Annual Report & Accounts 2017
Building momentum
and driving growth
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7
Strategic report
Overview
04
06
08
12
14
16
18
Group financial highlights
Group operational highlights
Chairman’s statement
Market overview
Business model
Strategic priorities
Our people
Group performance
20
26
38
46
Review of the Chief Executive Officer
Our operations
26
32
Water and wastewater
Waste management
Report of the Chief Financial Officer
Risk report
Governance
and remuneration
54
Chairman’s letter to shareholders
56
63
74
Board of Directors
Board Committees’ reports
Directors’ remuneration report
100
Directors’ report – other statutory disclosures
Financial statements and
shareholder information
Independent auditor’s report
106
114
173
174
Financial statements
Five-year financial summary
Shareholder information
Find out more
about Pennon
Corporate website
www.pennon-group.co.uk
Annual Report
www.pennon-group.co.uk/AR2017
Integrated reporting
Our business touches the lives
of many stakeholders, from
customers, employees, investors
and suppliers to our communities,
the environment and regulators.
Reflecting the integrated nature
of our business, we seek to
integrate our reporting
on financial, economic, social
and environmental aspects of
our performance and how they
contribute to long-term value
creation. To support this ambition,
this report has been prepared
with reference to the principles
of the International Integrated
Reporting Council’s International
Framework.
Siblyback Reservoir, Cornwall
Cover Alan Hawkins and
Zak Morrill at Ardley ERF
As one of the largest
environmental infrastructure
groups in the UK, Pennon is
at the top end of the FTSE 250,
has assets of around £5.9 billion
and a workforce of around
5,000 people.
Our mission
Together we will build the most trusted environmental solutions
company in the UK, providing infrastructure and services that
enhance our customers’ lives, protect the environment and
deliver growth for our shareholders.
Our businesses
Water and
wastewater
The merged water company of South West Water and
Bournemouth Water provides water and wastewater services
to a population of c.1.7 million in Cornwall, Devon and parts of
Dorset and Somerset and water only services to c.0.5 million
in parts of Dorset, Hampshire and Wiltshire.
South West Water was awarded enhanced status for its
2015-2020 Business Plan, and has the highest potential
returns in the water sector.
Waste
management
Viridor is 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 pillars
Our six pillars form the foundations of our culture and the way
we work.
Safety first The safety of our employees, customers and
communities comes first. We will do everything safely and
responsibly, or not at all.
Our people Our success comes from our talented people
doing great things for our customers and each other.
Service and value We are committed to delivering exceptional
service and value for our customers and communities.
Efficiency in everything we do We work smart, keep things
simple and invest money wisely.
Progress through innovation From the technology and
science we use, through to the way we approach what we
do – innovation drives us forward.
Sustainability matters We take our responsibilities towards
the environment seriously and aim to be sustainable in
everything we do.
01
Strategic report The performance of the Group
against our strategy underpins
our confidence in delivering our
long-established sector-leading
dividend policy.
35.96p
total dividend for the year
7.1%
dividend increase over 2015/16
Pennon’s long-established 10-year
dividend policy of 4% year-on-year
growth above RPI inflation to 2020
results in a doubling of dividend over
10 years (2010-2020)(1). This reflects
the Board’s confidence in the continued
outperformance of our water business
and our significant investment in our
waste business, which is successfully
delivering on its targeted contribution
to Group earnings.
Read more page 42
(1) Future dividends growth based on policy
of 4% + RPI forecast to 2020.
Jess Dunn at
Ardley ERF
02
Pennon Group plc Annual Report 2017 Overview
04
06
08
12
14
16
18
Group financial highlights
Group operational highlights
Chairman’s statement
Market overview
Business model
Strategic priorities
Our people
Strong performance
underpinning
long-established
sector-leading
dividend growth
03
Strategic report Group financial
highlights
Highlights of the year
• Strong earnings growth across the Group
• Good performance in cost base efficiency
– Delivered £107 million of EBITDA from energy recovery facilities
– South West Water total expenditure (totex) efficiency K6 to date
(ERFs) ahead of c.£100 million target
£129 million
– Continued sector-leading return on regulated equity at 12.6%
• Continued delivery of long-established 10-year sector-leading
dividend policy supported by earnings growth
– Bournemouth Water successfully integrated, on track to deliver
cumulative synergies of c.£27 million by 2020
– £17 million per annum of efficiencies across the Group by 2019,
with £9 million per annum secured to date
• £385 million of capital investment in sustainable growth projects
• Group remains well funded with low cost efficient long-term financing.
Read more page 38
Revenue
£1,353m
(+0.1%)
Dividend
35.96p
(+7.1%)
Assets
£5.9bn
(+3.5%)
EBITDA
Statutory
£475m
(+8.5%)
EBITDA
Underlying(1)
£486m
(+8.4%)
EBITDA
Adjusted(2)
£546m
(+7.4%)
Profit before tax
Statutory
£211m
(+2.0%)
Profit before tax
Underlying(1)
£250m
(+18.3%)
Capital investment
£385m
(+21.4%)
Cash and committed facilities
£1.4bn
Shareholder profits(1)
Profit before tax and non-underlying items
Non-underlying items before tax
Statutory profit before tax
Tax charge
Profit attributable to perpetual capital holders
Profit after tax attributable to shareholders
£m
250
(39)
211
(31)
(16)
164
(1) Underlying earnings are presented alongside statutory results as the Directors believe they provide a
more useful comparison on business trends and performance. Note 6 to the financial statements provides
more detail on non-underlying items.
(2) Earnings before interest, tax, depreciation, amortisation (EBITDA) and non-underlying items, adjusted to
include IFRIC 12 interest receivable and share of joint venture EBITDA better reflects all the earnings
arising from our ERFs (see reconciliation on page 40).
04
Pennon Group plc Annual Report 2017 Key performance indicators
Revenue (£m)
2
.
1
2
3
,
1
.
2
7
5
3
,
1
.
3
2
5
3
,
1
2
.
1
0
2
,
1
1
.
3
5
3
,
1
%
1
.
0
+
Dividend per share (pence)
6
4
8
2
.
.
1
3
0
3
0
8
.
1
3
8
5
3
3
.
6
9
5
3
.
%
1
.
7
+
2012/13
2013/14
2014/15
2015/16
2016/17
2012/13
2013/14
2014/15
2015/16
2016/17
EBITDA (£m)
Interest rate on average net debt (%)
.
9
6
5
4
6
.
1
0
4
.
3
7
0
4
.
9
5
6
4
0
.
1
1
4
6
.
1
2
4
.
0
3
3
4
.
8
4
9
3
.
9
9
8
2
.
4
8
0
5
.
2
8
3
4
.
4
8
4
4
.
2
6
4
5
.
0
6
8
4
.
3
5
7
4
%
4
7
+
.
0
4
.
8
3
.
4
3
.
3
3
.
4
3
.
%
1
.
0
+
2012/13
2013/14
2014/15
2015/16
2016/17
2012/13
2013/14
2014/15
2015/16
2016/17
Statutory
Underlying
Adjusted
Profit before tax (£m)
.
3
7
0
7 2
8
5
1
.
.
0
0
9
1
.
6
3
1
.
7
0
1
2
.
0
7
9
1
.
3
6
0
2
3
.
1
1
2
.
5
0
1
2
.
0
0
5
2
.
%
3
8
1
+
Regulatory capital value
as at 31 March (£m)
6
1
9
2
,
9
5
9
2
,
8
2
9
2
,
0
5
1
,
3
1
9
2
3
,
%
5
4
+
.
2013/14
2012/13
Statutory
2014/15
Underlying
2015/16
2016/17
2013
2014
2015
2016
2017
Earnings per share (pence)
Group assets as at 31 March (£bn)
.
8
9
3 3
2
3
.
.
3
0
4
.
6
2
4
.
8
8
3
.
7
5
.
0
7
4
.
8
9
3
.
5
9
3
.
0
7
3
.
%
0
9
1
+
.
8
4
0
5
.
4
5
.
.
7
5
9
5
.
%
5
3
+
.
2012/13
2013/14
2014/15
2015/16
2016/17
2013
2014
2015
2016
2017
Statutory
Before non-underlying items
and deferred tax
05
Strategic report
Group operational
highlights
Highlights of the year
• Water business delivered net ODI rewards and improved
performance in a number of areas:
– No water restrictions
– Exceeded leakage target resulting in ODI reward
– Highest level of wastewater treatment compliance(1)
– 98.6% of bathing waters achieving the more stringent
bathing water standards that were introduced in 2015
• Energy Recovery Facilities (ERFs) continued to drive growth –
eight operational sites performing well, with average availability
at greater than 90% for 2016/17
• Construction of four further ERFs is ongoing
– Dunbar and South London (Beddington) progressing to budget
– Glasgow’s Recycling and Renewable Energy Centre is receiving
waste and generating energy. New construction contracts are
progressing well with ERF commissioning expected in 2017
– Avonmouth ERF investment now underway with key
construction and operational contracts in place. Completion
expected in 2020/21
• Recycling self-help measures delivering increased
margins and increased EBITDA(2)
• Negotiations with Greater Manchester Waste Disposal
Authority (GMWDA) continue to ensure a well managed
transition for the contract
• New retail venture for business customers established by
Pennon Water Services and South Staffordshire Plc
(incorporating South Staffs and Cambridge Water)
• Driving value through efficiency – integrating, sharing best
practice, reducing costs through a Shared Service Review.
Read more pages 26 to 37
Total renewable
energy generation
Bathing water compliance
(‘sufficient quality’ or higher)
Total waste material inputs
(tonnes)
1,549GWh 98.6%
7.6m
Drinking water quality (mean zonal compliance)
South West Water
Bournemouth Water
99.96%
99.98%
Riddor incidence rate
(per 100,000 employees)
683
Average ERF availability
Recycling volumes traded
(tonnes)
>90%
1.6m
(1) As measured by Numeric Compliance.
(2) Earnings before interest, tax, depreciation and amortisation.
06
Pennon Group plc Annual Report 2017 Key performance indicators(1)
RIDDOR incidents(2)
2
5
0
4
5
3
2
4
5
3
%
7
1
-
Customer satisfaction with overall service (%)
South West Water
Bournemouth
Water
Viridor
4
8
5
8
0
9
9
8
9
8
5
9
6
7
2012
2013
2014
2015
2016
2012/13
2013/14
2014/15
2015/16
2016/17
2016/17
2016/17
Total renewable energy generation
(GWh)
9
3
8
5
9
7
9
4
9
1
9
4
,
1
9
4
5
,
1
%
9
3
+
.
Drinking water quality
mean zonal compliance (%)
South West Water
.
7
9
9
9
.
8
9
9
9
6
9
9
9
.
.
7
9
9
9
6
9
9
9
.
Bournemouth Water
.
0
0
0
0
1
.
8
9
9
9
2012/13
2013/14
2014/15
2015/16
2016/17
2012
2013
2014
2015
2016
2015
2016
ERF availability(3) (%)
1
9
9
8
8
8
5
8
Recycling volumes traded
(million tonnes)
9
.
1
8
.
1
7
.
1
8
.
1
6
.
1
%
0
8
-
.
0
9
%
9
5
+
.
2012/13
2013/14
2014/15
2015/16
2016/17
2012/13
2013/14
2014/15
2015/16
2016/17
Total waste material inputs
(million tonnes)
Bathing water compliance(4) (%)
5
7
.
1
.
4
.
7
0
.
7
2
.
7
7
.
3
4
.
7
0
.
7
2
5
7
.
8
3
.
2
.
1
5
2
.
8
7
.
.
7
3
1
.
2
0
2
.
6
7
.
.
7
3
2
2
.
7
.
1
.
2
7
9
.
3
0
7
.
6
8
9
1
.
1
8
2012/13
2013/14
2014/15
2015/16
2016/17
2015
2016
Recycling and other
ERFs
Landfill
Sufficient quality
Excellent quality
(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 14.
(2) Incidents involving employees under the Reporting of Injuries, Diseases and Dangerous Occurrences Regulations. See page 18 for further details of our health and safety performance.
(3) Average availability for the year. Includes 100% capacity of joint ventures at Lakeside and Runcorn 1.
(4) 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).
07
Strategic report
Chairman’s
statement
Sir John Parker
Chairman
Pennon Group performed
well in the year, delivering on
its strategy of market-leading
performance across its
businesses.
08
Dear Shareholder
Pennon Group performed well in the year, delivering
on its strategy of market-leading performance,
efficiency and investing for growth. The Group has the
UK’s top two water businesses as measured by return
on regulated equity (RoRE) while Viridor’s expanding
portfolio of Energy Recovery Facilities (ERFs) is on
track to generate further growth in earnings over the
next few years. The Group’s Shared Services Review
addressed a key strategic objective to drive value
through increased efficiency during the year.
The Group’s final dividend of 24.87 pence per
share reflects an increase of 7.1% and maintains
our long-standing sector-leading dividend policy
of RPI plus 4% year-on-year growth. This should
see dividends per share almost doubling over
10 years to 2020.
Pennon is committed to
providing a safe place for our
people to work, where health
and wellbeing comes first.
Since my previous report we have continued to make
good progress in establishing an effective Group
structure by drawing together all aspects of the
Group under the Pennon umbrella. Our CEO, with the
support of a high-calibre executive team, is pulling
together support functions at Group level that were
previously held within each subsidiary. The two
Managing Directors who are running the water and
waste businesses as operational divisions report
directly to the CEO. Pennon’s Non-Executive
Directors are now also members of the South West
Water board, along with three dedicated South West
Water non-executive directors, one of which is
currently a vacancy.
Safety
The position of health and safety as the first item
on the agenda for every Board meeting reflects the
importance I and my colleagues attach to this crucial
area. It also underlines our determination to increase
employee engagement, address the culture and
behaviours that lead to accidents and learn all
relevant lessons for the future from any incident.
Regrettably, a tragic incident occurred in August
2016, resulting in the death of a Viridor employee
whilst at work. Our thoughts are with his family,
friends and colleagues as we work with the Health
and Safety Executive in relation to this incident.
Pennon Group plc Annual Report 2017 Culture and values
• We are working with employees to bring together
a core set of organisational values and build a
culture that can be lived throughout the Group
• This process is drawing on the heritage and
strengths of our principal operations
• Six pillars (set out on pages 14-15) underpin our
values that will be shaped by employees during
the year ahead
• Our customer-facing businesses Viridor, South
West Water and Bournemouth Water are
established brands that are recognised and
valued by the public
• We are already bringing our businesses closer
together under new and modern branding.
Governance
Key achievements during the year
• The Non-Executive Directors have quickly
adapted to their expanded roles in respect of the
subsidiary businesses
• We have created new senior executive roles at
Group level and have brought in subject matter
specialists of a high calibre who will drive a
consistent and effective approach in safety, health
and environmental impact
• The new Group executive meeting arrangements
have allowed the senior executives from Pennon,
South West Water and Viridor to operate
collaboratively in one forum when dealing with
Group-wide issues
• The change is also facilitating holistic discussion and
has improved communications across the Group with
clear lines of sight into the subsidiary companies
• The administration required to support the Board
has come together quickly.
Read more pages 54 to 62
7.1%
increase in dividend
per share
78%
of employees completed an
annual engagement survey
We strive for the highest standards of health and
safety to achieve our objective of a harm free
environment. Pennon is committed to providing a
safe place for our people to work where health and
wellbeing comes first. The Board has supported the
appointment of a Group director of Safety, Health,
Quality and Sustainability, who will devise and
implement a strategy to raise the Group’s health
and safety performance.
Employees and culture
Throughout the Group, there is a spirit of pride and
professionalism and these are key qualities at a time
of change. We have no shortage of new talent joining
the company too, through graduate recruitment
and our award-winning apprenticeship programmes.
We are determined to recognise talent in both the
Group’s businesses and to support development
of people from early on in their careers, not just in
top-level succession planning.
As many aspects of the Group’s structure are still
relatively new, we intend to provide more information
about Pennon’s culture and values in next year’s
annual report. Our subsidiary companies each have
a strong sense of purpose supported by their own
set of corporate values and this provides a sound
foundation on which to build. I firmly believe that by
getting the structure and governance of the Group
right, and by attracting and developing the right
people, the right culture and values will follow.
We are developing a culture
that can be lived throughout
the Group.
Meanwhile, on behalf of the Board, I would like to take
this opportunity to thank all our employees for their
professional approach and their dedication to the
many communities and stakeholders we serve daily.
Shared services and other
Group synergies
Efforts to centralise key corporate services and
operational functions following the Shared Services
Review reflecting our more unified Group are
progressing well. This is part of an efficiency
programme that is increasing integration,
encouraging the sharing of best practice and
creating shareholder value. This work has been
facilitated by the creation of the role of Group Chief
Executive Officer, which has now been in existence
for over a year and is binding the Pennon Group more
closely together.
Sustainability
As a leading environmental infrastructure company,
the Group actively contributes to the UK’s long-term
needs for water, energy and waste management and
we aim to ensure that all our business activities have
a positive economic, social and environmental impact.
Our evaluation of risk consistently addresses
sustainability requirements. The Board’s Sustainability
Committee oversaw the Group’s performance during
the year in maintaining a responsible approach to
business operations.
09
Strategic report Chairman’s
statement
continued
Governance
The Group’s revised framework for governance and
decision-making introduced in April 2016 is operating
well and allowing us to pursue synergies across the
Group. Further details are provided on pages 58 to
62. Our Senior Independent Director, Gill Rider,
completed an assessment during the year of the
new approach. This was conducted alongside an
independent external evaluation of the Board’s
structure, operation and performance. Based
on these appraisals and on my own experience,
I believe the Group has a robust governance
structure that is delivering efficient and transparent
decision-making while preserving the degree of
regulatory independence that Ofwat requires for
the water business. I commend the Group’s
commitment to the new governance framework.
Board changes
Ian McAulay stepped down as the Chief Executive
Officer of Viridor during the year and we thank him
for his contribution and wish him well in the future.
Phil Piddington was appointed to the new role of
Managing Director of Viridor in September 2016.
The change in the management team and structure
at Viridor, which mirrors the arrangements in place
at South West Water, better reflects the objectives
of the Group and will drive stronger accountability.
Moreover, the appointment of Phil Piddington
demonstrates that the Group is adding new skills
and executing succession planning well.
Steve Johnson stepped down as a non-executive
director of South West Water in April 2016 following
his appointment to a new external executive position.
The Group has a robust
governance structure that
is delivering efficient and
transparent decision-making.
Rigorous testing is a
key part of ensuring
a high quality water
supply for customers
10
Pennon Group plc Annual Report 2017 Boardroom diversity
Our Board is made up
of 2 women and 4 men.
Read more page 71
Diversity
We actively promote equality and diversity across the
Group and hold a strong belief that we will be a better
business if we can understand the views, opinions
and backgrounds of our customers, communities,
shareholders and employees. Currently a third of our
Board members are women, exceeding our target of
at least 25% female representation. Additionally, the
Board continues to pursue a progressive diversity
agenda. You will find further information on our
Diversity Policy in our Nomination Committee Report
on page 71.
Looking to the future
The Group has strong financial control, sound
administration and our governance is robust and
transparent. Moreover, we are building the assets
and the teams to secure further growth. With the
commitment of everybody working at Pennon Group
under the direction of a strong leadership, we have
every reason to be confident about the future.
We will be a better business if
we can understand the views,
opinions and backgrounds of
our customers, communities,
shareholders and employees.
Sir John Parker
Chairman
Pennon Group plc
23 May 2017
Pennon Board
visits Ardley ERF
Board members regularly visit operational
sites and take the opportunity to meet
employees and see a plant at work. In April
2016 the Board visited Bournemouth Water’s
headquarters and received a tour of the water
treatment works.
The Board meeting in February 2017 was held
at Ardley ERF and included a tour of the plant
and its award-winning Visitor Centre which
received 3,483 visitors this year.
Board members also met the Ardley-based
Energy trading team that implements the
Group’s energy risk management strategy
and has aligned energy contracts to optimise
cost and carbon benefits. This same team
also manages the energy trading for both
output and usage, which has helped the
Group achieve greater energy efficiency.
11
Strategic report Pennon Group plc Annual Report 2017
Market
overview
With clear market opportunities for both the
water and waste businesses, the Group is
well prepared to capitalise on the changing
regulatory water markets and is in a strong
position to deliver growth through its
increasing market share of the UK’s
energy recovery operations.
1
UK water sector
2
Water regulators
3
Non-household
retail market
UK water industry (2016)
1
16
operators
in the UK
2
1 Water only companies(1)
2 Water and waste companies
6
10
The water industry serves 50 million
household and business customers in
England and Wales, who are supplied with
drinking water and have their wastewater
taken away and treated. These services are
provided by 16 privately-owned regional
companies of which 10 are providers of both
water and wastewater services.
The UK water industry supplies clean water
to properties through a mains network that
is 420,000km long (source: Water UK).
It manages more than 16 billion litres of
wastewater a day through 624,200km
of sewers and 9,000 wastewater
treatment plants.
(1) There are six regional companies. In addition
there are nine other small water providers.
12
1.2m
businesses and other
non-household customers
can choose who they buy
water and wastewater
services from
On 1 April 2017, the non-household retail
market was opened, allowing up to 1.2 million
businesses and other non-household
customers across the country to choose
which retailer they buy water and
wastewater services from.
The non-household market operates
through a controlled portal operated by the
Market Operator Services Limited (MOSL). It
has required the separation of the wholesale
and retail arms of water businesses.
Pennon Water Services (PWS) was
established to manage the non-household
retail business for Pennon and has formed a
retail venture with South Staffordshire plc.
DEFRA sets the overall water and sewerage
policy framework in England.
Ofwat is the economic regulator for the water
sector in England and Wales. Every five years
companies submit business plans as part of
a Price Review process. South West Water’s
2015-20 plan was awarded ‘enhanced’ status
as part of the 2014 Price Review.
The Environment Agency (EA) is the
principal environmental regulator of the
water and sewerage sector.
The Drinking Water Inspectorate (DWI)
is the drinking water quality regulator.
They check companies supply safe drinking
water and meet Water Quality Regulations.
The Consumer Council for Water (CCWater)
represents consumers and takes up
unresolved complaints.
4
Waste inputs to
Energy Recovery
Facilities
UK combustible waste (2016)
5
Recycled waste
materials
6
Waste to landfill
2 26m
tonnes
1
4m
tonnes of recyclable
waste materials
processed in the
UK in 2016
13.7m
tonnes of waste
to landfill in 2015
12.5m
tonnes of waste
to landfill in 2016
1 Municipal household waste
2 Commercial and industrial waste
15m tn
11m tn
We estimate that in the UK, 26 million
tonnes of waste were suitable for
combustion in Energy Recovery Facilities
(ERFs) in 2016, comprising an estimated
15 million tonnes of municipal household
waste and 11 million tonnes of commercial
and industrial waste. All the ERFs in the UK
processed a combined 12 million tonnes of
this waste in 2016. Our facilities processed
two million tonnes in 2016.
We expect that new ERFs being constructed
will increase the UK’s energy from waste
capacity to c.15-16 million tonnes by 2020.
During the same period Viridor will bring into
operation ERFs at Glasgow, Beddington,
Dunbar and Avonmouth, providing a total
capacity for Viridor ERFs of 3.2 million
tonnes of waste.
Viridor is a market leader in processing
comingled waste streams (where recyclables
are mixed in the same bin) collected by
councils and their contractors. In 2016, we
processed c.0.7 million tonnes of comingled
mixed recyclable waste out of an estimated
total of four million tonnes, indicating a 18%
market share in comingled recyclate.
The volume of waste for recycling is
expected to increase marginally reflecting
population growth and possibly more so,
if national and local government policies,
especially in England, align to encourage
further recycling. 45% of household waste
is currently recycled against the existing
national target to recycle 50% of household
waste by 2020.
The UK mainland disposed of 12.5 million
tonnes of active waste (i.e. household black
bag waste and similar unrecyclable waste
from industrial and commercial sources) into
landfills in 2016 compared to 13.7 million
tonnes in 2015. In 2016 our landfill sites
received 1.7 million tonnes of active waste,
which comprised 14% market share.
In addition to this, we received 0.7 million
tonnes of inert inactive waste for daily cover
and restoration purposes.
We expect the volume of waste being sent
to landfill to continue to reduce as the
availability of ERFs increase, with an ongoing
baseline requirement for landfill disposal of
waste that is not suitable for recycling
or recovery.
Control room at Exeter ERF
13
Strategic report Pennon Group plc Annual Report 2017
Business
model
Through our business model, we fulfil our
vision to deliver sustainable shareholder value
by providing high quality environmental
infrastructure and customer services.
Our strategy is to lead in the UK’s water and
waste sectors, invest for sustainable growth
and drive value through efficiency.
What we do...
…the strengths we rely on
Our strengths
The best people
The talent, commitment and hard work
of our people is the foundation of our
success. As a responsible employer
we are focused on employee wellbeing,
retention, training and development,
productivity and, above all, an unwavering
commitment to health and safety.
Effective governance
Strong governance framework
provides oversight and support to
Group businesses including robust
decision‑making and performance
management processes.
High quality assets
We invest in the construction of
world‑class facilities and plants that
use state‑of‑the‑art technology.
We engage the best people to
maintain and operate our fleet of assets,
to ensure we always maximise returns.
Strong relationships
with our suppliers
We work closely with our suppliers and
take the steps necessary to ensure their
performance meets our expectations.
We expect them to uphold our
standards, align with our policies,
protect human rights and promote
good working conditions.
Efficient financing
The strength of our proposition and
investor confidence in our performance
and reputation means that we are well
funded with efficient long‑term financing.
Well managed risk
Comprehensive and fully embedded
risk management processes assist us
in identifying and managing risks and
opportunities to deliver the Group’s
strategy and objectives.
Our people
Our success comes from our
talented people doing great things
for our customers and each other.
Service and value
We are committed to delivering
exceptional service and value for
our customers and communities.
We provide water and
wastewater services in
the most efficient and
sustainable way possible
Read more page 26
We transform waste
into energy, high
quality recyclates
and raw materials
Read more page 32
Our pillars
Safety first
The safety of our employees,
customers and communities
comes first. We will do everything
safely and responsibly, or not at all.
14
…and our strategy
…to create value
Long-term priorities
Value created for our stakeholders
1
Leadership in UK
water and waste
We aim to lead in the water and
waste sectors by capitalising on Group
strengths, capabilities, best practice
and synergies and achieving the right
balance between risk and reward.
Customers
Read more page 22
Investors
2
Leadership in cost
base efficiency
We are focused on driving down
overheads and operating in the
most efficient way to minimise costs.
Read more page 23
People
3
Driving sustainable
growth
We actively seek opportunities to
invest for growth, whether through
investment to increase our asset
portfolio, initiatives to expand our
customer base or partnerships with
other organisations.
Community
Read more page 23
Environment
(1) As measured by the service incentive mechanism (SIM). See page 30 for details.
(2) Before non-underlying items and deferred tax.
(3) 116 beaches (81.1%) classified as ‘excellent’.
81.6
Best ever customer service
score for South West Water(1)
19%
Earnings per share
increased to 47.0p(2)
130
Number of apprentices trained
within the Group since 2011
98.6%
141 bathing waters out of 143
classified as ‘sufficient’ or better(3)
1.6m
Tonnes of waste
materials recycled
Efficiency in
everything we do
We work smart, keep things simple
and invest money wisely.
Progress through
innovation
From the technology and science
we use, through to the way we
approach what we do – innovation
drives us forward.
Sustainability
matters
We take our responsibilities towards
the environment seriously and aim to
be sustainable in everything we do.
Under the dam at Roadford Reservoir, Devon
15
Our pillars
Strategic report Pennon Group plc Annual Report 2017
Strategic
priorities
Our strategic objectives are set and monitored
through a rolling long-term strategic planning
process. This takes into account potential risks
and our sustainability framework.
Long-term priorities
Near-term objectives
Progress in 2016/17
Sustainability drivers
Risks and uncertainties
1
Leadership in UK
water and waste
• Develop and fully maximise value from our
infrastructure business through long-term,
predictable, asset-backed, index-linked revenues
• Build on the strong track record of our water
business by delivering and outperforming the
K6 regulatory contract (2015-2020)
• Optimise our portfolio of Energy Recovery
Facilities (ERFs) to ensure a high level of
performance and availability is maintained
• Achieve the right balance between risk and
reward by mitigating volatility through securing
long-term cash flows
• Continue to drive returns from recycling
‘self-help’ measures that reduce the cost base
and improve the utilisation of our assets
• Continue to develop a new model for proactive
customer service that puts our customers at
the heart of everything we do.
• Outperformance by South West Water against
the K6 regulatory contract (2015-2020)
continued in 2016/17, securing a net cumulative
reward of £3.6 million
• South West Water’s return on regulated equity
(RoRE) continues to be sector-leading
• Innovative investment in new Mayflower Water
Treatment Works in Plymouth – the first of its
kind in the UK
• Delivery by Viridor of £107 million EBITDA
from its ERF business, exceeding the target
of c.£100 million
• Improved performance of Viridor’s recycling
business resulting from ‘self-help’ initiatives
to reduce costs and improve asset utilisation
• Dividend per share increased by 7.1% reflecting
strong performance of Pennon’s water and
waste management businesses.
2
Leadership in cost
base efficiency
• Complete the organisation change programme
coming out of our Shared Services Review and
finalise the centralisation of key corporate and
operational services
• Continue to maximise the benefits of the
integration of Bournemouth Water operations
into South West Water’s business
• Ongoing initiatives to reduce central overheads,
share best practice and deliver synergies.
• Good progress towards delivering K6 cost
savings of £27 million from the Bournemouth
Water integration
• South West Water cumulative totex efficiency of
£129 million driven by continuing advantages
from our strategic alliances
• £17 million per annum of cost savings to be
delivered across the Group by 2019; £9 million
per annum secured to date
• Cost efficient long-term financing in place –
3.4% interest rate on annual net debt.
3
Driving sustainable
growth
• Continue to grow the ERF business, including
the successful completion of construction
projects at Glasgow, South London, Dunbar and
Avonmouth ERFs
• Exploit the introduction of competition in the
non-household retail market by building scale
and efficiency through Pennon’s water retail
business, Pennon Water Services
• Identify and consider opportunities for
further growth.
• £385 million invested in key infrastructure
during the year
• Four ERFs now under construction
• New retail venture for business customers
between Pennon Water Services, South Staffs
and Cambridge Water – combined revenue of
c.£170 million and entering the market with the
fourth largest customer base
• Well positioned for regulatory and market
developments – ongoing engagement with
Ofwat reforms and prepared for the 2019
price review.
Strategic priorities linked to annual
bonus targets, see pages 90 & 91
16
KPIs
>90%
average ERF availability
85%
customer satisfaction with
overall service(1)
(1) Average of the customer satisfaction scores
achieved by South West Water, Bournemouth
Water and Viridor for the year.
£17m
of cost savings per annum
targeted across the Group
by 2019
Group assets as at 31 March
(£bn)
8
.
4
0
.
5
4
.
5
7
.
5
9
.
5
2013
2014
2015
2016
2017
%
5
.
3
+
• Investing in people – protecting the health,
safety and wellbeing of our people to ensure we
have a skilled, diverse, engaged and motivated
workforce to deliver our strategy
• Environmental protection – integral to our
water business’s regulatory contract and the
promotion of the circular economy by our waste
management business
• Waste prevention and resource efficiency
– delivering solutions for society is core to our
strategy and helps to address the challenge of
depleting natural resources.
Our aspiration to be a leader in the sectors in
which we operate could be affected by the
occurrence of certain events, many of which
have reputational consequences:
• An avoidable health and safety incident
• Legal, regulatory or tax non-compliance
• Poor customer service
• Failure to recruit, retain and develop people
with the appropriate skills
• Business interruption (for example, as
a result of a failure of our information
technology systems) or operational failure
• Failure of a capital project
• Loss or corruption of data as a result of
a cyber attack.
• Minimising disruption and inconvenience for
Risks that could impact our ability to deliver
our communities – means that we also
minimise the cost to the business
• Energy efficiency – the use of solar
photovoltaics to power our facilities and other
energy saving initiatives help us to reduce our
own demand for electricity from the grid whilst
maximising the energy generated from our
core operations
• Responsible sourcing – value for money
secured through robust procurement practices
and sustainable supply chains.
• Customer service and engagement
– increased focus to improve the customer
experience and help expand our customer
base whilst retaining existing customers
• High standards of business conduct – ensure
that our people are incentivised appropriately
and exhibit the right behaviours to enable us to
achieve long-term and sustainable growth.
efficiencies include:
• Operational failures that result in
rectification costs
• Changes in law or regulation that require
additional expenditure to fund implementation
and ongoing compliance
• An increase in customer bad debt resulting in
additional debt collection costs
• Failure to recruit and retain people with the right
skills, mindset and motivation to share best
practice, deliver synergies and move the Group
forward in the new ‘shared services’ structure.
Our ability to deliver sustainable growth could
be impacted by:
• Unfavourable economic conditions
• Local authority austerity
• Poor customer service
• Loss of market share as a result of regulatory
reform and increased competition
• Difficulties in recruiting, retaining and
developing people with the necessary
commercial acumen to help our businesses
grow and prosper.
Long-term priorities
Near-term objectives
Progress in 2016/17
KPIs
Sustainability drivers
Risks and uncertainties
1
2
3
Leadership in UK
water and waste
• Develop and fully maximise value from our
infrastructure business through long-term,
predictable, asset-backed, index-linked revenues
• Build on the strong track record of our water
business by delivering and outperforming the
K6 regulatory contract (2015-2020)
• Optimise our portfolio of Energy Recovery
Facilities (ERFs) to ensure a high level of
performance and availability is maintained
• Outperformance by South West Water against
the K6 regulatory contract (2015-2020)
continued in 2016/17, securing a net cumulative
reward of £3.6 million
• South West Water’s return on regulated equity
(RoRE) continues to be sector-leading
• Innovative investment in new Mayflower Water
Treatment Works in Plymouth – the first of its
kind in the UK
• Achieve the right balance between risk and
reward by mitigating volatility through securing
• Delivery by Viridor of £107 million EBITDA
from its ERF business, exceeding the target
long-term cash flows
of c.£100 million
• Continue to drive returns from recycling
‘self-help’ measures that reduce the cost base
and improve the utilisation of our assets
• Continue to develop a new model for proactive
customer service that puts our customers at
the heart of everything we do.
• Improved performance of Viridor’s recycling
business resulting from ‘self-help’ initiatives
to reduce costs and improve asset utilisation
• Dividend per share increased by 7.1% reflecting
strong performance of Pennon’s water and
waste management businesses.
Leadership in cost
base efficiency
• Complete the organisation change programme
coming out of our Shared Services Review and
finalise the centralisation of key corporate and
operational services
• Continue to maximise the benefits of the
integration of Bournemouth Water operations
into South West Water’s business
• Ongoing initiatives to reduce central overheads,
share best practice and deliver synergies.
• Good progress towards delivering K6 cost
savings of £27 million from the Bournemouth
Water integration
• South West Water cumulative totex efficiency of
£129 million driven by continuing advantages
from our strategic alliances
• £17 million per annum of cost savings to be
delivered across the Group by 2019; £9 million
per annum secured to date
• Cost efficient long-term financing in place –
3.4% interest rate on annual net debt.
Driving sustainable
growth
• Continue to grow the ERF business, including
the successful completion of construction
projects at Glasgow, South London, Dunbar and
Avonmouth ERFs
• Exploit the introduction of competition in the
non-household retail market by building scale
and efficiency through Pennon’s water retail
business, Pennon Water Services
• Identify and consider opportunities for
further growth.
• £385 million invested in key infrastructure
during the year
• Four ERFs now under construction
• New retail venture for business customers
between Pennon Water Services, South Staffs
and Cambridge Water – combined revenue of
c.£170 million and entering the market with the
fourth largest customer base
• Well positioned for regulatory and market
developments – ongoing engagement with
Ofwat reforms and prepared for the 2019
price review.
average ERF availability
>90%
85%
customer satisfaction with
overall service(1)
(1) Average of the customer satisfaction scores
achieved by South West Water, Bournemouth
Water and Viridor for the year.
£17m
of cost savings per annum
targeted across the Group
by 2019
Group assets as at 31 March
(£bn)
.
8
4
0
5
.
4
5
.
.
7
5
9
5
.
2013
2014
2015
2016
2017
%
5
3
+
.
• Investing in people – protecting the health,
safety and wellbeing of our people to ensure we
have a skilled, diverse, engaged and motivated
workforce to deliver our strategy
• Environmental protection – integral to our
water business’s regulatory contract and the
promotion of the circular economy by our waste
management business
• Waste prevention and resource efficiency
– delivering solutions for society is core to our
strategy and helps to address the challenge of
depleting natural resources.
Our aspiration to be a leader in the sectors in
which we operate could be affected by the
occurrence of certain events, many of which
have reputational consequences:
• An avoidable health and safety incident
• Legal, regulatory or tax non-compliance
• Poor customer service
• Failure to recruit, retain and develop people
with the appropriate skills
• Business interruption (for example, as
a result of a failure of our information
technology systems) or operational failure
• Failure of a capital project
• Loss or corruption of data as a result of
a cyber attack.
• Minimising disruption and inconvenience for
our communities – means that we also
minimise the cost to the business
• Energy efficiency – the use of solar
photovoltaics to power our facilities and other
energy saving initiatives help us to reduce our
own demand for electricity from the grid whilst
maximising the energy generated from our
core operations
• Responsible sourcing – value for money
secured through robust procurement practices
and sustainable supply chains.
• Customer service and engagement
– increased focus to improve the customer
experience and help expand our customer
base whilst retaining existing customers
• High standards of business conduct – ensure
that our people are incentivised appropriately
and exhibit the right behaviours to enable us to
achieve long-term and sustainable growth.
Risks that could impact our ability to deliver
efficiencies include:
• Operational failures that result in
rectification costs
• Changes in law or regulation that require
additional expenditure to fund implementation
and ongoing compliance
• An increase in customer bad debt resulting in
additional debt collection costs
• Failure to recruit and retain people with the right
skills, mindset and motivation to share best
practice, deliver synergies and move the Group
forward in the new ‘shared services’ structure.
Our ability to deliver sustainable growth could
be impacted by:
• Unfavourable economic conditions
• Local authority austerity
• Poor customer service
• Loss of market share as a result of regulatory
reform and increased competition
• Difficulties in recruiting, retaining and
developing people with the necessary
commercial acumen to help our businesses
grow and prosper.
Colliford Reservoir, Cornwall
17
Strategic report Our continued investment in our people is a
cornerstone of the Group’s ability to create shareholder
value. In support of this, Pennon has started work on
a new Group-wide people strategy and will roll this
out before the end of the 2017/18 reporting year.
We continue to invest in the
skills and career progression
of our staff.
Workplace strategy
Our goal is to attract and retain talented people with
the knowledge, skills, values and behaviours required
to deliver the Group’s long term goals and objectives.
Underpinning this, and in line with human rights
principles, we have a range of policies covering health
and safety, equal opportunities, diversity, ethics and
employee relations. All elements of our workplace
strategy apply to both our permanent and temporary
workers and we expect suppliers and contractors
to comply with relevant legislation and to hold
similar principles.
Health and safety
Our policy is to provide and maintain a safe working
environment while preventing injury and ill health
wherever possible. We continue to target
improvement through training programmes
focusing on behaviours and attitudes as well as risk
awareness and risk control and the ability to learn
from accidents or near misses. As the reporting of
near misses has increased, RIDDOR* injury incidence
rates have dropped across the Group. Viridor
reported an improvement for 2016 and South West
Water achieved a better performance on a like-for-
like basis (excluding Bournemouth Water).
Earlier this year, Pennon announced a new vision
and strategy for health and safety, designed to
raise standards, prevent harm and create a culture
of safety across its businesses. We call our new
health and safety programme ‘HomeSafe’ and it
represents a wide-ranging agenda of consolidation
and improvement, which focuses on people, process
and the physical environment.
* Reporting of Injuries, Diseases and Dangerous Occurrences Regulations.
Our
people
The talent,
professionalism and
commitment of our
people is key to
the delivery of our
strategic objectives.
Abdul Warsame carrying out
maintenance at Ardley ERF
18
Pennon Group plc Annual Report 2017 We believe fully
engaged staff
facilitate better
safety, greater
productivity and
higher customer
satisfaction.
Gender diversity
as at 31 March
Code of Conduct
Our Code of Conduct sets out the principles we believe
should guide our actions. These principles apply equally
to permanent and temporary employees and we expect
our suppliers and contractors to comply with equivalent
guidance. Employee training courses have been
developed around the Code of Conduct that focus on
specific aspects relating to legal and ethical behaviour.
Employee engagement
We believe motivated and engaged people
value their own health and safety and that of their
colleagues, drive greater productivity, and aspire
to deliver higher levels of customer satisfaction.
Across the Group, over 3,800 of our people (78%)
completed annual employment engagement surveys,
in line with previous years. Importantly, for the first
time, we brought together all of the leaders across
the Group to discuss the results and agree key
actions. These actions are focused on engaging our
people in our strategy, supporting our people better
as we evolve as an organisation, and providing more
opportunities to engage in two-way communication.
Employee development
We continue to invest in the skills and career
progression of our staff through a range of schemes
and training opportunities, ranging from operational
upskilling programmes to management training.
In the water business, this included specialist
training for our call handlers in a range of skills
including a programme with the mental health
charity MIND, designed to help call handlers
recognise if a customer is struggling to pay their
bills owing to stress or depression. This has helped
to improve our management of income recovery,
which during 2016/17 was our best-ever.
In Viridor, we have continued to support 24 individuals
undertaking a foundation degree specifically designed
for the business, and launched a management
development programme which 76 of our senior
leaders completed during the year.
Community initiatives
Our employees are enthusiastic participants in
the Group’s volunteering programmes. Viridor
employees volunteered 99 days, including activities
with Somerset Wildlife Trust to transform a neglected
area close to the River Tone in Taunton, Somerset.
Throughout December, Viridor’s Manchester Trafford
Park team helped out Key 103’s Cash for Kids Mission
Christmas appeal, collecting donated toys from
Greater Manchester residents.
South West Water staff took part in educational
outreach programmes alongside the region’s Wildlife
Trusts and participated in Keep Britain Tidy’s
BeachCare programme. Since 2010, South West
Water has supported 830 beach cleans which have
collected more than 120 tonnes of rubbish.
Diversity and equal opportunities
The Board continues to promote equality of
opportunity and diversity across the Group in all
areas, including gender and ethnicity. Although some
progress has been made on diversity in certain areas
across the Group, this still remains a key area of focus
and diversity specific actions are being reviewed as
part of the wider sustainability agenda.
Gender diversity
In South West Water 27% of the workforce is female
(an increase of 2% from last year). We do have some
areas of under-representation for example in our craft
and industrial group where the proportion of women
is less than 1%. We are committed to focusing on this
as an area for improvement in line with the industry.
The majority of Viridor’ s employees are male (85%),
reflecting a traditionally male-dominated industry.
The ratio is similar across senior management with
16% female. Of those employed directly by Pennon,
45% are women. We are committed to improving
senior management gender ratios in time across the
Group through initiatives such as informal mentoring
programmes and family friendly policies.
A working group is ensuring Pennon complies with
new legislation on gender pay equality that requires
certain companies to publish information on
their gender pay gap and report this data to the
UK Government.
Employees
Senior Management
Board
%
6
9
7
.
%
9
9
7
.
%
4
0
2
.
4
5
0
,
1
5
0
1
,
4
2016
%
1
.
0
2
0
3
0
,
1
2
9
0
4
,
2017
Women
Men
%
4
7
7
.
%
6
2
2
.
6
2
9
8
2017
%
1
.
8
7
%
9
.
1
2
1
2
5
7
2016
%
4
.
1
7
%
7
6
6
.
%
3
3
3
.
%
6
8
2
.
2 5
2 4
2016
2017
19
Strategic report
The use of new technologies
helps to improve both the
performance and efficiency
of our operational assets.
South West Water continues to invest
in processes such as Granular Activated
Carbon (GAC) and Ultraviolet
Disinfection (UV), which is now used at
70 of our drinking water and wastewater
treatment sites. In the drinking water
side of the business these processes
are designed to improve the taste and
odour of customer supplies while
securing long-term compliance with
water quality standards.
70
drinking water and
wastewater sites using
UV treatment processes
Technician Gary Hellier
at Restormel Water
Treatment Works
20
Pennon Group plc Annual Report 2017 Group performance
22
26
38
46
Review of the Chief Executive Officer
Our operations
26
32
Water and wastewater
Waste management
Report of the Chief Financial Officer
Risk report
Improving the
performance
and efficiency
of our assets
21
Strategic report
Review of the Chief
Executive Officer
Our strategy is to
lead in the UK’s water
and waste sectors,
drive value through
efficiency and invest for
sustainable growth.
Chris Loughlin
Chief Executive Officer
22
Pennon Group achieved a strong performance in
2016/17. Our strategy is to lead in the UK’s water
and waste sectors, invest for growth and drive value
through efficiency. I am pleased to say the Group is
delivering against each of its strategic objectives
while achieving a return for shareholders in a
responsible and sustainable way.
Health and safety
During the year we were shocked and saddened
by the death of Viridor worker Rafal Swiadek at
the Materials Recycling Facility in Milton Keynes.
No fatality is acceptable and I want to underline
the Group’s commitment to health and safety.
In January 2017 we created the new role of director
of Safety, Health, Quality and Sustainability (SHQS)
and appointed Steve Holmes, who previously held
the role of Health, Safety, Security and Environment
director for Amec Foster Wheeler. He brings many
years of senior experience in operations, health and
safety from industries including oil and gas, nuclear,
power and rail.
This appointment is an important development for
Pennon because it reflects our commitment at the
highest level to improve health and safety by utilising
concepts and learnings from other high hazard
industries. Steve has a mandate from the Board to
implement an enhanced strategy that will raise the
Group’s performance and reinforce health and safety
as core to Pennon’s way of working. Our ambition is
to be the health and safety leader in the UK water
and waste sectors and, to that end, we have launched
our HomeSafe programme (see page 18). As we
pursue our ambition, we can expect to see changes
to how we evaluate and control risk, how we engage
with our employees, and how we build greater
leadership and accountability for health and safety.
Leadership in water and waste
We remain committed to delivering high quality
services for the benefit of our customers, proactively
seeking to understand their needs and priorities and
making the most of new technologies and innovation
to deliver appropriate improvements.
South West Water once again outperformed its
regulatory contract to achieve a sector-leading RoRE
(return on regulated equity) of 12.6%. In addition,
South West Water once again achieved ODI
outperformance which has secured a net reward
of £3.6 million in the year.
In our waste operations, Viridor continues to be a
leader following its significant investments in Energy
Recovery Facilities (ERFs) in recent years. We delivered
£107 million EBITDA, which is in excess of our target
of c.£100 million, and now have a clear track record of
constructing and commissioning ERFs, and delivering
the operational and financial results.
We continued to drive returns from recycling through
broader ‘self-help’ measures that are reducing the
cost base and improving utilisation of assets. It is
Pennon Group plc Annual Report 2017 £129m
Cumulative totex
outperformance
>90%
Average ERF availability
encouraging to see these initiatives supporting an
increasing EBITDA. We are also making progress in
commodity risk sharing with our recycling clients.
Investing for sustainable growth
Our decision in November 2016 to commit to a
£252 million ERF at Avonmouth, near Bristol, has
expanded our future portfolio to 12 plants. We expect
demand for ERFs to continue to exceed capacity into
the long term.
The Group is actively addressing opportunities
arising from water industry deregulation.
In preparation for the new non-household retail water
market, which commenced 1 April 2017, we set up
Pennon Water Services as a Pennon Group plc
subsidiary, ringfenced from South West Water’s
business, to provide retail services to business
customers. To achieve scale, Pennon Water Services
formed a non-household retail venture with South
Staffordshire Plc (incorporating South Staffs and
Cambridge Water). Pennon Water Services entered
the market with the fourth largest customer base in
the deregulated market.
Driving value through efficiency
South West Water maintained its strong momentum in
controlling total expenditure (Totex) with cumulative
savings of £129 million and financing outperformance
of £67 million in the first two years of K6 (2015-2020).
South West Water is targeting to remain at the
forefront of cost efficiency for the water sector.
During the year, we completed our Shared Services
Review to drive value through efficiency, synergy and
best practice. Reflecting the more integrated nature
of our Group, we are taking advantage of the
expertise our combined water and waste businesses
have in terms of managing large asset bases, and in
engineering, technology and innovation. The review
resulted in a plan to centralise key corporate services
and operational functions, including the introduction
of a shared IT platform. This will achieve estimated
savings of £17 million per year from 2019, up from
the £11 million per year that we announced last
year of which c.£9 million per annum has been
secured to date.
Other efficiency successes include the Group’s
energy trading team which has developed a portfolio
management strategy. This addresses the energy
demands of the Group and ensures Pennon is buying
energy at the right price while enhancing profitability
from the energy we generate. With South West Water
a net user of electricity, the Group has a natural
energy hedging opportunity representing one third
of Viridor’s energy generation. We can now hedge
our market position for up to five years ahead, further
helping to protect revenues.
Balanced risk-reward
profile across the Group
Part of our strategy as we build our ERFs, and in our
recycling operations, is to ensure there is a balanced
risk-reward profile that complements our water
operations as closely as possible.
As a long-term infrastructure provider, we manage
our risk profile by mitigating volatility through secure,
long-term cash flows. We have made significant
progress over the past two years in reducing risk
and unpredictability across the Group by
overlaying our long-term assets with long-term
commercial arrangements, and supporting these
with long-term financing.
At Viridor, for example, we have increased contracted
volumes better aligning with the life cycle of our
assets. By negotiating long-term 25-year index-linked
contracts with stated volumes and prices, Viridor is
building a similar risk-reward profile to the water side
of the business. Prior to committing to Avonmouth,
approximately 80% of our ERF portfolio volumes
(and associated prices) were contracted long term.
Striking an appropriate balance between operational
risk and reward is a key part of our strategy. This
applies to any aspect of the Group’s operations –
developing our recycling business, our decision
to build the Avonmouth ERF, or our entry into the
non-household retail market. The starting point for
achieving the right risk-reward balance is to ensure
the Group fully understands the differences between
its water and waste operations. This has given us
a strong and effective framework for identifying risk.
Innovation and
investment in Plymouth
South West Water’s largest investment in its
current five-year plan is the new £60 million
state of the art Mayflower Water Treatment
Works in North Plymouth. Due for completion
by March 2018, Mayflower uses the innovative
treatment processes of suspended ion
exchange, inline coagulation and ceramic
membrane filtration. This is the first time that
this combined technology has been used in
the UK. Mayflower will provide a secure, high-
quality drinking water supply for the Plymouth
area for generations to come.
23
Strategic report We also ensure senior management are fully aware of
how we are managing risk and how we can mitigate
adverse impacts. At the same time, we identify
appropriate business opportunities, especially as
our strategy is to invest for growth in both water
and waste over the longer term.
Sustainability is core to our business
Sustainability is core to the Group both in terms of
ensuring its long-term commercial viability and of
operating in an environmentally and socially
responsible manner. The Group has a long track
record in partnership and innovation across a range
of sustainability issues. Our operations are deeply
embedded into local communities and we believe this
is one of the reasons Ofwat responded so positively
to South West Water’s latest business plan.
Sustainability is carefully integrated into our strategic
thinking given the nature of our business as a provider
of key water and waste services and the close
relationship our operations have with environmental
issues. Furthermore, we recognise that making
responsible and sustainable business decisions is
critical to achieving long-term investor confidence.
Our decision-making on capital investment integrates
many sustainability factors including social, community
and environmental impacts. We use a range of tools
to ensure we make decisions that involve more than
purely economic or financial criteria. In the case of
capital expenditure on our network infrastructure,
for example, an ideal solution is always one that
combines not just the lowest cost base but also
a favourable sustainability score.
There was clear evidence of the importance of
sustainability within the Group during the year.
In early 2017 Pennon completed its first Group
submission to Business in the Community’s Corporate
Responsibility Index and received a score of 90%
(a three-star rating). Pennon is also included in the
FTSE4Good Index. In addition, we achieved a score
of B (Management) for the annual CDP submission
(formerly the Carbon Disclosure Project) for Climate
Change and Water, and we continue to take steps to
effectively reduce our impacts.
Our gross greenhouse gas emissions increased by
14%, primarily as a result of Viridor’s newly
commissioned ERFs reaching full operating capacity.
The ERFs burn waste that would otherwise have
gone to landfill. This has the double benefit of
extracting more of the energy embedded in the
waste and substituting energy generated from other,
predominantly fossil fuel, sources.
Our environmental performance is an area of
focus and further progress is needed in aspects
such as reducing the risk of pollutions and flooding.
In recognition of the shared importance of our
environmental responsibilities across the Group, we
have created the new role of director of Environment
and, in April 2017, appointed Ed Mitchell to the role.
Ed brings with him a wealth of experience, having
spent eight years at the Environment Agency. Prior to
this Ed held senior positions at Thames Water and the
Department of Environment, Food and Rural Affairs.
Our people
Across the Group we look to attract, develop and
retain a highly skilled and customer-centric workforce.
At the end of the year, Pennon had a workforce of
around 5,000 people and we continue to be a
large employer in the south west of England.
Our multi-award winning apprenticeship programme,
which started in 2011, continues to go from strength
to strength. This year South West Water recruited
its 100th apprentice since the programme began.
Viridor is actively committed to expanding
the number of apprentices it employs.
The Group also contributes to local efforts to
develop skills for the future, an example being
South West Water’s role as a leading partner in a
University Technical College for South Devon, which
places a unique focus on engineering, water and
the environment.
Our employees supported communities through
359 days of volunteering during the year and both
South West Water and Viridor continue with a broad
community education programme. Viridor has been
shortlisted for The UBS Award for Education as part
of Business in the Community’s Responsible Business
Awards 2017.
At executive level, the creation of the position of Group
director of Human Resources is an important step in
the Group’s evolution. The responsibilities of the role
include developing and implementing the Group’s
people strategy and assessing how we evolve the
human resources model across the Group.
The success we achieved in 2016/17 owes much to
our employees and I would like to thank all of them
for their hard work, loyalty and dedication.
Outlook
The Group’s outlook is encouraging. In our waste
business, our ERF portfolio is a significant investment
in the UK’s environmental infrastructure and key to
Pennon’s growth agenda. Construction of our ERFs
at Dunbar and South London is progressing well
and construction on Avonmouth is now underway.
In November 2016 we announced that we had taken
positive action to terminate Interserve Construction
Limited as EPC contractor for our ERF in Glasgow
following their continued underperformance on the
project. Good progress has been made since this
date in engaging sub-contractors and progressing
construction which is expected to be complete
within a revised timetable agreed with our customer,
Glasgow City Council.
Once all facilities are fully operational, we
are confident they will add to the already strong
contribution these assets are making to the Group’s
financial performance. We continue to work hard to
create a balanced risk profile across our waste and
recovery operations.
Review of the Chief
Executive Officer
continued
New branding
As we begin to work more closely as an
integrated business, it is important that
the Pennon, South West Water and
Viridor brands also work together
visually. The new branding underlines
our commitment to environmental
infrastructure, unifying us as a group
but still reflecting the strengths of each
business. A cost effective three-year
programme for roll-out of the new
branding for vehicles, sites and
uniforms was in progress by year end.
24
Pennon Group plc Annual Report 2017 Avonmouth ERF:
investing for growth
Viridor, with its joint venture partners, is
already one of the largest independent power
generators from waste. When Avonmouth
begins operation early in the next decade,
it will place us in the leading position in UK
energy recovery with 20% market share.
Avonmouth will serve around 3.5 million people
in the West of England and supply the national
grid with enough electricity to power over
30,000 homes.
The waste supply in the Avonmouth ERF
catchment area substantially exceeds the
plant’s own capacity as well as available
capacity nearby. Supporting contracts
we already have, an additional volume of
some 800,000 tonnes is available from
local municipal, commercial and industrial
sources. Combustible waste market under-
capacity in the west of England extends to
2030 and beyond, matching the UK trend.
Viridor’s market projections are supported by
independent third party analysis.
Looking ahead, our strong operational and financial
performance shows we are delivering on our strategy
and providing a firm foundation for further growth.
Our immediate priority is to optimise our current
assets and operations so that we can continue
fulfilling our strategic objectives. In the longer term,
we believe there is additional opportunity for
consolidation in wholesale water.
Meanwhile, we have a clearly articulated core strategy
focusing on water and waste operations in the UK and
we believe both business streams provide excellent
opportunities. With our sector-leading dividend policy,
our growth profile and our strong balance sheet,
Pennon Group is well positioned to deliver further
value to customers, communities and shareholders.
Chris Loughlin
Chief Executive Officer
Pennon Group plc
25
We remain well
positioned to play
our part in the
development of
future regulatory
reform.
The Greater Manchester Waste Disposal Authority
(GMWDA) has confirmed that it is seeking to exit and
re-negotiate the Greater Manchester Waste private
finance initiative (PFI) contract with Viridor Laing
Greater Manchester. The PFI contract, which was
entered into in 2009, was the UK’s largest waste and
energy project. Diversion of waste from landfill
remains ahead of contractual commitments and we
are keen to ensure this progress is able to continue.
Viridor and its joint venture partner John Laing have
been actively engaging with GMWDA as they
consider their options. There are provisions in the PFI
contract for compensation to be paid to Viridor and
John Laing on termination.
Our water business is well prepared for the future.
South West Water is fully engaged in Ofwat’s
programme for future water and wastewater services
regulation as the Group prepares for the PR19
five-year review of pricing and investment
requirements. We remain well positioned to play
our part in the development of future regulatory
reform and are working to ensure our voice is
heard in shaping the industry’s future.
South West Water will publish its 25-year strategic
plan during 2017/18, setting out our evolving strategic
priorities and our path to continued strong
operational performance. We will make every effort to
maintain a first-class, innovative and efficient service
that is characterised by reliability, responsiveness
and resilience. At the same time, we will ensure our
operations and investments enhance the communities
we serve and that we continue our commitment to
understanding the needs of vulnerable customers
and offering appropriate support.
Strategic report Our operations
Water and wastewater
In our water and wastewater business
we are focused on providing services
in the most efficient 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.
www.pennon-group.co.uk/water
Reservoir
Key water mains
South West Water
1.7
million total
population served
15,300
km of drinking water
mains network
0.8
million customers
21
raw water reservoirs
682
treatment works with
66 ultraviolet (UV)
treatment facilities
15,600
km wastewater
mains network
26
900
wastewater pumping stations
144
bathing waters and
24 shellfish waters
Pennon Group plc Annual Report 2017
Bournemouth Water
2,831
0.5
million total
population served
km of drinking water
mains network
7
treatment works with
4 ultraviolet (UV)
treatment facilities
0.2
million customers
2
raw water reservoirs
Stephen Bird
Managing Director,
South West Water
We continued to deliver strong
performance in 2016/17, providing high
quality drinking water, achieving our best
result to date in leakage and delivering
a significant improvement in wastewater
compliance. We were well prepared for
the opening of the non-household
retail market and are well-placed as
preparations get underway ahead of
the next Price Review (PR19).
27
Strategic report
Continuing outperformance
The merged water business of South West Water and
Bournemouth Water performed well during the year.
South West Water’s Return on Regulated Equity
(RoRE) performance continues to be sector leading
and is outperforming its business plan with a RoRE
of 12.6%. This arises from base, financing and
operational returns with 6% as the base return, 3.2%
reflecting total expenditure savings and efficiencies,
0.3% reflecting a net reward on Outcome Delivery
Incentives (ODIs) and 3.1% reflecting the difference
between actual and assumed financing costs. This is
consistent with the approach to our WaterShare
mechanism.
A key highlight for the year is our significant capital
investment of £191 million in our drinking water and
wastewater operations. This reflects our focus on
enhancing our environmental performance and we
are pleased with the progress seen during the year.
During the year Ofwat updated its guidance to
companies which requires financing outperformance
to be calculated using an in-year average RPI rate.
This approach reflects a financing outperformance of
2.4% and a total RoRE of 11.9% for 2016/17 (10.1% for
2015/16). South West Water’s RoRE would remain
sector leading and by the end of K6 period overall
performance will converge.
Total expenditure savings
South West Water continued to focus on driving
value through efficiency. It achieved cumulative
total expenditure (Totex) savings of £129 million and
financing outperformance of £67 million in the first
two years of K6 (2015-2020).
The business expects to remain at the forefront
of cost efficiency for the water sector.
RoRE (2016/17)
2
3
4
1
These savings were driven by continuing advantages
from our strategic alliances, including a new water
distribution framework and the H50 capital alliance,
which is now delivering efficient schemes within the
Bournemouth region.
We are also ensuring efficient capital investment,
promoting off-site build techniques and changing the
way we work through our iOPS programme focussed
on innovation and new technology to deliver cost
efficiency and customer service improvements.
We continued to deliver synergies from our
acquisition of and merger with Bournemouth Water,
focusing on front-line functions, having completed
integration of back-office and support services at the
end of the prior year. The targeted c.£27 million of net
synergies over K6 are on track.
ODI rewards
South West Water had 22 ODIs and Bournemouth
Water 10 ODIs, which have potential financial rewards
or penalties. These ODIs include the Service
Incentive Mechanism (SIM).
Operational performance for the year continued to
improve and there was a net ODI reward of £3.6
million (£5.5 million cumulatively over two years)
reflecting 0.3% RoRE outperformance to date.
South West Water maintained good reliability and
serviceability across all four areas of operations and
bathing water quality, water restrictions, interruptions
to supply and leakage all resulted in rewards for the
year. Disappointingly, performance in wastewater
pollutions and external flooding fell below our
targeted commitment and resulted in a penalty,
however, performance did improve overall compared
with the prior year.
The cumulative net reward of £5.5 million comprises
£7.5 million of net rewards recognised at the end of
the regulatory period and £2.0 million of net penalty
which could be adjusted during the regulatory period.
Drinking water
Drinking water quality is a key priority and we
maintained the high standards set previously. South
West Water achieved 99.96% and Bournemouth
Water achieved 99.98%.
The improved performance in managing our network
led to our best ever leakage result of 82ML per day,
exceeding our original target and delivering an
ODI reward. This reflects innovative approaches
to network management including investment in
real-time pressure management, detection, repairs
and network monitoring.
1 Base
2 Totex outperformance
3 ODI outperformance
4 Financing outperformance(1)
This was our 20th consecutive year of unrestricted
water supplies and the Bournemouth water region
maintained its record of zero water restrictions
since privatisation.
6.0%
3.2%
0.3%
3.1%
(1) Interest outperformance is based on the outturn effective real
interest rate on net debt using the forecast K6 average RPI,
notional gearing of 62.5% and an actual effective tax rate of
18.2%.
The average duration of supply interruptions per
property was lower in both regions compared with
the previous year. In the South West Water region this
performance delivered a small reward compared to
the penalty incurred in 2015/16.
Our operations
Water and
wastewater
continued
28
Pennon Group plc Annual Report 2017 Upstream Thinking for
sustainable solutions
Upstream Thinking is a good example of our
aim to examine long-term costs as well as
environmental factors when assessing capital
expenditure on our network infrastructure.
By delivering landscape-based solutions
sympathetic to the environment rather than
harder engineering solutions, we are addressing
water quality and flooding risk in the most
sustainable manner. Our strategy is to improve
the quality of drinking water before it reaches
treatment works, making it more cost effective
to treat water. We also look to reduce flooding
risk and retain water in catchments.
We could look solely at costly end-of-pipe
solutions that might have had less preferable
environmental impacts. But by co-operating
with farmers and other stakeholders, we
avoid the financial costs of hard engineering
solutions and deliver solutions with a
favourable sustainability score.
Mayflower will be
one of only two plants
in the world to use
transformational
ceramic membrane
filter technology.
Investment and innovation
We continued to invest in our assets to deliver
drinking water improvements. The new £60 million
state-of-the-art Mayflower Water Treatment Works
in Plymouth is the largest single item of capital
expenditure in our current five-year plan.
Serving Plymouth and South Devon, this is a major
construction and engineering project with the facility
scheduled to open in 2018. During the year, we reached
the halfway point in the build on time and on budget.
Mayflower will be one of only two plants in the
world to use transformational ceramic membrane
filter technology.
Construction is also progressing well at three other
modern drinking water treatment works – at Tamar
Lakes, Tottiford and Northcombe. Each will use
Granulated Activated Carbon (GAC), a sophisticated
filter technology for improved water treatment.
There was continued investment in our award-
winning Upstream Thinking programme of catchment
management involving a range of stakeholders
including wildlife trusts and river authorities.
During the year we worked with 1,056 farms
and improved 7,568 acres of upstream land.
Wastewater
South West Water aims to ensure the safe and
efficient removal and disposal of wastewater, while
minimising the possibility of sewer flooding and
pollution. We continued to implement a programme
of wastewater treatment improvements and
increased monitoring to prevent potential failure.
This delivered a significant improvement in numeric
compliance (the percentage of wastewater treatment
works deemed compliant). Performance for works
with numeric consents was 98.4% compared to 95.8%
in the previous year. Our performance at our smaller
(descriptive) sites was 99.4% compared to 99.1%
last year.
We delivered record bathing
water quality results
Protecting the environment
Significant incidents (Categories 1 to 2) continued to
fall, however the number of minor incidents increased
marginally to 246 (2015 222). Unfortunately, the
number of significant incidents at four is higher than
target and, although lower than the seven reported last
year, will result in a penalty for the year. We are
prioritising further improvement in this area of our
wastewater operations.
We delivered record bathing water quality results
against more stringent EU standards during the year.
Of the 143 bathing waters tested in the South West
Water Region, 141 (98.6%) were classified as ‘sufficient’
or better. 116 beaches (81.1%) were classified as
‘excellent’. All of Cornwall’s beaches passed and only
two beaches in Devon failed with neither of these due
to any failure on the part of South West Water’s own
assets. These bathing water results are critically
important given the importance of the coastal
environment to the region’s economy.
29
Strategic report Our operations
Water and
wastewater
continued
Wastewater investment
Highlights of our investments and activity in wastewater
during the year include process improvements and
upgrades at four key sites and improvements in the
sewage network to reduce the impact of saline
infiltration (the impact of salt water). We also invested
in increased capacity at our wastewater treatment
works at Fluxton in Devon and Hayle in Cornwall.
Our continued investment in sustainability includes
£5 million as part of our Downstream Thinking
programme, which seeks to reduce sewer flooding
by improving urban drainage, and £20 million for
improvements in bathing waters and shellfish waters
around Plymouth.
We also invested over £1 million to support the
Exeter Flood Defence Scheme at Countess Wear
Wastewater Treatment works. This is a welcome
opportunity to work with partners in the region
to enhance sustainability and deliver more
resilient services.
Think Sink!
We continue to target a reduction in sewer flooding and pollution through the
promotion of responsible sewer usage with our customers.
Following the success of our award-winning ‘Love Your Loo’ campaign, which
targeted communities in areas with a history of sewer blockages, we launched
a new ‘Think Sink’ campaign in December 2016.
This encourages customers to ‘take the pledge’ and avoid disposing of fat, oil
and grease (among the major contributors to blockages) down the drain.
30
Customer service and engagement
There was a significant improvement in our customer
service performance during the year.
South West Water scored 81.6 under the SIM used by
Ofwat to compare water company performance.
The score for 2016/17 continues the improving trend
of recent years and compares well with the previous
year’s score of 78.6. This reflects good progress in
how we deal with service issues as well as call centre
investments in data analytics.
Bournemouth Water’s SIM score was 86.3 in 2016/17,
one of the highest in the industry.
The improved SIM score owes much to the
approximately 30% reduction in written complaints
received at South West Water and Bournemouth
Water. The customer experience quality scores also
improved across both regions during the year. In
addition, our overall customer satisfaction was 89%,
in line with last year, with value-for-money satisfaction
at an all-time high, with customer bills reducing in real
terms over 2015-2020 regulatory period.
Support for those who need it
There was also good progress in helping vulnerable
customers, including developing affordability
schemes. South West Water was one of the first
companies to introduce a social tariff to help
customers experiencing temporary or long-term
problems in paying their water bills.
We implemented a new employee training and
development programme during the year that extends
the support for vulnerable customers. We have also
brought Bournemouth Water in line with South West
Water’s approach by rolling out a social tariff for the
first time in 2017/18.
WaterShare
Our unique WaterShare scheme identified
£4.0 million of benefits to customers during the
year under review.
This is in addition to the £3.1 million shared in 2015/16.
Following discussions with the independent
WaterShare panel, it was decided to invest the
£3.1 million in key areas of customer service.
How the benefit in 2016/17 is to be applied will again
be considered by the WaterShare panel.
Non-household market opening
Since 1 April 2017, up to 1.2 million businesses and
other non-household customers across the country
have been able to choose which retailer they buy water
and wastewater services from. Wholesale services,
providing water to premises and taking wastewater
away, are unaffected, but business customers can
choose who provides their retail service.
During the year, the Group established Pennon Water
Services, which will operate independently of South
West Water and can secure services from any
wholesaler in the United Kingdom. Equally, South
West Water has the freedom to supply other business
retailers around the UK.
Pennon Group plc Annual Report 2017 98.6%
improved results for
bathing waters
£20m
investment in bathing and
shellfish water improvements
MarketReady
In preparation for the opening of the non-
household retail market on 1 April 2017, we
carried out a company-wide training and
awareness programme entitled MarketReady,
designed to ensure recognition and compliance
with the new market codes. A series of
workshops were delivered to almost 2000 staff
with messaging subsequently reinforced using
an innovative web-based knowledge-testing
application. The MarketReady campaign also
featured heavily in all internal communications
throughout the year.
From September 2016 South West Water fully
engaged in a period of ‘shadow operation’ to ensure
that systems and processes were ready for market
opening, operating as closely as possible to the
market conditions and requirements whilst ensuring
customer service levels were maintained.
Future market opportunities
Ofwat is promoting the development of a market for
bio-resources (also referred to as sludge; a product
from sewage which can be used for energy or as a
fertiliser substitute) and a market for water resources.
We conducted preliminary work on these potential
opportunities during the year and are actively
engaged with Ofwat in developing the potential
frameworks for these markets.
Ahead of PR19 we are also engaging with customers
and stakeholders around their priorities for water and
wastewater services over the short and long-term.
The initial findings have helped inform our updated
25-year strategic plan which is being published
during the summer.
Our community
Regional economy
South West Water is one of the largest companies in
its region. The services it provides are essential for
the area’s economic sustainability and the company
supports the employment of around 5000 staff
directly and indirectly through the supply chain.
The company works closely with Local Enterprise
Partnerships (LEPs), the Environment Agency and
other stakeholders and regulators on projects and
initiatives to ensure a sustainable and resilient future
for the region.
Charitable partnerships
In 2016/17 South West Water provided almost
£75,000 of community sponsorship as part of its
business plan. Using the Business in the Community
framework as a guide, which marries core business
purpose with identified community and social needs,
South West Water’s main sponsorships were with:
• Devon and Cornwall Wildlife Trusts – in support
of their community engagement and educational
outreach programmes. Activities included a 2-day
Wildlife Celebration at Trebah Gardens in Cornwall
and 55 school visits to Wembury Marine Centre
in Devon
• Surf Life Saving GB – in support of the Nippers &
Youth Championships and a three-year Graduate
Lifeguard Project programme for young people
who will be able to gain a National Vocational
Qualification and become a Level 1 Coach at
age 16
• The South West Coast Path Association, which
takes care of the 630-mile coast path, one of the
region’s main tourist attractions
• British elite windsurfer and Olympic hopeful Izzy
Hamilton, from Bude, who learned to windsurf at
Roadford Lake.
Access and recreation
The South West Lakes Trust, an independent charity,
manages over 14,000 acres of land on South West
Water’s behalf. The Trust is the region’s largest
combined environmental and recreational charity,
taking care of 50 inland water sites which attracted
more than 1.9 million visits during 2016/17.
Conservation, access and recreation activities in the
Bournemouth Water area, including management
of fisheries and moorings, are now also being
managed by South West Lakes Trust on South West
Water’s behalf.
31
Strategic report Our operations
Waste management
Viridor is at the forefront of
the resource sector in the UK,
transforming waste into energy, high
quality recyclates and raw materials.
www.pennon-group.co.uk/waste
Key facts
8
energy recovery facilities
in operation and four more
due to be operational by 2020
300
recycling, energy recovery and
waste management facilities
380,000
potential homes powered by
energy produced by our portfolio
650
waste collection vehicles
securing materials for our
network of assets
150
local authority and major
corporate clients
32,000
customers across the UK
7.6
million tonnes of waste
materials input each year
1.6
million tonnes of recyclate traded
Phil Piddington
Managing Director,
Viridor
Viridor has delivered a strong performance across its
recycling and energy asset base. Our ERF portfolio is
performing well and we have started construction of a
new facility in Avonmouth, for which we have already
secured half of the inputs. Our focus on self-help
measures has reduced the risks in the recycling
business and delivered significant financial benefit.
32
Pennon Group plc Annual Report 2017 Material recycling
facility
Energy recovery
facility
33
Strategic report Strong momentum
Our energy recovery and waste recycling business
enjoyed strong momentum in 2016/17. Through our
energy recovery facility (ERF) portfolio we are delivering
on the Group’s strategy to invest for growth.
Our announcement of a new ERF at Avonmouth
near Bristol takes our total portfolio to 12 plants.
Of the three other ERFs currently under construction,
Dunbar and South London ERFs are progressing well.
Following the termination in the year of Interserve as
our main contractor for Glasgow ERF, the project is
now progressing to our revised plan with
commissioning expected in 2017.
To date, the Group has invested more than £1 billion
into its ERF asset base. This significant investment
in environmental infrastructure is helping us to
transform our business model with an increasing
focus on ERFs and recycling.
In coming years, we expect our growing ERF business
to be the largest contributor to Viridor, followed by
recycling, with these operations together already
successfully delivering new revenues that can replace
our legacy landfill business.
‘Self-help’ measures during the year improved
efficiency in our recycling operations while there was
continued progress in commodity risk sharing with
our customers.
We took further steps to evolve our approach to
health and safety. The Group’s new director of Safety,
Health, Quality and Sustainability (SHQS) will work
closely with Viridor to deliver a major transformation
in our health and safety outlook that will benefit
personal wellbeing and enhance business performance.
Viridor’s total energy capacity has continued to
grow and with our joint venture partners, we are
already one of the largest independent power
generators from waste in the UK. We had 280MW of
operating capacity from ERFs, anaerobic digestion
(AD), solar and landfill gas (including joint ventures)
at 31 March 2017 and exported 1.5 terawatt hours
(TWh) of power during the year.
Customer experience
During the year, we completed our first customer
service survey to seek the views of over 1,000 clients.
Viridor will use the findings to strengthen customer
relationships and support the Group’s wider growth
strategy. By improving the quality of our products and
services we enhance the customer experience, and
this in turn supports customer retention and creates
long-term business partnerships.
76% of Viridor customers said
they were satisfied or very
satisfied with the service
The key requirement from the perspective of our
customers is for a seamless service providing safe,
reliable collection. We continue to develop a fully
integrated service of waste management, recycling
and recovery recognising that customers are keen
to avoid landfill. Our aim is to maximise the amount
of waste that goes into recycling and to divert
the balance to our ERFs or landfill as appropriate.
By doing this, we are supporting development
of a circular economy with greater resource
productivity leading to reduced waste and pollution.
Energy recovery facilities
Viridor reported a good operational and financial
performance for 2016/17.
Our ERF portfolio is a significant asset base
comprising eight plants in operation with four under
construction, including Avonmouth. This is the UK’s
largest network of modern low-carbon energy
recovery facilities and produces much-needed
energy. At year end, our ERFs provided 178MW of
generating capacity. Once the total committed ERF
portfolio is completed in 2020/21 our ERFs alone will
provide 276MW of energy generation capacity.
Long-term waste contracts provide a secure fuel
source for the ERFs and strategically agreed energy
offtake contracts provide assured earnings from the
energy generated.
Bringing new solutions to
plastics recycling
Viridor is continually working on solutions
to align next-generation recycling resources
with the needs of UK industry. Our £12.5m
advanced plastics recycling facility
at Rochester is capable of processing
75,000 tonnes of mixed plastics each year.
The Rochester team has partnered with
packaging specialists (Nextek, funded
by WRAP) to help find a solution to the
1.3 billion black plastic ready-meal trays
sold by UK supermarkets that are not
currently recyclable.
Our operations
Waste management
continued
£1.1bn
invested to date in our ERF
portfolio
1.5TWh
power exported in 2016/17
34
Pennon Group plc Annual Report 2017 Viridor plays a vital
part in the displacement
of virgin materials
in manufacturing
supply chains, with
recycled material
that significantly
reduces embodied
carbon across
product lifecycles.
Plant optimisation
We are maintaining a high level of performance in
these facilities and demonstrating we can deliver
long-term stable earnings. This helped us exceed our
target contribution of some £100 million of EBITDA
from our ERF portfolio for 2016/17.
For the operational plants, our focus was on
optimisation and during 2016/17 we achieved average
availability in excess of 90%. Our operational ERFs
have a design capacity of 2.1 million tonnes of
waste inputs, including joint ventures. Our forecasts
are for this to increase to 3.2 million tonnes of waste
by 2020.
ERF growth
Two of our ERFs under construction, at Dunbar and
Beddington, are progressing well and to budget. Delays
at Glasgow’s Recycling and Renewable Energy Centre
led Viridor to terminate the construction contract with
Interserve. The project will be finished by an experienced
team assembled by Viridor while contractual remedies
will also support completion. The client (Glasgow City
Council) is supportive and commissioning of the plant is
now expected in 2017.
We are building a strong operational team using
power industry best practice. We have demonstrated
that we can build these facilities safely, on time and
to budget and during the year we achieved upper
quartile availability and reliability. Maintaining this
high level of performance in our ERFs contributed to
fulfilling our commitment to achieve c.£100 million
EBITDA during the year.
The £252 million Avonmouth ERF near Bristol is
scheduled for completion in 2020/21. The plant will
have a capacity of 320,000 tonnes per annum and will
deliver 34MW of electricity. Viridor expects to fill the
plant’s capacity on opening and by year end 50% of
the fuel had already been agreed. This includes some
35% of total capacity secured through a long-term
contract with Somerset Waste Partnership. This aligns
with our strategy to achieve a balanced risk-reward
profile across the Group. We are implementing that
strategy by increasing long-term contracted revenue
to match the life cycle of our assets. There are further
contracts for Avonmouth ERF in the pipeline.
Impact on carbon emissions
41% of the Group’s 2016/17 emissions were attributable
to our ERFs. This part of the business will continue to
contribute a significant proportion of our carbon
footprint as more plants come on stream however
there are clear environmental benefits due to the
reduction of waste going to landfill. Viridor is in the
process of establishing energy efficiency projects at
key sites although, in the long term, we believe our
energy recovery activities and their related combined
heat and power schemes will help to deliver a distinct
improvement over landfill. In addition, the displacement
of virgin materials in manufacturing with recycled
material contributes to significant reductions in
embodied carbon across product life cycles. However,
this offset falls outside current greenhouse gas
reporting scopes.
Ardley ERF achieves
best-in-class delivery
Viridor’s ERF at Ardley, north of Oxford,
delivered world-class safety performance
in construction and was built on-time and
on-budget. It completed its first year of
operations in 2016/17 and achieved upper
quartile availability (between 90% and 96%).
This high level of performance is normally
associated with a mature asset and it would be
reasonable to expect a lower level of 80%-90%
availability from a new plant. The achievement
at Ardley of upper quartile performance in
the first year with a completely new team is
the result of Viridor’s record of investing in
quality people, training and development
and its commitment to effective operational
processes and procedures.
Innovative use of by-products
Viridor’s ERFs are moving closer to becoming a fully
‘zero waste to landfill’ solution using innovative
technology to treat the by-products of the energy
recovery process. Incinerator Bottom Ash (IBA),
the ash left behind after burning the waste and Air
Pollution Control Residue (APCr), the by-product of
the filtering process to clean exhaust gases before
they exit the facility, are now being transformed into
valuable construction products. Our IBA is recovered
for processing from all ERF sites and after the
removal of metals, is recycled into an aggregate that
is used as capping layers, sub-bases, trenches and
binding concrete to structures. The aggregate is now
widely recognised and used in nationally important
construction projects such as the M25 widening.
Contracts are also in place for recycling APCr that
includes an innovative technology that transforms
the APCr into a carbon negative aggregate. The
Environment Agency considers the aggregate to be a
product in its own right, having been assessed as an
‘end of waste’ material that can be used in exactly the
same way as virgin aggregates and with no worse
environmental impact than virgin aggregate.
35
Strategic report Our operations
Energy recovery
and waste recycling
continued
Recycling
Our recycling operations had a satisfactory year with
Viridor retaining its position as one of the largest
recycling businesses in the UK. Recycling volumes
traded in 2016/17 were slightly lower than previous
years at 1.6 million tonnes. We were active in many
areas, including mixed material recycling, glass and
plastics recycling, paper recycling, transforming food
waste into organic and energy resources. As one of
the UK’s largest glass-recycling companies, our
recycling plants in Sheffield and Glasgow processed
over 245,000 tonnes of glass in 2016/17.
Self-help measures
Recyclate prices were mainly flat but under pressure,
with fluctuations across different commodities. While
the outlook for recyclate prices is relatively stable
over the short term, we are not relying on a near-term
recovery. In addition, local authority austerity in the
face of central government cuts has made the market
environment more difficult. We therefore focused in
2016/17 on ‘self-help’ optimisation measures. These
initiatives drove improved margins with EBITDA
increasing by £6 per tonne, from £8 per tonne in
2015/16 to £14 per tonne in 2016/17.
As part of the ‘self-help’ initiative, Viridor intensified its
optimisation programme and, combined with other
ongoing efficiency initiatives, this saw costs reduced by
£1 per tonne for the year despite an increase in
shipping costs.
Sharing commodity risk and opportunity
In line with the Group’s strategy of achieving a
balanced risk profile, we continue to work with
stakeholders where we can share commodity risk
and opportunity. There are further opportunities
for risk sharing arrangements as contracts expire
and are renegotiated.
Local authority contracts
Performance in 2016/17 across our key local authority
contracts, including Greater Manchester, Glasgow,
Lancashire, Somerset and West Sussex, as well as
the Thames Water contract, remains broadly in line
with 2015/16. We began operating our 25-year
contracted service for Tomorrow’s Valley in Wales
(where four local authorities are collaborating in a
£190 million residual waste contract) that is securing
fuel for Trident Park ERF. In May 2016, we announced
a significant multi-authority recycling project in
Scotland’s Clyde Valley. This is expected to be worth
around £700 million over the 25-year contract period
and will secure fuel for the Dunbar ERF.
Joint ventures
The Lakeside ERF (a 50/50 joint venture with Grundon
Waste Management) continued to operate efficiently
while Viridor Laing Greater Manchester (a joint venture
between Viridor and John Laing Infrastructure) is
delivering the 25-year Greater Manchester Waste
private finance initiative (PFI) contract, which was the
UK’s largest waste and energy project entered into in
2009. Solid recovered fuel produced from Greater
Manchester’s residual waste is used to generate heat
and power at Runcorn 1 ERF (TPSCo, a joint venture
between Viridor, John Laing Infrastructure and Inovyn).
The Greater Manchester Waste Disposal Authority
(GMWDA) continues to face financial challenges
and in April 2017 confirmed it is seeking an exit and
re-negotiation of the PFI contract. Diversion of
waste from landfill remains ahead of contractual
commitments and Viridor and its partners are keen
to ensure this progress is able to continue. Viridor
and John Laing have been actively engaging with
GMWDA as they consider their options.
There are provisions in the PFI Contract for
compensation to be paid to Viridor and John Laing
on termination.
Crayford MRF underlines benefits
of ‘self-help’ asset optimisation
Viridor has one of Europe’s largest mixed-waste recycling facilities
at Crayford in Kent. Crayford MRF applies advanced technology to
sort and recover co-mingled recyclable materials from local councils
and businesses outside London.
This plant serves as a good example of our boosting productivity
through asset optimisation and self-help measures that saw
inputs into Crayford reduce marginally from the previous year, but
delivered a significantly increased EBITDA.
Investment in dust control
A key facet of our operations is managing the dust caused by
our activities, to minimise the impact on our staff as well as on
the external environment. The primary focus for dust control is
elimination at source, through localised extraction and dust filtration
systems at key locations within the process. Water suppression (the
dampening down of yard areas or haul roads) is also used and we
have invested in vacuum suction systems at a number of plants for
use in cleaning and maintenance activities. These measures, as well
as general standards of good housekeeping within our plants, help
us to keep dust levels under control.
36
Pennon Group plc Annual Report 2017 Energy efficiency
programmes and
reorganised operations
have made our
recycling facilities
more efficient and
productive.
Along with our JV partners,
Viridor is already one of the
largest independent power
generators from waste in
the UK.
Landfill
In 2016/17 we continued to manage our landfill energy
business to maximise the value of landfill gas power
generation, optimise opportunities for waste disposal
where it is not suitable for recycling or sending to ERFs,
whilst exploring alternative commercial development
opportunities and other energy uses.
We operate a network of landfill gas power
generation sites that contributed 99MW of capacity
in 2016/17. We are continuing our strategy of
delivering cash flow from landfill sites and anticipate
continued reduction of capacity. However, we believe
there will be an ongoing requirement for some landfill
capacity in the UK as some waste is not suitable
for recycling nor for sending to ERFs. Careful
consideration will be given to selecting suitable sites
for this opportunity, our intention being to retain only
a small number of strategic sites by 2020. Viridor
closed four sites during the year, bringing the total
number of operational sites to 11.
Landfill restoration and biodiversity
Viridor continues to manage 31 closed landfill sites
across the UK in accordance with biodiversity plans
and using our experience in restoration. Sites have
been restored to heathland, grassland, woodland,
agriculture, amenity parkland or a combination of
these. Viridor currently has eight sites that have
achieved The Wildlife Trust’s Biodiversity Benchmark,
which includes two heathland restorations (Tatchells
and Warmwell in Dorset) and a grassland restoration
that has national significance for birdlife (Beddingham
in Sussex).
Community engagement
Investing in educational programmes and supporting
initiatives local to our operational facilities is a key
element of our community engagement. Our 11
educational facilities have received 19,327 visitors over
the year and helped deliver 122 outreach events to
6,848 people.
The education facility at Ardley ERF has been
shortlisted for the UBS Award for Education, as part of
Business in the Community’s Responsible Business
Awards 2017 which recognised our Business Class
Partnership with The Bicester School, Industrial Cadet
Programme, Go4Set and Engineering Trust projects.
During 2016/17 Viridor has provided £8.0 million
in community support, sponsorship and charitable
donations, of which £7.7 million was paid to
Viridor Credits for distribution via the Landfill
Communities Fund.(1)
We operate active community liaison groups to ensure
effective dialogue with the local community and as
part of our major construction projects we work hard
to ensure maximum benefit is achieved for local
communities in the surrounding area.
(1) Viridor Credits is an independent, not-for-profit organisation
that administers Viridor’s contributions to the Landfill
Communities Fund.
Investment in
Leachate Management
Household Waste
Recycling Centres
A number of operational projects have been launched aimed at
reducing leachate generation including accelerated capping and
restoration initiatives. A dedicated leachate management team has
been created to focus on driving down long-term management and
disposal costs, improving treatment plants and achieving the best
environmental outcome.
Viridor manages a network of Household Waste Recycling Centres
(HWRCs) in partnership with local authorities across the UK. HWRCs
complement kerbside collections by giving residents access to safe
and modern facilities where they can bring along items that are not
routinely collected from their home to maximise recycling.
Our HWRCs have won awards for site design and excellent
customer services. In areas serviced by our HWRCs recycling rates
significantly exceed national averages, often achieving recycling
rates of more than 75%.
37
Strategic report Report of the Chief
Financial Officer
Financial review
Growth in
Pennon’s profit is
driven by delivery
of ERF earnings
and continued
outperformance
in water.
enabled us to exceed our c.£100 million EBITDA target
from our ERF portfolio in 2016/17, delivering £107 million
of EBITDA.
Both our water and waste operations implemented our
strategy to drive value through efficiency. We completed
our Shared Services Review during the year, an initiative
involving planned centralisation of key corporate
services and operational functions, reflecting the more
integrated nature of our Group. This initiative will
increase expected Group cost savings from c.£11 million
previously announced to c.£17 million p.a. from 2019, of
which c.£9 million p.a. has been secured to date. South
West Water maintained its strong record of controlling
total expenditure and remains at the forefront of cost
efficiency in the water sector. These efficiency initiatives
support the Board’s pledge in water to reduce bills in real
terms over the 2015-2020 regulatory period.
Other efficiency successes include the Group’s
energy trading team that is ensuring Pennon is buying
energy at the right price and enhancing profitability
from energy we generate. In addition our ‘self-help’
measures during the year improved efficiency in our
recycling operations.
Part of our strategy as we build our ERFs, and in
our recycling operations, is to ensure we achieve
a balanced risk-reward profile. We are successfully
reducing Group risk by overlaying our long-term
assets with long-term commercial arrangements,
and supporting these with long-term financing.
In February 2017 we unwound a derivative position
entered into in 2011 that had become uneconomic,
at a break cost of £44 million.
One of our key financial objectives is to ensure
we maintain strong liquidity and have access to the most
efficient and effective funding to support our capital
investment programme. During the year our interest
rate on average net debt remained low at 3.4% and at
31 March 2017 the Group continued to have a strong
funding position with £1,383 million of cash and facilities.
Susan Davy
Chief Financial Officer
38
Overview
Pennon Group achieved a strong financial performance
in 2016/17. We delivered against our strategic objectives
to lead in the UK’s water and waste sectors, invest for
growth and drive value through efficiency.
The Group had the sector leading water company in
the UK (as measured by Return on Regulated Equity
(RoRE)) during the year. South West Water’s RoRE has
led the sector since the start of the current regulatory
period and is outperforming with a RoRE 12.6%.
South West Water continued its significant investment
programme with the £60 million water treatment works
in Plymouth, the largest capital expenditure item in its
current five-year plan. The Group also established
Pennon Water Services (PWS) to compete in the newly
opened non-household retail sector. To build scale, it
was announced during the year that South Staffordshire
Plc’s non-household retail business would transfer to
PWS in return for a 20% shareholding in PWS.
There was strong momentum in the energy
recovery and waste recycling business in 2016/17.
Our energy recovery facility (ERF) portfolio provides an
excellent example of how the Group is executing its
strategy to invest for growth. Our announcement during
the year, of a new ERF at Avonmouth takes our total
portfolio to 12 plants and our overall investment in
ERFs to £1.5 billion. This major participation in UK
environmental infrastructure is helping us transform our
business model with an increasing focus on ERFs and
recycling. The high level of performance of our ERFs
Pennon Group plc Annual Report 2017 Performance overview
EBITDA (£m)
Earnings per share (pence)
.
9
6
5
4
6
.
1
0
4
.
3
7
0
4
.
0
3
3
4
.
8
4
9
3
.
9
9
8
2
.
9
5
6
4
6
.
1
2
4
0
.
1
1
4
.
4
8
0
5
.
4
8
4
4
.
2
8
3
4
.
2
6
4
5
.
0
6
8
4
.
3
5
7
4
.
0
7
4
.
8
9
3
.
5
9
3
.
0
7
3
.
8
9
3 3
2
3
.
.
3
0
4
.
6
2
4
.
8
8
3
.
7
5
2012/13
2013/14
2014/15
2015/16
2016/17
2012/13
2013/14
2014/15
2015/16
2016/17
Statutory
Underlying
Adjusted(1)
Statutory
Before non-underlying items and deferred tax
Profit before tax (£m)
Dividend per share (pence)
.
7
0
1
2
.
0
7
9
1
.
3
6
0
2
3
.
1
1
2
.
0
0
5
2
.
5
0
1
2
6
4
8
2
.
.
1
3
0
3
0
8
.
1
3
8
5
3
3
.
6
9
5
3
.
.
3
7
0
7 2
8
5
1
.
.
0
0
9
1
.
6
3
1
2012/13
2013/14
2014/15
2015/16
2016/17
2012/13
2013/14
2014/15
2015/16
2016/17
Statutory
Underlying
Underlying earnings reconciliation 2017
£m
EBITDA
Operating profit
Profit before tax
Taxation
Profit after tax (PAT)
PAT attributable to perpetual capital holders
Underlying
results
486.0
304.6
250.0
(58.4)
191.6
Restructuring
costs
(10.7)
(10.7)
(10.7)
2.3
(8.4)
Non-underlying items
Unwind of
derivative
–
–
(44.8)
8.0
(36.8)
Derivative
fair value
movements
–
–
16.0
(3.2)
12.8
Change in
tax rate
–
–
–
21.3
21.3
PAT attributable to shareholders
Deferred tax before non-underlying items
Non-underlying items post tax
Earnings before non-underlying items and deferred tax
Underlying earnings reconciliation 2016
£m
EBITDA
Operating profit
Profit before tax
Taxation
Profit after tax (PAT)
PAT attributable to perpetual capital holders
PAT attributable to shareholders
Deferred tax before non-underlying items
Non-underlying items post tax
Earnings before non-underlying items and deferred tax
(1) See reconciliation on page 40.
Non-underlying items
Underlying
results
448.4
261.8
211.3
(72.1)
139.2
Restructuring
costs
(10.2)
(10.2)
(10.2)
2.0
(8.2)
Derivative
fair value
movements
–
–
5.2
(1.0)
4.2
Change in
tax rate
–
–
–
33.1
33.1
Statutory
results
475.3
293.9
210.5
(30.0)
180.5
16.2
164.3
18.9
11.1
194.3
Statutory
results
438.2
251.6
206.3
(38.0)
168.3
16.2
152.1
39.2
(29.1)
162.2
Earnings per
share (p)
39.8
4.5
2.7
47.0
Earnings per
share (p)
37.0
9.5
(7.0)
39.5
39
Strategic report
Report of the Chief Financial Officer
continued
Adjusted EBITDA reconciliation
£m
Statutory EBITDA
Non-underlying items
Underlying EBITDA
IFRIC 12 interest receivable(1)
JV EBITDA(1)
JV IFRIC 12 interest receivable(1)
Adjusted EBITDA
2017
475.3
10.7
486.0
16.1
32.9
11.2
546.2
2016
438.2
10.2
448.4
16.7
31.6
11.7
508.4
(1) These adjustments relate to the waste management business, resulting in adjusted waste management EBITDA of £198.5 million (2015/16 £176.5 million).
Financial KPIs
Group
Revenue (£m)
Group
Capital investment (£m)
.
2
7
5
3
,
1
.
3
2
5
3
,
1
1
.
3
5
3
,
1
.
3
7
0
4
.
7
4
8
3
.
9
6
1
3
2014/15
2015/16
2016/17
2014/15
2015/16
2016/17
EBITDA (£m)
Gross assets (£bn)
.
9
5
6
0 4
.
1
1
4
6
.
1
2
4
.
2
8
3
4
.
4
8
0
4 5
8
4
4
.
.
2
6
4
5
.
0
6
8
4
.
3
5
7
4
4
5
.
.
7
5
9
5
.
2014/15
2015/16
2016/17
2015
2016
2017
Water
Statutory
Waste
Underlying
Adjusted
40
Pennon Group plc Annual Report 2017
Statutory financial performance
The Group’s statutory results showed growth in both profit before tax to
£210.5 million (2015/16 £206.3 million) and earnings per share to 39.8p
(2015/16 37.0p). This reflects strong earnings from both South West
Water and Viridor, supported by sector leading efficiencies in the water
business and a full year increase in Viridor’s ERF operational capacity.
The performance of the underlying business is set out in more detail
below in the financial performance section.
The statutory results include the impact of non-underlying items totalling
a charge after tax of £11.1 million (2015/16 £29.1 million credit). The
Directors believe excluding non-underlying items and deferred tax
provides a more useful comparison on business trends and performance.
The net non-underlying charge of £11.1 million is a result of:
• restructuring costs – £10.7 million charge
• derivative movements – £28.8 million charge
• taxation on the non-underlying items above totalling a credit
of £7.1 million
• taxation – £21.3 million credit arising from the enacted reduction
in the UK rate of corporation tax from 18% to 17% in 2020.
Financial performance
(before non-underlying items)
Revenue
Group revenue was marginally ahead of last year at £1,353.1 million
(2015/16 £1,352.3 million). Revenue from the water business was up
by 2.6% to £561.0 million (2015/16 £547.0 million) as a result of 2.5%
higher demand due to drier weather, tariff increases of 1.4% (with RPI of
1.1%) and increased new connections. This increase in revenue, primarily
linked to drier weather, is above the regulatory tolerance levels and will
result in a small penalty of £0.2 million. Viridor’s revenue decreased by
1.6% to £793.5 million (2015/16 £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 growing contribution of operational ERFs. Excluding the impact of
construction revenue, Group revenue would have increased in the year
by £20 million (1.5%).
Adjusted EBITDA
Group underlying EBITDA and adjusted EBITDA were ahead of 2015/16 up
8.4% at £486.0 million (2015/16 £448.4 million) and 7.4% to £546.2 million
(2015/16 £508.4 million) respectively. Underlying operating profit increased
by 16.3% to £304.6 million (2015/16 £261.8 million) and underlying profit
before tax increased by 18.3% to £250.0 million (2015/16 £211.3 million).
This has been achieved through an increase in profits from Viridor,
together with continuing strong South West Water financial performance
and efficient ongoing finance costs across the Group.
Following the merger of Bournemouth Water into South West Water the
water business recorded strong performances against the K6 regulatory
contracts, outperforming regulatory assumptions. The water business’
profit before tax increased by 4.9% to £173.9 million (2015/16 £165.7 million)
reflecting higher revenue from tariff increases and increased demand, with
operating costs of £211.9 million (2015/16 £211.8 million) broadly in line with
last year. With the highest potential returns in the sector for K6, South
West Water is outperforming its business plan, resulting in a cumulative
RoRE of 12.6%. More detail on RoRE performance is set out on page 28.
During the year Ofwat updated its guidance for calculating the financing
outperformance, using an in-year average RPI rate, rather than a forecast
RPI over the regulatory period. South West Water’s RoRE remains sector
leading through this approach and the cumulative forecast performance
over K6 is the same under both approaches.
South West Water’s EBITDA increased during the year due to higher
revenue and cost efficiencies along with other cost reductions.
While average RPI has been increasing (2.9% as at March 2017), total
operating costs in 2016/17 were in line with last year, with savings arising
from operational maintenance synergies from the company mergers as
well as targeted efficiencies contributing to cost performance. Operating
costs also include a fine for £1.8 million issued in April 2017 relating to a
HSE prosecution following the tragic fatality of an employee at a
wastewater treatment works in December 2013. In addition, South West
Water’s bad debt charge continues to fall, down by over a quarter since
the end of K5, to 1.1% as a percentage of revenues (1.7% at the end of K5).
This was driven by strong collections as we work with our customers to
manage their debt with the operations continually updating their
approaches in targeting those customers with the means to pay whilst
supporting those who have genuine affordability challenges.
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. As a result, Viridor’s EBITDA increased by 18.7% to £138.3 million
(2015/16 £116.5 million) whilst 2016/17 adjusted EBITDA increased 12.5% to
£198.5 million (2015/16 £176.5 million). Viridor has four further ERFs under
construction, including Avonmouth which we committed to during the
year. Dunbar and Beddington (South London) are progressing well and to
budget with steps being taken to ensure construction of Glasgow ERF is
completed successfully.
Viridor’s EBITDA was ahead of last year due to the ramping up of
the existing ERF portfolio and recycling self-help measures, where significant
progress has been made in reducing the cost base and improving the
utilisation of assets, net of anticipated declines in landfill earnings primarily
due to expected lower volumes. Our ERF activities contributed EBITDA of
£106.9 million (2015/16 £89.7 million) delivering 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 slightly
to £44.1 million (2015/16 £43.3 million), with strong EBITDA from all three
joint ventures. This resulted in a share of joint venture profit after tax of
£4.2 million (2015/16 £3.6 million). During the year ERF earnings included
contractual compensation(1) of £12.7 million, a similar level to previous years.
Recycling and resources EBITDA, comprising recycling, collection
and contracts and other, increased by 14.5% to £56.8 million (2015/16
£49.6 million). Recycling revenue at £90 per tonne (2015/16 £85 per
tonne) has increased £5 per tonne reflecting renegotiated input contracts
and recyclate prices. Average operating costs fell by £2 per tonne to
£72 per tonne (2015/16 £74 per tonne) as a result of targeted efficiencies.
This has been offset by an increase in shipping costs of £1 per tonne. As a
result the recycling EBITDA margin increasing by £6 per tonne to £14 per
tonne (2015/16 £8 per tonne). 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 and to look
to share commodity risk/opportunity with our clients.
Landfill EBITDA from power generation and waste disposal are down
compared to last year by £3.7 million. The decrease in earnings is primarily
due to lower power prices and volumes.
Across the Group we look to efficiently manage and optimise value
from our estates portfolio, recognising a profit on sale of assets in the year
of £7.5 million (2015/16 4.3 million).
Net finance costs
Underlying net finance costs of £58.8 million were £4.7 million higher
than last year, predominantly reflecting higher RPI, higher net debt from
continuing capital investments and lower finance income following the
unwind of the 2011 Peninsula MB derivative, which reduces finance income
by £8 million p.a. going forward.
We have secured funding at a cost that is efficient and effective.
The Group interest rate on average net debt for 2016/17 has slightly
increased to 3.4% (2015/16 3.3%) reflecting increases in RPI.
The Group’s interest rate on average net debt for the year to
31 March 2017 is 3.4% (after adjusting for capitalised interest of
£12.9 million, notional interest items totalling £5.8 million and interest
received from shareholder loans to joint ventures of £10.2 million).
For South West Water this figure was 3.2%.
During the year underlying net finance costs (excluding pensions net
interest cost £1.2 million, discount unwind on provisions £9.1 million
and IFRIC 12 contract interest receivable £16.1 million) were £64.6 million
(2015/16 £59.6 million), covered 4.7 times (2015/16 4.4 times) by Group
operating profit.
(1) Primarily relates to liquidated damages received/receivable when construction
completed post the original contractual completion date.
41
Strategic report Report of the Chief Financial Officer
continued
Profit before tax
Group underlying profit before tax was £250.0 million, an increase of 18.3%,
compared with the prior year (2015/16 £211.3 million). On a statutory basis,
profit before tax was £210.5 million (2015/16 £206.3 million) reflecting
non-underlying charges before tax of £39.5 million (2015/16 £5.0 million).
Taxation
The Group’s underlying mainstream UK corporation current tax charge
for the year (before prior year credits) was £41.3 million, the £7.0 million
increase on last year is primarily driven by higher profits; reflecting an
effective tax rate of 16.5% (2015/16 £34.3 million, 16.2%). There was a
prior year credit of £1.8 million recognised for the year (2015/16 credit
of £1.4 million). In addition there is a non-underlying £9.4 million current
tax credit relating to non-underlying items (2015/16 £1.7 million credit).
Underlying deferred tax for the year (before prior year charges) was a
charge of £17.8 million (2015/16 £23.3 million). The charge for 2016/17
primarily reflects capital allowances, including on ERFs, in excess of
depreciation charge. There was a prior year deferred tax charge of £1.1
million recognised for the year (2015/16 £15.9 million charge). In addition
there is a non-underlying £21.3 million deferred tax credit relating to the
enacted reduction in the UK rate of corporation tax to 17% in 2020 and
a £2.3 million deferred tax charge relating to other non-underlying items.
This resulted in a total tax charge for the year of £30.0 million (2015/16
£38.0 million).
We have recently concluded discussions with HMRC resolving the
treatment of certain uncertain tax items. Provisions for these uncertain
tax items had been recognised in previous years, no further amounts
are required to be recognised in relation to these items.
Non-underlying items
The net non-underlying charge of £11.1 million is a result of:
• restructuring costs – £10.7 million charge relating to restructuring
costs from the Group wide Shared Services Review and migration to
a Group IT platform (including a £9.5 million non-cash de-recognition
of an existing IT asset)
• derivative movements – £28.8 million charge reflecting the unwind
of the 2011 Peninsula MB Limited (PMB) derivative (charge
£44.8 million) offset by market movements on our long-dated
floating rate vanilla swaps
• taxation on the non-underlying items above totalling a credit
of £7.1 million
• taxation – £21.3 million credit arising from the enacted reduction
in the UK rate of corporation tax from 18% to 17% in 2020.
Unwind of the 2011 PMB derivative
Since 2011 Pennon has received a fixed interest rate on a £200 million
financial asset and paid an index-linked interest rate on a £200 million
loan, designed to improve the Group’s overall interest rate performance.
The counterparty to both instruments was PMB. In combination, these
instruments were accounted for by Pennon as a derivative, with a net
interest income of £8 million p.a., c.£7 million in 2016/17, cash settled.
In periods of index underperformance, losses arose in PMB which were
group relieved with Pennon.
Following a change in legislation, which saw the value of the derivative to
Pennon moving from a liability of £4 million to a liability of c.£40 million,
Pennon made the decision to exit the transaction.
42
The break cost due to Nomura in respect of the termination was
£44 million, with an agreed payment date of June 2018. The impact
for the Group is a net cost of £35 million post tax.
The group relief claimed by Pennon has been treated as an uncertain
tax item and has been substantially provided for over recent years.
Following the conclusion of discussions with HMRC, no further amounts
are required to be recognised by Pennon.
Post the unwind of the transaction the Group’s interest will no longer
include the c.£8 million p.a. income, c£7 million in 2016/17, and the
underlying tax charge will reduce by a similar amount.
Earnings per share
Earnings per share on both a statutory and underlying basis before
deferred tax were ahead of last year, up 7.6% at 39.8p (2015/16 37.0p)
and up 19.0% at 47.0p (2015/16 39.5p) respectively, reflecting
higher profits.
Net assets per share at book value at 31 March 2017 were 365p,
up 1.1% on last year.
Dividends and retained earnings
The statutory net profit attributable to ordinary shareholders
of £164.3 million has been transferred to reserves.
The Directors recommend the payment of a final dividend of 24.87p per
share for the year ended 31 March 2017. With the interim dividend of
11.09p per share paid on 4 April 2017 this gives a total dividend for
the year of 35.96p, an increase of 7.1% over 2015/16 and maintaining our
long-standing sector-leading dividend policy of RPI + 4% year-on-year
growth. We set that policy in the 2010-2015 regulatory period and
confirmed its continuation through to 2020. The net effect of this policy
is that dividends per share will have almost doubled over the 10 years
to 2020.
This 4% real growth above RPI per annum is driven by continued
outperformance of our water business and by the significant investments
we are making in Viridor which is successfully delivering on its targeted
contribution to Group earnings. We are actively seeking further
opportunities for growth beyond 2020 with the aim of sustaining a
sector-leading dividend policy over the longer term.
Proposed dividends totalling £149.5 million are covered 1.3 times by net
profit (before non-underlying items and deferred tax) (2015/16 1.1 times).
Dividends are charged against retained earnings in the year in which they
are paid.
Operating costs (before non-underlying items)
Operating costs for the year totalled £1,049 million. The most significant
areas of expenditure were:
Expenditure
Employment costs
Depreciation
Landfill tax
Raw materials and consumables*
Transport
Power
Business rates
Abstraction and discharge consents
* Excludes transport costs.
£m
180
178
141
91
58
41
39
9
Pennon Group plc Annual Report 2017 Group capital investment
Group capital investment was £384.7 million in 2016/17 compared to
£316.9 million in 2015/16. This peak level of investment is expected to
continue in to 2017/18, reflecting the profile of investment in
Viridor’s ERFs.
South West Water’s capital expenditure was £190.9 million compared
to £134.1 million in 2015/16. The beginning of the new regulatory period
reflects a change in the nature and extent of capital activity and an
increase in activity in year two.
As anticipated the largest single project in South West Water’s
spending is the development of the innovative Mayflower water
treatment works at North Plymouth. Construction works are well
advanced and the formation of the process elements is underway
with over 5km of water pipeline and effluent pipes already installed.
Advanced techniques have been used to limit the impact on the
surrounding area including micro tunnelling under a major road
into Plymouth. In addition investment has been targeted to improve
wastewater compliance with process upgrades and improvements
at six sites.
Viridor’s capital investment of £193.8 million was ahead of 2015/16
(£182.8 million). The majority of expenditure this year reflects the
ongoing ERF programme, with significant expenditure at South
London, Dunbar and Glasgow ERFs.
The infrastructure at Dunbar is nearing completion with a significant
element of the process plant having been delivered to site prior to
installation. The plant is expected to be operational in H2 2017/18.
Construction at Beddington is progressing to plan with access
routes to the site being improved and the core infrastructure under
construction. Operations are expected to commence in H1 2018/19.
Glasgow’s Recycling and Renewable Energy Centre is receiving waste
and generating energy. New construction contracts with Doosan
Babcock are progressing well with commissioning expected in 2017.
The major categories of expenditure were:
Summarised cash flow
Cash inflow from operations(1)
Net interest paid
Tax paid
Dividends paid (net of scrip)
Hybrid periodic return
Capital investment (2)
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
Debt indexation/interest accruals
Increase in net borrowings
2016/17
£m
2015/16
£m
456
(62)
(36)
(132)
(20)
(363)
5
(11)
2
–
(161)
–
(20)
(181)
418
(64)
(45)
(123)
(20)
(291)
34
(34)
102
(91)
(114)
(160)
(13)
(287)
(1) Before construction spend on service concession arrangements of £13 million
(2015/16 £14 million) and pension contributions of £11 million (2015/16 £33 million)
(2) Including construction spend on service concession arrangements and proceeds
from sale of property, plant and equipment
Major components of the Group’s
debt finance at 31 March 2017
5
3
4
6
2
1
5 6
4
3
1
2
ERF
1
2
Water
3 Wastewater
4 Recycling
5 Landfill energy
6 Other
Finance leasing
Bank bilateral debt
Index-linked bonds
1
2
3
4 European Investment Bank (EIB) loans
5 Private placements
6 Bond 2040
£1,384m
£404m
£416m
£364m
£562m
£133m
Liquidity and debt profile
The Group has a strong liquidity and funding position with £1,383 million
cash and facilities at 31 March 2017. This includes cash and deposits
of £598 million (including £224 million of restricted funds representing
deposits with lessors against lease obligations) and undrawn facilities
of £785 million. At 31 March 2017 the Group’s loans and finance lease
obligations totalled £3,263 million. After the £598 million held in cash,
this gives a net debt figure of £2,665 million, an increase of £181 million
during the year.
£158m
£91m
£100m
£3m
£12m
£21m
Cash flow
The Group’s operational cash inflows in 2016/17 at £456 million were
£38 million higher than last year (2015/16 £418 million). These funds
have been put to use in efficiently financing the Group’s capital
structure and investing in future growth, through our substantial
continuing capital investment programme. This investment has
resulted in higher Group net debt.
During the year the Group has drawn the South West Water EIB funding
of £130 million signed in 2015/16.
Since the year end the Group has signed £50 million of new and
renewed revolving credit facilities to provide pre-funding for future
cash flows.
43
Strategic report Report of the Chief Financial Officer
continued
The Group has agreed £110 million of funding from the EIB into
Pennon Group plc, in relation to the capital investment in Cardiff’s
Trident Park Energy Recovery Facility. This funding is anticipated to
be signed later in 2017 when the EIB expects to have clarity over the
implications of Article 50 being triggered. Negotiations are continuing
with the EIB to secure additional funding for South West Water, so this
can be delivered in a timely manner following the clarity noted above.
The investment in Avonmouth ERF will be corporately financed and
options are being considered, including a new hybrid, to continue the
Group’s diversified funding position.
The Group has a diversified funding mix of fixed, floating and
index-linked borrowings. The Group’s debt has a maturity of up to
40 years with a weighted average maturity of 20 years matching the
asset base. Much of the Group’s debt is floating rate, with derivatives
being 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, in line with the
Group’s policy to have hedging in place before the start of a regulatory
period. £486.3 million of South West Water’s debt is index-linked at
an overall real rate of under 2.0%. As a result of the aforementioned
initiatives, South West Water’s cost of finance is among the lowest
in the industry. Two-thirds of South West Water’s net debt is from
finance leases, providing a long maturity profile to its debt. Interest
payable on them benefits from the fixed credit margins, which were
secured at the inception of each lease. Bournemouth Water was
successfully integrated into South West Water on 1 April 2016 and
as a result a quarter of the gross funding for the water business is
RPI linked consistent with Ofwat’s notional level.
At 31 March 2017 the fair value of the Group’s non-current borrowings
was £28 million more than its book value (2016 less than £114 million)
as detailed in note 28 to the financial statements. This reflects the
benefit of securing interest rates below the current market rate, offset
by volatility in inflation markets.
Capital structure – overall position
The Group’s net debt has increased by £181 million to £2,665 million,
with the increase reflecting significant capital investment. The Group’s
gearing ratio at 31 March 2017, being the ratio of net debt to (equity
plus net debt) was 63.8% (31 March 2016 62.5%), reflecting continuing
capital investment.
Group net debt includes £1,132 million of investment in wholly-owned
ERFs (Runcorn II, Oxford, Exeter, Cardiff, Glasgow, Dunbar and South
London) and £87 million of funding for investments in joint ventures
through shareholder loans (which together represents 46% of Group
net debt). In addition the joint ventures have non-recourse net debt
from third parties (excluding shareholder loans) of which Pennon’s
share is £194 million. c.85% of ERF and joint venture funding is from
corporate finance.
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. £6.9 million (2015/16 £6.3 million) of
potential cash dividend was retained in the business and resulted
in the issuance of 771,563 shares.
The combined South West Water and Bournemouth Water debt to
RCV ratio is 61.8% (31 March 2016 59.7%), which aligns with Ofwat’s
K6 target for efficient gearing of 62.5%.
Regulatory capital value as at 31 March (£m)
6
1
9
2
,
9
5
9
2
,
8
2
9
2
,
0
5
1
,
3
1
9
2
3
,
%
5
4
+
.
2013
2014
2015
2016
2017
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. 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 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.
44
Pennon Group plc Annual Report 2017 Tax contribution 2016/17 –
collected/paid
The Group made a net payment of £36.4 million (of UK corporation
tax) in the year (2015/16 £45.0 million). The main elements of the
payment were £19.8 million in relation to 2016/17 instalment payments
and £16.6 million in relation to earlier years.
The total tax charge for the year of £30.0 million is less than the
charge that would have arisen had the accounting profit before tax
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 £41.3 million results in an
effective rate of 16.5%, which is lower than the statutory rate of 20.0%
mainly due to capital allowances received on ERF capital expenditure.
987
5 6
4
3
2
1
1 Landfill tax
2 Employment taxes
3 Business rates
4 UK corporation tax
5 Environmental payments
6 Fuel Excise Duty
7 VAT
8 Carbon Reduction Commitment
9 Other
£147m
£57m
£39m
£36m
£11m
£7m
£5m
£3m
£5m
The Group’s total tax contribution extends significantly beyond the
UK corporation tax payments.
Total taxes amounted to £310 million (2015/16 £342 million) of which
a net amount of £45 million (2015/16 £47 million) was collected on
behalf of the authorities for employee payroll taxes and VAT.
In addition to corporation tax the most significant taxes involved,
together with their profit impact, were:
Landfill tax of £145 million (2015/16 £166 million) collected and paid
on waste material deposited at our landfill sites. This amount includes
£6 million (2015/16 £11 million) paid to local environmental bodies via
the Landfill Tax Credits Scheme. Landfill tax is an operating cost which
is recovered from customers and is recognised in revenue. In addition
the Group incurred landfill tax of £2 million (2015/16 £1 million) on the
disposal of waste to third parties. 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 13% of
the total landfill receipts of HMRC in the year.
Value Added Tax (VAT) of £5 million paid (2015/16 £8 million) by the
Group to HMRC. VAT has no material impact on profit before tax
Business rates of £39 million (2014/15 £42 million) paid to local
authorities. This is a direct cost to the Group and reduces profit
before tax.
Employment taxes of £57 million (2015/16 £54 million) including
employees’ Pay As You Earn (PAYE) and total National Insurance
Contributions (NICs). Employer NICs of £16 million (2015/16 £15 million)
were charged approximately 93% to operating costs with 7% capitalised
to property, plant and equipment. The total amount of £50 million
includes PAYE of £3 million (2014/15 £2 million) on pension payments
made by the Group pension scheme.
Fuel Excise Duty of £7 million, (2015/16 £8 million) related to transport
costs. This reduces profit before tax
Payments to Environment Agency and other regulatory bodies total
£11 million, (2015/16 – £11 million) This reduces profit before tax
Carbon Reduction Commitment (CRC) payment for the Group of
£3 million, (2015/16 £4 million). This reduces profit before tax.
The corporation tax rate for 2016/17 used to calculate the current year’s
tax is 20% and will reduce to 19% for the year to 31 March 2018 and 17%
for the year ending 31 March 2021.
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 2017 the Group’s pension schemes showed an aggregate
deficit (before deferred tax) of £68.0 million (March 2016 £40.9 million).
The deficit has increased due to the post-Brexit fall in bond yields,
increasing the valuation of liabilities. However, over half of the increase
in the valuation of liabilities has been offset by increases in asset values.
The net aggregate liabilities of £56 million (after deferred tax)
represented around 2% of the Group’s market capitalisation at
31 March 2017.
The 31 March 2016 actuarial valuation of the main scheme has been
finalised, the outcome is in line with the 2013 valuation and schedule
of contributions, which is consistent with Final Determination (FD)
allowances for K6 (2015-2020).
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
45
Strategic report 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 in line with the Group’s agreed risk appetite,
and mitigated.
A Group Risk Forum provides a ‘top down’
assessment of Group risks, that supplements 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 reviewed on an ongoing
basis as part of a robust assessment of key risks,
mitigations, controls and assurance activities
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 and challenge principal risks, where
management justify their ‘bottom-up’ risk
assessments through formal reports
and presentations
• Principal risks of each subsidiary are reviewed
and confirmed on a quarterly basis by the
subsidiary executive management teams,
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 Pennon Executive
before consideration by the Audit Committee and
then formal presentation to the Board for approval
• The impact of risks on the three long-term
strategic priorities is included in the following
table of principal risks and uncertainties.
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 the agreed risk
appetite of the Board.
Robust risk assessment
The Directors confirm that they have carried out
a robust assessment of risks facing the Group,
including assessing the impacts on its business
model, future performance, solvency and liquidity.
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 51.
Risk
report
The Group faces
a number of risks
which, if they arise,
could affect its
ability to achieve its
strategic objectives.
Countess Wear Wastewater
Treatment Works
46
Pennon Group plc Annual Report 2017 Principal risks and uncertainties
Strategic impact
Risk level
1
2
3
Leadership
in UK water
and waste
Leadership
in cost base
efficiency
Driving
sustainable
growth
Long-term priorities affected.
Low
Medium
High
Increasing
Stable
Decreasing
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
Principal risks
Strategic impact
Mitigation
Net risk
Direction
Risk appetite
Compliance with
law, regulation
or decisions by
Government
and regulators,
including water
industry reform
Long-term priorities affected:
1 2
Non-compliance could lead to financial
penalties and other additional costs
which could undermine our efforts
to maximise cost base efficiency.
Damage to reputation could affect
shareholder value.
Regulatory reform could lead to
inefficiencies and have a consequential
affect on customer affordability.
The June 2017 General Election
could lead to a changed regulatory
environment.
Maintaining
sufficient finance
and funding to
meet ongoing
commitments
Non-compliance
or occurrence of
avoidable health
and safety incident
Uncertainty arising
from open tax
computations
where liabilities
remain to be agreed
Long-term priorities affected:
1 3
Failure to maintain funding
requirements could lead to
additional finance costs and
put our growth agenda at risk.
Long-term priorities affected:
1 2 3
Breach of health and safety laws and
regulations could lead to financial
penalties, significant legal costs,
damage to reputation and loss of
shareholder value.
Long-term priorities affected:
2
Censure for non-compliance with
HMRC requirements could lead to
financial penalties, significant legal
costs, damage to reputation and
loss of shareholder value.
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.
Clear and accessible guidance for
employees is in place and training
programmes have been rolled out
and are ongoing.
Good progress has been made
in preparing for regulatory reform and
we entered the non-household retail
market on1 April 2017. We are fully
engaged in the programme for the
next regulatory price review. External
reviews support the assurance
provided by the water business to
its regulators.
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.
Risk is reduced through health and
safety compliance systems, policies
and procedures, which are currently
being reviewed and enhanced,
supported by a programme of
capital investment.
Professionally qualified and experienced
in-house tax team, supported by
external specialists.
Significant progress made during
2016/17 to agree outstanding tax items
with HMRC.
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.
47
Strategic report Risk report
continued
Law, regulation and finance continued
Principal risks
Strategic impact
Mitigation
Net risk
Direction
Risk appetite
Increase in defined
benefit pension
scheme deficit
Long-term priorities affected:
2
The Group could be called upon to
increase funding to reduce the deficit,
impacting our cost base.
Use of professional advisers to manage
the pension scheme’s investment
strategy to ensure the scheme can
pay its obligations as they fall due.
Risk increased post-Brexit vote due
to market uncertainties. The situation
has since stabilised, as evidenced by
the outcome of the recent triennial
evaluation, which demonstrates
the recovery plan from 2013 is still
on track.
Expectation that pension
benefits can be paid in
full without increased
costs to the Company.
Market and economic conditions
Principal risks
Strategic impact
Mitigation
Net risk
Direction
Risk appetite
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.
Non-recovery of
customer debt
Long-term priorities affected:
1 2
Potential impact on customer debt
collection, particularly with regard to
vulnerable customers and affordability.
Macro-economic
risks arising
from the global
and UK economic
downturn
commodity and
power prices
Long-term priorities affected:
3
The economic climate and falling
commodity and energy prices have
a direct impact on the revenues
generated by our recycling business.
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, FreshStart) 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 recycling self help
measures focus on 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 South West Water and
Viridor, offsetting any drop in
power prices. Existing investments
that qualified for Renewable Obligation
Certificates are protected by the
‘grandfathering’ principle.
48
Pennon Group plc Annual Report 2017 Operating performance
Principal risks
Strategic impact
Mitigation
Net risk
Direction
Risk appetite
Poor operating
performance due
to extreme weather
or climate change
Long-term priorities affected:
1
Failure of our assets to cope with
extreme weather conditions may lead
to an inability to meet our customers’
needs, environmental damage,
additional costs and loss of reputation.
Poor customer
service/increased
competition
leading to loss of
customer base
Business
interruption
or significant
operational
failures/ incidents
Long-term priorities affected:
1 3
Poor customer service has a direct
impact on South West Water’s delivery
of the PR14 business plan and Viridor’s
ability to retain and grow market share.
The opening up of the non-household
retail market to competition means
that we must ensure we understand
and meet the needs of our business
customers if we are to deliver growth
in this area.
Long-term priorities affected:
1
Operational failure in our Water
business could mean that we are not
able to supply clean water to our
customers or provide safe wastewater
services. This has a direct impact on
successful delivery of the PR14
business plan.
Business interruption caused by
defects, outages or fire could impact
the availability and optimisation of
our ERFs and recycling facilities.
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
drought plans every three years, which
are both reviewed annually for a range
of climate change and demand
scenarios, with schemes promoted
to maintain water resources
(e.g. pumped storage for reservoirs),
conservation and customer water
efficiency measures.
While no water restrictions are
envisaged, the risk is rising due to
the recent prolonged period of
dry weather.
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 including
South West Water’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.
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.
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.
49
Strategic report Risk report
continued
Operating performance continued
Principal risks
Strategic impact
Mitigation
Net risk
Direction
Risk appetite
Difficulty in
recruitment,
retention and
development of
appropriate skills,
which are required
to deliver the
Group’s strategy
Long-term priorities affected:
1 2 3
Ensuring we have a workforce of
skilled and motivated individuals is key
to delivery of all our strategic priorities.
Succession plans are in place.
The recent Group restructure,
Viridor transformation and integration
of Bournemouth Water have
strengthened the executive team, but
in turn has the potential to impact
morale across the Group.
We need the right people in place to
share best practice, deliver synergies
and move the Group forward in the
new ‘shared services’ structure.
We need a team with the necessary
commercial acumen to help our
businesses grow and prosper.
With reliance on EU nationals,
uncertainties across the Group
following the Brexit vote mean the
current assessment of the direction
of travel of the risk is increasing.
Appropriate skills and
experience in place,
with good succession
plans to mitigate impact
on strategic plan.
Business systems and capital investment
Principal risks
Strategic impact
Mitigation
Net risk
Direction
Risk appetite
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.
Failure or increased
cost of capital
projects/exposure
to contract failures
Long-term priorities affected:
1 3
The success of our capital programme
and long-term contracts is key to our
ability to provide top class customer
service, the delivery of our growth
agenda and our aspirations to grow
market share in our waste recycling
and recovery business.
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.
The Greater Manchester Waste
Disposal Authority has publicly stated
it is seeking an exit from the Greater
Manchester Waste PFI. Pennon/Viridor
is working closely with its JV
partners to secure a mutually
acceptable outcome.
Major systems implementation is
supported by a formal programme
governance framework, supplemented
by specialist consultants. Viridor
systems are in the process of migrating
to a Group shared service platform.
Cyber risks are mitigated by a strong
information security framework, cyber
security awareness campaigns, plus
internal and external testing and
formal ISO accreditation. Ensure all
possible measures are in place, aligned
to guidance issued by the National
Cyber Security Centre (NCSC),
commensurate with the fast changing
cyber risk landscape.
Failure of
information
technology systems,
management
and protection,
including
cyber risks
Long-term priorities affected:
1
Failure of our systems due to
inadequate cyber security could lead
to significant business interruption.
Corruption or loss of data could result
in detriment to our customers, financial
penalties and reputational damage.
50
Pennon Group plc Annual Report 2017 Britain’s exit from the European Union
As with all major decisions and changes that affect our business,
Pennon conducted a thorough analysis of the possible implications
of a vote to leave the European Union. Pennon did not take a public
stance on the referendum in June 2016 as the Board believed that the
vote was a personal decision.
It is too early to know the implications of the vote to leave; this will only
become clear when negotiations following the March 2017 triggering
of Article 50 are complete. In the meantime, we are tracking Brexit
implications in assessing every risk.
Ofwat’s principles for holding companies – Board
leadership, transparency and governance
Ofwat requires that holding companies manage their risks in such
a way that the regulated company is protected from risk elsewhere
in the Group. The principal risks and uncertainties disclosed above
include the Group-level risks that could materially impact on South
West Water.
Pennon’s risk management and internal control frameworks ensure
that it does not take any action that would cause South West Water
to breach its licence obligations. Further, the Group’s governance and
management structures mean that there is full understanding and
consideration of South West Water’s duties and obligations under
its licence., as well as an appropriate level of information sharing and
disclosure to give South West Water assurance that it is not exposed
as a result of activities elsewhere in the Group.
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 47 to 50 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 the Group’s viability.
Over the course of the year the Audit Committee has considered a
deep-dive review of the following principal risks to enable a thorough
assessment of the impact of these risks on ongoing viability:
Principal risk
Cyber security
Financial markets
Brexit
Wholesale energy risk
Matters considered by the Audit Committee
Review of the cyber security framework
in place
Ability to manage external shocks or
potential market dislocations that could
impact on financing strategy
Initial assessment of Brexit implications
and mitigations
Review of Group energy risk strategy
to mitigate volatility in the wholesale
energy market
Legislative and
regulatory compliance
Drinking water contamination Review the risk to drinking water quality in
the event of significant water contamination
Management of changes in EU and
UK legislation and regulation, including
the impact of Brexit
Review of business continuity planning
in place across all ERF facilities
Non-recovery of household debt risks
and mitigations
ERF – business interruption
and continuity management
Water Business –
debt collection
Principal risk
Matters considered by the Audit Committee
Recycling and commodity
market volatility
Recruitment and retention
Water resources, flooding and
resilience
Management and de-risking of recycling
and commodity market volatility
Review of people risks including the ability
to attract and retain the right skills to deliver
the Group strategy
Consider the impact of climate change
and drought risks on water resources
and ongoing flood-related resilience
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. The five-year period was chosen for consistency
with the length of the Water business’s regulatory contract and the
associated business planning cycle, and the longer-term nature of
the business.
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. 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 1 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 1 to 51 was approved by
the Board on 23 May 2017.
By Order of the Board
Helen Barrett-Hague
Group Company Secretary
23 May 2017
51
Strategic report The annual performance
evaluation is an important
tool for assessing the Board’s
effectiveness in overseeing
the use of shareholders’ funds
and ensuring the Pennon
Executive implements the
Group’s strategy.
This year’s evaluation concluded
that the balance of skills, knowledge
and experience on the Board helped
it to demonstrate a high degree of
effectiveness, with a broad understanding
of Pennon’s businesses, the opportunities
available to them and the threats they face.
Read more page 62
Two of our Directors have
a background in industry,
three in finance and one
in governance.
Three of our Directors have
held office for less than
three years, reflecting our
commitment to continually
refresh the Board and bring
in new ideas.
Committed to operating
to the highest standards
of corporate governance
Exmouth beach,
Devon
52
Pennon Group plc Annual Report 2017 Governance and
remuneration
54
56
63
74
Chairman’s letter to shareholders
Board of Directors
Board Committees’ reports
Remuneration report
100
Directors’ report - other statutory disclosures
53
Governance Chairman’s letter
to shareholders
Good governance
provides the framework
for effective delivery of
our strategy, the
creation of shareholder
value and the ongoing
development of our
sustainable business.
Sir John Parker
Chairman
54
Dear Shareholder
I am pleased to introduce the corporate governance
report for 2017 on behalf of the Board. This 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.
Strong governance is central to the successful
management of any company. At Pennon it provides
the framework for effective delivery of our strategy,
the creation of shareholder value and the ongoing
development of our sustainable business. In my
second year as Chairman of Pennon I remain
committed to ensuring that we continue to operate
to the highest standards of corporate governance.
During the year we monitored the operation of the
revised governance structures that were put in place
in April 2016 and a review was carried out by our
Senior Independent Director, Gill Rider, alongside
an independent external evaluation of the Board’s
structure, operation and performance. Based on
these assessments, the Board has concluded that
the governance framework, which comprises the
operation of the Board, its Committees, executive
management and the board of South West Water,
as well as the risk management and internal control
environment described on pages 46 and 62, is robust
and effective, and is operating smoothly. It provides
a strong foundation for efficient and transparent
decision-making while preserving the degree of
regulatory independence that Ofwat requires for
the water business.
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 each of 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.
Pennon Group plc Annual Report 2017 103
meetings and calls in
our comprehensive
IR programme
16
city conferences, salesforce
briefings and roadshows
The revised governance structure implemented
in April 2016 has reinforced the good governance
already in place and has helped us to operate
effectively and cohesively as a Board. It is my
responsibility to act on the results of the annual
performance evaluation of the Board and its
Committees via an action plan approved by the
Board. 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 the
Directors in maintaining up-to-date knowledge
and understanding of our total business as we
pursue our 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 103 meetings
and conference calls were held. Pennon attended
eight city conferences and sales force briefings and
eight roadshows, including in the US and mainland
Europe. 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. In addition,
this year we held a site visit to Viridor’s Ardley Energy
Recovery Facility near Oxford.
Exeter ERF
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
corporate 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 2017 AGM on 6 July all of
our Directors intend to be present together with a
number of other senior executives of our businesses
to meet with shareholders to further explain
developments at Pennon.
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. 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
September 2014 version of the Code, which is
effective for reporting periods commencing on
or after 1 October 2014 and before 17 June 2016.
In addition, as the holding company of South West
Water Limited, the Company has complied with
Ofwat’s principles for holding companies in respect
of Board leadership, transparency and governance.
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 103 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
23 May 2017
55
Governance Board of Directors
Sir John Parker
Chairman
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.
Since his appointment as Chairman, Sir John has brought the
Group together under a revised governance framework that
features a new role of Group Chief Executive Officer and
other senior positions. The new team is working together
collaboratively to drive forward the Group’s strategy.
Skills and experience
Sir John is a highly experienced and independent chairman
and brings a wealth of leadership experience across a range
of industries. He won the lifetime achievement award at
The Sunday Times 2015 Non-Executive Director Awards
and is widely recognised for his policy work on corporate
governance, including the value of diversity in the boardroom.
He has chaired five FTSE100 companies and 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. He was also president of the Royal Academy of
Engineering from 2011 to 2014.
Christopher Loughlin
Chief Executive Officer
BSc Hons, MICE, CEng, MBA
Chris was appointed to the Board on 1 August 2006 upon
joining Pennon as Chief Executive of South West Water. He
became the Group Chief Executive Officer on 1 January 2016.
Chris is chairman of the Pennon Executive and a member of
the Sustainability Committee.
Skills and experience
Chris has extensive experience of the regulated business
environment and the management of major engineering and
infrastructure services. He started his career as a chartered
engineer working in both the consulting and contracting
sectors and, after holding a number of senior positions with
British Nuclear Fuels plc, joined its board as an executive
director. Prior to joining Pennon he was chief operating officer
with Lloyds Register and before that executive chairman of
Magnox Electric plc. He was also a senior diplomat in the
British Embassy, Tokyo.
Susan Davy
Chief Financial Officer
BSc Hons, ACA
Susan joined the Board on 1 February 2015. She is a member
of the Pennon Executive.
Skills and experience
Susan is a graduate qualified chartered accountant with
20 years’ experience in the utility sector.
Prior to her current appointment Susan was Finance Director
at South West Water between 2007 and 2015, during which
time she was responsible for the company’s Business Plan to
2020. She has also held a number of other senior finance roles
in the water sector, including as Head of Regulation and Head
of Finance (Wastewater) at Yorkshire Water.
External appointments
Sir John is the chairman of Anglo American plc and of
Advanced Plasma Power Limited. He is also a non-executive
director of Carnival Corporation and Airbus Group, and is
a Visiting Fellow of the University of Oxford. Sir John’s
commitments are expected to reduce in 2017, when
he retires from the board of Anglo American plc.
Chris has a comprehensive understanding of the water
industry. He was previously a board member (and, for a
period, president) of the Institute of Water, and between
April 2008 and March 2012 was chairman of Water UK.
Since his appointment as Group Chief Executive Officer, Chris
has set Pennon on a path of closer collaboration in pursuit of
delivery of its strategy, with the constituent parts of the Group
now working together to identify synergies, reduce costs and
exploit opportunities for growth.
External appointments
Chris is currently chairman of British Water, a director of Water
UK and a trustee of the charity WaterAid. An enthusiastic
advocate of local business, Chris is also vice chairman of the
Cornwall Local Enterprise Partnership.
Susan’s knowledge of the industry coupled with her financial
and regulatory expertise has supported the development of
Pennon’s strategy and her input has been invaluable to the
Board in its deliberations. Susan is highly respected in the City
and has been instrumental in building Pennon’s reputation.
External appointments
Susan is a member of the A4S (Accounting for Sustainability)
CFO leadership network and a council member of CBI
South West.
56
Pennon Group plc Annual Report 2017 Gill Rider
Senior Independent Director (Non-Executive)
CB, PhD, CCIPD
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.
Skills and experience
Gill has a wealth of experience in leadership, governance and
remuneration across a broad range of sectors including
professional services, education and government.
Formerly, she 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.
Martin Angle
Independent Non-Executive Director
BSc Hons, FCA, MCSI
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.
Skills and experience
Martin is an experienced non-executive director, bringing
a wide range of knowledge and experience from a career
in investment banking, private equity and industry.
Over a 20-year executive career in investment banking, Martin
held senior roles with SG Warburg & Co. Ltd, Morgan Stanley
and Dresdner Kleinwort Benson, before becoming the group
finance director of TI Group plc, then a FTSE 100 company.
He subsequently joined Terra Firma Capital Partners where he
held various senior roles in its portfolio companies, including
the executive chairmanship of the Waste Recycling Group
Limited, then a major participant in the UK waste sector,
and Le Meridien Hotel Group where he was executive
deputy chairman.
Neil Cooper
Independent Non-Executive Director
BSc Hons, FCMA
Neil joined the Board on 1 September 2014. He is chairman of
the Audit Committee and a member of the Remuneration and
Nomination Committees.
Skills and experience
Neil brings to the Board extensive experience in a wide variety
of corporate and financial matters. Most recently, he was group
finance director of Barratt Developments plc and, before that,
group finance director of William Hill plc and Bovis Homes plc.
He also held senior finance positions at Whitbread plc, worked
for PricewaterhouseCoopers as a management consultant and
held a number of roles with Reckitt & Colman plc.
As chairman of the Sustainability Committee, Gill has encouraged
and supported executive management in the development
of a sustainability programme that underpins the delivery of
Pennon’s strategy. At Accenture she chaired the global corporate
responsibility and Foundation giving programme and was
instrumental in building sustainability objectives into
Accenture’s worldwide human capital strategies.
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.
Martin has also served as a non-executive director on a
number of boards including Savills plc, where he was the
senior independent director; National Exhibition Group, where
he was chairman; Severstal; and Dubai International Capital.
As chairman of the Remuneration Committee, Martin has steered
Pennon’s approach on executive remuneration, ensuring that it is
aligned with and supports the Group’s strategy.
External appointments
Martin is currently vice chairman and non-executive
director of the FIA Foundation, the adviser to the Board of
the Commercial Bank of Dubai and the adviser to NGP, a
private group based in the USA, which is building out a
major platform in renewable energy in emerging markets.
As chairman of the Audit Committee, Neil has been influential
in directing Pennon’s approach on a number of significant matters
including internal control, governance and financial reporting.
External appointments
None.
Helen Barrett-Hague
Group General Counsel & Company Secretary
Solicitor, LLB Hons
Helen joined Pennon as Group General Counsel & Company
Secretary to the Board in March 2016.
Skills and experience
Helen has extensive corporate experience, including capital
raisings, initial public offerings, corporate restructuring,
mergers and acquisitions, both in the UK and overseas. She
began her career in private practice before moving in-house
in 1999 and subsequently held positions of increasing
responsibility with the Generics Group AG, Aveva Group plc
and Alent plc.
Helen is responsible for the provision of legal and company
secretarial services to the Group, for statutory and regulatory
compliance in terms of business conduct, and for supporting
the Chairman and the Board in ensuring that Pennon’s high
standards of governance continue to be met. She is also
chairman of the board of trustees of the Pennon Group
Defined Contribution Pension Scheme.
External appointments
None.
57
Governance The Board
and its
governance
framework
The Board of Pennon Group plc and its governance
framework is set out below.
The Board acts as the main governing body for the purpose of oversight
of Viridor’s business. For regulatory reasons, South West Water’s business
continues to be overseen by the board of South West Water Limited.
The boards and committees of Pennon Group plc and South West Water
Limited usually meet sequentially on the same day or days, facilitated by
the dual directorships held by a number of the Directors.
Read more pages 61 and 62
g
n
Viridor Executive M e e tin
haired by the Viridor M anagin g Dire c t o r a
consisting of principal executiv e s of V iri d
C
Audit Committee
Members: three independent
Non-Executive Directors and
two South West Water
non-executive directors for
South West Water matters
d
o r
P e n n o n E xecutive Meeting
t h e G roup CEO and consisting
e d b y
a i r
e xecutives of the Group
r i n c i p a l
f p
o
h
C
South W
Chaired by the So
consisting of prin
est W
uth W
cip
al e
e
st
a
t
e
r E
x
e
W
x
e
c
u
a
t
e
r
tiv
M
c
u
t
i
e
s
a
v
n
e
a
o
f
S
g
i
n
M
o
g
e
u
t
h
D
e
i
r
t
i
W
e
The
Pennon Board
Consisting of the Chairman, the Group
CEO, the CFO and three independent
Non-Executive Directors
The South West Water Board
Consisting of the Chairman, the Group CEO,
the Managing Director, the Finance Director,
three Pennon Non-Executive Directors
and three South West Water
non-executive directors*
c
n
e
t
s
t
o
g
r
W
a
a
n
t
d
e
r
Sustainability
Committee
Members: two independent
Non-Executive Directors , two
South West Water non-executive
directors (of which one is a
vacancy) for South West Water
matters, and the Group CEO
Remuneration Committee
Members: three independent
Non-Executive Directors and two South
West Water non-executive directors (of
which one is a vacancy) for South West
Water matters
Nomination Committee
Members: the Chairman, three
independent Non-Executive Directors
and three South West Water non-
executive directors (of which one is a
vacancy) for South West
Water matters
58
*Recruitment is underway to fill the vacancy for a
non-executive director of South West Water
Pennon Group plc Annual Report 2017
Pennon Board composition,
independence and experience
Composition
as at 31 March
Diversity
as at 31 March
100
75
50
25
%
0
7
5
.
%
0
3
4
.
%
7
6
6
.
%
3
3
3
.
100
75
50
25
%
4
.
1
7
%
6
8
2
.
%
7
6
6
.
%
3
3
3
.
2016
2017
2016
2017
Executive
Non-Executive
Male
Female
At the end of the year the Board of Directors comprised the Chairman,
two Executive Directors and three Non-Executive Directors.
The Board continued to exceed its target of 25% female
representation throughout the year and at the year end it was 33.3%.
Tenure
as at 31 March
%
7
5
100
75
50
25
%
9
2
%
4
1
2016
Experience
as at 31 March
100
75
50
25
%
3
4
%
3
4
.
%
4
1
%
0
5
%
3
3
%
7
1
2016
2017
%
0
5
%
3
3
%
7
1
2017
0-3 years
4-6 years
7-10+ years
Industry
Finance
Governance
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 Non-Executive
Directors listed on the following page. In December 2017 Martin Angle
will reach the ninth anniversary of his appointment. The Board is
satisfied that Martin continues to demonstrate independence of
character and judgement in the performance of his role as a Director
and therefore has determined that he remains independent.
Sir John Parker 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.
All Directors are subject to re-election each year in accordance with
provision B.7.1 of the UK Code.
All of the Non-Executive Directors are considered to have the
appropriate skills, experience in their respective disciplines and
personality to bring independent and objective judgement to the
Board’s deliberations. Their biographies on pages 56 and 57 and the
experience chart above demonstrates collectively a broad range of
business, financial and other relevant experience.
Directors’ roles
Neil Cooper is chairman of the Audit Committee and in accordance
with the UK Code and FCA Disclosure and Transparency Rule 7.1.1
he has recent and relevant financial experience (as set out in his
biography on page 57). Martin Angle is also a member of the
Audit Committee and he has relevant financial experience as set
out in his biography on page 57.
There is a clear separation of responsibilities between the Chairman
and the CEO, divided between managing the Board and the business,
while they of course maintain a close working relationship.
59
Governance
The Board and its
governance framework
continued
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 CEO
• Representing the Group and being available to shareholders
• Discussing separately with the Non-Executive Directors performance and strategic issues
Chief
Executive Officer
Chris Loughlin
Senior
Independent
Director
Chief Financial
Officer
Gill Rider
Susan Davy
• 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
• 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
• Supporting the CEO in providing executive leadership and developing Group strategy
• Reporting to the Board on performance and developments across the business
•
Implementing decisions of the Board
• Managing 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
South West Water
non-executive
directors
Martin Hagen
Matthew Taylor
Vacancy
• As for the Pennon Non-Executive Directors above, but only in respect of South West Water matters
Board meetings and attendance
The Directors and their attendance at the nine scheduled meetings
of the Board during 2016/17 are shown below:
Members
Appointment date
Attendance
Chairman
Sir John Parker
Non-Executive Directors
Martin Angle
Neil Cooper
Gill Rider
South West Water non-executive
directors(1)
Martin Hagen
Steve Johnson(2)
Matthew Taylor
Executive Directors
Susan Davy
Christopher Loughlin
Ian McAulay(3)
April 2015
December 2008
September 2014
September 2012
–
–
–
February 2015
August 2006
September 2013
(1) Representing South West Water interests.
(2) Until 28 April 2016.
(3) Until 31 August 2016.
60
9/9
9/9
9/9
9/9
9/9
1/1
9/9
9/9
9/9
4/4
In 2016 the number of scheduled Board meetings was reduced from
ten to nine per year (plus an annual strategy day) and the number
of scheduled Committee meetings was reduced to four per year to
coincide with Board meetings. Board and Committee meetings are
arranged over a session lasting a day and a half, which includes a
working dinner for the Directors. Additional meetings of Committees
are arranged as and when necessary. This approach allows for longer
agendas and in depth review and discussion around complex matters.
Managing the Group and its subsidiaries
The Board’s responsibilities include overall leadership of the Group,
setting the Group’s values, policies and standards, approving Pennon’s
strategy and objectives and providing oversight of the Group’s
operations and its performance. The Board makes decisions in relation
to Group and Viridor business in accordance with its schedule of
matters reserved. The South West Water board continues to operate
as a separate independent board in accordance with its own schedule
of matters reserved to ensure compliance with Ofwat’s principles on
board leadership, transparency and governance.
Pennon Group plc Annual Report 2017 Detailed consideration of certain matters is delegated to Board
Committees, to the Executive Directors and to the Group General
Counsel & Company Secretary, as appropriate. In addition to the
matters the Directors are required to decide by statute or regulation,
the matters reserved to the Board in relation to Pennon Group plc
and Viridor Limited include:
• 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.
approach is compatible with Ofwat’s principles for holding companies
in respect of Board leadership, transparency and governance.
Operation of the Board
The Board operates by receiving written reports circulated 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.
The Board also ratifies certain decisions taken by the South West
Water board, including major capital projects and investments,
long-term objectives and commercial strategy, the five-year regulatory
plan, annual budgets and certain decisions relating to financing. This
The Pennon Board and the South West Water board usually meet
sequentially, which allows a more holistic and cohesive approach to
decision-making and communication across the Group. This is
facilitated by the dual directorships held by a number of the Directors.
Pennon Board composition
South West Water board composition
Chairman
Group CEO
CFO
Chairman
Group CEO
Managing Director,
South West Water
Finance Director,
South West Water
3 independent
Non-Executive
Directors of Pennon
In attendance
3 independent non-executive
directors of South West Water*
*Recruitment is underway to fill the one vacancy
3 independent non-executive
directors of both South West
Water and Pennon
3 independent
non-executive directors
of South West Water*
In attendance
Group CFO
Pennon Executive management
The role of the Pennon Executive is to define and drive the business
priorities that will achieve delivery of the strategy. It is responsible for
ensuring, to the extent of the authority delegated by the Board, the
proper and prudent management of Group resources to create and
maximise shareholder value.
Chaired by the Chief Executive Officer, the Pennon Executive meets
formally on a monthly basis to review and refine recommendations to
be presented to the Board.
Members of the Pennon Executive
Chris Loughlin
Susan Davy
Adele Barker
Helen Barrett-Hague
Stephen Bird
Sarah Heald
Steve Holmes
Ed Mitchell
Phil Piddington
Paul Ringham
Bob Taylor
Chief Executive Officer
Chief Financial Officer
Interim Group director of Human Resources
Group General Counsel & Company Secretary
Managing Director, South West Water
Director of Corporate Affairs & Investor Relations
Director of Safety, Health, Quality & Sustainability
(SHQS)
Director of Environment and interim Operations
director (Wastewater Services), South West
Water
Managing Director, Viridor
Commercial director, Viridor
Operations director (Drinking Water Services),
South West Water
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,
including environmental, social and governance (ESG) risks), 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.
61
Governance The Board and its
governance framework
continued
Performance evaluation
The Board undertakes a formal and rigorous review of its
performance and that of its Committees and Directors each year.
This year, Armstrong Bonham Carter LLP, who are independent
board performance consultants with no other connection with
the Company, facilitated the evaluation of the Board’s and the
Committees’ performance. The exercise was conducted in March
2017 by way of a series of structured interviews with all the Directors,
various members of the senior executive team, the Internal Audit
Manager and the External Audit Partner.
The agenda for these interviews was circulated to each participant
prior to the meetings and was designed to assess:
• whether the Directors had thoroughly discussed and agreed the
use of shareholders’ funds to ensure the Company was successful
whilst managing the risks inherent in the strategy, plans and the
operating environment
• the effectiveness of the Board in ensuring that the executive team
had implemented the strategy and plans, and had managed all the
other activities of the Company well.
Armstrong Bonham Carter collated and analysed the results from
each interview and prepared separate reports on the performance
of the Board as a whole and one for each Committee, all of which
were reviewed and discussed by the Board.
The Senior Independent Director separately conducted a review of
the individual directors’ performance and the Chairman’s performance
was evaluated separately by the Non-Executive Directors, led by the
Senior Independent Director.
The review concluded that the Board, its Committees and its
individual Directors had demonstrated a high degree of effectiveness.
The new Board structure was viewed most positively and had helped
the Non-Executive Directors to achieve a broader knowledge of both
businesses. Consequently, the Board had a good understanding
of opportunities for growth and the threats facing the business.
The Board’s commitment to health and safety was widely noted
and all Directors commented on the need to improve performance
following three fatalities since 2013. The appointment of a new
Group director of Safety, Health, Quality and Sustainability, who will
work to embed a strong health and safety culture throughout the
Group, was welcomed. In addition, the Board agreed to adopt actions
relating to the development of Group strategy, the shaping of Pennon’s
corporate values and increased focus on employee engagement.
Subsequently the Board agreed and implemented an action plan
which it will monitor regularly.
Conclusions and recommendations in respect of the composition of
the Board were considered by the Nomination Committee and are
covered on page 70.
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 63 to 73 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 and are also
available from the Group Company Secretary upon request.
62
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. This has
operated effectively during the year.
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 2016/17 and
up to the date of the approval of this annual report and accounts.
The Group’s system of internal control is consistent with the FRC’s
new ‘Guidance on Risk Management, Internal Control and Related
Financial and Business Reporting’ (FRC Internal Control Guidance).
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
46 in the strategic report provides for the identification of key risks
including 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, which were reviewed and refreshed during the
year. 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 47 to 50.
Pennon Group plc Annual Report 2017 Board Committees’ reports
The Audit Committee report
Neil Cooper
Audit Committee Chairman
The role of the Audit
Committee is to ensure
that robust systems are
in place for financial
reporting, internal control
and risk management.
Dear Shareholder
I am pleased to introduce the Audit Committee’s report on its activities
during the year.
As in previous years, the principal responsibilities of the Committee
continue to be focused in a number of key areas: firstly, on ensuring
the appropriateness of the Group’s financial reporting; an activity
which includes the testing of accounting judgements made in
preparing reporting and in assessing whether the presentation of the
Group’s activities is fair, balanced and understandable. Secondly, on
reviewing and challenging the ongoing effectiveness of the internal
control environment and thirdly, on the scope of risk management
processes across the Group, including monitoring the Group’s risk
appetite as well as acting as a forum in which to carry out more
detailed reviews of higher risk areas of the operation.
Monitoring and reviewing the effectiveness of the external auditor
and the internal audit function is an important ongoing 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. In this context, the Committee notes
that the Financial Reporting Council (FRC) Audit Quality Review team
assessed the audit of the Group’s 2016 report and accounts during the
year and the Committee has received and discussed a report from
the Company’s external auditor with regards to the findings, as set
out on page 66.
Following the establishment last year of a new Group executive risk
management forum to assess risk appetite and monitor key risks
and their mitigation, the Committee has received detailed ‘deep dive’
presentations from senior management on individual principal risks
including, for example, drinking water contamination risk, wholesale
energy market risk, ERF business interruption and continuity
management, EU/UK regulatory and legislative change, non-
recoverable debt in South West Water and Viridor recycling and
commodity activities. More detail on our risk management processes,
principal risks and their associated mitigation can be found on pages
46 to 51. Aligned with this we continue to assess 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 51.
As part of the half-year and year-end reporting review process, we
reviewed and challenged the key financial reporting judgements of
management as set out on page 65. Significant matters considered by
the Committee both during the year and in relation to the year-end
financial statements are laid out in this report.
Neil Cooper
Audit Committee Chairman
63
Governance The Audit
Committee report
continued
Audit Committee composition and meetings
Committee chairman
Neil Cooper
Committee members
Martin Angle
Gill Rider
South West Water non-executive directors(1)
Martin Hagen
Matthew Taylor
(1) Representing South West Water interests.
Date of appointment to
Pennon Audit
Committee
Attendance
South West Water
audit committee
member
September 2014
December 2008
September 2012
–
–
5/5
5/5
5/5
5/5
5/5
√
√
√
√
√
The Pennon Audit Committee and the South West Water audit
committee meet sequentially on the same day. The responsibilities
of the South West Water audit committee mirror those of the
Pennon Audit Committee but only in respect of South West Water.
experience and also, in accordance with FCA Rule 7.1.1R of the FCA’s
Disclosure Guidance and Transparency Rules, have competence in
accounting or auditing. Details of each Director’s significant current
and prior appointments are set out on pages 56 and 57.
Other regular attendees to Committee meetings during the year
included: Chief Executive Officer; Chief Financial Officer; Managing
Directors of South West Water and Viridor; Group General Counsel
& Company Secretary; Finance Directors of South West Water and
Viridor; Group Financial Controller; Group Audit Manager; and
external auditor.
In addition, the Board Chairman has an open invitation to attend the
Committee meetings. In the last year he attended those meetings at
which the Committee 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
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.
Significant matters considered by the Committee
The calendar of business of the Committee sets in place 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 and opposite.
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 presentation of 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
External auditor
• Review of internal audit reports on core systems and processes across the Group, for example, Group treasury, contract management and Recycling
& Recovery
• Approved updated policies in relation to treasury and going concern assessment
• Reviewed an external quality assessment on the effectiveness of the Internal Audit function
• Monitored the effectiveness of key strategic projects including Viridor’s Enterprise transformation and South West Water’s market ready programme
• 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
• Considered the findings of the FRC’s review of the 2016 external audit
Risk
management
• Reviewed the Group’s 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
• Management of information security across the Group in mitigating key IT risks
• Received as part of the risk management review the annual report on any whistleblowing
• Carried out regular ‘deep dives’ at Committee meetings on principal risk areas
64
Pennon Group plc Annual Report 2017 Governance
• Discussed the results of independent performance evaluation of the Committee, conducted by Armstrong Bonham Carter LLP
• 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 updated Group policies covering treasury and foreign exchange
• 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
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 2017 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 106 to 113. In addition to the significant matters set
out in the table below, the Committee considered a range of other matters. These include presentational matters, in particular relating to the
non-underlying disclosure format and ensuring a fair presentation of statutory and non-statutory performance and financial measures.
During the year, the Group has seen substantial impact from movements in derivatives, both as a result of market movements and as a result of changes
in our expectations of economic benefits. This has led to the early unwind of a derivative through Peninsula MB Limited, giving rise to a substantial
non-underlying charge. The Committee and Board have received several updates and reports from the Chief Financial Officer in regard to these
movements, deeming management’s approach to the accounting recognition and disclosure of these items, as non-underlying, to be appropriate.
Area of focus by
the Committee
Revenue
recognition
Non-current
asset
impairment
review and
provisions
How the matter was addressed by the Committee
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
closely considered the work in respect of these areas at year end by the external auditor as well as reviewing disclosures around revenue recognition
accounting policies.
Recognising that the value of certain non-current assets and long-term environmental provisions within Viridor can be 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.
The Committee noted the substantial headroom in the mandatory review of goodwill for impairment, resulting in this area being deemed less judgemental.
Following a detailed review of the analysis undertaken, and consideration of management assumptions in relation to both the value of environmental
provisions and the assessment of indicators for potential impairment of non-current assets, the Committee was satisfied that a robust and consistent
approach had been followed and that the management’s assertion that the carrying value of these assets and liabilities remained reasonable, and therefore
the Committee were able to approve the disclosures in the financial statements.
This key area was also closely reviewed as part of the year-end audit by the external auditor.
South West
Water bad and
doubtful debts
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, enabled the Committee to conclude that
management’s assessment of the year-end position was reasonable.
Provisions for
uncertain tax
positions
It 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 a report to the Board setting out the resolution
of a number of uncertain tax items, 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 on resolution of these matters the level of judgement required in assessing the year end tax
creditor was consequently reduced.
Where appropriate expert external legal and accounting advice and other specialist taxation advice had been sought which assisted the Committee in
forming a view on the appropriateness of the provisions for remaining uncertain tax positions and related tax disclosures in the financial statements.
Going concern
basis for the
preparation of
the financial
statements and
viability
statement
A 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 on a periodic basis. Rolling five-year strategy projections and the resultant headroom
relative to borrowings is also regularly reviewed by the Board, including scenarios to better enable the committee to understand the potential range of
outcomes. At the end of each six month period 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 51.
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, Ernst & Young LLP, was appointed following a comprehensive audit tender process and approval by shareholders
at the Company’s 2014 AGM. Their reappointment was approved at the 2016 Annual General Meeting. Debbie O’Hanlon is the audit partner and
has been in that role since Ernst & Young’s appointment.
65
Governance The Audit
Committee report
continued
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 and which was shared with, and discussed by,
the Committee in advance.
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.
The effectiveness review of the external auditor is undertaken as part
of the Committee’s annual performance evaluation, which was carried
out by independent external consultants, Armstrong Bonham Carter
LLP. Further details of the performance evaluation are provided on
page 62. No issues were raised during that review and the Committee
concluded that the auditor was effective during the year. In addition,
during the year the FRC’s Audit Quality Review team reviewed the
audit of the Group’s 31 March 2016 financial statements, focussing on
the audit of impairment, taxation and revenue. The FRC categorised
the audit as ‘good or limited improvements required’, with no
significant areas for improvement identified. Following the review and
discussion of the findings by the Committee, changes were made to
the auditor’s approach to the audit of revenue in the waste business.
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 during the year
and again since the year end, confirming 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
In line with the requirements of the EU Audit Directive and Regulation
which came into force on 17 June 2016, the Committee continues to
have a robust policy for the engagement of the external auditor’s firm
for non-audit work. The Committee receives a regular report covering
the auditor’s fees including details of non-audit fees incurred.
Recurrent fees relate to agreed procedures in relation to annual
regulatory reporting obligations to Ofwat, work most efficiently and
effectively performed by the statutory auditor. The policy is for
non-audit fees not to exceed 70% of the audit fee for statutory work.
The Committee carefully reviews non-audit work proposed for the
statutory auditor, taking into consideration 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 11.3% of the audit fee, which is well within the Group’s 70%
non-audit fee limit.
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 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 regularly 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.
During the year an external assessment of the internal function was
performed by KPMG LLP, concluding that the Company’s internal
audit function conforms to IIA standards issued by the Institute of
Internal Auditors. The review highlighted both areas of good practice
and some areas for improvement which would improve the delivery of
the Company’s internal audit function.
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 103, 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 106 to 113.
In preparing and finalising the 2017 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.
66
Pennon Group plc Annual Report 2017 The Sustainability
Committee report
Gill Rider
Sustainability Committee
Chairman
Our approach to
sustainability helps us to
draw together the needs
of society with the delivery
of commercial success.
Dear Shareholder
I am pleased to introduce the Sustainability Committee’s report on its
activities during the year. Sustainability remains an integral part of
Pennon’s strategy, and the Group continues to take this responsibility
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 promote the highest
standards of corporate responsibility by bringing together and
reviewing initiatives that drive sustainability, approving targets and
monitoring the progress made in achieving Pennon’s strategic
sustainability objectives. Those objectives are set out on page 69.
We are well equipped to oversee performance from the perspective
of the Group and that of the individual businesses, with additional
attendees Lord Matthew Taylor (South West Water non-executive
director), Stephen Bird (Managing Director, South West Water) and
Phil Piddington (Managing Director, Viridor) contributing to the
Committee’s discussions. We are delighted with the strengthening
of the executive team and envisage that director of Safety, Health,
Quality and Sustainability, the director of Environment and the interim
director of Human Resources, all recently recruited to Group-level
roles, will play a central role in supporting the Committee as we
continue to guide the business and advise the Board on sustainability
which we believe is material to delivery of the Group’s strategy.
Pennon’s business model and its strategic priorities on pages 14 to 17
show how a thorough approach to sustainability helps us to draw
together the needs of society with the delivery of commercial success.
The Group’s long-term strategic priorities are designed to create
value for all our stakeholders – our customers, our communities and
our people, as well as our investors – and details of how we are
implementing this strategy are provided throughout the annual report.
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
67
Governance The Sustainability
Committee report
continued
Sustainability Committee composition and meetings
Committee chairman
Gill Rider
Committee members
Martin Angle
Chris Loughlin
Ian McAulay(1)
South West Water non-executive directors(2)
Steve Johnson(3)
Matthew Taylor
(1) Until 31 August 2016.
(2) Representing South West Water interests.
(3) Until 28 April 2016.
Date of appointment to
Pennon Sustainability
Committee
Attendance
South West Water
sustainability
committee
member
September 2012
December 2008
November 2006
September 2013
–
–
5/5
5/5
5/5
2/2
1/1
5/5
√
√
√
n/a
√
√
The Pennon Sustainability Committee and the South West Water
sustainability committee meet sequentially on the same day. Senior
executives also attend meetings to support discussions on their
specific areas of expertise.
Neil Cooper stood down from the Committee on 1 April 2016 and
Steve Johnson, who was a member of the South West Water
sustainability committee, resigned on 28 April 2016 as a non-executive
director of South West Water. Recruitment for a replacement
is underway.
The responsibilities of the South West Water sustainability committee
mirror those of the Pennon Sustainability Committee but only in
respect of South West Water. In addition, the South West Water
sustainability committee continues to provide oversight of South
West Water’s performance against its sustainability targets and the
sustainability activities that are core to the successful delivery of
South West Water’s K6 Business Plan 2015-2020. This is consistent
with Ofwat’s requirement for independent governance of our
regulatory business.
During the year the Committee continued to apply the best
practice framework published by Business in the Community (BitC),
a leading business-led charity that promotes responsible business.
The structure provided through BitC’s key areas of sustainability
(marketplace, workplace, community and environment) is reflected
in Pennon’s sustainability objectives and supports the development
of a range of targets by South West Water and Viridor as part of their
business planning processes.
We aim to set stretching targets and as at 31 March 2017 South West
Water had achieved eight of its 12 targets for the year and Viridor had
completed eight out of 16 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 June 2017 and
July 2017 respectively.
The Sustainability Committee balances the requirement to conduct
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.
Since last year’s report, the Committee has considered a wide range of
matters in the course of fulfilling its duties in accordance with its terms
of reference:
• the Group’s health and safety performance (including a health and
safety ‘deep dive’) and the effectiveness of health and safety
policies and procedures
• environmental strategy and performance
• performance in respect of customer service and engagement
• the Group’s approach to community relations 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 2016 and the associated verifier’s
reports and recommendations
• progress against the sustainability targets for 2016/17 and
sustainability targets for 2017/18.
In addition, the Committee considered:
• the development of Pennon’s new Code of Conduct, which sets out
the principles that should guide our employees’ actions and
support everyday decision making
• the establishment of a Group-wide compliance and
ethics programme
• the results of Business in the Community’s 2016 benchmarking
assessment of South West Water and Viridor, with both
organisations awarded two and a half stars out of five
• the results of Committee’s independent performance evaluation
conducted by Armstrong Bonham Carter LLP
• modifications to the Committee’s terms of reference.
68
Pennon Group plc Annual Report 2017 Strategic sustainability objectives
The Sustainability Committee has defined the following
strategic objectives, which drive the sustainability targets
set by South West Water and Viridor. Commentary on our
performance against our objectives is integrated throughout
the strategic report.
• Manage Pennon Group as a sustainable and successful
business for the benefit of our customers, shareholders and
other stakeholders
• Aim to ensure that all our business activities have a positive
economic, social and environmental impact on the
communities in which we operate
• Engage with our customers and other stakeholders and foster
good relationships with them
• Strive for the highest standards of health and safety in the
workplace so as to minimise accidents, incidents and lost time
• Develop and motivate our employees, treat them fairly and
ensure that they are fully engaged in all aspects of Pennon
Group’s objectives and follow the highest standards
of business conduct
• Aspire to leadership in minimising emissions that
contribute to climate change, and develop climate
change adaption strategies
• Aspire to leadership in all aspects of waste prevention
and resource efficiency by delivering solutions for society
to address the environmental challenge of depleting
natural resources.
Benchmarking
Pennon is a constituent of the FTSE4Good Index, 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.
Pennon sustainability report
Pennon’s sustainability reporting is integrated throughout the strategic
report and specifically in the following sections:
• Chairman’s statement (page 8)
• Business model (page 14)
• Strategic priorities (page 16)
• Our people (page 18)
• Review of the Chief Executive Officer (page 20)
• Our operations (pages 26 to 37)
South West Water and Viridor
sustainability reports
The sustainability report for Viridor will be published in June 2017, and
South West Water will incorporate its sustainability reporting in its
company annual performance report and regulatory accounts, which
will be published in July 2017. 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 2016/17, 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 Investment Association Guidelines on Responsible
Investment Disclosure.
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. Certain disclosures within
this annual report that relate to the sustainability performance of
South West Water and Bournemouth Water have been verified by
SMC against the output of an independent audit of regulatory data
conducted by CH2M.
69
Governance
The Nomination
Committee report
Sir John Parker
Nomination Committee Chairman
70
We are pleased to report
that, at the year end, 36% of
Pennon Executive members
were women.
The Nomination Committee met four times during the year to fulfil the
duties set out in its terms of reference.
Matters considered by the Committee during the year included:
• The recruitment for a non-executive director of South West Water,
to fill the vacancy arising from the resignation of Steve Johnson in
April 2016
• The appointment of the Group director of Safety, Health, Quality
and Sustainability, the interim Group director of Human Resources
and the Group director of Environment
• The recruitment of a director of Wastewater Services,
South West Water
• A review of succession plans, the leadership needs of the Group
and the Group’s approach to succession planning, resulting in the
instigation of a project to be undertaken by the interim Group
director of Human Resources
• the structure, size and composition of the Board, including
the skills, knowledge, independence, diversity and experience
of the Directors, taking into account the findings of the
independent performance evaluation conducted by
Armstrong Bonham Carter LLP
• a review of the time spent by Non-Executive Directors in
fulfilling their duties and the other directorships they hold
• the steps to be taken to bring further skills and experience in
environmental management into the executive team resulting
in the appointment of Ed Mitchell to the new role of director of
Environment, after the year end
• the Group’s performance against its diversity and equality policies.
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. Buchannan Harvey & Co, who have no other connection
with the Company, were engaged to assist with the recruitment of a
non-executive director for the South West Water board, the process
for which is still underway.
Pennon Group plc Annual Report 2017 Nomination Committee composition and meetings
Committee chairman
Sir John Parker
Committee members
Martin Angle
Neil Cooper
Gill Rider
South West Water non-executive directors(1)
Martin Hagen
Steve Johnson(2)
Matthew Taylor
(1) Representing South West Water’s interests.
(2) Until 28 April 2016.
Date of appointment to
Pennon Nomination
Committee
Attendance
South West Water
nomination
committee
member
April 2015
December 2008
September 2014
September 2012
4/4
4/4
4/4
4/4
2/2
0/0
2/2
√
√
√
√
√
√
√
The Pennon Audit Committee and the South West Water audit committee meet sequentially on the same day. The responsibilities of the South
West Water nomination committee mirror those of the Pennon Nomination Committee but only in respect of South West Water.
The CEO also attends meetings when invited.
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.
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 2017 and, as
disclosed on page 59, one third of the Board’s Directors are women
and as such the Group has exceeded 25% female representation at
Board level.
We are pleased to report that, at the year end, 36% of Pennon
Executive members were women compared to the reported 22% at
31 March 2016. 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 19.
The Committee and the Board will continue to monitor and promote
diversity across the Group with the aim of ensuring women are
appropriately represented on the Pennon Executive.
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
18, together with information regarding the gender breakdown of the
workforce on page 19.
71
Governance The Remuneration
Committee report
Martin Angle
Remuneration Committee Chairman
72
Our remuneration policy
must help us to attract and
retain high calibre people who
are able to contribute to the
success of the Group.
The Committee met seven times during the year to fulfil the duties
set out in its terms of reference. In particular, the Committee is
responsible for:
• ensuring remuneration is aligned with and supports the Group’s
strategy, reflects our values as a Group and optimises performance
• maintaining and, in every third year, reviewing the remuneration
policy and considering any changes necessary to ensure it remains
appropriate and fulfils its purpose of attracting and retaining 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 executives
of the Group.
The Committee’s activities during the
financial year
The Committee engaged in the following activities during the year:
• Annual executive salary review
• Annual review of the Chairman’s fee
• Determining performance targets in respect of the Annual Incentive
Bonus Plan for 2016/17
• Reviewing drafts of the Directors’ remuneration report for 2015/16
and recommending it to the Board for approval for inclusion in the
2016 annual report
• Determining bonuses and deferred bonus awards pursuant to
the Company’s Annual Incentive Bonus Plan in respect of the
year 2015/16
• Approving the Performance and Co-investment Plan awards for
the year
Pennon Group plc Annual Report 2017 • Approving the remuneration arrangements for the new Finance
Director, Viridor
• Approving the release of the 2013 deferred bonus share awards
and the vesting of executive share options pursuant to the
Annual Incentive Bonus Plan
• Determining the outcome of the 2013 Performance and
Co-investment Plan awards
• Considering and debating issues relating to the review of the
remuneration policy and future arrangements for the annual
bonus and long-term incentive plan (LTIP), with a particular focus
on performance metrics and incentive levels to ensure these are
aligned with the new management structure and strategic objectives
• Reviewing and agreeing to recommend the removal of the co-
investment obligation under the Performance and Co-investment
Plan, and an increase in our shareholding guidelines
• The results of independent performance evaluation of the
Committee, conducted by Armstrong Bonham Carter LLP.
The Committee’s focus for 2017/18
• Complete the design of the new simplified LTIP and oversee
its implementation
• Ensure that targets are stretching but also fair and achievable, so
that they act to retain, motivate and incentivise management to
deliver the Group’s strategic goals and to create long-term value
for shareholders
• Improve the process around, and disclosure of, personal
bonus targets
• Conduct a shareholder consultation process in preparation
for its submission to shareholders for approval at the AGM
• Monitor on an ongoing basis the alignment of executive pay
and benefits with the strategic direction of the Group.
Remuneration Committee composition and meetings
Date of appointment to
Pennon Remuneration
Committee
Attendance
South West Water
remuneration
committee
member
Committee chairman
Martin Angle
Committee members
Neil Cooper
Gill Rider
South West Water non-executive directors(1)
Martin Hagen
Steve Johnson(2)
(1) Representing South West Water interests.
(2) Until 28 April 2016.
December 2008
September 2014
September 2012
–
–
7/7
6/7
7/7
7/7
1/1
The Pennon Remuneration Committee and the South West Water remuneration committee meet sequentially on the same day.
The responsibilities of the South West Water remuneration committee mirror those of the Pennon Remuneration Committee but only
in respect of South West Water.
Steve Johnson, who was a member of the South West Water remuneration committee, resigned as a non-executive director of South
West Water on 28 April 2016
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 attends
from time to time but is not a member of the Committee. The CEO also attends meetings when invited except for such part of a meeting
when matters concerning his own remuneration are to be discussed.
√
√
√
√
√
73
Governance Directors’ remuneration at a glance
88
Annual report on remuneration
88
89
90
91
92
92
92
93
93
94
95
96
98
98
99
Operation of the remuneration
policy for 2017/18
Single total figure table
(audited information)
Annual bonus outturn for 2016/17
Performance and Co-investment
Plan outturn for 2016/17
Retirement benefits and
entitlements (audited information)
Director changes – additional
information (audited information)
Outside appointments
Non-Executive Director fees
and benefits
All employee, performance and
other contextual information
Share award and shareholding
disclosures (audited information)
Shareholder dilution
Details of share awards
The Remuneration Committee
and its advisers
Statement of voting at
general meeting
Directors’ remuneration
report compliance
Pennon Group plc Annual Report 2017
Directors’
remuneration report
75
76
Annual statement from the Chairman
of the Remuneration Committee
78
Directors’ remuneration policy
78
79
83
84
85
85
86
87
87
Changes to the remuneration policy
Future policy table –
Executive Directors
Future policy table –
Non-Executive Directors
Illustrations of applications
of remuneration policy
Approach to recruitment
remuneration
Dates of Directors’ service
contracts/letters of appointment
Policy on termination of service
agreements and payments for
loss of office
Statement of consideration of
employment conditions elsewhere
in the Company
Statement of consideration of
shareholder views
Waste processing at Exeter ERF
74
Directors’ remuneration
at a glance
Key components of Executive Directors’ remuneration
Base salary
Set at a competitive level to attract and retain
high calibre candidates to meet Company’s
strategic objectives in an increasingly complex
business environment.
Benefits
Benefits provided are consistent with the market
and level of seniority and to aid retention of key
skills to assist in meeting strategic objectives.
Annual bonus
Incentivises the achievement of key performance
objectives aligned to the strategy of the Company.
Long-term incentive plan
Provides alignment to the achievement of the
Company’s strategic objectives and the delivery
of sustainable long-term value to shareholders.
Pension
Provides funding for retirement and aids retention
of key skills to assist in meeting the Company’s
strategic objectives.
All-employee share plans
Align the interests of all employees with Company
share performance.
Shareholding guidelines
Create alignment between executives and
shareholders and promote long-term stewardship.
Summary of Directors’ remuneration 2016/17
Executive Directors
Chris Loughlin
Susan Davy
Non-Executive directors
Sir John Parker
Neil Cooper
Martin Angle
Gill Rider
Base
salary/fees
(£000)
Benefits
(including
Sharesave)
(£000)
Annual bonus
(cash and
deferred shares)
(£000)
Long term
incentive plan
(£000)
Pension
(£000)
Total
remuneration
(£000)
510
390
266
66
67
72
27
18
–
–
–
–
429
332
–
–
–
–
199
73
–
–
–
–
153
109
–
–
–
–
1,318
922
266
66
67
72
See the full single total figure of remuneration tables on page 89
Key proposed changes in policy and implementation
Performance measurement
Re-shaping our performance measurement
framework to align with the strategic priorities
of the Group – for both the annual bonus and
the LTIP.
LTIP opportunity
A proposed increase to our LTIP opportunity
to align it better with the market, aiding
retention and recruitment – the first increase to
incentive quantum we have made for 10 years.
Shareholding guidelines
Increasing our shareholding guidelines
for the Executive Directors, to provide
stronger alignment with shareholders and
long-term strategy.
Holding period
Formalising our existing two year holding period.
Read more about the changes to our remuneration policy on pages 76 to 79
75
Governance Annual Statement from
the Chairman of the
Remuneration Committee
Our remuneration
arrangements ensure
the commitment of our
Executive Directors
to our long-term strategic
objectives and to the creation
of shareholder value.
Read more about our strategic objectives on page 16
76
Dear Shareholder
Introduction
I am pleased to present, on behalf of our Board, the Remuneration
Committee’s Directors’ Remuneration Report for the year ended
31 March 2017.
We are submitting a revised Directors’ Remuneration Policy (Policy)
for a binding shareholder vote at the 2017 AGM, following the
expiration of a three year period. As explained below, the revised
Policy follows the first comprehensive review of our executive
remuneration arrangements for 10 years and reflects the major
changes Pennon has made to its strategy, management structure
and governance in the last year. This includes the appointment of
Chris Loughlin to the newly created role of Group CEO, leading a new,
restructured Pennon Executive team. It also reflects the challenges
we face in the recruitment and retention of executive talent.
We have always sought to take a responsible approach to executive
remuneration and are mindful of the views of shareholders and wider
stakeholders. We have therefore consulted with the shareholder base
and, taking on board feedback, have aligned our proposals accordingly.
On pages 88 to 99 we set out our annual report on remuneration
which contains the remuneration of the Directors for the year 2016/17
including the ‘single remuneration figure’ table. It also provides details
on how our policy will be applied for 2017/18. This section of the report
together with this letter is subject to an advisory shareholder vote at
this year’s AGM.
Last year the Remuneration Committee was pleased to note that
97% of shareholders who voted approved the annual report on
remuneration. The Committee appreciates the support of
its shareholders.
Policy review
Over the last year we have undertaken a comprehensive review of all
aspects of our executive remuneration arrangements. A particular
focus was given to looking at our performance measurement
framework afresh against our new Group structure, and to ensure its
continued relevance and alignment with strategy and consistency with
best practice. Throughout the process, the Committee has received
advice from its remuneration advisers, Deloitte LLP, and from the
Board Chairman.
This has been the first review of incentive levels for 10 years and, while
a number of best practice features have been adopted in recent years,
our review has also sought to address recent challenges that Pennon
has faced in recruiting talent in a changing talent pool and business
environment. Over the last ten years, the complexity of our business
has increased, and we are now one of the largest environmental
infrastructure groups in the UK.
Our objective continues to be to have remuneration arrangements
that ensure the commitment of our Executive Directors to our
long-term strategic objectives and to the creation of shareholder
value, whilst ensuring their behaviours reflect the values of the
organisation and actions are taken in accordance with our high
standards of governance.
Pennon Group plc Annual Report 2017 Remuneration review – the key
principles we followed
• Align executive targets with the Company’s
key strategic objectives
• Ensure a transparent, simple and equitable
approach to pay
• Incentivise the delivery of sustainable
long-term value to shareholders
• Attract and retain high calibre executives
in an increasingly competitive talent market
• Drive the right behaviours at all times from
executives
• Support the underlying strategic priorities of
operating safely, with an engaged workforce
and focus on customer service
• Improve transparency and line of sight under
the performance measurement framework
• Apply similar remuneration principles to
members of the Pennon Executive
• Seek feedback and input on our proposals
from shareholders.
Proposed modifications
As a result of our review, and following input and feedback from
shareholders, we are proposing some modifications to our
remuneration policy, including a refreshed approach to our
performance measurement framework, with metrics which are
strongly aligned to our Group strategy and targets which are
regarded as stretching.
• Long-term incentive plan (LTIP) performance measures
– introduction of new performance metrics under our LTIP,
aligned with our key strategic objectives. It is proposed, for 2017/18,
that LTIP awards will be based on a combination of EPS growth,
dividend growth/dividend cover, and return on capital employed
(ROCE). These metrics align executives with the delivery of
sustainable earnings and related cash flows, as well as our
sector-leading dividend policy. We also took account of shareholder
feedback and included a portion of the award linked to the
long-term capital returns generated by our business. This moves
away from our historic approach of using only Total Shareholder
Return (TSR). Our review highlighted that it has become
increasingly difficult to formulate a robust sector comparator group,
and a FTSE 250 group is often counter cyclical to our sector.
• LTIP opportunity – a proposed increase to our LTIP opportunity
– the first increase to incentive quantum we have made for 10
years. Under the proposed new policy, the maximum opportunity
for executive directors will be increased from 100% to 150% of
salary. Our recent experience in recruitment has led us to believe
that we are not sufficiently competitive in the market. While careful
consideration was given to the current climate, the Committee
strongly believes that it is in shareholders’ interests to enable
Pennon to compete for talent on a level playing field, securing
an executive team who can deliver long-term business success.
Our incentive levels will continue to be positioned conservatively
against the market. As a Committee we also recognise the
importance of stretching performance metrics in circumstances
where we are seeking a higher maximum award.
• LTIP simplification and performance alignment – simplification
of our long-term incentive framework with the removal of the
co-investment element under the new LTIP. In addition, vesting
for threshold performance will be reduced from 30% to 25%.
• Annual bonus performance measures – an increase in the
combined weighting on Group financial metrics and the key
operational measures on which performance is assessed by our
regulator, customers, communities and wider stakeholders. We are
not proposing any change to the existing maximum award or policy
that 50% of any bonus is deferred into shares which are normally
released after three years.
• Shareholding guidelines and long-term stewardship – the size
of the shareholding expected to be held by the Executive Directors
will be significantly increased from 100% of salary to 200% of
salary for both the CEO and CFO. This is to enhance the focus
on long-term stewardship and to provide stronger alignment
with shareholders.
• Holding periods – we introduced two-year holding periods in 2015.
We are retaining this feature and are formalising it as part of our policy.
Further details on the remuneration policy are set out on pages 79
to 87.
Overall performance achieved during the year
The Group achieved a strong performance in 2016/17 across its water
and waste businesses, delivering against its strategic objectives. Group
underlying profit before tax was £250.0 million, an increase of 18.3%
compared to 2015/16. Earnings per share (before deferred tax and
non-underlying items) was up 19.0% at 47.0p reflecting higher profits.
South West Water’s return on regulated equity (RoRE) at 12.6%
continues to lead the sector and Viridor generated EBITDA of £107
million during the year, ahead of the target of c.£100 million.
Key remuneration decisions
For 2017/18, salaries for executive directors were increased by 1.5%,
consistent with increases awarded to the wider employee population.
The bonus outturns for the Executive Directors for 2016/17 reflect
the strong 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 90 and 91.
As regards the Company’s long-term incentive plan, the overall
estimated outturn for awards vesting in 2017 at the end of the three
year period is 43.7% of the maximum 100%. This reflects that the
Company’s total shareholder return is estimated to exceed both the
comparator index performance and the FTSE 250 group.
Board changes
Ian McAulay (CEO of Viridor) stepped down from the Board on
31 August 2016 and left the Group on 31 December 2016. Details of
his leaving arrangements are set out on page 92.
Looking forward
We will continue to review our remuneration arrangements and
performance measures to ensure they are aligned with our strategy.
In conclusion, I hope you find our report this year informative and that
we can rely on your vote in favour of the remuneration policy and our
annual report on remuneration.
Martin D Angle
Remuneration Committee chairman
77
Governance Directors’
remuneration policy
Introduction
The remuneration policy described in this part of the report is intended to apply to the Company, subject to a binding shareholder vote, following the date
of the Company’s 2017 AGM which is scheduled to be held on 6 July 2017.
Shareholders will also be asked to approve a revised long-term incentive plan (LTIP). This will replace the current Performance and Co-investment Plan
(PCP), which will expire in July 2017.
The Directors’ remuneration policy will be displayed on the Company’s website at www.pennon-group.co.uk/about-us/governance-and-remuneration,
immediately after the 2017 AGM and will be available upon request from the Group Company Secretary.
www.pennon-group.co.uk/about-us/governance-and-remuneration
Changes to the remuneration policy
The Remuneration Committee undertook a comprehensive review of the remuneration policy following the end of a three year period, as well as the expiry
of our long-term incentive plan (the existing PCP will expire in July 2017). Following this review, which included a consultation process with our largest
shareholders, the key changes to the policy include:
• Re-shaping our performance measurement framework to align with the strategic priorities of the Group
• A proposed increase to our LTIP opportunity to align it better with the market, aiding retention and recruitment – the first increase to incentive quantum
we have made for 10 years
• Formalising our existing two year holding period
• Significant increase in our shareholding guidelines for Executive Directors.
Component
Annual bonus
Existing policy
New policy
Rationale and link to strategy
Performance measures
Performance targets relate to corporate and
personal objectives. Normally 70% relates to
financial targets or quantitative measures.
Performance measures
Increase in the portion of the award relating
to financial and quantitative operational
measures – amounting to 80% in 2017/18.
Improved focus on Group measures and
reflects new Group management structure.
Strong link to measurable financial and
operational KPIs which underpin the delivery
of our strategy and value to shareholders
and our customers.
Maximum award
Maximum award of 100% of salary.
Maximum award
No change to the Policy
Retain our current annual bonus maximum
with alignment to annual KPIs.
Deferred element
No change to the Policy.
Alignment of executives and shareholders,
with a significant portion of any bonus
deferred into shares.
Deferred element
A proportion (usually 50%) of any bonus is
deferred into shares in the Company which
are normally released after three years.
Performance measures
Total shareholder return (TSR) against the
performance of a water/waste peer group
index and constituents of the FTSE 250
index (excluding investment trusts).
Performance measures
A combination of EPS growth, sustainable
dividend growth and dividend cover, and
return on capital.
Co-investment requirement
Requirement to acquire co-investment
shares equivalent to one-fifth of the value of
the award.
Co-investment requirement
No co-investment requirement under the
new policy.
Maximum award
Maximum award of 100% of salary.
Maximum award
Maximum award of 150% of salary.
Performance measurement framework more
closely aligned to Pennon’s strategy.
Move away from TSR due to increasing
challenge in forming robust and relevant
comparator group due to sector
consolidation and the FTSE 250 group
which is often counter cyclical to our sector.
Simplification of our long-term incentive
framework.
Shareholdings requirements will significantly
increase (see below) but are no longer
linked to the LTIP.
Ensure we can recruit and retain executive
talent. Following the increase, Pennon will
continue to be positioned conservatively
against the market.
LTIP
78
Pennon Group plc Annual Report 2017 Component
Existing policy
New policy
Rationale and link to strategy
LTIP (continued)
Threshold vesting
30% of maximum award.
Threshold vesting
25% of maximum award.
Reduced threshold vesting to reflect best
practice.
Holding periods
Two-year holding periods were introduced
for awards made from 2015.
Holding periods
Two-year holding periods will continue to
apply (and will be formally included
in Policy).
Extend time horizons to five years and
enhance long-term focus of executives.
Shareholding requirements
100% of salary for executive directors
200% of salary for both the CEO and CFO.
Strengthen alignment of executives with
shareholders and promote long-term
stewardship.
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. Where it is intended that certain provisions of the 2014 remuneration policy will continue to apply, this is indicated in the future policy table below.
How the components
support the strategic
objectives of the Company
How the component operates
(including provisions for recovery or
withholding of any payment)
Maximum potential
value of the component
Description of framework
used to assess performance
Base salary
Set at a competitive level
to attract and retain high
calibre candidates to meet
the Company’s strategic
objectives in an increasingly
complex business
environment.
Base salary reflects the
scope and responsibility of
the role as well as the skills
and experience of
the individual.
Benefits
Benefits provided are
consistent with the market
and level of seniority to
aid retention of key skills
to assist in meeting
strategic objectives.
Annual bonus
Incentivises the achievement
of key performance
objectives aligned to the
strategy of the Company.
None, although individual and Company
performance are factors considered when
reviewing salaries.
Salaries are generally reviewed annually and any
changes are normally effective from 1 April each
year. In normal circumstances, salary increases
will not be materially different to general
employee pay increases.
However, the Committee reserves the right to
make increases above those made to general
employees, for example in circumstances
including (but not limited to) an increase in the
scope of the role.
When reviewing salaries the
Committee has regard to the
following factors:
• Salary increases generally
for all employees in the
Company and the Group
• Market rates
• Performance of individual
and the Company
• Other factors it
considers relevant.
There is no overall maximum.
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.
The cost of insurance
benefits may vary from
year to year depending on
the individual’s circumstances.
None.
In the event that an Executive Director is
required to relocate, relocation benefits
may be provided.
There is no overall maximum
benefit value but the Committee
aims to ensure that the total value
of benefits remain proportionate.
The maximum bonus potential
for each Director is 100% of
base salary.
Annual bonuses are calculated following
finalisation of the financial results for the year to
which they relate and are usually paid 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.
Malus and clawback provisions apply which
permit net cash bonuses and/or deferred bonus
shares to be forfeited, repaid or made subject to
further conditions where the Committee
considers it appropriate in the event of any
significant adverse circumstances, including (but
not limited to) a material failure of risk
management, serious reputational damage, a
financial misstatement or misconduct. Clawback
may be applied for the period of three years
following determination of the cash bonus.
Performance targets relate to corporate and
personal objectives which are reviewed each year.
For 2017/18, in relation to the financial and
operational measures of the annual bonus
framework there will be an 80% overall weighting
of which 50% will be profit before tax, 10% return
on regulated equity and 20% operational
measures. All of these measures will be subject to
defined quantitative targets.
The measures, weighting and threshold levels
may be adjusted for future years.
Following the financial year end the Committee,
with advice from the Chairman of the Board and
following consideration of the outturn against target
by the chairman of the Audit Committee, assesses
to what extent the targets are met and determines
bonus levels accordingly. In doing so the Committee
takes into account overall Company performance
and in exceptional circumstances may exercise its
discretion and adjust the bonus to reflect any
specific factors.
79
Governance Directors’ remuneration policy
continued
How the components
support the strategic
objectives of the Company
How the component operates
(including provisions for recovery or
withholding of any payment)
Maximum potential
value of the component
Description of framework
used to assess performance
Long-term incentive plan (LTIP)
The maximum annual award is
150% of base salary.
Provides alignment to
the achievement of the
Company’s strategic
objectives and the delivery
of sustainable long-term
value to shareholders.
Annual grant of conditional shares (or
equivalent). Share awards vest subject to the
achievement of specific performance conditions
measured over a performance period of no less
than three years.
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.
For grants made in 2015 and 2016 onwards
under the PCP, as well as all grants made from
2017 under the LTIP, 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 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.
The current performance measures for the
LTIP are based on a combination of growth in
earnings per share (EPS), sustainable dividend
growth and dividend cover, and return on capital.
For 2017/18 awards, performance measures will be
weighted as follows:
• 40% based on EPS growth
• 40% based on a combination of dividend
growth and a dividend cover metric
• 20% based on return on capital employed.
The ‘underpin’ evaluation includes consideration
of safety, environmental, social and governance
(ESG) factors as well as financial performance.
No more than 25% of maximum vests for
minimum performance.
The Committee will keep the performance
measures and weightings under review and may
change the performance condition for future
awards if this were considered to be aligned with
the Company’s interests and strategic objectives,
as well as the impact of regulatory changes.
However, the Committee would consult with major
shareholders in advance of any proposed material
change in performance measures.
Commitments made under the 2014 policy
Performance conditions set under the previous
remuneration policy (approved at the 2014 AGM)
will continue to apply to awards granted in 2014,
2015 and 2016. These awards are due to vest in
2017, 2018 and 2019 respectively. Previous
performance conditions were based on total
shareholder return (TSR) against the performance
of a water/waste peer group index and
constituents of the FTSE 250 index (excluding
investment trusts).
For awards granted under the 2014 remuneration
policy, no more than 30% of the maximum vests
for minimum performance.
80
Pennon Group plc Annual Report 2017 How the components
support the strategic
objectives of the Company
How the component operates
(including provisions for recovery or
withholding of any payment)
Maximum potential
value of the component
Description of framework
used to assess performance
Shareholding requirements
Create alignment between
executives and shareholders
and promote long-term
stewardship.
Pension
Provides funding for
retirement and aids retention
of key skills to assist in
meeting the Company’s
strategic objectives.
200% of salary for both the CEO and CFO.
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.
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.
Whilst one Executive Director is a
pension member there are no
further prospective accruals in
respect of defined benefit pension
arrangements.
All-employee share plans
Align the 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.
81
Governance Directors’ remuneration policy
continued
Notes to the policy table
Operation of executive share plans
The long-term incentive plan will be operated in accordance with the
rules of the plan as approved by shareholders. The deferred bonus
awards will be governed by the rules adopted by the Board from time
to time. Awards under any of the Company’s share plans referred to in
this report may:
• Be granted as conditional share awards, nil-cost options or in
such other form that the Committee determines has the same
economic effect
• Have any performance conditions applicable to them amended or
substituted by the Committee if an event occurs which causes the
Committee to determine an amended or substituted performance
condition would be more appropriate and not materially less
difficult to satisfy
• Incorporate the right to receive an amount (in cash or additional
shares) equal to the value of dividends which would have been paid
on the shares under an award that vest up to the time of vesting
(or where the award is subject to a holding period, release).
This amount may be calculated assuming that the dividends have
been reinvested in the Company’s shares on a cumulative basis
• Be settled in cash at the Committee’s discretion.
Pre-existing commitments
The Committee reserves the right to make any remuneration payments
and/or payments for loss of office (including exercising any discretion
available in connection with such payments) outside the policy set out
above where the terms of the payment were agreed (i) before the 2014
AGM (the date the Company’s first shareholder-approved directors’
remuneration policy came into effect); (ii) before the policy set out
above came into effect, provided that the terms of the payment were
consistent with the shareholder-approved directors’ remuneration policy
in force at the time they were agreed; or (iii) at a time when the relevant
individual was not a director of the Company and, in the opinion of the
Committee, the payment was not in consideration for the individual
becoming a director of the Company. For these purposes ‘payments’
includes the Committee satisfying awards of variable remuneration and,
in relation to an award over shares, the terms of the payment are ‘agreed’
at the time the award is granted.
The Executive Share Option Scheme (ESOS) which, under the 2014
remuneration policy, operated in conjunction with the deferred
element of the annual bonus, has been removed. No ESOS options
have been offered to Executive Directors since 2013.
Early vesting events
On a change of control or voluntary wind up of the Company, LTIP
awards may vest to the extent determined by the Committee having
regard to the performance of the Company and, unless the Committee
determines otherwise, the period of time that has elapsed since grant.
Deferred bonus awards may vest in full. Alternatively, participants may
have the opportunity, or be required, to exchange their awards for
equivalent awards in another company, although the Committee may
decide in these circumstances to amend the performance conditions.
The Committee also has the discretion to treat any variation of the
Company’s share capital or any demerger, special dividend or other
transaction that may affect the current or future value of awards as
an early vesting event on the same basis as a change of control.
82
Amendments to the remuneration policy
The Committee may make minor amendments to the policy (for
example for regulatory, exchange control, tax or administrative
purposes or to take account of a change in legislation) without
obtaining shareholder approval for that amendment.
Performance measures and targets
The performance conditions for the annual bonus plan are selected by
the Committee each year to reflect key performance indicators for the
Company and key metrics used by the Board to oversee the operation
of the businesses.
In respect of the LTIP, performance conditions for 2017/18 awards will
be EPS growth, a sustainable dividend metric (comprising dividend
growth and dividend cover) and return on capital employed (ROCE).
The Committee chose these measures as they are closely aligned with
Pennon’s strategic focus on the delivery of sustained earnings and
related cash flows, as well as our sector-leading dividend policy. ROCE
also measures the long-term capital returns generated by our
businesses. The performance targets are set in the context of the
Company’s forecasts and market expectations, and are regarded as
stretching targets.
The Committee may amend performance measures, weightings and
targets, in the context of the Company’s strategy, the impact of
changes to the regulatory framework, accounting standards and any
other relevant factors.
The measurement of performance against performance targets is at
the Committee’s discretion, which may include appropriate
adjustments to financial or non-financial elements and/or
consideration of overall performance in the round.
Performance conditions may also be replaced or varied if an event
occurs or circumstances arise which cause the Committee to
determine that the performance conditions have ceased to be
appropriate. If the performance conditions are varied or replaced, the
amended conditions must, in the opinion of the Committee, be fair,
reasonable and materially no less difficult than the original condition
when set.
The Committee would consult with major shareholders in advance of
any proposed material change in performance measures.
Differences in remuneration policy for all employees
When setting remuneration for Executive Directors the Committee
considers relevant information about pay and conditions in the Group.
Senior executives and Executive Directors generally receive a higher
proportion of their total pay in the form of variable remuneration and
share awards. All administrative employees of the Group are entitled to
base salary and pension provision including life assurance. In addition
all administrative staff in Pennon Group and South West Water and all
senior and middle management staff in the operations functions in
Viridor are entitled to participate in annual bonus arrangements, the
levels of which are based on the seniority and level of responsibility.
Long-term incentive share awards are only available to senior
executives and Executive Directors, and certain benefits are generally
available only to more senior employees at management level
and above.
Pennon Group plc Annual Report 2017 Future policy table – Non-Executive Directors
The table below sets out the Company’s policy in respect of the setting of fees for Non-Executive Directors.
How the components support the strategic objectives of
the Company
Fees
Set at a market level to attract Non-Executive Directors
who have appropriate experience and skills to assist in
determining the Group’s strategy.
How the component operates
Maximum potential value of the component
Total fees paid to Non-executive Directors will remain
within the limits stated in the Articles of Association.
Fees are set by the Board with the Chairman’s fees
being set by the Committee. The relevant Directors
are not present at the meetings when their fees are
being determined.
Non-Executive Directors normally receive a basic fee
and an additional fee for any specific Board
responsibility such as membership or chairmanship of
a Committee or occupying the role of Senior
Independent Director.
In reviewing the fees the Board, or Committee as
appropriate, consider the level of fees payable to
Non-Executive Directors in other companies of similar
scale and complexity.
Benefits
The benefits provided for the Chairman are consistent
with the market and level of seniority.
Expenses incurred in the performance of non-
executive duties for the Company may be reimbursed
or paid for directly by the Company (including any tax
due on the expenses).
None.
The Chairman’s benefits include the provision of a
driver and vehicle, when appropriate for the efficient
carrying out of his duties.
83
Governance Directors’ remuneration policy
continued
Illustrations of applications of remuneration policy
The total annual remuneration for the Executive Directors that could result from the proposed remuneration policy, based on salaries for
2017/18, is shown below.
Chris Loughlin – Chief Executive Officer
(£000)
Susan Davy – Chief Financial Officer
(£000)
5
9
9
,
1
%
9
3
%
6
2
%
5
3
4
5
1
,
1
%
7
1
%
2
2
%
1
6
0
0
7
%
0
0
1
%
]
•
[
6
1
5
,
1
%
9
3
%
6
2
%
5
3
%
2
]
7
•
8
[
%
7
1
%
3
2
%
0
6
6
2
5
%
0
0
1
Minimum
performance
Mid
performance
Maximum
performance
Minimum
performance
Mid
performance
Maximum
performance
Fixed remuneration
Annual variable remuneration
Long-term variable remuneration
Fixed remuneration
Annual variable remuneration
Long-term variable remuneration
Scenario
Fees
Minimum performance
Mid performance
Maximum
Assumptions
Fixed pay, which constitutes base salary, pension and benefits in kind. These values are made up of the salaries
for 2017/18 (set out on page 88) and an estimate of the value of the benefits and pension.
Fixed pay and 50% of the maximum annual bonus and 25% of the maximum long term incentive award.
Fixed pay and 100% vesting of the annual bonus and of long-term incentive awards.
No adjustments have been made for potential share price growth or payment of dividends. Benefits from all-employee schemes have also been
excluded.
84
Pennon Group plc Annual Report 2017 Approach to recruitment remuneration
When considering the appointment of Executive Directors the
Committee seeks to balance the need to offer remuneration to attract
candidates of sufficient calibre to deliver the Company’s strategy
whilst remaining mindful of the need to pay no more than is necessary.
The Committee will appoint new Executive Directors with a package
that is in line with the remuneration policy that has been agreed by
shareholders and is in place at the time. Base salary may be set at a
higher or lower level than the previous incumbent.
Other elements of remuneration would be in line with the Company’s
policy set out in the in the future policy.
The maximum variable pay opportunity on recruitment (excluding
‘buyouts’) would be in line with the future policy table, being a
maximum annual bonus award of 100% of salary and maximum award
under the LTIP of 150% of salary.
The Committee may determine for the first year of appointment that
any annual bonus will be subject to different weightings or objectives.
To facilitate recruitment it may be necessary to recompense a new
Executive Director for the expected value of incentive rewards
foregone with their previous employer (‘buyout’ awards). The
Committee may make buyout awards in accordance with LR9.4.2 of
the Listing Rules. The Committee will ensure that any such award
would at a maximum match the value of the awards granted by the
previous employer and be made only where a Director is able to
demonstrate that a loss has been incurred from leaving his or her
previous employment. Any buyout would take into account the terms
of the arrangement forfeited, including in particular any performance
conditions and the time over which they vest. The award would have
time horizons which are in line with or greater than the awards
forfeited.
For interim positions a cash supplement may be paid rather than
salary (for example a Non-executive Director taking on an executive
function on a short-term basis).
Where an employee is promoted to the position of Executive Director
(including if an Executive Director is appointed following an
acquisition or merger), pre-existing awards and contractual
commitments would be honoured in accordance with their
established terms.
Non-executive Directors fees would be in line with the policy set out in
the future policy table on page 83.
Dates of Directors’ service contracts/letters of appointment
The dates of Directors’ service contracts and letters of appointment and details of the unexpired term are shown below.
Executive Directors
Chris Loughlin*
Susan Davy*
Ian McAulay*
Date of service contract
Expiry date of service contract
1 January 2016
1 February 2015
2 August 2013
At age 67 (20 August 2019)
At age 67 (17 May 2036)
At age 65 (25 April 2030)
Resigned on 31 August 2016
* Each of the Executive Directors’ service contracts is subject to 12 months’ notice on either side.
Non-Executive Directors
Date of initial letter of appointment
Expiry date of appointment
Sir John Parker
Martin Angle
Neil Cooper
Gill Rider
19 March 2015
28 November 2008
17 July 2014
22 June 2012
31 March 2018
30 November 2017
30 August 2017
30 August 2018
The policy is for Executive Directors’ service contracts to provide for 12 months’ notice from either side.
The policy is for Non-Executive Directors’ letters of appointment to contain three months notice period from either side and for the Chairman’s letter of
appointment to contain a 12 months notice period from either side.
All Non-Executive Directors are subject to annual re-election and letters of appointment are for an initial three-year term.
Copies of Executive Directors’ service contracts and Non-Executive Directors’ letters of appointment are available for inspection at the Company’s
registered office.
85
Governance Directors’ remuneration policy
continued
Policy on termination of service agreements
and payment for loss of office
The Company’s policy is that Executive Directors’ service agreements
normally continue until the Director’s agreed retirement date or such
other date as the parties agree. Otherwise they are terminable on one
year’s notice.
There are no liquidated damages provisions for compensation on
termination within Executive Directors’ service agreements. Taking
into account the circumstances of any termination, the Committee
may determine that a payment in lieu of notice should be made. Any
such payments would be restricted to salary and benefits. In these
circumstances consideration would be given to phasing of payments
and an individual’s duty and opportunity to mitigate losses.
The Committee reserves the right to make any other payments in
connection with a director’s cessation of office or employment where
the payments are made in good faith in discharge of an existing legal
obligation (or by way of damages for breach of such an obligation) or
by way of compromise or settlement of any claim arising in connection
with the cessation of a director’s office or employment. Any such
payments may include but are not limited to paying any fees for
outplacement assistance and/or the director’s legal and/or
professional advice fees in connection with his cessation of office or
employment.
The Company may meet ancillary costs, such as outplacement
consultancy and/or reasonable legal costs if the Company terminates
the Executive Director’s service contract.
Any compensation payable will be determined by reference to the
terms of the service contract between the Company and the
employee, as well as the rules of the various incentive plans as set out
in the table below.
Annual bonus
Normally no bonus is payable unless an Executive Director is employed on the date of payment.
In certain good leaver circumstances (death, disability, redundancy, retirement and any other circumstance at the
Committee’s discretion) a bonus may be payable. Any such bonus would be based on performance and pro-rated
to reflect the period of service with performance normally assessed at the same time as other employees. The
Committee retains discretion to adjust the timing and pro-rating of any award to take account of any prevailing
exceptional circumstances which they consider would be fair to the Company and to the employee. Share
deferral would not normally apply.
Unvested awards would normally lapse upon cessation. In certain good leaver circumstances, unless the
Committee determines otherwise, the restricted period is not automatically terminated on cessation of
employment; rather, the restricted period continues to apply as if the leaver was still in employment. However,
awards may be released to participants on cessation of employment at the discretion of the Committee.
Good leaver circumstances are death, injury, ill-health, disability, redundancy, retirement, the sale of the
individual’s employing business or company out of the Group and any other circumstance at the Committee’s
discretion.
Any unvested awards would normally lapse upon cessation of the individual’s employment within the Group. In
certain good leaver circumstances, awards vest to the extent determined by the Committee taking into account
the extent to which the performance conditions have been satisfied, the period of time elapsed between grant
and the cessation of employment and such other factors as the Committee may deem relevant. Awards would
normally vest on the original normal vesting date and be released at the end of the two-year holding period
(unless the Committee determines awards should be subject to earlier vesting and release dates).
If a participant dies, an award will, unless the Committee determines otherwise, vest and be released at the time
of the participant’s death, taking into account the extent to which the performance conditions have been satisfied
and the period of time elapsed since grant.
Good leaver circumstances are death, ill health, injury, disability, redundancy, retirement, where the participant’s
employer is no longer a member of the Group, where the participant is employed in an undertaking which is
transferred out of the Group, or for any other reason that the Committee determines.
All awards would lapse if a participant was summarily dismissed.
Leavers will be treated in accordance with the HMRC approved rules.
Where a buyout award is made on recruitment, leaver provisions would be determined at the time of award.
Deferred shares
Long-term incentive plan
All-employee awards
Other awards
86
Pennon Group plc Annual Report 2017 Statement of consideration of employment
conditions elsewhere in the Company
In setting executive remuneration the Committee takes account of
employment market conditions and the pay and benefits differentials
across the Group. The Committee considers annual summary reports
of employee remuneration and the terms and conditions of
employment within each operating company and has regard to these
in setting salary and other benefits for the Executive Directors and
senior management. The reports of employee remuneration do not
include comparison metrics.
Statement of consideration of shareholder views
The Committee has taken into account general good governance,
best practice and shareholder views when formulating the
remuneration policy. As part of our recent remuneration review, we
carried out an extensive consultation process and consulted our Top
30 shareholders, comprising 63% of the shareholder base. As a result
of this process, a number of changes were made to our proposals,
including the use of a ROCE metric under our new LTIP and a
significant increase in our shareholding guideline, from 100% to 200%,
for both the CEO and the CFO.
The Committee does not consult with employees when drawing
up the Directors’ remuneration policy but does take account of
the Group-wide policy as described above.
87
Governance Annual report
on remuneration
Introduction
This section sets out how the Company has applied its remuneration policy in the 2016/17 year, and details how the new policy will be implemented for the
year 2017/18. 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 6 July 2017.
Operation of the remuneration policy for 2017/18
A summary of the specific remuneration arrangements for Executive Directors in 2017/18 is described below:
Base salary
Pension and
benefits
Annual bonus
2017/18 salaries are:
• Chris Loughlin: £517,650
• Susan Davy: £395,850
Salaries were increased by 1.5% in line with increases for all employees.
No changes. Salary supplement cash allowance of 30% for Chris Loughlin and 25% for Susan Davy, from which is deducted the employer’s contribution
to the defined benefit or defined contribution pension schemes for the Directors.
No change to maximum opportunity of 100% of salary. No change to operation of deferral, with 50% of the bonus to be deferred into shares for three years.
For 2017/18, the annual bonus will be based on the following performance measures:
60% based on Group financial metrics (50% PBT, 10% RoRE).
20% based on operational metrics, weighted equally between Waste and Water. These measures will be quantitative and measurable, and are key to
meeting the needs of our customers, our regulator, and wider stakeholders.
Water metrics
• Service Incentive Mechanism (SIM)
• Bathing quality
• Leakage
• Waste water pollution incidents
• Duration of interruptions to supply
• Waste water and waste asset reliability.
Waste metrics
• ERF availability
• Delivery against recycling action plan
• Growth in customer base.
20% based on personal strategic measures. These will be relevant to the individual, and will include health and safety, environmental performance,
development and delivery of commercial priorities for the Group, PR19, and leveraging of synergies.
For bonuses from 2014/15 both malus and clawback apply as described in the remuneration policy.
Long-term
incentive plan
Maximum award of 150% of base salary for both the Chief Executive Officer and the Chief Financial Officer.
For 2017/18, performance measures will be EPS growth, a sustainable dividend measure and ROCE, with targets set as follows:
EPS growth – 40% weighting
Threshold
Maximum
Straight-line vesting between threshold and maximum.
EPS growth pa
6%
10%
Vesting
25%
100%
Sustainable dividend measure (dividend growth and dividend cover) – 40% weighting
The performance measure comprises two performance targets, both of which need to be achieved. There is a ‘gateway’ dividend growth target of
RPI+4% per annum.
There is then an EBITDA dividend cover target which operates as follows:
Threshold
Maximum
EBITDA dividend cover
2.6
3.6
Vesting
25%
100%
Straight-line vesting between threshold and maximum.
As an additional underpin the board must also be satisfied with the level of EPS dividend cover. EBITDA dividend cover will be based on adjusted
EBITDA calculated as (underlying EBITDA + share of JV dividends & interest receivable + IFRIC12 interest receivable).
For the purpose of the calculation, dividend cover would be based on the policy of 4% pa above RPI.
88
Pennon Group plc Annual Report 2017 Long-term
incentive plan
continued
Return on capital employed (ROCE)* – 20% weighting
Average ROCE
Threshold
Maximum
* ROCE is defined as: (operating profit + JV profit after tax + interest receivable) divided by capital employed (debt + equity including hybrid).
8%
10%
Vesting
25%
100%
Straight-line vesting between threshold and maximum.
The LTIP award will be subject to an ‘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 remuneration policy report.
Performance is measured over three years and a two-year holding period applies.
Shareholding
guideline
200% of salary for both the CEO and CFO.
Non-Executive Director fees
Non-Executive Director fees for 2017/18 are set out below. They include an increase of 1.5% approved by the Board for the Chairman and for the Non-
Executive Directors, effective from 1 April 2017.
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
£
270,331
47,198
7,000
14,210
10,150
10,150
5,075
Single total figure of remuneration tables (audited information)
Base salary/fees
(£000)
Benefits(i)
(including Sharesave)
(£000)
Annual bonus
(cash and
deferred shares)
(£000)
Long term
incentive plan
(£000)
Pension(iii)
(£000)
Total
remuneration
(£000)
2016/17
2015/16
2016/17
2015/16
2016/17
2015/16
2016/17(ii)
2015/16
2016/17
2015/16
2016/17
2015/16
Executive Directors
Chris Loughlin(iv)
Susan Davy
Ian McAulay(v)
Non-executive directors
Sir John Parker
Neil Cooper
Martin Angle
Gill Rider
510
390
305
266
66
67
72
427
325
400
219
65
62
65
27
18
12
–
–
–
–
29
18
21
–
–
–
–
429
332
–
–
–
–
–
356
238
238
–
–
–
–
199
73
–
–
–
–
–
224
83
–
–
–
–
–
153
109
58
–
–
–
–
128
91
80
–
–
–
–
1,318
922
375
266
66
67
72
1,164
755
739
219
65
62
65
(i) Benefits comprise a car allowance and medical insurance.
(ii) Based on an estimated 43.7% vesting as referred to on page 91 and based on the Company’s share price of 836.64p (being the average share price over Q4 2016/17), together with an estimate
of the accrued dividends payable on the vesting shares.
(iii) See page 92 for further information.
(iv) Appointed 1 January 2016 – previously Executive Director and Chief Executive, South West Water. For 2015/16, remuneration is aggregate total in the year in respect of both positions.
(v) Stepped down from the Board on 31 August 2016 and left the Group on 31 December 2016.
89
Governance
Annual report on remuneration
continued
Annual bonus outturn for 2016/17
The performance targets set and the performance achieved in respect of the annual bonus for 2016/17 for both Executive Directors is set out below. In line with
the Committee’s policy, 50% of any bonus is payable in shares, the release of which is deferred for a three-year restricted period.
Chris Loughlin
Measure
EPS (30% weighting)
Threshold
Target
Maximum
Actual
outturn
Bonus
outturn
37.53p
41.7p
47.96p
47.0p
24.83%
17.56%
14.82%
26.84%
84.05%
£229.2m
9.0%
£224.6m
7.0%
Average South West Water directors’ performance (20% weighting)
The average of the bonus earned by the executive directors of South West Water in respect of targets which related to:
Operating profit
Return on regulated equity
Net debt*
Totex outperformance*
The achievement of a range of service improvements relating to bathing water quality, SIM, leakage, wastewater compliance, pollutions, resolution of
operational contacts, duration of supply interruptions, asset reliability and employee engagement.
Average Viridor directors’ performance (20% weighting)
The average of the bonus earned by the executive directors of Viridor in respect of targets which related to:
EBITDA + JVs
Budgeted restructuring savings
Sales revenue
Environmental compliance events
Personal strategic objectives (30% weighting)*
• Successful implementation of new governance arrangements across the Group to ensure these are effective and efficient, with improved processes,
£146.2m
£62.0m
£808.9m
–
£132.9m
£59.0m
£770.4m
11
£119.6m
£56.1m
£731.9m
–
£233.8m
11%
£142.5m
£58.7m
£785.0m
3
£237.2m
12.6%
communications and development of common services and synergies
• Refreshment of Group strategy, including identification of focus and growth areas, as well as agreement of appropriate business model for waste
recycling. Establishment of ‘Growth Forum’ to consider and validate growth opportunities. Centralisation of the recycling business model.
Implementation of ‘self help’ measures for margin (Viridor has improved from 3.2% to 4.7%)
• Revision of succession planning process and structure for directors
• Enhancement of Pennon’s recognition, branding and reputation with internal and external stakeholders. Completion of a group wide rebranding
exercise, which following board approval was rolled out throughout the organisation. Results of investor surveys on Pennon brand recognition at
investor level
• Delivery of strategic priorities around Group level processes, synergies and efficiencies. Achievement of £100 million EBITDA target for ERF, with
improvement in recycling margins. Strong progression of Shared Services and establishment of a Group executive
Total outturn
*some objectives and the detailed targets continue to be commercially confidential
90
Pennon Group plc Annual Report 2017 Susan Davy
Measure
EPS (30% weighting)
Threshold
Target
Maximum
Actual
outturn
Bonus
outturn
37.53p
41.7p
47.96p
47.0p
24.83%
£229.2m
9.0%
£224.6m
7.0%
Average South West Water directors’ performance (20% weighting)
The average of the bonus earned by the executive directors of South West Water in respect of targets which related to:
Operating profit
Return on regulated equity
Net debt*
Totex outperformance*
The achievement of a range of service improvements relating to bathing water quality, SIM, leakage, wastewater compliance, pollutions, resolution of
operational contacts, duration of supply interruptions, asset reliability and employee engagement.
Average Viridor directors’ performance (20% weighting)
The average of the bonus earned by the executive directors of Viridor in respect of targets which related to:
EBITDA + JVs
Budgeted restructuring savings
Sales revenue
Environmental compliance events
Personal strategic objectives (30% weighting)*
• Review of the Group’s funding strategy, in light of growth requirements and changes to the SWW regulatory framework
• Reviewing and optimising finance resources and support throughout the Group. Successful centralisation of procurement and property teams, and
£146.2m
£62.0m
£808.9m
–
£132.9m
£59.0m
£770.4m
11
£119.6m
£56.1m
£731.9m
–
£233.8m
11%
£142.5m
£58.7m
£785.0m
3
£237.2m
12.6%
completion of the review of financial advisors leading to appointment of new brokers
• Successful delivery of plan to deliver reduction in overheads and cost base. Development of the Growth Board to review growth opportunities across
the Group
• Successful completion of 2016 review of pension valuation and funding position, ensuring appropriate risk and funding exposure
Total outturn
*some objectives and the detailed targets continue to be commercially confidential
Ian McAulay
Ian McAulay stepped down from the Board on 31 August 2016 and left the Group on 31 December 2016. He did not receive a bonus for the year
ended 31 March 2017.
Performance and Co-investment Plan outturn for 2016/17
The PCP awards made on 14 July 2014, which are due to vest on 14 July 2017, are the awards included in the single figure table. The extent to
which the awards will vest is subject to the satisfaction of the performance conditions that were in place at the time the awards were made:
• 50% of the award vests subject to the Company’s TSR performance measured against an index made up of the following six listed
comparator companies:
– National Grid Plc
– Séché Environnement
– Severn Trent
– Shanks Group
– Suez Environnement
– United Utilities
17.56%
14.82%
27.82%
85.03%
• The remaining 50% of the award vests subject to the Company’s ranked TSR performance against the constituents of the FTSE 250 (excluding
investment trusts).
Currently it is estimated that the outturn will result in a 43.7% vesting as set out in the table below.
The calculation of TSR performance from the start of the performance period on 1 April 2014 to 10 May 2017 was undertaken by Deloitte LLP for
the Committee.
Comparator index (50% of award)
FTSE 250 (excluding investment trusts) (50% of award)
TOTAL
Straight-line vesting between points.
For below threshold performance, 0% vests.
Threshold (30% of
maximum vests)
Equal to index
Above 50th percentile
Maximum (100% of
maximum vests)
15% above the index
At or above
75th percentile
Achievement in the
period to 1 April 2017*
4.87% above the index
52.0%
Vesting outturn*
26.4%
17.3%
43.7%
*
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 2017 to 30 June 2017) the achievement and the outturn is an estimate at the date of calculation (11 May 2017)
Vesting of an award is also subject to the ‘underpin’ described on page 80 which the Committee has determined to the date of this report would
be satisfied.
91
Governance Annual report on remuneration
continued
Retirement benefits and entitlements (audited information)
Details of the Directors’ pension entitlements and pension-related benefits during the year are as follows:
Chris Loughlin
Susan Davy
Ian McAulay(iii)
Value of
defined
benefit
pension(i)
(£000)
Company
contributions
to defined
contribution
arrangements
(£000)
–
25
–
–
–
40
Cash
allowances
in lieu
of pension
(£000)
153
84
18
Total value
for the year
(£000)
Normal
retirement
age and date
(for pension
purposes)
Accrued
pension at
31 March 2017
(£000)
153
109
58
67 (20 August 2019)
65 (17 May 2034)
65 (25 April 2030)
–
18(ii)
–
(i) The value of the defined benefit pension accrued over the period comprises the total pension input amount (which has been calculated in line with regulatory requirements) less the pension
contributions paid by the Director.
(ii) Accrued pension is based on service to the year end and final pensionable salary at that date.
(iii) Continued to receive pension benefits until cessation of employment on 31 December 2016.
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.
Susan Davy receives an overall pension benefit from the Company equivalent to 25% of her salary which, in 2016/17 comprised an employer’s contribution
of £13,554 and a cash sum of £83,946. 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%
pa 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 was a member of Pennon Group’s defined contribution arrangement and received an overall pension benefit from the Company equivalent to
20% of his salary until the cessation of his employment on 31 December 2016.
No additional benefits will become receivable by a Director in the event that the Director retires early.
Director changes – additional information
Payments in connection with leaving arrangements – Ian McAulay (audited information)
Ian McAulay, stepped down from the Board on 31 August 2016. He left the employment of Viridor Waste Management Limited, on 31 December 2016,
at which point salary and benefits ceased to be paid. Mr McAulay did not receive an annual bonus award in respect of the year ended 31 March 2017.
The treatment of Ian McAulay’s share awards was in line with the Company’s remuneration policy (approved by shareholders at the 2014 AGM):
• Awards made to Mr McAulay in 2014, 2015 and 2016 under the Performance and Co-investment Plan were forfeited in accordance with the Rules
of the Plan
• Deferred shares allocated to Mr McAulay in 2014, 2015 and 2016 pursuant to the Annual Incentive Bonus Plan, which related to previous performance
periods, were released to him following cessation of his employment on 31 December 2016 at an aggregate value of £269,784. The 3,651 ESOS options
granted in 2014 in association with Mr McAulay’s 2014 deferred bonus share award lapsed upon his stepping down from the Board
• Deferred shares allocated to Mr McAulay as a buyout award upon his appointment as Chief Executive, Viridor, were released to him on 30 September 2016
(being the end of the three-year restricted period) together with additional shares in lieu of shares that could have been acquired with the amount of each
cash dividend on the released shares during the restricted period. The total value was £149,579.
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.
92
Pennon Group plc Annual Report 2017 Non-Executive Director fees and benefits
The Non-Executive Directors’ fees were increased by the Board for 2016/17 by amounts ranging from 0.6% to 7.3%, 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%.
The Chairman’s benefits comprise provision of a driver and vehicle, when appropriate for the efficient carrying out of his duties. He is entitled to expenses
on the same basis as for the other Non-Executive Directors.
All employee, performance and other contextual information
Historical TSR
The graph below shows the value, over the eight year period ended on 31 March 2017, 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 – Since April 2009
Total shareholder return (TSR)
350
300
250
200
150
100
50
Apr-09
Apr-10
Apr-11
Apr-12
Apr-13
Apr-14
Apr-15
Apr-16
Apr-17
Pennon
FTSE 250
Equivalent chief executive officer remuneration
As the Company did not have a Group Chief Executive Officer until 1 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 CEO) and the Group CEO’s
remuneration for the year, as explained in footnotes (i) and (ii) below. For 2016/17, the Group CEO’s remuneration for the year is shown.
Average Executive Director single figure
of remuneration (£000)
Annual bonus payout (% of maximum)
LTIP vesting (% of maximum)(iv)
2009/10
2010/11
2011/12
2012/13
2013/14
2014/15
2015/16(i)
2015/16(ii) 2016/17(iii)
916
91.79
67.30
1,091
94.69
50.00
1,221
72.87
79.30
894
47.00
50.00
962
67.56
30.20
762
68.20
0.00
738
66.37
37.90
1,119
83.98
37.90
1,318
84.05
43.70(v)
(i) The average of the Executive Directors, excluding the Group CEO.
(ii) Group CEO for the year, including remuneration received between 1 April 2015 and 31 December 2015 when in position as Chief Executive, South West Water.
(iii) Group CEO - first complete year in role.
(iv) The long-term incentive plan (LTIP) vesting percentage excludes accrued dividends which are added on vesting.
(v) The LTIP vesting percentage is an estimate as at 11 May 2017.
Comparison of CEO remuneration to employee remuneration
The table below shows the percentage change between 2015/16 and 2016/17 in base salary, benefits and annual bonus for the Group CEO (from
his appointment on 1 January 2016), and all employees.
The percentage increase in average remuneration for employees is calculated using wages and salaries (excluding share-based payments) of £157.1 million
(2015/16 £158.0 million), analysed into the three components in the table and the average number of employees of 4,799 (2015/16 4,987) both as detailed in
note 13 to the Group financial statements.
CEO remuneration
All employees
Percentage change
in salary
Percentage change
in benefits
Percentage change
in annual bonus
n/a
3.31%
n/a
0.00%
n/a
0.00%
Prior to 1 January 2016 there was no CEO of Pennon Group. The increase in remuneration for Chris Loughlin, following promotion to Group Chief Executive
Officer of Pennon from his previous position as Chief Executive, South West Water, is set out in the single total figure of remuneration table on page 89
and is not directly comparable with the general increases to all-employees across the Group. The increase in bonus outturn as a percentage of maximum
was 0.1%. The salary increase for 2017/18 is 1.5%.
93
Governance Annual report on remuneration
continued
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)
(i) Excludes non-underlying items.
2016/17
(£ million)
179.9
138.5
20.3
354.1
2015/16
(£ million)
180.0
129.5
20.3
283.7
Percentage change
-0.2%
6.9%
0.0%
24.8%
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 2016/17
The table below sets out details of share awards made in the year to Executive Directors.
Executive Director
Chris Loughlin
Susan Davy
Ian McAulay
Chris Loughlin
Susan Davy
Ian McAulay
Type of interest
Basis of award
Face value
£000
PCP
Deferred
bonus
100% of
salary
50% of
bonus
awarded
510
390
405(i)
178
119
119
Percentage
vesting at
threshold
performance
30% of
maximum
Performance
/restricted
period end date
31 March 2019
n/a
4 July 2019
(i) This award lapsed when Ian McAulay stepped down from the Board on 31 August 2016.
PCP awards were calculated using the share price at close on 29 June 2016, which was £9.20 per share. The date of grant was 1 July 2016. Deferred bonus
awards were calculated using the share price at which shares were purchased on the market on 1 July 2016 in order to satisfy the award, which was
£9.5014.
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. For 2016/17, this guideline was 100% of salary for Executive Directors. From 2017/18 the
Committee has significantly increased these guidelines to 200% of salary for both the CEO and CFO.
94
Pennon Group plc Annual Report 2017 The beneficial interests of the Executive Directors in the ordinary shares (40.7p each) of the Company as at 31 March 2017 (or date of cessation, if earlier)
and 31 March 2016 together with their shareholding guideline obligation (based on the 2016/17 guideline of 100% of salary) and interest are shown in the
table below:
Unvested awards
Share interests
(including
connected parties)
at 31 March 2017
Share interests
(including
connected parties)
at 31 March 2016
290,323
57,119
18,748
247,745
44,197
18,748
Shareholding
guideline
Shareholding
guideline met?
100%
100%
Yes
Yes
Performance
shares (subject
to performance
conditions)
153,251
100,382
SAYE
4,984
2,635
–
No longer applicable
–
–
Deferred
bonus shares
ESOS(i)
57,435
29,876
–
–
–
–
Chris Loughlin
Susan Davy(ii)
Ian McAulay(iii)
(i) Details of options that vested under the Executive Share Option Scheme (ESOS) and were exercised during the year are provided on page 97. No share options are held that are vested but
have not been exercised.
(ii) 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.
(iii) In respect of Ian McAulay:
• Share interests shown are as at 31 August 2016, being the date he stepped down from the Board
• Unvested awards made to him under the Performance and Co-investment Plan (numbering 137,831 performance awards) have lapsed.
• 33,080 deferred bonus shares were released to him following cessation of his employment on 31 December 2016. His buyout award of 16,091 deferred shares was released following the end
of the three-year restricted period, on 30 September 2016.
• His ESOS options, awarded to him on 27 August 2014, have lapsed.
Since 31 March 2017, 4,858 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 59 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 2017 and 22 May 2017.
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
Martin Angle
Neil Cooper
Gill Rider
Shares held at
31 March 2017
Shares held at
31 March 2016
10,000
–
–
2,500
10,000
–
–
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 2017 and 22 May 2017.
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 22 May 2017 is as set out below:
Discretionary schemes
All schemes
Awarded
1.48%
4.08%
Headroom
3.52%
5.92%
Total
5%
10%
95
Governance
Annual report on remuneration
continued
Details of share awards
(a) Performance and Co-investment Plan (long-term incentive plan)
In addition to the above beneficial interests, the following Directors have or had a contingent interest in the number of ordinary shares (40.7p each) of the
Company shown below, representing the maximum number of shares to which they would become entitled under the plan should the relevant criteria be
met in full:
Director and date of award
Chris Loughlin
02/07/13
14/07/14
01/07/15
01/07/16
Susan Davy(ii)
02/07/13
14/07/14
01/07/15
01/07/16
Ian McAulay(iii)
14/07/14
01/07/15
01/07/16
Conditional
awards
held at
1 April 2016
Conditional
awards made
in year
Market price
upon award
in year
Vesting
in year(i)
Value of
shares upon
vesting
(before tax)
£000
Conditional
awards
held at
31 March 2017
Date of end
of period for
qualifying
conditions
to be fulfilled
57,810
48,465
49,352
–
21,347
17,893
40,098
–
44,458
49,352
–
–
–
–
55,434
–
–
–
42,391
–
44,021
653.00p
798.50p
810.50p
920.00p
653.00p
798.50p
810.50p
920.00p
798.50p
810.50p
920.00p
24,625
–
–
–
9,093
–
–
–
–
–
–
224
–
–
–
83
–
–
–
–
–
–
–
48,465
49,352
55,434
–
17,893
40,098
42,391
–
–
–
01/07/16
13/07/17
30/06/18
30/06/19
01/07/16
13/07/17
30/06/18
30/06/19
13/07/17
30/06/18
30/06/19
(i) 37.9% of the July 2013 award shares vested on 1 July 2016 at a market price of 911.24p per share. The total number of shares that vested included additional shares equivalent in value to such
number of shares as could have been acquired by reinvesting the dividends which would otherwise have been received on the vested shares during the restricted period of three years. The
balance of the award lapsed.
(ii) 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.
(iii) Ian McAulay’s share awards lapsed upon his stepping down from the Board on 31 August 2016.
96
Pennon Group plc Annual Report 2017 Payments to past Directors
David Dupont, who retired as an Executive Director of the Company on 31 January 2015, remained entitled to a pro rata share of the PCP award made
on 2 July 2013, his entitlement reflecting the proportion of the restricted period he was employed by the Company. 37.9% of the PCP award made on
2 July 2013 vested on 1 July 2016 and David Dupont received this award, together with additional shares to the value of accrued dividends on such shares,
pro rated on the same basis as the award shares, amounting in total to 12,996 shares valued at £118,425 at the date of vesting. The award made to
David Dupont on 14 July 2014 lapsed in its entirety, due to his retirement being before the financial year end of the year in which the award was made.
(b) Annual Incentive Bonus Plan – deferred bonus shares (long-term incentive element)
The following Directors had or have a contingent interest in the number of ordinary shares (40.7p each) of the Company shown below, representing the
total number of shares to which they have or would become entitled under the deferred bonus element of the Annual Incentive Bonus Plan (the bonus
plan) at the end of the relevant qualifying period:
Director and date of award
Conditional
awards
held at
1 April 2016
Conditional
awards made
in year
Market
price of each
share upon
award in year
Chris Loughlin
05/08/13
27/08/14
27/07/15
04/07/16
Susan Davy(i)
05/08/13
27/08/14
27/07/15
04/07/16
Ian McAulay
30/09/13
27/08/14
27/07/15
04/07/16
16,978
19,552
19,124
–
7,555
7,543
9,809
–
16,091
7,775
12,779
–
–
–
18,759
–
–
12,524
–
–
12,526
693.00p
821.50p
791.00p
950.14p
693.00p
821.50p
791.00p
950.14p
696.00p
821.50p
791.00p
950.14p
Value of
shares upon
vesting
(before tax)
£000
Conditional
awards
held at
31 March 2017
Date of end
of period for
qualifying
conditions
to be fulfilled
141
–
–
–
58
–
–
–
150
63
104
102
–
19,552
19,124
18,759
–
7,543
9,809
12,524
–
–
–
–
04/08/16
26/08/17
26/07/18
03/07/19
04/08/16
26/08/17
26/07/18
03/07/19
29/09/16
26/08/17
26/07/18
03/07/19
Vesting
in year
16,040(ii)
–
–
–
6,617(ii)
–
–
–
18,087(iii)
7,775(iv)
12,779(iv)
12,526(iv)
(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 were released on 25 August 2016 at 882.01p per share. Executive share options granted in 2013 pursuant to the ESOS, in conjunction with the operation of the annual bonus
plan, were exercised by the Directors on 18 August 2016. Further details are provided below. Deferred bonus shares equivalent in value to the gain on the ESOS options were forfeited.
(iii) Ian McAulay’s buyout award was released at the end of the three-year restricted period, on 30 September 2016, at 827.00p per share. In addition, 1,996 shares were issued, being the number
of shares that could have been acquired with the amount of each cash dividend on the released shares during the restricted period.
(iv) These shares were released on 6 January 2017 following cessation of Ian McAulay’s employment on 31 December 2016, at 815.55p per share. ESOS options granted in conjunction with
Ian McAulay’s 2014 bonus award lapsed upon his stepping down from the Board on 31 August 2016.
During the year the Directors received dividends on the above shares in accordance with the conditions of the bonus plan as follows:
Chris Loughlin £23,026*; Susan Davy £11,259; Ian McAulay £9,798.
* 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. 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 95.
(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. Under the Company’s new remuneration policy, the ESOS has been removed and executive share options are no longer offered in
conjunction with deferred bonus shares.
Date of award
Chris Loughlin
05/08/13
Susan Davy(i)
05/08/13
Ian McAulay(ii)
27/08/14
Options
held at
1 April 2016
Granted
in year
Exercised
in year
Exercise
price
per share
Market price
of each share
on exercising
Options
held at
31 March 2017
Maturity
date
4,329
4,329
3,651
–
–
–
4,329
4,329
693.00p
884.5p
693.00p
884.5p
–
821.50p
–
–
–
–
–
–
–
(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 retained an interest in her
position as Chief Financial Officer.
(ii) Ian McAulay’s ESOS options lapsed following his stepping down from the Board on 31 August 2016.
97
Governance Annual report on remuneration
continued
(d) Sharesave scheme
Details of options to subscribe for ordinary shares (40.7p each) of the Company under the all-employee Sharesave scheme were:
Date of award
Chris Loughlin
03/07/13
24/06/15
Susan Davy
24/06/15
Options
held at
1 April 2016
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 2017
Options
held at
31 M§arch 2017
Exercise
period/
maturity date
2,788
2,196
2,635
–
–
–
–
–
–
538.00p
683.00p
683.00p
–
–
–
811.00p
811.00p
2,788
2,196
01/09/18 – 28/02/19
01/09/20 – 28/02/21
811.00p
2,635
01/09/18 – 28/02/19
The Remuneration Committee and its advisers
Martin Angle (Committee chairman), Neil Cooper and Gill Rider were members of the Committee throughout the year and at any time when the Committee
considered any matter relating to Directors’ remuneration during the year.
During the year the Committee received advice or services which materially assisted the Committee in the consideration of remuneration matters from Sir
John Parker (Chairman of the Board), Helen Barrett-Hague (Group General Counsel and Company Secretary), Adele Barker (interim Group director of
Human Resources), and from Deloitte LLP. Deloitte LLP was appointed directly by the Committee.
Deloitte LLP assisted in the remuneration policy review for Executive Directors and in calculating the Company’s total shareholder return compared with
two comparator groups for the Company’s long-term incentive plan, as well as providing advice on remuneration trends and market practice. Deloitte LLP’s
fees in respect of advice which materially assisted the Committee during 2016/17 were £88,330 (arrived at from an hourly rate basis of charging). During
the year, Deloitte LLP also provided tax, corporate finance and risk advisory services to the Group. Deloitte LLP is a member of the Remuneration
Consultants Group and as such voluntarily operates under the code of conduct in relation to executive remuneration consulting in the UK. The Committee
is satisfied that the advice it has received from Deloitte LLP has been objective and independent.
Statement of voting at general meeting
The table below sets out the voting by the Company’s shareholders on the resolution to approve the Directors’ remuneration report at the Annual General
Meeting held on 1 July 2016, including votes for, against and withheld.
Annual report on remuneration (2016 AGM)
For % (including votes at the Chairman’s discretion)
Against %
Withheld number
Remuneration policy (2014 AGM)
For % (including votes at the Chairman’s discretion)
Against %
Withheld number
97.49
2.51
218,770
97.11
2.89
264,354
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 97% of shareholders who voted approved the 2015/16 Directors’ remuneration report.
The Committee appreciates the continuing support of its shareholders.
98
Pennon Group plc Annual Report 2017 Directors’ remuneration report compliance
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.
On behalf of the Board
Martin D Angle
Chairman of the Remuneration Committee
23 May 2017
99
Governance 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 54 to 73 and 100 to 103 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 46 of the strategic report)
• likely future developments of the Company (pages 24 and 25
of the strategic report)
• important post-balance sheet events (page 25 of the
strategic report)
• certain employee matters (page 18 and 19 of the strategic report),
as well as the disclosures below.
In addition, there are a number of disclosures which are included in
the Directors’ report by reference, including:
• financial risk management (note 3 of the notes to the
financial statements)
• financial instruments (page 42 of the strategic report and
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 56 and 57. In addition,
Ian McAulay, who was Chief Executive, Viridor, and an Executive
Director of Pennon Group plc, served during the year until his
resignation from the Board on 31 August 2016.
Financial results and dividend
The Directors recommend a final dividend of 24.87 pence per ordinary
share to be paid on 1 September 2017 to shareholders on the register
on 7 July 2017, making a total dividend for the year of 35.96 pence,
the cost of which will be £149.5 million, resulting in a transfer to
reserves of £14.8 million. The strategic report on pages 38 to 45
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 18.
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 71, and information
regarding the diversity of the workforce is provided on page 19.
Employees are consulted regularly about changes which may affect
them either through their trade union-appointed representatives,
through consultation groups or by means of the elected staff council
which operates in South West Water for staff employees.
These forums, together with regular meetings with particular groups
of employees, are used to ensure that employees are kept up to date
with the business performance of their employer and the financial and
economic factors affecting the performance of the Group. The Group
also cascades information monthly to all employees to provide them
with important and up to date information about key events and to
obtain feedback from them. Further information about employment
matters relating to the Group is set out on pages 18 and 19 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 2017 around 41% of the Group’s
employees were participating in these plans.
Greenhouse gas emissions
Change in emissions
Gross greenhouse gas emissions for the Group this year increased by
14%, primarily as a result of Viridor’s newly commissioned energy
recovery facilities reaching their full operating capacity.
100
Pennon Group plc Annual Report 2017 Viridor’s energy recovery facilities burn waste that would otherwise
have gone to landfill. This has the double benefit of extracting more of
the energy embedded in the waste and substituting energy generated
from other, predominantly fossil fuel, sources. There has been a 4%
reduction year-on-year in emissions from the Group’s landfill sites and
a similar percentage increase in renewable energy generation across
the Group.
All Group companies benefitted from a reduction in the UK’s average
electricity grid emissions conversion factor which fell sharply by 11%
between 2015/16 and 2016/17. This resulted in an overall reduction in
the Group’s Scope 2 emissions over the year and saw both South West
Water and Bournemouth Water record lower overall emissions than in
the previous year.
South West Water recorded an increase in emissions from energy
usage associated with the provision of drinking water services driven
by an unusually dry year. The company’s water resources models
signalled the need to protect water resources that would normally be
topped-up naturally from rainfall. As a result additional raw water was
pumped into reservoirs over the winter period to ensure sufficient
water supplies would be available for the subsequent summer period.
A corresponding reduction in emissions from energy usage was seen
in the waste water side of the business as the lack of rainfall meant
less surface water run-off ended up in the sewer system and needed
to be pumped.
For the second year in succession the Group’s gross Scope 1 and 2
emissions are growing at a faster rate than our revenue.
This is reflected in the emissions intensity measure we use of
tCO2e/£100,000 revenue. This indicator has increased this
year from 112tCO2e/£100,000 to 127tCO2e/£100,000.
Methodology and approach
We have adopted the ‘equity share’ approach for Viridor 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 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.
‘Market’ and ‘Location’ based methodology
In 2015 the Greenhouse Gas Protocol introduced the ‘market-based’
and ‘location-based’ methodologies for reporting Scope 2 emissions
from imported energy. This change of reporting guidance allows
organisations that contractually purchase electricity from generators
where the supply is backed by appropriate certificates or other
instruments to use an emission factor that is specific to the electricity
being purchased. No such qualifying supply was procured by Pennon
Group companies for 2016/17 and therefore we have decided to
continue to report using only the location-based methodology this
year, we intend to review this approach again next year.
Organisational boundary
The emissions listed here cover the Pennon Group of companies, each
of which uses the financial control approach, except where Viridor use
an equity share approach where a joint venture exists.
Operational Scopes
We have measured our Scope 1, 2 and certain Scope 3 emissions
where information is available.
Intensity measurement
We have chosen an intensity measure of Scope 1 and 2 gross
emissions in tCO2e per £100,000 revenue
External assurance statement
Our greenhouse gas emissions data has been independently verified
by Strategic Management Consultants. Certain aspects that relate
to the disclosures of South West Water and Bournemouth Water’s
emissions have been subject to an independent audit of regulatory
data conducted by CH2M. The assumptions methods and procedures
that are followed in the development of the reported data have been
tested and the data audited for accuracy and consistency.
Carbon offsets
We rely on self-generated renewable energy to reduce our overall
Scope 2 emissions and 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 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.
Pennon Group plc greenhouse gas emissions
Scope 1
Scope 2
Scope 3
Total gross emissions
Green tariff electricity offset
Exported renewable energy reduction
(up to total amount of electricity
purchased and consumed by
organisation)
Total annual net emissions
Biogenic emissions outside
of scopes
Intensity measure: tCO2e
(gross Scope 1+2)/£100,000 revenue
2016/17
1,576,428
144,707
60,760
1,781,895
(1,774)
2015/16
1,351,192
157,089
56,764
1,565,044
(2,041)
(142,933)
1,637,188
(155,048)
1,407,955
1,692,423
1,767,878
127.1
112
Scope 1 (direct emissions) Activities owned or controlled by our organisation that
release emissions straight into the atmosphere, for example the combustion of fuels in
company-owned and controlled stationary equipment and transportation, emissions from
site based processes and site-based fugitive emissions.
Scope 2 (indirect emissions) Emissions released into the atmosphere associated with
our consumption of purchased electricity, heat, steam and cooling. These are indirect
emissions that are a consequence of our activities but which occur at sources we do not
own or control.
Scope 3 (other indirect emissions) Emissions that are a consequence of our actions,
which occur at sources which we do not own or control and which are not classed as
Scope 2 emissions.
101
Governance Directors’ report –
other statutory disclosures
continued
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 2017:
a)
b)
c)
d)
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.
In addition, we have 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 our anti-slavery
and human trafficking web-based statement for the year is available
at www.pennon-group.co.uk.
Research and development
Research and development within the Group involving water and
waste treatment processes amounted to £0.2 million during the
year (2015/16 £0.1 million).
Overseas branches
The Company has no overseas branches.
Pennon Group donations
During 2016/17 the Group provided a total of £136,000 in
charitable donations
No political donations were made or political expenditure incurred and
no contributions were made to a non-EU political party (2015/16 nil).
e)
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 2016), which was valid as at 31 March 2017 and remains currently
valid. No purchases were made during the year. As at 1 April 2016,
10,356 shares were held in treasury, with a nominal value of £4,215
and representing 0.003% of issued share capital. 1,913 treasury shares
representing 0.0005% of issued share capital as at 1 April 2016 were
reissued during the year under the Company’s Executive Share Option
Scheme for proceeds of £13,257.
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;
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;
Details of significant direct or indirect holdings of securities of
the Company are set out in the shareholder analysis on page 175.
The Company is not aware of any agreements between
shareholders which may result in restrictions on the transfer of
securities or on voting rights;
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;
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) £55,978,817 (such amount to be reduced by
any shares allotted or rights granted under (ii) below in excess of
£55,978,817); and (ii) £111,957,635 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 2016
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;
102
Pennon Group plc Annual Report 2017 Each of the Directors, whose names and functions are listed on pages
56 and 57, confirms that, to the best of his or her knowledge:
i)
ii)
iii)
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.
The strategic report (pages 1 to 51) and the Directors’ report
(pages 100 to 103) 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.
Following receipt of advice from the Audit Committee, that the
annual report, taken as a whole, is fair, balanced and
understandable, and provides the information necessary for the
shareholders to assess the Group’s performance, business model
and strategy.
The Directors are responsible for the maintenance and integrity of
the Company’s website www.pennon-group.co.uk.
Legislation in the United Kingdom governing the preparation and
dissemination of financial statements may differ from legislation in
other jurisdictions.
Statement as to disclosure of information to
the auditor
i)
So far as each of the Directors in office at the date of the signing
of the report is aware, there is no relevant audit information of
which the Company’s auditor is unaware; and
ii)
each of the Directors has taken all the steps each Director ought
to have taken individually as a Director in order to make himself
or herself aware of any relevant audit information and to establish
that the Company’s auditor is aware of that information.
The Directors’ report consisting of pages 54 to 73 and 100 to 103 was
approved by the Board on 23 May 2017.
By Order of the Board
Helen Barrett-Hague
Group Company Secretary
23 May 2017
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.
Statement of Directors’ responsibilities
The Directors are responsible for preparing the annual report, the
Directors’ remuneration report and the financial statements in
accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements
for each financial year. Under that law the Directors have prepared
the Group and Company financial statements in accordance with
International Financial Reporting Standards (IFRSs) as adopted by
the European Union.
Under company law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair view
of the state of affairs of the Group and the Company and of the profit
or loss of the Group for the year.
In preparing these financial statements the Directors are required to:
• select suitable accounting policies and then apply
them consistently
• make judgements and accounting estimates which are
reasonable and prudent
• state whether applicable IFRSs as adopted by the European
Union have been followed, subject to any material departures
disclosed and explained in the financial statements.
The Directors confirm that they have complied with the above
requirements in preparing the financial statements.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company’s
transactions, and disclose with reasonable accuracy at any time the
financial position of the Group and the Company; and enable them to
ensure that the financial statements and the Directors’ remuneration
report comply with the Companies Act 2006 and, as regards the
Group financial statements, Article 4 of the International Accounting
Standards (IAS) Regulation. They are also responsible for
safeguarding the assets of the Group and the Company and hence for
taking reasonable steps for the prevention and detection of fraud and
other irregularities.
103
Governance Pennon Group plc Annual Report 2017
Our business continues to
grow supported by ongoing
investment in our assets
This includes improving and future
proofing our services with projects
such as the Mayflower Water
Treatment Works in Plymouth
and generating growth through
the expansion of our fleet of
Energy Recovery Facilities with four
new plants due to be operational
in Avonmouth, Beddington,
Dunbar and Glasgow by 2020.
£191m
Capital investment in South
West Water up from £134.1m
in previous year
£195m
Capital investment in
Viridor up from £182.8m
in previous year
Skelmersdale
Recycling Facility
104
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
n
F
i
Financial statements and
shareholder information
106
Independent auditor’s report
114
173
174
Financial statements
Five-year financial summary
Shareholder information
Continued
investment
in our assets
105
Independent auditor’s report to
the members of Pennon Group plc
Our opinion on the 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 2017 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 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
Consolidated income statement
Consolidated statement of comprehensive income
Balance sheet
Statement of changes in equity
Cash flow statement
Parent Company
Balance sheet
Statement of changes in equity
Cash flow statement
Related notes 1 to 44 to the financial statements
Related notes 1 to 44 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
• 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)
• Completeness of provisions for uncertain tax positions and tax disclosures (Group, including SWW & Viridor).
• We performed a full scope audit of three components
• The components where we performed full scope audit procedures accounted for 100% of Profit before taxation
before non-underlying items, 100% of Revenue and 96% of Total assets.
• Overall Group materiality of £12.5 million which represents approximately 5% of Profit before taxation before
non-underlying items.
Risks of material misstatement
Audit scope
Materiality
106
Pennon Group plc Annual Report 2017 Our assessment of risks of material misstatement
We identified the risks of material misstatement described below
as those that had the greatest effect on our overall audit strategy;
the allocation of resources in the audit; and direction of the efforts
of the audit team. 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.
Risk
Risk direction Our response to the risk
Valuation of non-current assets (Viridor)
Refer to the Audit Committee report (page 63);
accounting policies (page 119); and note 17 of the
consolidated financial statements (page 139)
The net book value of Viridor’s property, plant and
equipment is £1,121 million (2016: £1,012 million),
as included in note 17. The Group is required to
review the carrying value of assets when
impairment indicators are identified. There is
risk that assumptions and judgements used by
management in determining whether there are any
impairment indicators, or in performing impairment
reviews when required, could be susceptible to
management bias.
During the year, as part of the Group-wide Shared
Services Review, a decision to rationalise systems
resulted in the derecognition of system related
assets and a related charge to the income
statement of £9.5 million.
There is a risk that judgements used to calculate
the derecognition charge could include
management bias.
Valuation of landfill related provisions
(Viridor)
Refer to the Audit Committee report (page 63);
accounting policies (page 119); and note 32 of the
consolidated financial statements (page 157)
Landfill related provisions of £183.8 million (2016:
£182.1 million) are disclosed 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 is a
key estimate for the remediation provision.
There is a risk that provisions could be misstated
due to the complexity of factors to be assessed
and if assumptions applied by management are
inappropriate, including the impact of any
management bias.
Our procedures include:
• We read management’s paper on impairment indicators
for other non-current assets, and evaluated whether
indicators have been appropriately considered and
assessed judgements for evidence of management bias
• We compared the current year performance of Viridor
with the forecasts produced in the prior year to
corroborate management’s assessment in relation to
indicators of impairment
• We inspected other external publicly available
information on sector developments, such as EU led
recycling targets, to corroborate management’s
assessment relating to indicators of impairment
• We obtained management’s analysis of the
asset derecognition costs and discussed with
management the methods applied to allocate costs and
assess enduring values of the assets
• We tested a sample of supporting information, including
breakdowns of costs incurred, and documentation
relating to process design and specification, to evidence
the key judgements made by management in calculating
the asset derecognition charge
• We reperformed management’s calculation of the
derecognition charge to test for arithmetical accuracy
• We tested whether the amounts retained in non-current
assets reflected items that have a continuing use in the
business by agreeing to supporting documentation, on a
sample basis
• We agreed whether disclosures made, both in the
respect of the consideration of impairment and of the
derecognition charge, are in accordance with IFRS.
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 material estimates made for evidence
of management bias, including agreeing anticipated
cost savings to detailed plans and current performance
• We benchmarked the discount and inflation 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 performed sensitivity analysis on these
key assumptions
• We tested the aftercare, restoration and remediation
provision models, and verified that the models are
arithmetically accurate
• We compared the key assumptions used in the current
models to those used in the prior year, and obtained
evidence to corroborate that changes were appropriate.
This included obtaining evidence to support the impact
of future planned technological changes
• We tested the appropriateness of journal entries
impacting landfill related provisions, particularly those
raised close to the balance sheet date.
Key observations communicated
to the Audit Committee
We concluded that the
assessment performed by
management to identify any
impairment indicators is
appropriate. We concur with
management’s conclusion that
no indicators exist at the balance
sheet date.
We concluded that, based on
the evidence obtained we concur
with the approach adopted and
the charge recorded in the
income statement.
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.
107
Financial statements Key observations communicated
to the Audit Committee
South West 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.
Independent auditor’s report to
the members of Pennon Group plc
continued
Risk
Risk direction Our response to the risk
Our procedures include:
South West 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 relating to 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 assessed whether there were any other billing
runs for unmeasured revenue that should be excluded
from 2016/17 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 revenue was recognised at the
correct time in accordance with IFRS
• We performed analytical procedures by comparing
revenue balances for the year against expectation and
obtaining support for significant variances
• We tested a sample of transactions to underlying bills for
•
both types of revenue
In performing our journal testing, we paid increased
attention to entries impacting revenue, focusing on
non-system postings and those raised in the last two
weeks of the year.
Revenue recognition across the
Group’s operations
Refer to the Audit Committee report (page 63);
accounting policies (page 119); and note 2 of the
consolidated financial statements (page 120)
The Group’s material revenue streams relate to the
provision of water and sewerage services by South
West Water and revenue generated from
the renewable energy, recycling and
waste management services provided by Viridor.
ISAs (UK & Ireland) presume there is a risk of fraud
relating to revenue recognition. For the Group,
given targets associated to financial performance
and pressures to meet market expectations, there
is an incentive to overstate revenue. This risk over
revenue recognition specifically arises in the
following judgemental areas, where there is
opportunity to overstate revenue:
South West Water
• Income from measured water services requires
an estimation of the amount of unbilled charges
at the year end. This is calculated using a
combination of system generated information,
based on previous customer volume usage,
together with management judgements as to
the likely impact on usage of factors such as
recent weather patterns. The accrued
income balance at 31 March 2017 is £72.2 million
(2016: £67.8 million)
• For unmeasured revenue, the bills for each
calendar year are raised in advance for the next
financial year. 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.
108
Pennon Group plc Annual Report 2017 Key observations communicated
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
Risk direction Our response to the 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 based on
appropriate assessment of the margin earned
during the construction period and during the
operational period. The determination of the
margin allocated during the different phases
of each service concession may involve
management judgement
• Recognising revenue in the correct period for
invoices raised close to the balance sheet date
may involve management judgement.
Valuation of the provision for doubtful
debts (South West Water)
Refer to the Audit Committee report (page 63);
accounting policies (page 119); and note 22 of the
consolidated financial statements (page 145)
As shown in note 22, there is a provision of
£102.6 million (2016: £95.6 million) at the year
end against gross trade debtors of £326.1 million
(2016: £303.6 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.
During the year management has performed
a data mining exercise to refresh the detailed
collection data by category of debt.
There is a risk that the assumptions used by
management in calculating the bad debt provision
may be susceptible to management bias and the
valuation of the provision against trade receivables
may be misstated.
Viridor
• We compared the key assumptions and estimates to
those made by management in recognising revenue
in the prior year. We analysed revenue trends and
corroborated unusual movements. We obtained
customer confirmations for a sample of revenue
• For material items within accrued income we
reperformed the calculation of the income that had been
earned on waste management contracts and powergen
revenue to confirm the accuracy of the accrued income
recorded by management
• We tested the application of IFRIC12 in respect of
construction revenue recognised and whether margins
used to recognise revenue are reasonable based on the
models used for each contract and comparing the
margins to those generated in prior years and to latest
projections for future years
• We agreed whether the revenue recognition policies
adopted comply with IFRSs
• 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
In performing our journal testing, we paid increased
attention to entries impacting revenue, particularly
those raised close to the balance sheet date.
•
Our procedures include:
• We performed a walkthrough of the process for
calculating the bad debt provision and assessed the
design effectiveness of key controls.
• We tested the operating effectiveness of key 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,
including assessing assumptions for evidence of
management bias
• We tested the appropriateness of journal entries and
adjustments impacting the doubtful debt provision,
particularly those raised close to the balance sheet date.
109
Financial statements Independent auditor’s report to
the members of Pennon Group plc
continued
Risk
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 opinions management was
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 our 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 the settlement proposal
agreed with HMRC and consideration of other open
uncertain tax positions
• 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.
Completeness of provisions for uncertain
tax positions and related tax disclosures
(Group, including SWW & Viridor)
Refer to the Audit Committee report (page 63);
accounting policies (page 119); and note 27 of the
consolidated financial statements (page 148)
The Group’s current tax liability of £26.8 million
(2016: £37.1 million) shown in note 27, includes
£18.6 million (2016: £37.1 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.
In prior periods, significant management
judgement has been required in estimating tax
expected to be paid in respect of these open
periods. However, during the year, the Group has
reached resolution with HMRC on a number of
areas. This has reduced the level of uncertainty
over the year end tax liability and therefore the risk
of material misstatement has reduced.
Key observations communicated
to the Audit Committee
We concluded that the
Group has recorded an
appropriate provision for
uncertain tax positions.
We concluded that the tax
amounts and disclosures
in the Annual Report and
Accounts for the year ended
31 March 2017 are appropriate.
110
Pennon Group plc Annual Report 2017 In the prior year, our auditor’s report included a risk of material
misstatement in relation to valuation of goodwill. In the current year,
we concluded the likelihood of material misstatement has reduced
as a further year of experience has provided management with more
confidence that the business plan will be met, and the impairment
test is less sensitive to changes in assumptions.
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.
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 five reporting
components of the Group, we performed an audit of the complete
financial information of three components (‘full scope components’)
which were selected based on their size or risk characteristics.
These components include Pennon Group plc, Viridor and South West
Water, and represent the principal business units within the Group.
For the current year, the full scope components contributed
100% (2016: 100%) of the Group’s profit before taxation before
non-underlying items, 100% (2016: 100%) of the Group’s Revenue
and 96% (2016: 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, has merged with South West Water and therefore balances
are included within the South West Water component, which was
designated as full scope for the current year audit. The second change
was that the scope determined for Peninsula Insurance was changed
from review scope to other procedures, reflecting the fact that, with
the growth in Group activities, including profit before taxation before
non-underlying items, this component is less than 1% of the Group.
Involvement with component teams
We perform audit procedures for the Group and its components at the
South West Water and Viridor locations. The audit teams of Pennon
Group plc and South West Water are led by the same audit partner.
A separate team audits Viridor and is led by a separate audit partner.
The Group 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.
We determined materiality for the Group to be £12.5 million (2016:
£10 million), which is 5% (2016: 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
Adjustments
Materiality
Reported profit before taxation £210.5 million
(2016: £206.3 million).
Non-underlying items – increase basis by
£39.5 million (2016: £5.0 million).
Totals £250.0 million (2016: £211.3 million) profit
before taxation before non-underlying items.
Materiality of £12.5 million (5% of profit before
taxation before non-underlying items).
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% (2016: 75%) of our planning
materiality, namely £9.4 million (2016: £7.5 million). This is based on
our assessment of the Group’s internal control environment and the
extent and nature of audit findings identified in the prior period and
is consistent with the prior year.
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
£4.4 million to £8.4 million (2016: £1.5 million to £7.1 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 £0.6 million (2016:
£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
111
Financial statements Independent auditor’s report to
the members of Pennon Group plc
continued
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 103, 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.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion:
• the part of the Directors’ Remuneration Report to be audited has
been properly prepared in accordance with the Companies Act
2006; and
• based on the work undertaken in the course of the audit:
– the information given in the Strategic Report and the Directors’
Report for the financial year for which the financial statements
are prepared is consistent with the financial statements;
– the Strategic Report and the Directors’ Report have been
prepared in accordance with applicable legal requirements.
Matters on which we are required to report by exception
ISAs (UK and Ireland) reporting
Companies Act 2006 reporting
We are required to report to you if, in our opinion, financial and non-financial
information in the annual report is:
• materially inconsistent with the information in the audited financial statements; or
• apparently materially incorrect based on, or materially inconsistent with, our
knowledge of the Group acquired in the course of performing our audit; or
• 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.
In light of the knowledge and understanding of the Company and its environment
obtained in the course of the audit, we have identified no material misstatements in
the Strategic Report or Directors’ Report.
We are required to report to you if, in our opinion:
We have no exceptions to report.
We have no exceptions to report.
• 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
Listing Rules review requirements We are required to review:
We have no exceptions to report.
• 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.
•
•
the directors’ statement in relation to going concern, set out on page 103, and
longer-term viability, set out on page 51; 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.
112
Pennon Group plc Annual Report 2017 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 nothing material to add or to draw
attention to.
•
•
•
•
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
23 May 2017
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
Financial statements Consolidated income statement
For the year ended 31 March 2017
Before
non-underlying
items
2017
£m
1,353.1
Notes
5
7
(179.7)
(115.8)
(571.6)
486.0
(181.4)
304.6
36.3
(95.1)
(58.8)
4.2
250.0
(58.4)
191.6
175.4
16.2
5
7
5
8
8
8
20
5
9
11
Non-underlying
items (note 6)
2017
£m
–
(1.1)
–
(9.6)
(10.7)
–
(10.7)
16.0
(44.8)
(28.8)
–
(39.5)
28.4
(11.1)
(11.1)
–
Revenue
Operating costs
Employment costs
Raw materials and consumables used
Other operating expenses
Earnings before interest, tax, depreciation and
amortisation
Depreciation and amortisation
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
Consolidated statement of comprehensive income
For the year ended 31 March 2017
Notes
30
9, 31
20
9, 31
36
Profit for the year
Other comprehensive (loss)/ income
Items that will not be reclassified to profit or loss
Remeasurement of defined benefit obligations
Income tax on items that will not be reclassified
Total items that will not be reclassified to profit
or loss
Items that may be reclassified subsequently to
profit or loss
Share of other comprehensive income from
joint ventures
Cash flow hedges
Income tax on items that may be reclassified
Total items that may be reclassified subsequently
to profit or loss
Other comprehensive (loss)/ income for the
year net of tax
Total comprehensive income for the year
Total comprehensive income attributable to:
Ordinary shareholders of the parent
Perpetual capital security holders
The notes on pages 119 to 172 form part of these financial statements.
Before
non-underlying
items
2017
£m
Non-underlying
items (note 6)
2017
£m
191.6
(11.1)
(23.6)
4.7
(18.9)
0.3
4.9
(1.0)
4.2
(14.7)
176.9
160.7
16.2
–
(1.4)
(1.4)
–
–
(0.3)
(0.3)
(1.7)
(12.8)
(12.8)
–
Before
non-underlying
items
2016
£m
Non-underlying
items (note 6)
2016
£m
1,352.3
(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
–
(8.6)
–
(1.6)
(10.2)
–
(10.2)
5.2
–
5.2
–
(5.0)
34.1
29.1
29.1
–
Before
non-underlying
items
2016
£m
Non-underlying
items (note 6)
2016
£m
139.2
29.1
(2.6)
0.6
(2.0)
2.4
5.0
(1.0)
6.4
4.4
143.6
127.4
16.2
–
(3.0)
(3.0)
–
–
(0.8)
(0.8)
(3.8)
25.3
25.3
–
Total
2017
£m
1,353.1
(180.8)
(115.8)
(581.2)
475.3
(181.4)
293.9
52.3
(139.9)
(87.6)
4.2
210.5
(30.0)
180.5
164.3
16.2
39.8
39.6
Total
2017
£m
180.5
(23.6)
3.3
(20.3)
0.3
4.9
(1.3)
3.9
(16.4)
164.1
147.9
16.2
Total
2016
£m
1,352.3
(188.6)
(114.7)
(610.8)
438.2
(186.6)
251.6
47.3
(96.2)
(48.9)
3.6
206.3
(38.0)
168.3
152.1
16.2
37.0
36.9
Total
2016
£m
168.3
(2.6)
(2.4)
(5.0)
2.4
5.0
(1.8)
5.6
0.6
168.9
152.7
16.2
114
Pennon Group plc Annual Report 2017 Balance sheets
At 31 March 2017
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
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
2017
£m
Notes
15
16
17
19
31
23
20
20
21
22
23
25
28
24
23
26
27
32
28
29
24
23
30
31
32
33
34
35
36
37
385.0
67.1
4,103.2
308.0
–
73.6
–
0.1
4,937.0
21.3
340.8
14.1
598.1
974.3
(146.5)
(2.4)
(17.3)
(286.5)
(26.8)
(40.4)
(519.9)
454.4
(3,116.5)
(180.7)
(48.4)
(25.2)
(68.0)
(269.6)
(173.8)
(3,882.2)
1,509.2
168.4
217.4
144.2
684.4
1,214.4
294.8
1,509.2
2016
£m
385.0
63.8
3,897.3
267.8
–
62.7
–
0.1
4,676.7
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
(3,051.6)
(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
Company
2017
£m
–
–
0.2
1,011.6
2.3
3.1
1,624.2
–
2,641.4
–
127.3
1.1
372.5
500.9
(357.8)
–
(2.1)
(6.3)
(37.9)
–
(404.1)
96.8
(848.2)
(53.0)
(1.4)
(1.3)
(4.1)
–
–
(908.0)
1,830.2
168.4
217.4
144.2
1,005.4
1,535.4
294.8
1,830.2
The profit for the year attributable to ordinary shareholders’ equity dealt within the accounts of the parent Company is £162.9 million (2016 £91.4 million).
The notes on pages 119 to 172 form part of these financial statements.
The financial statements on pages 114 to 172 were approved by the Board of Directors and authorised for issue on 23 May 2017 and were signed on its behalf by:
Chris Loughlin, Chief Executive Officer Pennon Group plc
Registered Office: Peninsula House, Rydon Lane, Exeter, Devon, England EX2 7HR. Registered in England Number 2366640.
2016
£m
–
–
0.1
905.5
2.2
1.3
1,628.3
–
2,537.4
–
77.4
0.5
429.7
507.6
(287.2)
–
(2.7)
(5.9)
(53.5)
–
(349.3)
158.3
(877.1)
(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
115
Financial statements Statements of changes in equity
For the year ended 31 March 2017
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
Group
At 1 April 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 reissued
Proceeds from shares issued under the Sharesave Scheme
Total transactions with equity shareholders
At 31 March 2016
Profit for the year
Other comprehensive loss for the year
Total comprehensive income for the year
Transactions with equity shareholders:
Dividends paid
Adjustment for shares issued under the Scrip Dividend Alternative
Adjustment in respect of share-based payments (net of tax)
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 shares issued under the Executive Share Option
Scheme
Proceeds from shares issued under the Sharesave Scheme
Total transactions with equity shareholders
At 31 March 2017
The notes on pages 119 to 172 form part of these financial statements.
162.4
–
–
–
–
0.3
–
4.9
–
–
–
–
–
0.2
5.4
167.8
–
–
–
–
0.3
–
–
–
0.1
–
0.2
0.6
168.4
118.6
–
–
–
–
(0.3)
–
95.4
(2.3)
–
–
–
–
1.9
94.7
213.3
–
–
–
–
(0.3)
–
–
–
1.2
0.2
3.0
4.1
217.4
144.2
–
–
–
–
–
–
–
–
–
–
–
–
–
–
144.2
–
–
–
–
–
–
–
–
–
–
–
–
144.2
634.1
152.1
0.6
152.7
(129.5)
6.3
2.5
–
–
–
–
(1.1)
2.5
–
(119.3)
667.5
164.3
(16.4)
147.9
(138.5)
6.9
3.2
–
–
(2.6)
–
–
(131.0)
684.4
294.8
16.2
–
16.2
–
–
–
–
–
(20.3)
4.1
–
–
–
(16.2)
294.8
16.2
–
16.2
–
–
–
(20.3)
4.1
–
–
–
(16.2)
294.8
Total
equity
£m
1,354.1
168.3
0.6
168.9
(129.5)
6.3
2.5
100.3
(2.3)
(20.3)
4.1
(1.1)
2.5
2.1
(35.4)
1,487.6
180.5
(16.4)
164.1
(138.5)
6.9
3.2
(20.3)
4.1
(1.3)
0.2
3.2
(142.5)
1,509.2
116
Pennon Group plc Annual Report 2017 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
Company
At 1 April 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 reissued
Proceeds from shares issued under the Sharesave Scheme
Total transactions with equity shareholders
At 31 March 2016
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
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
Own shares acquired by the Pennon Employee Share Trust in respect
of share options granted
Proceeds from shares issued under the Executive Share Option
Scheme
Proceeds from shares issued under the Sharesave Scheme
Total transactions with equity shareholders
At 31 March 2017
The notes on pages 119 to 172 form part of these financial statements.
162.4
–
–
–
–
0.3
4.9
–
–
–
–
–
–
0.2
5.4
167.8
–
–
–
–
0.3
–
–
–
–
–
0.1
0.2
0.6
168.4
118.6
–
–
–
–
(0.3)
95.4
(2.3)
–
–
–
–
–
1.9
94.7
213.3
–
–
–
–
(0.3)
–
–
–
–
0.2
1.2
3.0
4.1
217.4
144.2
–
–
–
–
–
–
–
–
–
–
–
–
–
–
144.2
–
–
–
–
–
–
–
–
–
–
–
–
–
144.2
1,005.9
91.4
(0.4)
91.0
(129.5)
6.3
–
–
–
–
0.7
(0.8)
2.5
–
(120.8)
976.1
162.9
(1.1)
161.8
(138.5)
6.9
–
–
1.2
(2.1)
–
–
–
(132.5)
1,005.4
294.8
16.2
–
16.2
–
–
–
–
(20.3)
4.1
–
–
–
–
(16.2)
294.8
16.2
–
16.2
–
–
(20.3)
4.1
–
–
–
–
–
(16.2)
294.8
Total
equity
£m
1,725.9
107.6
(0.4)
107.2
(129.5)
6.3
100.3
(2.3)
(20.3)
4.1
0.7
(0.8)
2.5
2.1
(36.9)
1,796.2
179.1
(1.1)
178.0
(138.5)
6.9
(20.3)
4.1
1.2
(2.1)
0.2
1.3
3.2
(144.0)
1,830.2
117
Financial statements Cash flow statements
For the year ended 31 March 2017
Cash flows from operating activities
Cash generated/(outflow) from operations
Interest paid
Tax paid
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 reissued
Proceeds from issuance of ordinary shares
Purchase of ordinary shares by the Pennon Employee Share Trust
Return/ (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 financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of the year
The notes on pages 119 to 172 form part of these financial statements.
Group
2017
£m
431.5
(76.4)
(36.4)
318.7
14.5
4.5
–
0.3
–
(354.1)
4.1
(330.7)
–
4.7
(2.6)
2.7
130.0
(39.0)
60.7
(24.0)
(131.6)
(20.3)
(19.4)
(31.4)
405.7
374.3
2016
£m
371.3
(79.1)
(45.0)
247.2
14.9
6.0
–
27.5
(91.0)
(283.7)
6.8
(319.5)
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
Company
2017
£m
(159.0)
(39.1)
(8.4)
(206.5)
49.6
247.0
–
–
–
(0.2)
0.1
296.5
–
4.7
–
9.7
–
–
–
–
(131.6)
(20.3)
(137.5)
(47.5)
420.0
372.5
2016
£m
(41.7)
(35.3)
(10.7)
(87.7)
51.3
140.7
(100.3)
–
–
(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
Notes
38
38
44
33
37
25
25
118
Pennon Group plc Annual Report 2017 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 2016/17 Pennon Group’s business was operated through two main subsidiaries. South West Water Limited includes the merged water
companies of South West Water and Bournemouth Water, providing water and wastewater services in Devon, Cornwall and parts of Dorset and Somerset
and water only services in parts of Dorset, Hampshire and Wiltshire. Viridor Limited’s business is recycling, energy recovery and waste management.
2. Principal accounting policies
The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied
to the years presented.
(a) Basis of preparation
These financial statements have been prepared on the historical cost accounting basis (except for fair value items, principally acquisitions, transfers of
assets from customers and certain financial instruments as described in accounting policy notes (b), (w) and (o) 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 103.
The new standards or interpretations which were mandatory for the first time in the year beginning 1 April 2016 did not have a material impact on the net
assets or results of the Group.
It is anticipated that adoption of the following standard could impact the Group’s future results as set out below:
• IFRS 16 ‘Leases’ no longer distinguishes 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 affect primarily the accounting for the Group’s operating leases. As at the
reporting date, the group has non-cancellable operating lease commitments of £143 million, see note 41. The Group is assessing the extent to which
these commitments will result in the recognition of an asset and a liability for future payments and how this will affect the group’s profit and classification
of cash flows. Existing borrowing covenants are not impacted by changes in accounting standards.
Other new standards or interpretations in issue, but not yet effective, including IFRS 15 ‘Revenue from contracts with customers’ and IFRS 9 ‘Financial
instruments’ are not expected to have a material impact on the Group’s net assets or results.
(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.
119
Financial statements
Notes to the
financial statements
continued
2. Principal accounting policies continued
(c) Revenue recognition
Revenue represents the fair value of consideration receivable in the ordinary course of business for the provision of goods and services to customers, and is
recognised to the extent that it can be reliably measured and that it is probable that economic benefits will flow to the Group.
Revenue excludes value added tax, trade discounts and revenue arising from transactions between Group companies. Revenue includes landfill tax.
In respect of ongoing, continuous services to customers, such as the provision of drinking water and wastewater services, revenue is recognised in line with the
customer using those services. Where applicable, this includes both billed amounts for estimated usage and an estimation of the amount of unbilled usage at
the period end.
Revenue in respect of construction services on long-term contracts, including the provision of service concession arrangements, is recognised based on the
fair value of work performed during the year with reference to the total sales value and the stage of completion of those services.
Where a contract with a customer includes more than one service, such as a long-term service concession arrangement, revenue for each service is recognised
in proportion to a fair value assessment of the total contract value split across the services provided.
Revenue in respect of goods, such as recyclate, is recognised when the significant risks and rewards of ownership have been transferred to the customer.
For other services, encompassing waste management services, revenue is recognised once the services have been provided to the customer.
Revenue from the sale of electricity from our generating assets is measured based upon metered output delivered at rates specified under contract terms
or prevailing market rates as applicable.
Payments received in advance of services provided are held within liabilities.
(d) Landfill tax
Landfill tax is recognised in both revenue and operating costs at the point waste is disposed of at a licensed landfill site.
(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 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 contracted.
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.
Infrastructure assets (being water mains and sewers, impounding and pumped raw water storage reservoirs, dams, pipelines and sea outfalls)
(h) Property, plant and equipment
i)
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.
120
Pennon Group plc Annual Report 2017 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
Land and buildings – leasehold buildings
Operational properties
Energy recovery facilities (including major refurbishments)
Fixed plant
Vehicles, mobile plant and computers
30 – 60 years
Over the estimated economic lives or the finance lease period, whichever is the shorter
40 – 80 years
25 – 40 years
20 – 40 years
3 – 10 years
Assets in the course of construction are not depreciated until commissioned.
The cost of assets includes directly attributable labour and overhead costs which are incremental to the Group. Borrowing costs directly attributable to the
construction of a qualifying asset (an asset necessarily taking a substantial period of time to be prepared for its intended use) are capitalised as part of the
asset. Assets transferred from customers are recognised at fair value as set out in accounting policy (v).
The assets’ residual values and useful lives are reviewed annually.
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 on a straight-line basis over the life of the lease.
Impairment of non-financial assets
(j)
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.
Investment in subsidiary undertakings
(k)
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.
Investment in joint ventures
(l)
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.
121
Financial statements Notes to the
financial statements
continued
2. Principal accounting policies continued
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:
Loans and receivables
i)
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 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.
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 in 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.
122
Pennon Group plc Annual Report 2017 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 as appropriate.
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 where they arise 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:
Landfill restoration costs
i)
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).
(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 reissued. Where such shares are subsequently reissued, 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)
The Group operates defined benefit and defined contribution pension schemes.
Retirement benefit obligations
123
Financial statements Notes to the
financial statements
continued
2. Principal accounting policies continued
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.
Share-based payment
ii)
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.
124
Pennon Group plc Annual Report 2017 3. Financial risk management
(a) Financial risk factors
The Group’s activities expose it to a variety of financial risks: liquidity risk, market risk (interest rate and foreign currency risk) and credit risk.
The Group’s treasury function seeks to ensure that sufficient funding is available to meet foreseeable needs and to maintain 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.
Liquidity risk
i)
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 requires that no more than 20% of Group net borrowings should 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 plus interest receivable on service concession arrangements) and interest
cover. Existing covenants are not impacted by subsequent changes to accounting standards.
Contractual undiscounted cash flows, including interest payments, at the balance sheet date were:
Due within
1 year
£m
Due between
1 and 2 years
£m
Due between
2 and 5 years
£m
Over
5 years
£m
Group
31 March 2017
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 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)
Company
31 March 2017
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 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
116.0
49.5
44.3
286.5
187.5
8.6
39.0
47.9
41.1
264.6
159.7
8.3
74.9
282.9
29.2
6.3
743.4
1.3
–
287.2
30.4
5.9
580.8
1.1
181.5
49.3
43.0
44.3
–
7.0
116.1
47.3
45.0
–
–
6.1
149.5
39.1
28.8
44.3
–
1.1
74.6
–
29.7
–
–
1.0
No liability is expected to arise in respect of the guarantees noted above. Guarantees are analysed in note 42.
Total
£m
1,878.7
909.7
2,310.9
330.8
187.5
258.5
131.4
202.3
–
–
1,322.7
679.5
2,021.3
–
–
(4.1)
(74.8)
(66.3)
327.5
137.7
175.5
–
–
2.2
148.1
–
70.6
–
–
–
225.8
–
76.7
–
–
0.7
1,293.4
687.7
2,130.7
–
–
1,776.0
920.6
2,392.3
264.6
159.7
(67.0)
(50.4)
511.5
–
94.0
–
–
–
576.7
–
122.4
–
–
–
884.0
322.0
222.6
50.6
743.4
2.4
877.1
287.2
259.2
5.9
580.8
2.8
125
Financial statements Notes to the
financial statements
continued
3. Financial risk management continued
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 69% (2016 67%) of
Group net borrowings were at fixed rates (including at least 50% of South West Water’s borrowings) 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.
20% (2016 22%) of the Group’s net borrowings are RPI index-linked. The interest rate for index-linked debt is based upon an RPI measure, which is also
used in determining the amount of income from customers in South West Water.
The Group has no significant interest-bearing assets upon which the net return fluctuates from market risk. Deposit interest receivable is expected to
fluctuate in line with interest payable on floating rate borrowings. Consequently the Group’s income and cash generated from operations (note 38) are
independent of changes in market interest rates.
For 2017 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 £0.3 million (2016 £0.1 million), for the equity sensitivity fair value, with derivative impacts excluded.
For 2017 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 (2016 £1.9 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 notes 19 and 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 board approved minimum criteria based on
their short-term credit ratings and therefore of good credit quality.
(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 2017 the Group had cash and facilities,
including restricted funds, of £1.4 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
126
2017
£m
2,664.9
1,509.2
4,174.1
63.8%
2016
£m
2,484.4
1,487.6
3,972.0
62.5%
Pennon Group plc Annual Report 2017 The Water segment is also monitored on the basis of the ratio of its net borrowings to Regulatory Capital Value (RCV). 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
Water Business
2017
£m
3,290.6
2,033.8
61.8%
2016
£m
3,150.2
1,880.0
59.7%
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.
(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.
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.
Estimates
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 aftercare provision is particularly sensitive to the estimated volumes of leachate and their associated cost, together with the discount rate used to
establish the provision.
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 2017 the Group’s environmental and landfill restoration provisions were £183.8 million (2016 £182.1 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 2017 these assets had a net book value of £14.3 million (2016 £11.7 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 2015 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.
127
Financial statements Notes to the
financial statements
continued
4. Critical accounting judgements and estimates continued
Estimates continued
Taxation
The Group’s current tax provision of £26.8 million, reduced from £37.1 million in 2015/16, includes £18.6 million related to prior year tax items
(2016 £37.1 million).
In 2015/16 the Group reported significant judgement around uncertain tax items related to the interpretation of tax legislation regarding financial
arrangements entered into in the normal course of business, which could have resulted in a range of outcomes of additional liabilities of c£20 million, to a
reduction in liabilities of £52 million. Following engagement and subsequently resolution with HMRC across a number of areas, achieved through a process
designed to expedite outstanding tax matters, these items are no longer an area of significant judgement and there is no such range related to ongoing
uncertain tax items.
The Group has a small number of ongoing uncertain tax items related to capital allowances for expenditure incurred in the normal course of business,
where the Group has paid in full the tax HMRC interpret as due, and therefore would receive up to £20 million (2015/16 £70 million) should these tax items
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. At the balance sheet date the Group recognised contract receivables of £217.6 million
(2016 £201.9 million) and other intangible assets of £61.3 million (2016 £55.0 million) in relation to its service concession arrangements.
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 judgement is used in the allocation between these three elements, this assessment reflects external
market conditions according to the type of service provided and project specific cash flow expectations, including the recovery of costs from the original
contractor on our Glasgow concession.
Revenue recognition
The Group recognises revenue at the time of delivery of services. Payments received in advance of services delivered are recorded as liabilities.
South West Water raises bills and recognises revenue in accordance with its entitlement to receive revenue in line with the limits established by the
Periodic Review price-setting process. For water and wastewater customers with water meters, revenue recognised is dependent upon the volume supplied
including an estimate of the sales value of units supplied between the date of the last meter reading and the year-end. Estimated usage is based on historic
data, judgement and assumptions. The accrued income balance in this area at the balance sheet date was £77.7 million (2016 £67.8 million).
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. Revenue is accrued from the sale of electricity from our generating assets based upon metered output delivered
at rates specified under contract terms or prevailing market rates as applicable. The total accrued income balance in relation to these areas at the balance
sheet date was £42.8 million (2016 £37.8 million).
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 2017 the Group’s current trade receivables were
£321.6 million (2016 £303.6 million), against which £98.1 million (2016 £95.6 million) had been provided for impairment (note 22).
Judgements
Impairment of non-financial assets
In order to determine whether impairments, or reversals of previous impairments, are required for non-financial assets, the Group assesses whether there
are any indicators for further impairment or reversal during the year. The assessment includes a review of changes in markets and discount rates over the
year, together with a review of CGU business performance against expectations. The 2016/17 review concluded there were no indicators of further
impairment or reversal.
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. See note 6 for further details.
128
Pennon Group plc Annual Report 2017 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. The waste management business is the
recycling, energy recovery and waste management 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 borrowings
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 before depreciation, amortisation and non-underlying items (EBITDA)
Water
Waste management
Other
Operating profit 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
2017
£m
561.0
793.5
12.8
(14.2)
1,353.1
349.1
138.3
(1.4)
486.0
235.4
71.1
(1.9)
304.6
173.9
60.4
15.7
250.0
187.4
50.2
(27.1)
210.5
* 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.
2016
£m
547.0
806.2
12.0
(12.9)
1,352.3
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
129
Financial statements Notes to the
financial statements
continued
5. Segmental information continued
Balance sheet
31 March 2017
Assets (excluding investments in joint ventures)
Investments in joint ventures
Total assets
Liabilities
Net assets
31 March 2016
Assets (excluding investments in joint ventures)
Investments in joint ventures
Total assets
Liabilities
Net assets
Water
£m
Waste
management
£m
Other
£m
Eliminations
£m
Group
£m
3,495.0
–
3,495.0
(2,667.2)
827.8
3,385.8
–
3,385.8
(2,502.4)
883.4
2,099.9
0.1
2,100.0
(1,697.4)
402.6
1,911.1
0.1
1,911.2
(1,513.2)
398.0
1,856.8
–
1,856.8
(1,578.0)
278.8
1,715.9
–
1,715.9
(1,509.7)
206.2
(1,540.5)
–
(1,540.5)
1,540.5
–
(1,350.4)
–
(1,350.4)
1,350.4
–
5,911.2
0.1
5,911.3
(4,402.1)
1,509.2
5,662.4
0.1
5,662.5
(4,174.9)
1,487.6
Segment liabilities of the water and waste management segments comprise of operating liabilities and borrowings. The other segment liabilities include the
Group taxation liabilities.
Other information
31 March 2017
Amortisation of other intangible assets
Capital expenditure
Depreciation
Finance income (before non-underlying items)
Finance costs (before non-underlying items)
31 March 2016
Amortisation of other intangible assets
Capital expenditure (including acquisitions)
Depreciation
Finance income (before non-underlying items)
Finance costs
Revenue
United Kingdom
Rest of European Union
China
Rest of World
Notes
7
17
7
8
8
7
7
8
8
Water
£m
0.5
190.9
113.5
1.5
62.3
0.7
220.6
110.3
3.0
61.8
Waste
management
£m
2.7
186.5
64.6
26.3
12.3
3.0
154.5
72.5
28.2
12.3
Other
£m
–
0.1
0.1
8.5
20.5
–
0.1
0.1
10.9
22.1
2017
£m
1,287.6
10.3
45.1
10.1
1,353.1
Group
£m
3.2
377.5
178.2
36.3
95.1
3.7
375.2
182.9
42.1
96.2
2016
£m
1,296.1
10.5
38.8
6.9
1,352.3
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.
130
Pennon Group plc Annual Report 2017 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 in the year and business trends over time. This presentation of results is consistent with internal
performance monitoring.
Operating costs
Restructuring costs(a)
Total operating costs
Remeasurement of fair value movement in derivatives(b)
Unwind of synthetic derivative(c)
Deferred tax change in rate(d)
Tax credit arising on non-underlying items
Net non-underlying (charge)/ credit
Notes
17, 32
8
8
31
9
2017
£m
(10.7)
(10.7)
16.0
(44.8)
21.3
7.1
(11.1)
2016
£m
(10.2)
(10.2)
5.2
–
33.1
1.0
29.1
(a)
During the year a one-off charge of £10.7 million was made relating to restructuring costs associated with the Group-wide Shared Services Review.
The £10.7 million charge consists of a £9.5 million non-cash charge to other operating expenses relating to a rationalisation of systems leading to an
asset de-recognition, and a £1.1 million charge to manpower costs and a £0.1 million charge to other operating costs in relation to restructuring
provisions. The charge is considered non-underlying due to its size and non-recurring nature.
(b)
(c)
Last year a one-off charge of £10.2 million was made to the restructuring provision reflecting announced reorganisations across the Group.
In the year a credit of £16.0 million was recognised relating to non-cash derivative fair value movements associated with derivatives that are not
designated as being party to an accounting hedge relationship. These movements are non-underlying due to the nature of the item being market
dependant and potentially can be significant in value (size).
Since 2011 the Group has received a fixed interest rate on a £200 million financial asset and paid an index-linked interest rate on a £200 million loan,
designed to improve the Group’s overall interest rate performance. The counterparty to both instruments was Peninsula MB Limited (PMB). In
combination, these instruments were accounted for as a derivative, with a net interest income of £8 million p.a., c£7 million in 2016/17, cash settled.
In periods of index underperformance, losses arose in PMB which were group relieved with the Group. Following a change in legislation, which saw the
value of the derivative to the Group moving from a liability of £4 million to a liability of c.£40 million, the Group made the decision to exit the transaction.
On 10 February 2017 the Company unwound this transaction. The derivative had been due to end in 2027, however, following a change in the
economic benefit of this derivative due to a change in legislation which impacted the derivative’s future cash flows, the Company exercised its option
to unwind the transaction early.
The process for unwinding the derivative resulted in the Group acquiring a financial asset for £283 million and a financial liability for £239 million from
Nomura Structured Holdings plc. The counterparty to both these transactions was PMB. Simultaneously, the Company also acquired the remaining
25% of PMB’s share capital from Nomura Structured Holdings plc, for a consideration of £36,000, with all PMB’s liabilities being due to the Company
from that point. The Company has since settled these liabilities through intercompany transactions with PMB. PMB has ceased all operating activities
and will be liquidated in due course. The net consideration due to Nomura Structured Holdings plc in respect of these transactions is £44 million with
an agreed payment date of June 2018. The impact for the Group is a net cost of £35 million post tax.
PMB is a private limited company, incorporated in England and Wales on 5 December 2011 as a subsidiary of Nomura Structured Holdings plc, part of
the ‘Nomura Group’. Prior to the transaction on 10 February 2017, PMB’s share capital was 75% owned by the Company and 25% owned by Nomura
Structured Holdings plc, who had control of PMB for accounting purposes.
The group relief claimed by the Group has been treated as an uncertain tax item and has been substantially provided for over recent years.
Following the conclusion of discussions with HMRC, no further amounts are required to be recognised by the Group. A tax credit of £8 million relates
to the overall cost to unwind this derivative transaction.
Post the unwind of the transaction the Group’s interest will no longer include the c£8 million p.a. income, c£7 million in 2016/17, and the underlying tax
charge will reduce by a similar amount.
The liability recognised is non-underlying by its size and nature.
(d)
Following the enactment during the year the rate of corporation tax reduced from 18% to 17% from April 2020, resulting in a one-off credit of £21.3
million being recognised in the income statement. In addition a charge of £1.7 million has been recognised in the statement of comprehensive income
and a credit of £0.1 million was recognised directly in equity.
Last year the rate of corporation tax reduced from 20% to 19% from April 2017, reducing further to 18% from April 2020, resulting in a one-off credit of
£33.1 million recognised in the income statement. In addition, a charge of £3.8 million was recognised in the statement of comprehensive income and a
charge of £0.1 million was recognised directly in equity.
These movements are non-underlying as are dependent on changes in UK tax law and are non-underlying due to their size.
131
Financial statements
Notes to the
financial statements
continued
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
Amortisation of other intangible assets
Notes
13
22
16
Operating costs include a £10.7 million charge (2016 £10.2 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
Expenses reimbursed to the auditors in relation to the audit of the Group were £51,000 (2016 £45,000).
2017
£m
179.7
115.8
(7.5)
17.2
8.8
0.2
7.4
136.5
41.7
3.2
2017
£000
91
583
50
77
801
32
2016
£m
180.0
114.7
(4.3)
16.9
9.0
0.1
8.4
140.0
42.9
3.7
2016
£000
94
635
50
122
901
30
A description of the work of the Audit Committee is set out in its report on pages 63 to 66 which includes an explanation of how the auditors’ objectivity
and independence are safeguarded when non-audit services are provided by the auditors’ firm.
132
Pennon Group plc Annual Report 2017 8. Net finance costs
Notes
Finance
cost
£m
2017
Finance
income
£m
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
Unwinding of discounts in provisions
Net gains on derivative financial instruments arising
from the combination of non-derivative instruments
Net finance cost before non-underlying items
Non-underlying items
Fair value remeasurement of non-designated
derivative financial instruments providing
commercial hedges
Unwind of synthetic derivative
Net finance cost after non-underlying items
30
32
6
6
(49.4)
(31.9)
(3.5)
–
–
(84.8)
–
(1.2)
(9.1)
(10.3)
–
(95.1)
–
(44.8)
(139.9)
–
–
–
3.2
10.2
13.4
16.1
–
–
16.1
6.8
36.3
16.0
–
52.3
Finance
cost
£m
2016
Finance
income
£m
(48.7)
(33.5)
(2.8)
–
–
(85.0)
–
(1.8)
(9.4)
(11.2)
–
(96.2)
–
–
(96.2)
–
–
–
6.3
10.7
17.0
16.7
–
–
16.7
8.4
42.1
5.2
–
47.3
Total
£m
(49.4)
(31.9)
(3.5)
3.2
10.2
(71.4)
16.1
(1.2)
(9.1)
5.8
6.8
(58.8)
16.0
(44.8)
(87.6)
Total
£m
(48.7)
(33.5)
(2.8)
6.3
10.7
(68.0)
16.7
(1.8)
(9.4)
5.5
8.4
(54.1)
5.2
–
(48.9)
In addition to the above, finance costs of £12.9 million (2016 £9.4 million) have been capitalised on qualifying assets included in property, plant and
equipment and other intangible assets.
9. Taxation
Analysis of charge in year
Current tax charge
Deferred tax – other
Deferred tax arising on change of rate of
corporation tax
Total deferred tax charge/ (credit)
Tax charge for year
Before
non-underlying
items 2017
£m
Non-underlying
items (note 6)
2017
£m
Notes
Before
non-underlying
items 2016
£m
Non-underlying
items (note 6)
2016
£m
Total 2017
£m
Total 2016
£m
39.5
18.9
–
18.9
58.4
(9.4)
2.3
(21.3)
(19.0)
(28.4)
30.1
21.2
(21.3)
(0.1)
30.0
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
31
UK corporation tax is calculated at 20% (2016 20%) of the estimated assessable profit for the year.
UK corporation tax is stated after a credit relating to prior year current tax of £1.8 million (2016 credit of £1.4 million) and a prior year deferred tax charge of
£1.1 million (2016 charge of £15.9 million).
The 2017 deferred tax credit includes a credit of £21.3 million (2016 charge includes a credit of £33.1 million) reflecting a reduction in the rate of UK
corporation tax.
133
Financial statements Notes to the
financial statements
continued
9. Taxation continued
The tax for the year differs from the theoretical amount which would arise using the standard rate of corporation tax in the UK (20%) from:
Profit before tax
Profit before tax multiplied by the standard rate of UK corporation tax of 20% (2016 20%)
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
Other
Tax charge for year
2017
£m
210.5
42.1
(1.3)
10.7
(0.9)
(21.3)
(0.7)
1.9
(0.5)
30.0
The average applicable tax rate for the year before non-underlying items was 23% (2016 34%). The reduction from 2016 reflects a higher charge for
uncertain tax items in 2016. The average applicable tax rate for the year after non-underlying items was 14% (2016 18%).
In addition to the amounts recognised in the income statement the following tax charges and credits were also recognised:
Amounts recognised directly in other comprehensive income
Deferred tax (credit)/ charge on defined benefit pension schemes
Deferred tax charge on cash flow hedges
Amounts recognised directly in equity
Deferred tax (credit)/ charge on share-based payments
Current tax credit on perpetual capital securities periodic return
10. Profit of the Parent Company
Profit attributable to ordinary shareholders’ equity dealt within the accounts of the parent company
2017
£m
(3.3)
1.3
(0.3)
(4.1)
2017
£m
162.9
2016
£m
206.3
41.3
1.6
12.0
(0.7)
(33.1)
14.5
2.4
–
38.0
2016
£m
2.4
1.8
0.3
(4.1)
2016
£m
91.4
As permitted by Section 408 of the Companies Act 2006 no income statement or statement of comprehensive income is presented for the Company.
134
Pennon Group plc Annual Report 2017 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
2017
413.0
1.9
414.9
2016
410.9
1.8
412.7
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:
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
Profit
after tax
£m
164.3
18.9
11.1
194.3
2017
Earnings per share
Basic
p
Diluted
p
39.8
4.5
2.7
47.0
39.6
4.6
2.6
46.8
Profit
after tax
£m
152.1
39.2
(29.1)
162.2
Amounts recognised as distributions to ordinary equity holders in the year
Interim dividend paid for the year ended 31 March 2016: 10.46p (2015 9.98p) per share
Final dividend paid for the year ended 31 March 2016: 23.12p (2015 21.82p) per share
Proposed dividends
Proposed interim dividend for the year ended 31 March 2017: 11.09p per share
Proposed final dividend for the year ended 31 March 2017: 24.87p per share
2016
Earnings per share
Diluted
p
36.9
9.5
(7.1)
39.3
2016
£m
39.8
89.7
129.5
Basic
p
37.0
9.5
(7.0)
39.5
2017
£m
43.1
95.4
138.5
45.9
103.6
149.5
The proposed interim and final dividends have not been included as liabilities in these financial statements.
The proposed interim dividend for 2017 was paid on 4 April 2017 and the proposed final dividend is subject to approval by shareholders at the
Annual General Meeting.
135
Financial statements
Notes to the
financial statements
continued
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
2017
£m
157.1
16.6
18.8
2.9
1.1
196.5
179.7
1.1
15.7
196.5
2016
£m
158.0
15.3
20.1
2.8
8.6
204.8
180.0
8.6
16.2
204.8
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 2017 was 4,788 (2016 5,033).
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
2017
2016
1,589
3,153
57
4,799
2017
£000
1,205
381
421
312
471
2,790
1,706
3,230
51
4,987
2016
£000
1,152
416
555
258
529
2,910
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 £102,000 (2016 £220,000). Total gains made by Directors on the exercise of share options were
£17,000 (2016 £2,000).
Total emoluments include £476,000 (2016 £1,200,000) payable to Directors for services as directors of subsidiary undertakings.
At 31 March 2017 one Director (2016 one) is accruing retirement benefits under defined benefit pension schemes in respect of which the Group
contributed £35,000 (2016 £29,000).
At 31 March 2017 no Director (2016 one) is a member of the Group’s defined contribution pension scheme in respect of which the Group contributed
£40,000 (2016 £52,000).
At 31 March 2017 two Directors received payments in lieu of pension provision (2016 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 74 to 99.
136
Pennon Group plc Annual Report 2017 15. Goodwill
Cost:
At 1 April 2015
Recognised on acquisition of subsidiaries
At 31 March 2016
At 31 March 2017
Carrying amount:
At 1 April 2015
At 31 March 2016
At 31 March 2017
£m
339.3
45.7
385.0
385.0
339.3
385.0
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.
The acquisition of Peninsula MB Limited, as detailed in note 6, did not give rise to the recognition of goodwill.
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 recognised on acquisition of Bournemouth Water in 2016, is assessed using
level 2 fair value hierarchy techniques, with reference to the market value of the merged water business, using a market based observable premium to
Regulated Capital Value.
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 those used reflect management’s prudent estimate of a rate that investors would require if they were to choose a similar
investment ranging from 6-9% across the CGUs business activities.
The base cash flow projections have been derived from 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.
Long-term growth rates of 3%, based on forecast of growth in waste management markets and the UK economy, are applied to cash flows beyond the
seven year period, with overheads expected to grow at 1% based on ongoing efficiency expectations of 2% per annum.
These plans are based on detailed market-by-market forecasts of projected volumes, prices and costs for each business activity. These forecasts reflect, on
an individual operational site basis, numerous assumptions and estimates. The key assumptions include anticipated changes in market size and volumes;
recyclate prices; energy selling prices; gate fees; the level of future landfill tax; and cost inflation. Management has determined the value assigned to each
assumption based on historical experience, market surveys, industry analysis and current legislation. For business activities with an indefinite life a terminal
growth rate has been used.
The results of tests performed during the year demonstrate significant headroom in all CGUs, and it is judged that no reasonable change in the key
assumptions would cause the carrying amount of the CGUs to exceed the recoverable amount.
137
Financial statements Notes to the
financial statements
continued
16. Other intangible assets
Acquired intangible assets
Cost:
At 1 April 2015
Additions
Recognised on acquisition of subsidiaries
At 31 March 2016
Additions
At 31 March 2017
Accumulated amortisation:
At 1 April 2015
Charge for year
At 31 March 2016
Charge for year
At 31 March 2017
Carrying amount:
At 1 April 2015
At 31 March 2016
At 31 March 2017
Service
concession
arrangements
£m
Customer
contracts
£m
Patents
£m
Other
£m
48.1
6.9
–
55.0
6.5
61.5
–
–
–
0.2
0.2
48.1
55.0
61.3
32.7
–
1.6
34.3
–
34.3
24.5
3.0
27.5
2.4
29.9
8.2
6.8
4.4
0.2
–
–
0.2
–
0.2
0.1
0.1
0.2
–
0.2
0.1
–
–
–
0.3
2.3
2.6
–
2.6
–
0.6
0.6
0.6
1.2
–
2.0
1.4
Total
£m
81.0
7.2
3.9
92.1
6.5
98.6
24.6
3.7
28.3
3.2
31.5
56.4
63.8
67.1
Service concession arrangements, once available for use, are amortised over the useful life of each contract. The average remaining life is 23 years
(2016 24 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 two years (2016 three years).
Patents are amortised over their estimated useful lives which at acquisition was 13 years. The average remaining life is nil years (2016 two 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 (2016 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 (2016 £2.1 million) have been capitalised on qualifying assets, at an average borrowing rate of 3.5%
(2016 4.2%).
138
Pennon Group plc Annual Report 2017 17. Property, plant and equipment
Group
Cost:
At 1 April 2015
Additions
Arising on acquisition
Assets adopted at fair value
Grants and contributions
Disposals
Transfers/reclassifications
At 31 March 2016
Additions
Assets adopted at fair value
Grants and contributions
Disposals
Transfers/reclassifications
At 31 March 2017
Accumulated depreciation:
At 1 April 2015
Charge for year
Impairment charge/ (reversal) for the year
Disposals
At 31 March 2016
Charge for year
Disposals
At 31 March 2017
Net book value:
At 1 April 2015
At 31 March 2016
At 31 March 2017
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
493.7
10.5
41.5
–
–
(28.8)
7.5
524.4
9.8
–
–
(3.5)
8.7
539.4
335.3
21.2
36.0
(20.3)
372.2
13.5
(1.0)
384.7
158.4
152.2
154.7
1,641.5
19.3
121.1
6.6
(5.5)
(1.2)
43.1
1,824.9
12.7
5.4
(1.6)
(1.2)
14.6
1,854.8
201.3
23.6
–
(1.2)
223.7
24.4
(1.3)
246.8
1,440.2
1,601.2
1,608.0
649.6
1.0
27.4
0.8
–
(0.1)
14.8
693.5
1.2
14.1
–
(0.2)
(2.2)
706.4
215.1
12.4
–
(0.1)
227.4
12.8
(0.2)
240.0
434.5
466.1
466.4
2,151.6
35.4
35.2
–
–
(18.2)
425.9
2,629.9
47.0
5.1
–
(10.7)
62.9
2,734.2
1,059.4
123.5
(36.0)
(17.0)
1,129.9
126.1
(9.3)
1,246.7
1,092.2
1,500.0
1,487.5
67.4
–
–
–
–
(2.8)
–
64.6
7.1
–
–
–
–
71.7
49.5
4.6
–
(1.2)
52.9
4.5
–
57.4
17.9
11.7
14.3
435.6
218.0
3.8
–
–
–
(491.3)
166.1
299.7
–
–
(9.5)
(84.0)
372.3
–
–
–
–
–
–
–
–
435.6
166.1
372.3
Total
£m
5,439.4
284.2
229.0
7.4
(5.5)
(51.1)
–
5,903.4
377.5
24.6
(1.6)
(25.1)
–
6,278.8
1,860.6
185.3
–
(39.8)
2,006.1
181.3
(11.8)
2,175.6
3,578.8
3,897.3
4,103.2
Of the total depreciation charge of £181.3 million (2016 £185.3 million), £1.6 million (2016 £1.4 million) has been charged to capital projects, £1.5 million
(2016 £1.0 million) has been offset by deferred income and £178.2 million (2016 £182.9 million) has been charged against profits. Asset lives and residual
values are reviewed annually. During the year borrowing costs of £10.8 million (2016 £7.3 million) have been capitalised on qualifying assets, at an average
borrowing rate of 3.5% (2016 4.1%).
Groups of assets forming cash generating units are reviewed for indicators of impairment. No indicators of impairment were identified during the year.
In 2016 an impairment of non-strategic landfill sites of £60.9 million and a £60.9 million reversal of assets was recognised.
Asset lives are reviewed annually. No significant changes were required in 2016/17. In 2015/16 the annual review, encompassing internal assessments and
external benchmarking, resulted in upper end of the range of useful lives for water mains and sewers increasing from 100 to 120 years and for Energy
Recovery Facilities from 30 to 40 years.
139
Financial statements Notes to the
financial statements
continued
17. Property, plant and equipment continued
Assets held under finance leases included above were:
Cost:
At 31 March 2016
At 31 March 2017
Accumulated depreciation:
At 31 March 2016
At 31 March 2017
Net book amount:
At 31 March 2016
At 31 March 2017
Company
Cost:
At 1 April 2015
Additions
Disposals
At 31 March 2016
Additions
Disposals
At 31 March 2017
Accumulated depreciation:
At 1 April 2015
Charge for year
Disposals
At 31 March 2016
Charge for year
Disposals
At 31 March 2017
Net book value:
At 1 April 2015
At 31 March 2016
At 31 March 2017
Asset lives and residual values are reviewed annually.
140
Infrastructure
assets
£m
Operational
properties
£m
Fixed and
mobile plant,
vehicles and
computers
£m
Construction
in progress
£m
409.5
409.0
52.6
58.2
356.9
350.8
439.8
436.7
107.2
111.6
332.6
325.1
515.9
574.8
252.6
276.0
263.3
298.8
0.2
0.2
–
–
0.2
0.2
Total
£m
1,365.4
1,420.7
412.4
445.8
953.0
974.9
Fixed and
mobile plant,
vehicles and
computers
£m
0.3
0.1
(0.1)
0.3
0.2
(0.2)
0.3
0.2
0.1
(0.1)
0.2
–
(0.1)
0.1
0.1
0.1
0.2
Pennon Group plc Annual Report 2017 18. Financial instruments by category
The accounting policies for financial instruments that have been applied to line items are:
Group
31 March 2017
Financial assets
Trade receivables
Other receivables
Derivative financial instruments
Cash and cash deposits
Total
Financial liabilities
Borrowings
Derivative financial instruments
Trade payables
Other payables
Total
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
Company
31 March 2017
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
Other payables
Total
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
Derivatives
used for
fair value
hedging
£m
Fair value
Derivatives
used for
cash flow
hedging
£m
Derivatives
not in a hedge
accounting
relationship
£m
Amortised cost
Loans and
receivables
£m
Trade
receivables
and trade
payables
£m
–
–
6.2
–
6.2
–
–
–
–
–
–
–
1.8
–
1.8
–
–
–
–
–
–
2.9
–
2.9
–
–
–
–
–
–
–
–
1.8
–
1.8
–
–
–
–
–
–
–
2.8
–
2.8
–
(40.0)
–
–
(40.0)
–
–
3.4
–
3.4
–
(46.9)
–
(46.9)
–
–
1.3
–
1.3
–
–
(3.4)
–
–
(3.4)
–
–
–
–
–
–
–
(7.6)
–
(7.6)
–
–
78.7
–
78.7
–
(2.5)
–
–
(2.5)
–
–
67.0
–
67.0
–
(9.0)
–
(9.0)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(4.2)
–
(4.2)
–
314.3
–
598.1
912.4
(3,263.0)
–
–
–
(3,263.0)
–
283.0
–
632.2
915.2
(3,116.6)
–
–
(3,116.6)
1,137.7
0.3
–
372.5
1,510.5
(0.8)
(1,206.0)
–
–
–
(1,206.8)
974.2
7.4
–
429.7
1,411.3
(0.3)
(1,164.3)
–
–
(1,164.6)
223.5
–
–
–
223.5
–
–
(107.4)
(48.5)
(155.9)
208.0
–
–
–
208.0
–
–
(95.9)
(95.9)
–
–
–
–
–
–
–
–
(0.2)
(44.3)
(44.5)
–
–
–
–
–
–
–
–
(0.3)
(0.3)
Notes
22
19,22
23
25
28
23
26
26,29
22
19,22
23
25
28
23
26
19,22
22
23
25
26
28
23
26
29
19,22
22
23
25
26
28
23
26
Total
£m
223.5
314.3
87.7
598.1
1,223.6
(3,263.0)
(42.5)
(107.4)
(48.5)
(3,461.4)
208.0
283.0
72.2
632.2
1,195.4
(3,116.6)
(55.9)
(95.9)
(3,268.4)
1,137.7
0.3
4.2
372.5
1,514.7
(0.8)
(1,206.0)
(3.4)
(0.2)
(44.3)
(1,254.7)
974.2
7.4
1.8
429.7
1,413.1
(0.3)
(1,164.3)
(11.8)
(0.3)
(1,176.7)
141
Financial statements Notes to the
financial statements
continued
19. Other non-current assets
Non-current receivables
Amounts owed by subsidiary undertakings
Amounts owed by related parties (note 44)
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
2017
£m
–
87.2
210.1
10.7
308.0
Group
2017
£m
19.4
23.7
264.9
308.0
2016
£m
–
78.3
179.4
10.1
267.8
2016
£m
36.7
29.4
201.7
267.8
2017
£m
1,011.6
–
–
–
1,011.6
Company
2017
£m
85.8
269.9
655.9
1,011.6
Group
Company
2017
£m
–
156.9
210.1
10.7
377.7
2016
£m
–
145.4
179.4
10.1
334.9
2017
£m
1,115.7
–
–
–
1,115.7
2016
£m
905.1
–
–
0.4
905.5
2016
£m
66.4
250.4
588.7
905.5
2016
£m
1,000.5
–
–
0.4
1,000.9
The Group has a number of service concession arrangements with local authority clients in the waste management sector to build and operate recycling
assets and energy recovery facilities. The terms of the contracts, including pricing and performance obligations, are established at the outset and the
contracts are typically for a duration of 25 years. The assets revert to the local authority at the end of the contract. At 31 March 2017 the average remaining
duration of the service concession arrangements was 22 years.
The fair value of amounts owed by related parties is based on cash flows using a rate based on the borrowings rate of 2.25% (2016 2.50%). 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 12.5% (2016 12.3%).
Other receivables include site development and pre-contract costs of £4.1 million (2016 £9.6 million).
There is no concentration of risk in non-current receivables. A significant proportion of the debt is due from local government authorities or joint venture
companies which principally operate under long-term local government authority contracts.
20. Investments
Subsidiary undertakings
Company
At 1 April 2015
Additions
At 31 March 2016
Additions
Disposals
At 31 March 2017
142
£m
1,523.6
104.7
1,628.3
100.0
(104.1)
1,624.2
Pennon Group plc Annual Report 2017 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 the Company 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.
On 10 February 2017 the Company acquired the controlling interest in Peninsula MB Limited for £36,000, bringing its shareholding of Peninsula MB Limited’s
issued share capital to 100%. The acquisition was a component of a wider transaction to unwind a historic derivative position as set out in note 6 to the financial
statements.
Joint ventures
Group
At 1 April 2015
Share of post–tax profit
Share of other comprehensive profit
Dividends received
At 31 March 2016
Share of post–tax profit
Share of other comprehensive profit
Dividends received
At 31 March 2017
Shares
£m
0.1
3.6
2.4
(6.0)
0.1
4.2
0.3
(4.5)
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
England
England
England
% of
ownership
Measurement
method
50
50
20
Equity
Equity
Equity
(1) Lakeside Energy from Waste Holdings Limited provides energy recovery facility services.
(2) Viridor Laing (Greater Manchester) Holdings Limited is delivering the 25 year Greater Manchester Waste PFI contract, which is a combined energy and renewable energy project.
(3) INEOS Runcorn (TPS) Holdings Limited provides energy recovery 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.
Summarised financial information for the Group’s joint ventures and associate:
Summarised balance sheet
Lakeside
Energy
from Waste
Holdings
Limited
£m
2017
Viridor Laing
(Greater
Manchester)
Holdings
Limited
£m
INEOS
Runcorn
(TPS)
Holdings
Limited
£m
Lakeside
Energy
from Waste
Holdings
Limited
£m
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)
13.5
10.5
24.0
–
(4.6)
(4.6)
117.7
(105.5)
(32.9)
(138.4)
(1.3)
(92.0)
17.1
(74.9)
63.2
4.2
67.4
–
(35.9)
(35.9)
40.0
6.7
46.7
–
(13.8)
(13.8)
14.4
9.5
23.9
–
(3.7)
(3.7)
303.9
283.5
122.6
288.8
(321.9)
(48.4)
(370.3)
(34.9)
(258.7)
80.3
(178.4)
(319.7)
(44.2)
(363.9)
(47.5)
(279.7)
100.9
(178.8)
(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)
2016
Viridor Laing
(Greater
Manchester)
Holdings
Limited
£m
61.2
27.4
88.6
–
(43.2)
(43.2)
INEOS
Runcorn
(TPS)
Holdings
Limited
£m
24.3
17.5
41.8
–
(11.4)
(11.4)
289.7
(322.1)
(53.6)
(375.7)
(55.6)
(297.8)
94.6
(203.2)
143
Financial statements Notes to the
financial statements
continued
20. Investments continued
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
Lakeside
Energy
from Waste
Holdings
Limited
£m
2017
Viridor Laing
(Greater
Manchester)
Holdings
Limited
£m
INEOS
Runcorn
(TPS)
Holdings
Limited
£m
Lakeside
Energy
from Waste
Holdings
Limited
£m
2016
Viridor Laing
(Greater
Manchester)
Holdings
Limited
£m
46.8
29.4
(8.1)
–
(8.2)
13.1
(2.2)
10.9
6.0
16.9
(9.0)
145.5
6.3
(1.3)
22.5
(27.5)
–
(2.5)
(2.5)
8.0
5.5
–
59.4
40.2
(12.4)
–
(29.7)
(1.9)
1.9
–
8.1
8.1
–
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
–
INEOS
Runcorn
(TPS)
Holdings
Limited
£m
56.2
34.3
(10.7)
–
(30.0)
(6.4)
(1.4)
(7.8)
(0.2)
(8.0)
–
The information above reflects the amounts presented in the financial statements of the joint ventures and associate adjusted for differences in
accounting policies between the Group and the joint ventures and associate. The information reflects 100% of the joint ventures and associate results
and net liabilities.
Reconciliation of summarised financial information
Reconciliation of the summarised financial information presented to the carrying amount of its interest in the joint venture/associate.
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
Lakeside
Energy
from Waste
Holdings
Limited
£m
2017
Viridor Laing
(Greater
Manchester)
Holdings
Limited
£m
(9.2)
10.9
6.0
(9.0)
(1.3)
(0.7)
0.8
0.1
(40.4)
(2.5)
8.0
–
(34.9)
(17.4)
17.4
–
INEOS
Runcorn
(TPS)
Holdings
Limited
£m
(55.6)
–
8.1
–
(47.5 )
(17.8)
17.8
–
Lakeside
Energy
from Waste
Holdings
Limited
£m
2016
Viridor Laing
(Greater
Manchester)
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
–
INEOS
Runcorn
(TPS)
Holdings
Limited
£m
(47.6)
(7.8)
(0.2)
–
(55.6)
(20.9)
20.9
–
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.
144
Pennon Group plc Annual Report 2017 21. Inventories
Raw materials and consumables
22. Trade and other receivables – current
Trade receivables
Less: provision for impairment of receivables
Net trade receivables
Amounts owed by related parties
Amounts owed by subsidiary undertakings
Other receivables
Prepayments and accrued income
Group
Company
2017
£m
21.3
2016
£m
20.6
2017
£m
–
Group
Company
2017
£m
321.6
(98.1)
223.5
17.0
–
15.6
84.7
340.8
2016
£m
303.6
(95.6)
208.0
17.9
–
14.3
83.3
323.5
2017
£m
–
–
–
–
126.1
0.4
0.8
127.3
2016
£m
–
2016
£m
–
–
–
–
69.1
7.4
0.9
77.4
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
2017
£m
34.1
26.6
148.2
2016
£m
37.8
18.7
148.8
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 has a duty under legislation to continue to provide domestic customers with services regardless of payment.
The movement in the allowance for impairment in respect of trade receivables was:
At 1 April
Arising on acquisition
Provision for receivables impairment
Receivables written off during the year as uncollectable
At 31 March
2017
£m
95.6
–
7.4
(4.9)
98.1
2016
£m
86.8
1.0
8.4
(0.6)
95.6
145
Financial statements Notes to the
financial statements
continued
23. Derivative financial instruments
Derivatives used for cash flow hedging
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Derivatives used for fair value hedging
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Derivatives not in a hedge accounting relationship
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Group
2017
£m
1.4
4.8
(16.0)
(24.0)
2.2
0.6
–
–
70.0
8.7
(1.3)
(1.2)
2016
£m
2.4
1.0
(14.7)
(32.2)
1.3
0.5
–
–
59.0
8.0
(2.7)
(6.3)
Company
2017
£m
0.9
0.4
(2.1)
(1.3)
2.2
0.7
–
–
–
–
–
–
2016
£m
–
–
(2.7)
(4.9)
1.3
0.5
–
–
–
–
–
(4.2)
The fair value of 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 (2016 £nil).
During the year a £10.8 million charge (2016 £7.9 million) was recognised in profit and loss relating to cash flow hedges previously recognised through other
comprehensive income and recorded in the hedging reserve.
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 2017 69% of Group net borrowings were at fixed rate (2016 67%).
At 31 March 2017 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 2.9 years (2016 £1,078.0 million, with 3.9 years). The weighted average interest rate of the swaps for their nominal
amount was 2.0% (2016 2.0%).
Derivatives deemed held for trading at 31 March 2016 included a derivative with a fair value of £4.2 million which did not qualify for hedge accounting
under IAS 39, but was designed to improve the Group’s overall interest rate performance. During the year this derivative position was unwound as set out
in note 6.
The periods for which cash flow hedges are expected to affect future profit or loss are as follows:
Group
31 March 2017
Assets
Liabilities
31 March 2016
Liabilities
Company
31 March 2017
Assets
Liabilities
31 March 2016
Liabilities
Due within
1 year
£m
Due between
1 and 2 years
£m
Due between
2 and 5 years
£m
Due over
5 years
£m
0.4
(16.0)
(14.4)
0.4
(2.1)
(2.7)
0.4
(12.1)
(10.8)
0.4
(1.3)
(1.9)
0.4
(11.3)
(20.7)
0.4
–
(2.7)
0.1
(0.6)
(0.5)
0.1
–
(0.2)
Total
£m
1.3
(40.0)
(46.4)
1.3
(3.4)
(7.5)
In addition, the Group has cash flow hedges that are expected to affect future amounts recognised in property, plant and equipment, amounting to assets of
£4.9 million (2016 £2.9 million).
146
Pennon Group plc Annual Report 2017 Valuation hierarchy
The Group uses the following hierarchy for determining the fair value of financial instruments by valuation technique:
• quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1)
• inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is,
derived from prices) (level 2)
• inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3).
The fair value of financial instruments not traded in an active market (level 2, for example over-the-counter derivatives) is determined by using valuation
techniques. A variety of methods and assumptions are used based on market conditions existing at each balance sheet date. Quoted market prices or
dealer quotes for similar instruments are used for long-term debt. Other techniques, such as estimated discounted cash flows, are used to determine fair
value for the remaining financial instruments. The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows.
The Group’s financial instruments are valued principally using level 2 measures:
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 not in a hedge accounting relationship
Total liabilities
Group
Company
2017
£m
6.2
2.8
78.7
87.7
40.0
2.5
42.5
2016
£m
3.4
1.8
67.0
72.2
46.9
4.8
51.7
2017
£m
1.3
2.9
–
4.2
3.4
–
3.4
2016
£m
–
1.8
–
1.8
7.5
–
7.5
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
Derivatives deemed held for trading
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
Unwind loss on financial instrument (note 6)
Amounts to be settled post unwind of financial instrument (notes 6 and 29)
Amounts settled during the year
At 31 March
24. Financial instruments at fair value through profit
Current liabilities
Non-current liabilities
Group
Company
2017
£m
–
2016
£m
4.2
2017
£m
–
Group
Company
2017
£m
(4.2)
6.8
(44.8)
44.3
(2.1)
–
2016
£m
(3.6)
8.4
–
–
(9.0)
(4.2)
2017
£m
(4.2)
6.8
(83.5)
44.3
36.6
–
Group
Company
2017
£m
(2.4)
(48.4)
2016
£m
(2.2)
(51.0)
2017
£m
–
(1.4)
2016
£m
4.2
2016
£m
(3.6)
8.4
–
–
(9.0)
(4.2)
2016
£m
–
(1.6)
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.
147
Financial statements Notes to the
financial statements
continued
25. Cash and cash deposits
Cash at bank and in hand
Short-term bank deposits
Other deposits
Total cash and cash deposits
Group short-term deposits have an average maturity of 1 day.
Group other deposits have an average maturity of 53 days.
Group
Company
2017
£m
101.2
78.0
418.9
598.1
2016
£m
44.5
31.1
556.6
632.2
2017
£m
99.4
78.0
195.1
372.5
2016
£m
92.7
31.1
305.9
429.7
Group other deposits include restricted funds of £223.8 million (2016 £216.8 million) to settle long-term lease liabilities (note 28) and £nil million
(2016 £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:
Group
Company
2017
£m
598.1
(223.8)
374.3
2016
£m
632.2
(226.5)
405.7
2017
£m
372.5
–
372.5
2016
£m
429.7
(9.7)
420.0
Group
Company
2017
£m
107.4
–
4.2
50.6
124.3
286.5
2016
£m
95.9
–
3.9
52.3
112.5
264.6
2017
£m
0.2
0.8
–
0.3
5.0
6.3
2016
£m
0.3
0.3
–
0.3
5.0
5.9
2016
£m
–
53.5
53.5
Cash and cash deposits as above
Less: deposits with a maturity of three months or more (restricted funds)
26. Trade and other payables – current
Trade payables
Amounts owed to subsidiary undertakings
Amounts owed to joint ventures (note 44)
Other tax and social security
Accruals and other payables
The Directors consider that the carrying amount of trade and other payables approximates to their fair value.
Group
Company
2017
£m
8.2
18.6
26.8
2016
£m
–
37.1
37.1
2017
£m
–
37.9
37.9
27. Current tax liabilities
Current year creditor
Prior year tax items
148
Pennon Group plc Annual Report 2017 28. Borrowings
Current
Short-term loans
European Investment Bank
Amounts owed to subsidiary undertakings (note 44)
Obligations under finance leases
Total current borrowings
Non-current
Bank and other loans
Private placements
Bond 2040
RPI index-linked bonds
European Investment Bank
Amounts owed to subsidiary undertakings (note 44)
Obligations under finance leases
Total non-current borrowings
Total borrowings
Group
Company
2017
£m
74.9
41.1
–
116.0
30.5
146.5
328.8
560.5
133.6
416.4
323.4
–
1,762.7
1,353.8
3,116.5
3,263.0
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
2017
£m
74.9
–
282.9
357.8
–
357.8
248.6
560.5
–
–
–
39.1
848.2
–
848.2
1,206.0
2016
£m
–
–
287.2
287.2
–
287.2
323.3
553.8
–
–
–
–
877.1
–
877.1
1,164.3
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%. This instrument was
transferred to South West Water Limited in April 2016.
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
Amounts owed to subsidiary undertakings (note 44)
2017
2016
Book value
£m
Fair value
£m
Book value
£m
Fair value
£m
328.8
560.5
133.6
416.4
323.4
1,762.7
1,353.8
3,116.5
248.6
560.5
39.1
848.2
336.4
614.0
198.7
496.2
282.3
1,927.6
1,217.3
3,144.9
256.4
614.0
39.1
909.5
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
Where market values are not available, fair values of borrowings have been calculated by discounting expected future cash flows at prevailing interest rates.
The maturity of non-current borrowings was:
Between 1 and 2 years
Over 2 year and less than 5 years
Over 5 years
The weighted average maturity of non-current borrowings was 20 years (2016 22 years).
Group
Company
2017
£m
207.7
408.3
2,500.5
3,116.5
2016
£m
141.7
427.0
2,482.9
3,051.6
2017
£m
188.6
148.1
511.5
848.2
2016
£m
74.6
225.8
576.7
877.1
149
Financial statements Notes to the
financial statements
continued
28. Borrowings continued
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
2017
£m
44.3
245.3
2,021.3
2,310.9
(926.6)
1,384.3
2016
£m
41.1
220.5
2,130.7
2,392.3
(1,051.7)
1,340.6
Company
2017
£m
–
–
–
–
–
–
Group
Company
2017
£m
30.5
175.4
1,178.4
1,384.3
2016
£m
26.0
124.8
1,189.8
1,340.6
2017
£m
–
–
–
–
2016
£m
–
–
–
–
–
–
2016
£m
–
–
–
–
Included above are accrued finance charges arising on obligations under finance leases totalling £146.3 million (2016 £138.8 million), of which £2.0 million
(2016 £1.7 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, £79.3 million at 31 March 2017 (2016 £71.7 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.
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, £142.4 million at 31 March 2017 (2016 £142.3 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
2017
£m
60.0
725.0
785.0
2016
£m
100.0
975.0
1,075.0
2017
£m
60.0
180.0
240.0
2016
£m
50.0
240.0
290.0
In addition at 31 March 2017 the Group had undrawn uncommitted short-term bank facilities of £15.0 million (2016 £25.0 million) available to the Company
or South West Water Limited.
150
Pennon Group plc Annual Report 2017 29. Other non-current liabilities
Amounts owed to subsidiary undertakings
Deferred income
Other payables
Group
Company
2017
£m
–
114.5
66.2
180.7
2016
£m
–
91.2
22.0
113.2
2017
£m
8.7
–
44.3
53.0
2016
£m
8.7
–
–
8.7
Deferred income includes amounts relating to the adoption at fair value of assets transferred from customers in the water segment.
Other payables includes an amount of £44.3 million (2016 £nil) due to Nomura Structured Holdings plc on unwind of a synthetic derivative (see note 6).
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.
30. Retirement benefit obligations
During the year the Group operated a number of defined benefit pension schemes and also a defined contribution section within the main scheme. The
principal plan within the Group is the Pennon Group Pension Scheme, which is a funded defined benefit, final salary pension scheme in the UK. The Group’s
pension schemes are established under trust law and comply with all relevant UK legislation.
The assets of the Group’s pension schemes are held in separate trustee administered funds. The trustees of the funds are required to act in the best
interest of the funds’ beneficiaries. The appointment of schemes’ trustees is determined by the schemes’ trust documentation. The Group has a policy for
the main fund that one-half of all trustees, other than the Chairman, are nominated by members of the schemes, including pensioners.
Defined contribution schemes
Pension costs for defined contribution schemes were £5.3 million (2016 £7.5 million).
Defined benefit schemes
Assumptions
The principal actuarial assumptions at 31 March were:
Rate of increase in pensionable pay
Rate of increase for current and future pensions
Rate used to discount schemes’ liabilities and expected return on schemes’ assets
Inflation
2017
%
3.2
2.0
2.55
3.2
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 2015 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
2017
24.8
27.2
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:
2017
26.2
29.5
2016
25.1
27.3
2016
26.5
29.6
Rate of increase in pensionable pay
Rate of increase in current and future pensions
Rate used to discount schemes’ liabilities
Inflation
Life expectancy
Change in
assumption
+/– 0.5%
+/– 0.5%
+/– 0.5%
+/– 0.5%
+/– 1 year
2015
25.0
27.2
2015
26.4
29.5
Impact on
schemes’
liabilities
+/– 0.6%
+/– 6.2%
+/– 9.3%
+/– 6.4%
+/– 4.5%
The sensitivity analysis shows the effect of changes in the principal assumptions used for the measurement of the pension liability. The method used to
calculate the sensitivities is approximate and has been determined taking into account the duration of the liabilities and the overall profile of each scheme’s
membership. This is the same approach as has been adopted in previous years.
151
Financial statements Notes to the
financial statements
continued
30. Retirement benefit obligations continued
The amounts recognised in the balance sheet were:
Present value of financial obligations
Fair value of plan assets
Deficit of funded plans
Impact of minimum funding asset ceiling
Net liability recognised in the balance sheet
The movement in the net defined benefit obligation over the accounting period is as follows:
At 1 April
Arising on acquisition
Current service cost
Past service cost and gains and losses on settlements
Interest (expense)/income
Remeasurements:
Return/ (loss) on plan on assets excluding amounts included in
interest expense
Gain from change in demographic assumptions
(Loss)/ gain from change in financial assumptions
Experience gains
Contributions:
Employers
Plan participants
Payments from plans:
Benefit payments
At 31 March
Present value
of obligation
£m
(833.6)
–
(12.0)
(1.5)
(27.4)
(40.9)
2017
Fair value
of plan assets
£m
792.7
–
–
–
26.2
26.2
–
12.2
(133.1)
(8.7)
(129.6)
–
(1.1)
33.8
32.7
(971.4)
106.0
–
–
–
106.0
11.2
1.1
(33.8)
(21.5)
903.4
Group
Company
2017
£m
(956.0)
903.4
(52.6)
(15.4)
(68.0)
Total
£m
(40.9)
–
(12.0)
(1.5)
(1.2)
(14.7)
106.0
12.2
(133.1)
(8.7)
(23.6)
11.2
–
–
11.2
(68.0)
2016
£m
(826.0)
792.7
(33.3)
(7.6)
(40.9)
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
(833.6)
2017
£m
(58.0)
53.9
(4.1)
–
(4.1)
2016
Fair value of
plan assets
£m
692.7
88.5
–
–
25.5
25.5
(19.7)
–
–
–
(19.7)
33.8
1.1
(29.2)
5.7
792.7
2016
£m
(50.7)
47.7
(3.0)
–
(3.0)
Total
£m
(59.6)
1.9
(12.6)
–
(1.8)
(14.4)
(19.7)
–
2.7
14.4
(2.6)
33.8
–
–
33.8
(40.9)
152
Pennon Group plc Annual Report 2017
The movement in the Company’s net defined benefit obligation over the accounting period is as follows:
1 April
Current service cost
Interest (expense)/income
Remeasurements:
Return/ (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
Present value
of obligation
£m
(50.7)
(0.2)
(1.8)
(2.0)
2017
Fair value of
plan assets
£m
47.7
–
1.7
1.7
–
1.0
(9.0)
0.5
(7.5)
–
2.2
2.2
(58.0)
6.0
–
–
–
6.0
0.7
(2.2)
(1.5)
53.9
Changes in the effect of the asset ceiling during the year were:
Irrecoverable asset at start of the year
Interest on irrecoverable surplus
Actuarial gains/ (losses)
Present value
of obligation
£m
(50.8)
(0.3)
(1.7)
(2.0)
2016
Fair value of
plan assets
£m
46.6
–
1.5
1.5
–
–
–
0.3
0.3
–
1.8
1.8
(50.7)
(0.9)
–
–
–
(0.9)
2.3
(1.8)
0.5
47.7
Total
£m
(3.0)
(0.2)
(0.1)
(0.3)
6.0
1.0
(9.0)
0.5
(1.5)
0.7
–
0.7
(4.1)
Group
Company
2017
£m
7.6
0.2
7.6
2016
£m
10.1
0.3
(2.8)
2017
£m
–
–
–
Total
£m
(4.2)
(0.3)
(0.2)
(0.5)
(0.9)
–
–
0.3
(0.6)
2.3
–
2.3
(3.0)
2016
£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:
Equities
Government bonds
Other bonds
Diversified growth
Property
Insurance linked security
Other (including cash funds)
Quoted prices in
active market
£m
243.7
168.8
170.0
96.8
52.1
47.2
100.2
878.8
2017
Prices not quoted
in active market
£m
1.9
–
–
–
8.8
–
13.9
24.6
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
Fund
%
27
19
19
11
7
5
12
100
Fund
%
31
11
17
22
7
–
12
100
153
Financial statements Notes to the
financial statements
continued
30. Retirement benefit obligations continued
Other assets at 31 March 2017 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
Insurance linked security
Other
Quoted prices
in active market
£m
13.0
10.5
10.1
6.2
4.2
3.8
6.1
53.9
2017
Prices not quoted
in active market
£m
–
–
–
–
–
–
–
–
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
–
–
–
–
–
–
–
–
Fund
%
24
19
19
12
8
7
11
100
Fund
%
30
17
20
12
8
–
13
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
Changes in bond yields
Inflation risk
Life expectancy
The liabilities are calculated using a discount rate set with reference to corporate bond yields; if assets
underperform this yield, this will create a deficit. The schemes hold a significant proportion of growth assets
(equities and diversified growth funds) which are expected to outperform corporate bonds in the long-term,
but can give rise to volatility and risk in the short-term. The allocation to growth assets is monitored such that
it is suitable with the schemes’ long-term objectives.
A decrease in corporate bond yields will increase the schemes’ liabilities, although this will be partially offset
by an increase in the value of the schemes’ bond holdings.
The majority of the schemes’ benefit obligations are linked to inflation, and higher inflation will lead to higher
liabilities (although, in most cases, caps on the level of inflationary increases are in place to protect against
extreme inflation). The majority of the assets are either unaffected by or loosely correlated with inflation,
meaning that an increase in inflation will also increase the deficit.
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 2016 triennial actuarial valuation of the principal defined benefit scheme has been agreed, with the actuarial valuation deficit and schedule of
contributions being in line with the 2013 triennial actuarial valuation, requiring deficit recovery contributions of c.£12 million per annum from 2019 to 2022.
The Group has made a deficit recovery contribution of £0.5 million to the main scheme during the year (2016 £23.7 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 2018.
154
Pennon Group plc Annual Report 2017 31. Deferred tax
Deferred tax is provided in full on temporary differences under the liability method using enacted tax rates.
Movements on deferred tax were:
Liabilities/(assets) at 1 April
Charged to the income statement
(Credited)/charged to equity
Change of rate in income statement – non-underlying
Other non-underlying charges in the income statement
Arising on acquisition
Liabilities/(assets) at 31 March
Group
Company
2017
£m
272.0
18.9
(2.3)
(21.3)
2.3
–
269.6
2016
£m
235.9
39.2
4.5
(33.1)
0.7
24.8
272.0
2017
£m
(2.2)
–
–
(0.1)
–
–
(2.3)
2016
£m
(3.0)
0.5
0.5
(0.2)
–
–
(2.2)
Deferred tax assets have been recognised in respect of all temporary differences giving rise to deferred tax assets because it is probable that these assets
will be recovered.
The majority of the Group’s deferred tax liability is expected to be recovered over more than one year. The majority of the Company’s deferred tax asset is
expected to be recovered over more than one year. All deferred tax assets and liabilities within the same jurisdiction are offset.
The deferred tax balance has been reduced by a credit of £19.7 million to recognise the change in the rate of corporation tax enacted on 15 September
2016 to reduce the rate at 1 April 2020 from 18% to 17%. This credit includes a credit of £21.3 million recognised in the income statement and a debit of
£1.6 million recognised in equity.
The movements in deferred tax assets and liabilities were:
Group
Deferred tax liabilities
At 1 April 2015
Arising on acquisition
Charged/(credited) to the income statement
Non-underlying (credit)/charge to the income statement
At 31 March 2016
Charged/(credited) to the income statement
Non-underlying (credit)/charge to the income statement
Reclassifications
At 31 March 2017
Deferred tax assets
At 1 April 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
(Credited)/charged to the income statement
Non-underlying (credit)/charge to the income statement
(Credited)/charged to equity
Non-underlying charge/(credit) to equity
Reclassifications
At 31 March 2017
Net liability:
At 31 March 2016
At 31 March 2017
Accelerated tax
depreciation
£m
235.0
18.3
16.3
(25.9)
243.7
15.8
(17.6)
(0.1)
241.8
Fair value
adjustments
£m
9.9
19.1
(1.7)
(2.7)
24.6
(1.9)
(0.6)
–
22.1
Revenue on service
concession
arrangements
£m
37.3
–
7.5
(5.1)
39.7
4.8
(2.8)
–
41.7
Other
£m
0.3
–
–
0.6
0.9
(0.4)
(0.1)
–
0.4
Long term
liabilities
including
provisions
£m
(19.9)
(0.1)
14.0
1.1
–
–
(4.9)
(1.2)
(0.1)
–
–
(0.2)
(6.4)
Retirement
benefit
obligations
£m
(11.8)
0.4
3.7
(2.1)
(0.6)
3.0
(7.4)
(0.6)
(0.2)
(4.7)
1.4
–
(11.5)
Derivatives
£m
(9.0)
–
–
–
1.0
0.8
(7.2)
–
2.6
1.0
0.3
0.9
(2.4)
Share
based
payments
£m
(1.6)
–
–
–
0.2
0.1
(1.3)
–
–
(0.2)
(0.1)
–
(1.6)
Tax losses
£m
(1.4)
–
(0.7)
0.2
–
–
(1.9)
0.1
0.1
–
–
–
(1.7)
Fair value
adjustment
£m
–
(12.9)
0.7
1.2
–
–
(11.0)
0.5
0.5
–
–
–
(10.0)
Other
£m
(2.9)
–
(0.6)
0.3
–
–
(3.2)
1.8
(0.8)
–
–
(0.6)
(2.8)
Total
£m
282.5
37.4
22.1
(33.1)
308.9
18.3
(21.1)
(0.1)
306.0
Total
£m
(46.6)
(12.6)
17.1
0.7
0.6
3.9
(36.9)
0.6
2.1
(3.9)
1.6
0.1
(36.4)
272.0
269.6
155
Financial statements Notes to the
financial statements
continued
31. Deferred tax continued
Company
Deferred tax assets
At 1 April 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
(Credited)/ charged to the income statement
Non-underlying credit to income statement
(Credited)/charged to equity
Non-underlying charge to equity
At 31 March 2017
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)
Share-based payments
Retirement
benefit
obligations
£m
Derivatives
£m
Share based
payments
£m
(0.8)
0.3
(0.2)
(0.1)
0.3
(0.5)
–
(0.1)
(0.3)
0.2
(0.7)
(1.6)
–
–
0.2
0.1
(1.3)
–
–
0.1
0.1
(1.1)
Group
2017
£m
3.3
(1.3)
2.0
0.3
2.3
(0.3)
–
–
0.1
–
(0.2)
(0.1)
–
(0.1)
–
(0.4)
2016
£m
(2.4)
(1.8)
(4.2)
(0.3)
(4.5)
Other
£m
(0.3)
0.1
–
–
–
(0.2)
0.1
–
–
–
(0.1)
Company
2017
£m
0.1
(0.2)
(0.1)
0.1
–
Total
£m
(3.0)
0.4
(0.2)
0.2
0.4
(2.2)
–
(0.1)
(0.3)
0.3
(2.3)
2016
£m
(0.2)
(0.3)
(0.5)
(0.1)
(0.6)
156
Pennon Group plc Annual Report 2017 32. Provisions
Group
At 1 April 2016
Charged to the income statement
Non-underlying charge (note 6)
Capitalised
Utilised
At 31 March 2017
Environmental
and landfill
restoration
£m
Restructuring
£m
Other
provisions
£m
182.1
6.2
–
7.1
(11.6)
183.8
11.7
–
1.2
–
(6.4)
6.5
27.6
0.6
–
–
(4.3)
23.9
Total
£m
221.4
6.8
1.2
7.1
(22.3)
214.2
The amount charged to the income statement includes £9.1 million (2016 £9.4 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
2017
£m
40.4
173.8
214.2
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. The Group has applied a discount rate of 4.75% (2016 4.75%) and an inflation rate of 2.5% (2016 2.5%).
The restructuring provision relates principally to severance costs and will be utilised within one year.
Other provisions include underperforming contracts of £11.1 million (2016 £15.6 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. The weighted average
contract life of underperforming contracts is 3 years.
157
Financial statements Notes to the
financial statements
continued
33. Share capital
Allotted, called–up and fully paid
Group and Company
At 1 April 2015 ordinary shares of 40.7p each
Shares issued in respect of equity issuance
Shares issued under the Scrip Dividend Alternative
For consideration of £1.1 million, shares reissued to the Pennon Employee Share Trust
For consideration of £0.1 million, shares reissued under the Executive Share Option Scheme
For consideration of £1.3 million, shares reissued under the Company’s Sharesave Scheme
For consideration of £2.1 million, shares issued under the Company’s Sharesave Scheme
At 31 March 2016 ordinary shares of 40.7p each
Shares issued under the Scrip Dividend Alternative
For consideration of £1.3 million, shares issued to the Pennon Employee Share Trust
For consideration of £0.2 million, shares issued under the Executive Share Option Scheme
For consideration of £0.0 million, shares reissued under the Executive Share Option Scheme
For consideration of £3.2 million, shares issued under the Company’s Sharesave Scheme
At 31 March 2017 ordinary shares of 40.7p each
Number of shares
Treasury shares
Ordinary shares
389,515
–
–
(143,538)
(8,305)
(227,316)
–
10,356
–
–
–
(1,913)
–
8,443
398,720,708
12,084,337
760,626
143,538
8,305
227,316
395,767
412,340,597
771,563
143,479
24,457
1,913
611,284
413,893,293
£m
162.4
4.9
0.3
–
–
–
0.2
167.8
0.3
0.1
–
–
0.2
168.4
The 12,084,337 share issuance last year 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 reissued 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:
Sharesave Scheme
i)
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 17% 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
386p
431p
536p
588p
538p
611p
683p
709p
2012 – 2016
2013 – 2017
2014 – 2018
2015 – 2017
2016 – 2018
2017 – 2019
2018 – 2020
2019 – 2021
Thousands of shares in respect of
which options outstanding at 31 March
2016
44
41
150
103
540
687
1,291
–
2,856
2017
–
41
29
91
103
609
1,132
748
2,753
6 July 2009
28 June 2010
29 June 2011
29 June 2012
3 July 2013
14 July 2014
24 June 2015
29 June 2016
158
Pennon Group plc Annual Report 2017 The number and weighted average exercise price of Sharesave options are:
At 1 April
Granted
Forfeited
Exercised
Expired
At 31 March
2017
2016
Number of
ordinary shares
(thousands)
2,856
798
(205)
(610)
(86)
2,753
Weighted
average exercise
price per share
(p)
619
709
661
533
639
660
Number of
ordinary shares
(thousands)
2,330
1,364
(170)
(623)
(45)
2,856
Weighted
average exercise
price per share
(p)
561
683
622
545
596
619
The weighted average price of the Company’s shares at the date of exercise of Sharesave options during the year was 878p (2016 779p). The options
outstanding at 31 March 2017 had a weighted average exercise price of 660p (2016 619p) and a weighted average remaining contractual life of 1.9 years
(2016 2.1 years).
The aggregate fair value of Sharesave options granted during the year was £0.9 million (2016 £1.7 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
2017
854
709
18.0%
3.4 years
0.3%
4.2%
2016
854
683
17.0%
3.4 years
0.8%
4.0%
Expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous three 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
2017
2016
Number of
ordinary shares
(thousands)
1,198
378
(128)
(427)
1,021
Weighted
average exercise
price per share
(p)
761
920
653
721
850
Number of
ordinary shares
(thousands)
1,195
420
–
(417)
1,198
Weighted
average exercise
price per share
(p)
744
811
–
764
761
The awards outstanding at 31 March 2017 had a weighted exercise price of 850p (2016 761p) and a weighted average remaining contractual life of 1.3 years
(2016 1.3 years).
159
Financial statements
Notes to the
financial statements
continued
33. Share capital continued
The aggregate fair value of awards granted during the year was £1.7 million (2016 £1.7 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
2017
920p
18.0%
0.3%
2016
811p
17.0%
0.8%
Expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous three 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
2017
2016
Number of
ordinary shares
(thousands)
307
146
(122)
(6)
325
Weighted
average
exercise price
per share
(p)
759
944
745
701
848
Number of
ordinary shares
(thousands)
316
154
(152)
(11)
307
Weighted
average
exercise price
per share
(p)
758
791
790
776
759
The awards outstanding at 31 March 2017 had a weighted average exercise price of 848p (2016 759p) and a weighted average remaining contractual life of
1.4 years (2016 1.6 years). The Company’s share price at the date of the awards ranged from 791p to 950p.
The aggregate fair value of awards granted during the year was £1.3 million (2016 £1.2 million), determined from market value. No option pricing
methodology is applied since dividends paid on the shares are receivable by the participants in the scheme.
Further details of the plans and options granted to Directors, included above, are shown in the Directors’ remuneration report.
34. Share premium account
Group and Company
At 1 April 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
Adjustment for shares issued under the Scrip Dividend Alternative
Shares issued under the Sharesave Scheme
Shares issued to the Pennon Employee Share Trust
Shares issued under the Executive Share Option Scheme
At 31 March 2017
160
£m
118.6
95.4
(2.3)
(0.3)
1.9
213.3
(0.3)
3.0
1.2
0.2
217.4
Pennon Group plc Annual Report 2017 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 2015
At 31 March 2016
At 31 March 2017
36. Retained earnings and other reserves
Group
At 1 April 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
Profit for the year
Other comprehensive loss for the year
Transfer from hedging reserve to property, plant and equipment
Dividends paid relating to 2016
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
At 31 March 2017
Own shares
£m
Hedging
reserve
£m
Retained
earnings
£m
(1.8)
–
–
–
–
–
–
0.8
(1.1)
–
(2.1)
–
–
–
–
–
–
2.1
(2.6)
(2.6)
(35.0)
–
(0.2)
3.4
–
–
–
–
–
–
(31.8)
–
5.1
(1.5)
–
–
–
–
–
(28.2)
670.9
152.1
(2.6)
–
(129.5)
6.3
2.5
(0.8)
–
2.5
701.4
164.3
(20.0)
–
(138.5)
6.9
3.2
(2.1)
–
715.2
£m
144.2
144.2
144.2
Total
£m
634.1
152.1
(2.8)
3.4
(129.5)
6.3
2.5
–
(1.1)
2.5
667.5
164.3
(14.9)
(1.5)
(138.5)
6.9
3.2
–
(2.6)
684.4
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 330,000 ordinary shares (2016 309,000 ordinary shares) held by the trust at 31 March 2017 was £2.9 million (2016 £2.5 million).
161
Financial statements
Notes to the
financial statements
continued
36. Retained earnings and other reserves continued
Company
At 1 April 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 reissued
At 31 March 2016
Profit for the year
Other comprehensive loss for the year
Dividends paid relating to 2016
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
At 31 March 2017
37. Perpetual capital securities
Group and Company
At 1 April 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
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 2017
Hedging
reserve
£m
Retained
earnings
£m
(5.5)
–
0.5
–
–
–
–
–
(5.0)
–
0.3
–
–
–
–
(4.7)
1,011.4
91.4
(0.9)
(129.5)
6.3
0.7
(0.8)
2.5
981.1
162.9
(1.4)
(138.5)
6.9
1.2
(2.1)
1,010.1
Total
£m
1,005.9
91.4
(0.4)
(129.5)
6.3
0.7
(0.8)
2.5
976.1
162.9
(1.1)
(138.5)
6.9
1.2
(2.1)
1,005.4
£m
294.8
(20.3)
4.1
16.2
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 2017, a periodic return of £20.3 million was paid during
the year.
162
Pennon Group plc Annual Report 2017 38. Analysis of cash flows given in the statement of cash flows
Reconciliation of profit for the year to cash generated from operations:
Cash generated from operations
Continuing operations
Profit for the year
Adjustments for:
Share-based payments
Profit on disposal of property, plant and equipment
Depreciation charge
Amortisation of intangible assets
Non-underlying provision charge
Non-underlying remeasurement of fair value movement in derivatives
Non-underlying unwind of synthetic derivative
Share of post-tax profit from joint ventures
Finance income (before non-underlying items)
Finance costs (before non-underlying items)
Dividends receivable
Taxation charge/(credit)
Changes in working capital:
Increase in inventories
(Increase)/decrease in trade and other receivables
Increase in service concession arrangements receivable
Increase/(decrease) in trade and other payables
Increase/(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
Group
Company
2017
£m
180.5
2.9
(7.5)
178.2
3.2
10.7
(16.0)
44.8
(4.2)
(36.3)
95.1
–
30.0
(0.7)
(13.1)
(22.2)
8.5
2.3
(24.7)
431.5
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
2017
£m
179.1
1.1
–
0.1
–
–
–
83.5
–
(51.1)
37.1
(247.0)
(3.3)
–
(158.1)
–
0.1
(0.5)
–
(159.0)
Group
Company
2017
£m
76.4
12.9
89.3
2016
£m
79.1
9.4
88.5
2017
£m
39.1
–
39.1
2016
£m
107.6
0.8
–
0.1
–
–
–
–
–
(52.3)
37.2
(140.7)
44.9
–
(37.4)
–
0.3
(2.2)
–
(41.7)
2016
£m
35.3
–
35.3
163
Financial statements
Group
Company
2017
£m
598.1
(74.9)
(41.1)
(30.5)
–
(146.5)
(1,439.3)
(323.4)
(1,353.8)
(3,116.5)
(2,664.9)
2016
£m
632.2
–
(39.0)
(26.0)
–
(65.0)
(1,502.5)
(234.5)
(1,314.6)
(3,051.6)
(2,484.4)
2017
£m
372.5
–
–
–
(357.8)
(357.8)
(848.2)
–
–
(848.2)
(833.5)
2016
£m
429.7
–
–
–
(287.2)
(287.2)
(877.1)
–
–
(877.1)
(734.6)
Notes to the
financial statements
continued
39. Net borrowings
Cash and cash deposits
Borrowings – current
Bank and other loans
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
164
Pennon Group plc Annual Report 2017 40. Subsidiary, joint venture and associate undertakings at 31 March 2017
Principal subsidiary companies
Water
South West Water Limited*
South West Water Finance Plc
Source Contact Management Limited
Pennon Water Services Limited(2)
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
Registered office address
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
1 Exchange Crescent, Conference Square, Edinburgh, EH3 8UL
First Floor Offices, Riverside House, Sir Thomas Longley Road, Medway City,
Rochester, ME2 4FN
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
1 Exchange Crescent, Conference Square, Edinburgh, EH3 8UL
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
1 Exchange Crescent, Conference Square, Edinburgh, EH3 8UL
Country of
incorporation,
registration and
principal
operations
England
England
England
England
England
England
England
England
England
England
Scotland
England
England
England
England
England
England
England
England
England
England
Scotland
England
England
England
Scotland
Other
Peninsula Insurance Limited*(1)
Level 5, Mill Court, La Charroterie, St Peter Port, GY1 1EJ
Guernsey
(1) Captive insurance company established with the specific objective of financing risks emanating from within the Group.
(2) 80% of share capital owned by Pennon Group plc. All shares in issue are ordinary shares.
165
Financial statements
Notes to the
financial statements
continued
40. Subsidiary, joint venture and associate undertakings at 31 March 2017 continued
Other trading companies
Dragon Waste Limited (81%)
Peninsula Leasing Limited*
Peninsula Properties (Exeter) Limited
Peninsula Trustees Limited*
Pennon Defined Contribution Pension Trustee Limited*
Pennon Pension Trustees Limited*
Pennon Share Plans (Guernsey) Limited*
Pennon Share Schemes Trustees Limited*
Pennon Trustee Limited*
Raikes Lane Limited
Source Collections Limited
Source for Business Limited*
SSWB Limited
Viridor Waste (Somerset) Pension Scheme & Life Assurance Limited
Registered office address
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Albert House, South Esplanade, St Peter Port, GY1 1AW
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Other dormant companies
A.A. Best & Sons Limited
Acetip
Albion Water (Shotton) Limited
Alderney Water Limited
Analaq Limited*
Aquacare (BWH) Limited
Astley Minerals Limited
Avon Valley Water Limited
Basecall Limited
Bournemouth Water Investments Limited
Bournemouth Water Limited
BWH Enterprises 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*
Registered office address
1 Exchange Crescent, Conference Square, Edinburgh, EH3 8UL
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Country of
incorporation
England
England
England
England
England
England
Guernsey
England
England
England
England
England
England
England
Country of
incorporation
Scotland
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
166
Pennon Group plc Annual Report 2017 Other dormant companies
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
Peninsula MB Limited*
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*
Viridor Glass Recycling Limited
Viridor London Recycling Limited
Viridor New England (EfW) Limited
Viridor Resource (Peterborough) Limited
Viridor Resource Transport Limited
Registered office address
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
1 Exchange Crescent, Conference Square, Edinburgh, EH3 8UL
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
1 Exchange Crescent, Conference Square, Edinburgh, EH3 8UL
1 Exchange Crescent, Conference Square, Edinburgh, EH3 8UL
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
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
England
England
England
England
England
England
England
England
England
England
England
England
England
England
Scotland
Scotland
England
England
England
England
England
England
167
Financial statements Notes to the
financial statements
continued
40. Subsidiary, joint venture and associate undertakings at 31 March 2017 continued
Other dormant companies
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*
West Hampshire Water Limited
Registered office address
1 Exchange Crescent, Conference Square, Edinburgh, EH3 8UL
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
1 Exchange Crescent, Conference Square, Edinburgh, EH3 8UL
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Country of
incorporation
Scotland
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
Scotland
England
England
England
* Indicates the shares are held directly by Pennon Group Plc, the Company.
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.
168
Pennon Group plc Annual Report 2017 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
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
Shelford Composting Limited
Associate
INEOS Runcorn (TPS) Holdings Limited
INEOS Runcorn (TPS) Limited
1,000,000 A ordinary shares
1,000,000 B ordinary shares
–
100%
12,000 ordinary shares
50%
50 A ordinary shares
50 B ordinary shares
1,000 A ordinary shares
186,750 B1 ordinary shares
62,250 B2 ordinary shares
–
100%
20%
50%
–
Waste management
Waste management
Waste management
Waste management
Shares in INEOS Runcorn (TPS) Holdings Limited are held by Viridor Waste Management Limited.
The Group’s economic interest in INEOS Runcorn (TPS) Holdings Limited is 37.5%, as returns from the investment are based on holdings of B1 and B2
ordinary shares.
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
2017
£m
10.6
28.2
104.5
143.3
2016
£m
10.7
29.2
80.0
119.9
Company
2017
£m
–
–
–
–
2016
£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.
169
Financial statements Notes to the
financial statements
continued
42. Contingent liabilities
Guarantees:
Borrowing facilities of subsidiary undertakings
Performance bonds
Other
Group
Company
2017
£m
–
187.5
–
187.5
2016
£m
–
159.7
4.0
163.7
2017
£m
555.9
187.5
–
743.4
2016
£m
421.1
159.7
4.0
584.8
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 last year to pay further consideration in respect of a previously acquired business when the
outcome of planning applications was 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 2017 of certain subsidiaries: Peninsula Leasing Limited and Viridor Waste 2 Limited since these companies qualify for
the exemption.
Other contractual and litigation uncertainties
The Group establishes provisions in connection with contracts and 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.
Matters where it is uncertain that these conditions are met are:
• The Group’s joint venture Viridor Laing (Greater Manchester) Ltd is party to a PFI contract with the Greater Manchester Waste Disposal Authority (the
Authority). The authority has announced its intention to terminate this contract. The Group is in negotiation with the Authority with the aim of delivering
an orderly exit from the contract.
• The Group is subject to litigation from time to time as a result of its activities, including a prosecution from the Health and Safety Executive in relation to
the fatality of a Viridor employee at Derriford, Plymouth in 2015.
Uncertain tax items
Management judgement is required to estimate the tax provisions relating to uncertain tax items that remain to be agreed with HMRC.
In 2015/16 the Group reported significant judgement around uncertain tax items related to the interpretation of tax legislation regarding financial
arrangements entered into in the normal course of business, which could have resulted in a range of outcomes of additional liabilities of c£20 million, to a
reduction in liabilities of £52 million. Following engagement and subsequently resolution with HMRC across a number of areas, achieved through a process
designed to expedite outstanding tax matters, these items are no longer an area of significant judgement and there is no such range related to ongoing
uncertain tax items. The Group has a small number of ongoing uncertain tax items related to capital allowances for expenditure incurred in the normal
course of business, where the Group has paid in full the tax HMRC interpret as due, and therefore would receive up to £20 million (2015/16 £70 million)
should these tax items be concluded in the Group’s favour.
43. Capital commitments
Contracted but not provided
Group
2017
£m
401.1
2016
£m
374.4
Company
2017
£m
–
2016
£m
–
170
Pennon Group plc Annual Report 2017 44. 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)
2017
£m
80.1
15.8
–
10.4
6.6
4.5
2017
£m
40.2
8.6
37.8
86.6
15.3
1.0
1.3
17.6
2.7
1.5
4.2
The £86.6 million (2016 £81.2 million) receivable relates to loans to related parties included within receivables and due for repayment in instalments
between 2017 and 2033. Interest is charged at an average of 13.0% (2016 13.0%).
Company
The following transactions with subsidiary undertakings occurred in the year:
Sales of goods and services (management fees)
Purchase of goods and services (support services)
Interest receivable
Interest payable
Dividends received
2017
£m
11.2
0.5
39.6
0.1
247.0
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.
2016
£m
87.3
18.5
0.3
12.1
4.3
6.0
2016
£m
36.8
8.9
35.5
81.2
11.3
1.0
2.7
15.0
2.3
1.6
3.9
2016
£m
10.5
0.4
38.6
0.1
140.7
171
Financial statements Notes to the
financial statements
continued
44. Related party transactions continued
Year-end balances
Receivables due from subsidiary undertakings
Loans
Trading balances
2017
£m
1,124.3
13.4
2016
£m
965.6
8.6
Interest on £70.0 million of the loans has been charged at a fixed rate of 4.5%, on £428.0 million at a fixed rate of 5.0% and on £28.0 million at a fixed rate of
6.0% (2016 £70.0 million at 4.5%, £373.6 million nil at 5.0%, £28.0 million at 6.0% and £0.5 million at 1.4%). Interest on £497.8 million of the loans is charged at
12 month LIBOR +1.0% (2016 £443.5 million) and on £0.5 million at base rate +1.0%. These loans are due for repayment in instalments over the period 2016
to 2043.
Interest on £100.0 million of the loans has been charged at 1 month LIBOR + 1.0% (2016 £50.0 million). This loan is expected to be repaid in 2017/18. During
the year there were no provisions (2016 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.
2017
£m
322.0
9.5
2016
£m
287.2
14.6
172
Pennon Group plc Annual Report 2017 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
Declared dividends per share
Capital expenditure
Acquisitions
Property, plant and equipment
Balance sheet
Non-current assets
Net current assets
Non-current liabilities
Net assets
Number of employees (average for year)
Water
Waste management
Other businesses
2017
£m
1,353.1
304.6
(58.8)
4.2
250.0
(39.5)
(30.0)
180.5
164.3
16.2
149.5
39.8p
4.5p
2.7p
47.0p
35.96p
2017
£m
–
377.5
4,937.0
454.4
(3,882.2)
1,509.2
1,589
3,153
57
4,799
2016
£m
1,352.3
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
33.58p
2016
£m
91.0
284.2
4,676.7
549.1
(3,738.2)
1,487.6
1,706
3,230
51
4,987
2015
£m
1,357.2
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
31.80p
2015
£m
–
301.4
4,325.9
586.0
(3,557.8)
1,354.1
1,408
3,101
49
4,558
2014
£m
1,321.2
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
30.31p
2014
£m
–
360.8
4,076.6
241.9
(3,120.9)
1,197.6
1,356
3,044
51
4,451
2013
£m
1,201.1
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
28.46p
2013
£m
14.8
410.1
3,846.0
378.5
(3,152.4)
1,072.1
1,354
3,180
50
4,584
173
Financial statements Shareholder
information
Financial calendar
Financial year end
28th Annual General Meeting
Ex-dividend date for 2017 final dividend
Record date for 2017 final dividend
2017 final dividend payable
2017/18 half-yearly results announcement
2018 interim dividend payable
2018 final results announcement
29th Annual General Meeting
2018 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
6 July 2017
6 July 2017*
7 July 2017*
1 September 2017*
29 November 2017
April 2018
25 May 2018
5 July 2018
September 2018
6 July 2017
7 July 2017
21 July 2017
14 August 2017
31 August 2017
1 September 2017
1 September 2017
* Subject to obtaining shareholder approval at the 2017 Annual General Meeting to the payment of a final dividend for the year ended 31 March 2017.
Shareholder analysis at 31 March 2017
Holding of shares
1-100
101-1,000
1,001-5,000
5,001-50,000
50,001-100,000
100,001 +
Individuals
Companies
Trust companies (pension funds etc.)
Banks and nominees
Number of shareholders
% of total shareholders
% of ordinary shares
2,418
8,354
7,614
1,111
95
283
19,875
12.17
42.03
38.31
5.59
0.48
1.42
0.02
1.07
4.04
3.03
1.64
90.21
Number of accounts
% of total accounts
% of total shares
17,474
135
10
2,256
19,875
87.92
0.68
0.05
11.35
6.59
0.30
0.01
93.09
174
Pennon Group plc Annual Report 2017 Major shareholdings
The net position on 31 March 2017 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:
Lazard Asset Management LLC
Pictet Asset Management SA
Ameriprise Financial, Inc.
The Capital Group Companies, Inc.
RARE Infrastructure Limited
AXA Investment Managers SA
Invesco Limited
UBS Investment Bank
Number of voting rights
(direct and indirect)
% of voting rights
33,187,671
25,599,217
20.328,154
20,106,888
19,366,782
18,088,394
17,212,959
16,610,004
8.02%
6.18%
4.91%
4.86%
4.68%
4.37%
4.16%
4.01%
No changes to interests in the Company’s issued share capital
have been disclosed to the Company between 31 March 2017
and 22 May 2017 (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 geographic
rate and will vary by provider.).
Lines are open 8.30am-5.30pm Monday-Friday, excluding public
holidays in England and Wales.
Overseas telephone: +44 371 664 9234 (calls outside the United
Kingdom will be charged at the applicable international rate).
Email: pennon@capita.co.uk
Website: signalshares.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).
ShareGift 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,
or by contacting ShareGift on 020 7930 3737 (www.sharegift.org.uk).
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 2017 Annual
General Meeting for the payment of a final dividend for the year
ended 31 March 2017, full details of the scrip dividend alternative
and how to participate will be sent to shareholders on 21 July 2017.
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.signalshares.com.
175
Financial statements Shareholder information
continued
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.signalshares.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
confirmations 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.signalshares.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.
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.
176
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.
3.
4.
5.
6.
7.
Do not get into a conversation; note the name of the person
and firm contacting you and then end the call.
Check the Financial Services Register from www.fca.org.uk
to see if the person and firm contacting you is authorised by
the FCA.
Beware of fraudsters claiming to be from an authorised firm,
copying its website or giving you false contact details.
Use the firm’s contact details listed on the Register if you
want to call it back.
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.
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.
Pennon Group plc Annual Report 2017 This report is printed on material derived from sustainable sources, and printed
using vegetable based inks. Both the manufacturing paper mill and printer
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Pennon Group plc
Peninsula House
Rydon Lane
Exeter
Devon
England EX2 7HR
www.pennon-group.co.uk
Registered in England & Wales
Registered Number: 2366640
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