REG - Pennon Group PLC - Final Results <Origin Href="QuoteRef">PNN.L</Origin> - Part 2
15/07/2015 18:30
- Part 2: For the preceding part double click ID:nRST7139Na
undertaken to replenish
Pennon's cash resources in
respect of the acquisition
and ensure funding
flexibility.
Bournemouth Water is an
excellent business fit
with South West Water and
provides an opportunity to
expand South West Water's
wholesale capabilities
whilst driving synergistic
and best practise
operations. The combined
business will provide an
enhanced platform for
innovation and growth
ahead of market
liberalisation.
Bournemouth is one of the
highest performing water
only companies in the UK
across a range of
indicators with
outstanding customer
service reflected in its
Service Incentive
Mechanism (SIM) scores.
The acquisition represents
an incremental 5% growth
in regulatory RCV and is
modestly earnings
enhancing following
integration.
The acquisition has been
automatically referred to
the Competition and
Markets Authority (CMA)
and a decision is expected
to be received from the
CMA within its usual
timescales. It is
anticipated that the
merger will create a net
benefit for customers and
this will form the basis
of the case to the CMA.
PENNON GROUP OUTLOOK
The Board's priority
continues to be the
creation of shareholder
value through its
strategic focus on water
and sewerage services; and
renewable energy,
recycling and waste
management.
Our successful strategy
allows us to deliver
consistent, sustainable
cash dividends to
shareholders. We are
targeting a policy of 4%
year-on-year dividend
growth above RPI inflation
to 2020.
South West Water is
continuing its strong
performance with robust
operational delivery and
high standards of customer
service and financial
performance. Early receipt
of Ofwat's Draft
Determination has enabled
the start of accelerated
delivery in 2014/15 of key
projects identified in the
company's business plan
for K6 (2015-2020). With
South West Water's track
record of efficiency and
outperformance, the
company has a strong
foundation to deliver its
business plan and will
have an opportunity to
outperform the assumed
returns on equity. South
West Water is well
prepared for, and
supportive of, industry
reform.
Viridor has now passed its
strategic point of
inflexion and the
company's financial
performance has been in
line with expectations as
2014/15 full year EBITDA
exceeded 2013/14 despite
current market conditions
in recycling. The company
has made excellent
progress in establishing
its ERF business with five
ERFs coming on stream this
year adding to the
existing Lakeside and
Bolton operational assets.
These projects and
contracts already
contribute to Viridor's
bottom line and reflect
the realisation of a
strategy, which is
expected to contribute
c.£100m to Viridor's
EBITDA in 2016/17.
The Group is well
positioned for the future.
SOUTH WEST WATER -
OVERVIEW
Chris Loughlin, Chief
Executive of South West
Water said:
"South West Water's
enhanced business plan,
track record of efficiency
and outperformance makes
the company well-placed to
deliver the 2015-2020
regulatory contract and we
will have an opportunity
to beat the assumed
returns on equity. Pennon
has also recently
announced the acquisition
of Bournemouth Water, a
top performing water
company which is an
excellent business fit
with South West Water. The
combined business will
provide an enhanced
platform for innovation
and growth ahead of market
liberalisation in 2017."
2014/15 2013/14 Change
Revenue £522.2m £520.0m +0.4%
EBITDA(1) £331.3m £330.9m +0.1%
Operating Profit(1) £225.4m £227.0m (0.7%)
Profit Before Tax(1) £167.9m £162.5m +3.3%
Capital Expenditure £145.1m £141.6m +2.5%
(1) Excluding exceptional credit
Performed strongly against
the 2010-15 regulatory
contract
· Despite impact of a price freeze, delivered growth in revenue and strong cost control
· Cumulative K5 cost increases were lower than inflation and the company focused on delivering efficiencies ahead of the 2009 Final Determination
· Capital efficiency delivered for K5 ahead of expectations
· Due to outperformance South West Water delivered a dividend to Pennon above the 2009 Final Determination assumptions
Well-placed to deliver the
2015-2020 regulatory
contract
· South West Water's business plan for the 2014 Price Review received enhanced status from Ofwat
· Based on the company's track record of efficiency and outperformance, well-placed to deliver the K6 regulatory contract
· Attaining enhanced status has allowed the advancement of K6 projects and the targeting of early delivery
· South West Water has the highest potential Return on Regulated Equity (RoRE) in the sector, in excess of 10% for outperformance
Engaged and prepared for
future regulatory reform
· Prepared for market liberalisation; developed wholesale and retail strategies
· Supporting development of Upstream reform
· Targeting outperformance of the K6 Final Determination
VIRIDOR - OVERVIEW
Ian McAulay, Chief
Executive of Viridor said:
"I'm delighted to say that
Viridor has now passed a
strategic point of
inflexion for the
business. The ERF business
is now operational with
five new ERFs brought on
-line during the year. We
are well on track to meet
our target of c.£100m of
EBITDA from ERFs in
2016/17. Viridor is well
-positioned in its other
businesses given
regulatory drivers for
recycling from the EU and
UK Government, significant
cash being generated in
Landfill Energy, and
Contracts and Collection
providing valuable input
materials for our ERF and
recycling businesses."
2014/15 2013/14 Change
Revenue(1)(2) £835.9m £802.0m +4.2%
EBITDA(3) £80.4m £76.3m +5.4%
Underlying EBITDA(3)(4) £135.3m £125.9m +7.5%
PBIT + Joint Ventures(3)(5) £37.9m £43.6m (13.1%)
Profit Before Tax(3) £27.7m £27.6m +0.4%
Exceptional items post tax (£21.4m) (£39.7m) +46.1%
Capital Expenditure(2) £262.2m £292.4m (10.3%)
(1) Including landfill tax(2) Including construction spend on service concession arrangements(3) Before exceptional items (4) Includes IFRIC 12 interest receivable and joint ventures' (Lakeside, Viridor Laing Greater Manchester (VLGM) and TPSCo) share of EBITDA. For VLGM, this is the share of IFRS EBITDA plus service concession interest(5) Interest receivable on shareholder loans plus share of PAT
Financial performance in
line with expectations
· 2014/15 EBITDA +5.4% year-on-year to £80.4m and Underlying EBITDA +7.5% year-on-year to £135.3m. Contribution from ERFs more than offsetting the declining trend in landfill and softening of recycling markets
Passed strategic point of
inflexion
· Strategic orientation of Viridor business model around 'Energy' and 'Recycling & Resources'
· Five new ERFs - Exeter, Ardley, Cardiff, Runcorn I & II - delivered
· Clear regulatory drivers for recycling from the EU and UK Government, alongside expectations from leading companies, laying the foundations for strong, ongoing demand for recycling over the next fifteen years. Viridor well-placed to grow market share. Input, Throughput and Output Optimisation (ITOO) programme yielding productivity benefits
· Landfill Energy continues to provide good cash generation - focus on reducing landfill operations, optimising energy production and alternative uses for sites now being realised
Energy Recovery Facilities
(ERF) business now
operational
· Two thirds of ERF portfolio now operational
· Construction substantially advanced at Peterborough and Glasgow. Dunbar also commenced. South London judicial review dismissed and Notice to Proceed with construction imminent
· All plants full at opening - c.80% of the waste inputs required across the committed portfolio secured, of which three-quarters is from long-term contracts
· On track for c.£100m of EBITDA in 2016/17 from ERFs
SOUTH WEST WATER
Overview
South West Water has
continued to deliver good
operational performance in
the final year of K5 (2010
-15) alongside further
improvements to customer
service, supported by
robust financial results.
2014/15 concludes the
successful delivery of K5,
with significant financial
outperformance and cost
efficiency.
South West Water's track
record in delivering
efficiency and significant
outperformance provides a
strong foundation for the
new regulatory period with
the highest potential
returns available within
the sector.
On 12 December 2014, South
West Water received its
Final Determination for K6
(2015-20) from the
Economic Regulator, Ofwat.
This confirmed the
'enhanced' assessment by
Ofwat on 4 April 2014 and
the financial benefits of
being the only water and
sewerage company to
achieve the top
assessment.
The early assessment gave
South West Water greater
certainty over the plan,
with the Final
Determination when
received virtually
unchanged from the draft.
This has enabled the
accelerated delivery of
key projects during
2014/15 ahead of the start
of K6.
Financial Highlights
As anticipated South West
Water's revenue for
2014/15 was impacted by
the tariff freeze
announced last year.
However good cost control,
the continued delivery of
cost efficiency and lower
financing costs has
resulted in an increase of
£5.4m in profit before tax
and exceptional items to
£167.9m.
Despite the tariff freeze
revenue increased
marginally by 0.4% to
£522.2m driven by
increased customer demand
and new connections,
offset by the effects of
customers switching to a
metered tariff.
7,600 new customer
connections contributed
£2.8m of additional
revenue. Customer demand
was 0.9% higher than last
year reflecting the drier
weather over the summer
and some relatively benign
months over winter
2014/15. Customers
switching from unmeasured
to metered or assessed
charges reduced revenue by
£4.8m. The impact of this
is reducing as the number
left to switch falls. 79%
of South West Water's
domestic customers are now
metered.
Total operating costs,
including depreciation and
restructuring costs,
increased by only 1.3%
from £293.0m to £296.8m,
below the average
inflation for the year.
The key movements in costs
were:
· £6.0m cost increases (including power, business rates and carbon reduction commitment). Cumulative cost increases over K5 continue to be lower than average RPI for the same period
· £1.0m increased depreciation and costs of new capital schemes reflecting growth in the asset base
· £1.9m other costs including those associated with developing our approach to market liberalisation and lower property sales this year
· (£5.1m) additional efficiencies delivered in the year - exceeding expectations.
This strong cost control
and increased customer
demand has resulted in a
marginal increase in
EBITDA to £331.3m and
Operating Profit decreased
by £1.6m to £225.4m,
reflecting increases in
capital charges as the
asset base increases.
Lower RPI on indexed
-linked facilities,
reduced net pension
interest and the impact of
leasing reprofiling has
resulted in a net interest
charge of £57.5m, £7.0m
lower than last year. This
is net of £2.4m of
interest costs on large
longer-term projects that
have been capitalised in
the year.
Profit before tax and
exceptional items
increased by 3.3% to
£167.9m.
Capital expenditure in the
year was broadly in line
with last year at £145.1m
(£141.6m in 2013/14). A
key element of the
programme this year was
the acceleration of K6
projects into 2014/15 to
deliver early outcome
benefits to customers and
the environment. This
includes asset
enhancements to deliver
bathing water quality,
investments targeting
wastewater compliance and
preparatory expenditure on
the innovative new water
treatment works at North
Plymouth.
The focus for the final
year of the K5 programme
was weighted towards the
maintenance of existing
assets, increasing
infrastructure resilience
and delivering
environmental
improvements.
Investments during the
year included:
· safeguarding high quality drinking water through the completion of upgrades at two key water treatment works
· upgrades at wastewater sites to improve compliance
· innovative investments to reduce the number of customers' properties previously highlighted as at risk from flooding.
The robustness of our
networks and assets is
illustrated by South West
Water achieving Ofwat's
'stable serviceability'
status across all areas
with asset reliability
being a key outcome for
the next regulatory
period.
Regulatory capital value
at 31 March 2015 was
£2,928m. With an increase
in net debt this has led
to gearing(2) of 62% (31
March 2014: 56%) - within
Ofwat's optimum range for
K5 and below the nominal
range assumed for K6 of
62.5%. Increased
projected RCV growth of
19% by 2020(1) in K6
reflects the Final
Determination including
enhanced assessment
benefits.
(1)Nominal prices assuming
3.2% per annum RPI as per
SWW Business Plan for
K6(2)South West Water net
debt / RCV
Efficiencies
South West Water remains
ahead of target in
delivering the required
operating cost
efficiencies for K5.
Cumulatively, the
efficiency delivered over
K5 is 11% ahead of target
reflecting the benefit of
front-end loading delivery
in the K5 period.
Annual operating costs are
£27.3m lower as a
consequence, with £5.1m
cost savings delivered in
2014/15 compared to £3.6m
in 2013/14. This reflects
an annual equivalent of
3.3% compared to the
required 2.8%(1)pa average
operating costs
efficiencies included
within the 2009 Final
Determination. This is
being achieved through
South West Water's ongoing
improvement programmes
with specific initiatives
this year in the areas of:
· asset investments and improvements supporting the PUROS(2) programme finalised
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