REG - Pennon Group PLC - Full Year Results 2021/22
31/05/2022 07:00
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RNS Number : 3192N Pennon Group PLC 31 May 2022
31 May
2022
Full Year Results 2021/22
Bringing water to life
Driving sustainable growth
Susan Davy, Group Chief Executive, commented:
2021/22 has been another year of resilient performance for Pennon.
We're building momentum, executing our strategy and driving sustainable
growth. At the same time, we are doing more for customers than ever before as
well as delivering the step change we all want for our rivers and seas, for
the Great South West, and for generations to come.
At Pennon, we believe every customer should benefit from what we do. That's
why in February, we announced average bills in the South West would fall,
lower now than 10 years ago, supporting the cost of living crisis.
We've also announced plans to share an additional c.£20 million of
outperformance with every household in the South West, part of our unique
WaterShare+ scheme, putting customers in control, choosing either to take £20
off their bill or investing in shares in Pennon Group, building on the 1 in 16
households who have already done so, in 2020.
At the same time, we're investing more where it matters most. With our
largest ever environmental programme in 15 years, we are accelerating plans to
make a step change in river and sea health, building on our track record of
100% coastal bathing water quality, with WaterFit, delivering a tangible
difference to communities and customers in the region over the next 3 years,
and with no impact on bills.
We can do all this and more, because of our relentless approach to being as
efficient as possible, delivering double base RORE, reinvesting outperformance
where it counts, with a robust balance sheet and an optimised financing
portfolio.
We also couldn't achieve any of this without the pioneering spirit of our
c.3000 employees, who see opportunities when others see obstacles, and show
extraordinary care for customers, communities and each other.
Purpose-led business
· Living our values - trusted, responsible, collaborative and
progressive
· Talented people delivering for customers, communities and the
environment - c.3,000 colleagues serving a population of c.3.5 million
· South West Water bill cut for 2022/23 - bills lower than they were 10
years ago
· Financially supporting all our customers
Robust, resilient financial and operational performance
· Largest ever water business capital investment programme - c.£240
million in 2021/22
· South West Water - sector-leading RORE - 9.2% 1 (#_ftn1)
o c.80% 2 (#_ftn2) of South West Water ODIs(^) on track - delivering net
reward in 2021/22
o Sector-leading effective interest rate(^) of 3.4%
o Continued focus on totex efficiency - supporting lower bills and enabling
headroom for re-investment
· Bristol Water financial results - ahead of acquisition expectations
o c.75%(2) of Bristol Water ODIs(^) on track - delivering net reward in
2021/22
o RORE - 6.3%(1), delivering above allowed base returns
· Cumulative K7 Group outperformance of c.£150 million(1) to date -
Group RORE(1) of c.8.9%
· Pennon Water Services 3 (#_ftn3) - c.£19 million new contract wins,
growing a sustainable national platform for business retail
· Finance portfolio strategically positioned - optimum level of
index-linked debt exposure - benefiting gearing and providing headroom for
growth
Investing for sustainable growth - for the benefit of all
· c.£425 million acquisition of Bristol Water - merger cleared on 7
March 2022 at Phase 1, synergies of c.£50 million identified over remainder
of K7 4 (#_ftn4) - targeting doubling of base returns by 2025
· c.£150 million additional and accelerated investment in K7
o c.£45 million totex reinvestment to deliver a step change for coastal and
river water quality - WaterFit
o c.£20 million accelerated second issuance of WaterShare+ return to
customers
o c.£82 million accelerated and additional spend on Green Recovery,
including pilots into river water quality
· Responsible gearing across the water business - 61.4% 5 (#_ftn5)
· Pennon Water Services delivering profit before tax for the first time
since market opening
· Delivering Group RCV 6 (#_ftn6) growth of >40% over K7
Shareholder returns
· Share buy-back programme - c.£200 million complete, c.£200 million
to deploy
· Shareholder dividend in line with policy - growth of CPIH + 2%
FINANCIAL PERFORMANCE
Underlying(^) 2021/22 2020/21 Change
Revenue £792.3m £644.6m +22.9%
EBITDA(^) £383.9m £334.7m +14.7%
Operating profit £237.2m £215.3m +10.2%
Profit before tax £143.5m £157.0m (8.6%)
Non-underlying items before tax 7 (#_ftn7) (£15.8m) (£24.9m) -
Profit before tax £127.7m £132.1m (3.3%)
Underlying tax (£13.9m) (£29.6m) +53.0%
Non-underlying tax (£98.2m) £4.8m -
Profit for the year £15.6m £1,762.0m (99.1%)
Earnings per share
- Adjusted EPS(^) - continuing operations (adjusted for share 50.2p 47.8p +5.0%
consolidation) 8 (#_ftn8)
- Statutory EPS 4.9p 418.5p (98.8%)
Dividend per share 9 (#_ftn9) - dividend policy 38.53p 35.61p +8.2%
- Interim dividend per share 11.70p 11.15p +4.9%
- Final dividend per share 26.83p 24.46p +9.6%
Resilient financial performance
· Results in line with management expectations
· +22.9% underlying revenue(^), with Bristol Water contributing £104.4
million
· +6.7% organic 10 (#_ftn10) underlying revenue(^) primarily due to a
recovery in non-household demand both in and out of region, and contract wins
from Pennon Water Services
· (1.2%) organic(10) underlying EBITDA(^) impacted by higher costs to
serve driven by high levels of demand and cost pressures from macro-economic
factors
· +14.7% underlying EBITDA(^) growth with contribution from Bristol
Water from 3 June 2021
· (8.6%) decrease in underlying profit before tax(^) with contribution
from underlying EBITDA(^) growth being more than offset by increased interest
charges on index-linked debt
· (3.3%) decrease in profit before tax
· +5.0% increase in adjusted earnings per share(^) (adjusted for share
consolidation)(8)
· Earnings per share of 4.9 pence reflecting non-underlying impacts
including deferred tax charge of £99.5 million in 2021/22 relating to the
future change in tax rate (2020/21 earnings per share of 418.5 pence including
the £1.7 billion profit on disposal)
· Sector-leading dividend growth of 8.2% with full year dividend per
share up (CPIH +2%) to 38.53 pence.
A full reconciliation to the statutory reported results is included in item
(i) in the Alternative Performance Measures on pages 60 to 64 of this
announcement.
Presentation of results
A presentation of these results hosted by Susan Davy, Group Chief Executive
and Paul Boote, Group Finance Director, will take place at London Stock
Exchange, 10 Paternoster Sq, London, EC4M 7LS at 09:00am (GMT), today, 31 May
2022.
The presentation will be available as live webcast and can be accessed here:
https://www.pennon-group.co.uk/investor-information
(https://www.pennon-group.co.uk/investor-information)
The presentation will be immediately followed by a live Q&A which will
also be available via conference call facility. Details are included below:
United Kingdom: 0800 640 6441
United Kingdom (Local): 020 3936 2999
All other locations: +44 20 3936 2999
Conference passcode: 623854
For further information, please contact:
Paul Boote Group Finance Director 01392 443 168
Jennifer Cooke Head of Investor Relations
James Murgatroyd Finsbury Glover Hering 020 7251 3801
Harry Worthington
OPERATIONAL PERFORMANCE
Delivering for customers, communities and the environment across the Great
South West
Performance across the Group continues to be operationally resilient,
delivering against South West Water and Bristol Water's business plan
commitments, and driving growth at Pennon Water Services, realising benefits
for all stakeholders.
In June 2021 we announced the acquisition of Bristol Water, increasing the
Group's RCV by c.16%. The merger of Bristol Water with South West Water was
reviewed by the Competition and Markets Authority (CMA), in line with standard
practice. Throughout this review process, we worked collaboratively with Ofwat
and the CMA to demonstrate the benefits for customers, communities, and
shareholders arising from the merger. During the period from June 2021 to the
point at which the CMA provided merger clearance at Phase 1 on 7 March 2022,
South West Water and Bristol Water operated independently of each other, in
line with CMA requirements.
The integration of the water businesses is now underway, with the focus of
sharing best practice across the Group.
Bringing together the best of the best
The acquisition of Bristol Water increases the population served across the
Group to over 3.5 million, with services delivered by a team of c.3,000
talented colleagues. Bristol Water embodies many of Pennon's values, our
approach to stakeholder engagement and collaboration, providing a solid
foundation for the integration.
As we did with Bournemouth Water, we are retaining the local presence,
operations and valuable Bristol Water brand which is very relevant for
customers and communities given Bristol Water has just celebrated its 175th
anniversary, building on that trusted heritage.
The merger and integration of South West Water and Bristol Water unlocks
specific benefits for all stakeholders. We have embarked on a 24-month
integration programme, deploying our proven integration blueprint which is
focused on:
· creating common systems and processes
· unlocking economies of scale
· driving supply chain efficiencies
· sharing environmental best practice
· delivering even better customer service.
There are three streams of integration, moving across three phases: corporate
and shared services, operations, and customer services. We are targeting more
efficient central governance and support structures, alongside combining
operational and customer service excellence.
We have identified a full run rate of synergies of c.£20 million per annum by
2025, with c.£50 million targeted cumulatively over the remainder of K7. The
scale of which is broadly comparable to the synergies delivered through the
Bournemouth Water acquisition. Financing outperformance will be realised over
a longer horizon as Bristol debt is refinanced. As was the case with
Bournemouth Water, the benefits are multiple and we are focused on ensuring we
can unlock service improvements alongside efficiency performance.
A greater stake and a say for customers in the Great South West
Building on the successful launch of our WaterShare+ scheme in 2020 which saw
one in 16 households in the region become shareholders, we are delighted to be
accelerating the next issuance of our unique WaterShare+ scheme in 2022/23 11
(#_ftn11) . c.£20 million of outperformance will be used to underpin our
commitment not just to South West Water and Bournemouth Water customers but
now also Bristol Water customers - enhancing the community contract already in
place with them.
Sustainability at the heart of our business
We are committed to being a responsible business for all our stakeholders,
achieving improved environmental, social and governance (ESG) performance.
Demonstrating our role in society is crucial in maximising the value we create
for stakeholders, and we are proud that our ongoing commitment to do the right
thing, in the right way continues to deliver sustainable results. Our
commitment to maintaining the highest standards is demonstrated through our
strong and improving ESG performance metrics.
We are also partnering across 11 innovation projects and underpinning this, is
our £20 million joint venture with the University of Exeter, where we're
collaborating on the first purpose-built, trans-disciplinary research centre
in the water sector, focused on the most pressing challenges that impact upon
the provision of safe and resilient water and wastewater services in the UK
and overseas.
Our existing environmental plans to 2025 are already delivering significant
benefits for the environment. We are well underway with the delivery of our
c.£1.4 billion capital programme in K7 across the Group - our largest
environmental investment programme in 15 years. This includes our Green
Recovery and Net Zero 2030 plans, delivering nature-based solutions and pilots
to shape future investment plans, along with accelerating renewable energy
generation to c.50% by 2030. Alongside this, WaterFit will see us reinvest
c.£45 million totex efficiencies achieved to date in K7 to deliver a step
change for river and coastal water quality.
We continue to build on the success of our pioneering Sustainable Financing
Framework, having raised c.£300 million through the Framework since 31 March
2021. We were also pleased to have achieved Fair Tax accreditation again this
year, recognising our responsible approach to tax.
At Pennon, we believe our people are our best asset and are delighted to have
been recognised as the winner in Britain's Most Admired Companies (Utilities)
for the second year running. This award demonstrates our commitment to
engaging employees in our strategy and the important role they play in
delivering it. We are also delighted that for the second year running we have
officially been accredited as a Great Place To Work. The survey measures
effectiveness in a range of categories including innovation, maximising human
potential, values, leadership effectiveness and wellbeing and we are pleased
to have achieved our highest ever participation rate of 85%.
We are proud to be a member of 'The 5% Club'- investing in the next generation
through embracing an 'earn and learn' culture and committing to having at
least 5% of our employees on structured graduate or apprenticeship programmes,
a target that we are currently exceeding. Our graduate programme is well
underway, with a new intake of 28 graduates during the year, who represent our
most diverse intake ever, and we are on track to recruit 100 graduates over
K7. We continue to create new apprenticeships and having added 209
apprenticeships since 2020, we are ahead of schedule in reaching our 2025
target of 500. We are also proud to support the #10000blackinterns initiative
and the Change The Race Ratio, as well as having increased gender diversity
across the Group with >30% female employees.
Supporting our customers
South West Water's New Deal business plan 2020-25 was developed with
customers, for customers. In helping to shape our business plan, customers
told us they want a resilient and reliable service, and a fair and affordable
bill. Through Covid-19, many of our customers saw significant additional
pressures on their finances, and teamed with the current rising inflationary
environment, our commitment to support customers has never been more
important.
We have worked hard to deliver quality services at an efficient cost, so that
bills remain as low as possible. During the year we announced that bills for
2022/23 would fall, meaning that whilst the majority of utilities are
increasing prices, our average bill will be reducing at this critical time.
South West Water's bills are lower in real terms than they were 10 years ago
thanks to our continued focus on driving efficiency through innovation.
Alongside this, the acquisition of Bristol Water will afford future bill
reductions for Bristol Water customers.
Alongside ensuring our bills remain as low as possible, our innovative
WaterCare programme, introduced in 2007, continues to offer support to
customers through a number of initiatives including direct account reviews and
benefit entitlement checks. This has been achieved through a range of
affordability support measures including a programme of physical and virtual
home visits to help customers ensure they are receiving all eligible benefits,
meaning they are financially better off. In addition, we have been working in
partnership with organisations such as social housing providers and carer
organisations to ensure that our schemes are promoted and easy for our
customers to access.
In 2021/22, there was a c.4% increase in customers benefiting from one or more
of South West Water's affordability initiatives, bringing the total to
c.70,000. These initiatives include discounts to bills or a level of bill
certainty to suit customers' circumstances. We are targeting a further
increase in 2022/23 as we work to address water poverty for our customers by
2025, in line with South West Water's Board Pledge.
For our Bristol Water customers, we offer three discounted tariffs to make
sure customers who find it hard to pay their water charges are given the help
they need, with over 21,000 customers receiving assistance through these
measures, an increase of c.4% on the previous year. In addition to the social
tariff schemes, almost 4,000 households are currently benefiting from the
'Restart' scheme to help clear their water bill debt. During 2021, Bristol
Water introduced 'Covid Assist' which provides support to customers who have
been unexpectedly thrown into severe financial hardship. These customers can
receive help with their bill for 6 months before applying for support on a
longer-term basis if needed. Bristol Water's work with debt advice partners
continues to be key to promoting the help available to customers.
As a result of these initiatives, since the start of this regulatory period we
have unlocked almost £22 million of support for customers across the Group.
At Bristol Water an additional c.8,000 households have been included on the
Priority Services Register (PSR) during the year, taking the number registered
to c.21,000. Encouragingly, 89% of Bristol Water's vulnerable customers rated
the service they receive through the PSR as 'very satisfied' or 'satisfied'
compared to the 2021/22 target of 85%. This measure is in line with the
progress made against Bristol Water's published Vulnerability Action Plan,
which is reviewed by the Bristol Water Challenge Panel.
Striving for service excellence
During the year, South West Water saw a c.60% reduction in total complaints,
maintaining our position as an upper quartile company and reflects customer
experience improvements implemented along with shortening resolution
timescales.
Bristol Water has more than halved the total number of complaints during the
year. Complaint resolution and handling is a key focus of Bristol Water's
customer experience strategy, and root cause information feeds directly into
future improvements to prevent repeat complaints.
Customer satisfaction as measured by Ofwat's Customer Measure of Experience
(C-MeX) presents a good opportunity for us to share best practice across the
Group. At South West Water this is an area where we're focusing our
improvement efforts, being ranked 12(th) in 2021/22. Improved customer
communications, using new channels convenient to our customers and a new
education campaign form part of our plan to advance performance in this area.
Bristol Water continues to deliver strong C-Mex performance, ranking 6th in
the industry - continuing its strong performance from the previous year. We
have managed a variety of projects to achieve this performance, which will
continue into 2022/23, including the 'In their shoes' campaign, which has been
embedded within the culture of our customer facing operational teams. During
the latter part of the year, Bristol Water increased the focus on messages to
help customers with their bill, which included the launch of the two year
'Money Back Guarantee' aimed at providing confidence to customers to trial a
meter for two years.
Our D-MeX performance, measuring satisfaction from developer customers such as
house builders for both South West Water and Bristol Water is forecast to be
close to the average for the industry, presenting an opportunity for targeted
improvements including greater stakeholder engagement through face-to-face and
virtual workshops and events.
R-MeX is a relatively new survey which measures retailer satisfaction in the
business market with wholesaler services. In the most recent survey, the
performance of both South West Water and Bristol Water is robust, with both
above the current average for the industry.
Playing our part in the community
South West Water's revamped school's education programme is aimed at
developing and delivering classroom material to local schools. This programme
is focused on teaching school children the importance of water conservation
and environmental protection, illustrating the part they can play through
being careful with what is discarded through the wastewater network. Through
this programme we have directly taught c.5,000 pupils about where our clean
water comes from and how wastewater is treated.
In the coming year we are extending our reach by working with our partners,
including South West Lakes Trust, and our ambition in this space is to engage
with more and more pupils outside the school term. We're also creating new
partnerships to support our ambition to drive behavioural change across the
region.
We continue to support communities with funding available for community groups
through both South West Water and Bristol Water, including South West Water's
Neighbourhood Fund and Water Saving Community Fund, and Bristol Water's
Community Fund, administered by the Quartet Community Foundation, supporting a
range of initiatives across the Bristol region.
Bristol Water's local community satisfaction target recognises the importance
of working together with local stakeholders to jointly tackle the issues which
the city faces. This means challenging ourselves on the way that we work to
deliver a safe and reliable supply to customers, so that we can maximise
additional economic, environmental and social value. This approach is
underpinned by Bristol Water's Social Contract, which provides the framework
and governance process for the delivery of this wider public value.
Clean safe, reliable drinking water
Across the Group, we are committed to ensuring the continuous supply of clean,
safe and reliable drinking water, whilst protecting the natural resources
within the Great South West. Our dedicated teams and ongoing investments
ensure that we are able to respond to challenges, such as those posed by the
Covid-19 pandemic and severe weather - such as Storm Eunice in February 2022.
Investing to secure resilience, now and into the future
At South West Water, in 2021 we celebrated a silver jubilee - the 25(th)
consecutive year without water restrictions. Bournemouth Water's track record
of no water restrictions was also successfully maintained. Despite high demand
over the year and hot weather over the summer we successfully managed our
water resources, taking advantage of the wetter periods over the winter. This
enabled us to replenish water storage and as we enter the summer period our
water resources are in a robust position with reservoir storage at c.93% at 31
March 2022.
We continue to look for strategic value enhancing opportunities in this area
having recently procured a site for development of a new reservoir on Bodmin
Moor, Devon.
At Bristol Water, the drought risk measure did not achieve its target for the
year due to the ongoing higher than forecast distribution input and unplanned
outages. However, Bristol Water's water resources remain in a robust position
with reservoir storage at the end of March 2022 at c.93%.
Water quality
The Compliance Risk Index (CRI) score as reported by the Drinking Water
Inspectorate (DWI) measures water quality compliance. Performance across the
Group, which missed 2021/22 targets, was impacted by one-off events in
2021/22, however underlying performance remains strong. Continued investment
in research and implementation of advanced treatment technologies, including
ceramic membranes and granular activated carbon is designed to ensure
compliance measures improve in future years.
Further enhanced maintenance and resilience improvements are being delivered
across all our water treatment works as part of our site MOT programme to
ensure we proactively intervene before failures occur.
Leakage
We recognise that the prevention of water being lost through leakage from our
pipes and assets is a key issue for all customers and is something we work
continuously to reduce. Across the Group in 2021/22 leakage levels reduced by
c.7%.
At South West Water, the specific investments made since the start of the
regulatory period, coupled with the launch of our targeted action plan are
delivering results. Improved leakage performance for the year has resulted in
us achieving our 3-year average target and represents a c.8% reduction on
prior year performance. Whilst we know there's still more to do to find, fix
and prevent leaks on our network, we're encouraged by the progress we've made
to date, and continue to focus on delivering further improvements to achieve a
15% reduction over the K7 period.
Bristol Water maintained its strong leakage performance during the year,
reflected in a 5% reduction on prior year performance. A focus on customer
leaks along with out-of-hours work has played a significant part in driving
stubborn leakage areas down. Bristol's current leakage strategy, delivering
sector-leading performance, is expected to continue for the remainder of K7.
Mains repairs
Decreasing the number of mains failures is vital to ensuring we maintain a
continuous supply of water to our customers.
The work to optimise the operation and control of our network by pressure
management and other 'network calming' activities, along with targeted
replacement of sections of water mains with higher failure rates has led to a
significant reduction in the number of mains failures across the year, and
across the Group. We are pleased to have significantly reduced the number of
reactive repairs across the Group, delivering a c.30% reduction across South
West Water and Bristol Water.
Unplanned outages
Water treatment unplanned outage is a new measure for the K7 regulatory period
and provides a means of assessing asset health (primarily for
non-infrastructure, above ground assets), for water abstraction and water
treatment activities. It tracks the temporary loss of production capacity
across all water treatment works, resulting from unplanned breakdowns and
asset failure. The Group is performing well in this area, with both South West
Water and Bristol Water outperforming the industry wide target.
South West Water's performance in 2021/22 has remained strong and is founded
on effective investment and maintenance regimes, ensuring that unplanned
failures are minimised. This in turn minimises the risk of any production
outages resulting in service impacts for our customers.
At Bristol Water, we continue to aim to fix all outages within the working day
however, due to some extreme weather events, such as storm Eunice, and supply
chain issues in obtaining replacement parts, there has been an increase in
unplanned outage over 2021/22, though performance still remains favourable to
the industry-wide target.
Minimising customer supply interruptions
As a Group, we understand the inconvenience that supply interruptions can
cause.
At South West Water, during 2021/22 performance was impacted by two large
events, including one in Gunnislake, Cornwall and a significant third-party
incident 12 (#_ftn12) , and reflects the way in which performance against
this target can be impacted by one-off issues. On an underlying basis South
West Water's core performance remains robust with our strategy of a dedicated,
in-house supply continuity and alternative water supply team making long term
improvements to customers, reducing the number and duration of supply
interruption events.
Bristol Water have made a number of changes in their approach to supply
interruptions over the past three years to improve performance. The impact
of these changes is now being seen, with Bristol Water outperforming their
2021/22 target.
Protecting the environment - robust wastewater delivery
Our wastewater services, delivered by South West Water, continue to drive
improvements through innovation by constantly seeking out new ideas,
pioneering and piloting new technologies with a focus on nature-based
solutions, where possible, and by enhancing governance and working in
partnership with others.
Reducing flooding incidents
During 2021/22 the number of internal sewer flooding cases decreased year on
year by c.40% in comparison to the prior year. This is a significant
outperformance against target and places us as one of the best performers in
the industry on this measure. External sewer flooding events also decreased,
with a 6% year on year reduction - maintaining our strongest performance yet,
supported by the use of artificial intelligence, such as Meniscus, enabling
proactive interventions based on predictive analytics.
We have a multi-faceted approach to improve our performance on sewer flooding
with key activities including the installation of sewer-depth monitors at key
points within the network to alert us to potential issues, enhanced data
collection and analysis, and HYBACS technology to help peak network demand.
This informs our forward plans for identifying repeat flooding risk areas and
locations requiring further sewer cleansing and defect remediation.
Sewer Collapses
The number of sewer collapses reduced by c.30% compared to the same period
last year and represents an area of excellence, with our performance already
exceeding the 2025 target. The downward trend in the number of collapses
reflects a relentless drive to investigate, clean, and repair sewers. We are
using artificial intelligence to produce automated sewer condition surveys,
and to detect and code faults accurately, resulting in faster proactive
repairs at a lower cost.
Pollution incident reduction plan delivering results
South West Water's Pollutions Incident Reduction Plan, launched in September
2020, continues to deliver results. This level of improvement has continued
into 2021 13 (#_ftn13) , with a one third reduction in pollution incidents
recorded compared to the previous year, reflecting our best ever performance
in 10 years.
2021/22 saw the completion of the first phase of 210 'hotspot' interventions
where issues identified at sites with multiple previous issues were fixed
during the year. A second phase has been identified for resolution in 2022
which, in addition to the other planned maintenance and enhancements to
assets, will support our trajectory to improve overall performance and target
continued reductions in pollutions incidents.
In addition, we continue to collaborate with others in the industry to share
best practice and operational insights and are enhancing our root cause
analysis to deliver greater insight into identifying risks. Alongside this we
are helping customers to understand how their behaviour impacts on our assets
and ultimately their local environment.
We recognise that there is still more to do in this area as our targets become
more stringent, impacting our relative EPA performance. The investments and
interventions we are making support our trajectory to improve our overall
position, achieving a 4-star EPA rating by 2024. Our steadfast focus remains
in this area as we work to deliver a meaningful step change in performance.
Enhancing the environment in the Great South West
Since the publication of South West Water's Final Determination, there has
been a marked shift in the focus on the environment from customers, the media,
Government and other stakeholders. During 2021 we saw COP26 in Glasgow and the
G7 meeting in Cornwall, with climate change at the forefront of discussions.
Improving river and coastal water quality has taken centre stage, as
water-based recreation, such as wild swimming and paddle boarding, have become
more popular, and the pandemic has strengthened the bond our customers want to
have with more open green and blue spaces, now and for generations to come.
WaterFit - protecting rivers and seas together
A key concern and priority of our customers is protecting and enhancing the
beautiful environment in the Great South West and we are determined to play
our part in improving river and coastal water quality. Our new investment
programme, 'WaterFit' is focused on protecting rivers and seas together,
bringing together existing plans to deliver multiple benefits, as well as
going further, faster - piloting and proving the case for future investment in
preparation for the next regulatory period, PR24.
WaterFit will see us nurturing healthy rivers and seas, reducing our impact on
rivers by one third by 2025 14 (#_ftn14) , and maintaining our excellent
bathing water quality standards all year round. We are also developing plans
to target zero harm on river quality by 2030. Our WaterFit plans have been
built around six pledges underpinned by a range of specific targets, including
targeting changes on around 200 treatment works, pumping stations and storm
overflows, increasing capacity across our infrastructure by the equivalent of
around 20 Olympic swimming pools, and reducing spills from storm overflows to
an average of 20 per year, per overflow. c.£45 million of additional
investment for WaterFit will be funded through totex efficiencies delivered to
date during the K7 regulatory period, with the achievement of our existing
environmental ODIs continuing to be a priority.
Delivering in our catchments
Our pioneering catchment management approach has now been in place for over 15
years and continues to be fundamental to helping unlock environmental
challenges across the region. To date we have improved over 95,000 hectares
including c.300 hectares of peatland, and we undertake catchment management
across c.80% of our region. These activities lead to reduced ammonia and
phosphate run-off thereby improving overall river quality. We're also well
advanced with our plans to plant 250,000 trees by 2025, more than doubling our
original target of 100,000, which we achieved four years early. We planted
c.50,000 trees this year bringing the total to date to c.150,000.
Record quality levels recorded at our bathing waters
In the South West we have over 860 miles of coastline to protect, representing
over one third of the UK's bathing waters. This is something we, and our
customers, have always valued and prioritised, working tirelessly across the
region to improve bathing water quality, which now for the first time ever,
has achieved 100% water quality, as measured by the Environment Agency.
We have advanced investment to deliver six bathing water enhancements ahead of
schedule - bringing the total delivered to 2022 to eight schemes. We are
particularly pleased that Combe Martin retained bathing water designation as a
result of our collaborative mixed investment approach and interventions
including nature-based solutions, restoring, protecting and enhancing land to
reduce pollution levels running off into our seas.
Improvements on the Isles of Scilly
South West Water commenced operating the water and sewerage services on the
Isles of Scilly in April 2020, at the very start of the Covid-19 pandemic.
During 2021/22 investments have been delivered on the islands that include
improved communication and control systems on key assets, and an enhanced
water sampling programme which provides improved water quality data that will
be used to design the new water treatment systems the islands require.
Recognising the importance of water efficiency, we completed the rollout of
our smart metering programme with c.90% of customers now metered. This forms
part of a focus on remote operations and communities. During the year we
improved water treatment for all customers on St Mary's, along with the
completion of a programme of tank cleansing. We have also bolstered our teams,
recruiting locally to strengthen the island based team that effectively manage
these critical services.
All specified targets agreed with the DWI and the Environment Agency have been
achieved, in addition to extra commitments made to the DWI based on further
water quality data that has been gathered since April 2020.
The programme now moves to the next stage of detailed design regarding
replacement treatment processes that provide improved resilience and reduced
environmental impacts.
Green Recovery - piloting for success
Our c.£82 million Green Recovery initiative, developed with customers and
stakeholders, has been designed to deliver benefits for customers, society and
the environment.
As part of our Green Recovery initiative, we are extending storm overflow
monitors 15 (#_ftn15) so that all c.1,600 overflows on our network will be
monitored by December 2023 (c.80% installed to date) giving us important data
on the number and duration of spills across the entire network. Alongside this
we are also trialling sewer separation which allows us to assess the
sustainability of this activity in reducing storm overflows during heavy
rainfall, ultimately helping to inform where to target investment in this
regulatory period and the next.
Our inland river bathing water pilots on the Rivers Dart and Tavy are
progressing. These pilots will enable us to test the implications, costs and
benefits of achieving bathing water designation and deliver specific asset
enhancements where necessary to achieve these aims. We are engaging with
stakeholders in the area and have commenced the installation of monitors to
measure water quality.
Four schemes are now underway focused on the removal of phosphorous and
ammonia, including investment in additional storm storage, in line with our
targeted programme.
Recognising that there are many contributing factors to river water quality
including farming and industry, we are taking the lead in supporting all those
who might be a source of river water pollution. We are also on track to reduce
the impact of our own assets and processes by one third by 2025.
Net Zero 2030
Our Net Zero 2030 journey is underway across the Group, with investment
focused on delivering reduced carbon emissions and increasing renewable energy
generation. As we target Net Zero by 2030, we are enhancing our understanding
of carbon in our business and processes, so that we can optimise our assets
and embed carbon into our decisions.
South West Water's Net Zero plan is driven by a combination of activities,
structured through three key pillars - bringing wider benefits to the South
West.
· Sustainable living - reducing emissions through operational
practices, including our on-site water usage, increasing energy efficiency and
using lower carbon fuel sources
· Championing renewables - investment is underway to support the
achievement of 50% renewable energy generation at our sites by 2030. During
the year we accelerated plans to roll out additional solar photo-voltaic (PV)
panels across many of our sites, including our flagship water treatment works,
Mayflower. These investments will help to double our renewable generation
capacity to over 10%
· Reversing carbon emissions - working in partnership to deliver
natural carbon sequestration through peatland restoration and tree planting.
We are making good progress towards our target of restoring 1,000 hectares of
peatland.
Bristol Water's Net Zero 2030 strategy is built around four pathways to reduce
our carbon footprint.
· More efficient use of water - continuing to reduce leakage from our
pipes and encouraging customers to use less water, offsetting the increase
from a growing population in our area
· More efficient operations - further reducing the amount of energy
used to supply our customers by optimising the design and operation of our
systems
· Switch to low or zero carbon sources of energy - switching to
renewable energy sources
· Remove carbon from the atmosphere - carbon offsets and sequestration.
Customer and shareholder returns
RORE outperformance underpins the Group's sustainable dividend policy whilst
enabling the reinvestment of efficiencies and keeping customer bills low.
South West Water's strong operational and financial performance has
contributed to a sector-leading RORE of 9.2% 16 (#_ftn16) with outperformance
in all areas in 2021/22.
Bristol Water has delivered a RORE of 6.8%(16), also delivering outperformance
in all areas in 2021/22. The identified synergies across the Group of c.£50
million over the remainder of K7 will result in a doubling of base returns for
Bristol Water.
Group RORE of c.8.9%(16) reflects c.£150 million 17 (#_ftn17) of cumulative
outperformance to date.
Outcome Delivery Incentives(^)
In 2021/22 South West Water achieved c.80%(( 18 (#_ftn18) )) of its ODIs
across a broad range of challenging bespoke, common and comparative measures -
in line with performance in 2020/21.
Ten ODIs continue to represent areas of excellence having achieved their 2025
target early, with a further 25 outperforming their 2021/22 target or on
track.
We have delivered a significant step change in pollutions performance in line
with our Pollutions Incident Reduction Plan, reducing wastewater pollution
incidents by over a third, and whilst still an area of focus the financial
penalty is substantially reduced from 2020/21.
Overall, financial ODI performance for South West Water for 2021/22 has
improved significantly from the prior year, resulting in a net reward of
c.£0.6 million (2020/21 net penalty of c.£10.4(( 19 (#_ftn19) )) million),
reflecting an annual equivalent RORE(^) outperformance of 0.1%.
Bristol Water achieved c.75%(18) of its ODIs, with three ODIs representing
areas of excellence and a further 19 outperforming or on track with their
2021/22 target.
Bristol Water has also delivered net financial reward based on their ODI
performance for 2021/22, delivering c.£0.4 million net reward (2020/21 net
penalty of c.£1.8 million), reflecting an annual equivalent RORE(^)
outperformance of 0.1%.
Financing
Our efficient financing strategy continues to drive outperformance with South
West Water's effective interest rate(^) at 3.4% (2020/21 2.5%), lower than
Ofwat's nominal cost of debt. While recent increases in inflation are driving
an increase in finance costs of index-linked debt, we continue to outperform
the cost of debt allowances through our flexible financing strategy and the
company's diverse debt portfolio, with a relatively lower level of
index-linked debt compared to the industry average.
Bristol Water's level of index-linked debt is in line with the industry
average at around 50%. With an effective interest rate(^) of 5.6%, this has
still delivered financing outperformance in the year.
Total expenditure savings (Totex(^))
South West Water's overall cumulative net efficiency savings in the regulatory
period to date are c.£87 million 20 (#_ftn20) . Whilst the elevated
inflationary environment is placing pressure on costs, we continue to focus on
efficient totex delivery, supported by our pioneering approach to innovation
across the Group.
Bristol Water has delivered totex outperformance of c.£7 million(21) on a
cumulative basis. The c.£50 million synergies identified across the Group
following the acquisition of Bristol Water over K7 will contribute to a
doubling of base returns.
Reflecting the above, overall totex for the water represents a c.10%
efficiency, net of increased expenditure on wastewater pollutions and leakage,
reflecting efficiencies and advancements across the Group.
Return on Regulated Equity
The table below summarises the 2021/22 and cumulative RORE(^) position for
both South West Water and Bristol Water.
Ofwat RORE 21 (#_ftn21) WaterShare RORE 22 (#_ftn22)
2021/22 2021/22
South West Water Bristol Water South West Water Bristol Water
Base return 3.9% 4.4% 3.9% 4.4%
Totex 0.8% 0.7% 0.8% 0.8%
ODI 0.1% 0.1% 0.1% 0.1%
Tax 0.5% (0.1%) N/A N/A
Financing 3.9% 1.7% 3.9% 2.1%
Total RORE 9.2% 6.8% 8.7% 7.4%
K7 cumulative RORE 7.9% 4.9% 8.2% 6.3%
Growing a sustainable national platform for business retail
Pennon Water Services(3), with a market share of c.6% continues to deliver on
its growth ambitions, winning c.£19 million of new contracts during 2021/22.
Pennon Water Services' strategy is to engage proactively with its customer
base, and to continue to win new, quality contracts.
Through a simple, transparent and competitive service offering, Pennon Water
Services attracted businesses of all sizes and sectors during the year,
including Essar Oil and Bourne Leisure, along with strategic water users such
as GSK and Rolls Royce, recognising the value from their relationship with
Pennon Water Services by renewing their retail contracts.
The business focus upon securing contracts from high volume strategic water
using sectors, such as manufacturing, supported Pennon Water Services'
resilience through the Covid-19 pandemic as these sectors continued to operate
in line or in some cases above pre-pandemic levels of consumption. Overall
non-household demand which had been impacted due to Covid restrictions on
customer's operations in some sectors, has returned to near pre-Covid levels
across the majority of sectors.
Pennon Water Services customers continued to recognise the value and support
provided by giving the business a high rating through the independent review
site Trustpilot, being rated as excellent - 4.8/5, reflecting efforts to
refine and improve customer service.
Through our acquisition of Bristol Water we gained a 30% share in
water2business - led by a strong team who are also focused on delivering an
outstanding customer experience, currently with a Trustpilot score of 4.9/5.
Serving c.160,000 customers, and with a c.6% market share, water2business'
offers tailored water and wastewater management helping customers improve
efficiency and deliver savings.
Well positioned for the future
At Pennon we have the headroom and capacity to respond with agility when it
matters most. We have always focused on having an agile and efficient
financing strategy and with the water company net debt/RCV gearing at 61.4%,
and forecast to fall further over K7, we are well placed for investment.
We also continue to drive efficiency and performance across financing and
totex. The financing at Pennon and the combined water business is the most
efficient in the sector and South West Water's effective interest rate is
consistently one of the lowest in the industry and significantly below Ofwat's
allowed nominal cost of debt. This outperformance provides headroom for
optionality, for reinvestment or sharing of benefits with customers, lowering
their bills at a time when they most need it most.
Now that the Bristol Water integration is underway, our approach is all about
taking the best of the best whether performance, process, talent or
efficiency. The synergies that we have identified will enable us to realise
efficiency savings across the Group of c.£50 million to 2025, leading to a
doubling of base returns for Bristol Water.
Supporting our plans for organic growth, we are reinvesting where we see the
opportunity. Having delivered cumulative outperformance of c.£150 million 23
(#_ftn23) across the Group so far in K7, we are reinvesting and accelerating
new projects as well as sharing benefits with customers.
Our long-term plans for PR24 and beyond are being developed to maximise public
value - adaptive plans focused on service, society and the environment, built
to recognise the uncertainties of climate change and population growth.
Pennon's agility and innovative approach to driving efficiency has positioned
the Group well, adopting a twin-track approach, pursuing both organic and
acquisitive growth. A key parameter of measuring growth is our Regulatory
Capital Value - with this being the basis of future revenues and central to
our gearing and debt position. Over K7 we expect RCV to have increased by over
40% from a combination of organic and acquisition led growth, broadly split
50:50 between the two, along with the impact of the higher inflationary
environment.
FINANCIAL PERFORMANCE
During this financial year, we have implemented our commitments to return
value to our shareholders and stakeholders following the sale of Viridor,
having paid a special dividend of c.£1.5 billion, commenced a share buy-back
programme of up to c.£400 million, and making further contributions to our
principal pension scheme. We have extended our investment in UK water with the
acquisition of Bristol Water and have committed further investment to fund the
water business in support of our Green Recovery initiative.
Bristol Water has contributed to the financial results since 3 June 2021, with
financial performance ahead of management expectations. The Competition and
Markets Authority cleared the non-household aspect of the acquisition in
November 2021, with full clearance for the merger of the wholesale water
businesses granted on 7 March 2022.
Underlying(^) 2021/22 2020/21 Change
Revenue £792.3m £644.6m +22.9%
Operating costs (£408.4m) (£309.9m) (31.8%)
EBITDA(^) £383.9m £334.7m +14.7%
Depreciation and amortisation (£146.7m) (£119.4m) (22.9%)
Operating profit £237.2m £215.3m +10.2%
Net interest charge (£93.7m) (£58.3m) (60.7%)
Profit before tax £143.5m £157.0m (8.6%)
Non-underlying items before tax(7) (£15.8m) (£24.9m) -
Profit before tax £127.7m £132.1m (3.3%)
Underlying tax (£13.9m) (£29.6m) +53.0%
Non-underlying tax (£98.2m) £4.8m -
Discontinued operations - £1,654.7m -
Profit for the year £15.6m £1,762.0m (99.1%)
Earnings per share
- Adjusted EPS(^) - continuing operations (adjusted for share 50.2p 47.8p +5.0%
consolidation)(8)
- Statutory EPS 4.9p 418.5p (98.8%)
Dividend per share(9) - dividend policy 38.53p 35.61p +8.2%
Capital investment £240.9m £205.2m +17.4%
- South West Water £203.4m £168.2m +20.9%
- Bristol Water £37.0m - -
- Other £0.5m £0.3m +66.7%
31 March 31 March 2021
2022
Total Group net (debt)/cash (£2,682.9m) £64.3m
Robust financial performance
Financial performance across the Group has been robust with a strong
contribution from the newly acquired Bristol Water, with performance in line
with management expectations.
The Group's revenue has increased from £624.1 million to £792.3 million,
with the prior period including a £20.5 million WaterShare+ non-underlying
reduction to revenue. The Group's underlying revenue(^) has increased from
£644.6 million to £792.3 million, an increase of c.23%, with Bristol Water
contributing £104.4 million of the increase in the year ended 31 March 2022.
Organically(10), underlying revenues(^) have increased by 6.7%. The Covid-19
pandemic led to a substantial population increase in the South West with
continued higher levels of household demand. Alongside this, as restrictions
eased, businesses have increased activity, resulting in increased water usage
both in and out of our region, as well as growth in developer services
activities.
Cost pressures from the macro-economic environment, alongside the increased
demand, which includes the impact of a sustained population increase in the
region, have resulted in higher costs to serve.
In the Bristol Water region, demand levels have been relatively stable
year-on-year with revenues benefitting from higher regulatory allowances in
its business plan as determined by the CMA.
Pennon Water Services continues to deliver further revenue growth with
contract wins contributing £17.5 million of additional revenue in 2021/22
compared to 2020/21.
Cash collections throughout the Group have remained robust during the
financial year. Underlying credit loss charges for 2021/22 of £3.1 million
for South West Water (0.5% of revenue) are in line with previous levels
(2020/21 0.5%). Bristol Water recognised an expected credit loss charge of
£1.9 million (1.8% of revenue) for the ten month period since acquisition, in
line with recent experience for the business. For Pennon Water Services, the
expected credit loss charge of £0.5 million (0.3% of revenue) is lower than
the previous year (2020/21 of 0.6% of revenue). This reflects the
significant focus on cash collection and the quality of the customer base as
revenues have recovered from the pandemic. Across all Group businesses, the
potential impact of significant increases in the cost of living on
affordability has been considered, noting the existing toolkit of measures we
have in place to help customers most in need in difficult times.
Overall, underlying EBITDA(^) has increased by 14.7% from £334.7 million to
£383.9 million including a contribution of £53.3 million from Bristol Water.
Organically(10), underlying EBITDA(^) has reduced marginally by 1.2% with cost
pressures from macro-economic conditions and higher costs to serve offsetting
higher revenues.
Group underlying profit before tax(^) decreased by 8.6% to £143.5 million
compared with the prior year of £157.0 million. This outturn reflects the
underlying EBITDA(^) growth, supported by the Bristol Water contribution,
being more than offset by increased interest charges on index-linked debt
driven by the continuing high inflationary environment.
As flagged in our half year results 2021/22 presentation, the results for the
Group are H1 weighted with the significantly higher levels of inflation
impacting finance costs on index-linked debt in the last six months. Whilst
long-term protection from the increasing inflationary environment is provided
through inflation linked revenues and RCV growth, along with regulatory
true-ups 24 (#_ftn24) , we continue to expect financing costs to be impacted
in the near term. Whilst the Group benefits from a lower proportion of
index-linked debt compared to the water industry average, 29% of Pennon's
regulated water businesses' gross debt of £2.8 billion is index linked,
meaning a 1% increase in inflation results in an additional c.£8 million of
financing costs.
SOUTH WEST WATER
South West Water underlying 25 (#_ftn25) 2021/22 2020/21 Change
Revenue 26 (#_ftn26) £583.4m £563.0m +3.6%
Operating Costs (£251.9m) (£222.4m) (13.3%)
EBITDA(^) £331.5m £340.6m (2.7%)
Depreciation and amortisation (£117.0m) (£118.3m) (1.1%)
Operating profit £214.5m £222.3m (3.5%)
Net interest charge (£77.9m) (£57.7m) (35.0%)
Profit before tax £136.6m £164.6m (17.0%)
South West Water's underlying revenue for 2021/22 of £583.4 million has
increased by 3.6% (£20.4 million) compared with the prior year (2020/21
£563.0 million). This increase reflects the continued recovery of the
non-household market and developer services activity to near pre-Covid levels,
in addition to maintained elevated demand by household customers.
Underlying operating costs of £251.9 million increased by £29.5 million
(2020/21 £222.4 million) principally reflecting:
· Inflationary and other cost pressures on wholesale energy of c.£5.1
million, c.£2.0 million on wages, c.£0.8 million on chemicals (linked to
energy markets), and £4.6 million on other cost lines including higher
insurance costs
· Increased production volumes arising from the recovery of
non-household demand driving increased power and chemical consumption of c.£4
million
· Additional operating costs of c.£5 million to enhance and accelerate
our key areas of operational focus of pollutions and leakage and reflecting
additional regulatory requirements such as 'farming rules for water'
· Higher developer activity such as government road schemes of c.£5
million associated with higher developer revenue
· Other operating costs of c.£5 million, partially offset by ongoing
efficiency initiatives and property sales.
South West Water's underlying EBITDA^ (#_ftn27) and underlying operating
profit reduced by 2.7% and 3.5%, respectively, reflecting the higher revenue
from higher overall demand more than offset by higher operating costs.
Net interest costs of £77.9 million are £20.2 million higher than the prior
year (2020/21 £57.7 million) due to the impact of higher inflation on
index-linked debt. The Group's efficient funding mix (which includes a
relative low proportion of index-linked debt) and hedging strategy minimises
these market effects with active management of our portfolio continuing to
deliver a sector leading effective interest rate(^) of 3.4% (2020/21 2.5%).
South West Water has c.£750 million of interest rate swaps in place to manage
its fixed, floating and index-linked ratios.
South West Water's capital expenditure this financial year was £203.4 million
(2020/21 £168.2 million), with the split between clean water investment and
wastewater investment being largely balanced at £102.1 million and £101.3
million, respectively. This c.20% increase reflects the expected profile in
the regulatory period with major capital schemes to replace the first of two
water treatment works in the Bournemouth region progressing well, in addition
to advanced expenditure on bathing water schemes and other environmental
projects.
BRISTOL WATER
Bristol Water underlying(26) 2021/22
Revenue(27) £104.4m
Operating Costs (£51.1m)
EBITDA(^) £53.3m
Depreciation and amortisation (£24.0m)
Operating profit £29.3m
Net interest charge (£20.1m)
Profit before tax £9.2m
Bristol Water has contributed to the Group's financial results since its
acquisition on 3 June 2021. The business has contributed underlying revenue(^)
of £104.4 million, underlying EBITDA(^) of £53.3 million and underlying
profit before tax(^) of £9.2 million since that date, before any adjustments
to depreciation and interest costs from the acquisition fair value exercise.
In the period since acquisition, the business has performed ahead of
acquisition expectations, with results having an H1 weighting, primarily due
to the inflationary impact on its index-linked debt. The impact of inflation
in the second half of the year on Bristol Water's financing costs has been
more marked with c.50% of Bristol Water's debt being index-linked.
Bristol Water has delivered increased revenues of c.4% in the financial year
to 31 March 2022, compared to the same 12 month period last year. Overall
demand in the Bristol region has remained relatively stable with reductions in
household demand being offset by the recovery in the non-household market.
Revenues have also benefitted from higher regulatory allowances in its
business plan determined by the CMA.
Bristol Water's capital programme totalled £37.0 million for the ten month
period since acquisition and includes resilience focused investment across the
network and initiatives to further improve supply interruptions performance.
PENNON WATER SERVICES
Pennon Water Services underlying(26) 2021/22 2020/21 Change
Revenue £195.3m £162.8m +20.0%
Water segment wholesale elimination (£90.9m) (£81.6m) +11.4%
Revenue excluding elimination £104.4m £81.2m +28.6%
Operating Costs 27 (#_ftn28) (£191.9m) (£161.4m) (18.9%)
Water segment wholesale elimination £90.9m £81.6m (11.4%)
Operating costs excluding elimination (£101.0m) (£79.8m) (26.6%)
EBITDA(^) £3.4m £1.4m +142.9%
Depreciation and amortisation (£0.8m) (£0.7m) (14.3%)
Operating profit £2.6m £0.7m +271.4%
Net interest charge (£1.6m) (£1.7m) +5.9%
Profit / (loss) before tax £1.0m (£1.0m) +200.0%
Pennon Water Services has performed strongly this financial year through its
disciplined approach to winning new business and benefitting from business
customers' Covid recovery throughout the year.
Non-household demand has returned to near pre-Covid levels, with the recovery
predominantly in the hospitality, tourism and manufacturing sectors. Growth
rates in the second half of the year have moderated from the growth rates seen
in the first half of 2021/22.
The overall impact on underlying revenues(^) for Pennon Water Services,
including the impact of new contract wins is an increase of c.20% compared to
the prior year. New business wins have contributed £17.5 million of
additional revenue compared to last year. Underlying operating costs have
grown in line with improving revenues and the business has more than doubled
its underlying EBITDA(^). This strong performance has resulted in the business
reporting a profit before tax of £1.0 million (2020/21 loss before tax £1.0
million).
The business continues to maintain its focus on targeting high quality,
sustainable customers who will benefit from the value-added services that form
part of Pennon Water Services' differentiated service proposition, with new
annualised contract wins of c.£19 million secured during the year.
Group net finance costs
Net finance costs for the Group of £93.7 million are £35.4 million higher
than last year (2020/21 £58.3 million), driven by the current high levels of
inflation. The Group has benefitted from the efficient financing that has been
achieved through our diverse mix of fixed, floating and index-linked debt,
including Pennon's relatively lower exposure to index-linked instruments in
comparison to the water industry average.
The Group continues to secure funding for South West Water through its
Sustainable Financing Framework and has efficiently secured funding, both
fixed or hedged, to ensure c.60% of its interest rate risk is mitigated in
line with the Group Treasury policy with a further c.27% index linked which
remains below Ofwat's notional assumption of 33%.
Bristol Water has a mix of fixed, floating and index-linked debt, of which
c.50% is index-linked. At 31 March 2022 Bristol Water's gross debt stood at
£419 million excluding fair value adjustments arising on acquisition. We will
seek to refinance Bristol Water's debt in line with the Group's efficient
financing strategy over a longer time period as debt matures.
The diverse portfolio of debt in the water business remains in line with
Ofwat's notional water company assumptions.
Profit before tax
Group underlying profit before tax(^) is £143.5 million compared with the
prior year of £157.0 million. This outturn reflects the underlying EBITDA(^)
growth, supported by Bristol Water's ten month contribution, being more than
offset by increased interest charges on index-linked debt.
Non-underlying items and acquisition accounting
Non-underlying items for 2021/22 total a charge before tax of £15.8 million
(2020/21 charge of £24.9 million). The Directors believe excluding
non-underlying items provides a more useful comparison of business trends and
performance.
The total non-underlying charge consists of expenses in connection with the
acquisition of Bristol Water and the related merger review by the CMA and
integration costs.
The total non-underlying tax charge is £98.2 million (2020/21 £4.8 million
credit), including a credit of £1.3 million in connection with the items
noted above and a £99.5 million non-underlying deferred tax charge,
recognised for the change in future tax rate which was substantively enacted
during this financial year.
As part of the requirements of acquisition accounting, we have determined the
fair values of the acquired balance sheet of Bristol Water. These provisional
values were reported in the Group's half year results to 30 September 2021
with some changes being required to the acquired tax balances. The most
material areas of adjustment relate to the fair value of acquired property,
plant and equipment, including the network infrastructure, and the fair value
of Bristol Water's debt portfolio.
Goodwill arising from the acquisition of £116.1 million has been recorded in
the Group consolidated balance sheet and is attributed to the synergies
expected to be derived from the combination and the value of the workforce
which cannot be recognised as an intangible asset. The consequent adjustments
to depreciation and interest costs arising from the fair value exercise are
reflected within 'Other' in our segmental reporting.
Responsible approach to tax
The overall tax charge for the Group is £112.1 million (2020/21 £24.8
million). On an underlying(^) basis, the net tax charge for 2021/22 for the
Group of £13.8 million (2020/21 £29.6 million) consists of:
· Current tax charge of £5.0 million, reflecting an effective tax rate
of 3.5% (2020/21 £23.0 million, 14.6%). This reduction is primarily as a
result of the introduction of capital allowance super-deductions (c.£15
million of additional capital allowances), along with tax relief on pension
payments made during the year and in recent years
· Deferred tax charge of £8.9 million (2020/21 £6.6 million)
primarily reflects capital allowances across the Group in excess of
depreciation charged together with relief on pension contributions. The
increase mainly relates to super-deductions.
The UK tax rate increases to 25% from 1 April 2023, and as such most deferred
tax items will crystallise at a higher rate. This change gives rise to a
non-underlying deferred tax charge of £99.5 million.
Earnings per share
The Group has recorded statutory earnings per share of 4.9 pence for the year
ended 31 March 2022. This includes non-underlying items before tax of £15.8
million and a net non-underlying tax charge of £98.2 million. Statutory
earnings per share of 418.5 pence in 2020/21 included the significant profit
on disposal of Viridor of c.£1.7 billion.
The comparability of the Group's earnings per share is distorted by the
significant one-off transactions that have been identified as non-underlying
and the profit on the sale of Viridor reported in the last financial year.
Furthermore, the average number of shares used to derive the earnings per
share reflects the share consolidation in July 2021, reducing the share count
from 422.1 million to 281.4 million.
To facilitate comparison of performance, our adjusted earnings per share
excludes the impact of deferred tax charges and non-underlying items. We have
also adjusted the number of shares in issue to reflect the share consolidation
as if it took place at the start of both this, and the last, financial year to
aid comparability. For the Group, we have generated adjusted earnings per
share(^) (adjusted for share consolidation)(8) for 2021/22 of 50.2 pence
compared to 47.8 pence in 2020/21, on a comparable basis. This represents an
increase of 5.0%, reflecting the contribution from Bristol Water and the lower
current tax charge from super-deductions.
Sustainable net debt position
Cash generation has remained robust throughout 2021/22. We closely monitor
cash collections throughout the year as the volatility in the wider economy
and the potential impact of significant rises in the cost of living increases
risk in this area. The Group's total operational cash inflows and other
movements(^) for 2021/22 were £364.7 million (2020/21 £316.0 million)
including a £47.1 million contribution from Bristol Water.
These cashflows adequately support our effective finance structures with net
interest paid of £72.0 million (2020/21 £66.3 million) and capital payments
of £227.6 million (2020/21 £157.6 million).
Net cash interest payments for the total Group have increased compared to the
previous year. c.£36 million of the income statement finance costs relate to
indexation, which is non-cash and accretes to the carrying value of the
respective debt instruments. Bristol Water has contributed an additional cash
interest cost of c.£12 million, which is partially offset by the reduced
interest charges at a Pennon company level following the repayment of Viridor
related debt during the previous financial year.
The acquisition of Bristol Water resulted in total cash outflows of £421.2
million 28 (#_ftn29) including transaction costs and stamp duty, net of
£12.8 million cash acquired. The Group's net debt is further increased by
£391.4 million book value of Bristol Water's net debt and subsequent fair
value adjustments of £134.8 million at the point of acquisition.
Other significant movements in net debt in 2021/22 include the special
dividend of £1,498.5 million, £27.9 million contributions to the Group's
principal pension scheme and the four tranches of the share buy-back programme
completed up to 31 March 2022, with the total cash outflow of £202 million.
The restructuring of the Group's borrowings is now substantially complete, and
the current levels of net debt represent a sustainable position for the Group.
Following the above, and the payment of our interim and final dividends for
2020/21, the Group's net debt at 31 March 2022 was £2,682.9 million (31 March
2021 net cash £64.3 million). This includes fair value adjustments on
acquired debt of £168.6 million 29 (#_ftn30) resulting from the Bournemouth
Water and Bristol Water acquisitions, which are released over the life of the
related debt instruments. The Group's net debt position excluding these
adjustments is £2,514.3 million.
Agile and efficient financing
The water business' cost of finance, with an effective rate(^) of 3.7% remains
among the lowest in the industry, continuing to benefit from the use of
finance leasing as the main source of funding in the portfolio which provides
long maturities at fixed margins, secured at the inception of each lease.
The water business net debt is a mix of fixed / swapped (£1,401 million,
53%), floating (£426 million, 16%) and index-linked borrowings (£812
million, 31%). The debt has a maturity of up to 35 years with a weighted
average maturity of c.15 years. New debt has been fixed to align to iBoxx
indices in line with Ofwat's approach to allowed cost of debt. Where
appropriate, derivatives are used to fix the rate on floating rate debt.
The gross debt position of the water business is a mix of fixed / swapped 53%,
floating 18% and index-linked 29% as at 31 March 2022, which reflects our
diverse debt portfolio and compares to an industry average 30 (#_ftn31) of
fixed / swapped 43%, floating 8% and index linked 49%.
South West Water's gross debt has reduced by £192 million to £2,429 million
(2020/21 £2,621 million). This is mainly due to the repayment and
restructuring of the lease portfolio to ensure its continued efficient and
effective management with a further c.£150 million planned to be repaid in
September 2022. The lease portfolio will continue to deliver long term
benefits as part of our diverse range of facilities as we look to further
develop our exposure to other products going forward.
During the year, the Group completed the transition to SONIA as its risk-free
rate following the cessation of LIBOR in December 2021, the Group has followed
the protocols set out for the transition and amended the financial instruments
to ensure the continued practice of hedge accounting for our facilities and
associated derivatives.
The water business index-linked debt remains below the Ofwat's notional
assumption of 33%. Given the current volatility within the market and the
divergence in the wedge from the assumed position, the water business remains
at a comparative advantage through the regulatory transition from RPI to CPIH
and in light of the current market conditions.
As announced in June 2021, Pennon planned to deploy c.£100 million investment
into the water business and, as at 31 March 2022 the first deployment of £45
million has been made into South West Water. Including this planned
investment, at 31 March 2022, the water business debt to RCV 31 (#_ftn32)
ratio stood at 61.4% 32 (#_ftn33) (,)(5) (31 March 2021 64.8%). At the
same date and on the same basis, gearing at South West Water was 61.7%(33),
which is expected to fall during this regulatory period with a trajectory
towards Ofwat's notional structure of 60% by 2025. Bristol Water gearing at 31
March 2022 was 59.8%(5). The debt to RCV ratios at 31 March 2022 for the water
business and Bristol Water stood at 62.7% and 69.2%, respectively, before the
remaining investment being made.
Responsible and sustainable balance sheet
The Group has a strong liquidity and funding position with £816 million of
cash and committed facilities as at 31 March 2022. This consists of cash of
£519 million (including £168 million of restricted funds representing
deposits with lessors against lease obligations) and £297 million of undrawn
facilities. £307 million of the cash holdings are held at the Pennon
company level.
Following the continued success of our Sustainable Financing Framework, in
September 2021 we issued our updated framework to incorporate the latest
sustainable principles; in particular in respect of sustainability linked
loans and bonds. The Group was the first UK corporate to issue sustainability
linked loans in 2018 and the new principles have helped to develop this market
further. Since March 2021, the Group has signed c.£300 million of new and
renewed facilities across Pennon and South West Water.
The Group's measure of return on capital employed has been distorted at the
year end 31 March 2021 and 31 March 2022 with the Group being in a net cash
position at 31 March 2021, which distorts the average capital employed.
South West Water's return on capital employed(^) at 31 March 2022 of 8.6% has
reduced marginally in comparison to the same period last year (2021: 9.1%)
reflecting the planned increased levels of capital investment at this phase of
our regulatory plan.
Pensions
At 31 March 2021, the Group reported a surplus on retirement benefit
obligations of £8.8 million relating to the Group's principal pension scheme,
Pennon Group Pension Scheme (PGPS). At 31 March 2022, the surplus on
retirement obligations of £66.3 million constitutes a surplus on PGPS of
£59.5 million and a surplus of £6.8 million in respect of Bristol Water's
defined benefit pension obligations.
The surplus on PGPS has increased by £50.7 million with the significant
elements of the increase being:
· £23.0 million of additional contributions to the scheme being part
of our package of returning capital to our investors and stakeholders
· £24.9 million increase in surplus from favourable movements in
financial and other actuarial assumptions.
In total, following the Viridor disposal, the Group has contributed £59.0
million over and above the agreed deficit recovery payments from the 2019
actuarial valuation. As at 31 March 2022, PGPS is approximately 105% funded
against its technical provisions and no further deficit recovery contributions
are outstanding from the 2019 actuarial valuation. The 2022 triennial
valuation is underway.
Bristol Water's pension surplus relates to the Bristol Water Section of the
Water Companies Pension Scheme (WCPS). The liabilities of the scheme are fully
insured, securing the pension promises made to the benefit of members through
a bulk annuity policy. Changes in actuarial assumptions have little impact on
the surplus recognised as the change in liabilities is materially matched by
the change in asset values through the bulk annuity policy. The surplus
recognised on acquisition reflects the fair value of the surplus to Pennon and
is restricted by a tax deduction of 35% under UK tax legislation.
Recognising shareholder support
The Group continues to deliver on its commitments to customers, shareholders
and stakeholders as our investments drive tangible, positive and sustainable
results. Over half of Pennon's shareholders are UK pension funds, savings,
charities and individuals with almost half of the Group's employees, now
including Bristol Water, also being shareholders.
In July 2021, shareholders approved the payment of a £1.5 billion special
dividend to shareholders as part of Pennon's recognition of shareholder
support following the sale of Viridor in July 2020. The special dividend
represented £3.55 per existing ordinary share and was paid in July 2021 from
the retained earnings arising from the Viridor disposal.
To maintain comparability of the Company's share price before and after the
special dividend, a share consolidation accompanied the special dividend. This
consolidated the Ordinary share capital on the basis of two New Ordinary
Shares for every three Existing Ordinary Shares. The effect of the share
consolidation was that the existing shares were replaced by the new shares,
reducing the number of shares in issue and reflecting the amount of cash to be
returned to shareholders, thus being economically neutral.
In July 2021 the Group commenced a share buy-back programme of up to £400
million, with the first four tranches totalling c.£200 million being
completed prior to 31 March 2022. Further phases are expected to commence
imminently and over the period to 30 September 2022, subject to our continued
review of further growth opportunities in UK water, in line with our
established financial disciplines.
Following the share consolidation, share buy-back and acquisition of Bristol
Water, the dividend per share was rebased, with the interim and final dividend
for 2020/21 being rebased to 11.15 pence and 24.46 pence respectively,
resulting in a total dividend for 2020/21 of 35.61 pence(9).
The Board has recommended a final dividend of 26.83 pence per share for the
year ended 31 March 2022. Together with the interim dividend of 11.70 pence
per share paid on 5 April 2022 this gives a total dividend for the year of
38.53 pence. This represents an increase of 8.2% (CPIH + 2%) on the adjusted
base for 2020/21. Pennon offers shareholders the opportunity to invest their
dividend in a Dividend Reinvestment Plan (DRIP).
Pennon's sector-leading dividend policy of growth of CPIH +2% reflects the
Board's confidence in the Group's sustainable growth strategy and is
underpinned by continued RORE(^) outperformance in South West Water.
Proposed dividends totalling £102.0 million are covered 1.4 times(^) by net
profit (before non-underlying items and deferred tax) (2020/21 1.9 times).
Dividends are charged against retained earnings in the year in which they are
paid.
Macro-economic outlook
The global economy continues to be volatile reflecting the global geopolitical
situation, including the ongoing war in Ukraine, compounding existing global
economic difficulties regarding the recovery from the impacts of the Covid-19
pandemic. The impacts on the supply chain, rising power prices and overall
higher levels of inflation are impacting all businesses. Our 2022/23 pay
increases across the business have been agreed at between 3% and 5%, and we
are continuing to target efficiencies across the Group, having delivered
c.£110 million 33 (#_ftn34) during K7 to date
We recognise the pressure that inflationary pricing increases may pose to our
customers, and customer bill affordability is a key consideration for us. Our
broad range of affordability measures ensures we are able to support those in
need of support, and we are pleased that for the coming year bills will
continue to be lower than they were 10 years ago, driven by our continued
focus on delivering improvements efficiently and effectively.
In the near-term we expect our earnings to be impacted by the higher
inflationary environment, in particular from higher interest and power costs.
Looking at our cost base, power costs represent 20% of our underlying
operating costs at c.£56 million of the regulated water business in 2021/22,
of which c.£28 million relates to wholesale power prices. Over the past year
energy prices have been volatile and have risen sharply. For 2022/23 we have
de risked around two thirds of our power needs. Given where power prices
currently are, with day-ahead pricing of around £100 MW/h and the Winter
season at £230 M/Wh we expect our power costs to rise between 50 and 75% 34
(#_ftn35) . For 2023/24 and 2024/25 have de-risked around 40% of our power
needs locking in rates around 10% above the 2021/22 outturn.
Our energy risk policies involve constant monitoring of forward power prices
and we will continue to manage our exposure to pricing volatility in this
area. As part of our target to achieve net zero carbon emissions by 2030, we
have identified renewable energy generation investment opportunities which
will decrease our reliance on wholesale power markets. We are underway with
installing our first phase of new solar PV which will help to more than double
the Group's self-generation capacity to >10%.
Like all companies we are seeing supply chain inflation pressures in
particular for chemicals, transport costs and construction materials such as
steel and concrete. However, we are well placed as we start from an efficient
cost base which has generated c.£110 million of totex efficiencies in K7 to
date.
However, in the longer term the elevated inflationary environment provides the
Group with additional growth in long-term sustainable value, with revenues and
RCV linked to November and March outturn inflation, respectively. The elevated
inflationary environment in this regulatory period is forecast to increase RCV
by a further c.10% over K7, bringing total RCV growth in K7 to >40%, more
than offsetting the near-term headwinds.
Technical Guidance - 2022/23
Pennon Group FY 2021/22 Change
Revenue • Full year revenue contribution from Bristol Water £792.3m ▲
• Pennon Water Services growth through contract wins and continued
non-household demand recovery
• Offset by impact of lower customer bills
Net debt • Expected deployment of share buy-back c.£200 million £2,682.9m ▲
• Continued capital investment across the Group
• Accretion on index-linked debt
Current tax • 2021/22 effective rate reflects additional pension contributions 3.5% ▲
made during the year
• Continued super-deductions anticipated in 2022/23
Water business FY 2021/22 Change
Operating costs • Operating cost increases due to market impact of inflation, £303.0m ▲
including power
• Full year impact of Bristol Water
Net interest • Efficient financing impacted by inflationary increases in £98.0m ▲
charges related to index-linked debt
• Full year impact of Bristol Water
Capex • Capital expenditure reflects K7 existing profile of investment, £240.4m ▲
with anticipated peak in 2022/23
RORE(^) • Continued doubling of base returns for South West Water - 7.9% -
targeting improved net reward on ODIs, maintaining cumulative totex efficiency
(Ofwat K7 cumulative) to date, increasing level of financing outperformance through inflationary
environment
• Bristol RORE anticipated to be improved as synergies are
realised
4.9%
-
RCV • Increase in line with K7 business plan levels of investment and £4.2bn ▲
inflationary impact
Pennon Water Services FY 2021/22 Change
Operating costs • Non-household recovery and contract wins leading to higher £191.9m ▲
wholesale supply charges
• Impact of increased inflationary environment
Underlying EBITDA(^) • Impact of increased non-household demand on margins £3.4m ▲
• Focus on continued cost efficiency with strong collections
Board Matters
Upon our acquisition of Bristol Water Holdings UK Limited and its
subsidiaries, including Bristol Water plc, on 3 June 2021, Paul Boote, Iain
Evans and Neil Cooper were appointed as directors of Bristol Water plc and the
other companies in the Bristol Water Group. Following the CMA's acceptance
of Pennon's undertakings in lieu and grant of merger clearance on 7 March
2022, Susan Davy was appointed as a director of Bristol Water plc on 9 March
2022 and the other Bristol Water Group companies on 4 April 2022, and Gill
Rider, Claire Ighodaro and Jon Butterworth were appointed directors of Bristol
Water plc on 2 April 2022.
Susan Davy
Group Chief Executive
30 May 2022
Financial Timetable
June 2022 Annual Report and Accounts published
21 July 2022 Annual General Meeting
22 July 2022* Ordinary shares quoted ex-dividend
22 July 2022* Record date for final dividend
11 August 2022* Final date for receipt of DRIP applications
5 September 2022* Final Dividend payment date
30 September 2022 Trading Statement
30 November 2022 Half Year Results 2022/23
26 January 2023 Ordinary shares quoted ex-dividend
27 January 2023 Record date for interim dividend
10 March 2023 Final date for receipt of DRIP applications
31 March 2023 Trading Statement
1 June 2023 Full Year Results 2022/23
* Subject to obtaining shareholder approval at the 2022 Annual General
Meeting.
PRINCIPAL RISKS AND UNCERTAINTIES
Principal Risks
The Board continues to regularly consider and review the principal risks of
the Group within the context of its risk appetite. This includes the impact of
changes to the external macro-economic, legal and regulatory environment
within which the Group operates.
The Board have reviewed the Group's principal risks and consider them to be
consistent with those reported within the 2021/22 Half Year Results:
Law, Regulation and Finance
1. Changes in Government Policy
2. Regulatory frameworks
3. Non-compliance with laws and regulations
4. Inability to secure sufficient finance and funding, within our debt
covenants, to meet ongoing commitments
5. Non-compliance or occurrence of avoidable health and safety incidents
6. Failure to pay all pension obligations as they fall due & increased
costs to the Group should the defined benefit pension scheme deficit increase
Market and Economic Conditions
7. Non-recovery of customer debt
8. Macro-economic near-term risks impacting on inflation, interest rates
and power prices
Operating Performance
9. The Group's operations and assets are impacted as a result of climate
change and extreme weather events
10. Failure of operational water treatment assets and processes resulting in
an inability to produce or supply clean drinking water
11. Failure of operational wastewater assets and processes resulting in an
inability to remove and treat wastewater and potential environmental impacts,
including pollutions
12. Failure to maintain excellent service or effectively engage with our
customers and wider stakeholders
13. Insufficient skills and resources to meet the current and future business
needs and deliver the Group's strategic priorities
14. Non-delivery of Regulatory Outcomes and performance commitments
Business Systems and Capital Investment
15. Inefficient or ineffective delivery of capital projects
16. Inadequate technological security results in a breach of the Group's
assets, systems and data
17. Failure to fully realise the strategic value arising from the acquisition
of Bristol Water.
CAUTIONARY STATEMENT IN RESPECT OF FORWARD-LOOKING STATEMENTS
This Report contains forward-looking statements relating to the Pennon Group's
operations, performance and financial position based on current expectations
of, and assumptions and forecasts made by, Pennon Group management which may
constitute "forward-looking statements" within the meaning of the U.S. Private
Securities Litigation Reform Act of 1995. Forward-looking statements are
identified in this Report by words such as "anticipate", "aim", "believe",
"continue", "could", "due", "estimate", "expect", "forecast", "goal",
"intend", "may", "outlook", "plan", "probably", "project", "remain", "seek",
"should", "target", "will", "would" and related and similar expressions, as
well as statements in the future tense. All statements other than of
historical fact may be forward-looking statements and represent the Group's
belief regarding future events, many of which, by their nature, are inherently
uncertain and outside the Group's control. Various known and unknown risks,
uncertainties and other factors could lead to substantial differences between
the actual future results, financial situation, development or performance of
the Group and the estimates and historical results given herein. Important
risks, uncertainties and other factors that could cause actual results,
performance or achievements of Pennon Group to differ materially from any
outcomes or results expressed or implied by such forward-looking statements
include, among other things, changes in Government policy; regulatory and
legal reform; compliance with laws and regulations; maintaining sufficient
finance and funding to meet ongoing commitments; non-compliance or occurrence
of avoidable health and safety incidents; 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; poor operating performance due to extreme
weather or climate change; macro-economic risks impacting commodity and power
prices and other matters; poor customer service and/or increased competition
leading to loss of customer base; business interruption or significant
operational failure/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 information technology systems, management and
protection, including cyber risks; and all other risks in the Pennon Group
Annual Report to be published in June 2022. Such forward looking statements
should therefore be construed in light of all risks, uncertainties and other
factors, including without limitation those identified above, and undue
reliance should not be placed on them. Nothing in this report should be
construed as a profit forecast.
Any forward-looking statements are made only as of the date of this document
and no representation, assurance, guarantee or warranty is given in relation
to them including as to their accuracy, completeness, or the basis on which
they are made. The Group accepts no obligation to revise or update publicly
these forward-looking statements or adjust them as a result of new information
or for future events or developments, except to the extent legally required.
UNSOLICITED COMMUNICATIONS WITH SHAREHOLDERS
A number of companies, including Pennon Group plc, continue to be aware that
their shareholders have received unsolicited telephone calls or correspondence
concerning investment matters which imply a connection to the company
concerned. If shareholders have any concerns about any contact they have
received, then please refer to the Financial Conduct Authority's website
www.fca.org.uk/scamsmart. Details of any share dealing facilities that the
Company endorses will be included in Company mailings.
PENNON GROUP PLC
Consolidated income statement for the year ended 31 March 2022
Before non-underlying items Non-underlying items Total Before non-underlying items Non-underlying items Total
2022
(note 4)
2022
2021
(note 4)
2021
2022
2021
Notes £m £m £m £m £m £m
Continuing operations
Revenue 3 792.3 - 792.3 644.6 (20.5) 624.1
Operating costs
Employment costs (90.4) (1.7) (92.1) (75.0) (4.4) (79.4)
Raw materials and consumables used (22.9) - (22.9) (18.1) - (18.1)
Other operating expenses (295.1) (14.1) (309.2) (216.8) - (216.8)
Earnings before interest, tax, 3 383.9 (15.8) 368.1 334.7 (24.9) 309.8
depreciation and amortisation
Depreciation and amortisation (146.7) - (146.7) (119.4) - (119.4)
Operating Profit 3 237.2 (15.8) 221.4 215.3 (24.9) 190.4
Finance income 5 2.6 - 2.6 4.2 - 4.2
Finance costs 5 (96.3) - (96.3) (62.5) - (62.5)
Net finance costs 5 (93.7) - (93.7) (58.3) - (58.3)
Profit before tax 3 143.5 (15.8) 127.7 157.0 (24.9) 132.1
Taxation 6 (13.9) (98.2) (112.1) (29.6) 4.8 (24.8)
Profit for the year from 129.6 (114.0) 15.6 127.4 (20.1) 107.3
continuing operations
Discontinued operations
Profit for the year from 14 - - - 35.5 1,619.2 1,654.7
discontinued operations
Profit for the year 129.6 (114.0) 15.6 162.9 1,599.1 1,762.0
Attributable to:
Ordinary shareholders of the parent 15.4 1,762.2
Non-controlling interests 0.2 (0.2)
Earnings per ordinary share 7
(pence per share)
From continuing operations
- Basic 4.9 25.5
- Diluted 4.9 25.4
From continuing and discontinued operations
- Basic 4.9 418.5
- Diluted 4.9 416.9
PENNON GROUP PLC
Consolidated statement of comprehensive income for the year ended 31 March
2022
Before non-underlying items Non-underlying items Total Before non-underlying items Non-underlying items Total
2022
(note 4)
2022
2021
(note 4)
2021
2022
2021
£m £m £m £m £m £m
Profit for the year 129.6 (114.0) 15.6 162.9 1,599.1 1,762.0
Other comprehensive income / (loss)
Items that will not be reclassified to profit or loss
Remeasurement of defined benefit obligations 24.9 - 24.9 (28.8) - (28.8)
Income tax on items that will not be reclassified 2.4 - 2.4 5.5 - 5.5
Total items that will not be reclassified to profit or loss 27.3 27.3 (23.3) - (23.3)
Items that may be reclassified
subsequently to profit or loss
Cash flow hedges 40.6 - 40.6 13.5 - 13.5
Income tax on items that may be reclassified (6.5) - (6.5) (2.4) - (2.4)
Total items that may be reclassified 34.1 - 34.1 11.1 - 11.1
subsequently to profit or loss
Other comprehensive income / (loss) for the 61.4 - 61.4 (12.2) - (12.2)
year net of tax
Total comprehensive income for the year 191.0 (114.0) 77.0 150.7 1,599.1 1,749.8
Total comprehensive income attributable to:
Ordinary shareholders of the parent 76.8 1,750.0
Non-controlling interests 0.2 (0.2)
PENNON GROUP PLC
Consolidated balance sheet at 31 March 2022
2022 2021
Notes £m £m
ASSETS
Non-current assets
Goodwill 158.4 42.3
Other intangible assets 13.9 1.2
Property, plant and equipment 4,264.0 3,221.0
Derivative financial instruments 14.8 3.8
Other non-current assets 9.6 -
Retirement benefit obligations 66.3 8.8
4,527.0 3,277.1
Current assets
Inventories 7.7 5.4
Trade and other receivables 270.9 216.8
Current tax receivable 1.5 0.1
Derivative financial instruments 5.6 1.3
Cash and cash deposits 12 519.0 2,919.3
804.7 3,142.9
LIABILITIES
Current liabilities
Borrowings 12 (240.2) (88.3)
Financial liabilities at fair value through profit (2.5) (2.8)
Derivative financial instruments - (6.3)
Trade and other payables (171.5) (126.1)
Provisions (1.0) (0.3)
(415.2) (223.8)
Liabilities associated with assets classified as held for sale -
Net current assets 389.5 2,919.1
Non-current liabilities
Borrowings 12 (2,961.7) (2,766.7)
Other non-current liabilities (137.2) (128.3)
Financial liabilities at fair value through profit (36.1) (39.4)
Derivative financial instruments - (17.4)
Deferred tax liabilities (506.9) (259.6)
(3,641.9) (3,211.4)
Net assets 1,274.6 2,984.8
Shareholders' equity
Share capital 9 161.7 171.8
Share premium account 235.5 232.1
Capital redemption reserve 154.7 144.2
Retained earnings and other reserves 722.6 2,436.8
Total shareholders' equity 1,274.5 2,984.9
Non-controlling interests 0.1 (0.1)
Total equity 1,274.6 2,984.8
PENNON GROUP PLC
Consolidated statement of changes in equity for the year ended 31 March 2022
Share capital (note 9) Share premium account Capital redemption reserve Retained earnings and other reserves Non-controlling interests Perpetual capital securities Total equity
£m £m £m £m £m £m £m
At 1 April 2020 171.3 227.0 144.2 872.8 0.1 296.7 1,712.1
Profit for the year - - - 1,762.2 (0.2) - 1,762.0
Other comprehensive income for the year - - - (12.2) - - (12.2)
Total comprehensive income for the year - - - 1,750.0 (0.2) - 1,749.8
Transactions with equity shareholders:
Dividends paid - - - (184.3) - - (184.3)
Adjustments in respect of share-based - - - 2.2 - - 2.2
payments (net of tax)
Redemption of perpetual capital securities - - - (3.3) - (296.7) (300.0)
Own shares acquired by the Pennon Employee (1.2) - - (1.2)
Share Trust in respect of share options granted
- - -
Deferred tax recognised directly in equity - - - 0.6 - - 0.6
Proceeds from shares issued under 0.5 5.1 - - - - 5.6
the Sharesave Scheme
Total transactions with equity shareholders 0.5 5.1 - (186.0) - (296.7) (477.1)
At 31 March 2021 171.8 232.1 144.2 2,436.8 (0.1) - 2,984.8
Profit for the year - - - 15.4 0.2 - 15.6
Other comprehensive income for the year - - - 61.4 - - 61.4
Total comprehensive income for the year - - - 76.8 0.2 - 77.0
Transactions with equity shareholders:
Dividends paid - - - (1,590.3) - - (1,590.3)
Shares purchased for cancellation (including - - - (201.7) - - (201.7)
related expenses)
Shares cancelled (note 9) (10.5) - 10.5 - - - -
Adjustments in respect of share-based - - - 2.2 - - 2.2
payments (net of tax)
Own shares acquired by the Pennon Employee - - - (1.2) - - (1.2)
Share Trust in respect of share options granted
Proceeds from shares issued under 0.4 3.4 - - - - 3.8
the Sharesave Scheme
Total transactions with equity shareholders (10.1) 3.4 10.5 (1,791.0) - - (1,787.2)
At 31 March 2022 161.7 235.5 154.7 722.6 0.1 - 1,274.6
PENNON GROUP PLC
Consolidated statement of cash flows for the year ended 31 March 2022
2022 2021
Notes £m £m
Cash flows from operating activities
Cash generated from operations 10 334.2 298.1
Interest paid (74.6) (80.2)
Tax paid (7.3) (7.4)
Net cash generated from operating activities 252.3 210.5
Cash flows from investing activities
Interest received 2.6 4.3
Loan repayments received from joint ventures - 4.0
Purchase of property, plant and equipment (225.6) (190.1)
Purchase of intangible assets (3.4) (0.2)
Acquisition of subsidiaries, net of cash acquired (421.2) -
Proceeds on disposal of subsidiaries, net of cash 9.2 3,628.5
disposed and transaction costs
Proceeds from sale of property, plant and equipment 1.4 0.4
Movement of restricted deposits 89.1 (23.6)
Net cash (used in) / received from investing activities (547.9) 3,423.3
Cash flows from financing activities
Proceeds from issuance of ordinary shares 3.8 5.6
Purchase of ordinary shares by the Pennon Employee Share Trust (1.2) (1.2)
Proceeds from new borrowing 61.0 330.0
Repayment of borrowings (49.4) (1,265.4)
Cash inflows from lease financing arrangements 10 15.0 15.0
Lease principal repayments (including recoverable VAT paid) (258.9) (28.4)
Dividends paid 8 (1,590.3) (184.3)
Repurchase of own shares and associated fees (201.7) -
Perpetual capital securities periodic return - (8.6)
Redemption of perpetual capital securities - (300.0)
Net cash used in financing activities (2,021.7) (1,437.3)
Net (decrease) / increase in cash and cash equivalents (2,317.3) 2,196.5
Cash and cash equivalents at beginning of year 11 2,668.5 472.0
Cash and cash equivalents at end of year 11 351.2 2,668.5
PENNON GROUP PLC
Notes
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
59. Pennon Group's continuing business is operated through three principal
subsidiaries. South West Water Limited includes the integrated water
companies of South West Water and Bournemouth Water, providing water and
wastewater services in Devon, Cornwall and parts of Dorset and Somerset and
water only services in parts of Dorset, Hampshire and Wiltshire. 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 2 June 2021, the Company approved the acquisition of the Bristol Water
Holdings UK Limited ('Bristol Water'), which was completed on 3 June 2021.
Bristol Water comprises Bristol Water plc, a regulated water only company
serving a population of approximately 1.2 million in the Bristol region, and a
30% share in water2business Limited, a joint venture with Wessex Water. The
acquisition was cleared by the Competition and Markets Authority on 7 March
2022, and the Bristol Water is consolidated in Pennon's accounts with effect
from midnight on 2 June 2021.
On 8 July 2020, Pennon completed the sale of Viridor Limited, a recycling,
energy recovery and waste management business. In accordance with IFRS 5
'Non-current assets held for sale and discontinued operations', the net
results for Viridor were presented within discontinued operations in the Group
income statement for 2021. The effect of the disposal on the financial
position of the Group is detailed in note 14.
The financial information for the years ended 31 March 2022 and 31 March 2021
does not constitute statutory accounts within the meaning of section 434 of
the Companies Act 2006. The Annual Report and Accounts for the year ended 31
March 2022, including the financial statements from which this financial
information is derived, will be delivered to the Registrar of Companies after
the AGM on 21 July 2022. The independent auditor's report on the 2022
financial statements was unqualified and did not contain a statement under
section 498 of the Companies Act 2006.
The full financial statements for the year ended 31 March 2021 were approved
by the Board of Directors on 2 June 2021 and have been delivered to the
Registrar of Companies. The independent auditor's report on those financial
statements was unqualified and did not contain a statement under section 498
of the Companies Act 2006. This final results announcement and the results for
the year ended 31 March 2022 were approved by the Board of Directors on 30 May
2022.
2. Basis of preparation
The financial information in this announcement has been prepared on the
historical cost accounting basis (except for fair value items as set out in
the 2021 Annual Report and Accounts) and in accordance with UK-adopted
international accounting standards. The accounting policies adopted are
consistent with those followed in the preparation of the Group's 2022 Annual
Report and Accounts which have not changed significantly from those adopted in
the Group's 2021 Annual Report and Accounts (which are available on the
Company website www.pennon-group.co.uk (http://www.pennon-group.co.uk) ).
The going concern basis has been adopted in preparing these financial
statements. At 31 March 2022 the Group has access to undrawn committed funds
and cash and cash deposits totalling £816 million (£648 million excluding
restricted cash). Having considered the Group's strong funding position and
prudent financial projections, which take into account a range of possible
impacts, as described in this report, the Directors have a reasonable
expectation that the Group has adequate resource to continue in operational
existence for the period which covers the period from approval of the 2022
financial statements through to 30 June 2023 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.
3. 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 Group is organised into two operating segments. The water segment
comprises the regulated water and wastewater services undertaken by South West
Water and the regulated water services undertaken by Bristol Water. The
non-household retail business reflects the services provided by Pennon Water
Services.
PENNON GROUP PLC
Notes (continued)
3. Segmental information (continued)
Separate disclosures for Bristol Water Group on a stand-alone basis are also
provided below as additional information.
The profit recognised on disposal of the Viridor business is provided in note
14.
2022 2021
Revenue £m £m
Water 687.8 563.0
Non-household retail 195.3 162.8
Other 8.5 5.6
Less intra-segment trading (99.3) (86.8)
Total underlying revenue 792.3 644.6
Water non-underlying revenue (note 4) - (20.5)
792.3 624.1
Operating profit/(loss) before depreciation, amortisation and
non-underlying items (underlying EBITDA)
Water 385.0 340.6
Non-household retail 3.4 1.4
Other (4.5) (7.3)
383.9 334.7
Operating profit/(loss) before non-underlying items
Water 244.0 222.3
Non-household retail 2.6 0.7
Other (9.4) (7.7)
237.2 215.3
Profit/(loss) before tax before non-underlying items
Water 146.0 164.6
Non-household retail 1.0 (1.0)
Other (3.5) (6.6)
143.5 157.0
Profit/(loss) before tax
Water 144.0 140.6
Non-household retail 1.0 (1.0)
Other (17.3) (7.5)
127.7 132.1
Intra-segment trading between different segments is under normal market based
commercial terms and conditions. Intra-segment revenue of the other segment is
at cost.
PENNON GROUP PLC
Notes (continued)
3. Segmental information (continued)
All revenue is generated in the United Kingdom. The grouping of revenue
streams by how they are affected by economic factors, as required by IFRS 15,
is as follows:
Year ended 31 March 2022
Water Non-household Other Total
retail
£m £m £m £m
Segment revenue (underlying) 687.8 195.3 8.5 891.6
Inter-segment revenue (90.9) (0.2) (8.2) (99.3)
Revenue from external customers 596.9 195.1 0.3 792.3
Significant service lines
Water 596.9 - - 596.9
Non-household retail - 195.1 - 195.1
Other - - 0.3 0.3
596.9 195.1 0.3 792.3
Year ended 31 March 2021
Water Non-household Other Total
retail
£m £m £m £m
Segment revenue (underlying) 563.0 162.8 5.6 731.4
Segment revenue (non-underlying) (note 4) (20.5) - - (20.5)
Inter-segment revenue (81.6) (0.4) (4.8) (86.8)
Revenue from external customers 460.9 162.4 0.8 624.1
Significant service lines
Water 460.9 - - 460.9
Non-household retail - 162.4 - 162.4
Other - - 0.8 0.8
460.9 162.4 0.8 624.1
Amounts included in the Water segment in respect of Bristol Water Group
Year ended 31 March 2022
£m
Segment revenue 104.4
Inter-segment revenue (0.5)
Revenue from external customers 103.9
Operating profit before depreciation, amortisation and 53.3
non-underlying items (Underlying EBITDA)
Operating profit before non-underlying items 29.3
Profit before tax before non-underlying items 9.2
Profit before tax 9.2
PENNON GROUP PLC
Notes (continued)
4. Non-underlying items
Non-underlying items are those that in the Directors' view are required to be
separately disclosed by virtue of their size, nature or incidence to enable a
full understanding of the Group's financial performance in the year and
business trends over time. The presentation of results is consistent with
internal performance monitoring.
2022 2021
£m £m
Revenue
WaterShare+((1)) - (20.5)
Operating Costs
Bristol Water acquisition costs((2)) (8.9) -
CMA merger review and integration costs((2)) (6.9) -
Pension curtailment charge((3)) - (4.4)
Earnings before interest, tax, depreciation and amortisation (15.8) (24.9)
Net tax credit arising on non-underlying items above 1.3 4.8
Deferred tax change in rate((4)) (99.5) -
Net non-underlying charge (114.0) (20.1)
(1) In September 2020, the Group offered its WaterShare+ scheme to its
customers whereby customers could choose to accept a credit on their bill or
take shares in Pennon Group plc. The value of the rebate equated to £20 per
customer and the total value of £20.5 million was recognised in full as a
non-underlying reduction to revenue in the year ended 31 March 2021. £19.3
million of the WaterShare+ credits were taken as credits on customers' bills,
with the balance of £1.2 million being taken as shares in Pennon Group plc.
This item was non-underlying in nature given its individual size and its
non-recurring nature.
(2) The Group incurred expenses of £15.8 million in the year ended 31 March
2022. £8.9 million of costs in connection with the acquisition of Bristol
Water and £6.9 million on the resulting merger review by the Competition and
Markets Authority and other integration costs, £1.7 million of which were
employment costs.
(3) In the year ended 31 March 2021 the Group completed its employee
consultation to modernise its ongoing pension arrangements. The outcome of the
consultation resulted in a decision to close Pennon's principal defined
benefit pension scheme to future accrual with effect from 30 June 2021. This
resulted in a curtailment charge of £4.4 million in 2021.
(4) Following the Chancellor's Budget on 4 March 2021 and subsequent
substantial enactment of the Finance Act on 24 May 2021, the UK's main rate of
corporation tax will increase to 25% from 1 April 2023. All deferred tax
assets and liabilities were therefore reviewed and where they crystallise
after 1 April 2023 recalculated to crystallise at 25%, hence giving a
non-underlying deferred tax charge of £99.5 million in 2022. 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 corporation tax rates.
PENNON GROUP PLC
Notes (continued)
5. Net finance costs
2022 2021
Finance costs Finance income Total Finance Finance income Total
costs
£m £m £m £m £m £m
Cost of servicing debt
Bank borrowings and overdrafts (73.9) - (73.9) (32.6) - (32.6)
Interest element of lease payments (20.3) - (20.3) (25.7) - (25.7)
Other finance costs (2.1) - (2.1) (3.5) - (3.5)
Interest receivable - 2.0 2.0 - 4.2 4.2
(96.3) 2.0 (94.3) (61.8) 4.2 (57.6)
Notional interest
Retirement benefit obligations - 0.6 0.6 (0.7) - (0.7)
Net finance costs (96.3) 2.6 (93.7) (62.5) 4.2 (58.3)
In addition to the above, finance costs of £1.3 million (2021 £0.9 million)
have been capitalised on qualifying assets included in property, plant and
equipment.
Other finance costs include £0.9 million (2021 nil) of dividends payable on
listed preference shares issued by Bristol Water, which are classified as
debt.
Excluded from the amounts above are net finance costs relating to discontinued
operations of nil (2021 £89.7 million), consisting of finance income of nil
(2021 £6.0 million) and finance costs of nil (2021 £95.7 million) (see note
14).
6. Taxation
Before non-underlying items Non-underlying items Total Before non-underlying items Non-underlying items Total
2022
2022
2021
2021
(note 4) (note 4)
2022
2021
£m £m £m £m £m £m
Analysis of charge
Current tax charge / (credit) 5.0 (1.3) 3.7 23.0 (3.9) 19.1
Deferred tax - other 8.9 - 8.9 6.6 (0.9) 5.7
Deferred tax arising on change of rate of corporation tax - 99.5 99.5 - - -
Deferred tax charge / (credit) 8.9 99.5 108.4 6.6 (0.9) 5.7
Tax charge / (credit) for the year 13.9 98.2 112.1 29.6 (4.8) 24.8
UK corporation tax is calculated at 19% (2021 19%) of the estimated assessable
profit for the year.
UK corporation tax is stated after a credit relating to prior year current tax
of £1.7 million (2021 credit of £0.7 million) and a prior year deferred tax
charge of £10.2 million (2021 £0.4 million charge). These items arise
following discussion with and the subsequent submission of tax computations to
HMRC. The largest adjustment relates to qualifying assets acquired in prior
years, which are now being recognised.
PENNON GROUP PLC
Notes (continued)
7. 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
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 weighted average number of shares and earnings
used in the calculations were:
2022 2021
Number of shares (millions)
For basic earnings per share 312.1 421.1
Effect of dilutive potential ordinary shares from share options 1.7 1.6
For diluted earnings per share 313.8 422.7
Basic and diluted earnings per ordinary share
Earnings per ordinary share before non-underlying items and deferred tax are
presented as the Directors believe 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. Earnings
per share have been calculated as follows:
2022 2021
Continuing and discontinued operations Profit Earnings per share Profit Earnings per share
after tax after tax
Basic Diluted Basic Diluted
£m p p £m p p
Statutory earnings 15.4 4.9 4.9 1,762.2 418.5 416.9
Deferred tax charge before non-underlying items 8.9 2.9 2.8 14.2 3.4 3.4
Non-underlying items (net of tax) 114.0 36.5 36.4 (1,599.1) (379.8) (378.4)
Adjusted earnings 138.3 44.3 44.1 177.3 42.1 41.9
2022 2021
Continuing operations Profit Earnings per share Profit Earnings per share
after tax after tax
Basic Diluted Basic Diluted
£m p p £m p p
Statutory earnings 15.4 4.9 4.9 107.5 25.5 25.4
Deferred tax charge before non-underlying items 8.9 2.9 2.8 6.6 1.6 1.6
Non-underlying items (net of tax) 114.0 36.5 36.4 20.1 4.8 4.7
Adjusted earnings 138.3 44.3 44.1 134.2 31.9 31.7
PENNON GROUP PLC
Notes (continued)
8. Dividends
Amounts recognised as distributions to ordinary equity holders in the year:
2022 2021
£m £m
Interim dividend paid for the year ended 28.6 57.5
31 March 2021: 6.77p (2020 13.66p) per share
Final dividend paid for the year ended 63.2 126.8
31 March 2021: 14.97p (2020 30.11p) per share
Special dividend paid for the year ended 1,498.5 -
31 March 2021: 355.0p (2020 nil) per share
1,590.3 184.3
Proposed dividends
Interim dividend paid for the year ended 32.4 28.6
31 March 2022: 11.70p (2021 6.77p) per share
Final dividend paid for the year ended 69.6 63.2
31 March 2022: 26.83p (2021 14.97p) per share
102.0 91.8
The proposed interim and final dividends have not been included as liabilities
in these financial statements.
The proposed interim dividend for 2022 was paid on 5 April 2022 and the
proposed final dividend is subject to approval by shareholders at the Annual
General Meeting.
9. Share capital
Allotted, called up and fully paid
Number of shares
Treasury shares Ordinary shares £m
At 1 April 2020 ordinary shares of 40.7p each 8,443 421,036,557 171.3
For consideration of £5.6 million, shares issued - 1,083,624 0.5
under the Company's Sharesave Scheme
At 31 March 2021 ordinary shares of 40.7p each 8,443 422,120,181 171.8
Share consolidation (2,815) (140,708,916) -
For consideration of £3.8 million, shares issued - 582,427 0.4
under the Company's Sharesave Scheme
Shares cancelled - (17,146,744) (10.5)
At 31 March 2022 ordinary shares of 61.05p each 5,628 264,846,948 161.7
PENNON GROUP PLC
Notes (continued)
9. Share capital (continued)
Shares held as treasury shares may be sold, re-issued for any of the Company's
share schemes, or cancelled.
On 16 July 2021, the Group paid a special dividend of £1.5 billion to
shareholders in relation to the return of capital to shareholders announced on
3 June 2021. In order to maintain the comparability of the Company's share
price before and after the special dividend, a share consolidation was
approved at the General Meeting held on 28 June 2021. Shareholders received 2
New Ordinary shares of 61.05 pence each for every 3 Existing Ordinary shares
of 40.7 pence each.
During the year, the Group announced and began a process to purchase ordinary
shares at an aggregate cost of £400 million by September 2022. During the
year the Group purchased £199.6 million of ordinary shares from the market at
an average ordinary share price of 1,164 pence. The shares acquired under the
tender offer were immediately cancelled, creating a capital redemption reserve
of £10.5 million. The maximum number of shares that can be repurchased in
connection with the Programme is 42,183,689 (being the maximum authority
granted by Pennon's shareholders at Pennon's AGM on 22 July 2021).
PENNON GROUP PLC
Notes (continued)
10. Cash flow from operating activities
Reconciliation of profit for the year to cash generated from operations:
2022 2021
£m £m
Cash generated from operations
Profit for the year 15.6 1,762.0
Adjustments for:
Share-based payments 2.2 3.1
Profit on disposal of property, plant and equipment (1.0) (0.1)
Profit on disposal of discontinued operations - (1,682.7)
Depreciation charge 143.3 119.2
Amortisation of intangible assets 3.4 0.2
Continuing Group:
- non-underlying pension items - 4.4
- non-underlying Bristol Water acquisition costs 8.9 -
- non-underlying CMA merger review and integration costs 6.9 -
Discontinued operations:
- non-underlying pension items - (5.6)
- non-underlying restructuring costs and share scheme charges - 6.8
- non-underlying debt retirement costs - 74.4
Share of post-tax profit from joint ventures - (4.3)
Finance income (before non-underlying items) (2.6) (10.1)
Finance costs (before non-underlying items) 96.3 83.7
Taxation charge 112.1 20.5
Changes in working capital:
Increase in inventories (0.6) (4.0)
(Increase) / decrease in trade and other receivables (14.3) (42.4)
Increase in service concession arrangements receivable - (3.8)
(Decrease) / increase in trade and other payables (12.2) 27.4
Decrease in retirement benefit obligations from contributions (24.2) (47.3)
Increase / (decrease) in provisions 0.4 (3.3)
Cash generated from operations 334.2 298.1
Cash generated from operations comprises:
Cash generated from discontinued operations - 28.7
Cash generated from the Continuing Group 334.2 269.4
Cash generated from operations 334.2 298.1
2022 2021
Total interest paid £m £m
Interest paid in operating activities 74.6 80.2
Interest paid in investing activities 1.3 0.9
Total interest paid 75.9 81.1
PENNON GROUP PLC
Notes (continued)
10. Cash flow from operating activities (continued)
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 14.
During the year, the Group completed a number of sale and leaseback
transactions in respect of its infrastructure assets as part of its ongoing
finance arrangements. Cash proceeds of £15.0 million (2021 £15.0 million)
were received and a gain of nil (2021 nil) was recognised. These assets are
primarily being leased back over an initial 10-year lease term at market
rentals.
11. Net borrowings
2022 2021
£m £m
Cash and cash deposits 519.0 2,919.3
Borrowings - current
Bank and other current borrowings (70.0) (40.1)
Lease obligations (170.2) (48.2)
Total current borrowings (240.2) (88.3)
Borrowings - non-current
Bank and other non-current borrowings (1,907.4) (1,375.7)
Listed preference shares (12.5) -
Lease obligations (1,041.8) (1,391.0)
Total non-current borrowings (2,961.7) (2,766.7)
Total net (borrowings) / cash (2,682.9) 64.3
For the purposes of the cash flow statement cash and cash equivalents
comprise:
2022 2021
£m £m
Cash and cash deposits as above 519.0 2,919.3
Less: deposits with a maturity of three months or more (restricted funds) (167.8) (250.8)
351.2 2,668.5
12. Contingencies
Contingent liabilities
2022 2021
£m £m
Guarantees: Performance bonds 9.7 -
Guarantees in respect of performance bonds in 2022 relate to changes to the
collateral requirements for the non-household retail business with other
wholesalers.
PENNON GROUP PLC
Notes (continued)
12. Contingencies (continued)
Other contractual and litigation uncertainties
Ofwat and the Environment Agency announced an industry-wide investigation into
sewage treatment works on 18 November 2021. Since that time, Ofwat announced
enforcement actions against certain companies. South West Water was not one
of those companies but Ofwat have stated that their industry-wide
investigation continues. The Environment Agency investigation is ongoing.
The potential outcome of these investigations remains unknown.
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.
Where it is uncertain that these conditions are met a contingent liability is
disclosed unless the likelihood of the obligation arising is remote or the
matter is not deemed material.
13. Acquisition of Bristol Water Group
On 2 June 2021, the Company acquired 100% of the issued share capital and
voting rights of Bristol Water Holdings UK Limited, the holding company of the
Bristol Water Group. Bristol Water Group comprises Bristol Water plc, a
regulated water only company and a 30% share in water2business Limited, a
joint venture with Wessex Water. The purpose of the acquisition was to grow
the Group's core water business by expanding into a geographically contiguous
region. The acquisition of the Bristol Water Group was reviewed by the
Competition and Markets Authority and given full clearance on 7 March 2022.
The Bristol Water Group is consolidated in Pennon's accounts with effect from
the completion of acquisition at midnight on 2 June 2021.
The details of the business combination are as follows:
£m
Fair value of consideration transferred
Amount settled in cash
419.6
Recognised amounts of identifiable net assets
Property, plant and equipment 944.8
Intangible assets 12.8
Other non-current assets 9.9
Inventories 1.7
Trade and other receivables 22.3
Cash and cash deposits (including restricted cash of £6.1 million) 18.9
Current tax liability (2.2)
Borrowings (545.1)
Trade and other payables (32.3)
Provisions (0.3)
Retirement benefit obligations 7.8
Deferred tax liabilities (134.8)
Identifiable net assets 303.5
Goodwill on acquisition 116.1
Consideration for equity settled in cash 419.6
Payment to acquire loan to former parent 5.5
Cash and cash equivalents acquired (excluding restricted cash) (12.8)
Net cash outflow on acquisition 412.3
Acquisition costs paid charged to expenses 8.9
Net cash paid relating to the acquisition 421.2
PENNON GROUP PLC
Notes (continued)
13. Acquisition of Bristol Water Group (continued)
Acquisition related costs of £8.9 million are not included as part of the
consideration transferred and have been recognised as an expense in the
consolidated income statement within other operating expenses.
The fair value of trade and other receivables acquired as part of the business
combination amounted to £22.3 million with a gross contractual amount of
£38.9 million. At the acquisition date the Group's best estimate of the
contractual cash flows expected not to be collected amounted to £16.6
million. As part of the acquisition of Bristol Water, the Group acquired
interests in two joint ventures, Bristol Wessex Billing Services Limited
("BWBSL") and water2business Limited ("water2business"). These two interests
are accounted for using the equity method. Currently the carrying values of
these investments equates to nil representing the relevant share of the net
assets of each of these interests.
Fair values on acquisition have been updated from those disclosed at half year
results to 30 September 2021, with some changes being required, primarily to
the acquired tax balances. This has led to a reduction in the total value of
goodwill recognised on acquisition by £2.3 million.
The goodwill that arose on the acquisition can be attributed to synergies
expected to be derived from the combination and the value of the workforce
which cannot be recognised as an intangible asset. Goodwill has been allocated
to the water segment. The goodwill arising is not expected to be tax
deductible. From the date of acquisition on 2 June 2021, Bristol Water Group
contributed £103.9 million (excluding £0.5 million intercompany revenue as
outlined in note 3) and £9.2 million to the Group's revenue and profits
before tax respectively. Had the acquisition occurred on 1 April 2021, the
contribution to the Group's revenue would have been £124.6 million and the
contribution to the Group's profit before tax for the period would have been
£11.1 million.
PENNON GROUP PLC
Notes (continued)
14. Discontinued operations
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.L.P.
(KKR). The Viridor business which represented the entirety of the waste
operating segment was classified as a discontinued operation at that date.
Consequently, Viridor has not been presented as an operating segment in the
segment note. The sale completed on 8 July 2020 and the results of the
discontinued operation and the effect of the disposal on the financial
position of the Group were as follows:
Before non-underlying items Non-underlying items Total Before non-underlying items Non-underlying items Total
(see below)
2022
(see below)
2021
2021
2022
2022
2021
£m £m £m £m £m £m
Discontinued operations
Revenue - - - 192.2 - 192.2
Operating costs
Employment costs - - - (34.4) 0.5 (33.9)
Raw materials and consumables used - - - (22.4) - (22.4)
Other operating expenses - - - (81.1) (1.7) (82.8)
Earnings before interest, tax, - - - 54.3 (1.2) 53.1
depreciation and amortisation
Depreciation and amortisation - - - - - -
Operating profit - - - 54.3 (1.2) 53.1
Finance income - - - 6.0 - 6.0
Finance costs - - - (21.3) (74.4) (95.7)
Net finance costs - - - (15.3) (74.4) (89.7)
Share of post-tax profit from joint ventures - - - 4.3 - 4.3
Profit/(loss) before tax - - - 43.3 (75.6) (32.3)
Taxation (charge)/credit - - - (7.8) 12.1 4.3
Profit/(loss) from operating activities, net of tax - - - 35.5 (63.5) (28.0)
Gain on sale of discontinued operation - - - - 1,682.7 1,682.7
Profit from discontinued - - - 35.5 1,619.2 1,654.7
operations, net of tax
-
Attributable to: -
Ordinary shareholders of the parent - 1,654.7
Non-underlying items
Non-underlying items in 2021 represent employment costs (restructuring,
accelerated share scheme charges and a settlement gain on transfer of pension
liabilities), other operating restructuring costs and finance costs relating
to debt retirements of £74.4 million, together with the related taxation
credit.
2022 2021
£m £m
Cash flows used in discontinued operations
Cash generated from operations - 28.7
Interest paid - (17.6)
Tax paid - (4.4)
Cash flows from operating activities - 6.7
Cash flows from investing activities - (24.0)
Cash flows from financing activities - (79.2)
Net cash flows from discontinued operations, net of intercompany - (96.5)
PENNON GROUP PLC
Notes (continued)
14. Discontinued operations (continued)
Effect of disposal of the financial position of the Group
The net assets relating to the Disposal Group at the date of disposal and the
gain on disposal are shown below.
2021
£m
Net assets disposed of and gain on disposal
Goodwill 340.8
Other intangible assets 86.9
Property, plant and equipment 1,619.2
Other non-current assets 266.7
Investments in joint ventures 64.4
Inventories 33.4
Trade and other receivables 298.7
Current tax asset 0.6
Cash and cash deposits 61.7
Total assets 2,772.4
Borrowings (240.7)
Trade and other payables (157.7)
Provisions (236.8)
Other non-current liabilities (12.7)
Retirement benefit obligations 1.5
Deferred tax liabilities (109.4)
Total liabilities (755.8)
Net assets disposed of 2,016.6
Consideration received in cash, net of transaction costs 3,690.2
Deferred consideration 9.2
Gain on sale before income tax and reclassification of reserves 1,682.8
Items previously recognised in equity recycled to the income statement (0.1)
Gain on sale of discontinued operation 1,682.7
Net cash inflow arising on disposal
Consideration received in cash, net of transaction costs 3,690.2
Less cash and cash deposits disposed of (61.7)
3,628.5
PENNON GROUP PLC
Notes (continued)
14. Discontinued operations and non-current assets held for sale (continued)
Deferred consideration
Under the sale agreement deferred consideration may be receivable in future.
The fair value of the amount expected to be received at 31 March 2021 has been
estimated at £9.2 million and this amount was received in the financial year
ended 31 March 2022. The receipt of further deferred consideration remains
possible, albeit the likelihood is judged as not probable and has therefore
not been recognised in the financial statements.
Taxation on the discontinued operations
The gain on sale of discontinued operations qualified for Substantial
Shareholding Exemption and consequently was not subject to corporation tax.
The taxation charge from discontinued operations before non-underlying items
in 2021 of £7.8 million includes a deferred tax charge of £7.6 million.
Pennon Group plc
Registered office:
Peninsula House
Rydon Lane
Exeter
Devon
EX2 7HR
pennon-group.co.uk
Registered
in England: 2366640
PENNON GROUP PLC
Alternative performance measures
Alternative performance measures (APMs) are financial measures used in this
report that are not defined by International Financial Reporting Standards
(IFRS). The Directors believe that these APMs assist in providing additional
useful information on the underlying trends, performance and position of the
Group as well as enhancing the comparability of information between reporting
periods.
As the Group defines the APMs they might not be directly comparable to other
companies' APMs. They are not intended to be a substitute for, or superior to,
IFRS measurements. The following APMs have been added or amended to those
presented previously to reflect the changing nature of the Group following the
sale of Viridor in July 2020 and the acquisition of Bristol Water in June
2021:
· An APM for 2021/22 has been added for Basic adjusted earnings per
share - Continuing Operations (adjusted for share consolidation). To aid
comparability, this new APM, which is presented on a basis other than in
accordance with IAS 33, includes the full impact of the share consolidation as
if it had taken place at the start of the previous financial year and
recalculates the resulting Adjusted earnings per share measure.
· The APM for effective interest rate has been expanded to outline
the calculation for the effective interest rate of South West Water Limited,
Bristol Water Group and together the water business segment. In previous
periods South West Water Limited was presented. This change has been made to
reflect the acquisition of Bristol Water and the resulting combined effective
interest rate of the water business.
· The APM 'Group return on capital employed' has been changed to
'South West Water return on capital employed' due to this metric providing a
more meaningful comparison of performance due to the Group holding a net cash
position at 31 March 2021.
(i) 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 4 in the notes to 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:
Non-underlying items
Underlying earnings reconciliation Underlying Deferred tax change of rate Acquisition and merger review costs Statutory results Earnings
per share
31 March 2022
£m £m £m £m p
EBITDA (see below) 383.9 - (15.8) 368.1
Operating profit 237.2 - (15.8) 221.4
Profit before tax 143.5 - (15.8) 127.7
Taxation (13.9) (99.5) 1.3 (112.1)
Profit after tax 15.6
Non-controlling interests (0.2)
Profit after tax attributable to shareholders 15.4 4.9
Non-underlying items
Underlying earnings reconciliation Underlying WaterShare+ Pension curtailment charge Statutory results Earnings
per share
31 March 2021
£m £m £m £m p
EBITDA (see below) 334.7 (20.5) (4.4) 309.8
Operating profit 215.3 (20.5) (4.4) 190.4
Profit before tax 157.0 (20.5) (4.4) 132.1
Taxation (29.6) 3.9 0.9 (24.8)
Profit after tax from continuing operations 107.3
Profit after tax from discontinued operations 1,654.7
Profit after tax 1,762.0
Non-controlling interests 0.2
Profit after tax attributable to shareholders 1,762.2 418.5
PENNON GROUP PLC
Alternative performance measures (continued)
(ii) Underlying EBITDA
Underlying EBITDA (earnings before interest, tax, depreciation and
amortisation and non-underlying items) is used to assess and monitor
operational underlying performance.
(iii) Basic adjusted earnings per share - Continuing Operations (adjusted for
share consolidation)
2022 2021
Basic weighted average number of shares
Basic weighted average number of shares (millions) (note 8) 312.1 421.1
Adjustment to reflect the post-consolidation share base as if it had been in (36.6) (140.4)
place
from the start of the previous financial year (millions)
Adjusted basic weighted average number of shares (adjusted for share 275.5 280.7
consolidation) (millions)
Basic adjusted earnings per share from continuing operations before 44.3 31.9
exceptional items and deferred tax (pence) (note 8)
Adjustment to reflect the post-consolidation share base as if it had been in 5.9 15.9
place
from the start of the previous financial year (pence)
Basic adjusted earnings per share from continuing operations before 50.2 47.8
exceptional items and deferred tax (adjusted for share consolidation)
(pence)
(iv) Effective interest rate
A measure of the mean average interest rate payable on net debt, which
excludes interest costs not directly associated with net debt. This measure is
presented to assess and monitor the relative cost of financing for South West
Water Limited, Bristol Water Group and together the water business.
South West Water Limited
A measure of the mean average interest rate payable on South West Water
Limited's net debt, which excludes interest costs not directly associated with
South West Water Limited net debt. This measure is presented to assess and
monitor the relative cost of financing for South West Water Limited.
2022 2021
£m £m
Net finance costs after non-underlying items 76.8 56.5
Net interest on retirement benefit obligations 0.4 (0.4)
Capitalised interest 1.0 0.9
Net finance costs for effective interest rate calculation 78.2 57.0
Opening net debt 2,273.5 2,307.2
Closing net debt 2,305.2 2,273.5
Average net debt (opening net debt + closing net debt divided by 2) 2,289.4 2,290.4
Effective interest rate (%) 3.4 2.5
PENNON GROUP PLC
Alternative performance measures (continued)
(iv) Effective interest rate (continued)
Bristol Water Group
A measure of the mean average interest rate payable on Bristol Water Group's
net debt, which excludes interest costs not directly associated with Bristol
Water Group net debt. This measure is presented to assess and monitor the
relative cost of financing for Bristol Water Group and includes full year
performance.
2022
£m
Net finance costs after non-underlying items (from 3 June 2021) 20.1
Net interest on retirement benefit obligations (from 3 June 2021) (0.2)
Capitalised interest (from 3 June 2021) 0.3
Net finance costs for effective interest rate calculation (from 3 June 2021) 20.2
Net finance costs for effective interest rate calculation (1 April 2021 to 2 2.4
June 2021)
Net finance costs for effective interest rate calculation 22.6
Opening net debt((1)) 395.6
Closing net debt 405.3
Average net debt (opening net debt + closing net debt divided by 2) 400.5
Effective interest rate (%) 5.6
(1) Opening net debt of £395.6 million reflects 31 March 2021 Bristol Water
Group net debt. On acquisition on 2 June 2021, Bristol Water Group's net debt
was £391.4 million. Net debt excludes fair value adjustments.
Water business
A combined measure reflecting the mean average interest rate payable on the
water business' net debt, which excludes interest costs not directly
associated with water business net debt. This measure is presented to assess
and monitor the combined relative cost of financing for the water business.
2022 2021
£m £m
Net finance costs for effective interest rate calculation 100.8 57.0
Opening net debt (at 31 Mar 2021) 2,669.1 2,307.2
Closing net debt 2,710.5 2,273.5
Average net debt (opening net debt + closing net debt divided by 2) 2,689.8 2,290.4
Effective interest rate (%) 3.7 2.5
(v) Underlying interest cover
Underlying net finance costs (excluding pensions net interest cost) divided by
operating profit before
non-underlying items.
2022 2021
£m £m
Net finance costs after non-underlying items 93.7 58.3
Net interest on retirement benefit obligations 0.6 (0.7)
Net finance costs for interest cover calculation 94.3 57.6
Operating profit before non-underlying items 237.2 215.3
Interest cover (times) 2.5 3.7
PENNON GROUP PLC
Alternative performance measures (continued)
(vi) Group dividend cover
Proposed dividends divided by profit for the year before non-underlying items
and deferred tax
2022 2021
£m £m
Proposed dividends 102.0 91.8
Profit for the year attributable to ordinary shareholders 15.4 1,762.2
Deferred tax charge before non-underlying items 8.9 14.2
Non-underlying items after tax in profit for the year 114.1 (1,599.1)
Adjusted profit for dividend cover calculations 134.8 177.3
Dividend cover (times) 1.4 1.9
(vii) Capital investment
Property, plant and equipment and intangible asset additions. The measure is
presented to assess and monitor the total capital investment by the Group.
2022 2021
£m £m
Additions to property, plant and equipment 237.3 168.4
Additions to intangible assets 3.6 0.2
Capital investment 240.9 168.6
(viii) Capital payments
Payments for property, plant and equipment (PPE) and intangible asset
additions net of proceeds from sale of PPE and intangible assets. The measure
is presented to assess and monitor the net cash spend on PPE and intangible
assets.
2022 2021
£m £m
Cash flow statements: purchase of property, plant and equipment 225.6 190.1
Cash flow statements: purchase of intangible assets 3.4 0.2
Cash flow statements: proceeds from sale of property, plant and equipment (1.4) (0.4)
Capital payments relating to the Total Group 227.6 189.9
Capital payments relating to discontinued operations - (32.3)
Capital payments relating to continuing operations 227.6 157.6
(ix) South West Water return on capital employed
The total of underlying operating profit 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.
2022 2021
£m £m
Underlying operating profit - South West Water 214.5 222.3
Capital employed:
Net debt 2,233.8 2,198.6
Total equity invested 295.9 250.9
Capital employed for return on capital employed calculation 2,529.7 2,449.5
Return on capital employed (%) 8.5 9.1
PENNON GROUP PLC
Alternative performance measures (continued)
(x) Continuing operations operational cash inflows and other movements
Cash generated from operations before pension contributions and other
movements.
2022 2021
£m £m
Cash generated from operations per cash flow statements 334.2 298.1
Remove: cash generated from discontinued operations - (28.7)
Cash generated from operations from the Continuing Group 334.2 269.4
Other movements((1)) 2.6 (3.6)
Pension contributions 27.9 50.2
Operational cash inflows and other movements from the Continuing Group 364.7 316.0
(1) Other movements reflect operational movements not related to operating cash
flows, such as proceeds from share issues and share trust purchases for the
employee share schemes.
(xi) Return on Regulated Equity (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.3.9% for South West Water and c.4.4% for Bristol Water for the
period 2020-25) 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 2020-25, the notional equity proportion is
40.0%.
References are made to Ofwat RoRE and Watershare RoRE which utilise differing
inflation assumptions and the disclosure of tax.
Further information on this metric can be found in South West Water and
Bristol Water's annual performance report and regulatory reporting, published
in July each year.
(xii) Totex
Operating costs and capital expenditure of the regulated water and wastewater
business (based on the Regulated Accounting Guidelines).
(xiii) Outcome Delivery Incentive (ODIs)
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.
(#_ftnref1) (^) Measures with this symbol are defined in the Alternative
Performance Measures (APMs) as outlined on pages 60 to 64.
1 Based on Ofwat's K7 approach to RORE, including total tax impacts and
using actual average inflation for totex and financing. Fast track reward for
South West Water of 10bps per annum applied over years one to five of K7
2 (#_ftnref2) On track or within regulatory tolerances
3 (#_ftnref3) 80:20 Joint venture with South Staffordshire Group
4 (#_ftnref4) 2020-2025 regulatory period
5 (#_ftnref5) Post Pennon deployment of c.£55 million into the water
business, notionally allocated to Bristol Water - deployment in progress
6 (#_ftnref6) Regulatory Capital Value
7 (#_ftnref7) Non-underlying items are adjusted for by virtue of their size,
nature or incidence to enable a full understanding of financial performance
8 (#_ftnref8) Adjusted earnings per share for 2021/22 and 2020/21 rebased to
reflect impact of share consolidation. This calculation is outlined in the
Alternative Performance Measures on pages 60 to 64
9 (#_ftnref9) Dividend policy of CPIH + 2%. The CPIH rate used is 6.2% as of
31 March 2022. Base 2020/21 uplift for share consolidation and return of
capital (from 21.74 pence to 32.61 pence). 2020/21 comparative full year
dividend includes additional 3.0 pence increase to the dividend base as
announced at the Full Year Results in June 2021
10 (#_ftnref10) References to organic movements throughout this commentary
refer to the performance of the business excluding the contribution from
Bristol Water from 3 June 2021
11 (#_ftnref11) Subject to shareholder approval at the Pennon AGM on 21 July
2022
12 (#_ftnref12) In late August 2021 a third-party utility company,
performing work unconnected with South West Water, damaged mains supply pipes
at Carland Cross in Cornwall, causing a localised loss of supply. Any impact
from this event in terms of ODI mechanism remains under evaluation.
13 (#_ftnref13) Calendar year measure
14 (#_ftnref14) Reducing the rivers where we are responsible for not
achieving good ecological status from c.19% to c.12%
15 (#_ftnref15) Event Duration Monitors (EDMs)
16 (#_ftnref16) Based on Ofwat's K7 approach to RORE, including total tax
impacts and using actual average inflation for totex and financing
17 (#_ftnref17) Outperformance reflects c.£94 million totex efficiency,
c.£67 million financing outperformance, net of c.£11 million ODI net penalty
and c.£1 million tax. WaterShare equivalent total outperformance c.£190
million to date.
18 (#_ftnref18) On track or within regulatory tolerances
19 (#_ftnref19) Reflects final outturn of prior year ODI performance,
consistent with Ofwat reporting
20 (#_ftnref20) Based on Ofwat's approach to RORE using average actual
inflation (2020/21 - 0.8%, 2021/22 - 3.7%)
21 (#_ftnref21) Based on Ofwat's K7 approach to RORE, including total tax
impacts and using actual average inflation for totex and financing
22 (#_ftnref22) Watershare RORE - financing outperformance is based on the
outturn effective interest rate translated into a real rate using a forecast
average inflation assumption of 3.1% CPIH. Base RORE for South West Water
includes fast track reward of 10bps applied over years one to five of K7
23 (#_ftnref23) Based on Ofwat's K7 approach to RORE, including total tax
impacts and using actual average inflation for totex and financing. Fast track
reward for South West Water of 10bps per annum applied over years one to five
of K7
24 (#_ftnref24) Including revenue and RCV adjustments to reflect changes of
totex allowances linked to changes in pay and wage indices (ASHE - average
survey of hours and earnings), the true up for higher tax rates, changes in
iboxx indices trueing up the cost of new debt, true ups for changes in volume
related to bioresources, developer activity, land sales and customer numbers
25 (#_ftnref25) Measures presented are before non-underlying items
26 (#_ftnref26) Includes wholesale revenue for non-household customers
(#_ftnref27)
27 (#_ftnref28) Includes wholesale costs for non-household customers
28 (#_ftnref29) Reflecting £425.1 million on acquisition, £8.9 million
cash outflow for expenses in connection with the acquisition of Bristol Water,
offset by £12.8 million cash acquired
29 (#_ftnref30) Carrying value of fair value acquisition adjustments to net
debt at 31 March 2022 - £39.9 million Bournemouth Water, £128.7 million
Bristol Water
30 (#_ftnref31) UK water position as at 31 March 2021
31 (#_ftnref32) RCV as published in South West Water's Final Determination
(2020-25), recognising the omission of data not included by Ofwat in relation
to IFRS16: Leases
32 (#_ftnref33) Based on RCV at 31 March 2022 and South West Water Group net
debt. Regulatory South West Water Limited gearing is 63.6% at 31 March 2022
(67.0% at 31 March 2021)
33 (#_ftnref34) Combined water business position
34 (#_ftnref35) Based on indicative pricing in late May 2022
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