waste hierarchy, improve resource
efficiency and contribute towards a more circular economy.
36
PENNON GROUP PLC ANNUAL REPORT 2016STRATEGIC REPORT | GROUP PERFORMANCE Viridor’s customers expect to receive a high quality and reliable
service, financial integrity and transparency, and the highest
standards of compliance. An increasing number of Viridor’s
customers also want clear auditing and reporting of recycling,
resource and carbon management practices, alongside a
commitment to continuous improvement and engagement with
us as a supply chain partner.
Viridor continues to offer a progressive and collaborative
approach to service and sustainability, epitomised in the
aggregated services model we are developing with our partners
in Greater Manchester. This is not only delivering results in terms
of increased recycling and landfill diversion but is supporting and
contributing to the region’s decentralised energy and low carbon
ambitions, aiming to attract further inward investment within the
broader context of the ‘Northern Powerhouse’.
SUPPORT FOR THOSE WHO NEED IT
South West Water has implemented a range of innovative
industry-leading schemes to assist those customers with
affordability or debt issues, such as its WaterCare+ scheme and
initiatives delivered in partnership with Citizens Advice.
We were one of the first water companies to introduce a social
tariff to ease financial pressures on very low income customers
and to introduce the FreshStart grant scheme to assist those new
to debt as a result of a downturn in their personal circumstances,
such as a bereavement or long-term illness.
Through partnerships with social housing providers, we
are providing affordability help and advice to residents in order to
build positive customer relationships and reduce customer debt.
During 2015/16 this included targeted work with Teign Housing
and North Devon Homes which resulted in a 170% increase
in the uptake of affordability schemes, increased metering and
significant debt reduction.
Bournemouth Water also offers a range of support and payment
options. Specially trained and experienced employees, together
with local debt charities, help customers manage their bills
in times of financial hardship. With customers’ support, we
are looking to introduce a social tariff later in 2016 to help the
most vulnerable in the community.
METERING
South West Water and Bournemouth Water continue to
promote the benefits of metering, including water efficiency, the
identification of leaks and the savings that can be made. 80%
of South West Water’s customers are now metered (2014/15
79%) with 6,058 installations carried out over the past year for
customers switching to metering. In 2015/16, Bournemouth
Water installed 2,553 meters against a target of 1,860. 70% of all
Bournemouth Water’s customers are now metered.
NON-HOUSEHOLD RETAIL STRATEGY
Preparations are being made to maximise the opportunities
presented by the opening of the non-household retail market in
2017 while continuing to improve the services provided to our
business and commercial customers.
A separate legal entity has been created, Pennon Water
Services, which operates from Bournemouth. This company will
provide retail and water management services to our c.85,000
non-household customers, who will be eligible for the water
retail market in 2017, through our existing brands – South West
Water Business Services, Source for Business, Avon Valley Water,
Bournemouth Water Business Services and Aquacare.
A key part of our non-household strategy will be to capitalise
on Viridor’s national footprint, focusing on existing customer
relationships and exploring the opportunities to provide
value-added services.
WE ASPIRE TO HAVE
A POSITIVE EFFECT
ON QUALITY OF
LIFE, COMMUNITIES
AND REGIONAL
ECONOMIES.
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CONTINUED
PENNON’S COMMUNITY RELATIONS
STRATEGY
We aim to ensure that all our business activities have a positive
impact on the communities in which we operate. With over 1,000
operating facilities and treatment works, it is important that we
maintain the highest operational standards, meet community
expectations and deliver clear community benefits in our service
areas. We achieve this by:
• undertaking our activities in a way that minimises potential
adverse effects on society, the environment and on those living
or working in proximity to our sites
• ensuring a positive economic impact on the local economy
through the provision of essential services, employment and
supply chain opportunities
• conducting open and transparent engagement with local
communities and taking into account their needs and priorities
• making community investments that create benefits for both
the community and the Group’s core businesses
• fostering an environment that encourages employees to
engage with communities and provides opportunities for
establishing partnerships with community organisations.
In 2016 both Viridor and South West Water received 2.5 stars
out of five in the Business in the Community’s 2016 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.
Bournemouth Water provides support through community
volunteering and the company matches the fundraising of
its employees. Employees of both South West Water and
Bournemouth Water continue to support WaterAid via regular
giving and participating in events and challenges, helping to bring
safe water and sanitation to those desperately in need.
During 2015/16 Pennon provided a total of £12.1 million in
community support, sponsorship and charitable donations, of
which £11.8 million was paid to Viridor Credits(1) for distribution
via the Landfill Communities Fund.
COMMUNITY SUPPORT, SPONSORSHIP
AND DONATIONS
SOUTH WEST WATER (£)
Both South West Water and Viridor have developed their
own strategies to deliver Pennon’s community vision. South
West Water is focusing on strengthening its profile within the
communities it serves, creating opportunities for employee
engagement and developing long-term collaborations with charity
and sponsorship partners, including the Royal National Lifeboat
Institution, the Devon and Cornwall Food Association, the Devon
Wildlife Trust and the South West Coast Path Association.
2011/12
2012/13
2013/14
2014/15
2015/16
Viridor offers structured and transparent programmes
of community investment, linked to its core business and
guided by its community strategy. Such activities include an
annually reviewed programme of targeted charitable giving
and sponsorship, education and engagement, and employee
volunteering opportunities.
VIRIDOR* (£m)
2011/12
2012/13
2013/14
2014/15
2015/16
79,858
73,301
90,921
106,188
136,250
10.4
10.7
13.5
12.8
12.0
* Including amounts paid to Viridor Credits for distribution via the Landfill
Communities Fund
(1) Viridor Credits is an independent not-for-profit organisation that was set up to
administer Viridor’s contributions to the Landfill Communities Fund.
38
PENNON GROUP PLC ANNUAL REPORT 2016STRATEGIC REPORT | GROUP PERFORMANCE UPDATE: VIRIDOR STREET TREES – GREATER MANCHESTER
Viridor’s innovative urban tree planting project, in partnership with Red Rose Forest, an environmental
charity, celebrated its fifth year in 2015/16. The partnership seeks to reward key recycling customers
by allowing them to give something back to their local communities and contribute to a greener
Greater Manchester, by identifying local streets and working with communities to plant and maintain
semi-mature street trees.
The partnership has directly engaged 1,092 residents, planted 154 semi-mature trees and improved
3,144 metres of urban roadside.
Via its regional educational programme, Viridor will continue to support Red Rose Forest’s new
movement – City of Trees – which aims to plant three million trees in the next two decades, one for
every man, woman and child in Greater Manchester.
RECREATION AND LEISURE
The recreational opportunities and facilities available at South West
Water’s reservoirs are managed on its behalf by the South West
Lakes Trust. Sailing, fishing, windsurfing, wakeboarding, nature trails
and cycling are just a few of the activities the trust helps to facilitate.
A highlight for 2015/16 was the achievement of a Green Tourism
Gold Award for Wimbleball Lake in December 2015, recognising
the trust’s work to promote sustainable tourism.
EMPLOYEE VOLUNTEERING
South West Water has an active volunteering programme that
enables staff to take part in agreed community projects including
beach cleans and habitat restoration. These are often linked
with external groups, such as Keep Britain Tidy and the region’s
wildlife trusts. In 2015/16 the volunteering programme included
tree planting and woodland expansion at Park Lake, a designated
County Wildlife Site in North Cornwall.
Bournemouth Water owns around three-quarters of Christchurch
Harbour, together with the tidal reaches of both the Stour and
Avon rivers, and offers fishing in the harbour and the Lower Stour,
as well as a range of fishing locations at Longham Lakes. We also
manage a wide range of moorings in the harbour, which provides
easy access to one of the most popular areas for boating on the
south coast.
CUSTOMER CAMPAIGNS
We strive to engage, educate and inform residents and businesses
about water usage, sewer blockages, waste prevention and best
practice in recycling and resource efficiency.
Viridor employees continued to fundraise for their preferred
charities, including Breast Cancer Now, Jeans for Genes, Save
the Children and Viridor’s main charity partner, the Children’s
Air Ambulance. A new partnership with Plantlife, an organisation
that promotes the protection of wild flowers and plants, was
recently confirmed.
Bournemouth Water encourages its employees to spend three
days each year working on community initiatives with charitable
organisations, schools, wildlife trusts and other community
partners. Volunteering resulted in 201.5 employee days being
spent in the community during 2015/16.
In Greater Manchester an updated communications plan for
2015-2018 has been developed to drive behavioural change
and increase recycling in communities that have been identified
as mid-performing and hard to reach. Viridor also works with
Somerset Waste Partnership and West Sussex County Council
to deliver comprehensive educational and behavioural change
programmes to a wide range of stakeholders.
In 2015 South West Water launched its ‘Love Your Loo’
community engagement campaign aimed at reducing sewer
blockages and sewer flooding incidences. The campaign began
in Falmouth, where the local public toilets received the ‘red
carpet’ treatment in an attempt to engage local residents and
visitors to the area.
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CONTINUED
SUPPORT FOR EDUCATION
To promote environmental sustainability and increase the level
of understanding about the sectors in which we operate, we are
actively engaged with schools, colleges and universities. Pennon
Group provides educational resources and activities ranging from
school talks to work experience placements and site visits.
In 2015/16 Viridor welcomed over 17,000 students and visitors
to its 11 educational facilities. The visitor centre at Ardley Energy
Recovery Facility (ERF) won the Chartered Institution of Wastes
Management’s award for Waste and Resource Learning &
Development for its work to educate children about the benefits
of reducing, reusing and recycling waste, and energy recovery. A
new education facility at the Glasgow Recycling and Renewable
Energy Centre is planned for 2016/17.
Bournemouth Water has developed a bespoke water efficiency
education programme, Waterwise, which is available free to all
schools within the company’s area of supply.
INSPIRING THE NEXT GENERATION OF
ENGINEERS
Viridor’s flagship educational partnerships with the Engineering
Development Trust’s ‘Go4SET’ programme in Scotland and
Business in the Community’s ‘Business Class’ programme
are helping establish long-term productive partnerships with
secondary schools. These innovative programmes closely align
with the science, technology, engineering and mathematics
(STEM) curriculum with real world applications in industry, and
help to inspire and connect students with career opportunities in
these important fields.
In Wales, Viridor runs a programme for ‘Girls into STEM’ that
supports the ambition of the Engineering Education Scheme
Wales (EESW) to encourage more young women to take up
educational and career options in engineering and science.
SKILLS FOR THE FUTURE
South West Water is a leading partner, together with the
University of Exeter and South Devon College, in the
development of a new University Technical College (UTC) for
South Devon, based in Newton Abbot. The college, which
opened in October 2015, places a unique focus on engineering,
water and the environment and caters for up to 600 young
people aged between 14 and 18.
Students will achieve academic and technical qualifications,
enabling them to progress to positions as technicians, apprentices
and graduate engineers, thereby making a valued and sustainable
contribution to the industry and the region.
UNIVERSITY PARTNERSHIPS
Viridor collects the waste and recycling for a number of
universities including the universities of Exeter, Kent and
Glasgow. Our partnerships with these key customers have
shown impressive results. In Exeter we secured a three-year
contract with the potential to extend for another two. This will
deliver three fundamental objectives: to improve the institution’s
recycling rate by providing support and education to university
staff and students, an upgrade on vehicles that will allow a
pay-by-weight solution and the delivery of zero waste to landfill.
Viridor has secured a further three to five-year contract with
the University of Kent. This long-established relationship has
seen the university achieve a recycling rate of 65%. We continue
to support the its zero waste strategy by helping it to further
increase recycling and utilise our ERF for energy generation.
In 2015/16, South West Water supported a successful bid, led
by the University of Exeter, to secure £0.7 million from the
European Commission’s Horizon 2020 programme. The funds
will be used to conduct pioneering investigations into how
policymakers can develop strategies to meet the climate
change challenges facing water, food and energy provision.
Bournemouth Water has maintained its successful partnership
with the Students’ Union at Bournemouth University and, with its
support, continues to run campaigns to engage students with the
aim of increasing awareness of the social impact of non-payment
of their bills.
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PENNON GROUP PLC ANNUAL REPORT 2016STRATEGIC REPORT | GROUP PERFORMANCE REGIONAL ECONOMIC IMPACTS
As an essential service provider and a significant employer and
user of third party services, South West Water has a major
economic impact on its region. We work with local enterprise
partnerships (LEPs) and are actively involved with European
Structural Fund and Rural Development Programme Monitoring
Committees to support economic growth, resilience and match
funding opportunities for delivery partners.
South West Water also works with partners to maximise funding
opportunities on behalf of the communities it serves. Alongside
Cornwall Council and the Environment Agency, we are part of
a bid to secure European Union funding for a £20 million flood
defence scheme in South East Cornwall.
Viridor’s programme of investment, which includes the UK’s
largest power plant programme over the last five years, has:
• provided 3,700 construction jobs and 470 new, full-time
skilled jobs
• supported 90 construction apprentices and 50
construction graduate trainees, along with 230 work
placement opportunities
• spent over £190 million with SMEs and other supply chain
partners in the communities around our facilities.
Our ERF construction projects will continue to add to the already
significant community benefits provided. As an example, Viridor
and its contractors are firmly committed to realising an ambitious
package of community benefits as part of the delivery of the
£177 million ERF at Dunbar, East Lothian. Over £3 million of
sub-contracts have been awarded to local companies, and a series
of ‘meet the buyer’ and job events have been held with more
planned for the coming year.
SUSTAINABLE SUPPLY CHAINS
Supply chain engagement remains an integral element of
sustainable business practice and delivers real economic and
social benefit.
South West Water annually places approximately £100 million of
order value with companies which have a base in the region. Our
procurement process sets standards for how individual suppliers
approach economic, financial and environmental sustainability and
rigorous steps are taken to ensure they meet strict criteria in this
regard. The water business operates a ‘mixed economy’ supply
chain model which uses smaller specialist companies alongside
larger strategic partners. Following the merger with Bournemouth
Water, the existing procurement strategy is being carried forward
across both companies.
Viridor continues to strengthen its approach to procurement
and supply chain relationships via its procurement team and
has a wide range of policies and protocols in this important
area. These include a policy on sustainable procurement which
utilises whole-life costings and criteria to ensure clear social and
environmental responsibility for goods and services procured.
This approach helped deliver benefits of over £2.6 million in
2015/16, demonstrating long-term value for us and, in turn,
our customers.
Examples of activities supporting Pennon’s sustainable
procurement objective include the adoption of in-cab technology
that monitors driver behaviour and helps to reduce accidents,
fuel usage and carbon emissions; the trial of electric and
hybrid vehicles as part of a review of the transport fleet; the
introduction of limits on CO2 emissions for company cars;
and, at Viridor, a tender for the procurement of new printing
and photocopying equipment that will reduce the amount and
cost of printing, as well as a move to environmentally friendly
office supplies.
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As a business within which the environment
is so closely correlated with its core
activities, Pennon is acutely aware of its
environmental impact and obligations.
We understand that the scale of our
operations brings responsibilities in how
we manage our workforce and operational
activities, and we are committed to
working in the most environmentally
sustainable way possible.
PENNON’S ENVIRONMENT STRATEGY
We are committed to the conservation and enhancement of
the natural environment. Our strategy involves applying best
practice and targeting innovation to ensure the sustainability of
our activities, maximising the efficiency of our use of resources,
reducing waste, increasing recycling and fully exploiting
opportunities for renewable energy generation.
Across the Group we are focused not only on meeting
environmental standards but also the drive to find new ways of
working that deliver better environmental outcomes. Our water
businesses take rigorous steps to protect the environment during
the extraction, treatment and delivery of drinking water and, for
South West Water, the removal and safe disposal of wastewater
(see ‘Our Operations’ on pages 28 to 31). Viridor’s mission
to give the world’s resources ‘new life’ directly contributes to
environmental sustainability.
KEY PERFORMANCE
INDICATORS
WATER BUSINESS – RECYCLING VOLUMES
(tonnes of dry solids)
2011/12
2012/13
2013/14
2014/15
2015/16
54,612
45,304
34,918
41,300
38,000
WASTE BUSINESS – RECYCLING VOLUMES
TRADED (million tonnes)
2011/12
2012/13
2013/14
2014/15
2015/16
GROUP RENEWABLE ENERGY
GENERATION (GWh)
2011/12
2012/13
2013/14
2014/15
2015/16
1.8
1.9
1.8
1.7
1.8
775
839
795
949
1,496
42
PENNON GROUP PLC ANNUAL REPORT 2016STRATEGIC REPORT | GROUP PERFORMANCE RENEWABLE ENERGY
BREAKDOWN 2015/16
WATER AND WASTEWATER
4
3
2
1) Hydro – 12.8GWh
2) CHP – 5.1GWh
3) Solar PV – 7.3GWh*
4) Wind – 0.3GWh
TOTAL – c.25.5GWh
1
* This includes 5.1GWh of output from two private
wire schemes – Polmaugan (Restormel) and
Wadebridge Renewable Energy Network (Nanstallon)
– and 0.3GWh of Bournemouth Water solar
energy generation
WASTE RECYCLING AND RECOVERY
1) ERFs – 903GWh
2) Anaerobic digestion – 3GWh
3) Landfill gas – 562GWh
1
4) Solar PV – 3GWh
TOTAL – 1,471GWh
4
3
2
Looking ahead, South West Water has committed to buying power from
Viridor, via its electricity supplier, Total Gas & Power and we are also
investigating additional private wire renewable energy opportunities with
developers and community groups across the South West region.
43
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CONTINUED
GREENHOUSE GAS EMISSIONS
Pennon aspires to leadership in minimising emissions that
contribute to climate change and recognises that improved waste
recycling and recovery contributes to the associated UK and EU
climate change adaption strategies.
CHANGE IN GROUP EMISSIONS
Our overall net emissions increased by 21% between 2014/15 and
2015/16 (see table on page 45) primarily as a result of the addition of
new Energy Recovery Facilities (ERFs) that became fully operational
during 2014/15. The proportion of Group emissions assigned to such
plants has more than doubled in the year as we seek to move our
focus away from landfill towards investment in energy recovery.
Our emissions intensity measure of tCO2e/£100,000 revenue
also increased from 92 tCO2e/£100,000 to 112 tCO2e/£100,000
as a result of the Group’s emissions growing at a faster rate than
its revenue.
South West Water reduced its carbon emissions to 158,891
tonnes of carbon dioxide equivalent (tCO2e) (2014/15 166,370
tCO2e). This was in part due to a reduction in the emissions
factor applied to usage of imported electricity from the
national grid which, as a result of a fall in coal-fired electricity
generation, reduced by almost 7% between 2014/15 and 2015/16.
Bournemouth Water (which, having been acquired in April 2015,
is included in Group reporting for the year 2015/16 only) was
responsible for 1% of total Group net emissions in 2015/16 with a
carbon footprint of 16,844 tCO2e.
Viridor’s overall emissions increased to 1,354,686 tCO2e (2014/15
1,111,906 tCO2e) although emissions from landfill operations
continued to decrease.
CARBON REDUCTION STRATEGY AND TARGETS
Consistent with the overall Group strategy, we are exploring
synergies across our businesses with a view to identifying
areas of best practice for carbon management and to develop
common goals.
Our businesses’ strategies are based on the optimisation and
efficiency of plants and treatment works through a suite of energy
management techniques (including performance monitoring and
maintenance of assets, such as Bournemouth Water’s pump
replacement programme), as well as the use of new technologies
(such as remote operating systems, cryogenic energy storage, the
installation of LED lighting and solar PV), community initiatives to
encourage greater water efficiency (which reduces the amount
of water to be pumped around the network), measures for the
reduction of transport emissions (including a trial of electric and
hybrid vehicles) and the promotion of in-house energy efficiency.
44
Our long-term goals are:
• To reduce the carbon footprint of our waste management
business by 35% by 2020, from a 2011 baseline of 1,231,762
tCO2e. This is an ambitious target, given the challenges of a
landfill wind-down and aftercare programme in the operating
landfill business happening in parallel with bringing a fleet
of ERFs into operation. In addition, Viridor’s aspiration is to
become 20% more efficient in terms of the fossil fuel-based
energy it uses.
• In our water and wastewater business, South West Water’s
target is to reduce emissions to less than 150,000 tCO2e
by 2019/20. The scope and boundary of this target includes
emissions from the regulated business, which includes Scope 1
and 2 emissions and significant Scope 3 emissions (see page 45
for definitions). This will represent a 12% reduction from the
2014/15 baseline.
88% of the Group’s gross emissions can be attributed to our waste
management business. In the short term, our increasing fleet of
ERFs will continue to contribute to a significant proportion of our
carbon footprint. We anticipate that in the long term, however,
our energy recovery activities and their related combined heat and
power schemes will help to deliver a step-change improvement
over landfill. In addition, although energy intensive for our business,
the displacement of virgin materials in manufacturing supply chains
with recycled material contributes to significant reductions in
embodied carbon across product life cycles (although this offset falls
outside greenhouse gas reporting scopes).
INITIATIVES DURING THE YEAR
A number of initiatives relating to renewable energy generation
and energy efficiency were implemented or progressed during the
year. This includes the Burrator Dam hydro scheme, a 160 kilowatt
turbine generating c.250MWh per annum, which South West
Water brought on line in April 2015. The water business has also
commissioned two solar PV schemes in Cornwall, one of which
is a 250kW array generating 270MWh per annum for Camborne
Wastewater Treatment Works in Cornwall (approximately 12%
of the site’s total usage), and the other a 100kW array (pictured)
supplying Nanstallon treatment works via a private wire supply and
20-year power purchase agreement with Wadebridge Renewable
Energy Network. The promotion of energy efficiency internally
has continued through South West Water’s ‘Powerdown’ initiative,
which focuses on the 20% of the company’s energy consumption
that comes from process treatment and non-operational activities,
for example, ultraviolet disinfection, process control, heating,
lighting, cooling and computer usage.
Within the waste recycling and recovery business we have
recently installed solar power at seven of our facilities, which will
generate 841kW of renewable energy and significantly reduce
the demand for electricity from the national grid, as well as
saving money, boosting energy output from a renewable source
and reducing the need for fossil fuels. In addition, our strategic
objective of utilising closed landfill sites for alternative energy
generation and storage technologies is progressing well (see
page 34 for further details).
Viridor, South West Water and Bournemouth Water
operate separate energy management systems and each is
registered to ISO 50001:2011 by independent external UKAS
accredited assessors.
PENNON GROUP PLC ANNUAL REPORT 2016STRATEGIC REPORT | GROUP PERFORMANCE PENNON GROUP PLC GREENHOUSE
GAS EMISSIONS
Scope 1
Scope 2
Scope 3
2015/16
1,351,192
157,089
56,764
2014/15
1,105,242
148,917
56,966
Total gross emissions
1,565,044
1,311,125
Green tariff electricity offset
Exported renewable energy
reduction (up to total amount
of electricity purchased and
consumed by organisation)
(2,041)
(155,048)
(1,018)
(147,899)
Total annual net emissions
1,407,955
1,162,208
Bournemouth Water was acquired by Pennon Group on 15 April
2015 and accordingly Bournemouth Water’s emissions have been
included in this greenhouse gas report for 2015/16.
ORGANISATIONAL BOUNDARY
The emissions listed here cover the Pennon Group of companies,
each of which uses the financial control approach, with the
exception of Viridor, which uses an equity share approach.
Biogenic emissions outside
of scopes
Intensity measure: tCO2e (gross
Scope 1+2)/£100,000 revenue
1,767,878
1,214,455
112
92
OPERATIONAL SCOPES
We have measured our Scope 1 and 2 emissions and certain
Scope 3 emissions where information is available.
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 company-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
METHODOLOGY AND APPROACH
We have retained last year’s approach in applying the ‘equity share’
methodology for Viridor and its subsidiary companies. This means
that emissions from joint venture operations can be accurately
attributed to the company in proportion to the percentage of
Viridor’s holding. The remaining companies in 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.
QUANTIFICATION AND REPORTING
We have followed the Government’s guidelines for mandatory
greenhouse gas emissions reporting published by the Department
for Environment, Food and Rural Affairs (DEFRA) in June 2013
(and updated in October 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.
We have adopted the revised emissions conversion factors
published by DEFRA in 2015, which are based on a higher rate for
the global warming potential (GWP) of methane gas.(1) Despite
this, emissions from our landfill operations have continued to
decrease, falling a further 3% between 2014/15 and 2015/16.
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 for 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 with third parties for renewable energy
through private wire where it is available 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
national 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) The GWP of methane gas has risen from 21 to 25 times the GWP of carbon dioxide
under the Fourth Assessment Report of the Intergovernmental Panel on Climate
Change, which is in line with the calculation of emissions for UK GHG Inventory
reporting under the Kyoto Protocol.
45
www.pennonannualreport.co.uk/2016OVERVIEWGROUP PERFORMANCEGOVERNANCEFINANCIAL STATEMENTS
OUR ENVIRONMENT
CONTINUED
BIODIVERSITY
We recognise the importance of environmental stewardship,
and the protection and enhancement of natural capital
and biodiversity.
BIODIVERSITY BENCHMARK SCHEMES
In addition to managing 14 active landfill sites and other
substantial landholdings Viridor also continues to care for 31
closed landfills across the UK. Using our expertise in restoration,
we can take a number of different approaches to closing a landfill,
restoring large tracts of land to heathland, grassland, woodland,
agriculture, amenity parkland or a combination of these schemes,
and Viridor seeks to restore and manage its sites in accordance
with clear biodiversity plans.
Some sites are also being restored and managed to attain the
Wildlife Trusts’ Biodiversity Benchmark Scheme (BBS). The BBS
is a national standard which recognises continual biodiversity
improvement to restore and manage habitats for existing plants
and wildlife, recreate new habitats once alternative land use has
ceased, and finally to work towards developing a network of
habitats in the local area.
Viridor currently has nine sites that have 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 that has national
significance for birdlife (Beddingham in Sussex).
These transformations have been so successful that the sites have
become havens for several rare and endangered species. Dormice
and bats at Odcombe and sand lizards, adders and woodlarks
at Tatchells and Warmwell are all thriving thanks to careful land
management and support from partner organisations such as
the RSPB.
ECOLOGICAL BASELINE ASSESSMENTS
Good ecological baseline assessment is key to producing good
management options for enhancing biodiversity and creating
healthy ecosystems. Bournemouth Water has been focusing its
work on establishing a baseline for all habitats and species on its
properties, many of which are designated as special protection
areas, special areas of conservation or sites of special scientific
interest, such as the banks of the River Avon at the Knapp
Mill site.
SITES OF SPECIAL SCIENTIFIC INTEREST
There are nine sites of special scientific interest (SSSIs) in South
West Water’s region and six in Bournemouth Water’s region.
South West Water is the only water and wastewater company
to have met the 2010 targets for SSSI land condition, with 95%
of the total area classed as ‘favourable’ or ‘recovering’. We are
now working to bring all of our land with SSSI designation to
‘favourable’ status by 2020.
Viridor also actively manages eight SSSIs on five of its sites.
46
PENNON GROUP PLC ANNUAL REPORT 2016STRATEGIC REPORT | GROUP PERFORMANCE CATCHMENT SENSITIVE FARMING
Bournemouth Water works closely with Natural England and
Catchment Sensitive Farming to protect the quality of raw water
sources through managing the catchment area and visiting farmers
in the catchment area with the aim of educating them about the
effects of their activities on raw water quality. The key areas of
focus are helping farmers find cost-effective, alternative solutions
to the use of pesticides and ensuring that livestock is kept away
from rivers to reduce the potential for contamination.
NON-NATIVE INVASIVE SPECIES
In order to protect native biodiversity and ecosystems, South
West Water and Bournemouth Water monitor, report and
assess the extent and potential impact of non-native invasive
species on their sites and remove them as appropriate. We also
work to protect any known protected species on our sites; for
Bournemouth Water, this has included the creation of roosts for
its resident bats.
RESTORATION OF PARK LAKE
Park Lake, a former china clay pit on Bodmin Moor, has been
transformed by South West Water from a ‘moonscape of waste
sand and mica’ to a designated County Wildlife Site and home to
rare plants and animals.
Park Pit was turned into a reservoir by South West Water after
we entered into an agreement with the former owners, Imerys,
to manage the surrounding land as an exemplar of post-industrial
restoration. Planning conditions were met by 2012 but, working
in partnership with local environmental groups and volunteers,
we have continued with an integrated management programme
of restoration.
Work has included restoration of wetlands, control of invasive
species and the introduction of managed grazing, which has led
to it being described by local conservationists as one of the best
sites on Bodmin Moor for wildlife. It is now home to the second
largest colony of the tormentil mining bee in Cornwall, breeding
populations of the nationally scarce small red damselfly, 15 species
of dragonfly including the keeled skimmer and black darter and
the marsh fritillary butterfly, making it a nationally important site
for conservation.
47
www.pennonannualreport.co.uk/2016OVERVIEWGROUP PERFORMANCEGOVERNANCEFINANCIAL STATEMENTS OUR PEOPLE
Across Pennon the most important
element for the delivery of our strategic
objectives is our people. It is our goal to
attract, nurture and retain a dedicated,
highly trained workforce.
PENNON’S WORKPLACE STRATEGY
Pennon relies on the talent and professionalism of its employees
and is committed to their health, safety and wellbeing, which it
sees as investment in the Group’s long-term human capital and
directly related to shareholder value. We aim to develop and
motivate employees, treat them fairly and ensure they are fully
engaged in all aspects of the Group’s objectives. Through this
approach, we seek to maintain a pipeline of talent that is well
placed to lead and serve our businesses as they grow and adapt.
We are committed to employee engagement, training and
development, and equality and diversity, and provide ongoing
support through a range of workplace policies. These cover areas
such as health and safety, equal opportunities, human rights,
ethics, employee relations and family-friendly policies such as
flexible working and parental leave, and schemes designed to
promote the health and wellbeing of employees.
RIDDOR INCIDENTS(1)
2011
2012
2013
2014
2015
48
59(2)
52
40
35
42(3)
HEALTH AND SAFETY
We strive for the highest standards of health and safety in the
workplace so as to minimise accidents, incidents and lost time.
Both the water and wastewater businesses and the waste
recycling and recovery business are working hard to embed
health and safety within the culture of the organisation, reduce
risk and achieve zero incidents across the Group.
At South West Water, performance in respect of
RIDDOR-reportable injuries was maintained at the same
level during the calendar year 2015 as in 2014, with a total
of seven reportable injuries (an incidence rate of 520 per
100,000 employees), none of which involved a serious injury
(2014 7 incidents; 552 per 100,000 employees). Bournemouth
Water had one RIDDOR-reportable injury (a rate of 490 per
100,000 employees).
During the same period Viridor experienced 47 RIDDORs of
which 34 involved employees (an incidence rate of 1,063 per
100,000 employees). In addition, there were nine incidents involving
agency colleagues, three involving contractors and one involving
a member of the public. Disappointingly, this was an increase
from 30 incidents the previous year (28 employees and two
agency workers) and the 2014 incidence rate of 889 per
100,000 employees.
Viridor has committed to delivering a new Safety, Health,
Environment, Quality and Sustainability (SHEQS) strategy centred
on the vision of ’no harm to people and environment’.
Building on our world-class safety record within our ERF and
capital investment programme, we have adopted a ‘beyond
a million’ approach with employees and contracting partners,
which targets over a million safe working hours on each project.
During 2015/16 this was exemplified at the Glasgow Recycling
and Renewable Energy Centre, which achieved the milestone one
million safe hours worked with no RIDDORs during construction.
Following a major review of its operational sites during 2014/15,
South West Water undertook a number of activities in 2015/16
to further reduce health and safety risks. This included the
roll-out of a Dynamic Risk Assessment training package, designed
to help front-line operational personnel undertake advanced
risk assessment.
South West Water made progress with its Lone Worker
project to further safeguard staff working alone. This has seen
the introduction of wearable hardware known as TWIG™,
which can monitor body movement and raise alerts if patterns of
movement synonymous with injury, trips or falls are detected. We
explored the use of remote technologies including aerial drones
to provide improved risk assessment and physiotherapy to
provide employees with timely treatment, reduce the risk of
longer-term injury and thereby minimise lost working time due
to absence. Health, safety and wellbeing also continued to be
promoted through a variety of internal campaigns including ‘TAP’
(‘Think, Act, Prevent’) and ‘Hang on a Sec’ which was focused on
raising awareness within wastewater operations.
(1) Incidents involving employees under the 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
(3) Bournemouth Water incidents included for 2015 only.
PENNON GROUP PLC ANNUAL REPORT 2016STRATEGIC REPORT | GROUP PERFORMANCE
Bournemouth Water’s strong safety record is underpinned by
a comprehensive programme of training, audit and inspection.
Senior managers are required to accompany compliance
personnel in conducting regular audits to ensure that they are
familiar with the requirements, can interrogate processes and
bring fresh perspectives to bear.
EMPLOYEE DEVELOPMENT
South West Water’s ‘People Strategy’ continues to foster a
culture of support and motivation for staff. Various programmes
are in place to encourage career development, and we continue
to review and expand these to ensure we have the right balance
of skills for the years ahead.
In 2015/16 South West Water’s employee development
programme included:
• continuing with the programme of skills-based training for
operational staff (started in 2014/15)
• supporting over 120 first-line, middle and senior managers
through three tiers of management development programmes
(Managing for Success (M4S), STEP and LEAD)
• continuing to grow and expand our award-winning
apprenticeship programme (85 apprentices have been recruited
to the apprenticeship programme since it started in 2011).
Bournemouth Water has retained the Gold standard of the
Investors in People accreditation and South West Water has
retained its Silver status.
Viridor believes strongly in helping all colleagues to reach their full
potential and has structured training programmes to develop and
nurture employees at all levels of the business.
As well as its range of employment benefits, Viridor offers popular
training opportunities for employees who wish to progress within
the company. Last year, colleagues across the waste business were
provided with over 6,500 training days. Viridor’s pioneering
management degree programme, developed in partnership with
Edge Hill University, will give its future leaders the skills necessary
to build on their existing knowledge and expertise. So far 40
supervisors and managers have completed the degree, which was
launched in 2012 and seeks to bridge the gap between technical
expertise and managerial knowledge. The latest round of students
began their studies in April 2015 with a further 30 currently on the
programme and due to graduate in 2017.
In addition, Viridor has a graduate management training scheme
that aims to develop the next generation of managers and
technical experts to support the changing nature of its business.
This programme is open to internal and external applicants with a
degree or equivalent qualification.
The two-stage development starts by providing a thorough
understanding of Viridor’s operations and services, framed within
the wider context of the recycling and waste industry. This sees
candidates participating in a rotating programme around core
areas of the business.
The second year involves an extended, and possibly permanent,
placement with clear objectives backed up with regular reviews.
In 2015 we recruited three graduates onto Viridor’s training
scheme and of the 12 past attendees of the scheme, currently 10
are in permanent positions across the business.
APPRENTICESHIPS
Apprenticeships provide a legacy for the skills and knowledge that
are integral to the Group’s core businesses.
In 2015/16 the water business recruited 24 new apprentices,
which brings the current total to 89 apprentices recruited
since 2011, including four at Bournemouth Water. South West
Water received a number of accolades during the year including
Large Employer of the Year (South West) at the National
Apprenticeship Awards and the retention of our Top 100
Apprenticeship Employer status.
Viridor offers a wide range of apprenticeship programmes in
different areas of its business, from Engineering Technician to
Business Administration Assistant.
Over 23 apprenticeships are currently registered across our
waste management business. All employees are offered a wide
range of training and career progression opportunities.
Viridor is currently working alongside Energy & Utility Skills and
other organisations in its industry and beyond to develop and
deliver a series of trailblazing apprenticeships in waste recycling
and recovery.
49
www.pennonannualreport.co.uk/2016OVERVIEWGROUP PERFORMANCEGOVERNANCEFINANCIAL STATEMENTS OUR PEOPLE
CONTINUED
EMPLOYEE ENGAGEMENT
Engaged staff are critical to our success. Employees who are more
engaged feel safer and are involved in fewer accidents at work,
take fewer days off sick and receive more positive feedback from
customers. Put simply, working to improve engagement is a key
part of working to improve overall performance and sustainability.
South West Water, Bournemouth Water and Viridor undertake
employee surveys at regular intervals.
Viridor’s most recent survey, which utilised the Gallup Q12
methodology, showed an impressive 77% response rate, up
from 39% in 2014/15. We also saw an increase in the overall
engagement score with nearly one-third of employees ranking as
actively engaged in our purpose and values, well above the UK
average of Gallup’s users. Resultant areas of focus for 2016/17
include management development, more emphasis on recognising
and rewarding effort and a more structured approach to
performance management and career progression.
South West Water’s 2015 employee survey, which was carried
out by Ixia, also showed a 77% response rate, up 4% on the
prior year. The Engagement Index remained at 74% (against
Ixia’s benchmark of 70%), with areas of focus including more
communication on company changes, more recognition of effort
and the sharing of rationales for decision-making.
CONSULTATION AND SUPPORT
At South West Water, director-led briefing sessions and a formal
consultation regarding the integration of Bournemouth Water
commenced in January 2016. A comprehensive employee support
programme was made available for those affected.
In February 2015 Viridor announced a new operating model to
meet the needs of current and future market conditions, and to
provide a platform for growth in line with its business strategy.
The plans, which were subject to consultation with affected
employees, include proposals to close a small number of sites
and merge the company’s South West and South East operating
regions. Affected employees were offered full support and, where
appropriate, assistance with finding alternative opportunities
outside the Group.
WORKPLACE DIVERSITY
We are committed to providing equal opportunities and
improving diversity within our workforce.
Viridor has established a new ‘Diversity in Action’ group
whose specific aim is to promote and encourage a culture of
inclusion where all colleagues are treated fairly and are given
every opportunity to learn, grow and excel in their careers with
us. The group’s initial focus is on improving gender diversity. The
majority of Viridor’s employees are male (83.8%), reflecting a
traditionally male-dominated industry. The ratio is similar across
senior management with 16.2% female. This is just short of our
goal of increasing the number of women to at least 20% by the
end of the 2015/16 financial year.
In South West Water over 25% of the workforce is female,
although in the craft and industrial group female ratios are
very low at less than 1%. We are focusing on this as an area for
improvement, in particular in operational and technical roles.
GENDER DIVERSITY as at 31 March
Employees
2015
Employees
2016
Senior
management
2015
Senior
management
2016
Board
2015
Board
2016
924
1,054
11
21
2
2
56
3,836
4,105
75
6
5
(%)
19.4
80.6
20.4
79.6
16.4
83.6
21.9
78.1
25.0
75.0
28.6
71.4
Women
Men
50
PENNON GROUP PLC ANNUAL REPORT 2016STRATEGIC REPORT | GROUP PERFORMANCE
RISK REPORT
The Group faces a number of risks which, if they arise, could affect its
ability to achieve its strategic objectives. The Board is responsible for
identifying principal risks and ensuring appropriate risk mitigation is in
place to manage them effectively.
RISK MANAGEMENT FRAMEWORK
Successful management of existing and emerging risks is essential to the long term success of the Group and
the achievement of its strategic objectives. Pennon has established a fully embedded Group risk management
framework, to identify significant risks and determine whether they are being appropriately managed
and mitigated.
With Pennon’s strategic decision to move towards a more homogeneous Group risk profile, the risk
management framework has evolved to ensure risks are being managed in line with the Group’s agreed
risk appetite. To support this transition, a Group Risk Forum has been established to provide a ‘top down’
assessment of Group risks, to supplement the ‘bottom up’ risk assessments by each subsidiary. The key stages of
the risk process are:
• Identification of significant risks by core business functions, utilising agreed risk criteria based on a
combination of likelihood over a five-year period, and impact based on financial, reputational, management
effort and impact on stakeholders and customers;
• Principal and other business risks are captured in risk registers, which are examined and challenged as part of
a robust assessment of the risks and key mitigations, controls and assurance activities that have been defined
by risk owners. The assessment considers gross risk, net risk after mitigation, and risk appetite, as well as the
direction of travel of the risk level;
• Quarterly risk and assurance forums are held to review principal risks, with management justifying their
bottom-up risk assessments through formal reports and presentations; and
• Principal risks faced by each subsidiary are reviewed and confirmed on a quarterly basis by the subsidiary
executive management boards, following which the Group Risk Forum completes a comprehensive
top-down evaluation of risks that could impact on the delivery of Group strategic objectives. The Forum
consists of senior executives and its role is to debate, challenge, agree and prioritise the principal risks
faced by the Group, based on the risk appetite set by the Board. The risk assessment is then subjected to a
thorough appraisal by the Audit Committee before formal presentation to the Board for approval.
RISK APPETITE
Risk appetite is defined as the level of risk it is considered appropriate to accept in achieving Group strategic
objectives. The appropriateness of the mitigation applied to each principal risk is considered by the Board in the
context of the effectiveness of the overall control environment in ensuring compliance with risk appetite.
ROBUST RISK ASSESSMENT
The Directors confirm that they have carried out a robust assessment of risks facing the Group. The following
table describes the principal risks and how they are being managed or mitigated in line with the Board’s risk
appetite. These principal risks have been considered in preparing the viability statement on page 55.
51
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Key
Risk Level
Low
Medium
High
The low, medium and high risk level is our estimate of the
net risk to the Group after mitigation. It is important to
note that risk is difficult to estimate with accuracy and
therefore may be more or less than indicated.
Current assessment of direction of travel of risk level.
LAW, REGULATION AND FINANCE
Increasing
Unchanged
Decreasing
Principal Risks
Mitigation
Net Risk
Direction
Risk Appetite
Compliance with
law, regulation
or decisions by
Government and
regulators, including
water industry reform
Maintaining
sufficient finance
and funding to meet
ongoing commitments
Robust regulatory framework ensures
compliance with Ofwat, Environment
Agency and other requirements. Full
engagement in consultations on reform of
policy and legislation, helps influence change
through effective stakeholder relationships.
Good progress has been made in preparing
for regulatory reform. We are fully engaged
in the Water 2020 programme including
upstream regulatory reform. External
reviews support the assurance letters
required by the Market Operator.
Clear treasury and funding policies and an
effective Group Treasury team.
Funding in place at effective average
interest rates below many in its sector,
with prefunding and headroom, including
revolving credit facilities, to meet future
funding requirements.
Non-compliance
or occurrence of
avoidable health and
safety incident
Rigorous health and safety compliance
systems, policies and procedures are in
place across the Group, supported by a
programme of capital investment to further
reduce risk.
Uncertainty arising
from open tax
computations where
liabilities remain to
be agreed
Professionally qualified and experienced
in-house tax team, supported by external
specialists. A dedicated team is working
with HMRC to expediate the agreement of
outstanding tax items.
52
High standards of
compliance are sought with
no appetite for legal and
regulatory breaches.
As regulatory reform is
progressing, we aim to
minimise the impact by
targeting changes which
are NPV neutral over the
longer term, to protect
shareholder value and
customer affordability.
Ensure funding
requirements are fully
met by maintaining
prudent headroom.
High standards of
compliance are sought with
no appetite for compliance
breaches within the Group
and third party operations.
Full compliance with HMRC
requirements. Residual
risk is higher on some
historic arrangements.
PENNON GROUP PLC ANNUAL REPORT 2016STRATEGIC REPORT | GROUP PERFORMANCE
MARKET AND ECONOMIC CONDITIONS
Principal Risks
Mitigation
Net Risk
Direction
Risk Appetite
Non-recovery of
customer debt
Macro-economic
risks arising from
the global and UK
economic downturn
impacting commodity
and power prices
Water business debt collection strategies
kept under review with new initiatives
regularly implemented:
• targeting previous occupier debt after
customer moves;
• specific case management and use of court
claims; and
• use of charging orders.
Affordability tariffs (e.g. Restart, WaterCare,
Fresh Start) help to reduce bad debt
exposure for customers struggling to pay.
Viridor’s debt collection risk is lower due to
the high proportion of public sector accounts.
Viridor is well positioned across the
waste hierarchy, with long-term contracts
supporting the ERF segment. The
ITOO (Input, Throughput and Output
Optimisation) programme helps focus on
recycling performance in mitigating the
impact of global economic conditions on
commodity prices.
Energy risk management at a Group level
acts as a natural hedge between SWW
and Viridor, offsetting the drop in power
prices. Existing investments that qualified
for Renewable Obligation Certificates are
protected by the ‘grandfathering’ procedure.
Minimise non-recoverable
debt. We recognise
customer affordability
challenges and that given
the inability to disconnect
domestic customers,
some risk of uncollectable
debt remains.
Taking well-judged risks
and having response
plans in place to mitigate
external macro-economic
risk factors down to an
acceptable level.
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RISK REPORT CONTINUED
OPERATING PERFORMANCE
Principal Risks
Mitigation
Net Risk
Direction
Risk Appetite
Poor operating
performance due to
extreme weather or
climate change
Poor customer service/
increased competition
leading to loss of
customer base
Contingency plans, emergency resources
and investment through a planned capital
programme mitigates the risks of extreme
weather incidents.
We prepare a Water Resources
Management Plan every five years and
review it annually for a range of climate
change and demand scenarios, with
various schemes promoted to maintain
water resources (e.g. pumped storage for
reservoirs), conservation and customer
water efficiency measures.
Viridor has in place a regional adverse
weather management strategy, aimed at
reducing disruption to site operations and
transport logistics
Targeted improvements made to improve
customer service and SWW’s relative
industry standing during the K6 period.
Viridor’s strategy to diversify into energy
recovery has offset the decline in landfill
and current challenges in recycling.
Viridor is exploring alternative uses for its
landfill assets.
Business interruption
or significant
operational failures/
incidents
Difficulty in
recruitment, retention
and development of
appropriate skills,
which are required
to deliver the
Group’s strategy
Detailed contingency plans and incident
management procedures.
Equipment failure is managed through
sophisticated planned preventative
maintenance regimes. Any disruption
is alleviated by good liaison
and communication.
Succession plans are in place. The recent
Group restructure, Viridor transformation
and integration of Bournemouth Water has
strengthened the executive team, but in turn
have the potential to impact morale.
Reduce both the likelihood
and impact through long
term planning and ensuring
sufficient measures are in
place to mitigate risk.
Good customer service is
at the heart of everything
we do. Continually
seek to increase
customer satisfaction.
Minimise the impact of
market reform by defending
the existing customer
base whilst developing
further markets.
Effective business continuity
and contingency plans
in place to mitigate the
risk and accelerate the
recovery from an incident,
with residual risk covered
by insurance.
Appropriate skills and
experience in place, with
good succession plans
to mitigate impact on
strategic plan.
54
PENNON GROUP PLC ANNUAL REPORT 2016STRATEGIC REPORT | GROUP PERFORMANCE BUSINESS SYSTEMS AND CAPITAL INVESTMENT
Principal Risks
Mitigation
Net Risk
Direction
Risk Appetite
Failure or increased
cost of capital
projects/exposure
to contract failures
Failure of information
technology systems,
management and
protection including
cyber risks
Skilled project management resource and
oversight boards provide rigour to the
delivery of major projects. Due diligence
on suppliers, technologies and acquisitions.
Back-to-back agreements and supplier
guarantees provide protection.
Regular reporting of performance on major
contracts and post project appraisals.
Major systems implementation is
supported by a formal programme
governance framework, supplemented by
specialist consultants.
Cyber risks are mitigated by a strong
information security framework, cyber
security awareness campaigns, plus
internal and external testing and formal
ISO accreditation.
Pennon’s investment
activities are based on
taking well-judged risks for
appropriate returns.
Robust systems in place
to support business
activity, with strong cyber
protection to minimise a
growing risk.
VIABILITY STATEMENT
The Board has assessed the Group’s financial viability and
confirms that it has a reasonable expectation that the Group will
be able to continue in operation and meet its liabilities as they
fall due over a five-year period. The assessment has been made
with reference to the Group’s current position and prospects, its
longer-term strategy, the Board’s risk appetite and the Group’s
principal risks and how these are managed, as detailed on
pages 51 to 54 of the risk report.
The Group’s strategic business plan and associated principal
risks are a foundation of the scenario testing. This assessment
has considered the potential impact of these risks arising on the
business model, future performance, solvency and liquidity over
the period in question. In making their assessment, the Directors
reviewed the principal risks and considered which risks might
threaten viability. It was determined that none of the individual
risks would in isolation compromise the Group’s viability, so a
number of plausible risk combinations were considered to stress
test the plan, primarily by reducing revenues, increasing costs and
impacting cash flows. The Board considered the monetary impact
of these scenarios over a five-year period, to ensure that they did
not adversely impact the Group’s viability.
In making the assessment, the Directors have taken account of
the Group’s robust capital solvency position, its ability to raise
new finance and a key potential mitigating action of restricting any
non-contractual payments.
In assessing the prospects of the Group, the Directors note
that, as the Group operates in a regulatory industry which
potentially can be subject to non-market influences, such
assessment is subject to uncertainty, the level of which depends
on the proximity of the time horizon, and accordingly the future
outcomes cannot be guaranteed or predicted with certainty.
As set out in the Audit Committee’s report on page 68, the
Directors reviewed and discussed the process undertaken
by management, and also reviewed the results of the stress
testing performed.
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.
The strategic report consisting of pages 4 to 55 was approved by the Board on 24 May 2016.
By Order of the Board
Helen Barrett-Hague
Group Company Secretary
24 May 2016
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GOVERNANCE AND
REMUNERATION
GOVERNANCE AND REMUNERATION
58 CHAIRMAN’S LETTER TO SHAREHOLDERS
60
62
66
BOARD OF DIRECTORS
THE BOARD AND ITS GOVERNANCE FRAMEWORK
BOARD COMMITTEES’ REPORTS
77 DIRECTORS’ REMUNERATION REPORT
99 DIRECTORS’ REPORT – OTHER STATUTORY DISCLOSURES
56
PENNON GROUP PLC ANNUAL REPORT 2016GOVERNANCE AND REMUNERATION COMMITTED TO OPERATING
TO THE HIGHEST STANDARDS
OF CORPORATE GOVERNANCE
RESPONSIBLE AND
SUSTAINABLE BUSINESS
BENEFITING CUSTOMERS
AND SHAREHOLDERS
WELL PLACED TO
DELIVER SOLID GROWTH
AND EFFICIENCY
57
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LETTER TO
SHAREHOLDERS
SIR JOHN PARKER, CHAIRMAN
DEAR SHAREHOLDER
In my first corporate governance report on behalf of the Board, I am
pleased to confirm that it was evident to me on my appointment that
the three essential pillars of a successful board were in evidence in
the Pennon boardroom, namely having strong financial control, sound
administration and good governance. I place great importance on all
these facets but maintaining good governance is central to the successful
management of every board and to the creation of shareholder value as
set out in our business model on pages 10 and 11.
I am committed to ensuring that Pennon Group continues to operate
to the highest standards of corporate governance and in my first few
months as Chairman I have reviewed in consultation with the Non-
executive Directors the Board governance structure. The result is a
more streamlined structure as described in this report on page 62 whilst
ensuring that the water business remains ring-fenced in accordance with
Ofwat regulatory requirements.
The annual report is 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 (FRC)
website, www.frc.org.uk. In accordance with the FRC’s requirements,
we have reported against the latest version of the Code, which is
effective for reporting periods commencing on or after 1 October 2014.
58
PENNON GROUP PLC ANNUAL REPORT 2016GOVERNANCE AND REMUNERATION ROLE OF THE BOARD AND ITS EFFECTIVENESS
My primary role as Chairman is to provide leadership to the
Board and to provide the right environment to enable the
Directors and the Board as a whole to perform effectively to
promote the success of the Company for the benefit of its
shareholders. In doing so we take account of the interests of our
customers, employees, suppliers, the communities in which we
operate and other interested stakeholders including Ofwat, the
Drinking Water Inspectorate, the UK environment agencies and
other regulatory bodies in the UK.
I believe our revised Board structure reinforces the good
governance that was in place before I became Chairman
and will enable us to continue to operate effectively and
cohesively as a Board. It is my responsibility each year to lead a
detailed performance evaluation of the Board and each of the
Committees. The aim is to identify further areas for improvement
and ensure that our knowledge, skills and processes 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.
The revised Board structure also assists in ensuring that all Board
members continue to have appropriate up-to-date knowledge
and understanding of our businesses as we pursue our refreshed
strategy described in the strategic report.
SHAREHOLDER ENGAGEMENT
We maintain appropriate and regular dialogue with our
shareholders to ensure that there is a good understanding of our
rationale for our strategy and our performance actions. It also
allows shareholders to provide feedback on the matters they
consider to be important and any issues which require addressing.
We have a comprehensive investor relations programme. During
the year some 85 meetings and conference calls were held and
Pennon attended six City conferences and salesforce briefings
hosted by investment banks. This engagement covered both
current and prospective shareholders, the majority of which are
institutional, with the remainder being a selection of large private
client investment managers.
Over the year we also held a series of analyst and investor
briefings focused on particular industry themes and key areas of
our business. These included a Viridor Waste Market Briefing, a
South West Water Briefing on delivering and outperforming the
K6 business plan and an analyst and investor day in Manchester,
including site visits to Viridor’s Runcorn Energy Recovery Facility
and Longley Lane Materials Recycling Facility. In addition to
these events, Pennon held its inaugural Capital Markets Event in
February, focusing on recent Board and management changes and
Group strategy.
THE THREE ESSENTIAL
PILLARS OF A SUCCESSFUL
BOARD ARE STRONG
FINANCIAL CONTROL,
SOUND ADMINISTRATION
AND GOOD GOVERNANCE
The Chief Financial Officer continues to report to the Board
regularly on major shareholders’ views about the Group, and
every six months the Company’s brokers present 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.
I will actively encourage the participation of our shareholders at
our AGMs and will welcome questions on any business issues
affecting the Group. As usual, at our 2016 AGM on 1 July all our
Directors intend to be present together with a number of other
senior executives of our businesses to meet with shareholders to
further explain the developments in the Group.
COMPLIANCE WITH THE UK CORPORATE
GOVERNANCE CODE AND OTHER REQUIREMENTS
I am pleased to report that throughout the year the Company
complied with the provisions and applied the main principles set
out in the UK Code with no exceptions to report.
My introduction to this corporate governance report and the
following sections are made in compliance with the UK Code,
Financial Conduct Authority (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 101 the Board confirms to shareholders
that the Annual Report and Accounts taken as a whole is fair,
balanced and understandable and provides the information
necessary to assess the Company’s performance, business model
and strategy.
Sir John Parker
Chairman
Pennon Group Plc
24 May 2016
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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.
COMPOSITION as at 31 March
(%)
2015
Executive
2015
Non-executive (inc. chairman)
2016
Executive
2016
Non-executive (inc. chairman)
37.5
2015
Male
62.5
43.0
57.0
2015
Female
2016
Male
2016
Female
EXPERIENCE as at 31 March
(%)
TENURE as at 31 March
2015
Industry
2015
Finance
2015
Governance
2016
Industry
2016
Finance
2016
Governance
37.5
50.0
12.5
43.0
43.0
14.0
2015
0-3 years
2015
4-6 years
2015
7-10+ years
2016
0-3 years
2016
4-6 years
2016
7-10+ years
(%)
75.0
25.0
71.4
28.6
(%)
50.0
12.5
37.5
57.0
14.0
29.0
The Board’s target to achieve 25% female representation was achieved early, before the 2014/15 year end. However, during a period of
transition on the Board, the female representation fell to 22% between April and July 2015 but then increased to 28.6% following the
2015 AGM.
CHAIRMAN
GROUP CHIEF EXECUTIVE OFFICER
Sir John Parker
GBE, FREng, DSc (Eng), ScD (Hon), DSc (Hon),
DUniv (Hon), FRINA
Sir John was appointed to the Board as Deputy Chairman on 1 April
2015 and became Chairman on 1 August 2015. He is also chairman of
the Nomination Committee.
Sir John is recognised as a highly experienced and independent
chairman and brings a wealth of leadership experience across a range
of industries. He was previously the chairman of National Grid Plc,
senior non-executive director and chair of the Court of the Bank of
England, deputy chairman of DP World, joint chair of Mondi and chair
of BVT and P&O Plc.
External appointments
Sir John is the chairman of Anglo American Plc. He is also a
non-executive director of Carnival Corporation and Airbus Group.
Sir John is a Visiting Fellow of the University of Oxford and was
president of the Royal Academy of Engineering from 2011 to 2014.
Sir John’s significant commitments in the year have reduced with his
stepping down as deputy chairman of DP World in July 2015.
Christopher Loughlin
BSc Hons, MICE, CEng, MBA
Chris was appointed to the Board on 1 August 2006 upon joining
Pennon Group as Chief Executive of South West Water. He became
the Group Chief Executive on 1 January 2016. Chris is chairman of
the Pennon Executive Management Board and a member of the
Sustainability Committee.
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.
External appointments
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.
60
PENNON GROUP PLC ANNUAL REPORT 2016GOVERNANCE AND REMUNERATION DIRECTORS
Martin Angle
BSc Hons, FCA, MCSI
Independent Non-executive Director
Martin was appointed to the Board on
1 December 2008. He is chairman of
the Remuneration Committee and a
member of the Audit, Nomination and
Sustainability Committees.
Formerly, Martin 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
having previously held a number of senior
investment banking positions with SG
Warburg & Co. Ltd, Morgan Stanley and
Dresdner Kleinwort Benson.
During the year, having completed his full
terms of office, he retired from the boards
of OAO Severstal, Shuaa Capital psc and
the National Exhibition Group where he
was chairman.
External appointments
Martin is currently the senior independent
director at Savills Plc, the vice chairman
and non-executive director of the FIA
Foundation, and the adviser to the board of
the Commercial Bank of Dubai.
Neil Cooper
BSc Hons, FCMA
Independent Non-executive Director
Neil joined the Board on 1 September 2014.
He is chairman of the Audit Committee and
is currently a member of the Remuneration
and Nomination Committees.
Neil was previously group finance director
of William Hill Plc and before that he was
group finance director of Bovis Homes
Group Plc. He 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.
External appointments
Neil is currently the chief financial officer of
Barratt Developments Plc.
Susan Davy
BSc Hons, ACA
Chief Financial Officer
Susan joined the Board on 1 February 2015.
She is a member of the Pennon Executive
Management Board. Susan is a graduate
qualified chartered accountant with 20 years’
experience in the utility sector.
Susan was previously finance and regulatory
director of South West Water, 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 its Waste Water Unit and was
head of finance for Brey Utilities, a joint
venture company owned by Yorkshire Water
and Earthtech Engineering Limited.
External appointments
Susan is a council member of
CBI South West.
GROUP COMPANY
SECRETARY
Ian McAulay
BEng, CEng, MICE, MCIWEM
Chief Executive, Viridor
Ian was appointed to the Board on 9
September 2013. He is chairman of
the Viridor Executive Management
Board and a member of the Pennon
Executive Management Board and the
Sustainability Committee.
Ian was previously chief of global strategy and
corporate development with MWH Global
based in the US, and before that 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.
External appointments
Ian is a member of the board of the
Environmental Services Association, the
Greater Manchester Low Carbon Hub
board and the Scottish Government’s 2020
Climate Group.
Gill Rider
CB, PhD, CCIPD
Senior Independent Director
Gill was appointed to the Board on 1
September 2012. She is chairman of
the Sustainability Committee and a
member of the Audit, Remuneration and
Nomination Committees.
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 LLP culminating in
the post of chief leadership officer for the
global firm. She was previously president
of the Chartered Institute of Personnel and
Development and a non-executive director
of De La Rue Plc.
External appointments
Gill currently holds non-executive
directorships with Charles Taylor Plc, where
she is senior independent director, and
Intertek Group Plc. She is chairman of both
their remuneration committees. She is also
chair of the council (board) of the University
of Southampton.
Helen Barrett-Hague
Solicitor, LLB Hons
Group General Counsel &
Company Secretary
Helen joined Pennon Group as Group
General Counsel & Company Secretary to
the Board in March 2016.
She began her career in private practice
before moving in-house in 1999. Helen
subsequently held positions of increasing
responsibility with the Generics Group
AG, Aveva Group Plc and Alent Plc. She
has worked both in the UK and overseas
and has extensive corporate experience,
including capital raisings, initial public
offerings, corporate restructuring, mergers
and acquisitions. She has previously held a
number of non-executive directorships.
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GOVERNANCE FRAMEWORK
The Board and its new governance framework introduced in April 2016, which
incorporates a ‘plenary’ style of operation, is set out below. The 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 the Board. Further details of the responsibilities
of the Pennon Group Board Committees are set out in the report of each
Committee on pages 66 to 76. These, together with the risk management and
internal control frameworks described on pages 51 and 65, 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.
THE BOARD
Consisting of the Chairman, the Group Chief Executive Officer, the Chief Financial Officer, the
Viridor Chief Executive and three independent Non-executive Directors. In addition, three
independent South West Water non-executive directors attend Board meetings and contribute
to the Board’s discussions.
AUDIT COMMITTEE
Members: three independent Pennon Non-executive
Directors. Two independent South West Water
non-executive directors attend Committee meetings and
contribute to the Committee discussions
REMUNERATION COMMITTEE
Members: three independent Pennon Non-executive
Directors. Two independent South West Water
non-executive directors attend Committee meetings and
contribute to the Committee discussions
GROUP EXECUTIVE
MANAGEMENT BOARD
Chaired by the Group Chief Executive
Officer and consisting of principal
executives of the Group
NOMINATION COMMITTEE
Members: the Chairman and three independent
Pennon Non-executive Directors with three
independent South West Water non-executive
directors attending when South West Water
matters are considered
SUSTAINABILITY COMMITTEE
Members: two independent Pennon
Non-executive Directors and two Executive
Directors. Two independent South West Water
non-executive directors attend Committee
meetings and contribute to Committee discussions
SOUTH WEST WATER
EXECUTIVE
MANAGEMENT BOARD
Chaired by the South West
Water Managing Director and
consisting of principal executives
of South West Water
VIRIDOR EXECUTIVE
MANAGEMENT
BOARD
Chaired by the Viridor Chief
Executive and consisting of
principal executives of Viridor
The South West Water board continues to operate as a separate independent board for regulatory and
statutory purposes and consists of the Chairman, the Group Chief Executive Officer, the Managing Director
and the Finance Director of South West Water, and six independent non-executive directors.
62
PENNON GROUP PLC ANNUAL REPORT 2016GOVERNANCE AND REMUNERATION BOARD COMPOSITION AND INDEPENDENCE
At the end of the year the Board of Directors comprised the Chairman, three Executive Directors and three Non-executive Directors.
All of the Non-executive Directors were considered by the Board to be independent throughout the year. None of the relationships
or circumstances set out in provision B.1.1 of the UK Corporate Governance Code (the UK Code) applied to the Directors listed
on the next page other than in respect of Gerard Connell who retired on 31 July 2015. While Gerard had served on the Board for
more than nine years since his first election, he was determined by the Board to be independent, and the Board was satisfied that he
demonstrated independence of character and judgement in the performance of his role on the Board up to the date of his retirement.
Sir John Parker, who was appointed to the Board on 1 April 2015 as Deputy Chairman, succeeded Ken Harvey as Chairman following
the 2015 Annual General Meeting. Sir John met the independence criteria set out in provision B.1.1 of the UK Code on his appointment
as Chairman and there have been no significant changes to his external commitments since his appointment.
Following the acquisition of Bournemouth Water in April 2015, Chris Loughlin and Gerard Connell were appointed as non-executive
directors on the Bournemouth Water board. That board, following the merger of South West Water and Bournemouth Water on 31
March 2016, ceased to operate and was disbanded.
All Directors are subject to re-election each year in accordance with provision B.7.1 of the UK Code.
DIRECTORS’ SKILLS AND ROLES
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 and the experience chart on
pages 60 and 61 demonstrate collectively a broad range of business, financial and other relevant experience.
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 61). Martin Angle is also a member of the Audit
Committee and he has relevant financial experience as set out in his biography on page 61.
There is a clear separation of responsibilities between the Chairman and the Group Chief Executive divided between managing the
Board and the business, while they of course maintain a close working relationship.
All the Directors are equally accountable for the proper stewardship of the Group’s affairs but they do have specific roles, which
include those set out below:
Position
Director
Role
Chairman
Sir John Parker
• Leading the Board and setting its agenda
• Promoting the highest standards of integrity and probity and ensuring good and effective governance
• Managing Board composition, performance and succession planning
• Providing advice, support and guidance to the Group Chief Executive
• Representing the Group and being available to shareholders
• Discussing separately with the Non-executive Directors performance and strategic issues
Group
Chief Executive
Officer
Chris Loughlin
• Managing the Group and providing executive leadership
• Developing and proposing Group strategy
• Leading the operation of the Group in accordance with the decisions of the Board
• Co-ordinating with the Chairman on important and strategic issues of the Group and providing input to
the Board’s agenda
• Contributing to succession planning and implementing the organisational structure
• Leading on acquisitions, disposals, business development and exploiting Group synergies
• Managing shareholder relations
Senior
Independent
Director
Gill Rider
• Assisting the Chairman with shareholder communications and being available as an additional point of
contact for shareholders
• Being available to other Non-executive Directors if they have any concerns that are not satisfactorily
resolved by the Chairman
• Leading the annual evaluation of performance of the Chairman with the other Non-executive Directors
Executive
Directors
Susan Davy
Ian McAulay
• Supporting the Group Chief Executive Officer in providing executive leadership and developing
Group strategy
• Reporting to the Board on performance and developments within their business areas
• Implementing decisions of the Board
• Managing their own specific business responsibilities
Non-executive
Directors
Martin Angle
Neil Cooper
Gill Rider
• Critically reviewing the strategies proposed for the Group
• Critically examining the operational and financial performance of the Group
• Evaluating proposals from management and constructively challenging management’s recommendations
• Contributing to corporate accountability through being active members of the Committees of the Board
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GOVERNANCE FRAMEWORK
CONTINUED
BOARD ATTENDANCE, OPERATION AND ACTIVITIES
The Directors and their attendance at the 10 scheduled meetings
of the Board during 2015/16 are shown below:
Members
Kenneth Harvey
(Chairman until 31 July 2015)
Sir John Parker
(Deputy Chairman and
Non-executive Director
until 31 July 2015 and
Chairman thereafter)
Non-executive Directors:
Martin Angle
Gerard Connell
Neil Cooper
Gill Rider
Executive Directors:
Susan Davy
Christopher Loughlin
Appointment
date
March 1997
April 2015
Attendance
4/4
9/10
December 2008
October 2003
September 2014
September 2012
February 2015
August 2006
10/10
4/4
9/10
10/10
10/10
10/10
10/10
Ian McAulay
September 2013
Sir John Parker and Neil Cooper were each unable to attend a
Board meeting on one occasion due to a prior commitment that
was scheduled before their appointment to the Board.
In accordance with the governance framework set out on page
62, the Board has a schedule of matters reserved for its decision.
The Board delegates more detailed consideration of certain
matters to Board Committees, to the Executive Directors
and to the Group General Counsel & Company Secretary, as
appropriate. The matters reserved to the Board include:
• approval of the full-year and half-year results announcements
• the approval of the Annual Report and 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
• appointments to the Board and its Committees.
The Pennon Group Board now operates as a plenary board
covering Group and Viridor matters and separately, when
appropriate, as the board of South West Water. This is to ensure
governance of South West Water in compliance with Ofwat’s
principles on board leadership, transparency and governance.
64
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 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. 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.
BOARD SUPPORT AND TRAINING
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. Directors
also visit operating facilities across the Group and have meetings
with staff to receive briefings on key processes and systems.
The training needs of Directors are reviewed as part of the
Board’s performance evaluation process each year. Training
consists of attendance at external courses organised by
professional advisers and also internal presentations from
senior management.
PERFORMANCE EVALUATION
The Board 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 facilitated by an external governance
consultancy, Lintstock. All participants’ views were sought via an
online questionnaire on a range of questions that were designed
by Lintstock following consultation with the Chairman and
the Group General Counsel & Company Secretary 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 pension scheme
board and committees’ performance evaluations and an insider
list governance system, Lintstock has no other connection with
the Company.
PENNON GROUP PLC ANNUAL REPORT 2016GOVERNANCE AND REMUNERATION The Board confirms that it applies procedures in accordance
with the UK Code and the FRC Internal Control Guidance which
brings together elements of best practice for risk management
and internal control by companies. The Board’s risk framework
described on page 51 in the strategic report 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
ongoing and annual evaluation of the overall process.
As part of the review of the effectiveness of the system of
risk management and internal control 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. Allegations of misconduct and irregularity
are thoroughly investigated and follow-up action in respect of the
Group’s control environment is taken when appropriate. In the
normal course of business, investigations into irregularities may be
ongoing as of the date of the approval of the financial statements.
The Group’s processes and policies serve to ensure that a
culture of effective control and risk management is embedded
throughout the Group 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
52 to 54.
The Board considered the 2015/16 performance evaluation which
it concluded was a thorough and valuable assessment of Board
performance although it was recognised that the new governance
structure had only just been introduced and therefore there
was a need to allow it to ‘bed in’ before further review.
Nevertheless some actions were considered desirable to improve
performance which related to a further drive to achieve more
succinct reporting by executives and careful time management
by the Board to ensure critical matters and strategic issues were
fully considered. The Board has agreed a performance action
plan against which the Group Company Secretary will monitor
developments during the year and ensure, in conjunction with
the Chairman and Executive Directors, that the agreed actions
are implemented.
The main area for action that had been identified as a result of
the 2014/15 performance evaluation (namely a focus on strategy
at a time of transition with the new Chairman) has been followed
up during the year and has resulted in a refreshed strategy
as outlined on page 8 and described in more detail on pages
14 to 17.
The Chairman’s performance was evaluated separately
by the Non-executive Directors, led by the Senior
Independent Director.
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 66 to
76 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.
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.
RISK MANAGEMENT AND THE GROUP’S SYSTEM 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 2015/16 and up to the date of the approval of
this Annual Report and Accounts.
The Group’s system of internal control has been further reviewed
to take account of the FRC’s new ‘Guidance on Risk Management,
Internal Control and Related Financial and Business Reporting’
(FRC Internal Control Guidance), which is applicable to reporting
periods beginning on or after 1 October 2014.
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REPORTS
THE AUDIT COMMITTEE REPORT
Dear Shareholder
I am pleased to introduce the Audit Committee’s report in my
first full year as chairman of the Committee.
The principal responsibilities of the Committee are focused
firstly on the appropriateness of the Group’s financial reporting,
including the accounting judgements made in preparing reporting,
secondly the ongoing effectiveness of the internal control
environment and thirdly the risk management processes across
the Group, including challenging and testing the Group’s risk
appetite. Monitoring and reviewing the effectiveness of the
external auditor and the internal audit function is an important
element of the Committee’s assurance activities. These
responsibilities are discharged throughout the year in accordance
with the calendar of business of the Committee, which is
designed to allow sufficient time for their consideration whilst also
permitting time to be spent on related key financial matters.
New significant matters considered during the year included
a review of the Group’s delegated authorities and financial
procedures which, following the appointment of a Group Chief
Executive Officer for the first time, were refreshed to ensure
ongoing alignment with Group requirements and the risk profiles
of the businesses, and a review of the long-lived asset cash
generating units (CGUs) within Viridor, which were realigned to
ensure they remained consistent with the evolving operational
and management focus of the business.
The Committee has also reviewed progress on Viridor’s
Enterprise (business transformation and systems integration)
solution, which is progressing on a multi-year timescale, to ensure
assurance protocols are in place, and the internal controls and
audit systems in place in Bournemouth Water which was acquired
in April 2015. It was pleasing to note that they were determined
to be robust and appropriate to the size of the business.
We are mindful of the revisions to the UK Corporate Governance
Code (the UK Code) and supporting FRC guidance on risk
reporting. As a result, we have further reviewed the risk
management processes in place across the Group and have
endorsed the establishment of a new Group executive risk
management forum to assess risk appetite and monitor key
risks and their mitigation. More detail on our risk management
processes, principal risks and their mitigation can be found on pages
51 to 55. Aligned with this we have also assessed the Company’s
viability over a period of five years, which we consider to be
aligned with key business cycle periods in the water business and
the longer-term nature of Viridor’s ERF assets, as well as being
reasonable in terms of our ability to look forward with some
certainty in the business and regulatory environment in which the
Company operates. Our viability statement is reported on page 55.
As part of the half-year and year-end reporting review process,
we reviewed and challenged the key judgements of management
as set out on page 68. Significant matters considered by the
Committee both during the year and in relation to the year-end
financial statements are explained in this report.
Neil Cooper
Audit Committee Chairman
AUDIT COMMITTEE COMPOSITION
AND MEETINGS
The membership of the Committee, together with appointment
dates and attendance at meetings during 2015/16, is set out below:
Members
Appointment date
Attendance
Neil Cooper
(Committee chairman)
Gerard Connell*
Martin Angle
Gill Rider
* Retired on 31 July 2015
September 2014
October 2003
December 2008
September 2012
7/7
2/2
7/7
7/7
Other regular attendees to our meetings during the year included:
• Group Chief Executive (following appointment on 1 January 2016)
• Group Director of Finance (now retitled Chief
Financial Officer)
• Chief Executive, South West Water (until 31 December 2015)
• Chief Executive, Viridor
• Group General Counsel & Company Secretary
• Managing Director, South West Water (following appointment
on 1 January 2016)
• Finance Director, South West Water
• Finance Director, Viridor
• Group Financial Controller
• Group Audit Manager
• External auditor.
In preparation for the revised governance structure (detailed on
page 62) two South West Water non-executive directors, Martin
Hagen and Lord Matthew Taylor, also attended the last two
meetings of the Committee in the year.
In addition, the Chairman of the Group, Ken Harvey until 31
July 2015 and Sir John Parker as his successor from this date, has
had an open invitation to attend the Committee meetings. In
the last year the Chairman has attended those meetings where
the Committee has reviewed the half-year and full-year financial
results of the Group.
In accordance with the UK Code, the Board is satisfied that Neil
Cooper and Martin Angle have recent and relevant financial
experience and also, in accordance with FCA Rule Disclosure and
Transparency Rule 7.1.1R, have competence in accounting and/or
auditing. Details of each Director’s significant current and prior
appointments are set out on pages 60 and 61.
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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PENNON GROUP PLC ANNUAL REPORT 2016GOVERNANCE AND REMUNERATION NEIL COOPER, AUDIT COMMITTEE CHAIRMAN
SIGNIFICANT MATTERS CONSIDERED BY THE COMMITTEE
The calendar of business of the Committee provides a framework for ensuring that it manages its affairs efficiently and effectively
throughout the year and is able to concentrate on the key matters that affect the Group.
The most significant matters that the Committee considered and made decisions on during the year and, where appropriate, since the
year end, 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.
• After a detailed review in accordance with its established process, advised the Board that the Annual Report and
Accounts is fair, balanced and understandable in accordance with reporting requirements and recommended their
approval for publication.
Internal control and
compliance
• Quarterly review of internal audit reports on core systems and processes across the Group, including Group treasury,
credit management, reactive operational maintenance, payroll, procurement practices, energy recovery facility control
environment, information security and IT risks, water leakage management, customer facing processes including billing
and collection, and business continuity management.
• Reviewed internal control framework for the Group.
• Monitored performance on specific matters including Viridor’s Project Enterprise (business transformation project).
External auditor
• Considered auditor’s report on its review of the annual results focusing on key findings.
• Assessed external auditor and its effectiveness in respect of the previous year’s external audit process.
• Recommended to the Board reappointment of the external auditor for approval at the Annual General Meeting with
the Committee being authorised to agree the external auditor’s remuneration.
• Considered and approved the audit plan and audit fee proposal for the external auditor.
• Monitored the provision of non-audit services.
Risk management
• Reviewed the risk management framework and compliance with that framework during the year 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 and considered risk appetite.
• 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.
• Introduced regular ‘deep dives’ at Committee meetings on specific areas.
Governance
• Discussed the annual evaluation exercise of the Committee and agreed action plans to further improve the
Committee’s performance.
• 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 financial delegations, 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 Group Internal Audit Manager without members of
management being present.
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REPORTS CONTINUED
THE AUDIT COMMITTEE REPORT 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 areas of judgement
considered in relation to the financial statements for the
year ended 31 March 2016 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 matters 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 104 to 113.
In addition to the significant matters set out in the table below,
the Committee considered a range of other areas including
presentational issues, in particular relating to non-underlying
disclosure and changes to asset lives following external
expert review.
Area of focus by the Committee How the matter was addressed by the Committee
Revenue recognition
Non-current asset impairment
review and provisions
South West Water and Viridor
bad and doubtful debts
Provisions for uncertain tax
positions
Going concern basis for the
preparation of the financial
statements and viability statement
Once again there were a number of judgement areas in respect of revenue recognition relating to income
from measured water services, estimates of timing of receipt of unmeasured revenue, accounting for revenue
from long-term service concession arrangements under IFRIC 12 and calculation of accrued income on waste
management contracts and powergen. The Committee relied 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
year end by the external auditor who was satisfied with the approach taken in each business.
Recognising that the value of certain non-current assets and long-term environmental provisions within
Viridor is sensitive to changes in assumptions over future discount rates and cash flow projections which
require judgement, the Committee pays careful attention to asset impairment and provisions and the review
of goodwill. In addition, in the year management reviewed the evolving structure of the cash generating units
(CGUs) with the objective of ensuring the determination of CGUs remained consistent with both the waste
market and Viridor’s operating model. The change in CGU determination resulted in impairment reversals
and charges being recognised in the year. This key area was also reviewed as part of the year-end audit by the
external auditor. Following a detailed review of the analysis undertaken, and consideration of management
assumptions in relation to the revised structure of the CGUs, the Committee was satisfied that a robust and
consistent approach had been followed and that the management’s assertion that goodwill and intangible assets
were not impaired was reasonable, and therefore the Committee were able to approve the disclosures in the
financial statements.
Regular updates on progress against debt collection targets and other contractual payments due are received
by the Board. 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, which together with the detailed analysis reported on to the Committee enabled the
Committee to conclude that the management’s assessment of the year-end position was reasonable.
It has been and remains the general policy of the Group to take a balanced view of its tax position and only
release tax provisions when matters under discussion are expected to be cleared by HM Revenue & Customs.
At the year end the Chief Financial Officer provided an update to the Board on progress in resolving a number
of tax positions the background to which had been considered in detail by the Committee on a regular basis as
part of progress reports from the Chief Financial Officer. It was noted that where appropriate expert external
legal advice and other specialist taxation advice had been sought which assisted the Committee in forming a
view on the appropriateness of the provisions for uncertain tax positions and related tax disclosures in the
financial statements.
A monthly report from the Chief Financial Officer on the financial performance of the Group including
forward-looking assessments of covenant compliance and funding levels under differing scenarios is provided
to the Board. Rolling five-year strategy projections and the resultant headroom relative to borrowings is also
regularly reviewed by the Board. At each half-year end the Chief Financial Officer prepares for consideration by
the Committee a report focusing on the Group’s liquidity over the 12-month period from the date of signing
either the annual report or half-year results. This year the Committee has also considered a report from the
Chief Financial Officer on the Group’s financial viability over an appropriate period, which the Board considers
to be five years, in connection with the new UK Corporate Governance Code requirement for a viability
statement to be given by the Board. Consideration of these reports and constructive challenge on the findings
of the reports, including the scenario testing carried out by management, has enabled the Committee to
form its assessment and satisfy itself that it remains appropriate for the Group to continue to adopt the going
concern basis of accounting in the preparation of the financial statements and in addition advise the Board on
providing the viability statement set out on page 55.
68
PENNON GROUP PLC ANNUAL REPORT 2016GOVERNANCE AND REMUNERATION EFFECTIVENESS OF THE EXTERNAL AUDIT PROCESS
Receiving high quality and effective audit services is of paramount
importance to the Committee. 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.
The current external auditor was appointed following a
comprehensive audit tender process and approval by shareholders
at the Company’s 2014 AGM. Their reappointment was approved
at the 2015 AGM.
The external auditor produced a detailed audit planning report
in preparation for the year-end financial statements, which has
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 satisfaction with the
performance of the external auditor. Accordingly, the Committee
considered that it is appropriate that the external auditor be
re-appointed and has made this 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.
The external auditor reported on their independence in the
year and since the year end and confirmed to the Committee
that they have complied with the Auditing Practices Board’s
Ethical Standards and, based on their assessment, 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 Chief Financial
Officer is required to set out in a report to the Committee
the reasons why the auditor’s firm should be appointed for any
such 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 the 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 15.74% of the audit fee, which is well within the
Group’s 70% non-audit fee limit.
The Chief Financial Officer regularly reports to the Committee
on the extent of services provided to the Company by the
external auditor 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 132.
INTERNAL AUDIT
The internal audit activities of the Group are a key part of the
internal control and risk management framework 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 usually in September
each year. It takes account of the principal risks, 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 Internal Audit Manager reports quarterly to the
Committee on audit reviews undertaken and their findings,
and there are regular discussions, correspondence and private
meetings between the Group Internal Audit Manager and the
Committee chairman.
FAIR, BALANCED AND UNDERSTANDABLE ASSESSMENT
To enable the Committee to advise 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
101, the Committee has applied a detailed FBU review framework
that 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 104 to 113.
In preparing and finalising the 2016 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 each Group executive management
board. 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.
STATEMENT OF COMPLIANCE WITH CMA ORDER
Having undertaken a competitive audit tender process in
2014, the Company is in compliance with the Statutory Audit
Services for Large Companies Market Investigation (Mandatory
Use of Competitive Tender Processes and Audit Committee
Responsibilities) Order 2014.
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REPORTS CONTINUED
THE SUSTAINABILITY COMMITTEE REPORT
Dear Shareholder
I am pleased to introduce the Sustainability Committee’s report on its annual activities. Sustainability remains
an integral part of Pennon’s strategy, and the Group continues to take 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 meeting our communities’ long-term needs – for water, energy and
waste management.
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 page 72.
The implementation of the new governance structure (as explained on page 62) was introduced formally on
1 April 2016, and we have been pleased to welcome two South West Water non-executive directors to the
Committee. Neil Cooper stood down from the Committee on 1 April 2016.
We continue to apply the best practice framework published by Business in the Community (BitC), a leading
business-led charity that promotes responsible business, and use the structure provided through BitC’s key
areas of sustainability (marketplace, workplace, community and environment) 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 thorough approach to sustainability helps us to draw together the needs
of society with the delivery of commercial success. This theme is expanded upon by Chris Loughlin in his Group
Chief Executive’s review, which explains how the Group’s strategy of investment for growth allows us to deliver
for the benefit of our customers, the environment and the communities we serve, as well as build shareholder
value. Details and examples of how South West Water and Viridor are implementing this strategy are provided
in the sections on Customers and Communities and Our Environment. 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
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PENNON GROUP PLC ANNUAL REPORT 2016GOVERNANCE AND REMUNERATION GILL RIDER, SUSTAINABILITY COMMITTEE CHAIRMAN
SUSTAINABILITY COMMITTEE COMPOSITION
AND MEETINGS
During the year the Committee considered a wide range of
matters in accordance with its terms of reference, including:
• the Group’s health and safety performance and plans
• pollution and compliance performance
• performance in respect of customer service and engagement,
in particular South West Water’s approach to affordability and
social tariffs
• the Group’s approach to community engagement
and investment
• performance against the Group’s workplace policy, including
review of the results of employee engagement surveys
conducted by Pennon, South West Water and Viridor
• sustainable procurement and practices within the supply chain
• sustainability reporting for 2015 for the Group, South West
Water and Viridor, and the associated verifier’s reports and his
recommendations for the 2015/16 reports
• progress against the sustainability targets for 2015/16
and sustainability targets for 2016/17
• the coverage and appropriateness of Group policies.
In addition, the Committee considered:
• the Committee’s performance evaluation results
• modifications to the Committee’s terms of reference.
Members
Appointment date
Attendance
Gill Rider (chairman)
September 2012
Martin Angle
December 2008
Gerard Connell*
November 2006
Neil Cooper
September 2014
Christopher Loughlin
November 2006
Ian McAulay
September 2013
* Retired on 31 July 2015
6/6
6/6
3/3
5/6
6/6
6/6
Two South West Water independent non-executive directors,
Steve Johnson and Lord Matthew Taylor, were invited to attend
the last two Committee meetings of the year in preparation for
the revised governance structure (detailed on page 62).
During the year the Sustainability Committee worked with the
South West Water sustainability committee and the Viridor
board which, prior to the new Group governance framework
coming into effect, directed 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 throughout the year.
As at 31 March 2016 South West Water had achieved eight of
its 12 targets for the year and Viridor had completed nine out
of 13 of its targets. Further details will be provided in Viridor’s
sustainability report and South West Water’s company annual
performance report, to be published in May 2016 and July
2016 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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www.pennonannualreport.co.uk/2016OVERVIEWGROUP PERFORMANCEGOVERNANCEFINANCIAL STATEMENTS BOARD COMMITTEES’
REPORTS CONTINUED
THE SUSTAINABILITY COMMITTEE REPORT CONTINUED
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.
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 49 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 44 and 45.
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 throughout the strategic report, including on
pages 32 to 35 and 39 to 44.
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 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 38 to 47.
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 36 to 41.
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 page 48.
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PENNON GROUP PLC ANNUAL REPORT 2016GOVERNANCE AND REMUNERATION PENNON SUSTAINABILITY REPORT
Pennon’s sustainability reporting is integrated throughout the
strategic report and specifically in the following sections:
• Group Chief Executive Officer’s overview (page 16)
• Our operations (pages 30 to 31)
• Customers and communities (pages 36 to 41)
• Our environment (pages 42 to 47)
• Our people (pages 48 to 50).
SOUTH WEST WATER AND VIRIDOR
SUSTAINABILITY REPORTS
The full sustainability report for Viridor will be published in
May 2016, and this year South West Water will incorporate
its sustainability reporting in its company annual performance
report and regulatory accounts, which will be published
in July 2016. 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 2015/16, and their performance against
them, are given in their respective reports.
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. Disclosures within this annual report in respect of
Bournemouth Water’s sustainability performance have been
verified by SMC against the output of an independent audit of
Bournemouth Water’s sustainability disclosures conducted by
Halcrow Management Sciences Limited.
BENCHMARKING
Pennon is pleased to have retained its place on the FTSE4Good
Index, having been independently assessed against the
FTSE4Good criteria and satisfying the necessary requirements.
Created by the global index provider FTSE Russell (the trading
name of FTSE International Limited and Frank Russell Company),
FTSE4Good is an equity index series that is designed to facilitate
investment in companies that meet globally recognised corporate
responsibility standards. Companies in the FTSE4Good Index
Series have met stringent environmental, social and governance
criteria, and are positioned to capitalise on the benefits of
responsible business practice.
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COMMITTEES’
REPORTS CONTINUED
THE NOMINATION
COMMITTEE REPORT
SIR JOHN PARKER, NOMINATION COMMITTEE CHAIRMAN
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 Board appointments in the Group.
DIVERSITY POLICY
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.
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 met to consider:
• the Group Chief Executive Officer, the South West Water
Managing Director and the Group General Counsel &
Company Secretary appointments
• the Group’s diversity and equality policies and practice.
Following the year end the Committee also considered its
performance evaluation for the year and concluded that for the
forthcoming year there would be a sharper focus on succession
planning, having regard to the new corporate structure
recently introduced.
External search consultants were not engaged to assist with the
recruitment of the Group Chief Executive Officer or the South
West Water Managing Director due to exceptionally able internal
candidates being available for consideration by the Committee.
The appointment of the Group General Counsel & Company
Secretary was undertaken with the assistance of an external
search consultant.
Members
Appointment date
Attendance
March 1997
December 2008
October 2003
September 2014
September 2012
April 2015
Kenneth Harvey*
(Committee chairman
until 31 July 2015)
Martin Angle
Gerard Connell*
Neil Cooper
Gill Rider
Sir John Parker
(Committee chairman
from 1 August 2015)
*Retired on 31 July 2015
2/2
4/4
2/2
4/4
4/4
4/4
In accordance with the revised governance structure (detailed on
page 62) with effect from 1 April 2016 the South West Water
independent non-executive directors will also contribute to
Committee discussions when matters within the Committee’s
remit relevant to South West Water are to be considered.
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 gender and ethnic diversity
on the Board.
• 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 endeavours to
achieve and maintain:
– a minimum of 25% female representation on the Board
– a minimum of 25% female representation on the Group’s
senior management team.
The Committee is pleased to report that as at 31 March 2016
and, as disclosed with the Directors’ biographies on page 60, the
Group had exceeded 25% female representation at Board level.
While circumstances on occasion will result in changes in Board
composition, the Committee and the Board remain committed to
maintaining at least the 25% level.
In respect of the Group’s senior management team, progress is
being made with 21.9% being female compared to the reported
16.4% at 31 March 2015. Action is being taken to improve
diversity across the workforce which will assist in increasing
female representation at senior management level as described
on page 50.
The Committee and the Board will continue to monitor and
promote diversity across the Group with the aim of achieving
a minimum of 25% female representation on the senior
management team by the end of 2017.
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 48, together with information
regarding the gender breakdown of the workforce on page 50.
74
PENNON GROUP PLC ANNUAL REPORT 2016GOVERNANCE AND REMUNERATION THE REMUNERATION
COMMITTEE REPORT
MARTIN ANGLE, REMUNERATION COMMITTEE CHAIRMAN
The Committee meets in accordance with an annual calendar to
consider remuneration matters in respect of the Group and in
particular is responsible for:
THE COMMITTEE’S ACTIVITIES DURING THE
FINANCIAL YEAR
• annual review of the pay and benefits policies and practices for
• ensuring remuneration is aligned with and supports the
Group’s strategy, reflects our values as a Group and
optimises performance
• maintaining and reviewing the remuneration policy to ensure
it remains appropriate to attract and retain high calibre people
who are able to contribute to the success of the Group
• advising the Board on the framework of executive
remuneration for the Group
• determining the remuneration and terms of engagement of the
Chairman, the Executive Directors and senior management of
the Group.
the staff below Board level in the Group
• annual executive salary review
• determining performance targets in respect of the Annual
Incentive Bonus Plan for 2015/16
• reviewing drafts of the Directors’ remuneration report for
2014/15 and recommending it to the Board for approval for
inclusion in the 2015 annual report, and reviewing early drafts
of the Directors’ remuneration report for 2015/16
• determining bonuses, deferred bonus awards and executive
share options pursuant to the Company’s Annual Incentive
Bonus Plan in respect of the year 2014/15
• approving the Performance and Co-investment Plan awards
Members
Appointment date
Attendance
for the year
Martin Angle
(Committee chairman)
Gerard Connell*
Neil Cooper
Gill Rider
* Retired on 31 July 2015
December 2008
October 2003
September 2014
September 2012
Two South West Water independent non-executive directors,
Martin Hagen and Steve Johnson, attended the last two
Committee meetings of the year in preparation for the revised
governance structure (detailed on page 62).
The current remuneration policy was approved by shareholders
at the Company’s 2014 AGM and no changes are proposed to the
policy at this year’s AGM.
OUR REMUNERATION POLICY
IS DESIGNED TO SUPPORT OUR
GROUP STRATEGY AND PROVIDE
STRETCHING INCENTIVES
FOR OUR MANAGEMENT TO
PERFORM IN THE INTERESTS OF
MAXIMISING SHAREHOLDER
VALUE WHILST ENSURING THE
LONG-TERM SUSTAINABILITY OF
THE GROUP.
6/6
4/4
6/6
6/6
• reviewing the annual performance evaluation results of
the Committee
• approving the remuneration arrangements for the new
Group Chief Executive Officer, the South West Water
Managing Director and the Group General Counsel &
Company Secretary
• approving the release of the 2012 deferred bonus share
awards and the vesting of executive share options pursuant to
the Annual Incentive Bonus Plan
• determining the outcome of the 2012 Performance and
Co-investment Plan awards.
THE COMMITTEE’S FOCUS FOR 2016/17
• monitor the alignment of executive pay and benefits with the
strategic direction of the Group
• following the acquisition of Bournemouth Water and the
bringing on stream of the ERFs, ensure incentive criteria is
properly aligned with the Group’s objectives
• review the remuneration policy in preparation for its
submission for approval to shareholders at the 2017 AGM
(after the conclusion of the three-year approval period of the
current policy) to ensure it is aligned with the Group’s strategy
going forward.
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REPORTS CONTINUED
THE REMUNERATION
COMMITTEE REPORT CONTINUED
GOVERNANCE
The Committee’s terms of reference, setting out full details of the
role and responsibilities of the Committee in accordance with the
principles of the UK Corporate Governance Code, is available on
our website www.pennon-group.co.uk
In accordance with the Code, all of the Committee members
are independent Non-executive Directors, and the Committee
is advised by Deloitte, an independent remuneration consultant,
to ensure remuneration is determined impartially. The Chairman
of the Board is a regular attendee but not a member of the
Committee and, following his appointment, the Group Chief
Executive Officer is invited to attend meetings except for such
part of a meeting when matters concerning his own remuneration
are to be discussed.
For 2016/17 two South West Water independent non-executive
directors will attend meetings of the Committee and contribute
to discussions. They will contribute to the setting of the
remuneration policy for the whole Group whilst being responsible
for leading on remuneration matters concerning South
West Water.
This Directors’ remuneration report has been prepared in
accordance with the provisions of the Companies Act 2006 and
the Large and Medium-sized Companies and Groups (Accounts
and Reports) (Amendment) Regulations 2013. It also complies
with the requirements of the Financial Conduct Authority’s
Listing Rules and the Disclosure and Transparency Rules. The
UK Corporate Governance Code also sets out principles of
good governance relating to directors’ remuneration, and this
report describes how these principles are applied in practice.
The Committee confirms that throughout the financial year the
Company has complied with these governance rules and best
practice provisions.
The above regulations also require the external auditor to
report to shareholders on the audited information within the
annual report on remuneration which is part of the Directors’
remuneration report. The external auditor is obliged to state
whether, in its opinion, the relevant sections have been prepared
in accordance with the Companies Act 2006. The external
auditor’s opinion is set out on page 112 and the audited sections
of the annual report on remuneration are identified in this report.
76
PENNON GROUP PLC ANNUAL REPORT 2016GOVERNANCE AND REMUNERATION DIRECTORS’
REMUNERATION REPORT
CONTENTS
ANNUAL STATEMENT
Annual statement from the chairman of the Remuneration Committee
DIRECTORS’ REMUNERATION POLICY
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 for 2016/17
Single total figure table (audited information)
Annual bonus outturn for 2015/16
Performance against performance conditions for LTIP vesting
(Performance and Co-investment Plan)
Total pension entitlements (audited information)
Director changes – additional information (audited information)
Directors’ service contracts and appointments
All employee, performance and other contextual information
Directors’ share awards and shareholdings (audited information)
Shareholder dilution
Details of share awards (audited information)
Advisers to the Remuneration Committee
Statement of voting at General Meeting
78
79
79
83
83
84
84
86
87
89
89
90
90
91
92
94
95
98
98
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THE REMUNERATION COMMITTEE
BOARD CHANGES
Sir John Parker became the Chairman on 1 August 2015
and his fee in the role was set at the same level as that of his
predecessor. His fee for 2016/17 will be £266,350.
On 1 January 2016 Chris Loughlin became the Group Chief
Executive Officer. As this was a new position for the Group,
his salary was set after receiving advice from the Committee’s
remuneration consultant and reflected the fact that he was an
experienced Director with the Pennon Group, having been
promoted from being the Chief Executive of South West Water.
Accordingly his pre-existing awards and contractual commitments
will continue in accordance with their established terms. This is in
accordance with the approved remuneration policy.
LOOKING FORWARD
We will continue to review performance measures annually to
ensure they are aligned with our strategy. For the financial year
2016/17 they have been adjusted as set out on page 84 to reflect
the drive for synergies across the businesses and the changing
structure of the businesses as the ERFs become operational and
as South West Water prepares for industry change.
We will also review our overall remuneration policy with our
external independent remuneration consultant in readiness for
submission for shareholder approval at our AGM in 2017 at the
end of the approval period of our current policy.
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 D Angle
Remuneration Committee Chairman
Dear Shareholder
INTRODUCTION
Our current remuneration policy was approved by shareholders
at our 2014 AGM and last year we set out a summary of the
policy for information. We are providing a summary again this
year on pages 79 to 83 as we are once again not proposing any
changes to the policy at this year’s AGM.
On pages 84 to 98 we set out our annual report on remuneration
which contains the remuneration, of the Directors for the
year 2015/16 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 87 to
89). It also provides details of how our policy will be applied for
2016/17. 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 98% of shareholders who voted approved the annual report
on remuneration. The Committee appreciates the continuing
support of its shareholders.
REMUNERATION DECISIONS
For 2016/17 the salary of the Group Chief Executive Officer
was not increased due to Chris Loughlin being appointed to the
position towards the end of the 2015/16 year. The salary for the
Chief Executive, Viridor, was increased by 1.5%, reflecting market
rates and performance in the year. Susan Davy was promoted
to the position of Chief Financial Officer on 1 February 2015.
The Committee initially set her salary at £325,000, a level below
market rates, with the intention of providing flexibility to make
higher than usual increases to reflect performance and experience
in the role. The Committee’s assessment is that she is now fully
effective in the role, and performing at a level which exceeds the
expectations set out on her appointment. The Committee’s view
was therefore that it was appropriate to make an adjustment to
her salary for 2015/16, and her salary was increased to £390,000
from 1 April 2016, the first salary increase since her appointment.
Following this adjustment, which is believed to be in line with
market rates and commensurate with her predecessor’s salary, it
is not anticipated that there will be any further increases of this
nature for Susan Davy and future increases are not expected to
be materially different from general employee increases.
The bonus outturns for the Executive Directors for 2015/16
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 87 and 88.
As regards the Company’s long-term incentive plan, the overall
estimated outturn for awards vesting at the end of the three year
period ended 31 March 2016 is 34.5% of the maximum 100%.
This reflects that the Company’s total shareholder return is
estimated to be 0.52% above the comparator index performance
and is expected to have a percentile rank of 52% within the FTSE
250 group.
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DIRECTORS’ REMUNERATION REPORT CONTINUEDPENNON GROUP PLC ANNUAL REPORT 2016GOVERNANCE AND REMUNERATION DIRECTORS’ REMUNERATION POLICY
INTRODUCTION
The current Directors’ remuneration policy was approved by shareholders at the Company’s AGM on
31 July 2014.
The Committee’s intention is to seek approval for the remuneration policy at the end of the normal three year
cycle, in line with the remuneration reporting requirements. We are therefore not seeking approval for our
remuneration policy at the 2016 AGM. The Committee will undertake a review of the policy during 2016/17
which will then be submitted for shareholder approval at the 2017 AGM.
The remuneration policy tables for Executive and Non-executive Directors are set out below for shareholder
information. They have been reproduced as approved at the 2014 AGM with the exception of updating to
reflect Director changes; additional wording on malus, clawback and the holding period introduced in 2015 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.
FUTURE POLICY TABLE – EXECUTIVE DIRECTORS
The table below sets out the elements of the total remuneration package for the Executive Directors which are
comprised in this Directors’ remuneration policy.
How the component supports
the strategic objectives of
the Company
BASE SALARY
Set at a competitive level to attract
appropriate candidates to meet
Company’s strategic objectives
and to aid retention.
How the component operates
(including provisions for
recovery or withholding of
any payment)
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.
Maximum potential value of the
component
Description of framework
used to assess performance
None, although individual
and Company performance
are factors considered when
reviewing salaries.
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
• 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.
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.
None.
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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FUTURE POLICY TABLE – EXECUTIVE DIRECTORS CONTINUED
How the component supports
the strategic objectives of
the Company
ANNUAL BONUS
Linked to achievement of key
performance objectives aligned to
the strategy of the Company.
Maximum potential value of the
component
Description of framework
used to assess performance
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 the Group Chief Executive
Officer, except with regard
to his own performance, 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.
How the component operates
(including provisions for
recovery or withholding of
any payment)
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 from the
2014/15 financial year 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 REPORT CONTINUEDPENNON GROUP PLC ANNUAL REPORT 2016GOVERNANCE AND REMUNERATION FUTURE POLICY TABLE – EXECUTIVE DIRECTORS CONTINUED
How the component supports
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.
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 (threshold)
performance, as described on
page 89 in respect of the current
forecast outturn for 2015/16.
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 a
performance condition for future
awards if it was 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.
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 onwards
For grants made from 2015
onwards malus and clawback
provisions 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.
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FUTURE POLICY TABLE – EXECUTIVE DIRECTORS CONTINUED
How the component supports
the strategic objectives of
the Company
PENSION
Provides funding for retirement
and aids retention of key skills to
assist in meeting the Company’s
strategic objectives.
How the component operates
(including provisions for
recovery or withholding of
any payment)
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.
Maximum potential value of the
component
Description of framework
used to assess performance
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.
82
DIRECTORS’ REMUNERATION REPORT CONTINUEDPENNON GROUP PLC ANNUAL REPORT 2016GOVERNANCE AND REMUNERATION 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 component supports the strategic
objectives of the Company
FEES
How the component operates
Maximum potential value of the component
Set at a market level to attract Non-executive
Directors who have appropriate experience
and skills to assist in determining the
Group’s strategy.
Fees are set by the Board with the Chairman’s
fee being set by the Committee. The relevant
Directors are not present at the meetings
when their fees are being determined.
Total fees paid to the Chairman and Non-
executive Directors will remain within the limits
stated in the Articles of Association.
BENEFITS
Benefits for the Chairman are provided which
are consistent with the market and level
of seniority.
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, considers the level of fees
payable to Non-executive Directors in other
companies of similar scale and complexity.
None.
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 Chairman 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, is 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 six month notice period from either side.
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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 2016/17. 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 1 July 2016.
OPERATION OF THE REMUNERATION POLICY FOR 2016/17
A summary of the specific remuneration arrangements for Executive Directors in 2016/17 is described below:
Base salary
2016/17 salaries are:
• Chris Loughlin: £510,000
• Ian McAulay: £406,000
• Susan Davy: £390,000
Susan Davy was promoted to the position of Chief Financial Officer on 1 February 2015. The Committee initially
set her salary at £325,000, a level below market rates, with the intention of providing flexibility to make higher
than usual increases to reflect performance and experience in the role. This approach of setting a lower salary
with the potential for higher increases following appointment is in line with the Committee’s normal policy. The
Committee’s assessment during the review was that she is now fully effective in the role, and is performing at a
level which exceeds the expectations set out on her appointment. The Committee was therefore of the view that
it was appropriate to make an adjustment to her salary for 2015/16, and her salary was increased to £390,000
from 1 April 2016, the first salary increase since her appointment. Following this adjustment, which is believed
to be in line with market rates and commensurate with her predecessor’s salary, it is not anticipated that there
will be any further increases of this nature for Susan Davy. Accordingly, future increases are not expected to be
materially different from general employee increases.
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 defined contribution pension schemes for the Directors.
Annual bonus
Chris Loughlin, appointed on 1 January 2016 and having been promoted from within the Group, already received
a pension benefit equivalent to 30% 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 to the overall performance measurement framework for the annual
bonus for 2016/17 although there is some adjustment to the component make-up of the financial performance
measures and the role-specific measures affecting the Group Chief Executive Officer and the Chief Financial
Officer to reflect goals for the year, as set out below:
• 30% EPS (before deferred tax and non-underlying items) performance
• 30% personal strategic objectives
• 40% measures which are specific to the role including, in South West Water, net debt, operating profit,
RoRE (Return on Regulated Equity), Totex (total expenditure), performance and service improvements
and, in Viridor, operating profit, net debt and Adjusted EBITDA (earnings before interest, tax, depreciation,
amortisation and non-underlying items plus joint ventures EBITDA and IFRIC interest receivable).
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 including consideration of environmental, social and governance
factors and safety performance, as well as financial performance.
For awards from 2015/16 both malus and clawback apply and a holding period applies in respect of any shares
which vest at the end of the three year performance period, as described in the summary of the remuneration
policy report.
Shareholding guideline
No change. 100% of salary to be built up in the first five years of joining.
84
DIRECTORS’ REMUNERATION REPORT CONTINUEDPENNON GROUP PLC ANNUAL REPORT 2016GOVERNANCE AND REMUNERATION FORWARD-LOOKING PERFORMANCE TARGETS
Details of the annual bonus framework that will apply for each Executive Director for 2016/17 are set out in the table below:
Group Chief Executive Officer, Chris Loughlin
30%
20%
20%
30%
EPS*
Average of South West Water directors’ performance including:
(i) Operating profit
(ii) RoRE+ performance
(iii) Net debt
(iv) Totex# outperformance
Average of Viridor directors’ performance including:
(i) Operating profit
(ii) Net debt
Personal strategic and delivery objectives.
Chief Executive, Viridor, Ian McAulay
30%
40%
30%
EPS*
Average of Viridor directors’ performance including:
(i) Operating profit
(ii) Net debt
Personal strategic and delivery objectives.
Chief Financial Officer, Susan Davy
30%
20%
20%
30%
EPS*
Average of South West Water directors’ performance including:
(i) Operating profit
(ii) RoRE+ performance
(iii) Net debt
(iv) Totex# outperformance
Average of Viridor directors’ performance including:
(i) Operating profit
(ii) Net debt
Personal strategic and delivery objectives.
(v) Service improvements performance
(iii) Adjusted EBITDA
(iii) Adjusted EBITDA
(v) Service improvements performance
(iii) Adjusted EBITDA
* EPS is before deferred tax and non-underlying items + RoRE is Return on Regulated Equity # Totex is total capital and revenue expenditure
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
Threshold
(30% of maximum vests)
Maximum
(100% of maximum vests)
15% above the index
FTSE 250 (excluding investment trusts)
(50% of award)
Above 50th percentile
At or above 75th percentile
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 2016/17 are set out below. They include increases per Non-executive Director ranging from 0.6% to
7.3% approved by the Board, effective from 1 April 2016, to reflect principally changed responsibilities and additional commitments
arising from the revised Board governance structure. The Chairman’s increase approved by the Committee was 1.5%.
Role
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
£
266,350
46,500
5,000
14,000
10,000
10,000
5,000
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SINGLE TOTAL FIGURE OF REMUNERATION TABLES (AUDITED INFORMATION)
Base salary/fees
(£000)
Benefits
(including
Sharesave)
(£000)
Annual bonus
(cash and
deferred shares)
(£000)
Performance and
Co-investment
Plan
(£000)
Pension
(£000)
Total
remuneration
(£000)
2
0
1
5
/
1
6
2
0
1
4
/
1
5
2
0
1
5
/
1
6
2
0
1
4
/
1
5
2
0
1
5
/
1
6
2
0
1
4
/
1
5
2
0
1
5
/
1
6
(
i
)
2
0
1
4
/
1
5
2
0
1
5
/
1
6
2
0
1
4
/
1
5
2
0
1
5
/
1
6
2
0
1
4
/
1
5
325
54
18
2
238
51
66
–
91(ii)
33(ii)
738
140
427
387
29
27
356
303
179
–
128
116
1,119
833
Executive Directors
Susan Davy,
Chief Financial
Officer (appointed
1 February 2015)
Chris Loughlin,
Group Chief
Executive
Officer (appointed
1 January 2016 –
previously Executive
Director and Chief
Executive, South
West Water)(iii)
Ian McAulay, Chief
Executive, Viridor
400
355
21
34(iv)
238
202
Non-executive Directors
Ken Harvey,
Chairman (retired
31 July 2015)
Sir John Parker,
Chairman
(appointed 1 August
2015 – previously
Deputy Chairman
from 1 April 2015)
Gerard Connell
(retired 31
July 2015)
Neil Cooper
Martin Angle
Gill Rider
87
262
219
–
23
63
65
62
65
37
60
60
8
–
–
–
–
–
24
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
80
71
739
662
–
–
–
–
–
–
–
–
–
–
–
–
95
286
219
–
23
63
65
62
65
37
60
60
(i) Based on an estimated 34.5% vesting as referred to on page 89 and based on the Company’s share price of 796.5p as at 19 May 2016, together with an estimate of the accrued
dividends payable on the vesting shares
(ii) Includes legacy pension benefit accrued in the year
(iii) Remuneration is aggregate total in the year in respect of both positions
(iv) Benefits included a reimbursement of relocation costs (including income tax) of £15,000.
86
DIRECTORS’ REMUNERATION REPORT CONTINUEDPENNON GROUP PLC ANNUAL REPORT 2016GOVERNANCE AND REMUNERATION
ANNUAL BONUS OUTTURN FOR 2015/16
The performance targets set and the performance achieved in respect of the annual bonus for 2015/16 for each Executive Director is
set out below. In line with the Committee’s policy, 50% of any bonus is payable in shares.
SUSAN DAVY
Measure
EPS
SWW operating profit
SWW Return on
Regulated Equity
Viridor operating profit
Net debt
30%
5%
5%
10%
20%
Weighting
Threshold
31.6p
£198.8m
8.5%
£40.3m
Target
35.1p
£209.3m
9%
Maximum
Actual
outturn
Bonus
outturn
40.4p
39.5p
24.38%
£219.8m
£215.0m
10%
11.7%
£42.4m
£44.5m
£41.0m
£1,788m
No payout for below target. Maximum payout for net debt
of 2.5% below target.*
Relating to key finance business objectives for the Group
including progressing the Group’s funding strategy, driving
the Group strategic review, developing the Group financial
framework and delivering on objectives relating to
subsidiary financial targets.*
Personal strategic objectives
30%
–
28.00%
Total outturn
* Some objectives and the detailed targets continue to be commercially confidential
IAN McAULAY
Measure
EPS
Average Viridor
directors’ performance
Weighting
Threshold
30%
40%
31.6p
Target
35.1p
Maximum
Actual
outturn
40.4p
39.5p
3.85%
5.00%
2.16%
9.84%
73.23%
Bonus
outturn
24.38%
10.13%
The average of the bonus earned by the other executive
directors of Viridor including targets that related to:
• operating profit – the operating profit targets
were £38.2m(threshold), £42.4m(target) and
£46.6m(maximum); actual outturn was £40.9m
• net debt*
• Adjusted EBITDA.*
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.*
Implementing Viridor strategy and projects, including
profitable sales of landfill sites and objectives in relation to
the implementation of the ERF programme.*
Personal strategic objectives
30%
Total outturn
* Some objectives and the detailed targets continue to be commercially confidential
–
25.00%
59.51%
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ANNUAL BONUS OUTTURN FOR 2015/16 CONTINUED
CHRIS LOUGHLIN
Chris Loughlin became Group Chief Executive Officer from 1 January 2016 and therefore different objectives applied to the last three
months of the year as set out below:
Measure
Weighting
Threshold
Target
Maximum
Actual
outturn
Bonus
outturn
Targets applicable for the period 1 April 2015 to 31 December 2015
EPS
Average South
West Water
directors’ performance
22.5%
30%
Personal
strategic objectives
22.5%
Total outturn
31.6p
35.1p
40.4p
39.5p
18.28%
The average of the bonus earned by the other executive directors of South West
Water in respect of targets which related to:
26.00%
• operating profit – the operating profit targets were £198.8m (threshold),
£209.3m (target) and £219.8m (maximum); actual outturn was £215m
• net debt*
• the position the company achieves in the ‘Service Incentive Mechanism’ of water and
wastewater companies established by Ofwat*
• the achievement of a range of service standards set for the company by Ofwat.*
Implementing South West Water’s new strategies and projects
including the achievement of the transition milestones and synergies
related to Bournemouth Water acquisition and the delivery of opex/
capex efficiency targets.*
Targets applicable for the period 1 January 2016 to 31 March 2016
EPS
Average South
West Water
directors’ performance
7.5%
5%
31.6p
35.1p
40.4p
39.5p
The average of the bonus earned by the other executive directors of South West
Water in respect of targets which related to:
• operating profit – the operating profit targets were £198.8m (threshold),
£209.3m (target) and £219.8m (maximum); actual outturn was £215m
• net debt*
• the position the company achieves in the ‘Service Incentive Mechanism’ of water and
wastewater companies established by Ofwat*
• the achievement of a range of service standards set for the company by Ofwat.*
Average Viridor
directors’ performance
5%
The average of the bonus earned by the other executive directors of Viridor
including targets that related to:
1.27%
• operating profit – the operating profit targets were £38.2m (threshold), £42,4m
(target) and £46.6m (maximum); actual outturn was £40.9m
• net debt*
• Adjusted EBITDA.*
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.*
7.5%
Development of new role as Group Chief Executive Officer, completing the
integration of Bournemouth Water and pursuing synergies across the Group.*
7.00%
18.70%
83.98%
Personal
strategic objectives
Total outturn
Overall total outturn
* Some objectives and the detailed targets continue to be commercially confidential
88
21.00%
65.28%
6.10%
4.33%
DIRECTORS’ REMUNERATION REPORT CONTINUEDPENNON GROUP PLC ANNUAL REPORT 2016GOVERNANCE AND REMUNERATION
PERFORMANCE AND CO-INVESTMENT PLAN OUTTURN FOR 2015/16
The PCP awards made on 2 July 2013, which are due to vest on 2 July 2016, are the awards included in the single figure table, and
currently it is estimated that the outturn will result in a 34.5% vesting as set out in the table below.
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 2013 to 1 April 2016) for the PCP awards
was undertaken by Deloitte LLP for the Committee.
Threshold (30% of
maximum vests)
Maximum (100% of
maximum vests)
Achievement in the
period to 1 April 2016*
Vesting
outturn*
Comparator index (50% of award)
Equal to index
15% above the index
1.05% above 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
52.0%
18.3%
16.2%
34.5%
* 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 2016 to 30 June 2016) the achievement and the outturn is an estimate at the date of calculation (20 May 2016)
Vesting of an award is also subject to the ‘underpin’ described on page 81 which the Committee has determined to the date of this
report would be satisfied.
TOTAL PENSION ENTITLEMENTS (AUDITED INFORMATION)
Defined benefit pension accrued
at 31 March 2016(i)
£000 p.a.
Normal retirement age
(for pension purposes)
Description of additional benefits
available to the Director on
early retirement
Susan Davy
16
65
None
(i) The accrued pension for Susan Davy is based on service to the year end and final pensionable salary at that date.
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.
No additional benefits will become receivable by a Director in the event that the Director retires early. Chris Loughlin’s normal
retirement age is 67, which will be reached on 20 August 2019. 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.
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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*
Chris Loughlin*
Ian McAulay*
1 February 2015
1 January 2016
2 August 2013
At age 67 (17 May 2036)
At age 67 (20 August 2019)
At age 65 (25 April 2030)
* Each of the Executive Directors’ service contracts is subject to 12 months’ notice on either side
Non-executive Directors
Date of letter of appointment
Expiry date of appointment
Sir John Parker
Ken Harvey
Martin Angle
Gerard Connell
Neil Cooper
Gill Rider
19 March 2015
Ongoing – subject to six months notice
1 April 2005
31 July 2015 (retired on this date)
28 November 2008
30 November 2017
30 September 2003
31 July 2015 (retired on this date)
17 July 2014
22 June 2012
30 August 2017
30 August 2018
The policy for Executive Directors’ service contracts is to provide for 12 months’ notice from either side.
Non-executive Directors’ letters of appointment contain three months’ notice from either side and the Chairman’s letter of
appointment contains a six month notice period from either side.
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.
DIRECTOR CHANGES – ADDITIONAL INFORMATION
RETIREMENT OF MR K G HARVEY AND MR G CONNELL
Both Mr Harvey (Chairman) and Mr Connell retired from office
on 31 July 2015. Neither Director received any compensation for
loss of office.
Following his retirement Mr Harvey continued in office as
the non-executive chairman of the board of Viridor Limited.
This appointment ceased on 31 March 2016 following the
implementation of the new Group Board structure. Mr Harvey
received fees amounting to £56,667 and benefits of £2,830
in respect of the Viridor chairman role for the remaining eight
months of the year.
Mr Connell, following his retirement, continued in office as a
non-executive director on the board of Bournemouth Water
until that board was disbanded on 31 March 2016 consequent
upon the merger of Bournemouth Water and South West Water.
Mr Connell received fees amounting to £13,333 in respect of
this role.
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 then
Chairman’s fee and was increased to the same level as that of his
predecessor 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.
90
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HISTORICAL TSR
The graph below shows the value, over the seven year period ended on 31 March 2016, 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
2013
2014
2015
2016
Year
EQUIVALENT CHIEF EXECUTIVE OFFICER REMUNERATION
As the Company did not have a Group Chief Executive Officer until 31 January 2016, the Committee has provided historic single
figure information in the form of the average remuneration of the Executive Directors for years up to and including 2014/15. Their
remuneration was considered to be the most appropriate to use as they were the most senior executives in the Company.
For 2015/16 the Committee has provided the average remuneration for the Executive Directors (excluding the Group Chief Executive
Officer) and the Group Chief Executive Officer’s remuneration for the year, as explained in footnotes (i) and (ii) below.
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
2015/16(i)
2015/16(ii)
916
1,091
1,221
894
962
762
738
1,119
91.79
67.30
94.69
50.00
72.87
79.30
47.00
50.00
67.56
30.20
68.20
0.00
66.37
34.50
83.98
34.50
(i) The average of the Executive Directors, excluding the Group Chief Executive Officer
(ii) Group Chief Executive Officer for the year, including remuneration received between 1 April 2015 and 31 December 2015 when in position as Chief Executive, South West Water
(iii) The long-term incentive plan (LTIP) vesting percentage is an estimate as at 19 May 2016 and excludes accrued dividends which are added on vesting.
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The table below shows the percentage change between 2014/15 and 2015/16 in base salary, benefits and annual bonus for the average
of the Executive Directors (including the Group Chief Executive Officer from his appointment on 1 January 2016 and in his previous
role as Chief Executive, South West Water) and all employees. To enable comparison, the remuneration of the previous Chief Financial
Officer (previously titled Group Director of Finance) for 2014/15 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 £158.0 million (2014/15 £143.9 million), analysed into the three components in the table and the average number of
employees of 4,987 (2014/15 4,558) both as detailed in note 13 to the Group financial statements. To ensure a consistent calculation of
year-on-year movements, Bournemouth Water’s costs and employee numbers have been excluded.
Average Executive Director remuneration
All employees
+2.95%
+0.5%
-20.01%(i)
-0.9%
+8.63%
+9.6%
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 -2.89%
RELATIVE IMPORTANCE OF SPEND ON PAY
Overall expenditure on pay(i)
Distributions to ordinary shareholders
Distributions to perpetual capital security holders
Purchase of property, plant and equipment (cash flow)
2015/16
(£ million)
2014/15
(£ million)
Percentage change
180.0
129.5
20.3
283.7
165.4
117.0
20.3
298.1
+8.8%
+10.7%
–
-7.3%
(i) Excludes non-underlying items. 2015/16 includes Bournemouth Water expenditure on pay.
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 2015/16
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
Percentage vesting
at threshold
performance
Performance period
end date
Ian McAulay
Chris Loughlin
Susan Davy
Ian McAulay
Chris Loughlin
Susan Davy
PCP
100% of salary
Deferred bonus
50% of bonus awarded
30% of maximum
31 March 2018
n/a
26 July 2018
400
400
325
101
151
78(i)
Sharesave (SAYE) awards were also made, as detailed on page 97.
(i) A proportion of the award made to Susan Davy related to her performance in her previous position with the Group as finance and regulatory director, South West Water.
PCP awards were calculated using the share price at the date of grant (1 July 2015) which was £8.105 per share. Deferred bonus
awards were calculated using the share price at the date of grant (27 July 2015) which was £7.91.
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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 2016 (or date of
cessation, if earlier) and 31 March 2015 together with their shareholding guideline obligation and interest are shown in the table below:
Share
interests
(including
connected
parties) at
31 March
2016
Share
interests
(including
connected
parties) at
31 March
2015
Shareholding
guideline (100%
to be accrued
over five years)
Shareholding
guideline
met?
Performance
shares
(subject to
performance
conditions)
Susan Davy(i)
44,197
38,557
Chris Loughlin
247,745
225,045
Ian McAulay
18,748
–
40%
100%
40%
Yes
Yes
Yes(ii)
79,338
155,627
93,810
Unvested awards
Deferred
bonus
shares
24,907
55,654
SAYE
2,635
4,984
ESOS
4,329
4,329
Buyout
award
–
–
–
20,554
3,651
16,091
(i) Susan Davy’s unvested awards include those she received in her previous position as finance and regulatory director, South West Water, which she retains an interest in following
her appointment as Chief Financial Officer on 1 February 2015
(ii) Due to salary increase timing and share price movement there is currently a small shortfall due to be made up in connection with the 2016/17 Performance and Co-investment Plan
award to Ian McAulay.
Since 31 March 2016 3,618 additional ordinary shares in the Company have been acquired by Chris Loughlin as a result of participation
in the Company’s scrip dividend alternative and the Company’s Share Incentive Plan; and 45 additional ordinary shares in the Company
have been acquired by Susan Davy as a result of participation in the Company’s Share Incentive Plan. 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 2016 and 20 May 2016.
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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
stepchildren, in the ordinary shares (40.7p) of the Company are shown in the table below:
Director
Sir John Parker
Ken Harvey (retired 31 July 2015)
Martin Angle
Gerard Connell (retired 31 July 2015)
Neil Cooper
Gill Rider
Shares held at 31 March 2016
Shares held at 31 March 2015
10,000
26,209
–
4,495
–
2,500
–
26,209
–
4,444
–
2,500
There have been no changes in the beneficial interests or the non-beneficial interests of the above Directors in the ordinary shares of
the Company between 1 April 2016 and 20 May 2016.
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 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 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 17 May 2016 is as set out below:
Discretionary schemes
All schemes
Awarded
1.48%
4.18%
Headroom
3.52%
5.82%
Total
5%
10%
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DIRECTORS’ REMUNERATION REPORT CONTINUEDPENNON GROUP PLC ANNUAL REPORT 2016GOVERNANCE AND REMUNERATION 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:
Conditional
awards held at
1 April 2015
Conditional
awards made
in year
Market price
upon award in
year
Value of shares
upon vesting
(before tax)
£000
Conditional
awards held at
31 March 2016
Vesting in
year(i)
Date of end
of period for
qualifying
conditions to
be fulfilled
17,696
21,347
17,893
–
–
–
–
40,098
48,145
57,810
48,465
–
–
–
768.50p
653.00p
798.50p
810.50p
768.50p
653.00p
798.50p
–
49,352
810.50p
44,458
–
798.50p
–
49,352
810.50p
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
21,347
17,893
40,098
–
57,810
48,465
49,352
44,458
49,352
2/7/15
1/7/16
13/7/17
30/6/18
2/7/15
1/7/16
13/7/17
30/6/18
13/7/17
30/6/18
Director and
date of award
Susan Davy(ii)
3/7/12
2/7/13
14/7/14
1/7/15
Chris Loughlin
3/7/12
2/7/13
14/7/14
1/7/15
Ian McAulay
14/7/14
1/7/15
(i) None of the July 2012 award shares vested on 2 July 2015 due to the performance criteria not being met. Therefore all of the award lapsed
(ii) A portion of Susan Davy’s share awards are those she received in her previous position as finance and regulatory director, South West Water, up to 31 January 2015, in which she
retains an interest in her role as Chief Financial Officer
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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:
Conditional
awards held at
1 April 2015
Conditional
awards made
in year
Market
price of each
share upon
award in year
Value of shares
upon vesting
(before tax)
£000
Vesting
in year
Conditional
awards held at
31 March 2016
Date of end
of period for
qualifying
conditions to
be fulfilled
7,263
7,555
7,543
–
20,650
16,978
19,552
–
–
–
9,809
–
–
–
–
19,124
16,091
7,775
–
–
–
12,779
754.50p
693.00p
821.50p
791.00p
754.50p
693.00p
821.50p
791.00p
696.00p
821.50p
791.00p
7,263(ii)
–
–
–
57
–
–
–
20,650(iii)
163
–
–
–
–
–
–
–
–
–
–
–
–
–
7,555
7,543
9,809
–
16,978
19,552
19,124
16,091
7,775
12,779
26/7/15
4/8/16
26/8/17
26/7/18
26/7/15
4/8/16
26/8/17
26/7/18
29/9/16
26/8/17
26/7/18
Director and
date of award
Susan Davy(i)
27/7/12
5/8/13(iii)
27/8/14
27/7/15
Chris Loughlin
27/7/12
5/8/13(iii)
27/8/14
27/7/15
Ian McAulay
30/9/13(iv)
27/8/14(iii)
27/7/15
(i) A portion of Susan Davy’s share awards are those she received in her previous position as finance and regulatory director, South West Water, up to 31 January 2015, in which she
retains an interest in her position as Chief Financial Officer
(ii) These shares vested on 18 August 2015 at 791.10p per share
(iii) In connection with 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 97. These awards were made in conjunction with the operation of the bonus plan, details of which are set out on page 80
(iv) This was a buyout award.
During the year the Directors received dividends on the above shares in accordance with the conditions of the bonus plan as follows:
Susan Davy £9,251; Chris Loughlin £22,356*.
* 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 2016 given on page 93.
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DIRECTORS’ REMUNERATION REPORT CONTINUEDPENNON GROUP PLC ANNUAL REPORT 2016GOVERNANCE AND REMUNERATION
(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 80.
Options
held at 1
April 2015
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
2016
Options
held at 31
March 2016
Maturity
date
4,329
4,329
3,651
–
–
–
–
–
–
693.00p
693.00p
821.50p
–
–
–
811.00p
4,329
5/8/16
811.00p
4,329
5/8/16
811.00p
3,651
27/8/17
Date of award
Susan Davy(i)
5/8/13
Chris Loughlin
5/8/13
Ian McAulay
27/8/14
(i) Susan Davy’s share options are those she received in her previous position as finance and regulatory director, South West Water, up to 31 January 2015, in which she retains an
interest in her position as Chief Financial Officer.
(d) Sharesave scheme
Details of options to subscribe for ordinary shares (40.7p each) of the Company under the all-employee Sharesave scheme were:
Options
held at
1 April 2015
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
2016
Options
held at 31
March 2016
Exercise period/
maturity date
1,530
–
1,530
588.00p
748.00p
–
–
1/9/15 – 28/2/16
–
2,635
2,788
–
–
2,196
–
–
–
683.00p
538.00p
683.00p
–
–
–
811.00p
2,635
1/9/18 – 28/2/19
811.00p
811.00p
2,788
1/9/18 – 28/2/19
2,196
1/9/20 – 28/2/21
Date of award
Susan Davy(i)
29/6/12
24/6/15
Chris Loughlin
3/7/13
24/6/15
(i) Susan Davy’s share options are those she received in her previous position as finance and regulatory director, South West Water, up to 31 January 2015, in which she retains an
interest in her position as Chief Financial Officer.
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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 (until 31 July 2015), from Ken Woodier, Group General Counsel &
Company Secretary (until 24 March 2016), from Chris Loughlin, Group Chief Executive
Officer following his appointment on 1 January 2016, and from the following adviser who
was 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 Group Chief Executive Officer
and the Chief Financial Officer. Subsequent to the year end Deloitte LLP provided
advice to the Committee on the form of the Directors’ remuneration. Deloitte LLP’s
fees in respect of advice which materially assisted the Committee during 2015/16
were £28,740 (arrived at from an hourly rate basis of charging). Deloitte LLP also
provided tax and share scheme advice to the Group, consulting, corporate finance
and assurance advisory services to Viridor and assurance advisory services to South
West Water. 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 on the basis that
it is an independent professional firm and complies with the code of conduct of the
Remuneration Consultants Group referred to above.
STATEMENT OF VOTING AT GENERAL MEETING
The table below sets out the voting by the Company’s shareholders on the resolution
to approve the Directors’ remuneration report at the Annual General Meeting held on
31 July 2015, including votes for, against and withheld.
Remuneration report
For % (including votes at the Chairman’s discretion)
Against %
Withheld number
98.26
1.74
3,072
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 98% of shareholders
who voted approved the 2014/15 Directors’ remuneration report. The Committee
appreciates the continuing support of its shareholders.
On behalf of the Board
Martin D Angle
Chairman of the Remuneration Committee
24 May 2016
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DIRECTORS’ REMUNERATION REPORT CONTINUEDPENNON GROUP PLC ANNUAL REPORT 2016GOVERNANCE AND REMUNERATION 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 58 to 76 and 99 to 101 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:
• risk management systems (page 51 of the strategic report)
• likely future developments of the Company (page 17 of the
strategic report)
• important post-balance sheet events (note 45 of the notes to
the financial statements)
• all matters relating to sustainability, which include details of the
Group’s carbon emissions (page 45 of the strategic report)
and information relating to employee involvement (page 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 (note 3 of the notes to the
financial statements)
• financial instruments (notes 2(o) and 18 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) are named on pages 60 and 61.
In addition, Ken Harvey, the previous Chairman, and Gerard
Connell, the previous Senior Independent Director, served during
the year until their retirement from the Board on 31 July 2015.
FINANCIAL RESULTS AND DIVIDEND
The Directors recommend a final dividend of 23.12p per ordinary
share to be paid on 2 September 2016 to shareholders on the
register on 8 July 2016, making a total dividend for the year of
33.58p, the cost of which will be £138.5 million, resulting in a
transfer to reserves of £13.6 million. The strategic report on
pages 18 to 25 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 48.
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 74, 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 48 to 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
2016 around 44% of the Group’s employees were participating in
these plans.
HUMAN RIGHTS AND ANTI-SLAVERY
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 Organization’s core
conventions for the protection and safety of workforces wherever
they may be throughout the Group.
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.
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OTHER STATUTORY DISCLOSURES CONTINUED
In addition, following appropriate due diligence we have put in
place policies and procedures to assess, monitor and reduce the
risk of modern slavery and human trafficking occurring in our
businesses and supply chains. Risk assessments of any high risk
supply partners have been completed by Viridor, South West
Water and Bournemouth Water to ensure compliance with the
Modern Slavery Act across the Group and we are in the process
of drafting our anti-slavery and human trafficking web-based
statement for the financial year 2016/17. This will be available at
www.pennon-group.co.uk in due course.
RESEARCH AND DEVELOPMENT
Research and development within the Group involving water and
waste treatment processes amounted to £0.1 million during the
year (2014/15 £0.1 million).
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 (2014/15 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 2015), which was valid as at 31 March 2016
and remains currently valid. No purchases were made during the
year. As at 1 April 2015, 389,515 shares were held in treasury,
with a nominal value of £158,533 and representing 0.1% of issued
share capital. 379,159 treasury shares representing 0.09% of
issued share capital as at 1 April 2015 were reissued during the
year under the Company’s employee share schemes for proceeds
of £2.5 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 and Reports) Regulations 2008 and Rule 7.2.6.R of the
UK Listing Authority’s Disclosure and Transparency Rules (DTR).
As at 31 March 2016:
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 page 160. 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 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
174. 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) £55,765,009 (such amount to
be reduced by any shares allotted or rights granted under (ii)
below in excess of £55,765,009); and (ii) £111,530,018 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 2015 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.
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.
100
PENNON GROUP PLC ANNUAL REPORT 2016GOVERNANCE AND REMUNERATION 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.
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 58 to 76 and 99 to
101 was approved by the Board on 24 May 2016.
By Order of the Board
Helen Barrett-Hague
Group Company Secretary
24 May 2016
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 60 and 61, confirms that, to the best of his or
her knowledge:
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 55) and the Directors’ report
(pages 99 to 101) 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.
101
www.pennonannualreport.co.uk/2016OVERVIEWGROUP PERFORMANCEGOVERNANCEFINANCIAL STATEMENTS FINANCIAL
STATEMENTS
AND
SHAREHOLDER
INFORMATION
FINANCIAL STATEMENTS AND SHAREHOLDER INFORMATION
104
INDEPENDENT AUDITOR’S REPORT
FINANCIAL STATEMENTS
FIVE YEAR FINANCIAL SUMMARY
SHAREHOLDER INFORMATION
114
172
173
102
PENNON GROUP PLC ANNUAL REPORT 2016FINANCIAL STATEMENTS AND SHAREHOLDER INFORMATION STRONG CASH INFLOW
FROM OPERATIONS
CONTINUING
INVESTMENT
FOR GROWTH
SOLID FINANCIAL POSITION
UNDERPINNING CAPITAL INVESTMENT
103
www.pennonannualreport.co.uk/2016OVERVIEWGROUP PERFORMANCEGOVERNANCEFINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF PENNON GROUP PLC
OPINION ON FINANCIAL STATEMENTS
In our opinion:
• Pennon Group Plc’s Group financial statements and Parent Company financial statements
(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 2016 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
Pennon Group Plc’s financial statements comprise:
Group
Parent Company
Consolidated income statement for the year then ended
Consolidated statement of comprehensive income for the year then ended
Consolidated balance sheet as at 31 March 2016
Balance sheet as at 31 March 2016
Consolidated statement of changes in equity for the year then ended
Statement of changes in equity for the year then ended
Consolidated cash flow statement for the year then ended
Cash flow statement for the year then ended
Related notes 1 to 46 to the financial statements
Related notes 1 to 46 to the financial statements
• 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.
OVERVIEW OF OUR AUDIT APPROACH
Risks of material
misstatement
• Completeness of provisions for uncertain tax positions and tax disclosures (Group, including SWW & Viridor)
• Valuation of goodwill (Group)
• Valuation of non-current assets (Viridor)
• Valuation of landfill related provisions (Viridor)
• Revenue recognition across the Group’s operations
• Valuation of the provision for doubtful debts (SWW)
Audit scope
• We performed an audit of the complete financial information of four components.
• The components where we performed full audit procedures accounted for 100% of Profit before taxation before
non-underlying items, 100% of Revenue and 95% of Total assets.
Materiality
• Overall Group materiality of £10m which represents approximately 5% of Profit before taxation before
non-underlying items.
104
PENNON GROUP PLC ANNUAL REPORT 2016FINANCIAL STATEMENTS AND SHAREHOLDER INFORMATION
OUR ASSESSMENT OF RISKS OF MATERIAL MISSTATEMENT
We identified the risks of material misstatement described below as those that had the greatest
effect on the overall audit strategy; the allocation of resources in the audit; and direction of the
efforts of the audit team. The identified risks are consistent with prior year. In addressing these
risks, we have performed the procedures below which were designed in the context of the financial
statements as a whole and, consequently, we do not express any opinion on these individual areas.
What we concluded to the
Audit Committee
We concluded that the tax
amounts and disclosures in the
Annual Report and Accounts
for the year ended 31 March
2016 are appropriate.
We concur with the approach
adopted in respect of uncertain
tax positions, and conclude that
the provision is appropriate,
taking into account our review
of third party advice and views
of our internal tax specialists.
Risk
direction
Our response to the risk
Our procedures include:
• We inspected the latest correspondence
between the Group and HMRC.
• We read legal advice or opinion management
have obtained in the period in relation to
uncertain tax positions, in order to verify
whether the level of provision is based
on up to date legal advice in response to
HMRC’s challenges
• We obtained an updated view from internal
tax specialists as to HMRC’s current position
on open matters
• We assessed the level of provision maintained
for uncertain tax positions, in light of third
party evidence obtained, the views of our tax
specialists and the level of coverage provided
by the provision for the total tax that could
become payable
• We tested whether the tax accounting and
disclosures in note 9 and 27 complied with the
requirements of IAS12 ‘Income Taxes’
• We read the tax disclosures in the Annual
Report and Accounts and evaluated the
adequacy of these.
Risk
COMPLETENESS OF PROVISIONS
FOR UNCERTAIN TAX POSITIONS
AND RELATED TAX DISCLOSURES
(GROUP, INCLUDING SWW
AND VIRIDOR)
The Group’s current tax liability of £37.1
million (2015: £52.2 million) shown in note
27, includes £37.1 million (2015: £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).
Pennon has a number of open periods with
HMRC as a result of on-going enquiries
into the interpretation of tax legislation
regarding transactions undertaken by the
Group. The Group evaluates uncertain tax
items and, where appropriate, establishes
provisions for uncertain tax positions based
on the status of discussions with HMRC.
Significant management judgement is required
in estimating tax expected to be paid for
uncertain tax items.
There is also limited HMRC guidance
available in relation to the tax treatment
associated with IFRIC 12 ‘Service concession
arrangements’ accounting.
Critical accounting judgements and estimates
made by management in applying the Group’s
taxation accounting policy are disclosed in
note 4.
Audit Committee commentary is on page 68.
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What we concluded to the
Audit Committee
We concluded that
management has determined
cash generating units and
allocated goodwill to those
CGUs at an appropriate level,
being the lowest level within
the Group at which goodwill
is monitored for internal
management purposes.
We concluded that the discount
rates and cash flow assumptions
applied by management were
within an appropriate range
and supported management’s
conclusion that no impairment
in goodwill was necessary.
We concur with management’s
assessment that the recently
acquired Bournemouth Water
business has outperformed
its budget for the year and
therefore the newly recognised
goodwill is not impaired.
We concluded that the revised
CGU structure is appropriate
and the timing of the revision
to CGUs is consistent with
the significant operational
developments within the
Viridor business.
We concluded that the
impairment assessment
performed by management and
the impairment adjustments
recognised and disclosed, as
a result of the revised CGU
structure, are appropriate.
Risk
VALUATION OF GOODWILL
(GROUP)
The value of goodwill is £385.0 million
(2015: £339.3 million), as included in note
15. Goodwill has increased during the year
following the acquisition of Bournemouth
Water and an annual impairment test is
required, with key assumptions being future
allowed tariff increases, delivery of operational
efficiencies and the discount rate applied.
The value in use of the Viridor business, to
which goodwill of £339.3 million has arisen,
is based on assumptions over growth rates,
future landfill volumes, power generation
prices and discount rates, which require
judgement.
There is a risk that assumptions and
judgements made by management, in
calculating the value in use of the cash
generating units (CGUs), could be susceptible
to management bias.
Critical accounting judgements and estimates
made by management, when testing goodwill
for impairment, are disclosed in note 4.
Audit Committee commentary is on page 68.
VALUATION OF NON-CURRENT
ASSETS (VIRIDOR)
The net book value of Viridor’s property, plant
and equipment is £1,012 million (2015: £945.3
million), as included in note 17. The Group is
required to review the carrying value of assets
when impairment indicators are identified.
During the year, a detailed exercise has been
performed by management to re-evaluate
the structure of the CGUs within the Viridor
business. The risk of impairment may arise if
management uses inappropriate assumptions
to group assets into CGUs or if impairment
indicators are not appropriately considered at
year end.
This risk has decreased in the current year due
to the alignment of CGUs, to reflect changes
in the waste market and reorientation of
Viridor’s operations towards Energy Recovery
Facilities (ERFs), which has resulted in a higher
level of headroom.
Critical accounting judgements and estimates
made by management, in revising the CGUs
and testing assets for impairment, are disclosed
in note 4.
Audit Committee commentary is on page 68.
Risk
direction
Our response to the risk
Our procedures include:
• We validated management’s determination
that the Viridor waste management business
was a single CGU
• We tested the clerical accuracy of the models
by reperformance of a sample of calculations
• We agreed input data into the goodwill
impairment model and cash flow forecasts
to approved business plans, and for Viridor
we performed sensitivity analysis over this
data, including growth rates, volumes, and
powergen prices
• We benchmarked 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 agreed whether disclosures made are in
accordance with IFRS.
Our procedures include:
• We discussed with management the change
in approach to identifying the CGUs and
obtained a detailed understanding of the
changes in the business operations and
environment underlying this change
• We validated that the change in CGUs has
been correctly applied to the grouping of
assets and assessment of the contractual cash
flows from customers to the revised CGUs
• We tested the accounting entries arising from
the revised CGUs from the calculations to the
amounts recorded in the financial statements
for impairment reversals and charges
• We tested management’s assessment, of
impairment at the year end, to supporting
evidence and considered whether, in our
opinion, there were any other indicators of
impairment at the balance sheet date.
• We benchmarked the discount rates applied,
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 tested the clerical accuracy of the
impairment model by reperformance of the
calculation. We also agreed input data into the
impairment model and agreed cash flow
forecasts to approved business plan
• We agreed whether disclosures made are in
accordance with IFRS.
106
INDEPENDENT AUDITOR’S REPORT CONTINUEDPENNON GROUP PLC ANNUAL REPORT 2016FINANCIAL STATEMENTS AND SHAREHOLDER INFORMATION
What we concluded to the
Audit Committee
We concluded that the
assumptions supporting the
landfill related provisions reflect
management’s best estimates,
informed by latest external and
internal data, and consider that
the provisions are within an
acceptable range.
Risk
direction
Our response to the risk
Our procedures include:
• 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 compared 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 tested the aftercare, restoration and
remediation provision models, and verified
that the models are clerically accurate.
Risk
VALUATION OF LANDFILL RELATED
PROVISIONS (VIRIDOR)
Landfill related provisions of £182.1 million
(2015: £193.0 million) are recorded in note
32 and consist of aftercare, restoration and
remediation provisions.
Calculation of the aftercare provision involves
significant judgement in respect of 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 a key estimate for the remediation
provision.
There is risk that provisions could be misstated
if inappropriate assumptions, such as discount
rates, are applied by management.
Critical accounting judgements and estimates
made by management, when recognising
landfill related provisions, are disclosed in
note 4.
Audit Committee commentary is on page 68.
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What we concluded to the
Audit Committee
South West Water and
Bournemouth Water
We concluded that the basis
of calculation of the measured
income accrual is appropriate.
Management assumptions in
respect of customer demand
are within an acceptable range.
Amounts identified as
advance billing have been
correctly recorded.
Risk
REVENUE RECOGNITION
ACROSS THE GROUP’S
OPERATIONS
The Group’s material revenue streams
relate to the provision of water and
sewerage services by South West
Water, water services by Bournemouth
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. For the Group,
given targets associated to financial
performance and also pressures to meet
market expectations, there is a risk that
revenue might be overstated. This risk
over revenue recognition specifically
arises in the following judgemental
areas, where there is opportunity to
overstate revenue:
South West Water and
Bournemouth 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. The accrued income
balance at 31 March 2016 is £67.8
million (2015: £61.0 million)
• For unmeasured revenue, the bills
for each calendar year are raised in
advance for the next financial year.
Therefore there is a risk that revenues
are recorded in the incorrect period,
if the advance billing element is not
properly excluded and carried forward
in the balance sheet.
Risk
direction
Our response to the risk
Our procedures include:
South West Water and Bournemouth Water
• We obtained an understanding of 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
• We tested key controls linked to system generated
information and around the estimation process for
measured revenue
• 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 balance to bills raised in the
subsequent year
• We performed a walkthrough of the process for
unmeasured revenue and the annual billing cycle
• We performed controls testing related to
the calculation of system generated billing for
unmeasured revenue
• We obtained details of the billing runs in February
and March and verified whether there were any
other billing runs for unmeasured revenue that
should be excluded from 2015/16 total revenue
• We corroborated the key assumptions and
estimates made by management in recognising
revenue, by obtaining internal and external data on
factors that influence demand from customers
• We tested whether contract terms and conditions
are 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 obtaining support for
significant variances
• We performed detailed testing of samples of
transactions to underlying bills for both types
of revenue
• In performing our journal testing, we paid increased
attention to entries impacting revenue, particularly
those raised close to the balance sheet date.
108
INDEPENDENT AUDITOR’S REPORT CONTINUEDPENNON GROUP PLC ANNUAL REPORT 2016FINANCIAL STATEMENTS AND SHAREHOLDER INFORMATION
What we concluded to the
Audit Committee
Viridor
We concluded that revenue has
been recorded in the correct
accounting period, accrued
income has been appropriately
recognised, and IFRIC 12
appropriately applied.
We concluded that the doubtful
debt provision is within an
acceptable range and reflects
recent history of collection of
outstanding debts.
Risk
direction
Our response to the risk
Viridor
• We compared the key assumptions and estimates
made by management in recognising revenue to
prior year and monthly trends and to external
customer confirmations
• For material items we re-performed the calculation
to confirm the accuracy of the accrued and deferred
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 agreed whether the revenue recognition
policies adopted comply with IFRSs, in particular the
requirements of IFRIC12 and whether margins used
to recognise revenue are 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.
Our procedures include:
• 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
evaluated how this data was used in the preparation
of the bad debt provision
• We corroborated 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 operationally by management
to collect debt, and in the external environment
• We utilised collection information over the past
three years, to determine a range of the likely
ultimate collection of debts existing at the balance
sheet date and compared this to the provision
recorded by management.
Risk
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
• Recognising revenue in the correct
period for invoices raised close to
the balance sheet date may involve
management judgement.
Critical accounting judgements and
estimates made by management in
applying the Group’s revenue recognition
policy are disclosed in note 4.
Audit Committee commentary is on
page 68.
VALUATION OF THE PROVISION
FOR DOUBTFUL DEBTS
(SOUTH WEST WATER)
As shown in note 22, there is a provision
of £102.8 million (2015: £86.8 million) at
the year end against gross trade debtors
of £306.4 million (2015: £282.5 million).
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.
There is a risk that the assumptions used
by management in calculating the bad
debt provision may be inappropriate and
the valuation of the provision against
trade receivables may be misstated.
Critical accounting judgements and
estimates made by management,
in providing for doubtful debts, are
disclosed in note 4.
Audit Committee commentary is on
page 68.
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THE SCOPE OF OUR AUDIT
TAILORING THE SCOPE
Our assessment of audit risk, our evaluation of materiality and our
allocation of performance materiality determine our audit scope
for each entity within the Group. Taken together, this enables
us to form an opinion on the consolidated financial statements.
We take into account size, risk profile, the organisation of the
group and effectiveness of group-wide controls, changes in the
business environment and other factors such as recent internal
audit results when assessing the level of work to be performed at
each entity.
In assessing the risk of material misstatement to the Group
financial statements, and to ensure we had adequate quantitative
coverage of significant accounts in the financial statements, of the
six reporting components of the Group, we performed an audit
of the complete financial information of four components (‘full
scope component’) which were selected based on their size or
risk characteristics. These components include Pennon Group
Plc, Viridor, South West Water and Bournemouth Water, and
represent the principal business units within the Group.
For the current year, the full scope components contributed
100% (2015: 99%) of the Group’s profit before taxation before
non-underlying items, 100% (2015: 99%) of the Group’s Revenue
and 95% (2015: 95%) of the Group’s Total assets.
The remaining two components, individually and in aggregate,
represent less than 1% of the Group’s profit before taxation
before non-underlying items. For these components, which
include Peninsula Insurance and Peninsula Leasing, we performed
other procedures, including analytical review procedures, testing
of consolidation journals and intercompany eliminations for each
component to respond to potential risks of material misstatement
to the Group financial statements.
CHANGES FROM THE PRIOR YEAR
There were two changes in scope from the prior year. The first
was that Bournemouth Water, which was acquired by Pennon
Group Plc in April 2015, was designated as full scope for the
current year audit. The second change was that the scope
determined for Peninsula Insurance was changed from specific
scope to review scope, reflecting the fact that, with the growth
in Group activities, including profit before taxation before
non-underlying items, this component is now less than 1% of
the Group.
INVOLVEMENT WITH COMPONENT TEAMS
There are three key locations where we perform audit
procedures for the Group and its components, being Exeter,
Taunton and Bournemouth. The Pennon Group Plc and South
West Water accounting functions are based in Exeter and
the audit teams of these components are led by the same
audit executive. Separate teams audit Viridor in Taunton and
Bournemouth Water in Bournemouth. The primary team
interacted regularly with all teams during various stages of the
audit, including review of key working papers, review of work
performed to address the risks of material misstatement and
attendance at key meetings with management.
OUR APPLICATION OF MATERIALITY
We apply the concept of materiality in planning and performing
the audit, in evaluating the effect of identified misstatements on
the audit and in forming our audit opinion.
MATERIALITY
The magnitude of an omission or misstatement that, individually
or in the aggregate, could reasonably be expected to influence
the economic decisions of the users of the financial statements.
Materiality provides a basis for determining the nature and extent
of our audit procedures.
We determined materiality for the Group to be £10 million
(2015 £10 million), which is 5% (2015 5%) of profit before
taxation before non-underlying items. We believe that profit
before taxation before non-underlying items provides us with
an appropriate measure of the underlying performance of the
Group. We excluded non-underlying items on the basis that
these are infrequent in occurrence and profit before taxation
after non-underlying items is not indicative of the underlying
performance of the Group. We also note that market and analyst
commentary on the performance of the Group uses the same
measure. We therefore, considered profit before taxation before
non-underlying items to be the most relevant performance metric
on which to base our materiality calculation.
Starting basis
Reported profit before taxation £206.3 million
(2015 £197.0 million)
Adjustments
Non-underlying items – increase basis by
£5.0 million (2015 £13.7 million)
Materiality
Totals £211.3 million (2015 £210.7 million) profit
before taxation before non-underlying items.
Materiality of £10 million (5% of profit before
taxation before exceptional items)
110
INDEPENDENT AUDITOR’S REPORT CONTINUEDPENNON GROUP PLC ANNUAL REPORT 2016FINANCIAL STATEMENTS AND SHAREHOLDER INFORMATION PERFORMANCE MATERIALITY
The application of materiality at the individual account or balance
level. It is set at an amount to reduce to an appropriately low level
the probability that the aggregate of uncorrected and undetected
misstatements exceeds materiality.
On the basis of our risk assessments, together with our
assessment of the Group’s overall control environment,
our judgement was that performance materiality was 75%
(2015: 50%) of our planning materiality, namely £7.5 million
(2015: £5 million). We have increased our assessment of
performance materiality from 50% to 75% during the year,
reflecting the fact that the prior year was a first year audit, and
also based on our assessment of the Group’s internal control
environment and the extent and nature of audit findings identified
in the prior period.
Audit work at component locations for the purpose of obtaining
audit coverage over significant financial statement accounts
is undertaken based on a percentage of total performance
materiality. The performance materiality set for each component
is based on the relative scale and risk of the component to the
Group as a whole and our assessment of the risk of misstatement
at that component. In the current year, the range of performance
materiality allocated to components was £1.49 million to £7.07
million (2015: £1 million to £4.25 million).
REPORTING THRESHOLD
An amount below which identified misstatements are considered
as being clearly trivial.
We agreed with the Audit Committee that we would report to
them all uncorrected audit differences in excess of £0.5 million
(2015: £0.5 million), which is set at 5% of planning materiality,
as well as differences below that threshold 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 in forming our opinion.
SCOPE OF THE AUDIT OF THE FINANCIAL STATEMENTS
An audit involves obtaining evidence about the amounts and
disclosures in the financial statements sufficient to give reasonable
assurance that the financial statements are free from material
misstatement, whether caused by fraud or error. This includes an
assessment of: whether the accounting policies are appropriate
to the Group’s and the Parent Company’s circumstances and
have been consistently applied and adequately disclosed; the
reasonableness of significant accounting estimates made by
the Directors; and the overall presentation of the financial
statements. In addition, we read all the financial and non-financial
information in the Annual Report and Accounts to identify
material inconsistencies with the audited financial statements 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.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS
AND AUDITOR
As explained more fully in the Directors’ Responsibilities
Statement set out on page 101, the Directors are responsible for
the preparation of the financial statements and for being satisfied
that they give a true and fair view. Our responsibility is to audit
and express an opinion on the financial statements in accordance
with applicable law and International Standards on Auditing (UK
and Ireland). Those standards require us to comply with the
Auditing Practices Board’s Ethical Standards for Auditors.
This report 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.
111
www.pennonannualreport.co.uk/2016OVERVIEWGROUP PERFORMANCEGOVERNANCEFINANCIAL STATEMENTS OPINION ON OTHER MATTERS PRESCRIBED BY THE COMPANIES ACT 2006
In our opinion:
• the part of the Directors’ Remuneration Report to be audited has been properly prepared in
accordance with the Companies Act 2006;
• the information given in the 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
ISAs (UK and Ireland)
reporting
We are required to report to you if, in our opinion, financial and non-financial information in
the annual report is:
We have no
exceptions to report.
• 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
• otherwise misleading.
In particular, we are required to report whether we have identified any inconsistencies
between our knowledge acquired in the course of performing the audit and the directors’
statement that they consider the annual report and accounts taken as a whole is fair, balanced
and understandable and provides the information necessary for shareholders to assess
the entity’s performance, business model and strategy; and whether the annual report
appropriately addresses those matters that we communicated to the audit committee that we
consider should have been disclosed.
We are required to report to you if, in our opinion:
• adequate accounting records have not been kept by the parent company, or returns
adequate for our audit have not been received from branches not visited by us; or
• the parent company financial statements and the part of the Directors’ Remuneration
Report to be audited are not in agreement with the accounting records and returns; or
• certain disclosures of directors’ remuneration specified by law are not made; or
• we have not received all the information and explanations we require for our audit; or
• a Corporate Governance Statement has not been prepared by the Company.
We have no
exceptions to report.
Companies Act 2006
reporting
Listing Rules review
requirements
We are required to review:
• the directors’ statement in relation to going concern, set out on page 100, and longer-term
viability, set out on page 55; and
• the part of the Corporate Governance Statement relating to the company’s compliance with
the provisions of the UK Corporate Governance Code specified for our review.
We have no
exceptions to report.
112
INDEPENDENT AUDITOR’S REPORT CONTINUEDPENNON GROUP PLC ANNUAL REPORT 2016FINANCIAL STATEMENTS AND SHAREHOLDER INFORMATION STATEMENT ON THE DIRECTORS’ ASSESSMENT OF THE PRINCIPAL RISKS THAT
WOULD THREATEN THE SOLVENCY OR LIQUIDITY OF THE ENTITY
ISAs (UK and Ireland)
reporting
We are required to give a statement as to whether we have anything material to add or
to draw attention to in relation to:
We have no
exceptions to report.
• the directors’ confirmation in the annual report that they have carried out a robust
assessment of the principal risks facing the entity, including those that would threaten
its business model, future performance, solvency or liquidity;
• the disclosures in the annual report that describe those risks and explain how they
are being managed or mitigated;
• the directors’ statement in the financial statements about whether they considered
it appropriate to adopt the going concern basis of accounting in preparing them, and
their identification of any material uncertainties to the entity’s ability to continue
to do so over a period of at least twelve months from the date of approval of the
financial statements; and
• the directors’ explanation in the annual report as to how they have assessed the
prospects of the entity, over what period they have done so and why they consider
that period to be appropriate, and their statement as to whether they have a
reasonable expectation that the entity will be able to continue in operation and
meet its liabilities as they fall due over the period of their assessment, including any
related disclosures drawing attention to any necessary qualifications or assumptions.
Debbie O’Hanlon (Senior statutory auditor)
for and on behalf of
Ernst & Young LLP, Statutory Auditor
Reading
24 May 2016
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 web site.
2. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
113
www.pennonannualreport.co.uk/2016OVERVIEWGROUP PERFORMANCEGOVERNANCEFINANCIAL STATEMENTS CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED 31 MARCH 2016
Revenue
Operating costs
Employment 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 non-underlying items and deferred tax
Notes
5
7
5
7
5
8
8
8
20
5
9
11
Before non-
underlying
items
2016
£m
1,352.3
Non-underlying
items
(Note 6)
2016
£m
–
Total
2016
£m
1,352.3
Before non-
underlying
items
2015
£m
1,357.2
Non-underlying
items
(Note 6)
2015
£m
–
(180.0)
(114.7)
(609.2)
448.4
(186.6)
261.8
42.1
(96.2)
(54.1)
3.6
211.3
(72.1)
139.2
123.0
16.2
(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
(8.6)
–
(1.6)
(188.6)
(114.7)
(610.8)
(10.2)
438.2
–
(10.2)
5.2
–
5.2
–
(5.0)
34.1
29.1
(186.6)
251.6
47.3
(96.2)
(48.9)
3.6
206.3
(38.0)
168.3
29.1
–
152.1
16.2
37.0
36.9
39.5
14.9
–
(4.3)
10.6
(24.3)
(13.7)
–
–
–
–
(13.7)
2.7
(11.0)
(11.0)
–
Total
2015
£m
1,357.2
(149.4)
(103.8)
(682.4)
421.6
(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
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 MARCH 2016
Before non-
underlying
items
2016
£m
Non-underlying
items
(Note 6)
2016
£m
Before non-
underlying
items
2015
£m
Non-underlying
items
(Note 6)
2015
£m
Total
2016
£m
139.2
29.1
168.3
153.3
(11.0)
Notes
Profit for the year
Other comprehensive income/ (loss)
Items that will not be reclassified to profit or loss
Remeasurement of defined benefit obligations
Income tax on items that will not be reclassified
30
9, 31
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
20
Cash flow hedges
Income tax on items that may be reclassified
9, 31
Total items that may be reclassified subsequently to
profit or loss
Other comprehensive income/ (loss) for the
year net of tax
36
Total comprehensive income for the year
Total comprehensive income attributable to:
Ordinary shareholders of the parent
Perpetual capital security holders
The notes on pages 119 to 171 form part of these financial statements.
(2.6)
0.6
(2.0)
2.4
5.0
(1.0)
6.4
4.4
143.6
127.4
16.2
–
(3.0)
(2.6)
(2.4)
(3.0)
(5.0)
–
–
(0.8)
(0.8)
(3.8)
2.4
5.0
(1.8)
5.6
0.6
25.3
168.9
25.3
152.7
–
16.2
(2.1)
0.4
(1.7)
1.1
(36.8)
5.7
(30.0)
(31.7)
121.6
105.6
16.0
114
Total
2015
£m
142.3
(2.1)
0.4
(1.7)
1.1
(36.8)
5.7
(30.0)
(31.7)
–
–
–
–
–
–
–
–
(11.0)
110.6
(11.0)
–
94.6
16.0
PENNON GROUP PLC ANNUAL REPORT 2016FINANCIAL STATEMENTS AND SHAREHOLDER INFORMATION BALANCE SHEETS
AT 31 MARCH 2016
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
Financial liabilities at fair value through profit
Derivative financial instruments
Trade and other payables
Current tax liabilities
Provisions
Net current assets
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
Group
Company
2016
£m
2015
£m
2016
£m
2015
£m
Notes
15
16
17
19
31
23
20
20
21
22
24
23
25
28
24
23
26
27
32
28
29
24
23
30
31
32
33
34
35
36
37
385.0
63.8
3,897.3
267.8
–
62.7
–
0.1
339.3
56.4
3,578.8
291.1
–
60.2
–
0.1
4,676.7
4,325.9
20.6
323.5
–
9.5
632.2
985.8
(65.0)
(2.2)
(17.4)
(264.6)
(37.1)
(50.4)
(436.7)
549.1
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
–
–
0.1
905.5
2.2
1.3
1,628.3
–
2,537.4
–
77.4
–
0.5
429.7
507.6
–
–
0.1
790.0
3.0
–
1,523.6
–
2,316.7
–
156.2
–
–
532.5
688.7
(287.2)
(333.9)
–
(2.7)
(5.9)
(53.5)
–
(349.3)
158.3
–
(2.9)
(5.6)
(23.8)
–
(366.2)
322.5
(3,051.6)
(2,854.5)
(877.1)
(885.4)
(113.2)
(51.0)
(38.5)
(40.9)
(272.0)
(171.0)
(3,738.2)
1,487.6
167.8
213.3
144.2
667.5
1,192.8
294.8
1,487.6
(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
(8.7)
(1.6)
(9.1)
(3.0)
–
–
(899.5)
1,796.2
167.8
213.3
144.2
976.1
1,501.4
294.8
1,796.2
(8.7)
(0.5)
(14.5)
(4.2)
–
–
(913.3)
1,725.9
162.4
118.6
144.2
1,005.9
1,431.1
294.8
1,725.9
The notes on pages 119 to 171 form part of these financial statements.
The financial statements on pages 114 to 171 were approved by the Board of Directors and authorised for issue on 24 May 2016 and were signed on its behalf by:
Sir John Parker Chairman Pennon Group Plc
Registered Office: Peninsula House, Rydon Lane, Exeter, Devon, England EX2 7HR. Registered in England Number 2366640
115
www.pennonannualreport.co.uk/2016OVERVIEWGROUP PERFORMANCEGOVERNANCEFINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 MARCH 2016
Share
capital
(Note 33)
£m
Share
premium
account
(Note 34)
£m
Capital
redemption
reserve
(Note 35)
£m
Retained
earnings and
other reserves
(Note 36)
£m
Perpetual
capital
securities
(Note 37)
£m
Total
equity
£m
151.3
4.9
144.2
–
–
–
–
2.6
8.5
–
–
–
–
–
–
–
–
–
(2.6)
116.3
–
–
–
–
–
11.1
162.4
113.7
118.6
–
–
–
–
0.3
–
4.9
–
–
–
–
–
0.2
5.4
167.8
–
–
–
–
(0.3)
–
95.4
(2.3)
–
–
–
–
1.9
94.7
213.3
–
–
–
–
–
–
–
–
–
–
–
–
144.2
–
–
–
–
–
–
–
–
–
–
–
–
–
–
144.2
602.4
126.3
(31.7)
94.6
(117.0)
48.0
(0.5)
3.5
–
–
(0.8)
3.9
(62.9)
634.1
152.1
0.6
152.7
(129.5)
6.3
2.5
–
–
–
–
(1.1)
2.5
–
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
–
–
(16.0)
(0.8)
3.9
45.9
294.8
1,354.1
16.2
168.3
–
0.6
16.2
168.9
–
–
–
–
–
(129.5)
6.3
2.5
100.3
(2.3)
(20.3)
(20.3)
4.1
4.1
–
–
–
(1.1)
2.5
2.1
(119.3)
667.5
(16.2)
(35.4)
294.8
1,487.6
Group
At 1 April 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
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)
Equity issuance
Equity issuance related costs
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
Proceeds from shares issued under the
Sharesave Scheme
Total transactions with equity shareholders
At 31 March 2016
The notes on pages 119 to 171 form part of these financial statements.
116
PENNON GROUP PLC ANNUAL REPORT 2016FINANCIAL STATEMENTS AND SHAREHOLDER INFORMATION
Company
At 1 April 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
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
Equity issuance
Equity issuance related costs
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
Proceeds from shares issued under the
Sharesave Scheme
Total transactions with equity shareholders
At 31 March 2016
The notes on pages 119 to 171 form part of these financial statements.
Share
capital
(Note 33)
£m
Share
premium
account
(Note 34)
£m
Capital
redemption
reserve
(Note 35)
£m
Retained
earnings and
other reserves
(Note 36)
£m
Perpetual
capital
securities
(Note 37)
£m
Total
equity
£m
151.3
4.9
144.2
–
–
–
–
2.6
8.5
–
–
–
–
–
–
–
–
–
(2.6)
116.3
–
–
–
–
–
11.1
162.4
113.7
118.6
777.2
300.1
(5.9)
294.2
(117.0)
48.0
(0.5)
–
–
0.9
(0.8)
3.9
294.8
1,372.4
16.0
316.1
–
(5.9)
16.0
310.2
–
–
–
(117.0)
48.0
124.3
(20.3)
(20.3)
4.3
–
–
–
4.3
0.9
(0.8)
3.9
43.3
–
–
–
–
–
–
–
–
–
–
–
–
(65.5)
(16.0)
144.2
1,005.9
294.8
1,725.9
–
–
–
–
0.3
4.9
–
–
–
–
–
–
0.2
5.4
167.8
–
–
–
–
(0.3)
95.4
(2.3)
–
–
–
–
–
1.9
94.7
213.3
–
–
–
–
–
–
–
–
–
–
–
–
–
–
144.2
91.4
(0.4)
91.0
(129.5)
6.3
–
–
–
–
0.7
(0.8)
2.5
–
(120.8)
976.1
16.2
107.6
–
(0.4)
16.2
107.2
–
–
–
–
(129.5)
6.3
100.3
(2.3)
(20.3)
(20.3)
4.1
–
–
–
–
4.1
0.7
(0.8)
2.5
2.1
(16.2)
(36.9)
294.8
1,796.2
117
www.pennonannualreport.co.uk/2016OVERVIEWGROUP PERFORMANCEGOVERNANCEFINANCIAL STATEMENTS
CASH FLOW STATEMENTS
FOR THE YEAR ENDED 31 MARCH 2016
Cash flows from operating activities
Cash generated/ (outflow) from operations
Interest paid
Tax (paid)/ received
Net cash generated/ (outflow) from operating activities
Cash flows from investing activities
Interest received
Dividends received
Investments in subsidiary undertakings
Loan repayments received from joint ventures
Acquisitions, net of cash acquired
Purchase of property, plant and equipment
Proceeds from sale of property, plant and equipment
Net cash (used in)/ received from investing activities
Cash flows from financing activities
Proceeds from treasury shares re-issued
Proceeds from issuance of ordinary shares
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 (used in)/ generated from financing activities
Net (decrease)/ increase in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of the year
The notes on pages 119 to 171 form part of these financial statements.
Notes
38
38
46
44
33
37
25
25
Group
Company
2016
£m
371.3
(79.1)
(45.0)
247.2
14.9
6.0
–
27.5
(91.0)
2015
£m
310.9
(62.0)
(21.0)
227.9
20.3
6.0
–
0.3
–
(283.7)
(298.1)
6.8
5.7
(319.5)
(265.8)
2.5
100.1
(1.1)
(30.3)
80.0
(96.5)
30.4
(38.4)
(123.2)
(20.3)
(96.8)
(169.1)
574.8
405.7
3.9
–
(0.8)
(23.0)
345.0
(123.6)
160.1
(99.5)
(69.0)
(20.3)
172.8
134.9
439.9
574.8
2016
£m
(41.7)
(35.3)
(10.7)
(87.7)
51.3
140.7
2015
£m
(103.8)
(34.7)
15.2
(123.3)
50.7
311.6
(100.3)
(200.3)
–
–
(0.1)
–
91.6
2.5
100.1
–
(9.7)
1.0
(66.8)
–
–
(123.2)
(20.3)
(116.4)
(112.5)
532.5
420.0
–
–
(0.1)
0.1
162.0
3.9
–
–
1.4
345.0
(92.5)
–
–
(69.0)
(20.3)
168.5
207.2
325.3
532.5
118
PENNON GROUP PLC ANNUAL REPORT 2016FINANCIAL 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 115. During 2015/16 Pennon Group’s business was operated through three main subsidiaries. South West Water Limited providing water and
wastewater services for Devon, Cornwall and parts of Dorset and Somerset. Bournemouth Water Limited providing the water services for parts of
Dorset, Hampshire and Wiltshire. Viridor Limited’s business is waste recycling and recovery.
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 100.
The new standards or interpretations which were mandatory for the first time in the year beginning 1 April 2015 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 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 2018 and is subject to EU endorsement.
• The Group continues to assess the impact of the new standard on the Group’s financial statements. The Group will make more detailed
assessments of the impact over the next twelve months.
•
IFRS 16 ‘Leases’ no longer distinguish between an on the balance sheet finance lease and an off the balance sheet operating lease. Instead, for
virtually all lease contracts the lessee recognises a lease liability reflecting future lease payments and a ‘right-of-use’ asset. The standard is effective
for annual periods beginning on or after 1 January 2019 and is subject to EU endorsement.
• The Directors anticipate that the adoption of IFRS 16 on 1 April 2019 will reduce operating costs, increase depreciation charges and increase
finance costs. In addition, c.£100 million of property, plant and equipment will be recognised, with a corresponding increase in borrowings and
group net debt. Existing borrowing covenants are not impacted by changes in accounting standards.
The accounting policy for non-underlying items (z), previously referred to as exceptional items, has been refined to include items which due to their
nature in the view of the Directors should be separately disclosed to enable a full understanding of the Group’s financial performance.
(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.
(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.
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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 water business which includes the regulated water and wastewater services undertaken by
South West Water and the regulated water services undertaken by Bournemouth Water, and the waste management business of Viridor. 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 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 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 – 120 years
40 – 120 years
Assets in the course of construction are not depreciated until commissioned.
ii) Landfill sites
Landfill sites are included within land and buildings at cost less accumulated depreciation. Cost includes acquisition and development expenses. The
cost of a landfill site is depreciated to its residual value (which is linked to gas production at the site post-closure) over its estimated operational life
taking account of the usage of void space.
iii) Landfill restoration
Where the obligation to restore a landfill site is an integral part of its future economic benefits, a non-current asset within property, plant and
equipment is recognised. The asset recognised is depreciated based on the usage of void space.
iv) Other assets (including 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
Over the estimated economic lives or the finance lease
period, whichever is the shorter
Operational properties
Energy recovery facilities (including
major refurbishments)
Fixed plant
Vehicles, mobile plant and computers
40 – 80 years
25 – 40 years
20 – 40 years
3 – 10 years
120
NOTES TO THE FINANCIAL STATEMENTS CONTINUEDPENNON GROUP PLC ANNUAL REPORT 2016FINANCIAL STATEMENTS AND SHAREHOLDER INFORMATION (h) Property, plant and equipment continued
Assets in the course of construction are not depreciated until commissioned.
The cost of assets includes directly attributable labour and overhead costs which are incremental to the Group. Borrowing costs directly attributable
to the construction of a qualifying asset (an asset necessarily taking a substantial period of time to be prepared for its intended use) are capitalised as
part of the asset. 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. With effect from 1 April 2015, the useful lives for certain assets have been amended
where both external benchmarking and internal experience indicates a change is required. Lives for some asset have increased whilst others have
decreased. To accommodate this change the range of useful lives for water mains and sewers has increased from 100 to 120 years.
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.
Where a previously impaired asset or cash generating unit’s recoverable amount is in excess of its carrying amount, previous impairments are reversed
to the carrying value that would have expected to be recognised had the original impairment not occurred.
(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) INVENTORIES
Inventories are stated at the lower of cost and net realisable value. The cost of finished goods and work in progress includes raw materials and the cost
of bringing stocks to their present location and condition. It excludes borrowing costs. Net realisable value is the estimated selling price less cost to sell.
(N) 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.
(O) 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.
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.
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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 and liabilities based on the
remaining maturity of the hedging derivative.
Derivative financial instruments deemed held for trading, which are not subject to 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
thereafter remeasured at each subsequent balance sheet date. The gain or loss on remeasurement for the period is recognised in the income statement.
(P) 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. Payments for group relief 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.
(Q) 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).
122
NOTES TO THE FINANCIAL STATEMENTS CONTINUEDPENNON GROUP PLC ANNUAL REPORT 2016FINANCIAL STATEMENTS AND SHAREHOLDER INFORMATION (R) 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.
(S) 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.
(T) 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.
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.
(U) 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.
(V) 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 ordinary 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.
(W) TRANSFERS OF ASSETS FROM CUSTOMERS
Where an item of property, plant and equipment that must be used to connect customers to the network is received from a customer, or where cash
is received from a customer for the acquisition or construction of such an item, that asset is recorded and measured on initial recognition at its fair
value. The credit created by the recognition of the asset is recognised in the income statement. The period over which the credit is recognised depends
upon the nature of the service provided, as determined by the agreement with the customer. Where the service provided is solely a connection to the
network, the credit is recognised at the point of connection. If the agreement does not specify a period, revenue is recognised over a period no longer
than the economic life of the transferred asset used to provide the ongoing service.
The fair value of assets on transfer from customers is determined using a cost valuation approach allowing for depreciation.
(X) FOREIGN EXCHANGE
Transactions denominated in foreign currencies are translated at the exchange rate at the date of the transaction. Monetary assets and liabilities
denominated in a foreign currency are translated at the closing balance sheet rate. The resulting gain or loss is recognised in the income statement.
(Y) 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.
(Z) NON-UNDERLYING ITEMS
Non-underlying items are those that in the Directors’ view are required to be separately disclosed by virtue of their size, nature or incidence to enable
a full understanding of the Group’s financial performance.
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(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 Chief Financial Officer 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 Water Business have entered into covenants with lenders. While terms vary, these typically provide for limits on gearing (primarily
based on the Water Business’s Regulatory Capital Value and Viridor Limited’s EBITDA) and interest cover.
Contractual undiscounted cash flows, including interest payments, at the balance sheet date were:
Due within
1 year
£m
Due
between 1
and 2 years
£m
Due
between 2
and 5 years
£m
Group
31 March 2016
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 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)
Company
31 March 2016
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 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
39.0
47.9
41.1
264.6
159.7
8.3
81.8
48.4
43.6
277.7
169.8
6.7
–
287.2
30.4
5.9
580.8
1.1
50.7
283.2
30.8
5.6
556.4
1.1
116.1
47.3
45.0
–
–
6.1
113.6
46.8
46.3
–
–
5.5
74.6
–
29.7
–
–
1.0
74.9
–
29.0
–
–
1.0
No liability is expected to arise in respect of the guarantees noted above. Guarantees are analysed in note 42.
124
Over
5 years
£m
1,293.4
687.7
2,130.7
–
–
Total
£m
1,776.0
920.6
2,392.3
264.6
159.7
327.5
137.7
175.5
–
–
2.2
(67.0)
(50.4)
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)
225.8
–
76.7
–
–
0.7
310.0
–
78.8
–
–
1.2
576.7
–
122.4
–
–
877.1
287.2
259.2
5.9
580.8
–
2.8
500.5
–
139.3
–
–
–
936.1
283.2
277.9
5.6
556.4
3.3
NOTES TO THE FINANCIAL STATEMENTS CONTINUEDPENNON GROUP PLC ANNUAL REPORT 2016FINANCIAL STATEMENTS AND SHAREHOLDER INFORMATION
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
67% (2015 72%) 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) 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 and Bournemouth Water. 18% (2015 13%) of the Group’s gross debt is RPI index-linked.
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 2016 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 increased/ decreased by £0.1 million (2015 £0.4 million), for the equity sensitivity fair value, derivative impacts
are excluded.
For 2016 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 £1.9 million (2015 £1.5 million).
Foreign currency risk occurs at transactional and translation level from borrowings and transactions in foreign currencies. These risks are managed
through forward contracts, which provide certainty over foreign currency risk.
iii) Credit risk
Credit counterparty risk arises from cash and cash deposits, derivative financial instruments and exposure to customers, including outstanding
receivables. Further information on the credit risk relating to trade receivables is given in note 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 board approved minimum
criteria based on their short term credit ratings.
(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 2016 the Group had cash and
facilities, excluding restricted funds, of over £1.7 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
2016
£m
2,484.4
1,487.6
3,972.0
62.5%
2015
£m
2,197.1
1,354.1
3,551.2
61.9%
South West Water and Bournemouth Water is also monitored on the basis of the ratio of its net borrowings to Regulatory Capital Value. Ofwat’s
optimum gearing for the K6 (2015-2020) regulatory period is set at 62.5%.
Regulatory Capital Value
Net borrowings
Net borrowings/Regulatory Capital Value
2,997.3
1,793.3
59.8%
1,817.5
62.1%
South West Water
2016
£m
2015
£m
2,928.0
Bournemouth
Water
2016
£m
152.9
86.7
56.7%
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.
125
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(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.
126
NOTES TO THE FINANCIAL STATEMENTS CONTINUEDPENNON GROUP PLC ANNUAL REPORT 2016FINANCIAL 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, or reversals of previous impairments, are required for non-financial assets, 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). To reflect changes in the waste market, including the structural decline of landfill, and the prominence of recycling and recovering value from
waste, together with the reorientation of Viridor’s operations towards ERFs, the Group has applied judgement in determining the allocation of
CGUs. In the updated allocations non-strategic landfill assets are considered separate CGUs, as are landfill gas assets, with other remaining assets
allocated to regional CGUs.
The Impairment assessment of non-current financial assets is 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. Judgement and estimation is required in determining
the appropriate cash flows and discount rate used in the assessment.
The lowest level to which goodwill is allocated, monitored and tested by management is the segmental level, in line with the segments set out in note
5. 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.
The principal assumptions used to assess impairment are set out in notes 15 and 17.
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 2016 the Group’s environmental and landfill restoration provisions were £182.1 million (2015 £193.0 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 2016 these assets had a net book value of £11.7 million (2015 £17.9 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 2016.
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 2016 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’s current tax provision of £37.1 million relates to management’s judgement of the amount of tax payable on open tax computations where
liabilities remain to be agreed with HMRC. The Group evaluates uncertain tax items, where a tax item is subject to interpretation and remains to be
agreed. Principally the uncertain tax items for which a provision is made, relate to the interpretation of tax legislation regarding financing arrangements
that have been entered into in the normal course of business. Provisions established for uncertain items are made using a best estimate of the tax
expected to be paid, based on a qualitative assessment of all relevant information.
In assessing any appropriate provision requirements for uncertain tax items, the Group considers progress made in discussions with HMRC, expert
advice on the likely outcome and any recent developments in case law.
Due to the uncertainty associated with such tax items, it is possible that at a future date, on conclusion of the open matters, the final outcome may
vary significantly. Whilst a range of outcomes is reasonably possible, the extent of this range is additional liabilities of up to £20 million to a reduction in
liabilities of up to £52 million. Any such variations will affect the tax financial results in the year in which such a determination is made.
In addition to provisions established for uncertain tax items, the Group has other uncertain tax items where the Group has paid in full the tax HMRC
interpret as due, and therefore would benefit by up to £70 million should such tax positions be concluded in the Group’s favour.
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.
127
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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 and Bournemouth Water raise bills and recognise revenue in accordance with their 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 2016 the Group’s current trade receivables were
£303.6 million, against which £95.6 million had been provided for impairment (note 22).
NON-UNDERLYING ITEMS
In establishing which items are disclosed separately as non-underlying, to enable a full understanding of the Group’s financial performance,
the Directors exercise their judgement in assessing the size, nature or incidence of specific items.
128
NOTES TO THE FINANCIAL STATEMENTS CONTINUEDPENNON GROUP PLC ANNUAL REPORT 2016FINANCIAL 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 earnings measures below are used by the Board in making decisions.
The water business comprises the regulated water and wastewater services undertaken by South West Water and the regulated water services
undertaken by Bournemouth Water. The waste management business is the waste recycling and recovery services provided by Viridor. 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
Waste management
Other
Less intra-segment trading*
Segment result
Operating profit/ (loss) before depreciation, amortisation and non-underlying items (EBITDA)
Water
Waste management
Other
Operating profit/ (loss) before non-underlying items
Water
Waste management
Other
Profit before tax and non-underlying items
Water
Waste management
Other
Profit before tax
Water
Waste management
Other
2016
£m
547.0
806.2
12.0
(12.9)
2015
£m
522.2
835.9
10.9
(11.8)
1,352.3
1,357.2
335.2
116.5
(3.3)
448.4
224.5
40.9
(3.6)
261.8
165.7
30.7
14.9
211.3
160.5
25.7
20.1
206.3
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
* 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.
129
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5. SEGMENTAL INFORMATION CONTINUED
Waste
management
£m
Water
£m
Other
£m
Eliminations
£m
Group
£m
Balance sheet
31 March 2016
Assets (excluding investments in joint ventures)
3,385.8
1,911.1
1,715.9
(1,350.4)
5,662.4
Investments in joint ventures
–
0.1
–
–
0.1
Total assets
Liabilities
Net assets
31 March 2015
3,385.8
1,911.2
1,715.9
(1,350.4)
5,662.5
(2,502.4)
(1,513.2)
(1,509.7)
1,350.4
(4,174.9)
883.4
398.0
206.2
–
1,487.6
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
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
Segment liabilities of the water and waste management segments comprise operating liabilities. The other segment liabilities include the Group
taxation liabilities.
Water
£m
Waste
management
£m
Other
£m
Group
£m
Notes
7
7
8
8
7
17
7
7
8
8
0.7
220.6
110.3
3.0
61.8
–
145.1
105.9
–
2.8
60.3
3.0
154.5
72.5
28.2
12.3
2.7
156.3
56.1
24.3
30.6
14.0
–
0.1
0.1
10.9
22.1
–
–
(0.3)
–
10.6
10.5
3.7
375.2
182.9
42.1
96.2
2.7
301.4
161.7
24.3
44.0
84.8
Other information
31 March 2016
Amortisation of other intangible assets
Capital expenditure (including acquisitions)
Depreciation
Finance income (before non-underlying items)
Finance costs
31 March 2015
Amortisation of other intangible assets
Capital expenditure
Depreciation
Impairment
Finance income
Finance costs
130
NOTES TO THE FINANCIAL STATEMENTS CONTINUEDPENNON GROUP PLC ANNUAL REPORT 2016FINANCIAL STATEMENTS AND SHAREHOLDER INFORMATION
Geographic analysis of revenue based on location of customers
Revenue
United Kingdom
Rest of European Union
China
Rest of World
2016
£m
2015
£m
1,296.1
1,317.6
10.5
38.8
6.9
10.4
25.3
3.9
1,352.3
1,357.2
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. NON-UNDERLYING ITEMS
Non-underlying items are those that in the Directors’ view are required to be separately disclosed by virtue of their size, nature or incidence to enable
a full understanding of the Group’s financial performance.
Operating (costs)/ credits
Restructuring costs(a)
Pension costs – past service(b)
Environmental provisions(c)
Underperforming contracts(d)
Impairment of property, plant and equipment(e)
Total net operating costs
Remeasurement of fair value movement in derivatives(f)
Deferred tax change in rate(g)
Tax credit arising on non-underlying items
Net non-underlying credit/ (charge)
Notes
32
30
32
32
17
8
31
9
2016
£m
(10.2)
–
–
–
–
(10.2)
5.2
33.1
1.0
29.1
2015
£m
–
14.9
6.7
(11.0)
(24.3)
(13.7)
–
–
2.7
(11.0)
(a) During the year a one-off charge of £10.2 million was made to the restructuring provision reflecting announced reorganisations across the Group.
(b) Last year a non-underlying credit was recognised relating to changes made to the Group’s defined benefit scheme. Changes implemented last year
capped pensionable pay for active members, reducing past service cost.
(c) Last year landfill environmental provisioning was reassessed £6.7 million lower reflecting lower expected restoration and aftercare costs, partly
offset by a reduction in discount rate.
(d) A small number of contracts last year were assessed as underperforming. On this basis a provision of £11.0 million was established.
(e) Following a detailed review of the allocation of non-financial assets to cash generating units, an impairment of £60.9 million has been recognised in
relation to Viridor’s non-strategic landfill assets and a £60.9 million reversal of impairment has been recognised in the newly aggregated regional
cash generating units. Further details of the review are set out in note 17.
In 2014/15 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 non-underlying 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.
(f) For certain derivative financial instruments, where market volatility and counterparty credit risk result in hedge accounting becoming less certain,
hedge accounting is discontinued and non-cash fair value movements are recognised in the income statement as non-underlying items.
(g) Following the enactment during the year the rate of corporation tax reduced from 20% to 19% from April 2017 and reduces further to 18%
from April 2020, a one-off credit of £33.1 million has been recognised in the income statement. In addition, a charge of £3.8 million has been
recognised in the statement of comprehensive income and a charge of £0.1 million has been recognised directly in equity.
131
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7. OPERATING COSTS
Employment costs before non-underlying items
Raw materials and consumables
Other operating expenses before non-underlying items include:
Profit on disposal of property, plant and equipment
Operating lease rentals payable:
– Plant and machinery
– Property
Research and development expenditure
Trade receivables impairment
Depreciation of property, plant and equipment:
– Owned assets
– Under finance leases
– Impairment of property, plant and equipment
Amortisation of other intangible assets
Notes
13
22
6
16
Operating costs include a £10.2 million charge (2015 £13.7 million charge) relating to non-underlying items, as detailed in note 6.
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
Other non-audit services
Total fees
Fees payable to the Company’s auditors in respect of Pennon Group pension schemes:
Audit
2016
£m
180.0
114.7
2015
£m
164.3
103.8
(4.3)
(3.7)
16.9
9.0
0.1
8.4
140.0
42.9
–
3.7
2016
£000
94
635
50
122
901
30
15.7
9.2
0.1
12.8
125.6
36.1
24.3
2.7
2015
£000
75
471
50
7
603
17
Expenses reimbursed to the auditors in relation to the audit of the Group were £45,000 (2015 £40,000).
A description of the work of the Audit Committee is set out in its report on pages 66 to 69 which includes an explanation of how the auditors’
objectivity and independence are safeguarded when non-audit services are provided by the auditors’ firm.
132
NOTES TO THE FINANCIAL STATEMENTS CONTINUEDPENNON GROUP PLC ANNUAL REPORT 2016FINANCIAL 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
Notional interest
Interest receivable on service concession
arrangements
Retirement benefit obligations
30
Unwinding of discounts in provisions
Finance
cost
£m
2016
Finance
income
£m
Notes
Total
£m
(48.7)
(33.5)
(2.8)
6.3
10.7
Finance
cost
£m
(32.2)
(32.9)
(6.5)
–
–
(68.0)
(71.6)
2015
Finance
income
£m
–
–
–
11.3
11.4
22.7
16.7
(1.8)
(9.4)
5.5
–
13.5
(2.7)
(10.5)
(13.2)
–
–
13.5
Total
£m
(32.2)
(32.9)
(6.5)
11.3
11.4
(48.9)
13.5
(2.7)
(10.5)
0.3
(48.7)
(33.5)
(2.8)
–
–
(85.0)
–
(1.8)
(9.4)
–
–
–
6.3
10.7
17.0
16.7
–
–
(11.2)
16.7
Net gains on derivative financial instruments
arising from the combination of non-derivative
instruments
–
8.4
8.4
–
7.8
7.8
Net finance cost before non-underlying items
(96.2)
42.1
(54.1)
(84.8)
44.0
(40.8)
Non-underlying items
Fair value remeasurement of non-designated
derivative financial instruments providing
commercial hedges
6
–
5.2
5.2
–
–
–
Net finance cost after non-underlying items
(96.2)
47.3
(48.9)
(84.8)
44.0
(40.8)
In addition to the above, finance costs of £9.4 million (2015 £22.5 million) have been capitalised on qualifying assets included in property, plant and
equipment and other intangible assets.
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9. TAXATION
Before non-
underlying
items 2016
£m
Notes
Non-
underlying
items
(Note 6)
2016
£m
Before non-
underlying
items 2015
£m
Total 2016
£m
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
Tax charge for year
31
32.9
39.2
–
39.2
72.1
(1.7)
0.7
(33.1)
(32.4)
(34.1)
31.2
39.9
(33.1)
6.8
38.0
39.2
18.2
–
18.2
57.4
Non-
underlying
items
(Note 6)
2015
£m
0.6
(3.3)
–
(3.3)
(2.7)
Total 2015
£m
39.8
14.9
–
14.9
54.7
UK corporation tax is calculated at 20% (2015 21%) of the estimated assessable profit for the year.
UK corporation tax is stated after a credit relating to prior year current tax of £1.4 million (2015 credit of £5.5 million) and a prior year deferred tax
charge of £15.9 million (2015 £9.7 million).
The 2016 deferred tax charge includes a credit of £33.1 million reflecting a reduction in the rate of UK corporation tax.
The tax for the year differs from the theoretical amount which would arise using the standard rate of corporation tax in the UK (20%) from:
Profit before tax
Profit before tax multiplied by the standard rate of UK corporation tax of 20% (2015 21%)
Effects of:
Expenses not deductible for tax purposes
Financial transaction deemed ineligible
Joint ventures profits not taxed
Change in rate of corporation tax
Adjustments to tax charge in respect of prior years
Depreciation charged on non-qualifying assets
Tax charge for year
2016
£m
206.3
41.3
1.6
12.0
(0.7)
(33.1)
14.5
2.4
38.0
2015
£m
197.0
41.4
4.1
3.7
(1.0)
–
4.2
2.3
54.7
The adjustments to the tax charge in respect of prior years, include a charge of £30 million for an uncertain tax item relating to a financial transaction,
partly offset by an updated assessment of other uncertain tax items, following discussions with HMRC on complex tax legislation relating to the
deductibility of financial arrangements and relief claims for capital expenditure, plus submission of the prior year tax returns resulting in lower tax being
due compared to the assessment made for the 2014/15 charge.
The average applicable tax rate for the year before non-underlying items was 34% (2015 27%). The average applicable tax rate for the year after
non-underlying items was 18% (2015 28%).
In addition to the amounts recognised in the income statement the following tax charges and credits were also recognised:
Amounts recognised directly in other comprehensive income
Deferred tax charge/ (credit) on defined benefit pension schemes
Deferred tax charge/ (credit) on cash flow hedges
Amounts recognised directly in equity
Deferred tax charge on share-based payments
Current tax credit on perpetual capital securities periodic return
10. PROFIT OF THE PARENT COMPANY
Profit attributable to ordinary shareholders’ equity dealt within the accounts of the parent company
2016
£m
2.4
1.8
0.3
(4.1)
2016
£m
91.4
2015
£m
(0.4)
(5.7)
–
(4.3)
2015
£m
300.1
As permitted by Section 408 of the Companies Act 2006 no income statement or statement of comprehensive income is presented for the Company.
134
NOTES TO THE FINANCIAL STATEMENTS CONTINUEDPENNON GROUP PLC ANNUAL REPORT 2016FINANCIAL STATEMENTS AND SHAREHOLDER INFORMATION
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
2016
2015
410.9
1.8
412.7
390.9
1.8
392.7
BASIC AND DILUTED EARNINGS PER ORDINARY SHARE
Earnings per ordinary share before non-underlying 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:
Profit
after tax
£m
152.1
39.2
(29.1)
162.2
Statutory earnings
Deferred tax charge before non-underlying items
Non-underlying items (net of tax)
Earnings before non-underlying items and deferred tax
12. DIVIDENDS
Amounts recognised as distributions to ordinary equity holders in the year
Interim dividend paid for the year ended 31 March 2015: 9.98p (2014 9.39p) per share
Final dividend paid for the year ended 31 March 2015: 21.82p (2014 20.92p) per share
Proposed dividends
Proposed interim dividend for the year ended 31 March 2016: 10.46p per share
Proposed final dividend for the year ended 31 March 2016: 23.12p per share
2016
2015
Earnings per share
Basic
p
Diluted
p
Profit
after tax
£m
Earnings per share
Diluted
p
Basic
p
37.0
9.5
(7.0)
39.5
36.9
9.5
(7.1)
39.3
126.3
18.2
11.0
155.5
32.2
4.6
2.8
39.6
2015
£m
34.8
82.2
117.0
32.3
4.7
2.8
39.8
2016
£m
39.8
89.7
129.5
43.1
95.4
138.5
The proposed interim and final dividends have not been included as liabilities in these financial statements.
The proposed interim dividend for 2016 was paid on 1 April 2016 and the proposed final dividend is subject to approval by shareholders at the Annual
General Meeting.
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13. EMPLOYMENT COSTS
Wages and salaries
Social security costs
Pension costs
Share-based payments
Non-underlying items
Total employment costs
Charged:
Employment costs (excluding non-underlying items) – consolidated income statement
Non-underlying items – consolidated income statement
Capital schemes – property, plant and equipment
Total employment costs
Notes
30
33
6, 30
6
2016
£m
158.0
15.3
20.1
2.8
8.6
204.8
180.0
8.6
16.2
204.8
2015
£m
143.9
13.8
17.9
3.5
(14.9)
164.2
164.3
(14.9)
14.8
164.2
Details of Directors’ emoluments are set out in note 14. There are no personnel, other than Directors, who as key management exercise authority and
responsibility for planning, directing and controlling the activities of the Group.
Employees (average full time equivalent number)
The average monthly number of employees (including Executive Directors) was:
Water
Waste management
Other
Group totals
The total number of employees at 31 March 2016 was 5,033 (2015 4,590).
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
2016
2015
1,706
3,230
51
4,987
2016
£000
1,152
416
555
258
529
1,408
3,101
49
4,558
2015
£000
1,119
382
750
327
506
2,910
3,084
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 £220,000 (2015 £642,000).
Total gains made by Directors on the exercise of share options were £2,000 (2015 £nil).
Total emoluments include £1,200,000 (2015 £1,359,000) payable to Directors for services as directors of subsidiary undertakings.
At 31 March 2016 one Director (2015 one) is accruing retirement benefits under defined benefit pension schemes in respect of which the Group
contributed £29,000 (2015 £5,000).
At 31 March 2016 one Director (2015 one) is a member of the Group’s defined contribution pension scheme in respect of which the Group
contributed £52,000 (2015 £49,700).
At 31 March 2016 three Directors received payments in lieu of pension provision (2015 three).
More detailed information concerning Directors’ emoluments (including pensions and the highest paid Director) and share interests is shown in the
Directors’ remuneration report on pages 77 to 98.
136
NOTES TO THE FINANCIAL STATEMENTS CONTINUEDPENNON GROUP PLC ANNUAL REPORT 2016FINANCIAL STATEMENTS AND SHAREHOLDER INFORMATION
15. GOODWILL
Cost:
At 1 April 2014
At 31 March 2015
Recognised on acquisition of subsidiaries (note 44)
At 31 March 2016
Carrying amount:
At 1 April 2014
At 31 March 2015
At 31 March 2016
£m
339.3
339.3
45.7
385.0
339.3
339.3
385.0
Goodwill acquired in a business combination is allocated at acquisition to the cash generating unit (CGU) expected to benefit from that business
combination. £342.7 million of the goodwill balance is allocated to the waste management business, with the remaining £42.3 million allocated to the
water business, representing the lowest levels 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 water business segment, for which goodwill was first recognised during the year on the acquisition of Bournemouth
Water, is assessed with reference to performance expectations compared to those assumed at time of acquisition. Key assumptions used to assess the
value of this goodwill included future allowed tariff increases and delivery of operational efficiencies.
The recoverable amount of the waste management segment, to which the majority of 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.
Management has applied the following assumptions to the cash flow projections:
Assumption
Discount rate
Pre-tax discount rates used range from
7% to 10%, across the CGUs business activities –
(2015 7.5% to 10%)
Long-term growth rates
0.5% applied to overheads beyond the period of the
detailed projections. (2015 0.5%)
2.5% applied to other cash flows beyond the period of
the detailed projections. (2015 2.5%)
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.
137
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Acquired intangible assets
Cost:
At 1 April 2014
Additions
At 31 March 2015
Additions
Recognised on acquisition of subsidiaries (note 44)
At 31 March 2016
Accumulated amortisation:
At 1 April 2014
Charge for year
At 31 March 2015
Charge for year
At 31 March 2016
Carrying amount:
At 1 April 2014
At 31 March 2015
At 31 March 2016
Service
concession
arrangements
£m
Customer
contracts
£m
Patents
£m
Other
£m
Total
£m
19.6
28.5
48.1
6.9
–
55.0
–
–
–
–
–
19.6
48.1
55.0
32.7
–
32.7
–
1.6
34.3
21.8
2.7
24.5
3.0
27.5
10.9
8.2
6.8
0.2
–
0.2
–
–
0.2
0.1
–
0.1
0.1
0.2
0.1
0.1
–
–
–
–
0.3
2.3
2.6
–
–
–
0.6
0.6
–
–
2.0
52.5
28.5
81.0
7.2
3.9
92.1
21.9
2.7
24.6
3.7
28.3
30.6
56.4
63.8
Service concession arrangements, once available for use, are amortised over the useful life of each contract. The average remaining life is 24 years
(2015 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 (2015 three years).
Patents are amortised over their estimated useful lives which at acquisition was 13 years. The average remaining life is two years (2015 three years).
Other, including computer software, is amortised over the useful life of the assets which at acquisition was three years. The average remaining life is
two 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.
During the year borrowing costs of £2.1 million (2015 £1.4 million) have been capitalised on qualifying assets, at an average borrowing rate of 4.2%
(2015 4.1%).
The principle assumptions used to assess impairment are set out in note 17.
138
NOTES TO THE FINANCIAL STATEMENTS CONTINUEDPENNON GROUP PLC ANNUAL REPORT 2016FINANCIAL 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
481.9
9.7
–
–
(0.5)
2.6
493.7
10.5
41.5
–
–
(28.8)
7.5
524.4
312.8
22.7
–
(0.2)
335.3
21.2
36.0
(20.3)
372.2
169.1
158.4
152.2
1,608.6
11.5
6.9
(1.8)
(1.2)
17.5
1,641.5
19.3
121.1
6.6
(5.5)
(1.2)
43.1
1,824.9
178.6
23.9
–
(1.2)
201.3
23.6
–
(1.2)
223.7
1,430.0
1,440.2
1,601.2
641.3
3.5
–
–
(0.1)
4.9
649.6
1.0
27.4
0.8
–
(0.1)
14.8
693.5
203.5
11.7
–
(0.1)
215.1
12.4
–
(0.1)
227.4
437.8
434.5
466.1
1,622.5
34.8
0.1
–
(25.6)
519.8
2,151.6
35.4
35.2
–
–
(18.2)
425.9
2,629.9
960.3
98.7
24.3
(23.9)
1,059.4
123.5
(36.0)
(17.0)
1,129.9
662.2
1,092.2
1,500.0
63.4
–
–
–
–
4.0
67.4
–
–
–
–
(2.8)
–
64.6
42.6
6.9
–
–
49.5
4.6
–
(1.2)
52.9
20.8
17.9
11.7
730.5
241.9
–
–
–
(536.8)
435.6
218.0
3.8
–
–
–
(491.3)
166.1
–
–
–
–
–
–
–
–
–
730.5
435.6
166.1
Total
£m
5,148.2
301.4
7.0
(1.8)
(27.4)
12.0
5,439.4
284.2
229.0
7.4
(5.5)
(51.1)
–
5,903.4
1,697.8
163.9
24.3
(25.4)
1,860.6
185.3
–
(39.8)
2,006.1
3,450.4
3,578.8
3,897.3
Group
Cost:
At 1 April 2014
Additions
Assets adopted at fair value
Grants and contributions
Disposals
Transfers/ reclassifications
At 31 March 2015
Additions
Arising on acquisition (note 44)
Assets adopted at fair value
Grants and contributions
Disposals
Transfers/ reclassifications
At 31 March 2016
Accumulated depreciation:
At 1 April 2014
Charge for year
Impairment charge/ reversal for
the year
Disposals
At 31 March 2015
Charge for year
Impairment charge/ reversal for
the year
Disposals
At 31 March 2016
Net book value:
At 1 April 2014
At 31 March 2015
At 31 March 2016
Of the total depreciation charge of £185.3 million (2015 £163.9 million), £1.4 million (2015 £1.3 million) has been charged to capital projects, £1.0 million
(2015 £0.9 million) has been offset by deferred income and £182.9 million (2015 £161.7 million) has been charged against profits.
Asset lives and residual values are reviewed annually.
During the year borrowing costs of £7.3 million (2015 £21.1 million) have been capitalised on qualifying assets, at an average borrowing rate of 4.1%.
IMPAIRMENT TESTING FOR PROPERTY, PLANT AND EQUIPMENT AND 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 assets which together 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 assets 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).
To reflect changes in the waste market, including the structural decline of landfill, and the prominence of recycling and recovering value from waste,
together with the reorientation of Viridor’s operations towards ERFs, the allocation of CGUs has been refreshed.
The updated allocations ensure CGUs reflect the lowest level of independent cash inflows. Non-strategic landfill assets are considered separate CGUs
as are landfill gas assets, with other remaining assets allocated to regional CGUs.
The result of this change in CGUs is an impairment of non-strategic landfill sites of £60.9 million and a £60.9 million reversal of assets, including strategic
landfill sites and recycling assets, allocated to regional CGUs.
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.
139
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17. PROPERTY, PLANT AND EQUIPMENT CONTINUED
For the purposes of disclosing the results of the impairment review the CGUs have been grouped together by asset class of non-strategic landfill CGUs
or regional CGUs. 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%
The pre-tax discount rate used for regional CGUs ranges from 7% - 10%
Long–term growth rates
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.
0.5% applied to overheads beyond the period of the detailed
projections.
Ongoing efficiencies and benefits from economies of scale.
2.5% applied to other cash flows beyond the strategic plan period up to
the end of the life of the assets on projected volumes.
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 or impairment reversal in the year.
Assets held under finance leases included above were:
Infrastructure
assets
£m
Operational
properties
£m
Fixed and
mobile plant,
vehicles and
computers
£m
Construction
in progress
£m
398.0
409.5
47.4
52.6
350.6
356.9
422.3
439.8
96.9
107.2
325.4
332.6
492.3
515.9
210.1
252.6
282.2
263.3
1.1
0.2
–
–
1.1
0.2
Total
£m
1,313.7
1,365.4
354.4
412.4
959.3
953.0
Cost:
At 31 March 2015
At 31 March 2016
Accumulated depreciation:
At 31 March 2015
At 31 March 2016
Net book amount:
At 31 March 2015
At 31 March 2016
140
NOTES TO THE FINANCIAL STATEMENTS CONTINUEDPENNON GROUP PLC ANNUAL REPORT 2016FINANCIAL STATEMENTS AND SHAREHOLDER INFORMATION Company
Cost:
At 1 April 2014
Additions
Disposals
At 31 March 2015
Additions
Disposals
At 31 March 2016
Accumulated depreciation:
At 1 April 2014
Charge for year
Disposals
At 31 March 2015
Charge for year
Disposals
At 31 March 2016
Net book value:
At 1 April 2014
At 31 March 2015
At 31 March 2016
Asset lives and residual values are reviewed annually.
Fixed and mobile plant,
vehicles and computers
£m
0.3
0.1
(0.1)
0.3
0.1
(0.1)
0.3
0.1
0.1
–
0.2
0.1
(0.1)
0.2
0.2
0.1
0.1
141
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18. FINANCIAL INSTRUMENTS BY CATEGORY
The accounting policies for financial instruments have been applied to the line items:
Fair value
Amortised cost
Derivatives
used for
fair value
hedging
£m
Derivatives
used for cash
flow hedging
£m
Derivatives
not in a hedge
accounting
relationship
£m
Loans and
receivables
£m
Trade
receivables
and trade
payables
£m
–
–
1.8
–
1.8
–
–
–
–
–
–
68.1
–
68.1
–
(6.5)
–
(6.5)
–
–
1.8
–
1.8
–
–
–
–
–
–
–
–
–
–
(0.7)
–
(0.7)
–
–
3.4
–
3.4
–
(46.9)
–
(46.9)
–
–
0.2
–
0.2
–
(45.9)
–
(45.9)
–
–
–
–
–
–
–
(7.6)
–
(7.6)
–
–
–
–
–
(13.1)
–
(13.1)
–
–
67.0
–
67.0
–
(9.0)
–
(9.0)
–
–
–
–
–
–
(13.1)
–
(13.1)
–
–
–
–
–
–
–
(4.2)
–
(4.2)
–
–
–
–
–
(3.6)
–
(3.6)
–
283.0
–
632.2
915.2
(3,116.6)
–
–
(3,116.6)
–
300.2
–
771.0
1,071.2
(2,968.1)
–
–
(2,968.1)
974.2
7.4
–
429.7
1,411.3
(0.3)
(1,164.3)
–
–
(1,164.6)
945.2
532.5
1,477.7
(0.3)
(1,219.3)
–
–
(1,219.6)
208.0
–
–
–
208.0
–
–
(95.9)
(95.9)
195.7
–
–
–
195.7
–
–
(102.5)
(102.5)
–
–
–
–
–
–
–
–
(0.3)
(0.3)
–
–
–
–
–
–
(0.1)
(0.1)
Total
£m
208.0
283.0
72.2
632.2
1,195.4
(3,116.6)
(55.9)
(95.9)
(3,268.4)
195.7
300.2
68.3
771.0
1,335.2
(2,968.1)
(65.5)
(102.5)
(3,136.1)
974.2
7.4
1.8
429.7
1,413.1
(0.3)
(1,164.3)
(11.8)
(0.3)
(1,176.7)
945.2
532.5
1,477.7
(0.3)
(1,219.3)
(17.4)
(0.1)
(1,237.1)
Notes
22
19,22
23
25
28
23
26
22
19,22
23
25
28
23
26
19,22
22
23
25
26
28
23
26
19,22
25
26
28
23
26
Group
31 March 2016
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 2015
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 2016
Financial assets
Amounts owed by subsidiaries
Other receivables
Derivative financial instruments
Cash and cash deposits
Total
Financial liabilities
Amounts due to subsidiaries
Borrowings
Derivative financial instruments
Trade payables
Total
31 March 2015
Financial assets
Amounts owed by subsidiaries
Cash and cash deposits
Total
Financial liabilities
Amounts due to subsidiaries
Borrowings
Derivative financial instruments
Trade payables
Total
142
NOTES TO THE FINANCIAL STATEMENTS CONTINUEDPENNON GROUP PLC ANNUAL REPORT 2016FINANCIAL STATEMENTS AND SHAREHOLDER INFORMATION
19. OTHER NON-CURRENT ASSETS
Non-current receivables
Amounts owed by subsidiary undertakings
Amounts owed by related parties (note 46)
Service concession arrangements
Other receivables
Non-current receivables were due:
Between 1 and 2 years
Over 2 years and less than 5 years
Over 5 years
The fair values of non-current receivables were:
Amounts owed by subsidiary undertakings
Amounts owed by related parties
Service concession arrangements
Other receivables
Group
Company
2015
£m
–
97.6
182.9
10.6
291.1
2016
£m
905.1
–
–
0.4
905.5
2015
£m
789.6
–
–
0.4
790.0
Group
Company
2015
£m
20.3
31.5
239.3
291.1
2016
£m
66.4
250.4
588.7
905.5
2015
£m
63.0
229.1
497.9
790.0
Group
Company
2015
£m
–
170.7
182.9
10.6
364.2
2016
£m
1,000.5
–
–
0.4
1,000.9
2015
£m
897.5
–
–
0.4
897.9
2016
£m
–
78.3
179.4
10.1
267.8
2016
£m
36.7
29.4
201.7
267.8
2016
£m
–
145.4
179.4
10.1
334.9
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% (2015 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% (2015 12.3%).
Other receivables include site development and pre-contract costs of £9.6 million (2015 £9.3 million).
143
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SUBSIDIARY UNDERTAKINGS
Company
At 1 April 2014
Additions
At 31 March 2015
Additions
At 31 March 2016
JOINT VENTURES
Group
At 1 April 2014
Share of post–tax profit
Share of other comprehensive profit
Dividends received
At 31 March 2015
Share of post–tax profit
Share of other comprehensive profit
Dividends received
At 31 March 2016
£m
1,323.3
200.3
1,523.6
104.7
1,628.3
Shares
£m
0.1
4.9
1.1
(6.0)
0.1
3.6
2.4
(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
Lakeside Energy from Waste Holdings Limited(1)
Viridor Laing (Greater Manchester) Holdings Limited(2)
INEOS Runcorn (TPS) Holdings Limited(3)
Place of business/
country of incorporation
% of ownership
Measurement method
England
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 facility facilities. 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.
144
NOTES TO THE FINANCIAL STATEMENTS CONTINUEDPENNON GROUP PLC ANNUAL REPORT 2016FINANCIAL STATEMENTS AND SHAREHOLDER INFORMATION
Summarised financial information for the Group’s joint ventures and associate:
SUMMARISED BALANCE SHEET
Lakeside
Energy
from Waste
Holdings
Limited
£m
2016
Viridor Laing
(Greater
Manchester)
Holdings
Limited
£m
INEOS
Runcorn
(TPS)
Holdings
Limited
£m
Lakeside
Energy
from Waste
Holdings
Limited
£m
2015
Viridor Laing
(Greater
Manchester)
Holdings
Limited
£m
INEOS
Runcorn (TPS)
Holdings
Limited
£m
14.4
9.5
23.9
–
(3.7)
(3.7)
61.2
27.4
88.6
–
(43.2)
(43.2)
24.3
17.5
41.8
–
(11.4)
(11.4)
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)
122.6
288.8
289.7
130.6
328.0
297.2
(114.0)
(38.0)
(152.0)
(9.2)
(99.6)
17.8
(81.8)
(331.4)
(43.2)
(374.6)
(40.4)
(270.2)
73.6
(196.6)
(322.1)
(53.6)
(375.7)
(55.6)
(297.8)
94.6
(203.2)
(125.8)
(39.6)
(165.4)
(11.5)
(103.9)
18.5
(85.4)
(387.3)
(56.4)
(443.7)
(44.8)
(282.9)
114.4
(168.5)
(319.1)
(46.0)
(365.1)
(47.6)
(289.8)
84.2
(205.6)
Lakeside
Energy
from Waste
Holdings
Limited
£m
2016
Viridor Laing
(Greater
Manchester)
Holdings
Limited
£m
INEOS
Runcorn
(TPS)
Holdings
Limited
£m
Lakeside
Energy
from Waste
Holdings
Limited
£m
2015
Viridor Laing
(Greater
Manchester)
Holdings
Limited
£m
INEOS
Runcorn (TPS)
Holdings
Limited
£m
46.7
31.3
(7.9)
–
(9.0)
14.4
(1.2)
13.2
1.1
14.3
(12.0)
148.0
6.2
(1.2)
23.4
(29.6)
(1.2)
1.1
(0.1)
4.5
4.4
–
56.2
34.3
(10.7)
–
(30.0)
(6.4)
(1.4)
(7.8)
(0.2)
(8.0)
–
49.6
36.2
(7.9)
–
(9.4)
18.9
(2.5)
16.4
(7.8)
8.6
(12.0)
141.4
6.0
(1.3)
24.2
(32.6)
(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)
–
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)
Summarised statement of comprehensive income
Revenue
EBITDA
Depreciation and amortisation
Interest receivable on service concession
arrangements
Other net interest charge
Pre–tax profit/ (loss)
Income tax (expense)/ income
Post–tax profit/ (loss)
Other comprehensive income/ (loss)
Total comprehensive income/ (loss)
Dividends paid by joint venture
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.
145
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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.
Lakeside
Energy
from Waste
Holdings
Limited
£m
2016
Viridor Laing
(Greater
Manchester)
Holdings
Limited
£m
INEOS
Runcorn
(TPS)
Holdings
Limited
£m
Lakeside
Energy
from Waste
Holdings
Limited
£m
2015
Viridor Laing
(Greater
Manchester)
Holdings
Limited
£m
INEOS
Runcorn (TPS)
Holdings
Limited
£m
(11.5)
13.2
1.1
(12.0)
(9.2)
(4.6)
4.7
0.1
(44.8)
(0.1)
4.5
–
(40.4)
(20.2)
20.2
–
(47.6)
(7.8)
(0.2)
–
(55.6)
(20.9)
20.9
–
(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)
(23.8)
23.8
–
Opening net liabilities 1 April
Profit/ (loss) for the year
Other comprehensive income/ (loss)
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
Group
Company
2016
£m
20.6
2015
£m
15.0
2016
£m
–
2015
£m
–
146
NOTES TO THE FINANCIAL STATEMENTS CONTINUEDPENNON GROUP PLC ANNUAL REPORT 2016FINANCIAL STATEMENTS AND SHAREHOLDER INFORMATION
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
2016
£m
303.6
(95.6)
208.0
17.9
–
14.3
83.3
2015
£m
282.5
(86.8)
195.7
19.7
–
10.9
61.4
323.5
287.7
2016
£m
2015
£m
–
–
–
–
69.1
7.4
0.9
77.4
–
–
–
–
155.6
0.3
0.3
156.2
Trade receivables include accrued income relating to customers with water 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.
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
2016
£m
37.8
18.7
148.8
2015
£m
33.6
20.8
134.4
The aged trade receivables above are taken directly from aged sales ledger records before deduction of credit balances and other adjustments.
The Group’s operating businesses specifically review separate categories of debt to identify an appropriate provision for impairment. South West
Water Limited and Bournemouth Water Limited have 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
Arising on acquisition (note 44)
Provision for receivables impairment
Receivables written off during the year as uncollectable
Cumulative amounts previously excluded from debt
At 31 March
2016
£m
86.8
1.0
8.4
(4.1)
3.5
95.6
2015
£m
86.1
–
12.8
(19.2)
7.1
86.8
147
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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
Derivatives not in a hedge accounting relationship
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Group
Company
2016
£m
2.4
1.0
(14.7)
(32.2)
1.3
0.5
–
–
59.0
8.0
(2.7)
(6.3)
2015
£m
0.2
–
(13.2)
(32.7)
60.0
8.1
(2.4)
(4.1)
–
–
(3.9)
(9.2)
2016
£m
–
–
(2.7)
(4.9)
1.3
0.5
–
–
–
–
–
2015
£m
–
–
(2.9)
(10.2)
–
–
–
(0.7)
–
–
–
(4.2)
(3.6)
The fair value of hedging derivatives is split between current and non-current assets or liabilities based on the maturity of the cash flows.
The ineffective portion recognised in the income statement arising from hedging relationships was £nil (2015 £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 2016 67% of Group net borrowings were at fixed rate (2015 72%).
At 31 March 2016 the Group had interest rate swaps to swap from floating to fixed rate and hedge financial liabilities with a notional value of £1,078.0
million and a weighted average maturity of 3.9 years (2015 £1,103.0 million, with 4.4 years). The weighted average interest rate of the swaps for their
nominal amount was 2.0% (2015 2.1%).
Derivatives deemed held for trading includes a derivative with a fair value of £4.2 million (2015 £3.6 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 10 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.
148
NOTES TO THE FINANCIAL STATEMENTS CONTINUEDPENNON GROUP PLC ANNUAL REPORT 2016FINANCIAL STATEMENTS AND SHAREHOLDER INFORMATION
The Group’s financial instruments are valued principally using level 2 measures:
Level 2 inputs
Assets
Derivatives used for cash flow hedging
Derivatives used for fair value hedging
Derivatives not in a hedge accounting relationship
Total assets
Liabilities
Derivatives used for cash flow hedging
Derivatives used for fair value hedging
Derivatives not in a hedge accounting relationship
Total liabilities
Group
Company
2015
£m
0.2
68.1
–
68.3
45.9
6.5
9.5
61.9
2016
£m
2015
£m
–
1.8
–
1.8
7.5
–
–
7.5
–
–
–
–
13.1
0.7
–
13.8
2016
£m
3.4
1.8
67.0
72.2
46.9
–
4.8
51.7
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
2016
£m
2015
£m
2016
£m
2015
£m
Derivatives deemed held for trading
4.2
3.6
4.2
3.6
The following table presents the changes in level 3 financial instruments for the year:
Level 3 inputs
At 1 April
Gains recognised in net finance costs
Settlement of recognised gains
At 31 March
Group
Company
2016
£m
(3.6)
8.4
(9.0)
(4.2)
2015
£m
(2.4)
7.8
(9.0)
(3.6)
2016
£m
(3.6)
8.4
(9.0)
(4.2)
24. FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT
Group
Company
Current assets
Current liabilities
Non-current liabilities
2016
£m
–
(2.2)
(51.0)
2015
£m
0.1
–
(57.3)
2016
£m
–
–
(1.6)
(0.5)
2015
£m
(2.4)
7.8
(9.0)
(3.6)
2015
£m
–
–
Financial instruments at fair value through profit reflect the fair value movement of the hedged risk on a hedged item which had been designated in a
fair value hedging relationship.
149
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25. CASH AND CASH DEPOSITS
Cash at bank and in hand
Short-term bank deposits
Other deposits
Total cash and cash deposits
Group
Company
2016
£m
44.5
31.1
556.6
632.2
2015
£m
49.6
125.0
596.4
771.0
2016
£m
92.7
31.1
305.9
429.7
2015
£m
42.4
125.0
365.1
532.5
Group short-term deposits have an average maturity of one day.
Group other deposits have an average maturity of 53 days.
Group other deposits include restricted funds of £216.8 million (2015 £186.5 million) to settle long-term lease liabilities (note 28) and £9.7 million
(2015 £9.7 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
Group
Company
2016
£m
632.2
(226.5)
405.7
2015
£m
771.0
(196.2)
574.8
2016
£m
429.7
(9.7)
420.0
2015
£m
532.5
–
532.5
Trade payables
Amounts owed to subsidiary undertakings
Amounts owed to joint ventures (note 46)
Other tax and social security
Accruals and other payables
Group
Company
2016
£m
95.9
–
3.9
52.3
112.5
264.6
2015
£m
102.5
–
1.2
64.2
109.8
277.7
2016
£m
0.3
0.3
–
0.3
5.0
5.9
The Directors consider that the carrying amount of trade and other payables approximates to their fair value.
27. CURRENT TAX LIABILITIES
Group
Company
2016
£m
–
51.6
(14.5)
37.1
2015
£m
15.6
36.6
–
52.2
2016
£m
–
53.5
–
53.5
Corporation tax creditor
Continuing uncertain tax items
Clarified tax items
Current tax liabilities
150
2015
£m
0.1
0.3
–
0.3
4.9
5.6
2015
£m
–
23.8
–
23.8
NOTES TO THE FINANCIAL STATEMENTS CONTINUEDPENNON GROUP PLC ANNUAL REPORT 2016FINANCIAL STATEMENTS AND SHAREHOLDER INFORMATION
28. BORROWINGS
Current
Short-term loans
European Investment Bank
Amounts owed to subsidiary undertakings (note 46)
Obligations under finance leases
Total current borrowings
Non-current
Bank and other loans
Private placements
Bond 2040
RPI index-linked bonds
European Investment Bank
Obligations under finance leases
Total non-current borrowings
Total borrowings
Group
Company
2016
£m
0.3
38.7
–
39.0
26.0
65.0
403.2
553.8
133.3
412.2
234.5
1,737.0
1,314.6
3,051.6
3,116.6
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
2016
£m
–
–
287.2
287.2
–
287.2
323.3
553.8
–
–
–
877.1
–
877.1
1,164.3
2015
£m
50.7
–
283.2
333.9
–
333.9
338.0
547.4
–
–
–
885.4
–
885.4
1,219.3
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%.
South West Water Finance Plc issued a £150 million bond in July 2010 maturing in 2040 with a cash coupon of 5.875%.
Bournemouth Water Limited issued a £65 million RPI index-linked bond in April 2005 maturing in 2033 with a cash coupon of 3.084%.
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
2016
2015
Book value
£m
Fair value
£m
Book value
£m
Fair value
£m
403.2
553.8
133.3
412.2
234.5
1,737.0
1,314.6
3,051.6
323.3
553.8
877.1
403.2
600.0
198.4
364.6
209.3
1,775.5
1,163.0
2,938.5
323.3
600.0
923.3
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
Where market values are not available, fair values of borrowings have been calculated by discounting expected future cash flows at prevailing
interest rates.
151
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The maturity of non-current borrowings was:
Between 1 and 2 years
Over 2 year and less than 5 years
Over 5 years
The weighted average maturity of non-current borrowings was 22 years (2015 23 years).
Finance lease liabilities – minimum lease payments were:
Within 1 year
Over 1 year and less than 5 years
Over 5 years
Less: future finance charges
Present value of finance lease liabilities
The maturity of finance lease liabilities was:
Within 1 year
Over 1 year and less than 5 years
Over 5 years
Group
Company
2016
£m
141.7
427.0
2,482.9
3,051.6
2015
£m
133.7
465.2
2,255.6
2,854.5
2016
£m
74.6
225.8
576.7
877.1
2015
£m
74.9
310.0
500.5
885.4
Group
Company
2016
£m
41.1
220.5
2,130.7
2,392.3
2015
£m
50.6
251.3
2,167.6
2,469.5
(1,051.7)
(1,133.8)
1,340.6
1,335.7
2016
£m
2015
£m
–
–
–
–
–
–
–
–
–
–
–
–
Group
Company
2016
£m
26.0
124.8
1,189.8
1,340.6
2015
£m
23.7
123.8
1,188.2
1,335.7
2016
£m
2015
£m
–
–
–
–
–
–
–
–
Included above are accrued finance charges arising on obligations under finance leases totalling £138.8 million (2015 £132.8 million), of which
£1.7 million (2015 £2.9 million) is repayable within one year.
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, £71.7 million at 31 March 2016 (2015 £70.7 million), are currently being held to settle the
lease liability, subject to rights to release by negotiation with the lessor. The deposits are subject to a registered charge given as security to the lessor
for the balance outstanding.
152
NOTES TO THE FINANCIAL STATEMENTS CONTINUEDPENNON GROUP PLC ANNUAL REPORT 2016FINANCIAL STATEMENTS AND SHAREHOLDER INFORMATION
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, £142.3 million at 31 March 2016 (2015 £115.8 million), are currently being
held to settle the lease liability, subject to rights to release by negotiation with the lessor. The deposits are subject to a registered charge given as
security to the lessor for the outstanding balance.
Undrawn committed borrowing facilities at the balance sheet date were:
Floating rate:
Expiring within 1 year
Expiring after 1 year
Group
Company
2016
£m
100.0
975.0
1,075.0
2015
£m
150.0
820.4
970.4
2016
£m
50.0
240.0
290.0
2015
£m
–
420.0
420.0
In addition at 31 March 2016 the Group had undrawn uncommitted short-term bank facilities of £25.0 million (2015 £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
2016
£m
–
113.2
113.2
2015
£m
–
110.1
110.1
2016
£m
8.7
–
8.7
2015
£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 segment.
Included in 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.
153
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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 £7.5 million (2015 £5.4 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
2016
%
2.9
2.9
3.30
2.9
2015
%
2.9
2.9
3.35
2.9
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
2016
25.1
27.3
The average life expectancy in years of a future pensioner retiring at age 62, 20 years after the balance sheet date, is projected as:
Male
Female
The sensitivities regarding the principal assumptions used to measure the schemes’ liabilities are:
2016
26.5
29.6
2015
25.0
27.2
2015
26.4
29.5
2014
%
3.4
3.2
4.30
3.4
2014
24.9
27.1
2014
26.3
29.4
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
+/– 0.1%
+/– 6.2%
+/– 9.4%
+/– 6.3%
+/– 3.6%
154
NOTES TO THE FINANCIAL STATEMENTS CONTINUEDPENNON GROUP PLC ANNUAL REPORT 2016FINANCIAL STATEMENTS AND SHAREHOLDER INFORMATION 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
The movement in the net defined benefit obligation over the accounting period is as follows:
At 1 April
Arising on acquisition (note 44)
Current service cost
Past service cost and gains and losses on settlements*
Interest (expense)/ income
Remeasurements:
(Loss)/ return on plan on assets excluding amounts
included in interest expense
Gain from change in demographic assumptions
Gain/ (loss) from change in financial assumptions
Experience gains
Contributions:
Employers
Plan participants
Payments from plans:
Benefit payments
Present
value of
obligation
£m
(752.3)
(86.6)
(12.6)
–
(27.3)
(39.9)
–
–
2.7
14.4
17.1
–
(1.1)
29.2
28.1
2016
Fair value
of plan
assets
£m
692.7
88.5
–
–
25.5
25.5
–
–
–
(19.7)
33.8
1.1
(29.2)
5.7
At 31 March
(833.6)
792.7
* includes non-underlying credit of £14.9 million in 2015.
Group
Company
2016
£m
(826.0)
792.7
(33.3)
(7.6)
(40.9)
Total
£m
(59.6)
1.9
(12.6)
–
(1.8)
(14.4)
2015
£m
(742.2)
692.7
(49.5)
(10.1)
(59.6)
2016
£m
(50.7)
47.7
(3.0)
–
(3.0)
2015
Present value
of obligation
£m
Fair value of
plan assets
£m
(687.7)
608.4
–
(12.5)
14.6
(28.6)
(26.5)
–
–
–
25.9
25.9
–
2.7
14.4
(2.6)
33.8
–
–
33.8
(40.9)
19.0
(81.5)
1.7
(60.8)
–
(1.2)
23.9
22.7
–
–
–
58.7
22.4
1.2
(23.9)
(0.3)
(752.3)
692.7
(19.7)
(19.7)
–
58.7
2015
£m
(50.8)
46.6
(4.2)
–
(4.2)
Total
£m
(79.3)
–
(12.5)
14.6
(2.7)
(0.6)
58.7
19.0
(81.5)
1.7
(2.1)
22.4
–
–
22.4
(59.6)
155
www.pennonannualreport.co.uk/2016OVERVIEWGROUP PERFORMANCEGOVERNANCEFINANCIAL STATEMENTS 30. RETIREMENT BENEFIT OBLIGATIONS CONTINUED
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:
(Loss)/ return on plan on assets excluding amounts
included in interest expense
Gain from change in demographic assumptions
Loss from change in financial assumptions
Experience gains
Contributions:
Employers
Payments from plans:
Benefit payments
31 March
Changes in the effect of the asset ceiling during the year were:
Irrecoverable asset at start of the year
Interest on irrecoverable surplus
Actuarial losses
Present
value of
obligation
£m
2016
Fair value
of plan
assets
£m
Total
£m
(4.2)
(0.3)
–
(0.2)
(0.5)
46.6
–
–
1.5
1.5
(0.9)
(0.9)
–
–
–
(0.9)
–
–
0.3
(0.6)
2.3
2.3
(50.8)
(0.3)
–
(1.7)
(2.0)
–
–
–
0.3
0.3
–
1.8
1.8
(50.7)
(1.8)
0.5
47.7
–
2.3
(3.0)
2016
£m
10.1
0.3
(2.8)
2015
Present value
of obligation
£m
(47.2)
Fair value of
plan assets
£m
41.0
(0.4)
1.2
(2.0)
(1.2)
–
1.4
(5.8)
0.1
(4.3)
–
1.9
1.9
(50.8)
–
–
1.8
1.8
3.7
–
–
–
3.7
2.0
(1.9)
0.1
46.6
Total
£m
(6.2)
(0.4)
1.2
(0.2)
0.6
3.7
1.4
(5.8)
0.1
(0.6)
2.0
–
2.0
(4.2)
Group
Company
2015
£m
10.3
0.4
(0.6)
2016
£m
–
–
–
2015
£m
–
–
–
The Group has two smaller pension schemes which are in surplus. One of these surpluses is deemed to have irrecoverable assets in accordance with
IFRIC 14 ‘The Limit on Defined Benefit Asset, Minimum Funding Requirements and their Interaction’.
The schemes’ assets were:
Quoted
prices
in active
market
£m
247.9
87.2
134.2
170.8
50.4
80.0
770.5
2016
Prices not
quoted
in active
market
£m
–
–
–
–
8.3
13.9
22.2
Quoted
prices
in active
market
£m
240.4
106.2
123.3
71.2
44.8
95.9
681.8
2015
Prices not
quoted
in active
market
£m
–
–
–
–
1.5
9.4
10.9
Fund
%
31
11
17
22
7
12
100
Fund
%
35
15
18
10
7
15
100
Equities
Government bonds
Other bonds
Diversified growth
Property
Other (including cash funds)
156
NOTES TO THE FINANCIAL STATEMENTS CONTINUEDPENNON GROUP PLC ANNUAL REPORT 2016FINANCIAL STATEMENTS AND SHAREHOLDER INFORMATION
Other assets at 31 March 2016 represented principally cash contributions received from the Group towards the year end which were invested during
the subsequent financial year.
The Company’s share of the schemes’ assets at the balance sheet date was:
Equities
Government bonds
Other bonds
Diversified growth
Property
Other
Quoted
prices
in active
market
£m
14.3
8.0
9.7
5.6
4.0
6.1
47.7
2016
Prices not
quoted
in active
market
£m
–
–
–
–
–
–
–
Quoted
prices
in active
market
£m
15.4
8.2
6.4
5.7
3.6
7.3
Fund
%
30
17
20
12
8
13
100
46.6
2015
Prices not
quoted
in active
market
£m
–
–
–
–
–
–
–
Fund
%
33
18
14
12
8
15
100
Through its defined benefit pension plan, 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
The majority of the schemes’ benefit obligations are linked to inflation, and higher inflation will lead to higher liabilities
(although, in most cases, caps on the level of inflationary increases are in place to protect against extreme inflation).
The majority of the assets are either unaffected by or loosely correlated with inflation, meaning that an increase in
inflation will also increase the deficit.
Life expectancy
The majority of the schemes’ obligations are to provide benefits for the life of the member, so increases in life
expectancy will result in an increase in the liabilities.
In conjunction with its investment advisers, the trustees have structured the schemes’ investments with the objective of balancing investment returns
and levels of risk. The asset allocation for the main scheme has three principal elements:
• holding of 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 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 £23.7 million to the main scheme during the year (2015 £11.0 million). The Group monitors funding levels on an annual basis and expects to pay total
contributions of around £10 million during the year ended 31 March 2017.
157
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31. DEFERRED TAX
Deferred tax is provided in full on temporary differences under the liability method using enacted tax rates (2015 20%).
Movements on deferred tax were:
Liabilities/ (assets) at 1 April
Charged/ (credited) to the income statement
Charged/ (credited) to equity
Change of rate in income statement – non-underlying
Other non-underlying charges in the income statement
Arising on acquisition (note 44)
Liabilities/ (assets) at 31 March
Group
Company
2016
£m
235.9
39.2
4.5
(33.1)
0.7
24.8
272.0
2015
£m
227.1
18.2
(6.1)
–
(3.3)
–
235.9
2016
£m
(3.0)
0.5
0.5
(0.2)
–
–
(2.2)
2015
£m
(1.3)
(0.1)
(1.6)
–
–
–
(3.0)
Deferred tax assets have been recognised in respect of all temporary differences giving rise to deferred tax assets because it is probable that these
assets will be recovered.
The majority of the Group’s deferred tax liability is expected to be recovered over more than one year.
The majority of the Company’s deferred tax asset is expected to be recovered over more than one year.
All deferred tax assets and liabilities within the same jurisdiction are offset.
The deferred tax balance has been reduced by a credit of £29.1 million to recognise the changes in the rate of corporation tax enacted on 18
November 2015 to reduce the rate at 1 April 2017 from 20% to 19%, followed by a further reduction from 1 April 2020 to 18%. This credit includes a
credit of £33.1 million recognised in the income statement and a debit of £3.9 million recognised in equity. If the Government proposals contained in
the Finance Bill 2016 to reduce the rate of corporation tax by a further 1% for the financial year 2021 (2% reduction in total) had been enacted at the
balance sheet date, the impact would have been a further reduction of approximately £15.0 million.
The movements in deferred tax assets and liabilities were:
GROUP
Deferred tax liabilities
At 1 April 2014
(Credited)/ charged to the income statement
Non-underlying credit to the income statement
At 31 March 2015
Arising on acquisition
Charged/ (credited)to the income statement
Non-underlying (credit)/ charge to the income statement
At 31 March 2016
Deferred tax assets
Accelerated tax
depreciation
£m
239.1
(1.4)
(2.7)
235.0
18.3
16.3
(25.9)
243.7
Fair value
adjustments
£m
11.1
(1.2)
–
9.9
19.1
(1.7)
(2.7)
24.6
Revenue on
service concession
arrangements
£m
17.3
20.0
–
37.3
–
7.5
(5.1)
39.7
Other
£m
0.2
0.1
–
0.3
–
–
0.6
0.9
Long term
liabilities incl.
provisions
£m
(15.8)
Retirement
benefit
obligations
£m
(15.9)
Derivatives
£m
(3.3)
Share based
payments
£m
(1.7)
Tax losses
£m
(1.4)
Fair value
adjustment
£m
–
(0.5)
–
(3.6)
(19.9)
(0.1)
14.0
1.1
–
–
(4.9)
1.5
(0.4)
3.0
(11.8)
0.4
3.7
(2.1)
(0.6)
3.0
(7.4)
–
(5.7)
–
(9.0)
–
–
–
1.0
0.8
(7.2)
0.1
–
–
(1.6)
–
–
–
0.2
0.1
(1.3)
–
–
–
(1.4)
–
(0.7)
0.2
–
–
(1.9)
–
–
–
–
(12.9)
0.7
1.2
–
–
(11.0)
At 1 April 2014
Charged/ (credited) to the income
statement
Credited to equity
Non-underlying (credit)/ charge to the
income statement
At 31 March 2015
Arising on acquisition
Charged/ (credited) to the income
statement
Non-underlying charge/ (credit) to the
income statement
(Credited)/ charged to equity
Non-underlying charge to equity
At 31 March 2016
Net liability:
At 31 March 2015
At 31 March 2016
158
Total
£m
267.7
17.5
(2.7)
282.5
37.4
22.1
(33.1)
308.9
Total
£m
(40.6)
0.7
(6.1)
(0.6)
(46.6)
(12.6)
17.1
Other
£m
(2.5)
(0.4)
–
–
(2.9)
–
(0.6)
0.3
0.7
–
–
(3.2)
0.6
3.9
(36.9)
235.9
272.0
NOTES TO THE FINANCIAL STATEMENTS CONTINUEDPENNON GROUP PLC ANNUAL REPORT 2016FINANCIAL STATEMENTS AND SHAREHOLDER INFORMATION
COMPANY
Deferred tax assets
At 1 April 2014
Charged/ (credited) to the income statement
(Credited)/ charged to equity
At 31 March 2015
Charged to the income statement
Non-underlying credit to income statement
(Credited)/ charged to equity
Non-underlying charge to equity
At 31 March 2016
Deferred tax (charged)/ credited to equity during the year was:
Remeasurement of defined benefit obligations
Cash flow hedges
Deferred tax on other comprehensive loss (gain)/ loss
Share-based payments
32. PROVISIONS
Group
At 1 April 2015
Charged to the income statement
Non-underlying charge (note 6)
Released
Utilised
At 31 March 2016
Retirement
benefit
obligations
£m
(1.2)
Derivatives
£m
–
Share based
payments
£m
(0.4)
Other
£m
0.3
(0.6)
–
(0.3)
0.1
–
–
–
(0.2)
Total
£m
(1.3)
(0.1)
(1.6)
(3.0)
0.4
(0.2)
0.2
0.4
(2.2)
0.1
(0.3)
–
–
0.1
–
(0.2)
Group
Company
2015
£m
0.4
5.7
6.1
–
6.1
2016
£m
(0.2)
(0.3)
(0.5)
(0.1)
(0.6)
0.5
(0.1)
(0.8)
0.3
(0.2)
(0.1)
0.3
(0.5)
(1.6)
(1.6)
–
–
0.2
0.1
(1.3)
2016
£m
(2.4)
(1.8)
(4.2)
(0.3)
(4.5)
Environmental
and landfill
restoration
£m
Restructuring
£m
Other
provisions
£m
193.0
11.2
–
(8.8)
(13.3)
182.1
2.0
–
10.2
–
(0.5)
11.7
32.3
4.9
–
(3.5)
(6.1)
27.6
2015
£m
0.1
1.6
1.7
(0.1)
1.6
Total
£m
227.3
16.1
10.2
(12.3)
(19.9)
221.4
2015
£m
32.9
194.4
227.3
The amount charged to the income statement includes £9.4 million (2015 £10.5 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
2016
£m
50.4
171.0
221.4
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.
During the year a landfill asset was disposed which resulted in the release of a £8.8 million environmental and landfill restoration provision. The release
of the provision has also been recognised within profit on disposal of property, plant and equipment.
The restructuring provision relates principally to severance costs and will be utilised within one year.
Other provisions include underperforming contracts of £15.6 million (2015 £18.3 million), which 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.
159
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ALLOTTED, CALLED–UP AND FULLY PAID
Group and Company
Number of shares
Treasury shares Ordinary shares
£m
At 1 April 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 £0.1 million, 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
Shares issued in respect of equity issuance
Shares issued under the Scrip Dividend Alternative
389,515
398,720,708
162.4
–
–
12,084,337
760,626
For consideration of £1.1 million, shares re–issued to the Pennon Employee Share Trust
(143,538)
143,538
For consideration of £0.1 million, shares re–issued under the Executive Share Option Scheme
(8,305)
8,305
For consideration of £1.3 million, shares re–issued under the Company’s Sharesave Scheme
(227,316)
227,316
For consideration of £2.1 million, shares issued under the Company’s Sharesave Scheme
–
395,767
At 31 March 2016 ordinary shares of 40.7p each
10,356
412,340,597
4.9
0.3
–
–
–
0.2
167.8
The 12,084,337 share issuance was on a non pre-emptive basis to replenish cash resources following the acquisition of Bournemouth Water in April
2015. The discount achieved was 0.5% and proceeds raised, net of discount and costs, were £98 million. The percentage increase in issued share capital
due to the issuance was 3%.
Shares held as treasury shares may be sold or re–issued for any of the Company’s share schemes, or cancelled.
EMPLOYEE SHARE SCHEMES
The Group operates a number of equity–settled share plans for the benefit of employees. Details of each plan are:
i) Sharesave Scheme
An all–employee savings related plan is operated that enables employees, including Executive Directors, to invest up to a maximum of £500 per month
for three or five years. These savings can then be used to buy ordinary shares, at a price set at a 20% discount to the market value at the start of the
savings period, at the third, fifth or seventh year anniversary of the option being granted. Options expire six months following the exercise date and,
except for certain specific circumstances such as redundancy, lapse if the employee leaves the Group before the option exercise period commences.
Outstanding options to subscribe for ordinary shares of 40.7p each under the Company’s share option schemes are:
Date granted and subscription
price fully paid
Period when options normally
exercisable
Thousands of shares in respect of which
options outstanding at 31 March
8 July 2008
6 July 2009
28 June 2010
29 June 2011
29 June 2012
3 July 2013
14 July 2014
24 June 2015
160
517p
386p
431p
536p
588p
538p
611p
683p
2011 – 2015
2012 – 2016
2013 – 2017
2014 – 2018
2015 – 2017
2016 – 2018
2017 – 2019
2018 – 2020
2016
–
44
41
150
103
540
687
1,291
2,856
2015
6
49
205
156
561
581
772
–
2,330
NOTES TO THE FINANCIAL STATEMENTS CONTINUEDPENNON GROUP PLC ANNUAL REPORT 2016FINANCIAL STATEMENTS AND SHAREHOLDER INFORMATION
The number and weighted average exercise price of Sharesave options are:
At 1 April
Granted
Forfeited
Exercised
Expired
At 31 March
2016
2015
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
1,364
(170)
(623)
(45)
2,856
561
683
622
545
596
619
2,330
811
(97)
(657)
(57)
2,330
515
611
559
457
550
561
The weighted average price of the Company’s shares at the date of exercise of Sharesave options during the year was 779p (2015 811p). The options
outstanding at 31 March 2016 had a weighted average exercise price of 619p (2015 561p) and a weighted average remaining contractual life of 2.1 years
(2015 1.9 years).
The aggregate fair value of Sharesave options granted during the year was £1.7 million (2015 £0.8 million), determined using the Black-Scholes valuation
model. The significant inputs into the valuation model at the date of issue of the options were:
Weighted average share price
Weighted average exercise price
Expected volatility
Expected life
Risk-free rate
Expected dividend yield
2016
854
683
17.0%
2015
764p
611p
17.0%
3.4 years
3.4 years
0.8%
4.0%
1.4%
4.0%
Expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous two years.
ii) Performance and Co-investment Plan
Executive Directors and senior management receive a conditional award of ordinary shares in the Company and are also required to hold a substantial
personal shareholding in the Company. The eventual number of shares, if any, which vest is dependent upon the achievement of conditions of the plan
over the restricted period, being not less than three years.
The number and price of shares in the Performance and Co-investment Plan are:
At 1 April
Granted
Vested
Lapsed
At 31 March
2016
2015
Number of
ordinary shares
(thousands)
Weighted
average exercise
price per share
(p)
Number of
ordinary shares
(thousands)
Weighted average
exercise price per
share
(p)
1,195
420
–
(417)
1,198
744
811
–
764
761
1,200
400
(132)
(273)
1,195
711
799
698
698
744
The awards outstanding at 31 March 2016 had a weighted exercise price of 761p (2015 744p) and a weighted average remaining contractual life of 1.3
years (2015 1.3 years).
161
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33. SHARE CAPITAL CONTINUED
The aggregate fair value of awards granted during the year was £1.7 million (2015 £1.9 million) determined using a Monte-Carlo simulation model. The
significant inputs into the valuation model at the date of the share awards were:
Weighted average share price
Expected volatility
Risk-free rate
2016
811p
17.0%
0.8%
2015
799p
17.0%
1.4%
Expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous two years.
iii) Annual Incentive Bonus Plan – deferred shares
Awards under the plan to Executive Directors and senior management involve the release of ordinary shares in the Company to participants. There is
no performance condition since vesting is conditional upon continuous service with the Group for a period of three years from the award. The number
and weighted average price of shares in the Annual Incentive Bonus Plan are:
At 1 April
Granted
Vested
Lapsed
At 31 March
2016
2015
Number of
ordinary shares
(thousands)
Weighted
average exercise
price per share
(p)
Number of
ordinary shares
(thousands)
Weighted average
exercise price per
share
(p)
316
154
(152)
(11)
307
758
791
790
776
759
315
107
(106)
–
316
727
822
728
–
758
The awards outstanding at 31 March 2016 had a weighted average exercise price of 759p (2015 758p) and a weighted average remaining contractual life
of 1.6 years (2015 1.3 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 £1.2 million (2015 £0.9 million), determined from market value. No option pricing
methodology is applied since dividends paid on the shares are receivable by the participants in the scheme.
Further details of the plans and options granted to Directors, included above, are shown in the Directors’ remuneration report.
34. SHARE PREMIUM ACCOUNT
Group and Company
At 1 April 2014
Convertible bond – equity issuance
Adjustment for shares issued under the Scrip Dividend Alternative
At 31 March 2015
Equity placing
Equity issuance related costs
Adjustment for shares issued under the Scrip Dividend Alternative
Shares issued under the Sharesave Scheme
At 31 March 2016
162
£m
4.9
116.3
(2.6)
118.6
95.4
(2.3)
(0.3)
1.9
213.3
NOTES TO THE FINANCIAL STATEMENTS CONTINUEDPENNON GROUP PLC ANNUAL REPORT 2016FINANCIAL STATEMENTS AND SHAREHOLDER INFORMATION 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 2014
At 31 March 2015
At 31 March 2016
36. RETAINED EARNINGS AND OTHER RESERVES
Own shares
£m
Hedging
reserve
£m
Retained
earnings
£m
Group
At 1 April 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 (net of tax)
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
At 31 March 2015
Profit for the year
Other comprehensive loss for the year
Transfer from hedging reserve to property, plant and equipment
Dividends paid relating to 2015
Adjustment for shares issued under the Scrip Dividend Alternative
Credit to equity in respect of share-based payments (net of tax)
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 2016
(1.7)
–
–
–
–
–
–
0.7
(0.8)
–
–
(1.8)
–
–
–
–
–
–
0.8
(1.1)
–
(2.1)
608.0
126.3
(0.6)
–
(117.0)
48.0
3.5
(0.7)
–
(0.5)
3.9
670.9
152.1
(2.6)
–
(3.9)
–
(33.0)
1.9
–
–
–
–
–
–
–
(35.0)
–
(0.2)
3.4
–
–
–
–
–
–
(129.5)
(129.5)
6.3
2.5
(0.8)
–
2.5
6.3
2.5
–
(1.1)
2.5
(31.8)
701.4
667.5
£m
144.2
144.2
144.2
Total
£m
602.4
126.3
(33.6)
1.9
(117.0)
48.0
3.5
–
(0.8)
(0.5)
3.9
634.1
152.1
(2.8)
3.4
The own shares reserve represents the cost of ordinary shares in Pennon Group Plc issued to or purchased in the market and held by the Pennon
Employee Share Trust to satisfy awards under the Group’s Annual Incentive Bonus Plan.
The market value of the 309,000 ordinary shares (2015 304,000 ordinary shares) held by the trust at 31 March 2016 was £2.5 million (2015
£2.5 million).
163
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36. RETAINED EARNINGS AND OTHER RESERVES CONTINUED
Hedging
reserve
£m
Retained
earnings
£m
Company
At 1 April 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 (net of tax)
Charge in respect of share options vesting
Convertible bond – equity issuance
Proceeds from treasury shares re-issued
At 31 March 2015
Profit for the year
Other comprehensive loss for the year
Dividends paid relating to 2015
Adjustment for shares issued under the Scrip Dividend Alternative
Credit to equity in respect of share-based payments (net of tax)
Charge in respect of share options vesting
Proceeds from treasury shares re-issued
At 31 March 2016
37. PERPETUAL CAPITAL SECURITIES
Group and Company
At 1 April 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
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 2016
–
–
(5.5)
–
–
–
–
–
–
(5.5)
–
0.5
–
–
–
–
–
Total
£m
777.2
300.1
(5.9)
(117.0)
48.0
0.9
(0.8)
(0.5)
3.9
777.2
300.1
(0.4)
(117.0)
48.0
0.9
(0.8)
(0.5)
3.9
1,011.4
1,005.9
91.4
(0.9)
91.4
(0.4)
(129.5)
(129.5)
6.3
0.7
(0.8)
2.5
6.3
0.7
(0.8)
2.5
(5.0)
981.1
976.1
£m
294.8
(20.3)
4.3
16.0
294.8
(20.3)
4.1
16.2
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 2016, a periodic return of £20.3 million was paid during
the year.
164
NOTES TO THE FINANCIAL STATEMENTS CONTINUEDPENNON GROUP PLC ANNUAL REPORT 2016FINANCIAL 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
Group
Company
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
Non-underlying impairment of property, plant and equipment
Non-underlying provision charge
Non-underlying movement in derivatives
Non-underlying 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
Decrease/(increase) in trade and other receivables
Increase in service concession arrangements receivable
(Decrease)/increase in trade and other payables
Decrease in retirement benefit obligations from contributions
Decrease in provisions
Cash generated/ (outflow) from operations
Reconciliation of total interest paid:
Interest paid in operating activities
Interest paid in investing activities
Total interest paid
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
2016
£m
168.3
2.8
(4.3)
182.9
3.7
–
10.2
(5.2)
–
(3.6)
(42.1)
96.2
–
38.0
(5.5)
10.5
(15.6)
(27.0)
(21.2)
(16.8)
371.3
2016
£m
79.1
9.4
88.5
2016
£m
632.2
(39.0)
(26.0)
–
(65.0)
2015
£m
142.3
3.5
(3.7)
161.7
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)
310.9
2016
£m
107.6
0.8
–
0.1
–
–
–
–
–
–
(52.3)
37.2
(140.7)
44.9
–
(37.4)
–
0.3
(2.2)
–
(41.7)
2015
£m
316.1
1.0
–
0.1
–
–
–
–
(1.2)
–
(51.0)
35.6
(311.6)
11.7
–
(101.6)
–
(1.2)
(1.7)
–
(103.8)
Group
Company
2015
£m
62.0
22.5
84.5
2016
£m
35.3
–
35.3
2015
£m
34.7
–
34.7
Group
Company
2015
£m
771.0
(82.0)
(31.6)
–
(113.6)
2016
£m
429.7
–
–
(287.2)
(287.2)
2015
£m
532.5
(50.7)
–
(283.2)
(333.9)
(1,502.5)
(234.5)
(1,314.6)
(3,051.6)
(2,484.4)
(1,277.2)
(273.2)
(1,304.1)
(2,854.5)
(2,197.1)
(877.1)
(885.4)
–
–
(877.1)
(734.6)
–
–
(885.4)
(686.8)
165
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40. SUBSIDIARY, JOINT VENTURE AND ASSOCIATE UNDERTAKINGS AT 31 MARCH 2016
Principal subsidiary companies
Water
South West Water Limited*
South West Water Finance Plc
Source Contact Management Limited
Bournemouth Water Investments Limited*
Bournemouth Water Limited
Pennon Water Services 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
Viridor Clyde Valley Limited
Other
Peninsula Insurance Limited*(1)
Other trading companies
Alderney Water Limited
Aquacare (BWH) Limited
Avon Valley Water Limited
BWH Enterprises Limited
Dragon Waste Limited (81%)
Peninsula Leasing Limited*
Peninsula Properties (Exeter) Limited
Peninsula Trustees Limited*
Pennon Defined Contribution Pension Trustee Limited*
Pennon Pension Trustees Limited*
Country of
incorporation
England
England
England
England
England
England
England
England
England
England
Pennon Share Plans (Guernsey) Limited*
Guernsey
Pennon Share Schemes Trustees Limited*
Pennon Trustee Limited*
Raikes Lane Limited
Source Collections Limited
Source for Business Limited
Viridor Waste (Somerset) Pension Scheme & Life
Assurance Limited
West Hampshire Water Limited
England
England
England
England
England
England
England
166
Country of incorporation,
registration and principal operations
England
England
England
England
England
England
England
England
England
England
England
England
Scotland
England
England
England
England
England
England
England
England
England
England
Scotland
England
England
England
Scotland
Guernsey
Country of
incorporation
Scotland
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
Scotland
England
England
England
England
England
England
England
Other dormant companies
A.A. Best & Sons Limited
Acetip
Albion Water (Shotton) Limited
Analaq Limited*
Astley Minerals Limited
Basecall Limited
Centre for Environmental Research Limited
City Reclamation Services Limited
Corby Skip Hire Limited
DMP (Holdings) Limited*
ELE Datasystems
Exe Continental
Greater Manchester Sites Limited
Greenhill Environmental Limited*
Handside Limited
Haul Waste Limited*
Hodgejoy Recycling Limited
Industrial Waste Disposals (Sheffield) Limited
Lavelle & Sons Limited
Mac-Glass Recycling Limited
Oakley Recycling Limited
Oakley Skip Hire Limited
Parkwood Environmental Limited
Parkwood Group Limited
Parkwood Recycling Limited
Pearsons Group Holdings Limited
Peninsula
NOTES TO THE FINANCIAL STATEMENTS CONTINUEDPENNON GROUP PLC ANNUAL REPORT 2016FINANCIAL STATEMENTS AND SHAREHOLDER INFORMATION
Other dormant companies
Peninsula Water Limited*
Pennon Power Limited*
Pennon South West Limited*
Pennon Waste Management Limited*
pHOX Systems Limited
Pilsworth Forest (1996) Limited
Pilsworth Forest Limited
Roseland Plant Co. Limited
Rydon Properties Limited
Seal Security Systems Limited*
Sheffield Waste Disposal Company Limited
Shore Recycling (Ozone) Limited
SWW Pension Trustees Limited*
Thames Incineration and Recycling Limited
Thames Incineration Services Limited
Thames Tankering Services Limited
Thames Waste Limited
The Metropolitan Water Company Limited
Tokenmarch Limited
Viridor (Cheshire) Limited
Viridor (Community Recycling MK) Limited
Viridor (Community Recycling MKH) Limited
Viridor (Erith) Limited
Viridor (Martock) Limited
Viridor (Winsford) Limited
Viridor Contracting Limited
Viridor Electrical Recycling (Holdings) Limited
Viridor Electrical Recycling Limited
Viridor Enterprises Limited*
Country of
incorporation
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
Scotland
Scotland
England
Other dormant companies
Viridor Glass Recycling Limited
Viridor London Recycling Limited
Viridor New England (EfW) Limited
Viridor Resource (Peterborough) Limited
Viridor Resource Transport Limited
Viridor South Lanarkshire Limited
Viridor South West Limited*
Viridor Waste (Adapt) Limited
Viridor Waste (Allwaste Disposal) Limited
Viridor Waste (Atherton) Holdings Limited
Viridor Waste (Atherton) Limited
Viridor Waste (Bristol Holdings) Limited
Viridor Waste (Bristol) Limited
Viridor Waste (Bury ) Limited
Viridor Waste (Corby) Limited
Viridor Waste (Earls Barton) Limited
Viridor Waste (East Anglia) Limited
Viridor Waste (Medway Holdings) Limited
Viridor Waste (Medway) Limited
Viridor Waste (Sheffield) Limited
Viridor Waste (Thetford) Limited
Viridor Waste (Wastenot Recycling) Limited
Viridor Waste 2 Limited*
Viridor Waste Disposal Limited
Viridor Waste Hampshire Limited
Viridor Waste Wootton Limited
VWM (Scotland) Limited
Waste Treatment Limited
Water West Limited*
Country of
incorporation
England
England
England
England
England
Scotland
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
Scotland
England
England
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 unless stated otherwise and all shares in issue are ordinary shares. All companies above are consolidated
in the Group financial statements.
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.
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, INEOS Runcorn (TPS) Holdings Limited and Shelford Composting 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
Lakeside Energy from Waste Limited
Shares in Lakeside Energy from Waste Holdings Limited are held by Viridor Waste Management Limited.
Viridor Laing (Greater Manchester) Holdings Limited
Viridor Laing (Greater Manchester) Limited
Shares in Viridor Laing (Greater Manchester) Holdings Limited are held by Viridor Waste Management Limited.
12,000 ordinary shares
Shelford Composting Limited
Associate
INEOS Runcorn (TPS) Holdings Limited
50 A ordinary shares
50 B ordinary shares
1,000 A ordinary shares
186,750 B1 ordinary shares
62,250 B2 ordinary shares
Waste management
Waste management
Waste management
–
100%
50%
–
100%
20%
50%
–
INEOS Runcorn (TPS) Limited
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.
Waste management
167
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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
2016
£m
10.7
29.2
80.0
119.9
2015
£m
11.0
32.0
82.4
125.4
2016
£m
2015
£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 42 years and rentals are reviewed on average at five-yearly intervals.
The Group also leases plant and machinery under non-cancellable operating lease agreements.
42. CONTINGENT LIABILITIES
Guarantees:
Borrowing facilities of subsidiary undertakings
Performance bonds
Other
Group
Company
2016
£m
–
159.7
4.0
163.7
2015
£m
–
169.8
4.0
173.8
2016
£m
421.1
159.7
4.0
584.8
2015
£m
386.6
169.8
4.0
560.4
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 2016 of certain of its subsidiaries: Peninsula Leasing Limited, 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.
Significant management judgement is required to estimate the tax provisions relating to uncertain tax items that remain to be agreed with HMRC. It is
reasonably possible that the outcomes and settlements may differ from the estimated current tax liabilities shown in the consolidated balance sheet.
Due to the uncertainty associated with such tax items, it is possible that at a future date, on conclusion of the open matters, the final outcome may
vary significantly. Whilst a range of outcomes is reasonably possible, the extent of the range is additional liabilities of up to £20 million to a reduction in
liabilities of up to £52 million. Any such variations will affect the tax financial results in the year in which such a determination is made.
In addition to provisions established for uncertain items, the Group has paid in full the tax HMRC interpret as due, and therefore would benefit by up
to £70 million should such tax positions be concluded in the Group’s favour.
43. CAPITAL COMMITMENTS
Contracted but not provided
Group
Company
2016
£m
374.4
2015
£m
350.3
2016
£m
–
2015
£m
–
168
NOTES TO THE FINANCIAL STATEMENTS CONTINUEDPENNON GROUP PLC ANNUAL REPORT 2016FINANCIAL STATEMENTS AND SHAREHOLDER INFORMATION
44. ACQUISITIONS
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’).
The acquisition was in line with the Group’s strategy to increase shareholder returns from the anticipated future synergies and outperformance arising
from the merger into South West Water.
The acquisition has been accounted for using the acquisition method. Goodwill of £42.3m million has been capitalised attributable to the anticipated
future synergies and outperformance arising from the merger into South West Water.
On 1 June 2015 Viridor Waste Management Limited acquired Commercial Recycling Limited’s waste collection division in Dorset and Somerset for an
initial £4.5 million. An additional payment of up to £1.0 million could be made in the future depending upon certain performance-related criteria. The
acquisition has been accounted for using the acquisition method.
Goodwill of £3.4 million has been capitalised attributable to the profitability of the acquired business.
No amount of goodwill related to these acquisitions is expected to be deductible for tax purposes.
The residual excesses over the net assets acquired in each business combination has been recognised as goodwill.
Bournemouth Water
Investments Limited
£m
Waste Collection
Division
£m
Fair values on acquisition
Intangible assets
Property, plant and equipment
Inventories
Trade and other receivables
Cash and cash deposits
Retirement benefit surplus
Borrowings
Trade and other payables
Other liabilities
Taxation - current
Deferred tax liabilities
Provisions
Net assets acquired
Goodwill
Total consideration
Satisfied by:
Cash
Transfer of amounts due to Bournemouth Water Investments Limited
Deferred consideration
Net cash outflow arising on acquisition:
Cash consideration
Cash and cash deposits acquired
Revenue for the period since acquisition to 31 March 2016
Profit before tax for the period since acquisition to 31 March 2016
Directly attributable costs included in other operating expenses
2.3
228.5
0.1
23.8
13.8
1.9
(160.2)
(19.7)
(0.5)
(2.7)
(24.8)
(0.2)
62.3
42.3
104.6
100.3
4.3
–
104.6
100.3
(13.8)
86.5
41.9
6.0
2.9
The fair value of trade and other receivables in Bournemouth Water Investments Limited on acquisition was £23.8 million. This included gross
contracted amounts receivable of £21.8 million, of which cash flows of £1.0 million were not expected to be collected.
Goodwill movement
At 1 April 2015
Acquisition of Bournemouth Water Investments Limited
Acquisition of the waste collection division of Commercial Recycling Limited
At 31 March 2016
1.6
0.5
–
–
–
–
–
–
–
–
–
–
2.1
3.4
5.5
4.5
–
1.0
5.5
4.5
–
4.5
4.6
0.7
0.2
£m
339.3
42.3
3.4
385.0
169
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45. POST BALANCE SHEET EVENTS
On 1 April 2016 the Company sold the entire share capital of Bournemouth Water Investments Limited to South West Water Limited for
£104 million. The consideration was satisfied through Pennon Group Plc subscribing for an additional £100 million of new share capital in South West
Water Limited and transferring a £4 million loan due to Bournemouth Water Limited to South West Water Limited.
46. RELATED PARTY TRANSACTIONS
During the year Group companies entered into the following transactions with joint ventures and associate related parties who are not members of
the Group:
Sales of goods and services
Viridor Laing (Greater Manchester) Limited
INEOS Runcorn (TPS) Limited
Purchase of goods and services
Viridor Laing (Greater Manchester) Limited
Lakeside Energy from Waste Limited
INEOS Runcorn (TPS) Limited
Dividends received
Lakeside Energy from Waste Holdings Limited
Year-end balances
Receivables due from related parties
Viridor Laing (Greater Manchester) Limited (loan balance)
Lakeside Energy from Waste Limited (loan balance)
INEOS Runcorn (TPS) Limited (loan balance)
Viridor Laing (Greater Manchester) Limited (trading balance)
Lakeside Energy from Waste Limited (trading balance)
INEOS Runcorn (TPS) Limited (trading balance)
Payables due to related parties
Lakeside Energy for Waste Limited (trading balance)
INEOS Runcorn (TPS) Limited (trading balance)
2016
£m
87.3
18.5
0.3
12.1
4.3
2015
£m
99.0
5.6
–
12.6
1.1
6.0
6.0
2016
£m
2015
£m
36.8
8.9
35.5
81.2
11.3
1.0
2.7
15.0
2.3
1.6
3.9
57.2
9.3
31.4
97.9
12.8
1.0
5.6
19.4
1.1
0.1
1.2
The £81.2 million (2015 £97.9 million) receivable relates to loans to related parties included within receivables and due for repayment in instalments
between 2016 and 2033. Interest is charged at an average of 13.0% (2015 13.0%).
170
NOTES TO THE FINANCIAL STATEMENTS CONTINUEDPENNON GROUP PLC ANNUAL REPORT 2016FINANCIAL STATEMENTS AND SHAREHOLDER INFORMATION
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
2016
£m
10.5
0.4
38.6
0.1
140.7
2015
£m
9.5
0.5
35.6
0.1
311.6
Sales of goods and services to subsidiary undertakings are at cost. Purchases of goods and services from subsidiary undertakings are under normal
commercial terms and conditions which would also be available to unrelated third parties.
Year-end balances
Receivables due from subsidiary undertakings
Loans
Trading balances
2016
£m
965.6
8.6
2015
£m
936.6
8.5
Interest on £70.0 million of the loans has been charged at a fixed rate of 4.5%, on £373.6 million at a fixed rate of 5.0%, on £28.0 million at a fixed rate
of 6.0% and on £0.5 million at a fixed rate of 1.4% (2015 £70.5 million at 4.5%, nil at 5.0%, £332.5 million at 6.0% and £0.5 million at 1.4%). Interest
on £443.5 million of the loans is charged at 12 month LIBOR +1.0% (2015 £403.1 million). These loans are due for repayment in instalments over the
period 2016 to 2043.
Interest on £50.0 million of the loans has been charged at 1 month LIBOR + 1.0% (2015 £130.0 million). This loan is expected to be repaid in 2016/17.
During the year there were no provisions (2015 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.
2016
£m
287.2
14.6
2015
£m
283.2
14.6
171
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FIVE-YEAR FINANCIAL SUMMARY
Income statement
Revenue
Operating profit before non-underlying items
Net finance costs before non-underlying items
Share of profit in joint ventures
Profit before tax and non-underlying items
Net non-underlying 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 non-underlying items
Non-underlying items (net of tax)
Earnings per share before non-underlying and deferred tax
2016
£m
2015
£m
2014
£m
2013
£m
2012*
£m
1,352.3
1,357.2
1,321.2
1,201.1
1,233.1
261.8
(54.1)
3.6
211.3
(5.0)
(38.0)
168.3
152.1
16.2
138.5
37.0p
9.5p
(7.0)p
39.5p
246.6
(40.8)
4.9
210.7
(13.7)
(54.7)
142.3
126.3
16.0
129.5
32.3p
4.7p
2.8p
39.8p
257.5
(53.9)
3.7
207.3
(48.6)
(0.6)
158.1
142.5
15.6
117.0
38.8p
(7.0)p
10.8p
42.6p
245.6
(61.4)
5.8
190.0
(176.4)
7.0
20.6
20.6
–
103.9
5.7p
(4.0)p
38.6p
40.3p
268.8
(72.3)
4.0
200.5
–
(28.1)
172.4
172.4
–
96.0
48.1p
(0.8)p
–
47.3p
Declared dividends per share
33.58p
31.80p
30.31p
28.46p
26.52p
2016
£m
91.0
284.2
4,676.3
549.5
(3,738.2)
1,487.6
1,706
3,230
51
4,987
2015
£m
2014
£m
–
–
301.4
360.8
2013
£m
14.8
410.1
2012*
£m
29.2
257.4
4,325.9
4,076.6
3,846.0
3,592.5
586.0
241.9
378.5
11.8
(3,557.8)
(3,120.9)
(3,152.4)
(2,775.2)
1,354.1
1,197.6
1,072.1
829.1
1,408
3,101
49
4,558
1,356
3,044
51
4,451
1,354
3,180
50
4,584
1,335
3,148
46
4,529
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
Waste management
Other businesses
* Prior to the application of IAS 19 (Revised) ‘Employee Benefits’
172
PENNON GROUP PLC ANNUAL REPORT 2016FINANCIAL STATEMENTS AND SHAREHOLDER INFORMATION
SHAREHOLDER INFORMATION
FINANCIAL CALENDAR
Financial year end
27th Annual General Meeting
Ex-dividend date for 2016 final dividend
Record date for 2016 final dividend
2016 final dividend payable
2016/17 half-yearly results announcement
2017 interim dividend payable
2017 final results announcement
28th Annual General Meeting
2017 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
1 July 2016
7 July 2016*
8 July 2016*
2 September 2016*
25 November 2016
April 2017
May 2017
July 2017
September 2017
7 July 2016
8 July 2016
22 July 2016
15 August 2016
1 September 2016
2 September 2016
2 September 2016
* Subject to obtaining shareholder approval at the 2016 Annual General Meeting to the payment of a final dividend for the year ended 31 March 2016
SHAREHOLDER ANALYSIS AT 31 MARCH 2016
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 +
2,457
9,312
8,854
1,231
88
288
22,230
11.05
41.89
39.83
5.54
0.40
1.30
0.02
1.21
4.66
2.32
1.53
89.26
Individuals
Companies
Trust companies (pension funds etc.)
Banks and nominees
Number of accounts
% of total accounts
% of total shares
17,839
125
9
4,257
22,230
80.25
0.56
0.04
19.15
6.70
0.25
0.01
93.03
173
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SHAREHOLDER INFORMATION CONTINUED
MAJOR SHAREHOLDINGS
The net position on 31 March 2016 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:
1.
Pictet Asset Management SA
The Capital Group Companies, Inc.
Lazard Asset Management LLC
Ameriprise Financial, Inc.
RARE Infrastructure Limited
AXA Investment Managers SA
Invesco Limited
UBS Investment Bank
Legal & General Group Plc
Royal London Asset Management Limited
Number of voting rights (direct and indirect)
% of voting rights
25,599,217
25,268,507
24,547,305
20,328,154
19,366,782
18,088,394
17,212,959
16,610,004
13,458,627
12,453,831
6.21%
6.13%
5.95%
4.93%
4.70%
4.39%
4.17%
4.03%
3.26%
3.02%
On 12 May 2016 Lazard Asset Management LLC notified the Company
that it held 20,257,364 shares (equivalent to 4.91% of voting rights).
No further changes to interests in the Company’s issued share
capital have been disclosed to the Company between 31 March 2016
and 20 May 2016 (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. For further details of this service, contact Stocktrade on
+44 (0)131 240 0414 and quote: Pennon Group Dial & Deal Service.
Commission is 1% (subject to a minimum charge of £25.00).
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 2016 Annual General
Meeting for the payment of a final dividend for the year ended 31 March
2016, full details of the scrip dividend alternative and how to participate
will be sent to shareholders on 22 July 2016. 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 proxy form)
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 reports.
174
PENNON GROUP PLC ANNUAL REPORT 2016FINANCIAL STATEMENTS AND SHAREHOLDER INFORMATION 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 ScamSmart section of the Financial
Conduct Authority’s website (www.scamsmart.fca.org.uk). 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. 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. Seek impartial advice from a financial adviser before you
make an investment.
8. 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.
175
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176
PENNON GROUP PLC ANNUAL REPORT 2016FINANCIAL STATEMENTS AND SHAREHOLDER INFORMATION