Plain-text annual report
Annual Report & Accounts 2018
Bringing resources to life
P
e
n
n
o
n
A
n
n
u
a
l
R
e
p
o
r
t
&
A
c
c
o
u
n
t
s
2
0
1
8
PE NNON GROUP PLC
ANNUA L REP ORT 2 018
As one of the largest
FTSE 250 environmental
infrastructure groups in
the UK, Pennon has assets
of around £6.2 billion and
a workforce of around
5,000 people.
STR ATE GIC REPORT
G OVERN ANC E
Overview
04 Our business at a glance
06 Group highlights
08 Chairman’s statement
12 Market overview
Business model
14
Strategic priorities
16
Review of the Chief Executive Officer
Group performance
20
24 Key performance indicators
26 Our people
28 Our operations
28 Waste management
34 Water and wastewater
41 Water retail services
Report of the Chief Financial Officer
Risk report
42
52
Chairman’s letter to shareholders
64
66 Board of Directors
68 Board Committees’ reports
84 Directors’ remuneration report
Directors’ report – other
102
statutory disclosures
FINAN CIA L STATEM ENTS
Independent auditor’s report
108
114 Financial statements
169 Five-year financial summary
170 Shareholder information
Find out more about Pennon
Corporate website
www.pennon-group.co.uk
Annual Report
www.pennon-group.co.uk/
annualreport2018
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 have integrated our
reporting on financial, economic, social
and environmental aspects of our
performance and how they contribute
to long-term value creation. In preparing
this integrated report, we have referred
to the principles of the International
Integrated Reporting Council’s
International Framework.
Our vision
Bringing resources to life
Our values
Trusted
We do the right thing for
our customers and stakeholders
Collaborative
We forge strong relationships, working
together to make a positive impact
READ MORE ON PAGES 09 A ND 26
Strategic priorities
Leadership
in UK water
and waste
READ MORE ON PAGES 1 6 AND 17
Responsible
We keep our promises to our customers,
communities and each other
Progressive
We are always looking for new ways
to improve and make life better
Leadership
in cost base
efficiency
Driving
sustainable
growth
Our core businesses
Pennon provides services in waste management,
water and wastewater, and water retail services through
our three businesses Viridor, South West Water and
Pennon Water Services.
Waste
management
Water and
wastewater
Water retail
services
READ MORE ON PAGES 28 TO 41
R E A D M O R E O N L I N E
www.pennon-group.co.uk/our-core-businesses
01
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS We aim to protect the
environment while
providing outstanding
service to customers
02
PENNON GROUP PLC ANNUAL REPORT 2018 OVERVIEW
04 Our business at a glance
06 Group highlights
08 Chairman’s statement
12 Market overview
Business model
14
Strategic priorities
16
S
T
N
E
M
E
T
A
T
S
L
A
I
C
N
A
N
I
F
03
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCE
Our business at a glance
We aim to provide an outstanding level of
service to our customers and communities,
while protecting the environment and
creating value for our shareholders.
1
2
3
Water and
wastewater
We are focused on providing water and wastewater
services in the most efficient and sustainable way
possible. Innovation, new technologies, and the
pioneering of a holistic approach to water and
wastewater management are delivering service
improvements and long-term value.
READ MORE ON PAGES 3 4 TO 4 0
1
Raw water reservoirs/
water resources
2 Upstream catchment
3 Water treatment works
4
Drinking water
mains network
5 Surface water catchment
8
6 Customer support
Wastewater mains
7
network
Wastewater treatment
works
Sewage sludge/
bio-resources
Improve bathing and
shellfish water quality
9
10
5
17
4
7
8
9
04
16
15
12
14
13
11
6
18
10
PENNON GROUP PLC ANNUAL REPORT 2018 1
2
3
5
17
7
8
4
9
6
18
16
15
12
14
13
11
Waste
management
Our purpose is to give resources new life. We remain
at the forefront of the resource sector in the UK,
transforming waste into energy, high-quality
recyclates and raw materials.
READ MORE ON PAGES 28 TO 3 3
11
12
13
A fleet of waste
collection vehicles
Energy recovery
facilities (ERFs)
Household waste
recycling centres (HWRCs)
14
15
16
Materials recycling
facilities (MRFs)
Powering homes
and businesses
Landfill sites and
power generation
17 Trading recycled materials
Water retail
services
Business water specialists providing water
retail services for all business customers’
water management needs.
READ MORE ON PAGE 41
18
UK-based customer
service centre
10
05
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Group highlights
Financial
Highlights of the year
• Good performance in cost base efficiency
– South West Water total expenditure (totex)
efficiency K6 to date £177 million
– Final phase of Bournemouth Water
integration complete: on track to deliver
K6 cost savings of £27 million
– £13 million of Group-wide efficiencies
secured to date, including integration
of a Group-wide IT platform. On track
to deliver £17 million by 2019
• Delivered £124 million of EBITDA from
energy recovery facilities (ERFs)
• Continued sector-leading return on regulated
equity at a cumulative rate of 11.8%
• Strong earnings growth across the Group
• £398 million of capital investment
in sustainable growth projects
• Perpetual capital securities issuance
delivering balance sheet flexibility
• Group remains well funded with low-cost
efficient long-term financing
• Launch of pioneering sustainable
financing framework
• Continued delivery of long-established
10-year sector-leading dividend policy
to 2020 supported by earnings growth.
READ MORE ON PAGES 4 2 TO 51
(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.
Revenue statutory
£1,396m
2016/17: £1,353m (+3.2%)
EPS statutory
48.0p
2016/17: 39.8p (+20.6%)
EBITDA statutory
£513m
2016/17: £475m (+7.9%)
EPS underlying(1)
50.9p
2016/17: 47.0p (+8.3%)
EBITDA underlying(1)
£510m
2016/17: £486m (+4.9%)
Dividend
38.59p
2016/17: 35.96p (+7.3%)
Profit before tax statutory
£263m
2016/17: £211m (+24.9%)
Capital investment
£398m
2016/17: £385m (+3.5%)
Profit before tax underlying(1)
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
259
4
263
(41)
(21)
201
£259m
2016/17: £250m (+3.5%)
Average interest rate
3.7%
2016/17: 3.4% (+0.3pts)
06
PENNON GROUP PLC ANNUAL REPORT 2018 Operational and sustainability(2)
Highlights of the year
• ERFs continued to perform well
with average availability of 92%(3) and
operational ERFs delivering in excess
of base case expectations
• Three ERFs in commissioning:
– At Glasgow’s Recycling and Renewable
Energy Centre the materials recycling
facility and anaerobic digestion facility
have operated throughout the period
and commissioning is underway for
the advanced combustion facility
– Dunbar contributing financially(5) in
line with expectations. Commissioning
continues to progress
– South London (Beddington)
commissioning nearing completion
• Avonmouth ERF construction on
schedule and budget
• Long-term partnership with Greater
Manchester Waste Disposal
Authority continues – positive
outcome reached
• Recycling markets challenging with operating
costs increasing to meet quality demands.
Self-help measures continue. Developing new
Asian markets, partially mitigating impacts
of China’s changing quality requirements
• Continued strong performance in water, with
customers at the heart of our delivery plans:
– Overall operational performance ahead of
our commitments despite challenges from
severe weather experienced in the region
– £79 million of benefits identified to share
with customers since 2015 through our
unique WaterShare mechanism
– Extensive customer research and
engagement ahead of Price Review
2019 (PR19)
• Pennon Water Services has achieved net
growth in the new competitive non-
household market. Focused on value
enhancing contracts
• Successful launch of HomeSafe programme
• New vision and values developed.
READ MORE ON PAGES 26 TO 41
(2) Further commentary on these highlights and metrics is
provided in the sections Our people (pages 26 and 27)
and Our operations (pages 28 to 41).
(3) Weighted by capacity, excludes Bolton, includes JVs
at 100%.
(4) Gigawatt hours, being an amount of energy equivalent to
delivering 1 billion watts of power for a period of one hour.
(5) Reflecting liquidated damages.
Total low-carbon
energy generation
1,560GWh(4)
2016/17: 1,549GWh (+0.7%)
Lost time injuries
89
2016: 124 (-28.2%)
Average ERF availability(3)
92%
2016/17: >90%
Drinking water quality
South West Water
99.96%
2016: 99.96% (unchanged)
Recycling volumes traded
(tonnes)
1.4m
2016/17: 1.6m (-12.5%)
Drinking water quality
Bournemouth Water
99.98%
2016: 99.98% (unchanged)
Total waste material inputs
(tonnes)
Bathing water compliance
(‘sufficient quality’ or higher)
7.0m
2016/17: 7.6m (-7.9%)
97.9%
2016: 98.6% (-0.7pts)
07
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Chairman’s
statement
Sir John Parker
Chairman
Pennon’s record
demonstrates that the Board
is behaving in a responsible
way to our customers, our
workforce, our suppliers
and our shareholders.
Dear Shareholder
The Group is once again reporting a strong year. In the
water business, strong operational and financial performance
underpinned our sector-leading return on regulated equity
(RoRE). In our waste operations, the Group made good
progress towards bringing Viridor’s remaining energy
recovery facilities (ERFs) on stream.
Across the Group, we delivered high levels of service to our
customers, and improved the quality of our communication
and engagement with both them and our workforce. Our
unified structure is operating well, having brought together
all aspects of the Group under Pennon, providing a clear
line of sight operationally and strategically into South West
Water, Viridor and Pennon Water Services. I particularly
welcome the way we have delivered improvements in
safety and environmental incident management over
the past year. Our new vision and values emphasise to
employees and external stakeholders that we strive to be
a trusted and responsible company delivering high-quality,
resilient services in a safe, reliable and sustainable manner.
Our success, however, needs to be viewed in a broader
social and political context. The Government has expressed
concern about certain behaviours displayed by some water
companies and Ofwat is looking to address these. Work
needs to be done to restore trust and confidence in the
sector and we fully support Ofwat’s agenda of reform. I am
pleased to report that South West Water is already carrying
out its business in line with the improvements outlined. We
remain committed to transparency, independent governance
and sharing financial outperformance with our customers.
The Group’s final dividend of 26.62 pence per share is an
increase of 7.0% and continues our 10-year, sector-leading
dividend policy to 2020 of retail price index plus 4%
year-on-year growth. Dividends per share are expected
to almost double over the 10 years of the policy. In addition,
we continue to share our success with customers through
South West Water’s innovative WaterShare mechanism
with £79 million of total cumulative benefits identified
since 2015 to be shared through future bill reductions,
service improvements and reinvestment.
Safety
The Group treats the issue of safety very seriously and has
taken steps to enhance its performance in this crucial area
with the injection of fresh expertise at both board and
executive level.
89
Lost time
injuries 2017
158
number of apprenticeships
which started in 2017/18
08
T
R
O
P
E
R
C
I
G
E
T
A
R
T
S
Jon Butterworth was appointed as a new independent
non-executive director of South West Water in September
2017. In the role of independent scrutineer of health and
safety processes across the Group, he is giving us the
benefit of his years of operational and safety experience
gained in the electricity and gas industry. Jon attends
Pennon’s main Board meetings, where safety continues
to be the first item for discussion on the agenda. During
the year, our director of Health, Safety, Security and
Assurance continued to lead the development of our
HomeSafe programme, which is designed to deliver
the highest standards of health and safety performance
(see page 26 for further details). The Board has given its
wholehearted support to HomeSafe which commenced
Group-wide roll-out in April 2018, following the successful
completion of pilots at South West Water and Viridor.
Employees and culture
I firmly believe organisations that embody a clear sense of
vision and purpose deliver significant, measurable results.
Such organisations acquire and retain the best employees,
deliver the most for customers, attract the best clients and
increase returns for shareholders. With that in mind, I would
like to take the opportunity to thank all our employees for
their dedication and hard work in serving our customers,
communities and other stakeholders during 2017/18
particularly during the severe weather experienced in
March 2018.
Following last year’s appointment of a Group director
of HR, we are seeing a refreshed dialogue with our
workforce through a variety of initiatives. Our first
Group-wide integrated employee survey has given us a
tool for benchmarking Pennon’s workplace culture against
other companies and is discussed further on page 26.
The most successful workplace cultures are built on trust
and this is a key driver of engagement. Our corporate
value of ‘trusted’ has particular resonance for all our
stakeholders. Respect for human rights is incorporated
into our employment practices and our values (see the
Directors’ report on page 103 for more details).
We have retained our emphasis on attracting graduates
and offering apprenticeships while recognising the need
to continually train and develop our people in line with best
practice. The Government’s new apprenticeship standards
mean that apprenticeships are now on offer at all stages
of the employee development lifecycle, from entry level
through to executive level, and we are launching a range
of new programmes in areas such as project management
and engineering. Of particular note this year has been the
six-fold growth in apprenticeships across the Group.
The most successful workplace cultures
are built on trust.
Sustainability
As one of the UK’s largest environmental infrastructure
groups, we take our responsibilities to the environment and
communities in which we operate very seriously. Customers
expect us to deliver a variety of critical services – clean
and safe drinking water, reliable removal and disposal
of wastewater, recycling, energy recovery and the safe
handling and landfill disposal of waste. Performing all of
this to the benefit of the various communities we serve
throughout the UK, and providing the consistent investment
that underwrites this activity, amounts to a significant
social contribution.
Bringing resources to life
Given our closer working across Pennon as part of the
Group’s evolutionary development, we reviewed the
different visions and values in place across the Group
and devised a new single vision – Bringing resources
to life – with strong supporting values of ‘trusted,
responsible, collaborative and progressive’. Involving
extensive input from our employees, our new vision and
values build on the Group’s strengths and will help drive
our strategic priorities over the long term.
Our new vision and values also resonate with all our
stakeholders, both internal and external. It is our job as
a Board to set the tone from the top and to live up to our
values consistently and with integrity and transparency.
Pennon is building the Group into a trusted entity wherever
we work within local communities and across the UK.
Trusted
We do the right thing for
our customers and stakeholders
Collaborative
We forge strong relationships, working
together to make a positive impact
Responsible
We keep our promises to our customers,
communities and each other
Progressive
We are always looking for new ways
to improve and make life better
09
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
Chairman’s statement
continued
Pennon is pioneering a sustainable financing framework
to integrate commitments to environmental and social
objectives or expenditure into a variety of funding
opportunities across the Group (see pages 42 and 49
for further information).
As a sustainable business, we seek continuous improvement
in our waste management operations, in our water and
wastewater services and in our ability to manage
environmental incidents. Our director of Environment and
Sustainability, who was appointed last year, is helping us to
address environmental issues. There has been significant
investment already in mitigating the risk of flooding and
pollution and I am confident the Group will maintain
this momentum.
Our new governance structure has
bedded in well and we have continued
to refine Board processes.
Pennon’s record demonstrates that the Board is behaving
in a responsible way to all our stakeholders, including
our customers, our workforce, our suppliers and our
shareholders. We are maintaining high levels of investment
to ensure customers receive the best possible service, while
controlling bills to households and providing support and
assistance to those customers in vulnerable circumstances.
We are a key employer in the South West and nationally
and continue to invest in our people. We are delivering
appropriate rewards to shareholders, a significant number
being our employees, many of whom are residents of the
South West, and pension funds that will help to provide
financial security to members of the public in retirement.
We believe this represents responsible leadership and
will continue to behave in a manner that reflects our values.
Board changes
In line with governance best practice, Martin Angle,
Non-Executive Director and chairman of the Remuneration
Committee, who has been a Director for nine years, will
stand down from the Board on 31 December 2018. The
Board plans to make an announcement about a successor
shortly. In order to allow a period of continuity with a
replacement, Martin will stand for reappointment at the
AGM on 5 July 2018. I would like to thank Martin for his
considerable contribution to the Group’s success and
strong governance over the years.
During the year, South West Water appointed Jon
Butterworth as a new independent non-executive director
and Matthew Taylor as senior independent director. While
Jon and Matthew’s roles are with South West Water, under
Pennon’s governance structure they and their colleague
Martin Hagen, South West Water’s third independent
non-executive director, attend the Pennon Board and
are encouraged to contribute to a range of issues from
a South West Water perspective.
The Board received an in-depth tour of the
Mayflower treatment plant under construction.
10
PENNON GROUP PLC ANNUAL REPORT 2018 Board diversity
2
Women
4
Men
Extreme weather March 2018
In March 2018, a period of abnormally cold weather and
snowfall provided significant operational challenges, especially
in the South West of England, where the Met Office issued its
first ever ‘red’ warning relating to snowfall in England. The cold
weather and rapid thaw led to an increase in burst pipes,
resulting in supply interruptions in some areas of Devon and
Cornwall. Contingency plans were utilised to ensure supplies
of raw water were maintained to water treatment works
and leaks resulting in interruptions to supply were fixed
as quickly as possible.
South West Water acted swiftly to ensure bottled water
supplies were provided to customers without potable water,
mobilising South West Water staff (both field and office based),
partners and contractors as well as others such as Viridor
HGV drivers.
Following the resumption of supplies, South West Water also
provided collection points to ensure that the plastic bottles
provided to customers could be returned for recycling.
Governance
Our new governance structure has bedded in well and
we have continued to refine Board processes. All our
independent Non-Executive Directors have clear line of sight
into South West Water, Viridor and Pennon Water Services.
As we look to another year of operations, I welcome the way
the new Group Board structure and the Pennon Executive
have settled into what I believe is an efficient and effective
organisation in which we can deploy the full strengths of our
independent Directors. The executive teams at South West
Water, Viridor and Pennon Water Services have also shown
dedication, drive and enthusiasm, and their transparency
with the Board has been a highlight.
Diversity
The Board and Group actively promote equality and
diversity in the workplace and we have approved a new
Group diversity and inclusion policy. We are committed
to the search for Board candidates being conducted
(and appointments being made) on merit and with due
regard for the benefits of gender and ethnic diversity.
The November 2017 Hampton-Alexander Review:
FTSE Women Leaders listed Pennon at number 40 in its
FTSE 250 rankings for women on boards and in leadership,
with a score of 33.3%. Both Chris Loughlin and I are
members of the 30% Club, a forum with a goal of achieving
a minimum of 30% women on FTSE 350 boards by 2020.
READ M ORE ON PAGE 81
Outlook: building success, earning trust
There are many reasons why Pennon is well placed for the
future. Confidence in our financial resilience is driven by
reliable operating cash flow, a strong liquidity and balance
sheet position, and a diversified mix of low-cost and flexible
funding, underpinning a sector-leading dividend policy.
Following the significant investments of the last few years
in ERFs, we are now poised to reap the benefits as the next
four plants come on stream. We have also ensured we are
well prepared both operationally and in terms of cost
effectiveness for PR19. In recycling, we are optimistic that
positive changes will be announced in the Government’s
Resources & Waste Strategy to be published later in 2018.
We collaborate closely with our customers and have
enhanced the way we engage with our workforce. We
believe our strong organisational culture will give us a
competitive advantage, deliver a high level of service to
our customers and ultimately lead to outstanding business
performance. Looking ahead, we have many successes
upon which we can build as we apply our vision of Bringing
resources to life. I am confident the Board, working
together with the Pennon Executive and our people, will
continue to ensure we are not just a successful company,
but a responsible and trusted one too.
Sir John Parker
Chairman
11
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 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.
UK water
sector
Water
regulators
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 32
privately-owned regional companies, of which
10 are providers of both water and wastewater
services (source: Ofwat.gov.uk).
The UK water industry supplies clean water
to properties through a mains network that
is 420,000km long. It manages more than
16 billion litres of wastewater a day through
624,200km of sewers and 9,000 wastewater
treatment plants (source: Water UK).
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
2015-2020 plan was awarded enhanced status
as part of the 2014 Price Review. The company
is currently preparing its submission as part of
the 2019 (2020-2025) Price Review.
The Environment Agency is the principal
environmental regulator.
The Drinking Water Inspectorate (DWI)
is the drinking water quality regulator.
The Consumer Council for Water
represents consumers and takes up
unresolved complaints.
Non-household
retail market
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 Market
Operator Services Limited. It has required
the separation of the wholesale and retail
arms of water businesses.
Pennon Water Services was established to
manage the non-household retail business
for Pennon and has formed a retail venture
with South Staffordshire plc.
UK water industry (2017)
UK water regulators
Market choice
10
Water and waste
companies
32operators
in the UK
22
Water only
companies
1.2m
businesses and other
non-household customers
can choose who they buy
water and wastewater retail
services from
How we’ve responded
South West Water is focused on demonstrating
leadership within the water sector, pioneering
new technologies and methods to improve
customer service, efficiency and resilience
while working closely with industry peers and
the supply chain to identify and implement
best working practice across all areas of
the business.
South West Water engages with its regulators
at all levels and is committed to ensuring trust
and transparency within these relationships.
Pennon Water Services has focused on
offering high-quality retail customer service
and a broad range of services that enhance
value. As a result, Pennon Water Services is
one of only four retailers who were previously
part of a water company to have achieved net
growth and has achieved 96% customer
satisfaction with the service provided.
12
PENNON GROUP PLC ANNUAL REPORT 2018 Waste inputs
to ERFs
Recycled waste
materials
Waste
to landfill
We estimate that in the UK, 26 million tonnes
of waste were suitable for combustion in ERFs
in 2017, 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 11 million tonnes of this waste in
2017. Our facilities processed 2 million tonnes
in 2017, giving us a market share of around
20%, based on input tonnages, making the
company the joint leader in the sector.
In 2017, the total power generated by ERFs in
the UK was 6.2TWh – approximately 1.7% of
total UK generation in 2017 and an increase
of 19% on 2016.
UK combustible waste (2017)
11m tn
Commercial and
industrial
waste
The recycling market has had a challenging
year with input quality suffering from local
authority cost savings and increasing quality
demands on outputs. In 2017, China announced
it was prohibiting certain types of waste imports,
including plastics and unsorted paper. We are
working with new customers to access recycling
markets in Asia, which partially mitigate the
impact of China’s restrictions.
We are optimistic that positive changes will be
announced in the Government’s Resources &
Waste Strategy later this year.
Viridor is a market leader in processing
comingled waste streams (where recyclables are
mixed in the same bin). In 2017, we processed
c.0.7 million tonnes of comingled mixed
recyclable waste out of an estimated 4 million
tonnes (based on the most recent numbers
available), indicating an 18% market share.
The volume of waste for recycling is expected
to increase reflecting population growth and
a growing public pressure particularly around
plastics. As a result manufacturers are taking
an interest in securing longer-term supplies
of high-quality recyclate.
Comingled recyclable waste
materials processed in the UK
(2017)
26m
tonnes
4m
tonnes
15m tn
Municipal
household waste
Households in England generated 22.3 million
tonnes of waste in 2017, amounting to 406kg
of waste per person. Of this, the UK mainland
disposed of 11 million tonnes of active waste
(household black bag waste and similar
unrecyclable waste from industrial and
commercial sources) into landfills in 2017
compared with 12.5 million tonnes in 2016.
In 2017 our landfill sites received 1.5 million
tonnes of active waste (14% UK market share).
In addition, we received 0.6 million tonnes of
inert inactive waste for daily cover and
restoration purposes.
We expect the volume of waste being sent
to landfill to reduce as the availability of ERFs
increases, with an ongoing baseline
requirement for landfill for materials that are
not suitable for recycling or recovery.
Tonnes of waste to landfill
12.5m
tonnes of waste to
landfill in 2016
11.0m
tonnes of waste
to landfill in 2017
Viridor’s programme of investment in ERFs
continues as planned with 12 facilities due
to be operational by 2020/21.
Viridor had implemented self-help measures
before the new Chinese restrictions were
introduced. Increased quality sampling
regimes ensure recyclate is being sent to
the appropriate markets. 65% of contracted
recycling volumes has been renegotiated
to provide sustainable pain/gain sharing
mechanisms in the current climate.
Viridor continues to maximise gas yields
from its landfills and maximise its external
grid connections. It continues to reopen
mothballed sites as demand justifies and
will maintain well-located sites in areas of
landfill scarcity.
13
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
Business
model
Through our business model, we fulfil our objective
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.
Bringing resources to life
Trusted
We do the right thing for our
customers and stakeholders
Collaborative
We forge strong relationships, working
together to make a positive impact
What we do...
...the strengths we rely on
Our core businesses
Our strengths
Waste management
We transform waste into
energy, high‑quality recyclates
and raw materials.
READ MORE ON PAGE 28
Water and wastewater
We provide water and wastewater
services in the most efficient and
sustainable way possible.
READ MORE ON PAGE 34
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 retention, training and development,
productivity and, above all, an unwavering
commitment to health, safety and wellbeing.
Effective governance
A 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.
Water retail services
We provide water retail services
covering all business customers’
water management needs.
Efficient financing
The strength of our proposition, and investor
confidence in our performance and reputation,
means we are well funded with efficient
long‑term financing.
READ MORE ON PAGE 41
Environmental stewardship
We invest in the maintenance and improvement
of our services, operations and assets and
constantly seek more sustainable ways of
working to protect, enhance and reduce
our impact on the natural environment.
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.
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.
14
PENNON GROUP PLC ANNUAL REPORT 2018 Responsible
We keep our promises to our customers,
communities and each other
Progressive
We are always looking for new ways
to improve and make life better
...delivering our strategy
...to create value
Our long-term priorities
Leadership in
UK water and waste
Leadership in
cost base efficiency
Driving sustainable
growth
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.
READ MO RE ON PAGE 20
We are focused on driving down
overheads and operating in the
most efficient way to minimise costs.
READ MO RE ON PAGE 21
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.
READ MO RE ON PAGE 21
Value created for
our stakeholders
Customers
Community
98%
140 bathing waters out
of 143 classified as
‘sufficient’ or better(3)
Environment
1.4m
Tonnes of waste
materials recycled
85
Best ever customer
service score for
South West Water(1)
Investors
+8.3%
Earnings per share
increased to 50.9p(2)
People
14,379
Formal training days
recorded for employees
(1) As measured by the service incentive mechanism (SIM).
See page 36 for details.
(2) Before non‑underlying items and deferred tax.
(3) 107 beaches (75%) classified as ‘excellent’.
15
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 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 drivers.
Long-term priorities
Near-term objectives
Progress in 2017/18
KPIs
Sustainability drivers
Risks and uncertainties
• Build on the strong track record of our water
business by delivering and outperforming
the K6 (2015-2020) plan
• Continue to develop a new model for
proactive customer service that puts our
customers at the heart of everything we do
• Develop and fully maximise value from our
infrastructure business
Leadership
in UK water
and waste
• Mitigate the risk arising from local authority
austerity and global challenges in recycling
• Improve our environmental performance
• Strengthen employee engagement across
the Group.
• Outperformance by South West Water continued in 2017/18
• Largest ever programme of customer research and
engagement carried out in support of PR19 business planning
• Introduction of customer service improvements have allowed
South West Water to increase the speed and quality of its
responses through a more proactive, tailored approach
• High levels of performance and availability maintained by the
ERF fleet, which delivered £123.7 million EBITDA in 2017/18
• Greater Manchester contract reset – positive outcome reached
• New trading relationships developed within Asia and ongoing
‘self-help’ initiatives to mitigate challenges in the market
• Reduction in wastewater pollution incidents
• New people strategy developed and Group vision and
values launched.
• Realise value from the organisation
change programme following our
Shared Services Review
• Continue to maximise the benefits of
the integration of Bournemouth Water
operations into South West Water
• Ongoing initiatives to reduce central
overheads, share best practice and
deliver synergies.
• £13 million of Group-wide efficiencies secured to date, including
integration of a Group-wide IT platform. On track to deliver
£17 million by 2019
• Final phase of Bournemouth Water integration complete:
on track to deliver K6 cost savings of £27 million
• South West Water cumulative totex efficiency of £177 million
driven by continuing advantages from our strategic alliances
• Cost-efficient, long-term financing in place – 3.7% interest rate
on annual net debt.
• Continue to grow the ERF business,
including the successful completion of
construction projects at Glasgow, South
London, Dunbar and Avonmouth ERFs
• Build on the success of PR14 by developing
a high-quality, ambitious and innovative
business plan for PR19 that meets the
needs and priorities of South West Water’s
customers and other stakeholders
• Continue to build scale and efficiency in
the non-household retail market through
Pennon’s water retail business, Pennon
Water Services
• Identify and consider opportunities for
further growth, including initiatives to
expand our customer base or form
partnerships with other organisations.
• £398 million invested in key infrastructure during the year
• Perpetual capital securities issuance delivering funding and
balance sheet flexibility
• Three ERFs in commissioning and one under construction
• Well positioned for regulatory and market developments
– ongoing engagement with Ofwat reforms and prepared for
the 2019 price review
• Construction of the innovative Mayflower water treatment
works in Plymouth – on track to become operational in 2018
• Progress towards the adoption of water and wastewater
services for the Isles of Scilly in 2019
• Pennon Water Services’ high-quality, service-based approach
means it is one of only four retailers who were previously
part of a water company to achieve growth since the
competitive market opened in April 2017, with the second
lowest attrition rate
• Sustainable dividend – increase in total dividend for the year
of 7.3% reflecting strong performance of Pennon’s water and
waste management businesses.
16
Leadership
in cost base
efficiency
Driving
sustainable
growth
LIN KE D TO REMUNERATION
TARG ETS, SEE PAGES 24 , 2 5 & 87
• Investing in people – protecting the health, safety
and wellbeing of our people to ensure we have a
skilled, diverse, engaged and motivated workforce
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:
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.
• 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.
92%
average ERF
availability(1)
91%
customer
satisfaction with
overall service(2 )
(1) Weighted by capacity, excludes Bolton, includes JVs
at 100%.
(2) South West Water score for 2017/18. The customer
satisfaction score for Bournemouth Water was 96%.
• Minimising disruption and inconvenience for
our communities – means that we also minimise
Risks that could impact our ability to deliver
efficiencies include:
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 while maximising the
energy generated from our core operations
• Responsible sourcing – value for money secured
through robust procurement practices and
sustainable supply chains.
• 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.
£259m
increased underlying PBT
including the benefit of cost
efficiencies across the Group
Group assets as at 31 March (£bn)
• Customer service and engagement – increased
Our ability to deliver sustainable growth could be
focus to improve the customer experience and
help expand our customer base while retaining
impacted by:
7
.
5
9
.
5
4
.
5
0
.
5
2
.
6
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.
• 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.
7
6
5
4
3
2
1
0
2014
2015
2016
2017
2018
%
1
.
5
+
PENNON GROUP PLC ANNUAL REPORT 2018
Long-term priorities
Near-term objectives
Progress in 2017/18
KPIs
Sustainability drivers
Risks and uncertainties
Leadership
in UK water
and waste
Leadership
in cost base
efficiency
Driving
sustainable
growth
• Build on the strong track record of our water
business by delivering and outperforming
the K6 (2015-2020) plan
• Continue to develop a new model for
proactive customer service that puts our
customers at the heart of everything we do
• Develop and fully maximise value from our
infrastructure business
• Mitigate the risk arising from local authority
austerity and global challenges in recycling
• Improve our environmental performance
• Strengthen employee engagement across
the Group.
• Outperformance by South West Water continued in 2017/18
• Largest ever programme of customer research and
engagement carried out in support of PR19 business planning
• Introduction of customer service improvements have allowed
South West Water to increase the speed and quality of its
responses through a more proactive, tailored approach
• High levels of performance and availability maintained by the
ERF fleet, which delivered £123.7 million EBITDA in 2017/18
• Greater Manchester contract reset – positive outcome reached
• New trading relationships developed within Asia and ongoing
‘self-help’ initiatives to mitigate challenges in the market
• Reduction in wastewater pollution incidents
• New people strategy developed and Group vision and
values launched.
• Realise value from the organisation
change programme following our
Shared Services Review
• Continue to maximise the benefits of
the integration of Bournemouth Water
operations into South West Water
• Ongoing initiatives to reduce central
overheads, share best practice and
deliver synergies.
• £13 million of Group-wide efficiencies secured to date, including
integration of a Group-wide IT platform. On track to deliver
£17 million by 2019
• Final phase of Bournemouth Water integration complete:
on track to deliver K6 cost savings of £27 million
• South West Water cumulative totex efficiency of £177 million
driven by continuing advantages from our strategic alliances
• Cost-efficient, long-term financing in place – 3.7% interest rate
on annual net debt.
• Continue to grow the ERF business,
including the successful completion of
construction projects at Glasgow, South
London, Dunbar and Avonmouth ERFs
• Build on the success of PR14 by developing
a high-quality, ambitious and innovative
business plan for PR19 that meets the
needs and priorities of South West Water’s
customers and other stakeholders
• Continue to build scale and efficiency in
the non-household retail market through
Pennon’s water retail business, Pennon
Water Services
• Identify and consider opportunities for
further growth, including initiatives to
expand our customer base or form
partnerships with other organisations.
• £398 million invested in key infrastructure during the year
• Perpetual capital securities issuance delivering funding and
balance sheet flexibility
• Three ERFs in commissioning and one under construction
• Well positioned for regulatory and market developments
– ongoing engagement with Ofwat reforms and prepared for
the 2019 price review
• Construction of the innovative Mayflower water treatment
works in Plymouth – on track to become operational in 2018
• Progress towards the adoption of water and wastewater
services for the Isles of Scilly in 2019
• Pennon Water Services’ high-quality, service-based approach
means it is one of only four retailers who were previously
part of a water company to achieve growth since the
competitive market opened in April 2017, with the second
lowest attrition rate
• Sustainable dividend – increase in total dividend for the year
of 7.3% reflecting strong performance of Pennon’s water and
waste management businesses.
• 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 while maximising the
energy generated from our core operations
• Responsible sourcing – value for money secured
through robust procurement practices and
sustainable supply chains.
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.
• Customer service and engagement – increased
focus to improve the customer experience and
help expand our customer base while 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.
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.
92%
average ERF
availability(1)
91%
customer
satisfaction with
overall service(2 )
(1) Weighted by capacity, excludes Bolton, includes JVs
at 100%.
(2) South West Water score for 2017/18. The customer
satisfaction score for Bournemouth Water was 96%.
£259m
increased underlying PBT
including the benefit of cost
efficiencies across the Group
Group assets as at 31 March (£bn)
7
6
5
4
3
2
1
0
.
7
5
9
5
.
.
2
6
4
5
.
0
5
.
2014
2015
2016
2017
2018
%
1
.
5
+
17
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
We are building an
asset business and
a people business
18
PENNON GROUP PLC ANNUAL REPORT 2018 GROUP PERFORMANCE
42
52
Report of the Chief Financial Officer
Risk report
Review of the Chief Executive Officer
20
24 Key performance indicators
26 Our people
28 Our operations
28 Waste management
34 Water and wastewater
41 Water retail services
S
T
N
E
M
E
T
A
T
S
L
A
I
C
N
A
N
I
F
19
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
Review of the Chief
Executive Officer
Chris Loughlin
Chief Executive Officer
Customer needs and
priorities will continue to
be the cornerstone of
our operations.
I am pleased to report the Group made excellent progress
against our strategic objectives, implementing changes to
deliver Group-wide synergies and savings within our water
and waste businesses while delivering on our promises to
customers, maintaining a responsible approach to finance
and creating business growth across the value chain.
We believe all companies should be held to the highest
possible standards and welcome the dialogue between the
Government, our regulators and the wider water industry.
As the Chairman has stated, South West Water already
operates in line with Ofwat’s proposed improvements.
Health and safety
As I said last year, we are committed at the highest
level to showing leadership in improving safety by
using concepts and learnings from a range of industries,
including high-hazard sectors. This remains our ambition.
I am pleased to note the progress we have made following
the creation of our new health and safety programme
HomeSafe. As detailed in the Chairman’s statement
(page 08) and the Our People section (page 26) of this
Report, this wide-ranging behavioural change programme
is being adopted by everybody working at Pennon and is
creating a clear and structured long-term platform for all
health and safety activity.
20
Building our leadership in water and waste
Our water business continued to outperform during
the year, despite adverse extreme winter weather. Strong
operational and financial performance underpinned our
sector-leading return on regulated equity, which consistently
tracks above 11%. While we incurred a penalty for pollution
incidents, South West Water achieved overall outperformance
against its outcome delivery incentives (ODIs), resulting in
a net reward of £2.6 million for the year. We are committed
to reducing the number of pollution incidents and a
programme of actions is underway, which has already
shown good progress (see pages 38 and 40 for
further details).
We continue to share the benefits of our outperformance
with our water customers through our unique WaterShare
mechanism. Since 2015, we have identified £79 million to
be shared with customers. Our focus on cost efficiency
means South West Water’s average annual bill is lower
than it was nine years ago and this underlines the Group’s
strong commitment to delivering the best possible service
to customers.
Our continuing investment in our assets and distribution
network has allowed us to deliver notable improvements in
drinking water and bathing water quality, while our leakage
levels have almost halved since privatisation. At the same
time, we continue to maintain conservative gearing levels,
ensuring the amount of debt we take on is consistent with
Ofwat’s notional view of an efficient company.
In September 2018 South West Water will submit its
combined business plan for the 2020-2025 regulatory
period (PR19), covering both the South West and
Bournemouth operating areas. Ofwat’s final methodology
for PR19 was published in December 2017 and indicates
a relatively more prescriptive approach than PR14, with
an even greater focus on cost efficiencies and the delivery
of exceptional service to customers;. South West Water
While a small part of the Pennon Group, our subsidiary
Pennon Water Services, which provides retail services to
non-household customers across the UK, is now serving
over 160,000 retail customer accounts across 18 different
wholesale regions. The business achieved net growth in
customer accounts during the year with some c.7,000
accounts switching to Pennon Water Services (see page 41
for more information). Pennon Water Services is ringfenced
from South West Water and can secure services from any
wholesaler in the UK.
Cost efficiency drive continues
South West Water maintained its strong track record
in controlling total expenditure (totex) with cumulative
savings of £177 million and financing outperformance
of £100 million in the first three years of K6 (2015-2020).
Looking to the future:
what do our customers think?
In preparation for PR19 we have been carrying out research
and engaging with our customers and stakeholders across
the South West and Bournemouth areas to refresh our
understanding of their long-term priorities. In September 2017,
we captured the results of that process in WaterFuture 2050.
It sets out our updated long-term vision (2020-2050) and also
highlights some of the specific service levels we are proposing
to achieve between 2020 and 2025. To ensure that the views
of our customers and stakeholders remain central to our plans,
we invited further feedback on the priorities and proposals for
the 2020-2025 period. New interactive tools and techniques for
greater customer participation include our Get into Water
campaign that is built around a video showing how South West
Water is planning for the future. We invited the public to have
their say via our social media channels including YouTube,
Twitter, Facebook and LinkedIn. This campaign generated
thousands of customer interactions.
R E A D M O R E O N LI N E
www.southwestwater.co.uk/waterfuture
is well placed to meet these challenges. As part of our
preparations for PR19 – which have included our largest
programme of customer research and engagement to
date – we launched the ‘Get into Water’ campaign which
has been helping us to further understand customer
needs and preferences.
We believe c.£6 to £9 billion of investment will be required
over the 30 years to 2050. The anticipated areas of
investment are: resilience, environmental protection and
enhancement, security of supply, flood protection and
transformational improvements to customer service.
Our waste operations again performed well with the
fundamentals of the UK waste market remaining strong
and demand for energy recovery facilities (ERFs) set to
continue to exceed capacity. We anticipate the capacity
gap to be greater than seven million tonnes by 2030.
The ERFs performed strongly and the operational part
of our portfolio has achieved an availability of 92%(1).
Elsewhere in our waste operations, Viridor successfully
negotiated a reset to its contract with the Greater
Manchester Waste Disposal Authority, achieving a
positive outcome.
In recycling, we are seeking to influence government policy,
including to mitigate increasing pressure on input quality
from local authority cost savings. We have invested to
ensure output quality requirements are delivered and
are seeking further targeted investment in value adding
technology. Our risk/reward share with customers now
covers 65% of input volumes.
We are maintaining flexibility in our landfill operations,
where we continue to see demand for landfill solutions.
Investing for sustainable growth
Development of our ERF portfolio continued during the
year with three plants progressing through commissioning,
and construction of our 12th facility at Avonmouth near
Bristol on track for delivery in 2020/21. The majority
of Viridor’s capital investment continues to relate to the
delivery of the ERF portfolio, which will support Pennon’s
earnings growth to 2020 and beyond. We have successfully
implemented all phases of our ERF business model from
initial concept to raising investment, gaining planning
permission, building facilities, winning contracts and
operating plants to high levels of efficiency.
£177m
cumulative totex
outperformance
92%
average
ERF availability(1)
(1) Weighted by capacity, excludes Bolton, includes JVs at 100%.
21
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Review of the Chief
Executive Officer
continued
Pennon continues to drive greater synergies and savings
across the Group and share best practice through the
Shared Services programme. Both Viridor and South West
Water have a breadth and depth of experience in managing
large asset bases and in using innovative engineering
and technology to increase efficiency and effectiveness.
We are sharing this knowledge across the Group so we
can harness our combined skills. We are on track to achieve
by 2019 the annual cost savings and synergy targets of
c.£17 million which were initially identified in the 2016/17
Shared Services Review.
Pennon continues to drive greater
synergies and savings across the Group.
In the water business, the integration of Bournemouth
Water’s business into South West Water operations has
provided a natural opportunity for consolidation. Our target
is for c.£27 million of cumulative synergies by 2020 and we
are on track to achieve this.
In our waste operations, we centralised control to optimise
performance across the UK. We have focused on driving
efficiencies by entering into more framework contracts in
partnership with key suppliers and by rationalising our
supplier base. We continue to implement self-help
measures in our recycling business by rationalising facilities,
renegotiating contracts and sharing commodity risk and
reward with our clients.
Enhancing sustainability and resilience
In fulfilling their role of serving local communities, stewarding
resources and providing essential services, our water and
waste businesses integrate long-term sustainability into
their strategic thinking.
South West Water’s role is to secure adequate supplies
of water, treat it to high drinking water standards, provide
resilience to prevent flooding or droughts and to return
water to the environment in a responsible and benign way.
This is essential for the long-term resilience of our water
business. We continue to make good progress in our
programme of catchment management initiatives working
with local landowners and farmers in a wide range of
upstream and downstream initiatives.
UK waste strategies prioritise waste minimisation and
recycling wherever possible, followed by energy recovery
for non-recyclable materials, with landfill always the last
resort. Viridor’s strategy aligns with that. When Avonmouth
ERF is operational the Group will hold some 19% of national
energy recovery capacity and we will be the UK leader
in this sector.
Our gross carbon emissions increased by 11% as our fleet
of operational ERFs continues to grow while we scale down
our landfill operations (in themselves the most significant
contributors of greenhouse gas). Our full greenhouse gas
(GHG) reporting can be found on pages 102 and 103.
We continue to work to minimise and reduce the carbon
intensity of our operations and to maximise the carbon
benefits of our services for customers.
Pennon is both an asset business and a people business.
The Group can only be as good as the people who build
and operate its assets. Training, developing and retaining
employees who have the right skills to take us forward is
an essential part of our strategy. This year for the first time,
we ran a Group-wide employee engagement survey that is
helping us identify what matters to our employees so we
can deliver improvements that benefit and strengthen
their skills and our culture as well as our operations.
Reducing our environmental impacts remains a priority.
We are an active member of Business in the Community,
and were delighted to retain our 3 star rating in their
Corporate Responsibility Index and improve our score
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 adaptation strategies
• Aspire to leadership in all aspects of waste prevention
and resource efficiency by delivering solutions for society
that help to address the environmental challenge of depleting
natural resources.
22
PENNON GROUP PLC ANNUAL REPORT 2018 to 92% this year. We also collaborate on initiatives including
their Circular Economy Task Force. We also retained our
inclusion in the FTSE4Good Index, following independent
assessment in 2017 of our environmental, social and
governance (ESG) performance.
Our people
We look to attract, develop and retain a highly skilled
and customer-focused workforce, supported by our
award-winning apprenticeship programme (see Our
people on pages 26 and 27 for more information).
Our employees supported communities through 225 days
of volunteering during the year with Viridor exceeding the
goal that it had set of delivering 1,500 hours of volunteering
by 2018. Both South West Water and Viridor continue to
offer broad community education programmes.
Our success relies on the professionalism and hard work
of our employees and I would like to thank all of them for
their dedication during the year.
Key performance indicators (KPIs)
We have made some changes to the KPIs we present
in the annual report, to ensure they are consistent with
those adopted as part of our revised remuneration policy,
approved by shareholders last year. The KPIs set out
on pages 24 and 25 are those used by the Board to
measure the performance of the business in delivering the
strategy and are directly relevant to executive remuneration.
Additional metrics are provided within the operational and
financial reviews (pages 28 to 51).
Outlook
Customer needs and priorities will continue to be the
cornerstone of our operations. In our water business,
we will continue to share with customers the rewards
we receive for outperformance while working to maintain
high standards of customer service. In our waste
operations, we will work with local authorities in a
strong spirit of partnership.
In water, the successful merger of Bournemouth Water into
South West Water has strengthened our operations. We are
also currently in talks regarding extending our operational
area to cover the Isles of Scilly. In waste, growth will come
from our ERF portfolio, with the expansion supporting
earnings growth to 2020 and beyond, as additional facilities
come on stream. We expect demand in the wider residual
waste market to exceed capacity over the long term.
South West Water continues to lead the sector in many
areas, delivering RoRE outperformance through totex
savings, financing with the lowest effective rates in
the industry and achieving net ODI rewards. We are
determined to sustain our outperformance momentum
over the remaining K6 regulatory period, remain at the
forefront of cost efficiency for the water sector and
continue to share these benefits with our customers.
This is a strong platform as we prepare for PR19 and
develop our business plan for the next regulatory period
2020-2025. We are demonstrating a real commitment to
engaging our customers and other stakeholders in this
regard. While we expect PR19 to be challenging, South
West Water is well placed to respond and to continue
delivering truly outstanding services to customers.
New systems delivering great results
Working closer together over the past 12 months has helped
us achieve some great things for our customers, employees
and our business.
More than 250 people from across the Group have been
involved in project Enterprise, which is helping us to work
smarter. Enterprise has delivered new standardised systems
and processes for Viridor leading to more consistent and better
quality data, and making life easier for our people, the business,
our suppliers and customers.
Making the most of our size and scale, Pennon is also launching
a Group-wide travel management system helping our employees
save time and effort when booking business travel, and helping
the Group make significant savings.
To support and deliver ongoing improvements across Pennon,
a Senior Leadership Forum has been established, bringing
together leaders from across the Group to collaborate and keep
aligned on the progress we are making against our strategy.
I believe Pennon Group is well positioned to deliver for its
customers, communities and shareholders through a clearly
articulated strategy for water and waste operations in the
UK, while taking a progressive approach to working with
policy makers to achieve change within the water sector.
Chris Loughlin
Chief Executive Officer
23
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Key performance indicators
Long-term
Earnings per share (pence)
Dividend per share (pence)
Return on capital employed (RoCE) (%)
Our strategic priorities
.
8
9
3 3
2
3
.
.
5
9
3
.
0
7
3
.
6
2
4
.
8
8
3
50
40
30
20
10
0
.
0
7
8 4
9
3
.
.
1
3
0
3
0
8
.
1
3
8
5
3
3
.
6
9
5
3
.
9
5
8
3
.
9
.
0
1
0
.
0
1
2
.
9
0
.
0
1
2
.
0
1
.
9
0
5
.
0
8
4
50
40
30
20
10
0
2013/14
2014/15
2015/16
2016/17
2017/18
2013/14
2014/15
2015/16
2016/17
2017/18
2013/14
2014/15
2015/16
2016/17
2017/18
on our strategic priorities see pages 16 and 17.
Statutory
Underlying
Relevance to remuneration
LTIP (40%)
Alignment to strategy
1, 2, 3
For more information and discussion of our
performance during the year see the Report
of the Chief Financial Officer, pages 42 to 51.
Relevance to remuneration
LTIP (40%)
Alignment to strategy
1, 2, 3
For more information and discussion of our
performance during the year see the Report
of the Chief Financial Officer, pages 42 to 51.
Relevance to remuneration
New metric introduced for the LTIP in 2017.
LTIP (20%)
See page 92.
Alignment to strategy
2, 3
Annual
Operational
Profit before tax (£m)
.
3
7
0
2
.
7
8
5
1
.
7
0
1
2
.
0
7
9
1
.
3
6
0
2
3
.
1
1
2
250
200
150
100
50
0
.
0
0
5
5 2
0
1
2
.
Return on regulated equity (RoRE) (%)
ODI net rewards (£m)
ERF availability (%)(2)
.
9
2
6
2
.
8
8
5
2
15
12
9
6
3
0
7
.
1
1
.
6
2
1
1
.
1
1
8
.
1
1
9
8
8
8
5
8
0
9
>
2
9
6
.
3
6
.
2
9
.
1
2013/14
2014/15
2015/16
2016/17
2017/18
2015/16
2016/17
2017/18
2017/18
2015/16
2016/17
2017/18
2013/14
2014/15
2015/16
2016/17
2017/18
Statutory
Underlying
Relevance to remuneration
Annual bonus (50%)
Alignment to strategy
1, 2, 3
For more information and discussion of our
performance during the year see the Report
of the Chief Financial Officer, pages 42 to 51.
Cumulative over the first three years of K6
Annual
Relevance to remuneration
Annual bonus (10%)
Alignment to strategy
1, 2, 3
For more information and discussion of our
performance during the year see Our operations,
Water and wastewater, page 36 and the Report
of the Chief Financial Officer, page 42.
Sustainable business
Customer satisfaction with overall service (%)
Employee engagement (%)(3)
100
80
60
40
20
0
5
8
0
9
9
8
5
9
9
8
6
7
6
9
1
9
6
9
0
7
80
60
40
20
0
.
0
4
7
.
2
7
6
.
0
4
7
8
.
1
7
.
0
9
6
.
6
0
7
.
0
8
6
.
0
5
6
.
0
2
7
.
0
7
6
2013/14
2014/15
2015/16
2016/17
2017/18
2014/15
2015/16
2016/17
2017/18
2013
2014
2015
2016
2017
2016
2017
2013/14
2014/15
2015/16
2016/17
2017/18
Bournemouth Water
South West Water
Viridor
Pennon Water Services
South West Water
Viridor
Pennon Water Services
Pennon Group
RIDDOR incidents(4)
Lost time injuries
For more information and discussion of our
performance during the year see Our operations,
pages 30, 36 and 41.
Relevance to remuneration
Associated with annual
bonus operational or
personal metrics(1)
Alignment to strategy
1, 3
Relevance to remuneration
Associated with annual
bonus operational or
personal metrics(1)
Alignment to strategy
1, 3
24
For more information and discussion of our
Group-wide employee survey see Our people,
page 26.
15
12
9
6
3
0
5
4
3
2
1
0
Relevance to remuneration
Associated with annual
bonus operational or
personal metrics(1)
Alignment to strategy
1, 3
Health and safety
0
4
125
100
75
50
25
0
Relevance to remuneration
Associated with annual
bonus operational or
personal metrics(1)
Alignment to strategy
1, 3
Leadership in UK
water and waste
Leadership in cost
Driving sustainable
base efficiency
growth
Our KPIs are aligned to our three strategic priorities. For more information
(1) Comprising different elements for the CEO, CFO and members of the Pennon Executive.
(2) Average availability for the year for the five ERFs constructed by Viridor plus our two joint
ventures weighted by capacity (JVs at 100%) and excludes Bolton.
(3)
In 2017/18 we introduced a Group-wide employee survey, which changed the methodology for
calculating employee engagement. See page 26 for more information.
(4)
Incidents involving employees under the Reporting of Injuries, Diseases and Dangerous
Occurrences Regulations.
(5) Tonnes of carbon dioxide equivalent.
bonus operational or
personal metrics(1)
Alignment to strategy
1, 3
100
80
60
40
20
0
2.0
1.6
1.2
0.8
0.4
0
For more information and discussion of our
performance during the year see Our operations,
Relevance to remuneration
Associated with annual
For more information and discussion of our
performance during the year see Our operations,
Water and wastewater, page 36.
Waste management, pages 30 and 31.
Carbon emissions (million tCO2e)(5)
4
2
1
9
8
4
.
1
6
.
1
0
.
2
1
.
1
2
.
1
5
3
2
4
5
3
8
4
For more information and discussion of our
approach to health and safety during the year
see the Chairman’s statement, page 08,
the Review of the Chief Executive Officer,
page 20 and Our people, page 26.
Relevance to remuneration
Associated with annual
bonus operational or
personal metrics(1)
For more information and discussion of our
performance during the year see the Review
of the Chief Executive Officer, page 22, and
the Directors’ Report, page 102.
Alignment to strategy
1, 3
PENNON GROUP PLC ANNUAL REPORT 2018
Long-term
Earnings per share (pence)
Statutory
Underlying
Relevance to remuneration
LTIP (40%)
Alignment to strategy
1, 2, 3
Annual
Operational
50
40
30
20
10
0
250
200
150
100
50
0
100
80
60
40
20
0
50
40
30
20
10
0
15
12
9
6
3
0
80
60
40
20
0
3
.
7
0
2
7
.
8
5
1
7
.
0
1
2
0
.
7
9
1
3
.
6
0
2
3
.
1
1
2
0
.
0
5
5 2
.
0
1
2
9
.
2
6
2
8
.
8
5
2
7
.
1
1
6
.
2
1
1
.
1
1
8
.
1
1
For more information and discussion of our
performance during the year see the Report
of the Chief Financial Officer, pages 42 to 51.
Cumulative over the first three years of K6
Annual
Relevance to remuneration
For more information and discussion of our
performance during the year see Our operations,
Water and wastewater, page 36 and the Report
of the Chief Financial Officer, page 42.
Annual bonus (10%)
Alignment to strategy
1, 2, 3
Statutory
Underlying
Relevance to remuneration
Annual bonus (50%)
Alignment to strategy
1, 2, 3
Sustainable business
Customer satisfaction with overall service (%)
Employee engagement (%)(3)
5
8
0
9
9
8
5
9
9
8
6
7
6
9
1
9
6
9
0
7
0
.
4
7
2
.
7
6
0
.
4
7
8
.
1
7
0
.
9
6
6
.
0
7
0
.
8
6
0
.
5
6
0
.
2
7
0
.
7
6
Dividend per share (pence)
Return on capital employed (RoCE) (%)
Our strategic priorities
6
.
2
4
8
.
8
3
8
.
9
3 3
.
2
3
5
.
9
3
0
.
7
3
0
.
7
8 4
.
9
3
9
.
0
5
0
.
8
4
1
3
.
0
3
0
8
.
1
3
8
5
.
3
3
6
9
.
5
3
9
5
.
8
3
.
9
0
1
.
0
0
1
2
9
.
.
0
0
1
.
2
0
1
15
12
9
6
3
0
2013/14
2014/15
2015/16
2016/17
2017/18
2013/14
2014/15
2015/16
2016/17
2017/18
2013/14
2014/15
2015/16
2016/17
2017/18
For more information and discussion of our
performance during the year see the Report
of the Chief Financial Officer, pages 42 to 51.
For more information and discussion of our
performance during the year see the Report
of the Chief Financial Officer, pages 42 to 51.
Relevance to remuneration
LTIP (40%)
Alignment to strategy
1, 2, 3
Relevance to remuneration
LTIP (20%)
New metric introduced for the LTIP in 2017.
See page 92.
Alignment to strategy
2, 3
Leadership in UK
water and waste
Leadership in cost
base efficiency
Driving sustainable
growth
Our KPIs are aligned to our three strategic priorities. For more information
on our strategic priorities see pages 16 and 17.
(1) Comprising different elements for the CEO, CFO and members of the Pennon Executive.
(2) Average availability for the year for the five ERFs constructed by Viridor plus our two joint
(3)
(4)
ventures weighted by capacity (JVs at 100%) and excludes Bolton.
In 2017/18 we introduced a Group-wide employee survey, which changed the methodology for
calculating employee engagement. See page 26 for more information.
Incidents involving employees under the Reporting of Injuries, Diseases and Dangerous
Occurrences Regulations.
(5) Tonnes of carbon dioxide equivalent.
Profit before tax (£m)
Return on regulated equity (RoRE) (%)
ODI net rewards (£m)
ERF availability (%)(2)
2013/14
2014/15
2015/16
2016/17
2017/18
2015/16
2016/17
2017/18
2017/18
2015/16
2016/17
2017/18
2013/14
2014/15
2015/16
2016/17
2017/18
6
3
.
6
2
.
9
.
1
5
4
3
2
1
0
100
80
60
40
20
0
9
8
8
8
5
8
0
9
>
2
9
Relevance to remuneration
Associated with annual
bonus operational or
personal metrics(1)
Alignment to strategy
1, 3
Health and safety
For more information and discussion of our
performance during the year see Our operations,
Water and wastewater, page 36.
Relevance to remuneration
Associated with annual
bonus operational or
personal metrics(1)
Alignment to strategy
1, 3
For more information and discussion of our
performance during the year see Our operations,
Waste management, pages 30 and 31.
Carbon emissions (million tCO2e)(5)
0
4
125
100
75
50
25
0
5
3
2
4
5
3
8
4
4
2
1
9
8
2.0
1.6
1.2
0.8
0.4
0
4
.
1
6
.
1
0
2
.
1
.
1
2
.
1
2013/14
2014/15
2015/16
2016/17
2017/18
2014/15
2015/16
2016/17
2017/18
2013
2014
2015
2016
2017
2016
2017
2013/14
2014/15
2015/16
2016/17
2017/18
Bournemouth Water
South West Water
Viridor
Pennon Water Services
South West Water
Viridor
Pennon Water Services
Pennon Group
RIDDOR incidents(4)
Lost time injuries
Relevance to remuneration
Associated with annual
bonus operational or
personal metrics(1)
Alignment to strategy
1, 3
For more information and discussion of our
performance during the year see Our operations,
Relevance to remuneration
Associated with annual
For more information and discussion of our
Group-wide employee survey see Our people,
pages 30, 36 and 41.
page 26.
bonus operational or
personal metrics(1)
Alignment to strategy
1, 3
Relevance to remuneration
Associated with annual
bonus operational or
personal metrics(1)
Alignment to strategy
1, 3
For more information and discussion of our
approach to health and safety during the year
see the Chairman’s statement, page 08,
the Review of the Chief Executive Officer,
page 20 and Our people, page 26.
Relevance to remuneration
Associated with annual
bonus operational or
personal metrics(1)
For more information and discussion of our
performance during the year see the Review
of the Chief Executive Officer, page 22, and
the Directors’ Report, page 102.
Alignment to strategy
1, 3
25
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
Our people
We strengthened Group-wide
engagement through our new people
strategy and a common vision – Bringing
resources to life – while carrying out
our first ever Group-wide engagement
survey and introducing HomeSafe.
People strategy
Group-wide management of our new people strategy
‘talented people doing great things for our customers
and each other’ is led by our Group director of HR. The six
threads: leadership; culture; people processes; compliance;
training; and talent are helping us to focus more than ever
on being a place where people enjoy working.
As part of our commitment to improve two-way
communications with our workforce, we asked our people
across the Group what they feel makes us unique as a
business and what motivates them. We complemented this
with sessions with the Group’s leadership, our employee
survey data and external benchmarking. The results
showed we had much in common across the Group in
terms of what we value and a shared sense of purpose in
the work we do. This insight allowed us to develop a new
vision: Bringing resources to life, with its associated values
of ‘trusted, responsible, collaborative and progressive’.
Work to embed our new vision and engage employees,
customers and shareholders is underway.
Workforce engagement
Involving our staff in the decisions we make helps us deliver
the right business solutions. A company can only be as
good as its people so our Group HR team is finding new
ways to enhance Pennon employees’ voice so that our
people feel empowered.
A landmark was our first Group-wide employee survey.
We were pleased to see a high response rate of 75% with
a Trust Index© score of 60% and an Engagement Score of
67%. Our Trust Index© is above the UK national average,
but slightly below the 70% threshold for being considered
a ‘Best Workplace’. The survey identified clear Group
strengths in communication and involvement, trust,
diversity, and empowerment and accountability. It also
revealed areas requiring further work. These include
continuing to ensure our people understand the Group’s
strategy and direction, as well as maintaining our focus
on embedding our values into everything we do, while
recognising the contribution made by our employees.
Our Group-wide turnover rate in 2017/18 was 15.86%.
Other initiatives include our quarterly Senior Leadership
Forum which brings together leaders from across the Group
to ensure they are engaged in our strategy and ‘The Big
Chat’, which gives employees the chance to put questions to
the Pennon Executive. We also introduced our six-monthly
Employee Voice Forum at Viridor to complement the
HomeSafe
As its name implies, HomeSafe is about ensuring staff get to
work safely, enjoy a safe and healthy working environment,
and arrive home without incident at the end of each working
day. It was created in consultation with employees to ensure
real needs are addressed by the programme content. In August
2017, we held a Stand-Up for HomeSafe event involving over
4,000 employees to formally launch the concept right across
the Group. A three-week pilot programme at Viridor’s materials
recycling facility in Plymouth, in December 2017, further
refined the concept and safety behavioural tools. A series of
interactive and highly visual learning events taught staff about
key standards, processes and expectations in H&S, including
guidance on understanding workplace hazards, identifying
opportunities for improvement and how to apply appropriate
safety rules. Daily training sessions allowed content, teaching
materials and tools to be streamlined. Informal evaluations
after the pilot showed staff warmly welcomed the HomeSafe
approach. HomeSafe is now being deployed across Pennon,
involving 6,500 staff and agency workers.
well-established staff council at South West Water. An open,
transparent and safe working environment, where workers
feel able to speak up and are supported if they do so, is
encouraged by Speak Up, our whistleblowing policy.
Health and safety (H&S)
As well as launching HomeSafe across the Group in
2017, we continued to look to strengthen other areas of
our H&S approach. New training for supervisory staff,
language lessons for our non-English speaking workers and
safety behavioural training for our front line employees all
featured. We also created a broader set of H&S indicators to
improve management information and insights, and safety
performance. In addition to recording RIDDOR injuries
and ill health cases, we now also record lost time injuries*.
This broader data set allows for a better understanding
of injury causes and allows us to benchmark against other
companies across many sectors. We recorded 89 lost time
injuries in 2017, a 28.2% reduction compared with 2016.
For 2018, we will review the current safety performance
measures to ensure they remain the most appropriate.
* A lost time injury is defined as any work related injury that results in a
person being unfit for work on any day beyond the day of the incident.
26
PENNON GROUP PLC ANNUAL REPORT 2018
As at 31 March 2018, 14,379 formal
training days had been recorded
for employees across Pennon.
Further enhancements to the way we record and report H&S
events include introducing a new Incident Management
System and associated standards and processes to provide
better, more accessible, real-time data, allowing further
insights and actions to aid learning and prevention.
Employee training and development
We remain committed to investing in the development
of our staff; we want to recognise talent across the Group.
We support employees at all levels through training
and development, helping to increase productivity, job
satisfaction and safety, as well as developing our next
generation of leaders by encouraging people to develop
their knowledge, skills and competencies.
The Government’s apprenticeship reforms and introduction
of the apprenticeship levy are helping us prioritise
development for new and existing employees to address
key skills shortages. Pennon plays an active role in
developing skills and raising training standards across
the water and waste industry through our membership of
the Energy and Utility Skills Council and we have partnered
with award-winning vocational training provider System
Group to develop employees in engineering, driver training,
project management and team leadership.
Code of Conduct
In June 2017, we introduced the new Pennon Code
of Conduct. To ensure everybody has the same
understanding of what the new Code means, all
employees were required to complete an e-learning
module. This was followed by ancillary training on
anti-bribery and anti-corruption, and the acceptance of
gifts and hospitality, to ensure we have strong compliance
across the Group. Training on the Code and our legal
compliance policies is compulsory for all our workers.
Further information is provided on page 72.
South West Water
Many front-line operational roles are regulated and
supported by high-quality training standards. Training
is accredited and reviewed periodically to ensure high
standards are maintained. We keep a register of personal
training and skills and individuals receive a photo ID card
displaying the training and skills programmes completed
and associated expiry dates.
Viridor
Viridor’s workforce represents more than 40 different
nationalities, with a high percentage of Polish workers, and,
in April 2017, we partnered with RWS Language Solutions
(RWS) to provide interpretation and translation services. This
partnership enables key documents such as site operating
procedures and health and safety policies to be translated
into native languages. RWS also provides interpreters, where
necessary, to ensure workers understand what is expected
of them and can work in as safe a manner as possible.
Diversity and equal opportunities
The Board continues to promote equality of opportunity
and diversity across the Group in all areas, including
gender and ethnicity. This remains a key area of focus –
see both the Nomination Committee report page 81
and the Directors’ Report page 102 for further details.
In line with all organisations with 250 or more employees,
we published details of our gender pay gap for the first
time. As a Group we have a mean average pay gap of 5.5%
with South West Water at 4.0% and Viridor at 6.9%. These
figures are more favourable than the national average.
Gender diversity
Across Pennon Group, the workforce comprises 80% male
and 20% female employees. This gender split reflects the
traditional male-dominated industry. In our water business,
27% of the employees are female, which is consistent with
previous years. In Viridor, 85% of the employees are male.
Across the Group, 23% of the senior managers are female
which again remains consistent with the previous year.
Addressing diversity has been a priority for us and we
believe we should do more to access the wealth of diverse
talent in the marketplace. We have developed a six point
plan to help make Pennon a more diverse place to work
(read more at www.pennon-group.co.uk/gender-pay-gap).
Gender diversity as at 31 March
Employees
Senior management
100
80
60
40
20
0
%
6
9
7
.
%
9
9
7
.
%
1
.
0
8
%
4
0
2
.
4
5
0
,
1
5
0
1
,
4
%
1
.
0
2
0
3
0
,
1
2
9
0
4
,
%
9
9
1
.
9
5
0
,
1
5
5
2
4
,
2015/16
2016/17
2017/18
100
80
60
40
20
0
%
1
.
8
7
%
4
7
7
.
%
3
7
7
.
%
9
.
1
2
%
6
2
2
.
%
7
2
2
.
1
2
5
7
2015/16
6
2
9
8
2016/17
5
2
5
8
2017/18
Board
100
80
60
40
20
0
%
4
.
1
7
%
7
6
6
.
%
7
6
6
.
%
6
8
2
.
%
3
3
3
.
%
3
3
3
.
2
5
2
4
2
4
2015/16
2016/17
2017/18
Women
Men
Women
Men
Women
Men
27
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
Our operations
Waste management
Powering homes and businesses
Energy is converted into electricity
and provided directly to the grid.
Energy recovery facilities (ERFs)
Residual household and business
waste is transformed into a usable
form of energy.
We remain at the forefront of the UK resource
sector, transforming waste into energy,
high quality recyclates and raw materials.
R E A D M O R E O N L I N E
www.viridor.co.uk
Viridor has delivered a strong financial
and operational performance, led by increased
availability across the ERF portfolio. We continue
to work closely with our customers to deliver
quality service and value for money. We are
navigating challenges in recycling markets and
are well positioned to deliver improved results
as markets stabilise.
Phil Piddington
Managing Director, Viridor
Trading recycled materials
Selling recycled materials
around the world.
28
A fleet of waste collection vehicles
Waste collected directly from businesses
and safely transported to our facilities.
PENNON GROUP PLC ANNUAL REPORT 2018 Landfill sites and
power generation
Safe disposal of waste that cannot
be recycled or sent to ERFs.
Materials recycling
facilities (MRFs)
Separating and preparing recyclable
materials for manufacturing into
new recycled products.
100km
Materials recycling facility
Energy recovery facility
Key facts
8
energy recovery facilities
in operation, three in
commissioning and one
more in construction
32,000
customers across
the UK
400,000
potential homes powered
by energy produced
by our portfolio
150
local authority
and major
corporate clients
300+
600
recycling, energy
recovery and waste
management facilities
waste collection vehicles
securing materials for
our network of assets
7.0
1.4
million tonnes of waste
materials input
million tonnes of
recyclate traded
29
Household waste
recycling centres (HWRCs)
Public disposal sites for the
collection of recyclable and
non-recyclable household waste.
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Our operations
Waste management
continued
Viridor is at the forefront of the resource sector in the UK,
transforming waste into energy, high-quality recyclates
and raw materials. We provide services to more than
150 local authorities and major corporate clients as
well as more than 32,000 customers across the UK.
Our activity supports the development of a regenerative
circular economy that seeks to keep resources in use
for as long as possible and recover and regenerate
materials at the end of their service life.
Our operational ERFs are delivering
above initial base case expectations.
Viridor maintains strong performance
Viridor continued to develop a fully integrated service of
waste management, recycling and recovery during the year.
Highlights of our performance include the continuing success
of our ERF portfolio. With three of our ERFs under construction
progressing through commissioning, we have successfully
implemented all phases of our ERF business model from initial
concept through to completion, and our operational ERFs are
delivering above initial base case expectations. We negotiated
a reset to the contract with the Greater Manchester Waste
Disposal Authority (GMWDA), which had a positive outcome.
Global recycling markets have been challenging, in particular
following changes in China’s import regulations. We have
partially mitigated the impact of these challenges through
self-help measures, including finding new export markets.
We are investing in quality improvement processes in our
recycling facilities as the quality of input materials has
deteriorated while demands on the quality of outputs have
increased. In landfill, the rate of volume decline has slowed
during the year and we are adopting a flexible strategy.
Total waste inputs for 2017/18 were 7.0 million tonnes,
with 2.2 million taken by our ERFs, 1.5 million going
to landfill and 3.3 million taken by our recycling
and other facilities.
Viridor is one of the UK’s largest independent power
generators from waste. We had 274 megawatts (MW)(1)
of operating capacity from ERFs, anaerobic digestion,
solar and landfill gas (including 100% of joint ventures)
at 31 March 2018. Viridor exported 1.5 terawatt hours
of power during the year.
Customer experience
Responding to feedback from our customer service
surveys for a more seamless service, we have been
working to improve integration across our marketing
and sales, service delivery and customer service teams.
The resulting reorganisation has created a platform for
launching national initiatives based on great customer
service, excellent service delivery and transparent pricing.
We rolled out a number of initiatives during the year to
benefit our customers, including training programmes
for all heads of sales teams and customer service staff,
developed a more customer-centric website and organised
a number of meet the customer days and events giving
customers the opportunity to see our facilities and what
happens to their waste.
Building on the success of last year’s customer survey, a new
methodology has now been adopted, which allows us to
gather the views of a much broader base of customers. In
November 2017 we asked more than 6,000 customers about
their perception of Viridor, which provided positive feedback
that the reorganisation is delivering benefits to our customers
and identified opportunities to improve our performance and
drive growth. Of those who responded, 70% were satisfied with
our service overall. This will provide the benchmark for future
surveys, which will be carried out on a six-monthly basis.
ERFs build momentum
Our ERF portfolio, which turns black bag waste into energy,
is a significant asset base which performed strongly during
the year. The operational ERFs delivered increased EBITDA
in the year. Like for like facilities contributed a 9% increase
as a result of our focus on optimisation of the facilities with
the remainder reflective of a financial contribution(2) from
Dunbar ERF. Our operational ERFs are delivering above
initial base case expectations and are helping to deliver
the Group’s growth strategy.
(1) Including Bolton ERF.
(2) Reflecting liquidated damages.
Total waste material inputs (million tonnes)
Total low carbon energy generation (GWh)
10
8
6
4
2
0
7
7
.
4.3
0.7
2.7
5
7
.
3.8
1.2
2.5
8
7
.
3.7
2.1
2.0
6
7
.
3.7
2.2
1.7
0
7
.
3.3
2.2
1.5
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
3
3
9
8
7
7
1
7
4
,
1
1
3
5
,
1
9
3
5
,
1
2013/14
2014/15
2015/16
2016/17
2017/18
2013/14
2014/15
2015/16
2016/17
2017/18
Landfill
ERFs
Recycling & other
30
PENNON GROUP PLC ANNUAL REPORT 2018
At year end, the operational ERFs had a capacity of
2.1 million tonnes of waste and 178MW of electricity p.a.
(including 100% of joint ventures). This will extend to
2.9 million tonnes and 242MW in 2018/19 and 3.2 million
tonnes and 276MW by 2021.
Our ERF at Beddington in South London is in final
commissioning, with waste deliveries being received
and financial contribution being recognised from the first
half of 2018/19. Work at Dunbar continues to progress,
with liquidated damages expected to be received until
commissioning is complete. Both Beddington and Dunbar are
expected to be completed on budget. Progress at Avonmouth
near Bristol is on schedule and budget. Piling for the ERF
building has been completed, the bunker construction is
well underway and process steelwork is being erected.
At the Glasgow Recycling and Renewable Energy Centre, the
materials recycling facility and anaerobic digestion facility
have operated throughout the year and commissioning is
underway for the advanced combustion facility.
Including the £173 million total remaining capital expenditure
for completion of the ERF portfolio, the total investment in
ERFs is £1.5 billion.
Environmental impacts
We keep a strong focus on our environmental performance
and responsibilities, working closely with environmental
regulators (the Environment Agency, Scottish Environment
Protection Agency and Natural Resources Wales) to maintain
high standards of operations and compliance, and to further
reduce the risk of pollution incidents. In addition to the
services Viridor offers its customers for the safe management,
treatment and disposal of hazardous wastes, our environment
policy clearly commits Pennon to minimising hazardous
wastes used or produced and any impacts arising, as well
as any (non-GHG) emissions to air. This is monitored via our
performance, compliance and reporting against our operating
environmental permit conditions. Our full GHG reporting can
be found on pages 102 and 103.
0
9
9
,
1
3
2
9
2
2
3
,
Customer base
33,000
32,250
31,500
30,750
30,000
2016/17
2017/18
31
Avonmouth ERF
Construction of the £252 million ERF in Avonmouth, on the
outskirts of Bristol, made strong progress during the year. The
facility will enable local authorities and businesses to transform
320,000 tonnes of non-recyclable residual waste each year into
renewable energy, which would otherwise go to landfill. Once
operational in 2020/21, the new ERF will generate an estimated
34MW of low carbon energy, supplying National Grid with
enough electricity to power over 70,000 homes. As part of
Viridor’s commitment to supporting the local economy around
its developments, Viridor held Meet the Buyer events in Bristol
where 30 local businesses attended, from which several local
contracts have been awarded.
Dynamic landfill strategy
Viridor operated 11 landfill sites throughout the year.
The rate of volume decline has slowed during the year,
and pricing has held up. With the sites of competitors
having closed and with insufficient capacity in the UK
ERF market, we are operating a dynamic landfill strategy.
Sites are being kept open for longer, with the aim of
optimising their long-term value, and investment will be
made in new cells where there is commercially attractive
demand. We are also investing in our landfill gas business
to enhance the long-term reliability of our assets.
We constructed new cells at four sites in 2017/18. Consented
landfill capacity reduced from 42.5 million cubic metres
(mcm) to 40.5mcm, reflecting usage during the period.
We continue to manage our landfill energy business
with the aim of maximising the value of landfill gas power
generation. We are also looking at alternative commercial
development opportunities and other energy uses such
as photovoltaic and energy storage at our landfill sites.
At year end, our landfill gas sites had engine generation
capacity of 88MW, a decrease from last year’s 99MW.
During the year, cells at some sites were reopened to
landfill, resulting in a short-term reduction in the volumes
of gas captured. In addition, higher engine maintenance –
as part of an engine replacement programme – resulted
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
Our operations
Waste management
continued
in a one-time larger reduction in landfill gas power
generation output for the year, down 13% to 445 gigawatt
hours (GWh). This level of reduction is not expected to
recur. Average revenue per megawatt hour (MWh) was
£93.39 (2016/17 £87.16). Average operating costs were
£40.96 per MWh (2016/17 £33.02).
Recycling
Viridor retained its position as one of the leading recycling
businesses in the UK, although the market environment
remains challenging. Recycling volumes traded in 2017/18
were lower than the previous year at 1.4 million tonnes, in
part reflecting a decision not to retender certain contracts
where the level of contamination in inputs was unacceptable.
We were active across the recycling spectrum, including
mixed materials, glass, plastics and paper recycling, as
well as 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 more than 230,000 tonnes of glass in 2017/18.
Self-help measures continue
The UK’s national policy is to recycle as much as possible
and Viridor’s operations align with that. However, as local
authorities seek to cut costs, the quality of materials brought
in to our recycling assets is under pressure. As part of our
continuing self-help measures, we are rationalising facilities
and investing in quality improvement schemes.
Investments in glass recycling
to meet customer needs
Viridor has invested in its glass recycling facility at Newhouse
near Glasgow to take comingled glass. The site was originally
designed to take only single-source separated glass bottles
and jars. The latest investments from Viridor meet the quality
standards demanded by today’s bottle-makers.
Some 60% of feedstock for Newhouse comes from local
authorities, with Viridor contracted to serve 17 of Scotland’s 32
local authorities. Newhouse uses a range of technologies such
as advanced colour-sort recycling that is capable of processing
both mixed and colour-segregated glass. The output is sold to
bottle-makers, who turn it into new bottles and jars.
One of the most important developments in the recycling
market over the past year was the change in import
regulations in China, which has announced new quality
requirements for imports of plastic and paper with the
expectation that China will take lower volumes of these
materials. This does not affect other parts of our recycling
operations as the metal and glass that Viridor processes
stays in the UK.
Our high-quality recyclate helps
manufacturers reduce reliance on
imported materials.
Viridor anticipated this change in advance of China’s
announcement and has secured new markets for plastic
waste in the UK, Asia and elsewhere in Europe. We are also
making additional investments and working with our supply
chain to improve the quality of paper recycling for China.
During the year, recycling EBITDA was £15.0 million, a
decrease of 33.9% against the previous year’s £22.7 million.
Around £3.0 million of the reduction related to the pricing
and quality implication of China’s policy announcement.
The remaining reduction of £4.7 million reflects our
overall reduction in recycling volumes and an increase in
processing and reject costs as a result of lower input in
quality, and higher output quality demands. EBITDA per
tonne decreased by £3 year on year to £11 as a result of
higher processing costs (up £11 per tonne to £83 per
tonne) offset by higher pricing. Revenue per tonne was
up 7.8% to £97 (2016/17 £90), reflecting a shift towards
higher value output including polymers. Compared with
the second half of 2017/18, we anticipate market and
operational improvements into 2018/19.
Sharing commodity risk and opportunity
In line with the Group’s strategy of achieving a balanced
risk profile across its operations, we continue to work with
stakeholders to share commodity risk and opportunity.
At year end, 65% of our contractual volumes from local
authorities had been renegotiated to share recyclate
commodity risk (up from c.40% last year).
Recycling volumes traded (million tonnes)
8
.
1
8
.
1
7
.
1
6
.
1
4
.
1
2013/14
2014/15
2015/16
2016/17
2017/18
2.0
1.5
1.0
0.5
0.0
32
PENNON GROUP PLC ANNUAL REPORT 2018
Joint ventures
Viridor Laing Greater Manchester (VLGM), a joint venture
between Viridor and John Laing, performed in line with
expectations during the first half year. As part of the
contract exit, the company was sold to GMWDA at the end
of September and as a result is no longer a joint venture.
The TPSCo joint venture (between Viridor, John Laing
and Inovyn) performed strongly with good availability
throughout the year. As part of the wider contract reset,
GMWDA provided finance to the joint venture to enable the
repayment of external bank debt. This change in cash flows
resulted in the recognition of income in this joint venture,
with an amount deferred relating to the lower ongoing gate
fee. A new seventeen-year contract between TPSCo and
GMWDA was signed during the year securing fuel supply for
the ERF over the period covered by the previous contract.
Viridor’s operating contract for TPSCo’s Runcorn I ERF
remains unchanged.
The Lakeside ERF (a 50:50 joint venture with Grundon Waste
Management) continued to perform strongly. In its eighth
year of operation, it continues to exceed its original targets
for both waste processing and power generation.
Community engagement
Viridor continues to invest in educational programmes
and support community initiatives in the localities of our
operational sites. We have 11 educational centres which
received 17,496 visitors in the year ending 31 March 2018.
We helped to deliver 93 outreach events.
One of our most prominent educational facilities is our visitor
centre at Ardley ERF, a few miles north of Oxford. It runs tailored
educational programmes to teach children and adults about
sustainable waste management and how energy recovery fits
into the waste hierarchy. In April 2018, we were longlisted for
the Education Partnership Award as part of Business in the
Community’s Responsible Business Awards 2018.
We also run community liaison groups that engage in
effective dialogue with community representatives. These
ensure we keep in touch with our neighbours and give back
to the local communities in which we operate. We use these
groups to provide updates on our operations and respond to
feedback. Wherever possible, we have an open-door policy
so that people can see how we are transforming waste in
their own community.
During 2017/18, Viridor provided £7.6 million to community
support, sponsorship and charitable donations. Some
£7.3 million of this was paid to Viridor Credits for distribution
via the Landfill Communities Fund.(1)
Our charitable donations scheme helped 114 projects
supporting STEM, environmental, resource and recycling
education initiatives, communities coming together through
sport and community events and communities focused
on improving the quality of life for disadvantaged and
priority groups.
We have exceeded our three-year goal to deliver 1,500 hours
of volunteering within the local community by 2018. In
2017/18, our employees volunteered 123 days. Viridor won the
Taunton Deane Business Award (TDBA) CSR Award 2017 for
our community partnership with the Somerset Wildlife Trust.
(1) Viridor Credits is an independent, not-for-profit organisation that
administers Viridor’s contributions to the Landfill Communities Fund.
Supporting STEM (science, technology,
engineering & maths) projects in schools
Viridor is a leading sponsor of Go4Set across Scotland, a schools
educational programme challenging young people to think about
their future environment and how we utilise resources.
The programme encourages young people to be the
engineers and scientists of tomorrow and helps them develop
skills in team working, communication, report writing and
problem solving – all essential skills in the working world.
Confidence in UK waste sector,
strong drivers for recycling
Viridor, alongside the waste industry, has called for a new
attractive framework for UK recycling to address input
quality to UK materials recycling facilities, stagnant recycling
rates and producer responsibility.
We are encouraged that the ‘Blue Planet’ effect is spurring
action and we are optimistic that positive changes may be
announced in the Resources & Waste Strategy later this
year creating a UK recycling system fit for the future
including incentives for ‘producer responsibility’, consistency
of household bin collections, increasing household waste
quality, new packaging recycling targets and packaging
recovery note reform, making recycling more profitable and
enabling investment and innovation.
Local authority contracts
We continue to work with customers to identify mutually
beneficial enhancements to our contracts. We have sharing
mechanisms in place in our long-term local authority
contracts where returns exceed contractual hurdle levels.
The contract to operate the recycling assets on behalf of
GMWDA has entered a run off period of no less than 18
months from 1 October 2017 while they tender for a new
contract expected to commence in 2019. Viridor has been
shortlisted for two of the three lots being tendered, including
the operation of the main processing assets. Performance of
major local authority contracts was in line with expectations.
Our collections business continued to provide a valuable
service to our customers during the year and secured
volume for our ERF, landfill and recycling assets.
33
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Our operations
Water and wastewater
Upstream catchment
Managing quality and quantity of
water running off the land and into
the rivers and reservoirs.
We are focused on providing services in the most
efficient and sustainable way possible. Innovation,
new technologies and the pioneering of an holistic
approach underpins our commitment to delivering
service improvement and long-term value.
R E A D M O R E O N L I N E
www.southwestwater.co.uk
Raw water reservoirs/
water resources
Stores an available and
sufficient supply of untreated
water collected from rivers
and a small number of
bore holes.
We continued to deliver strong performance
in 2017/18, providing high-quality drinking
water, beating our leakage targets, driving
improvements in our environmental standards
and delivering improvements in customer service.
We are confident in our preparations for the
2019 Price Review (PR19).
Stephen Bird
Managing Director, South West Water
South West Water
1.7
million total
population served
21
raw water reservoirs
651
0.8
million customers
15,401
km of drinking water
mains network
29
wastewater treatment
works with 63 ultraviolet
(UV) treatment facilities
drinking water treatment
works with 3 UV
treatment facilities
17,439
km wastewater
mains network
144(1)
bathing waters and
24 shellfish waters
(1) Assessments were carried out at 143 of these during the year
Wistlandpound
Upper Tamar
Wimbleball
Roadford
Meldon
Crowdy
Stannon
Fernworthy
Kennick,
Tottiford &
Trenchford
Colliford
Siblyback
Venford
Park
Burrator
Avon
Stithians
College
Drift
Argal
Reservoir
Key water mains
34
30km
PENNON GROUP PLC ANNUAL REPORT 2018 Surface water catchment
Managing surface water drainage
and reducing the impact of flooding.
Drinking water mains network
Extensive network to deliver an
uninterrupted supply of treated water
to households and businesses.
Water treatment works
Treating water to high standards to
ensure it is clean, safe and reliable.
Longham Lakes
10km
Reservoir
Key water mains
Bournemouth Water
0.5
million total
population served
0.2
million customers
2
raw water reservoirs
2,832
km of drinking water
mains network
5
treatment works with
4 UV treatment facilities
Wastewater mains network
A resilient and reliable network
of sewers to take wastewater from
properties to our treatment works.
Wastewater treatment works
Ensuring treated wastewater
is returned to the environment
in as safe as state as possible.
Sewage sludge/bio-resources
Treated sludge is used often
in agriculture, minimising any
adverse environmental impacts.
Customer support
Our field teams work
proactively to ensure
high-quality services are
maintained and respond
quickly to any issues
reported by customers
themselves.
Improve bathing
and shellfish
water quality
To support local
communities and
businesses.
35
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
Our operations
Water and wastewater
continued
Sector-leading outperformance
We continued to deliver sector-leading performance in
2017/18 with a cumulative return on regulated equity
(RoRE) of 11.8%. This industry-leading performance
comprises 6.0% as the base return, 2.6% total expenditure
(totex) savings and efficiencies, and 0.3% as a net reward
on outcome delivery incentives (ODIs). The remaining
2.9% reflects the difference between actual and assumed
financing costs using a cumulative forecast retail
price index over K6 of 2.8%, consistent with the way
we calculate our innovative WaterShare mechanism.
Total expenditure savings
During 2017/18, we continued to deliver further efficiencies
and cost savings with £177 million of cumulative totex
savings in the first three years of K6 (2015-2020).
We expect to remain at the forefront of cost efficiency
in the water sector.
We continued to deliver sector-leading
performance in 2017/18.
We use new technology, innovative processes, skills
training and equipment to deliver both drinking and
wastewater improvements. Savings are driven by
continuing advantages from our strategic alliances
including a new water distribution framework and the
H5O capital alliance. We are ensuring efficient capital
investment through the use of data analytics, optimising
capital and operating solutions while promoting efficient
off-site build techniques. The integration of Bournemouth
Water continues to drive efficiencies, including delivery
of key capital schemes in the region.
ODI rewards
Overall, our operational performance is ahead of our
committed performance levels, resulting in continued
net reward in ODI despite the challenges from the cold
weather in March 2018.
Operational performance for the full-year resulted in a net
ODI reward of £2.6 million (£8.1 million cumulatively over
three years of K6), reflecting annual equivalent RoRE
outperformance of 0.3% to date.
We maintained good asset reliability and stable
serviceability across all water and wastewater areas and
received rewards for bathing water quality and water
restrictions. Following improvements in external and
internal sewer flooding from last year, we received a
reward for performance this year.
The cumulative net reward of £8.1 million comprises
£10.4 million of net rewards recognised at the end of the
regulatory period and £2.3 million of net penalty which
may be reflected during the regulatory period.
Pollution events in wastewater, while improving, continue
to be higher than the levels to which we have committed
and we are targeting further improvements over the
remaining regulatory period.
Delivering excellent customer service
We aim to deliver the highest levels of customer service.
South West Water’s overall customer satisfaction score
remains strong at 91%. Value-for-money satisfaction has
also increased from last year.
South West Water achieved its highest ever service
incentive mechanism (SIM) score of 84.5 (giving a
reportable score of 85) while Bournemouth Water’s
SIM score of 87.6 (a reportable score of 88) remains one
of the best in the UK. The SIM score is calculated using a
qualitative element (based on a customer survey) and a
quantitative element including the number of complaints
received in writing or by phone. Complaints have halved
since 2011 with written complaints down again in 2017/18
following the c.30% reduction in 2016/17.
During 2017/18 we introduced a number of proactive
customer service improvements. These included the
in-house development of our ‘voice of the customer‘ (VoC)
technologies, designed for use as a transactional (retail)
survey and customer engagement tool, innovatively
Cumulative K6 RoRE
2.9%
Financing
outperformance
0.3%
ODI out-
performance
11.8%
Total
6.0%
Base
2.6%
Totex
outperformance
36
1
7
4
7
5
7
6
8
9
7
6
8
2
8
8
8
5
8
SIM
100
80
60
40
20
0
2012/13
2013/14
2014/15
2015/16
2016/17
2017/18
Bournemouth Water
South West Water
PENNON GROUP PLC ANNUAL REPORT 2018
adapted to fit with the unique needs of the wholesale
area of our business. The technology has helped us
increase the speed and quality of our responses though
a more proactive, tailored approach. In conjunction with
a wide-ranging number of process, people, technology
and proactive customer service improvement initiatives
implemented during the year, this has seen South West
Water achieve a larger in-year increase in its Customer
Experience Survey score (which is an industry comparison
of customer service) than any other water company.
In April 2018, South West Water received accreditation
from the Institute of Customer Service (ICS). ServiceMark
is a national standard recognising an organisation’s
achievement in customer service and its commitment
to upholding those standards. This is a key development
because the next generation of Ofwat’s SIM mechanism
– its customer experience measure known as CMeX
(customer measure of excellence) – is likely to be based
on the ICS metrics and principles.
A cornerstone of our customer service strategy is to
ensure affordable bills and help customers in vulnerable
circumstances. We introduced a new social tariff into
the Bournemouth region during the year and now assist
approximately 51,000 customers through a variety of
support schemes.
WaterShare
Our unique WaterShare scheme identified £6.1 million
of customer benefits during the year, in addition to the
£4.0 million identified for 2016/17. The independent
WaterShare customer panel scrutinises our performance
against the current business plan and reviews and
challenges our recommendations on how any benefits
should be shared with customers. It recommended the
£4.0 million should be deferred to facilitate investments
planned later in the regulatory period. The WaterShare
panel will consider how to apply the 2017/18 benefit
following customer research later in the year.
ODI net penalties valued at £2.1 million, which apply in
the current regulatory period, have been passed back
to customers through a reduction to their bills in 2018/19.
Leakage megalitres per day
100
80
60
40
20
0
4
8
4
8
4
8
2
8
3
8
0
2
9
1
9
1
2013/14
2014/15
2015/16
2016/17
2017/18
Bournemouth Water
South West Water
37
Co-creation workshops improve
customer service on leaks
Customers are understandably concerned about leaks on
their supply pipes because they do not want to be charged
for water they have not used. Our collaborative ‘co-creation’
workshops have allowed us to re-engineer the way we respond
to customers when they have leaking pipes. Our customers get
a better experience and this has increased our customer service
scores. Effective use of a range of communication channels
including SMS, apps and social media has allowed us to respond
faster and ensure customers are kept fully informed throughout
the response process. Independent Ofwat surveys have
confirmed we are offering a much more responsive process
and fulfilling our service commitments.
Drinking water
We continued to maintain the high standards of drinking
water quality achieved last year. South West Water’s
leakage performance at 83 megalitres per day was ahead
of our target and resulted in a reward for the year. This
reflects our continued investment in real-time pressure
management and additional network monitoring and
effective repairs.
South West Water achieved its 21st consecutive year of
unrestricted water supplies, while the Bournemouth Water
region has had no water restrictions since privatisation.
This is a result of prudent water resource management,
keeping leakage under control and high levels of water
meter adoption, which helps customers to manage
their consumption. Our long-term draft water resource
management plan, published in 2017, includes a
stress-tested forecast surplus of supply over demand.
The average duration of supply interruptions per property
for South West Water was higher than last year as a
result of the extreme cold weather in early March 2018.
This resulted in a penalty of £0.9 million.
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Our operations
Water and wastewater
continued
Protecting water quality
in Plymouth Sound
Our wastewater investment during the year included £20 million
in Plymouth to help further protect bathing water quality.
We have made significant upgrades to our wastewater
infrastructure to improve water quality in Plymouth Sound
and maintain bathing water quality at Plymouth Hoe East
and West beaches, which have been rated excellent every
year since tougher new standards were introduced in 2015.
Investment included improving key stormwater overflows,
removing surface water and increasing stormwater storage
capacity. UV disinfection technology has also been installed
on the stormwater overflow at Plymouth Central wastewater
treatment works – the largest UV scheme of its type in the UK.
Investment in drinking water infrastructure
Investment into key drinking water projects continued
during the year to assist in maintaining water quality
and reducing supply interruptions. This work includes
improving mains in the Plymouth area as well as our
£60 million investment in the innovative Mayflower
water treatment works at North Plymouth, which is
due to become operational in autumn 2018. We also
completed improvements at three water treatment
plants in Devon: Tottiford £6.0 million; £6.3 million at
Northcombe; and in June 2017, work started on the
£5.7 million upgrade of Tamar Lakes treatment works.
All three use granular activated carbon filtration and UV
disinfection. We continued to invest in real-time pressure
management and network modelling technology
to reduce supply interruptions.
Wastewater
We aim to ensure the safe and efficient removal and
disposal of wastewater, while minimising the likelihood of
sewer flooding or pollution affecting homes, businesses
or the environment. Wastewater treatment improvements
were a focus again this year along with increased
monitoring to improve our ability to prevent potential
failures. A good example is our £5 million investment in
wastewater treatment in Fluxton, East Devon, which was
completed in January.
We continue to reduce the risk
of flooding to customers.
Although our numeric compliance was slightly down on the
previous year’s 98.4%, the underlying performance shown
by lead indicators and our internal monitoring results
continue to improve.
Drinking water quality mean zonal compliance (%)
Pollutions (Categories 1-4)(1)
.
8
9
9
9
6
9
9
9
.
.
0
0
0
0
1
.
7
9
9
9
8
9
9
9
.
6
9
9
9
.
.
8
9
9
9
6
9
9
9
.
100.00
99.96
99.92
99.88
99.84
99.80
1
8
3
1
2
3
5
6
2
8
5
2
4
3
2
400
320
240
160
80
0
2014
2015
2016
2017
2018
2013/14
2014/15
2015/16
2016/17
2017/18
Bournemouth Water
South West Water
(1) Category 1-4 water and wastewater pollutions.
38
PENNON GROUP PLC ANNUAL REPORT 2018
Protecting the environment
Investment to continue improving environmental
performance saw a reduction in overall pollution incidents
during the year. While performance still needs to improve,
and we incurred a penalty this year, we made good
progress and anticipate further improvement in 2018/19.
During the year, a thorough analysis of our historical
performance regarding pollution incidents and their
root causes was undertaken. New predictive computer
models anticipate where blockages might arise and locate
them before they become an issue. South West Water is
investing in improvements at wastewater treatment works
and pumping stations. New capabilities for assessing and
clearing sewage network blockages are being introduced
in addition to training to increase understanding among
employees of the causes and impacts of pollution incidents.
We also continue to promote responsible sewer usage with
our customers through initiatives such as Think Sink! and
Love your Loo.
In April 2018, South West Water was longlisted for the
Environmental Sustainability Award as part of Business
in the Community’s Responsible Business Awards 2018.
Investment in wastewater infrastructure
Wastewater activity during the year included a £20 million
investment in Plymouth to improve the already high level
of bathing water quality. We created extra storm storage
in the sewerage network helping to reduce the risk of
spills into Plymouth Sound, while protecting the already
excellent water quality against extreme rainfall events in
the future. The project includes construction of our largest
ever ultra-violet disinfection facility for storm water and
represents the largest single wastewater investment in the
current K6 programme.
We improved water quality at eight shellfish harvesting
areas on major estuaries in Devon and Cornwall and
investment in providing higher capacity and better
resilience at our wastewater treatment works, including
Hayle in Cornwall, is ongoing, while monitoring of our
network during weather events has been enhanced.
Our positive results for the 2017 bathing water season,
assessed under EU standards, reflect a sustained
programme of major investments to protect bathing waters.
Of the 143 bathing waters assessed in the South West
Water region, 140 (98%) were classified as ‘sufficient’ or
better, with 75% qualifying as ‘excellent’. None of the three
bathing waters rated as ‘poor’ was attributed to any failure
of South West Water’s assets.
We continue to reduce the risk of flooding to customers
through numerous improvements to our sewage system
in a range of locations, including Totnes and Paignton.
Our Mayflower treatment works
is a glimpse of the future
This drinking water investment is attracting widespread interest
from other UK water companies as well as overseas. Mayflower
will use innovative water treatment processes to deliver even
cleaner water more efficiently, while helping to keep customer
bills down. A first of its kind in the UK and Europe, Mayflower’s
new technology combines suspended ion exchange, inline
coagulation and ceramic membrane technology. These
cutting-edge treatment processes were developed by the
Dutch water technology company PWNT. Mayflower combines
three of our core values: ‘progressive’ (the innovative use
of robust new technology and a fresh approach to water
treatment); ‘collaborative’ (working in partnership); and
‘responsible’ (Mayflower will produce renewable energy
on site, use fewer chemicals and produce less waste than
a conventional treatment works).
R E A D M O R E O N LI N E
www.southwestwater.co.uk/mayflower
Bathing water compliance(2) (%)
.
2
7
9
.
3
0
7
.
6
8
9
1
.
1
8
.
9
7
9
.
5
5
7
100
80
60
40
20
0
2015/16
2016/17
2017/18
Excellent
Sufficient
(2) 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).
39
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Our operations
Water and wastewater
continued
New wastewater van fleet brings
immediate drop in pollution incidents
The 2017/18 reduction in pollution incidents results from a range
of investments, including a new fleet of specialised wastewater
vans. Each van accommodates advanced equipment including
CCTV and sonar to detect blockages in wastewater pipes.
The vans were commissioned in September and South West
Water recorded an immediate reduction in pollution incidents.
We are also running information campaigns such as Think Sink!
and Love Your Loo to educate the public about the blockages
that can arise when flushing waste fat or baby wipes away.
The Environment Agency is looking for serious pollution
incidents across the UK to ‘trend towards zero’ by 2020 and
we continue to look for innovative ways to reduce the number
of such incidents.
Customer engagement for PR19
In September 2018 South West Water will submit its
business plan for the 2020-2025 period to Ofwat as
part of PR19.
In support of PR19 business planning, the company has
carried out its largest programme of customer research
and engagement to date, including inviting all customers
to have their say on business proposals published for
consultation in March 2018 through traditional and digital
channels, including social media. Feedback has been
received from more than 22,000 customers.
Wholesale services
As a wholesaler within the non-household market, which
opened on 1 April 2017, we currently work with more than
16 different retailers, including Pennon Water Services, and
our wholesale service desk has been operating effectively.
As a wholesaler in this new market, we welcome the
opportunity to facilitate competition.
Our community
As one of the largest companies in the region, South West
Water provides services that are essential for the area’s
economic sustainability supporting the employment of
some 5,000 people either directly or indirectly through our
supply chain. We engage with local communities through
a range of activities including our own events, support for
events run by our partners in Devon and Cornwall and
fundraising for charities. Our community outreach also
includes public information campaigns including Think
Sink! and Love Your Loo, and customer consultations such
as our Get Into Water programme as part of our PR19 work.
Sponsorships and charitable partnerships
In 2017/18, South West Water provided £97,000 of
community sponsorship and supported a number of
charities. Sponsorships included BeachCare with Keep
Britain Tidy, Cornwall Wildlife Trust, Devon Wildlife Trust,
South West Coast Path Association, Surf Life Saving GB
and Beach Schools South West. Our charity activity was
on behalf of Age UK Cornwall, Age UK Devon, Cornwall
Air Ambulance Trust, Devon Air Ambulance Trust,
Devon and Cornwall Food Action and the RNLI.
Access and recreation
Our partnership with South West Lakes Trust ensures
that our reservoirs and landholdings are managed for
environmental improvements and for the benefit of our
customers and communities. During the year we welcomed
over two million visitors to our recreational estate. There
was a big focus on health and wellbeing with 70,000
people benefiting from health giving outdoor activities
at the lakes while 5,000 people learnt new skills as the
Trust delivered training workshops in watersports,
environmental and heritage education.
40
PENNON GROUP PLC ANNUAL REPORT 2018 Our operations
Water retail services
Pennon Water Services provides
water retail and consultancy
services across Great Britain to
more than 160,000 business
customer accounts.
On 1 April 2017 the business retail market for water and
wastewater services opened for competition, allowing
more than 1.2 million businesses, charities and public
sector organisations in England to choose who they
buy their water and wastewater retail services from, for
the first time.
The wholesale suppliers of water and wastewater
services are the same, and domestic retail services
remain unaffected.
Pennon’s water retail operation
In order to benefit from the introduction of competition,
Pennon Water Services was established and formed a retail
venture with South Staffordshire plc (incorporating South
Staffs Water and Cambridge Water) to build scale and
efficiency in the new market. Pennon Water Services is
licensed by Ofwat and has achieved excellent adherence
to regulatory standards. Pennon Water Services is
managed independently of South West Water and
can secure services from any wholesaler in the UK.
Operational successes
Pennon Water Services now looks after 5.3% of the UK’s
business customer accounts having been responsible for
33% of all water-only accounts that switched to combine
water and wastewater services under a single retailer.
It is one of only four retailers who were previously part of
a water company to have achieved net growth in the new,
competitive non-household market. 437,000 bills have
been issued with over 71,000 customer calls answered.
We continue to support key sectors in health, education,
manufacturing and agriculture with products designed to
help businesses better understand, enhance and protect
their water supply. This allows businesses to save money
and be more competitive while supporting our continued
drive for environmental sustainability.
Over the last 12 months, we have won a number of
high-profile, national contracts including Moto, Unite
Students and BMI Healthcare, and has been recognised
as one of the top four ‘champion’ performers in the new
market by independent consultant Brodick, based on size
and growth. We have also been rated highly by customers,
scoring 96% customer satisfaction with staff service and
95% customer satisfaction with staff knowledge.
Pennon Water Services has been able to maximise its
value by offering a broad range of services to business
customers under its AquaCare brand, including legionella
testing and prevention, leakage reduction and contingency
planning while at the same time creating an opportunity to
introduce services from other Pennon Group companies.
Source for Business
Source for Business was originally established in 2011 as the
specialist business customer division of South West Water,
fusing decades of operational excellence with exemplary
customer service.
With the deregulation of the water and wastewater retail market
in April 2017, Source for Business now operates as the national
trading brand of Pennon Water Services.
R E A D M O R E O N LI N E
www.sourceforbusiness.co.uk
5.3%
160,000
of the UK’s business customer
accounts serviced
business customer accounts
nationwide
41
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Report of the Chief
Financial Officer
Financial review
Susan Davy
Chief Financial Officer
Our sustainable approach
to finance is a key contributory
factor towards continued and
controlled progress against
strategic objectives.
Overview
Pennon Group had another year of strong financial
performance in 2017/18, reflecting continuing outperformance
against the K6 business plan at South West Water and
increasing earnings at Viridor, primarily from its energy
recovery facility (ERF) portfolio. This continues to underpin
our 10-year dividend policy of 4% year-on-year growth above
retail price inflation (RPI) to 2020. Viridor’s ERF portfolio
remains a key differentiator for Pennon compared with our
peers in the water sector. The expansion of ERF earnings,
with further facilities being commissioned against a background
of under-capacity in the market will play a major role in
supporting the Group’s earnings growth to 2020 and beyond.
Pennon’s financial performance, balance sheet and
dividend are aligned to our strategic sustainability objectives.
The publication of our refreshed tax strategy in March 2018,
ensuring we contribute to society through a responsible
approach to tax and the refinancing of our £300 million
perpetual capital securities in September 2017 demonstrate
our commitment to sustainable financing. In addition,
Pennon has pioneered a sustainable financing framework
to integrate commitments to environmental and social
objectives into a variety of funding opportunities across
the Group. Our sustainable approach to finance is a key
contributory factor towards continued and controlled
42
progress on delivery against our strategic objectives to lead
the UK’s water and waste sectors, invest for growth and drive
value through efficiency.
South West Water, including the merged Bournemouth
Water business, continues to deliver and outperform the
sector leading business plan targets for the current K6
regulatory period and achieved a return on regulated equity
(RoRE) of 11.1% for the year (11.8% cumulatively). This result
is achieved through outperformance spread across total
expenditure (totex) savings, financing with the lowest
effective rates in the industry and delivery of net outcome
delivery incentive (ODI) rewards; and through the unique
WaterShare mechanism the benefits of outperformance
are being shared with our water customers. £79 million has
been identified for sharing with customers to date. Within
the context of totex outperformance of £177 million to date
in K6, South West Water is also delivering on its targeted
capital expenditure programme with a major investment
in the innovative new Mayflower water treatment works for
Plymouth now nearing completion, investment in Plymouth
Bathing Waters where specific improvements are maintaining
the high level of bathing water quality in that area and
improvements at three other water treatment works
including the installation of granular activated carbon
(GAC) filtration technology.
With Ofwat’s PR19 Price Review widely anticipated to be
challenging to the industry (with the Final Methodology
signalling reduced allowed returns, but with strong
operational and customer service incentives for good
performing companies) South West Water is making good
progress with its 2020-2025 business plan. The company’s
multi-channel customer engagement campaign ‘Get into
Water’ is well underway and a formal customer consultation
was launched on 1 March 2018. In developing its detailed
plans the business is confident in its ability to remain at the
frontier of cost efficiency for the water sector and is focused
on maintaining the momentum on cost savings and financing
outperformance that it has already achieved to date.
Revenue (£m)
EBITDA (£m)
0
.
1
2
3
,
1
.
2
7
5
3
,
1
.
3
2
5
3
,
1
1
.
3
5
3
,
1
.
0
2
0
8
.
0
2
2
5
.
9
5
3
8
.
2
2
2
5
.
2
6
0
8
.
0
7
4
5
.
5
3
9
7
0
.
1
6
5
3
.
1
7
5
2,000
1,600
1,200
800
400
0
)
1
(
.
7
5
8
7
)
1
(
.
0
3
9
3
,
1
.
9
6
5
4
.
3
7
0
4
6
.
1
0
4
.
9
5
6
4
0
.
1
1
4
6
.
1
2
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
.
3
2
6
5
.
6
9
0
5
.
8
2
1
5
750
600
450
300
150
0
2013/14
2014/15
2015/16
2016/17
2017/18
2013/14
2014/15
2015/16
2016/17
2017/18
Water
(1) Underlying.
Waste
Group
Capex (£m)
Underlying
Statutory
Adjusted
Interest rate on average net debt (%)
500
400
300
200
100
0
1
.
4
3
4
.
3
7
0
4
.
4
2
9
2
6
.
1
4
1
.
2
2
6
2
1
.
5
4
1
.
9
6
1
3
.
8
2
8
1
1
.
4
3
1
.
7
4
8
3
.
2
8
9
3
.
9
0
9
1
.
8
3
9
1
.
0
3
1
2
.
2
4
8
1
0
.
1
5
4
3
2
1
0
8
3
.
8
3
.
3
3
.
4
3
.
3
3
.
1
.
3
4
3
.
2
3
.
.
7
3
5
3
.
2013/14
2014/15
2015/16
2016/17
2017/18
2013/14
2014/15
2015/16
2016/17
2017/18
Water
Waste
Pennon Water Sevice
Group
Water
Group
Underlying earnings reconciliation 2018
£m
EBITDA
Operating profit
Profit before tax
Taxation
Profit after tax (PAT)
PAT attributable to perpetual capital holders
Non-controlling interest
PAT attributable to shareholders
Deferred tax before non-underlying items
Non-underlying items post tax
Proportional adjustment on Perpetual capital returns
Underlying earnings
(2) See reconciliation on page 44.
Underlying earnings reconciliation 2017
£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
Underlying earnings
Non-underlying items
Reset of
Greater
Manchester
contact
3.2
3.2
6.5
3.0
9.5
Derivative
fair value
movements
–
–
(2.4)
0.4
(2.0)
Underlying
509.6
323.9
258.8
(44.4)
214.4
Non-underlying items
Underlying
486.0
304.6
250.0
(58.4)
191.6
Restructuring
costs
(10.7)
(10.7)
(10.7)
2.3
(8.4)
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
43
Statutory
results
512.8
327.1
262.9
(41.0)
221.9
21.5
(0.2)
200.6
18.3
(7.5)
1.3
212.7
Statutory
results
475.3
293.9
210.5
(30.0)
180.5
16.2
164.3
18.9
11.1
194.3
Earnings
per share
(p)
48.0
4.4
(1.8)
0.3
50.9
Earnings
per share
(p)
39.8
4.5
2.7
47.0
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
Report of the CFO
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
2018
512.8
(3.2)
509.6
13.8
33.2
5.7
562.3
2017
475.3
10.7
486.0
16.1
32.9
11.2
546.2
(1) These adjustments relate to the waste management business, resulting in adjusted waste management EBITDA of £202.9 million (2016/17 £198.5 million).
Viridor performed well in the year, with particularly strong
performance from its ERFs, with the operational part of
our portfolio consistently achieving availability of 92%(2)
and outperforming initial base case expectations.
The majority of Viridor’s capital investment continues
to relate to the delivery of the four remaining ERFs.
The recycling market environment remains challenging,
with operational costs increasing to meet operational
requirements and the impact of China’s new import
policy (impact of c.£3 million in 2017/18).
Austerity measures faced by Viridor’s local authority
customers continue to create pressure for them and
emphasise the importance of continuing delivery of
efficiency and value for money.
During the year, Viridor negotiated a reset to the Greater
Manchester waste contract which had a mutually
positive outcome. Following the changes in contractual
arrangements it is anticipated that future annual earnings
will reflect:
• No further finance income or share of profit after tax
will be recognised from Viridor Laing, as the entity is
no longer part of the Group
• A non-material reduction in profit after tax and finance
income from TPSCo shareholder loans due to a
reprofiling of cash flows
• Improved earnings from the recycling asset operations
contract over the 18 month run-off period.
The Group’s subsidiary Pennon Water Services has
successfully gained new customers since the opening of the
non-household retail market to competition on 1 April 2017.
Pennon Water Services operates independently of South
West Water and can secure services from any UK wholesaler,
while South West Water has the freedom to supply other
UK business retailers.
Pennon remains focused on driving greater synergies and
savings across the Group, sharing best practice and ensuring
it is well placed to capitalise on emerging opportunities.
A good example is the successful implementation of
a Group-wide enterprise resource planning system.
The cost savings and synergy targets of c.£17 million p.a.
from 2019, identified by the Group’s Shared Services Review,
is on track and the run rate is already c.£13 million p.a.
(2) Weighted by capacity, excludes Bolton, includes JVs at 100%.
In the water business in particular, we see consolidation
as a sustainable way to deliver greater efficiency, lower
bills and delivering benefits for customers. This has been
demonstrated through the Bournemouth Water integration
with c.£27 million of cumulative synergies targeted by 2020,
of which £16 million has already been delivered through a
25% reduction in back office costs and sharing best practice
improving performance.
Balancing operational risk and reward remains a key
component of our financial and business strategy.
Across our operations, we are successfully reducing Group
risk by overlaying our long-term assets with long-term
commercial arrangements and supporting these with
long-term financing. This applies to any aspect of the
Group’s operations – new investments in our water business,
working with local authorities on long-term waste solutions,
our investment into the Avonmouth ERF, or the Group’s
entry into the UK’s non-household retail market. This policy
is enhancing the Group’s resilience and sustainability.
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. In September 2017, the Group issued
£300 million of perpetual capital securities recognised as
equity. The issue achieved a coupon rate of 2.875% and was
four times oversubscribed. This new issue refinanced the
same amount raised as perpetual capital securities in March
2013 (which had also been treated as equity and has now
been repaid). As a result of this issue, the flexibility of our
balance sheet has been enhanced. Our decision in the first
half of 2017/18 to stop offering a scrip dividend in lieu of
cash underlines the strength of the Group’s balance sheet.
During the year our interest rate on average net debt
remained relatively low at 3.7% and at 31 March 2018 the
Group continued to have a strong funding position with
£1,171 million of cash and committed facilities.
Statutory financial performance
The Group’s statutory results showed growth in both profit
before tax to £262.9 million (2016/17 £210.5 million) and
earnings per share to 48.0p (2016/17 39.8p). This reflects
strong earnings from both South West Water and Viridor,
supported by sector leading efficiencies in the water
business and high availability from Viridor’s ERFs.
The performance of the underlying business is set out
in more detail below in the financial performance section.
44
PENNON GROUP PLC ANNUAL REPORT 2018 The statutory results include the impact of non-underlying
items totalling a credit after tax of £7.5 million
(2016/17 £11.1 million charge). The Directors believe excluding
non-underlying items and deferred tax provides a more
useful comparison on business trends and performance.
The net non-underlying credit of £7.5 million is a result of:
• Reset of Viridor’s Greater Manchester contracts – credit
of £6.5 million, representing a gain on the re-profiling of
cash flows (£22.5 million), favourable settlement of all
construction related claims (£3.2 million) net of a
write-down of shareholder loans (£19.2 million)
• The movement in the fair value of long-dated derivatives
associated with South West Water’s 2040 bond giving
a charge of £2.4 million (2016/17 credit of £16.0 million)
• Taxation on the non-underlying items above totalling
a credit of £3.4 million.
Financial performance
(before non-underlying items)
Revenue
Group revenue increased by 2.9% to £1,393.0 million (2016/17
£1,353.1 million). Revenue from the water business was up by
2.9% to £571.3 million (2016/17 £555.3 million) due to net tariff
increases of 2.5%(3) and customer demand increasing by 0.2%
from drier weather and increased infrastructure connections.
Viridor’s revenue marginally decreased to £785.7 million (1.0%)
(2016/17 £793.5 million) principally due to lower landfill tax
on lower landfill volumes and lower recycling sales offset by
higher ERF sales as the fleet of ERFs performed strongly.
Around 2% of the Group revenue increase is attributable to
non-household customer accounts related to the retail book
acquired from South Staffordshire by Pennon Water Services
(the new retail venture with South Staffordshire owned 80:20).
Adjusted EBITDA
Group underlying EBITDA and adjusted EBITDA were
ahead of 2016/17 up 4.9% at £509.6 million (2016/17
£486.0 million) and 2.9% to £562.3 million (2016/17
£546.2 million) respectively. Underlying operating profit
increased by 6.3% to £323.9 million (2016/17 £304.6 million)
and underlying profit before tax increased by 3.5% to
£258.8 million (2016/17 £250.0 million). This has been
achieved through increases in profits from both Viridor
and South West Water, together with continuing efficient
ongoing finance costs across the Group.
South West Water’s EBITDA and operating profit increased
by 3.8% and 5.9% respectively. Tariff rises and increased
customer demand (up 0.2% from last year) net of meter
switchers has driven an increase in revenue. Operating
costs increased but at a lower rate of increase than inflation
of 3.7% as a result of targeted efficiencies and other savings.
In addition, South West Water’s bad debt performance
remains strong with a charge of 0.8% of revenues
(2016/17 1.1%) reduced from 1.7% at March 2015.
This continues to be driven by efficient collections as we
work with our customers to manage their debt and strive
to support those customers in vulnerable situations with
affordability challenges. South West Water has continued
to record strong performances against the K6 regulatory
contracts, outperforming regulatory assumptions resulting
in a cumulative RoRE of 11.8%. More detail on RoRE
performance is set out on page 36.
Pennon Water Services has successfully gained new
customers since the opening of the non-household retail
market to competition on 1 April 2017. During 2017/18,
service investment and set up costs of c.£1.5 million have
been recognised relating to the successful migration to a
single billing system and customer service operation for
those customers previously served by South West Water and
South Staffs Water. Overall EBITDA for the year is £1.0 million.
Viridor has delivered an increase in EBITDA of 8.6% to
£150.2 million (2016/17 £138.3 million) through improved
performance of existing assets and a focus on quality
and efficiency.
The ERFs have performed strongly during the year
with availability of 92%(4). ERF EBITDA was £123.7 million
(2016/17 £106.9 million) increasing 15.7%, due to like for
like facilities contributing a 9% increase with the remainder
reflective of the financial contribution from Dunbar ERF.
Performance of the facilities is above initial base case
assumptions. During the year ERF earnings included
contractual compensation of £12.1 million, a similar level
to last year.(5) IFRIC 12 interest receivable has reduced to
£13.8 million (2016/17 £16.1 million) as the financial assets are
paid down through the operational phase of the contracts.
Joint venture EBITDA has decreased by 11.8% to
£38.9 million (2016/17 £44.1 million). This is as a result
of strong performance in TPSCo and Lakeside, offset by
the impact of the Greater Manchester contract reset
where Viridor disposed of its shares in Viridor Laing
(Greater Manchester) Holdings Limited. Viridor Laing
contributed EBITDA of £7.5 million prior to disposal
(2016/17 £14.4 million).
Landfill EBITDA has dropped since 2016/17 as volumes have
decreased, though the rate of volume decline has slowed.
The volumes observed in the first half of the year were
stronger but have reduced slightly during the second
half. However, the demand for a landfill solution remains
resilient, therefore four new cells were constructed in the
year. EBITDA at £5.6 million is 13.8% lower than last year
(2016/17 £6.5 million).
As we reported at the half year, we have been investing
in our Landfill Gas business to enhance the long-term
reliability of our assets. As a result of the required shutdowns
there have been consequential impacts to revenue (lower
availability) and costs. EBITDA for the year is £23.3 million,
down 15.6% from the prior year (2016/17 £27.6 million).
(3) Tariff increase reflects the net position post wholesale revenue
forecast Incentive mechanism (WRFIM) pass back of £10.9 million.
(4) Weighted by capacity, excludes Bolton, includes JVs at 100%.
(5) Primarily relates to liquidated damages received/receivable when
construction completed post the original contractual completion date.
45
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Report of the CFO
continued
EBITDA for recycling has reduced by £7.7 million from
£22.7 million to £15.0 million. The recycling market has
been challenging, with operational costs increasing to meet
quality requirements and the impact of China’s new import
policy. Self-help measures are focusing on asset and
contract optimisation, innovation and accessing new
markets. This has contributed to an increase in average
revenue per tonne. Of the EBITDA reduction in the year,
around £3 million related to the pricing and quality
implications of China’s policy announcement. The
remaining reduction of £4.7 million reflects an overall
reduction in recycling volumes and increase in processing
and reject costs as a result of local authority cost savings
impacting input quality, and higher output quality demands.
Consequently EBITDA per tonne has fallen to £11 (2016/17
£14). Revenue per tonne is up 7.8% to £97 (2016/17 £90),
reflecting a mix change towards higher value product,
including polymers and higher-grade paper. Operational
cost per tonne has increased by £11 to £83 (2016/17 £72).
Compared with the second half of 2017/18 we anticipate
market and operational improvements into 2018/19.
Viridor also continues to work with customers to improve
performance levels and is incentivised to work together to
find mutually beneficial solutions including through income
sharing mechanisms, in particular with our long-term local
authority clients. The agreement of solutions that give a
positive outcome for Viridor as well as our customers has
contributed to a 15.2% increase in EBITDA from Contracts,
Collections and Other to £39.3 million (2016/17 £34.1 million).
Group efficiencies achieved as a result of the Shared
Services initiatives have delivered a further £4 million of cost
savings and synergy benefits during the year bringing the
cumulative position to c.£13 million p.a. to date, and is on
track for the cumulative c.£17 million p.a. targeted from 2019.
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 £2.5 million (2016/17 £7.5 million).
Net finance costs
Underlying net finance costs of £74.5 million were
£15.7 million higher than last year (2016/17 £58.8 million).
This includes a reduction of c£8.0 million in other finance
income following the unwind of the 2011 Peninsula MB
Limited derivative in the prior year, higher RPI on index-linked
debt and higher net debt from continuing capital investments.
We have secured funding at a cost that is efficient and
effective. RPI funding represents approximately 20% of
Group borrowing resulting in higher interests costs as
inflation rates have risen, but at 3.7% the Group interest
rate on average net debt for 2017/18 remains sector leading
(2016/17 3.4%). The effective interest rate is calculated after
adjusting for capitalised interest of £17.0 million, notional
interest items totalling £11.8 million and interest received
from shareholder loans to joint ventures of £7.9 million.
For South West Water this figure was 3.5% (2016/17 3.2%).
During the year underlying net finance costs (excluding
pensions net interest cost £1.6 million, discount unwind
on provisions £10.2 million and IFRIC 12 contract interest
receivable £13.8 million) were £76.5 million (2016/17
£64.6 million), covered 4.2 times (2016/17 4.7 times)
by Group operating profit.
Profit before tax
Group underlying profit before tax was £258.8 million, an
increase of 3.5%, compared with the prior year (2016/17
£250.0 million). On a statutory basis, profit before tax was
£262.9 million (2016/17 £210.5 million) reflecting a net
non-underlying credit before tax of £4.1 million (2016/17 net
charge of £39.5 million). Included in profit before tax is the
Group’s share of joint venture profit after tax of £9.4 million
(2016/17 £4.2 million). Joint venture profit before tax is
benefiting from improved performance at Lakeside and
Runcorn I ERFs.
Taxation
The Group’s underlying mainstream UK corporation
current tax charge for the year (before prior year
adjustments) was £29.7 million, reflective of an effective
tax rate of 11.5% (2016/17 16.5%). The lower effective rate
of taxation reflects the level of capital allowances claims
available to Viridor on its increased capital expenditure.
The 2016/17 effective tax rate included a £10.7 million
charge for the 2011 Peninsula MB derivative. There was
a prior year credit of £3.6 million recognised for the year
(2016/17 credit of £1.8 million). In addition there is a
non-underlying £3.0 million current tax credit relating
to non-underlying items (2016/17 £9.4 million credit).
Underlying deferred tax for the year (before prior year
adjustments) was a charge of £20.7 million (2016/17
£17.8 million). The charge for 2017/18 primarily reflects
capital allowances across the Group in excess of
depreciation charges. There was a prior year deferred
tax credit of £2.4 million recognised for the year (2016/17
£1.1 million charge). In addition there is a non-underlying
£0.4 million deferred tax credit relating to non-underlying
items (2016/17 £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).
The prior year credit related to the enacted reduction in
the UK rate of corporation tax to 17% in 2020. There is no
change in rate to be recognised for 2017/18.
Overall the total tax charge for the year was £41.0 million
(2016/17 £30.0 million).
Earnings per share
Earnings per share on both a statutory and underlying basis(1)
were ahead of last year, up 20.6% at 48.0p (2016/17 39.8p)
and up 8.3% at 50.9p (2016/17 47.0p) respectively, reflecting
higher profits. Net assets per share at book value at 31 March
2018 were 391p, up 7.1% on last year (2016/17 365p).
Dividends and retained earnings
The statutory net profit attributable to ordinary shareholders
of £200.6 million has been transferred to reserves.
The Directors recommend the payment of a final dividend
of 26.62p per share for the year ended 31 March 2018. With
the interim dividend of 11.97p per share paid on 4 April 2018
this gives a total dividend for the year of 38.59p, an increase
of 7.3% over 2016/17 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.
(1) Earnings per share before non-underlying items, deferred tax
and proportionally adjusted for perpetual capital returns.
46
PENNON GROUP PLC ANNUAL REPORT 2018 The net effect of this policy is that dividends per share
should almost double 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 £162.0 million are covered
1.3 times by net profit (before non-underlying items and
deferred tax) (2016/17 1.3 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 £1,069 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
193
182
132
84
64
43
39
9
Group capital investment
Group capital investment was £398.2 million in 2017/18
compared to £384.7 million in 2016/17. The expenditure
focused on the regulatory programme for South West Water
and ERF build out for Viridor.
Viridor’s capital investment in the year was £213 million,
£19.2 million higher than last year.
The majority of Viridor’s capital investment continues to
relate to the delivery of the ERF portfolio, with £168 million
of the total spend relating to the four ERFs under construction.
Beddington, Dunbar and Avonmouth are all expected to
be completed on budget. Solid progress has been made
with Doosan Babcock at Glasgow. Completion of the
construction of this facility has required a higher level
of remediation expenditure than originally envisaged.
Cumulative spend of £238 million has been incurred to
31 March 2018 which is higher than the original target of
£155 million. Viridor is contractually entitled to recover
incremental costs from the original principal contractor,
Interserve, under certain circumstances. The Group believes
these circumstances have been met and discussions with
Interserve are ongoing with regard to the contractual
settlement. At 31 March 2018 a receivable of £68.7 million
has been recognised. In accordance with IFRIC 12 service
concession arrangements, a financial asset of £140.6 million
and an intangible asset of £67.6 million have been recognised
(including rolled up finance income and capitalised interest),
with no operating profit on construction having been taken
to date. While there are further possible recoveries that are
contingent on future events, these are not currently
recognised. The ultimate agreement of the contractual
amount due to the Group from the original principal
contractor, including the nature of any receipts and the
recoverability of such agreed amounts under the contract,
could result in revisions to the receivable and the amounts
recorded for the financial asset and intangible assets,
including the allocation between the two amounts, which
could then impact the margins recognised on this contract
over the life of the project to 2043. Internal assessments
have been corroborated by legal advice in arriving at
appropriate amounts to be recognised on the balance sheet.
Including the £173 million(2) total remaining capital
expenditure for completion of the ERF portfolio, the
total investment in ERFs is £1.5 billion(2).
Landfill demand has remained strong and new cells have
been constructed at four sites during the year at a cost
of £5 million.
South West Water’s capital expenditure in the year was
£184.2 million compared with £190.9 million in 2016/17
with the slight decrease being in line with the profile of
the K6 capital plan. Major features of the programme for
the year include:
• The innovative Mayflower water treatment works at
North Plymouth with c.£28 million of expenditure in
2017/18 (2016/17 c.£27 million)
• Investment in Plymouth Bathing Waters, delivering
targeted improvement to maintain the high level of
bathing water quality in that area
• Improvements at three water treatment works including
the installation of GAC filtration improving water quality.
The major categories of expenditure were:
£15m
Landfill energy
£3m
Recycling
£18m
Other
£88m
Wastewater
£398m
Total
£96m
Water
£178m
ERF
(2) Excluding capitalised interest and amounts subject to legal
contractual processes.
47
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Report of the CFO
continued
Cash flow
The Group’s operational cash inflows in 2017/18 at
£672 million were £106 million higher than last year
(2016/17 £566 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.
Contributions into the Group’s pension schemes for the
year were £17 million and corporation tax payments were
£22 million. Total tax payments reflecting all taxes borne
and collected by the Group in 2017/18 were £265 million, as
described in more detail in the section on Tax Contribution
2017/18 – borne/collected on page 50.
Summarised cash flow
Cash inflow from operations(1)
Net interest paid
Tax paid
Other taxes paid
Dividends paid (net of scrip)
Hybrid payments
Capital investment (2)
Spend incurred on Glasgow
Recycling and Renewable
Energy Centre
Dividends and loan repayments
received from joint ventures
Pension contributions
Equity placing and other
share issues
Acquisition of South Staffs
non-household retail
customer book
Net cash outflow
Debt indexation/interest
accruals and other movements
Increase in net borrowings
2017/18
£m
672
(61)
(22)
(129)
(108)
(23)
(382)
(82)
40
(17)
4
(8)
(116)
(21)
(137)
2016/17
£m
566
(62)
(36)
(110)
(132)
(20)
(363)
–
5
(11)
2
–
(161)
–
(20)
(181)
(1) Before construction spend on service concession arrangements of
£83 million (2016/17 £13 million), pension contributions of £17 million
(2016/17 £11 million) and other tax payments of £129 million (2016/17
£110 million). Other taxes include business rates,employers national
insurance, fuel excise duty, carbon reduction commitment,
environmental payments, climate change levy and external landfill tax.
(2) Including construction spend on service concession arrangements and
proceeds from sale of property, plant and equipment. For 2016/17
includes service concession spend on Glasgow.
Liquidity and debt profile
The Group has a strong liquidity and funding position
with £1,171 million cash and committed facilities at 31 March
2018. This consists of cash and deposits of £585 million
(including £182 million of restricted funds representing
deposits with lessors against lease obligations) and
undrawn facilities of £586 million. At 31 March 2018 the
Group’s borrowings totalled £3,387 million. After the
£585 million held in cash, this gives a net debt figure of
£2,802 million, an increase of £137 million during the year
(2016/17 £2,665 million).
In March 2013 the Group issued £300 million of perpetual
capital securities recognised as equity. This was refinanced
in September 2017 by issuing another £300 million of
perpetual capital securities which are also recognised
as equity in the financial statements. The new issue
achieved a coupon rate of 2.875% (and was four times
oversubscribed) and supports an increase in investible
capacity to c.£800 million. For the closure of the 2013
perpetual capital securities there was a take up of
approximately 95% to the offer of 103% of par plus accrued
periodic returns, resulting in cash outflow of £8 million net
of the new issuance. The remaining 2013 perpetual capital
securities were called at par plus accrued periodic returns
with a cash outflow of approximately £15 million settled in
October 2017.
Major components of the Group’s
debt finance at 31 March 2018
£134m
Bond 2040
£619m
Private
placements
£323m
European
Investment
Bank (EIB)
loans
£427m
Index-linked
bonds
£3,387m
Total
£1,505m
Finance
leasing
£379m
Bank bilateral debt
As a result of the refinance of the perpetual capital securities,
statutory earnings per share is reduced by:
• £15.7 million (after tax)(3) periodic return on the 2013
issuance, due 8 March 2018, which has effectively been
paid to bond holders through accrued payments to the
refinance date and the premium to par
• £5.8 million reflecting the periodic return due on the new
issuance payable in May 2018. It has been recognised in
accordance with the terms of the securities as an ordinary
dividend has been paid in the 12 months preceding
May 2018.
The costs of issuing the 2013 perpetual capital securities of
£5.2 million have been reclassified from the perpetual capital
securities reserve to retained earnings. The costs of issuance
for the 2017 perpetual capital securities of £3.3 million
have been recognised directly in the perpetual capital
securities reserve.
(3) The new perpetual capital securities do not qualify for tax relief.
48
PENNON GROUP PLC ANNUAL REPORT 2018 In addition to the refinancing of the perpetual capital
securities, during the year £150 million of new and renewed
facilities have been signed, £125 million in Pennon Group plc
and £25 million in South West Water. In addition, an
agreement was signed in the year to release £50 million of
previously restricted cash held against lease obligations.
Following European Investment Bank (EIB)/Government
discussions, previous EIB approved transactions are
being progressed.
Pennon has pioneered a sustainable financing framework
to integrate commitments to environmental and social
objectives into a variety of funding opportunities across
the Group. The framework allows Pennon to access future
funding opportunities aligned with the green loan principles,
green bond principles and social bond principles. The
framework has been certified by DNV-GL a leading
sustainability verifier. Pennon is committed to continuous
annual improvements in sustainability ratings and KPIs and
may lead to improved interest rate margins.
Since the year end £30 million of leases with the use of
proceeds focused on innovative Mayflower Water Treatment
Works and £80 million of revolving credit facilities have been
signed under this sustainable financing framework.
In addition, a further £130 million of new and renewed
facilities have also been signed since 31 March 2018.
Following these financing initiatives, Pennon has cash and
committed facilities covering the remainder of planned K6
capital spend and our ERF investment programme.
However, funding will be sourced over K6 to:
• Maintain an appropriate headroom of cash and committed
facilities, including replacing maturing finance
• Prepare for the next regulatory period
The Group has a diversified funding mix of fixed (£1,740
million, 62%), floating (£502 million, 18%) and index-linked
borrowings (£560 million, 20%). The Group’s debt has
a maturity of up to 39 years with a weighted average
maturity of 19 years. 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 at least 50% of funding fixed before the start of
a regulatory period.
£505.8 million of South West Water’s debt is index-linked
at an overall real rate of under 2.0%. South West Water’s
cost of finance is among the lowest in the industry. Around
two-thirds of the water business 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. A quarter
of South West Water’s net funding is RPI linked, at below
Ofwat’s notional level of 33% leaving headroom for RPI to
CPIH (consumer price index plus housing) transition.
Capital structure – overall position
The Group’s net debt has increased by £137 million to
£2,802 million. The gearing ratio at 31 March 2018, being
the ratio of net debt to equity plus net debt was 63.1%
(31 March 2017 63.8%).
South West Water’s debt to RCV ratio is 60.3% (31 March
2017 61.8%), which aligns with Ofwat’s K6 target for efficient
gearing of 62.5%.
Group net debt includes £1,442 million of investment in
wholly-owned ERFs (Runcorn II, Oxford, Exeter, Cardiff,
Glasgow, Dunbar, South London and Avonmouth). In
addition, the amount invested in joint ventures through
shareholder loans is £41 million primarily for TPSCo
(which together represents c.50% of Group net debt).
Following the Greater Manchester contract reset where all
external debt related to Viridor Laing and TPSCo was repaid,
Pennon’s share of Lakeside’s non-recourse net debt from
third parties (excluding shareholder loans) stands at
£32 million.
Regulatory capital value as at 31 March (£m)
4,000
9
5
9
2
,
8
2
9
2
,
0
5
1
,
3
1
9
2
3
,
3,000
2,000
1,000
0
0
3
4
3
,
2014
2015
2016
2017
2018
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 funding is treated for regulatory
purposes as ring-fenced. This means that funds raised by,
or for, South West Water are not available as long-term
funding for other areas of the Group.
49
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
Report of the CFO
continued
Taxation strategy
Our Tax strategy means that we will:
• At all times consider the Group’s corporate and social
responsibilities in relation to its tax affairs
• Operate appropriate tax risk governance processes to
ensure that the policies are applied throughout the Group
• Comply with our legal requirements; file all appropriate
returns on time and make all tax payments by the due date
• Consider all taxes as part of ongoing business decisions
• Not enter into artificial tax arrangements or take an
aggressive stance in the interpretation of tax legislation
• Not undertake transactions which are outside the Group’s
low risk appetite for tax or not in line with the Group’s
Code of Conduct
• Engage with HMRC in a proactive and transparent way
and discuss our interpretation of tax laws in real-time,
such interpretations following both the letter and spirit
of the laws.
The Group’s approach to tax planning, risk management and
governance is in line with the Finance Act 2016 requirements;
the Group does not expect its tax strategy to change
significantly year on year, however it is reviewed and
updated annually.
Further details are given in the Group’s Tax Strategy
document available on the Pennon Group website.
Tax contribution 2017/18 – borne/collected
The Group’s total tax contribution (TTC) for 2017/18
amounted to £265 million (2016/17 £310 million). TTC is
a standardised measure of a group’s total tax contribution,
having been developed by PwC and the 100 Group (FTSE
100 finance directors). It is acknowledged as being a fair
and comparable representation of total tax cost.
£3m
Carbon Reduction Commitment
£9m
Fuel Excise Duty
£11m
Environmental
payments
£7m
Other
£22m
UK
corporation
tax
£41m
Business
rates
£59m
Employment taxes
£265m
Total
£132m
Landfill tax
Our tax strategy explained
In developing our refreshed tax strategy, we consulted
customers and members of the public through focus
groups and qualitative surveys to assess views of Pennon’s
corporate responsibility in general and our proposed tax
strategy publication. Most of our focus group participants
said they welcomed our commitment to a robust and
transparent tax strategy, describing our tax contribution
as ‘fair’. Participants were clear that a company that gets
its tax right is highly likely to get other aspects of corporate
responsibility right.
As a result of this research, Pennon has: been clear in the
tax strategy document about Pennon’s approach to tax;
sought to make the tax strategy digestible to all; and
included real-life examples to demonstrate how the tax
approach works in practice.
R E A D M O R E O N LI N E
www.pennon-group.co.uk/taxstrategy
TTC looks at taxes borne and taxes collected. Taxes borne
includes all taxes which are a cost to the Group, such as
business rates, corporation tax and employer’s National
Insurance contributions (NICs). Taxes collected and
recovered highlights where the business is collecting tax
on behalf of HMRC. A net amount of £23 million (2016/17
£45 million) was collected on behalf of the authorities for
employee payroll taxes and VAT.
Landfill tax of £127 million (2016/17 £145 million) collected
and paid on waste material deposited at our landfill sites.
The reduction in landfill tax is a result of less waste being
deposited to landfill during the year. This amount includes
£7 million (2016/17 £6 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 £5 million (2016/17 £2 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 HMRC’s tax receipts in the year.
Employment taxes of £59 million (2016/17 £57 million)
including employees’ Pay As You Earn (PAYE) and total
National Insurance Contributions (NICs). Employer NICs of
£17 million (2016/17 £16 million) were charged approximately
92% to operating costs with 8% capitalised to property, plant
and equipment. The Group also paid £1 million in apprentice
levy which was introduced by the Government in April 2017.
The total amount of £59 million includes PAYE of £3 million
(2016/17 £3 million) on pension payments made by the
Group pension scheme. A net amount of £41 million
(2016/17 £41 million) was collected on behalf of the
authorities for employee payroll taxes.
50
PENNON GROUP PLC ANNUAL REPORT 2018
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.
Conclusion
Pennon Group had another year of strong performance. The
Group goes forward with a strong balance sheet, sustainable
finances, and dividend well aligned to its strategic objectives.
Susan Davy
Chief Financial Officer
Pennon Group plc
Business rates of £41 million (2016/17 £39 million) paid
to local authorities. This is a direct cost to the Group and
reduces profit before tax.
The main elements of the £22 million UK corporation tax
payment in the year (2016/17 £36 million) were £11 million
in relation to 2017/18 instalment payments and £11 million
in relation to earlier years. The reduction in corporation tax
payments is due to additional payments being made in
prior years to settle open tax enquiries which have now
been agreed.
VAT of £19 million has been received (2016/17 £5 million
paid) by the Group from HMRC. This is due to an increase
in expenditure on ERFs versus the prior year. VAT has no
material impact on profit.
Payments to the Environment Agency and other regulatory
bodies total £11 million (2016/17 £11 million). This reduces
profit before tax.
Fuel Excise Duty of £9 million (2016/17 £7 million) related
to transport costs. This reduces profit before tax.
Carbon Reduction Commitment (CRC) payment for the
Group of £3 million (2016/17 £3 million). This reduces profit
before tax.
Pensions
The Group operates both defined contribution and defined
benefit pension schemes for employees of Pennon Group.
The main defined benefit schemes were closed to new
entrants on or before 1 April 2008.
At 31 March 2018 the Group’s pension schemes showed
an aggregate deficit (before deferred tax) of £49.5 million
(March 2017 £68.0 million). The deficit has decreased
primarily due to increases in corporate bond yields during
the year.
For the Group’s principal pension scheme the recovery plan
includes annual deficit contributions up to 2022. South West
Water accounts for around 80% of the principal scheme.
The net aggregate liabilities of £41 million (after deferred tax)
represented around 2% of the Group’s market capitalisation
at 31 March 2018.
51
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Risk report
Risk management and internal
control framework
The Group faces a variety of risks which, should they arise,
could materially impact its ability to achieve its strategic
priorities. The effective management of these existing and
emerging risks is, therefore, essential to the long-term
success of the Group.
Pennon has a mature Group-wide integrated risk
management framework (see diagram below) which is
embedded into the existing governance structures and
culture, and helps us to live up to our values of ‘trusted’ and
‘responsible’ in the way we carry out our business. Our risk
management approach incorporates both top down and
bottom up processes, ensuring a common understanding
of the risks and opportunities that the Group is exposed
to and how they may impact on the achievement of the
strategic priorities.
A consistent Group-wide methodology is applied to the
identification, evaluation and management of the Group’s
principal risks which considers both the likelihood of the
risk occurring over a five-year period and the potential
impact from a stakeholder and customer, financial,
management effort and reputational perspective.
Principal and other risks are captured in risk registers
which are regularly reviewed and challenged.
The Group seeks to reduce its risk exposure, in line with
the desired risk appetite and tolerance levels, through the
operation of a robust internal control environment which
is aligned to the three lines of defence model. The Board,
via the Audit Committee, obtains comfort over the
effectiveness of the internal control environment through
the reporting of outcomes from a variety of internal and
external assurance providers, including an independent
internal audit function.
Board
Audit Committee
Subsidiary internal control
Risk management framework
l
s
o
r
t
n
o
c
d
n
a
s
e
r
u
d
e
c
o
r
p
,
e
c
n
e
f
e
d
f
o
e
n
i
l
t
s
r
i
F
e
c
n
e
f
e
d
f
o
e
n
i
l
d
n
o
c
e
S
e
c
n
e
f
e
d
f
o
e
n
i
l
d
r
i
h
T
s
e
c
i
i
l
o
p
t
n
e
m
e
g
a
n
a
M
t
n
e
m
e
g
a
n
a
m
k
s
R
i
t
i
d
u
a
l
a
n
r
e
t
n
I
Pennon Executive
Group Risk Forum
Subsidiary risk management
Risk and compliance
Responsible for the identification of principal risks, setting of risk appetite, and ensuring an effective risk management process
Responsible for the management of risk in accordance with appetite
Responsible for evaluating the effectiveness of the internal control environment
Internal Audit
52
PENNON GROUP PLC ANNUAL REPORT 2018
T
R
O
P
E
R
C
I
G
E
T
A
R
T
S
E
C
N
A
N
R
E
V
O
G
S
T
N
E
M
E
T
A
T
S
L
A
I
C
N
A
N
I
F
The key elements of the Group’s risk management process include:
Key risk management responsibilities
Key assurance activities
Board
• Sets the Group’s strategic objectives
• Establishes the Group’s risk appetite
• Determines the Group’s principal risks
• Ensures an effective internal control framework.
Audit Committee
• Reviews the effectiveness of the Group’s risk
management framework
• Reviews the adequacy of the internal control framework.
• Quarterly reviews of the Group’s principal risks against
the determined risk appetite.
• Perform quarterly ‘deep dive’ reviews on principal risks
• Approves the Group Internal Audit Plan
• Receive reports on the outcomes of key
assurance activities.
Pennon Executive
• Day-to-day management of the Group’s principal and
• Perform a thorough appraisal of the Group’s risk
operational risks
profile quarterly
Group Risk Forum
Individuals
subsidiaries/
functions
• Establishes the relevant Group-wide risk management
• Monitoring of the Group’s performance against KPIs
processes and procedures
and financial performance
• Maintaining the internal control framework.
• Establishes and reviews policies, procedures and
delegated authorities.
• Provides review and challenge over subsidiary/functional
• Quarterly review of Group and subsidiary principal risks
principal risks and mitigation strategies
• Alignment of the top down and bottom up risk
management process
• Horizon scanning on emerging risks and opportunities.
on a quarterly basis
• Deep dive reviews of specific risks. Topics include;
cyber security, renationalisation, health and safety
and financial markets and liquidity.
• The identification and assessment of subsidiary level risks
• Implementation and execution of appropriate risk
mitigation strategies, aligned with the agreed risk appetite
• Review of subsidiary/functional principal risks on
a quarterly basis by executive management teams
• Risk and Compliance functions undertake compliance
• Monitor compliance with internal control framework.
activities over ISO standards and other key
business processes
• Self-certification of compliance with internal
control framework.
Group Internal Audit
• Provide independent, risk based assurance on the
effectiveness of the internal control framework
• Coordination of independent assurance activities.
• Regular reporting to Audit Committee and Pennon
Executive on the effectiveness of internal controls and
the outcomes from other third line assurance activity.
e
c
n
e
f
e
d
f
o
e
n
i
l
t
s
r
i
F
e
c
n
e
f
e
d
f
o
e
n
i
l
d
n
o
c
e
S
e
n
i
l
d
r
i
h
T
e
c
n
e
f
e
d
f
o
Continuous improvement to
risk management and internal control
The Group seeks to continually improve its approach to risk
management and internal control. During the year there have
been a number of developments which have further
enhanced these processes, including:
• A director of Risk and Assurance has been appointed
with responsibility for the Group Internal Audit and Risk
Management functions and the coordination of assurance
activities across the Group
• A Group-wide health and safety programme, HomeSafe,
has been implemented across a number of sites and is
being rolled out across the remainder of the Group
• The Group Health, Safety, Security and Assurance (HSSA)
function will provide second line assurance over the
application of HSSA processes and controls across
the Group
• The Group has continued to align key corporate policies
and procedures across all subsidiaries and functions
• Risks relating to Group corporate functions established
during the year have been subject to review and
challenge by the Group Risk Forum
• Viridor has successfully migrated to a Group shared
services platform, providing greater consistency and
control over key financial processes
• A new programme of legal and compliance awareness
training for staff has been implemented.
53
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
Britain’s exit from the EU
The Group continues to regularly monitor the potential
risks and implications arising from Britain’s decision to
trigger Article 50 and exit the EU. While a significant
amount of uncertainty remains, the following issues have
been identified which impact the Group’s principal risks
and may be influenced by any agreement between Britain
and the EU:
• Changes in environmental legislation, such as
drinking and bathing water quality. At present the
Group does not anticipate any significant deviation in
existing environmental legislation or regulations when
existing EU legislation is transferred to domestic UK law
(principal risk C)
• Exposure to exchange rate and interest rate
fluctuations. There is limited exposure to exchange
rate fluctuations which is further mitigated through the
forward contracts providing certainty over future foreign
currency risk. Interest rate risks are mitigated through
the Group’s long-term maturity of debt and finance
leases with a significant proportion of interest-bearing
liabilities at fixed rates (principal risk D)
• Inability to access the same levels of funding from
the European Investment Bank. While the Group has
a variety of funding opportunities available to it, it
continues to calls for an appropriate UK replacement
(principal risk D)
• Impact on the domestic economy and the ability
of our customers to pay their bills. The Group has
mature processes to proactively monitor debt levels and
operate a number of initiatives to support customers
who are unable to pay their bills (principal risk H)
• The ability to attract and employ EU nationals with
the necessary skills and experience. The Group faces
continued challenges in attracting EU nationals as a
result of the continued uncertainty over the movement
of labour (principal risk M)
The Directors confirm that during 2017/18 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. These principal
risks have been considered in preparing the viability
statement on page 61.
Risk report
continued
Risk appetite
The UK Corporate Governance Code requires companies
to determine their risk appetite with respect to the level of
risk it is considered appropriate to accept in achieving the
Group’s strategic priorities. Striking an appropriate balance
between risk and reward is key to the success of the
Group’s strategy. The Board has established its risk
appetite for each of the principal risks which allows the
business to pursue value enhancing opportunities, while
maintaining an overall level of risk exposure that the Board
considers to be appropriate. The Board’s evaluation of the
effectiveness of internal control is considered in the
context of the stated risk appetite.
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 Group’s principal risks and
uncertainties include those Group-level risks which 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 within the Group.
Principal risks and
uncertainties
The Group’s business model exposes the business to a
variety of external and internal risks. The assessment of the
Group’s principal risks is informed by the potential impact
of macro political, economic and environmental factors.
While the ability of the Group to influence these macro level
risks is limited, they continue to be regularly monitored and
the potential implications on the Group are considered as
part of the ongoing risk assessment process. This includes
undertaking scenario planning and analysis to understand
the risk exposure of one, or a number, of these events
occurring and taking appropriate steps to reduce the
potential impact.
Over the past year there has been a significant increase
in the level of uncertainty within the water sector as a
result of evolving political views on the future of the water
industry and changes in the priorities and focus of Ofwat.
Specific risks have been included within the statement of
principal risks, on the following pages, which reflects this
uncertainty and the potential risk exposure to the Group.
Additionally, the Group’s tax related risk has evolved from
‘uncertainly arising from open tax computations where
liabilities remain to be agreed’ in the 2016 Annual Report
to ‘Tax compliance and contribution’. This reflects
both the finalisation of tax returns for older periods
with HMRC and the increased external focus on the
tax contribution of companies in the sector and other
large corporate organisations.
54
PENNON GROUP PLC ANNUAL REPORT 2018 Reporting an overview of the principal risk profile
Law, regulation
and finance
Business systems and
capital investments
F
D
A(ii)
C
E
B
A(i)
I
H
O
K
M
L
N
J
Market and
economic conditions
Operating
performance
Strategic impact
1
Leadership in UK
water and waste
2
Leadership in cost
base efficiency
3
Driving
sustainable growth
Long-term priorities affected.
Risk level
High
Medium
Low
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.
Principal risks
Law and regulation
and finance
Ref
A
B
C
D
E
F
G
H
I
J
K
L
M
N
O
Market and
economic conditions
Operating
performance
Business systems
and capital
investments
Strategic priorities
Risk description
Net
level risk
Trend
1, 2
1, 2
1, 2
1, 3
1, 2, 3
2
2
1, 2
3
1
1, 3
1, 3
1, 2, 3
1, 3
1
Changes in Government policy:
(i)
Renationalisation
(ii) Use of single-use plastics
Regulatory reform
Compliance with laws and regulations
Maintaining sufficient finance and funding to meet ongoing commitments
Non-compliance or occurrence of avoidable health and safety incident
Tax compliance and contribution
Increase in defined benefit pension scheme deficit
Non-recovery of customer debt
Macro-economic risks impacting commodity and power
Poor operating performance due to extreme weather or climate change
Poor service and/or increased competition leading to loss of customers
Business interruption or significant operational failures/incidents
Difficulty in recruitment, retention and development of skills
Failure or increased cost of capital projects/exposure to contract failures
Failure of IT system, management and protection including cyber risks
55
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Strategic impact
Mitigation
Net risk
Direction
Risk appetite
Risk report
continued
Law, regulation and finance
Principal risk
Changes in
Government policy
Long-term priorities affected:
1, 2
Changes in Government policy
may fundamentally impact our
ability to deliver the Group’s
strategic priorities, impacting
shareholder value.
Regulatory reform
Compliance with
laws and regulations
Long-term priorities affected:
1, 2
Reform of the regulatory framework
may result in changes to the Group’s
priorities and the service we provide
to our customers. It may have
a significant impact on our
performance which can impact
shareholder value.
Long-term priorities affected:
1, 2
The Group is required to comply
with an ever increasing range of
regulated and non-regulated laws
and regulation across our water and
waste businesses. Non-compliance
with one or a number of these may
result in financial penalties, a
negative impact on our ability to
operate effectively and reputational
damage which could affect
shareholder value.
We recognise that
Government policy
evolves and seek to
minimising potential
risk and maximising
opportunities through
regular communication
and robust scenario
planning.
We accept that regulatory
reform occurs and
seek to leverage the
opportunities this
creates while mitigating
the associated risk.
The Group has the
highest standards of
compliance and has
no appetite for legal
or regulatory breaches.
We aim to minimise the
impact of regulatory
reform by targeting
changes which are
NPV neutral over the
longer term to protect
customer affordability
and shareholder value.
(i) The renationalisation of the water
industry continues to be a central policy
of the Opposition and remains a possibility
in the event of a change of Government.
We recognise, however the existing
Government is supportive of the existing
regulatory model. We engage regularly
with all political parties as well as customers
and stakeholders demonstrating the value
they receive based on our operational
performance and continued investment
in the network infrastructure.
(ii) The Government is considering
legislating on the use of specific single-use
plastics to reduce the environmental impact
and improve recycling rates. Viridor is well
positioned to leverage this opportunity
in the event that legislation is introduced
and continue to invest in its sorting and
reprocessing technology. Viridor is also a
founding signatory to the UK Plastic Pact.
During the year Ofwat finalised their price
review methodology for 2020-25. There has
also been a focus by the Government and
Ofwat on the governance of companies in
the water sector.
We are well positioned for the new
regulatory period with a dedicated,
experienced PR19 project team, supported
by external consultants, which is monitored
through a robust governance framework.
We are broadly supportive of Ofwat’s
proposed reforms and engage fully with the
regulator during each consultation. South
West Water already carries out its business
in line with the improvements set out.
Our robust regulatory framework ensures
compliance with Ofwat, Environment
Agency and other relevant requirements.
Employees, contractors and partners
receive a rolling programme of training
and guidance. Additionally, during the
year we have launched our ‘Speak Up’
whistleblowing policy.
We have been proactive in reviewing our
policies and processes in preparation for the
introduction of the General Data Protection
Regulation and have appointed a dedicated
Data Protection Officer.
56
PENNON GROUP PLC ANNUAL REPORT 2018 Strategic impact
Mitigation
Net risk
Direction
Risk appetite
Law, regulation and finance continued
Principal risk
Maintaining
sufficient finance
and funding, within
our debt covenants,
to meet ongoing
commitments
Long-term priorities affected:
1, 3
Failure to maintain funding
requirements could lead to
additional finance costs and put
our growth agenda at risk. Breach
of covenants could result in the
requirement to repay certain debt.
Non-compliance
or occurrence of
avoidable health
and safety incident
Long-term priorities affected:
1, 2, 3
A breach of health and safety law
could lead to financial penalties,
significant legal costs and damage
to the Group’s reputation.
We operate a prudent
approach to our financing
strategy in order to ensure
our funding requirements
are fully met.
The Group has no
appetite for health and
safety related incidents
and has the highest
standards of compliance
within the Group and
third parties.
The Group have mature treasury,
funding and cash flow policies in place.
We regularly consider how political,
economic and regulatory risks may impact
on the Group’s financing commitments
and cashflow.
The Group operates with strong liquidity
position and diversified funding mix. South
West Water is funded to March 2020 while
the Viridor committed energy recovery
facility (ERF) programme is also fully funded.
The successful refinancing of the
£300 million hybrid in September 2017
has also strengthened our investment
capacity and covenant position.
The effective management of health and
safety related risks continue to be a priority
for the Board and Pennon Executive.
The HomeSafe programme was
successfully piloted in Viridor’s materials
recycling facility site in Plymouth, nationwide
rollout commenced in April 2018. This is
supported by a programme of capital
investment for existing assets.
The Group has also invested in people,
processes and systems within its HSSA
function during the year which will assist
in driving consistency and monitoring
compliance with the Group’s health and
safety standards.
57
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Risk report
continued
Market and economic conditions
Principal risk
Non-recovery of
customer debt
Long-term priorities affected:
1, 2
Potential impact on revenue
as a result of reduced customer
debt collection, particularly with
regards to vulnerable customers
and affordability.
Macroeconomic
risks arising from
a downturn in the
global and UK
economy and
commodity and
power prices
Long-term priorities affected:
3
Challenges such as continued local
authority, reduced global demand
for our recycled commodities and
decreases in power prices have
a direct impact on the revenues
generated by our recycling business.
Strategic impact
Mitigation
Net risk
Direction
Risk appetite
While seeking to minimise
non-recoverable debt,
we recognise customer
affordability challenges
and the inability to
disconnect domestic
customers, some risk
of uncollectable
debt remains.
We seek to take
well-judged and
informed decisions while
ensuring plans are in
place to mitigate the
potential impact of
macroeconomic risks.
Mature and embedded debt collection
strategies are in place for the recovery of
South West Water domestic customer debt.
This is supplemented by affordability tariffs
such as Restart, WaterCare and Freshstart
to help reduce our bad debt exposure for
those customers who are struggling to pay.
Within the non-household market there has
been renewed focus on the collection of
older debt which has proved effective.
Due to high proportion of public sector
contracts, Viridor’s debt collection risk is
lower, however, customer debt is regularly
reviewed and proactively managed.
We work closely in partnership with our
local authority customers in the delivery
of our services, while Viridor remains well
positioned across the waste hierarchy,
with long term contracts supporting the
ERF segment.
We have secured new markets for our paper
and plastic recyclate in response to changes
in quality requirements announced by
China. We continue to invest in our assets
and are working with our supply chain to
improve the quality of paper recycling, we
are also implementing self-help measures
to drive operational efficiencies.
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.
58
PENNON GROUP PLC ANNUAL REPORT 2018 Strategic impact
Mitigation
Net risk
Direction
Risk appetite
Operating performance
Principal risk
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 being
incurred and reputational damage.
Poor customer
service/increased
competition leading
to loss of customer
base
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 the ability of both Viridor and
Pennon Water Services to retain
and grow market share.
Business
Interruption
or significant
operational failure/
incidents
Long-term priorities affected:
1, 3
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 the successful
delivery of the PR14 business plan.
Additionally, business interruption
caused by defects, outage or fire
could impact the availability and
optimisation of our ERFs and
recycling facilities.
We seek to reduce
both the likelihood and
impact through long-term
planning to ensure
sufficient measures
are in place.
We continually seek
to increase customer
satisfaction and
maximise customer
retention while taking
well-informed risk to
develop further markets.
We operate a low
tolerance for significant
operational failure or
incidents and seek to
mitigate these risks
where possible.
Contingency plans, emergency resources
and investment through a planned capital
programme assist in mitigating this risk.
Extreme weather conditions, such as those
experienced in March 2018, are expected
to test the resilience of South West Water’s
assets, while the expectations of both
customers and Ofwat with regards to
operational performance during such
an event have increased.
We also prepare drought plans every three
years which are reviewed annually for a
range of climate change and demand
scenarios. The recently published Water
Resources Management Plan has not
identified an overall significant increase
in the risk to water resources, however
ongoing climate change will continue
to challenge this.
Viridor has in place a regional adverse
weather management strategy, aimed
at reducing disruption to site operations
and transport logistics.
Targeted improvements have been made
to continually improve customer service
within South West Water has contributed
to the achievement of the ServiceMark
accreditation during the year and we
continue to secure high service incentive
mechanism (SIM) scores.
There has been a significant focus within
Viridor on our customer experience during
the year and the reorganisation of the
marketing and sales, service delivery and
customer service functions has improved
this further, alongside the launch of an
annual customer survey.
Both Viridor and Pennon Water Services
have a large and diverse customer base and
are not materially exposed to the loss of any
one customer.
A continued reduction in the number of
pollution events in wastewater has been
identified as a priority and a programme
of targeted action is currently underway
to address these risks.
Both South West Water and Viridor maintain
detailed contingency plans and incident
management procedures which are
regularly reviewed. Equipment failure
is managed through a programme of
sophisticated planned and preventive
maintenance regime and effective
management of stores. The focus on the
effective optimisation of ERFs in particular
has resulted in availability exceeding the
Group’s original forecasts.
The Group also maintains comprehensive
insurance across its asset base in the event
of an incident occurring.
59
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Risk report
continued
Operating performance continued
Principal risk
Difficulty in
recruitment,
retention and
development of
appropriate skills
which are required
to deliver the
Group’s strategy
Strategic impact
Mitigation
Net risk
Direction
Risk appetite
Long-term priorities affected:
1, 2, 3
Failure to have a workforce of
skilled and motivated individuals
will detrimentally impact all of our
strategic priorities. We need the
right people in the right places to
share best practice, deliver synergies
and move the Group forward in the
new shared services structure.
The people strategy, underpinned by six
threads, has been rolled out across the
Group and is designed to ensure we have
the workforce necessary to deliver our
strategic priorities. This has included our
refreshed Vision, increased workforce
engagement, continued commitment to
training and development and the
introduction of a Pennon Code of Conduct.
Succession plans remain in place for senior
and other key positions. Challenges remain,
however, in sourcing skills and expertise
externally for specific senior and operational
roles with the implications of Brexit
continuing to add additional uncertainty.
While turnover does occur,
we ensure the appropriate
skills and experience is
in place with succession
plans to provide resilience
in mitigating the impact
of this.
Business systems and capital investment
Strategic impact
Mitigation
Net risk
Direction
Risk appetite
Principal risk
Failure or increased
cost of capital
projects/exposure
to contract failures
Long-term priorities affected:
1, 3
Inability to successfully deliver our
capital programme may result in
increased costs and delays and
detrimentally impacts our ability to
provide top class customer service
and achieve our growth agenda.
Pennon’s investment
activities are taken on
an informed basis with
risks weighed against
appropriate returns.
We seek to minimise the
risk of informational
technology failure and
cyber security threats to
the lowest level without
detrimentally impacting
on business operations
All capital projects are subject to a
robust business case process and skilled
project management resource and senior
oversight is utilised to provide additional
rigour in the delivery of major projects.
Robust due diligence is undertaken
on key suppliers, technologies and
acquisitions. Back to back agreements
and supplier guarantees also provide
additional protection.
Commissioning at Beddington, Dunbar and
Glasgow Recycling and Renewable Energy
Facility (GRREC) continued through the
year, with financial contributions from
Dunbar ERF protected by contractual
mechanisms. Expenditure at GRREC is
above initial expectations. Viridor is
contractually entitled to recover incremental
costs under certain circumstances.
Avonmouth ERF and Mayflower water
treatment works remain on schedule
and on budget.
The Group operates a mature and
embedded governance framework over
the business as usual IT environment and
major project implementations. This is
aligned to ISO27001 standards and regular
internal and external assessments are
undertaken to maintain this accreditation.
Disaster recovery plans are in place for
corporate and operational technology and
these are regularly reviewed and tested.
Cyber risks are mitigated by a strong
information security framework.
This is aligned with guidance issued
by the National Cyber Security Centre
(NCSC). Awareness campaigns have
been undertaken during the year
aligned with preparations for GDPR.
A variety of internal and external
assessments are also undertaken,
including annual penetration testing,
to test the robustness of our controls.
60
Failure of information
technology systems,
management and
protection including
cyber risks
Long-term priorities affected:
1
Failure of our information technology
systems, due to inadequate internal
processes or external cyber threats
could result in the business being
unable to operate effectively and the
corruption or loss of data. This would
have a detrimental impact on our
customers and result in financial
penalties and reputational damage
for the Group.
PENNON GROUP PLC ANNUAL REPORT 2018 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 56 to 60 of the risk report. The Group’s principal
operating subsidiaries of South West Water and Viridor are long term
business characterised by multi-year investment programmes, with
associated revenue streams
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 and other 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 resilience
Group recruitment
and retention
Water resources and
resilience
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
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
In stress testing the Group’s business plan it was determined that
none of the individual principal risks would in isolation, or in aggregate,
compromise the Group’s viability. In performing this stress testing all
risks have been monetised with reference to risk weighting, factoring
in the likelihood of occurrence and financial impact. In addition, further
factors were considered to reverse engineer a scenario that could
possibly compromise the Group’s viability, these included:
• All the principal risks occurring in all of the five years
• Lower RPI projections in each of the five years
• Significant one-off costs
• A deterioration in the credit quality of amounts owed to the Group.
The three factors above, which are in addition to the principal risks,
have been monetised as absolute financial costs and are not risk
weighted on likelihood of occurrence.
The Board considered the monetary impact of these factors on the
Group’s viability over a five-year period, concluding the reversed
engineered scenario remote. The five-year period was chosen given
the longer-term nature of the Group’s businesses.
As part of the Board’s considerations, additional scenarios concerning
South West Water Limited’s viability were reviewed. This additional
assessment considered South West Water’s regulatory financial ring
fence through the following scenarios that are recommended to be
tested by Ofwat:
• Totex underperformance (15% of totex)
• ODI penalty (3% of RoRE) in one year
• Inflation sensitivities (+/-3%)
• Increase in the level of bad debt (20%)
• New debt financed at 2% above forward projections
• Financial penalty – equivalent to 3% of turnover
• Any relevant inter-company financing scenarios.
These scenarios were considered in isolation and in the
following combination
• 10% totex underperformance in each of the five years
• ODI penalty of 1.5% in each of the five years
• A one-off financial penalty of 1% of revenue.
The Directors concluded these scenarios in isolation and the
combination noted above did not compromise the viability of South
West Water or the Group over the five-year assessment period.
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 75, 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 61, 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 61 was approved by the
Board on 24 May 2018.
By Order of the Board
Helen Barrett-Hague
Group General Counsel and Company Secretary
24 May 2018
61
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS We are committed to
the highest standards
of corporate governance
62
PENNON GROUP PLC ANNUAL REPORT 2018 G OVERNAN CE AND
REMUNERATION
Chairman’s letter to shareholders
64
66 Board of Directors
73
Board Committees’ reports
84 Directors’ remuneration report
102
Directors’ report – other statutory disclosures
63
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Chairman’s letter to shareholders
We are committed to carrying out our
business in a responsible way for the
benefit of all our stakeholders.
Sir John Parker
Chairman
Dear Shareholder
I am pleased to introduce the corporate governance report for 2018
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.
At Pennon we consider that strong governance is central to our
successful management of the Group. 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 third
year as Chairman of Pennon, I remain committed to ensuring that we
continue to operate to the highest standards of corporate governance.
Additional complexity is added to Pennon’s governance structure as
a result of our ownership of a regulated water and wastewater business,
South West Water, alongside our non-regulated businesses. In order to
comply with the requirements of Ofwat, South West Water is required to
have its own independent board of directors and to operate as if it were
a publicly listed company in its own right.
We consider that our board and committee framework has enabled us
successfully to streamline our decision-making processes such that we
avoid duplication. The South West Water board, which includes all of the
Pennon Non-Executive Directors, as well as three South West Water
only non-executive directors, convenes before each Pennon Board
meeting and considers South West Water strategy, performance and
regulatory planning. In its meetings the Pennon Board concentrates
on strategic forward-looking matters for all parts of the Group, as well
as overseeing the Viridor businesses.
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 stakeholders.
It is my view that the Board is highly effective with a good understanding
of the Group’s opportunities for growth as well as the threats facing the
business. This view is supported by the results of this year’s Board and
Committee performance evaluations. Further details are provided on
page 71 and 72.
Stakeholder engagement
The Board understands the part the Group can play in bringing
resources to life and creating a more sustainable UK. We are committed
to carrying out our business in a responsible way and remain focused
on improving the provision of water and waste services for benefit of all
of our stakeholders.
We actively engage with our customers, our communities, our people
and our suppliers, as well as with our investors, and maintain appropriate
and regular dialogue with those stakeholders to ensure that the
rationale for our strategy and our performance objectives reflects
their expectations. It also allows stakeholders to provide feedback
on the matters they consider to be important and any issues which
require addressing.
Further information about the stakeholder engagement mechanisms
we use to gather feedback is available on our website.
R E A D M O R E O N LI N E
www.pennon-group.co.uk/sustainability
64
PENNON GROUP PLC ANNUAL REPORT 2018 Our shareholders are a key stakeholder group and we have a
comprehensive investor relations programme. During the year
some 81 meetings and conference calls were held. Pennon attended
eight city conferences and sales force briefings and six road shows,
including in the USA 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.
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.
It is always pleasing to be part of a well-attended AGM and I welcome
questions on any business issues affecting the Group. At our 2018 AGM
on 5 July, all of our Directors intend to be present together with a number
of other senior executives of our businesses to meet shareholders and
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 April 2016
version of the Code, which is effective for reporting periods commencing
on or after 17 June 2016.
Beddington energy
recovery facility
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 105 the Board confirms to shareholders that
the Annual Report and Accounts taken as a whole is fair, balanced and
understandable and provides the information necessary to assess the
Company’s performance, business model and strategy.
Sir John Parker
Chairman
Pennon Group plc
24 May 2018
65
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 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.
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 is widely recognised
for his policy work on the value of diversity in the
boardroom, having chaired the Government’s review
on Ethnic Diversity on UK Boards in 2017. Prior to that,
he was a member of the Davies Committee – Women
on Boards.
He has chaired five FTSE 100 companies and was
previously the chairman of Anglo American plc (until
October 2017) and 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 and
is a Visiting Fellow of the University of Oxford.
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.
External appointments
Sir John is the chairman of construction and engineering
company Laing O’Rourke and of Advanced Plasma
Power Limited. He is also a non-executive director of
Carnival Corporation and Airbus Group. He is a senior
adviser to Spencer Stuart and is the senior non-
executive director on the Cabinet Office board.
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.
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 Davy
Chief Financial Officer
BSc Hons, ACA
Susan joined the Board on 1 February 2015. She is
a member of the Sustainability Committee and 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.
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 chair of the CBI South West council and a
member of the A4S (Accounting for Sustainability)
CFO leadership network.
Board Committee members
Pennon Executive
Audit Committee
Sustainability Committee
Nomination Committee
Remuneration Committee
Chair of Committee
66
PENNON GROUP PLC ANNUAL REPORT 2018
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. He is currently
the chief financial officer of Currencies Direct, a foreign
exchange broker and international payment provider.
Previously, 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 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
Executive Director, Currencies Direct.
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.
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 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.
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
During the year, Martin was 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.
Helen Barrett-Hague
Group General Counsel and 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
holding positions of increasing responsibility with PA Consulting, 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.
67
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
The Board and its
governance framework
The Board acts as the main governing body for the purpose of oversight
for the Group with additional supervision of the regulated business of
South West Water being provided by South West Water’s own board.
Our approach to governance is an integral part of our culture, guiding
how we do business and create value for our stakeholders.
READ MORE ON PAGES 1 4 & 15
Culture
P u r p o se and values
i n ternal controls
S t rategy
o n g
t r
S
R
o
b
u
s
t
a
n
d
t
r
a
n
s
p
a
r
e
n
t g
o
Stakeholder
value
Perform a n c
e
t
n
e
m
e
g
a
n
a
e ctive risk m
ff
E
vernance
Stakeholder value
We deliver sustainable value for our
stakeholders by providing high-quality
environmental infrastructure and
customer services.
Strategy
Our strategy is to lead in the UK’s water
and waste sectors, invest for sustainable
growth and drive value through efficiency.
Performance
Our financial and operational performance is
driven by our strategic sustainability objectives.
Robust and transparent governance
We are committed to operating to the highest
standards of corporate governance.
Effective risk management
We have a mature integrated risk management
framework which is embedded into existing
governance structures and ways of working.
Strong internal controls
We keep the effectiveness of our internal
control environment under regular review
and seek continually to improve our approach.
Vision and values
Our Vision of ‘Bringing resources to life’ and
supporting values of ‘trusted, responsible,
collaborative and progressive’ will help drive
our strategic priorities over the long term.
Culture
We are developing a culture that can be
lived throughout the Group with integrity
and transparency, ensuring Pennon is
trusted and valued by all its stakeholders.
68
PENNON GROUP PLC ANNUAL REPORT 2018
Pennon Board composition,
independence and experience
Composition as at 31 March
Diversity as at 31 March
100
80
60
40
20
0
%
7
6
%
3
3
%
7
6
%
3
3
100
80
60
40
20
0
%
7
6
%
3
3
2017
2018
Executive
Non-Executive
Male
2017
Female
%
7
6
%
3
3
2018
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
Experience as at 31 March
100
80
60
40
20
0
%
0
5
%
3
3
%
7
1
2017
%
3
3
%
3
3
%
3
3
100
80
60
40
20
0
%
0
5
%
3
3
%
7
1
%
0
5
%
3
3
%
7
1
2018
2017
2018
0-3 years
4-6 years
7-10+ years
Industry
Finance
Governance
All 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 66 and 67 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 67).
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.
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. Given the longer service of Martin Angle and Gill
Rider on the Board, a particularly rigorous review was undertaken in
respect of their respective re-elections. Martin Angle will be stepping
down from the Board in December 2018 in order to allow for continuity
with a replacement. Gill Rider will soon reach the six-year anniversary of
her appointment and the Board has agreed that her term be extended
for a further three years, subject to annual re-election at each AGM. The
Board is satisfied that, based on their participation at meetings and their
contribution outside of the boardroom, both Martin Angle and Gill Rider
continue to demonstrate independence of character and judgement
in the performance of their role.
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 overall 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.
69
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
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
Chairman
Director
Sir John Parker
Chief Executive
Officer
Chris Loughlin
Senior
Independent
Director
Gill Rider
Chief Financial
Officer
Susan Davy
Non-Executive
Directors
Martin Angle
Neil Cooper
Gill Rider
Role
• 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
• 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
• Managing investor relations including financing and treasury activities
• 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.
Board meetings and attendance
The Directors and their attendance at the nine scheduled meetings
of the Board during 2017/18 are shown below:
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.
Members
Chairman
Sir John Parker
Non-Executive Directors
Martin Angle
Neil Cooper
Gill Rider
Executive Directors
Susan Davy
Christopher Loughlin
Appointment date
Attendance
April 2015
December 2008
September 2014
September 2012
February 2015
August 2006
9/9
8/9
9/9
9/9
9/9
9/9
In addition to the nine Board meetings we hold a strategy day in
September of each year.
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 the Group’s business in accordance with its schedule of matters
reserved. The South West Water board continues to operate as
Detailed consideration of certain matters is delegated to Board
Committees, to the Executive Directors and to the Group General
Counsel and 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 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.
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 approach is
compatible with Ofwat’s principles for holding companies in respect
of Board leadership, transparency and governance.
70
PENNON GROUP PLC ANNUAL REPORT 2018 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. The Board also receives presentations on
key areas of the business and undertakes site visits to meet employees
and gain a better understanding of the operation of business initiatives.
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 whilst protecting the interests of the wider
stakeholder group.
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.
Board visit to Plymouth sites
In February 2018 the Board visited two sites in Plymouth; South
West Water’s innovative Mayflower water treatment works,
which is due to become operational this autumn, and Viridor’s
materials recycling facility, the location of the first pilot for our
new health and safety programme, HomeSafe. Further details on
each of these projects are provided on pages 39 and 26.
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.
In arriving at decisions the Board takes into account the impact on
stakeholder groups when considering what is in the best interests
of shareholders as a whole.
Pennon Board composition
Chairman
Group CEO
CFO
Three independent
Non-Executive
Directors of Pennon
In attendance
Three independent non-executive
directors of South West Water
Chief Executive Officer
Chief Financial Officer
Managing Director, South West Water
Members of the Pennon Executive
Chris Loughlin
Susan Davy
Stephen Bird
Phil Piddington Managing Director, Viridor
Helen Barrett-
Hague
Adele Barker
Steve Holmes
Group General Counsel and Company Secretary
Group director of Human Resources
Director of Safety, Health, Quality & Sustainability
(SHQS)
Director of Environment and Operations director
(Wastewater Services), South West Water
Director of Corporate Affairs & Investor Relations
Commercial director, Viridor
Operations director (Drinking Water Services),
South West Water
Ed Mitchell
Sarah Heald
Paul Ringham
Bob Taylor
Board support and training
Directors have access to the advice and services of the Group
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 meet with staff to receive briefings on key processes and systems.
The training needs of Directors are reviewed as part of the Board’s
performance evaluation process each year. Training consists of
attendance at external courses organised by professional advisers
and also internal presentations from senior management.
Performance evaluation
The Board undertakes a formal and rigorous review of its performance
and that of its Committees and Directors each year. Having carried out
an externally facilitated evaluation last year, this year the evaluation
of the Board’s and the Committees’ performance was carried out in
March 2018 by means of a questionnaire created internally by the
Group General Counsel and Company Secretary in consultation with
the Chairman and Chairs of the various committees. As well as the
Directors, the questionnaire was completed by various members
of the senior executive team, the external audit partner and the
adviser to the Remuneration Committee.
The questions were designed to assess the effectiveness of the
Board during the year in setting the Group’s strategy, promoting
Pennon’s culture and values, ensuring that the Group’s obligations
to its shareholders and other stakeholders were understood and
met, overseeing the use of the Group’s resources, managing the
risks inherent in the strategy, plans and the operating environment,
and ensuring that the executive team had managed all the activities
of the Company well.
71
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS of the Group, monitoring of such risks and ongoing and annual
evaluation of the overall process. ESG risks identified and assessed
by the Board cover areas such as health and safety, climate change,
changes to government policy on waste and recycling, and tax
compliance. Details of the key risks affecting the Group are set out in
the strategic report on pages 55 to 60. KPIs are in place to enable the
Board to measure the Company’s ESG performance (pages 24, 25 and
28 to 40) and a number of these are linked to remuneration incentives
(pages 91, 93 and 94).
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’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 55 to 60.
Code of Conduct and policies
The Group’s Code of Conduct and related policies set out Pennon’s
commitment to promoting and maintaining the highest level of
ethical standards. Areas covered include our impact on the environment
and our communities, our workplace and our business conduct.
The Group’s policy on anti-bribery and anti-corruption clearly prohibits
any worker from offering or accepting bribes, facilitation payments and
kickbacks and requires that due diligence checks be carried out before
engaging a third party (including a corruption risk assessment including
potential business partners of the third party and the nature of the
proposed work and transaction). The policy also sets out the employment
consequences for breach of the policy and potential legal sanctions
under bribery laws. The policy places an obligation on workers to report
any breach of the policy or any suspicions of fraud or other irregularities.
The Group’s whistleblowing policy (‘Speak Up’) encourages workers
to raise concerns and explains how this should be done.
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.
Our Code of Conduct and our policies are available on our website.
R E A D M O R E O N LI N E
www.pennon-group.co.uk/sustainability
The Board and its
governance framework
continued
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 and that the
Board had a good understanding of opportunities for growth and the
threats facing the business, as well as its role in setting Pennon’s values
and standards to ensure that its obligations to its stakeholders are met.
The Board’s commitment to promoting a strong health and safety
culture across the Group was noted. The Board and each Committee
considered the conclusions and recommendations arising from the
evaluation process, which included areas specifically relating to diversity
and succession planning, as well as continuing to address the Directors’
training and development needs.
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 73 to 83 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.
R E A D M O R E O N L I N E
www.pennon-group.co.uk/about-us/board-committees
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 2017/18 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
‘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’s Guidance on Risk Management, Internal Control
and Related Financial and Business Reporting, which brings together
elements of best practice for risk management and internal control by
companies. The Board’s risk framework described on pages 52 to 54 in
the strategic report provides for the identification of key risks, including
ESG risks, in relation to the achievement of the business objectives
72
PENNON GROUP PLC ANNUAL REPORT 2018 Board Committees’ reports
Audit Committee report
The role of the Audit Committee is to
ensure that robust systems are in place
for financial reporting, internal control
and risk management.
Neil Cooper
Audit Committee Chairman
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 that
includes the testing of accounting judgements made in preparing
financial reporting and the assessment of 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 and adequacy of risk
management processes across the Group. This includes monitoring
the Group’s risk appetite as well as acting as a forum for carrying 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 a further 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.
The Group’s executive risk management forum continues to assess risk
appetite and monitor key risks and their mitigation, with the Committee
subsequently receiving detailed ‘deep dive’ presentations from senior
management on individual principal risks. During the year, these
included Group recruitment and retention risk, water resources and
resilience risk, cyber security, and lastly financial resilience. More detail
on our risk management processes, principal risks and their associated
mitigation can be found on pages 52 to 60.
Together with this, we continue to assess the Company’s viability over
a period of five years, which we judge to be aligned with the longer-term
nature of our business. It is also a reasonable period 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 61.
The Committee acts as a forum carrying
out more detailed reviews of higher-risk
areas of the operation.
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 75. 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.
Finally, our long-serving Group Internal Audit Manager, Paul
Ramsbottom, stepped down during the year, and I would like to
thank him on behalf of the Committee for his service to the Group.
Neil Cooper
Audit Committee Chairman
73
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Audit Committee report
continued
Audit Committee composition and meetings
Committee chairman
Neil Cooper
Committee members
Martin Angle
Gill Rider
Date of appointment
to Pennon
Audit Committee
September 2014
December 2008
September 2012
Attendance
4/4
4/4
4/4
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;
Director of Treasury, Tax and Group Finance; Group Audit Manager; and
the 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 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 66 and 67.
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
• Review of internal audit reports on core systems and processes across the Group, for example, contract management,
health and safety and an outsourced audit of Group Treasury
• Reviewed our Tax Strategy prior to publication in line with the requirements set out in the Finance Act 2016
• Monitored the effectiveness of key strategic projects, including Viridor’s Enterprise transformation and readiness for the
new EU General Data Protection Regulations
• Considered auditor’s report on its review of the annual results focusing on key findings
• Assessed external auditor 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
• Reviewed the Group external audit policy and monitored the provision of non-audit services
• Considered the auditor’s report on control themes and observations for the year ended 2017, which did not identify any
significant deficiencies
External auditor
Risk management
• Reviewed the Group’s risk management framework and compliance with that framework during the year and after the year
Governance
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 which through 2017/18 has been aligned to the Group’s financial 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
• Discussed the results of the performance evaluation of the Committee
• Reviewed new annual report disclosure requirements, including the audit report
• Considered and approved Group accounting policies, including the impact of new accounting standards, used in the
preparation of the financial statements
• 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
74
PENNON GROUP PLC ANNUAL REPORT 2018 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 2018 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, together
with the areas of particular audit focus, as reported on in the independent
auditor’s report on pages 108 to 113. In addition to the significant
matters set out in the table below, the Committee considered a range
of other matters. These included presentational matters, in particular
relating to the issuance and buy-back of perpetual capital securities,
contingent liabilities and assets, the non-underlying disclosures and
finally ensuring a fair presentation of statutory and non-statutory
performance and financial measures.
During the year, the Committee’s areas of focus have been:
Area of focus
Revenue
recognition
Non-current asset
impairment review
and Environmental
provisions
South West Water
bad and
doubtful debts
Greater Manchester
contract reset
Glasgow Recycling
and Renewable
Energy Centre
(GRREC) –
outstanding
contractual claims
against Interserve
Going concern
basis for the
preparation of
the financial
statements and
viability statement
How the matter was addressed by the Committee
Given the nature of the Group’s business, 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, in particular for Glasgow Recycling and
Renewable Energy Centre, where forecast construction spend has increased, 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 as compared to 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 and management’s review of evidence of indicators for potential
impairment of non-current assets concluded that these areas were less sensitive to assumptions.
Following a detailed review of the analysis undertaken, and consideration of management assumptions in relation to the
value of environmental provisions the Committee was satisfied that a robust and consistent approach had been followed
and with management’s assertion that the carrying value of these liabilities remained reasonable, and therefore the
Committee was 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.
Regular updates on progress against debt collection targets and other contractual payments due are received by the Board.
Performance is monitored regularly against both South West Water’s historical collection record and the track record of other
companies in the sector. At the year end the external 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.
Following the renegotiation of the Greater Manchester contract and sale of the joint venture Viridor Laing (Greater
Manchester) Holdings Limited to the Greater Manchester Waste Disposal Authority, judgement has been required to
ensure all the various economic aspects of the reset have been fully considered in concluding the appropriate accounting
treatment. In particular consideration was given to the fair value attributed to all aspects of the transaction in arriving at
the amount of profit to be recognised at our TPSCo joint venture. The Committee has received detailed analysis from
management in satisfying itself that this treatment is appropriate. In addition this has been a significant area of focus for
the external auditor.
In November 2016 the lead construction contract for the GRREC was terminated due to delays and underperformance.
Additional costs required to complete the project have been incurred and are now subject to claims including against the
lead contractor, Interserve Construction Limited. The Committee has reviewed information on the background, quantum
and likelihood of the claims recognised in accounting terms as an amount owing to the Group, considering both legal and
financial analysis from management and expert third party opinions. The Committee is satisfied that the asset recognition
criteria for this amount has been met and that appropriate disclosures have been made.
A report from the Chief Financial Officer on the financial performance of the Group including forward-looking estimates
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 enable the Committee to better 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 of either the annual report or half-year results. The Committee
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 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 61.
75
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Audit Committee report
continued
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 FRC’s
Ethical Standard 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 2017 Annual General Meeting. Debbie O’Hanlon is
the audit partner and has been in that role since Ernst & Young’s
appointment. 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 effectiveness review of the external auditor is undertaken as part
of the Committee’s annual performance evaluation. Further details of
the performance evaluation are provided on pages 71 and 72. No issues
were raised during that review and the Committee concluded that the
auditor was effective during the year.
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 FRC’s Ethical Standard 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 typically relate to agreed procedures in relation to annual
regulatory reporting obligations to Ofwat; work which is 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 and
for the Committee chairman to approve all non-audit work performed by
the statutory auditor. 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 were another accounting firm that could provide the required
cost-effective 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 31.63% of the audit fee, which is well within the Group’s 70%
non-audit fee limit.
76
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 131.
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
which makes a significant contribution to the ability of the Committee
to deliver its responsibilities.
A new Group internal audit plan was approved in January 2018, which
aligns the annual internal audit programme with the Group’s financial
year. It takes account of the principal risks, the activities to be undertaken
by the external auditor, and 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.
As in previous years, the Group Internal Audit Manager reported
regularly to the Committee on audit reviews undertaken and their
findings, and there were regular discussions, correspondence and
private meetings between the Group Internal Audit Manager and the
Committee chairman. During the year, the long-serving Group Internal
Audit Manager stepped down. This presented a logical opportunity for
the Group to review its organisation structure in this area. As a result,
since the year end, a new senior management position of director of
Risk and Assurance has been created, with specific responsibilities for
keeping the Committee informed of internal audit activities.
An external assessment of the internal function that was performed by
KPMG LLP in 2016 concluded that the Company’s internal audit function
conforms to IIA standards issued by the Institute of Internal Auditors but
identified some areas for improvement including the alignment of the
internal audit annual programme with the financial year and refreshed
reporting content. These have been actioned.
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 105, 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 108 to 113.
In preparing and finalising the 2018 Annual Report and Accounts, the
Committee considered a report on the actions taken by management in
accordance with the FBU process and an FBU assessment undertaken
by the Pennon Executive. 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.
PENNON GROUP PLC ANNUAL REPORT 2018 Sustainability
Committee report
Our sustainability objectives are an
essential part of our long-term strategy
and create value for all our stakeholders.
Gill Rider
Sustainability Committee Chairman
Dear Shareholder
I am pleased to introduce the Sustainability Committee’s report on
its activities during the year. Sustainability remains an important and
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 set and oversee
the delivery of Pennon’s sustainability objectives, which our Chief
Executive Officer sets out on page 22. We do this by bringing together
and reviewing initiatives that drive sustainability, approving targets
and monitoring the progress made in achieving them. Our sustainability
objectives are truly ‘strategic’ in that they are an essential part of our
overall long-term strategy and create value for all our stakeholders.
On pages 14 to 17 we explain the relationship between our strategy,
sustainability objectives, the measurement of performance and how
we reward our Executive Directors. All of this is underpinned by our
corporate values, as Pennon strives to be trusted, responsible,
collaborative and progressive.
Through delivery of our sustainability objectives, we are able to uphold
the highest standards of corporate responsibility for the benefit of all
our stakeholders – our customers, our communities, our people and our
suppliers, and our investors. The Committee has always played a central
role in promoting and safeguarding stakeholder interests and is pleased
to see that stakeholder engagement is now recognised as an essential
aspect of corporate governance. Pennon and its subsidiaries have
always taken a proactive and comprehensive approach to stakeholder
engagement and we continue to monitor and refine the mechanisms
we have in place to support continuing dialogue. More information on
our approach to stakeholder engagement is provided on page 64.
Throughout this annual report we show how a thorough approach to
sustainability helps us to draw together the needs of society with the
delivery of commercial success. We are pleased to note the results
achieved throughout the Group, which confirm sustainability is
indeed integrated in all we do.
Gill Rider
Sustainability Committee Chairman
77
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Sustainability Committee report
continued
Sustainability Committee composition and meetings
Committee chairman
Gill Rider
Committee members
Martin Angle
Susan Davy
Chris Loughlin
Susan Davy joined the Committee in March 2018. Her involvement
reflects the growing and welcome interest of our investors in
environmental, social and governance (ESG) matters and the relevance
of ESG to Pennon’s funding strategy and financial decision-making.
The Sustainability Committee sets a range of targets for the Group’s
subsidiaries as part of their business planning processes. Progress
against these targets is reported to the Committee throughout the year.
In addition, the South West Water sustainability committee continues
to provide oversight of South West Water’s performance against its
sustainability targets 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
regulated business.
We aim to set stretching targets and as at 31 March 2018 South West
Water had achieved six of its 12 targets for the year, and Viridor had also
completed six out of 12 of its targets. Full details of the sustainability
targets for South West Water and Viridor for 2017/18, and their
performance against them, are given in their respective reports.
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.
The Sustainability Committee balances the requirement to conduct
business in a responsible manner (in relation to 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.
Date of appointment to Pennon
Sustainability Committee
Attendance
September 2012
December 2008
March 2018
November 2006
4/4
4/4
1/1
4/4
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 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 the first Group-wide employee engagement survey
• the new Group HR strategy, ‘Talented people doing great things for
our customers and each other’
• sustainable procurement and practices within the supply chain
• sustainability reporting for 2017 and the associated verifier’s reports
and recommendations
• progress against the sustainability targets for 2017/18 and
sustainability targets for 2018/19.
In addition, the Committee considered:
• the results of the Group’s gender pay gap analysis and proposed
action plan
• the implementation of a Group-wide compliance and ethics
training programme
• recommendations arising from the first Group submission to BitC’s
Corporate Responsibility Index
• a strategic review of Pennon’s approach to ESG reporting and
disclosure, to support potential “green” funding initiatives.
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 the Group’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 Jacobs.
78
PENNON GROUP PLC ANNUAL REPORT 2018 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)
• Review of the Chief Executive Officer (page 20)
• Key performance indicators (page 24)
• Our people (page 26)
• Our operations (pages 28 to 41).
South West Water and Viridor sustainability reports
The sustainability report for Viridor will be published in August 2018,
and South West Water will incorporate its sustainability reporting in its
company annual performance report and regulatory accounts, which will
be published in July 2018. Both documents will be available to view at
www.pennon-group.co.uk and also on the subsidiaries’ websites.
79
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Nomination
Committee report
Action is being taken to encourage
the growth of a diverse workforce where
individuals from different backgrounds
can fulfil their potential.
Sir John Parker
Nomination Committee Chairman
The Nomination Committee met three times during the year to fulfil
the duties set out in its terms of reference.
Matters considered by the Committee during the year included:
• A revised policy on Diversity, Respect and Inclusion
• The Group’s performance against its diversity and equality policies
• The recruitment and appointment of Jon Butterworth as a non-
executive director of South West Water, to fill the vacancy arising
from the resignation of Steve Johnson in April 2016
• The extension of Neil Cooper’s term of office as a Non-Executive
Director of Pennon Group plc for a second term of three years
commencing on 1 September 2017 and expiring on 31 August 2020
• The confirmation of Adele Barker’s appointment as Group director
of Human Resources, a role which she had held on an interim basis
during the recruitment process
• The appointment of Ed Mitchell as 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
• A review of our gender pay disclosure and ongoing action plan
• The structure, size and composition of the Board, including the skills,
knowledge, independence, diversity and experience of the Directors
• A review of the time spent by Non-Executive Directors in fulfilling
their duties and the other directorships they hold.
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, was engaged to assist with the recruitment of
a Non-Executive director for the South West Water board.
80
PENNON GROUP PLC ANNUAL REPORT 2018 Nomination Committee composition and meetings
Committee chairman
Sir John Parker
Committee members
Martin Angle
Neil Cooper
Gill Rider
The CEO also attends meetings when invited.
Board 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 2018 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.
As at the year end, 36% of Pennon Executive members are women.
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 27. In support of this aim, both our Chairman
and our CEO have joined the 30% club, a UK campaign that supports
the goal of women holding 30% of board seats and promotes initiatives
to expand the female talent pipeline at all levels.
Date of appointment to Pennon
Nomination Committee
April 2015
December 2008
September 2014
September 2012
Attendance
3/3
3/3
2/3
3/3
I am pleased to report that we received a favourable assessment in the
Hampton-Alexander Review, published in November 2017, which looked
at improving gender balance in FTSE Leadership. Pennon was placed
40th in the FTSE 250 and cited as one of the best improvers.
The Committee and the Board will continue to monitor and promote
diversity across the Group with the aim of ensuring a diverse pipeline for
succession to board and senior management positions. The Committee
has approved an updated Diversity, Respect and Inclusion Policy for
the Group, which encourages the growth of a diverse workforce where
individuals from different backgrounds can fulfil their potential.
Our 2017 employee survey told us that 88% of our employees believe
that people within Pennon Group are treated fairly regardless of race
or ethnic origin. While we recognise this as good progress, we plan to
increase our focus on ethnic diversity in the coming year. We continue to
strive to ensure people with disabilities are given all the encouragement
and support necessary and that Pennon is seen as a welcoming and
inclusive place to work in all respects.
Information regarding the gender breakdown of the workforce is
provided on page 27.
Sir John Parker
Nomination Committee Chairman
81
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Remuneration
Committee report
The Committee is responsible for
ensuring remuneration is aligned with and
supports the Group’s strategy, reflects our
values and optimises performance.
Martin Angle
Remuneration Committee Chairman
The Committee met four 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:
• Determining the remuneration policy and future arrangements for
the annual bonus and LTIP, with a particular focus on performance
metrics and incentive levels to ensure these are aligned with the new
management structure and strategic objectives and placing the same
before the shareholders at the AGM 2017
• Annual executive salary review
• Annual review of the Chairman’s fee
• Determining performance targets in respect of the Annual Incentive
Bonus Plan for 2017/18
• Reviewing drafts of the Directors’ remuneration report for 2016/17 and
recommending it to the Board for approval for inclusion in the 2017
annual report
• Determining bonuses and deferred bonus awards pursuant to the
Company’s Annual Incentive Bonus Plan in respect of the year
2016/17
• Approving the long-term incentive plan (LTIP) awards for the year
• Approving the release of the 2014 deferred bonus share awards
and the vesting of executive share options pursuant to the
Annual Incentive Bonus Plan
• Determining the outcome of the 2014 Performance and
Co-investment Plan awards
• Reviewing and agreeing to recommend the removal of the
coinvestment obligation under the Performance and Co-investment
Plan, and an increase in our shareholding guidelines
• Reviewing the results of the Committee’s performance evaluation
and instigating appropriate changes.
The Committee’s focus for 2018/19
• Ensure that targets are stretching but also fair and achievable,
so that they act to retain, motivate and incentivise the executive
to deliver the Group’s strategic goals and to create long-term value
for shareholders
• Monitor on an ongoing basis the alignment of executive pay and
benefits with the strategic direction of the Group to ensure these
support the long-term success of the Company and promote
its values
• Improve the process around, and disclosure of, personal
bonus targets
• Undertake a review of the Committee’s independent
remuneration consultants
• Consider and respond to the remuneration-related changes included
in the new version of the UK Corporate Governance Code, due to be
published in June 2018.
82
PENNON GROUP PLC ANNUAL REPORT 2018 Date of appointment to Pennon
Remuneration Committee
December 2008
September 2014
September 2012
Attendance
4/4
3/4
4/4
Remuneration Committee composition and meetings
Committee chairman
Martin Angle
Committee members
Neil Cooper
Gill Rider
In accordance with the Code, all of the Committee members are
independent Non-Executive Directors. 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.
The Committee is advised by Deloitte, an independent remuneration
consultant, to ensure remuneration is determined impartially.
The Committee is also supported by the Group director of Human
Resources and the Group General Counsel and Company Secretary.
Martin D Angle
Remuneration Committee Chairman
83
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS PE NNON GROUP PLC
ANNUA L REP ORT 2 018
DIRECTOR S’ REMUNER ATION REPORT
85 Directors’ remuneration at a glance
86
Annual statement from the Chairman
of the Remuneration Committee
88 Directors’ remuneration policy
88 Policy table – Executive Directors
90 Policy table – Non-Executive Directors
91 Annual report on remuneration
91
95
93
95
Operation of the remuneration policy for 2018/19
Single total figure table (audited information)
Annual bonus outturn for 2017/18
Performance and Co-investment Plan outturn
for 2017/18
Retirement benefits and entitlements
(audited information)
96
Outside appointments
96 Directors’ service contracts
96
97
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
98
99
99
100
101
101
Commissioning Engineer, PWNT,
Steve Dornan at Mayflower water
treatment works
84
Directors’ remuneration at a glance
Key components of Executive Directors’ remuneration
Base salary
Set at a competitive level to attract and
retain high-calibre people 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.
Shareholding guidelines
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.
All-employee share plans
Align the interests of all employees
with Company share performance.
Summary of Directors’ remuneration 2017/18
Executive Directors
Chris Loughlin
Susan Davy
Non-Executive Directors
Sir John Parker
Gill Rider
Martin Angle
Neil Cooper
See the full single total figure of remuneration tables on page 93
READ MORE PAGES 9 3 TO 9 5
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)
518
396
270
74
67
66
30
28
–
–
–
–
450
346
–
–
–
–
–
–
–
–
–
–
155
113
–
–
–
–
1,153
883
270
74
67
66
Total remuneration opportunity and outcome
Estimated zero vesting for LTIP reduces actual remuneration outcome for the year.
Chris Loughlin
Actual pay
2017/18
£703k
£450k
£1,153K
Maximum pay
2017/18
£703k
£518k
£518k
£1,739k
Susan Davy
Actual pay
2017/18
Maximum pay
2017/18
£537k
£346k
£883K
£537k
£396k
£396k
£1,329k
0
0
0
2
0
0
4
0
0
6
0
0
8
0
0
0
1
0
0
2
1
0
0
4
1
0
0
6
1
0
0
8
1
0
0
0
2
0
0
4
0
0
6
0
0
8
0
0
0
1
0
0
2
1
0
0
4
1
0
0
6
1
0
0
8
1
Fixed pay (salary, pension and benefits)
Annual bonus
LTIP
No adjustments have been made for share price movements or payment of dividends.
R E A D O U R R E M U N E R AT I O N P O L I CY
www.pennon-group.co.uk/about-us/governance-and-remuneration
85
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Annual Statement from the Chairman
of the Remuneration Committee
The Committee appreciated our
shareholders’ strong endorsement of the
revised remuneration policy prepared
during the year.
Martin Angle
Remuneration Committee Chairman
READ MORE ABO UT OUR ST RATEGIC
PRIORIT IES ON PAGES 16 A ND 17
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 2018.
At our 2017 AGM, shareholders approved our revised remuneration
policy with 98% of votes cast in favour of the resolution. The policy
is available in full on our website at www.pennon-group.co.uk/
about-us/governance-and-remuneration and a summary of the
policy is provided on pages 88 to 90. We are not proposing any
changes to the policy at this year’s AGM.
A significant proportion of the Executive Directors’ remuneration is
provided as variable pay that rewards the achievement of stretching
annual and long-term performance targets, which in turn are designed
to ensure delivery of Pennon’s strategy and create shareholder value.
The relationship between our strategy, performance and the
remuneration of our Executive Directors is summarised opposite
on page 87.
On pages 91 to 101 we set out our annual report on remuneration
which contains the remuneration of the Directors for the year 2017/18.
We also provide details of how our policy will be applied for 2018/19.
This section of the report, together with this letter, is subject to an
advisory shareholder vote at this year’s AGM.
Review of the year
Performance against bonus targets
The bonus outturns for the Executive Directors for 2017/18 reflect
the Company’s strong achievements against corporate financial and
operational targets and the Executive Directors’ performance against
personal targets. Half of the bonus is deferred and held as shares.
Strong earnings growth was maintained across the Group and Pennon
continued to make good progress towards delivering its long-term
strategic priorities. Group underlying profit before tax was £259 million,
an increase of 3.5% compared with 2016/17. Adjusted earnings per share
(EPS) before deferred tax and non-underlying items was up 8.3% at
50.9p reflecting 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. South West
Water’s cumulative return on regulated equity (RoRE) at 11.8% continues
to lead the sector and Viridor generated EBITDA of £150.2 million during
the year.
Our operational metrics incentivise our Executives to focus on the
issues that really matter to our customers and other stakeholders. In our
water business, the year-end outturn has been affected by the extreme
cold weather in early March 2018, which caused an increase in supply
interruptions, and while South West Water met its Outcome Delivery
Incentive (ODI) leakage target of 84 megalitres per day, it did not
achieve the additional stretch target of 82 megalitres a day.
In the waste business, although the ERF portfolio performed strongly
throughout the year, various headwinds, particularly around commodity
pricing of paper, meant that the recycling action plan was not delivered
in full. Viridor increased its customer base from 31,990 customers in
2016/17 to 32,292 in 2017/18.
While personal targets amount to only 20% of overall performance,
the Executive Directors performed extremely well in 2017/18. Their
leadership and drive has resulted in excellent progress towards
delivery of our strategic priorities. There have been many challenges
and successes during the year and the resolution of our negotiations
86
PENNON GROUP PLC ANNUAL REPORT 2018 on the Greater Manchester waste contract, which resulted in a positive
financial outcome and the preservation of our relationship with the
Authority, was a highlight for the team. Preparatory work on our PR19
business plan has produced the building blocks for a coherent and
compelling submission, which will demonstrate our commitment to
outstanding customer service and sharing reward.
The Committee recognises that positive steps have been taken during
the year in relation to health and safety, with the development of
HomeSafe and a 28% reduction in lost time injuries. Environmental
performance has also improved, with a 6% reduction in wastewater
pollution incidents in South West Water. The Committee and the
Executive expect these trends to continue, as we strive towards
a step change in performance in both areas.
Chris and Susan each completed actions that have established an
effective Group structure, continuing the integration of the Group’s
shared support functions under a single Pennon umbrella, developing
and embedding the high-calibre executive team put in place last year
and ensuring succession plans are in place. This year saw the Group’s
transformation take a step further, with the successful implementation
of business and financial systems and processes, which ensure we have
the capability to face future commercial challenges.
Further details of bonus targets, measures and performance are set out
on pages 93 and 94.
Long-term incentive plan outturn
We are disappointed that the overall estimated outturn for awards
vesting in 2018 under the old Performance and Co-investment Plan is
zero. This reflects that the Company’s total shareholder return (TSR)
for the three-year performance period is anticipated to be below the
comparator index performance and the median of the FTSE 250, with
the Company’s share price having been affected by external market
and political considerations.
In 2017 we were pleased that shareholders voted in favour of a new
long-term incentive plan, which has allowed us to move away from
TSR and introduce a set of new performance measures that are
aligned with our strategic objectives.
Key remuneration decisions
For 2018/19, salaries for Executive Directors were increased by 2%,
which will be lower than the pay increase awarded to the wider
employee population.
Looking ahead to the annual bonus for 2018/19, we are maintaining
our approach of setting measurable financial and customer-focused
operational objectives. These objectives will support the delivery
of our strategy and create value for our stakeholders.
Looking forward
The Committee will continue to monitor the proposed changes to the
UK Corporate Governance Code with interest, including proposals to
strengthen the employee voice, as well as the Government’s intention
to introduce mandatory pay ratio reporting.
We are constantly reviewing our remuneration arrangements and
performance measures to ensure they are aligned with our strategy,
best practice and provide shareholders with an appropriate level of
transparency. The Committee appreciated the strong endorsement
of last year’s revised remuneration policy and we hope we can
continue to rely on shareholders’ support.
Martin D Angle
Remuneration Committee chairman
Link between strategy, 2018 performance and remuneration
Strategic priority
Leadership in UK Water and Waste
Performance measures
TSR performance against comparator
index (50% weighting) and FTSE 250
(50% weighting)
Remuneration impacts
Performance and Co-Investment Plan outturn
for awards granted in 2015 and 2016 (due to
vest in 2018 and 2019 respectively)
•
•
•
EPS growth per annum (40% weighting)
Dividend growth per annum and dividend
cover (40% weighting)
Average return on capital employed
(20% weighting)
LTIP outturn for awards granted in
2017 onwards
Leadership in cost base efficiency
Profit before tax (PBT) & RoRE
Annual bonus outturn – 50% PBT / 10% RoRE
Driving sustainable growth
Performance against operational metrics and
personal measures that are key to meeting the
needs of our customers, communities,
employees and other stakeholders
Annual bonus outturn – 20% customer and
operational targets / 20% personal objectives
87
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Directors’ remuneration policy
Introduction
The current Directors’ remuneration policy was approved by shareholders at the Company’s AGM held on 6 July 2017.
The Committee’s intention is to seek approval for the Company’s remuneration policy at the end of the usual three-year cycle, in accordance with
section 439A of the Companies Act 2006. Unless the Directors wish to amend the remuneration policy in the meantime, it will be submitted for
shareholder approval at the 2020 AGM, following a review to be carried out by the Committee in 2019/20.
The remuneration policy tables for Executive and Non-Executive Directors are set out below for information. The policy is displayed in its entirety on
the Company’s website at www.pennon-group.co.uk/about-us/governance-and-remuneration and is available upon request from the Group
Company Secretary.
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
policy table below.
How the components
support the strategic
objectives of the Company
Base salary
Set at a competitive level
to attract and retain high
calibre people 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.
How the component operates
(including provisions for recovery
or withholding of any payment)
Salaries are generally reviewed annually and
any changes are normally effective from 1 April
each year. In normal circumstances, salary
increases will not be materially different to
general employee pay increases.
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.
Maximum potential
value of the component
Description of framework
used to assess performance
None, although personal and Company
performance are factors considered
when reviewing salaries.
When reviewing salaries the
Committee has regard to the
following factors:
• Salary increases generally
for all employees in the
Company and the Group
• Market rates
• Performance of 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.
In the event that an Executive Director is
required to relocate, relocation benefits
may be provided.
None.
The cost of insurance
benefits may vary from
year to year depending on
the individual’s circumstances.
There is no overall maximum
benefit value but the Committee
aims to ensure that the total
value of benefits remain
proportionate.
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.
The maximum bonus potential
for each Director is 100% of
base salary.
Performance targets relate to corporate
and personal objectives which are
reviewed each year.
For 2018/19, 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.
88
PENNON GROUP PLC ANNUAL REPORT 2018 How the components
support the strategic
objectives of the Company
Long-term incentive plan (LTIP)
Provides alignment to
the achievement of the
Company’s strategic
objectives and the
delivery of sustainable
long-term value to
shareholders.
How the component operates
(including provisions for recovery
or withholding of any payment)
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.
Maximum potential
value of the component
Description of framework
used to assess performance
The maximum annual award is
150% of base salary.
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 2018/19 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 2015 and 2016. These awards are
due to vest in 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.
Shareholding requirements
Create alignment
between executives and
shareholders and
promote long-term
stewardship.
200% of salary for both the CEO and CFO.
89
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Directors’ remuneration policy
continued
How the components
support the strategic
objectives of the Company
Pension
Provides funding for
retirement and aids
retention of key skills
to assist in meeting
the Company’s
strategic objectives.
How the component operates
(including provisions for recovery
or withholding of any payment)
Defined benefit pension arrangements are
closed to new entrants. Defined contribution
pension arrangements have been available
to new staff since 2008.
A cash allowance may be provided as an
alternative and/or in addition where pension
limits have been reached.
Maximum potential
value of the component
Description of framework
used to assess performance
None.
The maximum annual pension
contribution or cash allowance
is 20% of salary. For Executive
Directors who commenced
employment prior to April 2013,
the maximum annual pension
contribution or cash allowance
is 30% of salary.
Legacy defined benefit pension
arrangements will continue to
be honoured.
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.
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.
90
PENNON GROUP PLC ANNUAL REPORT 2018 Annual report on remuneration
Introduction
This section sets out how the Company has applied its remuneration policy in the year, and details how the new policy will be implemented
for the year 2018/19.
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 5 July 2018.
Operation of the remuneration policy for 2018/19
A summary of the specific remuneration arrangements for Executive Directors in 2018/19 is described below:
Base salary
2018/19 salaries are:
• Chris Loughlin: £528,003
• Susan Davy: £403,767
Salaries were increased by 2%, which was lower than increases for all employees.
Pension and benefits No changes. Salary supplement cash allowance of 30% for Chris Loughlin and 25% for Susan Davy, from which is deducted
Annual bonus
the employer’s contribution to the defined benefit pension scheme.
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 2018/19, the annual bonus will be based on the following performance measures:
60% based on Group financial metrics (50% PBT, 10% RoRE).
20% based on customer and 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 water quality
• Leakage
• Wastewater pollution incidents
• Duration of interruptions to supply
• Water and wastewater asset reliability.
20% based on personal objectives. These will be relevant to the individual, and will include the following:
Waste metrics
• ERF availability
• Delivery against recycling action plan
• Growth in customer base
• Lead and develop an innovative PR19 business plan to maximise the potential of a positive outcome for South West Water,
its customers and other stakeholders and work with government to achieve the same, gaining Board approval and
submitting a high quality bid to Ofwat;
• Undertake a strategic review of our recycling businesses in light of the Government’s waste strategy, developing and
gaining Board approval for an appropriate strategy for Viridor;
• Build on the trust and engagement of our 5,000 employees to support the delivery of our strategy;
• Continue to refine and extend the reach of the organisation’s succession and talent management processes;
• Continue to embed HomeSafe across the entire Group and drive further improvement in health and safety performance;
In addition, the CFO has objectives around the delivery of a sustainable financing strategy and the embedding of new
financial systems and processes.
For bonuses paid in respect of 2014/15 onwards, both malus and clawback apply as described in the remuneration policy.
91
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Annual report on remuneration
continued
Long-term
incentive plan
Maximum award of 150% of base salary for both the Chief Executive Officer and the Chief Financial Officer.
For 2018/19, performance measures will be EPS growth, a sustainable dividend measure and RoCE, with targets set as follows:
EPS growth – 40% weighting
Vesting
25%
100%
EPS growth pa
6%
10%
Threshold
Maximum
Straight-line vesting between threshold and maximum.
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
Straight-line vesting between threshold and maximum.
EBITDA dividend cover
2.6
3.6
Vesting
25%
100%
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.
Return on capital employed (RoCE)* – 20% weighting
Threshold
Maximum
* RoCE is defined as: (underlying operating profit + JV profit after tax + interest receivable) divided by capital employed
Average RoCE
8%
10%
Vesting
25%
100%
(debt + equity including hybrid).
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 made from 2015/16 both malus and clawback apply and a holding period applies in respect of any shares that vest
at the end of the three-year performance period, as described in the remuneration policy report.
Shareholding
guideline
Performance is measured over three years and a two-year holding period applies.
200% of salary for both the CEO and CFO.
Non-Executive Director fees
Non-Executive Director fees for 2018/19 are set out below. They include an increase of 2% approved by the Board for the Non-Executive Directors,
effective from 1 April 2018. The Chairman declined to accept an increase for 2018/19.
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
48,141
7,140
14,495
10,353
10,353
5,177
92
PENNON GROUP PLC ANNUAL REPORT 2018 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)
2017/18
2016/17
2017/18
2016/17
2017/18
2016/17
2017/18(ii)
2016/17
2017/18
2016/17
2017/18
2016/17
Executive Directors
Chris Loughlin
Susan Davy
Non-Executive Directors
Sir John Parker
Gill Rider
Martin Angle
Neil Cooper
518
396
270
74
67
66
510
390
266
72
67
66
30
28
–
–
–
–
27
18
–
–
–
–
450
346
429
332
–
–
–
–
–
–
–
–
–
–
–
–
–
–
92
34
–
–
–
–
155
113
–
–
–
–
153
109
–
–
–
–
1,153
883
270
74
67
66
1,211
883
266
72
67
66
(i) Benefits comprise a car allowance and medical insurance.
(ii) Based on an estimated 0% vesting as referred to on page 95.
(iii) See page 95 for further information.
Annual bonus outturn for 2017/18
The performance targets set and the performance achieved in respect of the annual bonus for 2017/18 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
Underlying profit before tax (50% weighting)
RoRE (10% weighting)
Threshold
Target
Maximum
Actual outturn
Bonus outturn
£242.7m
£247.7m
£260.1m
£258.8m
8.0%
9.0%
11.0%
11.8%
Target achieved
Target
Actual outturn
85
87
< 5 beaches failing
82 megalitres per day
Customer and operational metrics (20% weighting)
Water metrics
Service incentive mechanism (SIM)
• South West Water
• Bournemouth Water
Bathing water quality
Leakage
Wastewater pollution incidents
• Category 1-2
• Category 3-4
Average duration of supply interruptions
Wastewater and waste asset reliability
Waste metrics
ERF availability
Delivery against recycling action plan
Growth in customer base
Personal objectives (20% weighting)
A summary of achievements in the year is as follows:
• Championed and supported the HomeSafe health and safety improvement programme. Rolled out across the organisation through
92%
Recycling action plan was not met in full
See page 86 for details
3
237
0.369 hours per property
Stable
2
218
0.228 hours per property
Stable
85
88
0 beaches failing
83 megalitres per day
92%
No
No
Yes
Yes
No
Yes
Yes
Yes
No
e-learning and facilitated deployment at prioritised locations. Brand, vision, materials and plan have been established and well received
by the organisation. Lost time injuries have reduced by 28% during the year
• Delivered on a series of Board priorities, achieved targeted synergies, delivered a positive outcome on the negotiations on the
Greater Manchester waste contract, delivered the organic growth mandate, embedded and developed the Pennon Group Executive
• Initiated the strategy behind the PR19 business plan to ensure the production of a high quality submission to Ofwat
• Delivered a succession and talent plan approved by the Board
• Led the successful implementation of the revised Project Enterprise and other governance improvements.
Total outturn
93
47.0%
10.0%
5.0%
7.0%
18.0%
87.0%
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 47.0%
10.0%
5.0%
7.0%
18.5%
87.5%
Annual report on remuneration
continued
Susan Davy
Measure
Underlying profit before tax (50% weighting)
RoRE (10% weighting)
Threshold
Target
Maximum
Actual outturn
Bonus outturn
£242.7m
£247.7m
£260.1m
£258.8m
8.0%
9.0%
11.0%
11.8%
Target
Actual outturn
Target achieved
85
87
< 5 beaches failing
82 megalitres per day
Customer and operational metrics (20% weighting)
Water metrics
Service incentive mechanism (SIM)
• South West Water
• Bournemouth Water
Bathing water quality
Leakage
Wastewater pollution incidents
• Category 1-2
• Category 3-4
Average duration of supply interruptions
Wastewater and waste asset reliability
Waste metrics
ERF availability
Delivery against recycling action plan
Growth in customer base
Personal objectives (20% weighting)
A summary of achievements in the year is as follows:
• Developed financial systems and processes to support a modern commercial culture including the successful implementation of the revised
92%
Recycling action plan was not met in full
See page 86 for details
2
218
0.228 hours per property
Stable
3
237
0.369 hours per property
Stable
85
88
0 beaches failing
83 megalitres per day
Yes
No
Yes
No
Yes
Yes
No
92%
Yes
No
Project Enterprise. Group-wide enterprise resource planning (ERP) successfully delivered to time and budget
• Launched Pennon’s tax strategy ahead of schedule
• Initiated the strategy behind the PR19 business plan to ensure the production of a high quality submission to Ofwat
• Outperformed shared service targets for 2017/18
• Delivered against the funding and treasury strategy – successful hybrid issuance
• Championed and supported the HomeSafe health and safety improvement programme
• Delivered on a series of Board priorities, achieved targeted synergies, Greater Manchester contract resolution, supported the delivery of the
organic growth mandate.
Total outturn
94
PENNON GROUP PLC ANNUAL REPORT 2018 Performance and Co-investment Plan outturn for 2017/18
The PCP awards made on 1 July 2015, which are due to vest on 1 July 2018, are the awards included in the single figure table and currently
it is estimated that the outturn will result in a zero vesting as set out in the table below.
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
• 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).
The calculation of TSR performance from the start of the performance period on 1 April 2015 to 9 May 2018 was undertaken by Deloitte LLP for the Committee.
Comparator index (50% of award)
FTSE 250 (excluding investment trusts) (50% of award)
Total
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 2018*
Below the index
31.9%
Vesting
outturn*
0%
0%
0%
Straight-line vesting between points.
For below threshold performance for either performance condition, 0% vests in respect of that performance condition.
* 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 2018 to 30 June 2018) the achievement and the outturn is an estimate at the date of calculation (9 May 2018).
Vesting of an award is also subject to the ‘underpin’ described in the remuneration policy tables on page 89, which the Committee has determined
to the date of this report would be satisfied, if any award was to vest.
Vested awards are subject to a two-year holding period during which clawback may be applied where the Committee considers it appropriate in certain
circumstances. The circumstances in which clawback may be applied are material misstatement or serious misconduct. The holding period ends on
30 June 2020.
Retirement benefits and entitlements (audited information)
Details of the Directors’ pension entitlements and pension-related benefits during the year are as follows:
Value of defined
benefit pension (i)
(£000)
–
28
Company contributions
to defined contribution
arrangements
(£000)
–
–
Cash allowances
in lieu of pension
(£000)
155
85
Total value for
the year
(£000)
155
113
Normal retirement
age and date
(for pension purposes)
67 (20 August 2019)
65 (17 May 2034)
Accrued pension
at 31 March 2018
(£000)
–
20(ii)
Chris Loughlin
Susan Davy
(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.
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 2017/18 comprised an employer’s
contribution of £13,878 and a cash sum of £85,085. 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.
No additional benefits will become receivable by a Director in the event that the Director retires early.
95
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Annual report on remuneration
continued
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.
Directors’ service contracts and 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*
Date of service contract
1 January 2016
1 February 2015
* Each of the Executive Directors’ service contracts is subject to 12 months’ notice on either side.
Non-Executive Directors
Sir John Parker
Martin Angle
Neil Cooper
Gill Rider
Date of initial letter of appointment
19 March 2015
28 November 2008
17 July 2014
22 June 2012
Expiry date of service contract
At age 67 (20 August 2019)
At age 67 (17 May 2036)
Expiry date of appointment
31 March 2021
31 December 2018
30 August 2020
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-month notice period from either side and for the Chairman’s letter
of appointment to contain a 12-month 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.
Non-Executive Director fees and benefits
The Non-Executive Directors’ fees were increased by the Board for 2017/18 by 1.5%. The Chairman’s increase approved by the Committee was also 1.5%.
The Chairman’s benefits comprise provision of a driver and vehicle, when appropriate for the efficient conduct of his duties. He is entitled to expenses
on the same basis as for the other Non-Executive Directors.
96
PENNON GROUP PLC ANNUAL REPORT 2018 All employee, performance and other contextual information
Historical TSR
The graph below shows the value, over the nine-year period ended on 31 March 2018, of £100 invested in Pennon Group on 1 April 2009 compared with
the value of £100 invested in the FTSE 250 Index. The FTSE 250 index is a broad equity market index of which the Company is a constituent. In 2017 new
long-term performance conditions were introduced.
Total shareholder return – Since April 2009
400
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
Apr-18
Pennon
FTSE250
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 and 2017/18, the Group CEO’s remuneration for the year is shown.
2009/10
2010/11
2011/12
2012/13
2013/14
2014/15
2015/16(i)
2015/16(ii)
2016/17(iii)
2017/18
Average Executive Director
single figure of remuneration
(£000)
Annual bonus payout
(% of maximum)
LTIP vesting
(% of maximum) (iv)
916
1,091
1,221
894
962
762
738
1,119
1,318
1,153
91.79
94.69
72.87
47.00
67.56
68.20
66.37
83.98
84.05
87.00
67.30
50.00
79.30
50.00
30.20
0.00
37.90
37.90
20.40
0.00(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 of 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 9 May 2018.
Comparison of CEO remuneration to employee remuneration
The table below shows the percentage change between 2016/17 and 2017/18 in base salary, benefits and annual bonus for the Group CEO,
and all employees.
The percentage increase in average remuneration for employees is calculated using wages and salaries (excluding share-based payments) of
£170.6 million (2016/17 £157.1 million), analysed into the three components in the table and the average number of employees of 5,014 (2016/17 4,799)
both as detailed in note 13 to the Group financial statements.
CEO remuneration
All employees
Percentage change in salary
1.5%
2.7%
Percentage change in benefits
9.87%
-5.6%(1)
Percentage change in annual bonus
4.90%
13.5%
(1) The differential is driven predominantly by a change in how we record mileage, rather than a reduction in benefits..
The increase in the CEO’s bonus outturn as a percentage of maximum was 2.95%. The CEO’s salary increase for 2018/19 is 2.0%.
97
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 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.
2017/18
(£ million)
192.9
149.5
25.3
390.6
2016/17
(£ million)
179.9
138.5
20.3
354.1
Percentage
change
7.2%
7.9%
24.6%
10.3%
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 past financial year.
Share award and shareholding disclosures (audited information)
Share awards granted during 2017/18
The table below sets out details of share awards made in the year to Executive Directors.
Executive Director
Chris Loughlin
Susan Davy
Chris Loughlin
Susan Davy
Type of interest
Basis of award
LTIP
150% of salary
Deferred bonus
50% of bonus awarded
Face value
£000
776
594
214
166
Percentage vesting at
threshold performance
Performance /restricted
period end date
25% of maximum
31 March 2020
n/a
29 August 2020
LTIP awards were calculated using the share price of £8.027 being the average closing price over the five dealing days preceding the date of grant,
which was 25 August 2017. Deferred bonus awards were calculated using the average share price at which shares were purchased on the market on
25 and 29 August 2017 in order to satisfy the award, which was £8.08691.
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. From 2017/18 the Committee has significantly increased these guidelines from
100% to 200% of salary for both the CEO and CFO. This may be built up over a period of no more than five years. Once obtained, the shareholding
is then expected to be maintained by each Director and is revalued each year in accordance with the then prevailing share price and the Executive
Director’s salary.
The beneficial interests of the Executive Directors in the ordinary shares (40.7p each) of the Company as at 31 March 2018 (or date of cessation,
if earlier) and 31 March 2017 together with their shareholding guideline obligation and interest are shown in the table below:
Share interests
(including
connected parties)
at 31 March 2018
324,935
63,658
Share interests
(including
connected parties)
at 31 March 2017
290,323
57,119
Shareholding
guideline
200%
200%
Shareholding
guideline met?
Yes
No
Performance
shares (subject
to performance
conditions)
201,519
156,461
Chris Loughlin
Susan Davy
SAYE
4,984
2,635
Deferred
bonus shares
64,387
42,836
Unvested awards
Since 31 March 2018, 7,132 additional ordinary shares in the Company have been acquired by Chris Loughlin as a result of participation in the Company’s
Dividend Reinvestment Plan (DRIP) and the Company’s Share Incentive Plan; and 86 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 2018 and 23 May 2018.
98
PENNON GROUP PLC ANNUAL REPORT 2018 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 2018
27,027
–
–
2,500
Shares held
at 31 March 2017
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 2018 and 23 May 2018.
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 23 May 2018 is as set out below:
Discretionary schemes
All schemes
Awarded
1.50%
3.92%
Headroom
3.50%
6.08%
Total
5%
10%
Details of share awards
(a) 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
14/07/14
01/07/15
01/07/16
25/08/17
Susan Davy(iii)
14/07/14
01/07/15
01/07/16
25/08/17
Conditional
awards held at
1 April 2017
Conditional
awards made
in year
Market price
upon award
in year
Value of shares
upon vesting
(before tax)
£000
Conditional
awards held at
31 March 2018
Vesting
in year(i)
48,465
49,352
55,434
–
17,893
40,098
42,391
–
–
–
–
96,733
–
–
–
73,972
798.50p
810.50p
920.00p
802.70p
798.50p
810.50p
920.00p
802.70p
11,437
–
–
–
4,222
–
–
–
92
–
–
–
34
–
–
–
–
49,352
55,434
96,733
–
40,098
42,391
73,972
Date of end
of period for
qualifying
conditions to
be fulfilled
13/07/17
30/06/18
30/06/19
24/08/20
13/07/17
30/06/18
30/06/19
24/08/20
Expected date
of release(ii)
–
30/06/20
30/06/19
24/08/22
–
30/06/20
30/06/19
24/08/22
(i) 20.4% of the July 2014 award shares vested on 24 August 2017 at a market price of 806.84p 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) Awards granted from 2015 onwards are subject to a two-year holding period following vesting.
(iii) 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.
Payments to past Directors
No payments to past Directors were made during the year.
99
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Annual report on remuneration
continued
(b) Annual Incentive Bonus Plan – deferred bonus shares (long-term incentive element)
The following Directors had or have a contingent interest in the number of ordinary shares (40.7p each) of the Company shown below, representing the
total number of shares to which they have or would become entitled under the deferred bonus element of the Annual Incentive Bonus Plan (the bonus
plan) at the end of the relevant qualifying period:
Director and
date of award
Chris Loughlin
27/08/14
27/07/15
04/07/16
30/08/17
Susan Davy(i)
27/08/14
27/07/15
04/07/16
30/08/17
Conditional
awards held at
1 April 2017
Conditional
awards made
in year
19,552
19,124
18,759
–
7,543
9,809
12,524
–
–
–
–
26,504
–
–
–
20,503
Market price
of each share
upon award
in year
821.50p
791.00p
950.14p
808.691p
821.50p
791.00p
950.14p
808.691p
Vesting
in year
19,552(ii)
–
–
–
7,543(ii)
–
–
–
Value of shares
upon vesting
(before tax)
£000
Conditional
awards held at
31 March 2018
Date of end
of period for
qualifying conditions
to be fulfilled
155
–
–
–
60
–
–
–
–
19,124
18,759
26,504
–
9,809
12,524
20,503
26/08/17
26/07/18
03/07/19
29/08/20
26/08/17
26/07/18
03/07/19
29/08/20
(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 15 September 2017 at 792.29p per share.
During the year the Directors received dividends on the above shares in accordance with the conditions of the bonus plan as follows: Chris Loughlin
£20,654*; Susan Davy £10,743.
*
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 (which was withdrawn
by the Board in November 2017 and replaced with a DRIP). 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 2017 given on page 98.
(c) 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 2017
2,788
2,196
2,635
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 2018
Options held at
31 March 2018
–
–
–
–
–
–
538.00p
683.00p
683.00p
–
–
–
643.40p
643.40p
643.40p
2,788
2,196
2,635
Exercise period/
maturity date
01/09/18 – 28/02/19
01/09/20 – 28/02/21
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 (Group director
of Human Resources), and from Deloitte LLP. Deloitte LLP was appointed directly by the Committee.
Deloitte LLP assisted 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 2017/18 were £72,200 (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.
100
PENNON GROUP PLC ANNUAL REPORT 2018 Statement of voting at general meeting
The table below sets out the voting by the Company’s shareholders on the resolutions to approve the Directors’ remuneration report and the
remuneration policy at the Annual General Meeting held on 6 July 2017, including votes for, against and withheld.
Annual report on remuneration
For % (including votes at the Chairman’s discretion)
Against %
Withheld number
Remuneration policy
For % (including votes at the Chairman’s discretion)
Against %
Withheld number
98.79
1.21
223,594
97.92
2.08
237,155
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 99% of shareholders who voted approved the 2016/17 Directors’ remuneration report and 98%
voted in favour of the revised remuneration policy introduced last year. The Committee appreciates the continuing support of its shareholders.
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 108 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
24 May 2018
101
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Directors’ report –
other statutory disclosures
Introduction
This Directors’ report is prepared in accordance with the provisions of
the Companies Act 2006 and regulations made thereunder. It comprises
pages 64 to 83 and 102 to 105 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 (pages 52 to 54 of the strategic report)
• likely future developments of the Company (page 23 of the
strategic report)
• certain employee matters (page 26 and 27 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 (pages 42 to 51 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 66 and 67.
Financial results and dividend
The Directors recommend a final dividend of 26.62 pence per ordinary
share to be paid on 4 September 2018 to shareholders on the register
on 6 July 2018, making a total dividend for the year of 38.59 pence, the
cost of which will be £162 million, resulting in a transfer to reserves of
£38 million. The strategic report on pages 42 to 51 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 that
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.
The Group has policies in place covering health and safety, equal
opportunities, diversity and inclusion, ethics and employee relations.
In addition, the Board has a diversity policy details of which are set
out in the report of the Nomination Committee on page 81. Information
regarding the diversity of the workforce is provided on page 27.
Pennon respects the right to freedom of association and 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 workforce engagement and
employment matters relating to the Group is set out on pages 26 and 27
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 2018 around 38% of the Group’s
employees were participating in these plans.
Greenhouse gas emissions
Change in emissions
Gross greenhouse gas emissions for the Group increased by 11%
primarily as a result of Viridor’s recently commissioned energy recovery
facilities reaching their full operating capacity. 92% of our gross
emissions are due to Viridor operations, 93% of which relate to landfill
and ERFs. Our ERFs are fuelled by waste, composing of more than 50%
biogenic or renewable carbon, which would otherwise have gone to
landfill. This has a clear resulting carbon benefit, as a greater proportion
of the energy embedded in the residual waste is extracted and methane
generation from landfills is avoided.
Following a reduction last year, emissions from landfill increased by 12%
because of higher waste inputs to these sites during 2017/18. This is
due to an ongoing gap in alternative residual waste treatment capacity
in the UK.
Our water businesses’ energy usage has stayed effectively flat at 305
GWh compared to 307 GWh the previous year. This represents a
balance between our continued significant efforts to improve energy
efficiency in the face of some energy-intensive additional process
equipment being installed to maintain compliance with regulation.
All Group companies benefitted from a continued reduction in the
UK’s average electricity grid emissions conversion factor, which fell
from 0.44932 kgCO2e/kWh to 0.38443 kgCO2e/kWh between 2016/17
and 2017/18. This resulted in an overall reduction in the Group’s Scope 2
emissions over the year and has helped both South West Water and
Bournemouth Water to reduce their overall carbon footprint by
around 8%.
The intensity metric has increased from 127 to 138 tCO2e/£100,000
turnover reflecting an overall rise in Scope 1 and 2 emissions, as
described above, which have grown at a faster rate than our increase
in turnover.
102
PENNON GROUP PLC ANNUAL REPORT 2018 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.
The methodology will be reviewed next year in light of the disposal by
Viridor of its interest in Viridor Laing (Greater Manchester) Holdings
Limited following the reset of the Greater Manchester contract.
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 2017/18 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 uses
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 Jacobs. 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
2017/18
1,797,147
123,665
65,186
1,985,997
(1,738)
2016/17
1,576,428
144,707
60,760
1,781,895
(1,774)
(121,927)
1,862,333
1,520,021
(142,933)
1,637,188
1,692,423
137.9
127.1
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.
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’s Code of Conduct 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 forced labour 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 £0.1 million during the year
(2016/17 £0.2 million).
Overseas branches
The Company has no overseas branches.
Pennon Group donations
During 2017/18 the Group provided a total of £151,000
in charitable donations.
No political donations were made or political expenditure incurred and
no contributions were made to a non-EU political party (2016/17 nil).
103
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Directors’ report –
other statutory disclosures
continued
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 2017), which was valid as at 31 March 2018 and remains currently valid.
No purchases were made during the year. As at 1 April 2017, 8,443 shares
were held in treasury, with a nominal value of £3,436 and representing
0.002% of issued share capital. No treasury shares were reissued
during the year.
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 2018:
a)
b)
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 156. 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;
c)
Details of significant direct or indirect holdings of securities of the
Company are set out in the shareholder analysis on page 170. The
Company is not aware of any agreements between shareholders
which may result in restrictions on the transfer of securities or
on voting rights;
d)
e)
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) £56,498,376 (such amount to be reduced by any shares allotted
or rights granted under (ii) below in excess of £56,498,376); and
(ii) £112,996,752 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 2017 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;
f)
There are a number of agreements that 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.
There is no information to be disclosed under Listing Rule (LR) 9.8.4R.
The Company has no long-term incentive arrangements in place
under LR 9.4.2R (2) where the only participant is a Director and the
arrangement is established specifically to facilitate, in unusual
circumstances, the recruitment or retention of the individual.
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.
104
PENNON GROUP PLC ANNUAL REPORT 2018 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 64 to 83 and 102 to 105 was
approved by the Board on 24 May 2018.
By Order of the Board
Helen Barrett-Hague
Group General Counsel and Company Secretary
24 May 2018
Statement of Directors’ responsibilities
The Directors are responsible for preparing the annual report, the
Directors’ remuneration report and the financial statements in
accordance with applicable law and regulations. Company law requires
the Directors to prepare financial statements for each financial year.
Under that law the Directors have prepared the Group and Company
financial statements in accordance with International Financial
Reporting Standards (IFRSs) as adopted by the European Union.
Under company law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair view
of the state of affairs of the Group and the Company and of the profit
or loss of the Group for the year.
In preparing these financial statements the Directors are required to:
• select suitable accounting policies and then apply them consistently
• make judgements and accounting estimates which are reasonable
and prudent
• state whether applicable IFRSs as adopted by the European Union
have been followed, subject to any material departures disclosed
and explained in the financial statements. The Directors confirm that
they have complied with the above requirements in preparing the
financial statements.
The Directors are responsible for keeping adequate accounting records
that are sufficient to show and explain the Company’s transactions,
and disclose with reasonable accuracy at any time the financial position
of the Group and the Company; and enable them to ensure that the
financial statements and the Directors’ remuneration report comply
with the Companies Act 2006 and, as regards the Group financial
statements, Article 4 of the International Accounting Standards (IAS)
Regulation. They are also responsible for safeguarding the assets of the
Group and the Company and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
Each of the Directors, whose names and functions are listed on
pages 66 and 67, 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 61) and the Directors’ report
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 position and 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.
105
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Our approach to
finance is responsible
and sustainable
106
PENNON GROUP PLC ANNUAL REPORT 2018 FINANC IAL STATEMENTS AND
S HAREHOLDER INFORMATION
Independent auditor’s report
108
114 Financial statements
169 Five-year financial summary
170 Shareholder information
107
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Independent auditor’s report to
the members of Pennon Group plc
Opinion
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 2018 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.
We have audited the financial statements of Pennon Group plc
which comprise:
Group
Consolidated income
statement
Consolidated statement of
comprehensive income
Consolidated balance sheet
Consolidated statement of
changes in equity
Consolidated cash
flow statement
Related notes 1 to 45 to
the financial statements
Parent company
Balance sheet
Statement of changes in equity
Cash flow statement
Related notes 1 to 45 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.
Basis for opinion
We conducted our audit in accordance with International Standards on
Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under
those standards are further described in the Auditor’s responsibilities for
the audit of the financial statements section of our report below. We are
independent of the Group and parent company in accordance with the
ethical requirements that are relevant to our audit of the financial
statements in the UK, including the FRC’s Ethical Standard as applied to
listed public interest entities, and we have fulfilled our other ethical
responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
Use of our report
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.
Conclusions relating to principal risks, going concern
and viability statement
We have nothing to report in respect of the following information in the
annual report, in relation to which the ISAs(UK) require us to report to
you whether we have anything material to add or draw attention to:
• the disclosures in the annual report set out on pages 54 to 60 that
describe the principal risks and explain how they are being managed
or mitigated;
• the directors’ confirmation set out on page 54 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 directors’ statement set out on page 100 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
• whether the directors’ statement in relation to going concern required
under the Listing Rules in accordance with Listing Rule 9.8.6R(3) is
materially inconsistent with our knowledge obtained in the audit; or
• the directors’ explanation set out on page 61 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.
Overview of our audit approach
Key audit
matters
• Revenue recognition across the Group’s operations
• Valuation of landfill related provisions (Viridor)
• Valuation of the provision for doubtful debts (SWW)
• Contract claims (Viridor)
• We performed an audit of the complete financial
information of three components and audit
procedures on specific balances for one component.
• The components where we performed full or
specific audit procedures accounted for 100% of
Profit before taxation before non-underlying items,
100% of Revenue and 95% of Total assets.
• Overall Group materiality of £12.9m which
represents 5% of Profit before taxation before
non-underlying items.
Audit
scope
Materiality
108
PENNON GROUP PLC ANNUAL REPORT 2018 Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current
period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included
those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement
team. These matters were addressed in the context of our audit of the financial statements as a whole, and in our opinion thereon, and we do not
provide a separate opinion on these matters.
Key observations
communicated to
the Audit Committee
South West Water and
Pennon Water Services
We concluded that the
estimation process
undertaken by
management to calculate
the measured income
accrual reflects latest
operational factors in the
key assumptions and
results in an acceptable
income accrual.
Viridor
We concluded that
accrued income has
been appropriately
recognised, and IFRIC 12
appropriately applied.
We concluded that
management’s real risk free
rate of 2.325% applied to
the most significant
provision (aftercare) is
within an acceptable range
(2.00% to 2.54%). We
consider key assumptions
supporting the landfill
related provisions reflect
management’s best
estimates, informed by
latest external and internal
data, resulting in an
acceptable provision
balance.
Risk
Our response to the risk
Revenue recognition across the
Group’s operations (£1,396.2 million,
PY comparative £1,353.1 million)
Risk direction
Refer to the Audit Committee Report (page 73); Accounting
policies (page 119); and Note 4 of the Consolidated Financial
Statements (page 127)
The Group’s material revenue streams relate to the provision
of water and sewerage services by South West Water and
Pennon Water Services 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 with 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 and Pennon Water Services
• 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 2018 is £61.5 million (2017: £72.2 million) for South
West Water and £20.2 million for Pennon Water Services.
Viridor
• Calculations of accrued income on waste management
contracts and powergen revenue to be received involve
estimation by management. The accrued income balance
at 31 March 2018 is £53.4 million (2017: £42.8 million).
• Accounting for revenue from long term service concession
arrangements under IFRIC12 requires revenue to be
recognised on construction, during service delivery and
as a capital return on the asset. The determination of the
margin allocated during the different phases of each
service concession involves management judgement.
At 31 March 2018 the Group has recognised contract
receivables of £234.1 million (2017: £217.6 million) and
other intangible assets of £69.2 million (2017: £61.3 million).
Our procedures include:
South West Water and Pennon Water Services
• We obtained an understanding of the process for the supply of measured services,
meter reading and related billing in order to assess the completeness of adjustments
to reflect the accrual or deferral of revenue
• We tested key controls linked to system generated information and around the
estimation process for measured revenue
• We compared the accrued income to bills raised post year end for a sample of
customers, and compared management’s history of estimating the accrued income
balance to bills raised in the subsequent year to assess the accuracy of the accrued
income balance
• 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, such as weather patterns and leaks in infrastructure network
• We tested whether contract terms and conditions were met and revenue 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
• 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.
Viridor
• We compared the key assumptions and estimates made by management in
recognising accrued revenue in the current year to those applied in the prior year to
identify significant changes.
• We analysed revenue trends and corroborated unusual movements to assess the
accuracy of the accrued income balance
• 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 the IFRIC12 revenue recognised and assessed the
allocation of consideration between the construction and operating services provided
• We agreed whether the revenue recognition policies adopted comply with IFRS, in
particular the requirements of IFRIC 12, and that the margins used to recognised
revenue are appropriate through testing that costs were allocated to the correct
contracts and that revenue recognised, based on those costs, is reasonable and
aligned with the individual contract models. We also compared the margins to those
generated in prior years and to the latest projections for future years
• In performing our journal testing, we paid increased attention to entries impacting
revenue, particularly those raised close to the balance sheet date.
We performed full and specific scope audit procedures over this risk area for three
components, which covered 100% of the risk amount.
Valuation of landfill related provisions (Viridor)
(£191.9 million, PY comparative £183.8 million)
Our procedures include:
• We tested the aftercare, restoration and remediation provision models, and verified
Risk direction
Refer to the Audit Committee Report (page 73); Accounting
policies (page 119); and Note 4 of the Consolidated Financial
Statements (page 127).
Landfill related provisions of £191.9 million (2017: £183.8
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, where
breaches have been identified, is a key estimate for the
remediation provision.
We focused on this area given there is a risk that provisions
could be misstated due to the complexity of factors to be
assessed and assumptions, such as discount rates, applied
by management being inappropriate, including the impact of
any management bias.
that the models are arithmetically accurate
• We evaluated the forecast costs in the models, agreeing these to supporting evidence
such as budgets and supplier cost quotations and current performance, including
prices charged by contractors in current year for significant sites
• 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 compared the key assumptions used in the calculation of the provisions, including
the discount rates, inflation rates, void space and remaining lives of the sites, to
available market information
• We 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 performed sensitivity analysis on these key assumptions
• We tested the appropriateness of journal entries impacting landfill related provisions,
particularly those raised close to the balance sheet date.
We performed full scope audit procedures over this risk area at Viridor, which covered
100% of the risk amount.
109
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Independent auditor’s report to
the members of Pennon Group plc
continued
Risk
Our response to the risk
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.
We performed full scope audit procedures over this risk area at South West Water,
which covered 100% of the risk amount.
For the Manchester contract our procedures include:
• We inspected contracts and settlement agreements and agreed the accounting
treatment of settled claims
• We evaluated whether the allocation of income to the various settlement
arrangements was appropriate and assessed whether the timing of revenue
recognition was in accordance with IFRS.
• We tested the revised cash flow models over the contract life and ensured recognition
of revenue and costs are in accordance with IAS 18.
For the Glasgow contract our procedures include:
• We obtained an understanding of the key assumptions and estimates made by
management in accounting for material claims, assessing for evidence of management
bias and concluding on whether we concur with accounting estimates made by
management
• We inspected legal advice or opinion management have obtained in relation to
contract positions, quantum of costs and amounts recoverable
• We inquired of management and assessed other evidence, including board minutes, to
test the completeness of amounts recorded in relation to contract claims
• We inspected external data, including market announcements, analyst reports and
financial reports, to assess the recoverability of amounts due from contractors and
whether there is a need for a reserve to reflect any credit default risk.
We performed full scope audit procedures over this risk area in one location, which
covered 100% of the risk amount.
Valuation of the provision for doubtful debts
(South West Water) (£88.5 million, PY comparative
£90.0 million)
Risk direction
Refer to the Audit Committee Report (page 73); Accounting
policies (page 119); and include d within the total Group
balance per Note 22 of the Consolidated Financial
Statements (page 144)
The South West Water provision is calculated using a
combination of system generated information on historic
debt recovery rates and management’s judgement of the
future likely recovery rates.
There is a risk that the assumptions used by management
in calculating the bad debt provision may be susceptible to
management bias and the valuation of the provision against
trade receivables may be misstated. We have therefore
focused on this key audit matter.
Contract claims (Viridor)
Risk direction
Refer to the Audit Committee Report (page 73); Accounting
policies (page 119); and Note 4 of the Consolidated Financial
Statements (page 127)
During the year, there was significant activity on two of
Viridor’s key contracts.
Firstly, there was a reset of contracts associated with the
Greater Manchester Waste Disposal Authority. This resulted
in the settlement of outstanding claims and counter claims,
a write down of a financial asset and recognition of an
increase in share of profit after tax from joint ventures.
These transactions have been presented as non-underlying
items in the financial statements. We have focussed on the
key judgements made by management and accounting
treatment applied to this significant event.
Viridor is also contracted with Glasgow City Council to
construct a Recycling and Renewable Energy Centre in
Glasgow. Viridor terminated the contract with the original
principal contractor in November 2016 and is overseeing
the remaining construction. Expenditure to complete
construction is expected to exceed the original target and
management has accounted for what it believes its
contractual rights are.
Where contract claims arise, the claims and the related
accounting can be complex. We focused on this area given
there is risk of challenge of the legal position taken and
higher judgement involved in assessing the collectability
of amounts recorded.
Key observations
communicated
to the Audit Committee
We concluded that the
doubtful debt provision is
within an acceptable range
(£80.7 million to £91.2
million) and reflects recent
history of collection of
outstanding debts.
For the Manchester
contract, we concluded
that the accounting
treatment applied and
judgements made by
management, particularly
relating to the allocation of
income and timing of
revenue recognition was
appropriate.
In relation to the Glasgow
contract, we concluded
that the accounting
position taken by
management, including the
recoverability of amounts
due from contractors, is
appropriate and is based
on supporting legal and
financial analysis.
110
PENNON GROUP PLC ANNUAL REPORT 2018 In the prior year, our auditor’s report included a key audit matter in
relation to completeness of provisions for uncertain tax positions and
related tax disclosures. We reported that the Group had reached
resolution with HMRC on a number of areas, reducing the level of
uncertainty over the year end tax liability and the risk of material
misstatement. In the current year we concluded this is not a key
audit matter.
In the prior year, our auditor’s report also included a key audit matter in
relation to valuation of Viridor’s non-current assets. 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 financial performance in the business plan, which
supports the carrying value, will be achieved. There are no indicators
of impairment.
An overview of the scope of our audit
Tailoring the scope
Our assessment of audit risk, our evaluation of materiality and our
allocation of performance materiality determine our audit scope for
each entity within the Group. Taken together, this enables us to form an
opinion on the consolidated financial statements. We take into account
size, risk profile, the organisation of the group and effectiveness of
group-wide controls, changes in the business environment and other
factors such as recent Internal audit results when assessing the level
of work to be performed at each entity.
In assessing the risk of material misstatement to the Group financial
statements, and to ensure we had adequate quantitative coverage of
significant accounts in the financial statements, of the six reporting
components of the Group, we selected four components covering
Pennon Group plc, Viridor, South West Water and Pennon Water
Services, which represent the principal business units within the Group.
Of the four components selected, 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. For the remaining one component (“specific scope
component”), we performed audit procedures on specific accounts
within that component that we considered had the potential for the
greatest impact on the significant accounts in the financial statements
either because of the size of these accounts or their risk profile.
The reporting components where we performed audit procedures
accounted for 100% (2017: 100%) of the Group’s Profit before taxation
before non-underlying items, 100% (2017: 100%) of the Group’s Revenue
and 95% (2017: 95%) of the Group’s Total assets. For the current year,
the full scope components contributed 100% (2017: 100%) of the
Group’s Profit before taxation before non-underlying items, 88%
(2017: 100%) of the Group’s Revenue and 94% (2017: 95%) of the Group’s
Total assets. The specific scope component contributed 0.4% (2017: 0%)
of the Group’s Profit before taxation before non-underlying items, 12%
(2017: 0%) of the Group’s Revenue and 1% (2017: 0%) of the Group’s
Total assets. The audit scope of these components may not have
included testing of all significant accounts of the component but will
have contributed to the coverage of significant accounts tested for
the Group.
Of the remaining two components that together represent less than
1% of the Group’s profit before taxation before non-underlying items,
none are individually greater than 1% of the Group’s profit before
taxation before non-underlying items. For these components, we
performed other procedures, including analytical review procedures,
testing of consolidation journals and intercompany eliminations to
respond to any potential risks of material misstatement to the Group
financial statements.
Changes from the prior year
There was one change in scope from the prior year. Pennon Water
Services, a new business unit, was designated as a specific scope
component for the current year audit.
Involvement with component teams
In establishing our overall approach to the Group audit, we
determined the type of work that needed to be undertaken at each
of the components by us, as the primary audit engagement team, or
by component auditors operating under our instruction. There are three
key locations where we perform audit procedures for the Group and
its components, being Exeter, Taunton and Bournemouth. The Pennon
Group plc and South West Water accounting functions are based in
Exeter and the audit teams of these components are led by the Senior
Statutory Auditor. Separate teams audit full scope component, Viridor,
in Taunton, and specific scope component, Pennon Water Services, in
Bournemouth. Where the work was performed by component auditors,
we determined the appropriate level of involvement to enable us to
determine that sufficient audit evidence had been obtained as a basis
for our opinion on the Group as a whole.
The primary team interacted regularly with the component teams where
appropriate during various stages of the audit, reviewed key audit
working papers on risk areas, attended key meetings with local
management and were responsible for the scope and direction of the
audit process. This, together with the additional procedures performed
at Group level, gave us appropriate evidence for our opinion on the
Group financial statements.
Our application of materiality
We apply the concept of materiality in planning and performing the
audit, in evaluating the effect of identified misstatements on the audit
and in forming our audit opinion.
Materiality
The magnitude of an omission or misstatement that, individually or in
the aggregate, could reasonably be expected to influence the economic
decisions of the users of the financial statements. Materiality provides a
basis for determining the nature and extent of our audit procedures.
We determined materiality for the Group to be £12.9 million (2017: £12.5
million), which is 5% (2017: 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 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.
We determined materiality for the Parent Company to be £7.3 million (2017:
£7.1 million), which is 75% (2017: 75%) of Group performance materiality.
Starting basis
Adjustments
Materiality
Reported profit before taxation £262.9 million
(2017: £210.5 million).
Non-underlying items – increase basis by
£4.1 million (2017: £39.5 million).
Totals £258.8 million (2017: £250.0 million) profit
before taxation before non-underlying items.
Materiality of £12.9 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% (2017: 75%) of our planning materiality,
namely £9.7m (2017: £9.4m). We have set performance materiality at
this percentage based on our assessment of the Group’s internal control
environment and the extent and nature of audit findings identified in
the prior period. This basis is consistent with the prior year.
111
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Independent auditor’s report to
the members of Pennon Group plc
continued
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 £2.9m to £9.0m (2017: £4.4m to £8.4m).
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 £0.7m (2017: £0.6m), 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.
Other information
The other information comprises the information included in the annual
report set out on pages 1 to 101, other than the financial statements and
our auditor’s report thereon. The directors are responsible for the other
information.
Our opinion on the financial statements does not cover the other
information and, except to the extent otherwise explicitly stated in this
report, we do not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our
responsibility is to read the other information and, in doing so, consider
whether the other information is materially inconsistent with the
financial statements or our knowledge obtained in the audit or otherwise
appears to be materially misstated. If we identify such material
inconsistencies or apparent material misstatements, we are required to
determine whether there is a material misstatement in the financial
statements or a material misstatement of the other information. If, based
on the work we have performed, we conclude that there is a material
misstatement of the other information, we are required to report
that fact.
We have nothing to report in this regard.
In this context, we also have nothing to report in regard to our
responsibility to specifically address the following items in the other
information and to report as uncorrected material misstatements of
the other information where we conclude that those items meet the
following conditions:
• Fair, balanced and understandable set out on page 101 – the
statement given by the directors that they consider the annual report
and financial statements taken as a whole is fair, balanced and
understandable and provides the information necessary for
shareholders to assess the group’s performance, business model
and strategy, is materially inconsistent with our knowledge obtained
in the audit; or
• Audit committee reporting set out on pages 73 to 76 – the section
describing the work of the audit committee does not appropriately
address matters communicated by us to the audit committee; or
• Directors’ statement of compliance with the UK Corporate
Governance Code set out on page 6 – the parts of the directors’
statement required under the Listing Rules relating to the company’s
compliance with the UK Corporate Governance Code containing
provisions specified for review by the auditor in accordance with
Listing Rule 9.8.10R(2) do not properly disclose a departure from a
relevant provision of the UK Corporate Governance Code.
Opinions 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.
In our opinion, 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 and those reports have
been prepared in accordance with applicable legal requirements;
• the information about internal control and risk management systems
in relation to financial reporting processes and about share capital
structures, given in compliance with rules 7.2.5 and 7.2.6 in the
Disclosure Rules and Transparency Rules sourcebook made by the
Financial Conduct Authority (the FCA Rules), is consistent with the
financial statements and has been prepared in accordance with
applicable legal requirements; and
• information about the company’s corporate governance code and
practices and about its administrative, management and supervisory
bodies and their committees complies with rules 7.2.2, 7.2.3 and 7.2.7
of the FCA Rules.
Matters on which we are required to report by exception
In the light of the knowledge and understanding of the group and the
parent company and its environment obtained in the course of the audit,
we have not identified material misstatements in:
• the strategic report or the directors’ report; or
• the information about internal control and risk management systems
in relation to financial reporting processes and about share capital
structures, given in compliance with rules 7.2.5 and 7.2.6 of the
FCA Rules.
We have nothing to report in respect of the following matters in relation
to which the Companies Act 2006 requires us to report to you if, in our
opinion:
• adequate accounting records have not been kept by the parent
company, or returns adequate for our audit have not been received
from branches not visited by us; or
• the parent company financial statements and the part of the
Directors’ Remuneration Report to be audited are not in agreement
with the accounting records and returns; or
• certain disclosures of directors’ remuneration specified by law are
not made; or
• we have not received all the information and explanations we require
for our audit
• a Corporate Governance Statement has not been prepared by
the company.
112
PENNON GROUP PLC ANNUAL REPORT 2018 Responsibilities of directors
As explained more fully in the directors’ responsibilities statement set
out on page 101, the directors are responsible for the preparation of the
financial statements and for being satisfied that they give a true and fair
view, and for such internal control as the directors determine is
necessary to enable the preparation of financial statements that are free
from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for
assessing the group and parent company’s ability to continue as a going
concern, disclosing, as applicable, matters related to going concern and
using the going concern basis of accounting unless the directors either
intend to liquidate the group or the parent company or to cease
operations, or have no realistic alternative but to do so.
Auditor’s responsibilities for the audit of the
financial statements
Our objectives are to obtain reasonable assurance about whether the
financial statements as a whole are free from material misstatement,
whether due to fraud or error, and to issue an auditor’s report that
includes our opinion. Reasonable assurance is a high level of assurance,
but is not a guarantee that an audit conducted in accordance with
ISAs (UK) will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material
if, individually or in the aggregate, they could reasonably be expected to
influence the economic decisions of users taken on the basis of these
financial statements.
Explanation as to what extent the audit was considered
capable of detecting irregularities, including fraud
The objectives of our audit, in respect to fraud, are; to identify and
assess the risks of material misstatement of the financial statements
due to fraud; to obtain sufficient appropriate audit evidence regarding
the assessed risks of material misstatement due to fraud, through
designing and implementing appropriate responses; and to respond
appropriately to fraud or suspected fraud identified during the audit.
However, the primary responsibility for the prevention and detection of
fraud rests with both those charged with governance of the entity and
management.
Our approach was as follows:
• We obtained an understanding of the legal and regulatory frameworks
that are applicable to the group and determined that the most
significant are:
– Companies Act 2006
– Financial Reporting Council (FRC) and the UK Corporate
Governance Code
– Tax legislation (governed by HM Revenue & Customs)
– Health and Safety legislation
– Environment Agency environmental permits
– Ofwat regulations
– UK listing rules
• We understood how Pennon Group plc is complying with those
frameworks by reading internal policies and codes of conduct and
assessing the entity level control environment, including the level of
oversight of those charged with governance. We made enquiries of
the Group’s legal counsel, regulatory team and internal audit of known
instances of non-compliance or suspected non-compliance with laws
and regulations. We corroborated our enquiries through review of
correspondence with regulatory bodies. We designed our audit
procedures to identify non-compliance with such laws and
regulations identified in the paragraph above. As well as enquiry and
attendance at meetings, our procedures involved a review of the
reporting to the above committees and a review of board meetings
and other committee minutes to identify any non-compliance with
laws and regulations. Our procedures also involved journal entry
testing, with a focus on journals meeting our defined risk criteria
based on our understanding of the business.
• We assessed the susceptibility of the group’s financial statements to
material misstatement, including how fraud might occur by making
enquiries of senior management, including the Chief Executive
Officer, Chief Financial Officer, Head of Internal Audit and Audit
Committee Chairman. We planned our audit to identify risks of
management override, tested higher risk journal entries and
performed audit procedures to address the potential for management
bias, particularly over areas involving significant estimation and
judgement Further discussion of our approach to address the
identified risks of management override are set out in the key audit
matters section of our report.
• Based on this understanding we designed our audit procedures
to identify non-compliance with such laws and regulations. Our
procedures involved making enquiries of key management and
legal counsel, reviewing key policies, inspecting legal registers
and correspondence with regulators and reading key management
meeting minutes. We also completed procedures to conclude on
the compliance of significant disclosures in the Annual Report
and Accounts with the requirements of the relevant accounting
standards, UK legislation and the UK Corporate Governance Code.
• We communicated regularly with the component teams and attended
key meetings with the component teams, management and legal
counsel in order to identify and communicate any instances of non
compliance with laws and regulations.
• The Group operates in the water and waste sectors which are highly
regulated environments. As such the Senior Statutory Auditor
reviewed the experience and expertise of the engagement team to
ensure that the team had the appropriate competence and
capabilities, which included the use of an expert where appropriate.
A further description of our responsibilities for the audit of the financial
statements is located on the Financial Reporting Council’s website at
https://www.frc.org.uk/auditorsresponsibilities. This description forms
part of our auditor’s report.
Other matters we are required to address
• We were appointed by the company at its annual general meeting
on 31 July 2014 to audit the financial statements for the year ending
31 March 2015 and subsequent financial periods.
• The period of total uninterrupted engagement including previous
renewals and reappointments is 4 years, covering the years ending
31 March 2015 to 31 March 2018.
• The non-audit services prohibited by the FRC’s Ethical Standard
were not provided to the group or the parent company and we
remain independent of the group and the parent company in
conducting the audit.
• The audit opinion is consistent with the additional report to the
audit committee.
Debbie O’Hanlon
Senior statutory auditor
for and on behalf of Ernst & Young LLP, Statutory Auditor
Reading
24 May 2018
Notes:
(1) The maintenance and integrity of the Pennon Group plc web site 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
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Before
non-underlying
items
2018
£m
1,393.0
Non-underlying
items (note 6)
2018
£m
3.2
Before
non-underlying
items
2017
£m
1,353.1
Non-underlying
items (note 6)
2017
£m
–
Total
2018
£m
1,396.2
Consolidated income statement
For the year ended 31 March 2018
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
Non-controlling interests
Perpetual capital security holders
Earnings per ordinary share (pence per share)
– Basic
– Diluted
Notes
5
7
5
7
5
8
8
8
20
5
9
11
(192.9)
(108.7)
(581.8)
509.6
(185.7)
323.9
24.2
(98.7)
(74.5)
9.4
258.8
(44.4)
214.4
193.1
(0.2)
21.5
–
–
–
3.2
–
3.2
–
(21.6)
(21.6)
22.5
4.1
3.4
7.5
7.5
–
–
Consolidated statement of comprehensive income
For the year ended 31 March 2018
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 (loss)/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 income/(loss) for the
year net of tax
Total comprehensive income for the year
Total comprehensive income attributable to:
Ordinary shareholders of the parent
Non-controlling interests
Perpetual capital security holders
The notes on pages 119 to 168 form part of these financial statements.
Before
non-underlying
items
2018
£m
214.4
Non-underlying
items (note 6)
2018
£m
7.5
–
–
–
–
–
–
–
–
7.5
7.5
–
–
24.5
(4.2)
20.3
(2.7)
20.5
(3.5)
14.3
34.6
249.0
227.7
(0.2)
21.5
114
(192.9)
(108.7)
(581.8)
512.8
(185.7)
327.1
24.2
(120.3)
(96.1)
31.9
262.9
(41.0)
221.9
200.6
(0.2)
21.5
48.0
47.8
Total
2018
£m
221.9
24.5
(4.2)
20.3
(2.7)
20.5
(3.5)
14.3
34.6
256.5
235.2
(0.2)
21.5
(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
(1.1)
–
(9.6)
(10.7)
–
(10.7)
16.0
(44.8)
(28.8)
–
(39.5)
28.4
(11.1)
(11.1)
–
–
Before
non-underlying
items
2017
£m
191.6
Non-underlying
items (note 6)
2017
£m
(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)
–
–
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
PENNON GROUP PLC ANNUAL REPORT 2018
Balance sheets
At 31 March 2018
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
Non-controlling interests
Perpetual capital securities
Total equity
Notes
Group
2018
£m
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
72.6
4,310.6
263.5
–
70.5
–
22.8
5,125.0
24.6
416.0
12.9
585.3
1,038.8
(209.8)
(2.6)
(9.4)
(342.0)
(24.4)
(38.0)
(626.2)
412.6
(3,177.0)
(140.1)
(46.6)
(8.2)
(49.5)
(295.6)
(181.5)
(3,898.5)
1,639.1
170.8
218.8
144.2
807.1
1,340.9
1.5
296.7
1,639.1
2017
£m
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
Company
2018
£m
–
–
0.2
846.0
1.6
4.2
1,980.8
–
2,832.8
–
42.7
6.4
303.3
352.4
(433.2)
(0.4)
(2.7)
(57.1)
(23.9)
–
(517.3)
(164.9)
(711.7)
(8.7)
(1.7)
(0.9)
(3.3)
–
–
(726.3)
1,941.6
170.8
218.8
144.2
1,111.1
1,644.9
–
296.7
1,941.6
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 £215.1 million (2017 £162.9 million).
The notes on pages 119 to 168 form part of these financial statements.
The financial statements on pages 114 to 168 were approved by the Board of Directors and authorised for issue on 24 May 2018 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.
115
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Statements of changes in equity
For the year ended 31 March 2018
Group
At 1 April 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
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)
Issuance of perpetual capital securities
Redemption of perpetual capital securities
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
Non-controlling interests
Total transactions with equity shareholders
At 31 March 2018
The notes on pages 119 to 168 form part of these financial statements.
Share
premium
account
(note 34)
£m
Capital
redemption
reserve
(note 35)
£m
Retained
earnings
and other
reserves
(note 36)
£m
Non-
controlling
interests
£m
Perpetual
capital
securities
(note 37)
£m
667.5
164.3
(16.4)
147.9
(138.5)
6.9
3.2
–
–
(2.6)
–
–
(131.0)
684.4
200.6
34.6
235.2
(149.5)
41.7
2.2
–
(5.2)
–
–
(1.7)
–
–
–
(112.5)
807.1
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(0.2)
–
(0.2)
–
–
–
–
–
–
–
–
–
–
1.7
1.7
1.5
294.8
16.2
–
16.2
–
–
–
(20.3)
4.1
–
–
–
(16.2)
294.8
21.5
–
21.5
–
–
–
296.7
(294.8)
(25.3)
3.8
–
–
–
–
(19.6)
296.7
Total
equity
£m
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
221.9
34.6
256.5
(149.5)
41.7
2.2
296.7
(300.0)
(25.3)
3.8
(1.2)
–
3.3
1.7
(126.6)
1,639.1
Share
capital
(note 33)
£m
167.8
–
–
–
–
0.3
–
–
–
0.1
–
0.2
0.6
168.4
–
–
–
–
2.1
–
–
–
–
–
0.1
213.3
–
–
–
–
(0.3)
–
–
–
1.2
0.2
3.0
4.1
217.4
–
–
–
–
(2.1)
–
–
–
–
–
0.4
144.2
–
–
–
–
–
–
–
–
–
–
–
–
144.2
–
–
–
–
–
–
–
–
–
–
–
–
0.2
–
2.4
170.8
–
3.1
–
1.4
218.8
–
–
–
–
144.2
116
PENNON GROUP PLC ANNUAL REPORT 2018 Company
At 1 April 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
Profit for the year (note 10)
Other comprehensive income for the year
Total comprehensive income for the year
Transactions with equity shareholders:
Dividends paid
Adjustment for shares issued under the Scrip Dividend Alternative
Issuance of perpetual capital securities
Redemption of perpetual capital securities
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)
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 2018
The notes on pages 119 to 168 form part of these financial statements.
Share
premium
account
(note 34)
£m
Capital
redemption
reserve
(note 35)
£m
Retained
earnings
and other
reserves
(note 36)
£m
Perpetual
capital
securities
(note 37)
£m
Total
equity
£m
1,796.2
179.1
(1.1)
178.0
(138.5)
6.9
(20.3)
4.1
1.2
(2.1)
976.1
162.9
(1.1)
161.8
(138.5)
6.9
–
–
1.2
(2.1)
294.8
16.2
–
16.2
–
–
(20.3)
4.1
–
–
–
–
0.2
–
–
(132.5)
1,005.4
215.1
3.6
218.7
(149.5)
41.7
–
(5.2)
–
–
0.8
–
–
(16.2)
294.8
21.5
–
21.5
–
–
296.7
(294.8)
(25.3)
3.8
–
1.3
3.2
(144.0)
1,830.2
236.6
3.6
240.2
(149.5)
41.7
296.7
(300.0)
(25.3)
3.8
0.8
(0.8)
–
(0.3)
213.3
–
–
–
–
(0.3)
–
–
–
–
0.2
1.2
3.0
4.1
217.4
–
–
–
(2.1)
–
–
–
–
–
0.4
144.2
–
–
–
–
–
–
–
–
–
–
–
–
–
144.2
–
–
–
–
–
–
–
–
–
–
Share
capital
(note 33)
£m
167.8
–
–
–
–
0.3
–
–
–
–
–
0.1
0.2
0.6
168.4
–
–
–
2.1
–
–
–
–
–
0.1
–
0.2
2.4
170.8
–
3.1
1.4
218.8
–
–
–
144.2
–
–
(113.0)
1,111.1
–
–
(19.6)
296.7
–
3.3
(128.8)
1,941.6
117
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Cash flow statements
For the year ended 31 March 2018
Cash flows from operating activities
Cash generated/(outflow) from operations
Interest paid
Tax (paid)/received
Net cash generated/(outflow) from operating activities
Cash flows from investing activities
Interest received
Dividends received
Investments in subsidiary undertakings
Loan repayments received from joint ventures
Return of restricted deposits
Purchase of property, plant and equipment
Purchase of intangible assets
Acquisition of subsidiary undertakings
Proceeds from sale of property, plant and equipment
Net cash (used in)/received from investing activities
Cash flows from financing activities
Proceeds from issuance of ordinary shares
Proceeds from the issuance of perpetual capital securities
Redemption of 2013 perpetual capital securities
Purchase of ordinary shares by the Pennon Employee Share Trust
Return of restricted funds
Proceeds from new borrowing
Repayment of borrowings
Finance lease sale and lease back
Finance lease principal repayments
Disposal of non-controlling interest
Dividends paid
Perpetual capital securities periodic return
Net cash used in financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of the year
The notes on pages 119 to 168 form part of these financial statements.
Group
2018
£m
443.5
(69.6)
(21.7)
352.2
8.3
6.5
–
33.3
42.3
(390.6)
(1.0)
(8.4)
10.6
(299.0)
3.9
296.7
(300.0)
(1.8)
–
106.9
(116.0)
140.1
(28.6)
1.7
(107.8)
(19.6)
(24.5)
28.7
374.3
403.0
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
Company
2018
£m
249.4
(32.5)
17.9
234.8
41.2
202.3
(356.6)
–
–
(0.2)
–
–
–
(113.3)
3.9
296.7
(300.0)
–
–
–
(63.9)
–
–
–
(107.8)
(19.6)
(190.7)
(69.2)
372.5
303.3
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
Notes
38
38
45
44
44
37
25
25
118
PENNON GROUP PLC ANNUAL REPORT 2018 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. Pennon Group’s business is 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. Pennon Group is
also the majority shareholder of Pennon Water Services Limited, a company providing water and wastewater retail services to non-household customer
accounts across Great Britain.
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 104.
The new standards or interpretations which were mandatory for the first time in the year beginning 1 April 2017 did not have a material impact on the net
assets or results of the Group.
• IFRS 15 ‘Revenue from contracts with customers’ relates to revenue recognition and establishes principles for reporting useful information to users
of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers.
The standard will replace IAS 18 ‘Revenue’ and IAS 11 ‘Construction contracts’ and related interpretations. The standard is effective for annual periods
beginning on or after 1 January 2018.
The Directors anticipate that the adoption of IFRS 15 on 1 April 2018 will not materially impact reported revenues or net assets. It is anticipated that
additional information on the analysis of contract assets and contract liabilities will be disclosed.
• 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.
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 £163 million, see note 41. These predominantly relate to leases
of properties occupied by the Group in the course of carrying out its businesses. If the standard had been adopted in the current year (assuming
application of the modified retrospective transitional approach permitted by the standard) it is estimated this would have resulted in the Group
recognising an asset in use and corresponding lease liability figure in the region of £115 million. This would have resulted in a minimal impact on profit
before tax but an estimated increase of around £7 million EBITDA which would be replaced by increased charges for depreciation and finance costs.
These impacts are not considered to be material to the Group’s net assets or results. Existing borrowing covenants are not impacted by changes in
accounting standards.
Other new standards or interpretations in issue, but not yet effective, including 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
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL 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 customer usage of 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 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. The non-household retail business is a new segment
created this period reflecting the services provided by Pennon Water Services following the opening of the non-household water and wastewater retail
market to competition on 1 April 2017. 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 2018 2. Principal accounting policies continued
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.
Landfill sites
ii)
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 (w).
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.
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.
121
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Notes to the
financial statements
continued
2. Principal accounting policies continued
(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 amortisation.
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.
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 through 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.
122
PENNON GROUP PLC ANNUAL REPORT 2018 2. Principal accounting policies continued
(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
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.
123
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Notes to the
financial statements
continued
Share-based payment
2. Principal accounting policies continued
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.
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.
124
PENNON GROUP PLC ANNUAL REPORT 2018 3. Financial risk management continued
Contractual undiscounted cash flows, including interest payments, at the balance sheet date were:
Due within
1 year
£m
Due between
1 and 2 years
£m
Due between
2 and 5 years
£m
Over
5 years
£m
Total
£m
Group
31 March 2018
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 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)
Company
31 March 2018
Non-derivative financial liabilities
Borrowings excluding intercompany borrowings
Interest payments on borrowings
Trade and other payables
Guarantees
Derivative financial liabilities
Derivative contracts – net payments
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
181.5
57.5
52.1
342.0
185.1
4.1
116.0
49.5
44.3
286.5
187.5
8.6
149.6
31.4
57.1
734.9
0.7
74.9
282.9
29.2
6.3
743.4
1.3
129.1
53.7
87.1
–
–
2.4
181.5
49.3
43.0
44.3
–
7.0
102.1
27.4
–
–
–
149.5
39.1
28.8
44.3
–
1.1
426.2
147.9
223.7
–
–
1,144.9
689.1
2,121.7
–
–
1,881.7
948.2
2,484.6
342.0
185.1
(11.3)
(71.1)
(75.9)
258.5
131.4
202.3
–
–
1,322.7
679.5
2,021.3
–
–
1,878.7
909.7
2,310.9
330.8
187.5
(4.1)
(74.8)
(63.3)
260.6
69.8
–
–
–
148.1
–
70.6
–
–
–
349.0
76.8
–
–
–
511.5
–
94.0
–
–
–
861.3
205.4
57.1
734.9
0.7
884.0
322.0
222.6
50.6
743.4
2.4
No liability is expected to arise in respect of the guarantees noted above. Guarantees are analysed in note 42.
ii) Market risk
The Group has a policy of maintaining at least 50% of interest-bearing liabilities at fixed rates. The Group uses a combination of fixed rate and index-
linked borrowings and fixed rate interest swaps as cash flow hedges of future variable interest payments to achieve this policy. At the year-end 62%
(2017 69%) 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% (2017 20%) 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 2018 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 £1.3 million (2017 £0.3 million), for the equity sensitivity fair value, with derivative impacts excluded.
For 2018 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 £2.0 million (2017 £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.
125
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Notes to the
financial statements
continued
3. Financial risk management continued
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 2018 the Group had cash and facilities,
including restricted funds, of £1.2 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
2018
£m
2,801.5
1,639.1
4,440.6
63.1%
2017
£m
2,664.9
1,509.2
4,174.1
63.8%
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
2018
£m
3,431.2
2,068.1
60.3%
2017
£m
3,290.6
2,033.8
61.8%
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.
126
PENNON GROUP PLC ANNUAL REPORT 2018 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.
Viridor assume an aftercare period of 60 years in calculating provision values. This is considered reasonable by management, is comparable to peers
in the waste business and is consistent with Environment Agency bond periods.
The impact of a 0.1% change in discount rate is estimated to be in the region of £3 million.
As at 31 March 2018 the Group’s environmental and landfill restoration provisions were £191.9 million (2017 £183.8 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 2018 these assets had a net book value of £18.4 million (2017 £14.3 million) (note 17).
Retirement benefit obligations
The Group operates defined benefit pension schemes for which actuarial valuations are carried out as determined by the trustees at intervals of not more
than three years. The last such valuation of the main scheme was as at 31 March 2016.
The pension cost and liabilities under IAS 19 are assessed in accordance with Directors’ best estimates using the advice of an independent qualified
actuary and assumptions in the latest actuarial valuation. The assumptions are based on member data supplied to the actuary and market observations
for interest rates and inflation, supplemented by discussions between the actuary and management. The mortality assumption uses a scheme-specific
calculation based on CMI 2016 actuarial tables with an allowance for future longevity improvement. The principal assumptions used to measure schemes’
liabilities, sensitivities to changes in those assumptions and future funding obligations are set out in note 30.
Taxation
The Group’s current tax provision of £24.4 million, reduced from £26.8 million in 2016/17, includes £12.6 million related to prior year tax items.
The Group continues to have a small number of ongoing uncertain tax items primarily relating to the interpretation of tax legislation regarding different tax
aspects of its energy recovery facilities. This is part of the normal course of business and the Group has paid in full the tax HMRC interpret as due, and
therefore would benefit by a cash refund of up to £18 million (2016/17 £20 million) should these tax items be concluded in the Group’s favour. The Group
is working towards resolution of these matters with HMRC.
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
£234.1 million (2017 £217.6 million) and other intangible assets of £69.2 million (2017 £61.3 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. Pennon Water Services raises bills and recognises revenue in accordance with its contracts with customers and
in line with the limits established for the non-household periodic price-setting process where applicable. 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 £61.5 million (2017 £77.7 million) for South West Water and £20.2 million for Pennon Water Services. Each year a review of the
actual amounts billed in comparison with the metered accrual recognised at the previous year end is undertaken to ensure that the methodology
continues to be supported by historic experience.
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 £53.4 million (2017 £42.8 million).
127
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Notes to the
financial statements
continued
4. Critical accounting judgements and estimates continued
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 2018 the Group’s current trade receivables were
£325.0 million (2017 £321.6 million), against which £104.3 million (2017 £98.1 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 2017/18 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.
Greater Manchester contract reset
Following the renegotiation of the Greater Manchester contract and sale of the joint venture Viridor Laing Greater Manchester to the Greater Manchester
Waste Disposal Authority (see notes 6 and 20) judgement has been required to ensure all the various economic aspects of the reset have been fully
considered in concluding the appropriate accounting treatment. In particular in arriving at the amount of profit to be recognised in respect of the retained
TPSCo joint venture (a non-underlying profit of £22.5 million, as described in note 6), it was necessary for management to consider fair values attributed
to all aspects of the transaction.
Glasgow Recycling and Renewable Energy Centre (GRECC)
Completion of the construction of this facility has required a higher level of remediation expenditure than originally envisaged. Cumulative spend
of £238 million has been incurred to 31 March 2018 which is higher than the original target of £155 million. Viridor is contractually entitled to recover
incremental costs from the original principal contractor, Interserve, under certain circumstances. The Group believes these circumstances have been
met and discussions with Interserve are ongoing with regard to the contractual settlement. At 31 March 2018 a receivable of £68.7 million has been
recognised. In accordance with IFRIC 12 service concession arrangements, a financial asset of £140.6 million and an intangible asset of £67.6 million
have been recognised (including rolled up finance income and capitalised interest), with no operating profit on construction having been taken to date.
While there are further possible recoveries that are contingent on future events, these are not currently recognised. The ultimate agreement of the
contractual amount due to the Group from the original principal contractor, including the nature of the receipts and the recoverability of such agreed
amounts under the contract, could result in revisions to the receivable and the amounts recorded for the financial asset and intangible assets, including
the allocation between the two amounts, which could then impact the margins recognised on this contract over the life of the project to 2043. Internal
assessments have been corroborated by legal advice in arriving at appropriate amounts to be recognised on the balance sheet.
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. The non-household retail business is a new segment created this year
reflecting the services provided by Pennon Water Services following the opening of the non-household water and wastewater retail market to competition
on 1 April 2017. 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.
Comparative information has been re-presented during the year to reflect the opening of the non-household water and wastewater retail market
to competition. Comparative results for the non-household retail segment were previously recognised in the water segment.
128
PENNON GROUP PLC ANNUAL REPORT 2018 5. Segmental information continued
Revenue
Water
Waste management
Non-household retail
Other
Less intra-segment trading*
Segment result
Operating profit before depreciation, amortisation and non-underlying items (EBITDA)
Water
Waste management
Non-household retail
Other
Operating profit before non-underlying items
Water
Waste management
Non-household retail
Other
Profit before tax and non-underlying items
Water
Waste management
Non-household retail
Other
Profit before tax
Water
Waste management
Non-household retail
Other
2018
£m
571.3
788.9
165.9
13.8
(143.7)
1,396.2
360.9
150.2
1.0
(2.5)
509.6
247.8
78.6
0.4
(2.9)
323.9
180.5
70.8
(1.1)
8.6
258.8
178.1
77.3
(1.1)
8.6
262.9
2017
£m
555.3
793.5
128.6
12.8
(137.1)
1,353.1
347.6
138.3
1.5
(1.4)
486.0
233.9
71.1
1.5
(1.9)
304.6
172.4
60.4
1.5
15.7
250.0
185.9
50.2
1.5
(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.
Balance sheet
31 March 2018
Assets (excluding investments in joint ventures)
Investments in joint ventures
Total assets
Liabilities
Net assets
31 March 2017
Assets (excluding investments in joint ventures)
Investments in joint ventures
Total assets
Liabilities
Net assets
Water
£m
Waste
management
£m
Non-
household
retail
£m
Other
£m
Eliminations
£m
Group
£m
3,513.2
–
3,513.2
(2,721.9)
791.3
3,461.4
–
3,461.4
(2,641.6)
819.8
2,254.2
22.8
2,277.0
(1,512.4)
764.6
2,099.9
0.1
2,100.0
(1,697.4)
402.6
66.6
–
66.6
(59.1)
7.5
33.6
–
33.6
(25.6)
8.0
1,506.9
–
1,506.9
(1,431.2)
75.7
1,856.8
–
1,856.8
(1,578.0)
278.8
(1,199.3)
–
(1,199.3)
1,199.3
–
(1,540.5)
–
(1,540.5)
1,540.5
–
6,141.6
22.8
6,164.4
(4,525.3)
1,639.1
5,911.2
0.1
5,911.3
(4,402.1)
1,509.2
Segment liabilities of the water and waste management segments comprise of operating liabilities and borrowings. The other segment includes company
only assets and liabilities as well as Group taxation liabilities and should be considered in conjunction with the eliminations column.
129
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Notes to the
financial statements
continued
5. Segmental information continued
Other information
31 March 2018
Amortisation of other intangible assets
Capital expenditure
Depreciation
Finance income (before non-underlying items)
Finance costs (before non-underlying items)
31 March 2017
Amortisation of other intangible assets
Capital expenditure
Depreciation
Finance income (before non-underlying items)
Finance costs
Revenue
United Kingdom
Rest of European Union
China
Rest of World
Non-
household
retail
£m
Waste
management
£m
0.1
3.5
0.6
–
1.5
–
–
–
–
–
3.0
203.7
68.6
21.8
14.8
2.7
186.5
64.6
26.3
12.3
Water
£m
0.5
181.6
112.9
1.2
68.4
0.5
190.9
113.5
1.5
62.3
Notes
7
17
7
8
8
7
17
7
8
8
Other
£m
–
0.2
0.4
1.2
14.0
–
0.1
0.1
8.5
20.5
2018
£m
1,338.0
12.3
31.0
11.7
1,393.0
Group
£m
3.6
389.0
182.5
24.2
98.7
3.2
377.5
178.2
36.3
95.1
2017
£m
1,287.6
10.3
45.1
10.1
1,353.1
The Group’s country of domicile is the United Kingdom and is the country in which it generates the majority of its revenue. The Group’s non-current
assets are all located in the United Kingdom.
6. 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. The presentation of results is consistent with internal
performance monitoring.
Revenue
Construction contract settlement(1a)
Operating costs
Restructuring costs(2)
Earnings before interest, tax, depreciation and amortisation
Remeasurement of fair value movement in derivatives(3)
Write-down of joint venture shareholder loans(1b)
Refinancing of joint venture arrangement(1c)
Unwind of synthetic derivative(4)
Deferred tax change in rate(5)
Tax credit arising on non-underlying items
Net non-underlying credit/(charge)
Notes
20
17, 32
8
20
20
9
2018
£m
3.2
–
3.2
(2.4)
(19.2)
22.5
–
–
3.4
7.5
2017
£m
–
(10.7)
(10.7)
16.0
–
–
(44.8)
21.3
7.1
(11.1)
(1)
On reset of the contracts associated with the Greater Manchester Waste Disposal Authority (GMWDA) an overall net credit before tax of £6.5 million
has been recognised as follows:
(a)
(b)
A net amount of £3.2 million has been recognised in revenue following the settlement of all outstanding claims relating to the construction of assets.
On reset of the contracts associated with GMWDA ownership of Viridor Laing Holdings Limited passed to the GMWDA. On transfer
£23.5 million of Viridor’s shareholder loans were repaid, resulting in the write down of the remaining financial asset of £19.2 million.
On reset of the contracts associated with GMWDA repayment of external bank debt in our joint venture, Ineos Runcorn TPSCo Limited, was
financed by GMWDA. This change in cash flows resulted in the recognition of income in this joint venture, with an amount deferred relating
to a lower ongoing gate fee. The overall share of profit after tax related to the reset is £22.5 million, which has contributed to an increase
in investments in joint ventures recognised on the balance sheet to £22.8 million (31 March 2017 £0.1 million).
(c)
These items are considered non-underlying due to their size and non-recurring nature.
130
PENNON GROUP PLC ANNUAL REPORT 2018
6. Non-underlying items continued
(2)
In the prior year a one-off charge of £10.7 million was made relating to restructuring costs associated with a Group-wide Shared Services Review.
The £10.7 million charge consisted 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 was considered non-underlying due to its size and non-recurring nature.
(3)
(4)
(5)
In the year a charge of £2.4 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).
This relates to the unwind of a synthetic derivative in place from 2011 until it was unwound in February 2017 (the Peninsula MB derivative as set out
in Note 6 of the Annual Report and Accounts 2017).
Last year 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 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 were non-underlying due to being dependent on UK tax law and due to their size.
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 in the prior year include a charge of £10.7 million 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 £57,000 (2017 £51,000).
2018
£m
192.9
108.7
(2.5)
17.2
8.9
0.1
7.5
139.4
43.1
3.6
2018
£000
91
632
50
111
884
37
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
A description of the work of the Audit Committee is set out in its report on pages 73 to 76 which includes an explanation of how the auditors’ objectivity
and independence are safeguarded when non-audit services are provided by the auditors’ firm.
131
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Notes to the
financial statements
continued
8. Net finance costs
Cost of servicing debt
Bank borrowing and overdrafts
Interest element of finance lease rentals
Other finance costs
Interest receivable
Interest receivable on shareholder loans to joint
ventures
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
Write-down of joint venture shareholder loans
Unwind of synthetic derivative
Net finance cost after non-underlying items
Finance
cost
£m
Notes
2018
Finance
income
£m
(48.6)
(34.4)
(3.9)
–
–
(86.9)
–
(1.6)
(10.2)
(11.8)
–
(98.7)
(2.4)
(19.2)
–
(120.3)
–
–
–
2.5
7.9
10.4
13.8
–
–
13.8
–
24.2
–
–
–
24.2
30
32
6
6
Total
£m
(48.6)
(34.4)
(3.9)
2.5
7.9
(76.5)
13.8
(1.6)
(10.2)
2.0
Finance
cost
£m
(49.4)
(31.9)
(3.5)
–
–
(84.8)
–
(1.2)
(9.1)
(10.3)
–
(74.5)
–
(95.1)
(2.4)
(19.2)
–
(96.1)
–
–
(44.8)
(139.9)
2017
Finance
income
£m
–
–
–
3.2
10.2
13.4
16.1
–
–
16.1
6.8
36.3
16.0
–
–
52.3
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)
In addition to the above, finance costs of £17.0 million (2017 £12.9 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 2018
£m
Non-underlying
items (note 6)
2018
£m
Notes
Before
non-underlying
items 2017
£m
Non-underlying
items (note 6)
2017
£m
Total 2018
£m
Total 2017
£m
26.1
18.3
–
18.3
44.4
(3.0)
(0.4)
–
(0.4)
(3.4)
23.1
17.9
–
17.9
41.0
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
31
UK corporation tax is calculated at 19% (2017 20%) of the estimated assessable profit for the year.
UK corporation tax is stated after a credit relating to prior year current tax of £3.6 million (2017 credit of £1.8 million) and a prior year deferred tax credit
of £2.4 million (2017 charge of £1.1 million).
The 2017 deferred tax credit includes a credit of £21.3 million reflecting a reduction in the rate of UK corporation tax.
132
PENNON GROUP PLC ANNUAL REPORT 2018 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 of 19% (2017 20%)
as follows:
Reconciliation of total tax charge
Profit before tax
Profit before tax multiplied by the standard rate of UK corporation tax of 19% (2017 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
Reconciliation of current tax charge
Profit before tax
Profit before tax multiplied by the standard rate of UK corporation tax of 19% (2017 20%)
Relief for capital allowances in place of depreciation
Disallowance of depreciation charged in the accounts
Financial transactions deemed ineligible
Other timing differences
Adjustments to tax charge in respect of prior years
Joint venture profits not taxed
Expenses not deductible for tax purposes
Depreciation charged on non-qualifying assets
Relief for capitalised interest and foreign exchange gains/losses
Research and Development Expenditure credit
Current tax charge for year
2018
£m
262.9
49.9
0.3
–
(6.1)
–
(6.0)
1.5
1.4
41.0
2018
£m
262.9
49.9
(49.5)
31.2
–
1.6
(3.6)
(6.1)
0.3
1.5
(2.2)
–
23.1
2017
£m
210.5
42.1
(1.3)
10.7
(0.9)
(21.3)
(0.7)
1.9
(0.5)
30.0
2017
£m
210.5
42.1
(48.5)
31.6
10.7
(3.1)
(1.8)
(0.9)
(1.3)
1.9
(0.5)
(0.1)
30.1
The Group’s current tax charge is lower than the UK headline tax rate of 19%, primarily due to the availability of capital allowances. Capital allowances
provide tax relief when a business incurs expenditure on qualifying capital items such as plant and machinery used by the business. As an infrastructure
business, these allowances help the Group to plan major investment and consequentially to maintain lower customers bills, as corporation tax relief is
given against the investments made. As noted in the deferred tax note (note 31), the rate of UK corporation tax will reduce to 17% from April 2020.
Joint Venture profits are not subject to any additional tax within the Group as these are included on a post tax basis already, as the Joint Venture entity
is subject to tax itself.
In addition to the amounts recognised in the income statement the following tax charges and credits were also recognised:
Amounts recognised directly in other comprehensive income
Deferred tax charge/(credit) on defined benefit pension schemes
Deferred tax charge on cash flow hedges
Amounts recognised directly in equity
Deferred tax charge/(credit) 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
2018
£m
4.2
3.4
0.4
(3.8)
2018
£m
215.1
2017
£m
(3.3)
1.3
(0.3)
(4.1)
2017
£m
162.9
As permitted by Section 408 of the Companies Act 2006 no income statement or statement of comprehensive income is presented for the Company.
133
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Notes to the
financial statements
continued
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, the Long-term Incentive Plan and the deferred shares element of the Annual Incentive Bonus Plan, based on performance criteria for the vesting
of the awards.
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
2018
417.9
1.5
419.4
2017
413.0
1.9
414.9
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. Perpetual capital returns are proportionately adjusted to allow a more useful comparison in the year as the full return
is accrued at 31 March 2018 but not payable until May. Earnings per share have been calculated as follows:
Statutory earnings
Deferred tax charge before non-underlying items
Non-underlying items (net of tax)
Proportional adjustment on Perpetual capital returns
Adjusted earnings
12. Dividends
2018
2017
Profit
after tax
£m
200.6
18.3
(7.5)
1.3
212.7
Earnings per share
Basic
p
48.0
4.4
(1.8)
0.3
50.9
Diluted
p
47.8
4.4
(1.8)
0.3
50.7
Profit
after tax
£m
164.3
18.9
11.1
–
194.3
Earnings per share
Basic
p
39.8
4.5
2.7
–
47.0
Diluted
p
39.6
4.6
2.6
–
46.8
Amounts recognised as distributions to ordinary equity holders in the year
Interim dividend paid for the year ended 31 March 2017: 11.09p (2016 10.46p) per share
Final dividend paid for the year ended 31 March 2017: 24.87p (2016 23.12p) per share
Proposed dividends
Proposed interim dividend for the year ended 31 March 2018: 11.97p per share
Proposed final dividend for the year ended 31 March 2018: 26.62p per share
2017
£m
43.1
95.4
138.5
2018
£m
45.9
103.6
149.5
50.2
111.8
162.0
The proposed interim and final dividends have not been included as liabilities in these financial statements.
The proposed interim dividend for 2018 was paid on 4 April 2018 and the proposed final dividend is subject to approval by shareholders at the
Annual General Meeting.
134
PENNON GROUP PLC ANNUAL REPORT 2018
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
2018
£m
170.6
17.4
20.7
2.8
–
211.5
192.9
–
18.6
211.5
2017
£m
157.1
16.6
18.8
2.9
1.1
196.5
179.7
1.1
15.7
196.5
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.
2018
2017
Employees (average full time equivalent number)
The average monthly number of employees (including Executive Directors) was:
Water
Waste management
Non-household retail
Other
Group totals
The total number of employees at 31 March 2018 was 5,190 (2017 4,788).
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
1,575
3,285
81
73
5,014
2018
£000
914
398
667
298
477
2,754
1,589
3,153
–
57
4,799
2017
£000
1,205
381
421
312
471
2,790
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 £nil (2017 £102,000). Total gains made by Directors on the exercise of share options were
£nil (2017 £17,000).
Total emoluments include £nil (2017 £476,000) payable to Directors for services as directors of subsidiary undertakings.
At 31 March 2018 one Director (2017 one) is accruing retirement benefits under defined benefit pension schemes in respect of which the Group
contributed £28,000 (2017 £35,000).
At 31 March 2018 no Director (2017 no) is a member of the Group’s defined contribution pension scheme in respect of which the Group contributed
£nil (2017 £40,000).
At 31 March 2018 two Directors received payments in lieu of pension provision (2017 two).
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 84 to 101.
135
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Notes to the
financial statements
continued
15. Goodwill
Cost:
At 1 April 2016
At 31 March 2017
At 31 March 2018
Carrying amount:
At 1 April 2016
At 31 March 2017
At 31 March 2018
£m
385.0
385.0
385.0
385.0
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.
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 2015, 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 7-10% 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.
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.
136
PENNON GROUP PLC ANNUAL REPORT 2018 16. Other intangible assets
Acquired intangible assets
Cost:
At 1 April 2016
Additions
At 31 March 2017
Additions
At 31 March 2018
Accumulated amortisation:
At 1 April 2016
Charge for year
At 31 March 2017
Charge for year
At 31 March 2018
Carrying amount:
At 1 April 2016
At 31 March 2017
At 31 March 2018
Service
concession
arrangements
£m
Customer
contracts
£m
Patents
£m
Other
£m
55.0
6.5
61.5
8.1
69.6
–
0.2
0.2
0.2
0.4
55.0
61.3
69.2
34.3
–
34.3
–
34.3
27.5
2.4
29.9
2.8
32.7
6.8
4.4
1.6
0.2
–
0.2
–
0.2
0.2
–
0.2
–
0.2
–
–
–
2.6
–
2.6
1.0
3.6
0.6
0.6
1.2
0.6
1.8
2.0
1.4
1.8
Total
£m
92.1
6.5
98.6
9.1
107.7
28.3
3.2
31.5
3.6
35.1
63.8
67.1
72.6
Service concession arrangements, once available for use, are amortised over the useful life of each contract. The average remaining life is 22 years
(2017 23 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 one year (2017 two years).
Patents are amortised over their estimated useful lives which at acquisition was 13 years. The average remaining life is nil years (2017 nil years).
Other, including computer software, is amortised over the useful life of the assets which at acquisition was five years. The average remaining life is five
years (2017 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 £2.3 million (2017 £2.1 million) have been capitalised on qualifying assets, at an average borrowing rate of 3.7%
(2017 3.5%).
137
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Notes to the
financial statements
continued
17. Property, plant and equipment
Group
Cost:
At 1 April 2016
Additions
Assets adopted at fair value
Grants and contributions
Disposals
Transfers/reclassifications
At 31 March 2017
Additions
Assets adopted at fair value
Grants and contributions
Disposals
Transfers/reclassifications
At 31 March 2018
Accumulated depreciation:
At 1 April 2016
Charge for year
Disposals
At 31 March 2017
Charge for year
Disposals
At 31 March 2018
Net book value:
At 1 April 2016
At 31 March 2017
At 31 March 2018
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
524.4
9.8
–
–
(3.5)
8.7
539.4
12.3
–
–
(0.4)
3.7
555.0
372.2
13.5
(1.0)
384.7
17.2
(0.2)
401.7
152.2
154.7
153.3
1,824.9
12.7
5.4
(1.6)
(1.2)
14.6
1,854.8
13.2
8.0
(2.2)
(1.2)
21.9
1,894.5
223.7
24.4
(1.3)
246.8
23.0
(1.2)
268.6
1,601.2
1,608.0
1,625.9
693.5
1.2
14.1
–
(0.2)
(2.2)
706.4
1.8
–
–
–
11.1
719.3
227.4
12.8
(0.2)
240.0
13.4
–
253.4
466.1
466.4
465.9
2,629.9
47.0
5.1
–
(10.7)
62.9
2,734.2
45.4
–
–
(9.9)
85.4
2,855.1
1,129.9
126.1
(9.3)
1,246.7
125.3
(8.6)
1,363.4
1,500.0
1,487.5
1,491.7
64.6
7.1
–
–
–
–
71.7
11.1
–
–
–
–
82.8
52.9
4.5
–
57.4
7.0
–
64.4
11.7
14.3
18.4
166.1
299.7
–
–
(9.5)
(84.0)
372.3
305.2
–
–
–
(122.1)
555.4
–
–
–
–
–
–
–
166.1
372.3
555.4
Total
£m
5,903.4
377.5
24.6
(1.6)
(25.1)
–
6,278.8
389.0
8.0
(2.2)
(11.5)
–
6,662.1
2,006.1
181.3
(11.8)
2,175.6
185.9
(10.0)
2,351.5
3,897.3
4,103.2
4,310.6
Of the total depreciation charge of £185.9 million (2017 £181.3 million), £1.5 million (2017 £1.6 million) has been charged to capital projects, £1.9 million
(2017 £1.5 million) has been offset by deferred income and £182.5 million (2017 £178.2 million) has been charged against profits. Asset lives and residual
values are reviewed annually. During the year borrowing costs of £14.7 million (2017 £10.8 million) have been capitalised on qualifying assets, at an average
borrowing rate of 3.7% (2017 3.5%).
Groups of assets forming cash generating units are reviewed for indicators of impairment. No indicators of impairment were identified during the year.
Asset lives are reviewed annually. No significant changes were required in 2017/18.
138
PENNON GROUP PLC ANNUAL REPORT 2018 17. Property, plant and equipment continued
Assets held under finance leases included above were:
Cost:
At 31 March 2017
At 31 March 2018
Accumulated depreciation:
At 31 March 2017
At 31 March 2018
Net book amount:
At 31 March 2017
At 31 March 2018
Company
Cost:
At 1 April 2016
Additions
Disposals
At 31 March 2017
Additions
At 31 March 2018
Accumulated depreciation:
At 1 April 2016
Charge for year
Disposals
At 31 March 2017
Charge for year
At 31 March 2018
Net book value:
At 1 April 2016
At 31 March 2017
At 31 March 2018
Asset lives and residual values are reviewed annually.
Infrastructure
assets
£m
Operational
properties
£m
Fixed and
mobile plant,
vehicles and
computers
£m
Construction
in progress
£m
409.0
416.9
58.2
63.3
350.8
353.6
436.7
463.7
111.6
119.4
325.1
344.3
574.8
673.7
276.0
305.3
298.8
368.4
0.2
0.2
–
–
0.2
0.2
Total
£m
1,420.7
1,554.5
445.8
488.0
974.9
1,066.5
Fixed and
mobile plant,
vehicles and
computers
£m
0.3
0.2
(0.2)
0.3
0.1
0.4
0.2
–
(0.1)
0.1
0.1
0.2
0.1
0.2
0.2
139
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Notes to the
financial statements
continued
18. Financial instruments by category
The accounting policies for financial instruments that have been applied to line items are:
Group
31 March 2018
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 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
Company
31 March 2018
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 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
Notes
22
19,22
23
25
28
23
26
26,29
22
19,22
23
25
28
23
26
26/29
19,22
22
23
25
26
28
23
26
26
19,22
22
23
25
26
28
23
26
29
Derivatives
used for
fair value
hedging
£m
Fair value
Derivatives
used for
cash flow
hedging
£m
Derivatives
not in a hedge
accounting
relationship
£m
–
–
72.3
–
72.3
–
(0.9)
–
–
(0.9)
–
–
78.7
–
78.7
–
(2.5)
–
–
(2.5)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
4.1
–
4.1
–
–
–
–
–
–
–
2.8
–
2.8
–
–
–
–
–
–
–
4.1
–
4.1
–
–
–
–
–
–
–
–
2.9
–
2.9
–
–
–
–
–
–
–
7.0
–
7.0
–
(16.7)
–
–
(16.7)
–
–
6.2
–
6.2
–
(40.0)
–
–
(40.0)
–
–
6.5
–
6.5
–
–
(3.6)
–
–
(3.6)
–
–
1.3
–
1.3
–
–
(3.4)
–
(3.4)
140
Amortised cost
Loans and
receivables
£m
–
266.6
–
585.3
851.9
(3,386.8)
–
–
–
(3,386.8)
–
314.3
–
598.1
912.4
(3,263.0)
–
–
–
(3,263.0)
886.9
0.3
–
303.3
1,190.5
(5.7)
(1,144.9)
–
–
–
(1,150.6)
1,137.7
0.4
–
372.5
1,510.6
(0.8)
(1,206.0)
–
–
(1,206.8)
Trade
receivables
and trade
payables
£m
220.7
–
–
–
220.7
–
–
(98.2)
(48.0)
(146.2)
223.5
–
–
–
223.5
–
–
(107.4)
(48.5)
(155.9)
–
–
–
–
–
–
–
–
(0.1)
(44.3)
(44.4)
–
–
–
–
–
–
–
–
(0.2)
(44.3)
(44.5)
Total
£m
220.7
266.6
83.4
585.3
1,156.0
(3,386.8)
(17.6)
(98.2)
(48.0)
(3,550.6)
223.5
314.3
87.7
598.1
1,223.6
(3,263.0)
(42.5)
(107.4)
(48.5)
(3,461.4)
886.9
0.3
10.6
303.3
1,201.1
(5.7)
(1,144.9)
(3.6)
(0.1)
(44.3)
(1,198.6)
1,137.7
0.4
4.2
372.5
1,514.8
(0.8)
(1,206.0)
(3.4)
(0.2)
(44.3)
(1,254.7)
PENNON GROUP PLC ANNUAL REPORT 2018 19. Other non-current assets
Non-current receivables
Amounts owed by subsidiary undertakings
Amounts owed by related parties (note 45)
Service concession arrangements
Other receivables
Non-current receivables were due:
Between 1 and 2 years
Over 2 years and less than 5 years
Over 5 years
The fair values of non-current receivables were:
Amounts owed by subsidiary undertakings
Amounts owed by related parties
Service concession arrangements
Other receivables
Group
Company
2018
£m
–
39.4
222.9
1.2
263.5
2017
£m
–
87.2
210.1
10.7
308.0
2018
£m
846.0
–
–
–
846.0
Group
Company
2018
£m
12.9
34.9
215.7
263.5
2017
£m
19.4
23.7
264.9
308.0
2018
£m
35.5
108.1
702.4
846.0
Group
Company
2018
£m
–
70.6
222.9
1.2
294.7
2017
£m
–
156.9
210.1
10.7
377.7
2018
£m
909.5
–
–
–
909.5
2017
£m
1,011.6
–
–
–
1,011.6
2017
£m
85.8
269.9
655.9
1,011.6
2017
£m
1,115.7
–
–
–
1,115.7
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 24 years. The assets revert to the local authority at the end of the contract. At 31 March 2018 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 2.5% (2017 2.25%). 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 12.6% (2017 12.5%).
Other receivables include site development and pre-contract costs of £0.7 million (2017 £4.1 million).
A significant proportion of the non-current asset balances are 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 2016
Additions
Disposals
At 31 March 2017
Additions
Disposals
At 31 March 2018
£m
1,628.3
100.0
(104.1)
1,624.2
356.7
(0.1)
1,980.8
On 1 April 2017 the Company acquired 2,799,900 ordinary shares of £1 in Pennon Water Services Limited at par, having previously acquired 100 ordinary shares
of £1 in 2015 . On the same date Pennon Water Services Limited issued 700,000 shares to South Staffordshire Water Plc, resulting in the Company becoming
80% majority shareholder in Pennon Water Services Limited. On 29 March 2018 the Company acquired an additional 3,917,436 ordinary shares of £1 at par,
with South Staffordshire Water Plc acquiring a further 979,359 ordinary shares of £1.
On 29 March 2018, in settlement of intercompany loan balances owed by Viridor Limited to the Company, the Company subscribed for an additional £350 million
of new share capital in Viridor Limited.
The disposal during the year is related to the unwind of the PMB synthetic derivative in the prior year (described in full in note 6 in the 2017 Annual Report and
Accounts). Peninsula MB Limited was put into liquidation during the year.
141
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Notes to the
financial statements
continued
20. Investments continued
Joint ventures
Group
At 1 April 2016
Share of post–tax profit
Share of other comprehensive profit
Dividends received
At 31 March 2017
Share of post–tax profit – underlying
Share of post-tax profit – non-underlying
Share of other comprehensive charges
Disposals
Dividends received
At 31 March 2018
Shares
£m
0.1
4.2
0.3
(4.5)
0.1
9.4
22.5
(2.7)
–
(6.5)
22.8
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 associate undertakings are set out in note 40.
As part of the reset of the contracts associated with the Greater Manchester Disposal Authority (GMWDA) the Group disposed of its interest
in Viridor Laing (Greater Manchester) Holdings Limited during the year. Full details of the transaction are given in Note 6.
The Group’s joint venture 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)
INEOS Runcorn (TPS) Holdings Limited(2)
Place of
business/
country of
incorporation
England
England
% of
ownership
50
20
Measurement
method
Equity
Equity
(1) Lakeside Energy from Waste Holdings Limited provides energy recovery facility services.
(2) 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 venture and associate:
Summarised balance sheet
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 assets/(liabilities)
Net debt
Associated shareholder loans
Net (debt)/funds (excluding shareholder loans)
2018
Lakeside
Energy
from Waste
Holdings
Limited
£m
INEOS
Runcorn
(TPS)
Holdings
Limited
£m
Lakeside
Energy
from Waste
Holdings
Limited
£m
2017
Viridor Laing
(Greater
Manchester)
Holdings
Limited
£m
16.1
8.6
24.7
–
(6.5)
(6.5)
15.5
10.0
25.5
–
(8.6)
(8.6)
109.8
270.3
(95.5)
(28.4)
(123.9)
4.1
(79.4)
16.3
(63.1)
(86.9)
(145.1)
(232.0)
55.2
(71.4)
86.9
15.5
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)
303.9
(321.9)
(48.4)
(370.3)
(34.9)
(258.7)
80.3
(178.4)
INEOS
Runcorn
(TPS)
Holdings
Limited
£m
40.0
6.7
46.7
–
(13.8)
(13.8)
283.5
(319.7)
(44.2)
(363.9)
(47.5)
(279.7)
100.9
(178.8)
142
PENNON GROUP PLC ANNUAL REPORT 2018 20. Investments continued
Summarised statement of comprehensive income
Revenue
EBITDA
Depreciation and amortisation
Non-underlying credit (see note 6)
Interest receivable on service concessions
Other net interest charge
Pre-tax profit/(loss)
Income tax (expense)/income
Post-tax profit/(loss)
Other comprehensive income
Total comprehensive income
Dividends paid by joint venture
Lakeside
Energy
from Waste
Holdings
Limited
£m
49.2
33.7
(7.9)
–
–
(7.5)
18.3
(3.8)
14.5
3.9
18.4
(13.0)
2018
Viridor Laing
(Greater
Manchester)
Holdings
Limited
£m
85.3
3.6
(0.6)
–
11.3
(14.5)
(0.2)
0.1
(0.1)
–
(0.1)
–
INEOS
Runcorn
(TPS)
Holdings
Limited
£m
53.7
38.7
(12.1)
60.0
–
(20.3)
66.3
(0.3)
66.0
36.7
102.7
–
Lakeside
Energy
from Waste
Holdings
Limited
£m
46.8
29.4
(8.1)
–
–
(8.2)
13.1
(2.2)
10.9
6.0
16.9
(9.0)
2017
Viridor Laing
(Greater
Manchester)
Holdings
Limited
£m
145.5
6.3
(1.3)
–
22.5
(27.5)
–
(2.5)
(2.5)
8.0
5.5
–
INEOS
Runcorn
(TPS)
Holdings
Limited
£m
59.4
40.2
(12.4)
–
–
(29.7)
(1.9)
1.9
–
8.1
8.1
–
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. The current year information for Viridor Laing (Greater Manchester) Holdings Limited covers the period from the start of the year
to date of disposal.
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
Disposal
Closing net assets
Interest in joint venture
Share of net liabilities not recognised
Carrying value
Lakeside
Energy
from Waste
Holdings
Limited
£m
(1.3)
14.5
3.9
(13.0)
–
4.1
2.1
–
2.1
2018
Viridor Laing
(Greater
Manchester)
Holdings
Limited
£m
(34.9)
–
–
–
34.9
–
–
–
–
INEOS
Runcorn
(TPS)
Holdings
Limited
£m
(47.5)
66.0
36.7
–
–
55.2
20.7
–
20.7
Lakeside
Energy
from Waste
Holdings
Limited
£m
(9.2)
10.9
6.0
(9.0)
–
(1.3)
(0.7)
0.8
0.1
2017
Viridor Laing
(Greater
Manchester)
Holdings
Limited
£m
(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
–
Net liabilities in excess of the Group’s interest are not recognised unless the Group has a legal or constructive obligation to fund those liabilities.
21. Inventories
Raw materials and consumables
Group
2018
£m
24.6
2017
£m
21.3
Company
2018
£m
–
2017
£m
–
143
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Notes to the
financial statements
continued
22. Trade and other receivables – current
Trade receivables
Less: provision for impairment of receivables
Net trade receivables
Amounts owed by related parties (note 45)
Amounts owed by subsidiary undertakings
Other receivables
Prepayments and accrued income
Group
Company
2018
£m
325.0
(104.3)
220.7
4.3
–
4.1
186.9
416.0
2017
£m
321.6
(98.1)
223.5
17.0
–
15.6
84.7
340.8
2018
£m
–
–
–
–
41.0
0.3
1.4
42.7
2017
£m
–
–
–
–
126.1
0.4
0.8
127.3
Trade receivables include accrued income relating to customers with water budget plans.
In the current year prepayments and accrued income include contractual compensation amounts due totalling £68.7 million related to additional costs
incurred in the construction of the Glasgow Recycling and Renewable Energy Centre. A full credit risk appraisal has been carried out on this receivable.
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
2018
£m
55.6
27.8
161.3
2017
£m
34.1
26.6
148.2
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
Associated with acquisition of trade receivables (non-household market)
Provision for receivables impairment
Receivables written off during the year as uncollectable
At 31 March
2018
£m
98.1
3.0
7.5
(4.3)
104.3
2017
£m
95.6
–
7.4
(4.9)
98.1
144
PENNON GROUP PLC ANNUAL REPORT 2018 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
Derivatives not in a hedge accounting relationship
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Group
Company
2018
£m
3.4
3.6
(8.9)
(7.8)
3.3
0.8
63.8
8.5
(0.5)
(0.4)
2017
£m
1.4
4.8
(16.0)
(24.0)
2.2
0.6
70.0
8.7
(1.3)
(1.2)
2018
£m
3.4
3.1
(2.7)
(0.9)
0.8
3.3
–
–
–
–
2017
£m
0.9
0.4
(2.1)
(1.3)
2.2
0.7
–
–
–
–
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 (2017 £nil).
During the year a £15.6 million charge (2017 £10.8 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 2018 62% of Group net borrowings were at fixed rate (2017 69%).
At 31 March 2018 the Group had interest rate swaps to swap from floating to fixed rate and hedge financial liabilities with a notional value of £978 million
and a weighted average maturity of 2.1 years (2017 £1,078.0 million, with 2.9 years). The weighted average interest rate of the swaps for their nominal
amount was 2.0% (2017 2.0%).
The periods for which cash flow hedges are expected to affect future profit or loss are as follows:
Group
31 March 2018
Assets
Liabilities
31 March 2017
Assets
Liabilities
Company
31 March 2018
Assets
Liabilities
31 March 2017
Assets
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
2.8
(8.9)
0.4
(16.0)
2.2
(2.0)
0.4
(2.1)
2.2
(7.8)
0.4
(12.1)
2.2
(0.8)
0.4
(1.3)
1.8
–
0.4
(11.3)
1.9
(0.8)
0.4
–
0.2
–
0.1
(0.6)
0.2
–
0.1
–
Total
£m
7.0
(16.7)
1.3
(40.0)
6.5
(3.6)
1.3
(3.4)
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
£3.0 million (2017 £4.9 million).
145
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Notes to the
financial statements
continued
23. Derivative financial instruments continued
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
2018
£m
7.1
4.0
72.3
83.4
16.7
0.9
17.6
2017
£m
6.2
2.8
78.7
87.7
40.0
2.5
42.5
2018
£m
6.5
4.1
–
10.6
3.5
–
3.5
2017
£m
1.3
2.9
–
4.2
3.4
–
3.4
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.
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
2018
£m
–
–
–
–
–
–
Group
2018
£m
(2.6)
(46.6)
2017
£m
(4.2)
6.8
(44.8)
44.3
(2.1)
–
2017
£m
(2.4)
(48.4)
2018
£m
–
–
–
–
–
–
Company
2018
£m
(0.4)
(1.7)
2017
£m
(4.2)
6.8
(83.5)
44.3
36.6
–
2017
£m
–
(1.4)
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.
146
PENNON GROUP PLC ANNUAL REPORT 2018 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 58 days.
Group
Company
2018
£m
114.9
113.0
357.4
585.3
2017
£m
101.2
78.0
418.9
598.1
2018
£m
15.2
113.0
175.1
303.3
2017
£m
99.4
78.0
195.1
372.5
Group other deposits include restricted funds of £182.3 million (2017 £223.8 million) to settle long-term lease liabilities (note 28). Restricted funds are
available for access, subject to being replaced by an equivalent valued security.
For the purposes of the cash flow statement cash and cash equivalents comprise:
Cash and cash deposits as above
Less: deposits with a maturity of three months or more (restricted funds)
26. Trade and other payables – current
Trade payables
Amounts owed to subsidiary undertakings
Amounts owed to joint ventures (note 45)
Other tax and social security
Accruals and other payables
Group
Company
2018
£m
585.3
(182.3)
403.0
2017
£m
598.1
(223.8)
374.3
2018
£m
303.3
–
303.3
Group
Company
2018
£m
98.2
–
3.7
48.4
191.7
342.0
2017
£m
107.4
–
4.2
50.6
124.3
286.5
2018
£m
0.1
5.7
–
0.6
50.7
57.1
2017
£m
372.5
–
372.5
2017
£m
0.2
0.8
–
0.3
5.0
6.3
The Directors consider that the carrying amount of trade and other payables approximates to their fair value.
At 31 March 2018 Accruals and other payables includes an amount of £44.3 million due to Nomura Structured Holdings plc on unwind of a synthetic
derivative (see note 6) which was included in non-current liabilities at 31 March 2017.
27. Current tax liabilities
Current year creditor
Prior year tax items
Group
Company
2018
£m
11.8
12.6
24.4
2017
£m
8.2
18.6
26.8
2018
£m
(1.7)
25.6
23.9
2017
£m
–
37.9
37.9
147
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Notes to the
financial statements
continued
28. Borrowings
Current
Short-term loans
European Investment Bank
Amounts owed to subsidiary undertakings (note 45)
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 45)
Obligations under finance leases
Total non-current borrowings
Total borrowings
Group
Company
2018
£m
149.6
32.0
–
181.6
28.2
209.8
229.0
619.6
133.9
426.3
291.4
–
1,700.2
1,476.8
3,177.0
3,386.8
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
2018
£m
149.6
–
283.6
433.2
–
433.2
149.1
562.6
–
–
–
–
711.7
–
711.7
1,144.9
2017
£m
74.9
–
282.9
357.8
–
357.8
248.6
560.5
–
–
–
39.1
848.2
–
848.2
1,206.0
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 2017.
The fair values of non-current borrowings, valued using level 2 measures (as set out in note 23) were:
2018
2017
Book value
£m
Fair value
£m
Book value
£m
Fair value
£m
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 45)
229.0
619.6
133.9
426.3
291.4
1,700.2
1,476.8
3, 177.0
149.1
562.6
–
711.7
232.8
652.3
197.5
495.5
251.5
1,829.6
1,350.0
3,179.6
152.4
595.4
–
747.8
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
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 19 years (2017 22 years).
148
Group
Company
2018
£m
190.6
574.3
2,412.1
3,177.0
2017
£m
207.7
408.3
2,500.5
3,116.5
2018
£m
102.0
260.6
349.1
711.7
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
2017
£m
188.6
148.1
511.5
848.2
PENNON GROUP PLC ANNUAL REPORT 2018 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
Company
2018
£m
52.1
310.8
2,121.7
2,484.6
(979.6)
1,505.0
2017
£m
44.3
245.3
2,021.3
2,310.9
(926.6)
1,384.3
2018
£m
–
–
–
–
–
–
Group
Company
2018
£m
28.2
209.7
1,267.1
1,505.0
2017
£m
30.5
175.4
1,178.4
1,384.3
2018
£m
–
–
–
–
2017
£m
–
–
–
–
–
–
2017
£m
–
–
–
–
Included above are accrued finance charges arising on obligations under finance leases totalling £155.7 million (2017 £146.3 million), of which £3.4 million
(2017 £2.0 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, £87.9 million at 31 March 2018 (2017 £79.3 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
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, £92.5 million at 31 March 2018 (2017 £142.4 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
2018
£m
180.0
405.9
585.9
2017
£m
60.0
725.0
785.0
Company
2018
£m
100.0
125.0
225.0
2017
£m
60.0
180.0
240.0
In addition at 31 March 2018 the Group had undrawn uncommitted short-term bank facilities of £30.0 million (2017 £15.0 million) available to the Company.
149
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Notes to the
financial statements
continued
29. Other non-current liabilities
Amounts owed to subsidiary undertakings
Deferred income
Other payables
Group
Company
2018
£m
–
118.5
21.6
140.1
2017
£m
–
114.5
66.2
180.7
2018
£m
8.7
–
–
8.7
2017
£m
8.7
–
44.3
53.0
Deferred income includes amounts relating to the adoption at fair value of assets transferred from customers in the water segment.
In the prior year, other payables included an amount of £44.3 million due to Nomura Structured Holdings plc on unwind of a synthetic derivative
(see note 6) which this year is included within current liabilities.
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 £6.1 million (2017 £5.3 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
2018
%
3.2
3.0
2.70
3.2
2017
%
3.2
2.0
2.55
3.2
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 2016 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
2018
24.9
27.3
The average life expectancy in years of a future pensioner retiring at age 62, 20 years after the balance sheet date, is projected as:
Male
Female
2018
26.3
29.6
2017
24.8
27.2
2017
26.2
29.5
2016
%
2.9
2.9
3.30
2.9
2016
25.1
27.3
2016
26.5
29.6
150
PENNON GROUP PLC ANNUAL REPORT 2018 30. Retirement benefit obligations continued
The sensitivities regarding the principal assumptions used to measure the schemes’ liabilities are:
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
Impact on
schemes’
liabilities
+/– 0.6%
+/– 6.3%
+/– 9.3%
+/– 6.8%
+/– 4.6%
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.
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
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 losses
Contributions:
Employers
Plan participants
Payments from plans:
Benefit payments
At 31 March
Present value
of obligation
£m
(971.4)
(13.9)
(0.7)
(24.1)
(38.7)
2018
Fair value
of plan assets
£m
903.4
–
–
22.5
22.5
–
1.0
30.6
(1.4)
30.2
–
(1.0)
32.9
31.9
(948.0)
(5.7)
–
–
–
(5.7)
10.2
1.0
(32.9)
(21.7)
898.5
Group
Company
2018
£m
(931.2)
898.5
(32.7)
(16.8)
(49.5)
Total
£m
(68.0)
(13.9)
(0.7)
(1.6)
(16.2)
(5.7)
1.0
30.6
(1.4)
24.5
10.2
–
–
10.2
(49.5)
2017
£m
(956.0)
903.4
(52.6)
(15.4)
(68.0)
Present value
of obligation
£m
(833.6)
(12.0)
(1.5)
(27.4)
(40.9)
–
12.2
(133.1)
(8.7)
(129.6)
–
(1.1)
33.8
32.7
(971.4)
2018
£m
(56.5)
53.2
(3.3)
–
(3.3)
2017
Fair value of
plan assets
£m
792.7
–
–
26.2
26.2
106.0
–
–
–
106.0
11.2
1.1
(33.8)
(21.5)
903.4
2017
£m
(58.0)
53.9
(4.1)
–
(4.1)
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)
151
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
Notes to the
financial statements
continued
30. Retirement benefit obligations continued
The movement in the Company’s net defined benefit obligation over the accounting period is as follows:
1 April
Current service cost
Interest (expense)/income
Remeasurements:
(Loss)/return on plan on assets excluding amounts
included in interest expense
Gain from change in demographic assumptions
Gain/(loss) from change in financial assumptions
Experience gains
Contributions:
Employers
Payments from plans:
Benefit payments
31 March
Present value
of obligation
£m
(58.0)
(0.3)
(1.5)
(1.8)
2018
Fair value of
plan assets
£m
53.9
–
1.3
1.3
–
–
1.8
(0.6)
1.2
–
2.1
2.1
(56.5)
(0.1)
–
–
–
(0.1)
0.2
(2.1)
(1.9)
53.2
Changes in the effect of the asset ceiling during the year were:
Irrecoverable asset at start of the year
Interest on irrecoverable surplus
Actuarial gains
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
Total
£m
(4.1)
(0.3)
(0.2)
(0.5)
(0.1)
–
1.8
(0.6)
1.1
0.2
–
0.2
(3.3)
Group
Company
2018
£m
15.8
0.4
1.1
2017
£m
7.6
0.2
8.0
2018
£m
–
–
–
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)
2017
£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)
2018
Quoted prices
in active market
£m
208.3
170.2
211.9
182.3
57.4
41.8
8.8
880.7
Prices not quoted
in active market
£m
–
–
–
7.9
9.9
–
–
17.8
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
Fund
%
23
19
24
21
7
5
1
100
Fund
%
27
19
19
11
7
5
12
100
152
PENNON GROUP PLC ANNUAL REPORT 2018 30. Retirement benefit obligations continued
Other assets at 31 March 2018 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
10.5
10.7
13.3
10.4
4.7
3.3
0.3
53.2
2018
Prices not quoted
in active market
£m
–
–
–
–
–
–
–
–
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
–
–
–
–
–
–
–
–
Fund
%
20
20
24
20
9
6
1
100
Fund
%
24
19
19
12
8
7
11
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.£13 million per annum rising with inflation
from 2019 to 2022. The Group’s deficit recovery contribution to the main scheme for 2018 has been paid in earlier periods (2017 £0.5 million). The Group
monitors funding levels on an annual basis and expects to pay total contributions of around £27 million during the year ended 31 March 2019.
153
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Notes to the
financial statements
continued
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/(credited) to the income statement
Charged/(credited) to equity
Change of rate in income statement – non-underlying
Other non-underlying charges in the income statement
Liabilities/(assets) at 31 March
Group
Company
2018
£m
269.6
18.3
8.1
–
(0.4)
295.6
2017
£m
272.0
18.9
(2.3)
(21.3)
2.3
269.6
2018
£m
(2.3)
(0.2)
0.9
–
–
(1.6)
2017
£m
(2.2)
–
–
(0.1)
–
(2.3)
Deferred tax assets have been recognised in respect of all temporary differences giving rise to deferred tax assets because it is probable that these
assets will be recovered.
The majority of the Group’s deferred tax liability is expected to be recovered over more than one year. The majority of the Company’s deferred tax asset
is expected to be recovered over more than one year. All deferred tax assets and liabilities within the same jurisdiction are offset.
In the prior year the deferred tax balance was 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 included 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 2016
Charged/(credited) to the income statement
Non-underlying credit to the income statement
Reclassifications
At 31 March 2017
Charged/(credited) to the income statement
Transfer from deferred tax assets
At 31 March 2018
Deferred tax assets
At 1 April 2016
(Credited)/charged to the income statement
Non-underlying charge/(credit) to the income statement
(Credited)/charged to equity
Non-underlying charge to equity
Reclassifications
At 31 March 2017
(Credited)/charged to the income statement
Non-underlying (credit)/charge to the income statement
Charged to equity
Transfer to deferred tax liabilities
At 31 March 2018
Net liability:
At 31 March 2017
At 31 March 2018
Accelerated tax
depreciation
£m
243.7
15.8
(17.6)
(0.1)
241.8
18.1
–
259.9
Fair value
adjustments
£m
24.6
(1.9)
(0.6)
–
22.1
(1.5)
–
20.6
Revenue on service
concession
arrangements
£m
39.7
4.8
(2.8)
–
41.7
2.0
–
43.7
Derivatives
£m
–
–
–
–
–
–
0.7
0.7
Other
£m
0.9
(0.4)
(0.1)
–
0.4
(0.4)
–
–
Long term
liabilities
including
provisions
£m
(4.9)
(1.2)
(0.1)
–
–
(0.2)
(6.4)
1.0
–
–
–
(5.4)
Retirement
benefit
obligations
£m
(7.4)
(0.6)
(0.2)
(4.7)
1.4
–
(11.5)
(1.1)
–
4.2
–
(8.4)
Derivatives
£m
(7.2)
–
2.6
1.0
0.3
0.9
(2.4)
–
(0.4)
3.5
(0.7)
–
Share based
payments
£m
(1.3)
–
–
(0.2)
(0.1)
–
(1.6)
0.4
–
0.4
–
(0.8)
Tax losses
£m
(1.9)
0.1
0.1
–
–
–
(1.7)
–
–
–
–
(1.7)
Fair value
adjustment
£m
(11.0)
0.5
0.5
–
–
–
(10.0)
0.1
–
–
–
(9.9)
Other
£m
(3.2)
1.8
(0.8)
–
–
(0.6)
(2.8)
(0.3)
–
–
–
(3.1)
Total
£m
308.9
18.3
(21.1)
(0.1)
306.0
18.2
0.7
324.9
Total
£m
(36.9)
0.6
2.1
(3.9)
1.6
0.1
(36.4)
0.1
(0.4)
8.1
(0.7)
(29.3)
269.6
295.6
154
PENNON GROUP PLC ANNUAL REPORT 2018 31. Deferred tax continued
Company
Deferred tax assets
At 1 April 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
(Credited)/ charged to the income statement
Charged to equity
At 31 March 2018
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
32. Provisions
Group
At 1 April 2017
Charged to the income statement
Capitalised
Utilised
At 31 March 2018
Retirement
benefit
obligations
£m
(0.5)
–
(0.1)
(0.3)
0.2
(0.7)
(0.1)
0.2
(0.6)
Derivatives
£m
(1.3)
–
–
0.1
0.1
(1.1)
–
0.6
(0.5)
Share based
payments
£m
(0.2)
(0.1)
–
(0.1)
–
(0.4)
0.1
0.1
(0.2)
Other
£m
(0.2)
0.1
–
–
–
(0.1)
(0.2)
–
(0.3)
Group
Company
2018
£m
(4.2)
(3.5)
(7.7)
(0.4)
(8.1)
2017
£m
3.3
(1.3)
2.0
0.3
2.3
2018
£m
(0.2)
(0.6)
(0.8)
(0.1)
(0.9)
Environmental and
landfill restoration
£m
Restructuring
£m
Other
provisions
£m
183.8
6.7
11.1
(9.7)
191.9
6.5
–
–
(3.1)
3.4
23.9
0.9
–
(0.6)
24.2
Total
£m
(2.2)
–
(0.1)
(0.3)
0.3
(2.3)
(0.2)
0.9
(1.6)
2017
£m
0.1
(0.2)
(0.1)
0.1
–
Total
£m
214.2
7.6
11.1
(13.4)
219.5
The amount charged to the income statement includes £10.2 million (2017 £9.1 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
2018
£m
38.0
181.5
219.5
2017
£m
40.4
173.8
214.2
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 4.825% (2017 4.75%) and an inflation rate of 2.5% (2017 2.5%) to its aftercare
provision and a discount rate of 3.8% (2017 4.75%) and an inflation rate of 2.5% (2017 2.5%) to its restoration provision.
The restructuring provision relates principally to severance costs and will be utilised within one year.
Other provisions include underperforming contracts of £11.0 million (2017 £11.1 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 6 years.
155
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Notes to the
financial statements
continued
33. Share capital
Allotted, called–up and fully paid
Group and Company
At 1 April 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
Shares issued under the Scrip Dividend Alternative
For consideration of £0.5 million, shares issued to the Pennon Employee Share Trust
For consideration of £3.4 million, shares issued under the Company’s Sharesave Scheme
At 31 March 2018 ordinary shares of 40.7p each
Number of shares
Treasury shares
Ordinary shares
10,356
–
–
–
(1,913)
–
8,443
–
–
–
8,443
412,340,597
771,563
143,479
24,457
1,913
611,284
413,893,293
5,223,293
46,205
580,392
419,743,183
£m
167.8
0.3
0.1
–
–
0.2
168.4
2.1
0.1
0.2
170.8
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 or fifth 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:
28 June 2010
29 June 2011
29 June 2012
3 July 2013
14 July 2014
24 June 2015
29 June 2016
28 June 2017
Date granted and
subscription price
fully paid
Period when
options normally
exercisable
431p
536p
588p
538p
611p
683p
709p
767p
2013 – 2017
2014 – 2017
2015 – 2017
2016 – 2017
2017 – 2018
2017 – 2020
2019 – 2021
2020 – 2022
Thousands of shares in respect of
which options outstanding at 31 March
2017
41
29
91
103
609
1,132
748
–
2,753
2018
–
26
2
94
159
933
605
671
2,490
156
PENNON GROUP PLC ANNUAL REPORT 2018 33. Share capital continued
The number and weighted average exercise price of Sharesave options are:
At 1 April
Granted
Forfeited
Exercised
Expired
At 31 March
2018
2017
Number of
ordinary shares
(thousands)
2,753
775
(411)
(570)
(57)
2,490
Weighted average
exercise price
per share
(p)
660
767
707
597
667
700
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
The weighted average price of the Company’s shares at the date of exercise of Sharesave options during the year was 798p (2017 878p). The options
outstanding at 31 March 2018 had a weighted average exercise price of 700p (2017 660p) and a weighted average remaining contractual life of 1.6 years
(2017 1.9 years).
The aggregate fair value of Sharesave options granted during the year was £0.9 million (2017 £0.9 million), determined using the Black-Scholes valuation
model. The significant inputs into the valuation model at the date of issue of the options were:
Weighted average share price
Weighted average exercise price
Expected volatility
Expected life
Risk-free rate
Expected dividend yield
2018
848
767
19.0%
3.4 years
0.3%
4.5%
2017
854
709
18.0%
3.4 years
0.3%
4.2%
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. From 2017/18, no further awards are made under this Plan as it has been superseded by
a Long-term Incentive Plan (see iii) below).
The number and price of shares in the Performance and Co-investment Plan are:
At 1 April
Granted
Vested
Lapsed
At 31 March
2018
2017
Number of
ordinary shares
(thousands)
1,021
–
(50)
(400)
571
Weighted
average exercise
price per share
(p)
850
–
799
852
865
Number of
ordinary shares
(thousands)
1,198
378
(128)
(427)
1,021
Weighted
average exercise
price per share
(p)
761
920
653
721
850
The awards outstanding at 31 March 2018 had a weighted exercise price of 865p (2017 850p) and a weighted average remaining contractual life of
0.7 years (2017 1.3 years).
The aggregate fair value of awards granted in the prior year was £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
Expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous three years.
2017
920p
18.0%
0.3%
157
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Notes to the
financial statements
continued
33. Share capital continued
iii) Long-term Incentive Plan (LTIP)
Executive Directors and senior management receive an annual grant of conditional shares. Share awards vest subject to the achievement of specific
performance conditions measured over a performance period of not less than three years.
The number and price of shares in the LTIP are:
At 1 April
Granted
Lapsed
At 31 March
2018
Number of
ordinary shares
(thousands)
–
537
(27)
510
Weighted
average
exercise price
per share
(p)
–
803
803
803
The awards outstanding at 31 March 2018 had a weighted exercise price of 803p and a weighted average remaining contractual life of 2.4 years.
The aggregate fair value of awards granted during the year was £1.0 million, determined from market value. No option pricing methodology is applied
is applied since the vesting of the shares depend on non-market performance vesting conditions.
iv) 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
2018
2017
Number of
ordinary shares
(thousands)
325
172
(51)
(41)
405
Weighted
average
exercise price
per share
(p)
848
809
821
815
843
Number of
ordinary shares
(thousands)
307
146
(122)
(6)
325
Weighted
average
exercise price
per share
(p)
759
944
745
701
848
The awards outstanding at 31 March 2018 had a weighted average exercise price of 843p (2017 848p) and a weighted average remaining contractual
life of 1.5 years (2017 1.4 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 £0.9 million (2017 £1.3 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 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
Adjustment for shares issued under the Scrip Dividend Alternative
Shares issued under the Sharesave Scheme
Shares issued to the Pennon Employee Share Trust
At 31 March 2018
158
£m
213.3
(0.3)
3.0
1.2
0.2
217.4
(2.1)
3.1
0.4
218.8
PENNON GROUP PLC ANNUAL REPORT 2018 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 2016
At 31 March 2017
At 31 March 2018
36. Retained earnings and other reserves
Group
At 1 April 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
Profit for the year
Other comprehensive income for the year
Redemption of perpetual capital securities (see note 37)
Dividends paid relating to 2017
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 2018
Own shares
£m
Hedging
reserve
£m
Retained
earnings
£m
(2.1)
–
–
–
–
–
–
2.1
(2.6)
(2.6)
–
–
–
–
–
–
0.8
(1.7)
(3.5)
(31.8)
–
5.1
(1.5)
–
–
–
–
–
(28.2)
–
17.1
–
–
–
–
–
–
(11.1)
701.4
164.3
(20.0)
–
(138.5)
6.9
3.2
(2.1)
–
715.2
200.6
17.5
(5.2)
(149.5)
41.7
2.2
(0.8)
–
821.7
£m
144.2
144.2
144.2
Total
£m
667.5
164.3
(14.9)
(1.5)
(138.5)
6.9
3.2
–
(2.6)
684.4
200.6
34.6
(5.2)
(149.5)
41.7
2.2
–
(1.7)
807.1
The own shares reserve represents the cost of ordinary shares in Pennon Group plc issued to or purchased in the market and held by the Pennon
Employee Share Trust to satisfy awards under the Group’s Annual Incentive Bonus Plan.
The market value of the 440,000 ordinary shares (2017 330,000 ordinary shares) held by the Trust at 31 March 2018 was £2.8 million (2017 £2.9 million).
159
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
Notes to the
financial statements
continued
36. Retained earnings and other reserves continued
Company
At 1 April 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
Profit for the year
Other comprehensive loss for the year
Dividends paid relating to 2017
Adjustment for shares issued under the Scrip Dividend Alternative
Redemption of perpetual capital securities (see note 37)
Credit to equity in respect of share-based payments (net of tax)
Charge in respect of share options vesting
At 31 March 2018
Hedging
reserve
£m
Retained
earnings
£m
(5.0)
–
0.3
–
–
–
–
(4.7)
–
2.7
–
–
–
–
–
(2.0)
981.1
162.9
(1.4)
(138.5)
6.9
1.2
(2.1)
1,010.1
215.1
0.9
(149.5)
41.7
(5.2)
0.8
(0.8)
1,113.1
Total
£m
976.1
162.9
(1.1)
(138.5)
6.9
1.2
(2.1)
1,005.4
215.1
3.6
(149.5)
41.7
(5.2)
0.8
(0.8)
1,111.1
In making decisions about the level of dividends to be proposed the Directors take steps to check that retained earnings reflect realised profits and are
therefore distributable within the requirements of the Companies Act 2006.
37. Perpetual capital securities
Group and Company
At 1 April 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
Issuance of perpetual capital securities
Redemption of perpetual capital securities
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 2018
£m
294.8
(20.3)
4.1
16.2
294.8
296.7
(294.8)
(25.3)
3.8
21.5
296.7
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 had no fixed redemption date but the Company could 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. In the event the Company acquired 80% or more
of the securities it could then redeem the remainder at its sole discretion.
On 22 September 2017 the Company purchased £285.8 million in principal amount of the capital securities and settled accrued periodic returns totalling
£19.0 million for a total of £304.8 million. On 10 October 2017 the Company exercised its option to redeem all of the remaining £14.2 million capital
securities at their principal amount and accrued periodic returns totalling £0.6 million.
On 22 September 2017 the Company issued £300 million perpetual capital securities. Costs directly associated with the issue of £3.3 million were set off
against the value of the issuance. They have no fixed redemption date but the Company can at its sole discretion redeem all, but not part, of these
securities at their principal amount on 22 May 2020 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 22 May 2018, a periodic return of £5.8 million has been recognised
as a financial liability at the year end.
Profits for the year attributable to perpetual capital security holders of £21.5 million reflect £19.6 million of distributions noted above on the March 2013
perpetual capital securities, £3.8 million of associated corporation tax relief and £5.8 million for periodic returns due on 2017 perpetual capital securities.
(The newly issued securities do not qualify for corporation tax relief).
160
PENNON GROUP PLC ANNUAL REPORT 2018 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 JV loan write off and credit
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 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
2018
£m
221.9
2.5
(2.5)
182.5
3.6
–
(6.5)
2.4
–
(9.4)
(24.2)
98.7
–
41.0
(5.2)
(36.9)
(15.2)
2.2
4.5
(15.9)
443.5
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
Company
2018
£m
236.6
0.9
–
0.1
–
–
–
–
–
–
(42.5)
34.6
(202.3)
(28.4)
–
250.6
–
0.1
(0.3)
–
249.4
Group
Company
2018
£m
69.6
17.0
86.6
2017
£m
76.4
12.9
89.3
2018
£m
32.5
–
32.5
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)
2017
£m
39.1
–
39.1
161
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
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
The movements in net borrowings during the periods presented were as follows:
Group
Cash and cash deposits
Bank and other loans due within one year
Other current borrowings
Finance leases due within one year
Bank and other loans due after one year
Other non-current borrowings
Finance leases due after one year
Cash and cash deposits
Bank and other loans due within one year
Other current borrowings
Finance leases due within one year
Bank and other loans due after one year
Other non-current borrowings
Finance leases due after one year
Company
Cash and cash deposits
Bank and other loans due within one year
Amounts due to subsidiary undertakings
Bank and other loans due after one year
Cash and cash deposits
Bank and other loans due within one year
Amounts due to subsidiary undertakings
Bank and other loans due after one year
Net borrowings
at 1 April 2016
£m
632.2
–
(39.0)
(26.0)
(1,502.5)
(234.5)
(1,314.6)
(2,484.4)
Net borrowings
at 1 April 2017
£m
598.1
(74.9)
(41.1)
(30.5)
(1,439.3)
(323.4)
(1,353.8)
(2,664.9)
Net borrowings
at 1 April 2016
£m
429.7
–
(287.2)
(877.1)
(734.6)
Net borrowings
at 1 April 2017
£m
372.5
(74.9)
(282.9)
(848.2)
(833.5)
Group
Company
2018
£m
585.3
(149.6)
(32.0)
(28.2)
–
(209.8)
(1,408.8)
(291.4)
(1,476.8)
(3,177.0)
(2,801.5)
Cash flows –
other
£m
(34.1)
–
39.0
26.0
(0.5)
(130.0)
(12.1)
(111.7)
Cash flows –
other
£m
(12.8)
74.9
41.1
30.5
(106.9)
–
(117.1)
(90.3)
Cash flows –
other
£m
(57.2)
–
–
–
(57.2)
Cash flows –
other
£m
(69.2)
25.0
(0.7)
–
(44.9)
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)
Foreign
exchanged
adjustments
£m
–
–
–
–
(2.3)
–
–
(2.3)
Foreign
exchanged
adjustments
£m
–
–
–
–
(2.3)
–
–
(2.3)
Foreign
exchanged
adjustments
£m
–
–
–
–
–
Foreign
exchanged
adjustments
£m
–
–
–
–
–
2018
£m
303.3
(149.6)
–
–
(283.6)
(433.2)
(711.7)
–
–
(711.7)
(841.6)
2017
£m
372.5
(74.9)
–
–
(282.9)
(357.8)
(848.2)
–
–
(848.2)
(833.5)
Other non-cash
movements
£m
–
(74.9)
(41.1)
(30.5)
66.0
41.1
(27.1)
(66.5)
Net borrowings
at 31 March 2017
£m
598.1
(74.9)
(41.1)
(30.5)
(1,439.3)
(323.4)
(1,353.8)
(2,664.9)
Other non-cash
movements
£m
–
(149.6)
(32.0)
(28.2)
139.7
32.0
(5.9)
(44.0)
Net borrowings
at 31 March 2018
£m
585.3
(149.6)
(32.0)
(28.2)
(1,408.8)
(291.4)
(1,476.8)
(2,801.5)
Other non-cash
movements
£m
–
(74.9)
4.3
28.9
(41.7)
Net borrowings
at 31 March 2017
£m
372.5
(74.9)
(282.9)
(848.2)
(833.5)
Other non-cash
movements
£m
–
(99.7)
–
136.5
36.8
Net borrowings
at 31 March 2018
£m
303.3
(149.6)
(283.6)
(711.7)
(841.6)
The increase in the value of Financial liabilities at fair value through profit in the year of £0.4m for the Group and £0.7m for the Company is attributable
to Other non-cash movements.
162
PENNON GROUP PLC ANNUAL REPORT 2018 40. Subsidiary, joint venture and associate undertakings at 31 March 2018
Principal subsidiary companies
Water
South West Water Limited*
South West Water Finance Plc
Source Contact Management Limited
Waste management
Viridor Limited*
Viridor Waste Limited
Viridor Waste Exeter Limited
Viridor Waste Suffolk Limited
Viridor Waste (West Sussex) Limited
Viridor Waste Management Limited
Viridor EnviroScot Limited
Viridor Resource Management Limited
Viridor Waste Kent Limited
Viridor Oxfordshire Limited
Viridor EfW (Runcorn) Limited
Viridor Waste (Landfill Restoration) Limited
Viridor Waste (Somerset) Limited
Viridor Waste (Thames) Limited
Viridor Waste (Greater Manchester) Limited
Viridor Polymer Recycling Limited
Viridor Trident Park Limited
Viridor (Glasgow) Limited
Viridor (Lancashire) Limited
Viridor Peterborough Limited
Viridor South London Limited
Viridor Clyde Valley Limited
Non-household retail
Pennon Water Services Limited(1)
Other
Peninsula Insurance Limited*(2)
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
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
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Country of
incorporation,
registration and
principal operations
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
England
Level 5, Mill Court, La Charroterie, St Peter Port, GY1 1EJ
Guernsey
(1) 80% of share capital owned by Pennon Group plc. All shares in issue are ordinary shares.
(2) Captive insurance company established with the specific objective of financing risks emanating from within the Group.
163
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
Notes to the
financial statements
continued
40. Subsidiary, joint venture and associate undertakings at 31 March 2018 continued
Registered office address
Other trading companies
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Dragon Waste Limited (81%)
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula Leasing Limited*
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula Properties (Exeter) Limited
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula Trustees Limited*
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Pennon Defined Contribution Pension Trustee Limited*
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Pennon Pension Trustees Limited*
Albert House, South Esplanade, St Peter Port, GY1 1AW
Pennon Share Plans (Guernsey) Limited*
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Pennon Share Schemes Trustees Limited*
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Pennon Trustee Limited*
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Raikes Lane Limited
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Source Collections Limited
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Source for Business Limited*
SSWB Limited
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Viridor Waste (Somerset) Pension Scheme & Life Assurance Limited 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
Cambridge Water Business Limited
Centre for Environmental Research Limited
City Reclamation Services Limited
Corby Skip Hire Limited
DMP (Holdings) Limited*
ELE Datasystems
Exe Continental
Greater Manchester Sites Limited
Greenhill Environmental Limited*
Handside Limited
Haul Waste Limited*
Hodgejoy Recycling Limited
Industrial Waste Disposals (Sheffield) Limited
Lavelle & Sons Limited
Mac-Glass Recycling Limited
Oakley Recycling Limited
Oakley Skip Hire Limited
Parkwood Environmental Limited
Parkwood Group Limited
Parkwood Recycling Limited
Pearsons Group Holdings Limited
Peninsula
Peninsula MB Limited* (in liquidation)
Peninsula 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
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
164
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
England
England
England
England
England
England
Scotland
England
England
England
England
England
England
England
England
England
PENNON GROUP PLC ANNUAL REPORT 2018 40. Subsidiary, joint venture and associate undertakings at 31 March 2018 continued
Other dormant companies
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
South Staffordshire Water Business 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
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
* Indicates the shares are held directly by Pennon Group plc, the Company.
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
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 7HT
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
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
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
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
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.
165
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Notes to the
financial statements
continued
40. Subsidiary, joint venture and associate undertakings at 31 March 2018 continued
Joint ventures and associate
All joint ventures, the associate and the subsidiary undertakings of Lakeside Energy from Waste Holdings Limited, INEOS Runcorn (TPS) Holdings
Limited and Shelford Composting Limited are incorporated and registered in England which is also their country of operation. The registered office
of Lakeside Energy from Waste Holdings Limited and Lakeside Energy from Waste Limited is Thames House, Oxford Road, Wallingford OX10 6LX.
The registered office of Shelford Composting Limited is 900 Pavilion Drive, Northampton NN4 7RG.
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
Shelford Composting Limited
Associate
INEOS Runcorn (TPS) Holdings Limited
INEOS Runcorn (TPS) Limited
Share capital in issue
Percentage held
Principal activity
1,000,000 A ordinary shares
1,000,000 B ordinary shares
50 A ordinary shares
50 B ordinary shares
1,000 A ordinary shares
186,750 B1 ordinary shares
62,250 B2 ordinary shares
–
100%
–
100%
20%
50%
–
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
2018
£m
10.8
29.1
123.0
162.9
2017
£m
10.6
28.2
104.5
143.3
Company
2018
£m
–
–
–
–
2017
£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 33 years and rentals are reviewed on average at five-yearly intervals.
The Group also leases plant and machinery under non-cancellable operating lease agreements.
42. Contingencies
Contingent liabilities
Guarantees:
Borrowing facilities of subsidiary undertakings
Performance bonds
Group
Company
2018
£m
–
185.1
185.1
2017
£m
–
187.5
187.5
2018
£m
549.6
185.1
734.7
2017
£m
555.9
187.5
743.4
Guarantees in respect of performance bonds are entered into in the normal course of business. No liability is expected to arise in respect of the guarantees.
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 2018 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 include a potential prosecution by the Health and Safety Executive.
166
PENNON GROUP PLC ANNUAL REPORT 2018 42. Contingencies continued
Contingent assets
In addition to contractual receivables related to our construction contracts in respect of Glasgow Recycling and Renewable Energy Centre that are
reflected in the financial statements, there are further possible recoveries that are contingent on events in the future that are not wholly within the
Group’s control. These contingent assets have not been recognised as at 31 March 2018.
43. Capital commitments
Contracted but not provided
Group
2018
£m
287.7
2017
£m
401.1
Company
2018
£m
–
2017
£m
–
44. Acquisition
On 1 April 2017 Pennon Water Services Limited, a wholly owned subsidiary of Pennon Group plc (Pennon) at the start of the year, acquired 100% of
the issued share capital of SSWB Limited, including its two dormant subsidiary companies, South Staffordshire Water Business (SSWB) Limited and
Cambridge Water Business Limited, for a total consideration of £8.4 million.
The acquisition was part of the formation of a non-household retail venture with South Staffordshire plc (SS), incorporating South Staffs and Cambridge
Water, to participate in the non-household retail market which commenced 1 April 2017.
On the same date Pennon Water Services also purchased assets, primarily trade receivables from South West Water Limited, a fellow subsidiary
of Pennon, for a total consideration of £33.6 million.
The acquisition of SSWB Limited has been accounted for using the acquisition method. No goodwill has arisen as the book value of the net assets
of SSWB Limited at the point of acquisition equated to their fair value.
The consideration was financed by the issuance to SS of new equity share capital in Pennon Water Services of £1.7 million and the issuance of a loan from
SS to Pennon Water Services of £6.7 million. Initial placements of equity and debt were made on 1 April 2017 for £0.7 million and £6.3 million respectively
with final placements of £1.0 million and £0.4 million on 29 March 2018 upon final agreement of asset values within SSWB Limited.
As a result of these transactions Pennon now holds a majority 80% equity share in Pennon Water Services, with SS holding the remaining 20%
non-controlling interest.
Directly attributable costs included in other operating expenses were £0.4 million.
Fair values on acquisition of SSWB Limited
Intangible assets
Trade and other receivables
Total consideration
Satisfied by cash payment, which was financed by:
Issuance of equity share capital in Pennon Water Services
Issuance of loan from SS to Pennon Water Services
£m
1.7
6.7
£m
0.5
7.9
8.4
8.4
The fair value of trade and other receivables in SSWB Limited on acquisition was £7.9 million. This included gross contracted amounts receivable
of £10.9 million, of which £3.0 million were not expected to be collected.
Revenue and costs associated with the assets acquired are all included in the Consolidated Income Statement for the full year ended 31 March 2018.
45. Related party transactions
During the year Group companies entered into the following transactions with joint ventures and associate related parties who are not members of the Group:
Sales of goods and services
Viridor Laing (Greater Manchester) Limited
INEOS Runcorn (TPS) Limited
Purchase of goods and services
Lakeside Energy from Waste Limited
INEOS Runcorn (TPS) Limited
Dividends received
Lakeside Energy from Waste Holdings Limited
2018
£m
38.4
15.9
12.0
6.0
6.5
2017
£m
80.1
15.8
10.4
6.6
4.5
167
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Notes to the
financial statements
continued
45. Related party transactions continued
Year-end balances
Receivables due from related parties
Viridor Laing (Greater Manchester) Limited (loan balance)
Lakeside Energy from Waste Limited (loan balance)
INEOS Runcorn (TPS) Limited (loan balance)
Viridor Laing (Greater Manchester) Limited (trading balance)
Lakeside Energy from Waste Limited (trading balance)
INEOS Runcorn (TPS) Limited (trading balance)
Payables due to related parties
Lakeside Energy for Waste Limited (trading balance)
INEOS Runcorn (TPS) Limited (trading balance)
2018
£m
–
8.2
32.5
40.7
–
1.0
2.0
3.0
1.2
2.5
3.7
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 £40.8 million (2017 £86.6 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% (2017 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
2018
£m
12.2
1.5
39.9
0.1
202.3
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.
Year-end balances
Receivables due from subsidiary undertakings
Loans
Trading balances
2018
£m
870.8
16.2
2017
£m
1,124.3
13.4
Interest on £425.3 million of the loans has been charged at a fixed rate of 5.0%, and on £20.3 million at a fixed rate of 6.0% (2017 £70.0 million at 4.5%, £428.0 million
nil at 5.0% and £28.0 million at 6.0%). Interest on £411.8 million of the loans is charged at 12 month LIBOR +1.0% (2017 £497.8 million) and on £13.4 million at
12 month LIBOR +3.0% (2017 nil). These loans are due for repayment in instalments over the period 2018 to 2056.
Loans of £100.0 million at 1 month LIBOR + 1.0% and £0.5 million at base rate +1.0% were repaid during the year.
During the year there were no provisions (2017 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.
2018
£m
283.6
14.4
2017
£m
322.0
9.5
168
PENNON GROUP PLC ANNUAL REPORT 2018 Five-year
financial summary
Income statement
Revenue before non-underlying items
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
Profit for the year
Attributable to:
Ordinary shareholders of the parent
Perpetual capital security holders
Non-controlling interests
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)
Proportional adjustment on Perpetual capital returns
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
Non-household retail
Other businesses
2018
£m
1,393.0
323.9
(74.5)
9.4
258.8
4.1
(41.0)
221.9
200.6
21.5
(0.2)
162.0
48.0p
4.4p
(1.8)p
0.3p
50.9p
38.59p
2018
£m
8.4
389.0
5,125.0
412.6
(3,898.5)
1,639.1
1,575
3,285
81
73
5,014
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
169
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Shareholder information
Financial calendar
Financial year end
29th Annual General Meeting
Ex-dividend date for 2018 final dividend
Record date for 2018 final dividend
2018 final dividend payable
2018/19 half-yearly results announcement
2019 interim dividend payable
2018/19 final results announcement
30th Annual General Meeting
2019 final dividend payable
Dividend Reinvestment Plan (DRIP) alternative*
Ordinary shares quoted ex-dividend
Record date for final dividend
Final date for receipt of DRIP applications
Posting of dividend cheques
Final dividend payment date
31 March
5 July 2018
5 July 2018*
6 July 2018*
4 September 2018*
27 November 2018
April 2019
21 May 2019
4 July 2019
September 2019
5 July 2018
6 July 2018
13 August 2018
3 September 2018
4 September 2018
* Subject to obtaining shareholder approval at the 2018 Annual General Meeting to the payment of a final dividend for the year ended 31 March 2018.
Shareholder analysis at 31 March 2018
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
2,429
8,235
7,404
1,129
84
283
19,564
Number of accounts
17,151
128
8
2,277
19,564
% of total shareholders
12.41
42.09
37.84
5.77
0.45
1.44
% of ordinary shares
0.03
1.03
3.89
3.11
1.42
90.51
% of total accounts
87.66
0.66
0.04
11.64
% of total shares
6.42
0.31
0.01
93.25
Major shareholdings
The net position on 31 March 2018 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
BlackRock, Inc.
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)
41,575,771
25,599,217
21,700,561
20,328,154
20,106,888
19,366,782
18,088,394
17,212,959
16,610,004
% of voting rights
9.91%
6.10%
5.17%
4.84%
4.79%
4.61%
4.31%
4.10%
3.96%
No changes to interests in the Company’s issued share capital have been disclosed to the Company between 31 March 2018 and 23 May 2018
(being a date not more than one month prior to the date of the Company’s Notice of Annual General Meeting).
170
PENNON GROUP PLC ANNUAL REPORT 2018 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, Link Asset Services, who can be
contacted as follows:
Link 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@linkgroup.co.uk
Website: signalshares.com
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, Link 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).
Dividend Reinvestment Plan (DRIP)
Subject to obtaining shareholder approval at the 2018 Annual General
Meeting for the payment of a final dividend for the year ended 31 March
2018, full details of the DRIP and how to participate will be published
on the Company’s website at www.pennon-group.co.uk/dividends/
dividend-reinvestment-plan-drip. The full timetable for offering the
DRIP is given on page 170.
The DRIP 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 at preferable dealing rates.
Online portfolio service
The online portfolio service provided by Link Asset Services gives
shareholders access to more information on their investments. Details
of the portfolio service are available online at www.signalshares.com.
Electronic communications
The Company has passed a resolution which allows it to communicate
with its shareholders by means of its website.
Shareholders currently receiving a printed copy of the annual report
who now wish to sign up to receive all future shareholder communications
electronically can do so by registering with Link 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.
171
PENNON GROUP PLC ANNUAL REPORT 2018STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Shareholder information
continued
Beware of share fraud
The following is taken from the ScamSmart section of the Financial
Conduct Authority’s website (www.fca.org.uk/scamsmart).
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.fca.org.uk/scamsmart. 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.
172
PENNON GROUP PLC ANNUAL REPORT 2018
This report is printed on material derived from sustainable sources, and printed
using vegetable based inks. Both the manufacturing paper mill and printer
are registered to the Environmental Management System ISO 14001 and are
Forest Stewardship Council® (FSC®) chain-of-custody certified. CPI Colour is
also a Carbon Neutral Printing Company and reduces its CO2 emissions to net
zero in accordance with The CarbonNeutral Protocol. This carbon offsetting
supports the Uchindile Mapanda reforestation programme in Tanzania, an
environmental project to establish commercial forests at two locations in Africa.
This report is recyclable and bio-degradable. If you have finished with
this document and no longer wish to retain it, please pass it on to other
interested readers or dispose of it in your recycled paper waste. Thank you.
Designed and produced by MerchantCantos
www.merchantcantos.com
Pennon Group plc
Peninsula House
Rydon Lane
Exeter
Devon
England EX2 7HR
www.pennon-group.co.uk
Registered in England & Wales
Registered Number: 2366640
P
e
n
n
o
n
A
n
n
u
a
l
R
e
p
o
r
t
&
A
c
c
o
u
n
t
s
2
0
1
8
Continue reading text version or see original annual report in PDF
format above