Plain-text annual report
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Annual Report & Accounts 2020
Bringing
resources
to life
Founded in 1989, Pennon has been driven
by its strategic vision to become a leader
in UK infrastructure, delivering for the
benefit of customers, communities and
the environment.
2019/20 has been a landmark year for Pennon,
culminating in the announcement in March 2020
of the proposed sale of Viridor. The transaction
recognises the strategic value that has been
created over many years. Going forward, Pennon
will continue to pursue operational excellence
and growth within the UK water industry.
The COVID-19 pandemic is an unprecedented
challenge for all. Throughout the Pennon Group
with key worker status the majority of our
operations have continued and we have
successfully focused on supporting our
customers and employees through these
difficult and uncertain times.
Find out more on pages 2 and 34
Integrated reporting
Our business touches the lives of many
stakeholders, from customers, employees, investors
and suppliers, to our communities and regulators.
Find out more about Pennon
Corporate website
www.pennon-group.co.uk
Annual report
www.pennon-group.co.uk/annualreport2020
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.
Our vision:
Bringing
resources
to life
Our values
Trusted
We do the right thing for our
customers and stakeholders
Responsible
We keep our promises to our customers,
communities and each other
Collaborative
We forge strong relationships, working
together to make a positive impact
Progressive
We are always looking for new ways
to improve and make life better
Strategic priorities
1
2
3
Leadership in UK infrastructure
Cost base efficiency
Sustainable growth
Our businesses (2019/20)
During 2019/20 Pennon provided services in waste management,
water and wastewater, and water retail services through three
businesses: Viridor, South West Water and Pennon Water Services.
Water and wastewater
Find out more starting on page 42
Water retail services
Find out more on page 48
Waste management
Find out more on page 49
Strategic report
Overview
06 Our continuing business activities
08 Highlights of the year
10 Chairman’s statement
14 Business model
16 Strategic progress
20
Sustainability at the heart
of the business
22 Priority programmes 2019/20
24
26 Our stakeholders
Market and regulatory overview
Chief Executive Officer’s review
Strategic report
Group performance
32
36 Key performance indicators
38 Our people
42 Our operations
42 Water and wastewater
48 Water retail services
49 Waste management
Report of the Chief Financial Officer
Risk report including
viability statement
69 Customer ownership
121 Section 172 statement
50
58
Governance
71
94
Index to the Governance section
Index to the Directors’ remuneration
report
Financial statements
123 Index to the financial statements
191 Alternative performance measures
and glossary
Pennon Group plc Annual Report 2020
01
COVID-19:
staying resilient
during a global
pandemic
In 2020 the impact of the coronavirus
pandemic was felt across the world.
At Pennon Group, our people – many of whom
are designated key workers – have been
working hard to ensure services to customers
and communities are maintained despite the
challenging circumstances. Their health,
safety and wellbeing remains our top priority.
South West Water
In order to continue to provide the level of service
customers expect while ensuring their safety and that
of employees, South West Water enacted its contingency
planning. In line with Government guidance, and in
coordination with regulators, industry and supply chain
colleagues, this included the implementation of new
working processes for frontline staff, additional safety
precautions on sites, remote working support, regular
engagement with the region’s local resilience forum,
and a range of employee relations measures to
support employees.
Viridor
Similarly, at Viridor, additional measures were implemented
to prioritise the health and welfare of employees and
customers and reduce the risk of any exposure to the virus.
While household waste recycling sites were temporarily
closed, the committed and hard-working teams from
Scotland to Cornwall have continued to collect and process
waste and materials from households and businesses,
including the NHS.
Across the Group, from frontline workers to back
office functions, we recognise and thank our people
for their ongoing efforts during COVID-19.
02
Pennon Group plc Annual Report 2020
Pennon Group plc Annual Report 2020
03
Strategic report – Overview
Pennon is focused on the
responsible and sustainable
provision of essential utility services
and environmental infrastructure.
Innovation, new technologies and
a holistic approach underpin our
commitment to delivering service
improvement and long-term value.
04
Pennon Group plc Annual Report 2020
Strategic report
Overview
06
Our continuing
business activities
08 Highlights of the year
10 Chairman’s statement
14 Business model
16 Strategic progress
20
Sustainability at the heart
of the business
22 Priority programmes 2019/20
24
26 Our stakeholders
Market and regulatory overview
Note on the 2019/20 strategic report:
The following strategic report is focused
on performance reporting for the 2019/20
financial year, which includes the activities
of Viridor. Sections and statements relating
to the future are focused solely on the water
side of the business – South West Water
(including Bournemouth Water) and Pennon
Water Services.
Pennon Group plc Annual Report 2020
05
Strategic report – Overview
Our continuing
business activities
We aim to provide an outstanding level of service to the
customers and communities we serve, while protecting
the environment and creating value for our shareholders.
Water and wastewater
Through South West Water and Bournemouth
Water we are focused on providing water
and wastewater services in the most efficient
and sustainable way possible.
Innovation, new technologies and the
pioneering of a holistic approach to water
and wastewater management are delivering
service improvements and long-term value.
Find out more starting on page 42
Water retail services
Pennon Water Services are business water
specialists providing water retail services for
business customers’ water management needs.
Find out more on page 48
Water treatment
works
Treating water to high
standards to ensure it is
clean, safe and reliable.
Raw water
reservoirs/water
resources
Ensuring an available and
sufficient supply of raw
water collected from rivers,
reservoirs and a small
number of boreholes.
Upstream catchment
Managing water in the landscape
alongside landowners and
partner agencies.
Waste management
(discontinued operations)
Throughout 2019/20 Viridor remained
at the forefront of the resource sector
in the UK, transforming waste into energy,
high-quality recyclates and raw materials.
The sale of Viridor is anticipated to
complete in early summer 2020.
Find out more starting on page 49
06
Pennon Group plc Annual Report 2020
Agreed sale of Viridor for
£4.2bn
(net proceeds of c.£3.7bn)
Enterprise value of £4.2 billion
equates to 18.5 times EBITDA
multiple (based on Viridor’s
2018/19 adjusted EBITDA of
£225.4 million).
Surface water
management
Managing surface water
drainage and reducing
the risk of flooding.
Wastewater
mains network
A resilient and reliable
network of sewers to take
wastewater from properties
to our treatment works.
Drinking water
mains network
Managing an extensive
network to deliver an
uninterrupted supply
of drinking water to
households and businesses.
Customer support
Ensuring high-quality
services are maintained
and responding quickly
to any issues.
Wastewater
treatment works
Ensuring treated
wastewater is returned to
the environment safely.
UK-based
call centre
For household and
business customers
(South West Water and
Pennon Water Services).
Improved bathing
and shellfish
water quality
Supporting local communities
and businesses.
Bio-resources
Making the most of resources –
turning sludge by-products into
high-quality bio-resources.
Pennon Group plc Annual Report 2020
07
Strategic report – Overview
Highlights of the year
Continuing Group + Viridor
Effective interest rate^
3.5%
2018/19: 3.6% (-1pts)
Dividend
43.77p
2018/19: 41.06p (+6.6%)
EPS statutory – continuing operations^
27.7p
2018/19: 38.2p (-27.5%)
EPS statutory – continuing and
discontinued operations
47.7p
2018/19: 51.1p (-6.7%)
Capital investment^
£339m
2018/19: £396m (-14.3%)
Strong operating
cash flow performance
supporting continued capital investment,
accelerated pensions and responsible tax
contributions
Robust finance
Continuing Group + Viridor
Revenue
£1,390m
2018/19: £1,478m (-6.0%)
EBITDA underlying
£563m
2018/19: £546m (+3.1%)
Profit before tax underlying
£288m
2018/19: £280m (+2.6%)
Profit before tax including
non-underlying items
£302m
2018/19: £260m (+15.8%)
EPS underlying^(1)
61.7p
2018/19: 57.8p (+6.7%)
Highlights of the year
Solid performance
in 2019/20
in line with management expectations
Expected revenue
reduction reflecting
• transition of Viridor’s Greater
Manchester contract
• water business weather-driven
demand reduction
Efficient financing
3.5%
average interest rate
Good cost control
momentum in efficiency
3.6%
overall cost reduction in South West Water
08
Pennon Group plc Annual Report 2020
Continuing Group
Revenue – continuing operations
£637m
2018/19 restated: £633m (+0.6%)
EBITDA underlying – continuing operations
£365m
2018/19: £367m (-0.5%)
Profit before tax underlying –
continuing operations
£183m
2018/19: £192m (-4.5%)
Profit before tax statutory –
continuing operations
£193m
2018/19: £201m (-4.1%)
EPS underlying – continuing operations^(1)
35.2p
2018/19: 36.7p (-4.1%)
Dividend per share up
+6.6% to 43.77p
Cumulative return on regulated
equity (RoRE) over K6 (2015-20) at
11.8%
See page 45 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 191 to 194.
(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.
Sustainable operations
Continuing Group + Viridor
Continuing Group operations
Total low-carbon
energy generation(2)
1,816GWh
2018/19: 1,617GWh (+12.3%)
Lost time injury
frequency rate (LTIFR)(3)
0.90
2018/19: 1.37 (down 34%)
Drinking water quality
Bournemouth Water
99.99%
2018: 100.00% (-0.01pts)
Bathing water compliance
(‘sufficient quality’ or higher)
98.7%
2018: 98.7% (unchanged)
Drinking water quality
South West Water
99.98%
2018: 99.99% (-0.01pts)
Leakage (megalitres per day)
South West Water
84
2018: 84 (unchanged)
Viridor operations
Total waste material
inputs (tonnes)
6.7m
2018/19: 6.8m (-0.1m)
Average ERF availability(4)
90%
2018/19: 91% (-1 pt)
Waste recycled
and recovered (tonnes)
5.5m
2018: 4.9m (+0.6m)
Avonmouth ERF
in commissioning
LTIFR reduced by
34% to 0.9
Created 191
new graduate and apprenticeship
development opportunities across
the Group
Commitment to recycling resulting in
£65 million
PRF and refurbished MRF supported by
10-year local authority contract
New Deal business
plan for K7 (2020-25)
South West Water well positioned for
new K7 regulatory period
WaterShare delivering
c.£140 million
of outperformance for sharing
with customers
See pages 35 and 69
for further information
(2) Gigawatt hours, being an amount of energy equivalent
to delivering 1 billion watts of power for a period of one hour.
(3) LTIFR for employees and agency staff per 200,000
hours worked.
(4) Weighted by capacity. Includes joint ventures at 100%,
excludes Glasgow Recycling and Renewable Energy Centre
(GRREC) due to different technology.
Pennon Group plc Annual Report 2020
09
Strategic report – Overview
Chairman’s
statement
I would like to thank our people for their
incredible hard work and dedication to
providing our vital services. They have
continued to deliver for our customers
and communities day in and day out in
the most challenging circumstances.
Thank you.
Sir John Parker
Chairman
10
Pennon Group plc Annual Report 2020
This has been a significant year in the history of the
Pennon Group, and it has been a particularly busy
one for the Board. In 2019/20, we delivered strong
financial performance and operational progress as
we approached the commencement of the new K7
(2020-25) regulatory period for South West Water.
This performance has continued in the face of the
COVID-19 crisis, throughout which the Group has
proved resilient despite the range of operational
and other challenges it has presented. On this
point, I want to acknowledge our employees for
their resilience and commitment throughout the
year. In extraordinary times you need extraordinary
people and it gives me huge pride when I think
about our people across the Group, and in our
supply chain, who have continued to deliver for
customers and communities.
I also want to thank all those employees who have
supported our frontline teams to be able to continue
delivering, learning to work collaboratively together
in new and different ways.
Viridor strategic value realised,
well positioned for future growth in water
Over recent years, the Board has closely monitored
the market value of the Group and its component
parts. It has been clear for some time that the
fundamental value of Viridor was not adequately
reflected in Pennon’s share price. Against this
background, the Board concluded that it was an
appropriate time to commence a strategic review
of the Group. This was announced in September
2019, which ultimately led to a series of inbound
approaches to acquire the Viridor business.
Pennon announced on 18 March 2020 the proposed
sale of Viridor to KKR for an enterprise value of
£4.2 billion. The Board carefully considered the
wider implications of the deal and the impact on all
key stakeholders and agreed unanimously that the
transaction was in the best interests of shareholders
and employees across the Group.
The share price rose 42% from the announcement
of the strategic review to the announcement of the
sale and Pennon was promoted to the FTSE 100.
The transaction recognises the full strategic value
that Pennon has developed and nurtured in Viridor
over many years and accelerates the realisation
of that value for shareholders. The European
Commission has given merger clearance and
Pennon’s shareholders have given their approval.
The sale is expected to complete in early summer.
The Board intends to use the £3.7 billion of net cash
proceeds to reduce Pennon’s company borrowings
and pension deficit, make a return to shareholders,
and retain some funds for future opportunities.
We are extremely proud to have grown Viridor into a
key industry player with strong credentials as a
leader in engineering excellence, pioneering new
technologies, and as a vocal champion in tackling
environmental challenges particularly around the
use of plastics. Our shared heritage – between the
water and waste subsidiaries – has given the Group
a unique mix of strategic insight and operational
expertise while shaping our holistic approach to the
management of natural resources. This gives us a
valuable knowledge base with which to enter a new
period in the Group’s history.
Leakage Technician
Mel Ryan checking for
rural leaks during the
lockdown period in April
Thank you to our people
In these extraordinary times, I would
like to thank all our employees across
the Group for their incredible hard
work and dedication.
The Group has been tested in ways
we would never have previously
imagined but it gives me great pride
that we have been able to adapt so
successfully to the many challenges.
This would not have been possible
without the tremendous efforts of
all our people, many of whom are
classified by Government as key
workers in our society. I thank them
all for maintaining and delivering
high-quality services during this
difficult period and I wish our Viridor
employees a fond farewell and good
fortune under their new ownership.
Our water resources position recovered from the
previous dry year and we have met our leakage
target every year since targets were introduced
over two decades ago.
Transparent and engaged
Last year we welcomed 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. In addition,
the Board is now required to report, through the
section 172 statement, on the broad range of factors
we consider as part of discharging our duty to
promote Pennon’s success for the benefit of our
shareholders as a whole. Our section 172 statement
can be found on page 121. This move to increase
transparency fully aligns with our values and we
continue to develop strong relationships with our
full range of stakeholders.
We constantly engage with our people and seek
their views. Our employees are key to our successes
and achievements and provide vital services to our
customers and communities. We have increased the
frequency of our Big Chat over the year, providing
employees the opportunity to hear from and ask
questions of Directors, we have enhanced our
Employee Voice and Engagement Forums and
seen further improvements in our Group-wide
employee survey results.
Pennon Group plc Annual Report 2020
11
Robust performance
This has been an important year for Viridor
operationally, as the most recent ERFs at Glasgow,
Beddington and Dunbar move through their
ramp-up phases. The construction at Avonmouth
ERF is progressing and commissioning is underway.
Recycling is on a growth trajectory with the new
plastics processing facility at Avonmouth under
construction. Viridor will continue to serve its
customers and communities delivering vital public
services under new ownership.
South West Water finished the K6 (2015-20)
regulatory period with a sector-leading return on
regulated equity and the successful conclusion of
the 2019 price review process (PR19). As a result,
South West Water began the K7 regulatory period
as the only company to have achieved fast-track
status for its business plan in two consecutive
five-year price reviews.
This recognition from Ofwat, our water industry
regulator, was a welcome endorsement of the
efforts put in by the South West Water leadership
team over these plan periods. The board and
management of South West Water made a
great effort to introduce an even higher level of
technology and innovation into the business plan
and we look forward to seeing the benefits this will
deliver for customers, enabling us to reduce bills at
a faster rate than peers.
Health & safety is at the heart of the Group
The Group has an ambitious road map for health
& safety, focused largely on our HomeSafe
programme. This has yielded a range of
encouraging and improving trends.
Yet, despite our efforts, we sadly lost two colleagues
during the year as a result of tragic accidents in
Viridor operations: Mick at the Earls Barton,
Northamptonshire facility and Mark at a customer’s
premises in Bovey Tracey, Devon. Our thoughts are
with their families, friends and colleagues as we
continue to work with the Health and Safety
Executive in relation to these sad events.
Our HomeSafe initiative is designed to deliver the
highest standards of health & safety performance
and enjoys high visibility and support across our
operations. However, we have taken further steps
to place even greater emphasis on this including
further training, system upgrades and root cause
analysis. The longer-term HomeSafe strategy has
ambitious targets, which we are determined to
achieve and is subject to independent review,
which will help us achieve our goal to be the
health & safety leader in the UK water and waste
industries within this new K7 regulatory period.
Sustainability is our strategy
Last year the Board endorsed a new long-term
sustainability strategy with clear objectives and
three-year targets across nine sustainability focus
areas. Over the course of this year, we have made
good progress towards these targets through
implementing our detailed Group-wide action plans.
We continue to invest and focus management
efforts on further improvements to environmental
performance at South West Water.
In 2019/20, we further reduced the number of
serious and significant pollution incidents down
to one Category 2 event, building on our 2018/19
performance which was the best in the 2015-20
regulatory period. We expect our substantial
investments and measures to ensure further
reductions across all wastewater pollution
categories to meet our ambitious targets.
Strategic report – Overview
Chairman’s statement
continued
Using technology &
innovation to enhance
customer service
In July 2019 we were pleased to
receive confirmation that Research
England would be providing
£10 million support for the Centre
for Resilience in Environment,
Water and Waste (CREWW) – a
joint venture between ourselves
and the University of Exeter.
With up to £20 million funding
from South West Water, CREWW will
conduct world-leading research into
the provision of safe and resilient
water services in the UK and overseas.
Central to its focus will be how to
manage our natural resources to
ensure there is sufficient water to
cope with population growth, the
pressures of climate change, and
improving resilience to the potentially
devastating effects of flood, drought
and emerging pollutants. CREWW
will accommodate state-of-the-art,
specialist laboratory facilities, and
designated space to encourage
collaborative research between
academics and experts from the
water industry and will draw on
Exeter’s world-leading expertise
across a wide range of disciplines
to develop innovative new solutions
that benefit the environment,
global societies and the economy.
Sustainability focus area
With up to £20 million funding from
South West Water, CREWW will conduct
world-leading research into the
provision of safe and resilient water
services in the UK and overseas.
See sustainability
strategy on page 20
Sir John Parker
Chairman
12
Pennon Group plc Annual Report 2020
We work hard to build strong relationships with
our customers and to deliver excellent services.
The 2020-25 business plan is 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. The
Board wholeheartedly supports this bold and
imaginative initiative.
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, range
of relevant experience and with adequate
consideration given to the benefits of gender
and ethnic diversity.
The latest Hampton-Alexander Review: FTSE
Women Leaders (November 2019) listed Pennon
24th in its FTSE 250 rankings for women on boards
and in leadership, compared with 85th last year.
Key to our success this year has been the recent
appointment of Non-Executive Director, Claire
Ighodaro. As a result, the Board’s female headcount
increased to three with our diversity at board level
now standing at 42.9%.
Pennon is a member 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
In 2018, we announced our new vision – bringing
resources to life – with its strong supporting
values of trusted, collaborative, responsible and
progressive. Good work has continued this year in
further 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. Alongside our management trainee
scheme at Viridor, we have extended our graduate
recruitment across the Group in 2019/20 supporting
our pool of internal talent. We have continued to
invest in apprenticeships and are particularly
proud of our apprenticeship scheme which
started 191 new apprentices through this route
in 2019/20. This now brings our three-year total
to 575 apprenticeships across Pennon.
Balancing returns and investment
The Board has evaluated the Group’s dividend
for 2019/20 in light of the COVID-19 crisis and
has concluded that it is appropriate for Pennon
to deliver on its dividend commitment. The Group
has significant cash and liquidity of £1.6 billion and
has not needed to take any Government support
measures. The vast majority of Pennon shareholders
are pension funds, charities, employees, customers
and other retail holders who rely on this income.
Pennon’s dividend has been supported by the
growth in Viridor’s earnings and we have shared our
success with customers through South West
Water’s innovative WaterShare mechanism with
£140 million of total cumulative benefits identified
since 2015 and shared through bill reductions,
service improvements and reinvestment. This will
continue with our 2020-25 WaterShare+ scheme.
Bathing waters off
Plymouth, Devon
For 2019/20, the Board has recommended a final
dividend of 30.11 pence per share, subject to
shareholder approval at the Annual General
Meeting on 31 July 2020. Together with the interim
dividend of 13.66 pence per share, this will result in a
total dividend of 43.77 pence per share, an increase
of 6.6% from last year. This is in line with our
dividend policy for 2010-20 of retail price index
(RPI) +4% growth per annum, which has been
achieved while investing more than £3.6 billion
in our businesses over the past 10 years.
Board and leadership
We were pleased to welcome Claire Ighodaro to
the Board in September 2019. Claire’s extensive
range of boardroom experience and her
background in finance, across both regulated
and non-regulated industries, is a great asset to
the Group and complements the broad range of
skills on the current Board. We ensure that our
Board has a broad skill set and deep experience.
Sadly, we will say our farewells to Lord Matthew
Taylor and Martin Hagen, who have both served
on the South West Water board for some 10 years,
in order to provide continuity through to the K7
regulatory period. Both have rendered exemplary
service and deserve our heartfelt thanks. We thank
them for their commitment over many years and
wish them all future success.
Outlook
The sale of Viridor is targeted to complete
in summer 2020 and the Pennon Board will then
oversee the operating companies of South West
Water and Pennon Water Services and also perform
a holding company role in managing and allocating
the funds from the Viridor sale.
Pennon will continue to be a UK-focused water
infrastructure group, comprising South West Water
and Pennon Water Services. South West Water is
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. South West Water serves its
customers and communities and continues to
be committed to the highest standards of
environmental performance. Work is already
underway to deliver the commitments in the
business plan focusing on cost-base efficiency,
operational performance, customer service and
sustainable growth.
The crystallisation of the Viridor sale is equivalent
to 22.66 pence per share of the recommended
2019/20 dividend. This implies a Continuing Group
dividend (after excluding Viridor) of 21.11 pence
per share.
The Board intends to use the c.£3.7 billion of
net cash proceeds to reduce Pennon’s company
borrowings and pension deficit, retain some funds
for future opportunities, and make a return to
shareholders. Details of additional returns to
shareholders from the sale of the Viridor business
will be announced in due course.
Pennon’s dividend policy for 2020-25 for the
rebased Continuing Group will be growth of CPIH
+2% per annum, from an implied Continuing Group
dividend for 2019/20 of 21.11 pence per share. The
shift from the existing policy of linking the growth
in dividend from RPI to CPIH reflects the change
in the regulatory model for South West Water and
assumes continued alignment in regulatory growth.
The rebased dividend reflects the sector-leading
position of the Continuing Group, with expectations
for outperformance on financing and totex
supporting the sustainable dividend growth policy.
Sir John Parker
Chairman
Pennon Group plc Annual Report 2020
13
Strategic report – Overview
Business
model
Our business model is designed to deliver sustainable
shareholder value by providing high-quality
environmental infrastructure and customer services.
From 2020 onwards, following the proposed sale of the
waste management business, Pennon will be solely
focused on delivering excellence in the UK water sector.
What we do...
...the strengths we rely on
Our core businesses
Our strengths
Water and wastewater
We provide water and wastewater
services in the most efficient and
sustainable way possible.
See pages 42 to 47 for further information
Water retail services
We provide water retail services
for all business customers’ water
management needs.
See page 48 for further information
Underpinned by our values
Trusted
We do the right thing for our
customers and stakeholders
14
Pennon Group plc Annual Report 2020
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.
Collaborative
We forge strong relationships, working
together to make a positive impact
...delivering our strategy
...to create value
Our long-term priorities
Value created for our stakeholders
1
2
3
Leadership in UK infrastructure
We aim to lead in the sectors we operate in
by capitalising on Group strengths, capabilities,
best practice and synergies, and achieving
the right balance between risk and reward.
See page 17 for further information
Cost base efficiency
We are focused on driving down overheads
and operating in the most efficient way
to minimise costs.
See page 18 for further information
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 page 19 for further information
Customers
80.3pts
new measure – CMex(1)
Investors
+6.7%
earnings per share
increased to 61.7p(2)
People
23,223
formal training days
Community
98.7%
149 bathing waters out
of 151 classified as
‘sufficient’ or better(3)
Environment
659km
total km of river improved
during 2015-20
(1) As measured by the new
customer experience score
(CMex) based on the
methodology for the next
regulatory period 2020-25
which has been piloted
during 2019/20.
(2) Before non-underlying
items and deferred tax.
See note 6 on page 152
for more details.
(3) 125 beaches (82.8%)
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 2020
15
Strategic report – Overview
Strategic progress
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.
Pennon continues to strive towards the following
long-term strategic priorities.
Our priorities have always been applicable to both
water and waste but Pennon will be focusing solely
on water going forwards:
1 Leadership in UK water infrastructure
2 Cost base efficiency
3 Sustainable growth
For information on how our strategic
priorities are linked to remuneration
targets, see page 95
16
Pennon Group plc Annual Report 2020
Strategic priority
1
Pre 2020
Leadership in UK water and waste infrastructure
Performance against objectives 2019/20
• Improved Employee Trust Index score in 2019/20
• Outperformance of the regulatory contract for the 2015-20 period
achieving c.80%(1) of business plan commitments. Several
initiatives already underway as part of the fast-tracked 2020-25
business plan
• Ongoing improvement in customer satisfaction following
investment in enhancing the customer journey, improved
response times to issues, digital improvements, and training
and development of our people
(1) Financial ODIs exceeded, met or within regulatory tolerances.
• High levels of performance and availability maintained for ERF portfolio
• Maximising value from our infrastructure business through
strong performance across business divisions alongside
efficiency improvements
• Sector-leading performance across both water and
waste management
• Environmental performance improved in a range of areas in
the water business including the expansion of catchment
management programmes and an increased proportion of
energy from renewable sources. National Environment
Programme commitments on river water quality for the 2015-20
regulatory period completed in both service areas. High bathing
water standards retained.
Fast-track
Status for business plan
90%
Overall customer satisfaction
90%
ERF availability
63%
Employee trust score
KPIs
Sustainability drivers
Risks and uncertainties
• 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
• 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 or operational failure
• Failure or increased cost of a capital project
• Loss or corruption of data as a result of a cyber attack.
2020 onwards
Leadership in UK water infrastructure
Near-term objectives (2020 onwards)
• Deliver marked improvements in focus areas for
environmental performance. This includes the implementation
of the new pollutions strategy and ongoing investment in
wastewater upgrades
• Deliver on WaterShare+ benefits to customers
• Continue to deliver high-quality drinking water, minimising
supply interruptions and achieving demonstrable reductions
in the amount of water lost through leakage
• Target industry-leading customer service performance
including improved customer satisfaction
• Continue to improve scores for employee satisfaction and trust.
Pennon Group plc Annual Report 2020
17
Strategic report – Overview
Strategic progress
continued
Strategic priority
2
Pre 2020
Leadership in cost base efficiency
Performance against objectives 2019/20
• South West Water continues to deliver sector-leading totex
outperformance, with £297 million cumulative efficiencies over the
2015-20 regulatory period
• Continuing to drive efficiencies across all areas of the Group
• Continuing to deliver cost-efficient, long-term financing –
3.5% average interest rate – among the lowest in the sector
• Continued reduction in Viridor indirect costs.
11.8%
Cumulative RoRE in K6
£288m
Underlying profit before tax
£297m
Cumulative totex
outperformance 2015-20
3.5%
Interest rate –
efficient financing
KPIs
Sustainability drivers
Risks and uncertainties
• 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.
2020 onwards
Leadership in cost base efficiency
Near-term objectives (2020 onwards)
• Deliver sector-leading totex outperformance throughout the
K7 period (2020-25)
• Ensure ongoing sector-leading efficiency savings, including
through the identification of new technologies, systems
upgrades and overall performance improvement
• Continue to deliver cost-efficient, long-term financing
• Ensure the efficient transition of the waste business under
new ownership following the proposed Viridor sale.
18
Pennon Group plc Annual Report 2020
Strategic priority
3
Pre 2020
Driving sustainable growth
Performance against objectives 2019/20
• Strategic value being realised through the proposed sale of Viridor
• Opportunities for further growth, including initiatives to expand
our customer base or form partnerships with other organisations
being identified
• Building on the progress made in K6 by making headway with
the K7 New Deal plan that meets the needs and priorities of
South West Water’s customers and other stakeholders
• £65 million investment in new plastics processing facility
under construction
• Continuing to build scale and efficiency in the non-household
retail market through Pennon’s water retail business, Pennon
Water Services
• Completion of construction on the Mayflower water treatment
works. The works has entered commissioning and, pending
any restrictions due to the ongoing COVID-19 situation, will
begin supplying customers with drinking water from summer
2020 onwards
• Adoption of water and wastewater services for the Isles of Scilly
successfully completed.
+6.7%
growth in EPS
KPIs
£245m
Finance aligned to
Sustainable Financing
Framework
69
Sustainalytics score
Fair Tax Mark
Reaccreditation
Sustainability drivers
Risks and uncertainties
• Quality services and satisfied customers – delivered with an
increased focus on improving the customer experience
• Good governance and high standards of business conduct –
ensuring our people are rewarded 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
• 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 right skills to help our businesses grow and prosper.
2020 onwards
Driving sustainable growth
Near-term objectives (2020 onwards)
• Identify opportunities for growth within the water sector
• Further LTIFR reductions
• Support sustainable growth in the regions served through
the provision of value-for-money services and championing
regional growth initiatives
• Development of the CREWW (Centre for Resilience in
Environment, Water and Waste) innovation centre to
provide industry-wide learnings to ensure sustainable
best working practice
• Deliver the 2020-25 New Deal business plan for the benefit
of customers and stakeholders
• Continue to provide high-quality workplaces, training and
development to support employment and communities
• Capitalise on opportunities for growth and expansion in the
non-household retail market through the water retail business,
Pennon Water Services
• Deliver on sustainable supply chain objectives.
Pennon Group plc Annual Report 2020
19
Strategic report – Overview
Sustainability at the
heart of the business
Built around our environmental, social
and governance (ESG) framework, our
sustainability strategy helps us to focus
on the positive impact we can have on
the communities we serve, and on the
environment that we rely on. It supports
the creation of value – financial, social and
environmental – for our shareholders
and stakeholders.
Bringing
resources
to life
We have set clear long-term objectives and
three-year targets to enable clear monitoring
and continuous improvement of our performance
in each of our nine sustainability focus areas.
These cover the areas of greatest significance and
materiality to our businesses, and range from key
global issues of carbon reduction, biodiversity and
natural capital stewardship, to local community
benefits, employee wellbeing and development,
and ensuring good governance, quality services
and customer satisfaction.
Our environmental focus areas include:
• Demonstrating leadership – in carbon
management and climate change adaptation, and
in regulatory compliance and pollution prevention
• Proactively protecting and enhancing healthy
places, habitats and biodiversity in our operational
areas, especially working in partnership with
wildlife trusts and other stakeholders
• Showing leadership in natural capital
management and resource productivity.
Environmental improvement programmes
and contributing activities include:
• 100% of Viridor and South West Water’s sites and
operations covered by ISO 14001 environmental
management system accreditation
• Active land stewardship on three special areas of
conservation, two special protection areas and
nine sites of special scientific interest; with nine
SSSI Water Industry Environment Programme
schemes approved by Natural England and the
Environment Agency
• 25 biodiversity enhancement opportunities
identified on priority operational sites
• Priority habitats restoration and management
programmes, including blanket bog, purple
moorgrass and culm grassland
• Five-year biodiversity plan launched, focusing on:
county wildlife sites; fish passage and protection
measures; natural flood management; river
improvements; peatland restoration; and
tree planting
• 48,400 trees planted in 2019/20 – strong
contribution to our 100,000 trees commitment.
• Building natural capital – South West Water land
holdings in Dartmoor and Exmoor National Parks
will be prioritised for active management, as well
20
Pennon Group plc Annual Report 2020
as 14 sites in areas of outstanding natural
beauty (Cornwall, East Devon, Tamar Valley
and the Blackdown Hills).
Our social focus areas and objectives include:
• Net gain in our social capital through positive
investment and support for local communities,
including sponsorship, supply chain partnerships,
education services and employee volunteering
• Aiming for the highest standards of health, safety
and employee wellbeing in our workplaces
• Achieving a diverse and productive workforce,
reflecting the communities in which we
operate, and developing and upskilling our
employees through structured programmes
and opportunities.
Social capital improvement programmes
and contributing activities include:
• New Deal plan for 2020-25 to ensure 2025
customer bills are lower than in 2010, and to
include extra steps to eliminate water poverty
• Ongoing work with Citizens Advice and
social housing associations to support
vulnerable customers
• >25,500 customers are on a support tariff and
>35,000 customers have benefited from one
of our other support schemes
• Ongoing Love Your Loo, Think Sink and water
efficiency campaigns to prevent blockages
and promote good practice, including c.1,300
subsidised or free water butts distributed
• Supporting Refill Southwest: providing hydration
stations at public events, permanent community
Refill points and distributing reusable water
bottles.
Our governance focus areas and
objectives include:
• Engaging with our customers, clients and
stakeholders, aiming to exceed their expectations,
supporting vulnerable customers, and
continuously improving our services
• Enabling sustainable supply chain practice
and partnerships including human rights,
equal opportunities and positive social and
environmental values and outcomes
• Strong and transparent governance and a
sustainable finance framework, enabling
investment, innovation and sustainable growth.
Good governance improvement programmes
and regional contributing activities include:
• Building trust via quarterly WaterShare+ panel
meetings in public and a customer annual
general meeting from 2020
• Serving a population of 2.2 million
• c.5,300 regional jobs supported via our supply
chain, and c.£600 million GVA to Cornwall,
Devon and Dorset economies
• Continued participant in the Back the
Great SouthWest campaign and its regional
growth prospectus
• Ongoing support for the Mayflower 400
initiative, including supporting local social
enterprises and promoting Plymouth,
Britain’s Ocean City.
A clear, strategic and long-term approach
to sustainability enhances our business
performance, strengthens our resilience,
protects our ongoing licence to operate via
regulatory compliance and is an integral element
of our risk management processes.
Our contribution to the UN
Sustainability Development Goals
(SDGs)
We continue to encourage our customers,
suppliers, employees and other stakeholders
to familiarise themselves with the 17 SDGs,
or Global Goals, and see how we can all
contribute towards them.
We have assessed and mapped our
sustainability focus areas to the SDGs that
are most relevant to us. While we have been
committed to measuring our sustainability
performance against our own three-year
targets, we have also begun the process
of assessing the SDG targets and KPIs to
enable future detailed reporting against
them, as appropriate.
Find out more online
at www.pennon-group.
co.uk/sustainability
Environment
Social
Resource efficiency and
natural capital stewardship
Community investment
and benefit
Governance
Quality services and
customer satisfaction
Headline target:
measurable natural capital gain and improved resource
efficiency across relevant operational areas and projects
KPI:
• 3% year on year improvement from a 2019/20 baseline
Performance:
2 methodology approved, baseline
assessment underway. Completion summer 2020
Headline target:
measurable community benefit and social capital gain in
relevant operational areas and projects
KPI:
• 3% year on year improvement from a 2019/20 baseline
Performance:
2 methodology approved, baseline
assessment underway. Completion summer 2020
Headline target:
continual improvement in levels of customer satisfaction
and service quality, and defined methods to support
vulnerable customers
KPI:
• 2% year on year increase from a 2019/20 baseline
Performance:
1 methodologies established and baseline complete
Healthy places
and habitats
Health, safety
and wellbeing
Responsible
supply chain
Headline target:
measurable biodiversity net gain on our relevant
operational sites and projects
KPI:
• 5% biodiversity net gain across sites with biodiversity
management plans
Performance:
1 sites confirmed and baseline assessments complete
Headline target:
continual improvement in overall health, safety and
wellbeing achieved through implementation of our HSSA
strategy and its core KPIs
KPI:
• LTIFR at 0.5 by end of 2024/25
Performance:
3 target formally on track, however the sad loss of two
Viridor colleagues at Earls Barton and Bovey Tracey is
acknowledged, and investigations into both continue
Headline target:
adopt defined sustainability principles within procurement
and contract management processes, building resilience
across our supply chain
KPI:
• 100% compliance with sustainable procurement policy
by end 2021/22
Performance:
1 supply chain rationalisation and segmentation
ongoing. Onboarding compliance process continues
Environmental
leadership
Skills, diversity
and development
Headline targets:
implement Group climate change & carbon strategy
defining contribution to a low carbon economy. Embed
compliance culture ensuring positive and measurable
environmental impact and regulatory compliance
KPI:
• B-rated CDP Climate disclosure
• zero serious/major or significant environmental incidents
Performance:
1 improved CDP Climate B rating achieved. KPI to
be replaced by approved carbon reduction targets
2 single Category 2 incident recorded by
Environment Agency
Headline target:
continual improvement in employee diversity, skills
and engagement
KPI:
• increase % of female employees in the Group from 21% in
2019 to 25% by 2022.
• achieve 65% Trust Index score by 2021/22
Performance:
1 female employees rose to 23%
1 Trust Index score rose to 63% in 2019
Good governance enabling
investment, innovation
and sustainable growth
Headline target:
transparent approach to good governance,
responsible business and sustainable investment
through continuous improvement in ESG performance
KPI:
• upper quartile scores in our peer group for external
ESG disclosure assessments.
• 25% of total finance raised within the Pennon
Sustainable Financing Framework
Performance:
1 improved CDP Climate and Water ratings achieved
1 29% achieved (£245 million raised through
the Sustainable Finance Framework of a total £840 million)
Focus area performance
1
Currently on track
and forecast to achieve
KPI/target within
reporting period
2
Currently not on track but
forecast to be retrievable
with identified actions in
order to meet KPI/target
within reporting period
3
Currently not on track
and forecast to not
meet KPI/target within
reporting period
Pennon Group plc Annual Report 2020
21
Strategic report – Overview
Priority
programmes
2019/20
We chose three important priority
programmes for 2019/20 and have
made accelerated progress in these
key leadership programmes:
• Plastics
• Biodiversity
• Sustainable finance
Priority programmes 2020/21
Prior to the strategic review, we chose three new priority
programmes which offer opportunities to accelerate progress
in important aspects within our sustainability strategy focus areas.
We will report on our progress towards these commitments in our
next annual report.
Find out more online at
www.pennon-group.co.uk/sustainability
Sustainable transport, travel
and smarter working
Implementing a consistent approach to
working policies and practice in these
areas can help to improve: health & safety
performance; employee wellbeing;
productivity; business efficiency; our
reputation; and environmental awareness,
as well as helping to reduce GHG emissions.
It will contribute to targets in our
core strategies.
Circular workplace
Our commitment to the principles of a
more circular economy includes delivering
sustainability practices in the workplace.
We want to inspire change at work and in
everyday life – improving waste, water and
energy efficiency. This should deliver both
cost savings and opportunities for education
and engagement in our sustainability strategy
and wider sustainability issues by employees.
Community benefit and social value
We aim to provide measurable positive
investment and support for our communities
through a combination of: services and supply
chains; sponsorship, partnerships and
donation programmes; community liaison;
education and outreach; and employee
volunteering. We have conducted a baseline
social capital impact assessment to help
better target our community investment
activities and maximise value and benefit
to both the company and communities.
22
Pennon Group plc Annual Report 2020
Plastics
We assessed and identified opportunities under each of the five Pennon plastics
programme commitments. Our achievements include actions to:
Further develop innovative infrastructure
• Investment in polymers recycling technology at Masons MRF and Glasgow
• South West Water further investment in biobead containment.
Commission, support and enable targeted research and development
• Active polymers R&D support including micro-plastics
• Joint research into solutions to reprocess micro-plastics including biobeads
with opportunity identified to recycle micro-plastics into e.g. fence posts
• Working with universities, including PhD projects, to explore plastics
reprocessing and treatment opportunities.
Collaborate with our clients, partners and suppliers
• Continued engagement with UK Plastics Pact and Innovate UK’s Smart
Sustainable Packaging Plastics initiative, and partnership with Nurdle,
a CIC, to help clean coastal micro-plastic hotspots
• Hosted South West Rubbish to Resource event to boost regional
plastics recycling
• Extended BeachCare partnership programme with Keep Britain Tidy.
Enable and deliver dynamic campaigning
Campaigns and projects to change behaviours to reduce the amount and
impact of plastic waste and increase recycling, including:
• Year of Green Action volunteering initiative throughout 2019
• Keep Britain Tidy’s plastic initiatives
• Love Your Loo campaign preventing flushing of plastic products
• Award-winning Right Stuff, Right Bin recycling campaign continued
• Continued participation in Refill South West campaigns.
Engage and inspire our employees
Aim to reduce, recycle and replace plastics used in our offices and operations,
and help clean-up our beaches, rivers and local environments, including:
• Nine volunteering litter pick events including Taunton’s Big Litter Pick
• Sponsorship and launch of Nurdle’s micro-plastics South West beaches
clean-up programme at Croyde Beach.
Pennon’s UK plastics programme
contributes to the following
UN SDGs.
Sustainability focus area
Biodiversity
We established a biodiversity task & finish group to assess and identify progress
opportunities in each operating business in relation to our biodiversity strategy.
This has helped Viridor and South West Water biodiversity teams to align
across the Group, share knowledge and best practice, and build on work
already established. Achievements this year include:
• Viridor and South West Water each identifying 25 sites and developing
plans to measure biodiversity net gain using Defra’s version 2.0 metric
• Habitat volunteering by employees including tree planting, guard removal
and hedge laying with our partners The Somerset Wildlife Trust and The
South West Lakes Trust
• South West Water’s commitment to plant 100,000 trees by 2030 working
with The Wildlife Trusts, Woodland Trust and Friends of the Earth
• Restored 5,713 acres of habitat through South West Water’s Upstream
Thinking programme, exceeding Ofwat’s ODI target of 3,212 acres
• Progress by South West Water in the second year of its peatland restoration
Three Moors Project
• Appointment of 28 site guardians to report on invasives, biosecurity and
biodiversity as part of South West Water and South West Lakes Trust’s
invasive species programme, and extended management of invasive
non-native species on South West Water operational assets to 64 sites
• Eight Viridor sites maintaining Wildlife Trusts Biodiversity
Benchmark accreditation
• New Viridor partnerships with the Berkshire, Buckinghamshire and
Oxfordshire Wildlife Trusts and work with Thames Water to protect
and enhance the local biodiversity at Beddington
• Partnering with beekeepers to allow beehives to be located at five of
Viridor’s closed landfill sites.
Sustainable finance
At Pennon, we are proud to be the first UK corporate to launch a Sustainable
Financing Framework. We issued a green long-funding finance lease, and were
among the first to agree sustainability-linked impact loans and revolving credit
facilities. Being a leading company in this area demonstrates that sustainability is
truly at the core of our business. It incentivises sustainable behaviours by linking
outcomes to the cost of servicing our finance.
The Group is at the forefront of sustainable finance and has adopted a holistic
approach to incorporate all sustainable finance principles. We have signed a
diverse range of sustainable finance products.
We developed a Group Sustainable Financing Framework. This enables the
issuing of sustainable finance to support investment across the Group’s activities
in particular: pollution, prevention and control; sustainable water and wastewater
management; and climate change adaptation, resulting in environmentally and
socially sustainable outcomes. We have worked closely with The Prince’s
Accounting for Sustainability Project (A4S) to set the standard for sustainable
financing frameworks.
Over the year we have raised £245 million of finance aligned to the Sustainable
Financing Framework, representing approximately 29% of our total finance
raised. Cumulatively, since the introduction of the framework we have raised
£840 million.
Activities contributing towards the Sustainable Financing Framework:
• Mayflower water treatment works
• ERFs
• South West Water customer engagement
• HomeSafe
• Sustainable procurement policy
• Upstream Thinking programme
• Peatland restoration programme
• Avonmouth plastics recycling centre.
Our first annual allocation and Sustainable Financing Framework impact report
was issued in September 2019 with the first funds from the green reserve
account allocated to South West Water’s sustainable investment in 2019/20.
Pennon’s biodiversity programme
contributes to the following
UN SDGs.
Sustainability focus area
Pennon’s Sustainable Financing
Framework contributes to the
following UN SDGs.
Sustainability focus area
Pennon Group plc Annual Report 2020
23
Strategic report – Overview
Market and
regulatory
overview
Pennon operates at the forefront
of the changing regulatory water
markets and remains well-placed to
identify further growth opportunities.
24
Pennon Group plc Annual Report 2020
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.
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.
These services are provided by 16(1) core regional companies, of which 10 are
providers of both water and wastewater services.
Our competitive environment comprises the water and wastewater companies
in England and Wales. As well as the competitive environment with our UK water
peers, we benchmark customer service against other providers in the region and
the UK. As a FTSE 100 publicly-listed company, other infrastructure companies
are competitors from an investor (equity and debt) perspective.
Water companies (2019)(1)
6
Water only
companies
16
regional operators
in England
and Wales
10
Water and
wastewater
companies
Source: Ofwat.gov.uk
(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.
Regulatory framework
As a provider of water and wastewater services, we operate
within a framework which contains a variety of regulators.
We are subject to regulation on price and performance by
economic, quality and environmental regulators.
Non-household retail market
The non-household retail market allows 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.
This regulatory framework is designed to safeguard the
best interests of customers and the environment.
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.
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.
Pennon Water Services was established to manage the non-household
retail business for Pennon via a retail venture with South Staffordshire plc.
Key water industry regulators (2019)
Market choice and regulators (2019)
1.2m
customers
1.2m
businesses
and other
non-household
customers can
choose who they
buy water and
wastewater retail
services from.
Our approach
Our approach
South West Water has mature and robust processes to ensure
compliance with regulatory requirements.
Pennon Water Services has focused on offering high-quality retail
customer service and a broad range of services that enhance value.
We engage with our regulators at all levels and are committed to
ensuring trust and transparency within these relationships.
Pennon Group plc Annual Report 2020
25
Strategic report – Overview
Our stakeholders
The sector we operate in is high
profile with a wide stakeholder group.
We are committed to listening,
engaging and reflecting our
stakeholders’ needs and priorities
in our business plans and operations.
The work we do delivers a wide range of benefits
to a variety of stakeholders, creating long-term
sustainable value.
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 employees, 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 – takes into account stakeholders’ interests
when making decisions (see our section 172 statement
on page 121 and examples provided on page 73).
Our customers
Our water businesses supply water and wastewater services to around one
million household customers and over 160,000 business customers.
Our engagement approach
We engage regularly with our customers on service quality, cost of service,
value for money and our strategy. This includes regularly conducting customer
satisfaction surveys, holding focus groups, co-creation workshops and
convening forums, providing ongoing feedback to our teams to recognise
good service and make improvements where needed. With the introduction
of WaterShare+ as part of the New Deal 2020-25 business plan, customers
are being offered a tangible stake and a say in the business, including the
opportunity to participate in a customer annual general meeting.
We also engage with key trade and customer bodies, including CCW(1) – the
voice for water consumers. We have a well-established independent WaterShare
customer panel which reviews and challenges our performance against our
business plan commitments and, to support the development of our five-year
business plan, we established an independent WaterFuture customer panel.
Find out more on page 69
Quality services and
satisfied customers
South West Water’s
customer satisfaction
90%
target: year on year increase in
customer satisfaction scores
Pennon Water Service’s
customer satisfaction
91%
target: year on year increase in
customer satisfaction scores
83%
of customers have trust and
confidence in South West Water
and Bournemouth Water
Viridor’s customer satisfaction
80%
target: year on year increase in
customer satisfaction scores
Our
WaterShare
customer panel
meets quarterly
26
Pennon Group plc Annual Report 2020
(1) CCW – previously known as the Consumer Council for Water.
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 wellbeing, our organisational culture, promoting diversity and
inclusion, training and development. We use our annual employee trust
and engagement survey as a mechanism to measure progress and obtain
feedback. Our senior leaders meet once a quarter with established
engagement forums where staff representatives discuss business
challenges. We also recognise Trade Union partners in some areas of the
Group and maintain an open dialogue with them. We hold regular Big Chat
calls with employees, providing them with the opportunity to hear directly
from the Pennon Executive and ask any questions they wish.
Find out more on pages 38 and 39
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
and 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 and the Royal Yacht Association.
We also work closely with the South West Lakes Trust to support access to
our land and sites for recreation in the South West.
You can find our gender pay gap report online:
www.pennon-group.co.uk/about-us/gender-pay-gap-report
Find out more on pages 20, 40 and 47
Skills, diversity and
development
Community investment
and benefit
LTIFR 0.90 is down
Trust Index score
34%
from 2018/19. Target of 0.50 by 2025,
which would make Pennon a health &
safety sector leader in water and waste
63%
+1pt on 2018/19. Target is to be
Great Place to Work accredited
£6.4m
community investment
across Pennon including £5.3 million
to Viridor credits
Engagement score
68%
maintaining our strong 2018/19 score
Female representation at
Board level has increased to
42.9%
from 33.3% in 2018/19; ahead of
our 2020 30% Club target
c.2m
visitors to South West
Water’s reservoirs
in line with 2018/19
Eight STEM
partnerships delivered
up from 2018/19
long-term target to increase the
reach of our STEM and community
education programme
7,283
visitors to Viridor’s 11 educational
centres last year
98.7%
of bathing water classified
as ‘sufficient’ or better
maintaining last year’s excellent
performance. Our long-term target is
100%
173
beach cleans
held through our BeachCare
partnership removing 11.3 tonnes
of waste
Pennon Group plc Annual Report 2020
27
Strategic report – Overview
Our stakeholders
continued
Our environment
We work closely with a range of environmental partners including South
West Lakes Trust, Westcountry Rivers Trust, The Wildlife Trusts, Natural
England and various conservation and environmental interest groups and
charities to help ensure we deliver our environmental commitments.
Our engagement approach
We meet regularly with our environmental stakeholders on natural capital
stewardship and other areas of focus. This includes regular meetings and
liaison with the Wildlife Trusts in our operational areas and with the
Westcountry Rivers Trust, both of whom are partners in our catchment
management projects.
We also hold a twice-yearly BeachWise Forum with key stakeholders to
discuss matters relating to bathing water quality.
Find out more on pages 20 and 23
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.
In 2018/19, we launched our sustainable procurement policy and supplier
code of conduct.
Responsible
supply chain
Net zero
carbon
South West Water’s commitment
to achieve net zero carbon emissions
by 2030
5,713
acres of habitat restored by our
Upstream Thinking programme
2021/22 target continued delivery
of supply chain rationalisation
to achieve a supply base of
Following supplier segmentation
and rationalisation, work with all
suppliers to ensure
c.3,000
suppliers to reflect a 59%
decrease from the 2017/18 figure
(c.4,400 suppliers)
100%
compliance with the five objectives(2)
identified within our sustainable
procurement policy by end 2021/22
We have engaged extensively with
our SME suppliers who represent
over 80%
of our current supply chain. In
2018/19, we launched our sustainable
procurement policy and supplier code
of conduct
Incorporated
sustainability-
focused
questions
Healthy places
and habitats
1
Category 2 wastewater pollution
incident, down from 2 in 2019
100,000
the number of trees we are
committed to planting by 2030
supporting Water UK’s commitment
to plant 11 million trees
TCFD
on track to comply with Task Force on
Climate-related Financial Disclosures
recommendations by 2020/21
28
Pennon Group plc Annual Report 2020
(2) see www.pennon-group/sustainability/responsible-supply-chain.
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 USA each year in addition to conferences, investor and
analyst briefings. In 2019, we hosted an event for analysts dedicated to
Viridor’s work in plastics recycling and its contribution to the circular
economy – a key investment theme within the year. We also hold
twice-yearly results presentations and CFO updates and we continue to
provide trading updates between results.
Our regulators
We have an open dialogue and meet regularly with our regulatory bodies:
Ofwat, the Department for Environment, Food & Rural Affairs (Defra), the
Environment Agency, Drinking Water Inspectorate and the Health and
Safety Executive (HSE) 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.
Environmental
leadership
Good governance
enabling investment,
innovation and
sustainable growth
50.4%
of our shareholder register
met over 2019/20
90
meetings and
calls were held
Our policy makers
Engaging with national and local Government, MPs and Peers, Local
Enterprise Partnerships, the HSE, HM Revenue & Customs (HMRC), the
Department for Business, Energy & Industrial Strategy (BEIS) and Defra,
we have a good ongoing dialogue with policy makers and stakeholders
who influence and 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, and
through trade bodies including Water UK and British Water.
11
roadshows were held
and eight conferences attended
29%
of finance raised under
Pennon’s Sustainable
Financing Framework
against a target of 25%
ESG
2019 Sustainalytics score
2019 FTSE4Good score
69
down from 72 in 2018, target
of year on year improvement
3.6
out of 5
139
meetings and site visits
held in 2019/20, a 26% increase
on 2018/19
Pennon Group plc Annual Report 2020
29
Strategic report – Group performance
Strong financial and
operational performance
in 2019/20 provides
a solid platform for further
progress as the water
industry enters the K7
(2020-25) period.
30
Pennon Group plc Annual Report 2020
Chief Executive Officer’s review
Strategic report
Group performance
32
36 Key performance indicators
38 Our people
42 Our operations
50
42 Water and wastewater
48 Water retail services
49 Waste management
Report of the Chief
Financial Officer
Risk report including
viability statement
69 Customer ownership
58
Pennon Group plc Annual Report 2020
31
Strategic report – Group performance
Chief Executive
Officer’s review
Our focus on sustainability
continues to underpin the activities
Pennon undertakes and the way
in which we undertake them.
Chris Loughlin
Chief Executive Officer
32
Pennon Group plc Annual Report 2020
The past year has been pivotal for Pennon Group; a
year significant for the decisions taken, the progress
made, and the challenges overcome, not least those
relating to the impact of COVID-19 on our business
activities in the latter part of the year.
The announcement of the proposed sale of Viridor
marks an evolutionary step in the Group’s history
and the realisation of the strategic value created
following almost three decades of successful
acquisition and growth in the waste sector.
Meanwhile in the water side of the business, we
reached the end of the K6 (2015-20) period in an
extremely confident position, having once again
delivered strong financial results and excellent
operational performance across key business areas.
I am pleased to report that Pennon Group has
continued to carry out its business in a manner
which reflects our core values of trusted,
responsible, collaborative and progressive.
2019/20 has seen the ongoing implementation of
the sustainability strategy we announced last year,
further work to embed our HomeSafe culture of
health & safety across our businesses, and the
continued delivery of efficiencies for the benefit of
our customers and shareholders. This continues to
be achieved through a combination of innovation,
investment in new technologies and the pioneering
of cost-effective sustainable solutions.
Committed to health & safety
The health & safety of our people remains
paramount and we were shocked and saddened by
the tragic loss of two colleagues at Viridor during
the past year. We continue to cooperate with the
investigations being led by the Health and safety
Executive following the separate incidents at Earls
Barton in Northamptonshire and in Bovey Tracey,
Devon. Our thoughts and sympathies remain with
the loved ones of Mick and Mark.
Pennon’s focus and emphasis on health & safety
continues unabated, recognising that we should all
expect to go to work and come home safely at the
end of each day. While our headline performance
target – LTIFR – improved by 34% compared with
the previous year, our ambition for zero harm
remains and we have further stretched our
performance expectations for 2020/21.
The Board remains fully committed to HomeSafe.
This includes independent review and
benchmarking in order to identify areas for further
improvement, as we work towards our ambition to
become the health & safety leader in the industries
we operate within.
Tackling COVID-19
The development of the coronavirus crisis in
March 2020 presented the Group with a variety of
challenges, not least the logistical and technical
challenge of ensuring social distancing among
frontline workers.
Ensuring the health, safety and wellbeing of our
people has been our primary focus throughout.
Drawing on our strong resilience and crisis
management plans, complemented by our
HomeSafe health & safety philosophy (see page
40), we took timely and effective action in order
to ensure services could continue to be provided
to our customers as necessary, in a safe manner,
and in line with Government guidelines.
For our water customers we took steps to ensure
those facing difficult financial circumstances would
be provided with support in the most appropriate
way. This included automatically extending social
tariffs and payment plans and proactively
identifying and contacting those customers most in
need. Following the announcement of ‘stay at home’
guidance on 23 March we introduced a dedicated
priority services register for those self-isolating.
We also immediately implemented a range of
additional measures and processes to prevent
any risk of contracting or spreading the virus while
carrying out essential work in the community.
Core services were successfully maintained with
non-essential services gradually reinstated once
it was safe to do so.
I am pleased to report that, across the Group, our
employees responded incredibly well, adapting to
the situation as it developed with superb flexibility.
No employees in the Group were furloughed. New
working processes, cleaning regimes, adjusted shift
patterns and restrictions on non-essential visits to
treatment works and other non-essential activity
were introduced, while those able to work from home
were supported to do so. We successfully ensured
the right personal protective equipment (PPE) and
workplace protections were in place and made the
most of technology and digital platforms to ensure
good lines of communication between teams.
In addition to working closely with our industry
peers, we supported colleagues in the emergency
services, NHS and local authorities on a variety of
initiatives to protect public safety and wellbeing.
One example was the donation of an incident
support vehicle to East Cornwall Primary Care
Network for use as a temporary consulting room.
Furthermore, at industry level, and in my capacity
as Chairman of British Water, it was encouraging
to see increased collaboration between the leading
water organisations to support the sector during the
pandemic with British Water, Energy & Utility Skills,
the Future Water Association, Waterwise, Water UK
and UK Water Industry Research all working
together in partnership.
The impact of COVID-19 has tested the Group’s
resilience and we are proud to have risen to
the challenge.
I would like to personally thank our employees for
their adaptability and devotion to getting the job
done under challenging circumstances.
At the same time, we send our deepest sympathies
and a message of support to all of those at Pennon
and beyond who have been affected personally by
this unprecedented situation.
Delivering for customers and communities
Focused on delivering for customers and
communities while dedicated to the principles of
strong financial control, sound administration and
good governance, South West Water has made
considerable progress throughout the K6 period
while remaining at the forefront of efficiency within
the sector.
The company achieved £297 million of total
expenditure (totex) outperformance by
2020, outperforming its regulatory contract
to achieve a cumulative sector-leading RoRE
(return on regulated equity) of 11.8%, delivering
outperformance in outcome delivery incentives
(ODIs) to secure a net reward every year.
Colliford Reservoir,
Cornwall
Resilient water resources
2019 was South West Water’s 23rd consecutive
year without water restrictions despite a relatively
dry start to the year and the exceptionally hot
and dry weather of 2018. Bournemouth Water’s
track record of no water restrictions was also
successfully maintained. South West Water’s
careful management of resources ensured
sufficient supplies throughout summer 2019.
Ahead of the winter, precautionary work was
undertaken to prepare a pumped storage scheme
for Roadford reservoir in mid-Devon. However, the
second half of the year was abnormally wet with
monthly rainfall between August 2019 and January
2020 more than 130% of the long-term average –
an event only seen in one in 25 years.
South West Water is currently well placed in terms of
its water resources position and we continue to work
closely with customers and other stakeholders to
encourage water efficiency. We are also engaged
with the South West regional strategic water
resources group.
In 2019/20 South West Water’s water resources
management plan was approved by the Department
for Environment, Food & Rural Affairs (Defra). The
plan sets out how the company intends to maintain
the balance between supply and demand for water
over the next 25 years.
Pennon Group plc Annual Report 2020
33
Strategic report – Group performance
Chief Executive
Officer’s review
continued
Isles of Scilly
In 2014, Defra launched a consultation
on the introduction of water and
sewerage legislation applying to
the Isles of Scilly. As the level of
investment required to improve the
services and infrastructure to meet
new standards would have been
well beyond what the islands’
small number of bill payers could
collectively afford, a water company
operating on a similar basis to UK
mainland regions was the
Government’s preferred option to
deliver future services.
South West Water assessed the
condition of the water and wastewater
infrastructure on the islands before
submitting a business plan for the
Isles of Scilly to Ofwat. Following
licence amendments the company
took over responsibility for serving the
five inhabited islands on 1 April 2020.
As part of South West Water’s
2020-25 business plan, a programme
of investment has been developed,
designed to ensure legislative
compliance, environmental benefits
and resilience improvements.
These will, in turn, support the local
economy and contribute to island life.
Residents have been contacted and
partnerships developed with the
Council of the Isles of Scilly, Duchy
of Cornwall and Tresco Estate to
support the roll-out of operations
across the Islands.
(1) South West Water region only.
34
Pennon Group plc Annual Report 2020
£140 million cumulative benefits have been
identified for WaterShare during 2015-20 –
the innovative mechanism introduced by
South West Water at the start of the period for
the sharing of outperformance between
customers and shareholders.
At an operational level, drinking water quality
remains near perfect in both the South West Water
and Bournemouth Water service areas. The careful
management of resources, particularly following the
unusually dry weather of 2018, ensured there were
no water restrictions placed on customers in 2019,
leakage levels were successfully kept in line with
target once again and South West Water
outperformed its target for minimising supply
interruptions. Contacts about the taste and
appearance of drinking water were reduced to their
lowest ever level(1) and overall customer satisfaction
remained high, reflecting substantial investment in
customer service improvements during the period.
On the wastewater side of the business, targeted
investment continues to be made in improving
South West Water’s performance within
wastewater treatment, the prevention of flooding
and pollution control. The latter continues to
require additional focus, and we were disappointed
to narrowly miss our target of zero serious
(Categories 1 & 2) pollution incidents by 2020,
due to a single Category 2 incident.
A revised pollutions strategy is now in place and
we are confident this will further reduce the risk
of any incident occurring.
The impact of COVID-19
has tested our resilience
and we are proud to have
risen to the challenge.
Strong foundations laid at Viridor
We are proud of the progress made at Viridor
in recent years and 2019/20 was no exception.
Robust operational and financial performance was
achieved across the various business divisions with
market conditions in residual waste and recycling
remaining favourable.
In addition to the ramp-up of the energy recovery
facilities (ERFs) at Glasgow, Beddington and
Dunbar, the commissioning of the £252 million
resource recovery centre in Avonmouth during
2020 marks a major milestone in Viridor’s growth
trajectory. A flagship site, Avonmouth will divert
about 320,000 tonnes of non-recyclable waste
away from landfill and is being complemented by
the adjacent construction of a new cutting-edge
£65 million plastic recycling plant (announced in
May 2019). Reflecting Pennon’s commitment to
working in ever-more sustainable ways, this use
of energy from non-recyclable waste to power
plastic recycling will effectively create a South
West recycling powerhouse and has established
a blueprint for additional sites of this type
going forward. Read more on page 49.
Having focused on core waste infrastructure
in recent years, the revaluation of Viridor and
proposed sale following the strategic review
recognises the strategic value that Pennon has
developed and nurtured in the waste business
over many years and accelerates the realisation
of that value for our shareholders.
I would like to take this opportunity to thank the
leadership team at Viridor for their professionalism
and dedication throughout the past year. As a
Group we have come a long way together and
I wish them every future success.
Launch of the New Deal
As the only water company to have achieved
fast-track status for two consecutive price reviews,
South West Water entered the K7 (2020-25) period
on 1 April 2020, having already moved forward with
a number of key initiatives in support of its New
Deal 2020-25 business plan.
The company will continue to invest significantly to
improve services, including the delivery of the largest
programme of environmental improvements in 15 years.
At the same time customer bills will be reduced –
the plan will see the average bill in 2025 being lower
than it was in 2010, and extra steps taken to
eliminate water poverty.
Furthermore, the plan – which was informed by
the company’s largest ever programme of customer
engagement – marks a shift from customer
engagement to customer empowerment.
Through WaterShare+ eligible customers are being
given the option of a tangible stake through equity
shares in Pennon, and the ability to hold South West
Water to account through a customer annual
general meeting and quarterly public meetings.
The New Deal is designed to redefine the
relationship between the water company and its
customers and was welcomed by the regulator,
Ofwat, as ‘setting a new standard’ in the industry.
For the 2020-25 period, specific comparative
service and environmental targets will be measured
consistently across the whole industry on an annual
basis and South West Water remains well-placed to
make further progress in key business areas.
Highlights of the plan include two new water
treatment works for the Bournemouth Water area,
targeted water quality improvements in the South
West, an ambitious leakage transformation project
(see page 46), accelerated investment to further
reduce the risk of pollution, and a range of
technological upgrades to improve monitoring and
response times across the company’s drinking
water and wastewater networks.
Sustainable future
Our focus on sustainability continues to underpin
the activities Pennon undertakes and the way in
which we undertake them. Following the launch
of the Group’s sustainability strategy in 2018/19
(see pages 20 and 21) we have deepened the
integration of sustainability into all areas of business
decision-making; from those taken within our core
operations and services, to our approach to
longer-term Group strategy and finance.
In every aspect of our business we remain
committed to conducting our activities in a
way which optimises business, societal and
environmental value. This includes nurturing and
developing our people as we focus on being a
high-quality employer and a great place to work
(see pages 38 to 41).
Outlook
In a changing world, with new challenges at local
and global level, we are confident in our ability to
adapt and develop for the benefit of customers
and shareholders alike.
The ongoing strategic review, the decisions taken
regarding the sale of Viridor, and the progress made
within the water side of the business during 2019/20
gives us a strong platform to move forwards with
our strategic priorities and the ambitious plans we
have set out in the New Deal business plan.
With that in mind, I would like to thank all Group
employees for their hard work over the past year
and, in particular, for their enduring resilience during
recent, testing times. From new apprentices to
experienced professionals across all business
functions, everyone plays a vital role in helping
deliver the high-quality, value-for-money services
our customers and stakeholders depend upon.
Chris Loughlin
Chief Executive Officer
Supporting customers
in vulnerable
circumstances
We remain committed to providing
support for customers in vulnerable
circumstances and, as part of the
New Deal business plan, we have
committed to reducing bills and
tackling water poverty.
In 2019/20 we continued to support
customers through a range of
industry-leading affordability
measures, including the WaterCare+
scheme, which assists those with
affordability or debt issues. More than
35,000 have now been supported
through one or more of the schemes
available and over 25,500 are on a
support tariff. Work also continues to
support customers through our water
efficiency campaigns and initiatives.
Recognising the potential economic
impacts of both COVID-19 and Brexit,
we continue to review and assess
the most appropriate ways in which
to provide extra support to those
who need it.
Pennon Group plc Annual Report 2020
35
Strategic report – Group performance
Key performance indicators
Annual(1)
Operational
Profit before tax (£m)
Return on regulated equity (RoRE) (%)
ODI net rewards (£m)
ERF availability (%)(3)
.
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
.
5
8
8
7
.
1
9
1
.
3
0
6
2
.
9
8
5
4
.
1
0
2
5
.
1
0
3
.
4
8
0
1
1
.
3
9
1
.
6
7
8
2
.
6
4
0
1
.
0
3
8
1
350
300
250
200
150
100
50
0
2015/16
2016/17
2017/18
2018/19
2019/20
Statutory (continuing/discontinued)
Underlying (continuing/discontinued)
15
12
9
6
3
0
7
.
1
1
.
6
2
1
1
.
1
1
6
.
1
1
1
.
2
1
8
.
1
1
5
8
0
9
>
2
9
1
9
0
9
6
.
3
1
.
4
9
.
1
7
.
1
0
.
2
2015/16
2016/17
2017/18
2018/19
2019/20
2015-20
2015/16
2016/17
2017/18
2018/19
2019/20
2015/16
2016/17
2017/18
2018/19
2019/20
Cumulative over K6
Annual
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
Our operations, Water and wastewater,
pages 42 to 46.
Alignment to strategy
1 3
For more information and discussion
of our performance during the year see
Our operations, Water and wastewater,
page 45.
Alignment to strategy
1 3
For more information and discussion of
our performance during the year see
Our operations, Waste management,
page 49.
Sustainable business
Customer satisfaction with overall service (%)
Employee engagement (%)(2)
GHG emissions (million tCO2e)(5)
9
8
5
9
9
8
6
7
6
9
1
9
6
9
6
9
3
9
0
7
2
9
0
9
*
1
9
*
0
8
*
5
8
*
1
7
100
80
60
40
20
0
80
60
40
20
0
.
0
9
6
.
6
0
7
.
0
8
6
.
0
5
6
.
0
2
7
.
0
7
6
.
0
7
6
.
0
8
6
.
0
8
6
.
0
4
6
.
4
7
7
.
3
8
6
1
.
8
6
.
8
6
6
2015/16
2016/17
2017/18
2018/19
2019/20
2016/17
2017/18
2018/19
2019/20
2016/17
2017/18
2018/19
2019/20
2015/16
2016/17
2017/18
2018/19
2019/20
Bournemouth Water
South West Water
Viridor
Pennon Water Services
South West Water
Viridor
Pennon Water Services
Pennon Group
Alignment to strategy
1 3
For more information and discussion of
our performance during the year see
Our operations, pages 42 to 47.
* Basis of measurement for Viridor
changed during the year. Pennon Water
Services based on Trust Pilot score.
Alignment to strategy
1 3
For more information and discussion of
our Group-wide employee survey see
Our people, page 38.
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 10, the Chief
Executive Officer’s review, page 32 and
Our people, page 40.
Alignment to strategy
1 3
For more information and discussion
of our performance during the year
see the Directors’ report, pages 116
to 119.
Health & safety (LTIFR)(4)
6
9
.
1
2
0
.
2
7
3
.
1
9
.
0
5
.
1
7
.
1
9
.
1
7
.
1
1
.
2
100
80
60
40
20
0
2.5
2.0
1.5
1.0
0.5
0
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
2
3
Our KPIs are aligned to our three strategic priorities.
For more information on our strategic priorities see pages 16 to 19.
(1) For further information on the relevance to Executive Directors’ remuneration
see pages 94 and 107 to 109.
(2)
In 2017/18 we introduced a Group-wide employee survey, which changed the
methodology for calculating employee engagement.
(3) Weighted by capacity. Includes joint ventures at 100%, excludes GRREC due to
(4) Lost time injury frequency rate (LTIFR) for employees and agency staff per
(5) Gross Scope 1 & Scope 2 emissions – million tonnes carbon dioxide equivalent
different technology.
200,000 hours worked.
(location-based).
Dividend per share (pence)
Return on capital employed (RoCE) (%)
Our strategic priorities
.
6
3
3
.
0
6
3
.
6
8
3
1
.
1
4
.
8
3
4
50
40
30
20
10
0
2
.
9
0
.
0
1
4
.
9
4
.
9
3
.
9
Leadership
Cost base efficiency
Sustainable growth
2015/16
2016/17
2017/18
2018/19
2019/20
2015/16
2016/17
2017/18
2018/19
2019/20
2015/16
2016/17
2017/18
2018/19
2019/20
Statutory (continuing/discontinued)
Underlying (continuing/discontinued)
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.
36
Pennon Group plc Annual Report 2020
Long-term(1)
Earnings per share (pence)
.
0
7
3
.
5
9
3
.
0
7
4
.
8
9
3
.
0
8
4
.
9
0
5
.
8
7
5
1
.
1
2
.
7
6
3
1
.
1
5
.
9
2
1
.
2
8
3
80
70
60
50
40
30
20
10
0
.
0
0
2
.
7
7
2
.
2
5
3
7
.
1
6
7
7
4
5
6
2
.
.
Return on regulated equity (RoRE) (%)
ODI net rewards (£m)
ERF availability (%)(3)
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
5
.
8
8
7
.
1
9
1
3
.
0
6
2
9
.
8
5
4
.
1
0
2
5
.
1
0
3
4
.
8
0
1
1
.
3
9
1
6
.
7
8
2
6
.
4
0
1
0
.
3
8
1
7
.
1
1
6
.
2
1
1
.
1
1
6
.
1
1
1
.
2
1
8
.
1
1
2015/16
2016/17
2017/18
2018/19
2019/20
Statutory (continuing/discontinued)
Underlying (continuing/discontinued)
Cumulative over K6
Annual
2015/16
2016/17
2017/18
2018/19
2019/20
2015-20
2015/16
2016/17
2017/18
2018/19
2019/20
2015/16
2016/17
2017/18
2018/19
2019/20
6
3
.
1
.
4
9
.
1
7
.
1
0
2
.
5
4
3
2
1
0
100
80
60
40
20
0
5
8
0
9
>
2
9
1
9
0
9
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
Our operations, Water and wastewater,
pages 42 to 46.
Alignment to strategy
1 3
For more information and discussion
of our performance during the year see
Our operations, Water and wastewater,
page 45.
Alignment to strategy
1 3
For more information and discussion of
our performance during the year see
Our operations, Waste management,
page 49.
Customer satisfaction with overall service (%)
Employee engagement (%)(2)
Health & safety (LTIFR)(4)
GHG emissions (million tCO2e)(5)
9
8
5
9
9
8
6
7
6
9
1
9
6
9
6
9
3
9
0
7
2
9
0
9
*
1
9
*
0
8
*
5
8
*
1
7
0
.
9
6
6
.
0
7
0
.
8
6
0
.
5
6
0
.
2
7
0
.
7
6
0
.
7
6
0
.
8
6
0
.
8
6
0
.
4
6
4
.
7
7
3
.
8
6
1
.
8
6
8
.
6
6
6
9
.
1
2
0
2
.
7
3
.
1
.
9
0
2.0
1.6
1.2
0.8
0.4
0.0
2015/16
2016/17
2017/18
2018/19
2019/20
2016/17
2017/18
2018/19
2019/20
2016/17
2017/18
2018/19
2019/20
Bournemouth Water
South West Water
Viridor
Pennon Water Services
South West Water
Viridor
Pennon Water Services
Pennon Group
Alignment to strategy
1 3
For more information and discussion of
our Group-wide employee survey see
Our people, page 38.
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 10, the Chief
Executive Officer’s review, page 32 and
Our people, page 40.
5
.
1
7
.
1
9
.
1
7
.
1
1
.
2
2.5
2.0
1.5
1.0
0.5
0
2015/16
2016/17
2017/18
2018/19
2019/20
Alignment to strategy
1 3
For more information and discussion
of our performance during the year
see the Directors’ report, pages 116
to 119.
Dividend per share (pence)
Return on capital employed (RoCE) (%)
Our strategic priorities
Annual(1)
Operational
Profit before tax (£m)
Sustainable business
350
300
250
200
150
100
50
0
100
80
60
40
20
0
80
70
60
50
40
30
20
10
0
Alignment to strategy
1 3
For more information and discussion of
our performance during the year see
Our operations, pages 42 to 47.
* Basis of measurement for Viridor
changed during the year. Pennon Water
Services based on Trust Pilot score.
Long-term(1)
Earnings per share (pence)
0
.
7
3
5
.
9
3
0
.
7
4
8
.
9
3
0
.
8
4
9
.
0
5
8
.
7
5
1
.
1
2
7
.
6
3
1
.
1
5
9
.
2
1
2
.
8
3
7
7
.
1
6
5
.
6
2
2
.
5
3
.
7
4
0
.
0
2
7
.
7
2
Statutory (continuing/discontinued)
Underlying (continuing/discontinued)
15
12
9
6
3
0
80
60
40
20
0
50
40
30
20
10
0
6
.
3
3
0
.
6
3
6
.
8
3
1
.
1
4
8
.
3
4
15
12
9
6
3
0
2
9
.
.
0
0
1
4
9
.
4
9
.
.
3
9
Leadership
Cost base efficiency
Sustainable growth
1
2
3
2015/16
2016/17
2017/18
2018/19
2019/20
2015/16
2016/17
2017/18
2018/19
2019/20
2015/16
2016/17
2017/18
2018/19
2019/20
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.
Our KPIs are aligned to our three strategic priorities.
For more information on our strategic priorities see pages 16 to 19.
(1) For further information on the relevance to Executive Directors’ remuneration
(2)
see pages 94 and 107 to 109.
In 2017/18 we introduced a Group-wide employee survey, which changed the
methodology for calculating employee engagement.
(3) Weighted by capacity. Includes joint ventures at 100%, excludes GRREC due to
different technology.
(4) Lost time injury frequency rate (LTIFR) for employees and agency staff per
200,000 hours worked.
(5) Gross Scope 1 & Scope 2 emissions – million tonnes carbon dioxide equivalent
(location-based).
Pennon Group plc Annual Report 2020
37
Strategic report – Group performance
Our people
Talented, empowered people working safely to deliver for
our customers and communities.
Becoming a great place to work
We are committed to engaging employees in our
strategy and the important role they play in
delivering it. We know companies with high trust
cultures enjoy better financial results.
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.
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.
This was the third year we asked employees how
it feels to work for Pennon using Great Places to
Work Best Workplace Survey™. We were pleased
to see our highest ever response rate of 83%, an
11% improvement on last year and an improved
Trust Index© score of 63%. This is significantly
higher than the national average of 53%. We also
maintained our strong engagement score of 68%.
These results show that we are well on the journey
of embedding the Group’s HR strategy and
demonstrate that we are continuing to make
progress in living our values and being recognised
as a UK Best Workplace™.
The 2019 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 wellbeing, as
well as work environment and processes.
We have made improvements on all the key focus
areas of last year, which were communicating our
strategy and direction, values and ethics and
reward, demonstrating that living by our values is
making an impact. For 2020/21, we have decided to
focus on: teamwork and collaboration; healthy
working environment; and line manager
communication and involvement.
The Group’s highest scoring categories for
2019 included diversity at 84% favourable, line
management at 75% favourable, and empowerment
and accountability at 73% favourable.
We also undertake ‘pulse surveys’ during the year
as an additional way to get employee feedback
and have used this method to get feedback on
health & safety, home working during COVID-19
and our consultation on modernising our
pension arrangements.
We have continued to develop and evolve our staff
forums across the Group to ensure employees are
represented and have opportunities to understand
and feed into discussions on matters that impact
them and the work they do.
Employee forums
The Viridor Employee Voice Forum is now well
established, with 50 representatives from each
area of the business. Representatives work with
the Viridor leadership regarding all aspects of the
business and attend both functional and national
Voice Forum events. This year, members were
invited to attend the Senior Leadership Forum in
November so that they were able to share with
colleagues what was being discussed at a senior
level. We invest in training of our representatives,
for example how to understand behaviours using
the DiSC (dominance, influence, steadiness and
compliance) method.
The South West Water Employee Engagement
Forum has been running for two years in its current
format and has become an established group of
employees who meet regularly to create a two-way
communication between senior managers of the
Group and employees. This forum also helps to
influence and support business changes, including
being the employee voice in the recent pension
consultations, and ensures that our employees
are front and centre for all that we do.
Our Speak Up whistleblowing policy continued to
operate throughout 2019/20, providing 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. Further information can be
found on page 83.
The Pennon Big Chat continued throughout
2019/20 increasing in frequency from four to six
updates in the year. It is now in its third year and
allows all employees across Pennon Group the
opportunity to put any question direct to the
Pennon Executive; this initiative has been well
received by employees. Discussions always start
with a focus on health & safety; other topics on the
Big Chat have included, progress on the Group’s
Strategic Review, how we are managing through
COVID-19 and sharing of the engagement results
and progress on actions.
38
Pennon Group plc Annual Report 2020
Diversity and equal opportunities
Changing the diversity landscape across an
organisation the size and scale of Pennon needs
awareness and action at all levels, and requires a
cultural shift as well as targeted activity. Building a
sustainable, agile and diverse workforce is a key
pillar of our HR strategy. We have taken steps to
make progress in this area which continues to be
led at Board level. Across Pennon, the workforce
comprises almost 5,000 employees with a gender
split of 77% male and 23% female, a 2% increase in
the proportion of female employees during the year.
Our permanent workforce is supported by around
1,200 temporary and agency employees throughout
the year.
We have reviewed the Group’s recruitment
practices and are now able to monitor diversity in
all Group job applications. The Group now also uses
a software gender decoder tool which allows us to
check all our job advertising for masculinity to
reduce the potential risk of alienating female
applicants. In addition, we have refreshed our equal
opportunities forms to be included in all onboarding
packs. The new version allows us to report on
sexual orientation, gender identity, ethnicity and
disability and to include in annual reporting.
South West Water is part of the Women in Water
network, supported by Water UK, and aims to
encourage women into the water industry, support
their development into more senior roles and ensure
that their industry voices are heard.
According to the latest Energy & Utility Skills
demographics, 5% of the sector identifies as BAME.
Pennon stands at 2.7%, which is similar to 2.8% last
year. This is a self-reported figure and is believed to
be under-reported.
Our gender pay gap
This is the third year where employers in Great
Britain with more than 250 staff have been
required by law to publish their gender pay gap on
their own website and on a government website.
The current national average gender pay gap is
17.3% for all employees.
The aggregated Pennon Group gender pay gap for
2019 is 4.1%, which is an increase of 1.4% from 2018.
Viridor has a gender pay gap of 7% and at South
West Water it is 5%. The main driver for the Group
increase is the move to standardise pay review
cycles across the Group to 1 April each year. This
change largely impacted Viridor, which has a higher
proportion of male workers, therefore moving their
pay review date from 1 June and affecting
calculations for this year.
In Pennon, the number of female employees within
the upper-middle quartile has grown significantly
from 215 to 262 and in the upper quartile from 191
to 375, indicating that the pipeline of female talent
is growing.
According to Energy & Utility Skills, across the water
industry workforce 20% are identified as female,
which places South West Water, at 29%, slightly
ahead of the sector. The waste and resource
management workforce is 15% female and Viridor,
at 18.7%, is also ahead of the sector.
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 the Nomination
Committee report on page 90 for further details.
Training and development
We have a strong commitment to investing in the
development of our employees and want to build
and recognise talent across the Group. Training and
development is available for employees at all levels
within the organisation. Our aim is to increase
productivity, job satisfaction and safety, and
to equip the next generation of leaders and
employees with appropriate knowledge, skills
and the competencies they need to thrive.
We continue to embrace apprenticeships and since
2017 we have started 575 new apprenticeships
across the Group. This increased by 191 during the
past year, including 39 existing Viridor employees
who began a team leader apprenticeship to improve
their management and leadership capabilities. Find
out more online at www.southwestwater.co.uk/
careers/apprenticeships.
Our current graduate programme consists of 58
graduates across four cohorts with our next intake
scheduled for September. To date, nine of those
graduates have been offered permanent roles as
they complete their structured programme of
development and experience across the Group.
Gender diversity as at 31 March
Employees
Senior management
100
80
60
40
20
0
%
1
.
0
8
%
8
8
7
.
%
9
6
7
.
%
9
9
1
.
9
5
0
,
1
5
5
2
4
,
%
2
.
1
2
7
6
1
,
1
%
1
.
3
2
8
3
3
4
,
7
4
1
,
1
9
1
8
3
,
2017/18
2018/19
2019/20
100
80
60
40
20
0
%
3
7
7
.
%
9
3
7
.
%
4
9
7
.
%
7
2
2
.
%
1
.
6
2
%
6
0
2
.
5
2
5
8
2017/18
6
3
2
0
1
2018/19
7
2
4
0
1
2019/20
Our people strategy
supports our
sustainability goals
We are part of the 30% Club
mentoring programme, which is a
global campaign by CEOs and chairs
to actively increase gender diversity
at board and senior levels within
organisations. Our participation in
the 30% Club has increased during
2019/20 and three of our senior
leaders are now actively mentoring
future women leaders. We also have
three mentees who joined the
programme in 2019. The plan is to
expand this to 20 members in 2020,
demonstrating our commitment to
investment in future female leaders.
Sustainability focus area
See sustainability
strategy on page 20.
Board
100
80
60
40
20
0
%
7
6
6
.
%
7
6
6
.
%
3
3
3
.
%
3
3
3
.
%
1
.
7
5
%
9
2
4
.
2
4
2
4
3
4
2017/18
2018/19
2019/20
Women
Men
Women
Men
Women
Men
Pennon Group plc Annual Report 2020
39
Strategic report – Group performance
Our people
continued
Community
Pennon has a significant community
and educational programme across
the regions where we operate. Viridor
has 11 educational centres which
welcomed 7,283 visitors last year, in
addition to delivering 186 outreach
events, involving 44,841 people in our
communities. South West Water has
seven learning and education centres.
Last year, our multi award-winning
science, technology, engineering
and mathematics (STEM) projects
included mentoring 60 students
and hosting 25 work experience
placements.
We are a leading sponsor of Go4Set
across Scotland enabling 210 student
teams to tackle 10-week STEM
projects using business management
techniques. We also continue to
collaborate with seven local
educational establishments to inspire
young people through our long-term
STEM projects.
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..
Sustainability focus area
See sustainability
strategy on page 20.
40
Pennon Group plc Annual Report 2020
Our MBA apprenticeship programme was first
launched in 2017 in partnership with Cranfield
University, with two small cohorts of delegates.
In 2018, we extended the MBA apprenticeship
nationally across the business in partnership with
Exeter University. The programme has been
designed to focus on our core business functions
and situational analysis of the organisation. With a
100% success rate, the first cohort with Cranfield
University have now achieved their MBA and
passed end-point assessment with a merit or above.
Within our second cohort we anticipate a further
100% success rate. Our partnership with Exeter
University continues to grow with 14 employees
undertaking their MBA and a further four being
nominated for our next intake.
Our Group-wide turnover rate in 2019/20 was
18.05%. While this is a small increase on last year,
it remains at a healthy level for the Group,
enabling us to attract new talent during the year.
Responsible employer
We continued to live our values and demonstrate
we are a responsible employer during the year.
Pennon has maintained its membership of 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 continue to be a signatory of the Social Mobility
Pledge, the cross-party campaign to improve social
mobility in the UK established by the 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.
Our head office and customer call centre are
based in Exeter, providing jobs and investment
to the local community.
Human rights
We are fully supportive of the principles set out
in the UN Declaration of Human Rights and the
Group ethics policy outlines the high standards
of employment practice with which everyone in
Pennon Group is expected to comply. The
Group also supports the International Labour
Organization’s core conventions for the protection
and safety of employees wherever they may work
throughout the Group. These standards are also
embedded in our sustainable supply chain and
documented in our procurement policy and code
of conduct for supply chain partners.
Health & safety (H&S)
The Group’s flagship health & safety programme,
HomeSafe, was the focus of much attention and
roll-out in 2019/20, with the substantial completion
in Viridor and South West Water, and the extension
to Pennon shared services at the start of 2020.
As well as face-to-face training delivery, which
has now reached over 3,300 staff, a further three
HomeSafe e-learning packages were deployed
across the Group , the most recent of which was
targeted at mental wellbeing. This flexible method
of online learning will continue into 2020 with the
development of a further module focused on
security and resilience.
Following the introduction of the HomeSafe
2025 strategy, which was signed off in 2018, a
comprehensive range of activities have been
delivered and progressed, including: upgraded
supplier H&S assurance; mental wellbeing pilots
in South West Water and Viridor; a Group-wide
substance misuse policy; and the procurement
of an online incident investigation and root cause
analysis system.
The introduction of our new incident management
system (PIMS) in April 2019 has delivered improved
reporting capabilities and data capture, allowing
trend analysis, severity-based reporting and a
strengthened incident investigation and review
process. All lost time injuries and high potential
incidents are subject to a higher level of
investigation, with the latter subject to independent
investigation and formal incident review panel. This
is designed to establish accountability, causation,
action and ultimately drive learning across our
business operations
Significantly, Viridor was certified to ISO 45001:2018
in July 2019, and South West Water made
substantial progress towards certification to the
same standard, which is expected by the end of
2020. These improvements, coupled with
enhancements to H&S new starter induction, new
Group standards, and improvements to our health
surveillance arrangements, are putting us firmly on
track to achieve our ambition of 0.50 lost time injury
frequency rate(1) (LTIFR) by 2025.
LTIFR remains the Group’s primary measure of
injury performance and is subject to year-on-year
target setting. In this review period, the Group
achieved an LTIFR of 0.90 against a target of 1.09,
a reduction of 34% when compared to the previous
year. To achieve a broader balance of H&S metrics
across the Group, we introduced further key
performance indicators focused on occupational
ill-health, scores from our employee engagement
survey, safety visit impact assessments, and safety
observations raised and closed. Baseline results
from these metrics will be used to set targets in
the forthcoming period.
We will continue to pursue our HomeSafe 2025
strategic themes and activities this year, which will
realise further progress in areas including: task risk
assessment; supervisor training and competence;
occupational monitoring; and crisis management.
Measuring our 2025 strategy effectiveness
The Group continues to measure progress carefully
and Pennon’s Sustainability Committee monitors
the five key performance indicators set in March
2019. These include the core H&S 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.
Resource efficiency
In November 2019, Group IT needed to attract
and appoint a wide range of specialist IT staff
as a result of the new IR35 legislation. We
promoted our brands through a variety of
online media and encouraged applications from
candidates who needed flexible working hours
or location to attract the widest possible pool.
Candidates highly rated our recruitment
process – 75% of responses rated their
experience as very good or excellent.
We used an innovative platform to digitally
screen the 1,100 applications we received.
The resourcing project, led by Group
Recruitment, was successful with hires for the
majority of positions. All hires were directly
sourced, which gave us the opportunity to
increase our female representation in Group
IT and also to bring in our own employees to
replace contractors, with the aim of securing
a more sustainable, long-term resource.
(1) 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.
Non-financial information statement
The following table summarises the information required by section 414CB Companies Act 2006, and/or indicates
where this information can be found within the annual report. Due diligence is carried out on all of our suppliers,
and all are required to adhere to our code of conduct for supply chain partners. As such, equivalent standards
are expected from our suppliers as we expect from our employees in respect of each of the areas set out below.
Environmental
matters
Employees
Social matters
Respect for
human rights
Description of policies
Our social and environmental policy seeks to ensure that
we pursue activities that conserve, protect and enhance
the natural environment.
Environmental compliance is monitored as part of the
regulatory framework within which the business operates.
We have a wide range of employment policies that are
designed to protect and support our workforce. The key
features of these policies are disclosed on page 116 and as
follows:
• Health, safety and wellbeing (page 40)
• Diversity, respect and inclusion (pages 38 and 91)
• Code of Conduct (page 83)
Our social and environmental policy requires us to
undertake our activities in a way that minimises potential
adverse effects on society and has a positive impact on
the local economy.
Our community relations and investment policy enables
strong and clear governance for making positive
community investments which create value and benefit
both for the community and the businesses.
Pennon’s Code of Conduct (described on page 83)
confirms our respect for human rights throughout our
operations and our anti-slavery & human trafficking
policy requires the implementation and enforcement
of systems and controls to ensure modern slavery is
not taking place anywhere within our own business
or in our supply chain.
Anti-corruption
and anti-bribery
A description of our policy on anti-bribery and
anti-corruption (including due diligence and
enforcement procedures) is provided on page 83).
Policy outcomes
The policy underpins the
environmental improvement
programmes set out on
page 20.
The policies seek to achieve
the highest workplace
standards, as explained on
page 20 and an engaged
workforce, as reported on
page 38.
Principal risks and
risk management
Environmental non-compliance
may lead to non-delivery of
regulatory outcomes and
performance commitments –
see page 66.
Risks relating to health & safety
and employees, and their
mitigations, are set out on pages
64 and 66.
KPIs
See pages 21 and 37.
See pages 21 and 36 to 37.
The policies support the social
capital improvement
programmes set out on page
20 and the activities reported
on page 40.
A number of our principal risks
would impact our communities if
they occurred, for example:
business interruption, poor
operating performance and cyber
risks. See pages 65 to 67 for
further information.
See pages 21 and 36.
We will not tolerate human
rights abuse or modern slavery
in any form and have
developed processes and
procedures to manage the risk
of potential non-compliance
(see page 116).
The policy’s outcomes are
explained on page 83).
We explain the risks relating to
non-compliance with laws and
regulations and their mitigations
on page 63.
We have a zero tolerance
approach across the
Group and within our
supply chains.
We explain the risks relating to
non-compliance with laws and
regulations and their mitigations
on page 63.
We have a zero tolerance
approach to bribery
and corruption.
Pennon Group plc Annual Report 2020
41
Strategic report – Group performance
Our operations
Water and wastewater
As we reach the end of the K6 (2015-20) period South
West Water remains well positioned to forge ahead
with its ambitious New Deal business plan for the
next five-year period having once again made good
progress across all business areas during 2019/20.
Wistlandpound
Upper Tamar
Wimbleball
Roadford
Meldon
Crowdy
Stannon
Fernworthy
Kennick,
Tottiford &
Trenchford
Colliford
Siblyback
Venford
Park
Burrator
Avon
Stithians
College
Drift
Argal
Isles of Scilly
Reservoir
Key water mains
Longham Lakes
Reservoir
Key water mains
42
Pennon Group plc Annual Report 2020
Highlights of the year
2.2
million total
population served
23
raw water reservoirs
650
wastewater
treatment works
17,515
km wastewater
mains network
18,370
km of drinking water
mains network
1,501
employees
34
drinking water
treatment works
151
bathing waters
and 24 shellfish waters
Excellence in drinking water
On the drinking water side of the business South
West Water continued to deliver outstanding quality
tap water in both service areas, achieving 99.98%
and 99.99% in the South West and Bournemouth
regions respectively.
Careful management of resources, particularly
following the unusually dry weather of 2018,
ensured there were no water restrictions placed
on customers in 2019, leakage levels were
successfully kept in line with target and the
company outperformed its target for minimising
supply interruptions.
Furthermore, in the South West Water area,
contacts about the taste and appearance of
drinking water were reduced to their lowest
ever level.
Throughout the 2015-20 period South West Water
has delivered major investment in our drinking
water assets and networks, exploiting the use
of technology and innovation in areas such as
network modelling, to improve the efficiency and
sustainability of our operations.
This included the start of a c.£10 million
investment in new granular activated carbon (GAC)
disinfection treatment processes at our College
water treatment works. We also carried out
extensive refurbishment work on our drinking
water mains networks.
In 2019/20, the flagship Mayflower drinking
water treatment works in Plymouth also went into
commissioning and is due to enter operations in
summer 2020. The first of its kind in the UK, the
Mayflower is now undergoing rigorous performance
testing and will provide the blueprint for future
treatment facilities in the Bournemouth Water area.
Meeting customers’ needs
and expectations
South West Water’s strategy is designed to prevent
issues and problems arising, thereby avoiding the
need for customers to contact us. However, when a
customer does need to make contact, every effort is
made to resolve the matter as quickly and as
professionally as possible.
In recent years South West Water has radically
improved the level of service its customers receive.
In addition to investing in team development,
training and internal systems the company
has taken a proactive approach to customer
communications and made use of digital platforms,
data analysis and ‘co-creation’ to improve the
customer experience.
Having already surpassed its 2020 target for
customer service, as measured by the service
incentive mechanism (SIM), South West Water
continued to improve its service offering in 2019/20.
For the new regulatory period, a new customer
experience metric (CMex) has been introduced, and
we have been focused on these changes in our
delivery plans this year.
This included improving the website to increase
self-service options; making digital actions easier
through clearer online messages and improved
navigation; and increasing webchat to provide
customers with answers quickly and increase first
time resolution.
Pollutions (Categories 1-4)(1)
4
6
2
8
5
2
2
6
2
4
3
2
7
9
2
400
320
240
160
80
0
2015
2016
2017
2018
2019
South West Water
Customer satisfaction with overall service (%)
5
9
1
9
3
9
0
9
0
9
100
80
60
40
20
0
2015/16
2016/17
2017/18
2018/19
2019/20
South West Water
Delivering services which reflect the priorities
that matter most to our customers has resulted
in complaints to South West Water reducing by
16.7% this year, that is 56.5% since 2015/16.
Bournemouth Water complaints have also reduced
by 66.7% in this time.
Providing value for money services remains central
to all of South West Water’s business activities and
in cases in which customers struggle to pay their
bills a range of additional support measures are
available. To date, >35,000 customers have received
support from one of our support schemes including
WaterCare+ which assists those with affordability or
debt issues, and >25,500 customers are currently on
a support tariff.
Customer satisfaction with overall service remains
high. In 2019/20 South West Water achieved its
2020 committed performance target of customer
satisfaction at 90% and there was further
improvement in the percentage of customer
contacts resolved first time across both drinking
water and wastewater operations.
Furthermore, during the COVID-19 pandemic South
West Water has successfully maintained the vast
majority of its services, having taken swift and
responsive action to ensure critical operations and
essential services, particularly for vulnerable
customers, would be unaffected.
Investment in wastewater improvements
During 2015-20, South West Water set itself
ambitious targets to improve wastewater
services, reduce the risk of pollution and prevent
sewer flooding.
Despite having maintained our best-ever results
for wastewater treatment and reduced internal
sewer floodings by 12% over K6, South West Water
narrowly missed its 2020 targets in each of these
performance areas.
While this is disappointing, targeted action plans are
in place in order to build on the significant progress
made up to this point.
Similarly, following a concerted effort to reduce the
risk of pollution through a range of initiatives and
investments, we have seen a year-on-year reduction
in the number of serious (Categories 1 & 2)
incidents since 2015.
Our target of zero by 2020 was missed due to a
single Category 2 incident in 2019.
(1) Category 1-4 wastewater pollutions.
Pennon Group plc Annual Report 2020
43
Strategic report – Group performance
Our operations
Water and wastewater
continued
Alternative water
supplies
Recognising the vital importance
of ensuring the reliability of
customers’ drinking water supplies,
South West Water has invested in the
recruitment of a dedicated alternative
water supplies team, tasked with
responding quickly and effectively
to any network issues.
A key component of the company’s
strategy to tackle supply interruptions
during 2020-25, the 18-strong team
is being supported with a significant
investment in new equipment
and technology.
This includes state-of-the-art
response vehicles with pumping
capabilities and the capacity to be
plumbed into the mains network in
order to maintain supplies during
mains bursts or when planned work
is being undertaken.
The company has also invested in its
ability to carry out large scale water
deliveries, with two new lorry units
capable of carrying bulk supplies of
bottled water or portable water tanks.
The investment in this dedicated
resource means South West Water will
be better able to deliver large volumes
of water to areas at risk of supply
interruption. It also ensures that the
impact of supply interruptions on
customers can be minimised even
during the most challenging of
circumstances.
44
Pennon Group plc Annual Report 2020
Last years text
With respect to the less serious pollution incidents
(Categories 3 & 4) we recognise that this is a
challenging area for South West Water and we are
fully committed to tackling these issues during the
2020-25 period.
As such we have implemented an accelerated
pollution plan. This includes:
• The implementation of a dedicated pollutions
task force
• Significant increases in resources for sewer
cleansing and pumping station inspection/
maintenance
• Strengthening our incident response capability.
Furthermore, we are investing in improved root
cause analysis, developing asset specific plans for
treatment works, networks, and pumping stations,
enhancing our customer campaigns to help reduce
blockages and driving a culture change within
the organisation.
In May 2019 South West Water was fined £44,000
plus costs for a 2017 pollution offence caused by a
blocked sewer at South Sands, Salcombe. The
company has invested £2.9 million since 2013 to
address saline and sand ingress in the Salcombe
area, to minimise the risk of this type of incident.
On 1 April 2019, the Environment Agency accepted
an Enforcement Undertaking from South West
Water to make a payment of £385,000 to the
Westcountry Rivers Trust in relation to a pollution
incident in Widewell Woods, Plymouth in 2016.
Health & safety
Our success as a company relies on the health,
safety and wellbeing of our employees. Following
the launch of the long-term HomeSafe strategy
across the Pennon Group in September 2018 we
have been implementing a range of measures and
initiatives to protect our teams and support their
physical and mental health. HomeSafe has been
given greater visibility across our operations and
engagement with the training programme has been
high.
In 2019/20, there were 11 RIDDOR incidents in the
South West Water area and zero RIDDOR incidents
in the Bournemouth Water area.
The primary causes of such incidents in 2019/20
were slips, trips and falls and manual handling
issues. Management actions are ongoing to
improve performance.
A core aim of HomeSafe is to improve our key
safety measure known as LTIFR (lost time injury
frequency rate) from the 1.5 recorded for 2018/19 to
0.50 by 2025. This would place South West Water in
the top quartile of the industry.
Following the implementation of the Group’s
HomeSafe programme the LTIFR across South
West Water reduced to 1.27 in 2019/20 and we are
therefore on track to reduce this to 0.50 by 2025, as
well as reducing the number of RIDDOR incidents.
Protecting the environment
The major investment South West Water has
made in measures to help protect bathing and
river water quality continues to support the region’s
high standards in each of these areas and the
company continues to work closely with partner
organisations and landowners to manage water and
wastewater in a more sustainable and holistic way.
Bathing water quality results for Devon and
Cornwall were once again extremely high in 2019/20
which saw the largest proportion (82.8%) of bathing
waters meeting the ‘excellent’ criteria since this
more stringent standard came into effect in 2015.
All but two met the ‘sufficient’ standard and neither
of these failures were related to the performance of
South West Water’s assets.
Other environmental work during 2019/20 included
the completion of South West Water’s 2015-20
programme of river water quality upgrades and the
ongoing expansion of the company’s award-winning
catchment management schemes – Upstream
Thinking and Downstream Thinking.
Through the former, South West Water has worked
to improve the water quality at 1,604 farms located
upstream of water reservoirs and river abstractions.
The company has also restored 10,655 acres,
(4,312 hectares) of moorland, culm grassland
and other semi-natural habitats in this period.
This benefits raw water quality and biodiversity
while reducing flood risk.
Environmental programme 2020-25
As part of its 2020-25 business plan, South West
Water is launching its largest environmental
programme in 15 years, recognising that a healthy
environment is vital for the long-term sustainability of
the services we provide to customers. This includes
targeting the following:
• Zero serious pollutions
• Lowest number of minor pollutions in
the industry
• Industry-leading wastewater compliance
• Improving and maintaining the number of
high-quality bathing and shellfish waters
• Further 15% reduction in leakage levels with
no overall incremental expenditure increase
or impact on customer bills (see page 46)
• Protecting our river systems and expanding our
industry-leading catchment-based programmes
• The delivery of long-term drainage and
wastewater management plans.
Sector-leading outperformance
In 2019/20, South West Water once again delivered
sector-leading financial performance maintaining
a cumulative RoRE of 11.8% since the start of K6.
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 2019/20, we continued to deliver
cost efficiencies and delivered £297 million of
savings over K6.
ODI rewards
Operational performance resulted in a net ODI
reward of £2.0 million (£13.3 million cumulatively
over K6), reflecting an annual equivalent RoRE
outperformance of 0.3%.
Wholesale services
Since the opening of the non-household retail
market in April 2017, South West Water has
successfully engaged with 21 different retailers.
Our wholesale service desk continues to
operate effectively. During the COVID-19 pandemic
we took proactive steps to ensure close lines of
communication were kept with retailers. All were
contacted individually to discuss how operations
would be changing and to understand their needs
during the period, including their processes for
identifying vacant premises due to the pandemic.
Site visits were temporarily deferred and we were
involved in discussions with Water UK regarding
the guidance being provided to businesses
regarding return to work.
(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).
Cumulative K6 RoRE
2.9%
Financing
outperformance
0.3%
ODI
outperformance
2.6%
Totex
outperformance
Bathing water compliance(2) (%)
6
.
8
9
1
.
1
8
.
9
7
9
.
7
8
9
5
.
5
7
1
.
8
7
.
7
8
9
8
.
2
8
11.8%
Total
6.0%
Base
100
80
60
40
20
0
2016
2017
2018
2019
Excellent
Sufficient
Pennon Group plc Annual Report 2020
45
Strategic report – Group performance
Our operations
Water and wastewater
continued
Leakage transformation
project
In 2019/20 South West Water once
again met its target to maintain
leakage levels at a maximum of
84 megalitres per day. Performance
commitment levels in the
Bournemouth area were also met.
Recognising that leakage is a high
priority for customers, South West
Water has undertaken a leakage
transformation programme in
readiness for targeting a 15%
reduction in leakage levels across our
South West Water and Bournemouth
Water regions by 2025.
The greater deployment of ‘lift and
shift’ acoustic loggers and fixed
network sensors across our network
is improving real time visibility, the
targeting of leak detection activity
and the productivity of leakage
detection teams.
Alongside pressure management of
the network, the enhancements made
during 2019/20 provide a strong
platform to deliver sustained levels of
leak reductions over the longer term.
South West Water also continues to
actively collaborate with other water
companies to ensure best practice is
shared for the benefit of all customers.
Leakage megalitres per day
Drinking water quality mean zonal compliance (%)
100
80
60
40
20
0
4
8
2
8
3
8
4
8
4
8
0
2
9
1
9
1
8
1
8
1
100.00
99.96
99.92
99.88
99.84
99.80
.
0
0
0
0
1
.
7
9
9
9
.
8
9
9
9
6
9
9
9
.
.
8
9
9
9
6
9
9
9
.
.
0
0
0
0
1
9
9
9
9
.
9
9
9
9
.
.
8
9
9
9
2015
2016
2017
2018
2019
2016
2017
2018
2019
2020
Bournemouth Water
South West Water
Bournemouth Water
South West Water
46
Pennon Group plc Annual Report 2020
Our community
As well as providing essential water services,
South West Water supports the area’s economic
sustainability, supporting the employment of some
5,300 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.
Sponsorship and campaigns
As part of our 2015-20 business plan South
West Water is committed to spending a minimum
of £80,000 on community sponsorship and
charitable donations.
In 2019/20 the company provided c.£200,000 worth
of support for local charities and organisations.
South West Water’s strategy is to link our
sponsorship and charity support to initiatives which
have clear links with our core business activities,
such as protecting the environment, biodiversity
and health and wellbeing.
Over the past year this included sponsorships for:
• South West Coast Path
• Devon Wildlife Trust
• Cornwall Wildlife Trust
• Surf Life Saving GB
• Beach Schools South West
• Environment Plymouth
• Devon Youth Games Trust.
In addition to our ongoing support for WaterAid –
the water industry charity – we also provided
£46,000 of charitable donations, including to
the following:
• Cornwall Air Ambulance Trust
• Devon Air Ambulance Trust
• Age UK Devon
• Age UK Cornwall & The Isles of Scilly
• The Devon & Cornwall Food Association (DCFA)
• RNLI.
Furthermore, South West Water’s wastewater team
continued to fund the BeachCare programme with
Keep Britain Tidy, which organises and coordinates
voluntary, community-based beach cleans across
the South West peninsula.
Support for education
South West Water’s community team directly
engaged with more than 2,300 primary
schoolchildren about the water cycle in classrooms
and school assemblies, including through Scouts
and Guides groups.
Through Bournemouth Water’s partnership with
Dorset-based educational charity Life Education
Wessex, curriculum-based Waterwise presentations
and materials on the water cycle and water
efficiency were delivered to 48 schools in the
Bournemouth Water area, reaching more than
4,500 pupils.
Community access, conservation and recreation
Our reservoirs are managed for environmental
improvements and for the benefit of our customers
and communities through our partnership with
South West Lakes Trust.
During the year we welcomed more than two million
people to our recreational estate across both
service areas. Around 72,000 people took part in
organised recreation activities including sailing,
windsurfing and kayaking. A further 5,000
participants have learnt new skills at the sites
through the Trust’s heritage and environmental
education programme.
South West Water’s dedicated community team
also attended 34 high-footfall events including the
Devon County and Royal Cornwall Shows, various
regattas, food and drink and other community
festivals and events.
We also continue to take part in the Heritage Open
Days initiative. In 2019 we opened eight operational
water and wastewater sites to the public, hosting
behind-the-scenes tours for a total of around
400 people.
Think Sink!
Throughout 2019/20 South West
Water continued the region-wide
roll-out of its Think Sink! campaign
reminding businesses and food
service establishments of their
responsibilities regarding the
proper disposal of fat, oil, grease
and food waste.
Every year the company tackles
around 6,500 blocked sewers across
the region, with many caused by
excess fat, cooking oil and grease
are poured down sinks.
In extreme cases, fat and oil can
combine with other material to
create fatbergs, as seen in Sidmouth
during 2018/19.
Alongside the consumer-focused
Love Your Loo initiative, Think Sink!
will continue to form part of South
West Water’s pollution reduction
strategy for 2020-25.
Pennon Group plc Annual Report 2020
47
100%
of new tendered
contracts renewed
£51m
value of national customer
contracts served
Source for Business
Source for Business(1) is the national
trading brand of Pennon Water Services
covering both England and Scotland.
www.sourceforbusiness.co.uk
Strategic report – Group performance
Our operations
Water retail services
Pennon Water Services continues to deliver
excellent service to its customers and against its
strategic objectives, doubling prior year earnings
before interest, tax, depreciation and amortisation
through strong growth in its strategic sectors and
efficiencies delivered by investments in IT, process
and its people.
Pennon Water Services service performance is part
of a customer-centric approach which runs as a
thread throughout the year and underpins its
competitive advantage and reputation with key
market influencers such as brokers interacting on
behalf of clients. Across its brands Pennon Water
Services customers rate it very highly with a score
of 9.1 out of 10 through the independent review site
Trustpilot, an increase on an already strong
customer assessment of 8.5 out of 10 in the prior
financial year. This trend continues into its customer
complaint performance with a 41% drop in total
written complaints and an upper quartile position in
the market. Furthermore, improvements in its
market compliance scores demonstrate its focus
upon regulatory standards and measures with a top
three market performance score for the full financial
year among companies with more than 5,000
supply points.
The business has also shown strong resilience
amid continuing market challenges affecting
retailers, including poor market data, low customer
awareness and low margins which have rendered
large parts of the business switching market inert.
Focused on health & safety
Safety remains a top priority with Pennon Water
Services demonstrating this along with its resilience
and flexibility in March by its ability to quickly isolate
100% of its staff during the global outbreak of
COVID-19. Mental health support was provided to
employees while working in isolation to maintain the
strong sense of team and cohesive culture which
pervades the business. All employees were able to
function fully within a home environment with its IT
infrastructure, including customer call handling,
operable remotely. This enabled Pennon Water
Services to provide support and advice to its
customers in a difficult time personally and
professionally while protecting its employees,
their families and the communities it serves.
Securing long-term partnerships
Pennon Water Services strategy of acquiring and
retaining long-term partnerships in key sectors
continues to succeed. 100% of all tendered
customer contracts signed since the market opened
on 1 April 2017 have been renewed. By tendering,
customers have demonstrated a desire to switch
supplier to find the best market value and service
and in working with Pennon Water Services they
have opted to stay with the business to take
advantage of its customer-centric approach and
advice. This is, in part, demonstrated by the renewal
rate but also by the strong growth in the value of
non-retail services delivered by Pennon Water
Services in the past 12 months. Its customers have
benefited from services such as leakage detection
and repair, infrastructure and installation projects,
alternative water sources and consultation services.
A sustainable approach
Community and sustainability remain important to
Pennon Water Services. It continues to help global
communities build and thrive by championing
access to clean drinking water through the charity
WaterAid while locally supporting beach cleans and
helping businesses to use water more efficiently.
Installation of boreholes and projects designed to
allow businesses to recycle water back into their
business process help to reduce network demand
and support a more resilient water future for us
all. At the heart of its support for business and
communities are its people and, through work
with Great Places to Work, Pennon Water Services
has measured improvements to its employee
engagement scores which also compare favourably
to top performing companies in the UK.
Outlook
Further consolidation of the UK retail market
and difficult trading conditions, exacerbated
by COVID-19, continue to create a challenging
environment which will flow into financial year
2021. While the full impact of COVID-19 on the
non-household sector as a whole is yet to be fully
understood, Pennon Water Services remains well
placed to deliver against its long-term strategic
objectives, growing organically and able to take
advantage of opportunities to further consolidate
the market for economies of scale should they arise.
48
Pennon Group plc Annual Report 2020
(1) Pennon Water Services serves national
customers through the Source for Business
brand, additionally it operates regionally as
South West Water Business, South Staffs
Water Business, Bournemouth Water
Business and Cambridge Water Business.
Our operations
Waste management
Viridor continued to perform strongly during 2019/20,
with robust operational and financial performance across
its business divisions. With its focus on operational
excellence and ongoing efficiency Viridor has delivered
continued progress in targeted growth areas. As it
moves under new ownership, it is at the forefront of
the resource sector in the UK, transforming waste into
energy, high-quality recyclates and raw materials.
Health & Safety
Viridor continues to focus on health, safety and
wellbeing, and during the year substantially
completed the roll-out of the first phase of
HomeSafe, resulting in over 2,700 employees
trained since introducing HomeSafe in 2018.
This, coupled with the development of a new
management system, certification to ISO
45001:2018 and the completion of our mental
wellbeing pilot, has contributed to a 43% reduction
in our LTIFR compared with 2018/19.
Optimising ERF performance
There was strong growth in energy recovery
with operational ramp-up at Glasgow, Beddington
and Dunbar ERFs. Availability across the ERF
operational portfolio (including joint ventures)
was at 90%(1) for the fourth consecutive year.
The latest ERF at Avonmouth is now in
commissioning and on track for operational ramp
up in 2020/21.
Viridor announced its proposal to build a new ERF
at Ford, West Sussex, in partnership with Grundon
Waste Management, our joint venture partners at
Lakeside ERF. The new facility will be built adjacent
to Viridor’s existing MRF.
As the UK market fundamentals for ERFs provide
a solid foundation for growth, Viridor continues to
progress a pipeline of options for two further ERFs.
Momentum in recycling to support
a circular economy
The UK Government’s Resources and Waste
Strategy for England continues to provide positive
momentum for the recycling sector, particularly in
plastics, as producers focus on including more
recycled content in their products.
Construction is progressing at the Avonmouth
plastics processing facility.
Our high-quality recycled plastic offers
manufacturers alternatives to sourcing virgin stock
and has resulted in significant contracts with major
manufacturers including Unilever, Proctor & Gamble
and Klockner Pentaplast. Viridor continues to
progress additional plastics processing facilities at
its Ardley and Dunbar ERFs and has run stakeholder
engagement events ahead of formal planning
applications. This investment in UK plastics
processing will help reduce Viridor’s exposure to
international markets and help develop a more
sustainable waste value chain.
Our emphasis on producing high-quality recyclates
contributed to an increase in recycling revenue per
tonne to £118 from £115 per tonne in the prior year.
We have incurred higher costs in producing the
right quality recyclate. Global paper markets
continued to be challenging, as the markets for
high-grade export paper recyclate effectively
closed. Incorporating high-grade paper into the
mixed paper streams saw paper price reductions,
although Viridor’s risk share mechanisms provided
some protection in the volatile markets.
Landfill & landfill gas
Viridor continues to operate eight landfill sites flexibly
to adapt to market need. The volume of landfill gas
declined, but investment in new infrastructure and
engines meant this decline was at a lower rate than
experienced in previously years. Strong pricing from
hedging activities and renewables pricing helped
support overall performance.
Joint ventures outperform their
original targets
The TPSCo joint venture (between Viridor and
Inovyn) has performed strongly during the year
with availability again in excess of 90%. Operational
and financial performance at our Lakeside ERF
(a 50:50 joint venture with Grundon Waste
Management) also exceeded expectations for
both processing waste and power generation.
Contracts
Viridor continued to work closely with local
authorities and completed the transition of the
Greater Manchester Waste Disposal Authority
contract to another operator in May 2019 with
minimal impact to Viridor earnings. Significant
volumes of waste from this contract have been
secured into our key assets.
Total waste material inputs
Total waste inputs dropped slightly to a total of
6.7 million tonnes (6.8 million tonnes in 2018/19).
Within this there have been declines within landfill
and recycling & other, offset by increases to ERFs.
Landfill decline follows on from the closure of two
sites during last year. Recycling & other has been
impacted by the end of the Greater Manchester
contract (May 2019) and increased focus on quality
in the recycling market. Within ERF, inputs have
increased due to full year operation of three new
ERF sites (Beddington, Dunbar and Glasgow).
Enhancing environmental performance
Viridor’s regulatory compliance performance for
the calendar year 2019 improved in comparison
with 2018. No Category 1 or 2 non-compliances
(England and Wales), or significant or major
non-compliances (in Scotland) were reported.
Highlights of the year
11
energy recovery facilities (ERF)
including one in commissioning
500,000
potential homes powered by
energy produced by our portfolio
34,000
customers across the UK
>200
recycling, energy recovery and
waste management facilities
6.7
million tonnes of
waste materials input
5.5
million tonnes of material
recycled or recovered
(1) Weighted by capacity. Includes joint
ventures at 100%, excludes GRREC
due to different technology.
Pennon Group plc Annual Report 2020
49
Strategic report – Group performance
Report of the
Chief Financial Officer
Financial review
We have delivered solid underlying
performance through our sustainable
approach to operations. This has
resulted in a successful close to the
K6 regulatory period for South West
Water and the realisation of strategic
value through the sale of Viridor.
Financially, Pennon is well positioned
to manage the current COVID-19
situation with the Continuing Group’s
robust balance sheet, appropriate
gearing levels and healthy liquidity.
Susan Davy
Chief Financial Officer
50
Pennon Group plc Annual Report 2020
Overview
We have delivered a solid financial performance
in 2019/20, in line with management expectations.
Our businesses provide essential services to
local communities. We have a responsibility to
deliver these well and our customers depend
on our ability to operate in a sustainable way.
Our approach ensures alignment with our values:
trusted, responsible, collaborative and progressive.
We are at the forefront of sustainable financing
through our successful financing framework
and were the first water and waste company to
achieve the Fair Tax Mark accreditation, which
demonstrates transparency and best practice
across the Group.
The COVID-19 pandemic impacts from March
2020 have posed unprecedented challenges to all
businesses and the Group took timely and effective
action to ensure essential service delivery has been
maintained in line with Government guidelines.
While no business is immune to the impacts of
COVID-19, the financial impact for the Group for
2019/20 has been in respect of recoverability
of amounts owed by customers. A non-underlying
charge of £9.0 million has been recognised across
the Group in respect of expected credit losses
(ECLs) arising from the disruption of COVID-19 in
the year to 31 March 2020. During lockdown South
West Water has seen a change in customer demand
with a decline in wholesale demand from businesses
(c.20%), particularly those within the hospitality
and retail sectors, with c.84% of our household
customers on a meter, we have experienced net
increased residential demand of c.5% as people
remain at home during this period. We continue to
monitor these impacts closely, however any net
shortfall in household and non-household demand
in future years would be recovered through existing
regulatory mechanisms.
The extent of the impact of COVID-19 on the
UK economy remains uncertain with the risk of
ECL from business and commercial customers
increasing during and following lockdown. However,
cash collections in April and May have remained
relatively robust and Pennon Water Services has not
taken advantage of wholesaler regulatory support
through deferral of any payments at this stage.
In recent years, the strong collections performance
for household customers, and use of our social tariff
and support schemes, has successfully reduced our
bad debt costs. We believe these support measures
and our continued focus on collections will help
mitigate the financial impacts of COVID-19.
The significant local authority contracted position
in Viridor provides resilience to the underlying
business, with strong ERF performance mitigating
the volume impact from commercial & industrial
customers in collections, landfill and recycling.
The essential nature of the services we provide
and our sustainable financing strategy leaves
the Group well positioned with strong funding
and liquidity to weather the current uncertainty
resulting from COVID-19. Cash and committed
facilities of £1.6 billion were in place at 31 March
2020. £840 million of new or renewed finance was
raised in 2019/20, including £245 million of funding
for South West Water through the Sustainable
Financing Framework.
On 18 March 2020, the Group announced the sale
of Viridor to Kohlberg Kravis Roberts & Co. L.P.
(KKR) equating to an enterprise value of £4.2 billion.
The sale was approved by shareholders on 28 May
2020, European Commission merger clearance
has been received and we are finalising the last
condition precedent ahead of an expected
completion in early summer. The sale will provide
expected net cash proceeds to the Group of
£3.7 billion realising significant strategic value
from the sustainable investment that has been
made in Viridor over the last 30 years.
As a result, Viridor’s financial performance has been
shown as discontinued operations in these financial
statements with the assets and liabilities of Viridor
being shown as assets held for sale at the balance
sheet date.
Given the significant contribution of Viridor to
the Group’s results for the entire 2019/20 financial
year, pro forma results for the whole Group
including continuing and discontinued operations
have been presented alongside the statutory results
in the income statement.
On a pro forma basis, Pennon Group has again
delivered a solid set of underlying results, robust
cash flows, strong liquidity with a sound balance
sheet position underpinned with low cost, flexible
and sustainable funding. This supports our 2019/20
dividend growth of 4% above RPI. Underlying(1)
earnings per share from continuing and
discontinued operations rose by 6.7% from 57.8p to
61.7p, reflecting a 3.1% increase in underlying
EBITDA and a 2.6% increase in underlying profit
before tax. The earnings growth for 2019/20 has
been driven by our energy recovery facilities (ERF)
portfolio expansion and a strong focus on
cost control, benefiting both customers and
shareholders. Pennon remains focused
on ensuring it is well placed to capitalise on
emerging opportunities.
Statutory earnings per share from continuing and
discontinued operations fell by 6.7% from 51.1p to
47.7p in the main driven by a £41 million non-
underlying deferred tax charge relating to the
Government’s decision not to go ahead with the
planned reduction in the headline corporation tax
rate from 19% to 17%.
While revenues marginally increased for the
Continuing Group, the impact of lower wholesale
water revenues on margins reduced EBITDA.
As such, underlying earnings per share from
continuing operations fell by 4.1% reflecting a
0.5% decrease in underlying EBITDA and a 4.5%
decrease in underlying profit before tax. Statutory
earnings per share from continuing operations
reduced to 27.7p with the change in tax rate being
the major contributor to the non-underlying
charges.
During the year our effective interest rate on
average net debt remained relatively low at 3.5%
(2018/19 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 2020, the Group continued to have a
strong funding position with £1.6 billion of cash
and committed facilities.
South West Water has outperformed in the K6
(2015-20) regulatory period delivering a sector-
leading outperformance as measured by the return
on regulated equity (RoRE). Totex outperformance
of £297 million over the K6 regulatory period,
together with the delivery of £13.3 million net ODI
awards and outperformance in our cost of financing
has resulted in a cumulative RoRE for K6 of 11.8%.
Throughout our operations we align the
interests of investors and customers in sharing the
financial benefits of good performance. In South
West Water, our long established WaterShare
mechanism offers customers extra investment in
service enhancements or lower bills. We are also
pleased to announce that £20 million is available
to give back in this coming year. Shareholders
approved in principle last year to give customers
the option of receiving Pennon shares in 2020,
aligning customers and investors more closely.
This scheme will be launched subject to secondary
approval from investors at the July Annual General
Meeting (AGM).
The Board has evaluated the Group’s dividend for
2019/20 in light of the COVID-19 pandemic and
has concluded that it is appropriate for Pennon to
continue to deliver on its dividend commitment.
The Group has significant cash and liquidity of
£1.6 billion and has not received any government
support measures. In addition, the majority of
Pennon’s shareholders are UK-based pension funds,
charities, employees, customers and other retail
holders who rely on this income.
(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 191.
Revenue (£m)
EBITDA (£m)
2,000
1,600
1,200
800
400
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2015/16
2016/17
2017/18
2018/19
2019/20
2015/16
2016/17
2017/18
2018/19
2019/20
Water
Waste
Group (continuing/discontinued)
Underlying (continuing/discontinued)
Statutory (continuing/discontinued)
Adjusted (continuing/discontinued)
Capex (£m)
Interest rate on average net debt (%)
.
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2019/20
Water
Waste
Group
Water
Group
Pennon Group plc Annual Report 2020
51
Strategic report – Group performance
Report of the
Chief Financial Officer
continued
For 2019/20, the Board has recommended a final
dividend of 30.11p, subject to shareholder approval
at the AGM on 31 July 2020. Together with the
interim dividend of 13.66p, this will result in a total
dividend of 43.77p, an increase of +6.6% from last
year. This is in line with our dividend policy for
2010-2020 of RPI +4% growth per annum, which
has been achieved while investing more than
£3.6 billion in our businesses over the past 10 years.
Pennon offers shareholders the opportunity to
invest their dividend in a Dividend Reinvestment
Plan (DRIP).
The crystallisation of the Viridor sale is equivalent
to 22.66p per share of the 2019/20 dividend. This
implies a Continuing Group dividend (after
excluding Viridor) of 21.11p per share.
With respect to the future dividend policy of the
Continuing Group the dividend will grow, from a
rebased dividend of 21.11p per share, in line with
CPIH +2% per annum from 2020-25. The rebased
dividend reflects the sector-leading position of
the Continuing Group, with expectations for
outperformance on financing and totex, supporting
the dividend growth policy, consistent with
sustainable cover. Details of additional returns to
shareholders from the sale of the Viridor business
will be announced in due course.
Statutory financial performance
The Group’s statutory profit before tax, being
the profit before tax from continuing operations,
at £193.1 million was down marginally compared
with the prior year (2018/19 £201.4 million).
Earnings per share from continuing operations
decreased to 27.7p (2018/19 38.2p) with a
significant non-underlying deferred tax charge
of £30.3 million on continuing operations relating
to the change in the headline corporation tax rate
from 17% to 19%. South West Water forms the
significant majority of the Group’s continuing
operations and has seen a reduction in revenues
driven by the prolonged wet weather with rainfall
50% higher than levels seen in 2018/19 and
higher than long-term averages. The regulatory
mechanisms do ensure any shortfalls in
determined revenues are recovered in future years.
The performance of the underlying business is set
out in more detail below in the pro forma financial
performance section.
Profit before tax from discontinued operations
was £108.4 million (2018/19 £58.9 million).
The statutory results include the impact of
non-underlying items totalling a charge after tax
of £22.1 million to continuing operations and
£7.2 million to discontinued operations (2018/19
£9.0 million credit to continuing operations and
£23.9 million charge to discontinued operations).
The Directors believe excluding non-underlying
items and deferred tax provides a more useful
comparison of business trends and performance.
The non-underlying items before tax for the
Continuing Group and Viridor total a credit
£13.9 million and after tax total a charge of
£29.3 million, consisting of:
• The movement in the fair value of long-dated
derivatives associated with South West Water’s
2040 bond. These derivatives no longer met the
Group’s accounting hedging requirements and
early settlement enabled South West Water
to lock in a ‘mark to market’ gain. This has
resulted in the recognition of a pre-tax credit of
£18.0 million (2018/19 credit of £5.8 million) and
cash proceeds on termination of the derivative
of £87.2 million
• A provision for expected credit losses
of £9.0 million related to the impacts of
COVID-19 pandemic
• Aspects of the close down of defined benefit
pension commitments following the cessation
of the Greater Manchester recycling operating
contract have resulted in a pre-tax credit of
£4.9 million
• A net tax charge on the above items of
£2.6 million
• A deferred tax charge of £40.6 million resulting
from the now announced change of tax rates
from 17% to 19%.
Further details of non-underlying items are given
in note 6 to the financial statements.
Implementation of IFRS 16 ‘Leases’
From 1 April 2019, the new accounting standard
IFRS 16 ‘Leases’ has been adopted, which results in all
leases, whether operating or financing leases under
the previous IAS 17 classifications, being treated on a
consistent basis within the reported results with the
lease being recognised as a liability on the balance
sheet along with an associated right-of-use asset.
Overall there is marginal net impact on the income
statement and the balance sheet. On a pro forma
basis, the impacts from the implementation are:
• At 1 April 2019, recognition of £132.2 million of
right-of-use assets within property, plant and
equipment and £145.7 million of lease obligations
(these lease obligations are excluded for the
purposes of banking covenants)
• £17.9 million increase in EBITDA in 2019/20
across the total Group (reflecting the removal
of operating lease rentals) with a £1.9 million
increase in the Continuing Group
• £14.0 million increase in depreciation in 2019/20
(arising from the depreciation on the newly
recognised right-of-use assets), £1.4 million of
the increase relating to the Continuing Group
• £4.5 million increase in interest charges in
2019/20 (reflecting the interest on the newly
recognised lease liabilities) with £1.2 million of
the increase in respect of the Continuing Group
• £0.6 million overall reduction in profit before tax
in 2019/20, with £0.7 million reduction relating to
the Continuing Group.
Pro forma financial performance from
the Continuing Group and Viridor
(before non-underlying items)(1)
Given the significant contribution of Viridor to the
Group’s results for the entire financial year, pro
forma results for the whole Group, including
continuing and discontinued operations, have been
presented alongside the statutory results in the
income statement. The commentary on the overall
performance of the Group in this section is based
on the pro forma results.
Pro forma Group EBITDA (before underlying items) (£m)
575
550
525
500
475
.
2
6
4
5
.
6
6
8
7
.
.
8
0
1
.
5
2
.
9
0
.
)
7
0
(
.
4
3
6
5
.
)
7
0
1
(
2018/19
ERFs
SWW cost
impacts
Landfill and
landfill gas
Viridor contracts, collections
& other, and indirect costs
Plc, PWS
and other
Recycling
SWW revenue
2019/20
52
Pennon Group plc Annual Report 2020
The landfill and landfill gas business has
performed strongly in the year with EBITDA
up 26.0% at £32.0 million (2018/19 £25.4 million)
being achieved through high levels of reliability
and higher year on year pricing.
Recycling EBITDA at £14.2 million is 4.7% down on
last year (2018/19 £14.9 million) with unfavourable
pricing conditions impacting performance.
Both of our joint ventures have performed above
expectations and have increased the contribution
to pro forma adjusted EBITDA from £31.9 million to
£41.3 million, an increase of 29.5%, supported by the
full year impact of the additional investment made
in the Runcorn I ERF joint venture (TPSCo) in
December 2018.
In the year indirect costs have reduced by
£5.5 million through the efficiencies generated
following the termination of the Greater Manchester
run-off operating contract which completed on
31 May 2019.
IFRIC 12 interest receivable at £15.1 million is
broadly comparable with 2018/19 at £14.6 million.
Net finance costs
Pro forma underlying net finance costs of
£88.7 million are £5.5 million higher than last
year (2018/19 £83.2 million), primarily due to the
move from construction to operations of the
Beddington, Glasgow and Dunbar ERFs.
The Group continues to secure funding at a
cost that is efficient with the effective interest
rate reducing to 3.5% (2018/19 3.6%), reflecting
lower margins on new and renewed financing.
The effective interest rate for South West Water
has also reduced to 3.4% (2018/19 3.5%).
During 2019/20 underlying net finance costs were
covered 3.8 times(4) by Group operating profit
(2018/19 4.1 times).
Profit before tax
Pro forma Group underlying profit before tax was
£287.6 million, an increase of 2.6%, compared with
the prior year (2018/19 £280.2 million). Included
in pro forma profit before tax is our share of
joint venture profit after tax of £14.8 million
(2018/19 £12.4 million). After non-underlying items,
pro forma profit before tax was £301.5 million
(2018/19 £260.3 million) reflecting a combined
non-underlying credit before tax from continuing
and discontinued operations of £13.9 million
(2018/19 charge of £19.9 million).
Tax charge
On an underlying basis the pro forma net tax charge
of £52.0 million (2018/19 £42.7 million) consists of:
• Current year current tax charge of £28.0 million,
reflecting an effective tax rate of 9.7% (2018/19
£32.4 million, 11.6%). 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 £26.7 million
(2018/19 £23.2 million) primarily reflecting
capital allowances across the Group in excess
of depreciation charged.
Revenue
Pro forma Group revenue has reduced by 6.0%
(£88.3 million) to £1,389.9 million (2018/19
£1,478.2 million). The majority of this reduction
was due to the planned cessation of the Greater
Manchester recycling operating contract and lower
landfill tax receipts in Viridor. South West Water’s
revenue has reduced marginally due to customer
demand falling as a result of prolonged wet weather
in comparison with the levels of demand
experienced in 2018/19. Revenues in Pennon Water
Services are broadly in line with the previous
financial year, with an increase in revenues outside
of the South West Water region net of in region
attrition, albeit there has been a focus on customer
profitability with the resultant improvement in
profitability as outlined below.
Group EBITDA and adjusted EBITDA(2)
Pro forma Group EBITDA and adjusted EBITDA
were ahead of last year by 3.1% to £563.4 million
(2018/19 £546.2 million) and 4.6% to £619.8 million
(2018/19 £592.7 million) respectively driven by
good operational cost control across the Group
and strong performance across Viridor’s activities,
particularly from the fleet of ERFs.
As a result of lower revenue in 2019/20, South West
Water’s EBITDA and operating profit reduced by
0.8% and 2.3% respectively. The ongoing focus on
strong cost control and efficiency delivery, as well
as extreme weather costs in the prior period which
have not been repeated, resulted in operating costs
decreasing by 2.3%, below inflation. South West
Water’s bad debt performance remains strong
with a charge of 0.5% (excluding the impact of
COVID-19) as a percentage of revenue. This reflects
the continuation of efficient cash collections, with
the annual charge below the levels assumed for
K6 in the Final Determination.
Pennon Water Services’ performance has been
driven through stable revenues and a focus on
reducing operating costs. Revenue has remained
broadly stable with a focus on value added services
to large national customers and winning dual tariff
customers offsetting the attrition from businesses
switching retailer. Operating costs, excluding
the impact of COVID-19, have reduced through
automation, increased self-service and overhead
efficiencies which has resulted in EBITDA almost
doubling on last year. Increasing cash collections
has reduced the level of debt further reducing
the interest costs. The focus continues to be on
improving services but driving efficiency to reduce
the cost to serve our customers.
Overall for the Continuing Group, while revenue
has marginally increased by 0.6% (£4.1 million)
compared with the previous financial year, the mix
of revenue generated between household and
non-household customers has resulted in a
marginal reduction in EBITDA of 0.5% to
£365.3 million (2018/19 £367.3 million).
The results of Viridor are shown as discontinued in
the statutory presentation of the income statement.
Viridor’s EBITDA increased by 10.7% (£19.2 million)
to £198.1 million (2018/19 £178.9 million).
The ERF business has performed strongly during
the year with Glasgow, Beddington and Dunbar
facilities ramping up through the year and
Avonmouth going in to commissioning at the
end of the year. The EBITDA generated from
our portfolio was 7.0% higher at £165.6 million
(2018/19 £154.8 million) and availability has
been in line with expectations at 90%(3).
Following the completion and submission of the
prior year’s tax computations and returns to
HMRC, the following prior year amounts have
been recognised:
• Current tax credit of £9.2 million (2018/19
credit of £3.0 million)
• Deferred tax charge of £6.5 million (2018/19
£9.9 million credit), reflecting finalisation of
capital allowance claims.
The 2019/20 non-underlying items result in
a £43.2 million net tax charge (2018/19
£5.0 million credit).
Overall, the total tax charge for the year of
£95.2 million was higher than the prior year
(2018/19 £37.7 million).
Earnings per share
Earnings per share from continuing and
discontinued operations on a statutory basis have
reduced by 6.7% to 47.7p (2018/19 51.1p) driven by
£41 million non-underlying deferred tax charge
relating to the change in tax rate from 17% to
19%. Earnings per share from continuing and
discontinued operations on an underlying basis
have increased by 6.7% to 61.7p(4) (2018/19 57.8p).
Earnings per share from continuing operations on
a statutory and underlying basis have decreased to
27.7p (2018/19 38.2p) and 35.2p (2018/19 36.7p)
respectively.
Dividends and retained earnings
The statutory net profit attributable to ordinary
shareholders of £200.4 million has been transferred
to reserves.
The Board has evaluated the Group’s dividend
for 2019/20 in light of the COVID-19 pandemic and
has concluded that it is appropriate for Pennon to
continue to deliver on its dividend commitment.
The Directors recommend the payment of a final
dividend of 30.11p per share for the year ended 31
March 2020. Together with the interim dividend of
13.66p per share paid on 3 April 2020 this gives a
total dividend for the year of 43.77p, an increase of
6.6% over 2018/19. This is in line with our dividend
policy for 2010-2020 of RPI +4% growth per annum.
Pennon offers shareholders the opportunity to
invest their dividend in a DRIP.
Proposed dividends totalling £184.3 million are
covered 1.4 times(4) by net profit (before non-
underlying items and deferred tax) (2018/19
1.4 times). Dividends are charged against retained
earnings in the year in which they are paid.
With respect to the future dividend policy of
Pennon Group for the period 2020 to 2025, the
dividend will grow in line with CPIH +2% per annum.
The choice of indexation aligns with the regulatory
inflation measure being used for K7. The dividend
growth policy reflects the sector-leading positions
of the Continuing Group, consistent with sustainable
cover. Details of additional returns to shareholders
from the sale of the Viridor business will be
announced in due course.
(2) EBITDA and adjusted EBITDA are set out in the alternative
performance measures section on pages 191 to 194.
(3) Weighted by capacity. Includes joint ventures at 100%,
excludes GRREC due to different technology.
(4) Calculations are set out in the alternative performance
measures section (pages 191 to 194).
Pennon Group plc Annual Report 2020
53
Strategic report – Group performance
Report of the
Chief Financial Officer
continued
Group capital investment
Group capital investment from continuing and
discontinued operations was £339.2 million(4) in
2019/20 compared with £395.9 million in 2018/19.
South West Water
South West Water’s capital expenditure in the year
was £161.0 million, compared with £154.0 million
in 2018/19 including schemes to finalise the
K6 capital plan and with additional expenditure
to make an early start on key K7 initiatives focused
on ODI delivery.
Key areas of investment and activity during
2019/20 included:
• Further investments in our drinking water quality
programme including installation of granular
activated carbon (GAC) treatment at College
water treatment works in Cornwall. This
£10 million project will improve the resilience of
our water quality for c.35,000 customers
• Continued investment in the network to drive
leakage reduction to support pledges made in
the K7 regulatory period
• Investment in the Plymouth region to improve
resilience of water supplies with the completion
and commissioning of the Mayflower water
treatment works and upgrades to the network
and pumping stations
• Schemes to deliver National Environment
Programme (NEP) commitments, including
phosphorus and ammonia discharge reductions
• Continued improvements at wastewater
treatment works, including flood resilience
and at pumping stations to reduce
pollution incidents.
Viridor
Viridor’s capital spend in the year was £177.6 million
(2018/19 £241.7 million), a reduction of £64.1 million
compared with 2018/19 as the ERF assets have
moved from construction to operations.
The majority of the expenditure relates to the ERF
portfolio, principally the continued development
of Avonmouth ERF where commissioning is
now underway. Other larger projects in the year
include the commencement of construction of the
£65.0 million Avonmouth plastics recycling facility.
Ongoing restoration and remediation programmes
continue for Viridor’s landfill sites, ensuring we
meet or exceed our environmental duties and
responsibilities.
Cash inflow from operations, continuing
investment in future growth
The Group’s operational cash inflows(4) in 2019/20
were £728.6 million (2018/19 £649.0 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.
54
Pennon Group plc Annual Report 2020
Sustainable funding position
underpinning investment
The Group has a strong liquidity and funding
position with £1,639 million cash and committed
facilities at 31 March 2020. This consists of cash
and deposits of £666 million in the Continuing
Group (including £226 million of restricted funds
representing deposits with lessors against lease
obligations), £33 million in the Viridor Disposal
Group and undrawn facilities of £940 million. At
31 March 2020 the total Group borrowings were
£3,963 million with £3,715 million of borrowings in
the Continuing Group and £248 million of lease
liabilities transferring with Viridor as part of the
disposal. The net debt of the total Group including
the Disposal Group was £3,264 million, an increase
of £184 million during the year (2018/19 £3,080
million), which is largely attributable to £137.5 million
of lease liabilities on the balance sheet at 31 March
2020 in accordance with IFRS 16. The net debt of
the Continuing Group as at 31 March 2020 is
£3,049 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, £840 million of new and renewed
facilities have been signed, £500 million in Pennon
Group plc and £340 million in South West Water.
The total includes a short-term Pennon revolving
credit facility (RCF) which provides the Group with
flexible, efficient and effective funding during the
ongoing strategic review. In total, £245 million of the
new facilities signed in the year are linked to the
sustainable nature of the business. A new
£50 million CPI-linked sustainable loan was
signed in 2019/20, this maintains South West
Water’s proportion of index-linked net debt in line
with the Ofwat notionally funded company and
is in support of the transition from RPI to CPIH.
During this year the Group also early settled the
fixed to floating rate derivatives associated with
the South West Water Finance plc 2040 bond.
The settlement locked in the value and removed
the future volatility from the income statement, the
resulting cash inflow of £87.2 million will be utilised
to fund South West Water’s capital commitments.
In preparation for the announced abolition of LIBOR
in 2021, South West Water has completed the first
LIBOR to Sterling Overnight Index Average (SONIA)
amendment for a sustainable RCF. While financial
institutions finalise the precise workings of the
successor measure to LIBOR, widely expected to be
SONIA, this amendment to an existing facility allows
the Group to address documentation and early
system changes that will be required. Further work
continues and later this year it is expected that
financial institutions will no longer provide
LIBOR-linked financial products.
Efficient long-term financing strategy
The total Group has a diversified funding mix of
fixed (£1,797 million, 55%), floating (£844 million,
26%) and index-linked borrowings (£623 million,
19%). The Group’s debt has a maturity of up to
37 years with a weighted average maturity of
c.17 years. Much of the Group’s debt is floating rate
and derivatives are used to fix the rate on that debt.
Following the K7 (2020-25) South West Water Final
Determination the Group has aligned its hedging
strategy with the changed regulatory methodology
in this area. 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 60% of South
Major categories of capital expenditure
£17m
Landfill energy £11m
Other
£48m
Recycling
£74m
Wastewater
£339m
Total
£102m
ERF
£87m
Water
Net debt movements (strong cash inflow from operations, £m)
.
)
5
9
7
0
3
(
,
)
1
.
7
4
1
(
.
)
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2
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3
4
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8
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7
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2
7
8
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4
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3
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9
9
3
3
(
3500
3250
3000
2750
2500
2250
2000
1750
1500
.
)
0
4
6
2
3
(
,
Net debt
1 Apr 2019
Cash inflow
from operations
Cash settlement
of derivatives
Other
movements
Pension
contributions
Other
taxes(7)
Corporation
tax
Net
interest paid
Hybrid coupon
payment
Interim & Final
2018/19 dividend
Capital
payments
IFRS 16
adjustment(8)
Net debt
31 Mar 2020
West Water’s embedded floating net debt has
already been hedged through K7, taking advantage
of falling swap rates and assuring the Group
transitions smoothly into the new regulatory period.
Dividend payments and coupon payments on
the perpetual capital securities were £172.6 million
(2018/19 £162.0 million) and £8.6 million (2018/19
£5.8 million) respectively.
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 leases which provide
a long maturity profile. Interest charges benefit from
the fixed credit margins which are secured at the
inception of each lease. £576 million (c.26%) of
South West Water’s net debt is index-linked. This is
below Ofwat’s notional assumption of 33%, giving an
advantageous position through regulatory transition
from RPI to CPIH.
Net debt position
The net debt of the total Group including Viridor
was £3,264 million an increase of £184 million during
the year (2018/19 £3,080 million), which is largely
attributable to £138 million of lease liabilities being
recognised in accordance with IFRS 16. The net
debt of the Continuing Group as at 31 March 2020
is £3,049 million. For the purposes of banking
covenants these lease obligations remain excluded
from net debt.
The gearing ratio at 31 March 2020, being the ratio
of net debt to (equity plus net debt), was 64.6%(5)
(31 March 2018 64.7%).
The combined South West Water and Bournemouth
Water debt to RCV ratio is 63.6%(6) (31 March 2018
58.9%) which is broadly in line with Ofwat’s K6
target for efficient gearing of 62.5%, but is presently
above the new K7 notional assumptions of 60.0%.
During the year South West Water also made a
voluntary accelerated pension deficit recovery
payment of £17.2 million covering two years of
planned payments, adding 0.5% to gearing.
Group net debt includes £2,227 million for South
West Water and £215 million for Viridor, with
£822 million implied for Pennon, the Company.
In the year, cash inflow from operations were strong
at £728.6 million (2018/19 £649.0 million).
Pension contributions were £48.1 million (2018/19
£32.2 million).
Corporation tax payments were £52.6 million
(2018/19 £29.2 million) while payments of all other
operational taxes were £147.1 million (2018/19
£137.9 million).
Net interest payments totalled £94.3 million
(2018/19 £73.6 million).
Cash outflows relating to the capital programme
totalled £339.9 million (2018/19 £384.5 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
The Group’s operations and subsidiaries are subject
to tax in the UK. Each Group company operates in
accordance with the detailed tax strategy which is
published annually.
Transparency is a critical component of our
approach, recognising that openness and honesty
with our customers is essential. Optimising our tax
position benefits them, for example by keeping
water bills down, but we do not enter into artificial
tax arrangements, use tax havens or take an
aggressive stance in the interpretation of
tax legislation.
We were once again awarded the Fair Tax Mark
in November 2019. This is an independent UK
accreditation scheme for businesses paying their
fair share of corporation tax and reporting on their
tax practices transparently. Achieving the Mark
demonstrates that we are paying the right amount
of corporation tax in the right place at the right
time and apply the gold standard of transparency.
Having taken the lead, we have also helped
to inspire other water companies to apply for
the accreditation, thereby improving the tax
transparency of the sector in which we operate.
Under our tax strategy we:
• At all times consider the Group’s corporate and
social responsibilities 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 decisions
• Not enter into artificial tax arrangements nor
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
• Not have any connections with tax havens
unless it is necessary for the purposes of
trading within those jurisdictions.
As a long-term business with a long-term approach
to financial management there has been just a
single change to the Group’s overall tax strategy
this year compared to last and that is to explicitly
state that we will not have any connections with tax
havens unless it is necessary to be able to trade in
those jurisdictions. The tax strategy is reviewed and
reaffirmed on an annual basis.
Further details are given in the Group’s Tax Strategy
document available on the Pennon Group website.
Tax contribution 2019/20 – borne/collected
The Group’s total tax contribution (TTC) for
2019/20 amounted to £278 million (2018-19
£281 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 cost
to the Group, such as landfill tax, business rates,
corporation tax and employers’ National Insurance
contributions (NICs). Taxes collected and recovered
highlights where the business is collecting tax on
behalf of HMRC. A net amount of £33 million
(2018/19 £34 million) was collected on behalf of
the authorities for employee payroll taxes and VAT.
(5) Before the impact of IFRS 16. Group gearing including the
impact of IFRS 16 is 65.6%.
(6) Before the impact of IFRS 16. South West Water company
net debt to RCV after the impact of IFRS 16 is 64.6%.
(7) Other taxes include business rates, employer’s national
insurance, fuel excise duty, carbon reduction commitment,
environmental payments, climate change levy and external
landfill tax.
(8) IFRS 16 adjustment reflects impact of the new accounting
standard on Group net debt. This non-cash impact has no
debt covenant impact.
Pennon Group plc Annual Report 2020
55
Strategic report – Group performance
Report of the
Chief Financial Officer
continued
Major components of the Continuing Group’s debt finance at 31 March 2020
£135m
Bond 2040
£618m
Private placements
£374m
EIB loans
£3,715m
Total
£1,438m
Leases(9)
£490m
Index-linked bonds
£660m
Bank bilateral debt
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
,
0
3
4
3
,
5
0
5
3
,
3
7
5
3
,
2016
2017
2018
2019
2020
(9)
Includes leases previously defined as operating
leases under IAS 17 of £36 million.
56
Pennon Group plc Annual Report 2020
Landfill tax of £91 million (2018/19 £121 million) was
borne and paid on waste material deposited at our
landfill sites by our customers. The reduction year
on year reflects the nature of the waste materials
disposed and additional volumes which are now
processed by our ERFs. The amount includes
£5 million (2018/19 £7 million) paid to local
environmental bodies via the Landfill Tax Credits
Scheme. Landfill tax is a significant operating cost
in respect of the landfill business. In addition, the
Group incurred landfill tax of £13 million (2018/19
£10 million) on the disposal of waste to third parties.
This is an operating cost for the Group and reduces
profit before tax. The total amount of landfill tax
paid to HMRC by the Group represents 16% of
HMRC’s landfill tax receipts in the year.
Employment taxes totalled £64 million (2018/19
£65 million) including employees’ Pay As You
Earn (PAYE) and total NICs. Employers’ NICs of
£18 million (2018/19 £19 million) were charged
approximately 75% to operating costs with 25%
capitalised to property, plant and equipment.
The Group also paid £1 million in apprenticeship
levy (2018/19 £1 million). The total amount of
£64 million includes PAYE of £3 million (2018/19
£3 million) on pension payments made by the
Group pension scheme. A net amount of £45 million
(2018/19 £45 million) was collected on behalf of the
authorities for employee payroll taxes.
Business rates of £42 million (2018/19 £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 £52 million UK
corporation tax payment to HMRC in the year
(2018/19 £26 million) were £40 million in relation
to 2019/20 instalment payments and £12 million
in relation to earlier years. This is an increase of
£26 million on the prior year and relates to changes
to the payment on account legislation which has
been amended to accelerate payment of tax which
ultimately sees all tax now paid in year. To facilitate
this acceleration, the Group has paid six instalments
during the year, two in relation to the prior year and
four in relation to the 2019/20 year. In future years,
the Group will pay four instalments all of which will
relate to the relevant financial year.
VAT of £12 million has been received (2018/19
£12 million has been received) by the Group from
HMRC. VAT has no material impact on profit.
Payments to the Environment Agency and other
regulatory bodies total £13 million (2018/19
£11 million). This reduces profit before tax.
Fuel excise duty of £7 million (2018/19 £9 million)
related to transport costs. This reduces profit
before tax.
Carbon Reduction Commitment (CRC) payment
for the Group was £0.2 million (2018/19 £1 million).
This reduces profit before tax. This scheme ceased
in April 2019 and has been replaced by a new
streamlined energy and carbon reporting (SECR)
framework. The change will be neutral as there
has been an increase in Climate Change Levy.
Tax contribution 2019/20 (borne/collected)
£7m
Fuel excise
duty
£13m
Environmental
payments
£0m
Carbon reduction
commitment
£8m
Other taxes
£52m
UK
corporation
tax
£42m
Business
rates
£278m
net of £12m VAT receipt
Total
£104m
Landfill tax
£64m
Employment taxes
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 2020, the Group’s pension schemes
showed an aggregate deficit (before deferred tax)
of £8.5 million (March 2019 £60.8 million), a
reduction of £52.3 million as a result of:
• £32.6 million contributions over and above the
ongoing service and net interest charges
following the Group’s decision to voluntarily
accelerate a significant proportion of the
planned deficit recovery payments
• Reduction in liabilities of £51.9 million due to
lower long-term inflation rates reducing liabilities
• Greater Manchester recycling operating
contract cessation has decreased liabilities by
£2.0 million
• £25.1 million reduction in asset values caused by
the financial market uncertainty arising from the
COVID-19 pandemic
• Changes in other actuarial assumptions
increasing the net deficit by £9.1 million.
Of these liabilities a surplus of £6.6 million relates to
the Continuing Group and a deficit of £15.1 million
relates to Viridor.
On completion of the Viridor sale, expected early
summer 2020, the Continuing Group will assume
responsibility for near all of Viridor’s defined benefit
obligations.
The net aggregate liabilities of c.£7 million (after
deferred tax) represents less than 0.2% of the
Group’s market capitalisation at 31 March 2020.
For the Group’s principal scheme, of which South
West Water accounts for around 82% and Viridor
12%, the 2019 triennial valuation has been finalised,
recording an actuarial technical provisions deficit of
c.£53 million. In agreeing to the valuation, the Group
committed to deficit recovery contributions in line
with those agreed at the 2016 triennial actuarial
valuation to 2022, noting the significant acceleration
of contributions during the year. The schedule of
contributions is in line with the 2016 triennial
actuarial valuation.
In addition to the principal scheme, the Group has
further pension liabilities (£20.9 million at March
2019 calculated on an actuarial technical provisions
basis), that relate to schemes in which the Group
participates in connection with Viridor’s Greater
Manchester recycling operating contract which
ceased in May 2019. Following the planned exit
from the Greater Manchester recycling operating
contract, it is expected that the assets and liabilities
associated with all active members of these
schemes at 31 May 2019 will transfer to the new
operator’s pension fund. A non-underlying credit
of £4.9 million has been recognised in the income
statement in connection with active employees
moving to deferred status in these schemes.
The Group is in the process of consulting with
all employees on plans to modernise its pension
arrangements. The proposals which are being
consulted on include the closure of the main
defined benefit scheme to future accrual with
all employees transitioning to a new defined
contribution scheme offered through a master trust
arrangement. The outcome of the consultation is
expected to be announced in June 2020.
Energy hedging
Pennon has adopted a Group portfolio
management approach to energy hedging.
Currently around 50% of volumes generated are
either used within the Group (South West Water
and Viridor) or contracted for the long term
through private wire offtake agreements (c.40%
for Viridor internal usage).
The Continuing Group is a net energy buyer and
has the ability to hedge the pricing for its generation
for periods up to five years ahead, further helping to
protect revenues. Forward hedges for South West
Water not already under long-term contracts have
been put in place in the liquid market with 100% of
the energy requirements hedged until March 2021
and c.92% until March 2022.
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 has continued to deliver a solid
underlying performance, through our sustainable
approach to operations. This has resulted in a
successful close to the K6 regulatory period for
South West Water and the realisation of strategic
value through the expected sale of Viridor in
summer 2020, valuing the business at 18.5 times
EBITDA multiple. It is intended that the proceeds
generated from this transaction would be used
to reduce our pension fund deficit, reduce net
borrowings of the Company and provide a return
to shareholders, subject to other value creating
opportunities that may arise. While the precise
impacts of COVID-19 are yet to fully emerge,
the Continuing Group, with the benefit of the
crystallisation of value from the Viridor sale, will
continue with its sustainable approach to gearing
and benefits from the significant strength and
liquidity in the Group’s balance sheet, providing
stability to the business in these challenging times.
Susan Davy
Chief Financial Officer
Pennon Group plc
Pennon Group plc Annual Report 2020
57
Strategic report – Group performance
Risk report
The Pennon Board and Pennon Executive are
committed to the effective management of risks
and opportunities to ensure the long-term success
of the Group.
Risk management and
internal control framework
Our core business activities inherently expose the
Group to a variety of risks which could materially
impact our ability to achieve our strategic priorities.
The Pennon Board and Pennon Executive are
committed to the effective management of risks
and opportunities to ensure the long-term success
of the Group.
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 our business. This framework forms
a key part of our governance structure to ensure
that there is robust review, challenge and assurance
over the management of both our current and
emerging risks and opportunities.
Board
Audit Committee
Subsidiary internal control
Risk management framework
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58
Pennon Group plc Annual Report 2020
Responsible for the identification of principal risks, setting of risk appetite, and ensuring an effective risk management process
Responsible for the management of risk in accordance with appetite
Responsible for evaluating the effectiveness of the internal control environment
Internal Audit
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.
Environmental, social and governance (ESG)
considerations are a key focus for the Group.
The consideration of ESG risks and opportunities,
including the potential impact of climate change
on our business, is integrated into the Group’s
overall risk management framework and reflected
within the assessment of relevant principal risks.
The delivery of the Group’s ESG actions and
commitments is monitored through our ESG
framework. Further detail is provided on page 20.
A consistent methodology is applied in the
identification, assessment and management of the
Group’s risks, which considers both the likelihood
of the risk occurring over a long-term period and
the potential impact across a range of categories
aligned with our priorities including: financial, safety,
environmental and customer service. Principal and
business-level risks are subject to regular review
and challenge by the individual subsidiary
leadership teams, the Group Risk Forum, Pennon
Executive and the Pennon Board.
Emerging risks and opportunities are considered
to be factors and events which could potentially
have a future positive or negative impact on the
achievement of the Group’s strategic priorities.
Horizon scanning of emerging risks and
opportunities is embedded within the risk and
opportunity review process undertaken by
each subsidiary and the respective leadership
teams. Emerging risks are also reviewed by the
Group Risk Forum, Pennon Executive and Pennon
Board as part of their regular assessment of
the Group’s risk profile. Once an emerging risk
is deemed to have crystallised, it is assessed
applying the Group’s methodology and appropriate
mitigating actions are established.
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
leadership teams, Pennon Executive and the
Pennon Board obtain assurance 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.
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 review of the Group’s principal risks
against the determined risk appetite
• Quarterly review of the Group’s emerging risk log
Audit Committee
• Reviews the effectiveness of the Group’s risk
management framework
• Reviews the adequacy of the internal control framework
• Performs quarterly deep dive reviews on principal risks
• Approves the Group Internal Audit Plan
• Receives reports on the outcomes of key
assurance activities
Pennon Executive
• Day-to-day management of the Group’s principal and
operational risks
• Performs a thorough appraisal of the Group’s
principal and emerging risk profile quarterly
Group Risk Forum
• Establish the relevant Group-wide risk management
• Monitors the Group’s performance against KPIs and
processes and procedures
financial performance
• Maintains the internal control framework
• Establishes and reviews policies, procedures and
delegated authorities
• Provides review and challenge over subsidiary/functional
principal risks and mitigation strategies
• Alignment of the top down and bottom up risk
management process
• Performs horizon scanning on emerging risks and
• Quarterly review of Group and subsidiary principal risks
• Undertakes deep dive reviews of specific risks
Topics include: cyber security, customer service, health &
safety, energy management, GDPR and ODI
preparedness
opportunities
Individuals
subsidiaries/
functions
• Identifies and assesses subsidiary level risks
• Implements and executes appropriate risk mitigation
strategies, aligned with the agreed risk appetite
• Monitors compliance with internal control framework
• Review of subsidiary/functional principal risks on a
quarterly basis by executive management teams
• Compliance functions provide second line assurance
including regulatory, legal, health & safety and
ISO compliance and other key business processes
• Self-certification of compliance with internal
control framework
Group Internal Audit
• Provides independent, risk-based assurance on the
effectiveness of the internal control framework
• Coordination of independent assurance activities
• Regular reporting to Audit Committee and Pennon
Executive on the effectiveness of internal controls and
the outcomes from other third line assurance activity
e
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Pennon Group plc Annual Report 2020
59
Strategic report – Group performance
Risk report
continued
South West Water technical
(non-financial) data
In addition to the framework above which applies
across the Group, recognising the importance of
the regulatory ODI framework, South West Water
engages an independent, third-party auditor,
Jacobs, to audit the accuracy of the technical
(non-financial) data reported in its annual
performance report, including its performance
commitments and environmental data. DNV also
perform further assurance work over the Group’s
sustainability measures (see page 89).
Continuous improvements to risk
management and internal control
The Group seeks to continually improve its
approach to risk management and internal control
to ensure it remains fit for purpose. During the year
the following activities have been undertaken which
have further enhanced these processes, including:
• Revised key risk indicators and associated
metrics have been established, aligned to the
priorities over the next regulatory period,
to support the monitoring of the Group’s
principal risks against its risk appetite
• Risk forums within South West Water have
been streamlined into a single forum to allow
greater consideration of cross cutting issues
and challenges
• The second line health & safety assurance
programme has adopted a risk-based approach
to allow assurance to be focused on the areas
of greatest impact
• The delivery of ISO compliance activity across
the Group has been further standardised to
enhance the overall assurance provided
• A project is underway to enhance the Group’s
resilience arrangements, with a Director of
Resilience appointed for South West Water
to deliver commitments detailed within its
business plan for the next regulatory period
• An electronic learning and policy acceptance
platform has been implemented to enable more
effective communication and dissemination of
the Group’s key policies and standards.
Group risk management and protection of
South West Water
Pennon manages its risks in such a way that South
West Water, as a 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 the risk appetite considered
appropriate in achieving the Group’s strategic
objectives. 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 employees, the public and those who work with 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 recognises that our activities are exposed to changes in macroeconomic and external market
conditions. 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 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 the expected level of return on a case-by-case basis. The Group seeks
to minimise technology and security risk to the lowest possible level without detrimentally impacting on the
Group’s operations.
60
Pennon Group plc Annual Report 2020
Overview of Pennon’s principal risk profile
Strategic priorities
Risk level
1
2
3
Leadership in UK
infrastructure
Cost base
efficiency
Sustainable
growth
Long-term priorities affected
High
Medium
Low
Increasing
Stable
Decreasing
Net risk: excluding COVID-19
Net risk: including COVID-19
Law, regulation
and finance
F
B
D
A
C
G
E
I
H
J
Business systems and
capital investment
Law, regulation
and finance
Business systems and
capital investment
F
C
D
A
G
I
B
E
H
P
O
N
K
J
M
L
O
N
M
P
L
K
Market and
economic conditions
Operating
performance
Market and
economic conditions
Operating
performance
Category
Law, regulation
and finance
Market and
economic conditions
Operating
performance
Business systems and
capital investment
A
B
C
D
E
F
G
H
I
J
K
L
M
N
O
P
Ref
Strategic priorities
1 2
1 2
1 2
1 3
Excluding
COVID-19
Including
COVID-19
Risk description
Changes in Government policy
Regulatory reform
Compliance with laws and regulations
Maintaining sufficient finance and funding to meet ongoing commitments
1 2 3
Non-compliance or occurrence of avoidable health & safety incident
2
2
1 2
3
1
1 3
1 3
1 2 3
1 2 3
1 3
1
Tax compliance and contribution
Failure to pay all pension obligations as they fall due and increased costs to
the Group should the defined benefit pension scheme deficit increase
Non-recovery of customer debt
Macroeconomic risks impacting inflation, 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 2020
61
Strategic report – Group performance
Risk report
continued
Principal risks
and uncertainties
The Group’s business model exposes the business
to a variety of external and internal risks influenced
by the potential impact of macro political, economic
and environmental factors.
While the ability of the Group to influence these
macro level risks is limited, they continue to be
regularly monitored and the potential implications
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 been reviewed and
updated to reflect the transfer of risks associated
with waste activities as a result of the proposed
sale of Viridor, which has received shareholder and
European Commission approval. This has resulted
in the removal or reassessment of a number of
the Group’s principal risks when compared with
previous annual reports, reflecting the focus of the
Group on its water and wastewater businesses.
Britain’s exit from the European Union
Prior to Britain’s exit from the EU, detailed
contingency plans had been established and
tested to mitigate against potential issues that
may have occurred in the event of a no-deal
scenario. Negotiations on a future trading
agreement between Britain and the EU is
ongoing and continues to be closely monitored.
The impact of any agreement on the Group’s
operations and processes will be fully evaluated
as further detail is confirmed. In the event that no
agreement is reached, and trade arrangements
revert to World Trade Organization (WTO) rules,
existing contingency plans will ensure that the
Group is well prepared to mitigate against any
short-term impact that is likely to arise from
this scenario.
Impact of COVID-19
The Board recognise the significant impact that
COVID-19 has had globally and within the UK.
In response to the current situation the UK
Government has designated key worker status to
our frontline operational water and waste activities.
In order to continue delivering the expected levels
of service to our stakeholders we have reviewed our
processes and ways of working and drawn on our
resilience and continuity plans, while continuing
to prioritise the health, safety and wellbeing of
our employees and customers which remains
paramount during this period. We also continue to
work closely with our key stakeholders and peers
including local resilience forums, Water UK, Ofwat
and Defra ensuring a joined up and collaborative
response. Both the Pennon Executive and Pennon
Board continue to receive regular updates on the
Group’s response.
To date, our business has remained broadly resilient
to the immediate risks that have been presented by
COVID-19. It is likely, however, that there will be
ongoing restrictions in place during 2020/21, which
could provide continued challenges to the delivery
of our key operational activities. Medium-term
response planning has been undertaken to
establish strategies to mitigate these risks where
possible, which has considered a range of potential
scenarios and been informed by actions taken
by other countries impacted by the pandemic.
These plans will continue to be reviewed and
updated as further Government and Public Health
guidance is provided.
The principal risks detailed below have been
assessed applying the Group’s impact and likelihood
methodology, separately identifying both the
underlying risk assessment prior to the onset of
the COVID-19 virus and the assessment of risk
reflecting the potential impact of COVID-19.
The commentary for individual principal risks also
provides further detail on additional mitigation steps
that have been taken in response to this event.
The Directors confirm that during 2019/20 they
have carried out a robust assessment of current
and emerging risks facing the Group. The
assessment of the Group’s principal risks has
considered the impact on its business model,
future performance, solvency and liquidity.
These principal risks have been considered in
preparing the viability statement on page 68.
62
Pennon Group plc Annual Report 2020
Strategic impact
Mitigation
Net risk
(pre-
COVID-19)
Net risk
(including
COVID-19)
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 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.
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.
The General Election in December 2019 has provided
greater certainty over Government policy, with the current
UK Government supportive of the existing regulatory model.
We continue to engage with MPs, all political stakeholders,
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.
The UK Government has also committed to the £50
Government contribution made to household customers
of South West Water being retained for 2020/21.
The speed at which action announced by the Government in
response to COVID-19, including changes to restrictions and
ongoing support to the economy, presents challenges in
ensuring the impact to the business is minimised.
Greater certainty over reform of the regulatory framework
has been provided through the announcement of South West
Water’s Final Determination for the 2020-25 regulatory period.
Both South West Water and Pennon Water Services maintain
ongoing dialogue directly with regulators and through
sector-wide forums and engage fully with consultations
and proposed reforms of the regulatory frameworks.
A number of temporary regulatory changes have been
introduced in response to COVID-19; in particular in respect
of the water retail market, including wholesaler support.
The speed at which these changes are being introduced has
impacted on the ability to fully consult with regulators and
increases the possibility that these changes are detrimental
to the Group’s activities.
The Group operates within robust and mature regulatory
frameworks ensuring compliance with Ofwat, Environment
Agency and other relevant requirements. These frameworks are
subject to regular review by South West Water, Pennon Water
Services and the Pennon Executive.
Compliance with the regulatory framework has become more
complex as a result of a number of temporary changes
introduced by our regulators in response to COVID-19. All
regulatory changes are subject to detailed review and, where
necessary, internal processes, systems and controls are revised
to ensure compliance.
The Group also maintains a comprehensive internal framework
to ensure compliance with corporate laws and regulations.
This is reinforced through key policies such as the Group’s
Code of Conduct, supply chain code of conduct and anti-slavery
policy. Additionally, the Group’s Speak Up whistleblowing
process allows any concerns to be raised confidentially and
dealt with through appropriate investigations.
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 cash
flow is regularly reviewed by Pennon Executive and the Board.
The Group has £1.6 billion of cash and committed facilities
providing liquidity and ensuring South West Water is prefunded
into the next regulatory period.
During 2019/20 £840 million of new or renewed funding was
entered into, including £245 million of funding through the
Sustainable Funding Framework for South West Water.
The strength of our position provides the Group with added
resilience in the event of volatility which may arise as a result
of COVID-19.
Risk appetite
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.
The Group operates a
prudent approach to
our financing strategy
in order to ensure our
funding requirements
are fully met.
Strategic impact
1
2
Leadership in UK
water and waste
infrastructure
Leadership in
cost base
efficiency
3
Driving
sustainable
growth
Risk level
High
Medium
Low
Increasing
Stable
Decreasing
Pennon Group plc Annual Report 2020
63
Strategic impact
Mitigation
Long-term priorities
affected:
The effective management of health & safety risks continues to
be a priority for the Board and Pennon Executive.
Net risk
(pre-
COVID-19)
Net risk
(including
COVID-19)
Strategic report – Group performance
Risk report
continued
Law, regulation and finance continued
Principal risk
E: Non-
compliance or
occurrence of an
avoidable health
& safety incident
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.
Long-term priorities
affected:
2
The Group could be called
upon to increase funding to
reduce the deficit, impacting
our cost base.
G: Failure to
pay all pension
obligations as
they fall due and
increased costs
to the Group
should the
deferred pension
scheme deficit
increase
During the year there has been two fatalities that have
occurred in the delivery of our activities. Both incidents are
deeply tragic and full and thorough root cause analysis has
been undertaken to identify additional actions required to
prevent such incidents from occurring again alongside
additional training and system upgrades.
During the year the Group progressed the full roll-out of
HomeSafe across the Group, which has contributed to a
lost time injury frequency rate of 0.9, a further improvement
on prior year and the Group remains on track to achieve its
LTIFR target of 0.5 by 2025.
In response to COVID-19 additional safety measures have been
introduced to ensure that key activities across the Group can
continue to be performed safely, in line with Government and
public health guidance. This includes remote working, social
distancing and the provision of additional hygiene and
appropriate personal protective equipment (PPE).
The easing of Government restrictions continues to be
carefully reviewed to ensure the Group’s activities can
continue to be delivered safely and Government and public
health guidance will continue to be stringently followed.
The Group continues to achieve the Fair Tax Mark; an
independent certification scheme, which recognises
organisations that demonstrate they are paying the right
amount of corporation tax in the right place, at the right time.
The Group have an experienced and professionally qualified
in-house tax team supported, where necessary, by external
specialists.
Senior accounting officers are required to review and declare
annually the effectiveness of tax-related internal controls within
their respective area of responsibility.
Discussions continued with HMRC regarding the agreement
of uncertain tax items in order to enable the finalisation of
tax returns.
The Group has an experienced in-house Pensions team who
also engage professional advisers to manage the pension
scheme’s investment strategy, ensuring the scheme can pay
its obligations as they fall due.
The triennial 2019 valuation of the Group’s principal pension
scheme has recently been completed, with a recovery plan to
return to full funding on a technical provisions basis by March
2022. In addition, the Group has sought to support the scheme
through the acceleration of contributions of £17 million during
the year.
The Group is currently consulting on potential changes to its
pension scheme arrangements including closure to future
accrual of the main scheme which, if implemented, will be
effective from July 2020.
Risk appetite
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.
The Group will ensure
that all obligations are
met in full but seeks to
manage this without
unnecessary increased
costs to the Group.
Strategic impact
1
2
Leadership in UK
water and waste
infrastructure
Leadership in
cost base
efficiency
3
Driving
sustainable
growth
Risk level
High
Medium
Low
64
Pennon Group plc Annual Report 2020
Increasing
Stable
Decreasing
Strategic impact
Mitigation
Net risk
(pre-
COVID-19)
Net risk
(including
COVID-19)
Market and economic conditions
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 regards to
vulnerable customers and
affordability.
I:
Macroeconomic
risks impacting
inflation,
commodity
and power prices
Long-term priorities
affected:
3
Changes such as currency
exchange movements, tariffs
and volatility within the
energy markets could
increase the Group’s
cost base.
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 service
and/or increased
competition
leading to loss of
customers
Long-term priorities
affected:
1 3
Poor customer service has a
direct impact on the ability of
Pennon Water Services to
retain and grow market share.
South West Water has mature and embedded debt collection
strategies which has continued to deliver improved collection
rates and decreased debt exposure during the year. The collection
of debt within Pennon Water Services has also improved during
the year.
The potential impact of COVID-19 could place affordability
pressure on both our domestic and business retail customers
negatively impacting on collection rates and debt exposure.
Measures introduced by regulators within the retail water market,
including the deferral of payments to wholesalers, may also impact
on immediate debt levels.
We have worked proactively with our customers, identifying and
contacting those most in need and supporting them in the most
appropriate way. This has included automatically extending social
tariffs and payment plans for our domestic customers.
Additional short-term flexibility, requested by our regulators, has
already been incorporated within our collection processes for both
our domestic and retail water businesses.
The Group has a dedicated procurement function supported by
established processes to ensure the quality of provision and price
for goods and services procured.
There remains the potential for increased costs arising from
COVID-19 due to demand and exchange rate volatility for the
limited goods purchased from outside the UK, in particular
chemicals, which increases risk in this area.
Energy usage is minimised and where possible on-site renewable
generation schemes are implemented to reduce the requirement
to purchase electricity from the grid.
Despite the current volatility experienced within the spot market,
partly as a result of COVID-19, medium-term electricity markets
are relatively stable and South West Water had hedged the
majority of wholesale power costs for the first two years of the
new regulatory period.
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 proactively through a
planned capital investment programme as well as established
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.
Further improvement in South West Water’s resilience is a key
focus within the next regulatory period. A Director of Resilience
has been appointed during the year to lead this workstream.
Despite the retail water market continuing to remain highly
competitive, Pennon Water Services has a knowledgeable key
account team to support customers. The business has
strategically targeted high-consumption customers to maintain
market share.
As a result of restrictions imposed in response to COVID-19 a
proportion of Pennon Water Services’ customers have temporarily
ceased operating. If these businesses are unable or choose not to
resuming trading following the easing of restrictions this could
result in overall attrition to the customer base. Regular contact
and communication is being maintained with customers to
support them during this period.
Strategic impact
Mitigation
Net risk
(pre-
COVID-19)
Net risk
(including
COVID-19)
Risk appetite
While seeking to
minimise non-
recoverable debt, we
recognise customer
affordability challenges
and the inability to
disconnect household
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.
Risk appetite
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.
Pennon Group plc Annual Report 2020
65
Strategic impact
Mitigation
Net risk
(pre-
COVID-19)
Net risk
(including
COVID-19)
Strategic report – Group performance
Risk report
continued
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 PR19
business plan.
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.
South West Water has mature processes in place for the
management of their assets which is done through a programme
of sophisticated planned and preventive maintenance and
effective management of stores.
In the event of a significant incident South West Water maintains
detailed contingency plans and incident management procedures
which are regularly reviewed.
Existing processes have been extensively reassessed in light of
the potential impact of COVID-19 and appropriate measures and
actions have been introduced, working with the wider water sector
and our key strategic partners, to ensure the continued delivery of
our highest priority activities. This has included new working
processes, adjusted shift patterns and enhanced operational
cover to provide added resilience.
These actions have been effective to date in ensuring the
resilience of our operations, however, the potential ongoing impact
of COVID-19 on our business will continue to remain a risk.
The Group’s HR Strategy continues to be embedded across
the organisation in order to continue to attract, retain and
develop our employees. Succession plans remain in place for
senior and other key positions while the Group recruited an
additional 191 new apprentices during the year.
There are also various engagement forums across the Group
which provide opportunities for employees to regularly discuss
business priorities and challenges with business leaders.
The impact of these initiatives is measured through the results
of the most recent Great Places to Work Best Workplace
Survey which showed an improved Trust Index score of 63%
and maintained last year’s engagement score of 68%. We also
achieved our highest ever participation rate at 83%, demonstrating
employees value this mechanism for feedback.
During COVID-19 we have refocused our resources where
appropriate to essential parts of our business and not furloughed
any employees. To date there has been no immediate impact of
COVID-19 on the ability to attract and retain necessary skills
within the Group. It is recognised that there may be longer-term
challenges and action is underway to minimise the impact
of these.
The regulatory framework has been in place since 1 April 2015
and South West Water has delivered cumulative net ODI rewards
of £13.3 million during 2015-20.
The ODI regime in the 2020-25 regulatory period is more
stretching with the overall reward/penalty range more penal.
While South West Water has used the fast-track status awarded
by Ofwat to commence early roll-out of key projects and
initiatives, the impact of COVID-19 could present additional
medium-term challenges that impact on the ability to deliver
the required step change and outperform the agreed
performance commitments.
Alternative strategies and ways of working are being developed
which seek to ensure the continued delivery of performance
commitments into the future.
Risk appetite
The Group operates
a low tolerance for
significant operational
failure and seeks to
mitigate these risks
where possible.
While turnover of
employees 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.
Strategic impact
1
2
Leadership in UK
water and waste
infrastructure
Leadership in
cost base
efficiency
3
Driving
sustainable
growth
Risk level
High
Medium
Low
66
Pennon Group plc Annual Report 2020
Increasing
Stable
Decreasing
Business systems and capital investment
Principal risk
O: Failure or
increased cost of
capital projects/
exposure to
contract failures
P: Failure of
information
technology
systems,
management
and protection
including
cyber risks
Strategic impact
Mitigation
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.
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 of key assumptions.
Projects are delivered using skilled project management resource
complemented by senior oversight and leadership.
The scheduling of a number of projects for the 2020-25
regulatory period have been advanced and agreements are in
place with strategic partners who will support the delivery of the
capital programme.
The impact of COVID-19 has seen further strain placed on the
financial health of key contractors and supply chain partners.
There is regular engagement and communication with our supply
chain and early intervention is taken where necessary.
Medium-term restrictions, which could include continued social
distancing or restricted travel, could also impact on the costs and
timescales in delivering these projects.
The Group operates a mature and embedded governance
framework over the IT environment and South West Water
holds the ISO 27001 accreditation.
There has been a significant increase in the number of employees
working remotely as result of COVID-19, which has placed
additional strain on the capacity of our systems. Additional
bandwidth and licences have been procured and IT systems have
remained resilient during this period. Disaster recovery plans are
in place for corporate and operational technology, which have
been updated to reflect the impact of COVID-19.
During this period there has also been an increase in the
volume and sophistication of cyber threats. These risks are
mitigated by a strong preventive and detective information
security framework aligned to guidance issued by the National
Cyber Security Centre (NCSC).
South West Water also continues to progress actions to meet
the requirements of the Network and Information Systems (NIS)
directive with activities aligned to the priorities identified by the
Drinking Water Inspectorate.
Net risk
(pre
COVID-19)
Net risk
(including
COVID-19)
Risk appetite
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.
Pennon Group plc Annual Report 2020
67
Strategic report – Group performance
Risk report
continued
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.
While this is currently a time of change for the
Group with the proposed sale of Viridor an outcome
of the strategic review, 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,
including consideration of the ongoing COVID-19
pandemic, its longer-term strategy, the Board’s risk
appetite and the Group’s principal risks and how
these are managed, as detailed on pages 62 to 67 of
the risk report. The Group’s principal continuing
operating subsidiary is South West Water, a
long-term business characterised by multi-year
investment programmes, with associated revenue
streams.
The Group’s strategic business plan, including
consideration of the ongoing COVID-19 pandemic,
principal risks and Ofwat viability scenarios
considered in respect of South West Water (set out
in further detail below) are the 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.
Matters considered by the Audit Committee
Group cyber security
Group health & safety
Energy management
General Data Protection Regulation (GDPR)
Brexit readiness across the Group
ODI preparedness
Dam safety
Resilience and business continuity
68
Pennon Group plc Annual Report 2020
The Group’s business plan, which includes the sale
of Viridor to KKR for net proceeds of c.£3.7 billion
and a best assessment of the likely impacts of
COVID-19, has been stress tested. Through this
testing, it has been determined that none of the
individual principal risks or Ofwat viability scenarios
would in isolation, or in aggregate, compromise the
Group’s viability. In performing this stress testing the
following factors have been considered:
• Ofwat viability scenarios have been modelled
and monetised
• A near-term downside impact of COVID-19 has
been modelled
• Principal risks have been ascribed a value with
reference to risk weighting, factoring in the
likelihood of occurrence and financial impact
• Proceeds from the Viridor sale have been
utilised in part to repay Pennon company debt.
In addition, a reversed engineered scenario that
could possibly compromise the Group’s viability
over the five-year assessment period has been
modelled. This scenario builds on the factors above
and additional assumes all the Group’s principal
risks incurring each year with maximum effect and
no probability weightings attached, a scenario akin
to modelling the downside scenario on COVID-19
over the whole five-year period and the Viridor sale
proceeds are fully utilised.
The Board considered the likelihood of this scenario,
on the Group’s viability over a five-year period and
noted the potential mitigating actions which could
include retaining a certain amount of the Viridor
sale proceeds, reduction in capital and operational
spend and dividends, concluding the Group could
remain viable.
In making its assessment of the Group’s viability, the
Directors have taken account of the Group’s robust
capital solvency position, the impact of the Viridor
sale, the Group’s latest assessments of the impact of
the COVID-19 pandemic, 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 regulated
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 86, the Directors reviewed and
discussed the process undertaken by management,
and also reviewed the results of the stress testing
performed.
Additionally, South West Water Limited’s own
viability has been considered. This additional
assessment considered South West Water’s
regulatory financial ring fence through the following
scenarios that are recommended to be tested by
Ofwat:
• Totex underperformance (15% of totex)
• ODI penalty (3% of RoRE) in one year
• Inflation sensitivities (+/-3%)
• Increase in the level of bad debt (20%)
• New debt financed at 2% above
forward projections
• Financial penalty – equivalent to 3% of turnover
• Any relevant inter-company financing scenarios.
These scenarios were considered in isolation and in
the following combination:
• 10% totex underperformance in each of the
five years
• ODI penalty of 1.5% in each of the five years
• A one-off financial penalty of 1% of revenue.
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 69
and 121, 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.
Customer ownership: WaterShare
& WaterShare+
Sharing our success and enhancing our relationship with water customers
South West Water’s 2015-20 business plan introduced WaterShare –
a unique, innovative scheme which enables the financial benefits of
successful company performance to be shared with customers in a
more open and timely way. As part of the New Deal plan for 2020-25
the WaterShare+ mechanism takes this even further, moving from
customer engagement to customer empowerment by giving
customers ‘a greater stake and a say’ in the company.
WaterShare has been central to South West Water’s
customers since 2015. An independent WaterShare
panel – which met twice in 2019/20 – scrutinises
company performance against the business plan,
and reviews and challenges recommendations on
how any benefits should be shared with customers.
Previously this has included reinvestment to
improve services or through bill reductions. The
company’s performance is reported to customers
through the WaterShare scorecard and framework,
overseen by the panel, and financial benefits
resulting from regulatory outperformance are
discussed with customers through focus groups
and regular surveys.
As part of the 2020-25 business plan the
established WaterShare approach was scrutinised
with the aim of further building on the existing
relationship with customers and embedding the
sharing of regulatory outperformance. Research was
undertaken 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.
Our pledge for our 2020-25 business plan is
therefore to offer customers the choice, alongside
bill reductions, rebates and reinvestment, of taking a
financial stake in the business via an equity share in
Pennon.
Our performance during 2020-25 will continue to be
reviewed and challenged by an independent
WaterShare+ Customer Panel and these meetings
will be held quarterly in public, providing even more
transparency and openness.
We will also be introducing a customer AGM, which
all customers will be invited to attend. The first of
these will be held in the summer of 2021.
This strategic report, consisting of pages 1 to 69
and 121, was approved by the Board on
3 June 2020.
By order of the Board
Simon Pugsley
Group General Counsel and
Company Secretary
3 June 2020
Since the business plan submission to Ofwat in
September 2018, we have continued to engage with
customers about the principles of Watershare+ to
ensure that share ownership is still something they
would see as a positive step to evolving the
relationship between customer and the company.
Subject to a second confirmatory vote at the 2020
Annual General Meeting (AGM), the first being
approved in 2019, eligible household customers will
have the option of receiving the benefit in a rebate
or in the form of Pennon shares from 2020. These
will 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.
During 2020/21 c.£20 million of accrued benefit
from the 2015-20 period will be passed back to
customers.
This approach has been endorsed through the
regulatory review by Ofwat, with South West Water’s
plan fast tracked. As shareholders, participating
customers will 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 Annual General Meeting
• Receive annual reports and financial statements.
Pennon Group plc Annual Report 2020
69
Governance
Good governance remains at
the heart of our business and
benefits all our stakeholders.
70
Pennon Group plc Annual Report 2020
Governance
72
Chairman’s letter
to shareholders
Board of Directors
The Board and its
governance framework
Audit Committee report
Sustainability Committee report
Nomination Committee report
Remuneration
Committee report
Directors’ remuneration
report contents
Directors’ report – other
statutory disclosures
76
78
84
88
90
92
94
116
Pennon Group plc Annual Report 2020
71
Governance
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
On behalf of the Board, I am pleased to introduce
the corporate governance report for 2020.
This continues to be the Board’s principal method
of reporting to shareholders on our governance
policies and on our 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, one of my overriding
responsibilities is to ensure that we continue to
operate to the highest standards of corporate
governance. This year, for the first time, we are
reporting formally on our performance against
the Principles of the 2018 UK Corporate Governance
Code. The table on pages 74 and 75 will help you to
navigate our reporting and evaluate our performance.
72
Pennon Group plc Annual Report 2020
One consequence of Pennon’s ownership of South
West Water, a regulated water and wastewater
business, is that to meet the requirements of
Ofwat, South West Water Limited maintains its own
independent board of directors and continues to
operate in the manner of a publicly listed company
in its own right. Further detail of South West Water’s
operations and governance will be contained in
its annual report and accounts. Also, this year, Viridor
Limited, our waste management business is reporting
on its application of the Wates Governance principles
during the year; further information will be published
in Viridor’s annual report and accounts in due course.
Our current board and committee framework
allows us to streamline our decision-making process.
The South West Water board, which includes certain
Pennon Executive and 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.
Our governance framework has served the complex
structure of the Group well. It has been put to the
test in recent weeks but I am pleased to say it has
shown itself to be robust and effective in the way
it has supported decision-making in relation to the
Viridor disposal at the same time as dealing with
Pennon’s response to the COVID-19 risk and the
usual oversight of the Company’s performance and
delivery of its strategy. Following the completion of
the proposed sale of Viridor, we are mindful that
modifications may need to be considered to ensure
our system of governance remains appropriate and
continues to support the delivery of our strategy.
Role of the Board and its effectiveness
My primary role as Chairman is to provide leadership
to the Board and to provide the right environment
to enable each of the Directors, and the Board as a
whole, to perform effectively to promote the success
of the Company for the benefit of its shareholders
and other stakeholders.
It is my view that the Board is highly effective with
a good understanding of the Group’s opportunities as
well as the threats facing the business. This view is
supported by the results of this year’s Board and
Committee performance evaluations, which are
reported on pages 90 and 91, as well as hard
evidence. I refer to the Board’s understanding of
a wide range of opportunities from the release of
value in Pennon’s waste business in the form of the
Viridor sale, to the need for investment in plastics
recycling for the benefit of the environment and
our communities, and the New Deal for South West
Water customers. We keep under constant review
the threats to the future success of the business,
the most immediate being COVID-19.
Culture
Organisations that embody a clear sense of vision and
purpose deliver good results and the most successful
workplace cultures are built on trust. The Board relies
on employee engagement as a way of monitoring the
organisation’s culture, most notably our Trust Index
score. This is explained on page 38.
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 services for the
benefit of all our stakeholders.
This year, and in full compliance with The Companies
(Miscellaneous Reporting) Regulations 2018, we have
provided a section 172 statement, which describes
in more detail how the Board has had regard to the
interests of all our stakeholders when carrying out
its duties. Our section 172 statement, which can be
found on page 121, should be read alongside pages
26 to 29 and the summary opposite of how
stakeholder interests were taken into consideration
by the Board in decision making during the year.
There are a number of routes through which
the Board gains an understanding of employees’
views on key decisions, most notably staff forums,
employee surveys and the Big Chat. We were
particularly interested to see the results of the
employee ‘pulse survey’ on home working during the
COVID-19 pandemic; these views are reflected in the
measures that have been taken to ensure the safety
and wellbeing of our people. Further information on
employee engagement is provided on page 38.
The Board also carries out site visits and we were
disappointed when visits scheduled for March 2020
had to be cancelled due to COVID-19. We look
forward to those being rescheduled during 2020/21.
We continue to engage actively with all our
stakeholders, including our customers, our
communities, our people and our suppliers, as
well as with our investors. We are acutely aware
that our stakeholders are struggling with the
challenges posed by an uncertain future and commit
to maintaining appropriate and regular dialogue
to ensure that the rationale for our strategy and our
performance objectives reflects their expectations.
Our continuous engagement allows stakeholders
to provide feedback on the matters they consider
to be important and any issues which they would
like to be addressed.
Shareholder engagement
Our shareholders are just one of our key stakeholder
groups and we continue to manage a comprehensive
engagement programme with them throughout the
year. During this past year we undertook some 90
meetings and conference calls with both current and
prospective investors. Pennon also attended eight
city conferences and sales force briefings and hosted
11 road shows and investor events in the UK, USA
and mainland Europe. Pennon maintains a stable,
high-quality shareholder register with almost
two-thirds of investors based in the UK. The
majority of Pennon’s issued share capital is held
by institutions, with the remainder largely held by
private client investment managers.
The Chief Financial Officer continues to report
to the Board regularly on major shareholders’
views about the Group, and the Company’s corporate
brokers present frequently to the Board on equity
market developments and shareholder perceptions.
This helps to ensure 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 it was very
pleasing to see many familiar faces at the 2019 AGM.
I am sorry to say that we expect this year’s AGM,
which will be held on 31 July 2020, to be very
different. We are closely monitoring developments
relating to the COVID-19 pandemic and as at the date
of this report, compulsory government measures
remain in force restricting public gatherings and
non-essential travel. This means that shareholders
will not be able to attend the meeting and the
Company will arrange for a quorum to be present
to transact the business of the meeting.
We are very aware that the AGM provides an
important forum for shareholders to meet the
Board and raise questions and, assuming the
restrictions remain in place, we will provide an online/
telephone facility to allow shareholders to participate
remotely. We also encourage our shareholders to vote
on the resolutions by proxy. Further details will be
found in the Notice of AGM.
Compliance with the UK Corporate
Governance Code and other requirements
Details of how we have applied the Principles that
form the UK Corporate Governance Code (the UK
Code) are provided throughout this annual report
and the table on pages 74 and 75 provides some
useful signposting. Underpinning our application of
the Principles is our compliance with the UK Code’s
Provisions throughout the year; I am pleased to say
that we have no exceptions to report. The UK Code is
published on the Financial Reporting Council (FRC)
website, www.frc.org.uk.
My introduction to this corporate governance report
and the following sections is 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 120
the Board is able to confirm to shareholders that the
annual report and accounts taken as a whole is fair,
balanced and understandable and provides the
information necessary to assess the Company’s
performance, business model and strategy.
Sir John Parker
Chairman
Pennon Group plc
3 June 2020
The following table sets out some of the most significant decisions taken by the Board during the year and how stakeholder interests were taken into account:
Key decision
Proposed sale of Viridor
COVID-19
response
Pensions
Stakeholders affected
Investors
Employees
Customers
Employees
Customers
Investors
Strategic factors taken into consideration
• Realisation of significant strategic value for shareholders
• Positioning for potential future growth opportunities
• Smooth transition for employees
• Continuation of high standards of customer service
• Health, safety and wellbeing of employees and customers
• Continued delivery of essential services
• Helping vulnerable customers
• Financial security for employees
• Maintaining a solid funding and liquidity position
Employees
Shareholders
Scheme trustee
Employee representatives
• Ability of pension scheme to continue to meet obligations
• Managing the pension scheme deficit
• Ensuring employees can continue to save for their future in a way
that reflects their lifestyle and life stage
Ofwat’s Final
Determination of South
West Water’s business
plan for 2020-25
Investors
Employees
Customers
Government and regulators
• Realisation of strategic value for shareholders
• Continued delivery of high standards of service to customers
• Alignment of investor and customer interests; increasing trust and
legitimacy
• Giving customers a greater say in our water business
• Regulatory and environmental compliance
• Reputational matters
Outcome
Board decision to progress the sale
Strong Board support for measures
introduced by the management team
Board approval of employee consultation
programme on the closure of the defined
benefit scheme to future accrual and an
enhanced defined contribution offering
Acceptance of Final Determination
Interim dividend
Investors
Employee shareholders
New Group borrowings
Investors
Employees
Customers
Subsidiary strategic plans Investors
Employees
Customers
Communities
• Delivery of shareholder value
Payment of dividend
• Maintaining a sustainable and solid funding and liquidity position
• Delivery of shareholder value
• Continued delivery of high standards of service to customers
• Realisation of strategic value for shareholders
• Continued delivery of high standards of service to customers
• Regulatory and environmental compliance
Entry into new funding facilities
Strategic planning and roadmap agreed
Pennon Group plc Annual Report 2020
73
Governance
Chairman’s letter
to shareholders
continued
How we have performed against the Principles of the 2018 UK Code
Information about how we follow the Code’s Principles can be found in the following sections of the annual report:
UK Code principles
Where
• An effective and entrepreneurial board
• Promoting the long-term sustainable success of the Company
• Generating value for shareholders
• Contributing to wider society
• Board of Directors (pages 76 and 77)
• Strategic progress (pages 16 to 19)
• Business model (page 14 and 15)
• Sustainability at the heart of the business (pages 20 and 21)
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• Company’s purpose, values and strategy are aligned with
its culture
• Directors act with integrity, lead by example and promote
the desired culture
• Resources, internal controls, risk management
• Shareholder and stakeholder engagement
• Business model (page 14 and 15) and throughout the annual report
• Our People (page 40)
• Report of the Chief Financial Officer (page 54)
• Risk report (pages 58 to 60)
• Our stakeholders (pages 26 to 29)
• Our people (page 38)
• Workforce policies and practices are consistent with the
Company’s values and support its long-term sustainable success
• Workforce is able to raise any matters of concern
• Business model (pages 14 and 15)
• Our people (pages 38 to 41)
• The Board and its governance framework (page 83)
The role of the Chairman is to:
• Demonstrate objective judgement
• Promote a culture of openness and debate
• Facilitate constructive board relations and the effective
contribution of all non-executive directors
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r
• Ensure the directors receive timely, accurate and clear information
• Board composition – balance of executive/non-executive
• Clear division of responsibilities between the Chairman and CEO
• Non-Executive Director time commitment
• Non-Executive Director roles – to provide constructive challenge,
strategic guidance, offer specialist advice and hold management
to account
• The Board, supported by the Company Secretary, has the policies,
processes, information, time and resources it needs to function
effectively and efficiently
• The Board and its governance framework (pages 79 to 82)
• Nomination Committee report (pages 90 and 91)
• The Board and its governance framework (pages 80 and 81)
• Board of Directors (pages 76 and 77)
• The Board and its governance framework (page 80)
• The Board and its governance framework (pages 81 and 82)
74
Pennon Group plc Annual Report 2020
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UK Code principles
Where
• Board appointments are subject to a formal, rigorous and
Nomination Committee report (pages 90 and 91)
transparent procedure
• An effective succession plan is maintained for Board and
senior management
• Appointments and succession plans are based on merit and
objective criteria, and should promote diversity
• The Board and Committees have a combination of skills,
experience and knowledge
• Consideration is given to the length of service of the Board as a
whole and membership regularly refreshed
• Annual evaluation of the Board considers its composition, diversity
and how effectively members work together to achieve objectives
• Individual evaluation demonstrates that each director continues to
contribute effectively
• The Board has established policies and procedures to ensure the
independence and effectiveness of internal and external audit
functions and satisfy itself on the integrity of the financial and
narrative statements
• The Board presents a fair, balanced and understandable
assessment of the Company’s position and prospects
• The Board has established procedures to manage risk, oversee
the internal control framework and determine the nature and
extent of the principal risks the Company is willing to take in order
to achieve its long-term strategic objectives.
• Remuneration policies and practices are designed to support
strategy and promote long-term sustainable success.
• Executive remuneration is aligned to the Company’s purpose and
values, and is clearly linked to the successful delivery of the
long-term strategy
• There is a formal and transparent procedure for developing
policy on executive remuneration and determining director
and senior management remuneration
• No director is involved in deciding their own
remuneration outcome
Directors:
• Exercise independent judgement and discretion when authorising
remuneration outcomes; and
• Take account of Company and individual performance, and
wider circumstances
Board of Directors (pages 76 and 77)
The Board and its governance framework (page 79)
Nomination Committee report (pages 90 and 91)
Audit Committee report (page 87)
Audit Committee report (page 87)
Directors’ report (page 120)
Risk report (pages 58 to 60)
Directors’ remuneration report (page 95)
Directors’ remuneration report (page 98)
Directors’ remuneration report (pages 107 to 109)
Pennon Group plc Annual Report 2020
75
Governance
Board of
Directors
Sir John Parker
Chairman
Christopher Loughlin
Chief Executive Officer
Susan Davy
Chief Financial Officer
Board Committee members
Pennon Executive
Audit Committee
Nomination Committee
Remuneration Committee
Sustainability Committee
Chair of Committee
76
Pennon Group plc Annual Report 2020
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.
External appointments
Chris is currently chairman of British
Water and of Reall Limited, a director
of Water UK and a director of Mears
Group PLC.
Susan Davy
Chief Financial Officer
BSc Hons, ACA
Susan joined the Board on 1 February
2015. She is a member of the
Sustainability Committee and the
Pennon Executive.
Skills and experience
Susan is a graduate qualified chartered
accountant with over 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.
Gill Rider
Senior Independent Director
(Non-Executive)
CB, PhD, CCIPD
Gill was appointed to the Board on
1 September 2012. She is chairman
of the Remuneration Committee and
a member of the Audit, Nomination
and Sustainability Committees.
Sir John Parker
Chairman
GBE, FREng, DSc (Eng), ScD (Hon),
DSc (Hon), DUniv (Hon), FRINA
Sir John was appointed Chairman on
1 August 2015, having joined the Board
as Deputy Chairman on 1 April 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 six 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 PLC and Carnival
Corporation and is a senior adviser
to Spencer Stuart.
Christopher Loughlin
Chief Executive Officer
BSc Hons, MICE, CEng, MBA
Chris was appointed to the Board on
1 August 2006 upon joining Pennon as
Chief Executive of South West Water.
He became the Group Chief Executive
Officer on 1 January 2016. Chris is
chairman of the Pennon Executive
and a member of the Sustainability
Committee. Chris also serves as
Managing Director of South West Water.
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.
Skills and experience
Gill has a wealth of experience
in leadership, governance and
remuneration across a broad range
of sectors, including professional
services, education, not for profit
and government.
Gill was the senior independent
director of Charles Taylor plc until
its sale in January 2020.
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 chair of the council
of the University of Southampton.
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 is currently a non-executive
director of Intertek Group plc where she
is also chairman of their remuneration
committee. In addition to her PLC roles,
Gill is the President of the Marine
Biological Association.
Neil Cooper
Independent
Non-Executive Director
BSc Hons, FCMA
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.
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.
Iain Evans
Independent
Non-Executive Director
CBE, BSc Hons, FCA, MBA
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
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 is a non-executive director of
Bologna Topco Limited and also
acts as an independent corporate
strategy consultant.
Claire Ighodaro
Independent
Non-Executive Director
CBE, BSc Hons, FCMA, DUniv (Hon)
Claire was appointed to the Board on
1 September 2019. She is a member of
the Audit and Sustainability Committees.
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.
Claire 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
Claire is non-executive chairman of
Axa XL UK entities and non-executive
director of Flood Re, where she is also
chair of the audit committee.
Pennon Group plc Annual Report 2020
77
Gill Rider
Senior Independent Director (Non-Executive)
Neil Cooper
Independent (Non-Executive Director)
Iain Evans
Independent (Non-Executive Director)
Claire Ighodaro
Independent (Non-Executive Director)
Governance
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 14 and 15 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
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a
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s
p
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e
Performa n c e
E
Culture
n
t g
o
v
ernance
78
Pennon Group plc Annual Report 2020
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
Gender diversity as at 31 March
80
60
40
20
0
%
3
3
3
.
%
3
3
3
.
%
3
3
3
.
%
0
0
5
.
%
3
3
3
.
%
7
6
1
.
.
%
9
2
4
%
6
8
2
.
%
7
6
6
.
%
3
3
3
.
%
7
6
6
.
%
3
3
3
.
%
1
.
7
5
%
9
2
4
.
%
6
8
2
.
80
60
40
20
0
2018
2019
2020
2018
2019
2020
0-3 years
4-6 years
7-10+ years
Male
Female
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.
The Board continued to maintain its target of 33% female representation
throughout the year; at the year end it was 42.9%.
All of the Non-Executive Directors are considered by the Board to be
independent. None of the relationships or circumstances set out in the UK
Corporate Governance Code (the UK Code) applied to the Non-Executive
Directors listed on the following page. Claire Ighodaro joined the Board in
September 2019.
Gill Rider, having served in excess of six years in 2019, had her contract extended
by the Board 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 continues to demonstrate
independence of character and judgement in the performance of her role.
Sir John Parker met the independence criteria set out in the UK Code on his
appointment as Chairman and there have been no significant additions to his
overall external commitments since his appointment.
Chris Loughlin was appointed a non-executive director of Mears Group PLC and
accepted the Chair of Reall during the year, with the full approval and support of
the Board. The Executive Directors are encouraged to serve as non-executive
directors of external companies; the Board is of the opinion that the experience
gained provides additional and different business experience and a fresh insight
into the role of a non-executive director.
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 demonstrate collectively a broad range of business, financial
and other relevant experience.
Pennon Group plc Annual Report 2020
79
Governance
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 Guidance and Transparency Rule 7.1.1 he has
recent and relevant financial and accounting experience (as set out in his
biography on page 77. The Board is satisfied that the Committee as a whole has
competence relevant to the sector in which the Group operates.
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
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.
Gill Rider
• Assisting the Chairman with shareholder communications and being available as an additional point of
Senior
Independent
Director
Chief Financial
Officer
Susan Davy
contact for shareholders
• Acting as a sounding board for the Chairman
• Being available to other Non-Executive Directors if they have any concerns that are not satisfactorily
resolved by the Chairman
• Responsible for ensuring an annual performance evaluation of the Chairman, with the support of 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
• Leading the Pennon strategic review, including the proposed sale of Viridor
• Managing specific business responsibilities
• Managing investor relations including financing and treasury activities.
Non-Executive
Directors
Neil Cooper
Iain Evans
Claire Ighodaro
Gill Rider
• Critically reviewing the strategies proposed for the Group
• Critically examining the operational and financial performance of the Group
• Evaluating proposals from management and constructively challenging management’s recommendations
• Contributing to corporate accountability through being active members of the Committees of the Board.
80
Pennon Group plc Annual Report 2020
Board meetings and attendance
The Directors and their attendance at the six scheduled meetings of the Board during 2018/19 are shown below:
Position
Chairman
Non-Executive
Directors
Executive
Directors
Member
Sir John Parker
Gill Rider
Neil Cooper
Iain Evans
Claire Ighodaro
Chris Loughlin
Susan Davy
Appointment date
April 2015
September 2012
September 2014
September 2018
September 2019
August 2006
February 2015
Attendance
6/6
6/6
6/6
6/6
4/4
6/6
6/6
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.
Under the guidance of the Chairman, all matters placed before the Board are
discussed openly. Presentations and advice are received frequently from 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 30% of its
time has been taken up in discussions around strategy, 30% in operations of
the Group, including that of both main operating subsidiaries, 25% on financial
aspects of the Group and 15% on legal and risk matters.
Claire Ighodaro was appointed to the Board on 1 September 2019. All other
members of the Board served for the full year.
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 to the six scheduled Board meetings, a strategy day is held in
September each year, and extra ad hoc Board meetings are arranged as
required.
A number of unscheduled Board meetings were convened during the year,
allowing the Directors to receive reports and recommendations from the
sub-committee charged with overseeing the strategic review process and
presentations from the Company’s advisers. More information on the
governance arrangements for the strategic review can be found on page 120.
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 remains compatible with
Ofwat’s 2019 Board leadership, transparency and governance principles.
Pennon Group plc Annual Report 2020
81
Governance
The Board and its
governance framework
continued
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 the management committees and to review and refine
recommendations to be presented to the Board.
Members of the Pennon Executive
Chris Loughlin
Chief Executive Officer and Managing Director of
South West Water
Susan Davy
Chief Financial Officer
Phil Piddington
Managing Director, Viridor*
Simon Pugsley
Group General Counsel and Company Secretary
Adele Barker
Steve Holmes
Ed Mitchell
Sarah Moody
Paul Ringham
Group Director of Human Resources
Health, Safety, Security and Assurance Director
Group Director of Environment & Sustainability, and
Director of Wastewater Services, South West Water
Director of Corporate Affairs & Investor Relations
Commercial Director, Viridor*
Pennon Board composition
Chairman
Chief Executive Officer
Chief Financial Officer
Four independent
Non-Executive Directors
of Pennon
In attendance
Three independent non-executive
directors of 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 information flows
effectively between the Directors, the Board and the Committees.
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 employees in order to better understand key processes and
systems. Claire Ighodaro received such a tailored induction programme, following
her appointment in September 2019, details of which can be found on page 83.
* Until completion of the proposed sale of Viridor.
82
Pennon Group plc Annual Report 2020
The training needs of Directors are reviewed as part of the Board’s performance
evaluation process each year. Training may include attendance at external
courses organised by professional advisers and also internal presentations
from senior management.
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 84 to 115 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/about-us/board-committees 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.
Each director has a duty under the Companies Act 2006 to avoid a situation in
which they have or may have a direct or indirect interest that conflicts or might
conflict with the interests of the Company. This duty is in addition to the existing
duty owed to the Company to disclose to the Board any interest in a transaction
or arrangement under consideration by the Company.
Related parties
The processes outlined above in relation to conflicts of interest, together with
the commissioning of frequent share register analysis, enable the Board to
monitor the Group’s related parties so that any related party transactions may
be quickly identified and compliance with the Listing Rules ensured.
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 2019/20 and up to the
date of the approval of this Annual Report & 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 of 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 67.
Key performance indicators are in place to enable the Board to measure the
Company’s ESG performance (pages 21, 36, 37 and 42 to 47) and a number of
these are linked to remuneration incentives (page 108).
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 ethical standards. Areas covered in
the Code of Conduct and policies 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 strictly prohibits
employees from offering or accepting bribes, facilitation payments and
kickbacks. The policy requires proper due diligence checks of third parties
doing business with the Group, including a corruption risk assessment by the
relevant unit, to examine the nature of the proposed work or transaction. The
policy sets the framework for our clear requirement that everyone who works
with or for us must act honestly and with integrity at all times. It has been rolled
out comprehensively into all parts of the Group, with ongoing face-to-face
and online training provided into business units by the dedicated Group legal
compliance team. Enforcement of the policy is achieved through planned
and ad hoc checks, the training mentioned, and detailed investigations into
allegations or whistleblows received from employees, customers and suppliers
around potential wrongdoing.
Specific risk assessments undertaken by the Group internal audit function
identify more vulnerable areas of the Group. In order to try and mitigate risk
wherever possible, targeted authorisation and oversight processes apply to the
areas identified as being more vulnerable and additional training is provided.
The Group legal compliance team likewise actively assesses high risk areas
based on information gained through their close working with business
functions and Group internal audit. Assessments are undertaken using a number
of entry points, including using the output of reviews with the executive teams,
during and following face-to-face training, and analysing whistleblowing reports.
Foreign trading operations, procurement activities and business development/
commercial back-office areas have been specifically reviewed for compliance
with anti-bribery and anti-corruption requirements. Comprehensive operating
procedures are in place to address risks in those areas, with regular reviews
taking place to ensure the assessment of risk remains up to date.
The policy also sets out the employment consequences for breach of the policy
and potential legal sanctions under bribery laws. Any breaches or failure to
adhere to the Group’s strict standards of integrity and honesty will be subject
to disciplinary action, up to and including dismissal from the Company. All
employees are required to read, understand and comply with the policy and
report any circumstances or any suspicions of fraud, bribery, corruption or
other irregularities, either to a line manager or by using the Group’s confidential
whistleblowing (Speak Up) service.
The Speak Up service encourages employees to raise concerns about
suspected wrongdoing or unlawful or unethical conduct, explains how this
should be done and ensures that they are able to do so without fear of reprisals.
The Group’s whistleblowing policy specifically includes and encourages
reporting of:
• Bribery or corruption
• Stealing or fraud
• Corrupt or dishonest activity
• Anything else contrary to the law.
The Speak Up service comprises telephone and web-based reporting channels
operated for Pennon by independent provider Expolink, soon to be migrated to
Navex Global. Following receipt, the allegation will be assessed and an
investigation started promptly. The investigation process will be undertaken
fairly, impartially and thoroughly, and maintaining strict confidentiality at all
stages of the investigation and any subsequent action taken.
Allegations of bribery or corruption are reported to the Audit Committee
together with investigation outcome and details of any action taken, and will be
disclosed to our external auditors. To date there have been no fines, penalties or
significant issues reported or found in relation to bribery, corruption or fraud.
Our Code of Conduct and our policies are available on our website at
www.pennon-group.co.uk/about-us/policies.
Claire Ighodaro’s induction
Claire Ighodaro CBE joined the Board in September 2019.
Claire has a wealth of experience across industry and
business in the UK, and was previously the financial director
of BT Broadband. She is a past president of the Chartered
Institute of Management Accountants, and presently holds
positions, in addition to that held at Pennon, including as a
non-executive director of Flood Re where she is chair of its
Audit Committee, and XL Catlin Insurance Company UK
Limited where she is board chair.
Claire received a tailored induction programme, relevant to
her skills and experience, comprising a mix of written papers
and verbal updates on the strategic matters and challenges
relevant to the Group and its operations. The programme was
devised in order to provide her with necessary detail relevant
to her position as a Non-Executive Director of the Pennon
Board and a full understanding of the Group and its activities.
As part of the programme, Claire was provided with copies
of past Board and Committee papers, and met with relevant
members of the Pennon Executive to receive a detailed
update on their individual roles and to allow full discussion of
strategic matters and the Group’s operations. One of the first
Board meetings Claire attended was the annual strategy
review, at which the Board and key Executives reviewed the
year’s performance and debated where the strategy should
be directed going forward.
As an important part of the induction, Claire visited South
West Water’s Countess Wear wastewater treatment works
in Exeter, and the Viridor energy recovery facility at Ardley,
in Oxfordshire, where she met operational employees and
was shown at first hand the operations of those plants.
Claire also met both with our auditor, Ernst & Young LLP, to
gain an understanding of the auditing and financial oversight
of the Group, and with our external legal advisers, Allen &
Overy to discuss directors’ duties and legal matters relevant
to the Group. The induction programme gave Claire proper
insight into the Group needed to allow her to fulfil her role
as a Non-Executive Director of the Company.
Pennon Group plc Annual Report 2020
83
Governance
Board Committees’ reports
Audit Committee report
Dear Shareholder
I am pleased to introduce the Audit Committee’s report for the financial year
ended 31 March 2020. The report provides details of the work carried out by the
Committee and highlights our focus areas over the past year. The Committee
supports the Board in fulfilling its responsibilities in respect of monitoring the
quality and integrity of financial reporting, the adequacy of risk management
and internal controls processes, and governance and compliance matters.
The principal responsibilities of the Committee continue to be focused on three
key areas:
• Ensuring the adequacy of the Group’s financial reporting; an activity that
includes the assessment of the application of accounting policies given
underlying standards, 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 a
schedule of business reflecting the annual reporting cycle of the Group, 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 dam safety at South West Water, Group health & safety,
Group cyber risk management, energy management, resilience and business
continuity, ODI preparedness, Brexit readiness across the Group and the Group’s
approach to the General Data Protection Regulation (GDPR). More detail on our
risk management processes, principal risks and their associated mitigation can
be found on pages 58 to 67.
Together with this risk orientated activity, we continue to review the output
of the Group’s viability assessment over varying periods; both short term in
assessing the Group’s going concern status and over a period of five years as
it relates to the Group’s continuing viability. Significantly this year, the viability
assessment has considered a range of financial projections given a more
complex environment including a UK general election, the Brexit transition
period, the proposed sale of Viridor and most recently the ongoing COVID-19
pandemic. While the Group maintains a five-year viability assessment period,
South West Water has continued to use 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 68.
5/5
5/5
4/4
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 86. 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.
Looking ahead to 2020/21, as the full impact of COVID-19 emerges, the
Committee will continue to monitor developments and adapt its approach –
where necessary – to best support the Group’s stakeholders.
Neil Cooper
Audit Committee Chairman
The Audit Committee’s work is focused
on the quality and integrity of financial
reporting and the adequacy of internal
control and risk management systems
and processes.
Neil Cooper
Audit Committee Chairman
Audit Committee composition and meetings
Position
Committee
chairman
Committee
members
Director
Neil Cooper
Date of appointment
to Audit Committee
September 2014
Attendance
5/5
Gill Rider
Iain Evans
Claire Ighodaro(1)
September 2012
September 2018
September 2019
(1) Appointed to the Committee on 1 September 2019.
84
Pennon Group plc Annual Report 2020
Audit Committee composition
Claire Ighodaro was appointed to the Committee on 1 September 2019, following
her appointment to the Board. All other members of the Committee served for
the full year.
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.
Other regular attendees to Committee meetings during the year included: the
Chief Executive Officer/Managing Director of South West Water; the Chief
Financial Officer; the Managing Director of 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.
In accordance with the UK Code, the Board is satisfied that Neil Cooper, Iain
Evans and Claire Ighodaro have recent and relevant financial experience and
Three of the Committee members are also members of the Remuneration
Committee, which allows them to provide input into both Committees on any
Group performance matters and on the management of any risk factors relevant
to remuneration matters.
Significant matters considered by the Committee
The calendar of business of the Committee sets in place a framework for
ensuring that it manages its affairs efficiently and effectively throughout the
year and is able to concentrate on the key matters that affect the Group.
The most significant matters that the Committee considered and made
decisions on during the year and, where appropriate, since the year end,
are set out below and opposite.
Financial reporting
External auditor
Risk management
Governance
• Monitored the integrity of the financial statements of the Group and the half-year and full-year results
announcements relating to the Group’s financial performance, including reviewing and discussing significant
financial reporting judgements contained in the statements
• Reviewing the internal assessment of going concern and longer-term viability on behalf of the Board
• 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.
• Considered the 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 31 March 2019, which did
not identify any significant deficiencies
• Recommended to the Board the reappointment of Ernst & Young LLP (EY) as senior statutory auditor following a
thorough review and benchmarking of their operation following the conclusion of the 2018/19 audit,
• Noted the appointment of a new EY audit partner, Christabel Cowling, following the scheduled rotation of her
predecessor
• 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.
• 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.
In connection with the proposed sale of Viridor, the Group issued a Circular
to shareholders in May 2020. In support of the Circular’s preparation, through
the Board, Committee members scrutinised management’s near-term working
capital projections and the accountants report thereon, prepared by EY.
These projections were based on a sale of Viridor and included a reasonable
worst-case scenario that considered the cumulative impact of the Group’s
principal risks, Ofwat mandated viability sensitivities and a downside assessment
of the potential impact of the current COVID-19 pandemic. This working capital
assessment indicated that the continuing Group has adequate headroom for the
period assessed.
In addition to the matters above the Committee also reviewed and considered
communications with the Financial Report Council (FRC), following their review
of the Group’s 2019 Annual Report & Accounts. The FRC requested further
information with regard to a number of the Group’s disclosures and where
appropriate we have sought to include enhanced disclosure in this Annual Report
& Accounts following the constructive discussions. We are pleased to report the
FRC has satisfactorily concluded their review noting their review scope has
limitations and is performed on a non-reliance basis. 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
2020 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 124 to 131. In addition to the significant matters set out in the table
below, the Committee considered a range of other matters.
Pennon Group plc Annual Report 2020
85
Governance
Audit Committee report
continued
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 included:
Area of focus
Revenue recognition
Non-current asset
impairment review
and environmental
provisions
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
Disclosure of the
sale of Viridor
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 (GRREC). The Committee relied on South West Water’s refined 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.
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 environmental provisioning. 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. The recent £4.2 billion sale value agreed
in March 2020 for Viridor validates this substantial goodwill headroom. Following a detailed review of the analysis undertaken,
and consideration of the most recent management assumptions in relation to the value of environmental provisions including latest
assessments of the discount and inflation rates, 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 across the Group against historical collection records and the track records of other companies
in the relevant sectors. The Committee was particularly mindful of the impact of COVID-19 pandemic on the assessment of
expected credit losses in determining the bad debt provision, noting the likely impacts of the pandemic the water businesses
and Viridor. 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 and its provisions for
expected credit losses was reasonable.
In November 2016 the lead construction contract for 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. The Committee has reviewed developments relating to the amount due regarding both the ongoing
legal proceedings to recover the asset and financial analysis from management regarding Interserve’s financial condition impacting
likely recoverability. The Committee noted management’s update on the progression of the legal proceedings during the year. The
report contained legal analysis of developments and progress made towards recovery and an updated assessment of Interserve’s
credit worthiness having regard to publicly available information, including latest filings at Companies House and benchmarked
movement in credit against similar companies. The Committee is satisfied that the asset recognition criteria for this amount
continues to be met, the quantum of a credit loss provision made is appropriate in the circumstances and that appropriate
disclosures have been made.
A report from the Chief Financial Officer on the financial performance of the Group, including forward-looking estimates of covenant
compliance and funding levels under 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 report for 2019/20 included a downside scenario for the unfolding
COVID-19 pandemic, as well as considering scenarios for the Group if Viridor is or is not sold within the going concern assessment
period. 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. Similarly, this report also considered the viability of the Group considering a downside COVID-19
scenario alongside the manifestation of other adverse events modelled from the Group’s principal risks and Ofwat’s mandated
sensitivities for water companies. South West Water 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 68.
The Committee considered the appropriateness of the disclosure for Viridor’s financial performance and assets and liabilities
following the announcement of its sale on 18 March 2020. We considered management’s assessment of the likelihood of the sale
completing in the next 12 months in relation to the specific conditions precedent contained in the Share Purchase Agreement, and
agreed it was appropriate to disclose Viridor as a discontinued operation (requiring the prior year income statement to be restated)
and as an asset held for sale on the balance sheet as at March 2020.
86
Pennon Group plc Annual Report 2020
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 2019 Annual
General Meeting. Christabel Cowling is the audit partner, replacing Debbie
O’Hanlon, and is in her first year.
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 pages 90 and 91. 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 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
15% 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 153.
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.
Following last year, in which the Group established a new directorate of Risk and
Assurance encompassing Group risk reporting and internal audit, the Group’s
internal audit function has bedded down well. 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.
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 120, the Committee 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 124 to 131.
In preparing and finalising the 2020 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 no later than the year ending March 2024. This allows for any potential
new audit firm to take up the role no later than 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, while
receiving fresh challenge from a new senior statutory auditor.
Pennon Group plc Annual Report 2020
87
Dear Shareholder
I am pleased to report on the Sustainability Committee’s activities during the
year and am pleased to welcome Claire Ighodaro who brings considerable
experience to the Committee.
Designed to add value and resilience to our business, our sustainability strategy
was refreshed in 2018/19 and is integrated with Pennon’s business, people and
health & safety strategies. It clearly sets out our long-term objectives, three-year
targets and our associated KPIs and implementation plans required to ensure
continuously improving sustainability performance and responsible business
practice throughout the organisation.
The role of the Sustainability Committee is to ensure robust scrutiny of key
aspects of environmental, social and governance (ESG) performance and to
oversee Pennon’s performance against its strategic sustainability objectives.
In what has been a busy and important year, we have refined and approved a
full set of three-year targets and associated KPIs to monitor progress against
our agreed strategic objectives, within the ESG framework.
In the development of our new strategy we have tested thoroughly the
materiality of our areas of focus and consulted a cross-section of our key
stakeholders. We have also set Group-wide three-year sustainability targets in
support of the new strategy which we will use to monitor progress towards our
strategic objectives. We will report on our performance against these targets
regularly.
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
Governance
Sustainability
Committee report
In a busy and important year for
Pennon, we have refined and
approved a full set of three-year
targets and associated KPIs to monitor
progress against our agreed strategic
sustainability objectives, within the
ESG framework.
Iain Evans
Sustainability Committee Chairman
Sustainability Committee composition and meetings
Position
Committee
chairman
Committee
members
Director
Iain Evans
Date of appointment
to Sustainability
Committee
September 2018
Attendance
4/4
Gill Rider
Susan Davy
Chris Loughlin
Claire Ighodaro(1)
September 2012
March 2018
November 2006
September 2019
4/4
4/4
4/4
3/3
(1) Appointed on 1 September 2019.
88
Pennon Group plc Annual Report 2020
Claire Ighodaro was appointed to the Committee on 1 September 2019. All other
members of the Committee served throughout the 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 2020, Pennon remains on track to achieve all of its 12 three-year
targets, with most KPIs having been achieved in the year, apart from our
environmental compliance KPI due to a single Category 2 incident, and our
natural and social capitals baseline assessment which, largely due to its
complexity, is slightly behind schedule. It is also noted that although we remain
on track to meet our health, safety and wellbeing targets and LTIFR KPIs, the
fatal accidents that sadly occurred during 2019/20 are acknowledged and
investigations continue. Full details of the sustainability performance for
South West Water and Viridor in 2019/20 are given in their respective reports.
During the year the Committee continued to note Pennon’s engagement with
Business in the Community (BiTC), The Prince’s Responsible Business Network
and a leading business-led charity. Pennon is an active participant in BiTC’s
South West Regional Board and Viridor is a founder member of its Circular
Economy Task Force.
The Sustainability Committee continues to aim 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.
During 2019/20, 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
• Sustainability and environmental strategy and performance
• Sustainability reporting and disclosures for 2019 and the associated
verifier’s reports and recommendations
• Progress against the sustainability targets for 2019/20 and sustainability
targets for 2020-23
• 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
• Climate change and carbon management strategy
• Sustainable supply chain procurement and practices, including a new
suppliers’ code of practice
• Natural and social capital net impact assessment and methodologies
• Priority programmes (plastics, biodiversity and sustainable finance)
• Good governance review.
Reporting and assurance
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 assured by
DNV GL, an independent management consultancy specialising in technical
assurance in the utility sector. Pennon considers that DNV GL’s method of
assurance – 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 BiTC.
Certain disclosures within this annual report that relate to the sustainability
performance of South West Water and Bournemouth Water have been
subject to an independent audit of regulatory data conducted by Jacobs.
DNV GL has reviewed the consolidation of these into total Pennon data, but
not their preparation.
Jacobs are engaged by South West Water to independently audit South West
Water’s technical (non-financial) data published in its Annual Performance
Report. This includes all South West Water’s regulatory targets, including the
suite of environmental performance indicators. Jacobs provide a report on this
audit within South West Water’s Annual Performance Report.
DNV GL’s independent limited assurance report is available at www.pennon-
group.co.uk/sustainability.
Benchmarking
Pennon is a constituent within the FTSE4Good Index, Sustainalytics, CDP
Climate Change, Dow Jones Sustainability Index and a number of other leading
external ESG assessments. FTSE4Good and similar leading indices are designed
to facilitate investment in companies that meet globally recognised corporate
responsibility standards. These leading indices assess companies on their
disclosures relating to stringent environmental, social and governance criteria,
and their position 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 14
Strategic priorities, page 16
Sustainability at our core, page 20
Chairman’s statement, page 10
Our stakeholders, page 26
Chief Executive Officer’s review, page 32
Key performance indicators, pages 21 and 36 to 37
Our people, page 38
Our operations, pages 42 to 49
Viridor and South West Water sustainability reports
While this is a fully integrated annual report, South West Water and Viridor
continue to produce their own sustainability reporting. The sustainability report
for Viridor will be published in August 2020 and South West Water’s company
Annual Performance Report and regulatory reporting, to be published in July
2020, will incorporate its sustainability reporting. South West Water’s report
will be available to view from www.pennon-group.co.uk/sustainability and both
documents will be published on the relevant company’s website.
Pennon Group plc Annual Report 2020
89
Governance
Nomination
Committee report
We remain focused on encouraging
diversity and ensuring inclusion across
all parts of the Group.
Sir John Parker
Nomination Committee Chairman
Nomination Committee composition and meetings
Position
Committee
chairman
Committee
members
Director
Sir John Parker
Gill Rider
Neil Cooper
Iain Evans
Date of appointment
to Nomination
Committee
April 2015
September 2012
September 2014
September 2018
90
Pennon Group plc Annual Report 2020
The Nomination Committee met three times during the year to fulfil the duties
set out in its terms of reference. All of the members served on the Committee
throughout the year.
Only the members of the Committee are entitled to attend the meetings of
the Committee. Other regular invitees to Committee meetings during the year
included the Chief Executive Officer, the Group Director of Human Resources
and the General Counsel and Company Secretary.
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 and a
horizon scanning exercise for potential Non-Executive Directors to
complement the current boards of both Pennon and South West
Water Limited
• A review of the time spent by Non-Executive Directors in fulfilling
their duties
• Finalising the appointment of Claire Ighodaro to the Board effective from
1 September 2019 and, after reviewing the current composition of
committees to ensure a balance, recommending Claire be appointed to
the Sustainability and Audit Committees
• A review of the Group’s succession plans, leadership of the Group and
the Group’s approach to succession planning and in light of the ongoing
strategic review
• A review of the Group’s gender pay disclosure for 2019 and the ongoing
action plan
• Discussions around the Group’s ethnic diversity ambition and ensuring
Pennon made the appropriate contribution to the Parker Review
• Oversight of the Board effectiveness review
• A review of the Committee’s terms of reference.
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. Claire Ighodaro was
appointed during the year and, as reported in the 2019 annual report, the
Committee were assisted in the appointment by the Inzito Partnership. Inzito
had no other connection with the Company.
Board effectiveness review
The Board undertakes a formal and rigorous review of its performance and that
of its Committees and Directors each year. This year, the Committee engaged
independent board performance consultancy Condign Limited (Condign)
to facilitate the review. Condign has no other connection with the Group.
The exercise was conducted in March 2020 by way of:
• A review of the papers submitted to the Board and Committees over
the course of the year
• Attendance at the Board meeting in March 2020 to observe the
proceedings and debate
Attendance
3/3
• A series of structured interviews with each member of the Board
3/3
3/3
3/3
• A review of the results of the 2019 performance evaluation and an
assessment of whether the issues identified in that report had
been addressed.
The Senior Independent Director separately carried out a review of the individual
Directors’ performance and led the evaluation of the Chairman’s performance.
The Committee is pleased to report that as at 31 March 2020, 42.9% of the
Board’s Directors were women, as disclosed on page 79.
Condign collated and analysed the output from their activities and prepared a
report, which was discussed by the Board and its Committees. The report noted
that the Board had risen to the challenge of maintaining oversight of the existing
businesses and risks, while effectively guiding delivery of South West Water’s
2020-25 business plan and directing the strategic review, and throughout had
operated effectively on behalf of shareholders.
Action is being taken to improve diversity across the workforce, which will assist
in increasing female representation at senior management level as described on
pages 38 and 39. 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.
Having reviewed the report, the Committee agrees that the composition of the
Board provides a good balance of skill, experience, knowledge, diversity and
understanding of stakeholder interests. Further, it was noted that the Directors
work well together and that each Director continues to contribute effectively to
boardroom debate. The Committee concludes therefore that no modification to
the composition of the Board is required as a result of the review.
During 2019, our participation in the 30% Club increased with three of our senior
leaders actively mentoring future women leaders, and a further three employees
being mentored. Plans are underway to increase this in 2020 together with
active membership of ‘Women in Water’ promoting female talent across the
industry by encouraging networking and the progression of women into more
senior roles.
The areas identified in the Board effectiveness review as requiring future
focus are largely driven by the outcome of the strategic review: ensuring the
continued effectiveness of the Board and the Group’s governance framework;
the Group’s future strategy; and succession planning. In addition, the review
confirmed the Board’s commitment to health & safety and a desire to fully
understand the leadership and cultural drivers required to drive improvements
in health & safety performance. The Committee considers that while good
progress has been made in the areas identified in the 2019 review, matters such
as diversity and Directors’ training and development deserve ongoing attention.
The Committee welcomes the regular review of succession planning to ensure
that this continues to support the Group’s strategy.
Talent management and succession planning
Internal talent development as well as the ability to attract, retain and develop
skilled, high potential individuals across the Group are areas on which the
Committee continues to focus. The Committee, supported by the Group Director
of Human Resources, reviews both the executive and non-executive leadership,
including flight risks and mitigation plans as part of a regular agenda. Horizon
scanning externally has also become a more regular activity, to ensure that the
Board remains flexible to respond to changing priorities of the Group.
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 to 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.
Our position in the Hampton-Alexander review improved to 24 out of the 250
companies in the FTSE 250. This is up from 85 last year primarily driven by a
transitional change in the composition of our Board when the analysis was
undertaken. In September 2019, Claire Ighodaro was appointed to the Board
as an additional independent Non-Executive Director.
We remain committed to the targets as proposed by Hampton-Alexander of 33%
representation of women on the Board and on the Executive Committee.
Pennon was among the 325 companies listed in the 2020 Bloomberg Gender-
Equality Index (GEI) which tracks the financial performance of public companies
committed to disclosing their efforts to support gender equality through policy
development, representation and transparency.
Pennon contributed to the updated Parker Report, the survey for which is
undertaken on a voluntary basis. Released in February 2020, at the time of
surveying, Claire’s appointment was not included. However, our Board ethnic
diversity now stands at 14%, and we have met the objective of the review in
having at least one ethnically diverse Non-Executive Director ahead of the
2024 timeline.
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.
Information regarding the gender breakdown and ethnic diversity of the
workforce is provided on pages 38 and 39.
Sir John Parker
Chairman
Pennon Group plc Annual Report 2020
91
Governance
Remuneration
Committee report
We are grateful for shareholder support.
Our remuneration policy is important in
ensuring remuneration is aligned with
and supports the Group strategy and
continues to meet best practice.
Gill Rider
Remuneration Committee Chairman
Remuneration Committee composition and meetings
Position
Committee
chairman
Committee
members
Director
Gill Rider
Date of appointment
to Remuneration
Committee
September 2012
Attendance
5/5
Neil Cooper
Iain Evans
September 2014
September 2018
5/5
5/5
92
Pennon Group plc Annual Report 2020
The Committee met five 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.
The Committee’s activities during the financial year
The Committee engaged in the following activities during the year:
• Undertook a comprehensive review and external consultation exercise in
advance of releasing our updated remuneration policy, with a view to seeking
shareholder approval at the 2020 AGM
• Monitored external developments in remuneration
• Undertook a pensions review, with a view to ensuring alignment of Executive
Directors’ pensions with those of the wider workforce, including supporting
management proposals to consult with the wider workforce with proposals
to modernise the pension offering. The results have ensured higher pension
contributions to employees across the Group
• Agree Executive remuneration ensuring it remains appropriate and meets
all regulatory requirements, including that for South West Water in meeting
the Ofwat requirements
• Reviewing the wider workforce remuneration using the Pennon pay
dashboard and consider overall Group performance, 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 2020
annual report
• Determining performance targets in respect of the Annual Incentive
Bonus Plan for 2019/20
• Determining bonuses and deferred bonus awards pursuant to the
Company’s Annual Incentive Bonus Plan in respect of the year 2018/19
• Approving the long-term incentive plan (LTIP) awards for the year
• Reviewing the Group’s gender pay gap report
• Approving the release of the 2016 deferred bonus share awards and the
outcome of the 2016 LTIP awards
• Reviewing the Committee’s terms of reference and undertaking a review
of the Committee’s performance in the year.
The Committee’s focus for 2020/21
• Ensure that targets are stretching but also fair and achievable, so that they
act to retain, motivate and incentivise the Pennon Executive to deliver the
Group’s strategic goals, recognise the new Group structure, delivering the
PR19 regulatory commitments and creating 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
• Consider executive pay and benefits following the conditional sale of Viridor
in early summer 2020 and in the context of the Group’s ongoing strategic
review
• 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
• Monitoring of the updated remuneration policy to ensure that it is delivering
what it is meant to and assists in retaining and motivating employees, while
continuing to meet best practice.
All of the Committee members served throughout the year.
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. Aside from the provision of tax
services to the Group, Deloitte has no other connection with the Company or
any Director. 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 2020
93
Governance
Directors’
remuneration
report
94
2019/20 performance highlights
and outcomes
95 Link between strategy and remuneration
96
Annual statement from the Chairman
of the Remuneration Committee
98 Directors’ remuneration policy
98 Changes to the remuneration policy
99
Future policy table –
Executive Directors
Future policy table –
Non-Executive Directors
Illustrations of applications of
remuneration policy
102
102
103
103 Approach to recruitment remuneration
Directors’ service contracts and letters
103
of appointment
Policy on termination of service
agreements and payment for
loss of office
Statement of consideration of
employment conditions elsewhere
in the Company
Statement of consideration of
shareholder views
104
104
105 Annual report on remuneration
105
106
107
107
109
110
110
111
112
113
113
114
115
115
Implementation of the remuneration
policy for 2020/21
Remuneration approach for
wider employees
Single total figure table
(audited information)
Annual bonus outturn for 2019/20
Long-term incentive outturn
for 2019/20
Retirement benefits and entitlements
(audited information)
Outside appointments
Additional 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
94
Pennon Group plc Annual Report 2020
2019/20 performance
highlights and outcomes
Group performance
• Underlying profit before tax up 2.6%
• 2019/20 dividend per share up 6.6% to 43.77 pence per share
• Cumulative return on regulated equity over K6 (2015-20) 11.8%
• South West Water began the K7 (2020-25) regulatory period as the only
company to have achieved fast-track status for its business plan in two
consecutive five-year price reviews
• Proposed sale of Viridor for an enterprise value of £4.2 billion, which
will accelerate the realisation of significant value for our shareholders.
Annual bonus 2019/20 outturn (% of maximum)
Chris Loughlin
Chief Executive Officer
Susan Davy
Chief Financial Officer
78.0
78.7
0
5
2
0
5
5
7
0
0
1
Long-term incentive plan (LTIP) outturn
(estimated vesting) (% of maximum)
2017 grant
86.6
0
5
2
0
5
5
7
0
0
1
2019/20 single figure outcome (£’000)
Chris Loughlin
Chief Executive Officer
738
1,450
2,188
Susan Davy
Chief Financial Officer
558
1,112
1,670
0
.
5
2
1
3
.
0
5
2
6
.
5
7
3
9
0
5
2
1
,
Fixed
Variable
.
5
2
6
5
1
,
.
0
5
7
8
1
,
.
5
7
8
1
2
,
0
0
5
2
,
Link between strategy
and remuneration
Group KPIs
Long-term
Earnings per share (EPS)
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
GHG emissions
* Reflected in bonus operational and individual metrics.
Link to strategy
1
2
3
Link to variable
remuneration
Annual
bonus
LTIP
*
*
*
*
*
*
1
2
3
Leadership in UK
infrastructure
We aim to lead in the sectors we
operate in by capitalising on Group
strengths, capabilities, best practice
and synergies, and achieving
the right balance between risk
and reward.
Cost base efficiency
We are focused on driving down
overheads and operating in the
most efficient way to minimise costs.
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.
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.
Principles used to develop remuneration policy
Clarity and
simplicity
Risk
Predictability
Proportionality
Alignment to
culture
The Committee is committed to providing open and
transparent disclosures with regards to executive
remuneration arrangements.
Annual bonus deferral, the LTIP holding period and
shareholding requirements ensure that Executive
Directors are exposed to the long-term performance
of the Company.
For each component of pay, the policy outlines the
maximum opportunity levels for Executive Directors.
Actual incentive outcomes will vary depending on the
level performance achieved against specific measures.
Our remuneration framework does not reward poor
performance. Payment of the annual bonus and
LTIP are subject to the achievement of stretching
performance targets.
The metrics used to measure both short and long-term
performance at Pennon are closely aligned to our
business strategy and vision. Delivery of awards
in shares delivered over three to five years and
shareholding guidelines ensure focus on sustainable
performance.
Pennon Group plc Annual Report 2020
95
Governance
Annual statement
from the Chairman of the Remuneration Committee
Dear Shareholder
I am pleased to present the Directors’ remuneration report for the year ending
31 March 2020.
This has been a significant year in the history of the Pennon Group. In addition
to strong operational and financial results, South West Water’s price review was
fast tracked by the regulator. Then in March 2020, we announced the proposed
sale of Viridor to KKR for an enterprise value of £4.2 billion, which will accelerate
the realisation of significant value for our shareholders.
This provided the backdrop for decisions made in relation to executive
remuneration.
Performance in 2019/20
The Group delivered another year of robust financial and operating performance
in 2019/20. Overall underlying profit before tax increased to £288 million.
South West Water finished the K6 (2015-20) regulatory period with a cumulative
sector-leading return on regulated equity of 11.8% and the successful conclusion
of the 2019 price review process (PR19). As a result, South West Water began
the K7 (2020-25) regulatory period as the only company to have achieved
fast-track status for its business plan in two consecutive five-year price reviews.
This has been an important year for Viridor operationally. A pipeline of growth
projects has been developed across energy recovery, plastics recycling and
energy parks. This includes our new energy recovery facilities at Glasgow,
Beddington and Dunbar moving to ramp up, and good progress with the
construction of our plastics processing facility at Avonmouth, which is on track
for contribute to earnings in 2020/21.
The Group has an ambitious road map for health & safety, largely focused on our
HomeSafe programme. This has yielded a range of improving and encouraging
trends in recent years, however we continue to seek improvements as we work
towards our goal of being a health & safety leader in our industries.
We continue to make progress against our long-term sustainability strategy.
In 2019/20, South West Water further reduced the number of serious and
significant pollution incidents to one Category 2 event, building on the
previous year’s performance which was itself our best performance for a
decade. Less serious grades of pollution incident continue to be a challenging
area; an accelerated pollution plan has been implemented and we continue to
make additional investment. Our water resources position recovered from the
previous dry year and we have met our leakage target for 20 years in a row.
Despite the COVID-19 crisis, the Group continues to have significant cash and
liquidity and has not taken any Government support measures. For 2019/20, the
Board has recommended a final dividend and the total dividend of 43.77 pence
per share has been achieved while investing more than £3.6 billion in our
businesses over the past 10 years.
This has been a significant year in the
history of the Pennon Group.
Gill Rider
Remuneration Committee Chairman
96
Pennon Group plc Annual Report 2020
Incentive outcomes
The significant progress against financial and operational objectives is
reflected in the outcomes against the bonus scorecard and individual
objectives. Further details are set out on pages 107 to 109.
Policy review
Our previous remuneration policy was approved at the 2017 AGM, receiving
support of just under 98%. Under the normal three-year renewal cycle we will
be submitting a new policy for approval at the 2020 AGM.
In September 2019, the Company announced a full review of the strategic
focus, growth options and capital allocation policy for the Group.
Given the significance of this review, the Committee decided that 30% of
the 2019/20 bonus for the two Executive Directors should be linked to the
successful execution of the strategic review and the value created for our
shareholders. The balance of the award remained subject to the normal bonus
scorecard and individual objectives.
The Board are unanimous in the view that the strategic review has been
highly successful. The share price rose by 42% from the announcement of the
strategic review to the announcement of the proposed sale of Viridor. In March
2020 Pennon also joined the FTSE 100 index. The transaction enables our
shareholders to accelerate the realisation of value from Viridor and on
completion of the sale, the Board intends to use the net cash proceeds to
reduce Pennon’s company borrowings and pension deficit, and make a return
to shareholders, while retaining a portion of funds for future opportunities.
Overall, the annual bonus earned in respect of the year is 78.0% of salary
for the Chief Executive Officer and 78.7% for the Chief Financial Officer.
The Committee is satisfied that the bonus outcomes are fully supported
by performance in the year.
Half of the bonus earned is deferred into shares which affirms Executive
Directors’ commitment to creating a long-term, sustainable business.
Share awards granted under the long-term incentive plan (LTIP) in 2017
will be eligible for vesting in 2020. This award was based on EPS growth
(40%), dividend growth and cover (40%) and RoCE (20%), as well as an
‘underpin’ evaluation, including consideration of safety, ESG factors and
financial performance.
Awards are expected to vest at 86.6% of maximum, as shown on page 109.
This is reflective of EPS growth of 9.5% and returns of 9.6%. We have also
delivered dividends of £519 million to our shareholders for the last three
financial years while also making significant investments.
Vested shares for Executive Directors will remain subject to an additional
two-year holding period.
In light of the planned sale of Viridor, the Committee concluded that any
renewal of the remuneration policy at the 2020 AGM should incorporate
only minor updates, with a more detailed review of the remuneration strategy
deferred until later in the year when there is further clarity regarding the future
structure of the Group.
The key points to note in respect of the policy to be presented to shareholders
at the 2020 AGM:
• No material changes to structure - the conventional bonus and LTIP
structures will be retained.
• Bonus maximum – a modest increase to the bonus maximum from 100%
of salary to 125% of salary is proposed. This change is intended to provide
additional focus on key financial, operational and investment priorities, as
the Company moves towards delivery against the plan agreed with Ofwat
for the next five-year regulatory cycle, which commenced on 1 April 2020.
The proposed maximum opportunity remains towards the lower end of
FTSE 100 and FTSE 250 practices. Half of the award would continue to be
deferred into shares for three years.
• LTIP maximum – no change proposed (150% of salary).
• Pensions - for new hires pensions will be aligned with arrangements offered
to wider employees. We also commit to aligning pensions for incumbent
Executive Directors with the wider workforce by reduction in two equal steps
by 1 April 2022.
• Post-cessation shareholding – executives will be expected to hold shares
in the Company for two years following cessation of employment.
• Malus and clawback – provisions have been strengthened to align with
best practice.
I would like to thank the major shareholders who provided feedback on these
proposals during consultation earlier in the year.
The Committee intends to undertake a more wholesale review of the policy later
in the year, following the completion of the sale of Viridor. To the extent that
changes to the remuneration structure are proposed, we would consult and
seek shareholder approval for a revised remuneration policy as appropriate.
Due to the timeframe for completion of the Viridor transaction, the Committee
has determined that it would be prudent to delay the target-setting process
for 2020 LTIP awards. This is to ensure that the performance criteria reflect
the strategic priorities for the Continuing Group and the interests of our
shareholders. Once finalised, we intend to publish the performance metrics
and targets on our website.
Further detail on pay arrangements is provided in the main body of the
remuneration report. I hope that our shareholders continue to support
our approach.
Gill Rider
Remuneration Committee Chairman
Pennon Group plc Annual Report 2020
97
Governance
Directors’ remuneration policy
Introduction
The previous remuneration policy was approved by shareholders at the 2017 AGM, where the resolution received the support of nearly 98% of shareholders who
voted. Under the normal three-year renewal process, a new remuneration policy, as described in this part of the report, will be subject to a binding shareholder vote at
the AGM to be held on 31 July 2020, and if approved will come into effect from this date.
The Directors’ remuneration policy will be displayed on the Company’s website at www.pennon-group.co.uk/about-us/governance-and-remuneration, immediately
after the 2020 AGM and will be available upon request from the Group Company Secretary.
Changes to the remuneration policy
The policy has been updated in order to be more aligned with evolving market and best practice, including the remuneration elements of the 2018 UK Corporate
Governance Code. As explained on page 97, given the timing of the Group’s ongoing strategic review, a more detailed review of remuneration strategy has been
deferred until later in the year.
In determining the updates to the new remuneration policy, the Committee followed a robust process, discussing the detail of the policy over a series of meetings
in 2019 and 2020. The overall pay structure detailed in the previous 2017 policy remains in line with mainstream FTSE practices, and therefore the Committee was
satisfied that there was merit in maintaining this approach for the purposes of the 2020 policy renewal.
Throughout the Committee’s deliberations on pay matters, careful consideration is given to the strategic priorities of the business, evolving market practice and
investor guidance. Input is regularly sought from the management team, while ensuring that conflicts of interests are suitably mitigated. External perspective is
also provided by our independent advisors. The Committee also assesses the operation of the policy against the principles of clarity, simplicity, risk-management,
predictability, proportionality and alignment to culture detailed in the 2018 UK Corporate Governance Code.
The changes incorporated into this policy include:
• A reduction of pension benefits for newly appointed Executive Directors from the previous limit of 20% of salary to be aligned with arrangements offered to
employees in the wider organisation and a commitment to reduce pensions for incumbent directors;
• A modest increase to the maximum bonus opportunity from 100% of salary to 125% of salary in order to provide additional focus on key financial, operational
and investment priorities, as the Company moves towards delivery against the plan agreed with Ofwat for the next five-year regulatory cycle which commenced
on 1 April 2020;
• Extension of shareholding guidelines to operate after an Executive Director steps down from the Board;
• Strengthening of safeguards against payments for failure, by enhancing existing malus and clawback provisions; and
• Minor changes to clarify the operation of the policy and improve its effectiveness.
98
Pennon Group plc Annual Report 2020
Future policy table – Executive Directors
The table below sets out the elements of the total remuneration package for the Executive Directors which are comprised in this Directors’ remuneration policy.
Fixed pay
Base salary
Purpose and link to strategy
Operation
Maximum
Performance framework
Benefits
Purpose and link to strategy
Operation
Maximum
Performance framework
Pension-related benefits
Purpose and link to strategy
Operation
Maximum
Performance framework
Set at a competitive level to attract and retain high calibre candidates to meet the Company’s strategic objectives in an
increasingly complex business environment.
Base salary reflects the scope and responsibility of the role as well as the skills and experience of the individual.
Salaries are generally reviewed annually and any changes are normally effective from 1 April each year. In normal circumstances,
salary increases will not be materially different to general employee pay increases.
However, the Committee reserves the right to make increases above those made to general employees, for example in
circumstances including (but not limited to) an increase in the scope of the role, or to reflect an individual’s development in a role.
When reviewing salaries the Committee has regard to the following factors:
• Salary increases generally for all employees in the Company and the Group
• Market rates
• Performance of individual and the Company and/or development in the role
• Other factors it considers relevant.
There is no overall maximum.
None, although individual and Company performance are factors considered when reviewing salaries.
Benefits provided are consistent with the market and level of seniority to aid retention of key skills to assist in meeting strategic
objectives.
Benefits currently include the provision of a company vehicle, fuel, health insurance and life assurance. Other benefits may be
provided if the Committee considers it appropriate.
In the event that an Executive Director is required to relocate, relocation benefits may be provided.
The cost of insurance benefits may vary from year to year depending on the individual’s circumstances.
There is no overall maximum benefit value but the Committee aims to ensure that the total value of benefits remain proportionate.
None.
Provides funding for retirement and aids retention of key skills to assist in meeting the Company’s strategic objectives.
Defined benefit pension arrangements are closed to new entrants. Defined contribution pension arrangements have been
available to new employees since 2008 and we are currently consulting on proposals to further modernise our pension
arrangements.
A cash allowance may be provided as an alternative and/or in addition where pension limits have been reached.
Pension benefits for new appointments will be aligned with the rate available for the majority of employees at the time of
appointment.
For the current Executive Directors, the pension benefits are currently 30% of salary for the CEO and 25% of salary for the CFO.
These contractual benefits are consistent with the previous policy approved by shareholders. As noted in the annual report on
remuneration, the intention is for these benefit levels to be reduced over time to align with the wider workforce by 1 April 2022.
Legacy defined benefit pension arrangements will continue to be honoured. The current CFO is a pension member, however there
are no further prospective accruals in respect of defined benefit pension arrangements.
None.
Variable pay and share-based remuneration
Annual bonus
Purpose and link to strategy
Operation
Maximum
Performance framework
Incentivises the achievement of key performance objectives aligned to the strategy of the Company.
Annual bonuses are calculated following finalisation of the financial results for the year to which they relate.
A portion of any bonus is deferred into shares in the Company which are normally released after three years. Normally 50%
is deferred.
Dividends (or equivalents) may be paid/accrued on deferred shares.
Awards are subject to malus and clawback provisions. Further details are set out on page 101.
The maximum bonus potential is 125% of base salary.
Performance targets may relate to financial, operational, strategic and personal objectives which are reviewed each year.
Performance criteria will reflect strategic priorities and regulatory requirements.
The level of payment for threshold performance will vary depending on the nature of the metric and the stretch of the target set.
There is normally scaled payment for performance between the threshold and maximum performance hurdle.
The measures, weighting and threshold levels may be adjusted for future years.
Following the financial year end the Committee, with advice from the Chairman of the Board and following appropriate input from
other Board Committees (including the Audit Committee), assesses to what extent the targets are met and determines bonus
levels accordingly. The Committee may exercise its discretion in certain circumstances; further details are set out on page 101.
Pennon Group plc Annual Report 2020
99
Governance
Directors’ remuneration policy
continued
Variable pay and share-based remuneration continued
Long-term incentive plan (LTIP)
Purpose and link to strategy
Operation
Maximum
Performance framework
All-employee share plans
Purpose and link to strategy
Operation
Maximum
Performance framework
Shareholding guidelines
Shareholding guidelines
Purpose and link to strategy
Operation
Provides alignment to the achievement of the Company’s strategic objectives and the delivery of sustainable long-term value
to shareholders.
Annual grant of conditional shares (or equivalent). Share awards vest subject to the achievement of specific performance
conditions normally measured over a performance period of no less than three years.
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.
In addition, a two-year holding period may apply in respect of any shares which vest at the end of the three-year
performance period.
Dividends (or equivalents) may accrue on share awards that vest.
Awards are subject to malus and clawback provisions. Further details are set out below.
The maximum annual award is 150% of base salary.
Performance metrics and targets are set to reflect the long-term strategic priorities of the Group. Performance criteria are
linked to our long-term strategy and may include a combination of financial, operational and/or shareholder-related measures.
The ‘underpin’ evaluation includes consideration of safety, environmental, social and governance (ESG) factors as well as
financial performance.
No more than 25% of maximum vests for minimum performance.
The Committee will keep the performance measures and weightings under review and may change the performance condition
for future awards if this were considered to be aligned with the Company’s interests and strategic objectives, as well as the
impact of regulatory changes. In certain circumstances, the Committee may exercise its discretion and adjust performance
outcomes. Further details are set out on page 101.
The Committee would seek to consult with major shareholders in advance of any proposed material change in
performance measures.
Align the interests of all employees with Company share performance.
Executive Directors may participate in HMRC approved all-employee plans on the same basis as employees.
The maximum is as prescribed under the relevant HMRC legislation governing the plans.
None
Create alignment between Executives and shareholders and promote long-term stewardship.
During the course of their tenure, Executive Directors are expected to build up a shareholding equivalent to 200% of salary.
Following the adoption of this policy, departing Executive Directors will also be expected to retain a material interest in Company
shares for two years after they step down from the Board. Executives will normally be expected to hold 200% of salary (or actual
relevant holding, if lower) on departure, with the guideline reducing to 100% of salary after 12 months. This guideline will apply to
all share awards vesting after the adoption of this remuneration policy.
The Committee retains discretion to waive this guideline in certain cases (e.g. compassionate circumstances).
100
Pennon Group plc Annual Report 2020
Notes to the policy table
Performance measures and targets
The performance conditions for the annual bonus plan are selected by the Committee each year to reflect key performance indicators and metrics used by the
Board to oversee the operation of the businesses. There is a strong emphasis on financial and operating metrics.
In prior years the LTIP was based on EPS growth, a sustainable dividend metric (comprising dividend growth and dividend cover) and RoCE. The Committee chose
these measures as they were closely aligned with Pennon’s strategic focus on the delivery of sustained earnings and related cash flows, our sector-leading dividend
policy and the long-term capital returns generated by our businesses. As noted in the statement from the Remuneration Committee Chairman, the Remuneration
Committee expects to finalise the targets for 2020 LTIP awards later in the year, following the completion of the sale of Viridor. The performance targets are set in
the context of the Company’s forecasts and market expectations, and are regarded as stretching targets.
The Committee may amend performance measures, weightings and targets, in the context of the Company’s strategy, the impact of changes to the regulatory
framework, accounting standards and any other relevant factors.
The measurement of performance against performance targets and determination of incentive outcomes is at the Committee’s discretion. Adjustments may be made
to reflect underlying financial or non-financial performance of the individual or the Group, consideration of overall performance in the round, and/or circumstances
unforeseen or unexpected when the targets were set. When making this judgement, the Committee may take into account all factors deemed relevant.
Performance conditions may also be replaced or varied if an event occurs or circumstances arise which cause the Committee to determine that the performance
conditions have ceased to be appropriate. If the performance conditions are varied or replaced, the amended conditions must, in the opinion of the Committee, be
fair, reasonable and materially no less difficult than the original condition when set.
The Committee would clearly disclose any material changes to performance measures, and seek shareholder views as appropriate.
Malus and clawback
Malus and clawback provisions apply to all incentive awards. These provisions enable awards to either be forfeited prior to delivery, repaid or made subject to
further conditions where the Committee considers it appropriate in the event of any significant adverse circumstances. For awards granted under the term of this
policy, the circumstances in which malus and clawback may be applied include a financial misstatement, error in calculation, material failure of risk management,
serious reputational damage, serious corporate failure or misconduct. In respect of the annual bonus, clawback may be applied for the period of three years following
determination of the cash bonus. Under the LTIP, clawback may be applied until the end of the holding period.
Operation of executive share plans
The long-term incentive plan will be operated in accordance with the rules of the plan as approved by shareholders. The deferred bonus awards will be governed
by the rules adopted by the Board from time to time. Awards under any of the Company’s share plans referred to in this report may:
• Be granted as conditional share awards, nil-cost options or in such other form that the Committee determines has the same economic effect
• Have any performance conditions applicable to them amended or substituted by the Committee if an event occurs which causes the Committee to determine
an amended or substituted performance condition would be more appropriate and not materially less difficult to satisfy
• Incorporate the right to receive an amount (in cash or additional shares) equal to the value of dividends which would have been paid on the shares under an
award that vest up to the time of vesting (or where the award is subject to a holding period, release). This amount may be calculated assuming that the dividends
have been reinvested in the Company’s shares on a cumulative basis
• Be settled in cash at the Committee’s discretion (e.g. due to regulatory limitations).
Pre-existing commitments
The Committee reserves the right to make any remuneration payments and/or payments for loss of office (including exercising any discretion available in
connection with such payments) outside the policy set out above where the terms of the payment were agreed (i) before the 2014 AGM (the date the Company’s
first shareholder-approved directors’ remuneration policy came into effect); (ii) before this policy came into effect, provided that the terms of the payment were
consistent with the shareholder-approved directors’ remuneration policy in force at the time they were agreed; or (iii) at a time when the relevant individual was not a
director of the Company and, in the opinion of the Committee, the payment was not in consideration for the individual becoming a director of the Company. For these
purposes ‘payments’ includes the Committee satisfying awards of variable remuneration and, in relation to an award over shares, the terms of the payment are ‘agreed’
at the time the award is granted.
Early vesting events
On a change of control or voluntary wind up of the Company, LTIP awards may vest to the extent determined by the Committee having regard to the performance of
the Company and, unless the Committee determines otherwise, the period of time that has elapsed since grant. Deferred bonus awards may vest in full. Alternatively,
participants may have the opportunity, or be required, to exchange their awards for equivalent awards in another company, although the Committee may decide in
these circumstances to amend the performance conditions.
The Committee also has the discretion to treat any variation of the Company’s share capital or any demerger, special dividend or other transaction that may affect
the current or future value of awards as an early vesting event on the same basis as a change of control.
Differences in remuneration policy for all employees
When setting remuneration for Executive Directors the Committee considers relevant information about pay and conditions in the Group. Senior executives and
Executive Directors generally receive a higher proportion of their total pay in the form of variable remuneration and share awards. All administrative employees of
the Group are entitled to base salary and pension provision including life assurance. In addition, all administrative employees in Pennon Group and South West Water
and all senior and middle management employees in the operations functions in Viridor are entitled to participate in annual bonus arrangements, the levels of which
are based on the seniority and level of responsibility. Long-term incentive share awards are only available to senior executives and Executive Directors, and certain
benefits are generally available only to more senior employees at management level and above.
Minor amendments to the remuneration policy
The Committee may make minor amendments to the policy (for example for regulatory, exchange control, tax or administrative purposes or to take account of a
change in legislation) without obtaining shareholder approval for that amendment.
Pennon Group plc Annual Report 2020
101
Governance
Directors’ remuneration policy
continued
Future policy table – Non-Executive Directors
Purpose and link to strategy
Set at a market level to attract Non-Executive Directors who have appropriate experience and skills to assist in determining the
Group’s strategy.
Fees
Operation
Maximum
Benefits
Operation
Maximum
Fees are set by the Board with the Chairman’s fees being set by the Committee. The relevant Directors are not present at the
meetings when their fees are being determined.
Non-Executive Directors normally receive a basic fee and an additional fee for any specific Board responsibility such as
membership or chairmanship of a Committee or occupying the role of Senior Independent Director.
In reviewing the fees, the Board, or Committee as appropriate, consider the level of fees payable to Non-Executive Directors in
other companies of similar scale and complexity.
Total fees paid to Non-Executive Directors will remain within the limits stated in the Articles of Association.
Where appropriate limited role-appropriate benefits may be provided.
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.
None.
Illustrations of applications of remuneration policy
The total annual remuneration for the Executive Directors that could result from the proposed remuneration policy, based on salaries for 2020/21, is shown below.
Chris Loughlin – Chief Executive Officer (£000)
Susan Davy – Chief Financial Officer (£000)
2,500
2,000
1,500
1,000
500
0
4
9
2
,
1
%
6
1
%
6
2
%
8
5
8
4
7
%
0
0
1
1
5
2
2
,
%
7
3
%
0
3
%
3
3
2,500
2,000
1,500
1,000
500
0
2
8
9
%
7
5
%
6
1
%
7
2
4
6
5
%
0
0
1
4
1
7
,
1
%
7
3
%
0
3
%
3
3
Minimum performance
Mid performance
Maximum performance
Minimum performance
Mid performance
Maximum performance
Fixed remuneration
Annual variable remuneration
Long-term variable remuneration
Scenario
Fees
Minimum performance
Mid performance
Maximum
Fixed remuneration
Annual variable remuneration
Long-term variable remuneration
Assumptions
Fixed pay, which constitutes base salary, pension-related benefits and benefits in kind. These values are made up of the salaries
for 2020/21 (set out on page 105) and an estimate of the value of the benefits and pension-related benefits.
Fixed pay and 50% of the maximum annual bonus and 25% of the maximum long-term incentive award.
Fixed pay and 100% vesting of the annual bonus and of long-term incentive awards.
No adjustments have been made for potential payment of dividends. Benefits from all-employee schemes have also been excluded.
As long-term share awards are granted in shares and subject to stretching performance criteria, the value of the award can vary significantly depending on the extent
to which targets are achieved and the movement in the share price. For example, if the share price increased by 50% over the relevant vesting and holding period, the
maximum values shown in the charts above would increase to £2,660,800 for the CEO and £2,027,225 for the CFO. Conversely if the share price was to fall by 50%,
the maximum values shown in the charts above would reduce to £1,840,863 for the CEO and £1,400,263 for the CFO.
102
Pennon Group plc Annual Report 2020
Approach to recruitment remuneration
When considering the appointment of Executive Directors, the Committee seeks to balance the need to offer remuneration to attract candidates of sufficient calibre
to deliver the Company’s strategy while remaining mindful of the need to pay no more than is necessary.
The Committee will appoint new Executive Directors with a package that is in line with the remuneration policy that has been agreed by shareholders and is in place
at the time. Base salary may be set at a higher or lower level than the previous incumbent.
Other elements of remuneration would be in line with the Company’s policy set out in the in the future policy.
The maximum variable pay opportunity on recruitment (excluding buyouts) would be 275% of salary, which is in line with the future policy table. The Committee may
determine for the first year of appointment that incentives may be subject to different weightings or objectives.
To facilitate recruitment, it may be necessary to recompense a new Executive Director for the expected value of remuneration arrangements forfeited on joining the
Company (buyout awards). The Committee may make buyout awards in accordance with LR9.4.2 of the Listing Rules or utilising any other incentive plan operated by
the Group from time-to-time. The Committee will ensure that any such award would at a maximum match the value of the awards granted by the previous employer
and be made only where a Director is able to demonstrate that a loss has been incurred from joining the Company. Any buyout would take into account the terms of
the arrangement forfeited, including in particular any performance conditions and the time over which they vest. The award would normally have time horizons which
are in line with or greater than the awards forfeited. Where appropriate the exact nature of the buyout may be tailored based on the commercial circumstances at the
time, provided that the value of the buyout remains comparable to arrangements forfeited.
For interim positions a cash supplement may be paid rather than salary (for example a Non-Executive Director taking on an executive function on a short-term basis).
Where an employee is promoted to the position of Executive Director (including if an Executive Director is appointed following an acquisition or merger), pre-existing
awards and contractual commitments would be honoured in accordance with their established terms.
Non-Executive Directors’ fees would be in line with the policy set out in the future policy table on page 102.
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 Director and the Company.
Non-Executive Directors
Sir John Parker
Gill Rider
Neil Cooper
Iain Evans
Claire Ighodaro
Date of initial letter of appointment
19 March 2015
22 June 2012
17 July 2014
16 June 2018
28 May 2019
Expiry date of appointment
31 March 2021
31 August 2021
31 August 2020
31 August 2021
31 August 2022
The policy is for Executive Directors’ service contracts to provide for 12 months’ notice from either side.
The policy is for Non-Executive Directors’ letters of appointment to contain a three-month notice period from either side.
All Non-Executive Directors are subject to annual re-election and letters of appointment are for an initial three-year term.
Copies of Executive Directors’ service contracts and Non-Executive Directors’ letters of appointment are available for inspection at the Company’s registered office.
Policy on termination of service agreements and payment for loss of office
The Company’s policy is that Executive Directors’ service agreements are normally terminable on one year’s notice or such other date as the parties agree.
There are no liquidated damages provisions for compensation on termination within Executive Directors’ service agreements. Taking into account the circumstances
of any termination, the Committee may determine that a payment in lieu of notice should be made. Any such payments would be restricted to salary and benefits
(which may include pension-related benefits). In these circumstances, consideration would be given to phasing of payments and an individual’s duty and opportunity
to mitigate losses.
The Committee reserves the right to make any other payments in connection with a Director’s cessation of office or employment where the payments are made in
good faith in discharge of an existing legal obligation (or by way of damages for breach of such an obligation) or by way of compromise or settlement of any claim
arising in connection with the cessation of a director’s office or employment. Any such payments may include but are not limited to paying any fees for outplacement
assistance and/or the director’s legal and/or professional advice fees in connection with his cessation of office or employment.
The Company may meet ancillary costs, such as outplacement consultancy and/or reasonable legal costs, if the Company terminates the Executive Director’s
service contract.
Pennon Group plc Annual Report 2020
103
Governance
Directors’ remuneration policy
continued
Any compensation payable will be determined by reference to the terms of the service contract between the Company and the employee, as well as the rules of the
various incentive plans as set out in the table below.
Annual bonus
Deferred shares
Long-term incentive plan
All-employee awards
Other awards
Normally no bonus is payable unless an Executive Director is employed on the date of payment.
In certain good leaver circumstances (death, disability, redundancy, retirement and any other circumstance at the Committee’s
discretion) a bonus may be payable. Any such bonus would be based on performance and pro-rated to reflect the period of service
with performance normally assessed at the same time as other employees. The Committee retains discretion to adjust the timing
and pro-rating of any award to take account of any prevailing exceptional circumstances which they consider would be fair to the
Company and to the employee. Share deferral would not normally apply.
Unvested awards would normally lapse upon cessation. In certain good leaver circumstances, unless the Committee determines
otherwise, the restricted period is not automatically terminated on cessation of employment; rather, the restricted period continues
to apply as if the leaver was still in employment. However, awards may be released to participants on an earlier date following
cessation of employment at the discretion of the Committee.
Good leaver circumstances are death, injury, ill-health, disability, redundancy, retirement, the sale of the individual’s employing
business or company out of the Group and any other circumstance at the Committee’s discretion.
Any unvested awards would normally lapse upon cessation of the individual’s employment within the Group. In certain good leaver
circumstances, awards vest to the extent determined by the Committee taking into account the extent to which the performance
conditions have been satisfied, the period of time elapsed between grant and the cessation of employment and such other factors
as the Committee may deem relevant. Awards would normally vest on the original normal vesting date and be released at the end of
the two-year holding period (unless the Committee determines awards should be subject to earlier vesting and release dates).
If a participant dies, an award will, unless the Committee determines otherwise, vest and be released as soon as possible following
the participant’s death, taking into account the extent to which the performance conditions have been satisfied and the period of
time elapsed since grant.
Good leaver circumstances are death, ill-health, injury, disability, redundancy, retirement, where the participant’s employer is no
longer a member of the Group, where the participant is employed in an undertaking which is transferred out of the Group, or for any
other reason that the Committee determines.
All awards would lapse if a participant was summarily dismissed.
Leavers will be treated in accordance with the HMRC approved rules.
Where a buyout award is made on recruitment, leaver provisions would be determined at the time of award.
Statement of consideration of employment conditions elsewhere in the Company
In setting executive remuneration the Committee takes account of employment market conditions and the pay and benefits differentials across the Group. The
Committee considers annual summary reports of employee remuneration and the terms and conditions of employment within each operating company and has
regard to these when considering remuneration for the Executive Directors and senior management. As part of this assessment the Committee considers various
metrics including data on the ratio between CEO and all-employee pay, gender pay statistics and measures of employee engagement.
Engaging our workforce around remuneration is currently undertaken as part of the Great Place to Work survey. Additionally during 2020, we have undertaken our
largest consultation around remuneration as a Group as part of our plans to modernise pension arrangements. Going forward, we plan to utilise our engagement
forums to proactively talk about executive remuneration and how it aligns to wider Company pay as part of our ongoing two-way communication with employees.
Statement of consideration of shareholder views
The Committee has taken into account general good governance, best practice and shareholder views when formulating the remuneration policy. The changes to our
approach on pensions, the introduction of a post-employment shareholding guidelines and the updates to the malus and clawback provisions have all been made in
direct response to investor comment.
The Committee would seek to consult with shareholders prior to any material changes in our approach to pay for Executive Directors. Prior to the adoption of this
policy, major shareholders were notified regarding the Committee’s proposed approach and views were sought. To the extent that a further review of the policy is
initiated later in the year, the Committee would seek to engage with major shareholders as appropriate.
In accordance with the Companies Act 2006, shareholders have the right to vote on the Directors’ remuneration report. The remuneration policy is subject to a
binding vote at least every three years and the annual report on remuneration is subject to an annual advisory vote.
104
Pennon Group plc Annual Report 2020
Annual report on remuneration
Implementation of the remuneration policy for 2020/21
The proposed changes to the remuneration policy are set out on page 98 and will be subject to a binding shareholder vote, following the date of the Company’s 2020
AGM which is scheduled to be held on 31 July 2020. This section sets out how the policy will be implemented for the year 2020/21.
Executive Directors:
Base salary
Benefits
Pension-related benefits
Annual bonus
Long-term incentive plan (LTIP)
Shareholding requirements
All-employee share plans
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 2020/21 were increased by 1.5%, which was in line with or lower than increases for all employees:
Chris Loughlin – £546,625
Susan Davy – £417,975
No changes.
Benefits currently include the provision of a company vehicle, fuel, health insurance and life assurance. Other benefits may be
provided if the Committee considers it appropriate.
The rate for new hires in the future will be aligned with the rate available to the majority of employees at the time of appointment.
The retirement benefits for incumbent Executive Directors will be aligned with the wider workforce, with reduction to be made in
two equal steps to ensure alignment no later than 1 April 2022. The details of the reductions for incumbent directors will be
considered later in the year, following the conclusion of the wider review of workforce pensions.
Following the adoption of the new policy, the maximum bonus potential for each Director is 125% of base salary, with deferral of
50% of any bonus into shares for three years.
Malus and clawback provisions apply.
The annual bonus for 2020/21 will continue to be based on a combination of financial, operational and strategic objectives. In line
with our regulatory requirements, a substantial portion of the bonus will be linked to customer-related goals. The detailed metrics
will also require adjustment in light of the proposed sale of Viridor.
The detail of bonus targets are closely aligned to the strategy and are therefore considered to be commercially sensitive.
Disclosure of targets will be provided on a retrospective basis in next year’s remuneration report.
Share awards vest subject to the achievement of specific performance conditions measured over 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.
As noted in the Chairman’s statement, the target setting process for the 2020 LTIP grants has been deferred in light of the
proposed sale of Viridor. This is to ensure that any targets for the three-year period ending 31 March 2023 are aligned with the
long-term strategic priorities for the Group.
Once finalised, we intend to publish the performance metrics and targets on our website.
200% of salary for both the Chief Executive Officer and Chief Financial Officer.
Following the adoption of the new policy, departing Executive Directors will be expected to hold shares in the Company for two
years after they step down from the Board. Executives will be expected to hold 200% salary (or actual relevant holding, if lower) on
departure, with the guideline reducing to 100% salary after 12 months. This new requirement will apply to all incentive shares
vesting after the new policy comes into effect.
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.
Non-Executive Director fees
The table below outlines how the fees will be implemented for 2020/21 (an increase of 1.5%).
Chairman
Basic Non-Executive Director fee
Additional fees
Senior Independent Director
Chairman of Audit Committee
Chairman of Remuneration Committee
Chairman of Sustainability Committee
Committee fee
2020/21
£279,850
£49,850
£7,400
£15,000
£10,725
£10,725
£5,350
2019/20
£275,700
£49,100
£7,280
£14,785
£10,560
£10,560
£5,280
Pennon Group plc Annual Report 2020
105
Governance
Annual report on remuneration
continued
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 2020 was 1.5%, compared with general increases of
between 1.5% and 1.8% 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 UK Corporate Governance Code, the Committee has 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 remuneration and
Gender pay gap
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, employee engagement, 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 4.1%, 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 an increase in our Trust Index score from 62% to 63%. We have also conducted our largest ever consultation
with employees regarding our proposals to modernise pension arrangements across the Group.
106
Pennon Group plc Annual Report 2020
Operation of the remuneration policy during 2019/20
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)
2019/20
2018/19
2019/20
2018/19
2019/20
2018/19
2019/20(ii)
2018/19(ii) 2019/20
2018/19
2019/20
2018/19
Executive Directors
Chris Loughlin
Susan Davy
Non-Executive Directors
Sir John Parker
Gill Rider
Neil Cooper
Iain Evans
Claire Ighodaro(iv)
539
412
276
78
69
70
35
528
404
270
77
69
40
–
37
29
–
–
–
–
–
34
29
–
–
–
–
–
420
324
480
369
1,030
788
151
115
162
117
158
115
2,188
1,670
1,351
1,032
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
276
78
69
70
35
270
77
69
40
–
(i) Benefits comprise a car allowance, fuel allowance and medical insurance.
(ii) For 2019/20, the 2017/18 LTIP has been valued based on the average share price during the three-month period to 31 March 2020 of 1093.66p and a vesting outcome of 86.6%, as referred to on page
109, together with an estimate of the accrued dividends payable on the vesting shares. Of the vested amount, 26.6% relates to share price appreciation over the performance period. The Committee
did not exercise any discretion in relation to share price changes.
The 2016/17 LTIP value for 2018/19 reflects the share price at the date of vesting of 741.2p, a vesting outcome of 32% and an additional 4.7% equivalent to the value of accrued dividends over the
three-year performance period. The Committee did not exercise any discretion in relation to share price changes.
Both LTIP awards are subject to a two-year holding period.
(iii) See page 110 for further information on pensions.
(iv) Claire Ighodaro was appointed to the Board on 1 September 2019.
Notes to the single figure table
Annual bonus outturn for 2019/20
As noted in the statement from the chairman of the Remuneration Committee, the Committee determined that the basis for 2019/20 bonus awards should be adapted
to reflect the strategic review that commenced in the latter half of the year.
In light of the scale and scope of the review, and the potential incremental value for shareholders, the Committee determined that it would be inappropriate for
bonuses to be based solely on the conventional business-as-usual objectives. Therefore, on an exceptional basis, the Committee exercised discretion to assess
bonuses for 2019/20 on the following terms:
Part A: 70% – based on combination of financial (60% of element), customer and operational (20% of element) and individual (20% of element) objectives as per
original terms; and
Part B: 30% – based on the successful execution of the strategic review and the value created for shareholders.
In line with the Committee’s policy, 50% of any bonus is payable in shares, the release of which is deferred for three years.
Group financial measures (60% of Part A)
Measure
Underlying PBT (50% of Part A)
RoRE (10% of Part A)
Threshold
£277m
8%
Target
£283m
9%
Maximum
£297m
11%
Actual outturn
£287.6m
11.8%
Bonus outturn
(% of max)
64%
100%
Pennon Group plc Annual Report 2020
107
Governance
Annual report on remuneration
continued
Customer and operational measures (20% of Part A)
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(i)
ERF gate fee (£/T)
ERF volume inputs (mT)
ERF electricity revenue (£m)
ERF power output (million MWh)
Landfill volumes traded (mT)
Landfill gas power output (million MWh)
Recyclate revenue (£/T)
Recycling volumes traded (mT)
Target
Actual outturn
Target achieved
Bonus outturn
(% of max)
Upper quartile
0 beaches failing
84 megalitres per day
Median
0 beaches failed
84 megalitres per day
0
145
0.162 hours per property
Stable
1
296
0.158 hours per property
Stable
89%
*
2
*
1.2
1.3
371.4
*
1.2
90%
*
2
*
1.1
1.25
401.8
*
0.99
No
Yes
Yes
No
Yes
Yes
Yes
Yes
Yes
No
No
No
Yes
Yes
No
67%
56%
Bonus outturn
(% of max)
CEO:
70%
CFO:
75%
(i) Weighted by capacity. Includes joint ventures at 100%, excludes GRREC due to different technology.
* Target and outturn not disclosed for reasons of commercial confidentiality.
Individual objectives (20% of Part A)
Objectives
Achievements
CEO and CFO – joint objectives
Deliver the South West Water business plan metrics
for K6 (2015-20) including customer, operational
and environmental targets. Ensure the foundations
are in place for delivery of the K7 business plan
(2020-25)
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
CFO only
Lead the review of the modernisation of the Group’s
pensions arrangements
• Close out of South West Water’s confirmed position as sector leading with a cumulative
RoRE of 11.8%
• All operational targets were met with the exception of pollutions
• South West Water starts the K7 regulatory period as the only company to have achieved
fast-track status for its business plan in two consecutive five-year price reviews
• CEO continued to fulfil the role of Managing Director, South West Water.
• Improvement in headline performance target (lost time injury frequency rate) by 34%
to 0.90 against a target of 1.09
• Increased senior leadership visibility .
• 1% improvement in Group’s Trust Index
• Highest ever response rate at 83%
• Year-on-year improvements in both trust and engagement.
• Most extensive ever employee consultation across the Group
• Modernised pension arrangements due to be implemented from 1 July 2020.
Of the objectives set out above, a quarter of the individual objectives were linked to objectives relating to safety. Although good progress was made in relation to the
personal objectives linked to safety, and the overall trend in safety metrics remains positive, the Committee determined that the outcome under this element should
be reduced to nil.
108
Pennon Group plc Annual Report 2020
Strategic review – Part B (30% of overall bonus)
Objective
Conduct a full review of the strategic focus,
growth options and capital allocation policy for
the Group to maximise value for shareholders
Summary of bonus outcome
Part A: Financial, strategic and individual
Group financial measures
Customer and operational measures
Individual objectives
Part B: Strategic review
Total outturn
• Review commenced given the strong financial performance and operational progress of Viridor
and South West Water, coupled with the imminent start of the new K7 regulatory delivery period
for South West Water and the near and medium-term growth opportunities at Viridor. In March
2020, we announced the proposed sale of Viridor to KKR for an enterprise value of £4.2 billion,
which will accelerate the realisation of significant value for our shareholders.
• The share price rose by 42% from the announcement of the strategic review to the
announcement of the sale of Viridor. In March 2020 Pennon also joined the FTSE 100 index.
• The transaction enables our shareholders to accelerate the realisation of value from Viridor.
On completion of the sale, the Board intends to use the net cash proceeds to reduce Pennon’s
company borrowings and make a return to shareholders, while retaining some funds for
future opportunities.
Bonus outturn
(% of max)
100%
Bonus outturn
Chief Executive
Officer
Chief Financial
Officer
29.6%
8.6%
9.8%
30.0%
78.0%
29.6%
8.6%
10.5%
30.0%
78.7%
Weighting
70%
30%
100%
In the interest of full transparency, it is noted that without the exercise of discretion to vary the basis of performance assessment, the bonus outcomes for the Chief
Executive Officer and the Chief Financial Officer would have been 68.5% and 69.5% of maximum respectively.
Malus and clawback provisions apply in relation to the bonus awards in respect of the year.
Long-term incentive outturn for 2019/20
The awards in the single figure table relate to the 2017/18 share awards granted on 25 August 2017, which are due to vest on 24 August 2020.
The 2017/18 share awards were subject to the satisfaction of EPS growth, a sustainable dividend measure and RoCE performance conditions. These conditions were
set at the time that the awards were granted.
EPS growth (40% of award)
Sustainable dividend measure (dividend growth
and dividend cover) (40% of award)
RoCE (average)(1) (20% of award)
Total
(1) Average of opening and closing capital employed.
Straight-line vesting between points.
Threshold
(25% of maximum vests)
6% p.a.
2.6x
Maximum
(100% of maximum vests)
10% p.a.
3.6x
8%
10%
Achievement
9.50% p.a.
3.4x
9.62%
Vesting
outcome
(% of max)
90.5%
82.9%
85.9%
86.6%
For below threshold performance for either performance condition, 0% vests in respect of that performance condition.
Vesting of the award is subject to an ‘underpin’ relating to overall Group performance including environmental, social and governance factors and safety performance,
as well as financial performance. The Committee has determined, to the date of this report, that this underpin has been satisfied.
If awards were to vest, they would be subject to a two-year holding period during which clawback may be applied if the Committee considers it appropriate in certain
circumstances. The holding period ends on 24 August 2022.
Pennon Group plc Annual Report 2020
109
Governance
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)
162
88
Total value for
the year
(£000)
162
117
Normal retirement
age and date
(for pension purposes)
67 (20 August 2019)
65 (17 May 2034)
Accrued pension
at 31 March 2020(ii)
(£000)
–
26(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 2019/20 comprised an employer’s contribution of £14,958
and a cash sum of £87,992. 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. Chris Loughlin was appointed as a non-executive director of Mears Group PLC on 17 August 2019 and Susan Davy continued as a non-executive
director of Restore plc throughout 2019/20. No other outside company appointments are held by the Executive Directors other than with industry bodies or
governmental or quasi-governmental agencies.
110
Pennon Group plc Annual Report 2020
Additional contextual information
Historical TSR
The graph below shows the value, over the ten-year period ended on 31 March 2020, of £100 invested in Pennon Group on 1 April 2010 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 was a constituent until the end of the period.
Total shareholder return – Since April 2010
400
350
300
250
200
150
100
50
Apr-10
Pennon
Apr-11
FTSE 250
Apr-12
Apr-13
Apr-14
Apr-15
Apr-16
Apr-17
Apr-18
Apr-19
Apr-20
Historical chief executive officer remuneration
As the Company did not have a Chief Executive Officer until 1 January 2016, the table below provides historical 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)
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
–
2019/20
–
–
94.69
50.00
–
72.87
79.30
–
–
–
1,119
1,318
1,153
1,351
47.00
50.00
67.56
30.20
68.20
0.00
83.98
37.90
84.05
20.40
87.00
0.00
91.00
32.00
2,188
78.0
86.6
(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.
Comparison of Chief Executive Officer remuneration to employee remuneration
The table below shows the percentage change between 2018/19 and 2019/20 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
2.0%
4.6%
Percentage change in benefits
8.8%
7.3%
Percentage change in annual bonus
(12.5%)
11.6%
The percentage increase in average remuneration for employees is calculated using wages and salaries (excluding share-based payments) of £180.9 million
(2018/19 £184.3 million), analysed into the three components in the table and the average number of employees of 4,853 (2018/19 5,239) both as detailed in note 13 to
the Group financial statements.
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)
2019/20
(£ million)
205.3
172.6
8.6
337.7
2018/19
(£ million)
205.8
162.0
8.6
356.0
Percentage
change
(0.2)
6.5
0.0
(5.1)
(i) Excludes non-underlying items.
The above table illustrates the relative importance of spend on pay compared with distributions to equity holders. The purchase of property, plant and equipment
(cash flow) has also been included as this was the most significant outgoing for the Company in the past financial year.
Pennon Group plc Annual Report 2020
111
Governance
Annual report on remuneration
continued
Chief Executive Officer pay ratio
The table below discloses the ratio of the Chief Executive Officer’s pay for 2019/20, using the single total figure of remuneration (as disclosed on page 107) to the
comparable earnings of employees at the 25th, 50th & 75th percentiles.
Year
2019/20
Method
Option A
25th percentile (P25)
pay ratio
87:1
Median (P50)
pay ratio
68:1
75th percentile
pay ratio
50:1
Option A has been used for the calculations as per the disclosure regulations. The employees at the lower quartile, median and upper quartile (P25, P50, and P75,
respectively) have been determined based on a calculation of total remuneration for the financial year 1 April 2019 to 31 March 2020.
• Basic salary for part-time employees and new joiners within the applicable period have been converted to full-time equivalents for the purpose of the calculations
• Estimated values for employee P11D data have been used to establish the ordering of employees, given the timing of publication. This will be validated and
amended in due course to account for any variances.
The total remuneration of 2019/20 for the employees identified at P25, P50 and P75 is £25,184, £32,221, and £43,388, respectively. The base salary of 2019/20 for the
employees identified at P25, P50 and P75 is £22,737, £29,500, and £28,483, respectively. Employee identified at P75 has a higher component of variable pay (shift
premiums and overtime) relative to other employees at a similar level.
The remuneration arrangements for senior executives, including the Chief Executive Officer, fluctuate year-on-year as a significant portion of the package is linked to
performance-related incentive plans. This variation will impact the pay ratios reported in future years.
The reporting requirements required by the BEIS came into effect for the reporting of financial years starting on or after 1 January 2019. As a result this is the first year
of reporting within the annual report.
Share awards and shareholding disclosures (audited information)
Share awards granted during 2019/20
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
808
618
240
185
Percentage vesting at
threshold performance
Performance/restricted
period end date
25% of maximum
3 July 2022
n/a
23 July 2022
LTIP awards were calculated using the share price of £7.5272 being the average closing price over the five dealing days preceding the date of grant, which was
4 July 2019. 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 23 July 2019 in order to satisfy the award, which was £7.555386.
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 of 200% of salary for both the Chief Executive Officer and Chief Financial Officer. In line with best
practice guidelines, deferred bonuses and LTIP awards subject to a holding period only may count towards the guidelines on a net of tax basis. As noted on page 105,
a new post-employment shareholding requirement will come into effect following the AGM.
The beneficial interests of the Executive Directors in the ordinary shares (40.7p each) of the Company as at 31 March 2020 and 31 March 2019 together with their
shareholding guideline obligation and interest are shown in the table below:
Chris Loughlin
Susan Davy
Share interests
(including
connected parties)
at 31 March 2020
394,102
78,834
Share interests
(including
connected parties)
at 31 March 2019
359,265
71,844
Vested
LTIP awards in
holding period(1)
20,343
15,557
Deferred
bonus shares(1)
87,876
67,698
Performance
shares (subject
to performance
conditions)
304,293
232,687
SAYE
2,196
2,834
Shareholding
guideline
200%
200%
Shareholding
guideline met?
Yes
Yes
(1) These share awards are not subject to further performance criteria and may therefore count towards the guideline on a net-of-tax basis.
Since 31 March 2020, 6,277 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 68 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 2020 and 2 June 2020.
112
Pennon Group plc Annual Report 2020
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
Gill Rider
Neil Cooper
Iain Evans
Claire Ighodaro
Shares held
at 31 March 2020
27,027
2,500
–
–
–
Shares held
at 31 March 2019
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 2020 and 2 June 2020.
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 2 June 2020 is as set out below:
Discretionary schemes
All schemes
Awarded
1.50%
3.73%
Headroom
3.50%
6.27%
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
01/07/16
25/08/17
02/07/18
04/07/19
Susan Davy
01/07/16
25/08/17
02/07/18
04/07/19
Conditional
awards held at
1 April 2019
Conditional
awards made
in year
Market price
upon award
in year
55,434
96,733
100,239
–
42,391
73,972
76,653
–
–
–
–
107,321
–
–
–
82,062
920.00p
802.70p
790.12p
752.72p
920.00p
802.70p
790.12p
752.72p
Vesting
in year(i)
20,343
–
–
–
15,557
–
–
–
Value of shares
upon vesting
(before tax)
£000
Conditional
awards held at
31 March 2020
151
–
–
–
115
–
–
–
20,343(ii)
96,733
100,239
107,321
15,557(ii)
73,972
76,653
82,062
Date of end
of period for
qualifying
conditions to
be fulfilled
30/06/19
24/08/20
01/07/21
03/07/22
30/06/19
24/08/20
01/07/21
03/07/22
Expected date
of release(iii)
30/06/21
24/08/22
01/07/23
03/07/24
30/06/21
24/08/22
01/07/23
03/07/24
(i) 32% of the award shares granted on 1 July 2016 vested on 1 July 2019 at a market price of £741.2p per share. The total number of shares that vested included additional shares equivalent in value to
such number of shares as could have been acquired by reinvesting the dividends which would otherwise have been received on the vested shares during the three-year performance period. The
balance of the award lapsed.
(ii) Vested award; no longer subject to performance conditions.
(iii) Awards granted from 2015 onwards are subject to a two-year holding period following vesting.
Pennon Group plc Annual Report 2020
113
Governance
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 restricted period:
Director and date of award
Chris Loughlin
04/07/16
30/08/17
25/07/18
24/07/19
Susan Davy
04/07/16
30/08/17
25/07/18
24/07/19
Restricted
awards held at
1 April 2019
Restricted
awards made
in year
Market price
of each share
upon award
in year
Value of shares
upon release
(before tax)
£000
Released
in year
Restricted
awards held at
31 March 2020
Date of end
of restricted
period
18,759
26,504
29,575
–
12,524
20,503
22,746
–
–
–
31,797
–
–
24,449
950.14p
808.691p
761.36p
755.5386p
950.14p
808.691p
761.36p
755.5386p
18,759(i)
–
–
–
12,524(i)
–
–
–
142
–
–
–
95
–
–
–
–
26,504
29,575
31,797
–
20,503
22,746
24,449
03/07/19
29/08/20
24/07/21
23/07/22
03/07/19
29/08/20
24/07/21
23/07/22
(i) These shares were released on 25 July 2019 at 758.0p per share.
During the year the Directors received dividends on the above shares in accordance with the conditions of the bonus plan as follows: Chris Loughlin £34,408*;
Susan Davy £26,266.
* 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 DRIP . These shares are included in the figure given for
the additional ordinary shares (40.7p each) in the Company that he acquired since 31 March 2019 given on page 112.
(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
24/06/15
Susan Davy
03/07/18
Options
held at
1 April 2019
2,196
2,834
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 2020
Options held at
31 March 2020
–
–
–
–
683.00p
635.00p
–
–
1085.5p
1085.5p
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, Neil Cooper and Iain Evans were members of the Remuneration Committee throughout the year.
During the year the Committee received advice or services which materially assisted the Committee in the consideration of remuneration matters from
Sir John Parker (Chairman of the Board), Adele Barker (Group Director of Human Resources) and from Deloitte LLP.
During 2018/19, 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 2019/20 were £103,950 (arrived at from an hourly rate basis of charging).
During the year, Deloitte LLP also provided tax 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.
114
Pennon Group plc Annual Report 2020
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 2019 AGM and the
remuneration policy at the 2017 AGM, including votes for, against and withheld.
Annual report on remuneration (2019 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
99.31
0.69
1,236,442
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 124 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
3 June 2020
Pennon Group plc Annual Report 2020
115
Governance
Directors’ report –
other statutory disclosures
Introduction
This Directors’ report is prepared in accordance with the provisions of the
Companies Act 2006 and regulations made thereunder. It comprises pages 72 to
93 and 116 to 120 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:
• Particulars of important events affecting the Company and/or its subsidiaries
which have occurred since the year end (page 10 of the strategic report)
• Likely future developments of the Company (pages 13 and 35 of the
strategic report)
• Risk management systems (pages 58 to 60 of the strategic report)
• Certain employee and employee engagement matters (pages 38 to 41 of the
strategic report and pages 72 and 73 of the governance statement), as well
as the disclosures below
• Business relationships/engagement with suppliers, customers and others
(pages 26 to 29 of the strategic report and pages 72 and 73 of the
governance statement).
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. No other Directors served during the year.
Financial results and dividend
The Directors recommend a final dividend of 30.11 pence per ordinary share to
be paid on 2 September 2020 to shareholders on the register on 24 July 2020,
making a total dividend for the year of 43.77 pence per share, the cost of which
will be £184 million, resulting in a transfer to reserves of £16 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 & safety, equal opportunities,
diversity and inclusion, ethics and employee relations. Further detail of the
contents of the diversity and inclusion policy are set out in the report of the
Nomination Committee on page 91. Also, information regarding the diversity
of the workforce is provided on pages 38 and 39.
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
116
Pennon Group plc Annual Report 2020
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 details
of workforce engagement and employment matters relating to the Group are set
out on pages 38 to 41 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, this scheme and plan
were amended to provide for the increased savings limits approved by the
Government. At 31 March 2020, around 36% (2019 38%) of the Group’s
employees were participating in these plans.
Modern Slavery Act
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 are completed
to ensure compliance with the Modern Slavery Act across the Group and
our anti-slavery and human trafficking web-based statement is available at
www.pennon-group.co.uk.
Greenhouse gas emissions
Methodology and approach
Our approach follows the UK Government’s Environmental Reporting
Guidelines: including streamlined energy and carbon reporting guidance and
the Greenhouse Gas Protocol Corporate Standard (collectively referred to here
as the reporting guidelines). In calculating our emissions, we have used the
2019 UK Government conversion factors for greenhouse gas (GHG) reporting.
Organisational boundary
The emissions listed here cover the Pennon Group of companies, each of which
uses the financial control approach, whereby the emissions are reported on the
basis of the equity share held by the Pennon Group of companies in a company.
This means that emissions from joint venture operations can be accurately
attributed to the company in proportion to the percentage of Pennon Group
of companies’ holding.
Operational scopes
We report our Scope 1, 2 and 3 emissions where relevant and material.
Market and location-based methodology
The reporting guidelines allow for the reporting of both ‘market-based’ and
‘location-based’ Scope 2 emissions from imported energy. For some of our
supply we contract with third party renewable energy suppliers and ensure
this supply is backed by Renewable Energy Guarantees of Origin (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.
Self-generated renewable energy export
In accordance with the 2009 Defra Guidance, we may report an emissions
reduction in our reported net CO2e figure for any renewable electricity we have
generated and exported to the national grid or a third party. In order to meet
the good quality criteria set out in 2009 Guidance, especially concerning double
counting and additionality, we have only reported REGO-backed supply which
for which REGOs have been retired. Supply for which the associated REGOs
have been sold to third parties have not been included.
Base year
For GHG reporting we compare the current financial year against the previous
financial-year performance. As part of the Group climate change and carbon
management strategy we will use a 2019/20 baseline for setting of carbon
reduction targets.
Targets
As part of the climate change and carbon management strategy the Group is
intending to set a science-based target in 2020. South West Water supports the
UK water industry’s commitment to achieve net zero carbon emissions by 2030.
Carbon reduction opportunities and mechanisms are set out in Pennon’s climate
change and carbon management strategy.
Intensity measurement
We report an intensity measure of Scope 1 and 2 gross emissions in tCO2e
per £100,000 revenue.
Pennon Group plc GHG emissions(1)
External assurance statement
Our GHG data has been independently assured by DNV GL. Certain aspects
that relate to the disclosure of emissions from South West Water have been
subject to a separate and 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 can be found at
www.pennon-group.co.uk/sustainability.
Scope 1 GHG emissions (tCO2e)(1)
Scope 2 GHG emissions (tCO2e)
Total gross Scope 1 & 2 GHG emissions (tCO2e)
Scope 3 GHG emissions (estimated)(2)
Total gross Scope 1, 2 & 3 GHG emissions (tCO2e)
GHG emissions saved through purchases of REGO-backed renewable electricity import (tCO2e)
GHG emissions saved by exporting self-generated electricity (tCO2e)
Total annual net GHG emissions (tCO2e)
2019/20
(market based)
2,042,672
83,535
2,126,207
617,132
2,743,339
~
(2,218)
2,741,121
2019/20
(location based)
2,042,672
96,846
2,139,518
617,132
2,756,650
(13,311)
(2,218)
2,741,121
2018/19
(market based)
1,572,996
100,472
1,673,468
60,547
1,734,015
~
(100,472)
1,633,543
2018/19
(location based)
1,572,996
101,661
1,674,657
60,547
1,735,204
(1,190)
(100,472)
1,633,543
Notes:
~
(1) GHG emission figures expressed in tonnes of carbon dioxide equivalence (tCO2e) whereby emissions of carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), the fluorinated gases
Included in market-based Scope 2 GHG emissions above.
(HFC, PFC, SF6) are shown in terms of the equivalent emissions from CO2. A breakdown of emissions by GHG is available at www.pennon-group.co.uk/sustainability/greenhouse-gas-emissions.
(2) 2019/20 data includes comprehensive estimate of Scope 3 GHG emissions for the first time.
Scope 1 (direct GHG emissions) GHG activities owned or controlled by our organisation that release emissions straight into the atmosphere. For Pennon, key Scope 1 GHG emission sources include
combustion related emissions from ERFs, fugitive emissions from landfill, GHG emissions from stationary plant, fugitive emissions from air conditioning plant and transport related GHG emissions from
our own vehicles and fleet.
Scope 2 (indirect GHG emissions) GHG emissions released into the atmosphere associated with our consumption of imported electricity.
Scope 3 (other GHG indirect emissions) GHG emissions that are a consequence of our actions, which occur at sources which we do not own or control. Further details of our 2019/20 Scope 3 GHG
emissions estimate are provided below.
Other Group carbon and energy reporting
Energy consumption used to calculate Scope 1 and 2 GHG emissions (MWh) (see energy usage section)
GHG emissions intensity measure: tCO2e (gross Scope 1+2/£100,000 revenue)(3)
Biogenic GHG emissions outside of Scopes (tCO2e)
(3) Based on Group pro forma revenue for 2019/20.
Operational Pennon Group plc GHG emissions by business
2019/20
(market based)
620,409
152.8
1,756,029
2019/20
(location based)
2018/19
(market based)
2018/19
(location based)
620,409 Not reported Not reported
113.3
1,588,882
113.2
1,588,882
153.8
1,769,365
Scope 1 GHG emissions
Scope 2 GHG emissions (market based)
Total gross Scope 1 & Scope 2 GHG emissions (tCO2e)
Waste
(Viridor)
2,023,726
16,941
2,040,667
Water (South
West Water and
Bournemouth Water)
18,713
66,568
85,281
Group total*
2,042,672
83,535
2,126,207
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.
* Total includes 259 tCO2e from Pennon Water Services and Group shared services.
Change in GHG emissions
Operational (Scope 1 and 2) GHG emissions for the Group increased by 27%
from 2018/19. This was primarily due to the new energy recovery facilities (ERFs)
coming online within our waste business. Overall, our waste business contributed
around 96% of Group GHG emissions.
Measures to manage and reduce GHG emissions in order to achieve our
science-based targets, as well as the context of the essential sanitary treatment
of residual waste by ERFs and the out-of-scope carbon benefits of recycling,
are set out in our climate change and carbon management strategy.
All Group companies benefited from a continued reduction in the UK’s average
electricity grid emissions conversion factor, which fell by 10% from 0.3072 to
0.2773 kgCO2e/kWh(4) over the reporting period. This resulted in a reduction
in the Group’s overall Scope 2 GHG emissions while the purchase of REGO-
backed power has helped our water business to reduce its operational emissions
(market based) by around 17%.
The intensity metric has increased from 113 to 153 tCO2e/£100,000 turnover(3).
This reflects the increase in emissions from our waste business, as described
above, alongside a reduced turnover compared with 2018/19.
Scope 3 GHG emissions
As part of our commitment to fuller GHG disclosure and to enable science-
based target setting, the business undertook detailed analysis of our wider value
chain activities in 2019 in order to estimate Scope 3 GHG emissions. Scope 3
categories were evaluated in line with the GHG Protocol Scope 3 Calculation
Guidance. The assessment is based on the latest data available at the time
of the assessment which, for most categories, was 2018/19 activity data.
Where more recent 2019/20 data is available, this has been used.
With the inclusion of these additional emissions sources, our estimated
Scope 3 footprint is 617,132 tCO2e. As part of the climate change and carbon
management strategy the Group is committed to better understanding our
Scope 3 GHG emissions and investigating opportunities to reduce GHG
emissions. This includes working with our suppliers to help them understand
and manage their GHG emissions and implementing smarter travel/transport
policies.
(4) Aggregation of Scope 2 and Scope 3 grid electricity conversion factors.
Pennon Group plc Annual Report 2020
117
Governance
Directors’ report –
Other statutory disclosures
continued
Estimated Scope 3 GHG emissions breakdown (2018/19 activity data except where indicated* which use 2019/20 data)
Sources of Scope 3 GHG emissions
Category 1 – Purchased goods and services
Category 2 – Capital goods
Category 3 – Fuel- and energy-related (not Scope 1&2)*~
Category 4 – Upstream transportation and distribution
Category 5 – Waste generated in operations
Category 6 – Business travel*~
Category 7 – Employee commuting~
Category 8 – Upstream leased assets
Category 9 – Downstream transportation and distribution
Category 10 – Processing of sold products
Category 11 – Use of sold products
Category 12 – End of life treatment of sold products
Category 13 – Downstream leased assets
Category 14 – Franchises
Category 15 – Investments
Total estimate Scope 3 GHG emissions
Evaluation status
Material, calculated
Material, calculated
Not material, calculated
Material, calculated
Not material, calculated
Not material, calculated
Not material, calculated
Relevant, not calculated**
Material, calculated
Not relevant
Not relevant
Material, calculated
Not relevant
Not relevant
Not relevant
Viridor
60,975
30,699
17,386^
177,398
9,400
1,390^
Included in total
133,314
23,437
South West Water
51,204
70,478
19,834
7,979
9,102
334
Included in total
–
–
Total
112,179
101,177
37,235
185,377
18,502
1,817
4,095
133,314
23,437
453,999
158,931
617,133
Included in DNV GL 2019/20 Assurance.
Scope 3 emissions data notes:
^
* Figures updated based on 2019/20 activity data.
~
Totals include estimated impact for whole Group (i.e. including Pennon Water Services, Group shared services activity data). All other categories based on Viridor and South West Water impact only
as rest of Group impact is considered immaterial (i.e. <1% of total Group total Scope 3 emissions).
Category 8 – Upstream leased assets. Based on the 2018/19 data assessed there were some landlord locations within the portfolio. At present some are included under Scope 1 and 2 and some are
excluded due to lack of available data. This will be further evaluated and where possible included in future disclosures.
‘Not relevant’ – categories currently assessed as ‘not relevant’ in line with GHG Protocol Scope 3 Calculation Guidance. Further information on our Scope 3 emissions and explanation of the methodology
can be found in our CDP climate change disclosure available on the CDP website.
Energy usage
Including self-supplied energy, our water business used 354GWh of energy in 2019/20, while our waste business used 379GWh. A breakdown of Group energy usage
and associated data assessment methodologies is shown below. In 2018/19, the Group used a total of 709GWh of energy; details of this and previous years’ data are
provided at www.pennon-group.co.uk/sustainability/environmental-leadership.
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^
Water business
(MWh)
307,813
Waste business
(MWh)
66,278
Total Group*
(MWh)
374,191*
–
4,734
Methodology
(South West Water/Bournemouth Water)
Verifiable metered data except
some nHH supply~
Verified metered data
4,734
11,873
6,946
2,689
5,014
89,946
101,819
Verified metered data
–
6,946
13,028
15,717
114,481
119,495
Estimated that 60% of heat generated
by sewage gas CHP is beneficially used,
the rest (40%) is lost to atmosphere
Verified metered data – from billing
(some element of estimates)
Estimated based on verifiable data
(i.e. fuel expenditure)
Estimated based on verifiable data
(i.e. fuel expenditure)
15,258
94,932
111,106*
Methodology (Viridor)
Verifiable metered data
n/a
Estimated based on
verifiable data
n/a
Verified metered data
Estimated based on
verifiable data
Estimated based on
verifiable data
Total energy usage
Intensity measure: MWh/£100,000 revenue
354,327
378,664
734,008
52.8
Energy usage data notes:
No heat, steam or cooling was purchased by any Group company in 2019/20.
‘Self-supplied renewable electricity’ includes power from South West Water’s two hydroelectric power stations.
^ Energy consumption used to calculate Scope 1 and 2 emissions.
*
~ Estimate used for non-half hourly electricity supply (c.7% of total imported electricity) based on supplier renewal quotation estimate.
Includes small amount of electricity and transport related energy use for Pennon Water Services/Group shared services totalling an estimated 1GWh or around 0.1% of Group total.
118
Pennon Group plc Annual Report 2020
Energy efficiency action taken
South West Water and Viridor are accredited to the ISO 50001 energy
management system standard. A summary of improvement activities
undertaken in 2019/20 is provided below.
South West Water
Pumping represents around 80% of South West Water’s energy consumption
and so we have continued to invest in energy efficiency projects under our
pump efficiency programme, as well as funding energy efficiency projects under
our powerdown programme.
Projects completed during the year include further investment in our advanced
metering project to constantly monitor some of our largest energy using assets.
These new monitors have helped identify where pumps were performing below
their optimal efficiencies. Intervention has resulted in a cost saving of almost
£0.5 million in avoided electricity usage across the business by identifying and
refurbishing underperforming pumps to their ‘as new’ condition and by making
fine adjustments to the parameters that automatically control the pumps.
Major project work was undertaken at Bolham raw water pumping station
(£25,000 savings), Restormel water treatment works low-lift and high-lift pumps
(£236,000 savings), Roadford raw water pumping station (£43,000 savings),
Hayle sewage treatment works (£150,000 savings) and at Ilsham Valley sewage
pumping station (£15,000 savings). Further work included the implementation
of new variable speed drives to improve the control of pump motors at Pynes
(Exeter) water treatment works, saving £10,000 in pumping water to Belvidere
reservoir and £4,000 in pumping water to Parsonage reservoir in Exeter.
Viridor
The successful engagement and increased number of on-site energy champions
at Viridor’s highest energy consuming facilities allowed for strong progress in
energy management across the business this year, with the implementation of
a number of practical energy-saving projects.
Behaviour change projects such as operation ‘out of the red rate’ also resulted
in benefits across key sites through organised shift changes and maintenance
routines. The energy management team focused on effective communications
to share energy learnings across the business. Scheduled ongoing training
continues to onboard energy champions at as many sites as possible.
As part of the business-wide roll out of electrical submetering, Rochester
plastics recycling facility has observed a 7.5% reduction in site energy
consumption. Submeters have also been installed and live dashboards setup at
Crayford, Ford, Salmon Pastures and St Helens. Further installations are planned
at six sites in the coming year. The business is also moving forward with rooftop
solar installations with 13 sites having passed the preliminary feasibility stage,
with a planned portfolio expected to have a generation capacity of 1MW.
Research and development
Research and development within the Group involving water and wastewater
treatment processes amounted to £0.1 million during the year (2018/19
£0.2 million).
Overseas branches
The Company has no overseas branches.
Pennon Group donations
During 2019/20, the Group provided a total of £65,000 in charitable donations
(2018/19 £197,000).
No political donations were made or political expenditure incurred and no
contributions were made to a non-EU political party (2018/19 nil).
Purchase of own ordinary shares
The Company has authority from shareholders to purchase up to 10% of its own
ordinary shares (as renewed at the Annual General Meeting (AGM) in 2019),
which was valid as at 31 March 2020 and remains currently valid. No purchases
were made during the year and no shares were made subject to a lien or charge.
As at 1 April 2019, 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
Guidance and Transparency Rules (DTR).
As at 31 March 2020:
a) Details of the Company’s issued share capital, which consists of ordinary
shares of nominal value 40.7 pence each, are set out in note 33 to the financial
statements on page 176. All of the Company’s issued shares are fully paid up,
rank equally in all respects and are listed on the Official List and traded on the
London Stock Exchange. The rights and obligations attaching to the
Company’s shares, in addition to those conferred on their holders by law, are
set out in the Company’s Articles, copies of which can be obtained from
Companies House in the UK or by writing to the Group Company Secretary at
the Company’s registered office;
b) There are no restrictions on the transfer of issued shares of the Company or
on the exercise of voting rights attached to them, except where the Company
has exercised its right to suspend their voting rights or to prohibit their
transfer following the omission of their holder or any person interested in
them to provide the Company with information requested by it in accordance
with Part 22 of the Companies Act 2006 or where their holder is precluded
from exercising voting rights by the Financial Conduct Authority’s Listing
Rules or the City Code on Takeovers and Mergers. There are no persons with
special rights regarding control of the Company. No shares issued under the
employee share schemes have rights with regard to control of the Company
that are not exercisable directly by the employees;
c) Details of significant direct or indirect holdings of securities of the Company
are set out in the shareholder analysis on page 198. The Company is not
aware of any agreements between shareholders which may result in
restrictions on the transfer of securities or on voting rights;
d) The Company’s rules about the appointment and replacement of Directors
are contained in the Articles and accord with usual English company law
provisions. The powers of Directors are determined by UK legislation and the
Articles in force from time to time. Changes to the Articles must be approved
by the Company’s shareholders by passing a special resolution;
e) The Directors have the power to make purchases of the Company’s own
shares in issue as set out above. The Directors also have the authority to
allot shares up to an aggregate nominal value of:
(i) £57,049,557 (such amount to be reduced by any shares allotted or rights
granted under (ii) below in excess of £57,049,557); and
(ii) £114,099,113 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 2019 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;
As resolved by shareholders at the 2019 AGM, the Directors have the
authority to allot a single non-cumulative redeemable preference share of one
penny nominal value (the WaterShare+ Share), the rights and restrictions in
relation to which are set out in Article 5A of the Company’s Articles of
Association. The authority will expire at the 2021 AGM.
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
At 31 March 2020 the Group has access to undrawn committed funds and cash
and cash deposits totalling £1.6 billion (£1.4 billion after restricted cash). Having
considered the Group’s strong funding position, the potential use of proceeds
from the proposed sale of Viridor and prudent financial projections, which take
into account a range of possible impacts, as described in this report, from the
COVID-19 pandemic, the Directors have a reasonable expectation that the
Group has adequate resource to continue in operational existence for the period
of at least 12 months from the date of the approval of the financial statements
and that there are no material uncertainties to disclose. For this reason they
continue to adopt the going concern basis in preparing the financial statements.
Pennon Group plc Annual Report 2020
119
Governance
Directors’ report –
Other statutory disclosures
continued
Board Committee overseeing the sale of Viridor
Immediately following the announcement in September 2019 of the Group’s
strategic review, the Board established a dedicated Board Committee to
undertake the strategic review and report back to the Board with
recommendations for the Group’s future strategic focus, growth options
and capital allocations policy.
Committee composition for the first stage of the strategic review, involving
oversight of the Viridor transaction, was as follows:
• Sir John Parker (Chair of the Committee).
• Gill Rider
• Iain Evans
• Chris Loughlin
• Susan Davy
• Simon Pugsley (General Counsel and Secretary to the Committee)
Terms of reference were adopted to set and regulate the Committee’s remit
from the Board, covering matters which included scope of delegated authority,
quorum, frequency of meetings, reporting responsibilities, record keeping and
minutes, establishment of project teams and working groups, and appointment
of external advisers.
The Committee met every two weeks throughout the initial period of the
strategic review ending with a contract being executed for the sale of Viridor.
The Committee’s main remit during that period covered the management and
coordination of the workstreams and outputs. Decisions on strategic focus and
major items of expenditure and risk were reserved for the Board.
From the outset the Board indicated its commitment to ensuring and
maintaining the highest level of corporate governance throughout the strategic
review. The Committee’s remit was therefore written around this requirement.
Through the permanent attendance of the Group General Counsel at all its
meetings, the Committee had assurance that there was appropriate oversight
of all relevant legal and regulatory requirements. Financial assurance and
integrity was supported through attendance at the Committee of the Pennon
Director of Treasury, Tax and Group Finance. Retained financial and legal
advisers provided continuous advice and guidance to the Committee, and where
appropriate, to the Board. The project team working to the Committee likewise
worked with the financial and legal advisers across all areas of activity. The
Group’s auditor, Ernst & Young were kept regularly informed of developments
and of the state of play of the strategic review. Regular meetings of the Group’s
Disclosure Committee took place to ensure adherence with market disclosure
rules throughout the process.
Throughout the review, robust assurance processes were implemented to
ensure accurate and complete data and financial inputs, and detailed and
objective verification procedures were established in order to substantiate the
financial and technical data underpinning the review’s outputs and conclusions.
Ultimately, the Committee recommended that the Board accept an offer
from KKR for the acquisition of Viridor. The Committee and its advisers
presented extensive findings and recommendations to the Board together
with all information and assurance required by the Board to make a fully
informed decision.
Following signature of the transaction, the Committee continued to operate in
order to ensure that all relevant activities required to achieve completion of the
transaction were appropriately concluded. These activities included the proper
preparation, verification and submission of a Class 1 Shareholder Circular.
The wider Group strategic review continues and the Committee continues to
operate.
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).
120
Pennon Group plc Annual Report 2020
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) The strategic report (pages 1 to 69 and 121) 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.
iii) 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 72 to 93 and 116 to 120 was approved
by the Board on 3 June 2020.
By order of the Board
Simon A F Pugsley
Group General Counsel and Company Secretary
3 June 2020
Section 172
statement
Legislation is now in place requiring companies to report on how directors have
discharged their duty to promote the success of the company, while having
regard to the matters set out in section 172(1)(a) to (f) of the Companies Act
2006 (CA2006).
Health, safety and environment
The Board and its Committees conduct regular reviews of safety matters and
environmental performance, with the aim of continually improving safety and
minimising environmental impact.
Each director is required to act in the way they consider, in good faith, would
be most likely to promote the success of the company for the benefit of its
members as a whole. In doing so directors must have regard (among other
matters) to:
• The likely long-term consequences of any decision
• The interests of the company’s employees
• The need to foster the company’s business relationships with
suppliers, customers and others
• The impact of the company’s operations on our communities
and environment
• Maintenance of the company’s reputation for the highest standards
of business conduct
• The need to act fairly as between members of the company.
The Board welcomes the reporting requirement introduced by section 172,
and sees it as an opportunity to explain how these considerations have
informed and helped shape strategy and decision making.
Stakeholder engagement is embedded within the detailed corporate governance
framework operated by the Board, and the long-term consequences of its
strategic decision making are reviewed and assessed at each Board meeting,
through its Committees, and through its oversight of decision making delegated
to executive management. The Board takes its section 172 obligations very
seriously, and applies section 172 in the context of its strategic direction of
the Group at its meetings, including in the following specific ways:
Strategic priorities
At every Board meeting the Directors review progress against our strategic
priorities with the executive management team.
Financial discipline and shareholder returns
Board meetings review executive management’s focus around fiscal discipline,
and delivery of solid and stable earnings and shareholder returns.
People
The Board approaches all its decisions which may affect employees by reference
to our corporate values of ‘trusted, responsible, collaborative and progressive’.
The Board has focused this year on fostering a leadership culture which stresses
the importance of good mental health, diversity and inclusion.
Governance
Our governance requires consistently high standards of business conduct
and the Board and the Audit Committee review all decisions in the light of this
strategic priority. Strong cultural leadership and governance are seen by the
Board as critical elements underpinning the continuing success of the Company.
Operational availability and reliability
Executive management is charged by the Board with maintaining the strong
operational resilience expected by our customers, suppliers and others, with
reports on these areas provided to each Board meeting.
Ultimately Board decisions are taken in a way which further both the long-term
financial success of the Group and the interests of our stakeholders.
The table below provides the context behind the Board’s approach to decision
making in view of its obligations under section 172 and to ensure wider
stakeholder engagement, with cross references to where more information can
be found in this Annual Report. Examples of how the section 172 factors
influenced the significant decisions taken by the Board during the year are set
out on page 73.
Matters considered by the Board
The likely consequences of any decision in
the long term
The interests of the Company’s employees
The need to foster the company’s
business relationships with suppliers,
customers and others
The impact of the Company’s operations
on the community and the environment
The desirability of the company
maintaining a reputation for high
standards of business conduct
The need to act fairly as between
members of the company
Further information
Our strategic objectives, which are set and monitored through a rolling long-term strategic planning process,
and delivered through our focus on customer service and satisfaction, employee training, development and
wellbeing, our Sustainable Financing Framework and sustainable procurement policy, ensure we work towards
achieving long-term growth in a sustainable way (see pages 17 to 19).
We pride ourselves on being a responsible employer, focused on employee engagement and communication,
promoting a diverse and inclusive workforce and the continued development of our people in a safe working
environment (see pages 38 to 41).
Continued commitment to delivering quality of service, value for money and satisfaction to our customers,
with regular engagement through focus groups, workshops and surveys (see pages 26 and 69).
We continue to foster key strategic and commercial relationships with our supply chain partners – with
a focus on quality and sustainability-focused delivery across the entire supply chain (see page 28).
Open dialogue and transparent engagement with our regulatory bodies, policy makers and other stakeholders
who shape our social contract (see page 29).
Committed to providing educational programmes and community sponsorships and engaging in charity
support initiatives and outreach events across our regions of operation (see pages 27, 40 and 47).
Regular engagement and close relationships with our environmental stakeholders, partners and interest
groups in the areas in which we operate (see page 28).
Our Sustainable Financing Framework supports investment across our key activities, namely: pollution
prevention and control; sustainable water and wastewater management; and climate change adaptation
(see page 23).
We ensure a transparent approach to conducting business in a responsible manner, with a focus on
maintaining good governance. The codes of conduct and policies which apply across our group are
regularly updated to ensure the highest of standards are adhered to (see pages 40 and 83).
Regular engagement with our shareholders to ensure that they are well informed of our business strategy
and key developments (see page 29).
Pennon Group plc Annual Report 2020
121
Financial statements
Pennon is well positioned with the
continuing Group’s robust balance
sheet, appropriate gearing levels
and healthy liquidity.
122
Pennon Group plc Annual Report 2020
Financial statements
124 Independent auditor’s report
132 Financial statements
138 Notes to the
191
financial statements
Alternative performance
measures and glossary
196 Five-year financial summary
197 Task Force on Climate-
related Financial Disclosures
(TCFD) 2020
198 Shareholder information
Pennon Group plc Annual Report 2020
123
Financial statements
Independent auditor’s report to the
members of Pennon Group plc
Opinion
In our opinion:
• Pennon Group plc’s group financial statements and parent company
financial statements (the “financial statements”) give a true and fair view of
the state of the Group’s and of the Parent Company’s affairs as at 31 March
2020 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 2020
Statement of changes in equity for
the year then ended
Cash flow statement for the year
then ended
Related notes 1 to 47 to the
financial statements, including a
summary of significant accounting
policies
Group
Consolidated Balance sheet as at 31
March 2020
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
Related notes 1 to 47 to the financial
statements, including a summary of
significant accounting policies
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 67 that describe
the principal risks and explain how they are being managed or mitigated;
• the directors’ confirmation set out on page 59 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 119 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 68 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, specific to accrued income
and IFRIC 12 revenue – Group
• Valuation of landfill related provisions – Viridor
• Valuation of the provision for doubtful
debts – SWW
• Valuation of the receivable related to the
Interserve claim – 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.
• We set overall group materiality at £14.3 million,
which represents 5% of the sum of the profit
before taxation before non-underlying items and
profit before taxation before non-underlying
items from discontinued operations.
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.
Audit scope
Materiality
124
Pennon Group plc Annual Report 2020
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
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 reflected
latest operational
factors in the key
assumptions that the
income accrual was
appropriately
determined.
Viridor
We concluded that
accrued income had
been recognised
appropriately in
accordance with IFRS
and Viridor’s
accounting policy,
and that IFRIC 12 had
been applied
appropriately.
Our procedures included:
South West Water and Pennon Water Services
•
We obtained an understanding of the process for the supply of
measured services, meter reading and related billing in order
to assess the completeness of the accrual for revenue at the
year end;
We tested key controls linked to system generated information
and around the estimation process for measured revenue;
We corroborated the key assumptions and estimates made by
management in recognising revenue, by obtaining internal and
external data on factors that influence demand from customers,
such as weather patterns and leaks in infrastructure networks;
We performed analytical procedures by comparing revenue
balances for the year against expectations and obtained
support for significant variances; and
In performing our journal testing, we paid increased attention to
entries impacting revenue, focusing on non-system postings
and those raised in the last two weeks of the year.
Viridor
•
We compared the key assumptions and estimates made by
management in recognising accrued revenue in the current
year to those applied in the prior year to identify significant
changes;
We analysed revenue trends and evaluated unusual movements
to assess the accuracy of the accrued income balance;
We obtained customer confirmations for a sample of revenue;
For material items, within accrued income, we reperformed the
calculation of the income that had been earned on waste
management contracts and powergen revenue to confirm the
accuracy of the accrued income recorded by management;
We tested the application of the IFRIC 12 revenue recognised
and assessed the allocation of consideration between the
construction and operating services provided;
We considered whether the revenue recognition policies
adopted comply with IFRS, in particular the requirements of
IFRIC 12. Specifically, we considered whether the margins used
to recognise revenue were appropriate, through testing that
costs were allocated to the correct contracts and that revenue
recognised, based on those costs, was 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; and
In performing our journal testing, we paid increased attention to
entries impacting revenue, particularly those raised close to the
balance sheet date.
•
•
•
•
•
•
•
•
•
•
Revenue recognition, specific to accrued
income and IFRIC 12 revenue – Group statutory
(£636.7 million, PY comparative £632.6 million,
discontinued £753.2 million, PY comparative
£845.6 million)
Risk direction
Refer to the Audit Committee Report (page 86);
Accounting policies (pages 138 to 140); and Note 5 of the
Consolidated Financial Statements (page 150)
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) presume that 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
Group - statutory (£636.7 million, PY comparative
£632.6 million)
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 2020 is £83.9 million (2019: £89.8 million) for
South West Water and £26.3 million (2019: £28.9 million)
for Pennon Water Services.
Viridor – discontinued (£753.2 million,
PY comparative £845.6 million)
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 2020 is £51.2 million (2019: £53.3 million).
Accounting for revenue from long term service
concession arrangements under IFRIC 12 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 2020 the Group has recognised
contract receivables of £202.4 million (2019: £188.3
million) and other intangible assets of £86.9 million (2019:
£90.6 million), related to service concession
arrangements (refer to Note 46).
We performed full and specific scope audit procedures over this risk
area for three components, which covered 100% of the risk amount.
Pennon Group plc Annual Report 2020
125
Key observations
communicated to
the Audit Committee
We concluded that
management’s real
risk free rate of 2.175%
applied to the most
signifcant provision
(aftercare) lies outside
of an acceptable
range (1.80% to
2.16%), but this has an
immaterial effect on
the provision balance.
We concluded that
the key assumptions
supporting the landfill
related provisions
reflected
management’s
reasonable best
estimates, informed
by latest external and
internal data, and
resulted in
appropriately
measured and
recognised
landfill-related
provisions.
Financial statements
Independent auditor’s report to the
members of Pennon Group plc
continued
Risk
Our response to the risk
Our procedures included:
•
We tested the aftercare, restoration and remediation provision
models, and verified that the models were arithmetically and
logically 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 the 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 consideration 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 sought evidence 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; and
•
•
•
•
•
•
• 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.
Valuation of landfill related provisions –
Viridor (£201.2 million, PY comparative
£209.6 million)
Risk direction
Refer to the Audit Committee Report (page 86);
Accounting policies (page 144); and Notes 32 and 46 of
the Consolidated Financial Statements (pages 175 and
190)
Landfill related provisions of £201.2 million (2019: £209.6
million) are disclosed in Notes 32 and 46 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 rates 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.
126
Pennon Group plc Annual Report 2020
Risk
Our response to the risk
Valuation of the provision for doubtful debts –
South West Water & Pennon Water Services
(£105.5 million, PY comparative £95.5 million)
Risk direction
Refer to the Audit Committee Report (page 86);
Accounting policies (page 142); and included within the
total Group balance per Note 22 of the Consolidated
Financial Statements (page 164)
Both the South West Water provision of £91.0 million
(2019: £86.8 million) and Pennon Water Services
provision of £14.5 million (2019: £8.7 million) are
calculated using a combination of system generated
information on historic debt recovery rates and
management’s judgement of the future likely recovery
rates.
Within the current year the provisions were calculated
using the normal methodology, and then a further
assessment was made to reflect on the risks arising from
the ability to collect in future as a result of the economic
impact of the COVID-19 pandemic. This resulted in an
additional provision of £2.8 million for South West Water
and £5.0 million for Pennon Water Services (these
amounts are included in the total figures noted above).
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.
We have shown the risk direction as increasing, reflecting
the issues arising from COVID-19 and have also
expanded the risk to the PWS component, as the PWS
customer base is non household and has been impacted
to a greater extent by COVID-19.
Valuation of the receivable related to the
Interserve claim – Viridor
Risk direction
Refer to the Audit Committee Report (page 86); Critical
accounting judgements (page 149); and Note 46 of the
Consolidated Financial Statements (page 190)
Viridor contracted with Glasgow City Council to
construct a Recycling and Renewable Energy Centre in
Glasgow. Viridor terminated the contract with the original
principal contractor in November 2016 and has overseen
the remaining construction.
Expenditure to complete construction is expected to
exceed the original target and management has
accounted for what it believes its contractual rights are.
Contract claims as at 31 March 2020 amounted to £72.0
million (2019: £72.0 million). Management recognised a
provision against the claims as at 31 March 2020 of £28.3
million (2019: £28.7 million), resulting in a net receivable of
£43.7 million (2019: £43.3 million).
We focused on this area given there is risk of challenge of
the legal position taken and greater judgement involved
in assessing the collectability of amounts recorded.
Our procedures included:
•
We performed a walkthrough of the process for calculating the
bad debt provision and assessed the design effectiveness of
relevant key controls;
We tested the operating effectiveness of the relevant key
controls over the integrity of data and the report utilised to
generate the ageing and categorisation of debt within South
West Water’s and Pennon Water Services’s billing systems;
We tested historic data on collection rates and evaluated how
this data was used in the preparation of the bad debt provision;
We validated 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;
For South West Water, 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 management’s scenario analysis of the impact of
COVID-19 on collection of trade receiviables to supporting
evidence. This included consideration of information on
collections performance in previous recessions, the
segmentation of customer base by employment group for
household customers and business group for non household
customers, together with information on actual collections since
the balance sheet date; and
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 and Pennon Water Services, which covered 100%
of the risk amount for these components components and covered
100% of the Group debtors balance shown in Note 22 which
excludes receivables relating to Viridor which are shown in Note 46.
Our procedures included:
• We obtained an understanding of the key assumptions and
estimates made by management in accounting for thel claim,
assessing whether there was evidence of management bias and
concluding on whether we concurred with the accounting
estimates made by management;
We obtained an update, from management and Group legal, to
understand the latest position of the claim as at the year end
date;
•
•
•
• We inspected the contractual documentation and relevant
clauses of the contract for evidence of the entitlement to
receive financial compensation;
We inspected the external legal advice/opinion management
had obtained in relation to contract positions, quantum of costs
and amounts recoverable;
We inspected any available external data, market
announcements, financial reports and correspondence between
Viridor and Interserve, to assess the recoverability of amounts
due from Interserve and whether the reserve recognised
reflects an appropriate level of provision;
We inquired of management and assessed other evidence,
including board minutes, to test the completeness of amounts
recorded in relation to contract claims; and
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.
•
•
Key observations
communicated to
the Audit Committee
We have concluded
that the South West
Water doubtful debt
provision of £91.0
million is within an
acceptable range and
reflects the recent
history of collection of
outstanding debts and
considerations of the
impact on future
collections of the
economic environment
arising from COVID-19.
We have also
concluded that the
Pennon Water
Services’s provision,
including the
additional provision
relating to COVID-19 of
£5.0 million, is
appropriate.
We have concluded
that the accounting
criteria for asset
recognition have been
met and that the
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 in this key
judgement, including
the possible range of
outcomes, in the
Annual Report and
Accounts are
appropriate.
We performed full scope audit procedures over this risk area in one
location, which covered 100% of the risk amount.
The key audit matters for the current year are consistent with matters included in our prior year auditor’s report, with the exception of the extension of the provision
for doubtful debts also to relate to PWS as well as SWW in light of COVID-19.
Pennon Group plc Annual Report 2020
127
Financial statements
Independent auditor’s report to the
members of Pennon Group plc
continued
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% (2019: 100%) of the Group’s Profit before taxation before non-underlying
items from both continuing and discontinued operations, 100% (2019: 100%) of
the Group’s Revenue from continuing and discontinued operations and 95%
(2019: 95%) of the Group’s Total assets. For the current year, the full scope
components contributed 100% (2019: 100%) of the Group’s Profit before taxation
before non-underlying items from both continuing and discontinued operations,
87% (2019: 88%) of the Group’s Revenue from continuing and discontinued
operations and 95% (2019: 95%) of the Group’s Total assets. The specific scope
component contributed 0.4% (2019: -0.6%) of the Group’s Profit before taxation
before non-underlying items, 13% (2019: 12%) of the Group’s Revenue from
continuing and discontinued operations and 1% (2019: 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 from continuing
operations, none is individually greater than 1% of the Group’s profit before
taxation before non-underlying items from continuing operations. 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 the full scope component, Viridor, in Taunton, and
the 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. We maintained
continuous and open dialogue with all component audit teams in addition to
holding formal meetings to ensure that we were fully aware of their progress and
results of their procedures. The Senior Statutory Auditor discussed the planned
audit approach with the component teams and any issues arising from their
work, attended meetings with local management, attending closing meetings
and reviewing key audit working papers on risk areas. This, together with the
additional procedures performed at Group level, gave us appropriate evidence
for our opinion on the Group financial statements.
Subsequent to the development of COVID-19 pandemic, we revisited our risk
assessment and planning to re-assess the risks in this context and held a
planning session with Group and component teams. The primary team
continued to interact regularly with the component teams during the post year
end procedures.
The Senior Statutory Auditor continued to discuss the audit approach with the
component teams and any issues arising from their work, attended meetings
with local management, attended closing meetings and reviewed key audit
working papers on risk areas. All of the above interactions were held remotely
using audio-visual technology.
For all components, year-end review of relevant audit work papers was facilitated
by the EY’s electronic audit file platform, screen sharing or the provision of
copies of work papers direct to the Group audit team.
Based upon the above approach we are satisfied that we have been able to
perform sufficient and appropriate oversight of our component teams.
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.
128
Pennon Group plc Annual Report 2020
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 overall materiality for the Group to be £14.4 million (2019: £13.4
million), which is 5% (2019: 5%) of the sum of profit before taxation before
non-underlying items and profit before taxation before non-underlying items
from discontinued operations. 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 overall materiality for the Parent Company to be £21.4 million
(2019; £19.3 million), which is 1% of Equity. For balances relevant to the Group
financial statements we have performed our procedures to a materiality to be
in-line with the Group materiality.
Starting basis
Reported profit before taxation
£193.1 million (2019: £260.3 million)
Adjustments
– Profit before taxation on discontinued
operations (Refer to Note 46) – £108.4
million (2019: £58.9 million)
– Non-underlying items (Refer to Note 6
decrease basis by £13.9 million
(2019: £19.9 million increase)
Materiality
Totals £287.6 million (2019: £280.2 million)
profit before taxation before
non-underlying items.
Materiality of £14.4 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% (2019: 75%) of our planning materiality, namely £10.8 million
(2019: £10.5 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.
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 £3.7 million to £8.1 million (2019: £3.2 million to £9.5 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 (2019: £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.
Impact of the COVID-19 pandemic
As a result of the ongoing COVID-19 pandemic, we have revisited our
procedures in respect of the Directors’ going concern assessment, taking into
account the nature of the Group, its business model and related risks. We
evaluated the Directors’ assessment of the Group’s ability to continue as a going
concern, including the consistency of the cash flow forecasts, the key
assumptions within the scenarios modelled and the available sources of liquidity
with the findings from other areas of the audit. We assessed both the impact of
additional sensitivities and the availability of mitigating future actions on the
going concern assessment. We have also reviewed the disclosures contained
within the Annual Report and consolidated financial statements in relation to this
issue and consider them to describe adequately the impact of COVID-19 on the
Group as at 31 March 2020.
The COVID-19 outbreak and lockdown restrictions occurred late in the Group’s
financial year and, as such, any audit procedures dependent on physical
verification had either been completed, with the exception of stockcounts, and
were subject to roll forward procedures or alternative procedures were
performed. For stockcounts at the Viridor component, we performed virtual
stockcounts. Subsequent to the travel restrictions being put in place, our post
year end procedures for the Group and its components were completed
remotely. We completed these procedures holding regular discussions with
management to discuss the evidence, judgements and accounting. Where
evidence comprised reports from systems, we utilised secure software
collaboration facilities with management to observe the configuration used and
repeat the extraction of reports from systems.
Other information
The other information comprises the information included in the annual report
set out on pages 1 to 123, 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.
Pennon Group plc Annual Report 2020
129
Financial statements
Independent auditor’s report to the
members of Pennon Group plc
continued
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:
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:
• Fair, balanced and understandable set out on page 120 – 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 84 to 87 – 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 73 – the parts of the directors’ statement required
under the Listing Rules relating to the company’s compliance with the UK
Corporate Governance Code containing provisions specified for review by
the auditor in accordance with Listing Rule 9.8.10R(2) do not properly
disclose a departure from a relevant provision of the UK Corporate
Governance Code.
Opinions on other matters prescribed by the Companies Act 2006
In our opinion, the part of the directors’ remuneration report to be audited has
been properly prepared in accordance with the Companies Act 2006.
In our opinion, based on the work undertaken in the course of the audit:
• the information given in the strategic report and the directors’ report for the
financial year for which the financial statements are prepared is consistent
with the financial statements and those reports have been prepared in
accordance with applicable legal requirements;
• the information about internal control and risk management systems in
relation to financial reporting processes and about share capital structures,
given in compliance with rules 7.2.5 and 7.2.6 in the Disclosure Rules and
Transparency Rules sourcebook made by the Financial Conduct Authority
(the FCA Rules), is consistent with the financial statements and has been
prepared in accordance with applicable legal requirements; and
• information about the company’s corporate governance code and practices
and about its administrative, management and supervisory bodies and their
committees complies with rules 7.2.2, 7.2.3 and 7.2.7 of the FCA Rules.
• 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 120, 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.
130
Pennon Group plc Annual Report 2020
• Based on this understanding we designed our audit procedures to identify
non-compliance with such laws and regulations. Our procedures involved
making enquiries of key management and legal counsel, reviewing key
policies, inspecting legal registers and correspondence with regulators and
reading key management meeting minutes. We also completed procedures
to conclude on the compliance of significant disclosures in the Annual
Report and Accounts with the requirements of the relevant accounting
standards, UK legislation and the UK Corporate Governance Code.
• We communicated regularly with the component teams and attended key
meetings with the component teams, management and legal counsel in
order to identify and communicate any instances of non-compliance with
laws and regulations.
• The Group operates in the water and waste sectors, which are highly
regulated environments. As such the Senior Statutory Auditor reviewed the
experience and expertise of the engagement team to ensure that the team
had the appropriate competence and capabilities, which included the use of
an expert where appropriate.
A further description of our responsibilities for the audit of the financial
statements is located on the Financial Reporting Council’s website at
https://www.frc.org.uk/auditorsresponsibilities. This description forms part of our
auditor’s report.
Other matters we are required to address
• We were appointed by the company at its annual general meeting on
31 July 2014 to audit the financial statements for the year ending
31 March 2015 and subsequent financial periods.
• The period of total uninterrupted engagement including previous renewals
and reappointments is 6 years, covering the years ended 31 March 2015 to
31 March 2020.
• 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.
• Our audit opinion is consistent with our additional report to the Audit
Committee explaining the results of our audit.
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.
Christabel Cowling (Senior statutory auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditor
Leeds
3 June 2020
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.
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 2020
131
Financial statements
Consolidated income statement
For the year ended 31 March 2020
Revenue
Operating costs
Employment costs
Raw materials and consumables used
Other operating expenses
Underlying earnings before interest, tax,
depreciation and amortisation
Operating non-underlying items
Depreciation and amortisation
Operating profit
Finance income
Finance costs: Underlying
Finance costs: Non-underlying
Finance costs
Net finance costs
Share of post-tax profit from joint ventures
Underlying profit before tax
Non-underlying operating and finance costs
Profit before tax
Taxation charge
Profit from continuing operations
Profit from discontinued operations
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)
From continuing operations
– Basic
– Diluted
From continuing and discontinued operations
– Basic
– Diluted
Notes
5
7
5
6
7
8
8
6
8
20
5
9
46
11
Discontinued
operations
(note 46)
2020
£m
753.2
Statutory
2020
£m
636.7
(130.4)
(87.2)
(337.5)
198.1
3.8
(82.1)
119.8
22.5
(48.7)
–
(48.7)
(26.2)
14.8
104.6
3.8
108.4
(24.6)
83.8
(70.0)
(14.9)
(186.5)
365.3
(7.9)
(119.8)
237.6
4.1
(66.6)
18.0
(48.6)
(44.5)
–
183.0
10.1
193.1
(70.6)
122.5
83.8
206.3
200.4
(1.1)
7.0
27.7
27.6
47.7
47.5
Pro forma
Total
2019(2)
£m
1,478.2
(205.8)
(109.3)
(616.9)
546.2
(25.7)
(195.2)
325.3
23.5
(106.7)
5.8
(100.9)
(77.4)
12.4
280.2
(19.9)
260.3
(37.7)
222.6
Pro forma
Total(2)
2020
£m
1,389.9
(200.4)
(102.1)
(524.0)
563.4
(4.1)
(201.9)
357.4
26.6
(115.3)
18.0
(97.3)
(70.7)
14.8
287.6
13.9
301.5
(95.2)
206.3
Discontinued
operations
(note 46)
2019
(restated(1))
£m
845.6
Statutory
2019
(restated(1))
£m
632.6
(138.6)
(94.3)
(433.8)
178.9
(29.6)
(78.0)
71.3
20.0
(44.8)
–
(44.8)
(24.8)
12.4
88.5
(29.6)
58.9
(4.9)
54.0
(67.2)
(15.0)
(183.1)
367.3
3.9
(117.2)
254.0
3.5
(61.9)
5.8
(56.1)
(52.6)
–
191.7
9.7
201.4
(32.8)
168.6
54.0
222.6
214.3
(0.3)
8.6
38.2
38.1
51.1
50.9
(1) The prior year income statement has been restated to reflect the impact of classifying our waste management activities provided by Viridor as a discontinued operation (see note 46).
(2) Pro forma results represent non-GAAP measures presented to provide sufficient detail to enable certain users of the financial statements to assess the combined results of the continuing
and discontinued operations of the Group during the current and prior financial years.
132
Pennon Group plc Annual Report 2020
Consolidated statement of comprehensive income
For the year ended 31 March 2020
Profit for the year
Other comprehensive income/(loss)
Items that will not be reclassified to profit or loss
Remeasurement of defined benefit obligations
Income tax on items that will not be reclassified
Total items that will not be reclassified to profit or loss
Items that may be reclassified subsequently to profit or loss
Share of other comprehensive income from joint ventures
Cash flow hedges
Income tax on items that may be reclassified
Total items that may be reclassified subsequently to profit or loss
Other comprehensive income/(loss) for the year net of tax
Total comprehensive income for the year
Total comprehensive income attributable to:
Ordinary shareholders of the parent
Non-controlling interests
Perpetual capital security holders
The notes on pages 138 to 190 form part of these financial statements.
Notes
30
9, 31
20
9, 31
36
2020
£m
206.3
17.7
0.1
17.8
0.2
(14.3)
3.1
(11.0)
6.8
213.1
207.2
(1.1)
7.0
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
Pennon Group plc Annual Report 2020
133
Financial statements
Balance sheets
At 31 March 2020
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
Retirement benefit obligations
Current assets
Inventories
Trade and other receivables
Current tax receivable
Derivative financial instruments
Cash and cash deposits
Assets held for sale
Liabilities
Current liabilities
Borrowings
Financial liabilities at fair value through profit
Derivative financial instruments
Trade and other payables
Current tax liabilities
Provisions
Liabilities directly associated with assets classified as held for sale
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
2020
£m
Company
2019
£m
2020
£m
2019
£m
15
16
17
19
31
23
20
20
30
21
22
27
23
25
46
28
24
23
26
27
32
46
28
29
24
23
30
31
32
33
34
35
36
37
42.3
1.2
3,171.8
–
–
4.1
–
–
6.6
3,226.0
4.9
185.8
1.9
2.7
665.9
861.2
2,675.3
3,536.5
(59.9)
(1.5)
(7.1)
(115.3)
–
(0.6)
(184.4)
(756.3)
2,595.8
(3,654.9)
(122.9)
(43.1)
(27.2)
–
(261.6)
–
(4,109.7)
1,712.1
171.3
227.0
144.2
872.8
1,415.3
0.1
296.7
1,712.1
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
–
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
–
–
0.2
1,223.5
1.8
4.1
845.2
–
–
2,074.8
–
24.7
–
2.5
367.9
395.1
1,135.6
1,530.7
(290.5)
(0.5)
(0.9)
(19.8)
(2.5)
–
(314.2)
–
1,216.5
(1,135.4)
(8.6)
(1.1)
(2.8)
(0.1)
–
–
(1,148.0)
2,143.3
171.3
227.0
144.2
1,304.1
1,846.6
–
296.7
2,143.3
–
–
0.3
1,044.6
1.2
3.7
1,980.8
–
–
3,030.6
–
21.6
–
2.8
284.8
309.2
–
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
The profit for the year attributable to ordinary shareholders’ equity dealt with in the accounts of the Parent Company is £330.6 million (2019 £194.8 million).
The notes on pages 138 to 190 form part of these financial statements.
The financial statements on pages 132 to 190 were approved by the Board of Directors and authorised for issue on 3 June 2020 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.
134
Pennon Group plc Annual Report 2020
Statements of changes in equity
For the year ended 31 March 2020
Group
At 1 April 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
Opening adjustment on adoption of IFRS 16
At 1 April 2019 (adjusted for IFRS 16)
Profit for the year
Other comprehensive income 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
Current tax relief on distribution 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 2020
The notes on pages 138 to 190 form part of these financial statements.
Share
premium
account
(note 34)
£m
Capital
redemption
reserve
(note 35)
£m
Retained
earnings
and other
reserves
(note 36)
£m
Non-
controlling
interests
£m
Perpetual
capital
securities
(note 37)
£m
218.8
–
–
–
–
–
–
–
4.8
4.8
223.6
–
223.6
–
–
–
–
–
–
–
–
3.4
3.4
227.0
144.2
–
–
–
–
–
–
–
–
–
144.2
–
144.2
–
–
–
–
–
–
–
–
–
–
144.2
807.1
214.3
(19.3)
195.0
(162.0)
4.4
–
(1.5)
–
(159.1)
843.0
(8.0)
835.0
200.4
6.8
207.2
(172.6)
4.8
–
–
(1.6)
–
(169.4)
872.8
1.5
(0.3)
–
(0.3)
–
–
–
–
–
–
1.2
–
1.2
(1.1)
–
(1.1)
–
–
–
–
–
–
–
0.1
296.7
8.6
–
8.6
–
–
(8.6)
–
–
(8.6)
296.7
–
296.7
7.0
–
7.0
–
–
(8.6)
1.6
–
–
(7.0)
296.7
Share
capital
(note 33)
£m
170.8
–
–
–
–
–
–
–
0.3
0.3
171.1
–
171.1
–
–
–
–
–
–
–
–
0.2
0.2
171.3
Total
equity
£m
1,639.1
222.6
(19.3)
203.3
(162.0)
4.4
(8.6)
(1.5)
5.1
(162.6)
1,679.8
(8.0)
1,671.8
206.3
6.8
213.1
(172.6)
4.8
(8.6)
1.6
(1.6)
3.6
(172.8)
1,712.1
Pennon Group plc Annual Report 2020
135
Share
premium
account
(note 34)
£m
Capital
redemption
reserve
(note 35)
£m
Retained
earnings
and other
reserves
(note 36)
£m
Perpetual
capital
securities
(note 37)
£m
144.2
–
–
–
–
–
–
–
–
–
144.2
–
–
–
–
–
–
–
1,111.1
194.8
0.2
195.0
(162.0)
–
1.5
(0.9)
–
(161.4)
1,144.7
330.6
0.5
331.1
(172.6)
–
–
2.0
296.7
8.6
–
8.6
–
(8.6)
–
–
–
(8.6)
296.7
7.0
–
7.0
–
(8.6)
1.6
–
Total
equity
£m
1,941.6
203.4
0.2
203.6
(162.0)
(8.6)
1.5
(0.9)
5.1
(164.9)
1,980.3
337.6
0.5
338.1
(172.6)
(8.6)
1.6
2.0
–
–
–
144.2
(1.1)
–
(171.7)
1,304.1
–
–
(7.0)
296.7
(1.1)
3.6
(175.1)
2,143.3
218.8
–
–
–
–
–
–
–
4.8
4.8
223.6
–
–
–
–
–
–
–
–
3.4
3.4
227.0
Financial statements
Statements of changes in equity
For the year ended 31 March 2020
continued
Company
At 1 April 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
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
Current tax relief on distribution 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 2020
The notes on pages 138 to 190 form part of these financial statements.
Share
capital
(note 33)
£m
170.8
–
–
–
–
–
–
–
0.3
0.3
171.1
–
–
–
–
–
–
–
–
0.2
0.2
171.3
136
Pennon Group plc Annual Report 2020
Cash flow statements
For the year ended 31 March 2020
Cash flows from operating activities
Cash generated/(outflow) from operations
Interest paid
Tax paid
Net cash generated/(outflow) from operating activities
Cash flows from investing activities
Interest received
Dividends received
Investment in joint venture
Loan repayments received from joint ventures
Deposit of restricted deposits
Purchase of property, plant and equipment
Purchase of intangible assets
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 derivatives early settlement
Purchase of ordinary shares by the Pennon Employee Share Trust
Proceeds from new borrowing
Repayment of borrowings
Cash inflows from lease financing arrangements
Lease principal repayments (2019 Finance lease principal repayments)
Dividends paid
Perpetual capital securities periodic return
Net cash received from/(used in) financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of the year
Group
Company
2020
£m
516.3
(97.7)
(52.6)
366.0
3.4
6.0
–
13.4
(23.3)
(332.8)
(0.6)
10.6
(323.3)
3.6
87.2
(1.6)
268.2
(84.8)
115.0
(142.8)
(172.6)
(8.6)
63.6
106.3
365.7
472.0
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
2020
£m
(180.3)
(37.4)
(3.7)
(221.4)
45.1
335.6
–
–
–
–
–
–
380.7
3.5
–
–
151.7
(51.8)
–
–
(172.6)
(7.0)
(76.2)
83.1
284.8
367.9
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
Notes
38
38
44
37
25
25
The cash flow statement above includes the entire Group, including cash flows relating to the Viridor business. Disaggregated information relating to the Viridor business is provided in note 46.
The notes on pages 138 to 190 form part of these financial statements.
Pennon Group plc Annual Report 2020
137
Financial statements
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 199.
Through the year, Pennon Group’s business has been 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. On 18 March 2020 Pennon agreed to sell Viridor Limited for £3.7 billion, subject to a number of conditions. The sale is expected to complete in early
summer 2020 (see note 46).
2. Principal accounting policies
The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied to the
years presented.
(a) Basis of preparation
These financial statements have been prepared on the historical cost accounting basis (except for fair value items, principally acquisitions, transfers of assets from
customers and certain financial instruments as described in accounting policy notes (b), (v) and (n) respectively) and in accordance with International Financial
Reporting Standards (IFRS) and interpretations of the IFRS Interpretations Committee as adopted by the European Union, and with those parts of the Companies
Act 2006 applicable to companies reporting under IFRS. A summary of the principal accounting policies is set out below, together with an explanation where
changes have been made to previous policies on the adoption of new accounting standards and interpretations in the year.
The going concern basis has been adopted in preparing these financial statements. At 31 March 2020 the Group has access to undrawn committed funds and cash
and cash deposits totalling £1.6 billion (£1.4 billion after restricted cash). Having considered the Group’s strong funding position, the potential use of proceeds from
the proposed sale of Viridor and prudent financial projections, which take into account a range of possible impacts, as described in this report, from the COVID-19
pandemic, the Directors have a reasonable expectation that the Group has adequate resource to continue in operational existence for the period of at least 12 months
from the date of the approval of the financial statements and that there are no material uncertainties to disclose. For this reason they continue to adopt the going
concern basis in preparing the financial statements.
Other than the adoption of IFRS 16, which is explained in note 45, new standards or interpretations which were mandatory for the first time in the year beginning
1 April 2019 did not have a material impact on the net assets or results of the Group.
New standards or interpretations due to be adopted from 1 April 2020 are not expected to have a material impact on the Group’s net assets or results. Existing
borrowing covenants are not impacted by changes in accounting standards.
(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.
Assets held for sale and discontinued operations
In accordance with IFRS 5 ‘Non-current assets held for sale and discontinued operations’, non-current assets and disposal groups are classified as held for sale only
if available for immediate sale in their present condition and a sale is highly probable and expected to be completed within one year from the date of classification.
Such assets are measured at the lower of carrying amount and fair value, less the costs of disposal, and are not depreciated or amortised. Accordingly the net results
of the waste management segment (Viridor Group) are presented within discontinued operations in the Group income statement (for which the comparatives have
been restated) and the assets and liabilities of these operations are presented separately in the Group Balance Sheet. Further information is provided in note 46.
(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.
138
Pennon Group plc Annual Report 2020
2. Principal accounting policies continued
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 wastewater 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 wastewater 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 wastewater 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.
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 (ERFs). 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 ERFs, 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.
In respect of its landfill business, revenue is set to cover total costs, including landfill tax (LFT), and to achieve a desired profit margin. Viridor, as the operator,
has a direct obligation to pay LFT, which represents a significant waste disposal cost of production for the business.
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 IFRIC 12. 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.
Pennon Group plc Annual Report 2020
139
Financial statements
Notes to the
financial statements
continued
2. Principal accounting policies continued
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 (v) 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) 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. Following
the formal agreement to sell Viridor, which represents the waste management business segment, the comparative period segmental information has been restated
to remove the waste management business from the continuing operations segmental reporting. The Waste management business was a significant segment
of the Group throughout the financial year ended 31 March 2020 as such the results of the waste business have been included in the segmental disclosure as a
discontinued operation. Further Information relating to income, expenses, cash flows and net assets of Viridor’s waste management business is provided in note 46.
The remaining business segments of the Continuing Group include the water business, comprising the regulated water and wastewater services undertaken by
South West Water, and the non-household retail business, comprising the services provided by Pennon Water Services in the non-household water and wastewater
retail market which, while regulated, is open to competition. Other segments, including Pennon Group plc, are not reportable segments as they are not reported to
Chief Decision makers. Segmental revenue and results include transactions between businesses. Inter-segmental transactions are eliminated on consolidation.
(e) 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 (CGUs)
or group of CGUs, 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 (i).
When a subsidiary undertaking is sold, the profit or loss on disposal is determined after including the attributable amount of goodwill.
(f) Other intangible assets
Other intangible assets are recognised in relation to long-term service concessions contracts to the extent that future amounts to be received are not contracted.
Other intangible assets include assets acquired in a business combination and are capitalised at fair value at the date of acquisition. Following initial recognition, finite life
intangible assets are amortised on a straight-line basis over their estimated useful lives, with the expense charged to the income statement through operating costs.
Infrastructure assets (being water mains and sewers, impounding and pumped raw water storage reservoirs, dams, pipelines and sea outfalls)
(g) Property, plant and equipment
i)
Infrastructure assets were included at fair value on transition to IFRS, and subsequent additions are recorded at cost less accumulated depreciation and impairment
charges. Expenditure to increase capacity or enhance infrastructure assets is capitalised where it can be reliably measured, and it is probable that incremental future
economic benefits will flow to the Group. The cost of day-to-day servicing of infrastructure components is recognised in the income statement as it arises.
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.
140
Pennon Group plc Annual Report 2020
Landfill sites
2. Principal accounting policies continued
ii)
Landfill sites are included within land and buildings at cost less accumulated depreciation. Cost includes acquisition and development expenses. The cost of a landfill
site is depreciated to its residual value 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 ERFs, 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
ERFs (including major refurbishments)
Fixed plant
Vehicles, mobile plant and computers
30 – 60 years
Over the estimated economic lives or the finance lease period, whichever is the shorter
40 – 80 years
25 – 40 years
20 – 40 years
3 – 10 years
Assets in the course of construction are not depreciated until commissioned.
The cost of assets includes directly attributable labour and overhead costs which are incremental to the Group. Borrowing costs directly attributable to the
construction of a qualifying asset (an asset necessarily taking a substantial period of time to be prepared for its intended use) are capitalised as part of the asset.
Assets transferred from customers are recognised at fair value as set out in accounting policy (v).
The assets’ residual values and useful lives are reviewed annually.
Gains and losses on disposal are determined by comparing sale proceeds with carrying amounts. These are included in the income statement.
(h) Leased assets
All are accounted for by recognising a right-of-use asset and a lease liability except for:
• Low value assets; and
• Leases with a duration of 12 months or less.
Contracts previously classified as ‘operating leases’ under IAS 17 are measured at the present value of contractual payments due to the lessor over the lease term,
with the discount rate determined by reference to the rate inherent in the lease unless this is not readily determinable, in which case the Group’s incremental
borrowing rate on commencement of the lease is used. After initial measurement, lease payments are allocated between the liability and finance cost. The finance
cost is charged to profit and loss over the lease period to produce a constant periodic rate of interest on the remaining balance of the liability for each period.
The interest element of cash payments in respect of these leases is included within interest payments in determining net cash generated from operating activities.
The capital element of the cash payment is included within cash flows from financing activities. Right-of-use assets are amortised on a straight-line basis over the
remaining term of the lease or the remaining economic life of the asset if shorter. When the Group revisits its estimate of lease term (because, for example, it
reassesses an extension option), it adjusts the carrying amount of the lease liability to reflect the payments to make over the revised term, which is discounted at
the same discount rate that applied on lease commencement. In these circumstances an equivalent adjustment is made to the carrying value of the right-of-use
asset, with the revised carrying amount being amortised over the remaining (revised) lease term.
Measurement and recognition of assets and liabilities previously accounted for as ‘finance leases’ under IAS 17 continue to apply following the adoption of IFRS 16.
Assets continue to be included as property, plant and equipment as right-of-use assets 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.
The Group regularly uses sale and lease back transactions to finance its capital programme. A sale and leaseback transaction is where the Group sells an asset and
immediately reacquires the use of the asset by entering into a lease with the buyer. Each transaction is assessed as to whether it meets the criteria within IFRS 15
‘Revenue from contracts with customers’ for a sale to have occurred. As a result, a lease liability is recognised, the associated property, plant and equipment asset is
derecognised, and a right-of-use asset is recognised at the proportion of the carrying value relating to the right retained. Any gain or loss arising relates to the rights
transferred to the buyer.
The impact of the adoption of IFRS 16 ‘Leases’ on 1 April 2020 is set out in note 45.
IFRS 16 policy applied from 1 April 2020
The impact of the adoption of IFRS 16 ‘Leases’ on 1 April 2020 is discussed in paragraph (a) above and note 45.
Pennon Group plc Annual Report 2020
141
Financial statements
Notes to the
financial statements
continued
2. Principal accounting policies continued
(i)
Impairment of non-financial assets
Assets with an indefinite useful life are not subject to amortisation and are tested annually for impairment, or whenever events or changes in circumstance indicate
that the carrying amount may not be recoverable.
Assets subject to amortisation or depreciation are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not
be recoverable.
An impairment loss is recognised for the amount by which an asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an
asset’s fair value, less costs to sell, and value-in-use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately
identifiable cash flows (CGUs). Value-in-use represents the present value of projected future cash flows expected to be derived from a CGU, discounted using a
pre-tax discount rate which reflects an assessment of the market cost of capital of the CGU. 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 CGU’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
(j)
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
(k)
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.
Inventories
(l)
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. The costs of items of
inventory are determined using weighted average costs.
(m) Cash and cash deposits
Cash and cash deposits comprise cash in hand and short-term deposits held at banks. Bank overdrafts are shown within current borrowings.
(n) Financial instruments
Financial instruments are recognised and measured in accordance with IFRS 9. The Group classifies its financial instruments in the following categories:
Debt instruments at amortised cost
i)
All loans and borrowings are initially recognised at fair value, net of transaction costs incurred. Following initial recognition, interest-bearing loans and borrowings are
subsequently stated at amortised cost using the effective interest method. Gains and losses are recognised in the income statement when instruments are
derecognised or impaired. Premia, discounts and other costs and fees are recognised in the income statement through amortisation.
Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance
sheet date.
ii) Trade receivables
Trade receivables do not carry any interest receivable and are recognised initially at fair value and subsequently at amortised cost using the effective interest method,
less provision for expected credit losses (ECLs). In accordance with the terms and conditions of IFRS 9, since 1 April 2019, 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.
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Pennon Group plc Annual Report 2020
2. Principal accounting policies continued
iii) Trade payables
Trade payables are not interest-bearing and are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.
iv) Financial assets arising from service concession arrangements
Where the provision of waste management services is performed through a contract with a public sector entity, which controls a significant residual interest in asset
infrastructure at the end of the contract, then consideration is treated as contract receivables, split between profit on the construction of assets, operation of the
service and the provision of finance which is recognised in notional interest within finance income.
v) Derivative financial instruments and hedging activities
The Group uses derivative financial instruments, principally interest rate swaps, foreign exchange forward contracts and cross-currency interest rate swaps to hedge
risks associated with interest rate and exchange rate fluctuations. Derivative instruments are initially recognised at fair value on the date the derivative contract is
entered into and subsequently remeasured at fair value for the reported balance sheet.
The Group designates certain hedging derivatives as either:
• A hedge of a highly probable forecast transaction or change in the cash flows of a recognised asset or liability (a cash flow hedge); or
• A hedge of the exposure to change in the fair value of a recognised asset or liability (a fair value hedge).
The gain or loss on remeasurement is recognised in the income statement except for cash flow hedges which meet the conditions for hedge accounting, when the
portion of the gain or loss on the hedging instrument which is determined to be an effective hedge is recognised directly in equity, and the ineffective portion in the
income statement. The gains or losses deferred in equity in this way are subsequently recognised in the income statement in the same period in which the hedged
underlying transaction or firm commitment is recognised in the income statement.
In order to qualify for hedge accounting, the Group is required to document in advance the relationship between the item being hedged and the hedging instrument.
The Group is also required to document and demonstrate an assessment of the relationship between the hedged item and the hedging instrument which shows that
the hedge will be highly effective on an ongoing basis. This effectiveness testing is reperformed at the end of each reporting period to ensure that the hedge remains
highly effective.
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.
In January 2020, the IASB’s interest rate benchmark reform amendments IFRS 7 ‘Financial Instrument (FI) disclosures’ and to IFRS 9 ‘FI recognition and measurement’
were endorsed by the EU. The amendments modify hedge accounting requirements to allow hedge accounting to continue for affected hedges during the period of
uncertainty before the hedged items or hedging instruments are affected when current interest rate benchmarks are amended due to the ongoing interest rate
benchmark reforms.
The amendments are relevant to the Group given that it applies hedge accounting to its benchmark interest rate exposures.
The application of the amendments impacts the Group’s accounting policies in the following ways:
The Group has floating rate debt, linked to the UK’s benchmark rate GBP London Inter-Bank Offered Rate (GBP LIBOR), which it fixes through cash flow hedges using
interest rate swaps. The amendments permit continuation of hedge accounting even though there is uncertainty about the timing and amount of the hedged cash
flows due to the interest rate benchmark reforms.
The Group uses cross-currency interest rate swaps to hedge the foreign currency risk, where applicable, within its financial instruments. The amendments permit
continuation of hedge accounting even though there is uncertainty about the replacement of the floating interest rates included in its cross-currency interest
rate swaps.
The Group will retain the cumulative gain or loss in the hedging reserve for designated cash flow hedges that are subject to interest rate benchmark reforms even
though there is uncertainty arising from the reform with respect to the timing and amount of the cash flows of the hedged items. If the hedged future cash flows are
no longer expected to occur due to reasons other than interest rate benchmark reform, the cumulative gain or loss will be immediately reclassified to profit or loss.
The Group has chosen to early adopt the amendments to IFRS 7 and IFRS 9 for the reporting period ended 31 March 2020, which are mandatory for annual reporting
periods commencing after 1 January 2020.
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
vii) Receivables due from subsidiary undertakings
Amounts owed by subsidiaries are classified and recorded at amortised cost and reduced by allowances for ECLs. Estimated future credit losses are first recorded
on initial recognition of a receivable and are based on estimated probability of default. Individual balances are written off when management deems them not to
be collectible.
Pennon Group plc Annual Report 2020
143
Financial statements
Notes to the
financial statements
continued
2. Principal accounting policies continued
(o) Taxation including deferred tax
The tax charge for the year comprises current and deferred tax. Tax is recognised in the income statement, except to the extent that it relates to items recognised
in the statement of comprehensive income or directly in equity. In this case, the tax is also recognised in the statement of comprehensive income or directly in equity
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.
(p) Provisions
Provisions are made where there is a present legal or constructive obligation as a result of a past event and it is probable that there will be an outflow of economic
benefits to settle this obligation and a reliable estimate of this amount can be made. Where the effect of the time value of money is material the current amount of a
provision is the present value of the expenditures expected to be required to settle obligations. The unwinding of the discount to present value is included as notional
interest within finance costs.
The Group’s policies on specific provisions are:
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.
Environmental control and aftercare costs
ii)
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 (i).
(q) Share capital and treasury shares
Ordinary shares are classified as equity.
Where the Company purchases the Company’s equity share capital (treasury shares) the consideration paid, including any directly attributable costs, is deducted
from equity until the shares are cancelled or 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 2019 to supersede the Pennon Employee Share Trust which was registered in Guernsey.
(r) Dividend distributions
Dividend distributions are recognised as a liability in the financial statements in the period in which the dividends are approved by the Company’s shareholders.
Interim dividends are recognised when paid; final dividends when approved by shareholders at the Annual General Meeting.
(s) Employee benefits
i)
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 a 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.
144
Pennon Group plc Annual Report 2020
2. Principal accounting policies continued
Defined contribution scheme
Costs of the defined contribution pension scheme are charged to the income statement in the year in which they arise. The Group has no further payment obligations
once the contributions have been paid.
Share-based payment
ii)
The Group operates a number of equity-settled, share-based payment plans for employees. The fair value of the employee services required in exchange for the grant
is recognised as an expense over the vesting period of the grant.
Fair values are calculated using an appropriate pricing model. Non-market-based vesting conditions are adjusted for assumptions as to the number of shares which
are expected to vest.
(t) Pre-contract and development costs
Pre-contract and development costs, including bid costs are expensed as incurred, except where it is probable that the contract will be awarded or the development
completed, in which case they are recognised as an asset which is amortised to the income statement over the life of the contract. These costs are included within
other receivables as shown in note 19.
(u) Fair values
The fair value of interest rate swaps is based on the market price to transfer the asset or liability at the balance sheet date in an 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.
(v) Transfers of assets from customers
Where an item of property, plant and equipment that must be used to connect customers to the network is received from a customer, or where cash is received from
a customer for the acquisition or construction of such an item, that asset is recorded and measured on initial recognition at its fair value. The credit created by the
recognition of the asset is recognised as a contract liability 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.
(w) Foreign exchange
Transactions denominated in foreign currencies are translated at the exchange rate at the date of the transaction. Monetary assets and liabilities denominated in a
foreign currency are translated at the closing balance sheet rate. The resulting gain or loss is recognised in the income statement.
(x) Perpetual capital securities
Perpetual capital securities are issued securities that qualify for recognition as equity. Accordingly, any periodic returns are accounted for as dividends and recognised
directly in equity and as a liability at the time the Company becomes obligated to pay the periodic return. This reflects the nature of the periodic returns and
repayment of principal being only made at the Company’s discretion. Any associated tax impacts are recognised directly in equity.
(y) 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.
Pennon Group plc Annual Report 2020
145
Financial statements
Notes to the
financial statements
continued
3. Financial risk management continued
Contractual undiscounted cash flows, including interest payments, at the balance sheet date were:
Group
31 March 2020
Non-derivative financial liabilities
Borrowings excluding lease liabilities
Interest payments on borrowings
Lease liabilities including interest
Trade and other payables
Guarantees
Derivative financial liabilities
Derivative contracts – net payments/(receipts)
31 March 2019
Non-derivative financial liabilities
Borrowings excluding finance lease liabilities
Interest payments on borrowings
Lease liabilities including interest
Trade and other payables
Guarantees
Derivative financial liabilities
Derivative contracts – net payments/(receipts)
Company
31 March 2020
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 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
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
40.7
59.1
39.5
115.3
197.1
7.0
86.8
60.5
92.2
298.0
201.7
3.8
6.1
33.1
19.8
658.0
0.6
51.8
33.6
15.8
763.2
0.2
244.4
56.3
94.4
–
–
7.3
41.1
59.4
55.5
–
–
(3.7)
204.4
30.9
–
–
0.7
6.1
32.8
–
–
0.2
511.9
135.8
150.9
–
–
20.3
672.8
156.4
242.1
–
–
(12.0)
393.1
61.3
–
–
1.5
551.7
77.9
–
–
0.3
1,479.3
618.2
1,750.6
–
–
2,276.3
869.4
2,035.4
115.3
197.1
0.7
35.3
1,288.0
681.0
2,153.9
–
–
2,088.7
957.3
2,543.7
298.0
201.7
(65.1)
(77.0)
537.9
64.8
–
–
0.3
431.9
81.5
–
–
–
1,141.5
190.1
19.8
658.0
3.1
1,041.5
225.8
15.8
763.2
0.7
No liability is expected to arise in respect of the guarantees noted above. Guarantees are analysed in note 42.
ii) Market risk
Of the Group’s interest-bearing liabilities at the year end 55% (2019 63%) were at fixed rates after the impact of financial derivatives in order to manage the risk of
fluctuating interest rates impacting the financial performance of the Group. While this level is below our policy of maintaining at least 60% of interest-bearing liabilities
at fixed rates, it reflects considerations regarding Pennon’s debt levels following the Group’s announcement of the strategic review and the subsequent announcement
of the proposed sale of Viridor. 19% (2019 18%) 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. Overall around 76% of the Group’s debt is fixed or index-linked,
the Group uses a combination of fixed rate, index-linked borrowings and fixed rate interest swaps as cash flow hedges of future variable interest payments to achieve
this. The notional principal amounts of the interest rate swaps are used to determine settlement under those swaps and are not therefore an exposure for the Group.
These instruments are analysed in note 23.
The Group is primarily exposed to the UK’s benchmark interest rate, GBP LIBOR, within its hedge accounting relationships, which are subject to interest rate benchmark
reform. The Group also has a small amount of Euro denominated debt on which the foreign currency risk has been managed through cross currency swaps.
The Group has closely monitored the market and the output from the various industry working groups managing the transition to new benchmark interest rates.
The Financial Conduct Authority (FCA) has made clear that, at the end of 2021, it will no longer seek to persuade, or compel, the banks to submit to LIBOR.
During 2019/20 the Group has converted a LIBOR revolving credit facility (RCF) to a Sterling Overnight Index Average (SONIA) linked RCF, this was to address the
documentary changes and allow the Group to test the changes in the Treasury management system. Further work continues to ensure the Group is well placed to
amend the debt portfolio and it is expected that later this year our relationship banks will no longer provide LIBOR-linked products.
146
Pennon Group plc Annual Report 2020
3. Financial risk management continued
Below are the details of the hedging instruments and hedged items in scope of the amendments to IFRS 7 and 9 due to interest rate benchmark reform, by hedge
type. The terms of the hedged items listed match those of the corresponding hedging instruments.
Hedge type
Fair value hedges
Cash flow hedges
Instrument type
Pay six-month UK benchmark rate
(GBP LIBOR), receive sterling fixed
cross currency swap
Receive three-month UK benchmark
rate (GBP LIBOR), pay GBP fixed
interest rate swap
Receive six-month UK benchmark
rate (GBP LIBOR), pay GBP fixed
interest rate swap
Receive six-month EURIBOR, pay
GBP fixed cross currency swap
Maturing between
2020 – 2026
Nominal £m
16
2020 – 2027
958
Hedged item
Fixed-rate Euro denominated financial instrument
of the same maturity and nominal as the swap
UK benchmark rate (GBP LIBOR) issued financial
instruments of the same nominals as the swaps
2020 – 2025
150
UK benchmark rate (GBP LIBOR) issued financial
instruments of the same nominals as the swaps
2021
26.4
Euro denominated financial instruments issued
of the same maturity and nominals as the swaps
The Group will continue to apply the amendments to IFRS 9 until the uncertainty arising from the interest rate benchmark reforms with respect to the timing and the
amount of the underlying cash flows that the Group is exposed ends. The Group has assumed that this uncertainty will not end until alternative language has been
agreed with the counterparties and is dependent on the outcome of the introduction of fallback provisions and the clauses negotiated with lenders.
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 2020 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 (2019 £2.4 million), for the equity sensitivity fair value, with derivative impacts excluded.
For 2020 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 (2019 £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.
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 2020 the Group had cash and facilities, including
restricted funds, of £1.6 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
2020
£m
3,048.9
1,712.1
4,761.0
64.0%
2019
£m
3,079.5
1,679.8
4,759.3
64.7%
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 K7 (2020-25)
regulatory period is set at 60.0%.
Regulatory capital value
Net borrowings
Net borrowings/regulatory capital value
Water business
2020
£m
3,572.5
2,307.2
64.6%
2019
£m
3,504.7
2,062.6
58.9%
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.
Pennon Group plc Annual Report 2020
147
Financial statements
Notes to the
financial statements
continued
3. Financial risk management continued
(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.
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 impacting continuing operations
Provision for doubtful debts
The Group has a material level of exposure to collection of trade receivables. Provisions in respect of these balances are calculated with reference to historical credit
loss experience, adjusted for forward-looking factors which by their nature are subject to uncertainty. Analysis of actual recovery compared with provisioning levels
have not, to date, resulted in material variances.
Under its regular review procedures at the balance sheet date, the Group applies a simplified approach in calculating 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 informed by its historical credit loss experience, adjusted for forward-looking factors specific to the receivables and the
economic environment.
In light of the broad economic challenges arising from the COVID-19 pandemic, part of the assessment of ECLs has been focused on the potential impact from
the pandemic. Considerations in this assessment have included the type of customers, whether they conduct essential business operations, are linked to central
or regional government and past experience of behaviours in challenging economic times. The precise quantum of the impact of the pandemic on both the Group’s
business and household customers is subject to significant estimate at the current time.
The actual level of debt collected may differ from the estimated levels of recovery. As at 31 March 2020 the Continuing Group’s current trade receivables were
£241.9 million, against which £106.1 million had been provided for ECLs (note 22). The provision for ECLs includes a non-underlying charge of £7.9 million in relation to
the impact of COVID-19. At 31 March 2020, the Disposal Group’s current trade receivables were £96.8 million, against which £2.9 million had been provided for ECLs.
£1.1 million of the Disposal Group’s provision represents a non-underlying charge in respect of COVID-19. As at 31 March 2019, the Group’s current trade receivables
were £360.2 million against which £99.0 million had been provided for ECLs.
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 most recent triennial valuation of the main scheme was as at 31 March 2019 and has recently been concluded, the outcome of which is summarised
in note 30.
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 2019
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
As at 31 March 2020, the Continuing Group is reporting a current tax receivable of £1.9 million, reduced from £19.1 million in 2018/19, which includes £1.2 million
receivable related to prior year tax items. The balance at 31 March 2020 excludes a current tax liability of £1.0 million in respect of the Disposal Group and this
amount is included within liabilities associated with assets classified as held for sale.
Judgements impacting continuing operations
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.
148
Pennon Group plc Annual Report 2020
4. Critical accounting judgements and estimates continued
Estimates impacting measurement of assets and liabilities held for sale
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 2020, the Group’s environmental and landfill restoration provisions were £201.2 million (2019 £209.6 million) (note 32), which has now been transferred
to liabilities associated with assets classified as held for sale (note 46).
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 2020 these assets had a net book value of £27.3 million (2019 £30.8 million) (note 17), which has now been transferred to liabilities
associated with assets classified as held for sale (note 46).
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 £202.4 million (2019 £188.3 million)
and other intangible assets of £86.9 million (2019 £90.6 million) in relation to its service concession arrangements, which have been transferred to assets classified as
held for sale (note 46).
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.
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 most recent triennial valuation of the main scheme was as at 31 March 2019 and has recently been concluded, the outcome of which is summarised
in note 30.
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 2019
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 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 ERFs. 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 £24.0 million (2018/19 £26.2 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. The amount of the cash refund reduces over time as the uncertain tax items mainly relate to timing issues of when the tax is due.
Judgements impacting assets and liabilities held for resale
Glasgow Recycling and Renewable Energy Centre (GRREC)
Total spend to bring the project into full operation was 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. While Interserve disputes
the amount due, dialogue with Interserve is ongoing, alongside the Group continuing to legally pursue the matter.
The associated contract with Glasgow City Council is accounted for in accordance with IFRIC 12 service concession arrangements and the spend on the project of
£273.0 million has contributed £117.0 million to a financial asset, £84.0 million to an intangible asset and an amount contractually due from Interserve of £72.0 million
(accounted for in accordance with IFRS 9). In line with IFRS 9, the Group has recorded 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 2020 recognises a provision of
£28.3 million, resulting in a net receivable due of £43.7 million (2019 £43.3 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 £72.0 million.
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.
Other estimates
During the year, management reassessed the critical estimates and resolved that the level of estimation for revenue recognition of accrued revenue relating to water,
waste and sale of electricity was no longer considered critical as the estimates are largely calculated on a systematic basis and have not, to date, resulted in a material
adjustment within the following 12-month period. However, management consider the total level of estimation of accrued revenue relating to water, waste and sale of
electricity to be material and highlight this as a material other estimate.
Pennon Group plc Annual Report 2020
149
Financial statements
Notes to the
financial statements
continued
5. Segmental information
Operating segments are reported in a manner consistent with internal reporting provided to the Chief Operating Decision-Maker (CODM), 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 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.
Following the Group entering into a formal sale agreement on 18 March 2020 to dispose of Viridor, the waste management business has been accounted for as a
discontinued operation. In accordance with IFRS 5 ‘Non-current assets held for sale and discontinued operations’, the net results of the waste management segment
are presented within discontinued operations in the Group income statement (for which comparatives have been restated) and the assets and liabilities of these
operations are presented separately as assets held for sale in the Group balance sheet. The waste management business has been a significant reporting segment
during the year ended 31 March 2020 and will continue to be reported separately to the CODM until the expected completion of the disposal transaction in the
summer of 2020 following approval by the Group’s shareholders.
Revenue from continuing operations
Water
Non-household retail
Other
Less intra-segment trading(1)
Revenue from discontinued operations
Waste management
Other
Less intra-segment trading(1)
Pro forma total revenue
Operating profit before depreciation, amortisation and non-underlying items (EBITDA) from continuing operations
Water
Non-household retail
Other
EBITDA from discontinued operations – Waste management
Operating profit before non-underlying items from continuing operations
Water
Non-household retail
Other
Operating profit from discontinued operations – Waste management
Profit before tax and non-underlying items from continuing operations
Water
Non-household retail
Other
Profit before tax from discontinued operations – Waste management
Profit before tax from continuing operations
Water
Non-household retail
Other
Profit before tax from discontinued operations – Waste management
2020
£m
570.3
173.5
10.1
(117.2)
636.7
757.8
9.4
(14.0)
753.2
1,389.9
364.2
1.9
(0.8)
365.3
198.1
563.4
245.4
1.2
(1.1)
245.5
116.0
361.5
174.0
(0.4)
9.4
183.0
104.6
287.6
189.0
(5.4)
9.5
193.1
108.4
301.5
2019
(restated)
£m
581.0
173.7
10.5
(132.6)
632.6
852.7
10.9
(18.0)
845.6
1,478.2
367.1
1.0
(0.8)
367.3
178.9
546.2
251.1
0.3
(1.3)
250.1
100.9
351.0
180.6
(1.6)
12.7
191.7
88.5
280.2
184.6
(1.6)
18.4
201.4
58.9
260.3
(1) 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.
150
Pennon Group plc Annual Report 2020
5. Segmental information continued
Balance sheet
31 March 2020
Assets (excluding investments in
joint ventures)
Investments in joint ventures
Total assets
Liabilities
Net assets
31 March 2019
Assets (excluding investments in
joint ventures)
Investments in joint ventures
Total assets
Liabilities
Net assets
Non-
household
retail
£m
Water
£m
Total Continuing
Group (pre-
eliminations)
£m
Other
£m
Disposal
Group (pre-
eliminations)
£m
Eliminations
£m
Group
£m
3,654.6
–
3,654.6
(2,854.6)
800.0
3,690.2
–
3,690.2
(2,762.2)
928.0
54.6
–
54.6
(54.2)
0.4
64.6
–
64.6
(58.7)
5.9
1,928.0
–
1,928.0
(1,727.6)
200.4
1,659.0
–
1,659.0
(1,685.8)
(26.8)
5,637.2
–
5,637.2
(4,636.4)
1,000.8
5,413.8
–
5,413.8
(4,506.7)
907.1
2,618.4
60.1
2,678.5
(1,967.2)
711.3
2,464.8
51.1
2,515.9
(1,743.2)
772.7
(1,553.2)
–
(1,553.2)
1,553.2
–
(1,470.2)
–
(1,470.2)
1,470.2
–
6,702.4
60.1
6,762.5
(5,050.4)
1,712.1
6,408.4
51.1
6,459.5
(4,779.7)
1,679.8
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. Note 46 provides details of this Disposal Group
which excludes intercompany receivables of £3.2 million and intercompany payables of £1,210.9 million which will be settled on completion as part of the sale being
completed on a debt free basis.
Other information
31 March 2020
Amortisation of other intangible assets
Capital expenditure
Depreciation
Finance income
Finance costs (before non-underlying items)
31 March 2019
Amortisation of other intangible assets
Capital expenditure
Depreciation
Finance income
Finance costs (before non-underlying items)
Notes
7
17
7
8
8
7
17
7
8
8
Water
£m
0.4
161.1
118.3
2.3
73.4
0.5
154.0
115.5
2.3
72.8
Non-
household
retail
£m
Other and
eliminations
£m
Total from
continuing
operations
£m
Discontinued
operations
Waste
management
£m
0.2
–
0.5
–
0.3
0.2
–
0.6
–
1.9
–
0.1
0.4
1.8
(7.1)
–
0.1
0.4
1.2
(12.8)
0.6
161.2
119.2
4.1
66.6
0.7
154.1
116.5
3.5
61.9
4.1
165.7
78.0
22.5
48.7
4.5
233.1
73.5
20.0
44.8
Group
£m
4.7
326.9
197.2
26.6
115.3
5.2
387.2
190.0
23.5
106.7
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:
Non-
household
retail
Water
Other
Waste management (WM)
Year ended 31 March 2020
Segment revenue
Inter-segment revenue
Revenue from external customers
UK total
£m
570.3
(106.4)
463.9
UK total
£m
173.5
(0.9)
172.6
UK total
£m
10.1
(9.9)
0.2
Total from
continuing
operations
£m
753.9
(117.2)
636.7
Significant service lines
Water
Non-household retail
Waste management services
Energy
Recyclate
Other
463.9
–
–
–
–
–
463.9
–
172.6
–
–
–
–
172.6
–
–
–
–
–
0.2
0.2
463.9
172.6
–
–
–
0.2
636.7
UK
£m
741.3
(14.0)
727.3
–
–
567.2
109.2
50.9
–
727.3
Rest
of EU
£m
11.8
–
11.8
–
–
–
–
11.8
–
11.8
Total from
discontinued
operations
WM
£m
767.2
(14.0)
753.2
Rest
of world
£m
10.3
–
10.3
–
–
–
–
10.3
–
10.3
–
–
567.2
109.2
76.8
–
753.2
Total
£m
1,521.1
(131.2)
1,389.9
463.9
172.6
567.2
109.2
76.8
0.2
1,389.9
China
£m
3.8
–
3.8
–
–
–
–
3.8
–
3.8
Pennon Group plc Annual Report 2020
151
Financial statements
Notes to the
financial statements
continued
5. Segmental information continued
Non-
household
retail
Water
Other
Year ended 31 March 2019
Segment revenue
Inter-segment revenue
Revenue from external customers
UK total
£m
581.0
(124.9)
456.1
UK total
£m
173.7
(4.0)
169.7
UK total
£m
21.4
(21.4)
–
Waste management (WM)
Total from
continuing
operations
£m
776.1
(150.3)
625.8
UK
£m
802.3
(0.3)
802.0
Rest
of EU
£m
13.8
–
13.8
China
£m
25.6
–
25.6
Total from
discontinued
operations
WM
£m
852.7
(0.3)
852.4
Rest
of world
£m
11.0
–
11.0
Total
£m
1,628.8
(150.6)
1,478.2
Significant service lines
Water
Non-household retail
Waste management services
Energy
Recyclate
456.1
456.1
169.7
169.7
655.8
–
88.9
–
107.7
–
1,478.2
625.8
The Group’s country of domicile is the United Kingdom and this 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.
–
169.7
–
–
–
169.7
–
–
655.8
88.9
57.3
802.0
456.1
–
–
–
–
456.1
–
–
655.8
88.9
107.7
852.4
–
–
–
–
13.8
13.8
–
–
–
–
25.6
25.6
–
–
–
–
11.0
11.0
–
–
–
–
–
–
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.
Operating costs
Pension past service credit(1)
COVID-19 provision for expected credit losses(2)
Pension past service cost (GMP equalisation impact)(3)
Provision for receivable (due from Interserve in respect of Glasgow
Recycling and Renewable Energy Centre)(4)
Earnings before interest, tax, depreciation and amortisation
Remeasurement of fair value movement in derivatives(5)
Net tax credit arising on non-underlying items above
Deferred tax change in rate(6)
Net non-underlying (charge)/credit
Continuing
operations
2020
£m
Discontinued
operations
2020
£m
Pro forma
Total
2020
£m
Continuing
operations
2019
£m
Discontinued
operations
2019
£m
Pro forma
Total
2019
£m
Notes
–
(7.9)
–
–
(7.9)
18.0
(1.9)
(30.3)
(22.1)
4.9
(1.1)
–
–
3.8
–
(0.7)
(10.3)
(7.2)
4.9
(9.0)
–
–
(4.1)
18.0
(2.6)
(40.6)
(29.3)
8
9
–
–
(2.1)
6.0
3.9
5.8
(0.7)
–
9.0
–
–
(0.9)
(28.7)
(29.6)
–
5.7
–
(23.9)
–
–
(3.0)
(22.7)
(25.7)
5.8
5.0
–
(14.9)
(1) Upon cessation of the Greater Manchester contract, Viridor employees delivering this contract transferred to the new contract provider. Accordingly, defined benefit pension commitments for these
employees are in the process of being transferred. The past service credit of £4.9 million (2019 £nil) reflects curtailment and other gains resulting from transferring employees moving from an active
to deferred status in these schemes.
(2) In response to the COVID-19 pandemic a detailed expected credit loss review has been undertaken. Economic and credit conditions are worsening, however the UK Government continues to
implement economic measures to support the wider economy. As a result of the review a Group provision of £9.0 million has been recognised. The charge is considered non-underlying due to its
size and nature.
(3) 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 judgment. This cost was recognised as a past
service cost in the income statement for the year ended 31 March 2019. These charges are considered non-underlying due to size and non-recurring nature.
(4) The financial statements recognise a gross receivable of £72.0 million from Interserve Construction Limited in relation to rectifications and completion costs for GRREC. During the financial year
ended 31 March 2019, Interserve Plc (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 public information available. Consequently, a provision of £22.7 million was recognised in 2018/19 against the receivable, resulting in a 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.
(5) In the year a gain of £18.0 million has been recognised relating to non-cash derivative fair value movements associated with derivatives that are not designated as being party to an accounting hedge
relationship (2019 credit of £5.8 million). In the year these instruments were early settled, as the instruments no longer met the Group’s accounting hedging requirements, and this has locked in the
mark to market gain. These movements are non-underlying due to the nature of the item being market dependent and potentially can be significant in value (size).
(6) Following the Chancellor’s Budget on 11 March 2020, the UK headline corporation tax rate will remain at 19%. It was previously set to reduce to 17% from 1 April 2020 and that change has now been
cancelled. All deferred tax assets and liabilities have therefore been recalculated to crystallise at 19%, resulting in a non-underlying deferred tax change in the year of £40.6 million. The change was
substantively enacted on 17 March 2020. This charge is considered non-underlying due to it arising from a material legislative change, and its treatment is consistent with that applied in relation to
previous changes in the corporation tax rate.
152
Pennon Group plc Annual Report 2020
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
Short-term/low value asset lease expense
Research and development expenditure
Trade receivables impairment
Depreciation of property, plant and equipment:
– Owned assets
– Under leases (2019 finance leases only)
Amortisation of other intangible assets
Notes
13
22
16
Operating costs include a charge of £7.9 million relating to non-underlying items, as detailed in note 6.
The costs above are exclusive of amounts relating to discontinued operations.
Fees payable to the Company’s auditor in the year were:
Fees payable to the Company’s auditor and its associates for the audit of parent company and consolidated financial statements
Fees payable to the Company’s auditor 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 auditor in respect of Pennon Group pension schemes:
Audit
Expenses reimbursed to the auditor in relation to the audit of the Group were £39,000 (2019 £63,000).
2020
£m
70.0
14.9
(0.4)
–
1.2
0.1
11.4
73.2
46.0
0.6
2020
£000
143
784
50
85
1,062
52
A description of the work of the Audit Committee is set out in its report on pages 84 to 87 which includes an explanation of how the auditor’s objectivity and
independence are safeguarded when non-audit services are provided by the auditor’s firm.
8. Net finance costs
Finance
cost
£m
Notes
2020
Finance
income
£m
Cost of servicing debt
Bank borrowing and overdrafts
Interest element of lease payments (2019 interest element of
finance lease payments)
Other finance costs
Interest receivable
Notional interest
Retirement benefit obligations
Net finance cost before non-underlying items
Non-underlying items
Fair value remeasurement of non-designated derivative
financial instruments providing commercial hedges
Net finance cost after non-underlying items
30
6
(28.1)
(35.6)
(2.7)
–
(66.4)
(0.2)
(66.6)
18.0
(48.6)
–
–
4.1
4.1
–
4.1
–
4.1
Finance
cost
£m
2019 (restated)
Finance
income
£m
Total
£m
(28.1)
(35.6)
(2.7)
4.1
(62.3)
(0.2)
(62.5)
(23.1)
(35.4)
(2.4)
–
(60.9)
(1.0)
(61.9)
18.0
(44.5)
5.8
(56.1)
–
–
–
3.5
3.5
–
3.5
–
3.5
2019
(restated)
£m
67.2
15.0
(1.6)
3.1
–
0.2
2.9
77.0
39.5
0.7
2019
£000
102
621
50
118
891
50
Total
£m
(23.1)
(35.4)
(2.4)
3.5
(57.4)
(1.0)
(58.4)
5.8
(52.6)
In addition to the above, finance costs of £2 million have been capitalised on qualifying assets included in property, plant and equipment (2019 restated £2.9 million).
Excluded from the amounts above are net finance costs relating to discontinued operations of £26.2 million (2019 £24.8 million), consisting of finance income of
£22.5 million (2019 £20.0 million) and finance costs of £48.7 million (2019 £44.8 million).
Pennon Group plc Annual Report 2020
153
Financial statements
Notes to the
financial statements
continued
9. Taxation
Analysis of charge in year
Current tax charge/(credit)
Deferred tax – other
Deferred tax arising on change of rate of
corporation tax
Total deferred tax charge
Tax charge/(credit) for year
Analysis of charge in year
Current tax charge/(credit)
Deferred tax – other
Deferred tax arising on change of rate of
corporation tax
Total deferred tax charge
Tax charge for year
Before
non-underlying
items
2020
£m
Non-underlying
items (note 6)
2020
£m
Notes
18.8
33.2
–
33.2
52.0
15.3
(12.7)
40.6
27.9
43.2
Before
non-underlying
items
2019
£m
Non-underlying
items (note 6)
2019
£m
29.4
13.3
–
13.3
42.7
(5.5)
0.5
–
0.5
(5.0)
Total
2020
£m
34.1
20.5
40.6
61.1
95.2
Total
2019
£m
23.9
13.8
–
13.8
37.7
Continuing
operations
2020
£m
Discontinued
operations
2020
£m
Pro forma
Total
2020
£m
Continuing
operations
2019
£m
Discontinued
operations
2019
£m
Pro forma
Total
2019
£m
Notes
43.8
(3.5)
30.3
26.8
70.6
(9.7)
24.0
10.3
34.3
24.6
34.1
20.5
40.6
61.1
95.2
29.6
3.2
–
3.2
32.8
(5.7)
10.6
–
10.6
4.9
23.9
13.8
–
13.8
37.7
UK corporation tax is calculated at 19% (2019 19%) of the estimated assessable profit for the year.
UK corporation tax for the pro forma total group, including discontinued operations is stated after a credit relating to prior year current tax of £9.2 million
(2019 credit of £3.0 million) and a prior year deferred tax charge of £6.5 million (2019 credit of £9.9 million).
The tax for the year differs from the theoretical amount which would arise using the standard rate of corporation tax in the UK of 19% (2019 19%) as follows:
Reconciliation of total tax charge
Profit before tax for continuing operations
Profit multiplied by the standard rate of UK corporation tax of 19% (2019 19%)
Effects of:
Expenses not deductible for tax purposes
Joint venture profits not taxed
Adjustments to tax charge in respect of prior years
Change in UK tax rates
Depreciation charged on non-qualifying assets
Other
Tax charge for year
Continuing
operations
2020
£m
Pro forma
Total
2020
£m
Continuing
operations
2019
£m
193.1
36.7
0.4
–
3.2
30.3
0.3
(0.3)
70.6
301.5
57.3
1.0
(2.8)
(2.7)
40.6
1.9
(0.1)
95.2
201.4
38.3
0.4
–
(6.6)
–
1.9
(1.2)
32.8
Pro forma
Total
2019
£m
260.3
49.5
1.7
(2.4)
(12.9)
–
3.7
(1.9)
37.7
154
Pennon Group plc Annual Report 2020
9. Taxation continued
Reconciliation of current tax charge
Profit before tax
Profit multiplied by the standard rate of UK corporation tax of 19% (2019 19%)
Effects of:
Relief for capital allowances in place of depreciation
Disallowance of depreciation charged in the accounts
Other timing differences
Expenses not deductible for tax purposes
Joint venture profits not taxed
Adjustments to tax charge in respect of prior years
Depreciation charged on non-qualifying assets
Relief for capitalised interest and foreign exchange gains/losses
Current tax charge for year
Continuing
operations
2020
£m
Pro forma
Total
2020
£m
Continuing
operations
2019
£m
Pro forma
Total
2019
£m
193.1
36.7
(21.8)
19.5
9.3
0.4
–
(0.3)
0.3
(0.3)
43.8
301.5
57.3
(52.4)
32.1
7.9
1.1
(2.8)
(9.2)
1.9
(1.8)
34.1
201.4
38.3
(22.1)
18.8
(2.9)
0.4
–
(4.3)
1.9
(0.5)
29.6
260.3
49.5
(54.2)
31.0
0.2
1.7
(2.4)
(3.0)
3.7
(2.6)
23.9
The pro forma Group’s current tax charge is lower than the UK headline rate of 19%, primarily due to the availability of capital allowances. Capital allowances
provide tax relief when a business incurs expenditure on qualifying capital items such as plant and machinery used by the business. As an infrastructure business,
these allowances help the Group to plan major investment and consequently to maintain lower customers bills, as corporation tax relief is given against the
investments made.
The headline UK tax rate will now be held at 19% (rather than reducing to 17% as previously enacted) following the Chancellor’s Budget on 11 March 2020.
The change to remain at 19% was substantively enacted on 17 March 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 recognised:
Amounts recognised directly in other comprehensive income
Deferred tax credit on defined benefit pension schemes
Deferred tax credit on cash flow hedges
Amounts recognised directly in equity
Deferred tax credit on share-based payments
Current tax credit on perpetual capital securities periodic return
10. Profit of the parent company
Profit attributable to ordinary shareholders’ equity dealt within the accounts of the parent company
Continuing
operations
2020
£m
Pro forma
Total
2020
£m
Continuing
operations
2019
£m
Pro forma
Total
2019
£m
(1.5)
(3.1)
(0.8)
(1.6)
(0.1)
(3.1)
(1.4)
(1.6)
(1.3)
(0.1)
(0.4)
–
2020
£m
330.6
(3.2)
(0.6)
(0.5)
–
2019
£m
194.8
As permitted by Section 408 of the Companies Act 2006, no income statement or statement of comprehensive income is presented for the Company.
Pennon Group plc Annual Report 2020
155
Financial statements
Notes to the
financial statements
continued
11. Earnings per share
Basic earnings per share are calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding
during the year, excluding those held in the employee share trust (note 36), which are treated as cancelled.
For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to include all dilutive potential ordinary shares. The Group has
two types of dilutive potential ordinary shares – those share options granted to employees where the exercise price is less than the average market price of the
Company’s ordinary shares during the year; and the contingently issuable shares under the Group’s Performance and Co-investment Plan, the long-term incentive
plan and the deferred shares element of the Annual Incentive Bonus Plan, based on performance criteria for the vesting of the awards.
The weighted average number of shares and earnings used in the calculations were:
Number of shares (millions)
For basic earnings per share
Effect of dilutive potential ordinary shares from share options
For diluted earnings per share
2020
420.2
1.9
422.1
2019
419.6
1.3
420.9
Basic and diluted earnings per ordinary share
Earnings per ordinary share before non-underlying items, deferred tax and adjusted to annualise depreciation and amortisation in the Disposal Group are presented as
the Directors believe that this measure provides a more useful year on year comparison of business trends and performance. Deferred tax is excluded as the Directors
believe it reflects a distortive effect of changes in corporation tax rates and the level of long-term capital investment. Following the announcement on 18 March of the
proposed sale of Viridor, the assets and liabilities of the Disposal Group have been transferred to assets held for sale and in accordance with IFRS 5, the property, plant
and equipment and intangible assets have not been depreciated or amortised from that date. The Directors believe that to aid comparison of earnings year on year,
it is appropriate to reflect a full year’s depreciation and amortisation consistent with all other revenues and costs recognised for the full year in the Disposal Group.
Earnings per share have been calculated as follows:
Profit
after tax
£m
200.4
33.2
29.3
(1.0)
(2.6)
259.3
Profit
after tax
£m
116.6
10.1
22.1
(1.0)
–
147.8
Profit
after tax
£m
83.8
23.1
7.2
–
(2.6)
111.5
2020
Earnings per share
Basic
p
47.7
7.9
6.9
(0.2)
(0.6)
61.7
Diluted
p
47.5
7.8
6.9
(0.2)
(0.6)
61.4
2020
Earnings per share
Basic
p
27.7
2.4
5.3
(0.2)
–
35.2
Diluted
p
27.6
2.4
5.2
(0.2)
–
35.0
2020
Earnings per share
Basic
p
20.0
5.4
1.7
–
(0.6)
26.5
Diluted
p
19.9
5.4
1.7
–
(0.6)
26.4
Profit
after tax
£m
214.3
13.3
14.9
–
–
242.5
Profit
after tax
£m
160.3
2.5
(9.0)
–
–
153.8
Profit
after tax
£m
54.0
10.8
23.9
–
–
88.7
2019
Earnings per share
Basic
p
51.1
3.1
3.6
–
–
57.8
Diluted
p
50.9
3.1
3.6
–
–
57.6
2019
Earnings per share
Basic
p
38.2
0.6
(2.1)
–
–
36.7
Diluted
p
38.1
0.6
(2.2)
–
–
36.5
2019
Earnings per share
Basic
p
12.9
2.5
5.7
–
–
21.1
Diluted
p
12.8
2.6
5.7
–
–
21.1
Continuing and discontinued operations
Statutory earnings attributable to ordinary shareholders of
the parent
Deferred tax charge before non-underlying items
Non-underlying items (net of tax)
Non-controlling interests’ share of non-underlying items
Full year depreciation charge in the Disposal Group
Adjusted earnings
Continuing operations
Statutory earnings attributable to ordinary shareholders of
the parent
Deferred tax charge before non-underlying items
Non-underlying items (net of tax)
Non-controlling interests’ share of non-underlying items
Full year depreciation charge in the Disposal Group
Adjusted earnings
Discontinuing operations
Statutory earnings attributable to ordinary shareholders of
the parent
Deferred tax charge before non-underlying items
Non-underlying items (net of tax)
Non-controlling interests’ share of non-underlying items
Full year depreciation charge in the Disposal Group
Adjusted earnings
156
Pennon Group plc Annual Report 2020
12. Dividends
Amounts recognised as distributions to ordinary equity holders in the year
Interim dividend paid for the year ended 31 March 2019 12.84p (2018 11.97p) per share
Final dividend paid for the year ended 31 March 2019 28.22p (2018 26.62p) per share
Proposed dividends
Proposed interim dividend for the year ended 31 March 2020: 13.66p per share
Proposed final dividend for the year ended 31 March 2020: 30.11p per share
2020
£m
54.0
118.6
172.6
57.5
126.8
184.3
The proposed interim and final dividends have not been included as liabilities in these financial statements.
The proposed interim dividend for 2020 was paid on 3 April 2020 and the proposed final dividend is subject to approval by shareholders at the AGM.
13. Employment costs
Wages and salaries
Social security costs
Pension costs – before non-underlying items
Pension (credit)/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
Continuing
operations
2020
£m
67.2
7.1
8.5
–
2.9
85.7
Discontinued
operations
2020
£m
113.7
11.5
13.7
(4.9)
0.9
134.9
Notes
30
6
33
Total
2020
£m
180.9
18.6
22.2
(4.9)
3.8
220.6
Continuing
operations
2019
£m
63.7
6.6
8.6
2.1
2.5
83.5
Discontinued
operations
2019
£m
120.6
12.5
13.3
0.9
1.1
148.4
70.0
–
15.7
85.7
135.3
205.3
(4.9)
4.5
134.9
(4.9)
20.2
220.6
67.2
2.1
14.2
83.5
138.6
0.9
8.9
148.4
2019
£m
50.2
111.8
162.0
54.0
118.7
172.7
Total
2019
£m
184.3
19.1
21.9
3.0
3.6
231.9
205.8
3.0
23.1
231.9
Details of Directors’ emoluments are set out in note 14. There are no personnel, other than Directors, who as key management exercise authority and responsibility
for planning, directing and controlling the activities of the Group. Members of other executive committees assist the Directors in their duties but do not hold authority
to control the activities of the Group.
Employees (average full-time equivalent number)
The average monthly number of employees (including Executive Directors) was:
Water
Non-household retail
Other
Total continuing operations
Waste management
Total – continuing and discontinued operations
2020
2019
1,623
143
101
1,867
2,986
4,853
1,616
104
93
1,813
3,426
5,239
The total number of employees (full-time equivalent) of the continuing operations at 31 March 2020 was 1,937 (2019 1,834). The total number of employees of the
continuing operations and discontinued operations at 31 March 2020 was 4,801 (2019 5,382).
Pennon Group plc Annual Report 2020
157
Financial statements
Notes to the
financial statements
continued
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
2020
£000
951
372
872
316
528
3,039
2019
£000
932
425
936
307
508
3,108
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 (2019 £nil). Total gains made by Directors on the exercise of share options were £nil (2019 £nil).
Total emoluments include £nil (2019 £nil) payable to Directors for services as directors of subsidiary undertakings.
At 31 March 2020 one Director (2019 one) is accruing retirement benefits under defined benefit pension schemes in respect of which the Group contributed
£29,000 (2019 £29,000).
At 31 March 2020 no Director (2019 no) is a member of the Group’s defined contribution pension scheme in respect of which the Group contributed
£nil (2019 £nil).
At 31 March 2020 two Directors received payments in lieu of pension provision (2019 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 92 to 115.
15. Goodwill
Cost:
At 1 April 2018
At 31 March 2019
Disposals
Assets transferred to Disposal Group
At 31 March 2020
Carrying amount:
At 1 April 2018
At 31 March 2019
At 31 March 2020
£m
385.0
385.0
(1.9)
(340.8)
42.3
385.0
385.0
42.3
Goodwill acquired in a business combination is allocated at acquisition to the CGU expected to benefit from that business combination. Goodwill with a total carrying
value of £340.8 million has been transferred to the Disposal Group. The remaining £42.3 million is allocated to the water business, representing the lowest level at
which goodwill is monitored and tested.
Impairment testing of goodwill
The Group tests goodwill for impairment annually, or more frequently if there are any indications that impairment may have arisen.
The recoverable amount of the 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 results of tests performed during the year demonstrate significant headroom in the water CGU, 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.
158
Pennon Group plc Annual Report 2020
16. Other intangible assets
Cost:
At 1 April 2018
Additions
At 31 March 2019
Additions
Disposals
Transferred to assets held for sale
At 31 March 2020
Accumulated amortisation:
At 1 April 2018
Charge for year
At 31 March 2019
Charge for year
Disposals
Transferred to assets held for sale
At 31 March 2020
Carrying amount:
At 1 April 2018
At 31 March 2019
At 31 March 2020
Service
concession
arrangements
£m
Customer
contracts
£m
Patents
£m
Other
£m
69.6
24.7
94.3
0.1
–
(94.4)
–
0.4
3.3
3.7
3.8
–
(7.5)
–
69.2
90.6
–
34.3
–
34.3
–
(34.3)
–
–
32.7
1.2
33.9
0.4
(34.3)
–
–
1.6
0.4
–
0.2
–
0.2
–
–
–
0.2
0.2
–
0.2
–
–
–
0.2
–
–
–
3.6
–
3.6
0.6
(0.2)
–
4.0
1.8
0.7
2.5
0.5
(0.2)
–
2.8
1.8
1.1
1.2
Total
£m
107.7
24.7
132.4
0.7
(34.5)
(94.4)
4.2
35.1
5.2
40.3
4.7
(34.5)
(7.5)
3.0
72.6
92.1
1.2
Assets that belong to Pennon Group plc’s waste management business, Viridor, have been transferred to assets held for sale at 18 March 2020, at which point
amortisation of its assets ceased.
Customer contracts were disposed in full during the year. Prior to disposal customer contracts were amortised over the useful life of each contract which at
acquisition ranged between two and 15 years.
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 five years. The average remaining life is three years
(2018 four years).
The carrying values of other intangible assets are reviewed annually or when events or changes in circumstance indicate that the carrying amounts may not be
fully recoverable.
Pennon Group plc Annual Report 2020
159
Financial statements
Notes to the
financial statements
continued
.17. Property, plant and equipment
Group
Cost:
At 31 March 2018
Additions
Assets adopted at fair value
Grants and contributions
Disposals
Transfers/reclassifications
At 31 March 2019
IFRS 16 transition adjustment
At 1 April 2019 (adjusted for IFRS 16)
Additions
Assets adopted at fair value
Grants and contributions
Disposals
Transfers/reclassifications
Transferred to assets held for sale
At 31 March 2020
Accumulated depreciation:
At 31 March 2018
Charge for year
Disposals
At 31 March 2019
Charge for year
Disposals
Transferred to assets held for sale
At 31 March 2020
Net book value:
At 31 March 2018
At 31 March 2019
At 31 March 2020
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
555.0
5.2
–
–
(0.7)
1.0
560.5
116.6
677.1
11.6
–
–
(4.0)
1.7
(560.6)
125.8
401.7
11.1
(0.2)
412.6
17.4
(0.6)
(413.4)
16.0
153.3
147.9
109.8
1,894.5
16.4
10.0
(2.2)
(1.2)
36.1
1,953.6
–
1,953.6
27.8
8.1
(1.8)
(0.6)
17.4
–
2,004.5
268.6
22.1
(1.2)
289.5
23.6
(0.6)
–
312.5
1,625.9
1,664.1
1,692.0
719.3
2.2
–
–
–
20.0
741.5
–
741.5
1.8
–
–
–
19.1
–
762.4
253.4
13.4
–
266.8
13.3
–
–
280.1
465.9
474.7
482.3
2,855.1
50.0
–
–
(16.4)
409.4
3,298.1
15.6
3,313.7
59.6
–
–
(111.4)
137.5
(1,439.4)
1,960.0
1,363.4
136.6
(14.3)
1,485.7
138.7
(99.4)
(333.6)
1,191.4
1,491.7
1,812.4
768.6
82.8
22.8
–
–
–
–
105.6
–
105.6
5.3
–
–
–
–
(110.9)
–
64.4
10.4
–
74.8
8.8
–
(83.6)
–
18.4
30.8
–
555.4
290.6
–
–
–
(466.5)
379.5
–
379.5
220.8
–
(0.9)
–
(175.7)
(304.6)
119.1
–
–
–
–
–
–
–
–
555.4
379.5
119.1
Total
£m
6,662.1
387.2
10.0
(2.2)
(18.3)
–
7,038.8
132.2
7171.0
326.9
8.1
(2.7)
(116.0)
–
(2,415.5)
4,971.8
2,351.5
193.6
(15.7)
2,529.4
201.8
(100.6)
(830.6)
1,800.0
4,310.6
4,509.4
3,171.8
Assets that belong to Pennon Group plc’s waste management business, Viridor, have been transferred to assets held for sale at a 18 March 2020 at which point
depreciation of its assets ceased.
Of the total depreciation charge of £201.8 million (2019 £193.6 million), £2.6 million (2019 £1.6 million) has been charged to capital projects, £2.0 million
(2019 £2.0 million) has been offset by deferred income and £197.2 million (2019 £190.0 million) has been charged against profits. Asset lives and residual values
are reviewed annually. During the year borrowing costs of £10.6 million (2019 £15.2 million) have been capitalised on qualifying assets, at an average borrowing
rate of 3.8% (2019 4.0%).
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 2019/20.
160
Pennon Group plc Annual Report 2020
17. Property, plant and equipment continued
Right-of-use assets held under leases included above were:
Group
Cost:
At 31 March 2019
IFRS 16 transition adjustment
At 1 April 2019 (adjusted for IFRS 16)
Additions
Disposals
Transfers/reclassifications
Transferred to assets held for sale
At 31 March 2020
Accumulated depreciation:
At 31 March 2019
Charge for year
Disposals
Transferred to assets held for sale
At 31 March 2020 total
Net book amount:
At 31 March 2019
At 31 March 2020
Land and buildings
£m
Infrastructure
assets
£m
Operational
properties
£m
Fixed and
mobile plant,
vehicles and
computers
£m
Construction
in progress
£m
3.3
116.6
119.9
1.1
(1.7)
–
(84.2)
35.1
0.1
6.7
(0.1)
(5.2)
1.5
3.2
33.6
428.4
–
428.4
5.7
(29.2)
–
–
404.9
68.2
10.1
–
–
78.3
471.1
–
471.1
22.9
(17.7)
5.2
–
481.5
126.7
8.3
–
–
135.0
360.2
326.6
344.4
346.5
672.9
15.6
688.5
91.5
(67.2)
–
(193.8)
519.0
315.2
39.7
(8.3)
(65.3)
281.3
357.7
237.7
5.2
–
5.2
–
–
(5.2)
–
–
–
–
–
–
–
5.2
–
Total
£m
1,580.9
132.2
1,713.1
121.2
(115.8)
–
(278.0)
1,440.5
510.2
64.8
(8.4)
(70.5)
496.1
1,070.7
944.4
The net book value of right-of-use assets at 1 April 2019 was £1,202.9 million, comprising an adjustment upon transition to IFRS 16 of £132.2 million, and
assets previously held under finance leases under IAS 17 of £1,070.7 million. Refer to note 45 for additional information relating to the Group’s implementation
of IFRS 16 ‘Leases’.
Company
Cost:
At 31 March 2018
Additions
At 31 March 2019
Additions
Disposals
At 31 March 2020
Accumulated depreciation:
At 31 March 2018
Charge for year
At 31 March 2019
Charge for year
Disposals
At 31 March 2020
Net book value:
At 31 March 2018
At 31 March 2019
At 31 March 2020
Asset lives and residual values are reviewed annually.
Fixed and
mobile plant,
vehicles and
computers
£m
0.4
0.1
0.5
0.1
(0.2)
0.4
0.2
–
0.2
0.1
(0.1)
0.2
0.2
0.3
0.2
Pennon Group plc Annual Report 2020
161
Financial statements
Notes to the
financial statements
continued
18. Financial instruments by category
The accounting policies for financial instruments that have been applied to line items are:
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
–
–
–
–
–
–
3.4
–
3.4
–
–
–
–
–
–
–
3.4
–
3.4
–
–
–
–
–
–
–
3.4
–
3.4
–
–
–
–
–
–
3.4
–
3.4
–
(34.1)
–
(34.1)
–
–
3.1
–
3.1
–
(20.5)
–
–
(20.5)
–
–
3.2
–
3.2
–
–
(3.7)
–
(3.7)
–
–
3.1
–
3.1
–
–
(0.9)
–
(0.9)
–
–
–
–
–
(0.2)
–
(0.2)
–
–
75.8
–
75.8
–
(0.5)
–
–
(0.5)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
665.9
665.9
(3,714.8)
–
–
(3,714.8)
–
263.8
–
569.6
833.4
(3,649.1)
–
–
–
(3,649.1)
1,241.8
0.2
–
367.9
1,609.9
(0.4)
(1,425.9)
–
–
(1,426.3)
1,064.5
0.1
–
284.8
1,349.4
(0.1)
(1,325.4)
–
–
(1,325.5)
135.8
–
–
135.8
–
–
(64.2)
(64.2)
261.2
–
–
–
261.2
–
–
(127.6)
(4.1)
(131.7)
–
–
–
–
–
–
–
–
(2.8)
(2.8)
–
–
–
–
–
–
–
–
(0.2)
(0.2)
Total
£m
135.8
6.8
665.9
808.5
(3,714.8)
(34.3)
(64.2)
(3,813.3)
261.2
263.8
82.3
569.6
1,176.9
(3,649.1)
(21.0)
(127.6)
(4.1)
(3,801.8)
1,241.8
0.2
6.6
367.9
1,616.5
(0.4)
(1,425.9)
(3.7)
(2.8)
(1,432.8)
1,064.5
0.1
6.5
284.8
1,355.9
(0.1)
(1,325.4)
(0.9)
(0.2)
(1,326.6)
Group
31 March 2020
Financial assets
Trade receivables
Derivative financial instruments
Cash and cash deposits
Total
Financial liabilities
Borrowings
Derivative financial instruments
Trade payables
Total
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 – amounts owed to joint ventures
Total
Company
31 March 2020
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 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
Notes
22
23
25
28
23
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
162
Pennon Group plc Annual Report 2020
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
2019
£m
–
67.8
188.3
0.3
256.4
2020
£m
1,223.5
–
–
–
1,223.5
Group
Company
2019
£m
44.0
135.2
77.2
256.4
2020
£m
66.1
211.4
946.0
1,223.5
Group
Company
2019
£m
–
81.9
188.3
0.3
270.5
2020
£m
1,205.2
–
–
–
1,205.2
2020
£m
–
–
–
–
–
2020
£m
–
–
–
–
2020
£m
–
–
–
–
–
Excluded from the balances at 31 March 2020 above is £261.5 million relating to assets held for sale (see note 46 for further details).
20. Investments
Subsidiary undertakings
Company
At 1 April 2018
At 31 March 2019
Transferred to assets held for sale
At 31 March 2020
The recoverable amount of investments is determined based on value-in-use calculations, which are set out in note 15.
Joint ventures
Group
At 1 April 2018
Additions
Share of post-tax profit
Share of other comprehensive income
Dividends received
At 31 March 2019
Share of post-tax profit
Share of other comprehensive income
Dividends received
Transferred to assets held for sale
At 31 March 2020
2019
£m
1,044.6
–
–
–
1,044.6
2019
£m
48.6
148.1
847.9
1,044.6
2019
£m
1,160.4
–
–
–
1,160.4
£m
1,980.8
1,980.8
(1,135.6)
845.2
Shares
£m
22.8
20.9
12.4
0.5
(5.5)
51.1
14.8
0.2
(6.0)
(60.1)
–
Pennon Group plc Annual Report 2020
163
Financial statements
Notes to the
financial statements
continued
20. Investments continued
The Group’s joint ventures listed below all have share capital consisting solely of ordinary shares which is held directly by the Disposal 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, and voting rights are only 40% giving joint control over the
Runcorn I ERF. As such the investment is classified as a joint venture and equity accounting has been applied.
Both joint ventures, which have non-coterminous year ends, are being sold with the Viridor business and as at 31 March 2020 are classified as assets held for sale.
The aggregate capital and reserves of INEOS Runcorn (TPS) Holdings Limited at 31 December 2019 was £70.3 million (2019 £59.9 million) and its profit before tax
for the year was £10.1 million (2019 £5.6 million). The aggregate capital and reserves of Lakeside Energy from Waste Holdings Limited at 30 September 2019 was
£18.7 million (2019 £12.3 million) and its profit before tax for the year was £18.4 million (2019 £19.2 million).
Details of the Group’s principal subsidiary and joint venture undertakings are 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.
21.
Inventories
Raw materials and consumables
Group
Company
2020
£m
4.9
2019
£m
28.8
2020
£m
–
Excluded from the balance at 31 March 2020 above is £29.9 million relating to assets held for sale (see note 46 for further details).
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
Accrued income
Prepayments
Group
Company
2020
£m
241.9
(106.1)
135.8
–
–
10.0
29.3
10.7
185.8
2019
£m
360.2
(99.0)
261.2
7.7
–
5.9
123.3
86.7
484.8
2020
£m
–
–
–
–
18.3
0.2
0.2
6.0
24.7
2019
£m
–
2019
£m
–
–
–
–
19.9
0.1
0.1
1.5
21.6
Excluded from the balances at 31 March 2020 above is £277.9 million relating to assets held for sale (see note 46 for further details).
Trade receivables include accrued income relating to customers with water budget payment plan. Decreased demand in the water business has resulted in a decrease
in trade receivables balances.
Accrued income includes £26.9 million in respect of metered accrual revenue in the retail water business. Metered accrual revenue relates to performance obligations
that have been fully extinguished in providing services to customers prior to the reporting date. Payment in respect of these services is a matter of time following
issuance of invoices.
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.
164
Pennon Group plc Annual Report 2020
22. Trade and other receivables – current continued
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
2020
£m
33.7
15.8
17.2
175.2
241.9
2019
£m
152.2
22.5
25.2
160.3
360.2
The aged trade receivables above are taken directly from aged sales ledger records before deduction of credit balances and other adjustments.
The Group’s operating businesses specifically review separate categories of debt to identify an appropriate allowance for expected credit losses as outlined in
note 2(p). 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
Provision for expected credit losses
Receivables written off during the year as uncollectable
Transfer to assets held for sale
At 31 March
23. Derivative financial instruments
Derivatives used for cash flow hedging
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Derivatives used for fair value hedging
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Derivatives not in a hedge accounting relationship
Non-current assets
Current assets
Current liabilities
Non-current liabilities
2020
£m
99.0
11.6
(1.6)
(2.9)
106.1
Group
Company
2020
£m
1.2
2.2
(6.9)
(27.2)
2.9
0.5
–
–
–
–
(0.2)
–
2019
£m
1.0
2.1
(10.7)
(9.8)
2.6
0.8
–
–
66.9
8.9
(0.4)
(0.1)
2020
£m
1.2
2.0
(0.9)
(2.8)
2.9
0.5
–
–
–
–
–
–
2019
£m
104.3
3.2
(8.5)
–
99.0
2019
£m
1.1
2.0
(0.2)
(0.7)
2.6
0.8
–
–
–
–
–
–
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 (2019 £nil).
During the year a £8.6 million charge (2019 £6.8 million) was recognised in profit and loss relating to cash flow hedges previously recognised through other
comprehensive income and recorded in the hedging reserve. A £14.3 million charge (2019 £6.4 million charge) 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 2020 55% of Group net borrowings were at fixed rate (2019 63%). While this level is below our policy of maintaining at
least 60% of interest-bearing liabilities at fixed rates, it reflects considerations regarding Pennon’s debt levels following the Group’s announcement of the strategic
review and the subsequent announcement of the proposed sale of Viridor.
At 31 March 2020 the Group had interest rate swaps to swap from floating to fixed rate and hedge financial liabilities with a notional value of £1,178 million and
a weighted average maturity of 4.0 years (2019 £1,529 million, with 3.2 years). The weighted average interest rate of the swaps for their nominal amount was
1.4% (2019 1.7%).
Pennon Group plc Annual Report 2020
165
Financial statements
Notes to the
financial statements
continued
23. Derivative financial instruments continued
The periods for which the cash flow hedges are expected to affect future profit or loss are as follows:
Group
31 March 2020
Assets
Liabilities
31 March 2019
Assets
Liabilities
Company
31 March 2020
Assets
Liabilities
31 March 2019
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
2.2
(7.3)
2.1
(10.7)
2.0
(0.9)
2.0
(0.2)
0.8
(7.0)
0.5
(2.1)
0.8
(0.8)
0.5
(0.2)
0.4
(19.4)
0.5
(5.8)
0.4
(1.6)
0.6
(0.4)
–
(0.8)
–
(1.9)
–
(0.4)
–
(0.1)
Total
£m
3.4
(34.5)
3.1
(20.5)
3.2
(3.7)
3.1
(0.9)
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:
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
Group
Company
2020
£m
3.4
3.4
–
6.8
(34.1)
(0.2)
(34.3)
2019
£m
3.1
3.4
75.8
82.3
20.5
0.5
21.0
2020
£m
3.2
3.4
–
6.6
(3.7)
–
(3.7)
Group
Company
2020
£m
1.5
43.1
2019
£m
3.8
43.1
2020
£m
0.5
1.1
2019
£m
3.1
3.4
–
6.5
0.9
–
0.9
2019
£m
0.4
1.4
Financial instruments at fair value through profit reflect the fair value movement of the hedged risk on the hedged item which had been designated in a fair value
hedging relationship.
The hedged item was the £150 million bond issued by South West Water Finance Plc in 2010 which matures in July 2040 (see note 28). The hedging relationship
was de-designated in previous periods at which point the fair value amount recognised at that point ceased to be revalued. The fixed financial liability at the point of
de-designation is released to the income statement over the remaining life of the debt. Due to the de-designation the Group held a fixed to floating interest rate swap
which was classified as a derivative not in a hedging relationship as disclosed in note 23. This derivative arrangement was settled early in the first half of the year
ended 31 March 2020.
166
Pennon Group plc Annual Report 2020
25. Cash and cash deposits
Cash at bank and in hand
Short-term bank deposits
Other deposits
Total cash and cash deposits
Group
Company
2020
£m
64.9
175.0
426.0
665.9
2019
£m
110.5
45.0
414.1
569.6
2020
£m
17.8
150.0
200.1
367.9
2019
£m
109.7
45.0
130.1
284.8
Excluded from the balances at 31 March 2020 above is £33.3 million relating to assets held for sale (see note 46 for further details).
Group short-term deposits have an average maturity of 1 working day.
Group other deposits have an average maturity of 50 days.
Group other deposits include restricted funds of £227.2 million (2019 £203.9 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
Cash and cash deposits held in the Disposal Group
Less: deposits with a maturity of three months or more (restricted funds)
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
Other payables
Group
Company
2020
£m
665.9
33.3
(227.2)
472.0
2019
£m
569.6
–
(203.9)
365.7
2020
£m
367.9
–
–
367.9
Group
Company
2020
£m
64.2
2.0
–
–
2.8
15.5
30.8
115.3
2019
£m
127.6
10.3
–
4.1
32.5
–
123.5
298.0
2020
£m
2.8
–
0.4
–
0.8
–
15.8
19.8
Excluded from the balances above is £141.7 million relating to liabilities directly associated with assets classified as held for sale (see note 46 for further details).
The Directors consider that the carrying amount of trade and other payables approximates to their fair value.
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
Transfer to liabilities associated with assets held for sale
At 31 March
The analysis of contract liabilities between current and non-current is:
Current
Non-current (note 29)
2020
£m
126.4
(9.6)
24.7
(16.6)
124.9
2020
£m
2.0
122.9
124.9
2019
£m
284.8
–
–
284.8
2019
£m
0.2
–
0.1
–
0.8
–
14.7
15.8
2019
£m
120.2
(12.2)
18.4
–
126.4
2019
£m
10.3
116.1
126.4
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.
Pennon Group plc Annual Report 2020
167
Financial statements
Notes to the
financial statements
continued
27. Current tax assets/(liabilities)
Current year debtor/(creditor)
Prior year tax items
Group
Company
2020
£m
0.7
1.2
1.9
2019
£m
(12.9)
(6.2)
(19.1)
2020
£m
(0.6)
(1.9)
(2.5)
2019
£m
(1.9)
(1.7)
(3.6)
Excluded from the balances above is £1.0 million of current tax liabilities relating to liabilities directly associated with assets classified as held for sale (see note 46
for further details).
28. Borrowings
Current
Short-term loans
European Investment Bank
Amounts owed to subsidiary undertakings (note 44)
Leases (IAS 17 finance)
Leases (IAS 17 operating)
Total current borrowings
Non-current
Bank and other loans
Private placements
Bond 2040
RPI index-linked bonds
European Investment Bank
Amounts owed to subsidiary undertakings (note 44)
Leases (IAS 17 finance)
Leases (IAS 17 operating)
Total non-current borrowings
Total borrowings
Group
Company
2020
£m
7.6
33.1
–
40.7
18.2
1.0
59.9
702.1
618.2
134.5
440.0
340.8
–
2,235.6
1,384.2
35.1
3,654.9
3,714.8
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
2020
£m
–
6.1
284.4
290.5
–
–
290.5
520.4
511.6
–
–
103.4
–
1,135.4
–
–
1,135.4
1,425.9
2019
£m
51.8
–
283.9
335.7
–
–
335.7
370.9
509.3
–
–
109.5
–
989.7
–
–
989.7
1,325.4
Excluded from the balances above is £19.0 million of current and £229.4 million of non-current borrowings relating to liabilities directly associated with assets classified
as held for sale (see note 46 for further details).
Refer to note 45 for further details regarding the impact of IFRS 16 ‘Leases’. References above to IAS 17 finance and IAS 17 operating leases represent the classification
of these lease balances under IAS 17 prior to implementation of IFRS 16.
The Group has 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.
168
Pennon Group plc Annual Report 2020
28. Borrowings continued
The fair values of non-current borrowings, valued using level 2 measures (as set out in note 23) were:
2020
2019
Book value
£m
Fair value
£m
Book value
£m
Fair value
£m
Group
Bank and other loans
Private placements
Bond 2040
RPI index-linked bond
European Investment Bank
Leases
Company
Bank and other loans
European Investment Bank
Private placements
Amounts owed to subsidiary undertakings (note 44)
702.1
618.2
134.5
440.0
340.8
2,235.6
1,419.3
3,654.9
520.4
103.4
511.6
–
1,135.4
709.7
689.8
206.1
536.0
324.3
2,465.9
–
2,465.9
528.0
103.4
583.1
–
1,214.5
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
Following the application of IFRS 16 during the year ended 31 March 2020 the disclosure relating to the fair value of leases is no longer required.
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 17 years (2019 18 years).
The maturity of lease liabilities was:
Within 1 year
Over 1 year and less than 5 years
Over 5 years
Group
Company
2019
£m
68.3
834.5
2,595.9
3,498.7
2020
£m
204.4
393.0
538.0
1,135.4
Group
Company
2019
£m
63.6
188.9
1,307.9
1,560.4
2020
£m
–
–
–
–
2020
£m
315.1
590.1
2,749.7
3,654.9
2020
£m
19.2
149.0
1,270.3
1,438.5
447.3
657.7
197.5
526.4
345.2
2,174.1
1,431.6
3,605.7
375.3
109.5
557.7
–
1,042.5
2019
£m
51.8
557.7
380.2
989.7
2019
£m
–
–
–
–
The discount rate used to calculate the lease liabilities above involves estimation. Where there is no rate implicit in the lease the Group uses an estimated incremental
borrowing rate (IBR). At 31 March 2020 the range of IBR’s used for the Continuing Group was between 2.93% and 4.5% and the weighted average IBR across all leases
was 3.8%. If the weighted average rate used increased or decreased by 10bps, this would result in a c.3.8% increase or reduction in the present value of lease liabilities
recognised at 31 March 2020.
Included above is a total present value of liabilities of £1,402.3 million representing amounts previously classified as finance leases under IAS 17 prior to
implementation of IFRS 16.
Included above are accrued finance charges arising on obligations under agreements previously classified as finance leases under IAS 17 totalling £165.0 million
(2019 £163.7 million), of which £1.1 million (2019 £3.7 million) is repayable within one year.
The period for repayment of certain leases includes an agreement to deposit with the lessor group amounts equal to the difference between the original and revised
payments due. The accumulated deposits, £107.9 million at 31 March 2020 (2019 £97.5 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 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, £118.0 million at 31 March 2020 (2019 £105.1 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.
Pennon Group plc Annual Report 2020
169
Financial statements
Notes to the
financial statements
continued
28. Borrowings continued
Undrawn committed borrowing facilities at the balance sheet date were:
Floating rate:
Expiring within 1 year
Expiring after 1 year
Group
Company
2020
£m
–
940.0
940.0
2019
£m
–
600.0
600.0
2020
£m
–
705.0
705.0
In addition, at 31 March 2020 the Group had undrawn uncommitted short-term bank facilities of £30.0 million (2019 £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
2020
£m
–
122.9
–
–
122.9
2019
£m
–
116.1
7.5
24.3
147.9
2020
£m
8.6
–
–
–
8.6
2019
£m
–
405.0
405.0
2019
£m
8.6
–
–
–
8.6
Excluded from the balances above is £14.3 million relating to liabilities directly associated with assets classified as held for sale (see note 46 for further details).
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 12 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 as at 31 March 2019 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. These amounts have been transferred to/from other non-current liabilities to provisions within liabilities associated with assets held for sale (see note
46 for further details).
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 £9.0 million (2019 £8.8 million), of which £2.5 million (2019 £2.5 million) relates to the Continuing Group.
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
2020
%
2.7
2.5
2.30
2.7
2019
%
3.3
3.2
2.40
3.3
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 2019 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
2020
24.7
26.9
2019
23.9
26.3
2018
%
3.2
3.0
2.70
3.2
2018
24.9
27.3
170
Pennon Group plc Annual Report 2020
30. Retirement benefit obligations continued
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:
Rate of increase in pensionable pay
Rate of increase in current and future pensions
Rate used to discount schemes’ liabilities
Inflation
Life expectancy
2020
25.4
27.9
2019
25.0
28.1
2018
26.3
29.6
Change in
assumption
+/– 0.5%
+/– 0.5%
+/– 0.5%
+/– 0.5%
+/– 1 year
Impact on
schemes’
liabilities
+/– 1.4%
+/– 6.9%
+/– 9.3%
+/– 7.0%
+/– 4.0%
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, excluding amounts transferred to liabilities directly associated with assets classified as held for sale, were:
Group
Company
Present value of financial obligations
Fair value of plan assets
Surplus/(deficit) of funded plans
Impact of minimum funding asset ceiling
Net asset/(liability) recognised in the balance sheet
The movement in the net defined benefit obligation over the accounting period is as follows:
At 1 April
Current service cost
Past service cost and gains and losses on settlements
Interest (expense)/income
Remeasurements:
(Loss)/return on plan assets excluding amounts included in
interest expense
(Loss)/gain from change in demographic assumptions
Gain/(loss) from change in financial assumptions
Experience losses
Contributions:
Employers
Plan participants
Payments from plans:
Benefit payments
Present value
of obligation
£m
(994.8)
(8.1)
2.0
(23.1)
(29.2)
2020
Fair value
of plan assets
£m
934.0
–
–
22.3
22.3
–
(3.9)
51.9
(5.2)
42.8
–
(0.3)
38.7
38.4
(16.1)
–
(9.0)
–
(25.1)
41.5
0.3
(38.7)
3.1
Transfer to liabilities directly associated with assets held for
sale
At 31 March
257.5
(685.3)
(242.4)
691.9
2020
£m
(685.3)
691.9
6.6
–
6.6
Total
£m
(60.8)
(8.1)
2.0
(0.8)
(6.9)
(16.1)
(3.9)
42.9
(5.2)
17.7
41.5
–
–
41.5
15.1
6.6
2019
£m
(974.2)
934.0
(40.2)
(20.6)
(60.8)
Present value
of obligation
£m
(948.0)
(13.1)
(3.0)
(25.2)
(41.3)
–
41.6
(75.8)
(3.2)
(37.4)
–
(1.0)
32.9
31.9
–
(994.8)
2020
£m
47.9
(48.0)
(0.1)
–
(0.1)
2019
Fair value of
plan assets
£m
898.5
–
–
23.8
23.8
20.2
–
–
–
20.2
23.4
1.0
(32.9)
(8.5)
–
934.0
2019
£m
(58.5)
55.1
(3.4)
–
(3.4)
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)
Past service cost for the current year includes a non-underlying credit of £4.9 million representing the reduction in liabilities that result from the termination of the
Greater Manchester contract (see note 6).
Pennon Group plc Annual Report 2020
171
Financial statements
Notes to the
financial statements
continued
30. Retirement benefit obligations continued
The movement in the Company’s net defined benefit obligation over the accounting period is as follows:
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
(Loss)/gain from change in demographic assumptions
Gain/(loss) from change in financial assumptions
Experience gains/(losses)
Contributions:
Employers
Payments from plans:
Benefit payments
At 31 March
Present value
of obligation
£m
(58.5)
(0.2)
–
(0.4)
(0.6)
2020
Fair value of
plan assets
£m
55.1
–
–
0.3
0.3
–
(0.2)
3.0
6.1
8.9
–
2.2
2.2
(48.0)
(6.0)
–
–
–
(6.0)
0.7
(2.2)
(1.5)
47.9
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
Total
£m
(3.4)
(0.2)
–
(0.1)
(0.3)
(6.0)
(0.2)
3
6.1
2.9
0.7
–
0.7
(0.1)
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)
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 a Defined
Benefit Asset, Minimum Funding Requirements and their Interaction’. This relates to the Disposal Group and has been transferred to liabilities associated with assets
held for sale (see note 46).
Changes in the effect of the asset ceiling during the year were:
Irrecoverable asset at start of the year
Interest on irrecoverable surplus
Actuarial (losses)/gains
Transfer to liabilities associated with assets held for sale
The schemes’ assets relating to the Continuing Group were:
Equities
Government bonds
Other bonds
Diversified growth
Property
Insurance linked security
Other (including cash funds)
2020
Quoted prices
in active market
£m
109.9
78.1
174.2
110.0
48.5
49.2
11.2
581.1
Prices not quoted
in active market
£m
–
–
104.0
–
6.8
–
–
110.8
Group
Company
2020
£m
20.6
0.5
(7.0)
(14.1)
Fund
%
23
10
35
18
7
6
1
100
2019
£m
16.8
0.5
3.3
–
2020
£m
–
–
–
–
Quoted prices
in active market
£m
234.5
134.6
247.1
154.7
68.1
55.2
23.3
917.5
2019
Prices not quoted
in active market
£m
–
–
–
13.1
3.4
–
–
16.5
2019
£m
–
–
–
–
Fund
%
25
14
26
18
8
6
3
100
Other assets at 31 March 2020 represented principally cash contributions received from the Group towards the year end which were invested during the subsequent
financial year.
172
Pennon Group plc Annual Report 2020
30. Retirement benefit obligations continued
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
2020
Quoted prices
in active market
£m
7.6
5.4
19.3
7.6
3.8
3.4
0.8
47.9
Prices not quoted
in active market
£m
–
–
–
–
–
–
–
–
Quoted prices
in active market
£m
10.4
9.4
16.6
8.9
4.8
3.7
1.3
55.1
2019
Prices not quoted
in active market
£m
–
–
–
–
–
–
–
–
Fund
%
16
11
40
16
8
7
2
100
Fund
%
19
17
30
16
9
7
2
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 assets 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).
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 2019 triennial actuarial valuation of the principal defined benefit scheme has been agreed with an actuarial valuation deficit increasing of £53 million. The Group
has made deficit recovery contributions of £31.9 million during the year (2019 £13.1 million), £18.8 million being in advance of the previously agreed recovery plan.
Following the finalisation of the 2019 actuarial valuation, the Group is required to make further deficit recovery contributions, in addition to those amounts paid in
the year to 31 March 2020, of £2.8 million and £0.4 million in March 2021 and March 2022 respectively, with these amounts being adjusted for inflation. The Group
monitors funding levels on an annual basis and the Continuing Group expects to pay total contributions of around £7 million, including expenses, during the year
ended 31 March 2021. The new schedule of contributions is in line with the 2016 triennial actuarial valuation.
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
Opening adjustment on adoption of IFRS 16 Leases
Charged/(credited) to the income statement
(Credited)/charged to equity, including impact of change in tax rate
Change of tax rate charged to the income statement – non-underlying
Other non-underlying charges in the income statement
Transferred to liabilities associated with assets classified as held for sale
Liabilities/(assets) at 31 March
Group
Company
2020
£m
305.1
(1.8)
33.2
(4.6)
40.6
(12.7)
(98.2)
261.6
2019
£m
295.6
–
13.3
(4.3)
–
0.5
–
305.1
2020
£m
(1.2)
–
(0.1)
–
(0.5)
–
–
(1.8)
2019
£m
(1.6)
–
0.2
0.2
–
–
–
(1.2)
Deferred tax assets have been recognised in respect of all temporary differences giving rise to deferred tax assets because it is probable that these assets will
be recovered.
The majority of the Group’s deferred tax liability is expected to be recovered over more than one year. The majority of the Company’s deferred tax asset is expected
to be recovered over more than one year. All deferred tax assets and liabilities within the same jurisdiction are offset.
Pennon Group plc Annual Report 2020
173
Financial statements
Notes to the
financial statements
continued
31. Deferred tax continued
The movements in deferred tax assets and liabilities were:
Group
Deferred tax liabilities
At 1 April 2018
Charged/(credited) to the income statement
Non-underlying credit to the income statement
Charged to equity/SOCI
At 31 March 2019
Opening adjustment on adoption of IFRS 16 Leases
Charged/(credited) to the income statement
Non-underlying charge/(credit) to the income statement
Charged to equity/SOCI
Transfer to deferred tax assets
Transferred to liabilities directly associated with assets classified
as held for sale
At 31 March 2020
Deferred tax assets
Accelerated tax
depreciation
£m
259.9
12.1
–
–
272.0
(1.8)
24.8
33.0
–
–
Fair value
adjustments
£m
20.6
(4.1)
–
–
16.5
–
(1.3)
1.9
–
–
Revenue on service
concession
arrangements
£m
43.7
4.4
–
–
48.1
–
2.1
5.5
–
–
(53.6)
274.4
–
17.1
(55.7)
–
Derivatives
£m
0.7
(0.2)
1.0
(0.6)
0.9
–
–
(12.5)
(3.1)
14.7
–
–
Short-term
liabilities
including
provisions
£m
(5.4)
0.1
–
–
(5.3)
3.5
(1.1)
–
–
Retirement
benefit
obligations
£m
(8.4)
0.5
(0.5)
(3.2)
(11.6)
3.4
2.8
(0.1)
–
Derivatives
£m
–
–
–
–
–
–
–
–
(14.7)
Share-based
payments
£m
(0.8)
0.1
–
(0.5)
(1.2)
(0.3)
(0.1)
(1.4)
–
Tax losses
£m
(1.7)
0.5
–
–
(1.2)
(0.1)
(0.2)
–
–
Fair value
adjustment
£m
(9.9)
1.3
–
–
(8.6)
0.7
(1.0)
–
–
1.1
(1.8)
3.0
(2.5)
–
(14.7)
1.0
(2.0)
1.5
–
–
(8.9)
Other
£m
(3.1)
(1.4)
–
–
(4.5)
0.4
(0.4)
–
–
4.5
–
At 1 April 2018
Charged/(credited) to the income statement
Non-underlying credit to the income statement
Charged to equity/SOCI
At 31 March 2019
Charged/(credited) to the income statement
Non-underlying (credit)/charge to the income statement
Charged to equity/SOCI
Transfer from deferred tax liabilities
Transferred to liabilities directly associated with assets
classified as held for sale
At 31 March 2020
Net liability
At 31 March 2019
At 31 March 2020
Company
Deferred tax assets
At 1 April 2018
Charged to the income statement
Charged to equity
At 31 March 2019
(Credited)/charged to the income statement
Non-underlying (credit) to the income statement
Charged/(credited) to equity, including impact on change in tax rate
At 31 March 2020
Retirement
benefit
obligations
£m
(0.6)
–
–
(0.6)
–
(0.5)
1.0
(0.1)
Derivatives
£m
(0.5)
–
0.2
(0.3)
–
–
(0.6)
(0.9)
Share-based
payments
£m
(0.2)
–
–
(0.2)
(0.2)
–
(0.4)
(0.8)
Other
£m
(0.3)
0.2
–
(0.1)
0.1
–
–
–
174
Pennon Group plc Annual Report 2020
Total
£m
324.9
12.2
1.0
(0.6)
337.5
(1.8)
25.6
27.9
(3.1)
14.7
(109.3)
291.5
Total
£m
(29.3)
1.1
(0.5)
(3.7)
(32.4)
7.6
–
(1.5)
(14.7)
11.1
(29.9)
305.1
261.6
Total
£m
(1.6)
0.2
0.2
(1.2)
(0.1)
(0.5)
–
(1.8)
31. Deferred tax continued
Deferred tax (charged)/credited to equity during the year was:
Remeasurement of defined benefit obligations
Cash flow hedges
Deferred tax on other comprehensive (gain)/loss
Share-based payments
Group
Company
2020
£m
(0.1)
(3.1)
(3.2)
(1.4)
(4.6)
2019
£m
3.2
0.6
3.8
0.5
4.3
2020
£m
1.0
(0.6)
0.4
(0.4)
–
2019
£m
–
0.2
0.2
–
0.2
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 2% up
to 100% in certain instances, with most items qualifying at either 6% or 18% per annum. Given the Group’s continuing capital expenditure programme, it is likely that
the deferred tax liability will continue in to the longer term.
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.
Short-term temporary differences arise on items such as retirement benefit obligations, derivatives, fair value adjustments and share-based payments 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 is reflected in
the deferred tax charge in these financial statements. Specifically, retirement benefit obligations will crystallise over the life of the pension scheme, the fair value items
will be released over their useful remaining life which is up to 115 years while share-based payments will crystallise over the remaining period of the share schemes,
which is up to five years. Short-term liabilities, including provisions typically crystallise in the following year.
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
32. Provisions
Group
At 1 April 2019
Charged to the income statement
Capitalised
Utilised
Reclassification
Transferred to liabilities associated with assets classified as held for sale
At 31 March 2020
Environmental and
landfill restoration
£m
Restructuring
£m
Other
provisions
£m
209.6
2.3
5.3
(16.0)
–
(201.2)
–
1.1
–
–
(0.4)
(.0.1)
–
0.6
21.1
(5.0)
0.3
(0.1)
0.1
(16.4)
–
The amount charged to the income statement includes £7.9 million (2019 £11.1 million) charged to finance costs as the unwinding of discounts in provisions.
The analysis of provisions between current and non-current is:
Current
Non-current
2020
£m
0.6
–
0.6
Total
£m
231.8
(2.7)
5.6
(16.5)
–
(217.6)
0.6
2019
£m
28.7
203.1
231.8
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 4.220% (2019 4.825%) and an inflation rate of 2.0% (2019 2.5%) to its aftercare provision and a discount rate of 2.9% (2019 3.8%) and an inflation rate
of 2.0% (2019 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 £4.1 million (2019 £7.1 million), which are provided for at the net present value of the operating losses of
the underperforming contracts and are to be utilised over the remaining period of the contract to which they relate. The weighted average contract life of
underperforming contracts is three years (2019 five years).
Following the announced sale of the Group’s waste management business, Viridor, the environmental, landfill restoration and other provisions have been transferred
to liabilities directly associated with assets classified as held for sale, see note 46.
Pennon Group plc Annual Report 2020
175
Financial statements
Notes to the
financial statements
continued
33. Share capital
Allotted, called–up and fully paid
Group and Company
At 1 April 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
For consideration of £3.6 million, shares issued under the Company’s Sharesave Scheme
At 31 March 2020 ordinary shares of 40.7p each
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:
Number of shares
Treasury shares
Ordinary shares
8,443
–
8,443
–
8,443
419,743,183
777,415
420,520,598
515,959
421,036,557
£m
170.8
0.3
171.1
0.2
171.3
Sharesave Scheme
i)
An all-employee savings-related plan is operated that enables employees, including Executive Directors, to invest up to a maximum of £500 per month for three or
five years. These savings can then be used to buy ordinary shares, at a price set at a 17% discount to the market value at the start of the savings period, at the third
or fifth year anniversary of the option being granted. Options expire six months following the exercise date and, except for certain specific circumstances such as
redundancy, lapse if the employee leaves the Group before the option exercise period commences.
Outstanding options to subscribe for ordinary shares of 40.7p each under the Company’s share option schemes are:
14 July 2014
24 June 2015
29 June 2016
28 June 2017
3 July 2018
9 July 2019
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
611p
683p
709p
767p
635p
635p
2017 – 2019
2018 – 2020
2020 – 2021
2020 – 2022
2021 – 2023
2022 – 2024
2020
2
142
76
327
1,115
874
2,536
2019
142
194
478
462
1,367
–
2,643
2020
2019
Number of
ordinary shares
(thousands)
2,643
925
(295)
(514)
(223)
2,536
Weighted
average exercise
price per share
(p)
674
620
678
680
681
652
Number of
ordinary shares
(thousands)
2,490
1,456
(437)
(777)
(89)
2,643
Weighted
average exercise
price per share
(p)
700
635
717
661
661
674
The weighted average price of the Company’s shares at the date of exercise of Sharesave options during the year was 820p (2019 750p). The options outstanding
at 31 March 2020 had a weighted average exercise price of 652p (2019 674p) and a weighted average remaining contractual life of 1.9 years (2019 2.0 years).
The number of exercisable Sharesave options at 31 March 2020 was 4,000 (2019 1,000) and the weighted average exercise price of exercisable Sharesave options
was 649p (2019 683p).
The aggregate fair value of Sharesave options granted during the year was £0.9 million (2019 £0.8 million), determined using the Black-Scholes valuation model.
The significant inputs into the valuation model at the date of issue of the options were:
Weighted average share price
Weighted average exercise price
Expected volatility
Expected life
Risk-free rate
Expected dividend yield
Expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous three years.
176
Pennon Group plc Annual Report 2020
2020
765
620
20.0%
3.3 years
0.75%
5.7%
2019
801
635
20.0%
3.3 years
0.5%
5.2%
33. Share capital continued
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
2020
2019
Number of
ordinary shares
(thousands)
256
(86)
(170)
–
Weighted
average exercise
price per share
(p)
920
920
920
–
Number of
ordinary shares
(thousands)
571
–
(315)
256
Weighted
average exercise
price per share
(p)
865
–
820
920
There were no outstanding awards at 31 March 2020. The awards outstanding at 31 March 2019 had a weighted exercise price of 920p and a weighted average
remaining contractual life of 0.3 years.
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
2020
2019
Number of
ordinary shares
(thousands)
962
509
–
(125)
1,346
Weighted
average exercise
price per share
(p)
796
753
–
787
781
Number of
ordinary shares
(thousands)
510
526
–
(74)
962
Weighted
average exercise
price per share
(p)
803
790
–
798
796
The awards outstanding at 31 March 2020 had a weighted exercise price of 781p (2019 796p) and a weighted average remaining contractual life of 1.4 years
(2019 1.9 years).
The aggregate fair value of awards granted during the year was £1.5 million (2019 £1.7 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
2020
2019
Number of
ordinary shares
(thousands)
450
215
(113)
(28)
524
Weighted
average exercise
price per share
(p)
825
755
950
786
772
Number of
ordinary shares
(thousands)
405
191
(117)
(29)
450
Weighted
average exercise
price per share
(p)
843
761
791
790
825
The awards outstanding at 31 March 2020 had a weighted average exercise price of 772p (2019 825p) and a weighted average remaining contractual life of 1.5 years
(2019 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 £1.6 million (2019 £1.1 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.
Pennon Group plc Annual Report 2020
177
Financial statements
Notes to the
financial statements
continued
34. Share premium account
Group and Company
At 1 April 2018
Shares issued under the Sharesave Scheme
At 31 March 2019
Shares issued under the Sharesave Scheme
At 31 March 2020
£m
218.8
4.8
223.6
3.4
227.0
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 2018
At 31 March 2019
At 31 March 2020
36. Retained earnings and other reserves
Group
At 1 April 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
IFRS 16 Leases opening adjustment
At 1 April 2019 (adjusted for IFRS 16)
Profit for the year
Other comprehensive income for the year
Dividends paid relating to 2019
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 2020
Own shares
£m
Hedging
reserve
£m
Retained
earnings
£m
(3.5)
–
–
–
–
1.0
(1.5)
(4.0)
–
(4.0)
–
–
–
–
1.1
(1.6)
(4.5)
(11.1)
–
(5.8)
–
–
–
–
(16.9)
–
(16.9)
–
(11.2)
–
–
–
–
(28.1)
821.7
214.3
(13.5)
(162.0)
4.4
(1.0)
–
863.9
(8.0)
855.9
200.4
18.0
(172.6)
4.8
(1.1)
–
905.4
The own shares reserve represents the cost of ordinary shares in Pennon Group plc issued to or purchased in the market and held by the Pennon Group plc
Employee Benefit Trust to satisfy awards under the Group’s Annual Incentive Bonus Plan.
£m
144.2
144.2
144.2
Total
£m
807.1
214.3
(19.3)
(162.0)
4.4
–
(1.5)
843.0
(8.0)
835.0
200.4
6.8
(172.6)
4.8
–
(1.6)
872.8
178
Pennon Group plc Annual Report 2020
36. Retained earnings and other reserves continued
The market value of the 589,000 ordinary shares (2019 520,000 ordinary shares) held by the Trust at 31 March 2020 was £6.4 million (2019 £3.8 million).
Company
At 1 April 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
Profit for the year
Other comprehensive (loss)/income for the year
Dividends paid relating to 2019
Credit to equity in respect of share-based payments (net of tax)
Charge in respect of share options vesting
At 31 March 2020
Hedging
reserve
£m
(2.0)
–
0.2
–
–
–
(1.8)
–
(2.1)
–
–
–
(3.9)
Retained
earnings
£m
1,113.1
194.8
–
(162.0)
1.5
(0.9)
1,146.5
330.6
2.6
(172.6)
2.0
(1.1)
1,308.0
Total
£m
1,111.1
194.8
0.2
(162.0)
1.5
(0.9)
1,144.7
330.6
0.5
(172.6)
2.0
(1.1)
1,304.1
In making decisions about the level of dividends to be proposed the Directors take steps to check that retained earnings reflect realised profits and are therefore
distributable within the requirements of the Companies Act 2006.
37. Perpetual capital securities
Group and Company
At 1 April 2018
Distributions to perpetual capital security holders
Profit for the year attributable to perpetual capital security holders
At 31 March 2019
Distributions due 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 2020
£m
296.7
(8.6)
8.6
296.7
(8.6)
1.6
7.0
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 2020, a periodic return of £8.6 million (2019 £8.6 million) has been
recognised as a financial liability at the year end.
Pennon Group plc Annual Report 2020
179
Financial statements
Notes to the
financial statements
continued
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
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 increase in customer debt provisions
Non-underlying past service pension 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
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 in retirement benefit obligations from contributions
Decrease in provisions
Cash generated/(outflow) from operations
Reconciliation of total interest paid:
Interest paid in operating activities
Interest paid in investing activities
Total interest paid
Group
Company
2020
£m
206.3
3.4
(2.5)
197.2
4.7
9.0
(4.9)
(18.0)
(14.8)
(26.6)
115.3
–
95.2
(6.0)
32.6
(17.4)
(19.2)
(30.8)
(7.2)
516.3
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
2020
£m
337.7
1.7
–
–
–
–
–
–
–
(45.4)
38.2
(335.6)
4.2
–
(182.9)
–
2.5
(0.7)
–
(180.3)
Group
Company
2020
£m
97.7
10.6
108.3
2019
£m
83.9
15.2
99.1
2020
£m
37.4
–
37.4
2019
£m
203.4
1.5
–
–
–
–
–
–
–
(45.9)
35.5
(196.7)
3.7
–
(178.8)
–
(45.6)
(0.1)
–
(223.0)
2019
£m
36.8
–
36.8
The above includes the entire Group, including cash flows relating to the discontinued operations business. Disaggregated information relating to the discontinued
business is provided in note 46.
During the year, the Group completed a number of sale and leaseback transactions in respect of its infrastructure assets as part of its ongoing financing
arrangements. Cash proceeds of £115.0 million were received and a gain of £nil was recognised. These assets are primarily being leased back over an initial term of
10-year lease term at market rentals.
180
Pennon Group plc Annual Report 2020
39. Net borrowings
Cash and cash deposits
Borrowings – current
Bank and other loans
Other current borrowings
Lease obligations (IAS 17 finance)
Lease obligations (IAS 17 operating)
Amounts owed to subsidiary undertakings
Total current borrowings
Borrowings – non-current
Bank and other loans
Other non-current borrowings
Lease obligations (IAS 17 finance)
Lease obligations (IAS 17 operating)
Total non-current borrowings
Total net borrowings in Continuing Group
Net borrowings in Disposal Group
Net borrowings in total Group
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
Group
Company
2020
£m
665.9
(7.6)
(33.1)
(18.2)
(1.0)
–
(59.9)
(1,894.8)
(340.8)
(1,384.2)
(35.1)
(3,654.9)
(3,048.9)
(215.1)
(3,264.0)
Cash flows –
other
£m
(15.7)
149.6
32.0
28.2
(275.0)
(109.5)
(75.3)
(265.7)
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)
–
(3,079.5)
2020
£m
367.9
–
(6.1)
–
–
(284.4)
(290.5)
(1,032.0)
(103.4)
–
–
(1,135.4)
(1,058.0)
–
(1,058.0)
2019
£m
284.8
(51.8)
–
–
–
(283.9)
(335.7)
(880.2)
(109.5)
–
–
(989.7)
(1,040.6)
–
(1,040.6)
Foreign
exchange
adjustments
£m
–
–
–
–
1.6
–
–
1.6
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)
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)
Cash and cash deposits
Bank and other loans due within one year
Other current borrowings
Current lease obligations (IAS 17 finance)
Current lease obligations (IAS 17 operating)
Bank and other loans due after one year
Other non-current borrowings
Non-current lease obligations (IAS 17
finance)
Non-current lease obligations (IAS 17
operating)
Net borrowings in Disposal Group
Net borrowing in total Group
Net borrowings
at 1 April 2019
£m
569.6
(59.8)
(27.0)
(63.6)
–
(1,628.0)
(373.9)
(1,496.8)
–
(3,079.5)
IFRS 16
transition
adjustment
£m
–
–
–
–
(8.6)
–
–
–
(137.1)
(145.7)
Cash flows –
other
£m
129.6
57.6
27.0
63.6
13.0
(268.0)
–
Transfer between
non-current and
currrent
£m
–
(8.0)
(33.1)
(23.4)
(10.6)
8.0
33.1
(48.8)
–
(26.0)
23.4
10.6
–
Other non-cash
movements
£m
–
2.6
–
(3.8)
(4.8)
(6.8)
–
Transfer to
Disposal Group
£m
(33.3)
–
–
9.0
10.0
–
–
Net borrowings
at 31 March 2020
£m
665.9
(7.6)
(33.1)
(18.2)
(1.0)
(1,894.8)
(340.8)
–
138.0
(1,384.2)
–
(12.8)
91.4
215.1
(35.1)
(3,048.9)
(215.1)
(3264.0)
Other non-cash movements for the Group include the increase in the value of financial liabilities at fair value through profit in the year of £0.3 million and the increase
in borrowings from interest which is rolled into the amount repayable.
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
Other non-current borrowings
Net borrowings
at 1 April 2018
£m
303.3
(149.6)
(283.6)
(711.7)
–
(841.6)
Cash flows –
other
£m
(18.5)
149.6
(0.3)
(225.0)
(109.5)
(203.7)
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)
Pennon Group plc Annual Report 2020
181
Financial statements
Notes to the
financial statements
continued
39. Net borrowings continued
Cash and cash deposits
Bank and other loans due within one year
Other current borrowings
Amounts due to subsidiary undertakings
Bank and other loans due after one year
Other non-current borrowings
Net borrowings
at 1 April 2019
£m
284.8
(51.8)
–
(283.9)
(880.2)
(109.5)
(1,040.6)
Cash flows –
other
£m
83.1
49.6
–
(0.5)
(150.0)
–
(17.8)
Other non-cash
movements
£m
–
2.2
(6.1)
–
(1.8)
6.1
0.4
Net borrowings
at 31 March 2020
£m
367.9
–
(6.1)
(284.4)
(1,032.0)
(103.4)
(1,058.0)
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.
40. Subsidiary and joint venture undertakings at 31 March 2020
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 (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 (Collections) Limited
Viridor Waste (Electrical) 1 Limited
Viridor Waste (Electrical) 2 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
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
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
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
Scotland
England
England
England
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.
182
Pennon Group plc Annual Report 2020
40. Subsidiary and joint venture undertakings at 31 March 2020 continued
Other trading companies
Dragon Waste Limited (81%)
Peninsula Leasing Limited*
Peninsula Properties (Exeter) Limited
Peninsula Trustees Limited*
Pennon Defined Contribution Pension Trustee Limited*
Pennon Pension Trustees Limited*
Pennon Trustee Limited*
Raikes Lane Limited
Source for Business Limited*
SSWB Limited
Registered office address
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
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 Share Plans (Guernsey) Limited*
Pennon Share Scheme Trustees 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
Albert House, South Esplanade, St Peter Port, GY1 1AW
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
Peninsula House, Rydon Lane, Exeter, EX2 7HR
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
England
England
England
England
England
England
England
England
England
England
Country
of incorporation
Scotland
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
Scotland
England
England
England
England
England
England
England
England
England
Guernsey
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
England
Pennon Group plc Annual Report 2020
183
Financial statements
Notes to the
financial statements
continued
40. Subsidiary and joint venture undertakings at 31 March 2020 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 Suffolk 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
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
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.
184
Pennon Group plc Annual Report 2020
40. Subsidiary and joint venture undertakings at 31 March 2020 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.
Share capital in issue
Percentage held
Principal activity
Joint ventures
Lakeside Energy from Waste Holdings Limited
Lakeside Energy from Waste Limited
Shares in Lakeside Energy from Waste Holdings Limited are held
by Viridor Waste Management Limited
Shelford Composting Limited
INEOS Runcorn (TPS) Holdings Limited
INEOS Runcorn (TPS) Limited
1,000,000 A ordinary shares
1,000,000 B ordinary shares
50 A ordinary shares
50 B ordinary shares
1,000 A ordinary shares
186,750 B1 ordinary shares
62,250 B2 ordinary shares
–
100%
–
100%
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
2020
£m
–
–
–
–
2019
£m
12.5
37.7
145.5
195.7
Company
2020
£m
–
–
–
–
Following the adoption of IFRS 16 on 1 April 2019 operating lease commitments are included in borrowings as lease liabilities.
42. Contingencies
Contingent liabilities
Guarantees:
Borrowing facilities of subsidiary undertakings
Performance bonds
Group
Company
2020
£m
–
197.1
197.1
2019
£m
–
201.7
201.7
2020
£m
460.9
197.1
658.0
2019
£m
–
–
–
–
2019
£m
561.5
201.7
763.2
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. All of the
performance bonds relate to the activities of the Disposal Group.
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 2020 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 potential prosecutions by the Health and Safety Executive.
Pennon Group plc Annual Report 2020
185
Financial statements
Notes to the
financial statements
continued
43. Capital commitments
Contracted but not provided relating to the Continuing Group
Group
Company
2020
£m
72.0
2019
£m
68.3
2020
£m
–
2019
£m
–
Excluded from the balances at 31 March 2020 above is £98.6 million relating to discontinued operations (see note 46 for further details).
44. Related party transactions
During the year Group companies entered into the following transactions with joint ventures who are not members of the Group. The year end balances as at 31 March 2020
with joint ventures are included within assets held for sale (see note 46 for further details).
Sales of goods and services
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
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)
2020
£m
18.2
12.8
8.3
6.0
2020
£m
7.1
59.5
66.6
1.0
1.2
2.2
1.1
1.7
2.8
2019
£m
16.6
12.4
7.1
5.5
2019
£m
7.7
65.0
72.7
1.0
1.8
2.8
0.9
3.2
4.1
The £66.6 million (2019 £72.7 million) receivable relates to loans to related parties due for repayment in instalments between 2018 and 2033. Interest is charged at an
average of 13.0% (2019 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
2020
£m
17.9
0.6
43.4
0.1
335.6
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.
186
Pennon Group plc Annual Report 2020
44. Related party transactions continued
Year-end balances
Receivables due from subsidiary undertakings
Loans
Trading balances
2020
£m
1,225.6
16.0
2019
£m
1,044.6
19.9
Interest on £591.8 million of the loans has been charged at fixed rates during the year with an average effective rate of 4% (2019 £499.8 million charged at 5%), and on
£591.8 million at an average effective rate of three-month LIBOR plus 2.6% (2019 £499.8 million charged at 12-month LIBOR + 2.2%). Interest on £16.0 million (2019 £18.1 million)
has been charged at a fixed rate of 6.0%. These loans are due for repayment in instalments over the period 2021 to 2045.
Interest on £13.0 million (2019 £13.5 million) of the loans has been charged at a fixed rate of 5.0%. Interest on £13.0 million (2019 £13.5 million) of the loans has been 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 (2019 £nil).
Payables due to subsidiary undertakings
Loans
Trading balances
The loans from subsidiary undertakings are unsecured and interest-free without any terms for repayment.
2020
£m
284.4
9.1
2019
£m
283.9
14.3
45. Change in accounting policy on leases
Adjustments recognised on the adoption of IFRS 16
This note explains the impact of the adoption of IFRS 16 ‘Leases’ on the Group’s financial statements, and it discloses the new accounting policies that have been
adopted from 1 April 2019, where they are different from those applied in earlier periods.
On adoption of IFRS 16, the Group recognised lease liabilities in relation to leases which had previously been classified as ‘operating leases’ under the principles of
IAS 17 ‘leases’. These liabilities were measured at the present value of the remaining leases payments, discounted using the Group’s weighted average incremental
borrowing rate (IBR).
Following adoption of IFRS 16, the Group no longer distinguishes between an on the balance sheet finance lease and an off the balance sheet operating lease.
For leases previously classified as finance leases, the Group recognised the carrying amount of leased assets and lease liabilities immediately prior to transition
as the carrying amount of the right-of-use asset and lease liability at the date of initial application. The measurement principles of IFRS 16 only apply after this date.
As permitted under IFRS 16, the Group will present right-of-use assets and lease liabilities within property, plant and equipment and borrowings respectively.
This approach is consistent with the Group’s previous presentation of finance leases under IAS 17.
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. On transition on 1 April 2019, the Group recognised the following items in the balance sheet:
• Right-of-use assets – increase by £132.2 million
• Prepayments – decrease by £0.5 million
• Lease liabilities – increase by £145.7 million
• Accruals – decrease by £4.2 million
• Deferred tax liabilities – decrease by £1.8 million
• Retained earnings – decrease by £8.0 million.
The discount rate used in the calculation of the lease liability involves estimation. The discount rate is calculated on a lease by lease basis. For vehicle leases, which
account for less than 1% of the present value of future lease payments, the discount rate is determined by the implicit rate within the lease. For all other leases, where
implicit rates are not available, discount rates are calculated using the Group’s estimated IBR for each lease. The IBR is determined with reference to applicable
reference rate borrowing curves (e.g. LIBOR or its successor), credit margins for the different business segments and lease terms. At the commencement of new
leases discount rates are updated to ensure the Group applies the IBR that reflects current market conditions. At 1 April 2019, the date of transition to IFRS 16, the
range of rates used was between 2.43% and 4.5% and the weighted average IBR across all leases was 3.6%. If the weighted average rate used was increased by 10bps,
this would result in a c.0.9% reduction in the present value of lease liabilities recognised at 1 April 2019.
Pennon Group plc Annual Report 2020
187
Financial statements
Notes to the
financial statements
continued
45. Change in accounting policy on leases continued
A reconciliation of the lease liability recognised at 1 April 2019 to operating lease commitments at 31 March 2019 is shown below:
IAS 17 operating lease commitments
Less: contracts to which the short-term leases exemption has been applied
Less: contracts to which the low-value leases exemption has been applied
Add: adjustment due to different assessment of lease term
Less: impact of discounting at weighted average discount rate of 3.6%
Operating lease liabilities recognised at 31 March 2019
Add: finance lease liabilities recognised at 31 March 2019
IFRS 16 lease liability as at 1 April 2019
Of which:
Current lease liabilities
Non-current lease liabilities
£m
195.7
(0.1)
(1.6)
0.5
(48.8)
145.7
1,560.4
1,706.1
19.4
1,686.7
1,706.1
Associated right-of-use assets for selected land and building leases were measured on a retrospective basis as if IFRS 16 had always applied from lease inception.
All remaining right-of-use assets were measured at the amount equal to the lease liability, adjusted by prepaid or accrued lease payments under IFRS 16 transition
provisions relating to leases recognised on the balance sheet at 31 March 2019.
A reconciliation between the opening lease liabilities and right-of-use assets at 1 April 2019 is shown below:
Lease liabilities following first application of IFRS 16
Less: adjustment for onerous lease accruals
Less: adjustment for other accruals
Add: adjustment for prepaid lease rentals
Less: adjustment due to application of IFRS 16 at lease inception
Right-of-use assets on first application of IFRS 16
£m
145.7
(1.5)
(2.9)
0.5
(9.6)
132.2
In applying IFRS 16 for the first time, the Group has used the following practical expedients and made the following elections permitted by the standard:
• The use of single discount rates to portfolios of leases with similar characteristics
• Reliance on previous onerous lease assessments
• Accounting for operating leases with terms less than 12 months as at 1 April 2019 as short-term leases
• The application of hindsight, such as in determining the lease term if the contract contains options to extend or terminate the lease
• 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 £8.0 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.
Cash outflows in respect of leasing relate to principal repayments of £142.8 million and interest repayments of £37.7 million, in addition to inflows from lease
financing arrangements of £115.0 million.
References to disclosures required by IFRS 16 but not included within this note are outlined below:
• Right-of-use asset depreciations, additions and net book value (see page 161)
• Interest on lease liabilities (see page 153)
• Short-term and low value lease expense (see page 153)
• Maturity analysis of lease liabilities (see page 169).
Based on the additional lease liability and associated assets recognised at 1 April 2019 for the Continuing Group the impact on profit for the year ended 31 March 2020
was a reduction in profit after tax of £0.6 million, resulting from:
• An increase in EBITDA of £1.9 million
• An increase in depreciation of £1.4 million
• An increase in finance costs of £1.2 million; and
• A reduction in corporation tax of £0.1 million.
EBITDA increased as operating lease costs previously charged against EBITDA under IAS 17 has been replaced under IFRS 16 with charges for depreciation
and interest which are excluded from EBITDA (albeit included in earnings). Short-term and low value leasing costs continue to be charged against EBITDA.
Net operating cash flows increased under IFRS 16 as the element of cash paid attributable to the repayment of principal is included in financing cash flows.
The net increase/decrease in cash and cash equivalents remains unchanged.
188
Pennon Group plc Annual Report 2020
46. Discontinued operations and non-current assets held for sale
On 18 March 2020, the Group entered into a formal sale agreement to dispose of Viridor Limited to Planets UK Bidco Limited (Bidco), a newly formed company
established by funds advised by Kohlberg Kravis Roberts & Co. L.P. (KKR). In accordance with IFRS 5 ‘Non-current assets held for sale and discontinued operations’,
the assets and liabilities related to Viridor were classified as a disposal group held for sale at 31 March 2020. The sale is conditional on approval by the Group’s
shareholders, merger control clearance from the European Commission and certain other conditions. The first two of these conditions have now been met and
the sale is expected to complete in early summer 2020.
The agreed proceeds indicate a £3.7 billion estimated fair value less costs to sell, which exceeds the carrying value of Viridor’s net assets, and accordingly no
impairment losses have been recognised on reclassification as a disposal group.
The tables below show the results of the discontinued operations which are included in the Group income statement and cash flow statement for the year
ended 31 March 2020, together with the classes of assets and liabilities comprising the operations held for sale in the Group balance sheet as at 31 March 2019.
Discontinued operations
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
Before non-
underlying
items
2020
£m
Non-
underlying
items
(note 6)
2020
£m
Notes
Before non-
underlying
items
2019
£m
Total
2020
£m
Non-
underlying
items
(note 6)
2019
£m
Total
2019
£m
5
753.2
–
753.2
845.6
–
845.6
(130.4)
(87.2)
(337.5)
198.1
(82.1)
116.0
22.5
(48.7)
(26.2)
14.8
104.6
(13.6)
91.0
4.9
–
(1.1)
3.8
–
3.8
–
–
–
–
3.8
(11.0)
(7.2)
5
5
9
(138.6)
(94.3)
(433.8)
178.9
(78.0)
100.9
20.0
(44.8)
(24.8)
12.4
88.5
(10.6)
77.9
(0.9)
–
(28.7)
(29.6)
–
(29.6)
–
–
–
–
(29.6)
5.7
(23.9)
(125.5)
(87.2)
(338.6)
201.9
(82.1)
119.8
22.5
(48.7)
(26.2)
14.8
108.4
(24.6)
83.8
83.8
(139.5)
(94.3)
(462.5)
149.3
(78.0)
71.3
20.0
(44.8)
(24.8)
12.4
58.9
(4.9)
54.0
54.0
2019
£m
69.2
(255.6)
(73.1)
(259.5)
Cash flows from operating activities
Cash flows from investing activities
Cash flows from financing activities
Net decrease in cash and cash equivalents from discontinued operations, net of inter-company
2020
£m
149.1
(133.0)
(23.1)
(7.0)
Pennon Group plc Annual Report 2020
189
Financial statements
Notes to the
financial statements
continued
46. Discontinued operations and non-current assets held for sale continued
The net assets relating to the Disposal Group at 31 March 2020 in the Group and Company balance sheet are shown below:
Assets of the Disposal Group
Goodwill
Other intangible assets
Property, plant and equipment
Other non-current assets
Investment in subsidiary undertakings
Investments in joint ventures
Inventories
Trade and other receivables
Cash and cash deposits
Total assets
Liabilities of the Disposal Group
Borrowings
Trade and other payables
Current tax liabilities
Provisions
Other non-current liabilities
Retirement benefit obligations
Deferred tax liabilities
Total liabilities
Net assets
Group
£m
340.8
86.9
1,584.9
261.5
–
60.1
29.9
277.9
33.3
2,675.3
(248.4)
(141.7)
(1.0)
(237.6)
(14.3)
(15.1)
(98.2)
(756.3)
1,919.0
Company
£m
–
–
–
–
1,135.6
–
–
–
–
1,135.6
–
–
–
–
–
–
–
1,135.6
At 31 March 2020 trade and other receivables include a net other receivable of £43.7 million (2019 £43.3 million) relating to gross contractual compensation amounts
due totalling £72.0 million (2019 £72.0 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 £28.3 million (2019 £28.7 million) has been recognised for expected
credit losses as detailed in note 4.
The Company has classified its investment in ordinary shares in Viridor Limited as an asset held for sale. On completion of the proposed sale of Viridor, expected
in early summer 2020, loans made to Viridor of £1,200 million at 31 March 2020 will be repaid.
Provisions include environmental and landfill provisions relating to landfill sites totalling £201.2 million at 31 March 2020.
Included in provisions are amounts provided in relation to the expected economic outflow of resources required to settle claims associated with ongoing litigation
which were transferred from other non-current liabilities in the year. These amounts 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, as the Group believes
they are commercially sensitive and doing so would be seriously prejudicial to the Group’s position.
47. Events after the reporting period
Repayment of perpetual capital securities
On 6 May 2020, the Company exercised its sole discretionary right to redeem all of the £300 million perpetual capital securities at their principal amount on
22 May 2020, this being the first available date to exercise this right.
Disposal of Viridor
On 18 March 2020 the Group announced the sale of Viridor to KKR subject to shareholder, competition authority approval and other conditions. The first two
of these conditions have now been met and the final condition can be waived at Pennon’s discretion, giving the Group control of the timetable to complete the
transition during early summer 2020.
Impact of COVID-19
The World Health Organization (WHO) announced that COVID-19 was a global pandemic on 11 March 2020 and the UK Government announced its wide ranging
lockdown restrictions on 23 March 2020. Given these events took place prior to the Group and Company’s financial year end of 31 March 2020, the Directors have
taken the impact of these events into account when making its key judgements and estimates at the balance sheet date, as outlined in note 4 to the accounts, up
to the date of approving the annual report and accounts.
The Group’s operational response to COVID-19 is set out throughout the strategic review section of the annual report on pages 6 to 57. In addition, the risk report
on pages 58 to 67 sets out the updated risk assessment in response to the pandemic.
In assessing its going concern and viability the impacts of COVID-19 on these assessments has been considered in full and are set out on pages 119 and page
68 respectively.
190
Pennon Group plc Annual Report 2020
Alternative performance
measures and glossary
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 2020
£m
EBITDA (see below)
Operating profit
Profit before tax
Taxation
Profit after tax from continuing operations
Profit after tax from discontinued operations
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
Non-controlling interests’ share of non-underlying items
Adjustment for full year depreciation charge in the Disposal Group
Underlying earnings
Underlying earnings reconciliation 2019
£m
EBITDA (see below)
Operating profit
Profit before tax
Taxation
Profit after tax from continuing operations
Profit after tax from discontinued operations
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
Total Group
underlying (incl.
discontinued
operations)
563.4
361.5
287.6
(52.0)
Underlying
discontinued
operations
198.1
116.0
104.6
(13.6)
Non-underlying
items from
continuing
operations
(7.9)
(7.9)
10.1
(32.2)
Total Group
underlying (incl.
discontinued
operations)
546.2
351.0
280.2
(42.7)
Underlying
discontinued
operations
178.9
100.9
88.5
(10.6)
Non-underlying
items from
continuing
operations
3.9
3.9
9.7
(0.7)
Statutory
results
357.4
237.6
193.1
(70.6)
122.5
83.8
206.3
(7.0)
1.1
200.4
33.2
29.3
(1.0)
(2.6)
259.3
Statutory
results
371.2
254.0
201.4
(32.8)
168.6
54.0
222.6
(8.6)
0.3
214.3
13.3
14.9
242.5
Earnings
per share
(p)
47.7
7.9
6.9
(0.2)
(0.6)
61.7
Earnings
per share
(p)
51.1
3.1
3.6
57.8
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.
Pennon Group plc Annual Report 2020
191
Financial statements
Alternative performance
measures and glossary
continued
Adjusted EBITDA reconciliation
£m
Statutory EBITDA
Non-underlying items
Underlying EBITDA
IFRIC 12 interest receivable(1)
Joint venture EBITDA(1)
Adjusted EBITDA
Total Group
underlying (incl.
discontinued
operations)
559.3
4.1
563.4
15.1
41.3
619.8
2020
Discontinued
operations
201.9
(3.8)
198.1
15.1
41.3
254.5
Total Group
underlying (incl.
discontinued
operations)
520.5
25.7
546.2
14.6
31.9
592.7
Continuing
operations
357.4
7.9
365.3
–
–
365.3
2019
Discontinued
operations
149.3
29.6
178.9
14.6
31.9
225.4
Continuing
operations
371.2
(3.9)
367.3
–
–
367.3
(1) These adjustments relate to the waste management business, resulting in adjusted waste management EBITDA of £254.5 million (2018/19 £225.4 million).
Total Group 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
2020
£m
70.7
18.0
5.3
(0.8)
(8.2)
15.1
11.0
111.1
3,079.5
3,264.0
3,171.8
3.5%
Total Group 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)
2020
£m
70.7
18.0
(0.8)
(8.2)
15.1
94.8
361.5
3.8
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%
2019
£m
77.4
5.8
(1.4)
(11.1)
14.6
85.3
351.0
4.1
192
Pennon Group plc Annual Report 2020
Total Group 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
Non-controlling interests’ share of non-underlying items
Adjustment for full year depreciation charge in the Disposal Group
Adjusted profit for dividend cover calculation
Dividend cover (times)
2020
£m
184.3
200.4
33.2
29.3
(1.0)
(2.6)
259.3
1.4
2019
£m
172.7
214.3
13.3
14.9
–
–
242.5
1.4
Total Group 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
2020
£m
326.8
0.6
(5.3)
–
17.1
–
–
339.2
2019
£m
387.2
–
(22.8)
24.7
6.8
3.3
(3.3)
395.9
Following the adoption of IFRS 16 Property, plant and equipment additions in 2020 include right-of-use assets £6.2 million (2019 £nil million). These assets are directly
associated with leases previously classified as operating leases under IAS 17. In 2019, under IAS 17, operating leases and associated assets were not held on the
balance sheet.
Total Group 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
2020
£m
332.8
0.6
(10.6)
–
17.1
–
339.9
2019
£m
356.0
–
(6.3)
24.7
6.8
3.3
384.5
Total Group 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
2020
£m
361.5
14.8
5.3
381.6
3,264.0
171.3
227.0
144.2
296.7
4,103.2
9.3%
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%
Pennon Group plc Annual Report 2020
193
Financial statements
Alternative performance
measures and glossary
continued
Total Group operational cash inflows
Cash generated from operations before construction spend on service concession agreements, pension contributions and other tax payments.
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
2020
£m
516.3
–
17.1
–
48.1
147.1
–
728.6
2019
£m
399.8
24.7
6.8
3.3
32.2
137.9
44.3
649.0
(1) Other taxes include business rates, employers’ national insurance, fuel excise duty, carbon reduction commitment, environmental payments, climate change levy and external landfill tax.
RoRE
This is a key regulatory metric which represents the returns to shareholders expressed as a percentage of regulated equity.
Returns are made up of a base return (set by Ofwat the water business regulator at c.6.0% for 2015-20) plus totex outperformance, financing outperformance
and ODI outperformance. Returns are calculated post tax and post sharing (only a proportion of returns are attributed to shareholders and shown within RoRE).
The three different types of return calculated and added to the base return are:
• Totex outperformance – totex is defined below and outperformance is the difference between actual reported results for the regulated business compared
to the Final Determination (Ofwat published document at the start of a regulatory period), in a constant price base
• Financing outperformance – is based on the difference between a company’s actual effective interest rate compared with Ofwat’s allowed cost of debt
• ODI outperformance – the net reward or penalty a company earns based on a number of different key performance indicators, again set in the Final
Determination.
Regulated equity is a notional proportion of regulated capital value (RCV which is set by Ofwat at the start of every five-year regulatory period, adjusted for actual
inflation). For 2015-20, the notional equity proportion is 37.5%.
Further information on this metric can be found in South West Water’s Annual Performance Report and regulatory reporting, published in July each year.
The most recent can be found at: www.southwestwater.co.uk/about-us/how-are-we-performing.
Totex
Operating costs and capital expenditure of the regulated water and wastewater business (based on the Regulated Accounting Guidelines).
ODI
ODIs are designed to incentivise companies to deliver improvements to service and outcomes based on customers’ priorities and preferences. If a company exceeds
these targets a reward can be earned through future higher revenues. If a company fails to meet them, they can incur a penalty through lower future allowed revenues.
194
Pennon Group plc Annual Report 2020
Glossary
CIC – community interest company, a type of company introduced by the UK Government in 2005 under the Companies (Audit, Investigations and Community
Enterprise) Act 2004, designed for social enterprises that want to use their profits and assets for the public good
CMex – customer measure of experience, a mechanism to incentivise water companies to provide an excellent customer experience for residential customers,
across both the retail and wholesale parts of the value chain
CPI – consumer price index, a measure of inflation in a representative sample of retail goods and services using a geometric mean and excluding e.g. housing costs
CPIH – consumer price index, a measure of inflation in a representative sample of retail goods and services using a geometric mean, including owner occupiers’
housing costs
DNV GL – an independent management consultancy specialising in technical assurance in the utility sector
EBITDA – earnings before interest, tax, depreciation and amortisation
EIB – European Investment Bank
ERF – energy recovery facility
ESG – environmental, social and governance
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. In December 2018, Pennon became the first water services and waste management utility to receive it (see page 50)
GHG – greenhouse gases (see page 116)
GMP – guaranteed minimum pension
GRREC – Glasgow Recycling and Renewable Energy Centre
GVA – gross value added, the measure of the value of goods and services produced in an area, industry or sector of an economy
HomeSafe – our health & safety improvement programme (see page 40)
K7 – the current regulatory price review period during which South West Water’s 2020-25 New Deal business plan will be implemented (see page 18)
KPI – key performance indicator, our measures of business performance against the key targets monitored by Board and Pennon Executive (see page 36)
LTIFR – lost time injury frequency rate
MRF – materials recycling facility
ODI – outcome delivery incentives, 15 of which are common across all water companies while others are bespoke to South West Water (see page 43)
Ofwat – The Water Services Regulation Authority, or Ofwat, is the body responsible for economic regulation of the privatised water and sewerage industry in
England and Wales
PRF – plastics recycling facility
RoCE – return on capital employed
RoRE – return on regulated equity
RPI – retail price index, a measure of inflation in a representative sample of retail goods and services using an arithmetic mean
SIM – service incentive mechanism, a measure of customer service
STEM – science, technology, engineering and mathematics
Sustainable Financing Framework – the way we link financial impacts with sustainability impacts; the Framework aligns with the Green Bond Principles, the
Social Bond Principles and the Green Loan Principles (see page 23)
totex – total expenditure
WaterShare – the programme through which we shared the benefits of outperformance against our 2015-20 business plan targets with water customers
WaterShare+ – the enhanced benefit sharing mechanism introduced for water customers under our 2020-25 New Deal business plan (see page 26)
Pennon Group plc Annual Report 2020
195
Financial statements
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 and discontinuing operations
Earnings per share
Deferred tax before non-underlying items
Non-underlying items (net of tax)
Non-controlling interests’ share of non-underlying items
Adjustment for full year depreciation charge in the
Disposal Group
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(1)
Non-current liabilities
Net assets
Number of employees (average full time equivalent for year)
Water
Waste management
Non-household retail
Other businesses
Continuing
operations
Total Group
2020
£m
636.7
245.5
(62.5)
–
183.0
10.1
(70.6)
122.5
116.6
7.0
(1.1)
184.3
27.7p
2.4p
5.3p
(0.2p)
–
–
35.2p
43.77p
2020
£m
1,389.9
361.5
(88.7)
14.8
287.6
13.9
(95.2)
206.3
200.4
7.0
(1.1)
184.3
47.7p
7.9p
6.9p
(0.2p)
(0.6p)
–
61.7p
43.77p
2020
£m
–
326.8
3,226.0
2,595.8
(4,109.7)
1,712.1
1,623
2,986
143
101
4,853
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
(1.8p)
–
–
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
(7.0p)
–
–
–
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
(1) Net current assets for 2020 includes assets held for sale of £2,675.3 million and liabilities directly associated with assets classified as held for sale of £756.3 million.
196
Pennon Group plc Annual Report 2020
Task Force on Climate-related Financial
Disclosures (TCFD) 2020 – our approach
Pennon Group’s services bring clear societal benefits; we bring resources to life, protecting and enhancing public health, our communities, and the environment.
Our services and facilities nonetheless have carbon impacts. These include direct greenhouse gas emissions from our operations and indirect impacts through energy
use, transport, and those created by our supply chain.
Within our sustainability strategy we have set a clear objective: to demonstrate leadership in minimising emissions that contribute to climate change and develop
climate change adaptation strategies. We achieved our 2019/20 target to adopt and implement a Group climate change & carbon management strategy, defining
our contribution to a low-carbon economy, including specific carbon management and science-based reduction targets.
As a Group, we have reported our GHG (carbon) emissions since 2013. We also disclose our GHG emissions performance through the annual CDP Climate Change
assessment, in which we achieved an improved B rating for 2019.
A summary of our progress against the TCFD recommendations is given below. The Group will continue to work towards the TCFD recommendations and continue
to report our progress in future disclosures. To read our consolidated disclosure please see www.pennon-group.co.uk/sustainability
TCFD reference
Governance
Board oversight of climate-related risks and opportunities
Pennon reference
Sustainability Committee report in the governance section
See pages 20 to 21 and 88 to 89 for further information
Management’s role in managing climate-related risks and opportunities
Sustainability Committee report in the governance section
Strategy
What are our climate-related risks, in the short, medium and long term
What is the impact of climate-related risks and opportunities on our business,
strategy and financial planning
How resilient is our business strategy, to different climate scenarios
Risk management
What are the processes through which we assess and manage climate-related
risk and how are these integrated into our risk management programme
Metrics and targets
How do we assess the climate-related risks and opportunities facing the business
See pages 88 and 89 for further information
Refer to CDP Report
Strategic progress
See pages 16 to 19 for further information
Operational sections
See pages 42 to 49 for further information
See consolidated TCFD disclosure online
Risk report
See pages 58 to 61 and 65 for further information
See consolidated TCFD disclosure online.
View CDP Report
Our Scope 1, 2 and 3 GHG emissions
See Directors’ report pages 117 and 118 for further information
The targets we use to manage the risk and opportunities
Sustainability at the heart of the business
See pages 20 and 21 for further information
Consolidated TCFD report online
Find out more at www.pennon-group.co.uk/sustainability/environmental-
leadership
Pennon Group plc Annual Report 2020
197
Financial statements
Shareholder information
Financial calendar
Financial year end
Ex-dividend date for 2020 final dividend
Record date for 2020 final dividend
31st Annual General Meeting
2020 final dividend payable
2020/21 half-yearly results announcement
2021 interim dividend payable
2020/21 final results announcement
32nd Annual General Meeting
2021 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
Shareholder analysis at 31 March 2020
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
31 March
23 July 2020
24 July 2020
31 July 2020
2 September 2020
24 November 2020
April 2021
25 May 2021
22 July 2021
September 2021
23 July 2020
24 July 2020
10 August 2020
1 September 2020
2 September 2020
Number of shareholders
2,391
3,665
7,201
3,637
365
388
17,647
Number of accounts
15,510
186
6
1,945
17,647
% of total shareholders
13.55
20.77
40.81
20.61
2.07
2.20
% of ordinary shares
0.02
0.27
1.88
3.32
1.73
92.78
% of total accounts
87.89
1.06
0.03
11.02
% of total shares
5.77
0.41
0.01
93.81
Major shareholdings
The net position on 31 March 2020 of investors who have notified interests in the issued share capital of the Company pursuant to the Financial Conduct Authority’s
Disclosure Guidance and Transparency Rules is as follows:
Lazard Asset Management LLC
Number of voting rights
(direct and indirect)
41,575,771
% of voting rights
9.875
On 24 April 2020, Norges Bank notified the Company that it held 12,857,235 shares (equivalent to 3.054% of voting rights).
No further changes to interests in the Company’s issued share capital have been disclosed to the Company between 31 March 2020 and 2 June 2020 (being a date
not more than one month prior to the date of the Company’s Notice of Annual General Meeting).
198
Pennon Group plc Annual Report 2020
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 Market Services, who can be contacted as follows:
Online portfolio service
The online portfolio service provided by Link Market Services gives shareholders
access to more information on their investments. Details of the portfolio service
are available online at www.signalshares.com.
Link Market 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.
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 Market 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.
Overseas telephone: +44 371 664 9234 (calls outside the United Kingdom
will be charged at the applicable international rate).
By registering to receive your shareholder communications electronically, you
will also automatically receive your dividend confirmations electronically.
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 Market Services, or by contacting ShareGift
on 020 7930 3737 (www.sharegift.org).
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 2020 Annual General Meeting
for the payment of a final dividend for the year ended 31 March 2020, 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.
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.
Corporate information
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 2020
199
Financial statements
Shareholder information
continued
Beware of share fraud
The following is taken from the ScamSmart section of the Financial
Conduct Authority’s website (www.fca.org.uk/scamsmart).
Fraudsters use persuasive and high-pressure tactics to lure investors
into scams. They may offer to sell shares that turn out to be worthless
or non-existent, or to buy shares at an inflated price in return for an
upfront payment.
While high profits are promised, if you buy or sell shares in this way
you will probably lose your money.
How to avoid share fraud
1.
Keep in mind that firms authorised by the Financial Conduct
Authority (FCA) are unlikely to contact you out of the blue with
an offer to buy or sell shares.
2.
3.
4.
5.
6.
7.
Do not get into a conversation; note the name of the person and
firm contacting you and then end the call.
Check the Financial Services Register from www.fca.org.uk to see
if the person and firm contacting you is authorised by the FCA.
Beware of fraudsters claiming to be from an authorised firm,
copying its website or giving you false contact details.
Use the firm’s contact details listed on the Register if you
want to call it back.
Call the FCA on 0800 111 6768 if the firm does not have contact
details on the Register or you are told they are out of date.
Search the FCA Warning List of unauthorised firms at
www.fca.org.uk/scamsmart. Consider that if you buy or
sell shares from an unauthorised firm you will not have access
to the Financial Ombudsman Service or Financial Services
Compensation Scheme. Seek impartial advice from a financial
adviser before you make an investment.
8. Remember: if it sounds too good to be true, it probably is!
5,000 people contact the Financial Conduct Authority
about share fraud each year, with victims losing an
average of £20,000
Report a scam
If you are approached by fraudsters, please tell the FCA using the
share fraud reporting form at www.fca.org.uk/scams where you can
find out more about investment scams. You can also call the FCA
Consumer Helpline on 0800 111 6768.
If you have already paid money to share fraudsters you can report
this at any time to Action Fraud using their Online Fraud Report
Tool at www.actionfraud.police.uk/reporting-fraud-and-cyber-crime
or by calling 0300 123 2040.
200
Pennon Group plc Annual Report 2020
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Pennon Group plc
Peninsula House
Rydon Lane
Exeter
Devon
England EX2 7HR
www.pennon-group.co.uk
Registered in England & Wales
Registered Number: 2366640
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