REG - Pennon Group PLC - Half Year Results 2021/22
30/11/2021 07:15
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RNS Number : 9593T Pennon Group PLC 30 November 2021
30 November
2021
Half Year Results 2021/22
Bringing water to life
Building momentum, driving sustainable growth
Susan Davy, Group Chief Executive, commented:
We are reporting resilient performance across the group, we continue to build
momentum, driving sustainable growth, and ensuring we are well positioned to
help tackle climate change. This, together with an evolving environmental
strategy will deliver the step change we all want to see for the health of our
region now and for generations to come.
We continue to pursue a relentless approach to improving operational
performance through innovative solutions that drive efficiency, and in turn
keeping customer bills as low as possible, at a time when customers need
supporting most.
I'd like to recognise the pioneering spirit of Pennon's c.2,500 employees, who
live in our regions and love what they do, and are at the heart of our
ambition in developing innovative and sustainable solutions for customers,
communities and the environment.
Our sector leading dividend policy recognises the ongoing loyalty of our
shareholders, many of whom are customers, charities, employees and pensioners
in the UK, underpinned by the Group's confidence in our ongoing growth
strategy, and building a sustainable future for all.
RESILIENT PERFORMANCE
South West Water
Delivering for our customers and communities
· c.60% reduction in all complaints and year on year improvement in
CMeX 1 Performance
· Community funds providing c.£180,000 support to community groups
since inception
· Bills lower than they were 10 years ago and £3.8million of
affordability 2 support delivered for those customers most in need
Innovation helping to address wastewater challenges
· c.40% reduction in internal and c.20% reduction in external flooding,
are both ahead of target and reflecting a step-change in performance
· c.40% improvement in sewer collapses ahead of 2025 target, using
automated sewer conditioning surveys and AI to proactively detect faults on
our network
· Halving pollution incidents compared to last year, using technology
to predict potential events. This pace of improvement needs to be sustained to
meet our 2025 targets
Improving river and coastal water quality
· 100% 3 water quality standards achieved at our bathing beaches - our
best ever performance
· Focused on reducing our impact on river quality by one third by 2025,
pilot schemes underway on the Dart and Tavy for inland bathing water quality -
proving the case for K8 step change investment
· c.5,000 hectares of land within our catchments improved during H1
2021/22, ahead of our target for K7
Innovation driving performance and efficiency in water
· c.30% reduction in mains repairs focusing on the resilience of our
network
· Supply interruptions and unplanned outages ahead of target,
maintaining our best ever performance
· Leakage reduction plan on track, using innovative technology to
identify leaks resulting in increased repair
Consistent RORE delivery
· H1 2021/22 outperformance in all areas - cumulative K7 RORE(^) 7.8%
· c.85% of our ODIs(^) on track or ahead of target
· Sector leading effective interest rate - 2.9%(^)
· Driving efficient delivery through innovation and nature-based
solutions
Bristol Water
· Financial performance ahead of expectations, contributing £7.2
million in profit and capital investment of £12.7 million
· Leakage ahead of target and CMeX(1) in upper quartile position for H1
2021/22
Well positioned for the future
Talented people delivering for customers and communities
· Investing in the next generation - new graduate programme underway,
c.30% of our 500 2025 apprenticeships already underway and c.55% of
Kickstarters retained in permanent roles
· Supporting diversity with the #10000BlackInterns initiative,
increasing gender diversity to >30%
Evolving our environmental strategy
· Piloting innovative solutions to meet wastewater environmental
challenges through Green Recovery - informing future investment plans
· First tranche of c.£80 million renewables investment programme
underway to meet our Net Zero 2030 target
· Climate change resilience and adaptation a key focus for PR24
Driving sustainable growth
Delivering growth in Pennon Water Services
· Continued focus on securing sustainable business in the non-household
market c.£9 million of contracts won in H1 2021/22
· Demand recovering near to pre-Covid-19 levels - cash collections
remaining robust
· Working collaboratively to develop the market and customer experience
Investing sustainably, for the benefit of all
· >30% total RCV 4 growth to 2025 through organic investment and
acquisitions
· Delivering our base plans and £82 million Green Recovery investments
already underway
· Logical, accretive acquisition of Bristol Water, growing RCV by 16%.
FINANCIAL PERFORMANCE
Underlying(^) H1 2021/22 H1 2020/21 Change
Revenue £389.3m £319.7m +21.8%
EBITDA(^) £199.4m £174.5m +14.3%
Operating profit £127.4m £114.8m +11.0%
Profit before tax £90.4m £86.7m +4.3%
Non-underlying items before tax 5 (£10.5m) (£24.8m) -
Profit before tax £79.9m £61.9m +29.1%
Underlying tax (£5.2m) (£16.3m) +68.1%
Non-underlying tax (£96.9m) £4.8m -
Discontinued operations - £1,720.0m -
(Loss)/Profit for the year (£22.2m) £1,770.4m (101.3%)
Earnings per share
- Adjusted EPS(^) - continuing operations (adjusted for share 30.6p 26.8p +14.2%
consolidation) 6
- Statutory EPS (6.3p) 420.9p (101.5%)
Dividend per share 7 - dividend policy 11.70p 11.15p +4.9%
Resilient financial performance
· Results in line with management expectations
· +21.8% underlying revenue(^), with Bristol Water contributing £41.6
million
· +8.8% organic 8 underlying revenue(^) primarily due to a recovery in
non-household demand both in and out of region and contributing contract wins
from Pennon Water Services
· +1.8% organic(8) underlying EBITDA(^) growth with higher costs to
serve driven by high levels of demand and cost pressures from macro-economic
factors
· +14.3% underlying EBITDA(^) growth with contribution from Bristol
Water from 3 June 2021
· +29.1% increase in profit before tax
· +4.3% increase in underlying profit before tax(^) with contribution
from underlying EBITDA(^) growth offsetting increased interest charges on
index-linked debt
· +14.2% increase in adjusted earnings per share(^) (adjusted for share
consolidation)(6)
· Loss per share of 6.3 pence (H1 2020/21 earnings of 420.9 pence)
reflecting non-underlying costs, primarily related to deferred tax charge
(£96.9 million) for the future change in tax rate
· Sector-leading dividend growth of 4.9% with dividend per share up
(CPIH +2%) to 11.70 pence(7)
A full reconciliation to the statutory reported results is included in item
(i) in the Alternative Performance Measures on pages 61 to 65 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 be available at 08:30am (GMT),
today, 30 November 2021 and can be accessed here:
https://pennon-group.connectid.cloud/register
(https://eur03.safelinks.protection.outlook.com/?url=https%3A%2F%2Fpennon-group.connectid.cloud%2Fregister&data=04%7C01%7Cjecooke%40pennon-group.co.uk%7C9e928f47585843cf907d08d9212087c5%7C25d26f64e15045878705aefeb42a308c%7C0%7C0%7C637577246392319791%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C1000&sdata=79CMx0H1NQNACX6inSAUvCs01VjIvmZ64VrfCwJTqTI%3D&reserved=0)
The presentation will be followed by a live Q&A conference call at 09:15am
(GMT). Details are included below:
United Kingdom: 0800 640 6441
United Kingdom (Local): 020 3936 2999
All other locations: +44 203 936 2999
Conference passcode: 198676
For further information, please contact:
Paul Boote Group Finance Director 01392 443 168
Jennifer Cooke Group Investor Relations Manager
James Murgatroyd Finsbury Glover Hering 020 7251 3801
Harry Worthington
Final dividend payment information
27 January 2022 Ordinary shares quoted ex-dividend
28 January 2022 Record date for interim dividend
11 March 2022 Final date for receipt of DRIP applications
5 April 2022 Interim dividend payment date
Upcoming events
1 April 2022 Trading Statement
31 May 2022 Full Year Results 2021/22
21 July 2022 Annual General Meeting 2022
30 September 2022 Trading Statement
30 November 2022 Half Year Results 2022/23
OPERATIONAL PERFORMANCE
RESILIENT PERFORMANCE
Delivering for our customers and communities
Our focus on the priorities that matter most to customers has delivered
tailored solutions to resolve issues first time, creating more meaningful
connections. This has resulted in an improved customer experience and a
significant reduction in all complaints of c.60% year on year, our best ever
performance.
Our C-Mex performance has improved in comparison to the previous year, and we
are on track to deliver our outstanding service Board pledge by 2025.
We recognise the importance of our role in the communities we serve, and we
are committed to delivering more of what matters to them. Since inception, our
dedicated funds have provided around £180,000 much needed support to
community groups in our region.
Our Neighbourhood Fund builds on our work to support communities with funding
available for community groups, which inspire physical activities, education,
health and wellbeing and deliver positive environmental outcomes. Through our
Neighbourhood Fund we supported a range of charitable funds during the period
including Cornwall Air Ambulance, Axminster and Lyme Cancer Support and The
Hollow Lane Club, which supports children and young people with complex
disabilities with opportunities to socialise and engage with recreational
activities.
Our Water-Saving Community Fund promotes ideas to help our customers and
communities to get involved in water conservation projects, including support
for organisations to create drought tolerant gardens, to install water butts
in community allotments or provide educational training and displays in
schools.
Innovation driving performance and efficiency across our operations
South West Water has again delivered resilient results across water and
wastewater operations, with innovation driving performance and efficiency. Our
pilot, test and deploy approach to innovation helps us to mitigate risk for
customers, the environment and our stakeholders.
Through our partnership with the University of Exeter, the Centre for
Resilience in Environment, Water and Waste (CREWW), we will continue to
benefit from their academic expertise and use of state-of-the-art field
monitoring equipment to aid research excellence. We are also pleased to have
been successful, working with our partners, in securing four Ofwat Innovation
Fund projects totalling over £20 million, with these projects due to commence
in January 2022.
Reliable wastewater services
We continue to target and drive improvements in wastewater services through
innovation by constantly seeking out new ideas, pioneering and piloting new
technologies with a focus on nature-based solutions such as i-Phyc, an
algae-based solution to remove phosphorus and micro-pollutants.
Reducing flooding incidents
Internal sewer flooding can be caused by a number of factors including
blockages in our network or when the network becomes overwhelmed as a result
of rainfall during wet weather. These issues are also exacerbated when the
population swells through tourism as we have seen in our region through the
Covid pandemic. c.70% of blockages are caused by non-flushable waste including
wet wipes. We continue to promote campaigns to educate customers to reduce
such behaviours which has contributed to our H1 2021/22 performance being
c.40% lower than the same period last year. This continues to be an area of
excellence for South West Water, outperforming our 2025 target.
The number of external sewer flooding incidents has also reduced by c.20% year
on year, our best ever performance. To mitigate surges in our network arising
from the significant levels of tourism seen in 2021, we have been pioneering
the use of HYBACS technology to help increase treatment capacity, quickly and
efficiently. This technology is agile enough to be re-located to where it is
needed most.
Reducing sewer collapses
The number of sewer collapses has reduced by c.40% compared to the same period
last year and represents an area of excellence, with our performance already
exceeding the 2025 stretching 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.
Sustainable step change in wastewater pollutions
We launched our Pollutions Incident Recovery Plan in 2020 following a
disappointingly high level of pollutions. We are pleased to have made a
significant step change in performance, more than halving the number of
pollutions 9 compared to the same ten month period last year, and we
acknowledge there remains much more to do. The reduction stems from a range of
aspects in our Pollutions Incident Reduction Plan, including enhanced data
modelling supported by root cause analysis. Innovative Meniscus technology is
being used to model asset data in conjunction with weather forecasts to
predict potential pollution risks, and at identified high-risk areas, we are
advancing asset-specific plans.
Focus is maintained on a daily basis with Executive led, 7 days a week,
incident review calls. Enhanced service levels from key contractors, and
greater local ownership for our people has been achieved through improving our
environmental culture, and we have also been working to influence customer
behaviours.
We are committed to maintaining our pace of improvement, delivering a step
change in our performance in order to achieve the challenging targets set for
K7.
Clean, safe and reliable drinking water
Our focus remains on ensuring the supply of clean, safe and reliable drinking
water, whilst protecting the precious natural resources within our region. We
seek to achieve this through pioneering for success, launching pilots and
using new technologies to drive performance and increase efficiency. A recent
example includes Zeta measurement - a device that allows for constant
monitoring of particles in raw water supplies, so we can manage the treatment
process efficiently, reducing the use of chemicals in the process.
Increasing resilience of our networks
South West Water continues to deploy EZ valves - the first company to use this
new technology to repair bursts under pressure, ensuring supplies are
maintained to customers. This technology has helped to improve the resilience
of our network resulting in a c.30% reduction in mains repairs per 1,000km.
Minimising customer supply interruptions
Our underlying performance is consistently ahead of target 10 and the
excellent performance from 2020/21 has been maintained in the current year,
benefiting from previous investments in acoustic loggers and advanced
telemetry to predict faults and allow them to be repaired before customers are
impacted.
Unplanned outages
We have maintained our best ever performance in unplanned outages achieving
our 2025 target four years ahead of schedule. An unplanned outage is an
unforeseen or unavoidable event, typically resulting from an asset failure
which prevents a works from reaching its maximum production capability if
required. We continue to invest in our treatment works to reduce the
likelihood of failure alongside continued upgrades to telemetry and alarms to
identify and resolve issues quicker.
Leakage
We launched our Leakage Reduction Plan in late 2020, which has already begun
to deliver sustained improvements in our performance. This improvement
reflects the continued focus on optimising pressure management with new
control valves and improved network modelling and through working
collaboratively with our partners, increasing our detection and repair
activity. Satellite scanning and fixed acoustic loggers continue to enhance
our leak detection capability and pin-point leaks more precisely, reducing dig
and repair costs. Increased use of more agile acoustic logging enables greater
flexibility and deployment in greater numbers for targeted locations of focus.
We have also focused on customer leaks and reducing customer usage.
Improving river and coastal water quality
There's no doubt that improving river and coastal water quality has become
centre stage in the minds of the public, especially in our region, as
recreation, wild-swimming, and paddle boarding have become more popular, and
the pandemic has strengthened the bond we want to have with open green and
blue spaces and the places people love.
Record high bathing water quality
With a track record of developing solutions to improve bathing beaches in the
South West since privatisation, our analysis shows for the first time ever,
100% of our regions' beaches have achieved stringent bathing water standards,
making them some of the best in Europe, compared to c.28% in 1991.
We continue to deliver on our planned bathing water quality schemes ahead of
schedule, championing efficient and sustainable solutions, on track to
cumulatively complete 6 schemes by the end of 2021/22.
Key to the success of these schemes is a collaborative approach ensuring the
best outcome for the local economy and the environment. This mainly includes
implementing nature-based investments, rather than more engineering,
tree-planting to reduce farmland run-off into rivers, whilst also absorbing
carbon, as well as tackling sewer misuse and proactively identifying and
fixing misconnections.
Driving river water quality improvements
In the South West, c.20% of rivers and waterways currently meet good
ecological standards, compared to 16% across England.
By adopting similar approaches to care for our region's rivers as we have done
for bathing waters, we are already on track to reduce our impact on river
health by one third by 2025. At the same time, we have committed to
installing 100% of event duration monitors by 2023.
In addition, our Green Recovery initiative includes pilots on the Rivers Dart
and Tavy aimed at transforming inland bathing water quality by measuring the
whole river health and this will be instrumental in helping the region to
understand what more we can all do.
Most recently, the Environment Agency and Ofwat have announced an
industry-wide investigation into sewage discharges. We will work transparently
with the regulator to play our part. Ultimately, we all want the same thing,
to better understand and reduce the impact on river health and the
environment.
Pioneering catchment management for 15 years
With agricultural activity contributing one third of the water quality impact,
we understand how critical it is to work with others including the Environment
Agency, Catchment Sensitive Farming Partnership and the Devon Wildlife Trust
to firstly locate potential sources of pollution from agricultural practices
and then work together to mitigate the impacts.
South West Water's award winning catchment management programme, first
introduced in 2006, has set the standard for innovation and incentivisation of
good water quality outcomes. Catchment management is active in 80% of our
catchments and working with around 1,700 farms have restored c.91,000 hectares
date, and we have plans to do more.
Additionally, in support of the Government's 25-year environment plan, we are
well underway to plant 250,000 trees by 2025, having achieved our original
goal of 100,000 trees, four years early, in locking up carbon.
Living our values - sustainability at the heart of our business
Net zero 2030 - on track across our three pillars
Our Net Zero journey is underway with investment focused on delivering reduced
carbon emissions and increasing renewable energy generation. Our carbon
busting 2030 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
· Reversing carbon emissions - working in partnership to deliver
natural carbon sequestration through peatland restoration and tree planting.
We restored around 500 hectares of peatland in K7, and we are now targeting
planting 250,000 trees by 2025 after having achieved our initial five year
plan of 100,000 trees in 2021.
Responsible and sustainable business
We are committed to being a responsible business for all our stakeholders,
achieving improved environmental, social and governance (ESG) performance, and
we are building on the success of our pioneering sustainable financing
framework - having now enabled c.£1 billion of green funding since its
inception in 2018, using a diverse mix of sustainable financing with enhanced
speed of execution and efficient financing costs. We were also pleased to have
achieved the Fair Tax accreditation again this year, recognising our
responsible approach to tax.
Understanding 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.
Consistent RORE(^) delivery
South West Water's strong operational and financial performance has
contributed to a consistent RORE of 7.8% with outperformance in all areas in
H1 2021/22.
Outcome Delivery Incentives(^)
For H1 2021/22 South West Water has achieved c.85% 11 of its ODIs across a
broad range of challenging bespoke, common and comparative measures. This is
an increase from c.80% in FY 2020/21.
Seven ODIs continue to represent areas of excellence having achieved their
2025 target early, with a further nine outperforming their 2021/22 target, and
21 achieving their target or on track.
We have delivered a significant step change in pollutions performance in line
with our Pollutions Incident Reduction Plan and whilst still an area of focus
the financial penalty is substantially reduced.
Overall, ODI performance for the half year has resulted in a net reward of
£3.5 million (H1 2020/21 net penalty of £1.5 million), reflecting an annual
equivalent RORE(^) outperformance of 0.6%.
Financing
Our efficient financing strategy continues to drive outperformance with South
West Water's effective interest rate(^) at 2.9% (H1 2020/21 2.5%),
significantly lower than Ofwat's nominal cost of debt of 4.2%. While recent
increases in RPI and CPI are driving an increase in finance costs of
index-linked debt, we continue to outperform the nominal cost of debt through
our flexible financing strategy and the company's diverse debt portfolio.
Total expenditure savings (Totex(^))
South West Water's overall cumulative net savings in the regulatory period to
date are c.£94 million driven through a pioneering approach to innovation.
These include consideration of nature-based solutions such as i-Phyc,
improving the quality of treated wastewater with less harmful and costly
chemicals, increased use of data and artificial intelligence to predict and
target investments before more expensive reactive solutions are required, and
through driving economics of scale in our capital programme, such as
delivering multiple bathing water schemes simultaneously.
The table below summarises South West Water's RORE(^) position:
RORE Cumulative
Base return 3.9%
Totex performance 2.2%
ODI performance (0.1%)
Financing performance 1.8%
WaterShare RORE 12 7.8%
Ofwat RORE 13 8.3%
Bristol Water - reinvesting in UK water
The acquisition of Bristol Water is a strong strategic fit for the Group, with
financial performance since acquisition ahead of expectations. The CMA
unconditionally cleared the non-household aspect of the acquisition earlier in
November, and an update is expected in late December on the ongoing water
merger review. Whilst the CMA review is ongoing, Bristol Water and South West
Water will continue to be operated independently of each other.
Operationally for H1 2021/22, performance is balanced with some areas ahead of
target and some requiring further focus. Areas where performance is ahead of
target includes leakage, where Bristol Water holds an industry leading
position, and C-Mex with Bristol Water's continued drive to put customers
first, resulting in an upper quartile position.
Areas where performance is not on track and where improvements are being
targeted includes water quality compliance, as measured by the Compliance Risk
Index (CRI) and Per Capita Consumption (PCC) performance, which was
significantly impacted by Covid-19. Plans are in place to help customers to
reduce water usage through supportive and voluntary measures, including the
provision of free water efficiency equipment along with enhancing Bristol
Water's existing schools education programme. These plans will sit alongside
the continuation of community initiatives undertaken as part of Bristol
Water's social contract.
Bristol Water's capital investment of £12.7 million has been focused on
improving and renewing their asset base to increase resilience.
Bristol Water's RORE for H1 2021/22 at 4.9% (as measured by Ofwat), is
delivering ahead of its allowed base returns 14 .
WELL POSITIONED FOR THE FUTURE
Talented people delivering for customers and communities
At Pennon, we believe our people are our best asset and are delighted to have
been recognised as a Great Place to Work. We are focused on doing everything
we can to recruit, train, develop and support all our employees, whatever
their background, experience or outlook.
Progressive organisation
We continue to build a progressive organisation, recruiting, training,
developing and supporting all of our colleagues, whatever their background,
experience or outlook - unlocking their potential now and into the long term.
Pennon is proud to be a member of 'The 5% Club', a dynamic movement of
employer-members working to create a shared prosperity across the UK -
investing in the next generation through embracing of an 'earn and learn'
culture.
We've also focused on creating a diverse and inclusive place to thrive for our
c.2,500 employees and the communities we support. We were the first water
company to sign up to the Change the Race Ratio, campaigning to increase
racial and ethnic participation in British Businesses. We are also proud to be
a participant in the #10000blackinterns initiative and are pleased to have
increased the proportion of female colleagues in our workforce to more than
30%. The acquisition of Bristol Water also provides the potential to expand
our talent pool.
Our graduate programme is well underway with a new intake of 27 graduates, who
represent our most diverse intake ever, whether that's race, ethnicity,
gender, cultural heritage or background. The programme enables graduates to
gain practical experience in our core business areas of operations,
engineering, project management, and customer service which will be vital in
helping them find their ultimate leadership position.
We continue to create new apprenticeships and have added 135 apprenticeships
since 2020, and we are ahead of schedule in reaching our 2025 target of 500
with c.30% complete to date. Pennon was one of the first companies to sign up
to participate in the Government's Kickstart scheme, offering 16-24 years olds
deemed at risk of long-term unemployment, six month paid work placements. Of
the first cohort recruited, we are pleased to have retained c.55% of
Kickstarters in permanent roles across the Group, following the end of their
placement.
Tested through the pandemic
Great people are at the heart of any great organisation - and our talented
colleagues who deliver for customers and communities every day epitomise this.
Thanks to their continued hard work and commitment, the Group has continued to
deliver resilient service through extreme variability and high levels of
demand arising from the recovery of the non-household market and record
numbers of tourists and second homeowners staying in the region. The rapid
growth in population has maintained high levels of demand for our water and
wastewater services, placing additional pressure on our assets and people.
Focused on customer affordability
We understand the financial strain that the pandemic has put on customers. As
part of our New Deal business plan, we included a pledge to eliminate water
poverty by 2025 by expanding our toolkit of affordability measures to support
those who need it most. South West Water bills are now lower than they were 10
years ago, and we have unlocked c.£3.8 million of cumulative financial
support by ensuring customers are receiving all eligible benefits.
Evolving our environmental strategy
Focused on climate change mitigation and adaptation
As a Group, we recognise the role we have to play in reducing emissions
targeted at slowing climate change, and it is clear that investment to manage
climate change risk will be a key feature of K8.
Climate change has multiple impacts on our operations - from the availability
of secure water resources to flooding and resilience challenges in relation to
our low-lying operational assets, and we continue to invest to ensure we
remain a sustainable business, now and into the future.
Our robust water resources position is projected to be in water surplus in the
medium to long term, and in the South West, this will be our 25(th) year
without any water restrictions.
We are also on track with our commitment to achieve net zero carbon emissions
by 2030, and are committed to the Science Based Targets Initiative. Our
carbon-busting plan is underpinned by three pillars:
· Sustainable living - reducing our consumption of energy through being
ever more efficient in the way we operate
· Championing renewables - further embracing the natural resources
within our region to increase our own power generation to 50% of our usage,
with the first tranche of our c.£80 million investment underway
· Reversing carbon emissions - building on our industry leading
catchment management work, which we first embarked on 15 years ago. Whilst
this work plays a role in improving raw water quality before it is treated to
become drinking water, it also has the added benefit of capturing carbon in
the land.
Piloting for success
Our Green Recovery initiative, developed with customers and stakeholders, has
been designed to deliver benefits for customers, society and the environment -
with innovative pilots informing our investment strategy including:
· Inland bathing water quality pilots on the Rivers Dart and Tavy aimed
at informing future investment to enhancing our rivers for generations to come
· Expanding our nature-based solutions through increased peatland
restoration, reducing the risk of flooding and improving biodiversity, plant
life and habitats
· Smarter, healthier homes - customer focused initiatives reducing
water consumption and leakage to cut down abstraction from the environment and
our carbon footprint.
DRIVING SUSTAINABLE GROWTH
Delivering growth in Pennon Water Services
Pennon Water Services continues to demonstrate its resilience during the first
half of 2021/22 as performance recovers following the Covid-19 related
lockdowns in 2020 and 2021. Pennon Water Services' strategy is to engage
proactively with its customer base, continue to win new contracts, and deliver
against its priority of ensuring the safety of its employees, customers and
the communities it serves. It continues to focus upon simple and transparent,
retail services delivering low levels of customer attrition, contract wins and
high levels of customer satisfaction.
Non-household demand which had been impacted by Covid-19 due to restrictions
on customer's operations in some sectors, is starting to return to near
pre-Covid levels. This recovery is predominantly in the hospitality, tourism
and manufacturing sectors.
During the pandemic, Pennon Water Services took an active role in engaging
constructively with the market operator - MOSL, regulators and other market
stakeholders on measures designed to protect businesses and the water industry
from the effects of Covid-19. The range of customer support mechanisms
deployed alongside a fair but robust collections strategy enabled the business
to assist its customers struggling to deal with the impacts of Covid-19,
whilst balancing its own interests.
Ofwat has confirmed its decision to limit the potential risk of bad debt
exposure to retailers in the market to a maximum of 2% of revenue and will
publish its decision document in mid-February on allowed revenues for 2022/23
which will allow recovery of Covid-19 bad debt across the non-household
customer base.
Our customer service operations and contact centre have continued to operate
effectively through the first half of the year and we continue to focus on
cash collections, which remain robust. Our customer centric approach continues
to underpin the provision of outstanding service and remains a key
differentiator in the market as recognised through an excellent Trustpilot
score (4.9).
Despite a landscape of economic uncertainty Pennon Water Services continues to
grow its revenue, with its strategy focused on high quality, sustainable
customers. During the period to 30 September 2021, it has won national
customers such as Birds Eye, Synthomer, Country Style Foods and Pepsico which
will deliver c.£9 million in annualised revenue.
Investing sustainably for the benefit of all
As a purpose led business, we think differently about the relationship we have
with our customers through our innovative and pioneering WaterShare+ scheme.
We are maintaining our performance momentum from K6, continuing to deliver
benefits for customers - with c.£47 million delivered to date in K7. With one
in 16 households in the region now shareholders, we are planning a second
WaterShare+ issuance in 2022, linked to our acquisition of Bristol Water.
We continue to pursue a relentless approach to driving performance and
efficiency, ensuring we keep customer bills as low as possible, delivering
more for less, innovating to deliver solutions for the things that matter most
to customers, and building agility to be able to respond to both opportunities
and challenges as they arise.
With 8 out of 9 of our customers wanting us to be an environmental leader,
we're focused on accelerating plans for the future health of the planet. To do
this, we need to demand less of our world and do it in a way that's
innovative, pushing boundaries.
It's this agility and innovative approach to driving efficiency that also
positions us perfectly to be able to invest for sustainable growth, adopting a
twin-track approach, pursuing both organic and acquisitive growth.
At Pennon, we believe, that in doing what's right - it leads to a 'right to
grow' - and that's good for everyone. Doing the right thing, driving
efficiency for the benefit of customer bills in turn gives us a right to grow
both organically and through acquisition.
We are well underway with the delivery of South West Water's 2020-25 New Deal
business plan which includes c.£1 billion investment allowance reflecting
11% 15 RCV growth to 2025, and our Green Recovery initiative. This initiative
is an example of organic growth, earning base returns, with the added benefit
of being able to pilot areas to help develop innovative solutions to key
issues, and our incremental investment of £82 million represents a 2.5%
increase on SWW's RCV, importantly with no impact on customer bills in K7.
Our logical and accretive water acquisitions have also delivered significant
value underpinned by meaningful benefits for customers and shareholders. The
£425 million acquisition of Bristol represents 16% RCV growth, with
synergistic benefits expected to deliver further growth based on our previous
track record. Alongside this, Bristol's Final Determination reflects growth of
9.3% to 2025.
Combining our base, organic and acquisitive investments outlined above
reflects a total RCV growth to 2025 of more than 30%. This means we are able
to deliver on our commitments to customers, shareholders and stakeholders, as
our investments drive tangible, positive and sustainable growth, and through
our innovative WaterShare+ scheme, it means customers get to share in these
financial benefits in addition to keeping bills as low as possible.
FINANCIAL PERFORMANCE
During H1 2021/22, we have implemented our commitments to realise value for
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 our
water businesses in support of our Green Recovery initiative.
Bristol Water has contributed to the financial results since 3 June 2021 and
is performing ahead of management expectations. The CMA unconditionally
cleared the non-household aspect of the acquisition earlier in November. An
update is expected in late December on the ongoing water merger review. Whilst
the CMA review is ongoing, Bristol Water and South West Water will continue to
be operated independently of each other.
Underlying(^) H1 2021/22 H1 2020/21 Change
Revenue £389.3m £319.7m +21.8%
Operating costs (£189.9m) (£145.2m) (30.8%)
EBITDA(^) £199.4m £174.5m +14.3%
Depreciation and amortisation (£72.0m) (£59.7m) (20.6%)
Operating profit £127.4m £114.8m +11.0%
Net interest charge (£37.0m) (£28.1m) (31.7%)
Profit before tax £90.4m £86.7m +4.3%
Non-underlying items before tax(5) (£10.5m) (£24.8m) -
Profit before tax £79.9m £61.9m +29.1%
Underlying tax (£5.2m) (£16.3m) +68.1%
Non-underlying tax (£96.9m) £4.8m -
Discontinued operations - £1,720.0m -
Profit for the period (£22.2m) £1,770.4m (101.3%)
Earnings per share
- Adjusted EPS(^) - continuing operations (adjusted for share 30.6p 26.8p +14.2%
consolidation)(6)
- Statutory EPS (6.3p) 420.9p (101.5%)
Dividend per share(7) - dividend policy 11.70p 11.15p +4.9%
Capital investment £111.5m £73.5m +51.7%
- South West Water £98.7m £73.3m +34.7%
- Bristol Water £12.7m - -
- Other £0.1m £0.2m (50.0%)
30 September 2021 30 September 2020
Total Group net (debt)/cash (£2,542.9m) £64.3m
Resilient financial performance
Financial performance across the Group has been resilient and in line
management expectations.
The Group's revenue has increased from £299.2 million to £389.3 million,
with the prior period impacted by a £20.5 million WaterShare+ non-underlying
reduction to revenue. The Group's underlying revenue(^) has increased from
£319.7 million to £389.3 million, an increase of c.22%, with Bristol Water
contributing £41.6 million of the increase in the half year ended 30
September 2021.
Organically(8), underlying revenues(^) have increased by 8.8%. The Covid-19
pandemic has led to a substantial population increase in the regions we serve
with continued higher levels of household demand. Alongside this, as
restrictions have eased, businesses have increased activity, resulting in
increased water usage both in and out of our region, as well as growth in
South West Water's developer services activities. The combined impact of
growth from the Covid-19 recovery has resulted in increased revenues of c.£17
million. Pennon Water Services continues to deliver further revenue growth
with new contract wins since 1 October 2020 contributing c.£10 million of
additional revenue compared to H1 2020/21.
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.
Cash collections in both South West Water and Pennon Water Services have
remained robust throughout the first half of the financial year. Underlying
expected credit loss charges for H1 2021/22 of £1.8 million for South West
Water (0.6% of revenue) and £0.3 million for Pennon Water Services (0.3% of
revenue) are in line with previous years' levels for H1 2020/21 of 0.7% and
0.4%, respectively. The Group recognised a non-underlying charge for expected
credit losses in relation to Covid-19 of £7.9 million in the year ended 31
March 2020. The majority of the expected credit loss provision that was
created remains in place, with the full impact of the pandemic on collections
not expected to be known until such point as the impact of relief measures
being withdrawn is realised.
Overall, underlying EBITDA(^) has increased by 14.3% from £174.5 million to
£199.4 million including a contribution of £21.7 million from Bristol Water.
Organically(8), underlying EBITDA(^) has increased by 1.8%.
Group underlying profit before tax(^) increased by 4.3% to £90.4 million
compared with the prior year of £86.7 million. This outturn reflects the
contribution from organic(8) underlying EBITDA(^) growth and acquisitions
offsetting increased interest charges on index-linked debt.
The results for the Group are expected to have an H1 weighting primarily due
to the expected impacts of inflation on index linked debt in the second half
of the year.
South West Water
South West Water underlying 16 H1 2021/22 H1 2020/21 Change
Revenue 17 £298.1m £282.9m +5.4%
Operating Costs (£119.8m) (£106.8m) (12.2%)
EBITDA(^) £178.3m £176.1m +1.2%
Depreciation and amortisation (£60.4m) (£59.3m) (1.9%)
Operating profit £117.9m £116.8m +0.9%
Net interest charge (£33.2m) (£28.3m) (17.3%)
Profit before tax £84.7m £88.5m (4.3%)
South West Water underlying revenue for H1 2021/22 of £298.1 million has
increased by 5.4% (£15.2 million) compared with last year (H1 2020/21 £282.9
million). This increase reflects the recovery of the non-household market and
developer services activity which were adversely impacted by Covid-19 in the
prior period.
Underlying operating costs of £119.8 million increased by £13.0 million
compared to £106.8 million in H1 2020/21. This increase principally
reflects:
· Increased production volumes arising from the recovery of
non-household demand driving increased power and chemical consumption of c.£2
million
· Additional operating costs of c.£2 million to enhance and accelerate
our key areas of operational focus of pollutions and leakage
· Higher developer activity such as government road schemes of c.£3
million associated with higher developer revenue
· Other cost increases of c.£5 million, reflecting annual pay
increases, higher insurance costs and annual inflationary increases, partly
offset by continued efficient delivery.
South West Water's underlying EBITDA^ (#_ftn18) and underlying operating
profit increased by 1.2% and 0.9%, respectively, reflecting the higher revenue
from non-household demand more than offsetting higher operating costs.
Net interest costs of £33.2 million are £4.9 million higher than the prior
period (H1 2020/21 £28.3 million) due to the impact of higher RPI and CPI on
index-linked debt. The Group's efficient funding mix and hedging strategy
minimises these market effects with active management of our portfolio and
higher levels of fixed or swapped instruments continuing to deliver a sector
leading effective interest rate(^) of 2.9% (H1 2020/21 2.5%). South West Water
has c.£800 million of interest rate swaps in place to manage its fixed,
floating and index-linked ratios.
South West Water's capital expenditure for H1 2021/22 was £98.7 million,
compared to £73.3 million in H1 2020/21, reflecting the profile of the
regulatory business plan and further advancement of expenditure in both water
and wastewater operations, offset by efficient delivery of schemes in
conjunction with key partners.
Drinking water capital expenditure of £50.3 million includes the commencement
of Alderney water treatment works in Bournemouth, building a state-of-the-art
facility following on from the successful construction of Mayflower water
treatment works in Plymouth. We will again deploy cutting-edge treatment
processes, designed to produce high quality drinking water and to be more
sustainable than a traditional water treatment works.
Wastewater capital expenditure of £48.4 million includes continued
advancement of pollutions related investments and bathing water improvements.
Bristol Water
Bristol Water underlying(16) H1 2021/22
Revenue17 £41.6m
Operating Costs (£19.9m)
EBITDA(^) £21.7m
Depreciation and amortisation (£9.3m)
Operating profit £12.4m
Net interest charge (£5.2m)
Profit before tax £7.2m
Bristol Water has contributed to the financial results since 3 June 2021. The
table above shows the contribution to the Group since that date, before any
consolidation adjustments to depreciation and interest costs from the fair
value exercise performed on the acquired balance sheet. In the period since
acquisition, the business has performed ahead of our expectations, with its
results having an H1 weighting primarily due to the inflationary impact on its
index-linked debt.
Similar to South West Water, Bristol Water has experienced increased revenues
in the period to 30 September 2021, compared to the same period last year, as
a result of ongoing higher levels of household demand and a recovery in
non-household demand. Revenues have also benefitted from higher regulatory
allowances in its business plan.
Pennon Water Services
Underlying(16) H1 2021/22 H1 2020/21 Change
Revenue £92.7m £75.3m +23.1%
Water segment wholesale elimination (£43.2m) (£38.8m) +11.3%
Revenue excluding elimination £49.5m £36.5m +35.6%
Operating Costs 18 (£91.1m) (£75.0m) (21.5%)
Water segment wholesale elimination £43.2m £38.8m (11.3%)
Operating costs excluding elimination (£47.9m) (£36.2m) (32.3%)
EBITDA(^) £1.6m £0.3m +433.3%
Depreciation and amortisation (£0.4m) (£0.4m) -
Operating profit £1.2m (£0.1m) +1,300.0%
Net interest charge (£0.9m) (£0.8m) (12.5%)
Profit / (loss) before tax £0.3m (£0.9m) +133.3%
Pennon Water Services demonstrated its resilience during a second year of
significant economic uncertainty, by engaging proactively with its customer
base whilst continuing to win new contracts and delivering against its
strategic priorities, with results in line with management expectations.
Non-household demand has returned to near pre-Covid-19 levels, with the
recovery predominantly in the hospitality, tourism and manufacturing
sectors.
The overall impact on revenues for Pennon Water Services, including the impact
of new contract wins is an increase of c.23% compared to the prior half
year. New business wins since 1 October 2020 have contributed c.£10 million
of additional revenue compared to H1 2020/21. Underlying operating costs have
grown in line with improving revenues and the business has more than
quadrupled its underlying EBITDA(^).
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.
Group net finance costs
Net finance costs for the Group of £37.0 million are £8.9 million higher
than last year (H1 2020/21 £28.1 million) including the Bristol Water
acquisition. The Group has benefitted from the efficient financing that has
been achieved through our diverse mix of fixed, floating and index-linked
debt, including a lower exposure to index-linked instruments than our peers.
This increase is due to the current volatility in inflation which has seen the
rates move significantly higher than in previous years. The full impact of
inflationary increases has been minimised by the relatively low level of
index-linked debt in our portfolio, compared to the rest of the water
industry.
The Group continues to secure funding for South West Water through its
Sustainable Financing Framework and has efficiently hedged c.55% of its
interest rate risk through the K7 regulatory period and expect index-linked
debt to remain below Ofwat's notional assumption of 33%.
Profit before tax before non-underlying items
Group underlying profit before tax(^) is £90.4 million compared with the
prior year of £86.7 million. This outturn reflects the contribution from
organic underlying EBITDA(^) growth and acquisitions being offset by increased
interest charges on index-linked debt.
As part of the requirements of acquisition accounting, we have determined the
provisional fair values of the acquired balance sheet of Bristol Water. These
provisional values will continue to be reviewed and will be finalised for our
financial year ending 31 March 2022. 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. The consequent adjustments to depreciation and interest costs are
reflected within 'other' in our segmental reporting.
Non-underlying items
Non-underlying items for H1 2021/22 total a charge before tax of £10.5
million (H1 2020/21 charge of £24.8 million). The Directors believe excluding
non-underlying items provides a more useful comparison of business trends and
performance.
The non-underlying charge of £10.5 million consists of expenses in connection
with the acquisition of Bristol Water and the related merger review by the
CMA.
In addition, a £96.9 million non-underlying deferred tax charge has been
recognised for the change in future tax rate which was enacted during this
half year.
Responsible approach to tax
The overall tax charge for the Group is £102.1 million (H1 2020/21 £11.5
million). On an underlying(^) basis, the net tax charge for H1 2021/22 for the
Group of £5.2 million (H1 2020/21 £16.3 million) consists of:
· Current year current tax charge of £6.5 million, reflecting an
effective tax rate of 7.2% (H1 2020/21 £12.4 million, 14.3%). This reduction
is largely as a result of the introduction of super-deductions, along with tax
relief on pension payments made during the year and in recent years
· Current year deferred tax charge of £10.2 million (H1 2020/21 £4.2
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.
· In relation to prior years, amendments notified to HMRC result in:
o Current tax credit of £2.0 million (H1 2020/21 £0.8 million credit)
o Deferred tax credit of £9.5 million (H1 2020/21 £0.5 million charge).
The H1 2021/22 non-underlying items result in a £96.9 million charge (H1
2020/21 £4.8 million credit), reflecting the UK tax rate change,
substantively enacted in the period. The UK tax rate increases to 25% from 1
April 2023, hence most deferred tax items will crystallise at a higher rate.
Earnings per share
The Group has recorded a loss per share of 6.3 pence in H1 2021/22. This
reflects non-underlying deferred tax of £96.9 million and non-underlying
acquisition costs relating to Bristol Water of £10.5 million. The reported
loss per share compares to earnings per share of 420.9 pence in H1 2020/21
which included the significant profit on disposal of Viridor of c.£1.7
billion.
The comparability of our 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.
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)(6) for H1 2021/22 of 30.6 pence
compared to 26.8 pence in H1 2020/21, on a comparable basis. This represents
an increase of 14.2%, 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 H1 2021/22. We continue to
closely monitor cash collections as the full impact of the government's
pandemic support measures being withdrawn is not fully known. The Group's
total operational cash inflows(^) in H1 2021/22 were £168.7 million (H1
2020/21 £156.6 million) including a £16.6 million contribution from Bristol
Water.
These cashflows adequately support our effective finance structures with net
interest paid of £32.4 million and capital investment programme of £120.9
million.
The acquisition of Bristol Water resulted in total cash outflows of £434.2
million including transaction costs, stamp duty and related costs incurred to
date in connection with the merger review by the CMA, 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.
The cash outflow to 30 September 2021 arising from the share buy-back is
£60.5 million. At 30 September, the value of the contractually committed
buy-back programme which was underway was up to c.£120 million. The full
value of this commitment has been reflected in reserves, with the outstanding
element of this commitment at that time recognised in accruals. On 26 November
2021, the current phase of the buy-back programme has finished, and the total
value of the buy-back programme completed to date is c.£110 million.
Other significant movements in net debt in H1 2021/22 include the special
dividend of £1,498.5 million and £23.7 million contributions to the Group's
principal pension scheme.
Following this, and the payment of our interim and final dividends for FY
2020/21, the Group's net debt at 30 September 2021 was £2,542.9 million (31
March 2021 net cash £64.3 million). This includes fair value adjustments on
acquired debt of £173.9 million 19 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 £2,369.0 million.
The movement in net debt reflects the restructuring of the Group's balance
sheet following our responsible deployment of capital, including c.£0.5
billion reinvestment in UK water, c.£0.1 billion additional pension
contributions and c.£1.2 billion(( 20 )) repayment of debt originally drawn
to fund Viridor, that has taken place over the last 15 months since the sale
of Viridor. The restructuring of the Group's balance sheet is now
substantially complete, and the current levels of debt represent a sustainable
position for the Group.
Agile and efficient financing
South West Water's cost of finance, with an effective rate(^) of 2.9% 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.
South West Water net debt is a mix of fixed / swapped (£1,367 million, 61%),
floating (£295 million, 13%) and index-linked borrowings (£581 million,
26%). South West Water's debt has a maturity of up to 36 years with a weighted
average maturity of c.17 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 (South West Water and Bristol
Water) is a mix of fixed / swapped 52%, floating 22% and index-linked 26% as
at 30 September 2021, which reflects our diverse debt portfolio and compares
to an industry average 21 of fixed / swapped 43%, floating 8% and index
linked 49%.
South West Water's index-linked debt is below Ofwat's notional assumption of
33%. This gives a comparative advantage through the regulatory transition from
RPI to CPIH, given the uncertainty and volatility around pricing of the wedge
between RPI and CPI. The CPI and CPIH markets have continued to develop
further over the last year and we will seek to issue new index-linked
instruments to maintain our position as required.
As announced in June 2021, Pennon has planned to deploy £100 million
investment into the water business, notionally split between South West Water
(£45 million) and Bristol Water (£55 million). Including this planned
investment, at 30 September 2021, water business (South West Water and Bristol
Water) debt to RCV 22 ratio stood at 62.1% 23 (, 24 ) (31 March 2021
64.8%). At the same date and on the same basis, gearing at South West Water
was 62.4%(23)(,)(24), which is expected to fall during this regulatory period
with a trajectory towards Ofwat's notional structure of 60% by 2025, and
Bristol Water gearing at 30 September 2021 was 60.0%(24).( )Prior to this
planned investment, the debt to RCV ratios at 30 September 2021 for the water
business, South West Water and Bristol Water stood at 64.5%, 63.7% and 69.7%,
respectively.
Responsible and sustainable balance sheet
The Group has a strong liquidity and funding position with £1,139 million
cash and committed facilities as at 30 September 2021. This position
excludes Bristol Water which continues to be managed independently both
financially and operationally. This consists of cash of £869 million
(including £253 million of restricted funds representing deposits with
lessors against lease obligations) and £270 million of undrawn facilities.
£449 million of the cash holdings are held at the Pennon company level.
Given the current low interest rate environment, the Group's cash is being
managed to provide flexibility and liquidity to meet any required cashflow
needs whilst ensuring appropriate security and counterparty limits are
observed.
South West Water net debt as at 30 September 2021 was £2,243 million,
slightly higher than the previous year (31 March 2021 £2,199 million) as
South West Water continues to deliver its capital programme. During the period
to 30 September 2021, South West Water signed £50 million of new and renewed
facilities. Following the continued success of our Sustainable Financing
Framework, we have updated and reissued our framework to incorporate the
latest sustainable principles, in particular the sustainability linked loan
and bond principles. The Group was the first UK corporate to issue
sustainability linked loans in 2018 and the new principles will help develop
this market further.
Our 2021 Sustainable Financing Impact Report was published in September,
detailing the progress we have made in this area and the allocation of funding
to our sustainable projects in water and wastewater to support our
communities.
In preparation for the cessation of LIBOR in December 2021, the Group is
following current recommendations from Regulators and progressing our
transition plans. Having completed our first LIBOR to SONIA amendment for a
sustainable revolving credit facility in 2020, we have engaged with all our
banking counterparties to ensure we are well placed for the transition to meet
the December deadline.
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 30 September 2021, the surplus on
retirement obligations of £56.5 million constitutes a surplus on PGPS of
£48.8 million and a surplus of £7.7 million in respect of Bristol Water's
defined benefit pension obligations.
The surplus on PGPS has increased by £40.0 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
· £15.9 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. This represents approximately 2% of the Viridor proceeds,
after debt retirements. As at 30 September 2021, PGPS is approximately 107%
funded against its technical provisions.
Bristol Water's pension surplus relates to the Bristol Water Section of the
Water Companies Pension Scheme (WCPS). The liabilities of the scheme are
insured through a bulk annuity policy and will fluctuate with changes in
actuarial assumptions, however the scheme assets in the form of the bulk
annuity policy materially match the value of the liabilities. 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 more than half of the Group's employees also
being shareholders.
In June 2021, Pennon announced a proposed special dividend of £1.5 billion,
which represents £3.55 per existing ordinary share, would be paid from the
retained earnings arising from the Viridor disposal. This was approved by
shareholders and paid in July 2021.
To maintain comparability, so far as possible, of the Company's share price
before and after the special dividend, a share consolidation accompanied the
special dividend which consolidated the Ordinary Share capital on the basis of
two New Ordinary Shares in the capital of the Company 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.
As announced, following the special dividend and share consolidation, we have
commenced a share buy-back programme of up to c.£400 million, with the first
two tranches totalling c.£120 million being irrevocably committed prior to 30
September 2021. Further phases are expected to commence 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 strategic acquisition of
Bristol Water, the dividend per share has been rebased, with the interim
dividend for H1 2020/21 being rebased to 11.15 pence, as shown in the table
below. Pennon's dividend growth policy of CPIH + 2% per annum is applied to
the adjusted base.
H1 2021/22 Growth on dividend adjusted for consolidation
interim dividend
(pence)
2020/21 interim dividend 6.77
Base uplift for share consolidation and return of capital 25 +4.38
2020/21 interim dividend adjusted for return of capital 11.15
Dividend growth on revised base (CPIH+2%) +0.55 +4.9%
2021/22 interim dividend 11.70
Pennon's sector-leading dividend policy reflects the Board's confidence in the
Group's sustainable growth strategy and is underpinned by continued RORE(^)
outperformance in South West Water.
For H1 2021/22 the Board has declared an interim dividend of 11.70 pence,
representing an increase of 4.9% on the adjusted base for H1 2020/21. The
interim dividend will be paid on 5 April 2022 to shareholders on the register
on 28 January 2022. Pennon offers shareholders the opportunity to invest their
dividend in a Dividend Reinvestment Plan (DRIP).
Macro-economic outlook
As the UK economy starts to recover following the slowdown from the
restrictions imposed through the Covid-19 pandemic, the impacts on the supply
chain, rising power prices and overall higher levels of inflation are
impacting all businesses.
The high current inflationary environment is anticipated to increase certain
costs during 2021/22 and whilst finance costs for 2021/22 will increase above
2020/21 levels, the Group has a relatively lower proportion of index-linked
debt in its debt portfolio compared to industry peers. In terms of a financial
impact, a movement of 100 basis points on RPI inflation equates to an annual
impact of c.£8 million for South West Water and Bristol Water combined. To
offset operational and supply chain cost pressures, we continue to target
efficiencies across the business.
The impact of inflation on the Group's operating and finance costs is expected
to be outweighed by the increase in RCV driving future years revenues, with
inflation linkage and regulatory true ups providing long-term protection 26 .
100% of our expected power usage for FY 2021/22 has been de-risked through
hedging and our own generation. c.50% of our expected power usage beyond H1
2021/22 through to the end of K7 has been de-risked through hedging and
increasing our own generation capacity. c.10% of our underlying operating
costs are linked to wholesale power costs. 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 of c.£60 million over the period to 2030,
in addition to c.£20 million associated with projects within the envelope of
regulatory allowances. These investments will help to decrease our reliance
on wholesale power markets.
We recognise that inflationary pricing increases may pose challenges to our
customers. South West Water's sector-leading bad debt charge of 0.6% of
revenue (£1.8 million for H1 2021/22) reflects the enhancements to customer
support measures that we have made with c.68,000 customers now benefitting
from one or more of our social tariffs.
Technical Guidance - Full Year 2021/22
Pennon Group FY 2020/21 Change Movement from guidance at FY 2020/21
Revenue • Increased non-household demand and other services as Covid-19 £644.6m ▲ -
recovery continues
• South West Water household demand reflects increased regional
population due to staycations
Bristol Water • 10-month contribution - Profit before tax H1 weighted £8.9m ▲ ▲
Net (debt)/cash • Return of capital to shareholders in July 2021 £64.3m ▼ -
• Earnings accretive acquisition of Bristol Water including
acquired net debt at fair value
• Share buy-back programme deployment
Current year current tax rate • Underlying Group's effective current year current tax rate lower 15.1% ▼ -
than UK headline rate of 19% reflecting super-deductions and relief on pension
contributions
South West Water FY 2020/21 Change
Operating costs • Operating cost increase due to sustained high levels of demand £222.4m ▲ ▲
and inflationary pressures
Net interest • Efficient financing impacted by inflationary increases in £57.7m ▲ -
charges related to index-linked debt - H2 weighted
Capex • Capital expenditure reflects K7 profile of investment - H2 £168.2m ▲ -
weighted
RORE(^) • Outperformance expected to continue 7.8% - -
RCV • Increase in line with K7 business plan levels of investment, £3,393m ▲ -
supported by inflation expectations
Pennon Water Services FY 2020/21 Change
Operating costs • Non-household recovery from Covid-19 and contract wins leading £161.4m ▲ -
to higher wholesale supply charges
Underlying EBITDA(^) • Impact of increased non-household demand on margins £1.4m ▲ -
• Focus on continued cost efficiency with strong collections
offsetting potential bad debt impact of Covid-19
Covid-19 assumptions are based on our ongoing assessment of the impact of the
pandemic.
Financial Timetable
27 January 2022 Ordinary shares quoted ex-dividend
28 January 2022 Record date for interim dividend
11 March 2022 Final date for receipt of DRIP applications
1 April 2022 Trading Statement
5 April 2022 Interim dividend payment date
31 May 2022 Full Year Results 2021/22
June 2022 Annual Report and Accounts published
21 July 2022 Annual General Meeting
21 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
* 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.
Specifically, the current inflationary environment is expected to result in
increased operational and finance costs in 2021/22. However, the impacts of
these costs are expected to be outweighed by the increase in Regulated Capital
Value (RCV) driving revenue in future years.
The Board have reviewed the Group's principal risks and consider them to be
consistent with those reported within the 2020/21 Annual Report:
Law, Regulation and Finance
1. Changes in Government Policy
2. Regulatory reform
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 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 published in June 2021. 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 half year ended 30 September 2021
Unaudited
Before non-underlying items Non-underlying items (note 5) half year ended 30 September 2021 Total Before non-underlying items Non-underlying items (note 5) half year ended 30 September 2020 Total
half year
half year
half year
half year ended 30 September 2020
ended 30 September 2021
ended 30 September 2021
ended 30 September 2020
Notes £m £m £m £m £m £m
Continuing operations
Revenue 4 389.3 - 389.3 319.7 (20.5) 299.2
Operating costs
Employment costs (43.0) - (43.0) (37.6) - (37.6)
Raw materials and consumables used (9.8) - (9.8) (8.7) - (8.7)
Other operating expenses (137.1) (10.5) (147.6) (98.9) (4.3) (103.2)
Earnings before interest, tax, 4 199.4 (10.5) 188.9 174.5 (24.8) 149.7
depreciation and amortisation
Depreciation and amortisation (72.0) - (72.0) (59.7) - (59.7)
Operating Profit 4 127.4 (10.5) 116.9 114.8 (24.8) 90.0
Finance income 6 2.2 - 2.2 2.3 - 2.3
Finance costs 6 (39.2) - (39.2) (30.4) - (30.4)
Net finance costs 6 (37.0) - (37.0) (28.1) - (28.1)
Profit before tax 4 90.4 (10.5) 79.9 86.7 (24.8) 61.9
Taxation 7 (5.2) (96.9) (102.1) (16.3) 4.8 (11.5)
(Loss) / profit for the period from 85.2 (107.4) (22.2) 70.4 (20.0) 50.4
continuing operations
Discontinued operations
Profit for the period from 22 - - - 39.2 1,680.8 1,720.0
discontinued operations
(Loss) / profit for the period 85.2 (107.4) (22.2) 109.6 1,660.8 1,770.4
Attributable to:
Ordinary shareholders of the parent 85.1 (107.4) (22.3) 109.8 1,660.8 1,770.6
Non-controlling interests 0.1 - 0.1 (0.2) - (0.2)
Earnings per ordinary share 8
(pence per share)
From continuing operations
- Basic (6.3) 12.0
- Diluted (6.3) 12.0
From continuing and discontinued operations
- Basic (6.3) 420.9
- Diluted (6.3) 418.8
The notes on pages 41 to 58 form part of this condensed half year financial
information.
PENNON GROUP PLC
Consolidated statement of comprehensive income for the half year ended 30
September 2021
Unaudited
Before non-underlying items Non-underlying items (note 5) half year ended 30 September 2021 Total Before non-underlying items Non-underlying items (note 5) half year ended 30 September 2020 Total
half year
half year
half year
half year ended 30 September 2020
ended 30 September 2021
ended 30 September 2021
ended 30 September 2020
£m £m £m £m £m £m
(Loss) / profit for the period 85.2 (107.4) (22.2) 109.6 1,660.8 1,770.4
Other comprehensive income
Items that will not be reclassified to profit or loss
Remeasurement of defined benefit 15.9 - 15.9 (87.8) - (87.8)
obligations (note 16)
Income tax on items that will not be reclassified 4.3 - 4.3 16.7 - 16.7
Total items that will not be 20.2 - 20.2 (71.1) - (71.1)
reclassified to profit or loss
Items that may be reclassified subsequently
to profit or loss
Cash flow hedges 10.2 - 10.2 (6.4) - (6.4)
Income tax on items that may be reclassified (0.7) - (0.7) 1.5 - 1.5
Total items that may be reclassified 9.5 - 9.5 (4.9) - (4.9)
subsequently to profit or loss
Other comprehensive income/ (expense) 29.7 - 29.7 (76.0) - (76.0)
for the period net of tax
Total comprehensive income for the period 114.9 (107.4) 7.5 33.6 1,660.8 1,694.4
Total comprehensive income attributable to:
Ordinary shareholders of the parent 114.8 (107.4) 7.4 33.8 1,660.8 1,694.6
Non-controlling interests 0.1 - 0.1 (0.2) - (0.2)
The notes on pages 41 to 58 form part of this condensed half year financial
information.
PENNON GROUP PLC
Consolidated balance sheet at 30 September 2021
Unaudited
30 September 2021 31 March
2021
Notes £m £m
ASSETS
Non-current assets
Goodwill 21 160.7 42.3
Other intangible assets 14.0 1.2
Property, plant and equipment 17 4,206.8 3,221.0
Derivative financial instruments 2.3 3.8
Retirement benefit assets 16 56.5 8.8
Trade and other receivables 9.9 -
4,450.2 3,277.1
Current assets
Inventories 7.2 5.4
Trade and other receivables 250.8 216.8
Current tax receivable 2.5 0.1
Derivative financial instruments 3.4 1.3
Cash and cash deposits 885.0 2,919.3
1,148.9 3,142.9
LIABILITIES
Current liabilities
Borrowings 14 (171.1) (88.3)
Financial liabilities at fair value through profit and loss (2.8) (2.8)
Derivative financial instruments (6.7) (6.3)
Trade and other payables 18 (206.7) (126.1)
Provisions - (0.3)
(387.3) (223.8)
Net current assets 761.6 2,919.1
Non-current liabilities
Borrowings 14 (3,256.8) (2,766.7)
Other non-current liabilities 18 (131.7) (128.3)
Financial liabilities at fair value through profit and loss (38.2) (39.4)
Derivative financial instruments (7.5) (17.4)
Deferred tax liabilities (493.7) (259.6)
(3,927.9) (3,211.4)
Net assets 1,283.9 2,984.8
Shareholder's equity
Share capital 169.2 171.8
Share premium account 234.9 232.1
Capital redemption reserve 147.1 144.2
Retained earnings and other reserves 732.7 2,436.8
Total shareholders' equity 1,283.9 2,984.9
Non-controlling interests - (0.1)
Total equity 1,283.9 2,984.8
The notes on pages 41 to 58 form part of this condensed half year financial
information.
PENNON GROUP PLC
Consolidated statement of changes in equity for the half year ended 30
September 2021
Unaudited
Share capital (note 10) Share premium account (note 11) Capital redemption reserve Retained earnings and other reserves Non-controlling interests Perpetual capital securities Total equity
(note 12)
£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 period - - - 1,770.6 (0.2) - 1,770.4
Other comprehensive income for the period - - - (75.9) - - (75.9)
Total comprehensive income for the period - - - 1,694.7 (0.2) - 1,694.5
Transactions with equity shareholders:
Dividends paid - - - (184.3) - - (184.3)
Adjustments in respect of share-based - - - 2.1 - - 2.1
payments (net of tax)
Distributions due to perpetual capital - - - (3.3) - (296.7) (300.0)
security holders
Own shares acquired by the Pennon Employee - - - (1.3) - - (1.3)
Share Trust in respect of Share options
Proceeds from shares issued under 0.4 3.4 - - - - 3.8
the Sharesave Scheme
Total transactions with equity shareholders 0.4 3.4 - (186.8) - (296.7) (479.7)
At 30 September 2020 171.7 230.4 144.2 2,380.7 (0.1) - 2,926.9
Unaudited
Share Share premium account (note 11) Capital redemption reserve Retained earnings and other reserves Non-controlling interests Perpetual capital securities Total equity
capital
(note 10) (note 12)
£m £m £m £m £m £m £m
At 1 April 2021 171.8 232.1 144.2 2,436.8 (0.1) - 2,984.8
Loss for the period - - - (22.3) 0.1 - (22.2)
Other comprehensive income for the period - - - 29.7 - - 29.7
Total comprehensive income for the period - - - 7.4 0.1 - 7.5
Transactions with equity shareholders:
Dividends paid - - - (1,590.3) - - (1,590.3)
Shares purchased for cancellation - - - (121.4) - - (121.4)
Shares cancelled (note 10) (2.9) - 2.9 - - - -
Adjustments in respect of share-based - - - 1.3 - - 1.3
payments (net of tax)
Own shares acquired by the Pennon Employee - - - (1.1) - - (1.1)
Share Trust in respect of Share options
Proceeds from shares issued under 0.3 2.8 - - - - 3.1
the Sharesave Scheme
Total transactions with equity shareholders (2.6) 2.8 2.9 (1,711.5) - - (1,708.4)
At 30 September 2021 169.2 234.9 147.1 732.7 - - 1,283.9
The notes on pages 41 to 58 form part of this condensed half year financial
information.
PENNON GROUP PLC
Consolidated statement of cash flows for the half year ended 30 September 2021
Unaudited
Half year ended 30 September 2021 Half year
ended 30 September
2020
Notes £m £m
Cash flows from operating activities
Cash generated from operations 13 135.9 126.6
Interest paid (34.6) (45.4)
Tax paid (6.3) (11.5)
Net cash generated from operating activities 95.0 69.7
Cash flows from investing activities
Interest received 2.2 2.5
Loan repayments received from joint ventures - 4.0
Purchase of property, plant and equipment (119.9) (113.1)
Purchase of intangible assets (1.3) (0.1)
Acquisition of subsidiaries, net of cash acquired 21 (412.3) -
Proceeds on disposal of subsidiaries, net of cash 9.2 3,652.2
disposed and transaction costs
Proceeds from sale of property, plant and equipment 0.3 0.1
Investment in short-term deposits - (650.5)
Deposit of restricted cash (3.0) (3.8)
Net cash (used in)/received from investing activities (524.8) 2,891.3
Cash flows from financing activities
Proceeds from issuance of ordinary shares 3.1 3.8
Purchase of ordinary shares by the Pennon Employee Share Trust (1.1) (1.3)
Proceeds from new borrowings 50.9 200.0
Repayment of borrowings (20.2) (941.6)
Cash inflows from lease financing arrangements 13 15.0 5.0
Lease principal repayments (10.5) (16.9)
Dividends paid 9 (1,590.3) (184.3)
Repurchase of own shares (60.5) -
Redemption of perpetual capital security - (300.0)
Perpetual capital securities periodic return - (8.6)
Net cash used in financing activities (1,613.6) (1,243.9)
Net (decrease)/increase in cash and cash equivalents (2,043.4) 1,717.1
Cash and cash equivalents at beginning of period 14 2,668.5 472.0
Cash and cash equivalents at end of period 14 625.1 2,189.1
The cash flow statement above includes the entire Group, including
cashflows relating to discontinued operations for H1 2020/21. The notes on
pages 41 to 58 form part of this condensed half year financial information.
PENNON GROUP PLC
Notes to condensed half year financial information
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
58. Pennon Group's 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
Group, which was completed on 3 June 2021. Bristol Water Group comprises
Bristol Water plc, a regulated water only company serving a population of
approximately 1.2 million customers in the Bristol region, and a 30% share in
Water 2 Business Limited, a joint venture with Wessex Water. The acquisition
of the Bristol Water Group is currently under review by the Competition and
Markets Authority, and the Bristol Water Group 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. The net results for Viridor
are presented within discontinued operations in the comparative figures for
the Group income statement for the six months ended 30 September 2020.
This condensed half year financial information was approved by the Board of
Directors on 29 November 2021.
The financial information for the period ended 30 September 2021 does not
constitute statutory accounts within the meaning of section 435 of the
Companies Act 2006. The statutory accounts for 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 these financial
statements was unqualified and did not contain a statement under section 498
of the Companies Act 2006.
2. Basis of preparation
This condensed half year financial information has been prepared in accordance
with the Disclosure and Transparency Rules of the Financial Services
Authority, and UK adopted IAS 34 'Interim financial reporting'. This condensed
half year financial information should be read in conjunction with the Pennon
Group plc Annual Report and Accounts for the year ended 31 March 2021, which
were prepared in accordance with International Accounting Standards in
conformity with the requirements of the Companies Act 2006 and with
international financial reporting standards adopted pursuant to Regulation
(EC) No 1606/2002 as it applied in the European Union.
The going concern basis has been adopted in preparing the condensed half year
financial information (interim accounts). At 30 September 2021, the Group has
access to undrawn committed funds and cash and other short-term deposits
totalling £1,155 million, including cash and other short-term deposits of
£885 million and £270 million of undrawn facilities. Cash and other
short-term deposits include £260 million of restricted funds deposited with
lessors which are available for access, subject to being replaced by an
equivalent valued security. Having considered the Group's strong funding
position and prudent financial projections prepared to 31 March 2023, which
take into account a range of possible impacts, including from the Covid-19
pandemic, the Directors have a reasonable expectation that the Group has
adequate resource to continue in operational existence for the period to at
least the end of the detailed forecasting period of 31 March 2023, and that
there are no material uncertainties to disclose. For this reason, they
continue to adopt the going concern basis in preparing the interim accounts.
This condensed half year financial information has been reviewed, but not
audited, by the independent auditor pursuant to the Auditing Practices Board
guidance on the 'Review of Interim Financial Information'.
The preparation of the half year financial information requires management to
make judgements, estimates and assumptions that affect the application of
accounting policies and the reported amounts of assets and liabilities, income
and expense. Actual results may differ from these estimates. The significant
judgements made by management in applying the Group's accounting policies and
the key sources of estimation uncertainty are consistent with those that
applied to the consolidated financial statements for the year ended 31 March
2021.
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
3. Accounting policies
The accounting policies adopted in this condensed half year financial
information are consistent with those applied and set out in the Pennon Group
plc Annual Report and Accounts for the year ended 31 March 2021 and are in
accordance with IFRS and interpretations of the IFRS Interpretations Committee
expected to be applicable for the year ending 31 March 2022 in issue which
have been adopted by the UK.
New standards or interpretations which were mandatory for the first time in
the year beginning 1 April 2021 did not have a material impact on the net
assets or results of the Group. New standards or interpretations due to be
adopted from 1 April 2022 are not expected to have a material impact on the
Group's net assets or results.
Share buy-back scheme and tender offer
Shares purchased for cancellation are deducted from retained earnings at the
total consideration paid or payable, including any related expenses. Where the
Group has an irrevocable commitment to purchase shares for cancellation at the
balance sheet date, a liability is recognised in other creditors based on the
share price at the balance sheet date and retained earnings reduced by the
amount of the liability.
Shares purchased and held by the Group (treasury shares) are deducted from the
treasury reserve at the total consideration paid or payable. On cancellation
of treasury shares, the cost is transferred from the treasury reserve to
retained earnings.
When treasury shares are issued at below cost, an amount representing the
difference between the cost of those shares and issue proceeds is transferred
to retained earnings. No gain or loss is recognised in the consolidated income
statement on the purchase, sale, issue or cancellation of the Group's own
equity instruments.
4. 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 Board'). The earnings measures
below are used by the Board in making decisions.
The Group is organised into three 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
aggregation of these two operating segments reflects, in the opinion of
management, the similar economic characteristics, services offered, classes of
customers and the regulatory environment that these businesses share. The
non-household retail business reflects the services provided by Pennon Water
Services. The profit recognised on disposal of the Viridor business is
provided in note 22. The Bristol Water Group forms part of the Water segment.
Separate disclosures for Bristol Water Group on a stand-alone basis are also
provided below as additional information.
Unaudited
Half year ended 30 September 2021 Half year ended 30 September 2020
Revenue from continuing operations £m £m
Water - South West Water 298.1 282.9
Water - Bristol Water 41.6 -
Water total 339.7 282.9
Non-household retail 92.7 75.3
Other 1.0 3.7
Less intra-segment trading (44.1) (42.2)
Total underlying revenue 389.3 319.7
Water non-underlying revenue - (20.5)
389.3 299.2
Segment result
Operating profit before depreciation, amortisation and
non-underlying items (Underlying EBITDA)
Water - South West Water 178.3 176.1
Water - Bristol Water 21.7 -
Water total 200.0 176.1
Non-household retail 1.6 0.3
Other (2.2) (1.9)
199.4 174.5
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
4. Segmental information (continued)
Unaudited
Half year ended 30 September 2021 Half year ended 30 September 2020
£m £m
Operating profit before non-underlying items
Water - South West Water 117.9 116.8
Water - Bristol Water 12.4 -
Water total 130.3 116.8
Non-household retail 1.2 (0.1)
Other (4.1) (1.9)
127.4 114.8
Profit before tax before non-underlying items
Water - South West Water 84.7 88.5
Water - Bristol Water 7.2 -
Water total 91.9 88.5
Non-household retail 0.3 (0.9)
Other (1.8) (0.9)
90.4 86.7
Profit before tax
Water - South West Water 84.7 64.5
Water - Bristol Water 7.2 -
Water total 91.9 64.5
Non-household retail 0.3 (0.9)
Other (12.3) (1.7)
79.9 61.9
Intra-segment trading between different segments is under normal market based
commercial terms and conditions. Intra-segment revenue of the other segment is
reflected as a cost.
Factors such as seasonal weather patterns can affect sales volumes, income and
costs in the water segments.
The grouping of revenue streams by how they are affected by economic factors,
as required by IFRS 15, is as follows:
Unaudited
Six months ended 30 September 2020 UK total
Water Non-household Other Total
retail
£m £m £m £m
Segment revenue (underlying) 282.9 75.3 3.7 361.9
Inter-segment revenue (underlying) (38.8) - (3.4) (42.2)
Underlying revenue from external customers 244.1 75.3 0.3 319.7
Non-underlying revenue (20.5) - - (20.5)
223.6 75.3 0.3 299.2
Significant service lines
Water 223.6 - - 223.6
Non-household retail - 75.3 - 75.3
Other - - 0.3 0.3
223.6 75.3 0.3 299.2
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
4. Segmental information (continued)
Unaudited
Six months ended 30 September 2021 UK total
Water Non-household Other Total
retail
£m £m £m £m
Segment revenue (underlying) 339.7 92.7 1.0 433.4
Inter-segment revenue (underlying) (43.6) (0.1) (0.4) (44.1)
Underlying revenue from external customers 296.1 92.6 0.6 389.3
Non-underlying revenue - - - -
296.1 92.6 0.6 389.3
Significant service lines
Water 296.1 - - 296.1
Non-household retail - 92.6 - 92.6
Other - - 0.6 0.6
296.1 92.6 0.6 389.3
Amounts included in the Water segment in respect of Bristol Water Group
Unaudited
Half year ended 30 September 2021
£m
Revenue from continuing operations 41.4
Operating profit before depreciation, amortisation and 21.7
non-underlying items (Underlying EBITDA)
Operating profit before non-underlying items 12.4
Profit before tax before non-underlying items 7.2
Profit before tax 7.2
Segment revenue 41.6
Inter-segment revenue (0.2)
Revenue from external customers 41.4
5. 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 period and
business trends over time.
Unaudited
Half year ended 30 September 2021 Half year ended 30 September 2020
£m £m
Revenue
WaterShare+ (1) - (20.5)
Operating Costs
Bristol Water acquisition (2) (10.5) -
Pension curtailment charge (3) - (4.3)
Non-underlying tax (charge) / credit (4) (96.9) 4.8
Net non-underlying charge related to the Continuing Group (107.4) (20.0)
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
5. Non-underlying items (continued)
(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. This item was non-underlying in nature given its
individual size and its non-recurring nature.
(2) The Group incurred expenses of £10.5 million in the half year ended 30
September 2021 in connection with the acquisition of Bristol Water and the
related review by the CMA.
(3) 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 £4.3
million.
(4) The non-underlying tax charge of £96.9 million for the half year ended 30
September 2021 represents the impact on the Group's deferred taxation balances
of changes to UK legislation which became substantively enacted in the half
year period. These changes were the increase in the UK main corporation tax
rate to 25% with effect from 1 April 2023 and the increased level of capital
allowances available for the period from April 2021 to March 2023.
The non-underlying tax charge for the half year ended 30 September 2020
represented the tax effect of the non-underlying revenue and operating cost
items. The non-underlying operating costs for the half year ended 30 September
2021 had no related tax impact.
6. Net finance costs
Unaudited
Half year ended Half year ended
30 September 2021
30 September 2020
Finance costs Finance income Total Finance Finance income Total
costs
£m £m £m £m £m £m
Cost of servicing debt
Bank borrowings and overdrafts (26.4) - (26.4) (15.2) - (15.2)
Interest element of lease payments (11.4) - (11.4) (13.6) - (13.6)
Other finance costs (0.5) - (0.5) (1.0) - (1.0)
Interest receivable - 1.0 1.0 - 2.3 2.3
(38.3) 1.0 (37.3) (29.8) 2.3 (27.5)
Notional interest
Retirement benefit obligations (0.9) 1.2 0.3 (0.6) - (0.6)
Net finance costs (39.2) 2.2 (37.0) (30.4) 2.3 (28.1)
In addition to the above, finance costs of £0.3 million have been capitalised
on qualifying assets included in property, plant and equipment (H1 2020/21
£0.6 million). Excluded from the amounts above are net finance costs relating
to discontinued operations of £Nil (H1 2020/21 £11.2 million), consisting of
finance income of £Nil (H1 2020/21 £6.0 million) and finance costs of £Nil
(H1 2020/21 £17.2 million). In addition, non-underlying finance costs of
£Nil (H1 2020/21 £55.2 million) are included within discontinued operations
in respect of the retirement of debt relating to the discontinued operations,
including early settlement payments.
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
7. Taxation
Unaudited
Before non-underlying items Non-underlying items (note 5) half year ended 30 September 2021 Total Before non-underlying items half year ended 30 September 2020 Non-underlying items (note 5) half year ended 30 September 2020 Total
half year
half year
half year ended 30 September 2020
ended 30 September 2021
ended 30 September 2021
£m £m £m £m £m £m
Analysis of charge
Current tax charge 4.5 - 4.5 11.6 (3.9) 7.7
Deferred tax charge 0.7 96.9 97.6 4.7 (0.9) 3.8
Tax charge for the period 5.2 96.9 102.1 16.3 (4.8) 11.5
UK corporation tax is calculated at 19% (H1 2020/21 19%) of the estimated
assessable profit for the year. The tax charge for September 2021 and
September 2020 has been derived by applying the anticipated effective annual
tax rate to the first half year profit before tax.
Tax on amounts included in the consolidated statement of comprehensive income,
or directly in equity, is included in those statements respectively.
The effective tax rate for the period for the group, including prior year
adjustments but before the impact of non-underlying items was 6% (H1 2020/21
19%).
The effective tax rate for the period for the group including prior year
adjustments and the impact of non-underlying items was 128% (H1 2020/21
19%).
8. 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 period, 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 has reduced in the period following the
share consolidation which took place on 5 July 2021, whereby the Ordinary
Share capital was consolidated on the basis of two New Ordinary Shares in the
capital of the Company for every three Existing Ordinary Shares in the capital
of the Company.
The weighted average number of shares and earnings used in the calculations
were:
Unaudited
Half year ended 30 September 2021 Half year ended 30 September 2020
Number of shares (millions)
For basic earnings per share 353.3 420.7
Effect of dilutive potential ordinary shares from share options 1.9 2.1
For diluted earnings per share 355.2 422.8
Adjusted basic and diluted earnings per ordinary share
Adjusted earnings per share are presented to provide a more useful comparison
on business trends and performance. Non-underlying items are adjusted for by
virtue of their size, nature or incidence to enable a full understanding of
the Group's financial performance (as described in note 5). Earnings per share
have been calculated as follows:
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
8. Earnings per share (continued)
Unaudited
Half year ended Half year ended
30 September 2021
30 September 2020
Continuing and discontinued operations Profit Earnings per share Profit Earnings per share
after tax Basic Diluted after tax Basic Diluted
£m p p £m p p
Statutory earnings (22.3) (6.3) (6.3) 1,770.6 420.9 418.8
Deferred tax before non-underlying items 0.7 0.2 0.2 12.3 2.9 2.9
Non-underlying items (net of tax) 107.4 30.4 30.3 (1,660.8) (394.8) (392.8)
Adjusted earnings before non-underlying items 85.8 24.3 24.2 122.1 29.0 28.9
and deferred tax
Unaudited
Half year ended Half year ended
30 September 2021
30 September 2020
Continuing operations Profit Earnings per share Profit Earnings per share
after tax Basic Diluted after tax Basic Diluted
£m p p £m p p
Statutory earnings (22.3) (6.3) (6.3) 50.6 12.0 12.0
Deferred tax before non-underlying items 0.7 0.2 0.2 4.7 1.1 1.1
Non-underlying items (net of tax) 107.4 30.4 30.3 20.0 4.8 4.7
Adjusted earnings before non-underlying items 85.8 24.3 24.2 75.3 17.9 17.8
and deferred tax
9. Dividends
Amounts recognised as distributions to ordinary equity holders in the period: Unaudited
Half year ended 30 September 2021 Half year ended 30 September 2020
£m £m
Interim dividend paid for the year ended 28.6 57.5
31 March 2021: 6.77 pence (2020: 13.66 pence) per share
Final dividend paid for the year ended 63.2 126.8
31 March 2021: 14.97 pence (2020: 30.11 pence) per share
Special dividend paid for the year ended 1,498.5 -
31 March 2021: 355.00 pence (2020: Nil) per share
1,590.3 184.3
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
9. Dividends (continued)
In the six months to 30 September 2021 the 2020/21 interim and final dividends
and special dividend were paid resulting in a cash outflow of £1,590.3
million.
Unaudited
Half year ended 30 September 2021 Half year ended 30 September 2020
£m £m
Proposed interim dividend for the year ended
31 March 2022: 11.70 pence (2021: 6.77 pence) per share
32.4 28.6
The proposed interim dividend has not been included as a liability in this
condensed half year financial information. The proposed interim dividend for
the year ending 31 March 2022 will be paid on 5 April 2022 to shareholders on
the register on 28 January 2022.
10. Share capital
Allotted, called up and fully paid:
1 April 2020 to 30 September 2020 Unaudited
Number of shares
Treasury shares Ordinary shares £m
At 1 April 2020 ordinary shares of 40.7 pence each 8,443 421,036,557 171.3
For consideration of £3.8 million, shares issued in - 811,400 0.4
respect of the Company's Sharesave Scheme
At 30 September 2020 ordinary shares of 40.7 pence each 8,443 421,847,957 171.7
1 April 2021 to 30 September 2021 Unaudited
Number of shares
Treasury shares Ordinary shares £m
At 1 April 2021 ordinary shares of 40.7 pence each 8,443 422,120,181 171.8
Share consolidation* (2,815) (140,706,727) -
For consideration of £3.1 million, shares issued in - 413,271 0.3
respect of the Company's Sharesave Scheme
Cancelled Shares (acquired via share buy-back)** - (4,718,932) (2.9)
At 30 September 2021 ordinary shares of 61.05 pence each 5,628 277,107,793 169.2
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
10. Share capital (continued)
* 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 period, the Group announced and began a process to purchase
ordinary shares at an aggregate cost of £400 million by September 2022.
During the first phase of this process the Group has purchased £59.7 million
of ordinary shares from the market at an average ordinary share price of 12.66
pence. The shares acquired under the tender offer were immediately cancelled,
creating a capital redemption reserve of £2.9 million.
The second phase of this process began on 30 September 2021 and the Group has
recorded a liability of £60.9 million in respect of the irrevocable
commitment made as part of this phase (see note 18).
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).
Shares held as treasury shares may be sold, re-issued for any of the Company's
share schemes, or cancelled.
The weighted average market price of the Company's shares at the date of
exercise of share scheme options during the period was 1,236 pence (H1 2020/21
1,051 pence).
11. Share premium account
Unaudited
1 April 2020 to 30 September 2020 £m
At 1 April 2020 227.0
Shares issued under the Sharesave Scheme 3.4
At 30 September 2020 230.4
1 April 2021 to 30 September 2021
At 1 April 2021 232.1
Shares issued under the Sharesave Scheme 2.8
At 30 September 2021 234.9
12. Capital redemption reserve
Unaudited
1 April 2020 to 30 September 2020 £m
At 1 April 2020 and 30 September 2020 144.2
1 April 2021 to 30 September 2021
At 1 April 2021 144.2
Share capital redeemed 2.9
At 30 September 2021 147.1
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
13. Cash flow from operating activities
Reconciliation of profit for the period to net cash inflow from operations: Unaudited
Half year ended 30 September 2021 Half year ended 30 September 2020
£m £m
Cash generated from operations
(Loss)/Profit for the period (22.2) 1,770.4
Adjustments for:
Share-based payments 1.1 2.6
(Profit) / loss on disposal of property, plant and equipment (0.3) 0.2
Profit on sale of discontinued operations - (1,729.3)
Depreciation charge 70.7 60.7
Amortisation of intangible assets 1.3 0.1
Continuing Group:
- non-underlying pension items (note 5) - 4.3
Discontinued operations:
- non-underlying pension items - (6.0)
- non-underlying restructuring costs and share scheme charges - 6.6
- non-underlying debt retirement costs - 56.8
Share of post-tax profit from joint ventures - (4.3)
Finance income (before non-underlying items) (2.2) (8.3)
Finance costs (before non-underlying items) 39.2 47.6
Taxation charge 102.1 10.8
Changes in working capital:
Increase in inventories (0.1) (3.9)
Increase in trade and other receivables (20.5) (46.8)
Increase in service concession arrangements receivable - (3.8)
(Decrease) / increase in trade and other payables (8.9) 9.7
Decrease in retirement benefit obligations from contributions (23.7) (37.8)
Decrease in provisions (0.6) (3.0)
Cash generated from operations 135.9 126.6
Cash generated from operations comprises:
- Cash generated from discontinued operations - 6.0
- Cash generated from the Continuing Group 135.9 120.6
Unaudited
Half year ended 30 September 2021 Half year ended 30 September 2020
Total interest paid £m £m
Interest paid in operating activities 34.6 45.4
Interest paid in investing activities 0.3 1.4
Total interest paid 34.9 46.8
The above cash flow tables reflect the entire Group, including cash flows
relating to the discontinued operations in H1 2020/21. During the period, 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 (H1 2020/21 £5.0 million) were received. These
assets are primarily being leased back over an initial 10-year lease term at
market rentals.
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
14. Net borrowings
Unaudited
Half year ended 30 September 2021 Year ended 31 March 2021
£m £m
Cash and cash deposits 885.0 2,919.3
Borrowings - current
Bank and other loans (7.7) (7.7)
Other current borrowings (70.8) (32.4)
Lease obligations (92.6) (48.2)
Total current borrowings (171.1) (88.3)
Borrowings - non-current
Bank and other loans (1,713.8) (1,170.7)
Other non-current borrowings (188.8) (205.0)
Lease obligations (1,354.2) (1,391.0)
Total non-current borrowings (3,256.8) (2,766.7)
Total net (borrowings) / cash (2,542.9) 64.3
For the purposes of the cash flow statement cash and cash equivalents
comprise:
Unaudited
Half year ended 30 September 2021 Year ended 31 March 2021
£m £m
Cash and cash deposits as above 885.0 2,919.3
Less: deposits with a maturity of three months or more (restricted funds) (259.9) (250.8)
625.1 2,668.5
Restricted funds of £259.9 million (31 March 2021 £250.8 million) are
deposited with lessors which are available for access, subject to being
replaced by an equivalent valued security.
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
14. Net borrowings (continued)
The movements in net borrowings during the periods presented were as follows:
Unaudited
Net cash/ (borrowings) at 1 April 2020 Cash Transfer between non-current and current Other non-cash movements Viridor disposal Net cash/ (borrowings) at 30 September 2020
flows
£m £m £m £m £m £m
Cash and cash deposits 665.9 1,754.2 - - - 2,420.1
Other short-term deposits - 650.5 - - - 650.5
Bank and other loans due (7.6) 4.0 (4.0) (0.1) - (7.7)
within one year
Other current borrowings (33.1) 19.6 (16.2) - - (29.7)
Current lease obligations (19.2) 7.3 (15.0) (2.7) - (29.6)
Bank and other loans due (1,894.8) 559.4 4.0 (3.8) - (1,335.2)
after one year
Other non-current borrowings (340.8) 103.4 16.2 - - (221.2)
Leases due after one year (1,419.3) (5.0) 15.0 - - (1,409.3)
Net (borrowings) / cash (3,048.9) 3,093.4 - (6.6) - 37.9
Net borrowings in Disposal Group (215.1) 15.3 - (1.9) 201.7 -
Total (3,264.0) 3,108.7 - (8.5) 201.7 37.9
Net cash/ (borrowings) at 1 April 2021 Cash Transfer between non-current and current Other non-cash movements Bristol Water acquisition* Net cash/ (borrowings) at 30 September 2021
flows
£m £m £m £m £m £m
Cash and cash deposits 2,919.3 (2,040.4) - - 6.1 885.0
Bank and other loans due (7.7) 4.0 (4.0) - (8.4) (16.1)
within one year
Other current borrowings (32.4) 16.2 (46.2) - (62.4)
Current lease obligations (48.2) 10.5 (53.1) (1.6) (0.2) (92.6)
Bank and other loans due (1,170.7) (50.9) 34.0 3.6 (529.8) (1,713.8)
after one year
Other non-current borrowings (205.0) - 16.2 - - (188.8)
Non-current lease obligations (1,391.0) (15.0) 53.1 (0.1) (1.2) (1,354.2)
Total 64.3 (2,075.6) - 1.9 (533.5) (2,542.9)
*Net debt acquired as part of the Bristol Water acquisition includes £134.8
million fair value adjustments.
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
15. Fair value disclosure for financial instruments
Fair value of financial instruments carried at amortised cost.
Financial assets and liabilities which are not carried at an amount which
approximates to their fair value are:
Unaudited
Half year ended Year ended
30 September 2021
31 March 2021
Book value Fair value Book value Fair value
£m £m £m £m
Non-current borrowings:
Bank and other loans 1,713.8 2,022.8 1,170.7 1,370.7
Other non-current borrowings 188.8 173.2 205.0 188.8
Non-current borrowings excluding leases 1,902.6 2,196.0 1,375.7 1,559.5
Valuation hierarchy of financial instruments carried at fair value
The Group uses the following hierarchy for determining the fair value of
financial instruments by valuation technique:
× quoted prices (unadjusted) in active markets for identical assets or
liabilities (level 1)
× inputs other than quoted prices included within level 1 that are
observable for the asset or liability, either directly (that is, as prices) or
indirectly (that is, derived from prices) (level 2)
× Inputs for the asset or liability that are not based on observable
market data (that is, unobservable inputs) (level 3)
The fair value of financial instruments not traded in an active market (level
2, for example over-the-counter derivatives) is determined by using valuation
techniques. A variety of methods and assumptions are used based on market
conditions existing at each balance sheet date. Quoted market prices or dealer
quotes for similar instruments are used for long term debt. Other techniques,
such as estimated discounted cash flows, are used to determine fair value for
the remaining financial instruments. The fair value of interest rate swaps is
calculated as the present value of the estimated future cash flows.
The Group's financial instruments are valued principally using level 2
measures:
Unaudited
Half year ended 30 September 2021 Year ended 31 March 2021
£m £m
Level 2 inputs
Assets
Derivatives used for cash flow hedging 3.1 2.3
Derivatives used for fair value hedging 2.6 2.8
Total assets 5.7 5.1
Liabilities
Derivatives used for cash flow hedging 14.2 23.7
Total liabilities 14.2 23.7
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
16. Retirement benefit assets
Defined benefit schemes
The principal actuarial assumptions were: the rate used to discount schemes'
liabilities and expected return on scheme assets of 2.05% (March 2021 2.05%)
and the inflation assumption of 3.4% (March 2021 3.2%).
Unaudited
Half year ended Year ended
30 September 2021
31 March 2021
Present value of obligation Fair value of plan assets Total Present value of obligation Fair value of plan assets Total
£m £m £m £m £m £m
At beginning of period (901.7) 910.5 8.8 (685.3) 691.9 6.6
Amounts recognised in the (10.6) 9.1 (1.5) 32.9 (38.7) (5.8)
income statement
Remeasurements through other (24.4) 40.3 15.9 (72.0) 59.7 (12.3)
comprehensive income
Company contributions - 25.5 25.5 - 50.6 50.6
Benefits and expenses paid 2.3 (2.3) - 39.2 (39.2) -
Acquisition of Bristol Water Group (180.3) 188.1 7.8 - - -
Transfer (from) / to liabilities directly - - - (216.5) 186.2 (30.3)
associated with assets held for sale
At end of period (1,114.7) 1,171.2 56.5 (901.7) 910.5 8.8
The net surplus on retirement benefits has increased in the half year
following the acquisition of Bristol Water, whose scheme is in surplus, and
additional contributions made to the Group's principal pension scheme.
Recognition of surplus on principal pension scheme
In accordance with IAS 19 'Employee Benefits' the value of the net pension
scheme surplus that can be recognised in the statement of financial position
is restricted to the present value of economic benefits available in the form
of refunds from the scheme or reductions in future contributions. In respect
of the Group's principal pension scheme, PGPS, the surplus has been recognised
as the Group believes that ultimately it has an unconditional right to a
refund of any surplus assuming the full settlement of the plan's liabilities
in a single event, such as a scheme wind up.
Acquisition of Bristol Water
The value of obligations and plan assets acquired with Bristol Water were
measured in accordance with IAS 19 at the date of acquisition. The Group
believes that it has an unconditional right to a refund of surplus and that
the gross pension surplus can be recognised. This benefit is only available
as a refund as no additional defined pension benefits are being earned.
Under UK tax legislation a tax deduction of 35% is applied to a refund from a
UK pension scheme, before it is passed to the employer. This tax deduction
has been applied to restrict the value of the surplus recognised for this
scheme.
Disposal of Viridor
In the prior period, prior to the completion of the Viridor sale in July 2020,
the responsibilities for certain pension schemes that Viridor participated in
transferred to Pennon Group plc. The net liabilities of the transferred
obligations were £30.3 million.
Certain schemes that transferred from Viridor to Pennon were in respect of
Viridor's Greater Manchester contract which ceased in May 2019. In respect
of these obligations an agreement was reached, in September 2020, to transfer
the liabilities of the active employees of the Greater Manchester contract to
the new operator's pension fund. This resulted in a gain on settlement of
£6.0 million which was recognised in non-underlying items within discontinued
operations in the half year ended 30 September 2020. A settlement payment of
£7.2 million was made to ensure the plan was fully funded on transfer to the
new operator.
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
16. Retirement benefit assets (continued)
Modernisation of pension arrangements
The Group completed its employee consultation to modernise its ongoing pension
arrangements in the year ended 31 March 2021. 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 £4.3 million, which was included within
non-underlying items for the Continuing Group in the half year ended 30
September 2020 (see note 5).
The net gain of £1.2 million in respect of the settlement in connection with
Greater Manchester and the curtailment charge is shown in the amounts
recognised in the income statement for the year ended 31 March 2021.
17. Capital expenditure
Unaudited
Half year ended 30 September 2021 Year ended 31 March 2021((1))
£m £m
Property, plant and equipment
Additions 110.3 168.3
Net book value of disposals - 0.1
Assets acquired with Bristol Water Group 944.8 -
Capital commitments
Contracted but not provided for the Group 113.5 76.7
Assets acquired with Bristol Water Group are stated at their provisional fair
value at the date of acquisition.
(1) The additions and net book value of disposals in the year ended 31 March 2021
reflect additions for the Full Group, including Viridor up to the date of its
sale.
18. Trade and other payables & other non-current liabilities
Unaudited
Half year ended 30 September 2021 Year ended 31 March 2021
£m £m
Trade and other payables - current
Trade payables 73.5 74.4
Contract liabilities 2.0 2.0
Other tax and social security 3.1 2.7
Accruals 40.5 28.1
Other payables ((1)) 87.6 18.9
206.7 126.1
Other non-current liabilities
Contract liabilities 131.7 128.3
(1) Other payables at 30 September 2021 includes a liability of £60.9 million in
relation to the Group's irrevocable commitment that exists to purchase its own
shares, as described in Note 10.
19. Contingencies
Other contractual and litigation uncertainties
The Group establishes provisions in connection with contracts and litigation
where it has a present legal or constructive obligation as a result of past
events and where it is more likely than not an outflow of resources will be
required to settle the obligation and the amount can be reliably estimated.
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.
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
20. Related party transactions
Up to the point of the sale of Viridor on 8 July 2020, the Group's significant
related parties during the half year ended 30 September 2020 were its joint
venture in Lakeside Energy from Waste Holdings Limited and its joint venture
in INEOS Runcorn (TPS) Holdings Limited, for which disclosures were made in
the Pennon Group plc Annual Report and Accounts for the year ended 31 March
2021. These joint venture interests formed part of Viridor's operations and
following the disposal these are no longer related parties to the Group.
As part of the acquisition of Bristol Water, the Group acquired interests in
two joint ventures, Bristol Wessex Billing Services Limited ("BWBSL") and
Water 2 Business Limited ("Water 2 Business"). Details of transactions with
these related parties in H1 2021/22 and balances outstanding at 2 June 2021
(date of acquisition) and 30 September 2021 are set out below.
Transactions with joint ventures Unaudited
Half year ended 30 September 2021
£m
Sales to Water 2 Business 5.7
Purchases from BWBSL 0.8
Balances with joint ventures Unaudited
30 September 2021 2 June 2021
£m £m
Trade and other receivables - non-current
Water 2 Business 9.9 9.9
Trade and other receivables - current
Water 2 Business 1.5 1.2
BWBSL 1.2 0.8
Trade and other payables - current
BWBSL 1.4 1.7
21. 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 Water 2 Business Limited, a
joint venture with Wessex Water. The purpose of the acquisition was to grow
the Group's core water business by expanding Pennon's water activities in the
Greater South West region. The acquisition of the Bristol Water Group is
currently under review by the Competition and Markets Authority, and the
Bristol Water Group is consolidated in Pennon's accounts with effect from
midnight on 2 June 2021.
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
21. Acquisition of Bristol Water Group (continued)
The details of the business combination are as follows:
Unaudited
£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 22.6
Current tax asset 0.6
Cash and cash deposits (including restricted cash of £6.1 million) 18.9
Borrowings (545.1)
Trade and other payables (32.2)
Provisions (0.3)
Retirement benefit obligations 7.8
Deferred tax liabilities (140.3)
Identifiable net assets 301.2
Goodwill on acquisition 118.4
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 9.1
Net cash paid relating to the acquisition 421.4
Acquisition related costs paid and accrued of £10.5 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 values of all identifiable assets and liabilities have been
determined provisionally at 30 September 2021, whilst all necessary
information is finalised to complete the valuation.
The provisional fair value of trade and other receivables acquired as part of
the business combination amounted to £22.6 million with a gross contractual
amount of £39.2 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 noted in note 20 above as part of the acquisition of Bristol Water, the
Group acquired interests in two joint ventures, Bristol Wessex Billing
Services Limited ("BWBSL") and Water 2 Business Limited ("Water 2 Business").
These two interests are accounted for using the equity method.
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
provisionally 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 £41.4 million (excluding £0.2 million
intercompany revenue as outlined in note 4) and £7.2 million to the Group's
revenue and profits before tax respectively. Had the acquisition occurred on 1
April 2021, the Group's revenue would have been £410.4 million and the
Group's profit before tax for the period would have been £82.1 million.
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
22. Profit for the period from discontinued operations
The Group disposed of the Viridor waste operating segment on 8 July 2020,
having entered into a formal sale agreement on 18 March 2020. Viridor was
reported as a discontinued operation with effect from 18 March 2020. The
profit on discontinued operations of £1,720.0 million reported for Viridor in
H1 2020/21 comprised a net loss from operating activities after non-underlying
items of £9.3 million and a profit on disposal of discontinued operations of
£1,729.3 million. Non-underlying operating expenses of £48.5 million
comprised employments 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.
23. Post balance sheet events
Defra, Ofwat and the Environment Agency announced an industry-wide
investigation into sewage treatment works on 18 November 2021. The precise
scope or what the likely outcome of this investigation will be is not yet
clear as it is in its very early stages.
Pennon Group plc
Registered office:
Peninsula House
Rydon Lane
Exeter
Devon
EX2 7HR
pennon-group.co.uk
Registered
in England: 2366640
PENNON GROUP PLC
DIRECTORS' RESPONSIBILITIES STATEMENT
The Directors named below confirm on behalf of the Board of Directors that
this unaudited condensed half year financial information has been prepared in
accordance with UK adopted IAS 34 "Interim financial reporting" and to the
best of their knowledge the interim management report herein includes a fair
review of the information required by DTR 4.2.4, DTR 4.2.7R and DTR 4.2.8R of
the Disclosure and Transparency Rules, being an indication of important events
that have occurred during the period and their impact on the unaudited
condensed half year financial information; a description of the principal
risks and uncertainties for the remaining six months of the current financial
year; and the disclosure requirements in respect of material related party
transactions.
The Directors are responsible for the maintenance and integrity of the
Company's website. Legislation in the United Kingdom governing the preparation
and dissemination of financial information may differ from legislation in
other jurisdictions.
The Directors of Pennon Group plc at the date of the signing of this
announcement and statement are:
Gill Rider
Neil Cooper
Iain Evans
Claire Ighodaro
Jonathan Butterworth
Susan Davy
Paul Boote
For and on behalf of the Board of Directors who approved this half year report
on 29 November 2021.
S J Davy P M Boote
Group Chief Executive Officer Group Finance Director
PENNON GROUP PLC
INDEPENDENT REVIEW REPORT TO PENNON GROUP PLC
Conclusion
We have been engaged by Pennon Group plc (the Company) to review the condensed
set of financial statements in the half-yearly financial report for the six
months ended 30 September 2021, which comprises the consolidated income
statement, the consolidated statement of comprehensive income, the
consolidated balance sheet, the consolidated statement of changes in equity,
the consolidated statement of cash flows and related notes. We have read the
other information contained in the half-yearly financial report and considered
whether it contains any apparent misstatements or material inconsistencies
with the information in the condensed set of financial statements.
Based on our review, nothing has come to our attention that causes us to
believe that the condensed set of financial statements in the half-yearly
financial report for the six months ended 30 September 2021 is not prepared,
in all material respects, in accordance with UK adopted International
Accounting Standard 34 and the Disclosure Guidance and Transparency Rules of
the UK's Financial Conduct Authority.
Basis for conclusion
We conducted our review in accordance with International Standard on Review
Engagements 2410 (UK and Ireland) "Review of Interim Financial Information
Performed by the Independent Auditor of the Entity" issued by the Auditing
Practices Board. A review of interim financial information consists of making
enquiries, primarily of persons responsible for financial and accounting
matters, and applying analytical and other review procedures. A review is
substantially less in scope than an audit conducted in accordance with
International Standards on Auditing (UK) and consequently does not enable us
to obtain assurance that we would become aware of all significant matters that
might be identified in an audit. Accordingly, we do not express an audit
opinion.
As disclosed in note 2, the annual financial statements of the Company will be
prepared in accordance with UK adopted International Accounting Standards. The
condensed set of financial statements included in this half-yearly financial
report has been prepared in accordance with UK adopted International
Accounting Standard 34 "Interim Financial Reporting".
Responsibilities of the directors
The directors are responsible for preparing the half-yearly financial report
in accordance with the Disclosure Guidance and Transparency Rules of the UK's
Financial Conduct Authority.
Auditor's responsibilities for the review of the financial information
In reviewing the half-yearly report, we are responsible for expressing to the
Company a conclusion on the condensed set of financial statements in the
half-yearly financial report. Our conclusion is based on procedures that are
less extensive than audit procedures, as described in the basis for conclusion
paragraph of this report.
Use of our report
This report is made solely to the Company in accordance with guidance
contained in International Standard on Review Engagements 2410 (UK and
Ireland) "Review of Interim Financial Information Performed by the Independent
Auditor of the Entity" issued by the Auditing Practices Board. To the fullest
extent permitted by law, we do not accept or assume responsibility to anyone
other than the Company, for our work, for this report, or for the conclusions
we have formed.
Ernst & Young LLP
Leeds
29 November 2021
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 amended from 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 as well
as reflecting APM changes due to reporting interim results:
• An APM for 2021/22 has been added for Basic adjusted
earnings per share - Continuing Operations (adjusted 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.
• Group dividend cover is not presented in the half year
APM disclosure. The ratio represents a measure of full year adjusted profit
and dividend performance and cannot be calculated on a comparable basis using
half year adjusted profits and the interim dividend.
• Return on capital employed is not presented in the
half year APM disclosure. This ratio represents the total of underlying
operating profit 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.
(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 5 in the financial statements provides more detail on
non-underlying items, and a reconciliation of underlying earnings for the
current year and prior year is as follows:
Non-underlying items
Underlying earnings reconciliation Underlying Deferred tax change of rate Acquisition related costs Statutory results Earnings
per share (note 8)
30 September 2021
£m £m £m £m p
EBITDA 199.4 - (10.5) 188.9
Operating profit 127.4 - (10.5) 116.9
Profit before tax 90.4 - (10.5) 79.9
Taxation (5.2) (96.9) - (102.1)
Profit/(loss) after tax 85.2 (96.9) (10.5) (22.2)
Non-controlling interests (0.1)
Profit after tax attributable to shareholders (22.3) (6.3)
PENNON GROUP PLC
Alternative performance measures (continued)
(i) Underlying earnings (continued)
Non-underlying items
Underlying earnings reconciliation Underlying WaterShare+ Pension curtailment charge Statutory results Earnings
per share
30 September 2020
(note 8)
£m £m £m £m p
EBITDA 174.5 (20.5) (4.3) 149.7
Operating profit 114.8 (20.5) (4.3) 90.0
Profit before tax 86.7 (20.5) (4.3) 61.9
Taxation (16.3) 3.9 0.9 (11.5)
Profit after tax from continuing operations 70.4 (16.6) (3.4) 50.4
Profit after tax from discontinued operations 1,720.0
Profit after tax 1,770.4
Non-controlling interests 0.2
Profit after tax attributable to shareholders 1,770.6 420.9
(ii) Basic adjusted earnings per share - Continuing Operations (adjusted for
share consolidation)
H1 2022 H1 2021
Basic weighted average number of shares
Basic weighted average number of shares (millions) (note 8) 353.3 420.7
Adjustment to reflect the post-consolidation share base as if it had been in (73.0) (140.2)
place
from the start of the previous financial year (millions)
Adjusted basic weighted average number of shares (adjusted for share 280.3 280.5
consolidation) (millions)
Basic adjusted earnings per share from continuing operations before 24.3 17.9
exceptional items and deferred tax (pence) (note 8)
Adjustment to reflect the post-consolidation share base as if it had been in 6.3 8.9
place
from the start of the previous financial year (pence)
Basic adjusted earnings per share from continuing operations before 30.6 26.8
exceptional items and deferred tax (adjusted for share consolidation)
(pence)
(iii) Underlying EBITDA
Underlying EBITDA (earnings before interest, tax, depreciation and
amortisation and non-underlying items) is used to assess and monitor
operational underlying performance.
PENNON GROUP PLC
Alternative performance measures (continued)
(iv) South West Water Limited effective interest rate
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.
H1 2022 H1 2021
£m £m
Net finance costs after non-underlying items 32.7 27.6
Net interest on retirement benefit obligations 0.2 -
Capitalised interest 0.3 0.6
Net finance costs for effective interest rate calculation 33.2 28.2
Opening net debt 2,273.5 2,307.2
Closing net debt 2,314.6 2,286.6
Average net debt (opening net debt + closing net debt divided by 2) 2,294.1 2,296.9
Effective interest rate (%) 2.9 2.5
(v) Continuing operations underlying interest cover
Underlying net finance costs (excluding pensions net interest cost) divided by
operating profit before
non-underlying items.
H1 2022 H1 2021
£m £m
Net finance costs after non-underlying items 37.0 28.1
Net interest on retirement benefit obligations 0.3 (0.6)
Net finance costs for interest cover calculation 37.3 27.5
Operating profit before non-underlying items 127.4 114.8
Interest cover (times) 3.4 4.2
PENNON GROUP PLC
Alternative performance measures (continued)
(vi) Capital investment
Property, plant and equipment additions. The measure is presented to assess
and monitor the total capital investment by the Group.
H1 2022 H1 2021
£m £m
Additions to Property, plant and equipment 110.3 73.4
Additions to Other intangible assets 1.2 0.1
Capital investment 111.5 73.5
(vii) Capital payments
Payments for property, plant and equipment (PPE) additions net of proceeds
from sale of PPE. The measure is presented to assess and monitor the net cash
spend on PPE.
H1 2022 H1 2021
£m £m
Cash flow statements: purchase of property, plant and equipment 119.9 113.1
Cash flow statements: purchase of intangible assets 1.3 0.1
Cash flow statements: proceeds from sale of property, plant and equipment (0.3) (0.1)
Capital payments relating to the Group 120.9 113.1
Capital payments relating to discontinued operations - (32.3)
Capital payments relating to continuing operations 120.9 80.8
(viii) Continuing operations operational cash inflows
Cash generated from operations before pension contributions and cash elements
of non-underlying charges.
H1 2022 H1 2021
£m £m
Cash generated from operations per cash flow statements 135.9 126.6
Remove: cash generated from discontinued operations - (6.0)
Cash generated from operations from the Continuing Group 135.9 120.6
Pension contributions 23.7 36.0
Remove: cash elements of non-underlying charges 9.1 -
Operational cash inflows 168.7 156.6
PENNON GROUP PLC
Alternative performance measures (continued)
(ix) 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 2021-25) 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 2021-25, the notional equity proportion is
40.0%.
Further information on this metric can be found in South West Water's annual
performance report and regulatory reporting, published in July each year. The
most recent can be found at:
www.southwestwater.co.uk/about-us/how-are-we-performing.
(x) Totex
Operating costs and capital expenditure of the regulated water and wastewater
business (based on the Regulated Accounting Guidelines).
(xi) Outcome Delivery Incentive (ODI)
ODIs are designed to incentivise companies to deliver improvements to service
and outcomes based on customers' priorities and preferences. If a company
exceeds these targets a reward can be earned through future higher revenues.
If a company fails to meet them, they can incur a penalty through lower future
allowed revenues.
1 Customer measure of experience
^ Measures with this symbol ^ are defined in the Alternative Performance
Measures (APMs) as outlined on pages 61 to 65
2 K7 cumulative performance, H1 2021/22 £1.4 million
3 Based on our preliminary analysis of Environment Agency sample data. The
Environment Agency will publish formal results in January 2022
4 Regulatory Capital Value (RCV)
5 Non-underlying items are adjusted for by virtue of their size, nature or
incidence to enable a full understanding of financial performance
6 Adjusted earnings per share for H1 2021/22 and H1 2020/21 rebased to
reflect impact of share consolidation. This calculation is outlined in the
Alternative Performance Measures (APMs) on pages 61 to 65
7 Dividend policy of CPIH + 2%. The CPIH rate used is 2.9% as of 30
September 2021. Base H1 2020/21 uplift for share consolidation and return of
capital (from 6.77p to 10.15p), in addition 1.0 pence of 3.0 pence full
dividend uplift announced at the 2020/21 Full Year Results in June 2021
8 References to organic movements throughout this commentary refer to the
performance of the business excluding the contribution from Bristol Water from
3 June 2021.
9 per 10,000km
10 Excluding potential impact of third-party event at Carland Cross,
Cornwall. In late August 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 is being evaluated
11 On track or within regulatory tolerances
12 Full year 2021/22 equivalent performance Watershare RORE. Financing
outperformance is based on the outturn effective interest rate translated into
an effective real interest rate using K7 forecast CPIH of 2.0% (consistent
with the FD)
13 Based on Ofwat's K7 approach to RORE, including total tax impacts and
using actual average inflation for totex and financing
14 Full year equivalent RORE performance - in line with Bristol Water's CMA
Final Determination issued in March 2021
15 c.11% nominal growth in RCV over K7 opening position
16 Measures presented are before non-underlying items
17 Includes wholesale revenue for non-household customers
18 Includes wholesale costs for non-household customers
19 Carrying value of fair value acquisition adjustments to net debt at 30
September 2021 - £41.7 million Bournemouth Water, £132.2 million Bristol
Water
20 Including £0.1 billion of make-whole costs incurred on debt retirements
21 UK water position as at 31 March 2021
22 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
23 Based on RCV forecast at 31 March 2022 and South West Water Group net
debt. Regulatory South West Water Limited gearing is 65.7% at 30 September
2021 (67.4% at 30 September 2020)
24 Post planned Pennon deployment of £100 million into water business -
split between South West Water (£45 million) and Bristol Water (£55 million)
25 Base uplift for share consolidation and return of capital includes 1.0
pence of 3.0 pence full dividend uplift announced at the 2020/21 Full Year
Results in June 2021
26 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
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