Plain-text annual report
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Bringing resources to life
Annual Report & Accounts 2019
As the UK’s leading water
and waste infrastructure
business, Pennon is focused
on responsible, sustainable
growth. Our dedicated
colleagues deliver essential
services for our customers and
communities across the UK.
Find out more about Pennon
Corporate website
www.pennon-group.co.uk
Annual report
www.pennon-group.co.uk/annualreport2019
Integrated reporting
Our business touches the lives of many
stakeholders, from customers, employees,
investors and suppliers, to our communities
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 the
integrated report, we have referred to the
principles of the International Integrated
Reporting Council’s Framework.
STR ATEG IC REPORT
OV E RV I EW
02
Resource efficiency & natural
capital stewardship
04 Our business at a glance
Business model
06
Strategic priorities
08
Sustainability at our core
10
Group highlights
12
14
Chairman’s statement
18 Market and regulatory overview
20 Our stakeholders
STRATEGI C REP ORT
G RO UP PERFOR MANCE
24
26
30
32
36
50
58
70
Healthy places & habitats
Chief Executive Officer’s review
Key performance indicators
People
Our operations
36 Waste management
42 Water and wastewater
49 Water retail services
Report of the Chief Financial Officer
Risk report including viability statement
Customer ownership
G OVERNAN CE
72
Good governance enabling
investment, innovation &
sustainable growth
Index to the Governance section
73
FI NA NCIAL STATEMENTS
110 Environmental leadership
111
Index to the financial statements
Our vision is bringing resources to life
Our values
Strategic priorities
Our core businesses
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
1
2
Leadership
in UK water
and waste
infrastructure
Leadership
in cost base
efficiency
3 Driving
sustainable
growth
Find out more on pages 8 and 9
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
Find out more starting on page 36
Water and wastewater
Find out more starting on page 42
Water retail services
Find out more on page 49
Pennon Group plc Annual Report 2019
01
Our investment in an energy recovery facility and a
plastics recycling facility at Avonmouth epitomises UK
resource and energy efficiency goals. These new plants
are an example of our responsible approach to natural
capital stewardship, providing solutions to society’s
concerns about the environmental impact of plastics.
Viable alternatives to virgin plastic
Comprising a £252 million energy
recovery facility and a £65 million
plastics recycling facility, our
energy park at Avonmouth will use
non-recyclable waste to power a
circular economy solution for a range
of plastics, including a new process
focusing on pots, tubs and trays
– which a growing number of local
authorities are seeking to include
in kerbside collections.
As manufacturers and retailers work
to achieve sustainability targets by
increasing recycled content in their
packaging, this innovative new facility
will put used plastic back into the
economy as a viable and sustainable
alternative to virgin plastic.
South West Water continues to
work with partners on innovative
alternatives to plastic biobeads,
used at a small number of wastewater
treatment works.
Sustainability focus area
See sustainability strategy
on page 11
02
Pennon Group plc Annual Report 2019
STRATEGIC REPORT – OVERVIEW
04 Our business at a glance
06 Business model
08 Strategic priorities
10 Sustainability at our core
12 Group highlights
14 Chairman’s statement
18 Market and regulatory overview
20 Our stakeholders
Resource
efficiency &
natural capital
stewardship
Pennon Group plc Annual Report 2019
03
STR AT EG IC REPORT – OVERVIEW
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.
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 an holistic approach
to water and wastewater management are delivering service
improvements and long-term value.
Find out more starting on page 42
1
Raw water reservoirs
/water resources
2
Upstream catchment
3
Water treatment works
6
Surface water catchment
7
Wastewater mains network
8
Wastewater treatment works
9
Sewage sludge/bio-resources
4
Drinking water mains network
5
Customer support
10
Improved bathing and
shellfish water quality
Waste management
Our purpose is to bring resources to life. We remain at the forefront
of the resource sector in the UK, transforming waste into energy,
high-quality recyclates and raw materials.
Find out more starting on page 36
11
12
13
14
15
Landfill sites and
power generation
Energy parks
Powering homes
and businesses
Plastics recycling facilities
(PRFs)
Energy recovery
facilities (ERFs)
16
17
18
A fleet of waste
collection vehicles
Materials recycling
facilities (MRFs)
Household waste
recycling centres
19 Trading recycled materials
Water retail services
Business water specialists providing water retail services
for all business customers’ water management needs.
Find out more on page 49
20
UK-based customer service centre
04
Pennon Group plc Annual Report 2019
2
1
7
8
9
3
11
12
13
4
1313
16
5
20
6
19
14
15
17
18
10
Pennon Group plc Annual Report 2019
05
STR AT EG IC REPORT – OVERVIEW
Business
model
Through our business model, we fulfil our objective to
deliver sustainable shareholder value by providing high-
quality environmental infrastructure and customer service.
Our strategy is to lead in the UK’s water and waste
sectors, drive value through efficiency and invest for
sustainable growth.
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.
See pages 36 to 41 for further information
Water and wastewater
We provide water and wastewater
services in the most efficient and
sustainable way possible.
See pages 42 to 48 for further information
Water retail services
We provide water retail services
for all business customers’ water
management needs.
See page 49 for further information
Underpinned by our values
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.
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.
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.
Trusted
We do the right thing for our
customers and stakeholders
Collaborative
We forge strong relationships, working
together to make a positive impact
06
Pennon Group plc Annual Report 2019
...delivering our strategy
...to create value
Our long-term priorities
Value created for our stakeholders
1
2
3
Leadership in UK water and waste
infrastructure
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.
See pages 8, 26 and 27 for further information
Leadership in cost base efficiency
We are focused on driving down overheads
and operating in the most efficient way
to minimise costs.
See pages 8 and 53 for further information
Driving sustainable growth
We actively seek opportunities to invest
for growth, whether through investment
to increase our asset portfolio, initiatives
to expand our customer base, or partnerships
with other organisations.
See pages 8, 27 and 28 for further information
Customers
88pts
best ever customer
service score for
South West Water(1)
Community
98.7%
149 bathing waters out
of 151 classified as
‘sufficient’ or better(3)
Investors
+13.6%
earnings per share
increased to 57.8p(2)
Environment
4.9m
tonnes of waste
materials recycled
or recovered
People
19,221
formal training days
(1) As measured by the service
incentive mechanism (SIM).
See page 44 for details.
(2) Before non-underlying items
and deferred tax. See note 6
for more details.
(3) 118 beaches (78.1%) classified
as ‘excellent’.
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
Pennon Group plc Annual Report 2019
07
STR AT EG IC REPORT – OVERVIEW
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 2018/19
1Leadership in UK
water and waste
infrastructure
base efficiency
2Leadership in cost
3Driving
sustainable
growth
Linked to remuneration targets,
see pages 93 and 96
08
Pennon Group plc Annual Report 2019
• Develop and fully maximise value from our
infrastructure business
• Improve our environmental performance
• Strengthen employee engagement and trust
across the Group
• Mitigate the risk arising from local authority
austerity and global challenges in recycling
• Build on the strong track record of our water
and wastewater business by delivering and
outperforming the K6 (2015-20) plan and
successfully delivering the K7 (2020-25) plan
• Continue to develop a new model for proactive
customer service that puts our customers at
the heart of everything we do.
• Ongoing initiatives to reduce Viridor’s cost base
by sharing best practice and delivering synergies
• Continue to drive working efficiencies across
the Group and realise value from the
Shared Services Programme
• Continue to target totex outperformance
in South West Water.
• High levels of performance and availability
maintained by the ERF portfolio, which delivered
£155 million EBITDA in 2018/19
• Government Resources and Waste Strategy
aligned with our strategic priorities for recycling
• Outperformance by South West Water continued
in 2018/19
• Winner of a customer service award at the UK
Customer Satisfaction Awards 2019, run by the
Institute of Customer Service
• Highest ever customer service score of 88 points
achieved in both South West Water and
Bournemouth Water regions
• Reduction in serious wastewater pollution
incidents, however a small rise in less serious
incidents.
• c. £17 million p.a. of Group-wide efficiencies
secured in 2019, meeting our cumulative target
• Continuing to deliver cost-efficient, long-term
financing – 3.6% effective interest rate on annual
net debt – among the lowest in the sector
• 17% reduction in real terms in Viridor indirect
costs since 2016/17
• South West Water continues to deliver sector
leading totex outperformance, with £237 million
cumulative efficiencies to date over the 2015-20
regulatory period
• Efficiencies from the Bournemouth Water
integration, including delivery of key capital
schemes in the region, with the c.£27 million
of net synergies required by 2020 secured.
• Identify and consider opportunities for further
growth, including initiatives to expand our customer
base or form partnerships with other organisations
• Sustainable dividend – increase in total dividend for
the year of 6.4% reflecting strong performance of
Pennon’s water and waste management businesses
• Drive future growth opportunities for Viridor by
developing options for new ERFs, energy parks
and plastics recycling
• Build on the success of K6 by delivering K7
‘New Deal’ plan 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.
• Three ERFs in operational ramp up and one
under construction (current portfolio)
• Committed to £65 million investment in new
plastics recycling facility underpinned by
long-term contracts
• Increased stake in Runcorn I ERF joint venture
• Committed to investment in contract-backed
refurbishment of materials recycling facility in Suffolk
• Developing options for three new ERFs (in addition
to current portfolio) and a further two new plastics
recycling facilities
• Identified further opportunities through energy
parks linked to our ERF and landfill portfolio
• Well positioned for regulatory and market
developments and awarded fast-track status
for K7 (2020-25) business plan
• Completion and commissioning of the innovative
Mayflower water treatment works in Plymouth
• Preparation for the Isles of Scilly transfer
well advanced.
91%
average ERF availability(1)
93%
customer satisfaction
with overall service(2)
• Health, safety and wellbeing – investing in and
protecting our people to ensure we have a skilled,
diverse, engaged and motivated workforce to deliver
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:
our strategy
• Environmental leadership – integral to our
water business’s regulatory contract and the
promotion of the circular economy by our waste
management business
• Natural capital stewardship – delivering solutions
for society is core to our strategy and helps to
address the challenge of depleting natural resources.
• An avoidable health & safety incident
• Legal, regulatory or tax non-compliance
• Poor customer service
• Business interruption (for example, as a result of
a failure of our IT systems) or operational failure
• Failure or increased cost of a capital project
• Loss or corruption of data as a result of
a cyber attack.
(1) Weighted by capacity, excludes Bolton (reverting to
Greater Manchester Local Authority 31 May 2019),
includes joint ventures at 100%.
(2) South West Water score for 2018/19. The customer
satisfaction score for Bournemouth Water was 96%.
£280m^
underlying profit before
tax including the benefit of cost
efficiencies across the Group
Measures with this symbol ^ are defined
in the alternative performance measures
section on pages 174 to 176.
• Community investment and benefit – minimising
disruption and inconvenience for communities
means we also minimise the cost to the business
• Resource and 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 supply chain – 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, retain and develop people
with the appropriate skills.
Group assets as at 31 March (£bn)
• Quality services and satisfied customers –
increased focus to improve the customer experience
and help expand our customer base, while retaining
existing customers
Our ability to deliver sustainable growth could
be impacted by:
• Unfavourable economic conditions
• Good governance and high standards of
business conduct – ensure our people are
incentivised appropriately and exhibit the right
behaviours to enable us to achieve long-term,
sustainable growth.
• 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.
1Leadership in UK
water and waste
infrastructure
2Leadership in cost
base efficiency
3Driving
sustainable
growth
• Develop and fully maximise value from our
infrastructure business
• Improve our environmental performance
• Strengthen employee engagement and trust
across the Group
• Mitigate the risk arising from local authority
austerity and global challenges in recycling
• Build on the strong track record of our water
and wastewater business by delivering and
outperforming the K6 (2015-20) plan and
successfully delivering the K7 (2020-25) plan
• Continue to develop a new model for proactive
customer service that puts our customers at
the heart of everything we do.
• High levels of performance and availability
maintained by the ERF portfolio, which delivered
£155 million EBITDA in 2018/19
• Government Resources and Waste Strategy
aligned with our strategic priorities for recycling
• Outperformance by South West Water continued
in 2018/19
• Winner of a customer service award at the UK
Customer Satisfaction Awards 2019, run by the
Institute of Customer Service
• Highest ever customer service score of 88 points
achieved in both South West Water and
Bournemouth Water regions
• Reduction in serious wastewater pollution
incidents, however a small rise in less serious
incidents.
• Ongoing initiatives to reduce Viridor’s cost base
by sharing best practice and delivering synergies
• c. £17 million p.a. of Group-wide efficiencies
secured in 2019, meeting our cumulative target
• Continue to drive working efficiencies across
the Group and realise value from the
Shared Services Programme
• Continuing to deliver cost-efficient, long-term
financing – 3.6% effective interest rate on annual
net debt – among the lowest in the sector
• Continue to target totex outperformance
• 17% reduction in real terms in Viridor indirect
in South West Water.
costs since 2016/17
• Identify and consider opportunities for further
growth, including initiatives to expand our customer
base or form partnerships with other organisations
• Sustainable dividend – increase in total dividend for
the year of 6.4% reflecting strong performance of
Pennon’s water and waste management businesses
• Drive future growth opportunities for Viridor by
developing options for new ERFs, energy parks
and plastics recycling
• Build on the success of K6 by delivering K7
‘New Deal’ plan 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.
• South West Water continues to deliver sector
leading totex outperformance, with £237 million
cumulative efficiencies to date over the 2015-20
regulatory period
• Efficiencies from the Bournemouth Water
integration, including delivery of key capital
schemes in the region, with the c.£27 million
of net synergies required by 2020 secured.
• Three ERFs in operational ramp up and one
under construction (current portfolio)
• Committed to £65 million investment in new
plastics recycling facility underpinned by
long-term contracts
• Increased stake in Runcorn I ERF joint venture
• Committed to investment in contract-backed
refurbishment of materials recycling facility in Suffolk
• Developing options for three new ERFs (in addition
to current portfolio) and a further two new plastics
recycling facilities
• Identified further opportunities through energy
parks linked to our ERF and landfill portfolio
• Well positioned for regulatory and market
developments and awarded fast-track status
for K7 (2020-25) business plan
• Completion and commissioning of the innovative
Mayflower water treatment works in Plymouth
• Preparation for the Isles of Scilly transfer
well advanced.
Key performance indicators (KPIs)
Sustainability drivers
Risks and uncertainties
average ERF availability(1)
91%
93%
customer satisfaction
with overall service(2)
(1) Weighted by capacity, excludes Bolton (reverting to
Greater Manchester Local Authority 31 May 2019),
includes joint ventures at 100%.
(2) South West Water score for 2018/19. The customer
satisfaction score for Bournemouth Water was 96%.
£280m^
underlying profit before
tax including the benefit of cost
efficiencies across the Group
Measures with this symbol ^ are defined
in the alternative performance measures
section on pages 174 to 176.
Group assets as at 31 March (£bn)
7
.
2
6
.
5
6
.
7
5
9
5
.
4
5
.
6
5
4
3
2
1
0
2014/15
2015/16
2016/17
2017/18
2018/19
%
8
4
+
.
• Health, safety and wellbeing – investing in and
protecting our people to ensure we have a skilled,
diverse, engaged and motivated workforce to deliver
our strategy
• Environmental leadership – integral to our
water business’s regulatory contract and the
promotion of the circular economy by our waste
management business
• Natural capital stewardship – 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 & safety incident
• Legal, regulatory or tax non-compliance
• Poor customer service
• Business interruption (for example, as a result of
a failure of our IT systems) or operational failure
• Failure or increased cost of a capital project
• Loss or corruption of data as a result of
a cyber attack.
• Community investment and benefit – minimising
disruption and inconvenience for communities
means we also minimise the cost to the business
• Resource and 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 supply chain – 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, retain and develop people
with the appropriate skills.
• Quality services and satisfied customers –
increased focus to improve the customer experience
and help expand our customer base, while retaining
existing customers
• Good governance and high standards of
business conduct – ensure our people are
incentivised appropriately and exhibit the right
behaviours to enable us to achieve long-term,
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.
Pennon Group plc Annual Report 2019
09
STR AT EG IC REPORT – OVERVIEW
Sustainability
at our core
This year, we have structured our report around Pennon’s sustainability
strategy. Pennon’s environmental, social and governance (ESG)
framework is centred around how we positively impact the
communities we serve, from global issues including climate change
and biodiversity, through to local benefits, customer satisfaction and
employee wellbeing. Our strategy, objectives and targets set out how
we will drive improvements and performance in the years ahead.
As we deliver our purpose – bringing
resources to life – we aim to do so in a trusted,
collaborative, responsible and progressive way.
We work in long-term partnerships, seek to
deliver outstanding service to customers and
communities, and support the creation of value
for our shareholders – 65% of whom are UK
investors including pension funds and savings
trusts, charities and employees.
We know that there are obvious benefits to
a clear, strategic and long-term approach to
sustainability. This enhances our business
performance, helps strengthen business
resilience, protects our ongoing licence to
operate via regulatory compliance and is
integral to our risk management processes.
We have conducted a full materiality assessment
and have identified, within our ESG framework,
the nine focus areas most relevant to our
business. In each we have defined our strategic
objectives out to 2030. We have also set
three-year targets and will monitor and report
progress on each objective.
As well as resetting our sights through a
refreshed sustainability strategy, we have been
delivering improvements in our focus areas
throughout 2018/19.
We will report on progress towards our
commitments in the Pennon Plastics
Programme, promote and increase finance
raised through our Sustainable Financing
Framework to support sustainable investment
in the Group’s operations, and showcase good
practice via partnerships and responsible
stewardship to protect and improve
biodiversity on our sites.
Find out more online
at www.pennon-group.co.uk/sustainability
Mapping our contribution
to the UN Sustainability
Development Goals (SDGs)
All 17 of the UN SDGs are important, so
we encourage our customers, suppliers,
employees and other stakeholders to
familiarise themselves with the Global
Goals and see how we can all contribute
towards them.
We have mapped our sustainability focus
areas to the SDGs that are most materially
relevant to us, which enables Pennon to
measure and demonstrate its performance
and contribution to the SDGs. We have also
assessed and aligned our objectives and
targets against the most relevant of the UN
SDGs and will increasingly monitor our
performance using the SDGs and KPIs.
Find out more about our targets online at
www.pennon-group.co.uk/sustainability
Priority programmes 2019/20
We have also chosen three important priority
programmes for the year ahead in order
to accelerate progress in these key areas:
Plastics
Read more on page 02
Biodiversity
Read more on page 24
Sustainable finance
Read more on page 72
10
Pennon Group plc Annual Report 2019
Our sustainability focus areas and objectives
Environmental
leadership
• Leadership in
minimising carbon
emissions and
developing climate
change adaptation
strategies
• Ensure a positive
economic, social and
environmental impact
and continuous
positive action to
prevent pollution,
and ensure regulatory
compliance.
Healthy places
and habitats
• Proactively protect
and enhance
biodiversity in our
operational areas
through quality habitat
creation, good
stewardship and
environmental
partnerships.
Resource efficiency
and natural capital
stewardship
• Leadership in resource
productivity and
stewardship, best
practice in waste
prevention, resource
and water efficiency
• Services and
innovative solutions
for society that help
to protect natural
capital and resources.
Community
investment
and benefit
• Measurable positive
investment and
support for local
business and
communities through
our services, active
sponsorship,
partnership and
donation programmes,
education services
and employee
volunteering scheme.
Health, safety
and wellbeing
• Strive for the highest
standards of health,
safety and wellbeing
in the workplace
• Continuously improve
performance to create
a safe and healthy
working environment
for our employees,
contractors and
visitors.
Skills, diversity
and development
• Achieve a diverse
and productive
workforce reflecting
the communities
in which we work
• Develop, upskill
and empower our
employees. Treat them
fairly and ensure that
they are fully engaged
in all aspects of
Pennon Group’s
objectives and high
standards.
vironment
n
E
S
o
c
i
a
l
Bringing
resources
to life
Governance
Governan c e
Quality services and
satisfied customers
• Aim to exceed expectations
and engage with our
customers, clients
and other stakeholders to
build good relationships
and to continuously
improve our services
• Work with and support our
most vulnerable customers.
Responsible supply chain
• Enable sustainable supply
chain practice and
partnerships including human
rights, equal opportunities,
and positive social and
environmental values.
Good governance enabling
investment, innovation
and sustainable growth
• A sustainable and successful
business with transparency,
respect and integrity for the benefit
of our customers, shareholders,
employees and other stakeholders
• Continue to invest in vital
infrastructure and innovation
for strong performance and
sustainable growth, via our
Sustainable Financing Framework.
Pennon Group plc Annual Report 2019
11
STR AT EG IC REPORT – OVERVIEW
Group highlights
Sustainable finance
Revenue statutory
£1,478m
2017/18: £1,396m (+5.9%)
EBITDA statutory
£521m
2017/18: £513m (+1.6%)
EBITDA underlying^(1)
£546m
2017/18: £510m (+7.2%)
EPS statutory
51.1p
2017/18: 48.0p (+6.5%)
EPS underlying^(1)
57.8p
2017/18: 50.9p (+13.6%)
Dividend
41.06p
2017/18: 38.59p (+6.4%)
Profit before tax statutory
£260m
2017/18: £263m (-1.0%)
Capital investment^
£396m
2017/18: £398m (-0.6%)
Profit before tax underlying^(1)
£280m
2017/18: £259m (+8.3%)
Effective interest rate^
3.6%
2017/18: 3.7% (-0.1pts)
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 security holders
Profit after tax attributable
to shareholders
£m
280
(20)
260
(38)
(8)
214
Highlights of the year
• Robust performance in 2018/19, in
line with management expectations
• EBITDA growth of 19.1% at Viridor
supported by the build out and
performance of our energy recovery
facilities (ERFs)
• Higher revenues and EBITDA at
South West Water reflecting increased
customer demand over the summer
• c.£17 million p.a. Group efficiencies
secured, in line with expectations
• Cash flow from operations reflecting
robust operational performance, while
significant capital investment continues
• Development of our Sustainable
Financing Framework, with £600 million
of £830 million secured linked to the
sustainable nature of the business,
reducing our cost and reflecting our
environmental and social credentials
• Dividend per share up 6.4% to 41.06p
• Cumulative return on regulated equity
(RoRE) at 11.8%.
See pages 50 to 57
for further information
Alternative performance measures (APMs)
Measures with this symbol ^ are defined in the alternative
performance measures section of the annual report on
pages 174 to 176.
(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.
12
Pennon Group plc Annual Report 2019
Sustainable operations
Total low-carbon
energy generation
1,617GWh(3)
Lost time injury
frequency rate (LTIFR)(4)
1.37
2017/18: 1,560GWh (+3.7%)
2017/18: 2.02 (down 32.2%)
Average ERF
availability(2)
91%
2017/18: 92% (-1 pt)
Drinking water quality
South West Water
99.99%
2017: 99.96% (+0.03pts)
Waste recycled and recovered
(tonnes)
4.9m
2017: 4.9m (unchanged)
Drinking water quality
Bournemouth Water
100.00%
2017: 99.98% (+0.02pts)
Total waste material inputs
(tonnes)
Bathing water compliance
(‘sufficient quality’ or higher)
6.8m
98.7%
2017/18: 7.0m (-2.9%)
2017/18: 97.9% (+0.8pts)
Highlights of the year
• LTIFR reduced by 32.2% to 1.37
• Created 256 new graduate and apprenticeship
development opportunities across the Group
• Construction at Avonmouth ERF well advanced
• Plans well progressed for an orderly
transition at the end of the Greater
Manchester contract, with anticipated
non-material financial impact
• Commitment to recycling resulting
in £65 million plastics recycling facility
and refurbished materials recycling facility
supported by 10-year local authority contract
• Operational ramp up for Glasgow, Dunbar
and Beddington ERFs progressing well
• Continued strong performance from
ERFs with availability again >90%(2)
on operational assets
• ‘New Deal’ business plan for K7 (2020-25)
awarded fast-track status, the only water
company to achieve this for two successive
price reviews
• WaterShare delivering c.£110 million of
outperformance for sharing with customers.
See pages 32 to 49
for further information
(2) Weighted by capacity, excludes Bolton (reverting to
Greater Manchester Local Authority 31 May 2019),
includes joint ventures at 100%.
(3) Gigawatt hours, being an amount of energy equivalent to
delivering 1 billion watts of power for a period of one hour.
(4) LTIFR for employees and agency staff per 200,000
hours worked.
Pennon Group plc Annual Report 2019
13
I am pleased to report once again that the Group
achieved a strong overall performance during
the year.
We achieved a sector-leading return on
regulated equity at South West Water and our
2020-25 business plan received a fast-track
green light from Ofwat, the water industry
regulator, making South West Water the only
company to have achieved fast-track status for
two consecutive price reviews. We are proud
of the energy and commitment that went into
producing our innovative plan and we were
encouraged that the regulator regarded it in
such a positive light.
At Viridor, progress continued in bringing energy
recovery facilities (ERFs) on stream, with three in
operational ramp up and the latest facility under
construction. These facilities are the culmination
of an ambitious £1.5 billion ERF investment, which
began in 2010, to build 11 plants across the UK.
This reflects an enormous amount of effort by
the Viridor team and they should be proud of
an impressive achievement.
Transparent stakeholder engagement
We welcome the changes to the UK Corporate
Governance Code requiring companies to better
understand the views of key stakeholders and
report how their interests have been considered
and taken into account. This move to increased
transparency fully aligns with our values and we
continue to develop strong relationships with our
full range of stakeholders. We have a particularly
close dialogue with our regulators, as well as
excellent communications with government,
investors, customers and employees. We engage
with our stakeholders to understand their needs
and priorities, which in turn shape our strategy
and purpose. Further details on how we have
taken steps to embrace this new development
of the Corporate Governance Code will be
presented in our 2020 annual report.
Sustainability is at the heart
of what we do
Sustainability has always been at the heart
of what we do and I am pleased to report that
the Board has given its wholehearted support
to a new long-term sustainability strategy.
The strategy is backed up by initial three-year
objectives, targets and action plans and ties
together the knowledge of environment, social
and governance (ESG) requirements that
exist across the Group. We continue to invest
and focus management efforts on further
improvements to environmental performance
STR AT EG IC REPORT – OVERVIEW
Chairman’s
statement
Sustainability has always been at the
heart of what we do. The Board has
given its wholehearted support to
Pennon’s new long-term sustainability
strategy, shaped by the needs and
priorities of our stakeholders.
Sir John Parker
Chairman
14
Pennon Group plc Annual Report 2019
at South West Water. 2018/19 saw the lowest
number of serious and significant (Category 1
and 2) pollution incidents for 10 years. We expect
our substantial investments and measures
to ensure further reductions across all
wastewater pollution categories to meet
our ambitious targets.
In addition to the HomeSafe and People
strategies, our pioneering Sustainable Finance
Framework, which we began to implement
during the year, complements our refreshed
sustainability strategy. This framework formally
recognises our commitment to investments
which bring significant environmental and
social benefits across a range of areas. It allows
Pennon to access future funding opportunities
in a manner that is aligned with Green Loan
Principles, Green Bond Principles and Social
Bond Principles.
Giving customers a stake and a say
We work hard to build strong relationships
with our customers and to deliver excellent
services to those served by Viridor, South West
Water, Bournemouth Water and Pennon Water
Services. The 2020-25 business plan that we
submitted to Ofwat was all about empowering
customers and offering a New Deal. A striking
feature of this New Deal is an innovation called
WaterShare+, which builds on our established
WaterShare financial mechanism for sharing
outperformance with our customers. Through
WaterShare+, we will go even further, offering
eligible South West Water customers a
shareholding in Pennon Group in 2020, along
with a greater say in how South West Water is
run through a separate customer annual general
meeting. I wholeheartedly support this bold and
imaginative initiative.
See pages 70 and 71 for more details
Strong governance
Our governance structure has matured and is
performing well as we continue to refine Board
processes. We have a transparent corporate
structure and our Board is focused on providing
strong financial control, sound administration and
good governance. I am particularly pleased with
the professional debates we have in both the
Group Board and our South West Water board.
All our Independent Non-Executive Directors
have clear line of sight into South West Water,
Viridor and Pennon Water Services.
See the Governance sections starting on
page 74 for more details
Experienced Board
It is fundamentally important to ensure our
Board has a broad skill set and deep experience.
In September 2018, we announced the
appointment of Iain Evans to the Board as
an Independent Non-Executive Director.
Iain has 40 years’ global experience in advising
companies and governments on issues of
complex corporate strategy. In 1983 he
co-founded LEK Consulting in London and
built it into one of the world’s most respected
corporate strategy consulting firms. He was
appointed as a non-executive director of Welsh
Water plc in 1989 and served on the board for
nearly 10 years, including five years as chairman.
As announced in last year’s annual report, after
nine years on the Board, Martin Angle stood
down in December 2018. On behalf of the Board,
I would like to thank him for his hard work and
commitment to Pennon over the past nine years.
We are pleased to have recruited Claire Ighodaro
to our Board. Claire’s extensive background
in finance and across both regulated and
non-regulated industries will be a great asset
to the Group and will complement the broad
range of skills of the current Board. Claire will
join us in September.
Board members regularly
visit operational sites
and take the opportunity
to meet employees, learn
more about the processes
and see a facility in action.
Bringing resources to life
Since developing our new vision and
values, with extensive involvement
from employees across the Group,
we have moved our focus to truly
embedding these.
Our single vision – bringing resources
to life – and our four values, have
been communicated in a variety
of ways: through our quarterly
leadership forums, regular features
in our staff magazine, our Big Chats
(dial-in for all employees to engage
with the Pennon Executive) and
Town Hall sessions hosted by
each business.
We have also developed the
behaviours to support our values,
with our senior leaders demonstrating
these behaviours in all that they do,
making sure they are setting the
tone for the business, both internally
and externally.
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
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
Pennon Group plc Annual Report 2019
15
Balancing returns and investment
The Group’s dividend of 41.06 pence per
share is an increase of 6.4% and continues
our 10-year, sector-leading dividend policy to
2020 of retail price index plus 4% year-on-year
growth. This has been achieved while investing
more than £3.2 billion in our businesses over
the 10-year period to date. The dividend
growth is increasingly supported by growth
in Viridor’s earnings. In addition, we continue
to share our success with customers through
South West Water’s innovative WaterShare
mechanism with £110 million of total cumulative
benefits identified since 2015 to be shared
through future bill reductions, service
improvements, reinvestment or our 2020-25
WaterShare+ scheme.
We engage with
our stakeholders to
understand their needs
and priorities, which
in turn shape our
strategy and purpose.
STR AT EG IC REPORT – OVERVIEW
Chairman’s statement
continued
Ambitious health & safety road map
The Group set an ambitious road map for
our HomeSafe initiative. Designed to deliver
the highest standards of health & safety
performance, HomeSafe enjoys high visibility
across our operations. We have been pleased
to see that the investment we are making has
resulted in such strong engagement from our
people. We are determined to sustain the
momentum and, in September, the Board
approved a longer-term HomeSafe strategy
with ambitious targets and independent
benchmarking which I believe will help us
achieve our goal to be the health & safety leader
in the UK water and waste industries by 2025.
Promoting diversity
The Board promotes equality and diversity in the
workplace. We remain committed to the search
for Board candidates being conducted (and
appointments being made) on merit, and with
consideration given to the benefits of gender
and ethnic diversity.
The latest Hampton-Alexander Review: FTSE
Women Leaders (November 2018) listed Pennon
at number 85 in its FTSE 250 rankings for women
on boards and in leadership with a score of 28.6%.
This was lower than the previous year as a result
of a brief period at the end of 2018 during which
Iain Evans in his new role overlapped with Martin
Angle. This has now increased to 33% and will
increase to 43% in September with the
appointment of our new Non-Executive Director,
Claire Ighodaro.
Both Chris Loughlin and I continue to be
enthusiastic members of the 30% Club, a forum
with a goal of achieving a minimum of 30% women
on FTSE 350 boards by 2020.
Developing and retaining talent
More than a year ago we announced our new
vision – bringing resources to life – with its
strong supporting values of trusted, collaborative,
responsible and progressive. Good work was
done during the year in embedding these values
across the Group.
Great people make great organisations and
developing and retaining talent is integral to
the Group’s future success. Overcoming
competition for top talent in the marketplace
is a priority for the Group, so we enlarged our
graduate recruitment programme during the
year. Alongside our management trainee
scheme at Viridor, we will extend the progress
of our graduate recruitment across the Group
in 2019 supporting our pool of internal talent.
The Government’s apprenticeship reforms and
apprenticeship levy, introduced in 2017, are also
helping us to prioritise development programmes
for employees. We are particularly proud of our
apprenticeship scheme and started 226
apprentices through this route in 2018/19.
16
Pennon Group plc Annual Report 2019
Outlook: Delivering for all
our stakeholders
As we look ahead, Pennon is well placed for the
future as it draws on its many strengths. We are
poised to reap the benefits of our significant
investment in waste to energy, as the next four
ERF plants come on stream. In recycling, we were
pleased to see the Government’s Resources and
Waste Strategy was aligned to Viridor’s strategy
and our confidence in that market is reflected
in the £65 million investment in a new plastics
recycling facility at Avonmouth near Bristol,
which will be powered by the new ERF.
In the water business, with our fast-track status,
we expect to make a strong start to the next
regulatory period starting in April 2020.
We are making strong progress in our health &
safety strategy as we work towards our goal of
being a health & safety leader in our industries
by 2025.
Our People strategy to attract and retain top
talent is bringing greater diversity and experience
to our Group, which is reflected all the way up to
the Board. We believe our strong culture will give
us a competitive advantage, deliver a high level of
service to our customers and ultimately lead to
outstanding business performance. We continue
to operate in the interests of all our stakeholders,
delivering significant community investment and
benefit. From April 2020, this will include giving
eligible South West Water customers a stake
and a say in our business with WaterShare+
offering customers the chance to receive shares
in Pennon.
Our new Group-level sustainability strategy will
deliver even greater focus on the big strategic
themes of our time from climate change to
plastics and biodiversity. Over the coming years,
we will deliver sustainable growth to the benefit
of all our stakeholders as we pursue our vision
and live our values.
We remain committed to transparency,
independent governance and sharing financial
outperformance with our customers. As we
pursue our vision and live our core values, I am
confident the Board, the Pennon Executive and
Pennon’s people will deliver the broadest range
of benefits to all our stakeholders.
Sir John Parker
Chairman
Community
investment
& benefit
Part of the communities we serve
We are part of the communities we serve,
seeking opportunities to contribute and
deliver tangible community investment and
benefit. Our engagement is partnership-based,
working with selected charities and through
Pennon’s volunteering and community
outreach. We work with our partners to protect
and enhance our environment, we want to
make a positive difference to our society.
Our community and education programmes
include 18 learning centres across the country,
where we hosted more than 9,000 visitors
during the year. Through our partnership with
the South West Lakes Trust, our reservoirs
welcome more than two million visitors a year.
We also have an active community and
schools outreach programme. Our BeachCare
partnership with Keep Britain Tidy has
delivered 1,280 beach cleans and removed
174 tonnes of waste since it started in 2010.
In 2018/19, Pennon spent almost £7.4 million
on community sponsorship and charitable
donations including £6.9 million contributions
to Viridor Credits (an independent
not-for-profit organisation that administers
Viridor’s contributions to the Landfill
Communities Fund).
.
Sustainability focus area
See sustainability strategy
on page 11
Pennon Group plc annual report 2019
17
STR AT EG IC REPORT – OVERVIEW
Market and
regulatory
overview
With clear market
opportunities for both our
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.
Water sector
The water industry serves more than
50 million household and business customers
in England and Wales, who are supplied with
drinking water and have their wastewater
taken away and treated. These services are
provided by 16(1) core 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 more than 340,000km long. It manages
567,000km of sewers and 6,000 wastewater
treatment plants.
(Source: Water UK).
Regulatory framework
As a provider of water and waste water services,
we operate within a regulatory framework which
contains a variety of regulators. This regulatory
framework is in place to safeguard the best
interests of customers and the environment.
Defra sets the overall water and sewerage
policy framework in England while other
regulators focus on specific aspects
including water and sewerage policy,
economic, environmental, drinking water
quality and the customers we serve.
Water industry (2018)
Water regulators
10
Water and
wastewater
companies
16
regional operators
in England
and Wales
6
Water only
companies
(1) Hafren Dyfrdwy acquired by Severn Trent in 2016.
Our approach
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, as
appropriate, and the supply chain to identify
and implement best working practice across
all areas of the business.
South West Water has mature and robust
processes to ensure compliance with
regulatory requirements.
We engage with our regulators at all levels
and are committed to ensuring trust and
transparency within these relationships.
18
Pennon Group plc Annual Report 2019
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 via a retail venture with South
Staffordshire plc.
Recycled waste materials
There is an increased public awareness around
the importance of recycling following high profile
documentaries and media campaigns.
Residual waste
Waste that cannot be reused or recycled is
typically recovered and converted to energy
via ERFs or disposed of at landfill sites.
In 2018, the Government launched its 25 Year
Resources and Waste Strategy for England to
minimise waste, promote resource efficiency and
move towards a circular economy in England.
In 2018, UK household and commercial
and industrial waste activities produced
an estimated 54 million tonnes of non-
recyclable waste.
The most recent statistics published by the
UK Government show that UK households
produce 27 million tonnes of waste annually,
with 12.3 million tonnes being recycled; a rate
of 45.7%.
.
27.9 million tonnes was combustible waste,
of which approximately 11.5 million tonnes was
processed by ERFs (11 million tonnes in 2017),
demonstrating a continued capacity gap in
the UK market.
In addition to inert and other residual waste,
10.5 million tonnes of active waste was also
sent to landfill, a slight decrease on 2017
(11 million tonnes).
Market choice
UK household waste
recycled (published March 2019)
UK combustible waste
processed (2018)
1.2m
businesses and other
non-household customers
can choose who they buy
water and wastewater
retail services from
12.3m
tonnes
45.7%
recycling rate
0.4mt
coincineration
12.4mt
Landfill
11.5mt
ERF
27.9m
tonnes
0.4mt
mechanical
biological
treatment
3.2mt
refuse
derived
fuel
Pennon Water Services has focused
on offering high-quality retail customer
service and a broad range of services
that enhance value.
Viridor is a founder signatory of the UK Plastics
Pact, an initiative to create a circular economy
for plastics.
We are upgrading our existing sites, investing
in a new plastics recycling facility and exploring
options to invest in a further two facilities.
We also work closely with our customers to
maximise the quality of recyclate material inputs
and seek to share the pricing risk with them.
Viridor’s programme of investment in ERFs
continues as planned with 11 facilities due to be
operational by 2020/21. We are also exploring
opportunities for a further three ERF facilities.
We continue to maximise gas yields from our
landfills and our external grid connections.
Mothballed sites are reopened as demand
requires and we maintain sites in areas of
landfill scarcity.
Pennon Group plc Annual Report 2019
19
STR AT EG IC REPORT – OVERVIEW
Our stakeholders
Water and waste management
are high profile industries with
a wide stakeholder group.
We are committed to listening,
engaging and reflecting
our stakeholders’ needs and
priorities in our business plans
and operations.
Our engagement approach involves regular dialogue that
is timely and open, building meaningful relationships
based on trust and transparency.
We use a wide range of methods to reach our
stakeholders, ranging from formal independent research,
focus groups and workshops to real-time conversations.
We engage with our stakeholders in order to understand
their needs and priorities, which in turn shape our strategy
and social purpose:
Innovate and develop our business – by knowing how
our business is experienced, perceived and understood
by our stakeholders we learn how to improve
Identify our risk profile – an open and transparent
approach helps us to see potential problems before
they materialise
Build loyalty and satisfaction – engagement,
particularly with staff, customers and investors, builds
understanding and appreciation of our business
Develop advocates – strong stakeholder relationships
mean we have more advocates helping us shape our
reputation and the environment in which we operate
Our Board – reviews the impact of its decisions on
its stakeholders interests.
20
Pennon Group plc Annual Report 2019
Our customers
Our water businesses supply water and
wastewater services to around one million
household customers and over 160,000 business
customers and our waste and recycling business
services 150 local authority and major corporate
clients in addition to 32,000 customers.
We regularly conduct customer satisfaction
surveys, convene forums and meetings, providing
feedback to our teams to reward good service
and make improvements where needed
Our engagement approach
We engage regularly with our customers on
service quality, cost of service, value for money
and our strategy.
We regularly conduct customer satisfaction
surveys, convene forums and account
management meetings, providing ongoing
feedback to our teams to recognise good
service and make improvements where needed.
We engage with key trade and customer bodies
including the Consumer Council for Water.
We also have our well-established independent
water customer challenge panel which
represents customer views and engages
with the Executive.
Find out more on pages 28, 41 and 44
Quality services and satisfied customers
South West Water’s
customer service score is
Viridor’s Trustpilot
score is
88pts
+3pts its best ever quality service
score. Target: year-on-year increase
in customer satisfaction scores
7.1
Target: year-on-year
increase in customer
satisfaction scores
South West Water
engaged with
c.1m
customers
on its most recent business plan
Our
WaterFuture
Customer Panel (WFCP)
meets quarterly
Skills, diversity and development
LTIFR 1.37 is down
Trust Index score
32.2%
from 2017/18. Target of 0.50 by 2025,
which would make Pennon a health &
safety leader in water and waste
62%
+2pts on 2017/18. Target is
to be Great Place to
Work accredited
Engagement
score
68%
+1pt on 2017/18
Gender diversity
at Board level
has remained at
33.3%
Ahead of our 2020
30% ‘Club’ target
7 STEM
partnerships delivered
in line with 2017/18.
Long-term target to increase the reach
of our STEM and community education
programme by 10% per year
Our people
Our employees are our greatest asset.
We provide the opportunity for them to be
engaged at multiple levels of the business
and through a variety of two-way dialogue
and feedback channels
Our engagement approach
We continually engage and communicate with
our people on their health, safety and well-being,
our organisational culture, promoting diversity
and inclusion, training and development.
We use our annual employee trust and
engagement survey as our cornerstone,
with regular quarterly pulse surveys. Our senior
leaders meet once a quarter, Viridor and South
West Water have established engagement
forums where staff representatives discuss
business challenges and every other month
all employees are invited to Group-wide calls
to hear directly from the Pennon Executive,
asking any questions they wish.
Find out more on pages 32 to 35
You can find our gender pay gap report
online: www.pennon-group.co.uk/about-us/
gender-pay-gap-report
Our communities
Our businesses operate in the heart of local
communities, so we work closely with these
stakeholders through regular liaison meetings
and community events. Our education
facilities and outreach programmes support
environmental learning and our charity donation
schemes support hundreds of good causes
in communities where we operate
Our engagement approach
We engage regularly with our communities on
local projects and initiatives. We hold regular
community liaison groups around our sites.
We also engage with our communities through
print, digital and social media and use these
channels to great effect with our behavioural
change campaigns including Love Your Loo,
and Think Sink! South West Water holds
a Conservation and Recreation Forum twice
a year to get input from a range of stakeholders
including South West Lakes Trust, National
Farmers Union, Dartmoor National Park,
the Royal Yacht Association and others.
We work closely with the South West Lakes
Trust to support access to our land and sites
for recreation in the South West.
Find out more on pages 17, 41 and 48
Community investment and benefit
£7.4m
community investment
across Pennon,
including £6.9 million to Viridor Credits
c.9,000
visitors to South West Water and
Viridor’s 18 education and
learning centres
c.2m
visitors to
South West Water’s
reservoirs
in line with 2017/18
26
community liaison
groups held at Viridor
98.7%
of bathing water classified
as ‘sufficient’ or better
up from 97.9% in 2017/18.
Our long-term target is 100%
174
beach cleans
removing 14.8 tonnes
of waste
Pennon Group plc Annual Report 2019
21
STR AT EGI C REP ORT – OVERVIEW
Our stakeholders
continued
Healthy places and habitats
2
Category 1 and 2
wastewater
pollution incidents,
down from 3 in 2017/18
2020
establish clear targets
towards carbon neutrality
taking into account the
UK Government and
water sector 2030 targets
TCFD(1)
implement
recommendations
by 2020/21
4.9m
tonnes of material
recycled or recovered
4.9m in 2017/18
Our environment
We work closely with a range of environmental
partners including South West Lakes Trust,
Westcountry Rivers Trust, The Wildlife Trust
and various non-governmental organisations
(NGOs) to ensure we deliver our environmental
commitments
Our engagement approach
We meet regularly with our environmental
stakeholders on resource efficiency and natural
capital stewardship. Viridor is a founder and
active member of the Business in the Community
and Green Alliance cross-sector Circular
Economy Task Forces and the UK Plastics Pact.
We hold a twice yearly BeachWise Forum with
key stakeholders including Surfers Against
Sewage. We meet regularly with the Wildlife
Trusts in our operational areas and with the
West Country Rivers Trust. We hold both formal
and informal meetings with the Environment
Agency, Scottish Environment Protection
Agency and Natural Resources Wales including
review meetings during the year to assess
environmental performance.
Find out more on page 24
(1) Task Force on Climate-related Financial Disclosures
Our suppliers
Our supply chain partners play a vital role
in supporting sustainable growth and
cost base efficiency across the business.
Through rationalising and segmenting
our supply chain partners to reflect either
strategic, key, preferred or transactional
relationships, we are developing an approach
that maximises our engagement with each
supply chain partner.
Our engagement approach
We have formal contracts and framework
agreements with all supply chain partners
that meet the appropriate balance between
commercial, quality and sustainably focused
delivery. Our e-procurement platforms support
a structured, fair and transparent approach to
supplier engagement and as a signatory to
the EU Skills Accord we work collaboratively
to support skills development and investment
throughout the supply chain.
We have also launched our sustainable
procurement policy and supplier code
of conduct during the year.
22
Pennon Group plc Annual Report 2019
Responsible supply chain
2021/22 target continue delivery of supply chain
rationalisation to achieve a supply base of
c.3,000
suppliers
to reflect a 70% decrease from the 2017/18
figure (c.9,500 suppliers)
Ensure
internal
investment
and projects approval
processes contain
appropriate sustainability
criteria by end 2019/20
Incorporate
sustainability-
focused
questions
within the standardised
procurement compliance
questionnaire by end 2019/20
Following supplier segmentation
and rationalisation, work with
all suppliers to ensure
Following supplier segmentation
and rationalisation, monitor
and report compliance across
100%
compliance with
the five objectives
identified within our Sustainable
Procurement Policy by end 2021/22
100%
of suppliers
against the key principles identified
within our Code of Conduct for Supply
Chain Partners by end 2021/22
Our investors
We run an extensive investor relations
programme ensuring debt and equity
investors, shareholders, analysts and financial
media are informed of our business strategy
and key developments
Our engagement approach
We engage regularly with our financial community
including equity investors and debt providers
on financial performance, strategy, risks and
opportunities and macro themes. We hold
roadshows across the UK, Europe and the US
each year in addition to conferences, investor
and analyst briefings, twice yearly results
presentations and CFO updates. We continue
to provide trading updates between results.
Good governance enabling investment,
innovation and sustainable growth
49.2%
of our shareholder register
met over 2018/19
9
roadshows were held
and six conferences
attended
83
meetings and calls
were held
72%
of finance raised under
Pennon’s new Sustainable
Financing Framework
against a target of 25%
2018 Sustainalytics score
72
up from 61 in 2017, target
of year on year improvement
Our regulators
We have an open dialogue and meet regularly with our regulatory
bodies: Ofwat, Defra, Environment Agency, Scottish Environment
Protection Agency, Natural Resources Wales, Drinking Water
Inspectorate and the Health & Safety Executive to ensure that
our business plans address their priorities and concerns
Our engagement approach
We engage regularly with all our regulators on our Business Plans,
strategy, performance, risks and opportunities and delivery for
customers. We attend regular meetings, provide reports and
reviews, respond to consultations and join workshops, to ensure
trust and transparency within these relationships.
Find out more on page 18
Our policy makers
Engaging with national and local government, MPs and Peers,
Local Enterprise Partnerships, the Health & Safety Executive,
HM Revenue & Customs, Department for Business, Energy &
Industrial Strategy (BEIS) and Department for Environment,
Food & Rural Affairs (Defra), we have a good ongoing dialogue
with policy makers and stakeholders who influence shape our
social contract.
Our engagement approach
We regularly discuss our strategy, performance and risks and
opportunities with policy makers and key opinion formers.
We engage through a regular meeting programme, briefings,
round tables, consultation responses, trade bodies including Water
UK, the Environmental Services Association, Waste and Resources
Action Programme (WRAP), Recycling of Used Plastics Limited
(RECOUP) and others.
Environmental leadership
Environmental social and governance
110
meetings and
site visits
held in 2018/19,
a 52% increase
on 2017/18
Pennon Group plc Annual Report 2019
23
Our revised biodiversity strategy and
our proposals for the Water Industry
National Environment Plan help towards
improving healthy places and habitats.
S’
Focus on biodiversity
Our customers place a high value
on the environment and support
improvements in biodiversity. Tourism
dominates the South West regional
economy with visitors attracted by
the high quality of the environment.
Agriculture is an important activity
along with food industries and
a biodiverse landscape delivers
improved outcomes for all key parts
of the economy. Our Upstream
Thinking and biodiversity programmes,
including quality habitat creation
on restored landfills contribute to the
targets set out in the Government’s
25 Year Environment Plan.
Sustainability focus area
See sustainability strategy
on page 11
24
Pennon Group plc Annual Report 2019
STRATE GIC REPORT – GROUP PERFORM A NCE
Chief Executive Officer’s review
26
30 Key performance indicators
32 People
36 Our operations
50
36 Waste management
42 Water and wastewater
49 Water retail services
Report of the Chief
Financial Officer
Risk report including
viability statement
70 Customer ownership
58
Healthy places
& habitats
Pennon Group plc Annual Report 2019
25
STR AT EG IC REPORT – G ROUP PERFORMANCE
Chief Executive
Officer’s review
Above all we know it is not just
about what we do, but how we do it.
We have a special responsibility to
the communities that we serve.
Chris Loughlin
Chief Executive Officer
26
Pennon Group plc Annual Report 2019
I am pleased to report another year of excellent
progress against our strategic objectives.
We want to lead in the UK’s water and waste
infrastructure sectors, investing for sustainable
growth and driving value through efficiency.
South West Water’s 2020-25 business plan
received a green light from the water industry
regulator Ofwat in January 2019, giving us
fast-track status that allows us to plan and
provide early certainty to our customers.
Viridor reported an excellent year across its
UK recycling and residual waste operations.
Throughout the year, we continued to deliver
on our promises to customers and communities
and our investment across the Group is driving
tangible and positive results.
How we do business
Our two core businesses – South West Water
and Viridor – each provide essential services to
their local communities. We have a responsibility
to deliver those well and our customers depend
on our ability to operate over the long term
as a stable and sustainable service provider.
While delivering our services forms an essential
part of serving our customers, we have a special
responsibility to ensure we make a positive
difference to our communities. Delivering
in a way that reflects our values – trusted,
collaborative, responsible and progressive –
emphasises how we want to do that and the
contribution we want to make to society.
Delivering sustainability
We already have expertise in, and understanding
of, sustainability and it is a highlight of the past
year that we formulated our new long-term,
Group-wide sustainability strategy. This will
ensure we continue to build on our strengths
and achievements in sustainability under
a unifying framework built on environment,
social and governance (ESG) principles.
There are many aspects of our operations each
year that underline how we are living our values.
A good example is our Sustainable Financing
Framework, which is our platform for reducing
the cost of capital while reflecting our
environmental and social credentials.
Another example of how we are living our
values is the Group’s accreditation under the
Fair Tax Mark. The Group always strives to be
transparent about its tax affairs. We are the first
water and waste management utility to secure
this recognition and this initiative underlines
that we are committed to following both the
spirit and the letter of the law regarding our tax
contributions. We do this because our customers
tell us that it is important to them and because
it is the right thing to do.
Environmental sustainability is also fundamentally
important to us. Our operations in water and
waste all have a potential (positive or negative)
impact on the environment and we recognise
our responsibility to act in a benign manner.
In our water operations, for example, our
pioneering Upstream Thinking programme
delivers landscape-based solutions sympathetic
to the environment. We have demonstrated that
we can store water in an environmentally friendly
way without automatically resorting to concrete
for reservoirs or treating water with chemicals.
We lead the sector in this and 80% of our water
abstractions are positively impacted by
Upstream Thinking.
Health & safety
When I reflect on 2018, it was a year in which
significant progress was made embedding
our health & safety improvement programme,
HomeSafe, across the full spectrum of our
operations. Delivered through manager-led
training modules and e-learning, we are already
seeing benefits flowing through, evidenced by
reductions in our lost time injury frequency rate,
which has fallen 32.2% in the reporting period
(see page 31), and high health & safety scores
from our employee engagement survey.
Our ambitions do not end with the successful
deployment of the initial phase of HomeSafe,
though; as noted in the Chairman’s statement,
we have approved a progressive health & safety
agenda, which I believe will deliver sector-leading
health & safety performance by 2025 and
maintain the momentum of HomeSafe.
The Pennon Executive remain committed
to ensuring that everyone who works for,
with and in connection with our operations
goes HomeSafe every day.
People
The Group’s people strategy is showing good
progress on several fronts. Our aim is to attract,
develop and retain a highly skilled and customer-
centric workforce. At the end of the year under
review, Pennon had over 5,000 employees across
the UK and we continue to be a large employer
in the south west of England.
There is a sharper focus than ever before on
the Group’s long-term talent needs with our
new approach to graduate recruitment, our
fast-growing apprenticeship intake, which
set a record in 2018/19, and other training
and development opportunities. Our work in
communicating with all employees in a more
interactive manner is paying dividends with a
pleasing improvement in employee engagement.
We have also started to conduct 360° feedback
surveys among our operational teams to assess
how well they believe the Group’s leaders are
living our new values. We are promoting equality
of opportunity and diversity across all areas,
including gender and ethnicity. These are all
aspects of an ambitious cultural change that
is underway. Such change takes time, but I am
confident our approach and determination will
reap rewards and play a robust role in the
Group’s future development.
Dr Stephen Bird
In May 2019, we were shocked
and saddened by the death of our
Managing Director of South West
Water, Dr Stephen Bird. Stephen
joined us in 1992 as a Regulations
Manager and subsequently moved
up through Operations to become
Operations Director in 2000 and
was appointed to the South West
Water board. In 2016, Stephen
was appointed Managing Director.
Stephen made an immense
contribution to South West Water,
the region and the water industry
in his twenty-seven year career
with us. A proud Plymouthian,
Stephen’s commitment to the
communities we serve was an
inspiration. Stephen is greatly
missed by all his colleagues at
Pennon and South West Water.
We continued to support the communities
in which we operate through our education
programmes, sponsorship and charitable
donations. Our employees enhanced this
contribution with 317 days of volunteering across
projects such as litter picks, beach cleaning and
tree planting. Employees across the Group also
undertook fundraising for their chosen charities,
through activities including mountain climbs,
marathon runs and many cake sales.
Our ongoing success relies on the hard work and
professionalism of our employees and I would
like to thank them for their dedication and
support during the year.
Setting the standard in the
water industry
The approval of South West Water’s 2020-25
plan was excellent news. Ofwat described the
submission as setting ‘a new standard for the
sector’. The fast-track was significant because
South West Water is the only company to have
achieved this status for two consecutive
price reviews.
Our New Deal plan will see the average water
and wastewater bill fall by 11% in real terms
between 2020 and 2025, with the average bill in
2025 being lower than it was in 2010, and extra
steps being taken to eliminate water poverty
altogether. South West Water also plans to spend
more than £1 billion to improve services, enhance
the environment and strengthen resilience.
All of this responds to extensive research among
customers, which shows they would like more
empowerment and want to be involved in
decision making.
While we commence groundwork for
implementing our 2020-25 plan, we are of course
entering the final year of the current regulatory
period. The targets set for 2015-20 were
challenging, but we have managed to outperform
in every aspect and South West Water is one
of only three companies in the water sector
to do that. Strong operational and financial
performance has once again underpinned
our sector-leading return on regulated equity,
which remains at 11.8% cumulatively since the
start of the plan period. South West Water
achieved overall outperformance against
its outcome delivery incentives resulting
in a net reward of £4.1 million for the year.
As in previous years, we are sharing the benefits
of outperformance with our water customers
through WaterShare. Since 2015, we have
delivered £110 million of benefits to be shared.
Customers will continue to benefit from
reinvestment in services and lower bills in the
next period. Our focus on efficiency and cost
savings means South West Water’s average
annual bill is lower than it was 10 years ago
and this underlines the Group’s overriding
commitment to ensuring customers receive
the highest possible service levels.
Pennon Group plc Annual Report 2019
27
STR AT EG IC REPORT – G ROUP PERFORMANCE
Chief Executive
Officer’s review
continued
We know that delivering a resilient service is a
key promise to our water customers. Despite the
challenges of the March 2018 freeze and thaw
and the unprecedented demand during the hot
dry summer that followed, we continued to
deliver excellent service throughout the year.
This is reflected in our best ever customer
service score with South West Water ranked
second among all water and sewerage
companies in England and Wales.
Our legacy of major investment to protect
bathing waters continues to be reflected in
excellent results for the 2018 bathing season.
In addition, serious pollution and flooding
incidents continued to fall. We maintain gearing
at a level that aligns with Ofwat’s notional view
of an efficient company. South West Water
is the only UK water company to share the
benefits of lower interest rates with customers.
Delivering our strategy and committing
to the next growth phase
Our current portfolio of energy recovery facilities
(ERFs), which transform waste into electricity
and heat, is supporting growth and performed
well during the year. We now have three ERFs at
Glasgow, Beddington and Dunbar in operational
ramp up and our final facility at Avonmouth near
Bristol under construction. Viridor increased its
economic interest in its TPSCo joint venture,
which owns the Runcorn I ERF, from 37.5% to
75%. The operational ERF portfolio, for the third
year running, achieved availability from current
operational assets in excess of 90%1 including
joint ventures during the year under review.
The work on our portfolio of ERFs is a significant
achievement for the Group and we expect them
to support Pennon’s earnings growth to 2020
and beyond.
In recycling, the market dynamics are favourable
with the ‘Blue Planet’ effect prompting support
from the UK Government. We believe the
Government’s Resources and Waste Strategy
– published at the end of 2018 – will bring
positive changes. The strategy sets out a
framework for minimising waste, promoting
resource efficiency and moving towards a
circular economy. Our recycling activities have
shown strong recovery from the challenging
position we experienced in the second half of last
year. We are investing in a new plastics recycling
facility, co-located with our ERF in Avonmouth,
and are refurbishing our materials recycling
facility in Suffolk, supported by long-term
contracts.
The forecast for landfill demand is robust into the
medium term. Volumes and gate fees were stable
over the year. We are forecasting that six sites
will remain open into the medium term.
Outlook
We are on track to deliver all the commitments
we made in the 2015-20 regulatory period.
Looking beyond this, our focus is to capitalise
on the certainty provided by our fast-track
status for our next five-year business plan with
its new benchmarks for service and efficiency.
We expect long-term demand for ERFs to exceed
capacity by around seven million tonnes by 2035.
We have successfully delivered increased
capacity at our existing facilities in Glasgow,
Cardiff, Ardley and Runcorn II. We also believe
the market supports another phase of ERF
development and, as a result, we are analysing
opportunities for three new ERFs. Moreover,
we are looking at energy park opportunities
across the landfill and ERF portfolios that
would capitalise on existing grid connections.
These energy parks would be able to service
a range of energy-intensive facilities, such as
a third-party data centre or our own plastics
processing plants.
South West Water achieved its best-ever
customer performance
South West Water achieved its best-ever
performance against the service incentive
mechanism (SIM) – the industry-wide measure
of customer satisfaction – with 88 points,
beating the 2020 target score of 85 points
a year ahead of target and being placed
second in the overall industry customer
experience league table. Our service was
also recognised when we won the prestigious
2019 UK Customer Satisfaction Awards run
by the Institute of Customer Research.
Bournemouth Water continued its excellent
performance against SIM with a score of 88.
This included a further 15% reduction in
residential written complaints.
Viridor continues to score highly on Trustpilot
and is currently extending its customer
surveys across its wider customer base.
Sustainability focus area
See sustainability strategy on page 11
28
Pennon Group plc Annual Report 2019
Quality
service
& satisfied
customers
Engaging employees with HomeSafe
The roll-out of our HomeSafe programme
continues across the Group with all recycling and
integrated assets sites now having completed
the programme. Roll-out across our energy
recovery and water facilities is well underway.
We have used a variety of approaches to
engage employees. The CEO’s HomeSafe
Awards were created to recognise excellence
in health & safety across the Group. Our
winner in South West Water invented a piece
of equipment to mitigate the risks of people
falling into wastewater treatment tanks.
The equipment has been designed, installed
and fitted onto tanks, with operating and risk
assessment instructions provided as part
of onsite HomeSafe training.
Sustainability focus area
See sustainability strategy on page 11
The UK Government’s Resource and Waste
Strategy for England will stimulate more demand
for recycling. The immediate focus will be on
plastics with a potential doubling of the size of
the recycling processing infrastructure required
to service market demand. The Group is uniquely
placed to help find innovative long-term
solutions regarding plastics waste and we are
exploring the possibility of investing in two
additional new plastics recycling facilities.
I am confident the strong momentum in our
water and waste operations will ensure Pennon
Group has an excellent future. The Group’s core
businesses have real stature, with South West
Water a best-in-class company and Viridor
having 20% market share of the UK’s energy
recovery market. We see distinct growth
opportunities for energy recovery in the UK,
and we are confident we can deliver sustainable,
long-term returns.
Chris Loughlin
Chief Executive Officer
(1) Weighted by capacity, excludes Bolton (reverting to Greater
Manchester Local Authority 31 May 2019) includes joint
ventures at 100%.
Health,
safety &
wellbeing
Sustainability focus area
See sustainability strategy
on page 11
Pennon, a regional leader
in the South West
Recognising the key role Pennon plays
in the South West – as a provider of
essential services, environmental
stewardship and one of the region’s
largest employers – the Group
continues to champion the
campaign for South West Growth
(#backthesouthwest) which it
co-founded in 2016 with the Western
Morning News, the region’s Local
Enterprise Partnerships and the CBI.
Now in its third year, the campaign
calls for greater investment, a
pathway to future growth and
improved Government commitments
for the South West. The campaign
is actively supported by the region’s
MPs and has been the subject of
several parliamentary debates.
Pennon Group plc Annual Report 2019
29
STR AT EG IC REPORT – G ROUP PERFORMANCE
Key performance indicators
Annual(1)
Operational
Profit before tax (£m)
Return on regulated equity (RoRE) (%)
ODI net rewards (£m)
ERF availability (%)(2)
.
7
0
1
2
.
0
7
9
1
.
3
6
0
2
3
.
1
1
2
.
0
0
5
2
.
5
0
1
2
.
9
2
6
2
.
8
8
5
2
.
2
0
8
2
.
3
0
6
2
300
250
200
150
100
50
0
15
12
9
6
3
0
7
.
1
1
.
6
2
1
1
.
1
1
6
.
1
1
8
.
1
1
8
8
5
8
0
9
>
2
9
1
9
6
.
3
1
.
4
9
.
1
7
.
1
2014/15
2015/16
2016/17
2017/18
2018/19
2015/16
2016/17
2017/18
2018/19
2018/19
2015/16
2016/17
2017/18(6)
2018/19
2014/15
2015/16
2016/17
2017/18
2018/19
Statutory
Underlying
Alignment to strategy
1, 2, 3
Cumulative over the first four years of K6
Annual
For more information and
discussion of our performance
during the year see the Report
of the Chief Financial Officer,
pages 50 to 57.
Alignment to strategy
1, 2, 3
For more information and
discussion of our performance
during the year see Our
operations, Water and
wastewater, pages 44 and 46.
Sustainable business
Customer satisfaction with overall service (%)
Employee engagement (%)(3)
100
80
60
40
20
0
0
9
9
8
5
9
9
8
6
9
1
9
6
9
6
39
9
6
7
0
7
80
60
40
20
0
**
.
0
4
7
8
.
1
7
.
0
9
6
.
6
0
7
.
0
8
6
.
0
5
6
.
0
2
7
.
0
7
6
.
0
8
6
.
0
7
6
.
0
4
6
.
0
8
6
Alignment to strategy
1, 3
For more information and
discussion of our performance
during the year see Our
operations, Water and
wastewater, page 46.
Alignment to strategy
1, 3
For more information and
discussion of our performance
during the year see Our
operations, Waste management,
page 38.
Health & safety (LTIFR)(4)
6
9
.
1
2
0
.
2
Carbon emissions (million tCO2e)(5)
7
3
.
1
4
.
1
6
.
1
2
.
1
0
.
2
7
.
1
2014/15
2015/16
2016/17
2017/18
2018/19
2015/16
2016/17
2017/18
2018/19
2016/17
2017/18
2018/19
2014/15
2015/16
2016/17
2017/18
2018/19
Bournemouth Water
South West Water
Viridor
Pennon Water Services
South West Water
Viridor
Pennon Water Services
Pennon Group
100
80
60
40
20
0
2.0
1.6
1.2
0.8
0.4
0
Alignment to strategy
1, 3
For more information and
discussion of our performance
during the year see Our
operations, pages 41, 44 and 49.
* Basis of measurement for Viridor and
Pennon Water Services changed during
the year and data no longer available on
a comparable basis.
Long-term(1)
Earnings per share (pence)
Alignment to strategy
1, 3
For more information and
discussion of our Group-wide
employee survey see
People, page 32.
Alignment to strategy
1, 2, 3
Alignment to strategy
1, 3
For more information and
discussion of our performance
during the year see the Directors’
report, pages 106 to 108.
For more information and
discussion of our approach to
health & safety during the year
see the Chairman’s statement,
page 16, the Chief Executive
Officer’s review, page 27 and
People, page 35.
Dividend per share (pence)
Return on capital employed (RoCE) (%)
Our strategic priorities
5
4
3
2
1
0
2.0
1.6
1.2
0.8
0.4
0.0
15
12
9
6
3
0
1
Leadership in UK
water and waste
infrastructure
2
3
Leadership in cost
Driving sustainable
base efficiency
growth
Our KPIs are aligned to our three strategic priorities.
For more information on our strategic priorities see pages 08 and 09.
(1) For further information on the relevance to Executive Directors’ remuneration see pages 93
and 96.
(2) Average availability for the year for the five ERFs constructed by Viridor plus our two joint
ventures weighted by capacity (joint ventures 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 32 for more information.
(4) Lost time injury frequency rate (LTIFR) for employees and agency staff per 200,000 hours worked.
(6) Reflects prior year reassessment of £0.9 million for supply interruption relating to the extreme
(5) Tonnes of carbon dioxide equivalent.
cold weather in March 2018.
2014/15
2015/16
2016/17
2017/18
2018/19
2014/15
2015/16
2016/17
2017/18
2018/19
2014/15
2015/16
2016/17
2017/18
2018/19
Statutory
Underlying
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 50 to 57.
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 50 to 57.
Alignment to strategy
2, 3
New metric introduced for the
LTIP in 2017.
30
Pennon Group plc Annual Report 2019
.
9
0
5
.
0
8
4
.
8
7
1 5
.
1
5
50
40
30
20
10
0
8
.
1
3
.
6
3
3
.
0
6
3
.
6
8
3
1
.
1
4
0
.
0
1
2
.
9
0
.
0
1
4
.
9
4
.
9
60
50
40
30
20
10
0
0
7
8 4
9
3
8
9
3 3
2
3
.
5
9
3
.
0
7
3
.
.
.
.
Annual(1)
Operational
Profit before tax (£m)
7
.
0
1
2
0
.
7
9
1
3
.
6
0
2
3
.
1
1
2
0
.
0
5
2
5
.
0
1
2
9
.
2
6
2
8
.
8
5
2
2
.
0
8
2
3
.
0
6
2
7
.
1
1
6
.
2
1
1
.
1
1
6
.
1
1
8
.
1
1
Statutory
Underlying
Alignment to strategy
1, 2, 3
Sustainable business
For more information and
discussion of our performance
during the year see the Report
of the Chief Financial Officer,
pages 50 to 57.
Cumulative over the first four years of K6
Annual
Alignment to strategy
1, 2, 3
For more information and
discussion of our performance
during the year see Our
operations, Water and
wastewater, pages 44 and 46.
0
9
9
8
5
9
9
8
6
9
1
9
6
9
6
39
9
6
7
0
7
0
.
4
7
8
.
1
7
0
.
9
6
6
.
0
7
0
.
8
6
0
.
5
6
0
.
2
7
0
.
7
6
0
.
8
6
0
.
7
6
0
.
4
6
0
.
8
6
**
For more information and
discussion of our performance
during the year see Our
operations, pages 41, 44 and 49.
* Basis of measurement for Viridor and
Pennon Water Services changed during
the year and data no longer available on
a comparable basis.
Long-term(1)
Earnings per share (pence)
8
.
9
3 3
.
2
3
5
.
9
3
0
.
7
3
0
.
7
8 4
.
9
3
9
.
0
5
0
.
8
4
8
.
7
1 5
.
1
5
8
.
1
3
6
.
3
3
0
.
6
3
6
.
8
3
1
.
1
4
300
250
200
150
100
50
0
100
80
60
40
20
0
60
50
40
30
20
10
0
15
12
9
6
3
0
80
60
40
20
0
50
40
30
20
10
0
Return on regulated equity (RoRE) (%)
ODI net rewards (£m)
ERF availability (%)(2)
6
3
.
1
.
4
9
.
1
7
.
1
5
4
3
2
1
0
100
80
60
40
20
0
8
8
5
8
0
9
>
2
9
1
9
2014/15
2015/16
2016/17
2017/18
2018/19
2015/16
2016/17
2017/18
2018/19
2018/19
2015/16
2016/17
2017/18(6)
2018/19
2014/15
2015/16
2016/17
2017/18
2018/19
Alignment to strategy
1, 3
For more information and
discussion of our performance
during the year see Our
operations, Water and
wastewater, page 46.
Alignment to strategy
1, 3
For more information and
discussion of our performance
during the year see Our
operations, Waste management,
page 38.
Customer satisfaction with overall service (%)
Employee engagement (%)(3)
Health & safety (LTIFR)(4)
Carbon emissions (million tCO2e)(5)
2014/15
2015/16
2016/17
2017/18
2018/19
2015/16
2016/17
2017/18
2018/19
2016/17
2017/18
2018/19
2014/15
2015/16
2016/17
2017/18
2018/19
Bournemouth Water
South West Water
Viridor
Pennon Water Services
South West Water
Viridor
Pennon Water Services
Pennon Group
Alignment to strategy
1, 3
Alignment to strategy
1, 3
For more information and
discussion of our Group-wide
employee survey see
People, page 32.
Alignment to strategy
1, 2, 3
For more information and
discussion of our approach to
health & safety during the year
see the Chairman’s statement,
page 16, the Chief Executive
Officer’s review, page 27 and
People, page 35.
Alignment to strategy
1, 3
For more information and
discussion of our performance
during the year see the Directors’
report, pages 106 to 108.
6
9
.
1
2
0
2
.
7
3
.
1
2.0
1.6
1.2
0.8
0.4
0.0
4
.
1
6
.
1
2
.
1
0
2
.
7
.
1
2.0
1.6
1.2
0.8
0.4
0
Dividend per share (pence)
Return on capital employed (RoCE) (%)
Our strategic priorities
2014/15
2015/16
2016/17
2017/18
2018/19
2014/15
2015/16
2016/17
2017/18
2018/19
2014/15
2015/16
2016/17
2017/18
2018/19
Statutory
Underlying
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 50 to 57.
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 50 to 57.
Alignment to strategy
2, 3
New metric introduced for the
LTIP in 2017.
.
0
0
1
2
9
.
.
0
0
1
4
9
.
4
9
.
15
12
9
6
3
0
1
Leadership in UK
water and waste
infrastructure
2
Leadership in cost
base efficiency
3
Driving sustainable
growth
Our KPIs are aligned to our three strategic priorities.
For more information on our strategic priorities see pages 08 and 09.
(1) For further information on the relevance to Executive Directors’ remuneration see pages 93
and 96.
(2) Average availability for the year for the five ERFs constructed by Viridor plus our two joint
(3)
ventures weighted by capacity (joint ventures 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 32 for more information.
(4) Lost time injury frequency rate (LTIFR) for employees and agency staff per 200,000 hours worked.
(5) Tonnes of carbon dioxide equivalent.
(6) Reflects prior year reassessment of £0.9 million for supply interruption relating to the extreme
cold weather in March 2018.
Pennon Group plc Annual Report 2019
31
STR AT EGI C REP ORT – GROUP PERFO RMANCE
People
We continued to embed our Group-wide people
strategy, vision and values during the year and
announced a health & safety roadmap that builds
on our HomeSafe achievements.
Embedding the Group’s vision and values
We launched the Group’s new vision of Bringing
our resources to life last year; our focus in
2018/19 was on embedding this more deeply
across the Group. We also built a broader
understanding of how employees at all levels
can live our values of Trusted, Collaborative,
Responsible, and Progressive.
We measure the progress we are making in living
our values through our Group-wide employee
engagement survey and supported by our Group
HR strategy.
Becoming a great place to work
This was the second year we asked employees
how it feels to work for Pennon using Great
Places to Work Best Workplace SurveyTM. We
were pleased to see an improved Trust Index©
score of 62%, an improvement on the previous
year of 2 points and significantly higher than the
national average of 54%. Our Engagement score
of 68% was also higher than last year’s 67%
achieved by the Group. These results show that
we are well on the journey in embedding the
Group’s HR strategy and making continued
progress in living our values and being
recognised as a UK Best WorkplaceTM.
High trust cultures enjoy better financial results.
Research shows best workplaces outperform the
market by 2 to 3% a year over a 25-year period.
They have strong leadership, a talented
workforce, are more collaborative and more
innovative.
The 2018 Great Place to Work survey asked
employees to comment on a wide range of topics
including communication and involvement, job
security, culture, diversity, recognition, strategy,
talent management, teamwork and well-being,
as well as work environment and processes.
The Group scored 96% favourable in response
to the question ‘I understand my safety-related
responsibilities’ demonstrating the effectiveness
of HomeSafe. For the second year running there
were strong results in the area of diversity and
inclusion, with a 90% favourable response to
the question ‘People here are treated fairly
regardless of their race or ethnic origin’, and
similar results in response of gender, age
and sexual orientation demonstrating our
inclusive culture.
Our biggest improvements on the previous year
were for job security, talent management and
recognition.
The survey also revealed the areas where
continuing focus is required. Communicating
our strategy and direction continues to be
the biggest opportunity for improvement.
Demonstrating that we are living by our values
will move the Trust Index forward and we also
have work to do to ensure employees feel that
reward and benefits are reflective of their efforts.
Incorporating employees’ views
Under the Financial Reporting Council’s updated
code of standards, companies are now required
to explain how they are incorporating employee
views in board decisions. We welcome this.
This was the second year of Employee Voice
Forums in Viridor, with employee representatives
from all parts of the business discussing business
challenges with representatives from the Viridor
leadership team. This has been supported with
town-hall events regularly throughout the year.
This has resulted in a 4% increase in the Trust
Index score compared with last year.
Similarly, to ensure employees in the water and
wastewater business can share their views,
the South West Water Employee Engagement
Forum was established in February 2019.
Our employees designed the new format,
which replaces a previously established staff
council, and nominations for engagement
champions are made by peers.
Our Speak Up whistleblowing policy, which
operated throughout 2018/19, provides another
engagement channel. Speak Up helps to
create an open, transparent and safe working
environment, where workers feel able to speak
up and are supported if they do so.
The Pennon Big Chat continued throughout
2018, increasing in frequency from four to
six times a year. This provides all employees
across the Pennon Group the chance to put
any question direct to the Pennon Executive.
Now in its second year, this initiative has been
well received by employees. Topics typically
covered in the Big Chat include progress being
made against our business plans and strategy,
HomeSafe rollout and questions in response to
media items concerning Pennon as well as any
local operational questions employees may have.
Skills, diversity and development
Building a sustainable, agile and diverse
workforce is a key pillar of our HR strategy.
We have a strong commitment to investing in
the development of our staff and want to build
and recognise talent across the Group. Training
and development are available for employees
at a variety of levels. Our aim is to increase
productivity, job satisfaction and safety, and
to equip the next generation of leaders with
appropriate knowledge, skills and competencies.
To ensure we can compete for top talent in the
marketplace, the Group ran a national campaign
for the first time to attract suitably qualified
graduates in 2018/19 to work in Viridor.
Recognising that innovative use of technology
is playing a wider role in recruitment, we invited
graduates to send in personal videos rather than
conventional CVs and were pleased to select
30 high calibre graduates to join Viridor. Based
on Viridor’s success, we are planning to grow our
programme during the coming year and recruit
a further cohort of graduates. All successful
applicants were offered permanent roles
demonstrating our commitment and investment
in them on either a management trainee pathway
or a functional pathway for more specialised
roles. Our graduates are deployed in a variety of
locations that reflect the nationwide distribution
of Viridor’s operations but meet regularly for
mentoring and support. This sharper focus on
graduates is an important step forward for the
Group. It will strengthen our talent pipeline in
the mid and long term in support of the Group’s
growth-oriented strategy that seeks leadership
in the UK’s waste and water sectors. We will
continue to invest in this area and build on the
success of this first step across the Group.
We have always embraced the introduction of
the Apprenticeship Levy and, since its inception
in 2017, have offered 384 new apprenticeships
across the Group. In Viridor, our apprenticeship
focus has resulted in providing 90 new and
existing employees with large goods vehicle
(LGV) training, an area which traditionally
has seen a national skills shortage.
Our Group-wide turnover rate in 2018/19 was
16.4%.
32
Pennon Group plc Annual Report 2019
To complement our investment in leadership
development, we have partnered with Exeter
University and Cranfield School of Management
to develop and offer 16 of our aspiring future
leaders the opportunity to study for an MBA
alongside their current role.
We were pleased that our work in the area has
been noted with Pennon winning the Large
Employer of the Year category at the South
Devon College Apprenticeship Awards
recognising our commitment to both the
South West and skills development.
Community
Pennon has a significant community and
educational programme across the regions
where we operate. Viridor has 11 educational
centres which welcomed 8,455 visitors last year
in addition to delivering 52 outreach events.
South West Water has seven learning and
education centres.
Last year our multi award-winning science,
technology, engineering and mathematics
(STEM) projects included mentoring 34 students
and hosting 42 work experience placements.
Our work experience students have successfully
transitioned into new starters in Viridor.
We are a leading sponsor of Go4Set across
Scotland enabling student teams to tackle
10-week STEM projects using business
management techniques.
We have been a lead partner in the South Devon
University Technical College since it opened in
2016. This specialist school has a curriculum
focused on careers in water, engineering and the
environment and South West Water provides
work experience and real-life challenge projects.
Our people strategy supports
our sustainability goals
Our investment in apprenticeships,
graduates and MBA training
enhances productivity and
strengthens skill sets. We offered
30 new graduates permanent
roles in the business this year
demonstrating our commitment
and investment in them on either
a management trainee or
functional pathway.
Sustainability focus area
See sustainability strategy
on page 11
Gender diversity as at 31 March
Employees
Senior management
Board
100
80
60
40
20
0
%
9
9
7
.
%
1
.
0
8
%
8
8
7
.
%
1
.
0
2
0
3
0
,
1
2
9
0
4
,
%
9
9
1
.
9
5
0
,
1
5
5
2
4
,
%
2
.
1
2
7
6
1
,
1
8
3
3
4
,
2016/17
2017/18
2018/19
Women
Men
100
80
60
40
20
0
%
4
7
7
.
%
3
7
7
.
%
9
3
7
.
%
6
2
2
.
%
7
2
2
.
6
2
9
8
2016/17
5
2
5
8
2017/18
Women
Men
%
1
.
6
2
6
3
2
0
1
2018/19
100
80
60
40
20
0
%
7
6
6
.
%
7
6
6
.
%
7
6
6
.
%
3
3
3
.
%
3
3
3
.
%
3
3
3
.
2
4
2
4
2
4
2016/17
2017/18
2018/19
Women
Men
Pennon Group plc Annual Report 2019
33
STR AT EGI C REP ORT – GROUP PERFO RMANCE
People
continued
We are a sponsor for the Tamar Engineering
Project which provides financial and mentoring
support to talented and ambitious students
whose background or circumstances might
be a barrier to higher education advancement
and a career in engineering.
By inspiring school children, Pennon is helping
to get pupils interested in these vital subjects
and future STEM careers in the water and
waste management industry.
Gender, diversity and
equal opportunities
The Board promotes equality of opportunity
and diversity across all areas, including gender
and ethnicity. The Group has more to do in this
area which remains a key focus – see both the
Nomination Committee report on page 90
and the Directors’ report on page 106 for
further details.
Across Pennon Group, the workforce comprises
79% male and 21% female employees. This gender
split reflects the traditionally male-dominated
nature of our industry. While changing the
diversity landscape across an organisation the
size of Pennon needs awareness and action
at all levels, we are making some progress.
The Group’s female population saw a 1.3%
increase on the 2018 figure. We were pleased
to see in our recent graduate recruitment a 34%
female representation with good ethnic diversity.
According to the latest EU skills demographics,
we are slightly ahead of the sector in both
gender and BAME (black, asian and minority
ethnic) terms.
This was also the second year in which
publication of gender pay gaps for larger
organisations became mandatory. Our gender
pay data for 2018/19 shows an improved
position against 2017/18 with the Group
recording a gender pay gap of 2.7%, which is
lower than the national average. We believe that
improving our overall diversity holds the key to
ultimately closing the gender pay gap as we
recognise that the pay gap will fluctuate over
time. While our diversity landscape is gradually
beginning to take shape, and comparing more
than favourably with our industry peers, we do
not intend to become complacent in this area.
Our people are our greatest
strength as they deliver
the essential services to
customers every day.
Chris Loughlin
Chief Executive Officer
Active volunteering
Pennon has an active volunteering
programme which encourages staff to
take part in agreed community projects.
There were 317 volunteer days in 2018/19,
in which 279 staff participated.
South West Water has continued to
fund Keep Britain Tidy’s BeachCare
programme, which helps to sustain
voluntary beach clean groups across the
South West peninsula. From these litter
picks, as much of the recyclable content
as possible is taken out of the litter haul
and placed into recycling – usually about
25% of the litter found.
Viridor’s volunteering activities continue
to support Somerset Wildlife Trust, which
included planting trees for each of the
11,281 soldiers from Somerset who died
during World War I.
Sustainability focus area
See sustainability strategy
on page 11
34
Pennon Group plc Annual report 2019
Instead, our aim is to put ourselves in a prime
position to attract the top talent each of our
sectors has to offer, thereby further improving
our diversity mix.
We have developed a six-point plan which
focuses on improving reporting, mentoring,
recruitment and training to ensure that this
remains a key commitment for the Group.
Responsible employer
One of our four values is ‘responsible’ and to
further demonstrate our commitment in this area
we have signed up to two employer campaigns
in 2018/19. Pennon has joined the Slave-Free
Alliance, which is part of Hope for Justice,
the global anti-slavery charity. Our membership
demonstrates our commitment to the highest
employment standards for both our direct
employees and those within our supply chain.
We also signed up to the Social Mobility Pledge,
the cross-party campaign to improve social
mobility in the UK established by Rt Hon Justine
Greening MP. This pledge reflects our social
commitments through our partnerships with
local schools, our open door approach to
visitors and our provision of work experience
opportunities.
Health & safety
Following the initial success in the previous
year with the pilot at Viridor for the Group’s
HomeSafe health & safety programme, the
Group progressed to full roll-out in 2018/19 for
both Viridor and South West Water. As the 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.
Initial HomeSafe training was conducted on
a face-to-face basis but the teaching tools
and materials were adapted for e-learning so
that staff in back-office roles and working in
lower-risk environments could participate fully.
The Group substantially completed the initial
phase of HomeSafe during the year under review.
To build on the current momentum and the
HomeSafe vision set in March 2017, the Pennon
Board signed off a longer-term HomeSafe
strategy in September 2018. The Group now
has a comprehensive and ambitious roadmap
running to 2025 to look after employees and
keep them free from harm. A core aim is to
improve a key safety measure known as LTIFR
(lost time injury frequency rate*) from 2.02 the
Group recorded in March 2018 to 0.50 by 2025.
We have already seen a significant improvement
in our LTIFR in the review period, returning a
32.2% improvement when compared to the
previous year. This has come about through
the deployment of HomeSafe; bringing refreshed
focus to safety leadership, assurance and
compliance, and by equipping our people to spot
hazards, intervene when they observe something
unsafe and eliminate risks at source. We have
also targeted resources to facilities where
upgrades and improvements have been identified.
The longer-term HomeSafe strategy is based on
six themes: managing risk, sharing and learning;
working together; protecting health; enabling
leaders and being resilient. With the strategy,
including appropriate timelines and milestones,
everything hones in on the ambitious target of
0.50 LTIFR by 2025, which would place Pennon
in the top quartile of water and waste peers.
Measuring our 2025
strategy effectiveness
The Group will measure progress carefully and
Pennon’s Sustainability Committee approved five
new key performance indicators in March 2019.
These include the core health & safety measure
as well as targets on leadership, occupational
ill-health, hazard removal and the Engagement
Score from the annual Great Place to Work
survey. We will also arrange independent
benchmarking of its approach and outcomes.
* 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. Lost time injuries are expressed
as a frequency rate (LTIFR) per 200,000 working hours.
Embracing
apprenticeships
The apprenticeship reforms, which
have taken place in recent years,
have provided significant opportunities
to bring in new talent and develop
existing employees within the
business.
The programme has been particularly
beneficial in helping us fill some of
our more challenging skill gaps –
especially roles where there is a
national shortage, like LGV drivers
and engineers.
As well as creating posts for new
employees, we are also offering a
number of specialised apprenticeship
programmes to upskill and develop
current employees in our core
business functions such as
engineering, project management,
leadership and operations.
We have started 226 new
apprenticeships during the last year
which brings the total number on
the programme to more than 380.
Find out more online at
www.southwestwater.co.uk/
careers/apprenticeships
Non-financial
information statement
This People section of this annual
report contains a wide range of
non-financial information about
employees, environmental and
social matters. As required under
the new non-financial reporting
directive, the table opposite sets
out where you can find further
information on the key areas of
disclosure within the rest of this
annual report as well as on our
website. The information listed is
incorporated by cross-reference.
The due diligence carried out for
each policy is contained within
each policy’s documentation
Environmental,
social and employee-
related matters
Business model,
principal risks
and KPIs
Human rights
and anti-bribery
related matters
Diversity policy
and approach
• Principal risks and uncertainties: A, B, E, J
• Social and Environment Policy
• Code of Conduct
• Gender Pay Gap Report 2018
• Whistleblowing Policy (Speak Up)
• Health and Safety Policy
• Sustainable Financing Framework
• Business model
• Discussion of our approach to risk
and our principal risks
• KPIs
• Statement on Anti-Slavery and
Human Trafficking
Where to find it
pages 63 to 66
www.pennon-group.co.uk/sustainability
www.pennon-group.co.uk/sustainability
www.pennon-group.co.uk/sustainability
www.pennon-group.co.uk/sustainability
www.pennon-group.co.uk/sustainability
www.pennon-group.co.uk/sustainability
pages 04-11
pages 58-68
pages 30-31
www.pennon-group.co.uk/sustainability
• Anti-bribery and anti-corruption policy
• Code of Conduct
• Nominations Committee report:
www.pennon-group.co.uk/sustainability
www.pennon-group.co.uk/sustainability
page 90
Board diversity policy
• Diversity, Respect and Inclusion Policy
www.pennon-group.co.uk/sustainability
Pennon Group plc Annual Report 2019
35
STR AT EG IC REPORT – G ROUP PERFORMANCE
Our operations
Waste management
Viridor is at the forefront of
UK recycling and residual waste
processing and transformation.
11
energy recovery facilities
including one under
construction(1)
400,000
potential homes powered
by energy produced
by our portfolio
150
local authority and major
corporate clients
32,000
customers across
the UK
c.300
recycling, energy
recovery and waste
management facilities
600
waste collection vehicles
securing materials for
our network of assets
6.8
million tonnes of
waste materials input
4.9
million tonnes
of material recycled
or recovered
100km
Recycling facility
Energy recovery facility1
(1) Bolton excluded, reverting to Greater Manchester Local Authority 31 May 2019.
36
Pennon Group plc Annual Report 2019
Landfill sites and
power generation
Safe disposal of waste that cannot be
recycled or sent to ERFs, creates
power from the landfill gas.
Energy parks
Energy generation from multiple
sources on a single site and
direct supply of energy.
Plastic recycling facilities
Plastic is recycled to supply
manufacturers and
recyclate markets.
Providing local energy
Supplying energy
directly to local businesses
and our own operations.
Energy recovery facilities (ERFs)
Residual household and
business waste is transformed
into a usable form of energy.
Powering homes
and businesses
Energy is converted into
electricity and provided
directly to the grid.
A fleet of waste
collection vehicles
Waste collected directly from
businesses and safely
transported to our facilities.
Materials recycling
facilities (MRFs)
Separating and preparing recyclable
materials for manufacturing into
new recycled products.
Household waste
recycling centres (HWRCs)
Public disposal sites for the
collection of recyclable and
non-recyclable household waste.
Selling recycled
materials
Selling recycled materials
around the world.
Pennon Group plc Annual Report 2019
37
STR AT EGI C REP ORT – GROUP PERFO RMANCE
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 around 150 local authorities
and major corporate clients as well as around
32,000 customers across the UK. Our activity
supports growth 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.
Total waste inputs for 2018/19 were 6.8 million
tonnes, with 2.3 million taken by our ERFs,
1.5 million going to landfill and 3.0 million
taken by our recycling and other facilities.
Viridor is one of the UK’s largest independent
power generators from waste. We had 327
megawatts (MW) of operating capacity from
ERFs, anaerobic digestion, solar and landfill gas
(including 100% of joint ventures) at 31 March
2019. Viridor exported 1.6 terawatt hours of
power during the year.
Strong momentum for Viridor
A key achievement in the year under review
is our increased engagement with the UK
Government and other stakeholders on resource
efficiency. We have actively lobbied for a more
sustainable and circular economy around the
waste value chain and welcomed the direction
set out in the UK Government’s Resources and
Waste Strategy for England published at the end
of 2018.
The initial focus on plastics aligns with our latest
investment, commitment to a plastics recycling
facility with a significant proportion of inputs
and outputs secured with contracts into the
medium term.
We saw strong momentum in 2018/19 with
the £1.5 billion ERF portfolio nearing completion
and with operating facilities outperforming.
At year end, construction of our latest ERF
at Avonmouth was on track for takeover in line
with the planned costs and timetable. Growth
capex invested to date is supporting increased
earnings in Viridor now and into the future.
We continued to maximise value from landfill
and invest in landfill gas for improved longer-
term yields.
There was a continuing focus on enhancing
health and safety and on increasing our
customer service. To ensure we bring in sufficient
talent for the future, and increase diversity within
our workforce, we increased our graduate intake
during the year with recruitment of 30 new
employees, assigning them to management
programmes or more specialised engineering
roles across the UK.
A more sustainable waste value chain
A significant development in 2018 was the
publication in December of the UK Government’s
Resources and Waste Strategy for England. This
has provided strong and positive momentum,
including the adoption of the ‘producer pays’
principle to cover the costs of recycling, steps to
get plastics producers to include more recycled
content in their products, recognition of the role
of energy recovery, and a more consistent
approach to council collections.
In April 2018, Viridor became a founder signatory
to the UK Plastics Pact, which has targets
including 100% of plastic packaging to be reusable
or recyclable. Supported by the UK Government,
this initiative brings consumer brands, packaging,
retail and recycling companies together to tackle
plastic pollution and to maximise recycling and
reprocessing opportunities. We welcome the
establishment of the Plastics Pact because it
enables all stakeholders to facilitate meaningful
change on plastic. Collaboration across the supply
chain is increasingly important, especially in view
of the October 2018 Budget announcement of
a tax on plastic packaging which uses less than
30% recycled content and European targets
for 75% of the UK’s plastic packaging to be
effectively recycled.
Viridor will continue to play a leading role
in support of the UK’s resource and energy
efficiency goals, putting more recycled material
back into a low-carbon, circular economy.
The 2018 Viridor UK Recycling Index released in
September showed clearly that public concern
over plastics use, for example, is at an all-time
high.
We made excellent progress with customers
from the fast moving consumer goods sector
during the year in developing ‘closed-loop’
solutions that supply high quality recycled
plastics reducing the volume of virgin material
required. These relationships are already
established and we expect to collaborate further
so that we lead major change in this market.
Strong ERF performance
The market fundamentals for ERFs remain robust,
with the gap between combustible residual waste
arisings and ERF capacity forecast to remain
around seven million tonnes per annum to 2035.
The autumn 2018 UK Budget noted that, ‘the
Government recognises the important role energy
recovery currently plays in waste management
in the UK’. The Viridor portfolio processes around
a fifth of the UK’s combustible waste tonnage
processed at an ERF, and we continue to optimise
our assets through capacity expansions, heat
transfer and electricity offtake opportunities.
Our ERF portfolio offers the potential for
establishing integrated energy parks, providing
heat and power to Group companies and third
parties, and so creating further value from
these assets.
The ERFs performed well during the year with
availability exceeding 90% across our operational
portfolio (including joint ventures) for the third
consecutive year. We are successfully leveraging
our operational experience and capabilities to
enhance ERF efficiency and expand throughput,
typically in the range of between 3% and 5%.
We have successfully increased the permitted
capacity at Runcorn (combined for Runcorn I
and Runcorn II) by c.15% providing headroom
for future growth in input volumes.
Total waste material inputs
(million tonnes)
Total low carbon energy
generation (GWh)
ERF availability (%)
1
3
5
,
1
9
3
5
,
1
1
7
4
,
1
7
9
5
,
1
10
8
6
4
2
0
5
7
.
8
7
.
6
7
.
8
3
.
2
.
1
5
2
.
.
7
3
1
.
2
0
2
.
.
7
3
2
2
.
7
.
1
0
7
.
3
3
.
2
2
.
5
.
1
.
8
6
0
3
.
.
3
2
5
.
1
2,000
1,600
1,200
800
400
0
3
3
9
100
80
60
40
20
0
8
8
5
8
0
9
>
2
9
1
9
2014/15 2015/16 2016/17 2017/18 2018/19
2014/15 2015/16 2016/17 2017/18 2018/19
2014/15 2015/16 2016/17 2017/18 2018/19
Landfill
ERFs
Recycling
and other
38
Pennon Group plc Annual Report 2019
As we continue to optimise our performance,
we completed more of our planned maintenance
outages in the first half of the financial year,
when electricity demand and pricing is lower.
We are also sequencing these planned
shutdowns to make that process as efficient as
possible. Our ERF teams have done excellent
work delivering planned outages on time and on
budget while carefully coordinating operations
with our customers and our supply chain.
Glasgow, Beddington and Dunbar became
operational during the year. We have invested
at Glasgow which will increase capacity.
As we have previously reported, construction
at Glasgow required a higher level of remediation
and expenditure than predicted. Viridor is
contractually entitled to recover incremental
costs from the original principal contractor,
Interserve Construction Limited, under certain
circumstances. We are looking to recover up
to £97 million of this additional expenditure
(contractual receivable from Interserve
£72 million; other, including all contractors
and advisors £25 million).
Our latest ERF at Avonmouth is progressing well
and upon completion in 2020/21 will allow local
authorities and businesses to transform 320,000
tonnes of non-recyclable residual waste each
year into low carbon energy. Viridor has secured
an additional 120,000 tonnes p.a. of waste from
the West of England Partnership resulting in 85%
of Avonmouth inputs now being contracted.
Our ERF operational design capacity is now
2.8 million tonnes of waste (including joint
ventures) and 233MW per annum. When
Avonmouth comes on stream, this will extend
to 3.1 million tonnes of waste and 267MW.
Landfill sites are integral to our
residual waste strategy
Our analysis indicates a requirement for a
landfill solution into the medium term and,
as landfill sites close, some parts of the
country will experience a capacity shortage.
Against this background, Viridor’s landfill sites
are well positioned to support future market
requirements. The available void on operating
sites is approximately 27 million cubic metres,
with six sites providing capacity into the
medium term.
Viridor continues to operate nine landfill sites
following the planned closure of two sites during
the year. Total consented landfill capacity
(including mothballed sites) was 35 million
cubic metres at 31 March 2019. We have a good
track record of restoring our sites for alternative
uses with three landfill sites repurposed for
development in recent years in a manner that
meets or exceeds our environmental duties.
Since the year end, agreement has been reached
to transfer a further closed landfill site for
alternative use, mitigating long-term liabilities,
and we continue to seek opportunities for similar
transactions.
Landfill volumes and average gate fees were
comparable with the prior year at 1.5 million
tonnes and around £20 per tonne. We continued
to maximise the value of landfill gas power
generation and explored alternative commercial
development opportunities and other renewable
energy solutions at our landfill sites, such as
photovoltaic (PV).
We continue to manage our landfill gas business
with the aim of maximising the value of landfill
gas power generation. We direct gas collected
from our landfill sites to engines that generate
electricity. The natural decline in underlying
landfill gas volumes has continued, but the rate
of decline in electricity volumes generated is
lower than in recent years at c.5%. This is a result
of our planned preventative maintenance
programme and investment of over £5 million
in our Engine Optimisation Strategy. Together
these have improved engine availability, the gas
collection process and matched engine capacity
to the gas yields. We will continue to invest in
landfill gas to provide reliable generation and
improve the longer-term yields. The benefit of
higher year-on-year hedged electricity prices
helped support overall performance.
At present, our landfill gas engines contribute
86MW of landfill gas generation capacity, a small
decrease from 88MW at the end of March 2018.
Viridor also has a PV capacity of 3.2MW. We
currently have surplus grid connection capacity
at some sites, which presents an opportunity for
growth subject to suitable capital investment.
Average revenue per megawatt hour (MWh)
increased by 4% to £97 (2017/18 £93). Average
operating costs increased to £48 per MWh
(2017/18 £41) reflecting increased investment
in planned preventative maintenance.
Our UK plastics commitments
Viridor is already one of the UK’s
leading recyclers of plastics. Every year
we transform more than 1.5 billion
bottles and packaging items into
high-grade recycled plastic products.
South West Water is a progressive
and responsible water and wastewater
company and is accustomed to
dealing with the need to stop plastics
from getting into the water system.
The Group is uniquely placed to help
consumers, manufacturers and
communities to find innovative,
long-term solutions that tackle the
challenge of plastics waste. Viridor
is playing its part by committing to
Pennon’s Plastics Programme that
includes five clear commitments
across investment, innovation,
collaboration, campaigning and
engagement.
This is part of our sustainability
strategy and it contributes to the UN
SDG 12 – striving for more sustainable
consumption and production. We want
to help deliver the targets set out in the
UK Government’s 25 Year Environment
Plan as well as its Resources and
Waste Strategy, and the UK Plastics
Pact (of which Viridor is a founder
signatory).
Sustainability focus area
See sustainability strategy
on page 11
Pennon Group plc Annual Report 2019
39
STR AT EGI C REP ORT – GROUP PERFO RMANCE
Our operations
Waste management
continued
Investing in recycling
Viridor has committed to a new £65 million
plastics recycling facility, with the investment
reflecting a derisked infrastructure model backed
by index-linked contracts. The 80,000 tonne
capacity facility represents around 8% of current
market requirement and will be co-located with
the Avonmouth ERF that is currently under
construction. The new facility will handle
multi-stream plastics (including polyethylene
terephthalate, high density polyethylene and
polypropylene) and produce output pellets
directly for manufacture. Building on our existing
commercial relationships, we have already
secured around three-quarters of the input
requirement (Viridor and third party) and half of
the plastic offtake (third party) of the plant. The
investment has been assessed based on a hurdle
rate IRR (internal rate of return) of 15% real, post
tax and has a payback of under four years.
We are also investing £15 million in a full
refurbishment of our Masons materials recycling
facility (MRF) near Ipswich, which will support
a 10-year contract with Suffolk County Council
to process recyclate into high-quality output.
Existing recycling operations
There was a partial recovery of global recycling
markets in 2018/19 following import restrictions by
China in the prior year and we see ongoing value
in high quality recyclate. We focused throughout
the year on producing higher quality recyclates,
through investing over £9 million in our assets,
including our reliability-centred maintenance
programme, WorkSmart. Enhancement of the
quality of recycled paper was the main aim of the
upgrade at our Crayford MRF near Dartford. The
global quality standard for recycled output has
increased, especially for paper, card and plastic,
and we have aligned with market requirements.
In the UK, input quality has remained poor, largely
as a result of councils reducing their collection
schemes due to austerity cost pressures.
Our emphasis on producing high quality outputs
contributed to an increase in revenue per tonne
to £115 from £97 per tonne in the prior year.
We have incurred higher costs in producing the
right quality recyclate, but recycling margins
have improved year on year.
Viridor investment supports
recycling in Suffolk
A £15 million Viridor investment to
modernise the Masons MRF, near
Ipswich, will transform the plant to
support recycling. The investment
is part of a 10-year Viridor/Suffolk
County Council contract renewal and
part of the council’s plans to make the
most of residents’ recycling efforts at
the kerbside. The upgrade will
increase the MRF’s capacity by 10,000
tonnes to 75,000 tonnes per annum.
It will use 11 optical sorters to efficiently
sort recycling into specific waste
streams. Viridor is determined to put
quality recycling materials back into
the economy where they belong,
and this new investment will help
make the most of the county’s
recycling opportunities.
Sustainability focus area
See sustainability strategy
on page 11
40
Pennon Group plc Annual Report 2019
Viridor is seeking to sell recyclate close to the
point of recycling and an increasing proportion
of our output now stays in the UK or is taken by
European markets. For recycled paper, we have
successfully reduced our reliance on China but
have also ensured we can meet China’s quality
requirements as required.
To help mitigate our exposure to recyclate price
volatility, we continue to share commodity risks
and rewards with our customers. Over 60% of our
ongoing contracted input volumes continue to
share commodity risk.
Our recycling business finished the year in line
with our expectations.
Contracts, collections & other
We continued to work closely with local
authorities to ensure the long-term sustainability
of our business relationships. For example, we
agreed with Somerset Waste Partnership a
nine-year, £80 million extension of their
comprehensive waste management contract to
2031. Viridor strengthened its recycling
partnership with Kent County Council in August
with a two-year recycling contract extension.
Our collections business continues to provide a
valuable service to our customers, sourcing both
recycling and residual waste for treatment and
processing at our own ERF, landfill and recycling
assets as well as at third-party facilities.
In September 2017 we successfully negotiated
a reset to the contract with Greater Manchester
Waste Disposal Authority, now the Greater
Manchester Combined Authority (GMCA),
achieving a positive outcome. The contract to
operate the recycling assets on behalf of the
GMCA then entered a run off period of no less
than 18 months from 1 October 2017, which is
now set to end on 31 May 2019.
In November 2018, Viridor withdrew from the new
Greater Manchester waste operating contract
tender process. As we near the end of the
successful operation of the run off period,
we are well positioned for an orderly transition
at the end of the contract. The financial impact
of not continuing with this operating contract
is not material to the Group, and our position
with the ERFs at Runcorn is unaffected.
Waste recycled and
recovered (% of inputs)
8
6
5
6
0
7
2
7
100
80
60
6
5
40
20
0
2014/15 2015/16 2016/17 2017/18 2018/19
Community engagement
through education,
sponsorships and donations
Viridor plays a highly visible role in
communities surrounding operational
sites. Our 11 educational centres
received 8,455 visitors in the year
ending 31 March 2019 and we helped
to deliver 52 outreach events.
Our visitor centre at Ardley ERF, near
Oxford, runs tailored educational
programmes to teach children
and adults about sustainable
waste management. We also run
community liaison groups to provide
updates on our operations and
respond to feedback.
During 2018/19, Viridor provided
£7.2 million to community support,
sponsorship and charitable donations.
Some £6.9 million of this was paid
to Viridor Credits, an independent,
not-for-profit organisation that
administers Viridor’s contributions
to the Landfill Communities Fund.
Our charitable donation s scheme
helped projects supporting STEM
(science, technology, engineering
and mathematics), 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 also continued our local
community volunteering activity
with our employees donating
124 days of their time in 2018/19.
Sustainability focus area
See sustainability strategy
on page 11
Joint ventures performing well
The TPSCo joint venture (between Viridor and
Inovyn) has performed strongly during the year
with availability again in excess of 90%.
In December 2018, Viridor exercised its
pre-emption rights and paid a total cash
consideration of £54.8 million to acquire John
Laing Investments Limited’s 37.5% economic
interest and 20% voting rights in the Runcorn I
ERF. The acquisition consolidates further
Viridor’s leading market position in UK energy
recovery and results in an increase to Pennon’s
economic interest in INEOS Runcorn (TPS)
Holdings Limited from 37.5% to 75.0%, with
the associated voting rights moving from 20%
to 40%.
Operational and financial performance at
our Lakeside ERF (a 50:50 joint venture with
Grundon Waste Management) again exceeded
expectations for both waste processing and
power generation.
Enhancing safety and
environmental performance
Viridor focused heavily on enhancing safety
throughout the year by implementing the Group’s
HomeSafe initiative, which seeks to deliver the
highest standards in health & safety. We achieved
a 40% improvement in a key safety measure
known as lost time injury frequency rate and
continue to implement training with the aim
of becoming a leader in this field.
The Company is committed to its compliance
culture and to ensuring positive and measurable
environmental impact and regulatory compliance.
We maintain a proactive and positive relationship
with our environmental and performance
regulators. 90% of all Viridor’s permitted and
licenced sites achieved the top two compliance
bandings, as assessed by the Environment
Agency, Scottish Environmental Protection
Agency (SEPA) and Natural Resources Wales
(2017 91%).
During 2018, we had no pollution incidents
or Category 1 (major) environmental permit
non-compliances. We received three Category 2
non-compliances (2017 one), one of which is
contested, the other two being for paper storage
and litter management at a recycling facility
and for odour at a landfill site. We also received
a significant non-compliance from SEPA for a
plastics storage fire. We have agreed action plans
with the regulators to upgrade infrastructure at
these sites to further reduce environmental and
amenity risk.
Improving customer service
We continue to recognise the value of
feedback from our customers to help us
continue to deliver improvement in customer
service. We ask customers to provide feedback
about Viridor’s service on the Trustpilot review
platform. In 2018/19, we received a rating of
7.1 out of 10. We continue to gather customer
reactions to our performance through online and
offline channels and are looking at introducing
customer user groups.
Our customer wins during the year include a
waste management contract at Hinkley Point C
power station in Somerset, which seeks to deliver
a zero-to-landfill service for EDF Energy and
principal contractors. We also won a new waste
management contract for Safestore, one of the
UK’s largest self-storage providers.
Viridor’s new strategic options
Against a positive market backdrop, we have
developed three new strategic options for Viridor.
First, recognising that under-capacity in the
UK residual waste market varies by geography,
we have identified three new ERF opportunities
for further analysis. For landfill, we see strong
medium-term demand and are keeping sites
open for longer while creating new landfill cells
where there is commercially attractive demand.
We are also continuing to invest in landfill gas.
Second, we see new opportunities in recycling
that are akin to our residual waste operations
and we are therefore conducting feasibility
studies into building two further plastics
processing facilities. Our intention in plastics
would be to implement the contract-backed,
index-linked return model we have successfully
developed in our ERF operations.
Third, we are exploring opportunities for
integrated energy parks at our ERF and landfill
sites. The energy parks would provide
competitively priced heat and power as an
alternative to the national grid, potentially
involving provision of wind and solar power.
We already have several such connections,
including our Runcorn ERF that has a heat and
power offtake to Inovyn, Peterborough ERF
where we provide a heat connection to a council
depot, and our landfill gas engines and ERF at
Beddington, which provides heat offtake into a
community heating network. We believe there
is significant potential to do more with energy
parks supporting Viridor’s own activities, other
Pennon Group operations such as South West
Water’s treatment plants, or third-party energy
intensive facilities.
Pennon Group plc Annual Report 2019
41
STR AT EGI C REP ORT – GROUP PERFO RMANCE
Our operations
Water and wastewater
We are focused on providing services in
the most efficient and sustainable way possible.
Innovation, new technologies and a holistic
approach underpins our commitment to delivering
service improvement and long-term value.
Wistlandpound
30km
Wimbleball
10km
Upper Tamar
Roadford
Crowdy
Meldon
Stannon
Fernworthy
Siblyback
Venford
Kennick,
Tottiford &
Trenchford
Colliford
Stithians
College
Drift
Argal
1.7
million total
population served
21
raw water reservoirs
Park
Burrator
Avon
Longham Lakes
Reservoir
Key water mains
Reservoir
Key water mains
0.8
million customers
15,462
km of drinking water
mains network
0.5
million total
population served
0.2
million customers
2
raw water reservoirs
2,838
km of drinking water
mains network
5
treatment works
with 4 UV
treatment facilities
650
wastewater treatment works
with 65 ultraviolet (UV)
treatment facilities
29
drinking water treatment
works with 3 UV
treatment facilities
17,490
km wastewater
mains network
151
bathing waters and
24 shellfish waters
42
Pennon Group plc Annual Report 2019
Surface water catchment
Managing surface water drainage
and reducing the impact of flooding.
Water treatment works
Treating water to high standards to
ensure it is clean, safe and reliable.
Drinking water
mains network
Extensive network to deliver
an uninterrupted supply of
treated water to households
and businesses.
Wastewater mains network
A resilient and reliable network
of sewers to take wastewater from
properties to our treatment works.
Customer support
Our field teams work proactively to ensure
high-quality services are maintained
and respond quickly to any issues
reported by customers.
Improved bathing and
shellfish water quality
To support local communities
and businesses.
Raw water reservoirs
/water resources
Stores an available and
sufficient supply of untreated
water collected from rivers and
a small number of bore holes.
Wastewater treatment works
Ensuring treated wastewater
is returned to the environment
in as safe a state as possible.
Sewage sludge/bio-resources
Treated sludge is used often
in agriculture, minimising any
adverse environmental impacts.
Pennon Group plc Annual Report 2019
43
STR AT EG IC REPORT – G ROUP PERFORMANCE
Our operations
Water and wastewater
continued
Delivering excellent customer service
Once again, improving customer service was at
the heart of our delivery plans. We achieved our
best ever quality service score during the year,
with a ranking of second out of all water and
wastewater companies in England and Wales.
Our customer service score (SIM) improved to
88 points with no penalty forecast for the K6
(2015-20) period. The SIM score is calculated
against a qualitative element (based on a
customer survey) across the sector and a
quantitative element that includes the number
of complaints received in writing or by phone,
which have reduced by half since 2015/16.
The improvement in service is driven by
improved operational performance, an enhanced
capability in our call centres to reduce waiting
times along with investment in training and
systems to improve our ability to resolve
customer calls quickly. These have increased
customer query resolution and expanded the
channels that customers can use to contact
us to include online and social media. We made
all these improvements in consultation with
our customers and we were recognised for our
excellent customer service in the prestigious
2019 UK Customer Satisfaction Awards run by
the Institute of Customer Service.
We continued to focus on providing support
to customers in vulnerable circumstances and
those who struggle to pay their bills. At the end
of the year we were providing support to more
than 23,000 customers through reduced tariffs,
with around 57,000 customers supported
through this and other programmes and we have
extended our Priority Services Register to make
it easier to identify customers in vulnerable
circumstances. This level of assistance puts
us in a good position to deliver on our 2020-25
business plan aim to eliminate water poverty
in our region by 2025. Ofwat has described this
aim as ‘industry leading’.
WaterShare
South West Water continues to share the benefits
of business outperformance between customers
and shareholders through its unique WaterShare
mechanism. We have identified around c.£6 million
of customer benefits during the year.
Since 2015, £110 million of cumulative benefits
have been identified to share with customers
through future bill reductions, ODI service
improvements and investment in services in
addition to funding of our new Watershare+
share scheme. This reflects £80 million of totex
savings, £11 million of net outcome delivery
incentives (ODI) benefits and £19 million of other
benefits (including financing). These totex
savings and efficiencies (including the forecast
to 2020) have been reflected in the 2020-25
business plan, lowering bills for customers over
the next regulatory period.
44
Pennon Group plc Annual Report 2019
Cumulative K6 RoRE
2.9%
Financing
outperformance
11.8%
Total
6.0%
Base
0.3%
ODI
outperformance
2.6%
Totex
outperformance
SIM (pts)
100
6
8
9
7
6
8
2
8
5
7
7
8
5
8
8
8
8
8
80
60
40
20
0
2014/15
2015/16
2016/17
2017/18
2018/19
Bournemouth Water
South West Water
Our 2020-25
business plan was
fast-tracked by the
industry regulator
Ofwat, who said it
‘set a new standard
for the sector.’
Drinking water
We demonstrated excellent service resilience
during the year. The exceptional cold weather
of March 2018 resulted in the first red weather
warning for snow ever issued in the South West.
With good planning and flexible management,
we successfully managed the impact of this
freeze-and-thaw weather event. Ofwat praised
South West Water in their ‘Beast from the East’
wrap-up report stating that, ‘South West Water
demonstrated good communication with
wider stakeholders to respond to the needs of
customers in vulnerable circumstances.’ We also
maintained supplies to customers despite the
unprecedented demand during the hottest
and driest summer on record. The warm weather
resulted in an estimated 20% increase in visitors
to the region over the summer period. Water
production was increased by around 6% during
this period and we were able to distribute water
across our flexible strategic water network so
that we could maintain supply to our customers
while also meeting our leakage target of 84
megalitres per day. We supported the Isles of
Scilly over the summer months to help them
maintain supplies when ground water levels fell
to extreme lows. Water resources in the South
Harnessing real-time data to
improve leak detection
Alongside investment in technologies for
network monitoring (including telemetry,
sensors and data loggers) South West
Water is pioneering the use of real-time
data to help identify and tackle leakage
on its drinking water network.
The company is among the first to use
live hydraulic models which provide a fully
up-to-date picture of how sections of the
network are performing. This improves
the efficiency and accuracy of operational
responses to any issues, enabling repair
work to be carried out in a more proactive
way and minimising the impact
on customers.
South West Water is currently working
on expanding the system region-wide and
increasing its functionality to enable better
forecasting of issues before they occur.
Future plans also include the deployment
of the technology to mobile field teams
and customer-facing staff.
Sustainability focus area
See sustainability strategy
on page 11
West Water region remained unrestricted for
a 22nd consecutive year and the Bournemouth
water region maintained its position of exercising
no water restrictions since privatisation. As the
weather has continued to remain drier than
usual, South West Water has been actively
conserving and replenishing water resources
by operating its artificial recharge storage
schemes in order to protect future supplies.
We continued to maintain our high standards
of drinking water quality and achieved all our
targets. The Drinking Water Inspectorate has
confirmed that our water quality was among
the best in the industry this year.
Investment in drinking
water infrastructure
We commenced commissioning of the state-of-
the-art Mayflower water treatment works during
the year. This important investment will meet
the needs of Plymouth’s growing population for
generations to come. Mayflower is a landmark
project for many reasons. The facility uses
advanced technology that has not been
deployed in the UK before. The construction
work was completed without any lost time due
to injury with over a million hours of work time
going into the project. South West Water
also signed the UK’s first green finance lease
to support the Mayflower project as part
of Pennon’s Sustainable Financing Framework
which supports positive social, economic and
environmental outcomes.
Other investments include the upgrade to water
treatment works in Falmouth and improving
land management in 11 river catchments as part
of our Upstream Thinking strategy for healthier
rivers and lower-cost water treatment. South
West Water’s listing for the Business in the
Community Environmental Sustainability
Award in April 2018 recognised the successful
transformation the multi award-winning
Upstream Thinking programme has had on the
natural environment of the southwest of England.
Wastewater
We aim to ensure the safe and efficient removal
and disposal of wastewater, while minimising
the possibility of sewer flooding or pollution
affecting homes, businesses or the environment.
We achieved our best ever compliance in
wastewater treatment with 99% of our works
meeting their permit conditions.
Protecting the environment
We delivered a reduction in serious pollutions
with only two Category 1 and 2 incidents.
This was among the lowest number of such
incidents in the industry. Disappointingly, the
number of less serious incidents (Category 3
and 4) increased on the previous year. We have
continued to implement our pollution incident
reduction strategy and associated investment,
which should reduce minor incidents (Category 3
and 4) in future years.
To help address the issue of blocked sewers,
we continued our targeted ‘Love your Loo’
campaign to increase awareness of the
problems caused by flushing inappropriate items.
An incident that also focused extensive attention
on the issue of keeping sewers clear was the
discovery of Devon’s largest ever ‘fatberg’ in
a Sidmouth sewer. Our staff worked for several
weeks to remove this obstruction which was
estimated to be 64 metres long.
Pennon Group plc Annual Report 2019
45
STR AT EG IC REPORT – G ROUP PERFORMANCE
Our operations
Water and wastewater
continued
Sector-leading outperformance
In 2018/19, we once again delivered sector-
leading financial performance maintaining
a cumulative return on regulated equity (RoRE)
of 11.8% since the start of K6.
ODI rewards
Operational performance resulted in a net ODI
reward of £4.1 million (£11.3 million cumulatively
over four years of K6), reflecting an annual
equivalent RoRE outperformance of 0.3% to date.
Health & safety
South West Water continues to roll-out the
HomeSafe initiative that will continue into next
year as we drive for improved standards in
health & safety. During the year South West
Water delivered a 23% reduction in our key safety
measure known as lost time injury frequency rate
and are targeting further reductions next year.
Investment in wastewater infrastructure
We commissioned our £20 million investment
in Plymouth to improve the already high level
of bathing water quality. Our largest single
wastewater investment in the current K6
programme, will help protect the bathing
waters in the Plymouth Sound through the
installation of our largest ever ultraviolet
disinfection facility for treating storm water.
Our investments to protect bathing waters
continue to reap benefits with extremely
encouraging results for the 2018 bathing water
season. Of the 151 bathing waters tested in the
South West Water region, 149 (around 99%) were
classified as sufficient or better, with more than
78% classified as excellent. Neither of the two
bathing waters rated as poor were attributed
to any failure of South West Water’s assets.
Wholesale services
Since the opening of the non-household
retail market in April 2017, South West Water
has successfully engaged with 21 different
retailers, and our wholesale service desk has
been operating effectively.
This industry-leading performance comprises
6.0% as the base return, 2.6% totex savings and
efficiencies, with 0.3% reflecting a net reward on
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. Cumulatively, this WaterShare
RoRE outperformance is broadly consistent
with the approach adopted by Ofwat.
Total expenditure savings
During 2018/19, we continued to deliver
efficiencies with £237 million of cumulative totex
savings in the first four years of K6 (2015-20).
We are on track to deliver around £300 million
of totex savings by 2020, which supported our
efficiency position in our K7 business plan.
We use new technology, innovative processes,
skills training and equipment to deliver both
water and wastewater improvements. Savings
are driven by continuing advantages from
our strategic alliances including our water
distribution framework and 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 deliver
totex efficiencies, with secured £27 million
synergies secured.
Our 2020-25 business plan, continues to target
cost efficiency, supporting a 11% real reduction
in customer bills by 2025.
We have maintained good overall asset reliability
and stable serviceability across all water and
wastewater areas and received rewards for
bathing water quality and water restrictions,
as well as significant improvements in external
and internal sewer flooding.
The cumulative net reward of £11.3 million
comprises £14.4 million of net rewards
recognised at the end of the regulatory period
and £3.1 million of net penalty which may be
reflected during the regulatory period.
We are on track to meet all of our ODI
commitments for 2020.
Green light for 2020-25 business plan
In September 2018, South West Water submitted
its K7 business plan for 2020-25. Ofwat published
their initial assessment in January 2019, awarding
us fast-track status with our draft price
determination received in April 2019.
We are delighted Ofwat’s view was that our
business plan ‘set a new standard for the sector’.
South West Water is the only water company to
have achieved this status for two consecutive
price reviews. Customers can look forward to
lower bills, further investment and more of a
say in how their water company is run. We are
also addressing key social and sustainability
themes of protecting the environment, improving
services to customers and ensuring a strong
and transparent approach to governance.
The next regulatory period includes specific
comparative service and environmental targets
which will be measured consistently across
the whole industry on an annual basis. Based
on existing performance, we are well placed
to deliver into the next period.
Leakage megalitres per day
Drinking water quality mean zonal compliance (%)
100
80
60
40
20
0
4
8
4
8
2
8
3
8
4
8
0
2
9
1
9
1
8
1
100.00
99.96
99.92
99.88
99.84
99.80
.
0
0
0
0
1
.
7
9
9
9
6
9
9
9
.
.
8
9
9
9
6
9
9
9
.
.
8
9
9
9
6
9
9
9
.
.
0
0
0
0
1
9
9
9
9
.
2014/15
2015/16
2016/17
2017/18
2018/19
2015
2016
2017
2018
2019
Bournemouth Water
South West Water
Bournemouth Water
South West Water
46
Pennon Group plc Annual Report 2019
South West Water leads
ReFill revolution to
combat plastic pollution
As a co-founder and ongoing
supporter of ReFill – the award-
winning campaign to encourage
the use of refillable bottles – South
West Water is helping to reduce the
use of plastic bottles.
The campaign was launched in the
UK in Bude, Cornwall in 2014. Since
then, more than 1,200 locations
(such as cafés, hotels, restaurants
and shops) have registered with
ReFill in Devon and Cornwall,
allowing the public to top-up their
water bottles for free.
South West Water is supplying
3,000 stainless steel bottles to
Keep Britain Tidy, South West
Water’s BeachCare partner, for
onward distribution to local
communities. The company is
also working with councils and
other partners to support the
expansion of ReFill across the
South West, the first of which was
founded at Bude earlier this year.
More are planned in locations
such as Plymouth and Exeter.
Sustainability focus area
See sustainability strategy
on page 11
The ODIs for K7 are a mixture of bespoke
performance measures which are proposed
and designed by South West Water and
15 measures which are common across all of
the water companies. South West Water has
a strong base for outperformance in K7 with
two thirds of ODIs currently upper quartile
or above industry average.
As a responsible and transparent water
business, a key feature of our proposals is to
deliver a ‘New Deal’, which will empower our
customers by giving them the option of a
tangible stake through equity shares in Pennon,
and the ability to hold us to account through a
customer annual general meeting and quarterly
public meetings. We believe our New Deal
redefines the relationship between the water
company and its customers and recognises
our societal responsibilities.
Key partnerships are already in place, including
our strategic consultants and capital delivery
partners, wildlife and river trusts, customer groups
and charities. Our Resilient Service Improvement
(RSI) transformation project is already underway,
pilot trials for new water treatment technology
has been completed and preparation for the
expansion of our licence into the Isles of Scilly
are well advanced.
Our community
As well as providing essential water services,
South West Water supports the area’s economic
sustainability, supporting the employment of some
5,000 people either directly or indirectly through
our supply chain. Working with partners and
through our own events we fundraise and support
community activities, conservation and wildlife
programmes and environmental education
campaigns. We are also active supporters of the
region’s economic aspiration, and contributed
to the Local Enterprise Partnerships responses
to the Government’s Industrial Strategy.
Pollutions (Categories 1-4)(1)
Bathing water compliance(2) (%)
1
2
3
5
6
2
8
5
2
2
6
2
4
3
2
400
320
240
160
80
0
.
2
7
9
.
3
0
7
6
.
8
9
1
.
1
8
.
9
7
9
.
7
8
9
5
.
5
7
1
.
8
7
100
80
60
40
20
0
2014/15
2015/16
2016/17
2017/18
2018/19
2015/16
2016/17
2017/18
2018/19
Excellent
Sufficient
(1) Category 1-4 water and wastewater pollutions.
(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).
Pennon Group plc Annual Report 2019
47
STR AT EGI C REP ORT – GROUP PERFO RMANCE
Our operations
Water and wastewater
continued
Sponsorship and campaigns
In 2018/19, South West Water provided
c.£210,000 in community sponsorship and
charitable donations. This ensures that South
West Water is on track to deliver its Business
Plan ODI commitment of spending £80,000
per annum as part of its Community Scorecard.
In addition, Pennon sponsors the Theatre Royal
Plymouth and #BacktheSouthWest regional
economic growth campaign for a further
c.£60,000.
South West Water’s eight sponsorship
partners for the current Business Plan period
have been chosen to deliver tangible benefit
to our communities as well as protecting
and enhancing the natural environment.
These include The South West Coast Path
Association and Beach Schools South West.
Through its charitable donations programme,
South West Water supports five charities
including Age UK and the Devon & Cornwall
Air Ambulance that have been chosen by
employees for their social purpose.
Working with key campaign partners such as
Keep Britain Tidy and ReFill, South West Water is
working hard to help in the fight against marine
pollutions, particularly single use plastics. Since
2010, our campaign has helped deliver 1,287
beach cleans with 174 tonnes of waste removed.
Community relations over 2018/19 has
benefited from South West Water’s highest
ever media profile, helping to promote its
behavioural change campaigns Think Sink!
and Love Your Loo, which encourage people
to take a responsible approach to fats, oils,
greases and wet wipes in order to reduce
unnecessary blockages.
Bournemouth Water continued its support of
the Hampshire & Isle of Wight Wildlife Trust, the
Bournemouth 2026 initiative and the New Forest
National Park Authority’s Living Waters project.
We also partnered Dorset-based educational
charity Life Education Wessex to run curriculum-
based Waterwise programmes for primary
schools in the Bournemouth area.
Community access,
conservation and recreation
Our partnership with South West Lakes Trust
ensures that our reservoirs are managed for
environmental improvements and for the
benefit of our customers and communities.
During the year, we welcomed more than
two million people to our recreational estates.
Our reservoirs continue to offer health and
wellbeing opportunities with 71,000 people
taking part in organised recreation and 4,600
participants learning new skills at the sites
through the Trust’s heritage and environmental
education programme. We have co-developed
projects to ensure all our Sites of Special
Scientific Interest are in favourable condition
by 2020 and we are also running an awareness
campaign at the reservoirs to inform all
watersports participants and fishermen about
the management and control of invasive
non-native species.
Devon’s largest ever fatberg
discovered in Sidmouth sewer
In autumn 2018, a 64-metre ‘fatberg’ –
comprised largely of hardened fat, oil,
grease and wet-wipes – was discovered
beneath the seaside town of Sidmouth.
It took the South West Water team around
eight weeks to dissect and remove it for
processing, from which a sample was sent
to the University of Exeter for analysis. While
sewer workers carried out the removal using
a combination of manual clearance and
special jetting equipment, a pop-up shop
was set up nearby to provide information
to residents and visitors.
The substantial national and international
media coverage provided an opportunity
to remind people of the importance
of only flushing ‘the three Ps – pee,
paper and poo’.
Sustainability focus area
See sustainability strategy
on page 11
48
Pennon Group plc Annual Report 2019
Our operations
Water retail services
Pennon Water Services provides
retail water, wastewater and value added
services across England and Scotland.
We are focused on achieving long-term,
sustainable growth.
The business retail market for water and
wastewater opened in 2017.
Pennon Water Services has delivered against
a number of its original strategic objectives
working towards its goal of retailer of choice;
delivering strong service while achieving revenue
growth. It has faced challenges to its cost base
as a result of significant headwinds from market
systems, low customer knowledge of the market
and data accuracy which have restricted
opportunities to exploit economies of scale.
The market has developed differently to the way
it was originally expected with low and eroding
margins, greater consolidation, price-based
switching rationale and a higher regulatory cost
burden. Despite this, the business has built a
sound reputation and platform from which IT
and process investment will improve its financial
performance.
The business has successfully grown
through winning both national tenders with
multiple sites and dual service offerings to
SMEs, demonstrating a strong track record
in the healthcare, agricultural, tourism and
manufacturing sectors. In the past 12 months
we have continued to grow, winning and
renewing national contracts including Fullers,
Shearings, Unite Students, Pets at Home,
Britannia Hotels and the Grafton Group. Through
our strong service credentials, we have one of
the lowest customer loss rates among associated
retailers in the UK. Our approach has meant we
have been able to secure more than £35 million
of our revenue in a competitive market place,
renewing 100% of new nationally tendered
contracts signed since 1 April 2017.
While we operate in a relatively new market with
a business strategy that is based on long-term
growth, we have grown our revenue by around
5% and have a strong pipeline of opportunities
over the next three years. Our goal is to be the
water retailer of choice, trusted by customers
and stakeholders, delivering exceptional
customer service. We have sent more than
900,000 simple, clear and transparent bills
to customers since April 2017 and offer our
customers the chance to publicly rate their
experiences with us.
We are seeking to grow our share of the
non-household market, to become the leading
service provider through the provision of
a high-quality service.
During the year we changed the way in which
we measure customer service and now use
Trustpilot, which we believe gives a more
accurate picture as a wider number of customers
can take part in giving independent feedback.
Our current score is 8.5 out of 10.
Pennon Water Services also offer a range of
added value services. These include legionella
testing, leakage reduction and repair, water
auditing and contingency planning which creates
an opportunity for synergies across the Group.
Community and sustainability is important to
us and our experts are helping businesses to
use water more efficiently. We are investing in
water refill stations that will benefit a host of
community groups and individuals as well as
saving plastic bottles from being used. In
addition, we are long-term supporters of the
South West region’s tourism sector through
our support of the South West Tourism Awards.
Employee wellbeing and performance is a
priority for us and we have been recognised
at the national finals of both the Utility Week
Stars Awards and the British Chambers of
Commerce Awards.
100%
of new tendered
contracts renewed
£35m
in national customer
contracts served
Source for Business
Source for Business is the national
trading brand of Pennon Water
Services covering both England
and Scotland.
www.sourceforbusiness.co.uk
Pennon Group plc Annual Report 2019
49
STR AT EG IC REPORT – G ROUP PERFORMANCE
Report of the
Chief Financial Officer
Financial review
We have delivered strong
financial performance through
aligning our approach with
our values, including launching
a Sustainable Financing
Framework and being
accredited with the
Fair Tax Mark.
Susan Davy
Chief Financial Officer
Overview
Delivering strong sustainable financial
performance across the Group
We have delivered strong financial performance
in 2018/19 through aligning our approach and
financial strategy with our values, including
launching a Sustainable Financing Framework
and being accredited with the Fair Tax Mark.
We believe, as one of the UK’s largest
environmental infrastructure businesses, that
our sustainable business approach is an integral
part of Pennon’s success. All companies must
now consider the impact of issues such as water
scarcity, natural resource constraints, climate
change and labour conditions in the supply chain
on their bottom line and future viability. For debt
providers it is no different. Financial institutions
too are considering how these same issues
impact the ability of their portfolio to repay debt,
and how that impacts on their own measures
of success. At Pennon Group we have become
the first utility business to pioneer a Sustainable
Financing Framework which links financial
impact to sustainability impacts. The Framework
aligns with the Green Bond Principles, Social
Bond Principles and Green Loan Principles.
The Framework is designed to provide the ability
for the Group to finance projects which drive
improvements in sustainability – primarily in the
categories of pollution prevention and control,
sustainable water and wastewater management
and climate change adaptation – with interest
rates being linked to Pennon Group’s annual
environment, social and governance (ESG)
performance. In 2018/19 £600 million of new
facilities signed are linked to the sustainable
nature of the business, comprising:
• £110 million European Investment
Bank (EIB) loan
• £325 million other loan facilities
• £105 million revolving credit facilities
• £60 million Green long funding
finance leasing.
At Pennon, we know the taxes we pay help fund
vital public services and investment in people
and infrastructure to support future growth. In
2018/19, the Group’s taxes borne and collected
resulted in a total tax contribution of £281 million
being paid to the Government.
To support our second published tax strategy,
we once again consulted with customers and
members of the public through focus groups
to assess their opinions and thoughts of
Pennon in general and on our Group tax strategy.
Customers welcome our transparent approach
and commitment to pay our fair share of taxes.
The Fair Tax Mark is the UK’s accreditation
scheme for businesses paying their fair share
of corporation tax and reporting on their tax
practices transparently. This year we applied
to the Fair Tax Mark organisation to seek their
independent accreditation of our approach.
We are delighted to be the first water and
waste group to secure the Mark.
Further information on our tax strategy and the
total tax contribution are shown on pages 55
to 57.
Focusing on the financial performance for
2018/19, Pennon Group has again had a
successful year of earnings growth, robust cash
flows, strong liquidity and a sound balance sheet
position underpinned with low cost, flexible and
sustainable funding. These successes form the
background to the delivery of our 10-year, sector-
leading dividend policy of 4% year-on-year
growth above retail price index (RPI) to 2020.
50
Pennon Group plc Annual Report 2019
Underlying(1) earnings per share rose by 14%,
and by 7% on a statutory basis, reflecting
a 7% increase in underlying EBITDA and an
8% increase in underlying profit before tax.
The earnings growth for 2018/19 has been driven
by our energy recovery facilities (ERF) portfolio
expansion, weather-related higher revenue in
South West Water and a strong focus on cost
savings, benefiting both customers and
shareholders. 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.
During the year our effective interest rate on
average net debt remained relatively low at 3.6%.
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 and,
at 31 March 2019, the Group continued to have
a strong funding position with £1,170 million of
cash and committed facilities.
South West Water continues to deliver sector
leading totex outperformance and is on track
to deliver c.£300 million over the K6 (2015-20)
regulatory period. Together with delivery of net
ODI rewards and outperformance in our cost
of financing, momentum has been maintained
to deliver a cumulative return on regulated
equity (RoRE) for K6 of 11.8% (11.6% for 2018/19).
The expansion of the service area to encompass
the Isles of Scilly also gives South West Water
further opportunity for incremental growth.
South West Water’s performance creates a
sound platform for the next regulatory period.
Receiving fast-track status in two consecutive
price reviews – the only water company to
achieve this – allows us to make an early
start on the new plan with a continued focus
on cost efficiency and customer outcomes.
Throughout our operations, we align the
interests of investors and customers in sharing
the financial benefits of good performance.
At Viridor we have gain-share mechanisms
in place with corporate customers.
In South West Water, our long-established
WaterShare mechanism offers customers extra
investment or lower bills. Subject to shareholder
approval, one of our innovative initiatives
WaterShare+ will give eligible South West Water
customers the option to receive Pennon Group
plc shares in 2020, aligning customers and
investors more closely.
Viridor is delivering sustainable growth in UK
recycling and residual waste. With a de-risked
infrastructure model, our investment is backed
by profitable long-term contracts.
Viridor’s ERF portfolio remains a key differentiator
for the Group compared with our water industry
peers. The successful build out of the ERF
portfolio, in a market showing under-capacity,
will strongly support the Group’s earnings growth
to 2020 and beyond. During the year Viridor
acquired a further 37.5% stake in the joint venture
at Runcorn I ERF for a total cash consideration
of £54.8 million, bringing its total economic
interest to 75%. The associated voting rights
moved from 20% to 40%. There is potential for
further momentum from ERF portfolio expansion
and development of energy park opportunities
across the landfill and ERF portfolio.
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 every aspect of the Group’s operations –
new investments in our water business,
working with local authorities on long-term
waste solutions, or our investment in developing
the ERF portfolio. This approach is enhancing the
Group’s resilience and sustainability.
(1) Underlying earnings are presented to provide a more
useful comparison on business trends and performance.
A reconciliation of underlying and statutory earnings is set
out in the alternative performance measures section on
page 174.
Revenue (£m)
EBITDA (£m)
.
2
7
5
3
,
1
.
3
2
5
3
,
1
1
.
3
5
3
,
1
.
0
3
9
3
,
1
.
2
8
7
4
,
1
.
9
5
3
8
.
2
2
2
5
.
2
6
0
8
.
0
7
4
5
.
5
3
9
7
0
.
1
6
5
.
7
5
8
7
3
.
1
7
5
.
7
2
5
8
0
.
1
8
5
2,000
1,600
1,200
800
400
0
750
600
450
300
150
0
.
9
5
6
4
0
.
1
1
4
6
.
1
2
4
.
4
8
4
4
.
2
8
3
4
.
4
8
0
5
.
0
6
8
4
.
3
5
7
4
.
2
6
4
5
.
3
2
6
5
.
6
9
0
5
.
8
2
1
5
.
7
2
9
5
.
2
6
4
5
.
5
0
2
5
2014/15
2015/16
2016/17
2017/18
2018/19
2014/15
2015/16
2016/17
2017/18
2018/19
Water
Waste
Group
Underlying
Statutory
Adjusted
Capex (£m)
Interest rate on average net debt (%)
.
3
7
0
4
.
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
5
9
3
.
9
0
9
1
.
8
3
9
1
.
0
3
1
2
.
2
4
8
1
7
.
1
4
2
0
4
5
1
.
500
400
300
200
100
0
5
4
3
2
1
0
3
3
.
4
3
.
3
3
.
1
.
3
4
3
.
2
3
.
.
7
3
5
3
.
5
3
.
6
3
.
2014/15
2015/16
2016/17
2017/18
2018/19
2014/15
2015/16
2016/17
2017/18
2018/19
Water
Waste
Group
Water
Group
Pennon Group plc Annual Report 2019
51
STR AT EG IC REPORT – G ROUP PERFORMANCE
Report of the Chief
Financial Officer
continued
Statutory financial performance
The Group’s statutory profit before tax at
£260.3 million was broadly comparable with the
prior year (2017/18 £262.9 million), with earnings
per share increasing to 51.1p (2017/18 48.0p).
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.
The statutory results include the impact of
non-underlying items totalling a charge after
tax of £14.9 million (2017/18 £7.5 million credit).
The Directors believe excluding non-underlying
items and deferred tax provides a more useful
comparison of business trends and performance.
The net non-underlying charge of £14.9 million
is a result of:
• The movement in the fair value of long-dated
derivatives associated with South West
Water’s 2040 bond which results in a credit
of £5.8 million (2017/18 charge of £2.4 million)
• Increased provision in respect of the
receivable due for recovery of rectification
and completion costs for Glasgow Recycling
and Renewable Energy Centre (GRREC).
This reflects our assessment of the credit
loss (under IFRS 9) and results in a charge
of £22.7 million
• Past pension service cost for Guaranteed
Minimum Pension equalisation which
applies to all affected UK employers
and results in a charge of £3.0 million
• Taxation on the non-underlying items
above totalling a credit of £5.0 million.
Further details of non-underlying items are
given in note 6 to the financial statements.
Group EBITDA (£m)
Financial performance
(before non-underlying items)(1)
Revenue
Group revenue has increased by 6.1%
(£85.2 million) to £1,478.2 million
(2017/18 £1,393.0 million).
Viridor revenues increased by 8.5% (£67.0
million) to £852.7 million primarily due to the
ERF build out and IFRIC 12 construction revenue.
Revenue from South West Water increased by
1.7% (£9.7 million) to £581.0 million(2) due to
customer demand increases of 1.4% from
the hot and dry weather over the summer,
net tariff increases of 1.0%(3) and increased
infrastructure connections.
Adjusted EBITDA(4)
Group EBITDA and adjusted EBITDA were ahead
of last year by 7.2% at £546.2 million (2017/18
£509.6 million) and 5.4% to £592.7 million (2017/18
£562.3 million) respectively, with both South West
Water and Viridor ahead of 2017/18. The gap
between EBITDA and adjusted EBITDA narrowed
in the period as expected due to the reduced share
of joint venture EBITDA following the reset of the
Greater Manchester waste contract in 2017/18, net
of the increased holding in Runcorn I ERF (TPSCo).
Viridor’s EBITDA increased by 19.1%
(£28.7 million) compared with 2017/18.
The ERF business has performed strongly during
the year, in line with expectations. The EBITDA
generated from our portfolio was 25.1% higher at
£154.8 million (2017/18 £123.7million) reflecting
financial contributions from three new ERFs in
the year and increased like for like performance
at established facilities. ERF earnings include
contractual compensation in the form of
liquidated damages of £33.2 million (2017/18
£12.1 million) arising where construction was
completed post the original contractual
completion date.
While landfill volumes are comparable year on
year, landfill EBITDA has decreased by 14.3%
to £4.8 million since 2017/18 (£5.6 million)
reflecting the mix of waste deposited at our sites.
We continue to see demand for a landfill solution
into the medium term, and have sites well
positioned to meet these demands, with nine
sites operational at the year end. As part of the
planned closure profile, two sites were closed
in the year and we anticipate operating at a
level of six sites in the medium to long term.
In our landfill gas business we are currently
progressing our engine replacement strategy,
including investing in maintenance and more
efficient engines. This is improving reliability and
securing generation for the longer term, while
optimising the generating capacity potential
at our sites. EBITDA for the year at £20.6 million
is down 11.6% from the prior year (2017/18
£23.3 million), reflecting the natural decline in
gas volumes produced from sites (although at
5% this is at a lower rate than previous years),
and higher maintenance costs. The benefit of
higher year-on-year hedged electricity prices
has helped support the overall performance.
Recycling EBITDA at £14.9 million is in line with
expectations and prior year guidance (2017/18
£15.0 million). Viridor’s focus continues to be
on the production of higher quality and value
recyclates through our reliability-centred
maintenance programme ‘WorkSmart’ to create
margin improvement. While recyclate volumes
traded have decreased year-on-year, EBITDA
margin has increased by over a £1 per tonne
(9%) to £12 per tonne (2017/18 £11) reflecting
recovery in the global recycling markets for high
quality recyclate, net of the costs of challenging
input quality. We continue to share commodity
risks and rewards with our customers, with risk/
reward share arrangements in place for above
60% of inputs.
575
550
525
500
475
1
.
1
3
.
7
9
7
.
1
2
.
1
)
1
.
0
(
.
)
5
3
(
.
)
5
3
(
.
2
6
4
5
.
6
9
0
5
2017/18
ERFs
SWW revenue
Plc, PWS
and other
Viridor contracts, collections
& other, and indirect costs
Recycling
Landfill and
landfill gas
SWW cost
impacts
2018/19
52
Pennon Group plc Annual Report 2019
In the year contracts, collections and other
EBITDA was broadly comparable with the
previous year at £39.0 million (2017/18
£39.3 million). Following last year’s contract
reset, the Greater Manchester run-off operating
contract results are in line with our expectations.
The Greater Manchester run off contract is due
to end on 31 May 2019 and we continue with the
orderly transition towards its cessation, while
maintaining high levels of service. The financial
impact of not continuing with this operational
contract is not material to the Group.
Viridor’s indirect costs continued to fall with
a reduction of £1.5 million to £55.2 million
(2017/18 £56.7 million) in 2018/19 and are
17% lower in real terms than 2015/16.
Joint venture EBITDA has reduced to £31.9
million (2017/18 £38.9 million) as a result of
the contract reset at Greater Manchester in
September 2017, net of the £2.7 million impact
of the Group increasing its investment and
economic share in Runcorn I ERF joint venture
in the year from 37.5% to 75.0%. The contract
reset in 2017 saw both the disposal of our Viridor
Laing joint venture and the introduction of a
lower contractual EBITDA for the Runcorn I ERF
joint venture following the repayment of external
debt as part of the reset. This reduction in
EBITDA was offset by interest savings in the
joint venture profit after tax result. Runcorn I
ERF continues to deliver strong operational
and financial performance.
IFRIC 12 interest receivable at £14.6 million is
broadly comparable with 2017/18 at £13.8 million.
South West Water’s EBITDA and operating profit
increased by 1.7% and 1.3% respectively. Strong
cost management and efficiency delivery has
resulted in lower than inflation (average inflation
3.1%) cost increases, despite the c.£5 million
increased cost challenges posed by the extreme
weather and replenishment of water resources
in the second half of the year. In addition, South
West Water’s debt collection performance
remains strong resulting in a charge of 0.4%
of revenues (2017/18 0.8%) reduced from 1.7%
at March 2015. This continues to be driven
by efficient cash collections as we work with
our customers to manage their debt and strive
to support those customers in vulnerable
circumstances with affordability challenges.
South West Water has continued to record
strong performance against the K6 regulatory
contracts, outperforming regulatory assumptions
resulting in a cumulative RoRE of 11.8%.
Pennon Water Services has continued to
generate new customer gains during its second
year of trading with revenue increasing by 4.7%
to £173.7 million (2017/18 £165.9 million). Overall
EBITDA for the year was £1.0 million (2017/18 £1.0
million), with opportunities to improve operating
cost efficiencies continuing to be targeted.
Group efficiencies achieved as a result of our
Shared Services initiatives have delivered a
further £4.0 million of cost savings and synergy
benefits during the year, meeting our targeted
c.£17 million per annum from 2019.
Net finance costs
Underlying net finance costs of £83.2 million
are £8.7 million higher than last year (2017/18
£74.5 million). This is attributable to higher net
debt from continuing capital investments and
lower interest receivable on shareholder loans
following the Greater Manchester contract reset.
We have secured funding at a cost that is
efficient and effective with the effective interest
rate(5) continuing to be among the lowest in
the sector, reducing to 3.6% (2017/18 3.7%).
The effective interest rate for South West
Water is consistent with the prior year at 3.5%.
During 2018/19 underlying net finance costs
were covered 4.1 times(5) by Group operating
profit (2017/18 4.2 times).
Profit before tax
Group underlying profit before tax was
£280.2 million, an increase of 8.3%, compared
with the prior year (2017/18 £258.8 million).
Included in profit before tax is our share of joint
venture profit after tax of £12.4 million (2017/18
£9.4 million). On a statutory basis, profit before
tax was £260.3 million (2017/18 £262.9 million)
reflecting a non-underlying charge before tax
of £19.9 million (2017/18 credit of £4.1 million).
Tax charge
On an underlying basis the net tax charge of
£42.7 million (2017/18 £44.4 million) consists of:
• Current year current tax charge of £32.4
million, reflecting an effective tax rate of 11.6%
(2017/18 £29.7 million, 11.5%). The lower
effective rate versus the UK’s mainstream
corporation tax rate of 19% reflects the
accelerated level of capital allowance claims
available to the Group compared with the
depreciation charge
• Current year deferred tax charge of
£23.2 million (2017/18 £20.7 million) primarily
reflecting capital allowances across the
Group in excess of depreciation charged.
Recognising the resolution of minor outstanding
tax items with HMRC, the following prior year
credits have been recognised:
• Current tax credit of £3.0 million (2017/18
credit of £3.6 million)
• Deferred tax credit of £9.9 million (2017/18
£2.4 million credit), reflecting finalisation
of capital allowance claims.
The 2018/19 non-underlying items result in
a £5.0 million net tax credit (2017/18 £3.4 million
credit).
Overall, the total tax charge for the year of
£37.7 million was lower than the prior year
(2017/18 £41.0 million).
Earnings per share
Earnings per share on both a statutory and
underlying basis has been positively impacted
by a reduction in hybrid costs(6) compared with
last year. As a consequence, earnings per share
on both a statutory and underlying basis has
increased by 6.5% to 51.1p (2017/18 48.0p) and
13.6% to 57.8p (2017/18 50.9p) respectively.
Dividends and retained earnings
The statutory net profit attributable to ordinary
shareholders of £214.3 million has been
transferred to reserves.
The Directors recommend the payment of
a final dividend of 28.22p per share for the year
ended 31 March 2019. With the interim dividend
of 12.84p per share paid on 4 April 2019 this
gives a total dividend for the year of 41.06p, an
increase of 6.4% over 2017/18 and maintaining
our long-standing sector-leading dividend policy
of RPI +4% year-on-year growth. We set that
policy for the 2010-15 regulatory period and
confirmed its continuation through to 2020.
This policy reflects the Board’s confidence in our
sustainable growth strategy and is underpinned
by the highest potential Return on Regulated
Equity in the water sector over K6 (2015-20)
and the growth in earnings delivered by
Viridor’s ERFs. 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 £172.7 million
are covered 1.4 times(5) by net profit (before
non-underlying items and deferred tax) (2017/18
1.3 times). Dividends are charged against retained
earnings in the year in which they are paid.
(2) Including wholesale revenue for non-household customers.
(3) Net tariff increase reflects the net position post Wholesale
Revenue Incentive Mechanism pass back of £12 million for
2018/19.
(4) EBITDA and adjusted EBITDA are set out in the alternative
measures section on page 174.
(5) Calculation is set out in the alternative measures section
(pages 174 to 176).
(6) Perpetual capital securities (hybrid) cost in 2018/19 was
£8.6 million (2017/18 £21.5 million).
Pennon Group plc Annual Report 2019
53
Cash inflow from operations, continuing
investment in future growth
The Group’s operational cash inflows(5) in
2018/19 were £649.0 million (2017/18 £672.4
million). These funds have been put to use
in efficiently financing the Group’s capital
structure and investing in future growth.
This capital investment has resulted in higher
Group net debt.
Sustainable funding position
underpinning investment
The Group has a strong liquidity and funding
position with £1,170 million cash and committed
facilities at 31 March 2019. This consists of
cash and deposits of £570 million (including
£204 million of restricted funds representing
deposits with lessors against lease obligations)
and undrawn facilities of £600 million. At
31 March 2019 the Group’s borrowings totalled
£3,650 million. After the £570 million held in
cash, this gives a net debt figure of £3,080
million, an increase of £278 million during
the year (2017/18 £2,802 million).
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 which may lead to improved interest
rate margins.
During the year, £830 million of new and
renewed facilities have been signed, £665 million
in Pennon Group plc and £165 million in South
West Water. In total, £600 million of the new
facilities signed in the year are linked to the
sustainable nature of the business. Included
in these facilities is an inaugural Pennon Group
loan from the EIB of £110 million.
Major categories of capital expenditure
£10m
Landfill energy £15m
Other
£9m
Recycling
£77m
Wastewater
£77m
Water
£396m
Total
£208m
ERF
STR AT EG IC REPORT – G ROUP PERFORMANCE
Report of the Chief
Financial Officer
continued
Group capital investment
Group capital investment(5) was £395.9 million
2018/19 compared with £398.2 million in 2017/18.
Viridor
Viridor’s capital spend in the year was
£241.7 million (2017/18 £213.0 million),
an increase of £28.7 million over 2017/18.
The majority of capital investment continues
to relate to growth projects driving increased
earnings now and into the future, with
£207.7 million of total spend relating to the
ERF portfolio. As well as reflecting the move
into operation of three ERFs and continuing
construction at Avonmouth, the expenditure
in the year included additional investment
at Glasgow ERF of c.£21 million securing
incremental throughput capacity. Also
included are lifecycle capital expenditure
on our operational ERFs and development
of our Clyde Valley ERF fuel supply facility.
On-going restoration and remediation
programmes continue for our landfill assets,
ensuring we meet or exceed our environmental
duties and responsibilities.
South West Water
South West Water’s capital expenditure in
the year was £154.0 million, compared with
£184.2 million in 2017/18 with the profile aligned
with the K6 capital plan reflecting the completion
of specific large investment programmes at
Mayflower Water Treatment Works and the
bathing and shellfish water improvements.
Key areas of drinking water investment and
activity during 2018/19 included:
• Completion of the new state-of-the-art
Mayflower water treatment works which
has entered commissioning
• Investment in the resilience of our
infrastructure to reduce the number of bursts
and leakage, impacted by the freeze and thaw
in March 2018 and costs associated with the
hot dry summer.
Key areas of wastewater investment and activity
during 2018/19 included:
• Finalisation and completion of the
Plymouth bathing water scheme
• Continued improvements at wastewater
treatment works including flood resilience
• Investment for growth in order to meet
increases in supply and demand.
54
Pennon Group plc Annual Report 2019
Net debt movements (robust cash inflow from operations, £m)
3,500
3,250
3,000
2,750
2,500
2,250
2,000
1,750
1,500
)
5
.
1
0
8
2
(
,
.
0
9
4
6
.
)
5
9
7
0
3
(
,
.
)
2
2
3
(
.
)
0
7
4
(
.
)
9
7
3
1
(
.
)
2
9
2
(
.
)
6
3
7
(
)
8
5
(
.
.
)
0
2
6
1
(
.
)
8
4
5
(
.
)
5
4
8
3
(
Net Debt
1 Apr 2018
Cash inflow
from operations
Pension
contributions
Other
movements
Other
taxes(8)
Corporation
tax
Net
interest paid
Hybrid coupon
payment
Interim & Final
2017/18 dividend
Runcorn I
acquisition
Capital
payments
Net Debt
31 Mar 2019
Pennon has cash and committed facilities
providing funding for Viridor’s committed growth
projects and South West Water’s regulatory
capital programme into K7, with c.£725 million
headroom for investment.
Efficient long-term financing strategy
The Group has a diversified funding mix of fixed
(£1,936 million, 63%), floating (£576 million, 19%)
and index-linked borrowings (£568 million, 18%).
The Group’s debt has a maturity of up to 38
years with a weighted average maturity of c.18
years. Much of the Group’s debt is floating rate
and derivatives are used to fix the rate on that
debt. In line with the Group’s updated policy of
maintaining at least 60% of interest bearing
liabilities at fixed rates, 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.
Additionally, following the submission of the
K7 (2020-25) South West Water business plan
and the resulting Draft Determination from
Ofwat the Group is aligning the hedging for
the next regulatory period with the changed
regulatory methodology. A proportion of new
debt will be hedged in K7 on a rolling ten-year
basis while still maintaining flexibility within the
overall portfolio. Embedded debt hedging is
aligned with the five year regulatory delivery
period. Around 50% of South West Water’s
embedded floating net debt has already been
hedged into K7 during the past six months,
taking advantage of falling swap rates.
South West Water’s cost of finance is among the
lowest in the industry. Around two-thirds of
South West Water’s net debt is from finance
leases which provide a long maturity profile.
Interest payable benefits from the fixed credit
margins which are secured at the inception of
each lease. £517 million (c.25%) of South West
Water’s net debt is index-linked. This is below
Ofwat’s notional assumption of 33%, giving an
advantageous position as there remains
uncertainty over how transitioning from RPI to
CPIH may be translated into future funding rates.
Net debt position
The Group’s net debt has increased by
£278 million to £3,080 million.
The gearing ratio at 31 March 2019, being the
ratio of net debt to (equity plus net debt) was
64.7%(7) (31 March 2018 63.1%).
The combined South West Water and
Bournemouth Water debt to RCV ratio is
58.9%(7) (31 March 2018 60.3%) which is lower
than Ofwat’s K6 target for efficient gearing of
62.5%, but aligns with the new K7 notional
assumptions of 60.0%
Group net debt includes £2,057 million for South
West Water with the remaining £1,023 million
primarily supporting investment in Viridor growth
and expansion including the amount invested
in joint ventures, through shareholder loans of
£73 million for Runcorn I and Lakeside ERFs.
In the year, cash inflow from operations(5)
was £649.0 million (2017/18 £672.4 million).
Cash outflows relating to the capital programme(5)
totalled £384.5 million (2017/18 £463.9 million).
IFRIC 12 service concession payments (in respect
of GRREC, gross of amounts subject to legal
contractual process). In addition, a cash
consideration of £54.8 million was paid to acquire
an increased interest share in our Runcorn I ERF
joint venture.
Net interest payments totalled £73.6 million
(2017/18 £61.3 million).
Pension contributions were £32.2 million
(2017/18 £17.0 million).
Dividend payments and coupon payments on
the perpetual capital securities were £162.0
million (2017/18 £107.8 million) and £5.8 million
(2017/18 £22.9 million) respectively.
Corporation tax payments were £29.2 million
(2017/18 £21.7 million) while payments of all
other operational taxes were £137.9 million
(2017/18 £129.0 million).
Included in other movements of £47.0 million
is the 2017 unwind settlement of the Peninsula
MB Limited (PMB) derivative of £44.3 million.
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.
Taxation strategy
All Group operations and subsidiaries are subject
to tax in the UK and a detailed and accessible
tax strategy is published annually. Our annual
tax strategy and tax disclosure has been cited
as good practice by the Financial Reporting
Council. At Pennon we are transparent, sharing
details of how we optimise our tax position
without entering into artificial tax arrangements
or taking an aggressive stance in the
interpretation of tax legislation.
In December 2018 Pennon became the first
water services and waste management utility
to secure the Fair Tax Mark, an independent
certification scheme which recognises
organisations that demonstrate they are
paying the right amount of corporation tax
at the right time.
(7) Calculations set out on page 132.
(8) Other taxes include business rates, employers
national insurance, fuel excise duty, carbon reduction
commitment, environmental payments, climate
change levy and external landfill tax.
Pennon Group plc Annual Report 2019
55
cost to the Group, such as business rates,
corporation tax and employer’s National
Insurance contributions (NICs) as well as taxes
collected and recovered highlights where the
business is collecting tax on behalf of HMRC.
A net amount of £34 million (2017/18 £23 million)
was collected on behalf of the authorities for
employee payroll taxes and VAT.
Landfill tax of £121 million (2017/18 £127 million)
was collected and paid on waste material
deposited at our landfill sites. A slight reduction
year-on-year reflects the nature of the waste
materials disposed. This amount includes
£7 million (2017/18 £7 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
£10 million (2017/18 £5 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 18%
of HMRC’s landfill tax receipts in the year.
Employment taxes totalled £65 million
(2017/18 £59 million) including employees’
Pay As You Earn (PAYE) and total National
Insurance Contributions (NICs). Employer
NICs of £19 million (2017/18 £17 million)
were charged approximately 73% to operating
costs with 27% capitalised to property, plant
and equipment. The Group also paid £1 million
in apprentice levy (2017/18 £1 million).
The total amount of £65 million includes PAYE
of £3 million (2017/18 £3 million) on pension
payments made by the Group pension scheme.
A net amount of £45 million (2017/18 £41 million)
was collected on behalf of the authorities for
employee payroll taxes.
STR AT EG IC REPORT – G ROUP PERFORMANCE
Report of the Chief
Financial Officer
continued
Major components of the Group’s debt finance at 31 March 2019
£134m
Bond 2040
£668m
Private placements
£3,650m
Total
£401m
EIB loans
£1,560m
Finance
leasing
£435m
Index-linked bonds
£452m
Bank bilateral debt
Under our Tax strategy we:
• At all times consider the Group’s corporate
and social responsibilities in relation to its
tax affairs and 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.
Although the Group does not expect its tax
strategy to change significantly year on
year, it is reviewed and updated annually.
In preparation for our second strategy
document we once again sought customer
feedback on the approach we take.
Further details are given in the Group’s Tax
Strategy document available on the Pennon
Group website.
56
Pennon Group plc Annual Report 2019
Tax contribution 2018/19 –
borne/collected
The Group’s total tax contribution (TTC) for
2018/19 amounted to £281 million (2017/18
£265 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.
TTC looks at taxes borne and taxes collected.
Taxes borne includes all taxes which are a
Regulatory capital value as at 31 March (£m)
4,000
3,000
2,000
1,000
0
0
5
1
,
3
1
9
2
3
,
8
2
9
2
,
0
3
4
3
,
5
0
5
3
,
2015
2016
2017
2018
2019
Tax contribution 2018/19 (borne/collected)
£9m
Fuel excise
duty
£11m
Environmental
payments
£1m
Carbon reduction
commitment
£8m
Other taxes
£26m
UK
corporation
tax
£41m
Business
rates
£281m
net of £12m VAT receipt
Total
£132m
Landfill tax
£65m
Employment taxes
Business rates of £41 million (2017/18 £41 million)
were paid to local authorities. This is a direct cost
to the Group and reduces profit before tax.
The main elements of the £26 million UK
corporation tax payment to HMRC in the
year (2017/18 £22 million) were £14 million
in relation to 2018/19 instalment payments
and £12 million in relation to earlier years.
(An additional £3 million of corporation tax
payments were made to third parties in
respect of consortium relief).
• Increase in liabilities from other factors,
including service cost, of £13 million
• Increase in net asset values of £36 million,
reflecting good asset returns and deficit
contributions of £13 million.
For the Group’s principal scheme, of which South
West Water accounts for around 80%, the latest
actuarial valuation was at 2016. Contributions,
including the recovery plan of annual deficit
contributions up to 2022, remain in line with
2014 Final Determination allowances.
VAT of £12 million has been received
(2017/18 £19 million received) by the Group from
HMRC. VAT has no material impact on profit.
The net aggregate liabilities of £50.5 million
(after deferred tax) represented around 2% of the
Group’s market capitalisation at 31 March 2019.
Impact of low yields at 31 March 2019
At 31 March 2019 forward interest rates and
yields fell significantly, to some extent reflecting
Brexit uncertainty.
This resulted in a number of impacts for
the Group:
• Low corporate bond yield used to value
pension scheme liabilities increased our
present value of pension obligations
by £76 million (as noted above)
• Fair value of our borrowings increased
by c.£100 million or c.3% of gross debt
• The valuation of our derivative contracts, put
in place to manage interest risk, increased
compared with 2018, albeit to a lesser extent.
Payments to the Environment Agency and
other regulatory bodies total £11 million (2017/18
£11 million). This reduces profit before tax.
Fuel Excise Duty of £9 million (2017/18 £9 million)
related to transport costs. This reduces profit
before tax.
Carbon Reduction Commitment (CRC) payment
for the Group of £1 million (2017/18 £3 million).
This reduces profit before tax.
Pensions
The Group operates defined benefit pension
schemes for certain employees of Pennon Group.
The main schemes were closed to new entrants
on or before 1 April 2008.
At 31 March 2019, the Group’s pension schemes
showed an aggregate deficit (before deferred
tax) of £60.8 million (March 2018 £49.5 million),
an increase of £11.3 million as a result of:
• Increase in liabilities of £76 million due to
lower corporate bond yields
• Reduction in liabilities as a result of latest
CMI mortality assumptions of £42 million
The impacts noted above have partly reversed
since 31 March 2019, as forward interest rates
and yields have increased, however, as yields
were falling in the period leading up to
31 March 2019, the Group advantageously
entered forward starting interest rate hedges for
the K7 (2020-25) period, in line with the Group’s
interest rate management policy. Through this
period around 50% of South West Water’s
floating rate net debt has been hedged for K7.
Energy hedging
Pennon has adopted a Group portfolio
management approach to energy hedging, and
has the ability to hedge its market position for
periods up to five years ahead, further helping
to protect revenues.
Forward hedges have been put in place in the
liquid market with the Group c.95% for 2019/20,
c.55% for 2020/21 and c.20% for 2021/22 hedged
for its energy (generation net of internal usage
of electricity). In addition, the Group has a natural
hedging opportunity which represents one-third
of Viridor’s energy generation, as South West
Water is a net user of electricity.
The energy portfolio management team
continues to actively manage the Group net
energy generation position in liquid markets.
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 sound balance sheet, sustainable finances
and dividend well aligned to strategic objectives.
Susan Davy
Chief Financial Officer
Pennon Group plc
Pennon Group plc Annual Report 2019
57
STR AT EGI C REP ORT – GROUP PERFO RMANCE
Risk report
Risk management
and internal
control framework
Our core business activities across the water
and waste sectors inherently expose the Group
to a variety of risks and opportunities which
could materially impact our ability to achieve
our strategic priorities. The Pennon Board and
Pennon Executive are committed to the effective
management of both risks and opportunities to
ensure the long-term success of the Group.
Risk management framework
Pennon operates a mature Group-wide risk
management framework (see diagram below)
which is embedded into our culture and ways
of working at all levels of the business. This
framework forms a key part of our governance
structures to ensure that there is robust review,
challenge and assurance over the management
of our key risks and opportunities.
Our risk management framework encompasses
both a ‘top down’ and ‘bottom up’ approach.
This allows risks and opportunities to be
cascaded and escalated effectively, while
enabling a common understanding of the risks
and opportunities that the Group is exposed to
and their potential impact on the achievement
of our strategic priorities. The consideration
and evaluation of environmental, social and
governance (ESG) risks are integrated into the
Group’s risk management framework, with the
delivery of actions and performance monitored
through the ESG framework. Further detail on
the ESG framework is provided on page 10.
A consistent methodology is applied in the
identification, evaluation and management of
the Group’s risks, which considers both the
likelihood of the risk occurring over a long-term
period, formally from a Group perspective, a
five-year period, and the potential impact
assessed across a range of categories including
financial, safety, environmental and customer
service. All principal and business level risks are
captured within risk registers and are subject to
regular review and challenge.
The Group manages its risk exposure, in line
with the desired risk appetite and tolerance
levels, through the operation of a robust internal
control and assurance framework which is
aligned to the ‘three lines of defence’ model.
The subsidiary executive boards, Pennon
Executive and the Pennon Board obtain comfort
over the effectiveness of the internal control
environment through visibility of the outputs
from a variety of internal and external assurance
providers, including an independent Group
Internal Audit function.
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58
Board
Audit Committee
Subsidiary internal control
Pennon Executive
Group Risk Forum
Subsidiary risk management
Risk and compliance
Internal Audit
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
Pennon Group plc Annual Report 2019
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.
• Quarterly reviews of the Group’s principal risks
against the determined risk appetite.
Audit Committee
• Reviews the effectiveness of the Group’s risk
management framework
• Reviews the adequacy of the internal control
framework.
• 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
• Perform a thorough appraisal of the Group’s risk
and operational risks
• Establishes the relevant Group-wide risk
management processes and procedures
• Maintaining the internal control framework.
profile quarterly
• Monitoring of the Group’s performance against
KPIs and financial performance
• Establishes and reviews policies, procedures and
delegated authorities.
Group Risk Forum
• Provides review and challenge over subsidiary/
functional principal risks and mitigation strategies
• Alignment of the top down and bottom up risk
management process
• Horizon scanning on emerging risks and
opportunities.
• Quarterly review of Group and subsidiary principal
risks on a quarterly basis
• Deep dive reviews of specific risks. Topics include;
cyber security, renationalisation, health & safety,
and financial markets and liquidity.
Individuals
subsidiaries/
functions
• 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
activities over ISO standards and other key
business processes
• Monitor compliance with internal control framework.
• 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.
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Pennon Group plc Annual Report 2019
59
STR AT EG IC REPORT – G ROUP PERFORMANCE
Risk report
continued
Continuous improvements 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:
• The Group’s risk management strategy has
been refreshed, updated and approved by
the Board during the year
• There is greater coordination and alignment
between assurance activities across the
Group with integrated assurance reporting
presented to the Board
• Significant progress has been made in
rolling out the HomeSafe initiative across the
Group, which has delivered reduced injury
frequency rates
• A comprehensive health & safety second
line assurance programme has been delivered
by the Group Health Safety Security and
Assurance function
• There has been further standardisation of
operational and financial processes and
controls as part of the corporate shared
services structure
• A review has commenced to identify
opportunities to further improve the
Group’s resilience arrangements.
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.
Risk appetite
The UK Corporate Governance Code requires
the Group to determine its risk appetite with
respect to the level of risk exposure considered
appropriate 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 risk category and also for each principal
risk. This 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 also considered in the context of the stated
risk appetite. The risk appetite for each risk
category is detailed below:
Risk category
Law, regulation
and finance
Market and
economic conditions
Operating performance
Business systems and capital investment
Risk appetite statement
The Board is committed to fully complying with, and being seen to be complying with, all relevant laws,
regulations and obligations and has no appetite for non-compliance in this area. This includes (but is
not limited to) health & safety, where the Board places the highest level of importance on the welfare
of our staff, the public and those who work for or on behalf of Pennon.
The Group also operates a prudent approach to our financing strategy to ensure our long-term
financing commitments are met. The Board acknowledges, however, that the Group operates in a
complex environment influenced by Government policy and regulatory reform. Consequently, there
is a greater acceptance of risk in these areas and the Group seeks to mitigate any potential downside
and leverage opportunities that may arise from Government policy and regulatory change.
The Board recognise that our water and waste activities are exposed to changes in macroeconomic
and external market conditions, both domestically and internationally. The Group seeks to take
well-judged and informed decisions to mitigate these risks where possible, but accepts that a level
of residual risk may remain beyond the Board’s control.
The Board has a low appetite for significant operational failure of our water or waste assets and seeks
to reduce both the likelihood and impact through long-term planning and careful management of our
operational assets. There is greater appetite for well-informed risk taking to develop further markets,
subject to this not detrimentally impacting on the level of service that we provide to our existing
customer base.
While capital investment activities contain a degree of inherent risk, all decisions are taken on an
informed basis with risks weighted against potential appropriate returns on a case-by-case basis.
The Group seeks to minimise technology and security risk to the lowest possible level without
detrimentally impacting its operations.
60
Pennon Group plc Annual Report 2019
Overview of Pennon’s principal risk profile
Law, regulation
and finance
Business systems and
capital investments
F
D
A(ii)
C
G
B
P
E
A(i)
O
I
N
M
L
K
J
Strategic priorities
1
Leadership
in UK water
and waste
infrastructure
2
Leadership
in cost base
efficiency
3
Driving
sustainable
growth
Long-term priorities affected
Risk level
High
Medium
Low
H
Market and
economic conditions
Category
Law and regulation
and finance
Ref
A
B
C
D
E
F
G
H
I
J
K
L
M
N
O
P
Market and
economic conditions
Operating
performance
Business systems
and capital
investments
Increasing
Stable
Decreasing
Operating
performance
(i) 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.
(ii) Current assessment of direction of travel of risk level.
Strategic priorities
Risk description
Net risk level 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, 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 & safety incident
Tax compliance and contribution
Failure to pay all pension obligations as they fall due & increased costs to the
Group should the defined benefit pension scheme deficit increase
Non-recovery of customer debt
Macro-economic risks impacting commodity and power prices
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
Non-delivery of regulatory outcomes and performance commitments
Failure or increased cost of capital projects/exposure to contract failures
Failure of IT systems, management and protection including cyber risks
Pennon Group plc Annual Report 2019
61
STR ATEG IC REPORT – GROUP PERFORMANCE
Risk report
continued
Principal risks and uncertainties
The Group’s business model exposes it to a
variety of external and internal risks influenced
by the possible impact of macro political,
economic and environmental factors; notably the
continued uncertainly arising from Britain’s exit
from the European Union (EU) and the potential
renationalisation of the water industry. While the
current Government are supportive of the
existing regulatory model, in the event of a
change of government, it remains the policy of
the opposition to renationalise the water industry
and Labour has provided further detail of their
proposed approach during the year. In the event
of this scenario occurring there could be an
impact to the Group’s business model and
consequently this remains a significant risk to
the Group.
While the ability of the Group to influence
these macro level risks is limited, they continue
to be regularly monitored and the potential
implications are considered as part of the
ongoing risk assessment process. The Group
performs a range of scenario planning and
analysis exercises to understand the risk
exposure of one or a number of these events
occurring. The Group’s principal risks have
remained consistent with the 2018 annual report
with the exception of one additional principal risk:
Net risk
Direction
of travel
Risk
Non-delivery of regulatory
outcomes and performance
commitments’
This risk reflects the significance
of the ODI regime in the regulatory
model. South West Water has the
opportunity for reward but is also
exposed to risk if performance
commitments are not achieved.
62
Pennon Group plc Annual Report 2019
Britain’s exit from the European Union
During the year the Group has continued to
evaluate and monitor the potential risks and
opportunities arising from Britain’s decision to
exit the EU. Cross functional working groups
have been established and mitigation plans have
been implemented focusing on those activities
that are likely to be most impacted in the event
of Britain leaving the EU without a withdrawal
agreement. The Pennon Executive and the
Board have received regular updates throughout
the year on the Group’s preparations for a
no-deal scenario.
The Group continues to reflect the impact
associated with Britain leaving the EU within the
relevant principal risks. While no single issue is
considered to expose the Group to material risk,
it is recognised that the combination of multiple
issues or events concurrently could result in
some disruption in the period immediately
after leaving the EU in the event of a no-deal
scenario. Plans have been established which
seek to minimise the potential impact on the
Group and its operations.
The following issues have been identified as
potentially having a significant impact on the
Group’s principal risks:
• Availability of chemicals (linked to principal
risk: Business interruption or significant
operational failures/incidents). Detailed
analysis has been completed on chemicals
received from European-based suppliers
and on South West Water and Viridor stock
levels to ensure they continue to be
maximised. Additionally, operational plans
have been developed to ensure continued
asset availability and that Government and
Local Resilience Forum requirements are met.
South West Water has also been heavily
engaged with Water UK in developing a
national response. This has involved
discussions with the UK Government,
regulators and other key stakeholders,
developing a ‘critical chemicals’ action
plan jointly with the Chemicals Industry
Association and due diligence being
undertaken on critical chemical suppliers.
• Exporting of recyclate material (linked
to principal risk: Macro level risks impacting
on commodity and power prices). While we
continue to export recyclate to Europe,
contingency plans have been established
so that, in the event of a no-deal scenario,
the majority of recyclate can be diverted to
non-European markets. We have engaged
extensively with our haulage and shipping
partners to understand their preparations
and trialled shipments to EU and non-EU
countries from alternative UK ports.
For the limited volume of recyclate material
which will continue to be exported to Europe
in the event of a no-deal scenario, revised
documentation requirements have been
reviewed and internal processes amended
where appropriate.
• Inability to access the same level of
funding from the European Investment
Bank (linked to principal risk: Maintaining
sufficient finance and funding): Prior to the
financial year end funding lines have been
put in place which has resulted in cash
and committed facilities to fund Viridor’s
committed growth projects and South West
Water’s capital programme into K7 (2020-25).
Furthermore, we have engaged with a
variety of UK and European banks who
have reaffirmed their appetite for UK
infrastructure lending.
• The ability to attract and employ
individuals with the necessary skills and
experience (linked to principal risk: Difficulty
in the recruitment, retention and development
of skills): While the current position of the
UK Government in the event of a no-deal
scenario is that EU nationals already in the
country will be able to apply for settled status,
the Group has been proactive in reinforcing
this to all affected staff. Furthermore, Viridor
has moved 180 employees from agency roles
into permanent employment. The Group has
also sought assurances from temporary
employment agencies as to their plans to
ensure sufficient availability of temporary
resource in the event of a no-deal scenario.
The Directors confirm that during 2018/19
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 69.
Strategic impact
Mitigation
Net risk
Direction
Risk appetite
Law, regulation and finance
Principal risk
A: 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.
B: Regulatory
reform
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.
C: Compliance
with laws and
regulations
Long-term priorities affected:
1, 2
The Group is required to comply
with a range of regulated and
non-regulated laws and regulations
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.
We recognise that
Government policy
evolves. The Group
seeks to minimise
potential risk
and maximise
opportunities
through regular
engagement,
communication
and robust
scenario planning.
We accept that
regulatory reform
occurs and seek
to leverage
opportunities
where possible
and minimise the
negative impact of
regulatory reform by
targeting changes
which are NPV
neutral over the
longer term to
protect customer
affordability and
shareholder value.
The Group has the
highest standards
of compliance and
has no appetite for
legal or regulatory
breaches.
(i) While the present Government is supportive of the existing
regulatory model, the renationalisation of the water industry
continues to be a central policy of the Labour Party and remains
a possibility in the event of a change of Government. We
continue to engage with all political parties, customers and wider
stakeholders, both directly and via Water UK, demonstrating the
value received from our operational performance and continued
investment in the network infrastructure. South West Water’s
2020-25 business plan also detailed how we would empower
customers further and deliver benefits for our stakeholders
over the next regulatory period.
(ii) Viridor remains well placed to leverage the opportunities
arising from the key outcomes within the Government’s
Resources and Waste Strategy, as reflected by investment in an
additional plastic processing facility. Further clarity is required,
however, with respect to key aspects of the initiatives within the
Resources and Waste Strategy as timescales remain uncertain.
There remains a continued focus from Ofwat on the governance
of companies in the water sector; in particular the introduction
of a ‘social contract’ between water companies and their
stakeholders. We have been an active voice in the sector during
the year on this topic.
This concept was at the heart of South West Water’s 2020-25
business plan, entitled ‘New Deal’, which received fast-track
status from Ofwat. The Draft Determination was received from
Ofwat in April 2019. This included our commitment to provide
customers with a shareholding and a greater say in how South
West Water is run. Additionally, as a listed company we continue
to uphold the highest standards of corporate governance and
transparency, including compliance with the UK Corporate
Governance Code and Ofwat’s Principles for Holding
Companies.
The Group operates a robust and mature regulatory framework
which seeks to ensure compliance with Ofwat, Environment
Agency and other relevant requirements.
The Group also continues to provide a rolling programme of
training and guidance to our staff, contractors and partners.
This included data protection training following the
implementation of the General Data Protection Regulation.
During the year we have also refreshed our Code of Conduct
and launched a specific Supply Chain Code of Conduct, further
reinforcing the standards expected of our staff and our partners.
The Group’s Speak Up whistleblowing process allows any
concerns to be raised confidentially and robust processes are
in place for investigating these.
Additionally during the year Pennon became a member of the
Slave Free Alliance, demonstrating the Group’s commitment
to eradicating modern slavery.
Strategic impact
1
Leadership in UK
water and waste
2
Leadership in cost
base efficiency
3
Driving sustainable
growth
Risk level
High
Medium
Low
Increasing Stable
Decreasing
Pennon Group plc Annual Report 2019
63
STR ATEG IC REPORT – GROUP PERFORMANCE
Risk report
continued
Law, regulation and finance
Principal risk
D: 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.
E: Non-
compliance or
occurrence of
an avoidable
health & safety
incident
Long-term priorities affected:
1, 2, 3
A breach of health & safety law
could lead to financial penalties,
significant legal costs and damage
to the Group’s reputation.
F: Tax
compliance and
contribution
Long-term priorities affected:
2
Non-compliance may result in
financial penalties, legal costs and
reputational damage. Furthermore,
the perception that Pennon’s overall
tax contribution is inadequate could
have a detrimental impact on the
reputation of the Group.
Strategic impact
Mitigation
Net risk
Direction
Risk appetite
The Group has mature treasury, funding and cash flow
arrangements in place and the impact of political, economic,
and regulatory risks on the Group’s financing commitments
and cashflow is regularly reviewed by Pennon Executive and
the Board.
The Group has £1.2 billion of cash and committed facilities.
During the year the Group has signed new facilities of
£830 million of which £600 million is linked to the sustainable
nature of our business. This provides funding for Viridor’s
committed capital projects and funds the South West Water
into K7.
The strength of our position provides the Group with added
resilience in the event of short-term volatility of a potential Brexit
no-deal scenario. Further detail is provided on page 62.
The effective management of health & safety risks continues
to be a priority for the Board and Pennon Executive, as
demonstrated by the 2025 HomeSafe strategy.
Experienced health & safety professionals are embedded
within the Group providing advice, guidance and support to
operational staff.
During the year the Group progressed the full roll out
of HomeSafe for Viridor and South West Water which
encompassed both face-to-face and e-learning training.
This was supported by a comprehensive assurance programme
to ensure the key requirements of HomeSafe, legal compliance
and our standards are being correctly followed with outcomes
reported to the Pennon Health & Safety Committee.
The benefits of the HomeSafe programme are already
being seen with lost time injury frequency rates falling 32.2%
during the year.
The Group have an experienced and professionally
qualified in-house tax team, supported, where necessary,
by external specialists.
The Pennon tax strategy has been refreshed and published,
following customer consultation.
During the year Pennon became the first water and waste
management utility to secure the Fair Tax Mark; an independent
accreditation scheme, which recognises organisations that
demonstrate they are paying the right amount of corporation
tax at the right time.
Processes and controls have been reviewed during the year to
ensure we are able to continue to meet HMRC requirements.
The Group operates
a prudent approach
to our financing
strategy in order to
ensure our funding
requirements are
fully met.
The Group has no
appetite for health
& safety related
incidents and
has the highest
standards of
compliance
within the Group,
contractors,
partners and
other third parties.
The Group ensures
full compliance with
HMRC requirements
and will not enter
into artificial tax
arrangements or
take an aggressive
stance in the
interpretation
of tax legislation.
Strategic impact
1
Leadership in UK
water and waste
2
Leadership in cost
base efficiency
3
Driving sustainable
growth
64
Pennon Group plc Annual Report 2019
Risk level
High
Medium
Low
Increasing Stable
Decreasing
Law, regulation and finance continued
Strategic impact
Mitigation
Net risk
Direction
Risk appetite
Long-term priorities affected:
2
The Group could be called upon
to increase funding to reduce the
deficit, impacting our cost base.
The Group has an experienced in-house pensions team
who also engage professional advisors to manage the pension
scheme’s investment strategy, ensuring the scheme can pay
its obligations as they fall due.
During the past year there has been a significant decrease in
bond yields resulting from uncertainty over Brexit, which could
result in an increased deficit position following the revaluation
of the defined benefit pension scheme.
The Group will
ensure that all
obligations are met
in full but seeks to
manage this without
unnecessary
increased costs
to the Group.
Principal risk
G: Failure to
pay all pension
obligations as
they fall due
and increased
costs to the
Group should
the deferred
pension scheme
deficit increase
Market and economic conditions
Strategic impact
Mitigation
Net risk
Direction
Risk appetite
Principal risk
H: 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 regard to
vulnerable customers and
affordability.
I:
Macroeconomic
risks impacting
commodity
and power
prices
Long-term priorities affected:
3
Challenges such as continued
local authority austerity, reduced
global demand for our recycled
commodities and decreases in
power prices have a direct impact
on our revenues generated by our
recycling and energy businesses.
While seeking
to minimise
non-recoverable
debt, we recognise
customer
affordability
challenges and
the inability to
disconnect
customers results
in a residual risk
of uncollectable
debt remaining.
The Group seeks
to take well-judged
and informed
decisions while
ensuring plans are
in place to mitigate
the potential impact
of macroeconomic
risks.
South West Water has mature and embedded debt collection
strategies in place for the recovery of domestic customer debt
which has delivered improved collection rates and decreased
bad debt exposure during the past three years. There has been
no significant increase in bills for 2019/20 and real-term
decreases form part of the business plan for 2020-25.
The potential economic impact of Brexit on our customers remains
a risk. We work proactively with our customers who are struggling to
pay and have a range of affordability schemes and social tariffs to
support them including Restart, WaterCare and Freshstart.
Within the non-household market there has been continued
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.
Viridor remains well positioned across the waste hierarchy
with long-term contracts supporting the ERF business.
While recyclate markets have improved during the year,
continuing to meet the quality requirements within China
and other markets remains a key area of focus in addition to
sourcing other potential markets. Extensive planning in the
event of a Brexit no deal scenario has also been undertaken
and is detailed further on page 62.
We continue to invest in our assets and we work closely in
partnership with our local authority customers in the delivery of our
services and maximising the quality of the input recyclate material.
Additionally, a significant proportion of our input contracts have
price adjustments based on price fluctuations during the year.
Energy risk management is undertaken at a Group level and
acts as a natural hedge between South West Water and Viridor,
offsetting any drop in power prices. Forward hedges have been
put in place with the Group c. 95% hedged for 2019/20, c.55% for
2020/21 and c.20% for 2021/22 hedged..
Pennon Group plc Annual Report 2019
65
STR AT EG IC REPORT – GROUP PERFORMANCE
Risk report
continued
Operating performance
Principal risk
J: Poor
operating
performance
due to extreme
weather or
climate change
Long-term priorities affected:
1
Failure of our assets to cope with
extreme weather conditions may
lead to an inability to meet our
customers’ needs, environmental
damage, additional costs and
reputational damage.
K: 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.
Strategic impact
Mitigation
Net risk
Direction
Risk appetite
The increased frequency and impact of extreme weather
exposes our assets to risk, while there continues to be a
reduced appetite for reduced performance arising from such
incidents from the regulator and our stakeholders.
The Group seeks to mitigate this risk through investment via a
planned capital investment programme, emergency resources
and contingency planning. As part of the risk management
process the Group also performs horizon scanning on the
longer-term impacts of climate change on its operations.
Key lessons learnt from the freeze-thaw event in March 2018 were
incorporated into our 2018/19 winter preparedness planning.
Extensive modelling and forecasting is also performed to evaluate
South West Water’s water resources, both in actively managing
resources in periods of dry weather but also managing long-term
water resources as demonstrated through South West Water’s
25 year Water Resources Management Plan.
Viridor has in place regional adverse weather management
strategies aimed at reducing disruption to site operations and
transport logistics.
There has been a continued focus on customer experience
and the customer journey across the Group during the year.
Enhanced capability within our call centre, investment in training
and expanded channels to interact with our customers resulted
in South West Water’s best ever SIM customer service score
with a ranking of second out of all water and sewerage
companies in England and Wales. South West Water is also
accredited to the Institute of Customer Service’s ServiceMark
accreditation. Planning is also underway to evaluate South West
Water’s performance under the new C-MeX guidance, which
will replace SIM from 2020.
Customer service and experience has been a continued focus
for Viridor with a score of 7.1 out of ten on Trustpilot. Customer
service within Pennon Water Services is also monitored through
Trustpilot where a score of 8.5 out of ten has been achieved.
The Group seeks
to reduce both
the impact and
likelihood through
long-term planning
and forecasting
to ensure that
sufficient measures
are in place to
mitigate the impact
of extreme weather
and climate change
on our operations.
The Group
continually seeks to
increase customer
satisfaction and
maximise customer
retention while
taking well informed
risk to develop
further markets
and offerings.
Strategic impact
1
Leadership in UK
water and waste
2
Leadership in cost
base efficiency
3
Driving sustainable
growth
66
Pennon Group plc Annual Report 2019
Risk level
High
Medium
Low
Increasing Stable
Decreasing
Strategic impact
Mitigation
Net risk
Direction
Risk appetite
Operating performance continued
Principal risk
L: Business
Interruption or
significant
operational
failures/
incidents
Long-term priorities affected:
1, 3
Operational failure in our water
business could mean that we are
unable to supply clean water to
our customers or provide safe
wastewater processes. 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 ERF and
recycling facilities.
M: Difficulty in
the recruitment,
retention and
development of
appropriate
skills required
to deliver the
Group’s strategy
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 innovate, share best practice,
deliver synergies and move the
Group forward.
N: Non-delivery
of Regulatory
Outcomes and
performance
commitments
Long-term priorities affected:
1, 2, 3
South West Water’s Regulatory
Outcomes and performance
commitments cover key strategic
focus areas.
Non-delivery against these could
result in financial penalties being
applied as well as reputational
damage to the Group.
The Group maintains detailed contingency plans and incident
management procedures which are regularly reviewed and
assets are managed through a programme of sophisticated
planned and preventive maintenance and effective
management of stores.
Extensive Group-wide Brexit no-deal planning has also been
undertaken with further detail outlined on page 62.
Continued investment alongside South West Water’s pollution
reduction strategy has resulted in a reduction of serious pollution
incidents to two during the year. This was among the lowest
number of such incidents in the industry. There has also been
a continued reduction in minor pollution incidents (Category 3)
but disappointingly an increase in minor pollution incidents
(Category 4).
Careful management and effective optimisation of the ERF fleet
has again resulted in availability exceeding 90% across our
operational portfolio (including joint ventures).
The Group’s HR Strategy continues to be embedded across
the organisation and a range of initiatives have been delivered
during the year to attract, retain and develop our employees.
Employee Voice Forums and engagement provides
opportunities for employees to regularly discuss business
priorities and challenges with business leaders.
Mitigating actions have also been taken to reduce the potential
impact of a Brexit no-deal scenario on our workforce. Further
detail is included on page 62.
Succession plans remain in place for senior and other key positions.
In order to ensure the Group can compete for the top talent in the
market place during the year 30 graduates joined Viridor and 226
apprenticeships started across the Group supporting new starters
and existing employees in their career development.
The impact of these initiatives is measured through the results
of the most recent Great Places to Work Best Workplaces™
Survey which showed an improved Trust Index score of 62%
and Engagement score of 68%.
The regulatory framework has been in place since 1 April 2015
and South West Water has delivered cumulative net ODI
rewards of £11.3 million. South West Water is forecast to meet
all its ODI commitments by 2020.
This risk reflects the significance of the ODI regime in the
regulatory model. South West Water has the opportunity for
reward but is also exposed to risk if performance
commitments are not achieved.
Following the South West Water 2020-25 business plan being
awarded fast-track status, we are already working on plans to
deliver a step change in operational performance as well as
meeting our 2020 commitments.
The Group operates
a low tolerance
for significant
operational failure
and seeks to
mitigate these risks
where possible.
While turnover
of staff does occur
we ensure the
appropriate skills
and experience
is in place with
succession plans
providing adequate
resilience.
The Group is
committed to
achieving all of
our performance
commitments over
the length of each
regulatory period.
Where performance
in an individual
year falls below
expectation we
implement action
plans and targeted
interventions to
ensure performance
returns to
committed levels.
Pennon Group plc Annual Report 2019
67
Strategic impact
Mitigation
Net risk
Direction
Risk appetite
STR AT EG IC REPORT – G ROUP PERFORMANCE
Risk report
continued
Business systems and capital investment
Principal risk
O: Failure or
increased
cost of capital
projects/
exposure to
contract failures
Long-term priorities affected:
1, 3
Inability to successfully deliver on
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.
P: 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.
All capital projects are subject to a robust business case
process which includes challenge and risk modelling over
key assumptions. Projects are delivered using skilled project
management resource complimented by senior oversight
and leadership.
As a result of the financial challenges experienced by large
contractors in the construction sector, there is a reduced
appetite for large water and waste construction projects,
resulting in a general lack of commercial tension. Regular
monitoring is performed on the financial health of key
contractors and supply chain partners.
Glasgow, Beddington and Dunbar ERFs all began processing
waste during the year while the commissioning commenced
on Mayflower water treatment works. The construction of
Avonmouth ERF is progressing well with completion on track
for 2020/21.
Resulting from remediation work at the Glasgow ERF, Viridor is
contractually entitled to recover the gross contractual receivable
of £72 million from the original principal contractor Interserve
Construction Limited. We will take all necessary legal and
procedural steps to achieve this. Liquidated damages
associated with Beddington and Dunbar ERFs have been
fully offset against milestone payments.
The redevelopment of Heathrow Airport continues to be closely
monitored, with the Lakeside ERF joint venture located on the
site of the proposed third runway. Lakeside ERF would have to
be removed in the event this redevelopment occurs and we
would expect to be fully compensated for the rebuild of the
facility on a like-for-like basis. An alternative site has been
identified with detailed site studies and environmental
assessments currently being undertaken.
The Group operates a mature and embedded governance
framework over the ‘business as usual’ IT environment and
major project implementations aligned to ISO 27001
standards. Disaster recovery plans are in place for corporate
and operational technology and these are regularly reviewed
and tested.
Cyber threats continue to increase in volume and sophistication.
These risks are mitigated by a strong information security
framework aligned to guidance issued by the National Cyber
Security Centre (NCSC).
A gap analysis of South West Water’s drinking water operational
technology cyber security controls has been undertaken against
the requirements of the Network and Information Systems (NIS)
directive utilising external expertise. The outcomes of this
exercise have informed future actions where opportunities for
further improvement exist.
The Group’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.
Strategic impact
1
Leadership in UK
water and waste
2
Leadership in cost
base efficiency
3
Driving sustainable
growth
68
Pennon Group plc Annual Report 2019
Risk level
High
Medium
Low
Increasing Stable
Decreasing
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 period
considered to be appropriate by the Board in
connection with the UK Corporate Governance
Code. The five-year period appropriately
recognises the mix of business in the Group,
noting in particular the ability to look forward
with some certainty in the business and
regulatory environment in which the Group
operates, notably for South West Water.
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 63 to 68 of
the risk report. The Group’s principal operating
subsidiaries of South West Water and Viridor
are long-term businesses characterised by
multi-year investment programmes, with
associated revenue streams. The risk of
renationalisation is included as a principal risk,
this viability assessment assumes, should this
occur, it would be conducted in an orderly
manner in line with market conventions; noting
that this would be dependent on the specific
approach adopted by a government to
implement a renationalisation policy .
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
Capital
projects
Operational
challenges
Business
resilience
Commodity
risk
Matters considered
by the Audit Committee
Review of the performance of
large capital projects
Ability of South West Water to
maintain network resilience in
extreme scenarios
A review of business continuity
and planning
Consider the risks and mitigation
measures used to manage
recycling commodity risk
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.
Additionally South West Water Limited
considered further scenarios concerning South
West Water Limited’s viability. This additional
assessment considered South West Water’s
regulatory financial ring fence through the
following scenarios that are recommended
to be tested by Ofwat:
A further more extreme adverse scenario,
excluding the likelihood of occurrence, confirmed
the Group remained viable. 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 four factors above, have been monetised
as absolute financial costs with the principal risks
being 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 and reflects the long term
visibility of future cash flows in South West Water,
as a regulated utility business, and the
infrastructure backed cash flows of Viridor,
which operates in commercial markets.
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 85, the Directors reviewed and discussed
the process undertaken by management,
and also reviewed the results of the stress
testing performed.
• 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.
These scenarios in isolation and the combination
noted above did not compromise the viability of
South West Water over their assessment period
to 2030. South West Water uses a longer viability
period noting a greater visibility of future cash
flows, being a regulated business.
Forward-looking statements
This strategic report, consisting of pages 1 to 71,
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
all relevant factors, including those set out in
this section on principal risks and uncertainties.
Pennon Group plc Annual Report 2019
69
STR ATEG IC REPORT – WATER SHARE+
Customer ownership
Sharing our success and enhancing our relationship with water customers
As part of South West Water’s current business plan
(2015-20) we introduced WaterShare – a unique, innovative
scheme that enables the financial benefits of successful
company performance to be shared with customers in
a more open and timely way.
An independent WaterShare panel, which meets
three times a year, scrutinises our performance,
and reviews and challenges recommendations
on how any benefits should be shared.
Performance is reported to customers through
the WaterShare scorecard and framework,
which is overseen by the panel.
Any financial benefits resulting from regulatory
outperformance are discussed with customers
through focus groups and regular surveys are
carried out. Options discussed with customers
every year include:
• Reinvestment in improving services for
customers;
• Reduction in bills; and
• Deferral of benefits for the future.
We anticipate a WaterShare value of c.£20-25
million to be shared with customers in 2020.
For South West Water’s 2020-25 business plan,
we reviewed the established WaterShare
approach to ensure we would build on our
relationship with customers and further embed
the sharing of regulatory outperformance.
We undertook research to better understand
how customers would like to receive financial
benefits.
Options included bill reductions (immediate
and deferred), monetary rebates, reinvestment
in services and the choice of being given an
enduring ‘financial stake’ in the business.
While 77% of customers do not own shares or
have a financial stake in any company, 79% believe
share ownership would be a positive step as:
• Customers’ interests would be more aligned
with investors – customers would receive a
share of the Company profits in the form of
dividends on the Company’s ordinary shares
as and when shareholders do, in addition
to owning a capital stake in the Company
• Customers would have a vote and an
opportunity to share their views through
general meetings.
We concluded that, despite the lack of familiarity
with share ownership, there is perceived value
in it. Our research showed that many customers
are aware of schemes that are available for
employees and believe these are positive.
Our pledge in the South West Water 2020-25
business plan is to offer customers the
choice, alongside bill reductions, rebates and
reinvestment, of taking a financial stake in
the business via an equity share of Pennon.
Subject to confirmatory votes at the 2019 and
2020 Annual General Meetings, from 2020,
eligible household customers will have the
proposed option of receiving their rebate in
the form of Pennon shares. These would be
purchased in the market, avoiding any
dilution of existing shareholdings, with the
purchase to be funded by the benefits of
outperformance that South West Water has
already committed to return to customers
via the WaterShare sharing mechanism.
This approach has been endorsed through the
regulatory review by Ofwat, with South West
Water’s plan fast tracked.
As shareholders, participating customers
would then:
• Receive a share of company profits, in the
form of dividends, just as shareholders do
when dividends are paid;
• Be able to vote and have their say at the
company AGM; and
• Receive annual reports and financial
statements.
In addition, all customers will be invited to attend
a customer annual general meeting and quarterly
public customer meetings chaired by the
independent WaterShare+ panel.
Our customers already have a say in our
business through the extensive engagement we
have with them every day. As new shareholders,
we believe this will be enhanced by awarding
them a tangible stake in our business.
The strategic report consisting of pages 1 to 71
was approved by the Board on 29 May 2019.
By order of the Board
Simon Pugsley
Group General Counsel and Company
Secretary
29 May 2019
70
Pennon Group plc Annual Report 2019
Our customers already have a say in
our business through the extensive
engagement we have with them every
day. We believe our relationship with
them will be enhanced by giving
them a tangible stake.
Pennon Group plc Annual Report 2019
71
We continue to raise an increasing proportion
of our funding through our leading Sustainable
Finance Framework and to demonstrate
good governance via improved disclosures
and transparency in our business.
Mayflower is a green asset
Pennon’s Sustainable Financing
Framework aims to integrate
commitments to environmental and
social objectives into funding activities.
Mayflower water treatment works is
an eligible green asset and is the first
of its kind to use innovative ceramic
membrane filtration using fewer
chemicals and less energy than
traditional processes to treat raw water.
With a range of financing facilities
entered into during 2018/19, Pennon
has shown it is at the forefront of green
finance in the UK. This is through the
UK’s first green long funding finance
leases and loans linked to both ESG and
KPI targets, which will affect the margins
paid on these sustainable loans.
.
Sustainability focus area
See sustainability strategy on
page 11
72
Pennon Group plc Annual Report 2019
G OVE RNANCE
Chairman’s letter to shareholders
74
76 Board of Directors
78 The Board and its governance
framework
83 Audit Committee report
87 Sustainability Committee report
89 Nomination Committee report
91 Remuneration Committee report
92 Directors’ remuneration report
contents
106 Directors’ report – other
statutory disclosures
Good governance
enabling investment,
innovation and
sustainable growth
Pennon Group plc Annual Report 2019
73
G OVE R NANCE
Chairman’s letter
to shareholders
Strong governance is central
to our successful management
of the Group for the benefit
of all our stakeholders.
Sir John Parker
Chairman
Dear Shareholder
I am pleased to introduce the corporate
governance report for 2019 on behalf of the
Board. This is the principal method of reporting
to our shareholders on the Board’s governance
policies and the practical application of the
principles of good corporate governance.
Strong governance is central to our successful
management of the Group and it provides the
framework for the effective delivery of our
strategy, the creation of shareholder value and
the ongoing development of our sustainable
business. As Chairman of Pennon, I remain
committed to ensuring that we continue
to operate to the highest standards of
corporate governance.
An added complication to our governance
structure is our ownership of South West Water,
a regulated water and wastewater business.
In order to meet the requirements of Ofwat,
South West Water maintains its own independent
board of directors and continues to operate in
the manner of a publicly listed company in its
own right.
Our current board and committee framework
allows us to streamline our decision-making
process. The South West Water board, which
includes certain Pennon Non-Executive
Directors, as well as three South West Water
only non-executive directors, convenes on
the same day as 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, including South West Water.
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 82.
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 management services for
the benefit of all our stakeholders.
We actively engage with all our stakeholders,
including 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 detail on our stakeholder
engagement is contained on pages 20 to 23,
as well as on our website.
74
Pennon Group plc Annual Report 2019
Board visit
Demonstrating the Board’s
commitment to see its facilities
in action, part of the March
Board meeting included a visit
to Viridor’s energy recovery
facility in Beddington, Sutton.
The facility provides the South
London Waste Partnership and
local businesses with a safe and
cost-effective alternative to landfill
and will process around 275,000
tonnes of non-hazardous residual
waste a year.
Wider environmental benefits
include the landfill diversion of up
to 95% of waste delivered to the
facility and the generation of up
to 26MW of electricity, which will
power the facility itself and supply
over 22MW to the national grid.
It also provides energy direct to
a local business and could provide
heat for local users.
Our shareholders are just one of our key
stakeholder groups for which we continue
to manage a comprehensive engagement
programme. During the year some 83 meetings
and conference calls were held. Pennon attended
six city conferences and sales force briefings and
hosted nine road shows and investor events 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
Annual General Meeting (AGM) and I welcome
questions on any business issues affecting the
Group. At our forthcoming AGM on 25 July,
all of our Directors intend to be present together
with a number of other senior executives of
our businesses and will be available to meet
shareholders and take their questions 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
Corporate Governance Code (the UK Code)
with no exceptions to report. Further details are
contained within this 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 UK Code.
We are mindful of the more recent 2018 version
of the UK Code and will report more fully in our
2020 annual report.
In addition, as the holding company of South
West Water Limited, I am pleased to report
that 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 covers 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 109 the
Board is able to confirm to shareholders that the
annual report & 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
29 May 2019
Pennon Group plc Annual Report 2019
75
G OVERNANCE
Board of Directors
Sir John Parker
Chairman
Christopher Loughlin
Chief Executive Officer
Susan Davy
Chief Financial Officer
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 and National Grid plc, senior non-executive
director and chair of the Court of the Bank of
England, senior non-executive director of the
Cabinet Office Board, 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.
External appointments
Sir John is the chairman of construction and
engineering company Laing O’Rourke. He is also
a non-executive director of Carnival Corporation
and is a senior adviser to Spencer Stuart.
BSc Hons, MICE, CEng, MBA
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 a non-executive director and chairman
of the audit committee of Restore plc and is also
chair of the CBI South West council and a member
of the A4S (Accounting for Sustainability) CFO
leadership network.
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.
An enthusiastic advocate of local business,
Chris was previously the vice-chairman of the
Cornwall Local Enterprise Partnership.
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 director and
trustee of Reall.
Board Committee members
Pennon Executive
Audit Committee
Nomination Committee
Remuneration Committee
Sustainability Committee
Chair of Committee
76
Pennon Group plc Annual Report 2019
Gill Rider
Senior Independent Director
(Non-Executive)
Neil Cooper
Independent
Non-Executive Director
Iain Evans
Independent
Non-Executive Director
CB, PhD, CCIPD
BSc Hons, FCMA
CBE, BSc Hons, FCA, MBA
Gill was appointed to the Board on 1 September
2012. She is chairman of the Remuneration
Committee and a member of the Audit,
Nomination and Sustainability Committees.
Neil was appointed to the Board on 1 September
2014. He is chairman of the Audit Committee and
a member of the Remuneration and Nomination
Committees.
Iain was appointed to the Board on 1 September
2018. He is chairman of the Sustainability
Committee and a member of the Audit,
Nomination and Remuneration 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.
Skills and experience
Iain has 40 years of extensive global experience
in advising companies and governments on
issues of complex corporate strategy. In 1983
he co-founded L.E.K. Consulting in London and
built it into one of the world’s largest and most
respected corporate strategy consulting firms
with a global footprint active in a wide range of
industries. Iain was appointed as a non-executive
director of Welsh Water plc in 1989 and served
on the board for nearly ten years, including five
as chairman.
As chairman of the Sustainability Committee,
Iain is leading Pennon’s development of a
sustainability programme that underpins
the delivery of Pennon’s strategy.
External appointments
Iain acts as an independent corporate
strategy consultant.
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 and chair of the council of the
University of Southampton.
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.
As chair of the Remuneration Committee Gill is
helping to steer Pennon’s approach on executive
remuneration, ensuring that it is aligned with and
supports the Group’s strategy.
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.
Claire Ighodaro
Independent Non-Executive Director Designate (Claire joins on 1 September 2019)
CBE, BSc Hons, FCMA, DUniv (Hon)
Skills and experience
Claire has held a number of senior roles and directorships of UK and International organisations and has extensive
board experience of serving on audit and governance committees. In May 2019, she stepped down from Bank of
America’s Merrill Lynch International Board having served the maximum term. Claire is a past president of CIMA
and was the first woman to lead this organisation. She spent most of her executive career with BT plc and has also
held non-executive directorships across a diverse portfolio including audit committee chair of Lloyd’s of London,
The Open University and various UK public bodies including UK Trade & Investment and the British Council.
She was awarded a CBE in 2008 for services to business. A board level mentor, with Savile Group, from 2009-14,
she has also helped executives transitioning into non-executive roles.
External appointments
Currently non-executive chairman of Axa XL UK entities and non-executive director of Flood Re, where she is
audit committee chair.
Pennon Group plc Annual Report 2019
77
G OVE R NANCE
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.
See pages 6 and 7 for further information
V i s i o n and values
o n g
i n ternal controls
r
t
S
S t rategy
Stakeholder
value
R
o
b
u
s
t
a
n
d
t
r
a
n
s
p
a
r
e
n
t g
o
v
ernance
78
Pennon Group plc Annual Report 2019
Performa n c e
E
Culture
t
n
e
m
e
g
a
n
a
ff e ctive risk m
Pennon Board composition, independence and experience
100
Tenure as at 31 March
100
Diversity as at 31 March
80
60
40
20
0
%
3
3
%
3
3
%
3
3
%
0
5
%
3
3
%
7
1
%
7
6
%
3
3
80
60
40
20
0
2018
2019
0-3 years
4-6 years
7-10+ years
Male
2018
Female
The Board continues to maintain its focus on increasing female representation on the Board and at the year end it was 33.3%.
%
7
6
%
3
3
2019
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 – bringing resources to life – and
its supporting values of trusted, collaborative,
responsible 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.
All of the Non-Executive Directors are considered by the Board to be
independent. 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.
Martin Angle stepped down from the Board in December 2018 and he
was succeeded by Iain Evans who joined the Board in September 2018,
to allow a period of overlap and provide a degree of continuity.
Gill Rider has served in excess of six years and the Board agreed that her
term be extended for a further three years, subject to annual re-election
at each AGM. The Board remains satisfied that, based on her participation
at meetings and her contribution outside of the boardroom, Gill Rider
continues to demonstrate independence of character and judgement
in the performance of her 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 additions to his overall external commitments since his
appointment.
All Directors are subject to re-election each year.
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 76 and 77 and the experience chart above
demonstrate collectively a broad range of business, financial and other
relevant experience.
Pennon Group plc Annual Report 2019
79
G OVERNANCE
The Board and its
governance framework
continued
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 and accounting
experience (as set out in his biography on
page 77.
There is a clear separation of responsibilities
between the Chairman and the Chief Executive
Officer, divided between managing the Board
and the business, while they of course maintain
a close working relationship.
All the Directors are equally accountable for
the proper stewardship of the Group’s affairs
but they do have specific roles, which include
those set out below:
Position
Chairman
Director
Sir John Parker
Chief Executive
Officer
Chris Loughlin
Senior
Independent
Director
Gill Rider
Chief Financial
Officer
Susan Davy
Non-Executive
Directors
Neil Cooper
Iain Evans
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 Chief Executive Officer
• 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
• Coordinating 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 Chief Executive Officer 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 eight scheduled meetings of the Board during 2018/19 are shown below:
Position
Chairman
Non-Executive
Directors
Executive
Directors
Member
Sir John Parker(1)
Gill Rider
Neil Cooper
Iain Evans(2)
Martin Angle(3)
Chris Loughlin
Susan Davy
Appointment date
April 2015
September 2012
September 2014
September 2018
December 2008
August 2006
February 2015
Attendance
6/8
8/8
8/8
3/4
6/6
8/8
8/8
(1) Sir John Parker missed two meetings of the Board during the year due to medical treatment. Gill Rider chaired those meetings in his absence.
(2) Appointed on 1 September 2018.
(3) Stepped down on 31 December 2018.
80
Pennon Group plc Annual Report 2019
Iain Evans was appointed to the Board on
1 September 2018. Martin Angle stepped down
from the Board on 31 December 2018. All other
members of the Board served for the full year.
During the year under review, the Board and
the Executive Management team undertook
reviews of the Board and Committee structures.
This review concluded that the Board would
be better served by reorganising the current
committee structure and by having a more
concentrated meeting timetable for the Board
and its Committees. As a consequence, the
Executive teams of South West Water, Viridor
and Pennon meet in advance of each meeting
of the Board in order to ensure clear ownership
and management of the operations of the
business prior to the formal Board and
Committee meetings.
In addition, from 2019 onwards, it was agreed
that there would be six meetings of the Board,
including four two-day meetings when both the
Board and its Committees meet. There continue
to be a number of additional ad hoc Board and
Committee meetings as required.
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 a
separate independent board in accordance
with its own schedule of matters reserved thus
ensuring compliance with Ofwat’s principles on
board leadership, transparency and governance.
In addition, the independent non-executive
directors of South West Water are
also invited to attend Pennon Board and
Committee meetings in order to gain a greater
overview of the wider business.
While certain matters may be delegated to
the Board Committees and to the Executive
Directors, as appropriate, 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 endorses 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.
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 and Company Secretary on matters
within their respective business areas. 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. The
Managing Directors of both South West Water
and Viridor, along with the General Counsel
and Company Secretary, attend each of the
meetings of the Board in order to present on
their respective areas of responsibility, in person.
Pennon Board composition
Chairman
Chief Executive Officer
Chief Financial Officer
Three independent
Non-Executive Directors of Pennon
In attendance
Three independent non-executive directors
of South West Water
Under the guidance of the Chairman, all matters
placed 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 the year under
review, the Board has considered a wide range of
matters in order to meet its obligations and
estimates that 20% of its time has been taken up
in discussions around strategy, 40% in operations
of the Group, including that of both main
operating subsidiaries, 30% on financial aspects
of the Group and 10% on legal and risk matters.
In decision making, the Board always considers
the impact they might have on all stakeholder
groups when considering what is in the best
interests of shareholders as a whole.
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 while protecting the
interests of the wider stakeholder group. Chaired
by the Chief Executive Officer, the Pennon
Executive meets regularly, to receive reports
from all of the other management committees
and to review and refine recommendations to
be presented to the Board.
Members of the Pennon Executive
Chief Executive Officer
Chris
Loughlin*
Susan Davy
Phil Piddington Managing Director, Viridor
Simon Pugsley Group General Counsel and
Chief Financial Officer
Sarah Heald
Company Secretary
Director of Corporate Affairs &
Investor Relations
Group Director of Human
Resources
Steve Holmes Health, Safety, Security and
Adele Barker
Ed Mitchell
Assurance Director
Group Director of Environment
& Sustainability, and Director
of Wastewater Services,
South West Water
Paul Ringham Commercial Director, Viridor
* Chris Loughlin is also temporarily fulfilling the role of
Managing Director, South West Water.
Board support and training
Directors have access to the advice and services
of the Company Secretary, and the Board has
an established procedure whereby Directors, in
order to fulfil their duties, may seek independent
professional advice at the Company’s expense.
The Company Secretary is responsible for
ensuring that the Board operates in accordance
with the governance framework and that there
are good information flows between the
Directors, the Board and its Committees.
Pennon Group plc Annual Report 2019
81
G OVE R NANCE
The Board and its
governance framework
continued
Newly appointed Directors receive a formal,
tailored induction, which includes, inter alia,
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. Newly
appointed Directors are also invited to visit
different operating facilities across the Group
and to meet with staff in order to better
understand key processes and systems.
The training needs of Directors are reviewed
as part of the Board’s performance evaluation
process each year. Training will also include
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
in 2017, this year the evaluation was again carried
out by means of an internally facilitated online
questionnaire. The questions were designed
to assess the effectiveness of the Board and
its Committees, considering a wide range of
themes including strategy, culture and values,
the Group’s obligations to its shareholders and
other stakeholders, overseeing the use of the
Group’s resources, managing the risks inherent
in the strategy, plans and the operating
environment, and reviewing the general
operations of the Board and its Committees. The
performance and effectiveness of the Chairman
and Board members were also considered.
The results of the review were discussed at a
meeting of the Board and at meetings of each of
its Committees. These concluded that the Board,
its Committees and its individual Directors had
demonstrated a high degree of effectiveness
and that there was a good understanding of
opportunities for growth and the threats facing
the business. The review also confirmed that
the Board fully understood 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 & safety culture across the Group was
noted. Areas meriting ongoing focus included
succession planning, diversity and the ongoing
training and development needs of directors.
It is expected that, in 2020, an external evaluation
exercise will be undertaken using an external
consultancy with no other connection to the
Company and this will be reported on in next
year’s annual report.
82
Pennon Group plc Annual Report 2019
KPIs are in place to enable the Board to measure
the Company’s ESG performance (pages 30, 31
and 36 to 49) and a number of these are linked
to remuneration incentives (pages 93 and 96).
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.
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 employees 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
that covered 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
employees to report any breach of the policy
or any suspicions of fraud or other irregularities.
The Group’s whistleblowing policy (Speak Up)
encourages employees 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.
Find out more online at
www.pennon-group.co.uk/sustainability
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 83 to 91 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. The terms of reference, as well
as the Board’s schedule of matters reserved,
were reviewed during the year to ensure that
they remained appropriate and relevant.
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. The Board
considers that 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 2018/19 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
Internal Control Guidance, which brings together
elements of best practice for risk management
and internal control by companies. The Board’s
risk framework described on pages 58 to 60 in
the strategic report provides for the identification
of key risks, including ESG risks, in relation to the
achievement of the business objectives of the
Group, monitoring of such risks and ongoing and
annual evaluation of the overall process. ESG
risks identified and assessed by the Board cover
areas such as health & 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 61 to 68.
Board Committees’ reports
Audit Committee report
Audit Committee composition and meetings
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
Position
Committee
chairman
Committee
members
Director
Neil Cooper
Gill Rider
Iain Evans(1)
Martin Angle(2)
(1) Appointed to the Committee on 1 September 2018.
(2) Stepped down from the Board on 31 December 2018.
Dear Shareholder
I am pleased to introduce the Audit
Committee’s report.
Committee members – and the Board as a
whole – share a common view of the importance
of the Audit Committee as a foundation stone
in the governance armoury of the Company and
I welcome the opportunity to outline our key
activities during the year.
The principal responsibilities of the Committee
continue to be focused on three key areas:
• 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
• Reviewing and challenging the ongoing
effectiveness of the internal control
environment
• 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.
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 while also permitting time to be
spent on related key financial matters. 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.
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
areas impacting our principal risks. During the
year, these covered a wide range of topics
including performance on South West Water’s
capital projects, South West Water network
Date of appointment to
Audit Committee
September 2012
September 2018
December 2008
Attendance
4/4
4/4
3/3
3/3
resilience, Viridor capital projects, impacts of
a no-deal Brexit, business resilience and business
continuity, a review of Pennon Water Services
billing and collection process and recycling
commodity risk. More detail on our risk
management processes, principal risks and
their associated mitigation can be found on
pages 58 to 68.
Together with this risk orientated activity, we
continue to look at the Group’s viability over
a period of five years, which appropriately
recognises the mix of business in the Group,
noting in particular the ability to look forward
with some certainty in the business and
regulatory environment in which the Group
operates, notably for South West Water. South
West Water Limited uses a longer assessment
period to 2030, noting a greater visibility of
future cash flows, being a regulated business.
Our viability statement is reported on page 69.
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 85. 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, during the year the Group established
a new directorate of Risk and Assurance,
encompassing Group risk reporting and internal
audit. The consolidation of these activities fully
aligns our internal audit approach with the
Group’s ongoing risk monitoring and mitigation.
Neil Cooper
Audit Committee Chairman
Pennon Group plc Annual Report 2019
83
G OVE R NANCE
Audit Committee report
continued
Iain Evans was appointed to the Committee on
1 September 2018, following his appointment
to the Board, succeeding Martin Angle who
stepped down from the Board and its
Committees on 31 December 2018. The
Committee would like to thank Martin for
his strong contribution to Committee activities
during his tenure.
Other regular attendees to Committee meetings
during the year included: the Chief Executive
Officer; the Chief Financial Officer; the Managing
Directors of South West Water and Viridor; the
Group General Counsel and Company Secretary;
the Finance Directors of South West Water and
Viridor; the director of Treasury, Tax and Group
Finance; the director of Risk and Assurance; and
the external auditor.
In addition, the Board Chairman has an open
invitation to attend the Committee meetings.
In the last year his attendance included those
meetings at which the Committee reviewed
the half-year and full-year financial results of
the Group.
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.
In accordance with the UK Code, the Board is
satisfied that Neil Cooper and Iain Evans 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 76 and 77.
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
External auditor
Risk management
Governance
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 & 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, assurance work
on data submissions for Ofwat as part of PR19 and subsidiary financial controls.
• Considered auditor’s report on its audit 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
• Considered the auditor’s report on control themes and observations for the year ended 2018, which did not
identify any significant deficiencies
• Commenced the consideration of the appointment of a new senior statutory auditor following the mandatory
five-year rotation of the existing senior statutory auditor on conclusion of the 2018/19 audit.
• Considered the likely financial year in which the Group will next tender for its external audit provider
• Reviewed the Group’s risk management framework and compliance with that framework during the year and
after the year end up until the publication of the Company’s annual report
• Reviewed the assessment of the risks by the Executive Directors and considered risk appetite
• Reviewed the Group risk register and considered appropriate areas of focus and prioritisation for the audit work
programme for the year which is now 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 meetings with the external auditor and the Group Director of Risk and Assurance without
members of management being present.
84
Pennon Group plc Annual Report 2019
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 2019 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 112 to 117. In addition to the
significant matters set out in the table below,
the Committee considered a range of other
matters. These included:
• Implementation and measurement
considerations for IFRS 16 ‘Leases’
which was adopted on 1 April 2019
• Presentational matters including
contingent liabilities and assets and
the non-underlying disclosures; and
• 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
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 revenue, the areas of judgement for South West Water continue to be in respect of revenue
recognition relating to income from measured water services and estimates of timing of receipt of unmeasured revenue, accounting
for revenue. For Viridor, the focus was 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 energy sales. The Committee relied on South West Water’s detailed assessment of water into
supply and its track record of assessing an appropriate level of accrual at previous year ends as compared to invoiced revenue 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.
In addition, the Committee focused particularly on the implementation of IFRS 15 ‘Revenue’ from 1 April 2018, with new judgements
required in relation to the classification of revenue for the disaggregation note to the financial statements. The Committee reviewed
and discussed management’s paper which had been prepared in conjunction with expert advice and, after modest changes following
that discussion, was satisfied the new disclosures were appropriate.
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 changes in these 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 that 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.
The Committee noted that the detailed approach applied by management was consistent with the requirements of IFRS 9, effective
1 April 2018, which requires the consideration of expected credit loss.
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 form part of a claim being brought against the principal contractor,
Interserve Construction Limited. At half year and year end, 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. In addition the Committee considered management’s assessment of the
likely recoverability of the amount in regard to the financial condition of Interserve. The Committee noted management’s assessment
of Interserve’s credit worthiness having regard to publicly available information including latest annual filed accounts and the
administrator’s statement of proposal. The Committee is satisfied that the asset recognition criteria for this amount has been met
and that appropriate disclosures have been made, while recognising that this is both judgemental and fast moving.
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 different scenarios, is provided to the Board on a periodic basis. Rolling five-year strategy
projections and the resultant headroom relative to borrowings are 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 reviewed 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. South West Water Limited uses a longer
assessment period to 2030, noting a greater visibility of future cash flows, being a regulated business. 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 69.
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
(EY), was appointed following a comprehensive
audit tender process and approval by
shareholders at the Company’s 2014 AGM.
Their reappointment was approved at the 2018
Annual General Meeting. Debbie O’Hanlon is the
Pennon Group plc Annual Report 2019
85
G OVE R NANCE
Audit Committee report
continued
audit partner and has been in that role for
the five years since EY’s appointment, and
consequently will be rotating off from the
Pennon audit. EY have put forward potential
replacements who have met with Committee
members and management and have shadowed
Debbie through her final year on the Pennon
audit to ensure a smooth transition going into
next year’s audit. The Committee would like
to thank Debbie for her valuable input to the
Committee over the past five years in what
was a transition period from the Company’s
previous auditors to EY.
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 & 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 page 82.
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 reappointed and
has made this recommendation to the Board.
The Committee chairman has also met privately
with the external auditor to discuss key matters.
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
86
Pennon Group plc Annual Report 2019
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 & accounts is fair,
balanced and understandable (FBU) on page
109, 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 & 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 112 to 117.
In preparing and finalising the 2019 annual
report & 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 & 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.
Following the rotation of the senior statutory
auditor, the committee considers a full tender for
the Group’s external audit services, subject to its
annual reviews, likely in the year ending March
2024. This allows for any potential new audit firm
to take up the role for the year ending March
2025. The Committee believes this approach is
in the best interest of shareholders, as over this
period the Group will benefit from an efficient
and effective audit, whilst receiving fresh
challenge from a new senior statutory auditor.
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 22% of the
audit fee, which is well within the Group’s 70%
non-audit fee limit.
The Chief Financial Officer regularly reports
to the Committee on the extent of services
provided to the Company by the external auditor
and the level of fees paid. The fees paid to the
external auditor’s firm for non-audit services and
for audit services are set out in note 7 to the
financial statements on page 138.
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.
During the year the Group established a new
directorate of Risk and Assurance, encompassing
Group risk reporting and internal audit. The
consolidation of these activities fully aligns our
internal audit approach with the Group’s ongoing
risk monitoring and mitigation. The 2019/20
Group internal audit plan was approved in March
2019. 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.
The Director of Risk and Assurance reported
regularly through the year to the Committee on
audit reviews undertaken and their findings, and
there were regular discussions, correspondence
and private meetings between the director of risk
and assurance and the Committee chairman.
An external assessment of the internal audit
function was last performed by KPMG LLP in
2016 and 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.
Sustainability
Committee report
Our refreshed Sustainability
Strategy ensures alignment
and integration with Pennon’s
business, people and health
and safety strategies.
Iain Evans
Sustainability Committee Chairman
Sustainability Committee composition and meetings
Position
Committee
chairman
Committee
members
Director
Iain Evans(1)
Gill Rider
Susan Davy
Chris Loughlin
Martin Angle(2)
Date of appointment to
Sustainability Committee
September 2018
Attendance
3/3
September 2012
March 2018
November 2006
December 2008
4/4
4/4
4/4
3/3
(1) Appointed on 1 September 2018 and as Committee chairman on 1 January 2019.
(2) Stepped down from the Board on 31 December 2018.
We have also assessed and aligned our
objectives and targets against the most relevant
of the United Nations Sustainable Development
Goals (SDGs) and will increasingly monitor our
performance using the SDGs.
A strong performance against these SDGs and
our own sustainability objectives, ensures high
standards of corporate responsibility for the
benefit of all our stakeholders – our customers
and communities, our people, suppliers and
regulators, and our investors.
This annual report provides an integrated
assessment to show how a responsible approach
to sustainability helps us to balance the
immediate and longer-term needs of society with
the delivery of sustained commercial success.
Iain Evans
Sustainability Committee Chairman
Dear Shareholder
I am pleased to report on the Sustainability
Committee’s activities during the year, and would
particularly like to thank my predecessor, Gill
Rider, for her work in the role, including her
Chairmanship up until November 2018. I am
delighted we have retained Gill’s experience and
expertise on the Committee.
Our refreshed Sustainability strategy ensures
alignment and integration with Pennon’s
business, people and health & safety strategies.
With clear objectives, targets and implementation
plans identified throughout the organisation, we
are confident that we will be able to ensure that
our services bring resources to life, responsibly,
for customers and communities now and in the
long term.
The role of the Sustainability Committee is to
oversee the delivery of Pennon’s strategic
sustainability objectives and to ensure robust
scrutiny of key aspects of environmental, social
and governance (ESG) performance. This year
we have reviewed and approved refreshed
strategic objectives, within an ESG framework, to
add value and resilience to our business. These
are set out on page 11.
In the development of our new strategy we
tested thoroughly the materiality of our areas of
focus and consulted a cross-section of our key
stakeholders. We have also set new Group-wide
three-year sustainability targets aligned with the
new strategy as an effective way of monitoring
performance against our objectives in the focus
areas most materially relevant to the business
and our stakeholders. Progress and performance
will be clearly reported on going forward.
Pennon Group plc Annual Report 2019
87
Benchmarking
Pennon is a constituent within the FTSE4Good
Index and a number of other leading external
ESG assessments. FTSE4Good is an equity
index series that is designed to facilitate
investment in companies that meet globally
recognised corporate responsibility standards.
Companies in the FTSE4Good Index Series have
met stringent environmental, social and
governance criteria, and are positioned to
capitalise on the benefits of responsible
business practice.
Pennon sustainability report
Pennon’s sustainability reporting is integrated
throughout the strategic report and specifically
in the following sections:
Business model, page 6
Strategic priorities, page 8
Sustainability at our core, page 10
Chairman’s statement, page 14
Our stakeholders, page 20
Chief Executive Officer’s review, page 26
Key performance indicators, page 30
People, page 32
Our operations, pages 36 to 49
Viridor and South West Water
sustainability reports
The sustainability report for Viridor will be
published in August 2019 and South West
Water’s company annual performance report
and regulatory reporting, to be published in July
2019, will incorporate its sustainability reporting.
Both documents will be available to view at
www.pennon-group.co.uk/sustainability
and on the subsidiaries’ websites.
G OVE R NANCE
Sustainability Committee report
continued
Iain Evans was appointed to the Committee on
1 September 2018, following his appointment
to the Board. Iain took over as Chairman from
Gill Rider in January 2019.
During 2018/19, 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 & safety performance and
the effectiveness of health & safety policies
and procedures, including the continued
roll-out of the HomeSafe programme
• Environmental strategy and performance
• Performance in respect of customer service,
satisfaction and engagement
• The Group’s approach to community relations,
community benefit and investment
• Performance against the Group’s workplace
policy, within its People strategy, including the
results of the latest Group-wide employee
engagement survey
• Sustainable supply chain procurement and
practices, including a new Suppliers’ Code
of Practice
• Sustainability reporting and disclosures for
2018 and the associated verifier’s reports and
recommendations
• Progress against the sustainability targets for
2018/19 and sustainability targets for 2020-23.
• Materiality and refreshed sustainability
strategy.
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 DNV GL,
an independent management consultancy
specialising in technical assurance in the
utility sector. Pennon considers that DNV GL’s
method of verification – which includes testing
the assumptions, definitions, methods and
procedures that are followed in the development
of data and the auditing thereof to ensure
accuracy and consistency – complements the
best practice insight gained through the Group’s
continued 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
DNV GL against the output of an independent
audit of regulatory data conducted by Jacobs.
Martin Angle stepped down from the Board
and its Committees on 31 December 2018.
All other members served the full year.
The Sustainability Committee assesses
performance against a range of approved
targets for the Group’s subsidiaries, set as part
of their business planning processes. Progress is
reported to the Committee throughout the year.
In addition, the South West Water Sustainability
Committee provides assessment and oversight
of South West Water’s performance against
sustainability targets that are core to the
successful delivery of its K6 Business Plan
2015-20. This is consistent with Ofwat’s
requirement for independent governance
of the regulated business.
The Committee ensures challenging targets are
set and approved. As at 31 March 2019, Pennon
has achieved 10 out of its 12 targets for the year,
South West Water had achieved seven of its
12 and Viridor had completed nine out of 12
of its targets. Full details of the sustainability
performance for South West Water and Viridor
in 2018/19 are given in their respective reports.
During the year the Committee continued to
work closely within the best practice framework
developed by Business in the Community (BITC),
a leading business-led charity promoting
responsible business. Pennon was pleased to
be a pioneer company in trialing BITC’s new
Responsible Business Tracker during 2018 and
will use the results to further inform its own
community benefit programmes contributing
to social capital gain.
The Sustainability Committee aims to ensure a
transparent approach to conducting business in
a responsible manner, within a business focused
on delivering robust financial performance and
sustainable value for shareholders and
stakeholders.
The Committee reviews and approves
appropriate strategies, policies, management
processes, initiatives, disclosures, targets and
performance of the Pennon Group companies
in the areas of occupational health, safety,
wellbeing and security, environment and
compliance, workplace policies, responsible and
ethical business practice, supply chain, customer
service and engagement, community benefit,
and the role and value of the Group in society.
88
Pennon Group plc Annual Report 2019
Nomination
Committee report
Nomination Committee composition and meetings
We are committed to taking
action to encourage
the growth of a diverse
workforce where
individuals from different
backgrounds can fulfil
their potential.
Sir John Parker
Nomination Committee Chairman
Date of appointment to Pennon
Nomination Committee
April 2015
Attendance
2/3
September 2012
September 2014
September 2018
December 2008
3/3
3/3
2/2
2/2
It is the practice of the Committee, led by
the Chairman, to appoint an external search
consultancy to assist in Board appointments to
ensure that an extensive and robust search can
be made for suitable candidates. During the year
we engaged with Heidrick & Struggles to assist
in the recruitment of our Non-Executive Director,
Iain Evans and assist the Company in the
recruitment of certain senior employees.
Heidrick & Struggles has no other connection
with the Company.
We also engaged with the Inzito Partnership to
assist in the recruitment of Claire Ighodaro. Inzito
has no other connection with the Company.
Sir John Parker unfortunately missed the
May 2018 meeting due to medical treatment.
Gill Rider chaired the May Committee meeting
in Sir John’s absence. Iain Evans was appointed
to the Committee on 1 September 2018,
following his appointment to the Board and
Martin Angle stepped down from the Board
and its Committees on 31 December 2018.
All other members served for the full year.
Other regular attendees to Committee meetings
during the year included the Chief Executive
Officer, the Group General Counsel and Company
Secretary and the Group Director of Human
Resources.
Position
Committee
chairman
Committee
members
Director
Sir John Parker
Gill Rider
Neil Cooper
Iain Evans(1)
Martin Angle(2)
(1) Appointed on 1 September 2018.
(2) Stepped down from the Board on 31 December 2018.
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:
• The annual review of the Group policy on
Diversity, Respect and Inclusion and the
Group’s progress on diversity
• A review of succession planning for
Non-Executive Directors resulting in the
following changes:
– The extension of Sir John Parker’s
appointment as Chairman of Pennon Group
plc from 1 August 2018 into his second term
– The extension of Gill Rider’s appointment
as a Non-Executive Director of Pennon
Group plc from 1 September 2018 into her
third term. Gill was also appointed to the
role of Remuneration Committee Chairman
from 1 January 2019
– The recruitment and appointment of Iain
Evans as a Non-Executive Director of
Pennon Group plc from 1 September 2018,
replacing Martin Angle who stepped down
from the Board on 31 December 2018. Iain
was also appointed as a member of each of
the Board Committees as well as to the role
of Chairman of the Sustainability
Committee with effect from 1 January 2019
– The recruitment of Claire Ighodaro, to take
effect from 1 September 2019
– A review of the time spent by Non-
Executive Directors in fulfilling their duties
• A review of the Group’s succession plans,
leadership of the Group and the Group’s
approach to succession planning
• A review of the Group’s gender pay disclosure
for 2018 and ongoing action plan.
Pennon Group plc Annual Report 2019
89
G OVE R NANCE
Nomination Committee report
continued
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 in accordance with our Diversity,
Respect and Inclusion Policy, which encourages
the growth of a diverse workforce where
individuals from different backgrounds can fulfil
their potential.
Our 2018 employee survey told us that 88% of
our employees believe that people within Pennon
Group are treated fairly regardless of race or
ethnic origin and we were pleased to see our
graduate intake in 2018/19 having a gender split
of 66% male/34% female with 50% of the whole
intake being from diverse ethnic backgrounds.
While we recognise this as good progress, we
plan to further 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 33.
Sir John Parker
Nomination Committee Chairman
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. The Committee is mindful of the
direction of travel of the 2018 UK Corporate
Governance Code and the Board will
endeavour to achieve and maintain:
– A minimum of 33% female representation
on the Board
– A minimum of 33% female representation
on the Group’s senior management team.
The Committee is pleased to report that as at
31 March 2019 33% of the Board’s Directors were
women, as disclosed on pages 76 and 77.
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 32. In support of this
aim, both our Chairman and our Chief Executive
Officer are members of 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.
Our position in the Hampton Alexander review
is 85 out of the 250 companies in the FTSE 250.
This is down from 40 last year primarily driven
by a transitional change in the composition of
our Board when the analysis was undertaken.
In September 2018, Iain Evans was appointed to
the Board and Martin Angle stepped down from
the Board and its Committees on 31 December.
Our position will change again in September
2019, with the appointment to the Board of Claire
Ighodaro. We remain committed to the targets
as proposed by Hampton Alexander of 33%
representation of women on the Board and
on the Executive Committee.
90
Pennon Group plc Annual Report 2019
Remuneration
Committee report
Remuneration Committee composition and meetings
Position
Committee
chairman
Committee
members
Director
Gill Rider(1)
Neil Cooper
Iain Evans(2)
Martin Angle(3)
(1) Appointed as Committee chairman on 1 January 2019.
(2) Appointed on 1 September 2018.
(3) Stepped down from the Board on 31 December 2018.
The Committee’s activities during
the financial year
The Committee engaged in the following
activities during the year:
• Undertaking a comprehensive retendering
process for the appointment of remuneration
consultants, resulting in the reappointment of
Deloitte, with a refreshed advisory team
• Reviewing and implementing the required
changes to remuneration practices following
the July 2018 publication of the UK Corporate
Governance Code
• Ensuring executive pay in South West Water
is aligned to Ofwat’s principles and
responding to their request to ensure we set
the appropriate stretch in targets to meet
customer delivery requirements as part of
achieving fast-track status
• Reviewing the wider workforce remuneration
using the Pennon Pay Dashboard, to help
inform executive pay decisions and ensuring
cultural alignment
• Completing the annual executive salary
review and the annual review of the
Chairman’s fee
• Reviewing drafts of the Directors’ annual
remuneration report and recommending
it to the Board for approval for inclusion in
the 2019 annual report
• Determining performance targets in respect
of the Annual Incentive Bonus Plan for
2018/19
• Determining bonuses and deferred bonus
awards pursuant to the Company’s Annual
Incentive Bonus Plan in respect of the year
2017/18
• Approving the long-term incentive plan (LTIP)
awards for the year
• Approving the release of the 2015 deferred
bonus share awards
• Reviewing the outcome of the 2015
Performance and Co-Investment Plan awards
• Reviewing the results of the Committee’s
performance evaluation and considering any
appropriate changes.
Date of appointment to
Remuneration Committee
September 2012
September 2014
September 2018
December 2008
Attendance
4/4
4/4
3/3
3/3
The Committee’s focus for 2019/20
• 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
• Review workforce remuneration and related
policies for the purpose of aligning incentives
and reward with culture, taking these into
account when setting the remuneration policy
for Executive Directors and providing the
Board with feedback
• Reviewing and redrafting the remuneration
policy in line with the three-year cycle for
approval at the AGM in 2020.
Iain Evans was appointed to the Committee on
1 September 2018, following his appointment to
the Board, and Martin Angle stepped down from
the Board and its Committees on 31 December
2018.
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 Chief Executive Officer 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.
Gill Rider
Remuneration Committee Chairman
Pennon Group plc Annual Report 2019
91
Ensuring that Executive
remuneration is aligned with
and supports the Group’s
strategy, reflects our values
and meets best practice
governance standards is
an important responsibility
for the Committee.
Gill Rider
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
• Reviewing workforce remuneration and
related policies for the purpose of aligning
incentives and reward with culture, taking
these into account when setting the
remuneration policy for Executive Directors
and providing the Board with feedback.
2018/19 – performance
highlights and outcomes
Group performance
• Underlying profit before tax up 8.3%
• 2018/19 dividend per share up 6.4% to 41.06p per share
• EBITDA growth of 19.1% at Viridor supported by
ERF performance
• South West Water business plan awarded fast-track
status, the only water company to achieve this for two
successive price reviews
Annual bonus 2018/19 outturn (% of maximum)
Chris Loughlin
Chief Executive Officer
Susan Davy
Chief Financial Officer
0
5
2
0
5
5
7
91
91.5
0
0
1
Performance and Co-Investment Plan outturn
(estimated vesting) (% of maximum)
2016 grant
44
0
5
2
0
5
5
7
0
0
1
2018/19 single figure outcome (£’000)
Chris Loughlin
Chief Executive Officer
720
688
1,408
Susan Davy
Chief Financial Officer
548
528
1,076
0
0
5
2
0
0
5
0
5
7
0
0
0
1
,
0
5
2
1
,
0
0
5
1
,
Fixed
Variable
G OVERNANCE
G OVE R NANCE
Directors’
remuneration
report
DI RE CTOR S’ REMU NERATION REP ORT
92 Summary of outcomes
93 Link between strategy and remuneration
Annual statement from the Chairman
94
of the Remuneration Committee
95 Directors’ remuneration policy summary
95 Annual report on remuneration
95
98
100
98
99
Operation of the remuneration
policy for 2018/19
Single total figure table
(audited information)
Annual bonus outturn for 2018/19
Performance and Co-investment
Plan outturn for 2016 grant
Retirement benefits and entitlements
(audited information)
100
Outside appointments
100 Directors’ service contracts
Non-Executive Director fees
100
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
103
103
104
105
105
102
101
92
92
Pennon Group plc Annual Report 2019
Pennon Group plc Annual Report 2019
Link between strategy
and remuneration
1
2
3
Leadership in UK water and
waste infrastructure
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.
Leadership in cost base efficiency
Focused on driving down overheads
and operating in the most efficient way
to minimise costs.
Driving sustainable growth
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.
Link to customers
Pay linked to
underlying
performance
Performance pay
– appropriately
aligned with
customer interests
Bonus and long-term
incentives –
substantial link
to stretching
performance delivery
for customers
• Significant portion of executive
remuneration linked to performance
of the business
• Annual bonus includes customer
and operational measures linked to
metrics assessed by the water industry
regulator, customers, communities
and wider stakeholders
• Stretching targets – motivate
management to deliver sustainable
performance
• Safeguard mechanisms in place to
ensure outcomes reflect underlying
performance
Group KPIs
Long-term
Earnings per share
Dividend per share
Return on capital employed
(RoCE)
Annual
Profit before tax (PBT)
Return on regulated equity
(RoRE)
ODI net rewards
ERF availability
Sustainable business
Customer satisfaction
with overall service
Employee engagement
Health & safety
Carbon emissions
Link to strategy
Link to variable
remuneration
1
2
3 Annual
bonus
LTIP
*
*
*
*
*
*
* Reflected in bonus operational and individual metrics.
Transparency
Clear disclosure of
reasons for changes
to policy
Explanation of how
changes take into
account customer
interests
• Principles followed for 2017 policy review :
– Ensure a transparent, simple and
equitable approach to pay
– Incentivise the delivery of sustainable
long-term value to shareholders
– Support the underlying strategic priorities
of operating safely, with an engaged
workforce and focus on customer service
• Next policy review in 2020 – maintain
commitment to transparent pay structures
and clear disclosure of any changes.
Pennon Group plc
Pennon Group plc Annual Report 2019
93
93
G OVE R NANCE
Annual statement from the Chairman
of the Remuneration Committee
Future remuneration
As noted above, no major changes to executive
pay are being proposed for the coming year.
Key decisions include:
• Salaries for Executive Directors were
increased by 2%, which is slightly lower than
the pay increase awarded to the wider
employee population
• Maximum incentive opportunities will remain
unchanged
• We are maintaining the same form and
balance of performance measures from last
year as these continue to be closely aligned
with our strategy and the interests of our
various stakeholders
• The Remuneration Committee will continue
to consider how Executives demonstrate our
values when delivering individual objectives.
In this year’s report, we have provided detail as to
how we comply with the remuneration provisions
of the new UK Corporate Governance Code which
takes effect for 2019/20. Pennon is well placed for
the adoption of these provisions.
Under the normal three-year renewal cycle,
our Remuneration Policy will be presented to
shareholders for approval at the 2020 AGM.
During the year we will therefore be undertaking
a review of our current arrangements in light of
our strategic priorities, as well as evolving market
and best practice. As part of this review we intend
to consider our approach to pensions and
post-employment shareholding guidelines in
response to the new Code.
We are keen to maintain a dialogue with our
investors on pay matters and we intend to consult
with shareholders regarding our proposals, ahead
of the 2020 AGM.
The Remuneration Committee has sought to
take a measured and responsible approach to
executive pay, with a close focus on the strategic
priorities of the business and the interests of wider
stakeholders. We hope that this approach is clear
in our remuneration report. The Committee
appreciated the strong endorsement of last year’s
Directors’ remuneration report and we hope we
can continue to rely on shareholders’ support.
Gill Rider
Remuneration Committee Chairman
• Delivery of sector leading cumulative return
on regulated equity (RoRE) at 11.8%
• EBITDA growth of 19.1% at Viridor supported
by the build out and performance of our ERFs
• 2018/19 dividend per share up 6.4% to 41.06p.
These outcomes place the Company in a strong
position to continue to enjoy financial resilience
driven by reliable operating cash flow, a strong
liquidity and balance sheet position, and a
diversified mix of low-cost and flexible funding.
Incentive outcomes
The bonus outturns for the Executive Directors
for 2018/19 reflect the Company’s strong
achievements against financial, operational,
customer and individual targets set at the start of
the year. For 2018/19, the Chief Executive Officer
and Chief Financial Officer earned bonuses of
c.90% of salary. The Committee considered the
formulaic outcome and concluded that the bonus
was a fair reflection of the strong performance
achieved in the year. Further details of bonus
targets, measures and performance are set out
on pages 98 and 99.
For the 2018/19 bonus, Executives were also
asked to evidence how they demonstrated our
new Company values (trusted, collaborative,
responsible, progressive), in delivering individual
objectives. This is in order to ensure that our
values become part of the leadership culture,
with the intention of introducing this performance
element to further levels of the organisation.
Half of the bonus earned is deferred into shares
which affirms Executives’ commitment to creating
a long-term, sustainable business.
Legacy awards granted under the Performance
and Co-investment Plan in 2016 will be eligible for
vesting in 2019. This award was based on relative
TSR performance against sector peers and the
wider FTSE 250 (excluding investment trusts).
Although the performance assessment for this
award will only be concluded after the finalisation
of this report, our current expectation is that there
will be partial vesting, currently estimated at c.44%
for this award, due to outperformance against
sector peers.
Pay for wider workforce
The Remuneration Committee spends
considerable time on matters relating to
remuneration in the wider organisation.
Details of pay trends for the wider employee base
provide important context when making decisions
regarding remuneration for the Executive
Directors as well as ensuring that consistent
approaches are being adopted across the
organisation. In this year’s remuneration report
we have provided expanded disclosure on the
Committee’s activities in this area.
Although the structure of pay varies at different
levels in the organisation, the Company applies
a consistent set of guiding principles.
Dear Shareholder
Introduction
I am pleased to present the Directors’
remuneration report for the year ending 31 March
2019. This is my first report to you as chairman of
the Remuneration Committee, having succeeded
Martin Angle who stepped down from the Board
in December 2018. On behalf of the Committee,
I would like to thank Martin for his significant
contribution.
In recent years, Pennon has received strong
support from our shareholders for our approach
to pay. Our current Remuneration Policy was
approved in 2017 with close to 98% support.
At last year’s Annual General Meeting (AGM),
over 99% of votes were in favour of our Directors’
remuneration report. In light of this strong
endorsement, we are not proposing to make any
major changes to our pay arrangements this year.
A significant proportion of remuneration for the
Executive Directors is delivered as variable pay
that rewards for the achievement of sustainable
strong performance. As illustrated on page 93,
the metrics used for the bonus and long-term
incentives are directly aligned with Pennon’s
strategy. The incentives reward for performance
against financial, operating and customer-based
metrics that are important to our shareholders, our
customers, the water industry regulator and wider
stakeholders.
Performance in 2018/19
This has been another year of strong performance
in which Pennon has reaffirmed its status as a
leading provider of diverse environmental services.
Key achievements in the year included:
• Underlying profit before tax increased by 8.3%
to £280 million
• The South West Water 2020-25 business plan
received a fast track green light from Ofwat,
the water industry regulator – the only
company to have achieved fast-track status
for two consecutive price reviews
• Strong performance in the water business,
demonstrating service resilience through
extreme weather conditions. Our focus on
customers was demonstrated by delivery of
our lowest ever supply interruptions and a
record customer service score. South West
Water is now ranked second in the industry
for quality and service
94
Pennon Group plc Annual Report 2019
Annual report on remuneration
at a glance
Summary of Directors’ remuneration policy and implementation in 2019/20
The current Directors’ remuneration policy was approved by shareholders at the Company’s AGM held on 6 July 2017, 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. A summary of the policy is set out below alongside detail on how we intend to implement the policy in 2019/20.
Element
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.
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.
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.
Shareholding requirements
Create alignment between executives and shareholders
and promote long-term stewardship.
Pension
Provides funding for retirement and aids retention
of key skills to assist in meeting the Company’s
strategic objectives.
All employee share plans
Align the interests of all employees with Company
share performance.
Non-Executive Director fee policy
Set at a market level to attract Non-Executive Directors
who have appropriate experience and skills to assist in
determining the Group’s strategy.
Operation
Implementation in 2019/20
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.
Salaries for 2019/20 were increased by 2%, which
was lower than increases for all employees:
Chris Loughlin – £538,550
Susan Davy – £411,800
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.
No changes.
No changes.
Maximum opportunity of 100% of salary,
with deferral of 50% of any bonus into shares
for three years.
No changes.
Maximum award of 150% of salary.
The maximum bonus potential for each Director is 100%
of base salary.
A portion of any bonus is deferred into shares in the
Company which are normally released after three years.
Normally 50% is deferred.
Malus and clawback provisions apply.
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. 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.
The maximum annual award is 150% of base salary.
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.
Malus and clawback provisions apply.
200% of salary for both the Chief Executive Officer
and Chief Financial Officer.
No change.
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.
No changes.
Current benefit levels as agreed in prior years are:
30% for Chris Loughlin and 25% for Susan Davy.
As part of the updated UK Corporate Governance
Code, the Remuneration Committee will be
expecting to reduce the pension benefits for any
future Board appointment to reflect pensions
across the wider employee population.
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.
No changes.
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.
Expenses incurred in the performance of non-executive
duties for the Company may be reimbursed or paid
for directly by the Company (including any tax due
on the expenses). The Chairman’s benefits include
the provision of a driver and vehicle, when appropriate
for the efficient carrying out of his duties.
2019/20 fee policy is set out below (2% increase):
Chairman – £275,700
Basic NED fee – £49,100
Senior Independent Director fee – £7,280
Chairman of the Audit Committee – £14,785
Chairman of the Remuneration Committee /
Sustainability Committee – £10,560
Committee fee – £5,280.
Pennon Group plc Annual Report 2019
95
G OVE R NANCE
Annual report on remuneration
Implementation of the remuneration policy for 2019/20 – further details on performance metrics
Annual bonus
For 2019/20, the annual bonus will be based on the following performance measures:
Group financial measures (60%)
50% PBT
10% RoRE
Customer and operational measures (20%) These measures will be quantitative and measurable, and are key to meeting the needs of our customers,
our regulator and wider stakeholders.
Water metrics will include:
Customer service score
Bathing water failures
Leakage
Wastewater pollution incidents
Interruptions to supply
Asset reliability
Waste metrics will include:
ERF availability and efficiency metrics
Power output
Landfill and recycling volumes traded
Recyclate revenue
Individual objectives include goals relating to:
• Safety
• Employee engagement
• Execution of business plan
• Development of strategy.
Individual objectives (20%)
Executives will be asked to evidence how they demonstrated our values (trusted, collaborative,
responsible, progressive), in delivering individual objectives. This is in order to ensure that the values
become a part of the leadership culture, with the intention of introducing this performance element
to further levels of the organisation.
The detail of the annual bonus targets for 2019/20 are closely aligned to the strategy and are therefore considered to be commercially sensitive. However,
the Company intends to provide retrospective disclosure of targets in next year’s remuneration report.
Long-term incentive plan
For 2019/20, performance measures will continue to be EPS growth, a sustainable dividend measure and RoCE, with targets set as in the table below.
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.
EPS growth (40%)
Sustainable dividends (40%)
RoCE* (20%)
Maximum (100% of element)
Threshold (25% of element)
10% p.a.
6% p.a.
3.6x
2.6x
8%
10%
Straight-line vesting between the threshold and maximum
RoCE is defined as: (underlying operating profit + joint venture profit after tax + interest receivable) divided by capital employed (debt + equity invested including hybrid).
*
The sustainable dividends is based on EBITDA dividend cover. This element is subject to two underpins:
• Achievement of a gateway dividend growth target of RPI+4% p.a.; and
• 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 joint venture dividends & interest receivable + IFRIC 12 interest receivable).
For the purpose of the calculation, dividend cover would be based on the policy of 4% p.a. above RPI.
Discretion
In line with the 2018 Corporate Governance Code, the Remuneration Committee has ensured that they will maintain the ability to override the formulaic
outcomes for future awards under the annual bonus and LTIP where the outcomes are not considered by the Committee to be appropriate (e.g. unreflective
of underlying performance). The Committee will disclose the use of any such discretion.
96
Pennon Group plc Annual Report 2019
Remuneration approach for wider employees
Consistent with best practice, the Remuneration Committee spends considerable time on matters relating to remuneration arrangements in the wider
organisation. Details of pay trends for the wider employee base provide important context when making decisions regarding remuneration for the
Executive Directors as well as ensuring that consistent approaches are being adopted across the organisation.
Although the structure of pay varies at different levels in the organisation, the Company applies a consistent set of guiding principles. The structure
of Pennon’s approach to remuneration in the wider organisation is summarised in the table below:
Base salary
Pension and benefits
Variable remuneration
Salaries reflect the scope and responsibility of the role, as well as the skill and experience of the
individual.
The percentage change in salary for the Chief Executive Officer in 2019 was 2%, compared with general
increases of between 2% and 2.4% across the Group.
All employees of the Group are entitled to pension provision, including life assurance. Certain benefits
are generally available only to more senior employees at management level and above.
The Group also encourages share ownership among its employees by operating HM Revenue & Customs
approved Sharesave scheme and Share Incentive Plan. All employees are eligible to participate in share
plans, and there is a strong emphasis of employee buy-in and ownership.
All employees in Pennon Group plc and South West Water are entitled to participate in annual bonus
arrangements. In Viridor and Pennon Water Services, all senior and middle management employees as
well as many employees in operations functions are entitled to participate in annual bonus arrangements
or performance incentives. The maximum bonus levels are based on seniority and level of responsibility.
Long-term incentive share awards are only available to senior executives and Executive Directors.
In response to the 2018 Corporate Governance Code, the Committee have also reviewed the level of information provided on pay matters in the wider
organisation. Key activity in this regard included:
Pennon pay dashboard
• We have established a pay dashboard to help support the Committee in reviewing workforce
Gender Pay Gap
remuneration and related policies
• The dashboard provided an overview of pay arrangements across the business and provides key
statistics on pay in different areas of the business
• The dashboard covers information on workforce demographics, gender pay, pay ratios, pension and
benefits and incentive outcomes in different areas of the business
• The Committee intends to keep the content of the dashboard under review to ensure that it continues
to provide suitable information for the Committee.
• From April 2018 Pennon has published Gender Pay Gap data for the business
• As a Group that operates in traditionally non-diverse sectors, we are well aware of the impact our
own practices may have in relation to gender, as well as the broader issue of race and ethnicity.
• While we firmly believe there is still much to be done, our already established programme of measures
means that Group-wide we have an average Gender Pay Gap of 2.7%, below the latest published
UK average.
Employee engagement
Across Pennon we endorse the principle of strengthening opportunities for employees to engage in two-way dialogue at all levels.
We have welcomed the insight provided from the annual employee survey and the feedback from the Employee Voice and Employee Engagement Forums.
We have increased the frequency of Big Chat events during the year which provides employees the opportunity to dial-in to a Group-wide call with the
Pennon Executive to hear updates on key projects and participate in open question and answer sessions. This feedback is essential as we continue to work
with employees to make performance improvements across the Group and motivate and engage our employees. One of the key priority areas for discussion
during the last year has been on reward and remuneration and we were pleased to see a 2% increase in our Trust Index score from 2017.
Pennon Group plc Annual Report 2019
97
G OVE R NANCE
Annual report on remuneration
continued
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)
2018/19
2017/18
2018/19
2017/18
2018/19
2017/18
2018/19(ii)
2017/18
2018/19
2017/18
2018/19
2017/18
Executive Directors
Chris Loughlin
Susan Davy
Non-Executive Directors
Sir John Parker
Gill Rider
Martin Angle(iv)
Neil Cooper
Iain Evans(v)
528
404
270
77
52
69
40
518
396
270
74
67
66
–
34
29
–
–
–
–
–
30
28
480
369
450
346
208
159
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
158
115
155
113
1,408
1,076
–
–
–
–
–
–
–
–
–
–
270
77
52
69
40
1,153
883
270
74
67
66
–
(i) Benefits comprise a car allowance and medical insurance.
(ii) Based on an estimated 44% vesting as referred to on page 99.
(iii) See page 100 for further information on pensions.
(iv) Martin Angle stepped down from the Board on 31 December 2018.
(v) Iain Evans was appointed to the Board on 1 September 2018.
Notes to the single figure table
Annual bonus outturn for 2018/19
The bonuses for Executive Directors were based on a combination of financial, operational and personal objectives. The performance targets
set and the performance achieved in respect of the annual bonus for 2018/19 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.
Group financial measures – 60% weighting
Measure
Underlying profit before tax (50% weighting)
RoRE (10% weighting)
Customer and operational measures – 20% weighting
Measures
Water metrics
Service incentive mechanism (SIM)
Bathing water quality
Leakage
Wastewater pollution incidents:
Category 1-2
Category 3-4
Average duration of interruptions to supply
Water and wastewater asset reliability
Waste metrics
ERF availability
Delivery against recycling action plan
Growth in customer base
Threshold
£262.1m
8%
Target
£267.4m
9%
Maximum
£280.8m
11%
Actual outturn
£280.2m
11.8%
Bonus outturn
49%
10%
Target
Actual outturn
Target achieved
Bonus outturn
85/87
<5 beaches failing
81
88/88
0
84
2
180
0.214 hours per property
Stable
2
248
0.161 hours per property
Stable
91%
91%
Action plan delivered
Not achieved
Yes
Yes
No
No
Yes
Yes
Yes
Yes
No
7%
7%
98
Pennon Group plc Annual Report 2019
Individual objectives – 20% weighting
Objectives
CEO and CFO – joint objectives
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
Continue to embed HomeSafe across the entire Group and
drive further improvement in health & safety performance
Build on the trust and engagement of our 5,000 employees
to support the delivery of our strategy
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
CEO only
Continue to refine and extend the reach of the organisation’s
succession and talent management processes
CFO only
Delivery of a sustainable financing strategy and the embedding
of new financial systems and processes
Achievements
• Delivery of high-quality submission
• PR19 business plan for South West Water achieved fast-track status – only water
company to receive this status for two consecutive price reviews
• Clear evidence of Innovation in development of Water/Share+
• Industry leading cost base efficiency.
• Successful roll-out of e-learning throughout the organisation
• Headline LTIFR reduced by 32.2% to 1.37
• Reduction in serious incidents and near-miss events
• Visible leadership across the organisation – site visits and training sessions.
• 2% improvement in Group’s Trust Index
• Successful implementation of various internal initiatives to improve engagement
and leadership across the organisation.
• Strategy for Viridor established and agreed
• Strategic focus on derisked infrastructure model
• Implementation underway.
• Refinement of talent management processes
• Development of succession plans for senior roles
• New wider-reaching Graduate recruitment programme developed, alongside MBA
programme in partnership with Exeter University and Cranfield School of Management.
• Continuation of apprenticeship programme – 384 new apprenticeships offered in last
two years.
• Sustainable finance strategy developed and implemented
• Fair Tax Mark – first water company to be awarded
• Support for the ongoing position with Interserve
• Successful enterprise audits taken place – underlining the step change in system
approach. Good progress with heritage projects refocused to look at landfill solutions
and gatehouse.
Summary of bonus outcome
Group financial measures
Customer and operational measures
Individual objectives
Total outturn
Bonus outturn
Chief Executive
Officer
Chief Financial
Officer
59%
14%
18%
91%
18.5%
91.5%
Weighting
60%
20%
20%
100%
Long-term incentive plan – Performance and Co-investment Plan outturn for 2018/19
The awards in the single figure table relate to share awards granted on 1 July 2016, which are due to vest on 1 July 2019. These awards were granted under
the legacy incentive plan which operated prior to 2017.
The 2016 share awards were subject to the satisfaction of TSR-based performance conditions. These conditions were set at the time that the awards were
granted. The calculation for this award 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 2019 to 30 June 2019). In light of this timeframe, the outturn described
in this report is based on an estimate based on TSR up to 20 May 2019. The final vesting outcome will be confirmed in next year’s remuneration report.
Comparator index (50% of award)
FTSE 250 (excluding investment trusts) (50% of award)
Total
Threshold
(30% of maximum vests)
Equal to index
Maximum
(100% of maximum vests)
Forecasted
achievement
15% above the index Outperformance of index: 12.4%
Below median
Above 50th percentile At or above 75th percentile
Forecasted
vesting
44%
0%
44%
Straight-line vesting between points.
For below threshold performance for either performance condition, 0% vests in respect of that performance condition.
Comparator index comprises: National Grid Plc, Séché Environnement, Severn Trent, Shanks Group, Suez Environnement, United Utilities and Veolia Environnement.
The calculation of TSR performance was undertaken by Deloitte LLP for the Committee. Vesting of an award is also subject to the underpin described
in the remuneration policy, which the Committee has determined to the date of this report would be satisfied, if any award was to vest.
If awards were to vest, they would be subject to a two-year holding period during which clawback may be applied where the Committee considers
it appropriate in certain circumstances. The holding period ends on 30 June 2021.
Pennon Group plc Annual Report 2019
99
G OVE R NANCE
Annual report on remuneration
continued
Retirement benefits and entitlements (audited information)
Both Executive Directors were appointed prior to April 2013 and participate in legacy pension arrangements. Details of the Directors’ pension entitlements
and pension-related benefits during the year are as follows:
Chris Loughlin
Susan Davy
Value of defined
benefit pension(i)
(£000)
–
29
Company contributions
to defined contribution
arrangements
(£000)
–
–
Cash allowances
in lieu of pension
(£000)
158
86
Total value for
the year
(£000)
158
115
Normal retirement
age and date
(for pension purposes)
67 (20 August 2019)
65 (17 May 2034)
Accrued pension
at 31 March 2019(ii)
(£000)
–
23(ii)
(i) The value of the defined benefit pension accrued over the period comprises the total pension input amount (which has been calculated in line with regulatory requirements) less the pension
contributions paid by the Director.
(ii) Accrued pension is based on service to the year end and final pensionable salary at that date.
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 2018/19 comprised an employer’s contribution
of £11,256 and a cash sum of £86,470. She is a member of Pennon Group’s defined benefit pension arrangements and is entitled to normal retirement pension
payable from age 65 of broadly 1/80th of pensionable remuneration for each year of pensionable service completed.
The employer’s contribution to the pension for Susan Davy is deducted from the overall pension allowance.
Pensions in payment are guaranteed to increase at a rate of 5% p.a. or RPI if lower for service accrued in the period up to 30 June 2014 and at a rate of 2.5%
p.a. or CPI if lower for service accrued in the period after this date. If a Director dies within five years of retiring, a lump sum equal to the balance of five years’
pension payments is paid plus a spouse’s pension of one half of the member’s pension. Pensions may also be payable to dependants and children.
No additional benefits will become receivable by a Director in the event that the Director retires early.
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. In January 2019, Susan Davy joined the board of Restore Plc as a non-executive director and retained earnings of £11,250. No other
outside company appointments are held by the Executive Directors 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
Notice period
12 months
12 months
* Each of the Executive Directors’ service contracts is subject to 12 months’ notice on either side. The contract has a normal retirement age of 67, except where otherwise agreed by both the executive
and the Company.
Non-Executive Directors
Sir John Parker
Neil Cooper
Gill Rider
Iain Evans
Date of initial letter of appointment
19 March 2015
17 July 2014
22 June 2012
1 September 2018
Expiry date of appointment
31 March 2021
31 August 2020
31 August 2021
31 August 2021
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. During the year the Nomination Committee recommended that Gill Rider’s
appointment be extended for a further three-year term, having considered both her ongoing independence and her contribution to the Board
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 2018/19 by 2%. The Chairman declined to accept an increase for 2018/19.
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.
100
Pennon Group plc Annual Report 2019
Additional contextual information
Historical TSR
The graph below shows the value, over the ten-year period ended on 31 March 2019, 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.
Total shareholder return – Since April 2009
400
350
300
250
200
150
100
50
Apr-9
Pennon
Apr-10
FTSE 250
Apr-11
Apr-12
Apr-13
Apr-14
Apr-15
Apr-16
Apr-17
Apr-18
Apr-19
Historic chief executive officer remuneration
As the Company did not have a Chief Executive Officer until 1 January 2016, the table below provides 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.
From 2015/16 onwards, the Chief Executive Officer’s remuneration for the year is shown.
Average Executive Director single
figure of remuneration (£000)
Chief Executive Officer single
figure of remuneration (£000)
Annual bonus payout
(% of maximum)
LTIP vesting (% of maximum)(iii)
2009/10
916
2010/11
1,091
2011/12
1,221
2012/13
894
2013/14
962
2014/15
762
2015/16(i)
–
2016/17
–
2017/18
–
2018/19
–
–
–
–
–
–
–
1,119
1,318
1,153
1,408
91.79
94.69
72.87
47.00
67.56
68.20
83.98
84.05
87.00
91.00
67.30
50.00
79.30
50.00
30.20
0.00
37.90
20.40
0.00
44.00(iii)
(i) Group Chief Executive Officer for the year, including remuneration received between 1 April 2015 and 31 December 2015 when in position as Chief Executive of South West Water.
(ii) The long-term incentive plan (LTIP) vesting percentage excludes accrued dividends which are added on vesting.
(iii) The LTIP vesting percentage is an estimate as at 20 May 2019.
Comparison of Chief Executive Officer remuneration to employee remuneration
The table below shows the percentage change between 2017/18 and 2018/19 in base salary, benefits and annual bonus for the Chief Executive Officer,
and all employees.
Chief Executive Officer remuneration
All employees
Percentage change in salary
1.9%
4.5%
Percentage change in benefits
13.3%
2.2%
Percentage change in annual bonus
6.7%
5.7%
The percentage increase in average remuneration for employees is calculated using wages and salaries (excluding share-based payments) of £184.3 million
(2017/18 £170.6 million), analysed into the three components in the table and the average number of employees of 5,306 (2017/18 5,014) both as detailed in
note 13 to the Group financial statements.
Pennon Group plc Annual Report 2019
101
G OVE R NANCE
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.
2018/19
(£ million)
205.8
162.0
8.6
356.0
2017/18
(£ million)
192.9
149.5
25.3
390.6
Percentage
change
6.7
8.4
(66.0)
(8.9)
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 awards and shareholding disclosures (audited information)
Share awards granted during 2018/19
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
792
606
225
173
Percentage vesting at
threshold performance
Performance/restricted
period end date
25% of maximum
1 July 2021
n/a
24 July 2021
LTIP awards were calculated using the share price of £7.9012 being the average closing price over the five dealing days preceding the date of grant,
which was 2 July 2018. LTIP awards are also subject to an additional two-year holding period. Deferred bonus awards were calculated using the average
share price at which shares were purchased on the market on 25 July 2018 in order to satisfy the award, which was £7.6136.
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, which from 2017/18 more significantly increased from 100% to 200% of salary for both the
Chief Executive Officer and Chief Financial Officer. 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.
Interests in share awards following departure enable departing Directors to remain aligned with the interests of shareholders for an extended period after
leaving the Company. Deferred bonus and LTIP awards subject to a holding period will normally vest (and be released from their holding periods) at the
normal time. This means that Directors may retain a significant interest in shares following departure from the Company. The Remuneration Committee
intends to further review the Company’s arrangements for alignment with shareholders post-cessation of employment as part of the review of the
Remuneration Policy that will take place prior to the 2020 AGM.
The beneficial interests of the Executive Directors in the ordinary shares (40.7p each) of the Company as at 31 March 2019 and 31 March 2018 together
with their shareholding guideline obligation and interest are shown in the table below:
Share interests
(including
connected parties)
at 31 March 2019
359,265
71,844
Share interests
(including
connected parties)
at 31 March 2018
324,935
63,658
Shareholding
guideline
200%
200%
Shareholding
guideline met?
Yes
No
Performance
shares (subject
to performance
conditions)
252,406
193,016
Chris Loughlin
Susan Davy
Unvested awards
SAYE
2,196
2,834
Deferred
bonus shares
74,838
55,773
Since 31 March 2019, 7,588 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 91 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 2019 and 29 May 2019.
102
Pennon Group plc Annual Report 2019
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
Neil Cooper
Iain Evans
Gill Rider
Shares held
at 31 March 2019
27,027
–
–
2,500
Shares held
at 31 March 2018
27,027
–
–
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 2019 and 29 May 2019.
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 29 May 2019 is as set out below:
Discretionary schemes
All schemes
Awarded
1.53%
4.01%
Headroom
3.47%
5.99%
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 (of nominal value
of 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
01/07/15
01/07/16
25/08/17
02/07/18
Susan Davy
01/07/15
01/07/16
25/08/17
02/07/18
Conditional
awards held at
1 April 2018
Conditional
awards made
in year
Market price
upon award
in year
49,352
55,434
96,733
–
40,098
42,391
73,972
–
–
–
–
100,239
–
–
–
76,653
810.50p
920.00p
802.70p
790.12p
810.50p
920.00p
802.70p
790.12p
Lapsed
in year(i)
49,352
–
–
–
40,098
–
–
–
Value of shares
upon vesting
(before tax)
£000
Conditional
awards held at
31 March 2019
–
–
–
–
–
–
–
–
–
55,434
96,733
100,239
–
42,391
73,972
76,653
Date of end
of period for
qualifying
conditions to
be fulfilled
–
30/06/19
24/08/20
01/07/21
–
30/06/19
24/08/20
01/07/21
Expected date
of release(ii)
–
30/06/21
24/08/22
01/07/23
–
30/06/21
24/08/22
01/07/23
(i) All of the 2015 share awards lapsed in 2018 as a consequence of not meeting the performance criteria.
(ii) Awards granted from 2015 onwards are subject to a two-year holding period following vesting.
Pennon Group plc Annual Report 2019
103
G OVE R NANCE
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
27/07/15
04/07/16
30/08/17
25/07/18
Susan Davy
27/07/15
04/07/16
30/08/17
25/07/18
Conditional
awards held at
1 April 2018
Conditional
awards made
in year
19,124
18,759
26,504
–
9,809
12,524
20,503
–
–
–
–
29,575
–
–
–
22,746
Market price
of each share
upon award
in year
791.00p
950.14p
808.691p
761.36p
791.00p
950.14p
808.691p
761.36p
Value of shares
upon vesting
(before tax)
£000
Conditional
awards held at
31 March 2019
142
–
–
–
73
–
–
–
–
18,759
26,504
29,575
–
12,524
20,503
22,746
Vesting
in year
19,124(i)
–
–
–
9,809(i)
–
–
–
(i) These shares were released on 3 August 2018 at 740.08p per share.
Date of end
of period for
qualifying
conditions
to be fulfilled
26/07/18
03/07/19
29/08/20
24/07/21
26/07/18
03/07/19
29/08/20
24/07/21
During the year the Directors received dividends on the above shares in accordance with the conditions of the bonus plan as follows: Chris Loughlin
£24,847*; Susan Davy £16,530.
* 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 dividend reinvestment plan. 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 2018 given on page 102.
(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
03/07/18
Options
held at
1 April 2018
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 2019
Options held at
31 March 2019
2,788
2,196
2,635
–
–
–
–
2,834
2,788
–
2,635
–
538.00p
683.00p
683.00p
635.00p
739.80p
–
698.80p
–
–
743.60p
–
743.60p
–
2,196
–
2,834
Exercise period/
maturity date
–
01/09/20 – 28/02/21
–
01/09/21 – 28/02/22
The Remuneration Committee and its advisers
Gill Rider and Neil Cooper were members of the Committee throughout the year. Martin Angle stepped down from the Committee on 31 December 2018.
Iain Evans was appointed to the Committee on 1 September 2018.
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), Adele Barker (Group Director of Human Resources) and from Deloitte LLP.
During the year Deloitte LLP was reappointed directly by the Committee, with a refreshed advisory team, following a comprehensive retendering process.
Deloitte LLP’s fees in respect of advice which materially assisted the Committee during 2018/19 were £41,680 (arrived at from an hourly rate basis of
charging). During the year, Deloitte LLP also provided tax 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.
104
Pennon Group plc Annual Report 2019
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 at the 2018 AGM and
the remuneration policy at the 2017 AGM, including votes for, against and withheld.
Annual report on remuneration (2018 AGM)
For % (including votes at the Chairman’s discretion)
Against %
Withheld number
Remuneration policy (2017 AGM)
For % (including votes at the Chairman’s discretion)
Against %
Withheld number
99.78
0.22
2,071,068
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.
Directors’ remuneration report compliance
This Directors’ remuneration report has been prepared in accordance with the provisions of the Companies Act 2006 and the Large and Medium-sized
Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013. It also complies with the requirements of the Financial Conduct Authority’s
Listing Rules and the Disclosure and Transparency Rules. The UK Corporate Governance Code also sets out principles of good governance relating to
directors’ remuneration, and this report describes how these principles are applied in practice. The Committee confirms that throughout the financial year
the Company has complied with these governance rules and best practice provisions. The above regulations also require the external auditor to report to
shareholders on the audited information within the annual report on remuneration which is part of the Directors’ remuneration report. The external auditor is
obliged to state whether, in its opinion, the relevant sections have been prepared in accordance with the Companies Act 2006. The external auditor’s opinion
is set out on page 112 and the audited sections of the annual report on remuneration are identified in this report.
On behalf of the Board
Gill Rider
Chairman of the Remuneration Committee
29 May 2019
Pennon Group plc Annual Report 2019
105
G OVE R NANCE
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 74 to 91 and 106 to 109 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 58 to 62
of the strategic report)
• Likely future developments of the Company
(pages 28 and 29 of the strategic report)
• Certain employee matters (pages 32 to 35
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 50 to 57 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 are named on pages 76 and 77. In addition,
Martin Angle, an Independent Non-Executive
Director, served during the year until he stepped
down from the Board on 31 December 2018.
Financial results and dividend
The Directors recommend a final dividend of
28.22 pence per ordinary share to be paid on 3
September 2019 to shareholders on the register
on 26 July 2019, making a total dividend for the
year of 41.06 pence, the cost of which will be
£173 million, resulting in a transfer to reserves of
£ 41 million. The strategic report on pages 50 to
57 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 90. Information
regarding the diversity of the workforce is
provided on page 32 to 35.
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 or consultation groups or by
means of their elected representatives at the
Employee Engagement Forum which operates
in South West Water and the Employee Voice
Forum which operates in Viridor. 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 32 to 35 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 the
Government. At 31 March 2019, around 38%
(2018 38%) of the Group’s employees were
participating in these plans.
Greenhouse gas emissions
Methodology and approach
We have followed the Government’s updated
Environmental Reporting Guidelines: including
streamlined energy and carbon reporting
guidance (January 2019). In calculating our
emissions, we have used the Greenhouse Gas
Protocol Corporate Accounting and Reporting
Standard (revised edition) and the 2018
web-based conversion factors provided by the
Government’s Department for Business, Energy
& Industrial Strategy.
Streamlined energy and
carbon reporting
The new Streamlined Energy and Carbon
Reporting (SECR) regulations require all large
UK companies to begin reporting using their
2019/20 data in their 2020 annual reports. To
provide greater transparency on our greenhouse
gas (GHG) emissions and allow the Group to
assess compliance in readiness for 2019/20
we have decided to report our 2018/19 GHG
emissions in accordance with SECR Guidance
in advance of the regulatory requirement.
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. 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.
Operational scopes
We have measured our Scope 1, 2 and certain
Scope 3 emissions where information is available
Market and location based methodology
The Greenhouse Gas Protocol allows for the
reporting of both ‘market-based’ and ‘location-
based’ Scope 2 emissions from imported energy.
We supplement our self-generation of
renewable/low carbon energy by contracting
with third party renewable energy suppliers
where appropriate. We ensure this supply is
backed by Renewable Energy Guarantees of
Origin (REGOs) and retire these REGOs allowing
the contracted green tariff supply to qualify as
zero carbon ‘market-based’ emissions. We have
chosen to report our market-based emissions
separately from the location-based supply
and this is set out in our Group GHG emissions
table opposite.
106
Pennon Group plc Annual Report 2019
Base year
For GHG reporting we always compare current
financial against the previous financial year
performance. As part of the new Pennon
Sustainability Strategy, we are reviewing an
appropriate baseline for longer-term targets
Targets
For our water business, as part of our latest
business plan, we have set a new medium term
GHG emissions target of 130,000 tCO2e by 2025.
As part of the new Pennon sustainability strategy,
the Group GHG emissions targets including for
our waste business are currently under review.
Intensity measurement
We are reporting an intensity measure of Scope 1
and 2 gross emissions in tCO2e per £100,000
revenue.
Self-generated renewable energy export
Pennon Group self-generates more electricity
than it uses and most of this power is exported
to the grid as renewable/low carbon electricity.
This self-generated renewable energy export
reduces our overall net emissions since under
the GHG Protocol accounting methodology it
offsets Scope 2 emissions up to the total amount
of electricity purchased and consumed by the
organisation. Since our self-generated export is
many times our imported volume our Scope 2
emissions are completely removed from our
net emissions.
External assurance statement
Our GHG emissions data has been independently
assured by DNV GL. 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. DNV GL’s statement and the
Pennon Sustainability Indicator definitions
document can be found on the Pennon website
www.pennon-group.co.uk/sustainability.
Pennon Group plc greenhouse gas emissions (tCO2e)
Scope 1
Scope 2
Scope 3
Total gross emissions
REGO-backed renewable electricity import
via private wire
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)
2018/19
(Market Based)
1,572,996
100,472
60,547
1,734,015
Included in
Scope 2 above
2018/19
(Location Based)
1,572,996
101,661
60,547
1,735,204
2017/18
1,797,147
123,665
65,185
1,985,997
(1,190)
(1,738)
(100,472)
1,633,543
1,588,882
(100,472)
1,633,543
1,588,882
(125,403)
1,858,857
1,520,021
113.2
113.2
137.6
Previous year’s intensity measure was based on underlying revenue as opposed to the statutory revenue figure which was slightly
different in 2017/18. For consistency with our standard communications on Group revenue, which use the statutory revenue figure,
the intensity measure is expressed based on the statutory revenue figure. Previous year’s figure (137.9) has been updated in the
table using the statutory measure.
Scope 1 (direct emissions) Activities owned or controlled by our organisation that release emissions straight into the atmosphere.
For Pennon, key Scope 1 emission sources include combustion related emissions from energy recycling facilities, fugitive emissions
from landfill, emissions from stationary plant, fugitive emissions from air conditioning plant and transport related emissions from our
own vehicles and fleet.
Scope 2 (indirect emissions) Emissions released into the atmosphere associated with our consumption of purchased electricity,
heat, steam and cooling. These Emissions released into the atmosphere associated with our consumption of imported electricity.
Scope 3 (other indirect emissions) Emissions that are a consequence of our actions, which occur at sources which we do not own
or control. For Pennon, such Scope 3 emission sources include business travel, Well to Tank emissions and some embodied carbon
emissions associated with purchased goods where data is available.
Pennon Group plc greenhouse gas emissions by business
Scope 1
Scope 2
Scope 3
Total gross emissions (market based)
Waste (Viridor)
1,554,916
15,915
22,743
1,593,574
Water (South
West Water and
Bournemouth Water)
18,080
84,557
37,804
140,440
Note: The water business figure provided here includes the impact of emissions from our two hydroelectric power stations which do
not form part of our annual reporting to the water regulator Ofwat since these sites are outside of the Ofwat regulated contract.
Change in emissions
Gross GHG emissions for the Group reduced by
12.7%. For Viridor this was primarily as a result
of reduced landfill emissions, improved data
methods at sites as well as a change in the
ownership status of Viridor Manchester sites
which takes them out of reporting boundaries.
All Group companies benefited from a continued
reduction in the UK’s average electricity grid
emissions conversion factor, which fell by 20%
from 0.38443 to 0.3072 kgCO2e/kWh over the
reporting period. This resulted in a reduction in the
Group’s overall Scope 2 emissions and has helped
both SWW and Bournemouth Water to reduce
their overall carbon footprint by around 11%.
The intensity metric has decreased from 138 to
113 tCO2e/£100,000 turnover. This reflects both
a reduction in overall Scope 1 and 2 emissions,
as described above, alongside an increase in
turnover compared to 2017/18.
Further information on our GHG emissions can
be found in our CDP climate change disclosure
available on the CDP website.
.
Energy efficiency action taken
Both South West Water and Viridor are
accredited to the ISO50001 energy
management system standard. A summary
of key improvement activities undertaken in
2018/19 is provided below.
South West Water
Pumping represents around 80% of South
West Water’s energy consumption and so we’ve
continued to invest in energy efficiency projects
under our Pump Efficiency Programme. We also
funded energy efficiency projects under our
PowerDown Programme.
Projects completed during 2018/19 include
energy analysis of system performance at
Penzance STW which revealed over-sized
pumps. Smaller pumps were installed which
will deliver expected annual energy savings
of £23,000. Elsewhere, pump refurbishment
at Ilsham Valley pumping station will save
£65,000, while installation of variable speed
drives at Pynes Hill WTW will save £13,000.
Pennon Group plc Annual Report 2019
107
G OVE R NANCE
Directors’ report –
Other statutory disclosures
continued
Energy
Our water business uses 351GWh of energy while our waste business uses 357GWh of energy. A
breakdown of Group energy usage is shown below.
Energy usage (MWh)
Imported grid electricity
Imported private wire electricity (renewable)
Self-supplied renewable electricity
Self-supplied heat
Natural gas
Liquid fuels (for stationary applications)
Energy used by fleet transport, hire cars and
private mileage
Total energy usage
Intensity measure: MWh/£100,000 revenue
No heat, steam and cooling was purchased by any Group company in 2018/19.
2018/19
355,026
4,202
11,982
7,524
13,255
83,925
232,822
708,738
47.9
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
(AGM) in 2018), which was valid as at 31 March
2019 and remains currently valid. No purchases
were made during the year. As at 1 April 2018,
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 2019:
Viridor
To support energy management across the
Viridor business, 18 energy champions (one
at each major energy using site) achieved BSI
energy efficiency training in 2018/19. After the
installation at our Sheffield facility in 2018/19,
most sites have now upgraded their lighting to
LED, reducing the energy requirement for
lighting by up to 91%.
Viridor trialled the use of submetering at
Rochester plastics recycling facility (PRF),
during the year. The increased visibility of the
PRF process’s energy consumption highlighted
inefficiencies facilitating energy savings, while
at the same time increasing plant availability.
As a result, submetering projects are
progressing for other high energy consuming
sites (Skelmersdale PRF, Crayford materials
recycling facility (MRF), Ford MRF). Further
site-based energy surveys were conducted at
various sites around the company in 2018/19
to identify energy saving opportunities.
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.
a)
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 £0.2 million during the year
(2017/18 £0.1 million).
Overseas branches
The Company has no overseas branches.
Pennon Group donations
During 2018/19, the Group provided a total
of £197,000 in charitable donations (2017/18
£151,000).
No political donations were made or political
expenditure incurred and no contributions were
made to a non-EU political party (2017/18 nil).
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 162. 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;
108
Pennon Group plc Annual Report 2019
c)
d)
Details of significant direct or indirect
holdings of securities of the Company are
set out in the shareholder analysis on page
178. The Company is not aware of any
agreements between shareholders which
may result in restrictions on the transfer of
securities or on voting rights;
The Company’s rules about the
appointment and replacement of Directors
are contained in the Articles and accord
with usual English company law provisions.
The powers of Directors are determined by
UK legislation and the Articles in force from
time to time. Changes to the Articles must
be approved by the Company’s
shareholders by passing a special
resolution;
e)
The Directors have the power to make
purchases of the Company’s own shares in
issue as set out above. The Directors also
have the authority to allot shares up to an
aggregate nominal value of:
(i)
(ii)
£56,944,013 (such amount to be
reduced by any shares allotted or
rights granted under (ii) below in
excess of £56,944,013); and
£113,888,026 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 2018 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.
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 (EU).
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 EU 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 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 76 and 77, confirms
that, to the best of his or her knowledge:
i) The financial statements, which have been
prepared in accordance with IFRSs as adopted
by the EU, give a true and fair view of the
assets, liabilities, financial position and profit
of the Group and of the Company.
ii)
iii)
The strategic report (pages 1 to 71) 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, 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.
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 74 to 91
and 106 to 109 was approved by the Board on
29 May 2019.
By order of the Board
Simon A F Pugsley
Group General Counsel
and Company Secretary
29 May 2019
Pennon Group plc Annual Report 2019
109
We aim to demonstrate environmental
leadership via our carbon reduction and
energy efficiency programmes, and by
embedding our pollution prevention and
compliance culture across our business.
Our energy producing facilities are
already set up with grid connections
so we do all that we can to squeeze
as much energy out as possible.
That’s why we’ve installed solar panels
on many of our facilities and Head
Office and created a solar farm at
our closed landfill in Wiltshire.
We are also creating energy parks
at some of our energy recovery
facilities that allow us to generate
decentralised energy for consumption
locally without the need for the
national grid.
We will continue to investigate
opportunities to utilise solar energy
and other energy generating
technologies where it can bring
economic and environmental benefit.
Sustainability focus area
See sustainability strategy on
page 11
110
Pennon Group plc Annual Report 2019
FINANCIAL STATEMENTS
112
118
123
174
177
178
Independent auditor’s report
Financial statements
Notes to the financial
statements
Alternative performance
measures
Five-year financial summary
Shareholder information
Pennon Group plc Annual Report 2019
111
FI NANC IAL STATEMEN TS
Independent auditor’s report to the
members of Pennon Group plc
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 58 to 68 that
describe the principal risks and explain how they are being managed
or mitigated;
• the directors’ confirmation set out on page 58 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 109 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 69 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 £14.0 million which
represents 5% of Profit before taxation before
non-underlying items.
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 2019 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:
Parent company
Balance sheet as at 31 March 2019
Statement of changes in equity for
the year then ended
Cash flow statement for the year
then ended
Related notes 1 to 44 to the financial
statements, including a summary of
significant accounting policies
Group
Consolidated Balance sheet
as at 31 March 2019
Consolidated income statement
for the year then ended
Consolidated statement of
comprehensive income for
the year then ended
Consolidated statement of
changes in equity for the
year then ended
Consolidated cash flow
statement for the year then
ended statement
Related notes 1 to 44 to the
financial statements, including
a summary of significant
accounting policies
Audit
scope
Materiality
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.
112
Pennon Group plc Annual Report 2019
Key audit matters
Key audit matters are those matters that, in our professional judgement, 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.
Risk
Our response to the risk
Revenue recognition across the Group’s operations
(£1,478.2 million, PY comparative £1,396.2 million)
Risk direction
Refer to the Audit Committee Report (page 83); Accounting
policies (page 123); and Note 4 of the Consolidated Financial
Statements (page 134)
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 judgement as to the likely
impact on usage of factors such as recent weather patterns.
The accrued income balance at 31 March 2019 is £89.8
million (2018: £70.3 million) for South West Water and
£29.1 million (2018: £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 2019 is £54.7 million (2018: £53.4 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
2019 the Group has recognised contract receivables of
£188.3. million (2018: £234.1 million) and other intangible
assets of £90.6 million (2018: £69.2 million), related to
service concession arrangements (refer to Note 16 and 19).
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 evaluate whether expected adjustments
have been made to 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
networks, together with information on ‘water into supply’
• For a sample of contracts, we tested whether contract terms and conditions were
met, and revenue recognised at the correct time in accordance with IFRS 15
• 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, compared to prior year, and corroborated accrued
income balances to third party support, including published rates and tariffs
• 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 15 and
with the requirements of IFRIC 12. In particular, we tested that the margins used to
recognise 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)
(£209.6 million, PY comparative £191.9 million)
Our procedures include:
• We tested the aftercare, restoration and remediation provision models, and verified
Risk direction
Refer to the Audit Committee Report (page 83); Accounting
policies (page 123); and Note 4 of the Consolidated Financial
Statements (page 133)
Landfill related provisions of £209.6 million (2018: £191.9
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.
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 (1.94% to 2.329%).
Our range was calculated
using average yields on
30 year index linked
UK government bonds
and adjusting for
quantitative easing
and duration premiums.
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.
Pennon Group plc Annual Report 2019
113
FI NANC IAL STATEMEN TS
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 obtained an understanding of management’s consideration of the new standard
(IFRS 9 Financial Instruments) and its impact on the bad debt allowance calculation
• We obtained an understanding of management’s consideration of the new revenue
standard (IFRS 15) and its impact on revenue recognition and the bad debt allowance
• 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.
• 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 obtained an update, from management and Group legal, to understand the latest
position of material claims as at the year end date
• We inspected legal advice management has obtained in relation to contract positions,
quantum of costs and amounts recoverable
• We inquired of management and assessed other evidence, including board minutes,
agreement to monies spent and review of contracts, to test the completeness of
amounts recorded in relation to contract claims
• In respect of the Interserve claim, we inspected external data, including financial
reports, market announcements, Administrators’ statement of proposals, valuations
of Interserve’s business units and correspondence between Viridor and Interserve,
to assess the recoverability of amounts due and whether the reserve recognised
reflects an appropriate level of provision
• We read the disclosures made by management in Note 4 ‘Critical accounting
judgements and estimates’ in the Annual Report and Accounts, and evaluated the
adequacy of these.
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) (£86.8 million, PY comparative
£88.5 million)
Risk direction
Refer to the Audit Committee Report (page 83); Accounting
policies (page 123); and included within the total Group
balance per Note 22 of the Consolidated Financial Statements
(page 151)
The South West Water provision of £86.8 million (2018:
£88.5 million) is calculated using a combination of system
generated information on historic debt recovery rates and
management’s judgement of the future likely recovery rates.
Under the new revenue recognition criteria, revenue should
be recognised only when it is probable that the company will
collect the consideration to which it is entitled in exchange
for services that will be transferred to the customer.
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 83); Accounting
policies (page 123); and Note 4 of the Consolidated Financial
Statements (page 134)
Viridor was contracted by Glasgow City Council to construct
a Recycling and Renewable Energy Centre in Glasgow.
Viridor terminated the contract with the original principal
contractor, Interserve Construction Limited (Interserve),
in November 2016 and has overseen the remaining
construction. The facility completed commissioning and
became operational during the financial year.
Expenditure to complete construction has exceeded the
original target and management has accounted for what
it believes its contractual rights are.
Contract claims as at 31 March 2019 amounted to
£72.0 million (2018: £68.7 million). Management has
recognised a provision of £28.7 million (2018: £6.0 million),
under IFRS 9, resulting in a net receivable recognised of
£43.3 million (2018: £62.7 million).
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.
The key audit matters for the current year are consistent with matters included in our prior year auditor’s report.
Key observations
communicated to
the Audit Committee
We concluded that the
doubtful debt provision
is within an acceptable
range (£84.3 million to
£92.6 million) and reflects
recent history of collection
of outstanding debts.
We concluded that the
accounting position taken by
management, including the
recoverability of amounts
due from Interserve, is
appropriate and is based
on supporting legal
and financial analysis.
We concluded that the
disclosures on this key
judgement, including the
possible range of outcomes,
in the Annual Report and
Accounts are appropriate.
114
Pennon Group plc Annual Report 2019
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% (2018: 100%) of the Group’s Profit before taxation
before non-underlying items, 100% (2018: 100%) of the Group’s Revenue
and 95% (2018: 95%) of the Group’s Total assets. For the current year,
the full scope components contributed 100% (2018: 100%) of the Group’s
Profit before taxation before non-underlying items, 88% (2018: 88%) of the
Group’s Revenue and 95% (2018: 94%) of the Group’s Total assets. The
specific scope component contributed -0.6% (2018: -0.4%) of the Group’s
Profit before taxation before non-underlying items, 12% (2018: 12%) of the
Group’s Revenue and 1% (2018: 1%) 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
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, based in Exeter and 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 £14.0 million (2018: £12.7 million),
which is 5% (2018: 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 £7.8 million (2018:
£7.3 million), which is 75% (2018: 75%) of Group performance materiality, which
is a lower materiality than the amount determined on a stand alone basis.
Starting basis
Reported profit before taxation £260.3 million
(2018: £262.9 million)
Adjustments
Non-underlying items – decrease basis by £19.9 million
(2018: £4.1 million decrease) (refer to note 6 of the
Consolidated Financial Statements)
Materiality
Totals £280.2 million (2018: £258.8 million)
profit before taxation before non-underlying items.
Materiality of £14.0 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% (2018: 75%) of our planning materiality,
namely £10.5 million (2018: £9.7 million). 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.
Pennon Group plc Annual Report 2019
115
FI NANC IAL STATEMEN TS
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 £3.2 million to
£9.5 million (2018: £2.9 million to £9.0 million).
Reporting threshold
An amount below which identified misstatements are considered as being
clearly trivial.
We agreed with the Audit Committee that we would report to them all
uncorrected audit differences in excess of £0.7 million (2018: £0.7 million),
which is set at 5% of planning materiality, as well as differences below that
threshold that, in our view, warranted reporting on qualitative grounds.
We evaluate any uncorrected misstatements against both the quantitative
measures of materiality discussed above and in light of other relevant
qualitative considerations in forming our opinion.
Other information
The other information comprises the information included in the annual
report set out on pages 1 to 109, 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 109 – 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 83 to 86 – 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 109 – 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.
116
Pennon Group plc Annual Report 2019
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; or
• a Corporate Governance Statement has not been prepared by
the company.
Responsibilities of directors
As explained more fully in the directors’ responsibilities statement set
out on page 109, 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 5 July 2018 to audit the financial statements for the year ending
31 March 2019 and subsequent financial periods.
• The period of total uninterrupted engagement including previous
renewals and reappointments is 5 years, covering the years ended
31 March 2015 to 31 March 2019.
• 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
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.
Debbie O’Hanlon
(Senior statutory auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditor
Reading
29 May 2019
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.
Pennon Group plc Annual Report 2019
117
FI NANC IAL STATEMEN TS
Consolidated income statement
For the year ended 31 March 2019
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
Before
non-underlying
items
2019
£m
1,478.2
Non-underlying
items (note 6)
2019
£m
–
(205.8)
(109.3)
(616.9)
546.2
(195.2)
351.0
23.5
(106.7)
(83.2)
12.4
280.2
(42.7)
237.5
229.2
(0.3)
8.6
(3.0)
–
(22.7)
(25.7)
–
(25.7)
–
5.8
5.8
–
(19.9)
5.0
(14.9)
(14.9)
–
–
Notes
5
7
5
7
5
8
8
8
20
5
9
11
Consolidated statement of comprehensive income
For the year ended 31 March 2019
Notes
30
9, 31
20
9, 31
36
Before
non-underlying
items
2019
£m
237.5
Non-underlying
items (note 6)
2019
£m
(14.9)
(17.2)
3.2
(14.0)
0.5
(6.4)
0.6
(5.3)
(19.3)
218.2
209.9
(0.3)
8.6
–
–
–
–
–
–
–
–
(14.9)
(14.9)
–
–
Profit for the year
Other comprehensive (loss)/income
Items that will not be reclassified to profit or loss
Remeasurement of defined benefit obligations
Income tax on items that will not be reclassified
Total items that will not be reclassified to profit or loss
Items that may be reclassified subsequently
to profit or loss
Share of other comprehensive income/(loss) from
joint ventures
Cash flow hedges
Income tax on items that may be reclassified
Total items that may be reclassified subsequently
to profit or loss
Other comprehensive (loss) /income for the year
net of tax
Total comprehensive income/(loss) for the year
Total comprehensive income attributable to:
Ordinary shareholders of the parent
Non-controlling interests
Perpetual capital security holders
The notes on pages 123 to 173 form part of these financial statements.
118
Pennon Group plc Annual Report 2019
Before
non-underlying
items
2018
£m
1,393.0
Non-underlying
items (note 6)
2018
£m
3.2
(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
–
–
Before
non-underlying
items
2018
£m
214.4
Non-underlying
items (note 6)
2018
£m
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
–
–
–
–
–
–
–
–
7.5
7.5
–
–
Total
2019
£m
1,478.2
(208.8)
(109.3)
(639.6)
520.5
(195.2)
325.3
23.5
(100.9)
(77.4)
12.4
260.3
(37.7)
222.6
214.3
(0.3)
8.6
51.1
50.9
Total
2019
£m
222.6
(17.2)
3.2
(14.0)
0.5
(6.4)
0.6
(5.3)
(19.3)
203.3
195.0
(0.3)
8.6
Total
2018
£m
1,396.2
(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
Balance sheets
At 31 March 2019
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/(liabilities)
Non-current liabilities
Borrowings
Other non-current liabilities
Financial liabilities at fair value through profit
Derivative financial instruments
Retirement benefit obligations
Deferred tax liabilities
Provisions
Net assets
Shareholders’ equity
Share capital
Share premium account
Capital redemption reserve
Retained earnings and other reserves
Total shareholders’ equity
Non-controlling interests
Perpetual capital securities
Total equity
Notes
Group
2019
£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
92.1
4,509.4
256.4
–
70.5
–
51.1
5,364.5
28.8
484.8
11.8
569.6
1,095.0
(150.4)
(3.8)
(11.1)
(298.0)
(19.1)
(28.7)
(511.1)
583.9
(3,498.7)
(147.9)
(43.1)
(9.9)
(60.8)
(305.1)
(203.1)
(4,268.6)
1,679.8
171.1
223.6
144.2
843.0
1,381.9
1.2
296.7
1,679.8
2018
£m
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
Company
2019
£m
2018
£m
–
–
0.3
1,044.6
1.2
3.7
1,980.8
–
3,030.6
–
21.6
2.8
284.8
309.2
(335.7)
(0.4)
(0.2)
(15.8)
(3.6)
–
(355.7)
(46.5)
(989.7)
(8.6)
(1.4)
(0.7)
(3.4)
–
–
(1,003.8)
1,980.3
171.1
223.6
144.2
1,144.7
1,683.6
–
296.7
1,980.3
–
–
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
The profit for the year attributable to ordinary shareholders’ equity dealt within the accounts of the parent Company is £194.8 million (2018 £215.1 million).
The notes on pages 123 to 173 form part of these financial statements.
The financial statements on pages 118 to 173 were approved by the Board of Directors and authorised for issue on 29 May 2019 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.
Pennon Group plc Annual Report 2019
119
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
217.4
–
–
–
–
(2.1)
–
–
–
–
–
0.4
3.1
–
1.4
218.8
–
–
–
–
–
–
–
4.8
4.8
223.6
144.2
–
–
–
–
–
–
–
–
–
–
–
–
–
–
144.2
–
–
–
–
–
–
–
–
–
144.2
684.4
200.6
34.6
235.2
(149.5)
41.7
2.2
–
(5.2)
–
–
(1.7)
–
–
(112.5)
807.1
214.3
(19.3)
195.0
(162.0)
4.4
–
(1.5)
–
(159.1)
843.0
–
(0.2)
–
(0.2)
–
–
–
–
–
–
–
–
–
1.7
1.7
1.5
(0.3)
–
(0.3)
–
–
–
–
–
–
1.2
Total
equity
£m
1,509.2
221.9
34.6
256.5
(149.5)
41.7
2.2
296.7
(300.0)
(25.3)
294.8
21.5
–
21.5
–
–
–
296.7
(294.8)
(25.3)
3.8
3.8
–
–
–
(19.6)
296.7
8.6
–
8.6
–
–
(8.6)
(1.2)
3.3
1.7
(126.6)
1,639.1
222.6
(19.3)
203.3
(162.0)
4.4
(8.6)
–
–
(8.6)
296.7
(1.5)
5.1
(162.6)
1,679.8
FI NANC IAL STATEMEN TS
Statements of changes in equity
For the year ended 31 March 2019
Group
At 1 April 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 Sharesave Scheme
Non-controlling interests
Total transactions with equity shareholders
At 31 March 2018
Profit for the year
Other comprehensive loss for the year
Total comprehensive income for the year
Transactions with equity shareholders:
Dividends paid
Adjustment in respect of share-based payments (net of tax)
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 Sharesave Scheme
Total transactions with equity shareholders
At 31 March 2019
The notes on pages 123 to 173 form part of these financial statements.
Share
capital
(note 33)
£m
168.4
–
–
–
–
2.1
–
–
–
–
–
0.1
0.2
–
2.4
170.8
–
–
–
–
–
–
–
0.3
0.3
171.1
120
Pennon Group plc Annual Report 2019
Company
At 1 April 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 Sharesave Scheme
Total transactions with equity shareholders
At 31 March 2018
Profit for the year (note 10)
Other comprehensive income for the year
Total comprehensive income for the year
Transactions with equity shareholders:
Dividends paid
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 Sharesave Scheme
Total transactions with equity shareholders
At 31 March 2019
The notes on pages 123 to 173 form part of these financial statements.
Share
premium
account
(note 34)
£m
Capital
redemption
reserve
(note 35)
£m
217.4
–
–
–
–
(2.1)
–
–
–
–
–
0.4
3.1
1.4
218.8
–
–
–
–
–
–
–
4.8
4.8
223.6
144.2
–
–
–
–
–
–
–
–
–
–
–
–
–
144.2
–
–
–
–
–
–
–
–
–
144.2
Retained
earnings
and other
reserves
(note 36)
£m
1,005.4
215.1
3.6
218.7
(149.5)
41.7
–
(5.2)
–
–
0.8
(0.8)
–
(113.0)
1,111.1
194.8
0.2
195.0
(162.0)
–
1.5
Perpetual
capital
securities
(note 37)
£m
294.8
21.5
–
21.5
–
–
296.7
(294.8)
(25.3)
3.8
–
–
–
(19.6)
296.7
8.6
–
8.6
–
(8.6)
–
Total
equity
£m
1,830.2
236.6
3.6
240.2
(149.5)
41.7
296.7
(300.0)
(25.3)
3.8
0.8
(0.3)
3.3
(128.8)
1,941.6
203.4
0.2
203.6
(162.0)
(8.6)
1.5
(0.9)
–
(161.4)
1,144.7
–
–
(8.6)
296.7
(0.9)
5.1
(164.9)
1,980.3
Share
capital
(note 33)
£m
168.4
–
–
–
–
2.1
–
–
–
–
–
0.1
0.2
2.4
170.8
–
–
–
–
–
–
–
0.3
0.3
171.1
Pennon Group plc Annual Report 2019
121
Group
Company
2019
£m
399.8
(83.9)
(29.2)
286.7
10.3
5.5
–
(54.8)
0.5
(21.6)
(356.0)
–
–
6.3
(409.8)
5.1
–
–
(1.5)
384.5
(181.6)
74.9
(27.8)
–
(162.0)
(5.8)
85.8
(37.3)
403.0
365.7
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
2019
£m
(223.0)
(36.8)
(22.1)
(281.9)
44.5
196.7
–
–
–
–
–
–
–
–
241.2
5.1
–
–
–
334.5
(149.6)
–
–
–
(162.0)
(5.8)
22.2
(18.5)
303.3
284.8
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
Notes
38
38
44
37
25
25
FI NANC IAL STATEMEN TS
Cash flow statements
For the year ended 31 March 2019
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
Investment in joint venture
Loan repayments received from joint ventures
(Deposit)/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
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 received from/(used in) financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of the year
The notes on pages 123 to 173 form part of these financial statements.
122
Pennon Group plc Annual Report 2019
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 119.
Pennon Group’s business is operated through two main subsidiaries. South West Water Limited includes the integrated water businesses 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 is a recycling and residual waste processing and transformation business. 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 109.
The new standards or interpretations which were mandatory for the first time in the year beginning 1 April 2018 did not have a material impact on the net
assets or results of the Group.
Initial adoption of IFRS 15 ‘Revenue from Contracts with Customers’
The Group adopted the standard with effect from 1 April 2018 using the full retrospective approach to transition. As the impact of the new standard has not
had a material effect on the Group’s reported revenues, net assets or any specific financial statement line, there has been no restatement of prior year figures.
The revised accounting policy on revenue following implementation of IFRS 15 is set out below in paragraph (c). The disaggregation of revenue information
required by IFRS 15 is given below within note 5 (Segmental information) for the current and prior years.
Initial adoption of IFRS 9 ‘Financial Instruments’
IFRS 9 replaced IAS 39 with effect from 1 April 2018 bringing together all three aspects of the accounting for financial instruments: classification and
measurement, impairment and hedge accounting. The Group applied IFRS 9 prospectively from 1 April 2018. The first time application of this standard in the
specific areas is detailed below but has not resulted in any adjustment or reclassification of amounts previously reported.
The classification and measurement requirements of IFRS 9 require that financial assets are classified in the statements of financial position according to
their nature, the characteristics of their contractual cash flows and the business model adopted for their management. Following assessment of the Group’s
business model as of the date of initial application, 1 April 2018, these requirements did not have a significant impact on the Group. The Group continued
measuring at fair value all financial assets previously held at fair value under IAS 39.
The impairment aspects of IFRS 9 require the Group to evaluate and recognise expected credit losses (ECLs) on financial assets and to ensure changes in
credit risk are assessed at regular intervals, and to make suitable adjustments for ECLs where applicable. The disclosure below within note 4 Critical
accounting judgements and estimates on provision for doubtful debts has been expanded to clarify the Group’s evaluation approach, which now includes the
forward-looking assessment of ECLs and changes in credit risk.
The Group has a policy of hedging currency risk and interest rate risks as detailed in note 3 and previously adopted hedge accounting under IAS 39. The
Group adopted hedge accounting in accordance with IFRS 9 from 1 April 2018.
IFRS 16 ‘Leases’
The adoption of IFRS 16 on 1 April 2019 will affect primarily the accounting for those leases currently classified as operating leases. IFRS 16 no longer
distinguishes between an on the balance sheet finance lease and an off the balance sheet operating lease.
The Group has made the following elections on adopting IFRS 16 to apply from 1 April 2019:
• Applying the modified retrospective approach: the cumulative effect of initially applying IFRS 16 has been calculated as a reduction to retained profits
at 1 April 2019 of £8.1 million. Under this election no restatement of comparative figures will be made
• Electing to apply the standard to contracts that were previously identified as leases when applying IAS 17
• Using the exemptions available in respect of contracts with a lease term ending within 12 months of 1 April 2019 and in respect of the low value of
underlying assets. These exemptions allow accounting similar to that for an operating lease under IAS 17.
Carrying amounts for assets and liabilities under leases accounted for as finance leases prior to adoption of IFRS 16 will not be impacted.
At 31 March 2019 the Group had non-cancellable operating lease commitments of £195.7 million. These predominantly relate to leases of properties
occupied by the Group in the course of carrying out its businesses. Applying IFRS 16 at 1 April 2019 results in the Group recognising an asset in use of
£107.6 million, a deferred tax asset of £1.6 million, an additional lease liability of £121.2 million and the reversal of prepayments and accruals of £0.5 million
and £4.4 million respectively. The overall reduction in net assets of £8.1 million is deducted from retained profits at 1 April 2019 in accordance with the
modified retrospective approach.
Pennon Group plc Annual Report 2019
123
FI NANC IAL STATEMEN TS
Notes to the
financial statements
continued
2. Principal accounting policies continued
Differences between the values of the disclosed operating lease commitment at 31 March 2019 and the additional lease liability recognised at 1 April 2019
under IFRS 16 result from future cash outflows being discounted under IFRS 16 rather than shown gross, the availability of exemptions available on transition
and different rules defining the appropriate length of lease to use between the two methods.
Based on the additional lease liability and associated assets recognised at 1 April 2019 it is estimated that the impact on profit for the year ended 31 March
2020 would be a reduction in profit after tax of £1.0 million, resulting from an increase in EBITDA of £12.7 million, depreciation of £9.9 million, finance costs of
£4.0 million and a reduction in corporation tax of £0.2 million.
Other new standards or interpretations in issue but not yet effective 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 and joint ventures.
The results of subsidiaries and joint ventures 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 are accounted for on an equity basis.
Intra-group trading, loan balances and transactions are eliminated on consolidation.
The acquisition method of accounting is used to account for the purchase of subsidiaries. The excess of the value transferred to the seller in return for
control of the acquired business, together with the fair value of any previously held equity interest in that business over the Group’s share of the fair value of
the identifiable net assets, is recorded as goodwill.
(c) Revenue recognition
Group revenue is recognised following delivery of performance obligations and an assessment of when control over the product or service is transferred to
the customer. Revenue is only recognised when collection of consideration is highly probable.
Revenue is recognised either when the performance obligation in the contract has been performed (point in time recognition) or ‘over time’ as the
performance obligations to the customer are satisfied. For each obligation satisfied over time, the Group applies a revenue recognition method that
accurately reflects performance in transferring control of the services to the customer.
Where a contract with a customer includes more than one performance obligation, revenue is allocated to each obligation in proportion to a fair value
assessment of the total contract sales value split across the services provided.
At the inception of a contract the total transaction price is estimated, being the fair value to which the Group expects to be entitled under the contract,
including any variable consideration. Variable consideration is based on the most likely outcome of the performance obligations.
Revenue excludes value added tax, trade discounts and revenue arising from transactions between Group companies. Revenue includes landfill tax.
Water (domestic and non-household retail)
For most of the services provided to domestic customers, contract terms are implied through statute and regulation in the absence of formal, written
contracts. South West Water has a duty under legislation to provide domestic customers with services regardless of payment and is not permitted to
disconnect domestic customers for non-payment of bills. Charges are set via the periodic review price-setting process, regulated by Ofwat.
In respect of ongoing, continuous services to customers, such as the provision of drinking water and waste water services, revenue is recognised over time in
line with customer usage of those services.
Customers with an unmeasured supply are billed at the start of the year for the full amount of the annual charge but typically take advantage of a choice of
payment arrangements to pay by regular instalments.
Customers with a metered supply are sent up to four bills per year, based either on actual meter readings or estimated usage. For these customers, revenue
includes an estimation of the amount of unbilled usage at the period end. Payment options for domestic customers include an annual Meter Payment Plan
where customers agree to pay a fixed amount per month which is adjusted to reflect actual consumption at the end of the year.
A range of regulated services is offered to property developers and owners who require connection to the water and sewerage networks or need the
networks to be extended or altered. Typically, these customers pay an estimate of the charges in advance as a deposit, which is treated as a contract liability
and are billed or refunded the difference between the estimate and actual costs on completion of the work.
Where the performance obligation relates solely to a connection to the network, revenue is recognised at the point of connection when the customer is
deemed to obtain control.
Where assets are constructed or provided by the Group or assets transferred to the Group, it is considered that there is an explicit or implied performance
obligation to provide an ongoing water and/or waste water service, with the result that revenue is recognised over a time no longer than the economic life of
assets provided by or transferred to the Group.
Pennon Water Services provides specialist retail water and waste water services to business customers. It 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.
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2. Principal accounting policies continued
Energy sales
The Group receives revenue from the sale of electricity from generating assets. These assets include solar, anaerobic digestion, gas from landfill and energy
recovery facilities. Revenue from the sale of electricity from the Group’s generating assets is measured based upon metered output delivered at rates
specified under contract terms or prevailing market rates. Revenue is recognised at a ‘point in time’, being the point of distribution. Typically, invoices are
raised monthly with standard payment terms.
Waste Management Services
In respect of single services with fixed fees, such as the receipt of gate and collection fees, revenue is recognised at the time the service is provided.
The Group also delivers other waste management services for which revenue is recognised ‘over time’ in accordance with contracts with customers. The
nature of contracts and/or performance obligations includes management fees to operate local authority recycling centres and energy recovery facilities,
multi service contracts including collections and gate fees.
Revenue from other services can be fixed (i.e. management fees) or variable (i.e. gate fees).
Gate fee revenue, derived from the Group’s operational assets, is recognised as customer waste is deposited and is based on tonnage received.
In respect of waste collection services, revenue is recognised at the point of collection from customer premises.
A majority of waste management customers are invoiced monthly for services provided within the monthly billing period. Payments are typically due on an
end of month following invoice basis. Alternative billing and/or payment terms are agreed in exceptional circumstances.
The Group transfers control of such waste management services prior to invoicing. Receipt of payment following invoice is based solely on the passage of
time. A trade receivable is recognised until payment is made and/or refund issued.
Where the Group has entered into service concession arrangements it accounts for these contracts in accordance with IFRIC12. Consideration is treated as
contract assets or other intangible assets, depending upon the right to receive cash from the asset. Consideration is split between construction of assets,
operation of the service and provision of finance recognised as interest receivable.
Revenue in respect of construction services is recognised over time and is based on the fair value of work performed, with reference to the total sales value
and the stage of completion of those services, as this best reflects the manner in which control passes to the customer. While construction is in progress the
consideration is disclosed as a contract asset within non-current financial assets. On entry into operational service, in accordance with IFRIC 12, the contract
asset is reclassified as either costs recoverable from construction activities disclosed within other intangible assets when the concession grantor has not
provided a contractual guarantee in respect of the recoverable amount regardless of the service use by customers, and/or within other non-current financial
assets when the concession grantor contractually guarantees the payment of amounts determined in the contract or the shortfall, if any, between amounts
received from users of the public service and amounts specified or determined in the contract. No payments are received during construction.
In respect of operating services, revenue is recognised over time in line with delivery of operational services in accordance with the contract with the
local authority.
Once the operational phase commences the Group has a right to receive consideration for the construction and operational services delivered. Invoicing
typically occurs monthly and payments are due by the end of the month following date of invoice.
Recyclate
The Group transforms waste into recyclate ready for resale. Revenue is measured at the agreed transaction price per tonne of recyclate under the contract
with the customer. Revenue recognition occurs when control over the recyclate assets has been transferred to the customer.
In respect of UK sales, the Group’s performance obligation is satisfied at the point of collection by the customer. This is the point in time when an invoice is
issued and revenue is recognised. Payment terms are typically end of month following invoice date. Overseas sales are predominantly agreed under a letter
of credit. Goods are despatched at the point the letter of credit is accepted by the customer’s bank. Payment is released when the customer confirms
satisfactory receipt of the recyclate. This is the point legal title (i.e. control) passes to the customer and revenue is recognised.
Contract assets and liabilities
A trade receivable is recognised when the Group has an unconditional right to receive consideration in exchange for performance obligations already fulfilled.
A contract asset is recognised when the Group has fulfilled some of its performance obligations but has not yet obtained an unconditional right to receive
consideration, such as in the construction phase of a service concession agreement, as described above. The amounts for contract assets are disclosed
within note 19 (Other non-current assets) and note 22 (Trade and other receivables) as appropriate. A contract liability is recognised when consideration
is received in advance of the Group performing its performance obligations to customers, including, when appropriate, transfers of assets from customers
(per paragraph (w) below). The value of contract liabilities is disclosed within note 26 (Trade and other payables) and note 29 (Other non-current liabilities)
as appropriate.
(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 and residual waste processing and transformation services provided by Viridor. The non-household retail business comprises the services
provided by Pennon Water Services in the non-household water and wastewater retail market which, while regulated, is open to competition. Segmental
revenue and results include transactions between businesses. Inter-segmental transactions are eliminated on consolidation.
Pennon Group plc Annual Report 2019
125
FI NANC IAL STATEMEN TS
Notes to the
financial statements
continued
2. Principal accounting policies continued
(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.
(h) Property, plant and equipment
i)
Infrastructure assets (being water mains and sewers, impounding and pumped raw water storage reservoirs, dams, pipelines and sea outfalls)
Infrastructure assets were included at fair value on transition to IFRS, and subsequent additions are recorded at cost less accumulated depreciation and
impairment charges. Expenditure to increase capacity or enhance infrastructure assets is capitalised where it can be reliably measured, and it is probable
that incremental future economic benefits will flow to the Group. The cost of day-to-day servicing of infrastructure components is recognised in the income
statement as it arises.
Infrastructure assets are depreciated evenly over their useful economic lives, and are principally:
Dams and impounding reservoirs
Water mains
Sewers
200 years
40 – 120 years
40 – 120 years
Assets in the course of construction are not depreciated until commissioned.
ii) Landfill sites
Landfill sites are included within land and buildings at cost less accumulated depreciation. Cost includes acquisition and development expenses. The cost of
a landfill site is depreciated to its residual value 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.
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2. Principal accounting policies continued
(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.
The impact of the adoption of IFRS 16 ‘Leases’ on 1 April 2019 is discussed in paragraph (a) above.
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.
(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) Financial instruments
Financial instruments are recognised and measured in accordance with IAS 39 until 31 March 2018 and in accordance with IFRS 9 from 1 April 2018. The
Group classifies its financial instruments in the following categories:
i) Debt instruments at amortised cost
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 expected credit losses (ECLs). In accordance with the terms and conditions of IFRS 9, since 1 April 2018, each Group entity
performs an impairment analysis at each reporting date to measure the ECLs. Each entity does not track changes in credit risk but instead recognises a loss
allowance based on lifetime ECLs at each reporting date. Each subsidiary has established a provision matrix that is based on its historical credit loss
experience, adjusted for forward-looking factors specific to the receivables and the economic environment.
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.
Pennon Group plc Annual Report 2019
127
FI NANC IAL STATEMEN TS
Notes to the
financial statements
continued
2. Principal accounting policies continued
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.
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.
(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.
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Pennon Group plc Annual Report 2019
2. Principal accounting policies continued
(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 is an integral part of a
landfill site’s future economic benefit, 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 Group plc Employee Benefit 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. The Trust, which is
registered in the United Kingdom, was formed on 18 December 2018 to supersede the Pennon Employee Share Trust which was registered in Guernsey.
(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 of assumptions, using the
projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using
interest rates of high quality corporate bonds, and that have terms to maturity approximating to the terms of the related pension obligation. The increase in
liabilities of the Group’s defined benefit pension schemes, expected to arise from employee service in the year, is charged against operating profit.
Changes in benefits granted by the employer are recognised immediately as past service cost in the income statement.
Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to equity in the statement of
comprehensive income in the period in which they arise.
Defined contribution scheme
Costs of the defined contribution pension scheme are charged to the income statement in the year in which they arise. The Group has no further payment
obligations once the contributions have been paid.
ii) Share-based payment
The Group operates a number of equity-settled, share-based payment plans for employees. The fair value of the employee services required in exchange for
the grant is recognised as an expense over the vesting period of the grant.
Fair values are calculated using an appropriate pricing model. Non-market-based vesting conditions are adjusted for assumptions as to the number of shares
which are expected to vest.
Pennon Group plc Annual Report 2019
129
FI NANC IAL STATEMEN TS
Notes to the
financial statements
continued
2. Principal accounting policies continued
(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.
These costs are included within other receivables as shown in note 19.
(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 as contract liabilities on the balance sheet. The contract liability reduces, and revenue is
recognised in the income statement, as performance obligations are satisfied. 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 should 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.
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Pennon Group plc Annual Report 2019
3. Financial risk management continued
Contractual undiscounted cash flows, including interest payments, at the balance sheet date were:
Group
31 March 2019
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 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)
Company
31 March 2019
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 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
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
86.8
60.5
92.2
298.0
201.7
3.8
181.5
57.5
52.1
342.0
185.1
4.1
51.8
33.6
15.8
763.2
0.2
149.6
31.4
57.1
734.7
0.7
41.1
59.4
55.5
–
–
672.8
156.4
242.1
–
–
1,288.0
681.0
2,153.9
–
–
2,088.7
957.3
2,543.7
298.0
201.7
(3.7)
(12.0)
(65.1)
(77.0)
129.1
53.7
87.1
–
–
2.4
6.1
32.8
–
–
0.2
102.1
27.4
–
–
–
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)
551.7
77.9
–
–
0.3
260.6
69.8
–
–
–
431.9
81.5
–
–
–
349.0
76.8
–
–
–
1,041.5
225.8
15.8
763.2
0.7
861.3
205.4
57.1
734.7
0.7
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 60% of interest-bearing liabilities at fixed rates in order to manage the risk of fluctuating interest rates
impacting the financial performance of the Group. 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 63% (2018 62%) of Group net borrowings were at fixed rates
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.
18% (2018 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 2019 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 £2.4 million (2018 £1.3 million), for the equity sensitivity fair value, with derivative impacts excluded.
For 2019 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 (2018 £2.0 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.
Pennon Group plc Annual Report 2019
131
FI NANC IAL STATEMEN TS
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 and other 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 2019 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
2019
£m
3,079.5
1,679.8
4,759.3
64.7%
2018
£m
2,801.5
1,639.1
4,440.6
63.1%
The water segment is also monitored on the basis of the ratio of its net borrowings to regulatory capital value. Ofwat’s notional gearing target for the K6
(2015-20) regulatory period is set at 62.5%.
Regulatory capital value
Net borrowings of South West Water Limited
Net borrowings/Regulatory capital value
Water business
2019
£m
3,504.7
2,062.6
58.9%
2018
£m
3,431.2
2,068.1
60.3%
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 expected credit losses, of trade receivables and payables are assumed to approximate to their fair values.
132
Pennon Group plc Annual Report 2019
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 £2.5 million.
As at 31 March 2019 the Group’s environmental and landfill restoration provisions were £209.6 million (2018 £191.9 million) (note 32).
Where a restoration provision is an integral part of a landfill site’s future economic benefits, an asset is recognised and depreciated in accordance with the
Group’s depreciation policy. As at 31 March 2019 these assets had a net book value of £30.8 million (2018 £18.4 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 valuation as at 31 March 2019 is ongoing.
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 2018 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 £19.1 million, reduced from £24.4 million in 2017/18, includes £6.2 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 £26 million (2017/18 £27 million) should these tax items be concluded in the Group’s favour. The Group
is continuing to work 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 £188.3 million
(2018 £234.1 million) and other intangible assets of £90.6 million (2018 £69.2 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.
Pennon Group plc Annual Report 2019
133
FI NANC IAL STATEMEN TS
Notes to the
financial statements
continued
4. Critical accounting judgements and estimates continued
Revenue recognition
The Group recognises revenue as performance obligations are satisfied. Payments received in advance of performance obligations being satisfied are
recorded as contract 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,
which represents the unconditional right to consideration, was £89.8 million (2018 £70.3 million) for South West Water and £29.1 million for Pennon Water
Services (2018 £20.2 million). 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, which represents the unconditional right to consideration, was £54.7 million (2018 £53.4 million).
Provision for doubtful debts
At the balance sheet date the Group applies a simplified approach in calculating expected credit losses (ECLs) for trade receivables and contract assets.
Therefore the Group does not track changes in credit risk but instead recognises a loss allowance based on lifetime ECLs at each reporting date. Each
subsidiary has established a provision matrix that is based on its historical credit loss experience, adjusted for forward-looking factors specific to the
receivables and the economic environment.
The actual level of debt collected may differ from the estimated levels of recovery. As at 31 March 2019 the Group’s current trade receivables were
£360.2 million (2018 £325.0 million), against which £99.0 million (2018 £104.3 million) had been provided for expected credit losses (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 2018/19 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.
Glasgow Recycling and Renewable Energy Centre (GRREC)
The facility successfully completed commissioning, becoming fully operational during the second half of the financial year.
Total spend on the project since commencement has been £273.0 million, comprising the original target of £155.0 million, a further £21.0 million invested to
provide additional throughput capacity and £97.0 million to address remediation and non-conformities. Viridor is contractually entitled to recover the
incremental remediation and non-conformities spend, including from the original contractor, Interserve Construction Limited, under certain circumstances.
The Group believes these circumstances have been met for a substantial element which is recoverable from Interserve. Whilst dialogue with Interserve is
ongoing, the Group is preparing to legally pursue the matter.
The project is accounted for in accordance with IFRIC 12 service concession arrangements and the spend of £273.0 million has contributed £117.0 million to
a financial asset, £84.0 million to an intangible asset and a contract receivable from Interserve of £72.0 million, along with a contingent asset of £25.0 million
which considers a broader range of counterparties to the project. As reported through 2018/19 and in line with IFRS 9, the Group has made credit related
provisions recognising that Interserve’s financial condition has been under stress. The Group has considered all relevant available public information
concerning Interserve and at 31 March 2019 recognises a provision of £28.7 million, resulting in a net receivable due of £43.3 million (2018 £62.7 million).
Due to uncertainty and the level of judgement associated with the provision related to the specific recovery from Interserve, it is possible the final outcome
may differ from the net receivable recognised, with the boundaries for the possible outcome being zero and £72.0million.
134
Pennon Group plc Annual Report 2019
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 and residual waste processing and transformation services provided by Viridor. The non-household retail business comprises the services
provided by Pennon Water Services in the non-household water and wastewater retail market which, while regulated, is open to competition. Segment assets
include goodwill and other intangible assets, property, plant and equipment, inventories, trade and other receivables and cash and cash deposits. Segment
liabilities comprise operating liabilities and borrowings and exclude taxation. The other segment liabilities include the Company’s financing arrangements and
Group taxation liabilities. Capital expenditure comprises additions to property, plant and equipment, including additions resulting from acquisitions through
business combinations.
Revenue
Water
Waste management
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
2019
£m
581.0
852.7
173.7
21.4
(150.6)
1,478.2
367.1
178.9
1.0
(0.8)
546.2
251.1
100.9
0.3
(1.3)
351.0
180.6
88.5
(1.6)
12.7
280.2
184.6
58.9
(1.6)
18.4
260.3
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
* 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 2019
Assets (excluding investments in joint ventures)
Investments in joint ventures
Total assets
Liabilities
Net assets
31 March 2018
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
3,690.2
–
3,690.2
(2,762.2)
928.0
3,513.2
–
3,513.2
(2,721.9)
791.3
2,464.8
51.1
2,515.9
(1,743.2)
772.7
2,254.2
22.8
2,277.0
(1,512.4)
764.6
64.6
–
64.6
(58.7)
5.9
66.6
–
66.6
(59.1)
7.5
1,659.0
–
1,659.0
(1,685.8)
(26.8)
1,506.9
–
1,506.9
(1,431.2)
75.7
(1,470.2)
–
(1,470.2)
1,470.2
–
(1,199.3)
–
(1,199.3)
1,199.3
–
6,408.4
51.1
6,459.5
(4,779.7)
1,679.8
6,141.6
22.8
6,164.4
(4,525.3)
1,639.1
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.
Pennon Group plc Annual Report 2019
135
FI NANC IAL STATEMEN TS
Notes to the
financial statements
continued
5. Segmental information continued
Other information
31 March 2019
Amortisation of other intangible assets
Capital expenditure
Depreciation
Finance income
Finance costs (before non-underlying items)
31 March 2018
Amortisation of other intangible assets
Capital expenditure
Depreciation
Finance income
Finance costs (before non-underlying items)
Waste
management
£m
Non-
household
retail
£m
4.5
233.1
73.5
20.0
15.4
3.0
203.7
68.6
21.8
14.8
0.2
–
0.6
–
1.9
0.1
3.5
0.6
–
1.5
Water
£m
0.5
154.0
115.5
2.3
72.8
0.5
181.6
112.9
1.2
68.4
Notes
7
17
7
8
8
7
17
7
8
8
Finance income and costs above reflect the segment in which the amounts arise and exclude inter-company transactions.
The grouping of revenue streams by how they are affected by economic factors, as required by IFRS 15, is as follows:
Year ended 31 March 2019
Segment revenue
Inter-segment revenue
Revenue from external customers
Significant service lines
Water
Non-household retail
Waste management services
Energy
Recyclate
Year ended 31 March 2018
Segment revenue
Inter-segment revenue
Revenue from external customers
Significant service lines
Water
Non-household retail
Waste management services
Energy
Recyclate
Water
UK total
£m
581.0
(124.9)
456.1
456.1
–
–
–
–
456.1
Water
UK total
£m
571.3
(126.8)
444.5
444.5
–
–
–
–
444.5
UK
£m
802.3
(0.3)
802.0
–
–
655.8
88.9
57.3
802.0
UK
£m
733.9
(0.1)
733.8
–
586.0
78.4
69.4
733.8
Waste management (WM)
Rest
of EU
£m
13.8
–
13.8
–
–
–
–
13.8
13.8
China
£m
25.6
–
25.6
–
–
–
–
25.6
25.6
Waste management (WM)
Rest
of EU
£m
12.3
–
12.3
–
–
–
–
12.3
12.3
China
£m
31.0
–
31.0
–
–
–
–
31.0
31.0
Rest
of world
£m
11.0
–
11.0
–
–
–
–
11.0
11.0
Rest
of world
£m
11.7
–
11.7
–
–
–
–
11.7
11.7
Non-
household
retail
UK total
£m
173.7
(4.0)
169.7
–
169.7
–
–
–
169.7
Non-
household
retail
UK total
£m
165.9
(3.0)
162.9
–
162.9
–
–
–
162.9
WM total
£m
852.7
(0.3)
852.4
–
–
655.8
88.9
107.7
852.4
WM total
£m
788.9
(0.1)
788.8
–
–
586.0
78.4
124.4
788.8
Other
£m
–
0.1
0.4
1.2
16.6
–
0.2
0.4
1.2
14.0
Other
UK total
£m
21.4
(21.4)
–
–
–
–
–
–
–
Other
UK total
£m
13.8
(13.8)
–
–
–
–
–
–
–
Group
£m
5.2
387.2
190.0
23.5
106.7
3.6
389.0
182.5
24.2
98.7
Total
£m
1,628.8
(150.6)
1,478.2
456.1
169.7
655.8
88.9
107.7
1,478.2
Total
£m
1,539.9
(143.7)
1,396.2
444.5
162.9
586.0
78.4
124.4
1,396.2
The Group’s country of domicile is the United Kingdom and is the country in which it generates the majority of its revenue. The Group’s non-current assets
are all located in the United Kingdom.
136
Pennon Group plc Annual Report 2019
6. Non-underlying items
Non-underlying items are those that in the Directors’ view should 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(4a)
Operating costs
Pension past service cost (GMP equalisation impact)(1)
Provision for receivable (due from Interserve in respect of Glasgow Recycling Renewable Energy Centre)(2)
Earnings before interest, tax, depreciation and amortisation
Remeasurement of fair value movement in derivatives(3)
Write-down of joint venture shareholder loans(4b)
Refinancing of joint venture arrangement(4c)
Net tax credit arising on non-underlying items
Net non-underlying (charge)/credit
Notes
8
9
2019
£m
–
(3.0)
(22.7)
(25.7)
5.8
–
–
5.0
(14.9)
2018
£m
3.2
–
–
3.2
(2.4)
(19.2)
22.5
3.4
7.5
(1) On 26 October 2018, the High Court of Justice of England and Wales issued a judgment in a claim regarding the rights of female members of certain pension
schemes to equality of treatment in relation to pension benefits (GMP equalisation). The judgment concluded that the claimant is under a duty to amend the
schemes in order to equalise benefits for men and women in relation to guaranteed minimum pension benefit. The issues determined by the judgment arise
in relation to many other occupational pension schemes.
The Group estimates, with advice from the Group’s corporate actuary, that scheme liabilities will increase by an estimated £3.0 million as a result of the
judgement. This cost has been recognised as a past service cost in the current year income statement. The charge is considered non-underlying due to its
size and non-recurring nature.
(2) The financial statements recognise a gross receivable of £72.0 million from Interserve Construction Limited in relation to rectifications and completion costs
for Glasgow Recycling Renewable Energy Centre. Under IFRIC 12 the difference between the gross contractual value and the expected recovery will be
taken directly to the income statement. During the year, Interserve Plc (the holding company of Interserve Construction Limited) entered into administration.
The operating company, Interserve Construction Limited with whom we contracted, is currently continuing to trade. As a result of the lack of certainty
around the future of Interserve’s business and in accordance with IFRS 9, we have sought to make an appropriate market-based credit assessment using the
latest relevant public information available. Consequently a provision of £22.7 million has been recognised in the year against the receivable resulting in total
cumulative provision at 31 March 2019 of £28.7 million. The charge is considered non-underlying due to its size and non-recurring nature. The financial
stability of Interserve Construction Limited is judged to be outside the control of Pennon Group.
(3) In the year a credit of £5.8 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 dependent and
potentially can be significant in value.
(4) In the prior year, on reset of the contracts associated with the Greater Manchester Waste Disposal Authority (GMWDA) an overall net credit before tax of
£6.5 million was recognised as follows:
(a) A net amount of £3.2 million was recognised in revenue following the settlement of all outstanding claims relating to the construction of assets.
(b) 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.
(c) 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 was £22.5 million, which contributed to an increase in investments in joint ventures recognised
on the balance sheet to £22.8 million.
These items are considered non-underlying due to their size and non-recurring nature.
Pennon Group plc Annual Report 2019
137
FI NANC IAL STATEMEN TS
Notes to the
financial statements
continued
7. Operating costs
Employment costs before non-underlying items
Raw materials and consumables
Other operating expenses before non-underlying items include:
Profit on disposal of property, plant and equipment
Operating lease rentals payable:
– Plant and machinery
– Property
Research and development expenditure
Trade receivables impairment
Depreciation of property, plant and equipment:
– Owned assets
– Under finance leases
Amortisation of other intangible assets
Operating costs include a charge of £25.7 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 £63,000 (2018 £57,000).
Notes
13
22
16
2019
£m
205.8
109.3
(3.9)
18.2
9.3
0.2
3.2
143.9
46.1
5.2
2019
£000
102
621
50
118
891
50
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
A description of the work of the Audit Committee is set out in its report on pages 83 to 86 which includes an explanation of how the auditors’ objectivity and
independence are safeguarded when non-audit services are provided by the auditors’ firm.
138
Pennon Group plc Annual Report 2019
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 on provisions
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
Net finance cost after non-underlying items
Notes
30
32
6
Finance
cost
£m
(52.5)
(39.2)
(2.5)
–
–
(94.2)
–
(1.4)
(11.1)
(12.5)
(106.7)
5.8
–
(100.9)
2019
Finance
income
£m
–
–
–
3.6
5.3
8.9
14.6
–
–
14.6
23.5
–
–
23.5
Total
£m
(52.5)
(39.2)
(2.5)
3.6
5.3
(85.3)
14.6
(1.4)
(11.1)
2.1
(83.2)
5.8
–
(77.4)
Finance
cost
£m
(48.6)
(34.4)
(3.9)
–
–
(86.9)
–
(1.6)
(10.2)
(11.8)
(98.7)
(2.4)
(19.2)
(120.3)
2018
Finance
income
£m
–
–
–
2.5
7.9
10.4
13.8
–
–
13.8
24.2
–
–
24.2
In addition to the above, finance costs of £15.2 million have been capitalised on qualifying assets included in property, plant and equipment
(2018 £17.0 million, £14.7 million property, plant and equipment, £2.3 million other intangible assets).
9. Taxation
Analysis of charge in year
Current tax charge
Deferred tax charge
Tax charge for year
Before
non-underlying
items
2019
£m
Non-underlying
items (note 6)
2019
£m
Notes
29.4
13.3
42.7
(5.5)
0.5
(5.0)
Before
non-underlying
items
2018
£m
Non-underlying
items (note 6)
2018
£m
26.1
18.3
44.4
(3.0)
(0.4)
(3.4)
Total
2019
£m
23.9
13.8
37.7
Total
£m
(48.6)
(34.4)
(3.9)
2.5
7.9
(76.5)
13.8
(1.6)
(10.2)
2.0
(74.5)
(2.4)
(19.2)
(96.1)
Total
2018
£m
23.1
17.9
41.0
UK corporation tax is calculated at 19% (2018 19%) of the estimated assessable profit for the year.
UK corporation tax is stated after a credit relating to prior year current tax of £3.0 million (2018 credit of £3.6 million) and a prior year deferred tax credit
of £9.9 million (2018 credit of £2.4 million).
Pennon Group plc Annual Report 2019
139
FI NANC IAL STATEMEN TS
Notes to the
financial statements
continued
9. Taxation continued
The total tax charge for the year differs from the theoretical amount which would arise using the standard rate of corporation tax in the UK of 19% (2018 19%)
as follows:
Reconciliation of total tax charge
Profit before tax
Profit before tax multiplied by the standard rate of UK corporation tax of 19% (2018 19%)
Effects of:
Expenses not deductible for tax purposes
Joint ventures profits not taxed
Adjustments to tax charge in respect of prior years
Depreciation charged on non-qualifying assets
Other
Tax charge for year
2019
£m
260.3
49.5
1.7
(2.4)
(12.9)
3.7
(1.9)
37.7
2018
£m
262.9
49.9
0.3
(6.1)
(6.0)
1.5
1.4
41.0
The adjustment to the tax charge in respect of prior years represents a current tax credit of £3.0 million and a deferred tax credit of £9.9 million. These reflect
agreements reached with the tax authorities in respect of open enquiries, the release of historical liabilities and the true-up of the previous year’s provision to
reflect the tax computations filed with HMRC.
The current tax charge for the year differs from the theoretical amount which would arise using the standard rate of corporation tax in the UK of 19% (2018
19%) as follows:
Reconciliation of current tax charge
Profit before tax
Profit before tax multiplied by the standard rate of UK corporation tax of 19% (2018 19%)
Relief for capital allowances in place of depreciation
Disallowance of depreciation charged in the accounts
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
Current tax charge for year
2019
£m
260.3
49.5
(54.2)
31.0
0.2
(3.0)
(2.4)
1.7
3.7
(2.6)
23.9
2018
£m
262.9
49.9
(49.5)
31.2
1.6
(3.6)
(6.1)
0.3
1.5
(2.2)
23.1
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. The rates at which capital
allowances are given are set by Government. Such allowances are typically higher than depreciation in the earlier years of investment. Over time however
these will be equal to one another. 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 UK 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 (credit)/charge on defined benefit pension schemes
Deferred tax (credit)/charge on cash flow hedges
Amounts recognised directly in equity
Deferred tax (credit)/charge on share-based payments
Current tax credit on perpetual capital securities periodic return
140
Pennon Group plc Annual Report 2019
2019
£m
(3.2)
(0.6)
(0.5)
–
2018
£m
4.2
3.5
0.4
(3.8)
10. Profit of the parent company
Profit attributable to ordinary shareholders’ equity dealt within the accounts of the parent company
2019
£m
194.8
2018
£m
215.1
As permitted by Section 408 of the Companies Act 2006 no income statement or statement of comprehensive income is presented for the Company.
11. Earnings per share
Basic earnings per share are calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares
outstanding during the year, excluding those held in the employee share trust (note 36), which are treated as cancelled.
For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to include all dilutive potential ordinary shares.
The Group has two types of dilutive potential ordinary shares – those share options granted to employees where the exercise price is less than the
average market price of the Company’s ordinary shares during the year; and the contingently issuable shares under the Group’s Performance and
Co-investment Plan, 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
2019
419.6
1.3
420.9
2018
417.9
1.5
419.4
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 but not payable until May in the following financial year. 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
Profit
after tax
£m
214.3
13.3
14.9
–
242.5
2019
Earnings per share
Basic
p
51.1
3.1
3.6
–
57.8
Diluted
p
50.9
3.1
3.6
–
57.6
Profit
after tax
£m
200.6
18.3
(7.5)
1.3
212.7
Amounts recognised as distributions to ordinary equity holders in the year
Interim dividend paid for the year ended 31 March 2018: 11.97p (2017 11.09p) per share
Final dividend paid for the year ended 31 March 2018: 26.62p (2017 24.87p) per share
Proposed dividends
Proposed interim dividend for the year ended 31 March 2019: 12.84p per share
Proposed final dividend for the year ended 31 March 2019: 28.22p per share
2018
Earnings per share
Diluted
p
47.8
4.4
(1.8)
0.3
50.7
2018
£m
45.9
103.6
149.5
Basic
p
48.0
4.4
(1.8)
0.3
50.9
2019
£m
50.2
111.8
162.0
54.0
118.7
172.7
The proposed interim and final dividends have not been included as liabilities in these financial statements.
The proposed interim dividend for 2019 was paid on 4 April 2019 and the proposed final dividend is subject to approval by shareholders at the
Annual General Meeting.
Pennon Group plc Annual Report 2019
141
FI NANC IAL STATEMEN TS
Notes to the
financial statements
continued
13. Employment costs
Wages and salaries
Social security costs
Pension costs – before non-underlying items
Pension costs – non-underlying items
Share-based payments
Total employment costs
Charged:
Employment costs (excluding non-underlying items) – consolidated income statement
Employment costs (non-underlying items) – consolidated income statement
Capital schemes – property, plant and equipment
Total employment costs
Notes
30
6
33
2019
£m
184.3
19.1
21.9
3.0
3.6
231.9
205.8
3.0
23.1
231.9
2018
£m
170.6
17.4
20.7
–
2.8
211.5
192.9
–
18.6
211.5
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.
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 (full-time equivalent) at 31 March 2019 was 5,382 (2018 5,190).
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
2019
2018
1,616
3,426
104
93
5,239
2019
£000
932
425
936
307
508
3,108
1,575
3,285
81
73
5,014
2018
£000
914
398
667
298
477
2,754
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 (2018 £nil). Total gains made by Directors on the exercise of share options were £nil (2018 £nil).
Total emoluments include £nil (2018 £nil) payable to Directors for services as directors of subsidiary undertakings.
At 31 March 2019 one Director (2018 one) is accruing retirement benefits under defined benefit pension schemes in respect of which the Group contributed
£29,000 (2018 £28,000).
At 31 March 2019 no Director (2018 no) is a member of the Group’s defined contribution pension scheme in respect of which the Group contributed
£nil (2018 £nil).
At 31 March 2019 two Directors received payments in lieu of pension provision (2018 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 91 to 105.
142
Pennon Group plc Annual Report 2019
15. Goodwill
Cost:
At 1 April 2017
At 31 March 2018
At 31 March 2019
Carrying amount:
At 1 April 2017
At 31 March 2018
At 31 March 2019
£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 estimate of a rate that investors would require if they were to choose a similar investment ranging from
6-12% (2018 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. 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 both 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.
Pennon Group plc Annual Report 2019
143
FI NANC IAL STATEMEN TS
Notes to the
financial statements
continued
16. Other intangible assets
Cost:
At 1 April 2017
Additions
At 31 March 2018
Additions
At 31 March 2019
Accumulated amortisation:
At 1 April 2017
Charge for year
At 31 March 2018
Charge for year
At 31 March 2019
Carrying amount:
At 1 April 2017
At 31 March 2018
At 31 March 2019
Service
concession
arrangements
£m
Customer
contracts
£m
Patents
£m
Other
£m
61.5
8.1
69.6
24.7
94.3
0.2
0.2
0.4
3.3
3.7
61.3
69.2
90.6
34.3
–
34.3
–
34.3
29.9
2.8
32.7
1.2
33.9
4.4
1.6
0.4
0.2
–
0.2
–
0.2
0.2
–
0.2
–
0.2
–
–
–
2.6
1.0
3.6
–
3.6
1.2
0.6
1.8
0.7
2.5
1.4
1.8
1.1
Total
£m
98.6
9.1
107.7
24.7
132.4
31.5
3.6
35.1
5.2
40.3
67.1
72.6
92.1
Service concession arrangements, once available for use, are amortised over the useful life of each contract. The average remaining life is 21 years
(2018 22 years).
Customer contracts are amortised over the useful life of each contract which at acquisition ranged between 2 and 15 years. The weighted average remaining
life is 1 year (2018 1 year).
Patents have been amortised in full over their estimated useful lives which at acquisition was 13 years.
Other, including computer software, is amortised over the useful life of the assets which at acquisition was 5 years. The average remaining life is 4 years
(2018 5 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 £nil million (2018 £2.3 million at an average borrowing rate of 3.7%) have been capitalised on qualifying assets.
144
Pennon Group plc Annual Report 2019
17. Property, plant and equipment
Land and
buildings
£m
Infrastructure
assets
£m
Operational
properties
£m
Fixed and
mobile plant,
vehicles and
computers
£m
Landfill
restoration
£m
Construction
in progress
£m
Group
Cost:
At 1 April 2017
Additions
Assets adopted at fair value
Grants and contributions
Disposals
Transfers/reclassifications
At 31 March 2018
Additions
Assets adopted at fair value
Grants and contributions
Disposals
Transfers/reclassifications
At 31 March 2019
Accumulated depreciation:
At 1 April 2017
Charge for year
Disposals
At 31 March 2018
Charge for year
Disposals
At 31 March 2019
Net book value:
At 1 April 2017
At 31 March 2018
At 31 March 2019
539.4
12.3
–
–
(0.4)
3.7
555.0
5.2
–
–
(0.7)
1.0
560.5
384.7
17.2
(0.2)
401.7
11.1
(0.2)
412.6
154.7
153.3
147.9
1,854.8
13.2
8.0
(2.2)
(1.2)
21.9
1,894.5
16.4
10.0
(2.2)
(1.2)
36.1
1,953.6
246.8
23.0
(1.2)
268.6
22.1
(1.2)
289.5
1,608.0
1,625.9
1,664.1
706.4
1.8
–
–
–
11.1
719.3
2.2
–
–
–
20.0
741.5
240.0
13.4
–
253.4
13.4
–
266.8
466.4
465.9
474.7
2,734.2
45.4
–
–
(9.9)
85.4
2,855.1
50.0
–
–
(16.4)
409.4
3,298.1
1,246.7
125.3
(8.6)
1,363.4
136.6
(14.3)
1,485.7
1,487.5
1,491.7
1,812.4
71.7
11.1
–
–
–
–
82.8
22.8
–
–
–
–
105.6
57.4
7.0
–
64.4
10.4
–
74.8
14.3
18.4
30.8
Total
£m
6,278.8
389.0
8.0
(2.2)
(11.5)
–
6,662.1
387.2
10.0
(2.2)
(18.3)
–
7,038.8
2,175.6
185.9
(10.0)
2,351.5
193.6
(15.7)
2,529.4
372.3
305.2
–
–
–
(122.1)
555.4
290.6
–
–
–
(466.5)
379.5
–
–
–
–
–
–
–
372.3
555.4
379.5
4,103.2
4,310.6
4,509.4
Of the total depreciation charge of £193.6 million (2018 £185.9 million), £1.6 million (2018 £1.5 million) has been charged to capital projects, £2.0 million
(2018 £1.9 million) has been offset by deferred income and £190.0 million (2018 £182.5 million) has been charged against profits. Asset lives and residual
values are reviewed annually. During the year borrowing costs of £15.2 million (2018 £14.7 million) have been capitalised on qualifying assets, at an average
borrowing rate of 4.0% (2018 3.7%).
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 2018/19.
Pennon Group plc Annual Report 2019
145
Land and buildings
£m
Infrastructure assets
£m
Operational
properties
£m
Fixed and
mobile plant,
vehicles and
computers
£m
Construction
in progress
£m
–
3.3
–
0.1
–
3.2
416.9
428.4
63.3
68.2
353.6
360.2
463.7
471.1
119.4
126.7
344.3
344.4
673.7
672.9
305.3
315.2
368.4
357.7
0.2
5.2
–
–
0.2
5.2
Total
£m
1,554.5
1,580.9
488.0
510.2
1,066.5
1,070.7
Fixed and
mobile plant,
vehicles and
computers
£m
0.3
0.1
0.4
0.1
0.5
0.1
0.1
0.2
–
0.2
0.2
0.2
0.3
FI NANC IAL STATEMEN TS
Notes to the
financial statements
continued
17. Property, plant and equipment continued
Assets held under finance leases included above were:
Group
Cost:
At 31 March 2018
At 31 March 2019
Accumulated depreciation:
At 31 March 2018
At 31 March 2019
Net book amount:
At 31 March 2018
At 31 March 2019
Company
Cost:
At 1 April 2017
Additions
At 31 March 2018
Additions
At 31 March 2019
Accumulated depreciation:
At 1 April 2017
Charge for year
At 31 March 2018
Charge for year
At 31 March 2019
Net book value:
At 1 April 2017
At 31 March 2018
At 31 March 2019
Asset lives and residual values are reviewed annually.
146
Pennon Group plc Annual Report 2019
18. Financial instruments by category
The accounting policies for financial instruments that have been applied to line items are:
Group
31 March 2019
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 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
Company
31 March 2019
Financial assets
Amounts owed by subsidiaries
Other receivables
Derivative financial instruments
Cash and cash deposits
Total
Financial liabilities
Amounts due to subsidiaries
Borrowings
Derivative financial instruments
Trade payables
Total
31 March 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
Fair value
Derivatives
used for
cash flow
hedging
£m
Amortised cost
Derivatives
not in a hedge
accounting
relationship
£m
Debt
Instruments
at
amortised
Cost
£m
Trade
receivables
and trade
payables
£m
Derivatives
used for
fair value
hedging
£m
–
–
3.4
–
3.4
–
–
–
–
–
–
–
4.1
–
4.1
–
–
–
–
–
–
–
3.4
–
3.4
–
–
–
–
–
–
–
4.1
–
4.1
–
–
–
–
–
–
–
–
3.1
–
3.1
–
(20.5)
–
–
(20.5)
–
–
7.0
–
7.0
–
(16.7)
–
–
(16.7)
–
–
3.1
–
3.1
–
–
(0.9)
–
(0.9)
–
–
6.5
–
6.5
–
–
(3.6)
–
–
(3.6)
–
–
75.8
–
75.8
–
(0.5)
–
–
(0.5)
–
–
72.3
–
72.3
–
(0.9)
–
–
(0.9)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
263.8
–
569.6
833.4
(3,649.1)
–
–
–
(3,649.1)
–
266.6
–
585.3
851.9
(3,386.8)
–
–
–
(3,386.8)
1,064.5
0.1
–
284.8
1,349.4
(0.1)
(1,325.4)
–
–
(1,325.5)
886.9
0.3
–
303.3
1,190.5
(5.7)
(1,144.9)
–
–
–
(1,150.6)
261.2
–
–
–
261.2
–
–
(127.6)
(4.1)
(131.7)
220.7
–
–
–
220.7
–
–
(96.9)
(48.0)
(144.9)
–
–
–
–
–
–
–
–
(0.2)
(0.2)
–
–
–
–
–
–
–
–
(0.1)
(44.3)
(44.4)
Total
£m
261.2
263.8
82.3
569.6
1,176.9
(3,649.1)
(21.0)
(127.6)
(4.1)
(3,801.8)
220.7
266.6
83.4
585.3
1,156.0
(3,386.8)
(17.6)
(96.9)
(48.0)
(3,549.3)
1,064.5
0.1
6.5
284.8
1,355.9
(0.1)
(1,325.4)
(0.9)
(0.2)
(1,326.6)
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)
Notes
22
19,22
23
25
28
23
26
26
22
19,22
23
25
28
23
26
26,29
19,22
22
23
25
26
28
23
26
19,22
22
23
25
26
28
23
26
26
Pennon Group plc Annual Report 2019
147
FI NANC IAL STATEMEN TS
Notes to the
financial statements
continued
19. Other non-current assets
Non-current receivables
Amounts owed by subsidiary undertakings
Amounts owed by related parties (note 44)
Service concession arrangements
Other receivables
Non-current receivables were due:
Between 1 and 2 years
Over 2 years and less than 5 years
Over 5 years
The fair values of non-current receivables were:
Amounts owed by subsidiary undertakings
Amounts owed by related parties
Service concession arrangements
Other receivables
Group
Company
2018
£m
–
39.4
222.9
1.2
263.5
2019
£m
1,044.6
–
–
–
1,044.6
Group
Company
2018
£m
12.9
34.9
215.7
263.5
2019
£m
48.6
148.1
847.9
1,044.6
Group
Company
2018
£m
–
70.6
222.9
1.2
294.7
2019
£m
1,160.4
–
–
–
1,160.4
2019
£m
–
67.8
188.3
0.3
256.4
2019
£m
44.0
135.2
77.2
256.4
2019
£m
–
81.9
188.3
0.3
270.5
2018
£m
846.0
–
–
–
846.0
2018
£m
35.5
108.1
702.4
846.0
2018
£m
909.5
–
–
–
909.5
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 2019 the average remaining
duration of the service concession arrangements was 21 years (2018 22 years). No material expected credit loss provision has been recognised in respect of
service concession arrangements.
Service concession arrangements includes £nil (2018: £134.5 million) in respect of contract assets. The contract asset balance at 31 March 2018 related
to the Glasgow Recycling and Renewable Energy Centre which was in the course of construction at that time and met the definition of a contract asset.
Construction was completed during the year ended 31 March 2019.
The fair value of amounts owed by related parties is based on cash flows using a rate based on the borrowings rate of 2.4% (2018 2.5%). The discount rate
is equal to London Interbank Offered Rate plus an allowance to reflect an appropriate credit margin.
The effective interest rate on amounts owed by related parties was 12.6% (2018 12.6%).
Other receivables include site development and pre-contract costs of £nil (2018 £0.7 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 2017
Additions
Disposals
At 31 March 2018
At 31 March 2019
The recoverable amount of investments is determined based on value-in-use calculations, which are set out in note 15.
148
Pennon Group plc Annual Report 2019
£m
1,624.2
356.7
(0.1)
1,980.8
1,980.8
20. Investments continued
Joint ventures
Group
At 1 April 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
Additions
Share of post–tax profit
Share of other comprehensive income
Dividends received
At 31 March 2019
Shares
£m
0.1
9.4
22.5
(2.7)
–
(6.5)
22.8
20.9
12.4
0.5
(5.5)
51.1
In December 2018 John Laing Investments Limited, a joint venture partner with the Group in INEOS Runcorn (TPS) Holdings Limited (Runcorn I ERF)
sold its holding. The Group exercised its pre-emption rights and paid a total cash consideration of £54.8 million for the 37.5% economic interest and 20%
voting rights. The cash consideration has been allocated £20.9 million to investment in equity shares and £33.9 million to investment in shareholder loans.
The acquisition increased the Group’s economic interest in Runcorn I ERF from 37.5% to 75%, with the associated voting rights moving from 20% to 40%.
With the acquisition the Group now has joint control over Runcorn I ERF and classifies its investment as a joint venture. Previously the Group had classified
its investment as an associate because the other joint venture partners could have operated without the Group’s agreement. The equity method of
accounting is used for both classifications, so the same accounting treatment has been applied continuously.
Details of the Group’s principal subsidiary and joint venture undertakings are set out in note 40.
The Group’s joint ventures 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
40
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 75% as set out in note 40.
The Group’s joint ventures are all private companies and there are no quoted market prices available for their shares.
Summarised financial information for the Group’s joint ventures:
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
Net debt
Associated shareholder loans
Net (debt)/funds (excluding shareholder loans)
2019
2018
Lakeside
Energy
from Waste
Holdings
Limited
£m
INEOS
Runcorn
(TPS)
Holdings
Limited
£m
Lakeside
Energy
from Waste
Holdings
Limited
£m
22.5
8.7
31.2
–
(6.2)
(6.2)
101.9
(88.8)
(25.8)
(114.6)
12.3
(66.3)
15.4
(50.9)
15.9
11.4
27.3
–
(0.1)
(0.1)
193.1
(86.7)
(73.7)
(160.4)
59.9
(70.8)
86.7
15.9
16.1
8.6
24.7
–
(6.5)
(6.5)
109.8
(95.5)
(28.4)
(123.9)
4.1
(79.4)
16.3
(63.1)
INEOS
Runcorn
(TPS)
Holdings
Limited
£m
15.5
10.0
25.5
–
(8.6)
(8.6)
270.3
(86.9)
(145.1)
(232.0)
55.2
(71.4)
86.9
15.5
Pennon Group plc Annual Report 2019
149
FI NANC IAL STATEMEN TS
Notes to the
financial statements
continued
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
2019
Lakeside
Energy
from Waste
Holdings
Limited
£m
52.8
37.4
(7.9)
–
–
(7.3)
22.2
(4.0)
18.2
1.0
19.2
(11.0)
INEOS
Runcorn
(TPS)
Holdings
Limited
£m
43.6
24.8
(9.7)
–
–
(9.5)
5.6
(0.9)
4.7
–
4.7
–
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
–
The information above reflects the amounts presented in the financial statements of the joint ventures adjusted for differences in accounting policies
between the Group and the joint ventures. The information reflects 100% of the joint ventures’ results and net liabilities. The prior 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 ventures.
Opening net assets /(liabilities) 1 April
Profit/(loss) for the year
Other comprehensive income/(loss)
Dividends paid
Disposal
Closing net assets
Carrying value being net interest in share of net assets
21. Inventories
Raw materials and consumables
2019
Lakeside
Energy
from Waste
Holdings
Limited
£m
4.1
18.2
1.0
(11.0)
–
12.3
6.2
INEOS
Runcorn
(TPS)
Holdings
Limited
£m
55.2
4.7
–
–
–
59.9
44.9
Lakeside
Energy
from Waste
Holdings
Limited
£m
(1.3)
14.5
3.9
(13.0)
–
4.1
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
Group
Company
2019
£m
28.8
2018
£m
24.6
2019
£m
–
2018
£m
–
150
Pennon Group plc Annual Report 2019
22. Trade and other receivables – current
Trade receivables
Less: allowance for expected credit losses in respect of trade receivables
Net trade receivables
Amounts owed by related parties (note 44)
Amounts owed by subsidiary undertakings
Other receivables
Prepayments and accrued income
Group
Company
2019
£m
360.2
(99.0)
261.2
7.7
–
5.9
210.0
484.8
2018
£m
325.0
(104.3)
220.7
4.3
–
4.1
186.9
416.0
2019
£m
–
–
–
–
19.9
0.1
1.6
21.6
2018
£m
–
–
–
–
41.0
0.3
1.4
42.7
Trade receivables include accrued income relating to customers with water budget payment plans. The increased activity from the three additional Energy
Recovery Facilities becoming operational in the Waste Management business during the year coupled with increased demand in water business has resulted
in an increase in trade receivables balances.
In the current year prepayments and accrued income include a net receivable of £43.3 million (2018 £62.7 million) relating to gross contractual compensation
amounts due totalling £72.0 million (2018 £68.7 million) arising from additional costs incurred in the construction of the Glasgow Recycling and Renewable
Energy Centre (GRREC). A full credit risk appraisal has been carried out on this receivable and a provision of £28.7 million (2018 £6.0 million) has been
recognised for expected credit losses as detailed in note 4. For other accrued income balances, no material expected credit loss provision has been
recognised.
Prepayments and accrued income includes £nil (2018 £6.1 million) in respect of contract assets. The contract asset balance at 31 March 2018 related to the
GRREC which was in the course of construction at that time. Construction was completed during the year ended 31 March 2019.
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 applies the simplified approach in calculating the expected credit losses for trade receivables allowing a provision matrix to be used which is
based on the expected life of trade receivables, default rates for different customer categories within the collection process and forward-looking information.
As at 31 March, an analysis of the ageing of trade receivables is as follows:
Group
Not due
Past due 1 – 30 days
Past due 31 – 120 days
More than 120 days
2019
£m
152.2
22.5
25.2
160.3
360.2
2018
£m
80.3
55.6
27.8
161.3
325.0
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 allowance for expected credit losses as outlined
in note 2(o). South West Water Limited has a duty under legislation to continue to provide domestic customers with services regardless of payment.
The expected credit loss rate applied ranges from 0% (not due) to 100% (>120 days and untraced previous occupier).
No material expected credit loss provision has been recognised in respect of amounts owed by subsidiary undertakings.
The movement in the allowance for expected credit losses in respect of trade receivables was:
At 1 April
Associated with acquisition of trade receivables (non-household market)
Provision for expected credit losses
Receivables written off during the year as uncollectable
At 31 March
2019
£m
104.3
–
3.2
(8.5)
99.0
2018
£m
98.1
3.0
7.5
(4.3)
104.3
Pennon Group plc Annual Report 2019
151
FI NANC IAL STATEMEN TS
Notes to the
financial statements
continued
23. Derivative financial instruments
Derivatives used for cash flow hedging
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Derivatives used for fair value hedging
Non-current assets
Current assets
Derivatives not in a hedge accounting relationship
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Group
Company
2019
£m
1.0
2.1
(10.7)
(9.8)
2.6
0.8
66.9
8.9
(0.4)
(0.1)
2018
£m
3.4
3.6
(8.9)
(7.8)
3.3
0.8
63.8
8.5
(0.5)
(0.4)
2019
£m
1.1
2.0
(0.2)
(0.7)
2.6
0.8
–
–
–
–
2018
£m
3.4
3.1
(2.7)
(0.9)
0.8
3.3
–
–
–
–
The Group’s financial risks and risk management policies are set out in note 3. 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 (2018 £nil).
During the year a £6.8 million charge (2018 £15.6 million) was recognised in profit and loss relating to cash flow hedges previously recognised through other
comprehensive income and recorded in the hedging reserve. A £6.4 million charge (2018 £20.5 million credit) was recognised as an other comprehensive
loss/income for cash flow hedges that may be classified subsequently to profit and loss.
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 60%
of Group net borrowings are at fixed rate. At 31 March 2019 63% of Group net borrowings were at fixed rate (2018 62%).
At 31 March 2019 the Group had interest rate swaps to swap from floating to fixed rate and hedge financial liabilities with a notional value of £1,529 million
and a weighted average maturity of 3.2 years (2018 £978 million, with 2.1 years). The weighted average interest rate of the swaps for their nominal amount
was 1.7% (2018 2.0%).
The periods for which cash flow hedges are expected to affect future profit or loss are as follows:
Group
31 March 2019
Assets
Liabilities
31 March 2018
Assets
Liabilities
Company
31 March 2019
Assets
Liabilities
31 March 2018
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
2.1
(10.7)
2.8
(8.9)
2.0
(0.2)
2.2
(2.0)
0.5
(2.1)
2.2
(7.8)
0.5
(0.2)
2.2
(0.8)
0.5
(5.8)
1.8
–
0.6
(0.4)
1.9
(0.8)
–
(1.9)
0.2
–
–
(0.1)
0.2
–
Total
£m
3.1
(20.5)
7.0
(16.7)
3.1
(0.9)
6.5
(3.6)
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
£nil million (2018 £3.0 million).
152
Pennon Group plc Annual Report 2019
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 using level 2 measures:
Group
Company
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
24. Financial instruments at fair value through profit
Current liabilities
Non-current liabilities
2019
£m
3.1
3.4
75.8
82.3
20.5
0.5
21.0
2019
£m
3.8
43.1
2018
£m
7.0
4.1
72.3
83.4
16.7
0.9
17.6
2019
£m
3.1
3.4
–
6.5
0.9
–
0.9
Group
Company
2018
£m
2.6
46.6
2019
£m
0.4
1.4
2018
£m
6.5
4.1
–
10.6
3.6
–
3.6
2018
£m
0.4
1.7
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.
25. Cash and cash deposits
Cash at bank and in hand
Short-term bank deposits
Other deposits
Total cash and cash deposits
Group
Company
2019
£m
110.5
45.0
414.1
569.6
2018
£m
114.9
113.0
357.4
585.3
2019
£m
109.7
45.0
130.1
284.8
2018
£m
15.2
113.0
175.1
303.3
Group short-term deposits have an average maturity of 1 working day.
Group other deposits have an average maturity of 61 days.
Group other deposits include restricted funds of £203.9 million (2018 £182.3 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)
Group
Company
2019
£m
569.6
(203.9)
365.7
2018
£m
585.3
(182.3)
403.0
2019
£m
284.8
–
284.8
2018
£m
303.3
–
303.3
Pennon Group plc Annual Report 2019
153
FI NANC IAL STATEMEN TS
Notes to the
financial statements
continued
26. Trade and other payables – current
Trade payables
Contract liabilities
Amounts owed to subsidiary undertakings
Amounts owed to joint ventures (note 44)
Other tax and social security
Accruals and other payables
Group
Company
2019
£m
127.6
10.3
–
4.1
32.5
123.5
298.0
2018
(reanalysed)
£m
96.9
11.5
–
3.7
48.4
181.5
342.0
2019
£m
0.2
–
0.1
–
0.8
14.7
15.8
2018
(reanalysed)
£m
0.1
–
5.7
–
0.6
50.7
57.1
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 included an amount of £44.3 million due to Nomura Structured Holdings plc on unwind of a synthetic
derivative.
Prior year comparatives have been re-analysed to separately recognise contract liabilities in accordance with IFRS 15. Contract liabilities are recognised
when consideration is received in advance of the Group performing its obligations to customers. The movement in the contract liabilities was:
Contract liabilities
At 1 April
Revenue recognised in the year
Consideration received in advance of completion of performance obligations
At 31 March
The analysis of contract liabilities between current and non-current is:
Current
Non-current (note 29)
2019
£m
120.2
(12.2)
18.4
126.4
2019
£m
10.3
116.1
126.4
2018
£m
112.3
(9.5)
17.4
120.2
2018
£m
11.5
108.7
120.2
Performance obligations related to the current contract liabilities balance above are expected to be satisfied, and revenue will be recognised, within the
financial year ended 31 March 2020.
27. Current tax liabilities
Current year creditor
Prior year tax items
Group
Company
2019
£m
12.9
6.2
19.1
2018
£m
11.8
12.6
24.4
2019
£m
1.9
1.7
3.6
2018
£m
(1.7)
25.6
23.9
154
Pennon Group plc Annual Report 2019
28. Borrowings
Current
Short-term loans
European Investment Bank
Amounts owed to subsidiary undertakings (note 44)
Obligations under finance leases
Total current borrowings
Non-current
Bank and other loans
Private placements
Bond 2040
RPI index-linked bonds
European Investment Bank
Obligations under finance leases
Total non-current borrowings
Total borrowings
Group
Company
2019
£m
59.8
27.0
–
86.8
63.6
150.4
443.1
616.2
134.2
434.5
373.9
2,001.9
1,496.8
3,498.7
3,649.1
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
2019
£m
51.8
–
283.9
335.7
–
335.7
370.9
509.3
–
–
109.5
989.7
–
989.7
1,325.4
2018
£m
149.6
–
283.6
433.2
–
433.2
149.1
562.6
–
–
–
711.7
–
711.7
1,144.9
The Group has finance leases for various assets as shown in note 17.
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:
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
European Investment Bank
Private placements
2019
2018
Book value
£m
Fair value
£m
Book value
£m
Fair value
£m
443.1
616.2
134.2
434.5
373.9
2,001.9
1,496.8
3,498.7
370.9
109.5
509.3
989.7
447.3
657.7
197.5
526.4
345.2
2,174.1
1,431.6
3,605.7
484.8
109.5
557.7
1,152.0
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
Where market values are not available, fair values of borrowings have been calculated by discounting expected future cash flows at prevailing interest rates.
The maturity of non-current borrowings was:
Between 1 and 2 years
Over 2 years and less than 5 years
Over 5 years
The weighted average maturity of non-current borrowings was 18 years (2018 19 years).
Group
Company
2019
£m
68.3
834.5
2,595.9
3,498.7
2018
£m
190.6
574.3
2,412.1
3,177.0
2019
£m
51.8
557.7
380.2
989.7
2018
£m
102.0
260.6
349.1
711.7
Pennon Group plc Annual Report 2019
155
FI NANC IAL STATEMEN TS
Notes to the
financial statements
continued
28. Borrowings continued
Finance lease liabilities – minimum lease payments were:
Within 1 year
Over 1 year and less than 5 years
Over 5 years
Less: future finance charges
Present value of finance lease liabilities
The maturity of finance lease liabilities was:
Within 1 year
Over 1 year and less than 5 years
Over 5 years
Group
Company
2019
£m
92.2
297.6
2,153.9
2,543.7
(983.3)
1,560.4
2018
£m
52.1
310.8
2,121.7
2,484.6
(979.6)
1,505.0
2019
£m
–
–
–
–
–
–
Group
Company
2019
£m
63.6
188.9
1,307.9
1,560.4
2018
£m
28.2
209.7
1,267.1
1,505.0
2019
£m
–
–
–
–
2018
£m
–
–
–
–
–
–
2018
£m
–
–
–
–
Included above are accrued finance charges arising on obligations under finance leases totalling £163.7 million (2018 £155.7 million), of which £3.7 million
(2018 £3.4 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, £97.5 million at 31 March 2019 (2018 £87.9 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, £105.1 million at 31 March 2019 (2018 £92.5 million), are currently being held to settle the
lease liability, subject to rights to release by negotiation with the lessor. The deposits are subject to a registered charge given as security to the lessor for the
outstanding balance.
Undrawn committed borrowing facilities at the balance sheet date were:
Floating rate:
Expiring within 1 year
Expiring after 1 year
Group
Company
2019
£m
–
600.0
600.0
2018
£m
180.0
405.9
585.9
2019
£m
–
405.0
405.0
2018
£m
100.0
125.0
225.0
In addition at 31 March 2019 the Group had undrawn uncommitted short-term bank facilities of £30.0 million (2018 £30.0 million) available to the Company.
29. Other non-current liabilities
Amounts owed to subsidiary undertakings
Contract liabilities
Deferred income
Other payables
Group
Company
2019
£m
–
116.1
7.5
24.3
147.9
2018
(reanalysed)
£m
–
108.7
9.8
21.6
140.1
2019
£m
8.6
–
–
–
8.6
2018
(reanalysed)
£m
8.7
–
–
–
8.7
Non-current Contract liabilities relate to consideration received in advance of the Group performing its performance obligations to customers where
performance obligations will not be completed within twelve months of the balance sheet date. The overall movement in total contract liabilities is disclosed
in note 26. Contract liabilities reflect the fair value of assets transferred from customers in the water segment.
Included in other payables are amounts provided by the Group in relation to claims received which are considered by the Directors and the management
of the Group to be the best estimate of the amounts that might be finally settled. Further disclosures have not been provided in accordance with IAS 37
paragraph 92.
156
Pennon Group plc Annual Report 2019
30. Retirement benefit obligations
During the year the Group operated a number of defined benefit pension schemes and also a defined contribution 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 £8.8 million (2018 £6.1 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
2019
%
3.3
3.2
2.40
3.3
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 2018 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
2019
23.9
26.3
The average life expectancy in years of a future pensioner retiring at age 62, 20 years after the balance sheet date, is projected as:
Male
Female
The sensitivities regarding the principal assumptions used to measure the schemes’ liabilities are:
2019
25.0
28.1
Rate of increase in pensionable pay
Rate of increase in current and future pensions
Rate used to discount schemes’ liabilities
Inflation
Life expectancy
2018
24.9
27.3
2018
26.3
29.6
Change in
assumption
+/– 0.5%
+/– 0.5%
+/– 0.5%
+/– 0.5%
+/– 1 year
2017
24.8
27.2
2017
26.2
29.5
Impact on
schemes’
liabilities
+/– 0.6%
+/– 6.5%
+/– 9.7%
+/– 6.7%
+/– 4.7%
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
schemes’ 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
Group
Company
2019
£m
(974.2)
934.0
(40.2)
(20.6)
(60.8)
2018
£m
(931.2)
898.5
(32.7)
(16.8)
(49.5)
2019
£m
(58.5)
55.1
(3.4)
–
(3.4)
2018
£m
(56.5)
53.2
(3.3)
–
(3.3)
Pennon Group plc Annual Report 2019
157
FI NANC IAL STATEMEN TS
Notes to the
financial statements
continued
30. Retirement benefit obligations continued
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:
(Loss)/Return on plan 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
(948.0)
(13.1)
(3.0)
(25.2)
(41.3)
2019
Fair value
of plan assets
£m
898.5
–
–
23.8
23.8
–
41.6
(75.8)
(3.2)
(37.4)
–
(1.0)
32.9
31.9
(994.8)
20.2
–
–
–
20.2
23.4
1.0
(32.9)
(8.5)
934.0
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
Total
£m
(49.5)
(13.1)
(3.0)
(1.4)
(17.5)
20.2
41.6
(75.8)
(3.2)
(17.2)
23.4
–
–
23.4
(60.8)
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)
Past service cost for the current year includes a non-underlying charge of £3.0 million representing an estimate of the increase in liabilities that results from
GMP equalisation requirements following a court case in 2018 (see note 6).
The movement in the Company’s 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:
(Loss)/return on plan assets excluding amounts
included in interest expense
Gain from change in demographic assumptions
(Loss)/gain from change in financial assumptions
Experience gains
Contributions:
Employers
Payments from plans:
Benefit payments
At 31 March
Present value
of obligation
£m
(56.5)
(0.3)
(0.2)
(1.5)
(2.0)
2019
Fair value of
plan assets
£m
53.2
–
–
1.4
1.4
–
2.6
(4.5)
(0.2)
(2.1)
–
2.1
2.1
(58.5)
2.1
–
–
–
2.1
0.5
(2.1)
(1.6)
55.1
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
Total
£m
(3.3)
(0.3)
(0.2)
(0.1)
(0.6)
2.1
2.6
(4.5)
(0.2)
–
0.5
–
0.5
(3.4)
Total
£m
(4.1)
(0.3)
–
(0.2)
(0.5)
(0.1)
–
1.8
(0.6)
1.1
0.2
–
0.2
(3.3)
158
Pennon Group plc Annual Report 2019
30. Retirement benefit obligations continued
The Group has one smaller pension scheme which is in surplus and is deemed to have irrecoverable assets in accordance with IFRIC 14 ‘The Limit on
Defined Benefit Asset, Minimum Funding Requirements and their Interaction’.
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
The schemes’ assets were:
Equities
Government bonds
Other bonds
Diversified growth
Property
Insurance linked security
Other (including cash funds)
Group
Company
2018
£m
15.8
0.4
1.1
2019
£m
–
–
–
Quoted prices
in active market
£m
208.3
170.2
211.9
182.3
57.4
41.8
8.8
880.7
2018
Prices not quoted
in active market
£m
–
–
–
7.9
9.9
–
–
17.8
2019
£m
16.8
0.5
3.3
Fund
%
25
14
26
18
8
6
3
100
2018
£m
–
–
–
Fund
%
23
19
24
21
7
5
1
100
2019
Quoted prices
in active market
£m
234.5
134.6
247.1
154.7
68.1
55.2
23.3
917.5
Prices not quoted
in active market
£m
–
–
–
13.1
3.4
–
–
16.5
Other assets at 31 March 2019 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
2019
Quoted prices
in active market
£m
10.4
9.4
16.6
8.9
4.8
3.7
1.3
55.1
Prices not quoted
in active market
£m
–
–
–
–
–
–
–
–
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
–
–
–
–
–
–
–
–
Fund
%
19
17
30
16
9
7
2
100
Fund
%
20
20
24
20
9
6
1
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,
insurance linked securities and diversified growth).
Pennon Group plc Annual Report 2019
159
FI NANC IAL STATEMEN TS
Notes to the
financial statements
continued
30. Retirement benefit obligations continued
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. During the year, the Group made a deficit recovery contribution to the main scheme of £13 million (2018 £ Nil). The Group monitors
funding levels on an annual basis and expects to pay total contributions of around £24 million during the year ended 31 March 2020. The 2019 triennial
actuarial valuation is underway.
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
(Credited)/charged to equity
Other non-underlying credits/(charges) in the income statement
Liabilities/(assets) at 31 March
Group
Company
2019
£m
295.6
13.3
(4.3)
0.5
305.1
2018
£m
269.6
18.3
8.1
(0.4)
295.6
2019
£m
(1.6)
0.2
0.2
–
(1.2)
2018
£m
(2.3)
(0.2)
0.9
–
(1.6)
Deferred tax assets have been recognised in respect of all temporary differences giving rise to deferred tax assets because it is probable that these assets
will be recovered.
The majority of the Group’s deferred tax liability is expected to be recovered over more than one year. The majority of the Company’s deferred tax asset
is expected to be recovered over more than one year. All deferred tax assets and liabilities within the same jurisdiction are offset.
The movements in deferred tax assets and liabilities were:
Group
Deferred tax liabilities
At 1 April 2017
Charged/(credited) to the income statement
Transfer from deferred tax assets
At 31 March 2018
Charged/(credited) to the income statement
Non-underlying charged to the income statement
Credited to equity
At 31 March 2019
Accelerated tax
depreciation
£m
241.8
18.1
–
259.9
12.1
–
–
272.0
Fair value
adjustments
£m
22.1
(1.5)
–
20.6
(4.1)
–
–
16.5
Revenue on service
concession
arrangements
£m
41.7
2.0
–
43.7
4.4
–
–
48.1
Derivatives
£m
–
–
0.7
0.7
(0.2)
1.0
(0.6)
0.9
Other
£m
0.4
(0.4)
–
–
–
–
–
–
Total
£m
306.0
18.2
0.7
324.9
12.2
1.0
(0.6)
337.5
160
Pennon Group plc Annual Report 2019
31. Deferred tax continued
Deferred tax assets
At 1 April 2017
Charged/(credited) to the income statement
Non-underlying (credit) to the income statement
Charged to equity
Transfer to deferred tax liabilities
At 31 March 2018
Charged/(credited) to the income statement
Non-underlying (credit) to the income statement
Credited to equity
At 31 March 2019
Net liability:
At 31 March 2018
At 31 March 2019
Company
Deferred tax assets
Long term
liabilities
including
provisions
£m
(6.4)
1.0
–
–
–
(5.4)
0.1
–
–
(5.3)
Retirement
benefit
obligations
£m
(11.5)
(1.1)
–
4.2
–
(8.4)
0.5
(0.5)
(3.2)
(11.6)
Derivatives
£m
(2.4)
–
(0.4)
3.5
(0.7)
–
–
–
–
–
Share-based
payments
£m
(1.6)
0.4
–
0.4
–
(0.8)
0.1
–
(0.5)
(1.2)
Tax losses
£m
(1.7)
–
–
–
–
(1.7)
0.5
–
–
(1.2)
Fair value
adjustment
£m
(10.0)
0.1
–
–
–
(9.9)
1.3
–
–
(8.6)
Other
£m
(2.8)
(0.3)
–
–
–
(3.1)
(1.4)
–
–
(4.5)
At 1 April 2017
(Credited)/charged to the income statement
Charged to equity
At 31 March 2018
(Credited)/charged to the income statement
Charged to equity
At 31 March 2019
Deferred tax credited/(charged) to equity during the year was:
Remeasurement of defined benefit obligations
Cash flow hedges
Deferred tax on other comprehensive loss/(gain)
Share-based payments
Retirement
benefit
obligations
£m
(0.7)
(0.1)
0.2
(0.6)
–
–
(0.6)
Derivatives
£m
(1.1)
–
0.6
(0.5)
–
0.2
(0.3)
Share-based
payments
£m
(0.4)
0.1
0.1
(0.2)
–
–
(0.2)
Other
£m
(0.1)
(0.2)
–
(0.3)
0.2
–
(0.1)
Group
Company
2019
£m
3.2
0.6
3.8
0.5
4.3
2018
£m
(4.2)
(3.5)
(7.7)
(0.4)
(8.1)
2019
£m
–
0.2
0.2
–
0.2
Total
£m
(36.4)
0.1
(0.4)
8.1
(0.7)
(29.3)
1.1
(0.5)
(3.7)
(32.4)
295.6
305.1
Total
£m
(2.3)
(0.2)
0.9
(1.6)
0.2
0.2
(1.2)
2018
£m
(0.2)
(0.6)
(0.8)
(0.1)
(0.9)
Capital allowances are available when a business incurs qualifying expenditure on capital items such as infrastructure assets. Capital allowances provide tax
relief on these items in place of accounting depreciation which is not tax deductible. Over the period of ownership of an asset, cumulative depreciation and
capital allowances will equalise. Capital allowance rates are set by the UK Government and every business receives the same rate of allowance. Capital
allowance rates vary from 8% up to 100% in certain instances, with most items qualifying at either 8% or 18% per annum. The 8% rate reduces to 6% from
April 2019.
The different accounting treatment of property, plant and equipment for tax and accounting purposes means that the taxable income of the Group is not
the same as the profit reported in the financial statements. The adjustments for this are reflected in the current tax reconciliation (note 9).
Short-term temporary differences arise on items such as environmental provisions, retirement benefit obligations and revenue on service concession
arrangements because the treatment of such items is different for tax and accounting purposes. These differences reverse over future years following that
in which they arise, as reflected in the deferred tax charge in these financial statements.
Where interest charges or other costs are capitalised in the accounts, tax relief is either given as the charges are incurred or when the costs are taken to
the income statement.
Pennon Group plc Annual Report 2019
161
FI NANC IAL STATEMEN TS
Notes to the
financial statements
continued
32. Provisions
Group
At 1 April 2018
Charged to the income statement
Capitalised
Utilised
At 31 March 2019
Environmental and
landfill restoration
£m
Restructuring
£m
Other
provisions
£m
191.9
8.2
22.8
(13.3)
209.6
3.4
–
–
(2.3)
1.1
24.2
1.4
–
(4.5)
21.1
Total
£m
219.5
9.6
22.8
(20.1)
231.8
The amount charged to the income statement includes £11.1 million (2018 £10.2 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
2019
£m
28.7
203.1
231.8
2018
£m
38.0
181.5
219.5
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% (2018 4.825%) and an inflation rate of 2.5% (2018 2.5%) to its aftercare
provision and a discount rate of 3.8% (2018 3.8%) and an inflation rate of 2.5% (2018 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 £7.1 million (2018 £11.0 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 five years (2018 six years).
33. Share capital
Allotted, called–up and fully paid
Group and Company
At 1 April 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
For consideration of £5.1 million, shares issued under the Company’s Sharesave Scheme
At 31 March 2019 ordinary shares of 40.7p each
Number of shares
Treasury shares
Ordinary shares
8,443
–
–
–
8,443
–
8,443
413,893,293
5,223,293
46,205
580,392
419,743,183
777,415
420,520,598
£m
168.4
2.1
0.1
0.2
170.8
0.3
171.1
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.
162
Pennon Group plc Annual Report 2019
33. Share capital continued
Outstanding options to subscribe for ordinary shares of 40.7p each under the Company’s share option schemes are:
29 June 2011
29 June 2012
3 July 2013
14 July 2014
24 June 2015
29 June 2016
28 June 2017
3 July 2018
The number and weighted average exercise price of Sharesave options are:
At 1 April
Granted
Forfeited
Exercised
Expired
At 31 March
Date granted
and subscription
price fully paid
Period when
options normally
exercisable
Thousands of shares in respect of
which options outstanding at 31 March
536p
588p
538p
611p
683p
709p
767p
635p
2014 – 2017
2015 – 2017
2016 – 2017
2017 – 2018
2017 – 2020
2019 – 2021
2020 – 2022
2021 – 2023
2019
–
–
–
142
194
478
462
1,367
2,643
2018
26
2
94
159
933
605
671
–
2,490
2019
Weighted
average exercise
price per share
(p)
700
635
717
661
661
674
Number of
ordinary shares
(thousands)
2,490
1,456
(437)
(777)
(89)
2,643
2018
Weighted
average exercise
price per share
(p)
660
767
707
597
667
700
Number of
ordinary shares
(thousands)
2,753
775
(411)
(570)
(57)
2,490
The weighted average price of the Company’s shares at the date of exercise of Sharesave options during the year was 750p (2018 798p). The options
outstanding at 31 March 2019 had a weighted average exercise price of 674p (2018 700p) and a weighted average remaining contractual life of 2.0 years
(2018 1.6 years). The number of exercisable Sharesave options at 31 March 2019 was 1,000 (2018 28,000) and the weighted average exercise price of
exercisable Sharesave options was 683p (2018 540p).
The aggregate fair value of Sharesave options granted during the year was £0.8 million (2018 £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
2019
801
635
20.0%
3.3 years
0.5%
5.2%
2018
848
767
19.0%
3.4 years
0.3%
4.5%
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
Vested
Lapsed
At 31 March
2019
2018
Number of
ordinary shares
(thousands)
571
–
(315)
256
Weighted
average exercise
price per share
(p)
865
–
820
920
Number of
ordinary shares
(thousands)
1,021
(50)
(400)
571
Weighted
average exercise
price per share
(p)
850
799
852
865
The awards outstanding at 31 March 2019 had a weighted exercise price of 920p (2018 865p) and a weighted average remaining contractual life of 0.3 years
(2018 0.7 years).
Pennon Group plc Annual Report 2019
163
FI NANC IAL STATEMEN TS
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
Vested
Lapsed
At 31 March
2019
Weighted
average exercise
price per share
(p)
803
790
–
798
796
Number of
ordinary shares
(thousands)
510
526
–
(74)
962
2018
Weighted
average exercise
price per share
(p)
–
803
–
803
803
Number of
ordinary shares
(thousands)
–
537
–
(27)
510
The awards outstanding at 31 March 2019 had a weighted exercise price of 796p (2018 803p) and a weighted average remaining contractual life of 1.9 years
(2018 2.4 years).
The aggregate fair value of awards granted during the year was £1.7 million (2018 £1.0 million), determined from market value. No option pricing methodology 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
2019
Weighted
average exercise
price per share
(p)
843
761
791
790
825
Number of
ordinary shares
(thousands)
405
191
(117)
(29)
450
2018
Weighted
average exercise
price per share
(p)
848
809
821
815
843
Number of
ordinary shares
(thousands)
325
172
(51)
(41)
405
The awards outstanding at 31 March 2019 had a weighted average exercise price of 825p (2018 843p) and a weighted average remaining contractual life of
1.5 years (2018 1.5 years). The Company’s share price at the date of the awards ranged from 761p to 950p.
The aggregate fair value of awards granted during the year was £1.1 million (2018 £0.9 million), determined from market value. No option pricing methodology
is applied since dividends paid on the shares are receivable by the participants in the scheme.
Further details of the plans and options granted to Directors, included above, are shown in the Directors’ remuneration report.
34. Share premium account
Group and Company
At 1 April 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
Shares issued under the Sharesave Scheme
At 31 March 2019
164
Pennon Group plc Annual Report 2019
£m
217.4
(2.1)
3.1
0.4
218.8
4.8
223.6
35. Capital redemption reserve
The capital redemption reserve represents the redemption of B shares and cancellation of deferred shares arising from a capital return to shareholders
undertaken during 2006.
Group and Company
At 1 April 2017
At 31 March 2018
At 31 March 2019
36. Retained earnings and other reserves
Group
At 1 April 2017
Profit for the year
Other comprehensive income for the year
Redemption of perpetual capital securities
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
Profit for the year
Other comprehensive loss for the year
Dividends paid relating to 2018
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 2019
Own shares
£m
Hedging
reserve
£m
Retained
earnings
£m
(2.6)
–
–
–
–
–
–
0.8
(1.7)
(3.5)
–
–
–
–
1.0
(1.5)
(4.0)
(28.2)
–
17.1
–
–
–
–
–
–
(11.1)
–
(5.8)
–
–
–
–
(16.9)
715.2
200.6
17.5
(5.2)
(149.5)
41.7
2.2
(0.8)
–
821.7
214.3
(13.5)
(162.0)
4.4
(1.0)
–
863.9
£m
144.2
144.2
144.2
Total
£m
684.4
200.6
34.6
(5.2)
(149.5)
41.7
2.2
–
(1.7)
807.1
214.3
(19.3)
(162.0)
4.4
–
(1.5)
843.0
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 Group plc
Employee Benefit Trust to satisfy awards under the Group’s Annual Incentive Bonus Plan.
The market value of the 520,000 ordinary shares (2018 440,000 ordinary shares) held by the Trust at 31 March 2019 was £3.8 million (2018 £2.8 million).
Company
At 1 April 2017
Profit for the year
Other comprehensive income for the year
Dividends paid relating to 2017
Adjustment for shares issued under the Scrip Dividend Alternative
Redemption of perpetual capital securities
Credit to equity in respect of share-based payments (net of tax)
Charge in respect of share options vesting
At 31 March 2018
Profit for the year
Other comprehensive income for the year
Dividends paid relating to 2018
Credit to equity in respect of share-based payments (net of tax)
Charge in respect of share options vesting
At 31 March 2019
Hedging
reserve
£m
(4.7)
–
2.7
–
–
–
–
–
(2.0)
–
0.2
–
–
–
(1.8)
Retained
earnings
£m
1,010.1
215.1
0.9
(149.5)
41.7
(5.2)
0.8
(0.8)
1,113.1
194.8
–
(162.0)
1.5
(0.9)
1,146.5
Total
£m
1,005.4
215.1
3.6
(149.5)
41.7
(5.2)
0.8
(0.8)
1,111.1
194.8
0.2
(162.0)
1.5
(0.9)
1,144.7
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.
Pennon Group plc Annual Report 2019
165
FI NANC IAL STATEMEN TS
Notes to the
financial statements
continued
37. Perpetual capital securities
Group and Company
At 1 April 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
Distributions due to perpetual capital security holders
Profit for the year attributable to perpetual capital security holders
At 31 March 2019
£m
294.8
296.7
(294.8)
(25.3)
3.8
21.5
296.7
(8.6)
8.6
296.7
On 22 September 2017 the Company issued £300 million 2.875% 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 2019, a periodic return of £8.6 million (2018 £5.8 million)
has been recognised as a financial liability at the year end.
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 joint venture loan write off and credit
Non-underlying remeasurement of fair value movement in derivatives
Share of post-tax profit from joint ventures
Finance income
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
Decrease/(Increase) in service concession arrangements receivable
(Decrease)/Increase in trade and other payables
(Decrease)/increase in retirement benefit obligations from contributions
Decrease in provisions
Cash generated/(outflow) from operations
Reconciliation of total interest paid:
Interest paid in operating activities
Interest paid in investing activities
Total interest paid
166
Pennon Group plc Annual Report 2019
Group
Company
2019
£m
222.6
3.6
(3.9)
190.0
5.2
–
(5.8)
(12.4)
(23.5)
106.7
–
37.7
(4.2)
(46.4)
6.8
(47.7)
(7.3)
(21.6)
399.8
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
2019
£m
203.4
1.5
–
–
–
–
–
–
(45.9)
35.5
(196.7)
3.7
–
(178.8)
–
(45.6)
(0.1)
–
(223.0)
Group
Company
2019
£m
83.9
15.2
99.1
2018
£m
69.6
17.0
86.6
2019
£m
36.8
–
36.8
2018
£m
236.6
0.9
–
0.1
–
–
–
–
(42.5)
34.6
(202.3)
(28.4)
–
250.6
–
0.1
(0.3)
–
249.4
2018
£m
32.5
–
32.5
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
Other non-current borrowings
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 2018
£m
585.3
(149.6)
(32.0)
(28.2)
(1,408.8)
(291.4)
(1,476.8)
(2,801.5)
Net borrowings
at 1 April 2017
£m
372.5
(74.9)
(282.9)
(848.2)
(833.5)
Net borrowings
at 1 April 2018
£m
303.3
(149.6)
(283.6)
(711.7)
–
(841.6)
Group
Company
2019
£m
569.6
(59.8)
(27.0)
(63.6)
–
(150.4)
(1,628.0)
(373.9)
(1,496.8)
(3,498.7)
(3,079.5)
Cash flows –
other
£m
(12.8)
74.9
41.1
30.5
(106.9)
–
(117.1)
(90.3)
Cash flows –
other
£m
(15.7)
149.6
32.0
28.2
(275.0)
(109.5)
(75.3)
(265.7)
Cash flows –
other
£m
(69.2)
25.0
(0.7)
–
(44.9)
Cash flows –
other
£m
(18.5)
149.6
(0.3)
(225.0)
(109.5)
(203.7)
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)
Foreign
exchange
adjustments
£m
–
–
–
–
(2.3)
–
–
(2.3)
Foreign
exchange
adjustments
£m
–
–
–
–
1.6
–
–
1.6
Foreign
exchange
adjustments
£m
–
–
–
–
–
Foreign
exchange
adjustments
£m
–
–
–
–
–
–
2019
£m
284.8
(51.8)
–
–
(283.9)
(335.7)
(880.2)
(109.5)
–
(989.7)
(1,040.6)
2018
£m
303.3
(149.6)
–
–
(283.6)
(433.2)
(711.7)
–
–
(711.7)
(841.6)
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
–
(59.8)
(27.0)
(63.6)
54.2
27.0
55.3
(13.9)
Net borrowings
at 31 March 2019
£m
569.6
(59.8)
(27.0)
(63.6)
(1,628.0)
(373.9)
(1,496.8)
(3,079.5)
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)
Other non-cash
movements
£m
–
(51.8)
–
56.5
–
4.7
Net borrowings
at 31 March 2019
£m
284.8
(51.8)
(283.9)
(880.2)
(109.5)
(1,040.6)
The increase in the value of Financial liabilities at fair value through profit in the year of £0.3 million for the Group and £0.3 million for the Company is
attributable to other non-cash movements.
Pennon Group plc Annual Report 2019
167
FI NANC IAL STATEMEN TS
Notes to the
financial statements
continued
40. Subsidiary and joint venture undertakings at 31 March 2019
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.
Other trading companies
Dragon Waste Limited (81%)
Peninsula Leasing Limited*
Peninsula Properties (Exeter) Limited
Peninsula Trustees Limited*
Pennon Defined Contribution Pension Trustee Limited*
Pennon Pension Trustees Limited*
Pennon Share Plans (Guernsey) Limited*(3)
Pennon Trustee Limited*
Raikes Lane Limited
Source for Business Limited*
SSWB Limited
(3) The company ceased operations during the year.
Registered office address
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Albert House, South Esplanade, St Peter Port, GY1 1AW
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Country
of incorporation
England
England
England
England
England
England
Guernsey
England
England
England
England
168
Pennon Group plc Annual Report 2019
40. Subsidiary and joint venture undertakings at 31 March 2019 continued
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 Water Limited*
Pennon Power Limited*
Pennon South West Limited*
Pennon Waste Management Limited*
pHOX Systems Limited
Pilsworth Forest (1996) Limited
Pilsworth Forest Limited
Roseland Plant Co. Limited
Rydon Properties Limited
Seal Security Systems Limited*
Sheffield Waste Disposal Company Limited
Shore Recycling (Ozone) Limited
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
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
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
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
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
Pennon Group plc Annual Report 2019
169
FI NANC IAL STATEMEN TS
Notes to the
financial statements
continued
40. Subsidiary and joint venture undertakings at 31 March 2019 continued
Other dormant companies
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
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
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
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
*
Indicates the shares are held directly by Pennon Group plc, the Company.
The subsidiary undertakings are wholly owned unless stated otherwise and all shares in issue are ordinary shares. All companies above are consolidated in
the Group financial statements.
170
Pennon Group plc Annual Report 2019
40. Subsidiary and joint venture undertakings at 31 March 2019 continued
Joint ventures
All joint ventures 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. The registered office of INEOS Runcorn (TPS) Holdings Limited and INEOS Runcorn
(TPS) Limited is PO Box 9, Runcorn Site Headquarters, South Parade, Runcorn, Cheshire WA7 4JE.
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
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
–
100%
50 A ordinary shares
50 B ordinary shares
1,000 A ordinary shares
186,750 B1 ordinary shares
62,250 B2 ordinary shares
–
100%
40%
100%
–
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 75%, 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
2019
£m
12.5
37.7
145.5
195.7
2018
£m
10.8
29.1
123.0
162.9
Company
2019
£m
2018
£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.
Pennon Group plc Annual Report 2019
171
FI NANC IAL STATEMEN TS
Notes to the
financial statements
continued
42. Contingencies
Contingent liabilities
Guarantees:
Borrowing facilities of subsidiary undertakings
Performance bonds
Group
Company
2019
£m
–
201.7
201.7
2018
£m
–
185.1
185.1
2019
£m
561.5
201.7
763.2
2018
£m
549.6
185.1
734.7
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 2019 of Viridor Waste 2 Limited since this company qualifies 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.
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 of £25 million, as disclosed in note 4, have not been recognised as at 31 March 2019.
43. Capital commitments
Contracted but not provided
Group
Company
2019
£m
201.0
2018
£m
287.7
44. Related party transactions
During the year Group companies entered into the following transactions with joint ventures 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
172
Pennon Group plc Annual Report 2019
2019
£m
–
2019
£m
–
16.6
12.4
7.1
5.5
2018
£m
–
2018
£m
38.4
15.9
12.0
6.0
6.5
44. Related party transactions continued
Year-end balances
Receivables due from related parties
Lakeside Energy from Waste Limited (loan balance)
INEOS Runcorn (TPS) Limited (loan balance)
Lakeside Energy from Waste Limited (trading balance)
INEOS Runcorn (TPS) Limited (trading balance)
Payables due to related parties
Lakeside Energy from Waste Limited (trading balance)
INEOS Runcorn (TPS) Limited (trading balance)
2019
£m
7.7
65.0
72.7
1.0
1.8
2.8
0.9
3.2
4.1
2018
£m
8.2
32.5
40.7
1.0
2.0
3.0
1.2
2.5
3.7
The £72.7 million (2018 £40.7 million) receivable relates to loans to related parties included within receivables and due for repayment in instalments between
2018 and 2033. Interest is charged at an average of 13.0% (2018 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
2019
£m
19.7
2.0
43.3
0.1
196.7
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
2019
£m
1,044.6
19.9
2018
£m
12.2
1.5
39.9
0.1
202.3
2018
£m
870.8
16.2
Interest on £499.8 million (2018 £425.3 million) of the loans has been charged at a fixed rate of 5.0%, and on £18.1 million (2018 £20.3 million) at a fixed rate of 6.0%.
Interest on £499.8 million of the loans is charged at 12 month LIBOR +2.2% (2018 £411.8 million charged at 12 month LIBOR + 1.0% and £13.4 million charged at 12
month LIBOR + 3.0%). These loans are due for repayment in instalments over the period 2020 to 2056. Interest on £13.5 million of the loans has been charged at a
fixed rate of 5.0%. Interest on £13.4 million of the loans is charged at 12 month LIBOR + 3.0%. These loans are due for repayment in instalments over a five-year period
following receipt of a request to repay.
No material expected credit loss provision has been recognised in respect of loans to subsidiaries (2018 £nil).
Payables due to subsidiary undertakings
Loans
Trading balances
The loans from subsidiary undertakings are unsecured and interest-free without any terms for repayment.
2019
£m
283.9
14.3
2018
£m
283.6
14.4
Pennon Group plc Annual Report 2019
173
FI NANC IAL STATEMEN TS
Alternative performance
measures
Alternative performance measures (APMs) are financial measures used in this report that are not defined by International Financial Reporting Standards
(IFRS). The Directors believe that these APMs assist in providing additional useful information on the underlying trends, performance and position of the
Group as well as enhancing the comparability of information between reporting periods. As the Group defines the APMs they might not be directly
comparable to other companies’ APMs. They are not intended to be a substitute for, or superior to, IFRS measurements.
Underlying earnings
Underlying earnings are presented alongside statutory results as the Directors believe they provide a more useful comparison on business trends and
performance. Note 6 in the financial statements provides more detail on non-underlying items, and a reconciliation of underlying earnings for the current
year and the prior year is as follows:
Underlying earnings reconciliation 2019
Non-underlying items
£m
EBITDA (see below)
Operating profit
Profit before tax
Taxation
Profit after tax (PAT)
PAT attributable to perpetual capital holders
Non-controlling interests
PAT attributable to shareholders
Deferred tax before non-underlying items
Non-underlying items post tax
Underlying earnings
Underlying earnings reconciliation 2018
£m
EBITDA (see below)
Operating profit
Profit before tax
Taxation
Profit after tax (PAT)
PAT attributable to perpetual capital holders
Non-controlling interests
PAT attributable to shareholders
Deferred tax before non-underlying items
Non-underlying items post tax
Proportional adjustment on perpetual capital returns
Underlying earnings
Underlying
546.2
351.0
280.2
(42.7)
237.5
GMP
equalisation
(pensions)
(3.0)
(3.0)
(3.0)
0.6
(2.4)
Glasgow
receivable
provision
(22.7)
(22.7)
(22.7)
5.5
(17.2)
Derivative
fair value
movements
–
–
5.8
(1.1)
4.7
Non-underlying items
Reset of Greater
Manchester
contract
3.2
3.2
6.5
3.0
9.5
Underlying
509.6
323.9
258.8
(44.4)
214.4
Derivative
fair value
movements
–
–
(2.4)
0.4
(2.0)
Statutory
results
520.5
325.3
260.3
(37.7)
222.6
8.6
(0.3)
214.3
13.3
14.9
242.5
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
Earnings
per share
(p)
51.1
3.1
3.6
57.8
Earnings
per share
(p)
48.0
4.4
(1.8)
0.3
50.9
EBITDA
EBITDA (Earnings before interest, tax, depreciation and amortisation) is used to assess and monitor operational underlying performance. An adjusted
EBITDA is also presented that includes Viridor’s share of EBITDA from its joint ventures and finance income on service concession arrangements. This
measure is presented to aggregate earnings from all the Viridor ERFs which are accounted for differently depending upon the contractual relationships,
as shown in the reconciliation below.
Adjusted EBITDA reconciliation
£m
Statutory EBITDA
Non-underlying items
Underlying EBITDA
IFRIC 12 interest receivable(1)
Joint venture EBITDA(1)
Joint venture IFRIC 12 interest receivable(1)
Adjusted EBITDA
(1) These adjustments relate to the waste management business, resulting in adjusted waste management EBITDA of £225.4million (2017/18 £202.9 million).
174
Pennon Group plc Annual Report 2019
2019
£m
520.5
25.7
546.2
14.6
31.9
–
592.7
2018
£m
512.8
(3.2)
509.6
13.8
33.2
5.7
562.3
Effective interest rate
A measure of the mean average interest rate payable on the Group’s net debt, which excludes interest costs not directly associated with Group net debt.
This measure is presented to assess and monitor the relative cost of financing for the Group.
Net finance costs after non-underlying items
Non-underlying net finance costs
Interest receivable on shareholder loans to joint ventures
Net interest on retirement benefit obligations
Unwinding of discounts on provisions
Interest receivable on service concession agreements
Capitalised interest
Net finance costs for effective interest rate calculation
Opening net debt
Closing net debt
Average net debt (opening net debt + closing net debt divided by 2)
Effective interest rate
2019
£m
77.4
5.8
5.3
(1.4)
(11.1)
14.6
15.2
105.8
2,801.5
3,079.5
2,940.5
3.6%
2018
£m
96.1
(21.6)
7.9
(1.6)
(10.2)
13.8
17.0
101.4
2,664.9
2,801.5
2,733.2
3.7%
Interest cover
Underlying net finance costs (excluding pensions net interest cost, discount unwind on provisions and IFRIC 12 interest receivable on service concession
arrangements divided by Group operating profit before non-underlying items.
Net finance costs after non-underlying items
Non-underlying net finance costs
Net interest on retirement benefit obligations
Unwinding of discounts in provisions
Interest receivable on service concession arrangements
Net finance costs for interest cover calculation
Operating profit before non-underlying items
Interest cover (times)
Dividend cover
Proposed dividends divided by profit for the year before non-underlying items and deferred tax.
Proposed dividends
Profit for the year attributable to ordinary shareholders
Deferred tax charge before non-underlying items
Non-underlying items after tax in profit for the year
Adjusted profit for dividend cover calculation
Dividend cover (times)
2019
£m
77.4
5.8
(1.4)
(11.1)
14.6
85.3
351.0
4.1
2019
£m
172.7
214.3
13.3
14.9
242.5
1.4
2018
£m
96.1
(21.6)
(1.6)
(10.2)
13.8
76.5
323.9
4.2
2018
£m
162.0
200.6
18.3
(7.5)
211.4
1.3
Capital investment
Property, plant and equipment additions plus IFRIC 12 service concession expenditure (ERFs) less landfill restoration asset (spend accounted for through
provisions). The measure is presented to assess and monitor the total capital investment by the Group.
Additions to property, plant and equipment
Additions to intangible assets
Landfill restoration asset
IFRIC 12 additions to other intangible assets – service concession agreements
IFRIC 12 additions to Non-current assets – service concession agreements
IFRIC 12 additions to Current trade and other receivables – prepayments and accrued income
less: IFRIC 12 additions subject to legal contractual process
Capital investment
2019
£m
387.2
–
(22.8)
24.7
6.8
3.3
(3.3)
395.9
Capital payments
Payments for property, plant and equipment additions net of proceeds from sale of property, plant and equipment plus IFRIC 12 service concession
expenditure (ERFs). The measure is presented to assess and monitor the net cash spend on property, plant and equipment.
Cash flow statements: purchase of property, plant and equipment
Cash flow statements: purchase of intangible assets
Cash flow statements: proceeds from sale of property, plant and equipment
IFRIC 12 additions to other intangible assets – service concession agreements
IFRIC 12 additions to Non-current assets – service concession agreements
IFRIC 12 additions to Current trade and other receivables – prepayments and accrued income
Capital payments
2019
£m
356.0
–
(6.3)
24.7
6.8
3.3
384.5
2018
£m
389.0
1.0
(11.0)
6.3
12.1
64.5
(63.7)
398.2
2018
£m
390.6
1.0
(10.6)
6.3
12.1
64.5
463.9
Pennon Group plc Annual Report 2019
175
FI NANC IAL STATEMEN TS
Alternative performance
measures
continued
Return on capital employed
The total of underlying operating profit, joint venture profit after tax and joint venture interest receivable divided by capital employed (net debt plus total
equity invested). An average value for this metric is part of the long-term incentive plan for Directors.
Underlying operating profit
Underlying joint venture profit after tax
Joint venture interest receivable
Adjusted profit for return on capital employed calculation
Values at year end:
Net debt
Share capital
Share premium account
Capital redemption reserve
Perpetual capital securities
Capital employed for return on capital employed calculation
Return on capital employed
2019
£m
351.0
12.4
5.3
368.7
3,079.5
171.1
223.6
144.2
296.7
3,915.1
9.4%
2018
£m
323.9
9.4
7.9
341.2
2,801.5
170.8
218.8
144.2
296.7
3,632.0
9.4%
Operational cash inflows
Cash generated from operations before construction spend on service concession agreements, pension contributions and other tax payments. Other taxes
include business rates, employers national insurance, fuel excise duty, carbon reduction commitment, environmental payments, climate change levy and
external landfill tax.
Cash generated from operations per Cash flow statements
IFRIC 12 additions to Other intangible assets - service concession agreements
IFRIC 12 additions to Non-current assets - service concession agreements
IFRIC 12 additions to Current trade and other receivables - prepayments and accrued income
Pension contributions
Other tax payments(1)
Payment in respect of terminated synthetic derivative, related to a prior period non-underlying charge
Operational cash inflows
2019
£m
399.8
24.7
6.8
3.3
32.2
137.9
44.3
649.0
2018
£m
443.5
6.3
12.1
64.5
17.0
129.0
–
672.4
(1) Other taxes include business rates, employers national insurance, fuel excise duty, carbon reduction commitment, environmental payments, climate change levy and external landfill tax.
176
Pennon Group plc Annual Report 2019
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 (including investment in joint ventures)
Property, plant and equipment
Balance sheet
Non-current assets
Net current assets
Non-current liabilities
Net assets
Number of employees (average full time equivalent for year)
Water
Waste management
Non-household retail
Other businesses
2019
£m
1,478.2
351.0
(83.2)
12.4
280.2
(19.9)
(37.7)
222.6
214.3
8.6
(0.3)
172.7
51.1p
3.1p
3.6p
–
57.8p
41.06p
2019
£m
54.8
387.2
5,364.5
583.9
(4,268.6)
1,679.8
1,616
3,426
104
93
5,239
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
Pennon Group plc Annual Report 2019
177
FI NANC IAL STATEMEN TS
Shareholder information
Financial calendar
Financial year end
30th Annual General Meeting
Ex-dividend date for 2019 final dividend
Record date for 2019 final dividend
2019 final dividend payable
2019/20 half-yearly results announcement
2020 interim dividend payable
2019/20 final results announcement
31st Annual General Meeting
2020 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
25 July 2019
25 July 2019
26 July 2019
3 September 2019
26 November 2019
April 2020
2 June 2020
23 July 2020
September 2020
25 July 2019
26 July 2019
12 August 2019
2 September 2019
3 September 2019
* Subject to obtaining shareholder approval at the 2019 Annual General Meeting to the payment of a final dividend for the year ended 31 March 2019.
Shareholder analysis at 31 March 2019
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
2,400
7,806
7,088
1,096
80
276
18,746
Number of accounts
16,531
131
7
2,077
18,746
% of total shareholders
12.80
41.64
37.81
5.85
0.43
1.47
% of ordinary shares
0.02
0.99
3.73
3.00
1.39
90.87
% of total accounts
88.18
0.70
0.04
11.08
% of total shares
6.21
0.20
0.01
93.58
Major shareholdings
The net position on 31 March 2019 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.
RARE Infrastructure Limited
Invesco Limited
Number of voting rights
(direct and indirect)
41,575,771
25,599,217
21,028,272
20,328,154
19,366,782
17,212,959
% of voting rights
9.98
6.10
5.00
4.84
4.61
4.10
No changes to interests in the Company’s issued share capital have been disclosed to the Company between 31 March 2019 and 29 May 2019
(being a date not more than one month prior to the date of the Company’s Notice of Annual General Meeting).
178
Pennon Group plc Annual Report 2019
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.
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 2019 Annual
General Meeting for the payment of a final dividend for the year ended
31 March 2019, 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 opposite.
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.
Useful contacts
Registered office
Peninsula House
Rydon Lane
Exeter
Devon EX2 7HR
Company registration number: 2366640
Company Secretary
Simon A F Pugsley
Corporate brokers
HSBC Bank plc
Morgan Stanley & Co. International plc
Independent auditors
Ernst & Young LLP
Pennon Group plc Annual Report 2019
179
FI NANC IAL STATEMEN TS
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 can report this
at any time to Action Fraud using their Online Fraud Report Tool at
www.actionfraud.police.ul/reporting-fraud-and-cyber-crime or
by calling 0300 123 2040.
180
Pennon Group plc Annual Report 2019
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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
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
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