REG - Pennon Group PLC - Half Year Results 2022/23
30/11/2022 07:00
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RNS Number : 0032I Pennon Group PLC 30 November 2022
30 November
2022
Half Year Results 2022/23
Susan Davy, Group Chief Executive, commented:
I'm pleased to report a resilient half year performance for Pennon. We're
delivering robust fundamentals, executing our strategy and driving long-term
sustainable growth.
In the first half of this year we've delivered record levels of investment to
support a step change in environmental performance and build resilience for
the longer term, having experienced the hottest, driest year since records
began. Today we are announcing a further increase in investment in water
resilience schemes of c.£45 million to repurpose ex-quarries and mines and
introduce de-salination units to ensure our resilience to 2050 is in place
now. Together with the investment announced earlier this month, this brings
the total reinvestment in these initiatives to c.£75 million. Underpinning
our investment is our sector-leading financial outperformance and strong
balance sheet.
Our investments aren't just in places and infrastructure, they're in people
and communities too. Given the current cost of living crisis, at Pennon, we
believe every customer should benefit from what we do.
We are delivering over £78 million of benefits to customers, at a time when
customers need it most; including our commitment to share the benefits of
financial outperformance with customers through a second issuance of our
unique Watershare plus scheme, with £40 million funded so far to give
customers the option of a stake and a say in their water company, or money off
their bill.
We are also announcing plans to double our apprenticeship and graduate schemes
to 2030, and will offer 5,000 work placements to school children over the same
period, supporting those in our region to live local and prosper.
ROBUST FUNDAMENTALS, DRIVING LONG-TERM SUSTAINABLE GROWTH
Improving environmental performance
· 100% 1 (#_ftn1) bathing water quality for the second consecutive
year with 99% achieving good or excellent status
o 9 bathing water investments completed in K7 to date to support water
quality improvements
· c.50% reduction in storm overflow use during the bathing water
season, supported by our WaterFit investments
o On track to reduce releases from storm overflows to an average of 20 per
year, per storm overflow by 2025, investing c.£20 million in additional storm
storage at 58 sites across our network
· On track to reduce our impact on river water quality by one third by
2025 - extensive enhancement across the network including sewer separation at
9 sites, and progressing our bathing water pilots on the rivers Dart and Tavy
· Delivering continued reductions in wastewater pollution incidents -
best performance in 10 years - on track in 2022 for continued reduction
o Pollution Incident Reduction Plan activities accelerated to deliver
maximum environmental benefit
o Roll out of c.9,000 sewer depth monitors underway across the network
o Focused on predictive modelling of pollution risks enabling early
intervention
· Net Zero 2030 on track - supported by capturing carbon through
peatland restoration, increasing our electric fleet and investing in renewable
energy generation to support 50% self-generation ahead of 2030
Record c.30% increase in capital investment
· Investment of £142.5 million 2 (#_ftn2) in H1 2022/23 across our
asset base to support the delivery of our environmental, water and wastewater
service outcomes
o c.80% of Outcome Delivery Incentives(^) (ODIs) on track or ahead of target
for South West Water
o c.75% of Outcome Delivery Incentives on track or ahead of target for
Bristol Water
· c.95% of our capital programme under framework contracts
Supporting our customers
· Over 100,000 customers across our region benefiting from our
affordability initiatives
o c.12% increase in customers benefiting from our social tariff - targeting
to double the number of customers benefiting by 2025
· c.£78 million of customer benefits announced to date in K7
· Second £20 million issuance of our unique customer sharing mechanism
- WaterShare+, with Bristol Water customers also benefiting for the first time
· Keeping bills as low as possible - bill reduction in 2022/23 for
South West Water, and significantly below inflation for 2023/24 across the
Group
Innovating to deliver - water resources
· Investing c.£75 million to secure future resilience including
re-purposing old quarries and mines and progressing de-salination
· Pioneering 'Stop the Drop' initiative launched - customers
financially incentivised to reduce demand and support reservoir recovery
Double digit returns
· Sector-leading double-digit Return on Regulated Equity(^) (RORE) -
13.4% 3 (#_ftn3)
o Strong financing outperformance - strategic positioning enables the Group
to continue to outperform in current macro-economic environment
· Cumulative K7 outperformance of c.£225 million enabling reinvestment
in environmental and customer initiatives, including WaterFit, Green Recovery,
WaterShare+ and additional accelerated water resilience investment
· Continuing to anticipate cumulative doubling of base returns over K7
Financial resilience
· Sustainable gearing - 58.4% 4 (#_ftn4) , below Ofwat's notional
gearing of 60%
· Responsible employer - pension scheme in surplus
· Headroom for investment of c.£500 million
Long-term growth - disciplined capital allocation
· Sustainable, profitable B2B retailer growth
· c.£160 million earmarked for investment in renewable energy
generation
· Delivering on our twin track organic and acquisitive growth strategy,
supported by Pennon's strong balance sheet capacity and agility
· Sector-leading Regulatory Capital Value (RCV) growth - c.50% over K7,
benefiting from our acquisition of Bristol Water 5 (#_ftn5)
Dividend policy underpinned by continued RORE outperformance
· Growth of 10.8% 6 (#_ftn6) reflecting established policy of CPIH +
2%.
FINANCIAL PERFORMANCE
H1 2022/23 H1 2021/22 Change
Underlying revenue(^) £425.5m £389.3m +9.3%
Underlying profit before tax(^) £22.5m £90.4m (75.1%)
Non-underlying items before tax 7 (#_ftn7) (£1.6m) (£10.5m) -
Profit before tax £20.9m £79.9m (73.8%)
Group RORE 8 (#_ftn8) 13.4% 9.3% +4.1%
Earnings per share
· Adjusted EPS(^) 7.9p 30.6p (74.2%)
· Statutory EPS 7.0p (6.3p) +211.1%
Interim dividend per share(6) - dividend policy 12.96p 11.70p +10.8%
· Underlying revenue up primarily due to growth in non-household demand
both in and out of region, contract wins from Pennon Water Services 9
(#_ftn9) , and a full six-month contribution from Bristol Water
· Underlying profit before tax - reduction reflecting the near-term
pressures on earnings from inflation driven power pricing and financing costs,
net of other cost efficiencies, as flagged
· Profit before tax of £20.9 million, down from £79.9 million in H1
2021/22
· Adjusted earnings per share of 7.9 pence, down from 30.6 pence
· Statutory earnings per share of 7.0 pence includes non-underlying
items. Statutory earnings per share for H1 2021/22 were impacted by the
significant non-underlying deferred tax charge in respect of the change in
corporation tax rate
· Group RORE for H1 2022/23 of 13.4% reflecting an increase of 4.1% on
H1 2021/22
· Sector-leading dividend growth with interim dividend per share up
10.8% (CPIH +2%) to 12.96 pence.
A full reconciliation to the statutory reported results is included in item
(i) in the Alternative Performance Measures on pages 63 to 66 of this
announcement.
OUTLOOK
Underpinning the Group is our strategically positioned, robust balance sheet,
delivered through being disciplined with our financial investment and approach
through the long term. This has enabled us to absorb the impact of elevated
inflation on power and interest costs in this half, deliver record investment,
and ensure that the pension scheme continues to be in surplus, whilst
simultaneously reducing gearing at the water business to 58.4% and ensuring
there is headroom capacity for growth of c.£500 million.
Robust financial and operational outcomes underpin our sector-leading RORE,
with a Group RORE at H1 2022/23 of 13.4%. Outperformance delivered to date in
K7 of c.£225 million is enabling reinvestment in this period - including our
Green Recovery, WaterFit, additional water resources investments and our
second WaterShare+ issuance.
Our underlying performance across all Environmental Performance Assessment
(EPA) metrics is improving, however, with ratcheting targets we do not
anticipate a change in the EPA metric for 2022. We remain on a trajectory that
would result in achieving our target of 4* status for 2024.
To date in K7 we have announced c.£78 million of customer support. We
continue to work hard to deliver quality services at an efficient cost, so
that bills remain as low as possible. Over 100,000 customers are currently
benefiting from our broad range of affordability initiatives - including
delivering a c.12% increase in those benefiting from our social tariffs, which
we are targeting to double by 2025.
Our B2B businesses 10 (#_ftn10) , PWS and water2business continue to win
contracts, driving strong financial performance and profits. With a combined
market share of c.12% have some of the lowest customer attrition rates in the
market, and excellent customer service scores as measured by TrustPilot.
The water business RCV is set to grow by a sector-leading c.50% over K7, with
our two B2B retailers profitably growing in a competitive market and c.£160
million held for investment in value enhancing renewable energy generation
projects across the UK, decreasing our reliance on volatile global power
markets. Looking to K8 and beyond, we see the need for significant investment
which will drive RCV growth as we deliver extensive environmental and
resilience driven schemes.
Through the successful execution of our twin track strategy - driving both
organic and acquisitive opportunities, underpinned by our disciplined capital
allocation, we will continue to create long-term sustainable value.
Post our acquisition of Bristol Water in 2021 we are on track to integrate our
water businesses, bringing together the best of the best to improve services
for customers across the Group. The Licence change and Statutory Transfer is
anticipated in early 2023 and we are deploying our integration blueprint ahead
of that.
Performance across the Group for the half year continues to be resilient, as
we deliver robust fundamentals, and execute our twin track growth strategy -
utilising both organic and acquisitive growth potential to drive long-term
sustainable growth.
The Group's dividend policy to 2025 of CPIH +2% delivers an interim dividend
of 12.96 pence per share.
Presentation of results
A presentation of these results hosted by Susan Davy, Group Chief Executive
and Paul Boote, Group Chief Financial Officer, will be available at 08:30am
(GMT), today, 30 November 2022 and can be accessed here:
www.pennon-group.co.uk/investor-information
(http://www.pennon-group.co.uk/investor-information) .
The presentation will be followed by a live Q&A conference call at 09:00am
(GMT):
United Kingdom: 0800 640 6441
United Kingdom (Local): 020 3936 2999
All other locations: +44 20 3936 2999
Conference passcode: 282380
For further information, please contact:
Paul Boote Group Chief Financial Officer 01392 443 168
Jennifer Cooke Head of Investor Relations
James Murgatroyd FGS Global 020 7251 3801
Harry Worthington
PERFORMANCE REPORT
Performance across the Group for the half year continues to be resilient, as
we deliver robust fundamentals, and execute our twin track growth strategy -
utilising both organic and acquisitive growth potential to drive long-term
sustainable growth.
We operate across a unique topography - with 860 miles of coastline, our
infrastructure regularly flexes to accommodate a population that swells from
3.5 million to over 10 million through tourism in the summer months. Ensuring
resilience to delivery in peak times across our network is critical.
We are well underway with the delivery of our largest environmental investment
programme for 15 years, and have invested £142.5 million during H1 2022/23
across environmental, customer, water and wastewater outcomes - a record level
of spend and a c.30% increase this half year.
This investment has supported the achievement of c.80% of our ODIs for South
West Water and c.75% of ODIs for Bristol Water. Our leakage reduction plan is
delivering sustainable results, utilising satellite technology and acoustic
loggers to find and fix more leaks than ever. We continue to outperform our
mains repair targets across the region, and investments in water quality -
including granular activated carbon (GAC) and manganese removal, continue to
deliver results.
Nine bathing water investments have been delivered to date to support water
quality improvements and we have achieved 100% bathing water quality standards
for the second consecutive year running. Our award winning 'Upstream Thinking'
programme has driven an increase in biodiversity across the region, with
c.100,000 hectares cumulatively improved to date.
We are investing c.£20 million in additional storm storage at 58 sites across
the region, along with 15 increased treatment flow schemes - with one third on
track for completion ahead of 2023/24. We are also replacing 36 rising mains
during this regulatory period, with 8 completed in H1 2022/23, and our
internal flooding performance continues to be sector-leading - delivering a
c.80% reduction in K7 so far. Our Pollution Incident Reduction Plan continues
to deliver results and we are on track to deliver our best ever performance
this year, driven by the acceleration of initiatives from the plan to deliver
maximum environmental benefit.
In line with our WaterFit plans announced earlier this year, we are underway
with reinvesting c.£45 million over the next two years, targeting a reduction
in the use of storm overflows. This year we have also seen a c.50% reduction
in the use of storm overflows through the 2022 bathing season and we are on
track to reduce releases from storm overflows to an average of 20 per year,
per storm overflow by 2025.
We remain on track to deliver on our Net Zero 2030 commitments and have made
progress across all three pillars of our strategy in H1 2022/23, including
investing in an electric fleet and capturing carbon through our restoration of
c.900 hectares of peatland. Alongside this we have ringfenced c.£160 million
to expand our renewable energy generation capacity, whilst continuing our
current roll out of solar at our operational sites - supporting our target of
50% of self-generation ahead of 2030.
We continue to work hard to deliver quality services at an efficient cost, so
that bills remain as low as possible. We know that right now, given the
pressure that household finances are under, this is more important than ever
for our customers. On average, South West Water's customer bill in 2022/23
reduced by c.£10, and for 2023/24, bill increases are expected to be
significantly below inflation across the Group.
We have an extensive package of affordability and vulnerability measures
across the water businesses, including specific tariffs and income
maximisation schemes, supporting over 100,000 customers to date. We also know
that everyone is different, which is why the support we offer is different -
customer benefits announced to date in K7 equate to c.£78 million 11
(#_ftn11) .
Robust financial and operational outcomes underpin our sector-leading RORE,
with a Group RORE at H1 2022/23 of 13.4%. Driving outperformance across the
Group gives us the ability to deliver more within a regulatory delivery
period. The outperformance delivered to date in K7 of c.£225 million is
supporting reinvestment in this period, underpinning our Green Recovery,
WaterFit, additional water resource investments and our second WaterShare+
issuance.
Innovating to deliver - water resources
2022 has been the driest, hottest year on record across the region, with
record demand and visitors. Throughout this period, customers have received a
continuous supply of clean, safe drinking water, despite the significant
demand on the network and water sources across the region with river flows and
reservoir levels in Cornwall reaching historically low levels this summer.
Over 90% of South West Water's supply comes from surface water sources -
rivers and reservoirs, with the remainder coming from groundwater sources such
as springs, wells and boreholes. In August, the Environment Agency officially
declared a drought in the South West, bringing 11 out of the Environment
Agency's 14 areas in England into drought status following the record dry
spell.
South West Water has been doing more than ever to secure supplies, whilst
adopting our 'Quality First' initiative across the business to continually
improve production and distribution of water.
In line with our established drought plan we introduced a temporary use ban
(also known as a TUB or hosepipe ban) for the first time in 26 years, in parts
of Cornwall and North Devon. Alongside this, our operational response was
agile and included flexing the network, maximising water efficiency
campaigning, the provision of over 75,000 free water-saving devices to
customers including more than 18,000 free water butts, and investing in the
water grid to move water across the region to areas most in need. Educational
and customer campaigns continue to focus on water saving initiatives and ideas
to help both reduce customers' bills and to preserve our natural resources.
Leakage remains a key area of focus with elevated demand conditions causing
higher pressures across the network, and the hot, dry weather driving greater
ground movement. Greater use of network monitoring and artificial intelligence
in addition to a targeted customer campaign, including offering free customer
leak repairs, is helping to identify and fix leaks quicker than ever, with
around c.2,500 leaks repaired each month on average.
Pioneering to make a difference - driving industry firsts
Earlier in November, South West Water launched a pioneering incentive scheme
to help reservoir levels recover, as part of building longer term resilience.
'Stop the Drop' offers a financial incentive to customers in the Cornwall
region to encourage them to reduce consumption. If Colliford reservoir,
serving the majority of Cornwall, recovers to 30% capacity by 31 December
2022, customers in this region will receive a £30 rebate on their bill.
South West Water is investing c.£75 million 12 (#_ftn12) in water
resilience, including accelerating initiatives to secure supplies across
Cornwall. This includes investment at our new Hawkstor reservoir, purchased
earlier in 2022, alongside work at three other water sources in Cornwall
including re-purposing ex-quarries and mines, and progressing de-salination
solutions. We are also pursuing a new reservoir in the Bristol region -
Cheddar 2, which forms part of our longer-term strategy. We continue to work
collaboratively with Defra, Environment Agency, Drinking Water Inspectorate
and Ofwat.
Improving environmental performance
A key concern and priority of our customers and other stakeholders is
protecting and enhancing the beautiful environment in the Great South West and
we are determined to play our part, focusing on improving river and coastal
water quality.
Our c.£1.4 billion environmental investment programme - our largest for over
15 years, is now well underway, and includes the delivery of accelerated
environmental investments such as our Green Recovery initiative, and our
WaterFit plan launched earlier this year - focused on protecting rivers and
seas together.
Nurturing healthy rivers and seas
Having delivered capital improvements at 9 bathing waters to date in K7 -
ahead of our commitment of 8 by 2025, we are pleased that our nine investments
during K7 to date in our coastal bathing waters in recent years is anticipated
to result in 100% of bathing waters in the region achieving stringent quality
standards for a second year running - with 99% achieving good or excellent
status - as measured by the Environment Agency. We are using our expertise in
coastal water improvements learnt over many years to inform and guide our
river water quality pilots that are underway as part of our Green Recovery
initiatives, including pilot schemes on the Rivers Dart and Tavy.
Releases from storm overflows have reduced by c.30% this year to date, when
compared to the same period last year, and are c.50% lower during the bathing
season, and we are on track to reduce releases from storm overflows to an
average of 20 per year, per storm overflow by 2025. Contributing to this
reduction is our new 'Spillsure' system, enabling internal triaging of
information, along with c.£20 million investment in additional storm storage
identified at 58 sites and the establishment of a dedicated capital
intervention team in addition to extensive enhancement and replacement across
the wastewater network.
We are on track to reduce the impact of our own assets and processes on river
water quality by one third by 2025, with extensive enhancement and replacement
underway across the wastewater network, including sewer separation at 9 sites.
We are investing in wastewater treatment processes to enhance river quality
through reducing phosphate and ammonia at six sites.
Our award winning 'Upstream Thinking' programme has driven an increase in
biodiversity across the region, with c.100,000 hectares cumulatively improved
to date. We work closely with partners, including Natural England, National
Trust and South West Lakes Trust to deliver initiatives across the South West
including Exmoor, Dartmoor and Bodmin moor. We are also well on track to
deliver our target of planting 250,000 trees by 2025, having planted c.150,000
to date.
Working with communities, open and transparent reporting
We are committed to sharing open and transparent reporting with our numerous
stakeholders, including our wider customer base, particularly on our
environmental impact. South West Water is on track to complete the
installation of monitors at 100% of our c.1,600 storm overflows during 2022 -
ahead of our 2023 target date, and as part of our WaterFit plans we will be
launching our WaterFit Live app in early 2023 which will cover all beaches in
our region - equating to one third of the nation's bathing beaches.
Central to our commitment to being open and transparent is our unique
WaterShare+ scheme, which enables customers to hold the business to account on
performance through a dedicated customer AGM and quarterly meetings in public,
which is attended by the Group CEO.
Alongside this we work collaboratively with communities in areas where there
are wider catchment issues in order to provide support and resolution for
issues. Our in-depth analysis has shown that many incidents widely reported as
sewage spills are caused by field run-off of mud and silt, highlighting that
in many cases, what are seen as issues with storm overflows and drains are
down to other factors. Through working with the community, we can explore ways
in which we can work together to protect our natural environment through
aspects such as our award-winning 'Upstream Thinking' initiative which
protects our rivers by working with farmers and land-owners to improve water
quality, and our Downstream Thinking programme explores how we can work with
communities and partners to explore innovative ways to manage the amount of
surface water that enters our sewer network.
In July 2022 we hosted the South West's first regional environmental forum.
The forum provided an opportunity to raise awareness of the environmental work
being delivered by the company and to engage partners in the strategies and
plans being developed for the future. Discussions were held to identify shared
goals and to explore potential opportunities for collaboration in the future.
The forum was followed by online engagement sessions in September 2022
involving over 120 partners focusing on questions relevant to the future of
drainage and wastewater management.
As part of its industry-wide ongoing investigation into how water and
wastewater companies manage their wastewater treatment works, Ofwat announced
in June 2022 that South West Water have been included alongside the five
companies which received formal notices earlier in the year with regards to
Flow to Full Treatment. We continue to work openly, constructively and
transparently with Ofwat as part of this ongoing process.
Pollution Incident Reduction Plan - delivering improvements
South West Water's Pollution Incident Reduction Plan continues to deliver
results. Since 2020 we have delivered a c.65% 13 (#_ftn13) reduction in
wastewater (category 1-3) pollutions. We are on track to deliver our best ever
performance this year - a further year on year reduction, having accelerated
activities within our plan to deliver maximum environmental benefit.
Through sharing best practice from across the industry, our plans include a
range of solutions, driven by the use of AI and predictive technology, such as
Innovyze to map catchments and target interventions, and Meniscus, utilising
asset and weather data to predict potential pollution risks, enabling early
intervention.
The roll-out of c.9,000 sewer depth monitors is underway across our c.20,000km
of sewer network in addition to the deployment of region-wide predictive
network burst detection technology. We have also improved processes to rapidly
investigate illegal connections to our network to minimise the impact of
pollutions from these sources.
We have increased our supply chain resource by c.25% to support with our 24/7
response, along with delivering over 260 hotspot interventions since 2021. We
are also utilising the Centre for Resilience, Environment, Water and Waste
(CREWW), our innovative partnership with Exeter University, for root cause
analysis, with this insight helping to shape our plans. Alongside this, our
education programme also plays an important role in influencing customer
behaviours, supporting the achievement of our sewer blockages ODI.
Our underlying performance across all Environmental Performance Assessment
(EPA) metrics is improving, including a continuation of the trend in
pollutions and other compliance metrics, however with ratcheting targets we do
not anticipate a change in the EPA metric for 2022. We remain on a trajectory
that would result in achieving our target of 4* status for 2024.
Investment driving operational performance
This regulatory period will see us investing over £1.4 billion across the
Group and across the asset base. We are investing across water and wastewater
assets and these investments alongside our innovative operational ways of
working means we continue to deliver against our business plan ODI
commitments.
The provision of quality drinking water is the cornerstone of the water
business, and our dedicated teams continue to work around the clock to deliver
on our commitments. During the half year we have been focusing on water
quality with dedicated resources delivering targeted operational improvements,
including investing in GAC and manganese removal at 4 sites to further improve
the taste and appearance of water supplied - these improvements alone will
deliver water quality improvements for >70% of Cornwall. Coupled with this,
we have delivered a step change in service reservoir maintenance, doubling the
frequency of inspection for our highest risk treated water tanks, and
increasing the use of remote operated vehicle inspections for all treated
water tanks to allow testing and assessment under pressure. This has enabled
the Group to deliver a c.50% uplift in our tank cleaning programme. We also
launched our 'Quality First' initiative to continually improve production and
distribution of clean, safe drinking water.
Across the Group we have outperformed our mains repairs targets for K7 to
date, driven by investment in proactive replacements and network calming
measures.
At a time when resource levels are under pressure, delivering on leakage
reduction plans is ever more important. We have been using satellite
technology, investing in acoustic loggers, increasing our speed of response by
c.60% to find and fix more leaks than ever before. Our leakage plan is
yielding sustainable results, maintaining momentum from last year - keeping us
on track to deliver a 15% reduction over the K7 period.
Our wastewater services, delivered by South West Water, continue to drive
improvements through innovation by constantly seeking out new ideas,
pioneering and piloting new technologies with a focus on nature-based
solutions, where possible.
We are investing in storage schemes through our WaterFit investment, to hold
back flows and reduce the use of storm overflow releases. Our planned approach
to reduce the environmental impact from storm overflows is focused on
additional telemetry deployment, reviewing and responding to new and existing
data 24/7, alongside investment to reduce infiltration into our
infrastructure. This includes our investment to increase storage and treatment
capacity at 58 sites alongside increasing treatment flows at 15 sites across
the region, and we remain on track to deliver one third of these ahead of
2023/24. Alongside this, we are replacing 36 rising mains to increase the
resilience of our network, with eight completed in H1 2022/23.
Our internal flooding performance continues to be industry leading, having
delivered a c.80% reduction to date in K7, driven by investment in network
demand and customer education programmes.
Even though targets are ratcheting we are continuing to deliver on our ODI
commitments with c.80% on track or ahead of target for South West Water and
c.75% on track or ahead of target for Bristol Water and as we share best
practice across both businesses, there are opportunities to achieve more.
Supporting all our customers, colleagues and communities
Reducing bills for all customers
We believe that nobody should worry about their water bill, which is why we
have a range of help and support available for those that need it. We also
know that everyone is different, which is why the support we offer is
different - customer benefits announced to date in K7 equate to c.£78
million.
We continue to work hard to deliver quality services at an efficient cost, so
that bills remain as low as possible. We know that right now, given the
pressure that household finances are under, this is more important than ever.
On average, South West Water's customer bill in 2022/23 reduced by c.£10, and
for 2023/24, bill increases will stay significantly below inflation across the
Group.
Building on the successful launch of our WaterShare+ initiative in 2020 which
saw one in 16 households in the region become shareholders, we are delighted
to be accelerating the next issuance of our unique WaterShare+ scheme in
2022/23. £20 million of outperformance will be used to underpin our
commitment not just to South West Water and Bournemouth Water customers but
now also to Bristol Water customers, equating to £13 per customer - enhancing
the community contract already in place with them, and bringing the current
WaterShare+ total to c.£40 million to date.
Addressing water poverty
We have an extensive package of affordability and vulnerability measures
across the water businesses, including specific tariffs and income
maximisation schemes, supporting over 100,000 customers to date. These
initiatives include discounts to bills or a level of bill certainty to suit
customers' circumstances, helping to support our Board pledge to address water
poverty for our customers by 2025. We have increased the number of customers
benefiting from one or more of our social tariffs by c.12%.
As a result of these initiatives, since the start of this regulatory period we
have unlocked c.£28 million of support for customers across the Group.
Alongside the financial support we provide, we work closely with a range of
independent organisations and debt partners who continue to be key to
promoting the range of help available to customers.
Playing our part in the communities we serve
As a Business for Societal Impact (B4SI), we are passionate about contributing
positively to the communities in the regions we serve. We continue to support
communities with funding available for community groups through both South
West Water and Bristol Water, including South West Water's Neighbourhood Fund
and Water Saving Community Fund, and Bristol Water's Community Fund,
supporting a range of initiatives across the Bristol region, with over 45,000
people benefiting directly from these projects to date in K7. Given the
importance of our role in the communities we are proud to be providing c.£1
million to local charities and good causes over the period to 2030.
We are always looking at new and innovative ways to get our customers and
communities involved in water conservation, and are delighted that in its
first year, our Water Saving Community Fund has funded projects contributing
to a saving of almost 60 million litres in one year. This has been achieved
through projects both big and small, such as drought tolerant gardens, water
butts in community allotments, educational displays in schools, or harnessing
new technology to change behaviour towards water use.
Our school education programme is focused on teaching school children the
importance of water conservation and environmental protection, illustrating
the part they can play through being careful with what is discarded through
the wastewater network. Through this programme we have directly taught over
7,000 pupils in K7 to date about where our clean water comes from and how
wastewater is treated.
Supporting and developing our colleagues
At the heart of any great business are the people who work in it. With around
3,000 employees our people strategy is centred around talented people doing
great things for customers and each other, and creating the best place to
work.
We are passionate about creating a diverse and inclusive place to thrive and
are proud to support the #10000blackinterns initiative and the Change The Race
Ratio, as well as having increased gender diversity across the Group.
We are proud to be a member of 'The 5% Club'- investing in the next generation
through embracing an 'earn and learn' culture. We are delighted to be the only
water company awarded Gold membership status this year as we have exceeded the
5% target and have almost 10% of our employees on these development programmes
- with over 300 apprenticeships and graduates.
As a recognised Living Wage Employer, we are committed to ensuring that every
member of staff working for the Group is fairly paid. Pennon's commitment not
only applies to directly employed staff but also to third party contracted
staff.
We also plan to double our apprenticeship and graduate schemes to 1,000 by
2030, along with offering 5,000 work placement opportunities over the same
period.
Double digit RORE - outperformance enabling investment
Continued RORE outperformance underpins the Group's sustainable dividend
policy whilst enabling the reinvestment of efficiencies and keeping customer
bills low, with a sector-leading Group RORE for H1 2022/23 of c.13.4%. During
K7 to date we have delivered RORE outperformance of 9.5% cumulatively,
equating to c.£225 million. This is made up of c.£87 14 (#_ftn14) million -
Totex(^), c.£148 million financing, net of c.£10 million ODI penalty 15
(#_ftn15) . This has enabled the funding of multiple initiatives including:
· WaterFit - c.£45 million reinvestment of efficiencies to enhance
coastal and river water quality
· Green Recovery - c.£82 million accelerated and additional spend on
initiatives including pilot schemes on the Rivers Dart and Tavy, accelerated
investment in improving shellfish waters, rolling out over 70,000 smart meters
by 2025, and replacing lead pipes - which will be reflected in RCV in K8
· WaterShare+ - acceleration of c.£20 million returns to customers
through our second issuance in K7
· 'Stop the Drop' - c.£75 million additional and accelerated drought
resilience investment.
South West Water's strong operational and financial performance has
contributed to a RORE of 14.7%(( 16 (#_ftn16) )) in H1 2022/23, with strong
financing outperformance outweighing Totex contribution, and net ODI
rewards.
Bristol Water has delivered a RORE of 5.5%(16) in H1 2022/23 - above its
allowed base returns, with financing and Totex outperformance partially offset
by a small ODI penalty.
South West Water continues to build on its strong ODI performance, with
c.80%(( 17 (#_ftn17) )) either on track, or ahead of target across a broad
range of challenging bespoke, common and comparative measures. 8 ODIs continue
to represent areas of excellence having achieved their 2025 target early, with
a further 28 outperforming their 2022/23 target or on track. ODI performance
for South West Water during H1 2022/23 has resulted in a net reward of c.£2.1
million (H1 2021/22 net reward of c.£3.5 million), reflecting an H1 2022/23
equivalent RORE outperformance of 0.3%.
Bristol Water is on track to achieve c.75% of its ODIs, with 2 ODIs
representing areas of excellence and a further 19 outperforming or on track
with their 2022/23 target. ODI performance for Bristol Water for H1 2022/23
has resulted in a net financial penalty of c.£0.6 million, resulting in an H1
2022/23 equivalent RORE underperformance of 0.6%.
Financing
As a Group, we are strategically positioned to outperform in the current
macro-economic environment. Our flexible financing strategy and the company's
diverse debt portfolio, with a relatively lower level of index-linked debt
compared to the industry average allows us to outperform the cost of debt
allowances.
Our efficient financing strategy continues to drive significant outperformance
with South West Water's effective interest rate(^) at 5.1% (FY 2021/22 3.4%).
Bristol Water's level of index-linked debt is in line with the industry
average at around 50%, resulting in an effective interest rate(^) of 10.0%.
Totex savings
Whilst the elevated inflationary environment is placing significant pressure
on costs, including wholesale power, we continue to focus on efficient Totex
delivery, supported by our pioneering approach to innovation across the Group.
Our efficient delivery to date has enabled us to reinvest in environmental
initiatives including WaterFit and Green Recovery and remain financially
resilient.
Return on Regulated Equity
The table below summarises the H1 2022/23 RORE position for both South West
Water and Bristol Water.
Ofwat RORE(16) WaterShare RORE 18 (#_ftn18)
South West Water Bristol Water South West Water Bristol Water
Base return 3.9% 4.5% 3.9% 4.4%
Totex (1.7)% 0.4% (1.0)% (0.2)%
ODI 0.3% (0.6)% 0.3% (0.3)%
Tax 2.0% - N/A N/A
Financing 10.2% 1.2% 6.0% (1.0)%
Total RORE - H1 2022/23 14.7% 5.5% 9.2% 2.9%
K7 Cumulative RORE 10.2% 5.1% 8.6% 5.2%
Growing the business - bringing together the best of the best
Following clearance from the Competition and Markets Authority on the
integration of Bristol Water with South West Water earlier this year, we have
been working to deliver our programme to integrate the business.
Our proven integration blueprint consists of three phases, over 24 months. The
first phase of this includes corporate and shared services, which are now well
underway with organisational changes in progress - bringing together the best
of best from both businesses. We are rolling out our Group-wide HomeSafe
health and safety programme, and are well underway in developing a combined
plan for PR24, as well as making headway with financial restructuring
including the repayment of Bristol Water's 2041 bond in November 2022,
providing c.£20 million benefit in H2 2022/23.
Changes to South West Water's Licence along with the statutory transfer are
anticipated in early 2023, which once in place will enable us to unlock
further phases of our blueprint. We remain on track to deliver synergies of
c.£20 million per annum across the Group by 2024/25.
Growing a profitable, sustainable national platform for business retail
Pennon Water Services, with a market share of c.6% continues to deliver on its
growth ambitions, winning c.£8 million of new contracts during the period.
Pennon Water Services' strategy is to engage proactively with its customer
base, and to continue to win new, quality contracts.
Through a simple, transparent and competitive service offering, Pennon Water
Services attracted businesses of all sizes and sectors during the period,
including Hilton Foods, Places for People, Frasers Hospitality Group and
Seachill. Pennon Water Services has one of the lowest customer attrition rates
in the market, demonstrated through strategic water users such as Princes
Foods, Exxon Mobil, Smurfit Kappa and Nuffield Health recognising the value
from their relationship with Pennon Water Services and renewing their retail
contracts.
Overall non-household demand which had been impacted due to covid restrictions
on customer's operations in some sectors, has returned to pre-covid levels
across the majority of sectors.
Pennon Water Services' customers continued to recognise the value and support
provided. This is reflected through a Trustpilot rating of excellent - 4.8/5
and a c.13% reduction in complaints in comparison to last year, reflecting
efforts to refine and improve customer service.
Through our acquisition of Bristol Water, we acquired a 30% share in
water2business - led by a strong team who are also focused on delivering an
outstanding customer experience, with a Trustpilot score of 4.9/5 and a market
performance score of 96%. With a c.6% market share, water2business offers
tailored water and wastewater management helping customers improve efficiency
and deliver savings. Water2business delivered resilient financial performance
during its financial year to 30 June 2022 of £1.5 million profit after
tax 19 (#_ftn19) , supported by the addition of c.3,000 new customers this
year.
PR24 - delivering for now and the next generation
As we bring together the best of the best to support the development of our
combined business plan for PR24, we remain focused on delivering the best
outcomes for customers, communities and the environment.
Our plans include significant environmental investments, driven by new
legislative requirements, and an increasing need for resilience informed by
our long-term planning.
We will continue to challenge ourselves to develop innovative and sustainable
solutions to deliver on our commitment to protect and enhance the natural
environment we operate in, both now and for generations to come - driving
significant RCV growth to 2050.
Robust fundamentals, driving sustainable growth
At Pennon, we are focused on delivering sustainable results for customers,
communities, the environment, and for shareholders through the delivery our
twin track growth strategy. The strength of our balance sheet, combined with
our flexible financing strategy and diverse portfolio of debt, positions us
well, meaning we can be agile in our response to pursuing both organic and
acquisitive opportunities.
We are committed to being a responsible business for all our stakeholders,
achieving improved environmental, social and governance (ESG) performance.
Demonstrating our role in society is crucial in maximising the value we create
for stakeholders, and we are proud that our ongoing commitment to do the right
thing, in the right way, continues to deliver sustainable results, and is
reflected in our strong and improving ESG performance metrics.
We have a proven track record in delivering shareholder value, supporting the
delivery of long-term, sustainable returns. We are applying our integration
blueprint to our most recent acquisition, Bristol Water, to ensure we are
creating an organisation that fully embraces the best of the best - from
people to processes and everything in between. Our planned investment in
renewable energy generation will further complement our water assets,
providing energy to them, whilst de-risking exposure to volatile global power
markets in the longer term, and accelerating our journey to achieve net zero
carbon by 2030. We are well underway with delivering on our plans to 2025,
which when combined with our acquisition of Bristol Water will increase the
Group's RCV by around 50% to 2025.
As we develop our plans for K8 and beyond our focus will remain on protecting
and enhancing the natural environment in which we operate, and in delivering
value for all.
FINANCIAL PERFORMANCE
During H1 2022/23, volatility in the global economy, reflecting the
geopolitical situation and economic difficulties regarding the recovery from
the global pandemic, has continued. We started to experience the impact of
this in the second half of the financial year ended 31 March 2022 and, as
expected, the impact of elevated inflation on power and interest costs has had
an adverse impact on our near-term earnings.
In the longer term the elevated inflationary environment provides the Group
with additional growth in long term sustainable value with revenues and RCV
linked to November and March inflation, respectively.
Bristol Water has contributed to our financial results since 3 June 2021 with
full clearance for the merger of the wholesale water businesses granted on 7
March 2022. The results in the comparative period for H1 2021/22 only include
Bristol Water for four months from the date of acquisition.
Underlying(^) H1 2022/23 H1 2021/22 Change
Revenue £425.5m £389.3m +9.3%
Operating costs (£250.9m) (£189.9m) (32.1%)
EBITDA(^) £174.6m £199.4m (12.4%)
Depreciation and amortisation (£77.4m) (£72.0m) (7.5%)
Operating profit £97.2m £127.4m (23.7%)
Net interest charge (£74.7m) (£37.0m) (101.9%)
Profit before tax £22.5m £90.4m (75.1%)
Non-underlying items before tax(7) (£1.6m) (£10.5m) -
Profit before tax £20.9m £79.9m (73.8%)
Underlying tax(^) (£2.7m) (£5.2m) +48.1%
Non-underlying tax £0.3m (£96.9m) -
Profit / (loss) for the period £18.5m (£22.2m) +183.3%
Earnings per share
· Adjusted EPS(^) 7.9p 30.6p (74.2%)
· Statutory EPS 7.0p (6.3p) +211.1%
Interim dividend per share(6)Error! Bookmark not defined. - dividend policy 12.96p 11.70p +10.8%
Capital investment £142.6m £111.5m +27.9%
· South West Water £118.1m £98.7m +19.7%
· Bristol Water £24.4m £12.7m +92.1%
· Other £0.1m £0.1m -
30 September 30 September 2021
2022
Total Group net debt (£2,877.8m) (£2,542.9m)
As previously flagged, whilst the Group's revenues and RCV grow with
inflation, offsetting cost increases over the long-term, near-term earnings
are reduced through higher interest charges and operating costs such as power.
The Group's revenue has increased from £389.3 million to £425.5 million, an
increase of c.9.3%, with the additional two months of revenue from Bristol
Water in this half year contributing £22.5 million (5.8%). Excluding the
impact of the additional two months of revenue from Bristol in this half year
compared to last, revenues have increased by 3.5%.
In South West Water, elevated demand levels have continued, with non-household
revenues returning to pre-pandemic levels. Inflationary price increases have
been offset by the impact of regulatory adjustments resulting in an overall
reduction in tariffs to our customers and a net reduction in revenues in H1
2022/23 compared to H1 2021/22, though noting that revenues will be rebalanced
in future years given the revenue control mechanism.
In the Bristol Water region, demand levels have been relatively stable year on
year with revenues benefiting from higher regulatory allowances in its
business plan as determined by the Competition and Markets Authority (CMA).
Pennon Water Services continues to deliver further external revenue growth of
c.£12 million in H1 2022/23 compared to H1 2021/22 with demand growth of
c.£6 million and contract wins contributing c.£6 million of additional
revenue.
Operating costs have been impacted by significant increases in power costs
driven by the volatile global market prices and consequent higher associated
transmission costs. Overall power costs across the Group of c.£49 million (H1
2021/22 £24 million) have increased on a like for like basis by c.£23
million (c.90%) in H1 2022/23 compared to H1 2021/22, with an additional two
months of Bristol Water's power costs of c.£2 million contributing to the
overall increase. Other operating costs are broadly flat period on period,
with inflationary pressures largely offset by delivery of efficiencies.
As a Group, we recognise the pressure the cost of living crisis may pose to
our customers and we are focused on providing a broad range of affordability
measures to support those in need of support. Across all Group businesses, the
potential impact of significant increases in the cost of living on
affordability has been considered in assessing our credit loss charges.
Cash collections throughout the Group have remained robust during the first
half of the financial year. Underlying expected credit loss charges for H1
2022/23 of £4.1 million for the water business (1.1% of revenue) are in line
with previous levels (H1 2021/22 1.0% 20 (#_ftn20) ). For Pennon Water
Services, the expected credit loss charge of £0.3 million (0.3% of revenue)
is also in line with previous levels (H1 2021/22 of 0.3% of revenue).
Excluding the impact of power increases, Bristol Water has contributed £14.5
million of additional EBITDA in comparison to H1 2021/22 with £12.5 million
contributed from the additional two months of trading and £2 million from
like for like growth. Overall, underlying EBITDA has reduced 12.4% from
£199.4 million to £174.6 million reflecting the significant increase in
power costs.
The Group's net interest charge has doubled in comparison to H1 2021/22
increasing from £37.0 million to £74.7 million. Whilst the Group benefits
from a lower proportion of index-linked debt compared to the water industry
average, 30% of Pennon's regulated water businesses' gross debt of £2.8
billion is index linked at 30 September 2022. Inflation remained relatively
low in H1 2021/22 and has increased significantly throughout the calendar year
2022. The inflation element of the interest charge is c.£46 million, compared
to c.£9 million in H1 2021/22.
Group underlying profit before tax decreased by 75.1% to £22.5 million
compared with H1 2021/22 of £90.4 million. This outturn reflects the
near-term pressures on earnings from elevated power pricing and financing
costs.
Overall, our underlying results for the Group for the full year are expected
to be weighted to the first half of the financial year, as a result of the
impact of seasonally higher power usage and prices increasing inflationary
impacts on costs, and the impact on revenues through lower customer demand as
a result of continued water efficiency promotion and initiatives.
SOUTH WEST WATER
South West Water underlying H1 2022/23 H1 2021/22 Change
Revenue 21 (#_ftn21) £294.1m £298.1m (1.3%)
Operating Costs (£154.5m) (£119.8m) (29.0%)
EBITDA(^) £139.6m £178.3m (21.7%)
Depreciation and amortisation (£60.3m) (£60.4m) +0.2%
Operating profit £79.3m £117.9m (32.7%)
Net interest charge (£58.8m) (£33.2m) (77.1%)
Profit before tax £20.5m £84.7m (75.8%)
South West Water's underlying revenue for H1 2022/23 of £294.1 million has
reduced by 1.3% (£4.0 million) compared with the prior year (H1 2021/22
£298.1 million) with continued elevated demand and the inflationary impact of
tariffs, being more than offset by regulatory adjustments to revenue,
including in-year ODI penalties from 2020/21.
Underlying operating costs of £154.5 million increased by £34.7 million (H1
2021/22 £119.8 million) principally reflecting:
· Inflationary and other macro-economic impacts on wholesale energy and
chemical prices (£25.2 million)
· Responding to operational drivers including continued elevated demand
prolonging high production volumes, supporting improvements to leakage and
pollutions performance, and as a result of the recent dry weather driving
additional customer communications, water efficiency initiatives and costs
associated with ensuring water resilience
· Increased regulatory and compliance costs (£1.9 million) due to the
introduction of Farming Rules for Water and costs relating to PR24
· Other operating costs changes of £2.1 million, net of ongoing
efficiency initiatives.
South West Water's underlying EBITDA and underlying operating profit reduced
by 21.7% and 32.7% respectively reflecting the impact of lower tariffs on
revenue and additional cost pressures driven primarily by macro-economic
factors.
The net interest charge of £58.8 million is £25.6 million higher than prior
year (H1 2021/22, £33.2 million) primarily reflecting the impact of higher
RPI and CPI rates on index-linked debt. The Group's efficient funding mix
which includes a relatively low proportion of index-linked debt and hedging
strategy minimises these market effects resulting in an effective interest
rate of 5.1% (FY 2021/22 3.4%).
South West Water's capital expenditure in H1 2022/23 was £118.1 million, an
increase of £19.4 million (19.7%) on the prior year (H1 2021/22 £98.7
million), primarily due to water resources investments to boost and protect
supplies, water quality investment including GAC schemes to provide further
resilience, and preliminary works at our new water treatment works in the
Bournemouth region. Wastewater investments in H1 included the roll out of our
WaterFit programme, targeted investments in wastewater pollutions hotspots and
the installation of event duration monitors on our storm overflows to achieve
100% coverage in 2022.
BRISTOL WATER
Bristol Water underlying H1 2022/23 H1 2021/22 Change
Revenue(21) £69.7m £41.6m +67.5%
Operating Costs (£36.7m) (£19.9m) (84.4%)
EBITDA(^) £33.0m £21.7m +52.1%
Depreciation and amortisation (£14.5m) (£9.3m) (55.9%)
Operating profit £18.5m £12.4m +49.2%
Net interest charge (£19.8m) (£5.2m) (280.8%)
(Loss) / profit before tax £(1.3m) £7.2m (118.1%)
During H1 2022/23 Bristol Water has contributed underlying revenue of £69.7
million (H1 2021/22 £41.6 million), underlying EBITDA of £33.0 million (H1
2021/22 £21.7 million) and an underlying loss before tax of £1.3 million (H1
2021/22 profit before tax of £7.2 million). Performance has been impacted by
inflationary impacts in the period, particularly through power and
index-linked debt financing costs, with c.50% of Bristol Water's debt being
index-linked at 30 September 2022.
Bristol Water has delivered increased revenues of c.11% in the half year to 30
September 2022, compared to the same six-month period last year. Overall
household demand in the Bristol region has remained relatively stable with
reductions in household demand being offset by increases as a result of the
higher regulatory allowances in its business plan determined by the CMA.
Non-household demand has continued to recover during the first half of the
year, in addition to tariff increases through the regulatory mechanism.
Bristol Water's operating costs of £36.7 million were higher than the same
period last year as a result of the increase in power costs in the year, which
were around 90% hedged. In addition, the hot, dry summer resulted in action
being taken to protect Bristol Water's Mendip water resources, which has led
to the requirement for sourcing alternate water supplies, resulting in further
power and chemical usage.
Bristol Water's capital programme totalled £24.4 million during the period to
30 September 2022 (H1 2021/22 £12.7 million) and includes resilience focused
investment across the network, new development expenditure and initiatives to
stabilise supply interruptions and leakage performance.
PENNON WATER SERVICES
Pennon Water Services underlying H1 2022/23 H1 2021/22 Change
Revenue £108.2m £92.7m +16.7%
Water segment wholesale elimination (£46.7m) (£43.2m) +8.1%
Revenue excluding elimination £61.5m £49.5m +24.2%
Operating Costs 22 (#_ftn22) (£105.9m) (£91.1m) (16.2%)
Water segment wholesale elimination £46.7m £43.2m (8.1%)
Operating costs excluding elimination (£59.2m) (£47.9m) (23.6%)
EBITDA(^) £2.3m £1.6m +43.8%
Depreciation and amortisation (£0.4m) (£0.4m) -
Operating profit £1.9m £1.2m +58.3%
Net interest charge (£0.8m) (£0.9m) +11.1%
Profit before tax £1.1m £0.3m +266.7%
Pennon Water Services has performed strongly this financial year to date
through its disciplined approach to winning new business and benefiting from
business customers' covid recovery throughout the period.
Non-household demand has returned to higher pre-covid levels, with the
recovery predominantly in the hospitality, tourism and manufacturing sectors.
The growth rate in the first half of the year has continued at the same level
seen in H1 2021/22.
The overall impact on underlying revenues for Pennon Water Services, including
the impact of new contract wins is an increase of c.16.7% compared to the
previous half year period. New contract wins have contributed £5.8 million
of additional revenue compared to the same period last year. Underlying
operating costs have grown marginally behind improving revenues and the
business has improved its underlying EBITDA by 43.8% to £2.3 million (H1
2021/22 £1.6 million). This strong performance has resulted in the business
reporting a profit before tax of £1.1 million (H1 2021/22 £0.3 million).
The business continues to maintain its focus on targeting high quality,
sustainable customers who will benefit from the value-added services that form
part of Pennon Water Services' differentiated service proposition, with new
annualised contract wins of c.£8 million secured during the first half of the
year.
Group net finance costs
Net finance costs for the Group of £74.7 million are £37.7 million higher
than the same period last year (H1 2021/22 £37.0 million), driven largely by
the current high levels of inflation impacting index-linked debt charges but
also includes an additional two months' finance cost contribution from Bristol
Water in H1 2022/23.
The Group has benefitted from the efficient financing that has been achieved
through our diverse mix of fixed, floating and index-linked debt, including
Pennon's relatively lower exposure to index-linked instruments in comparison
to the water industry average.
The Group continues to secure funding for South West Water through its
Sustainable Financing Framework and has efficiently secured funding, to ensure
c.60% of its interest rate risk is mitigated in line with the Group Treasury
policy, which is achieved through issuing both fixed rate and effective
interest rate hedging, with a further element being index-linked. Prior to the
acquisition of Bristol Water, the index-linked proportion of debt had been
maintained at a relatively stable proportion of c.25%. Bristol Water has a
higher proportion of index linked debt and, as a result of the acquisition,
the water business index-linked debt proportion has increased but remains
below Ofwat's notional assumption of 33%.
Since 30 September, the Group has reduced its proportion of index linked debt
by repaying the Bristol Water plc index-linked bond due 2041 and has entered
into £300 million of RPI to fixed rate swaps to fix the interest charge over
the period to 2025. These changes, which have completed since 30 September
2022 will help to manage the Group's exposure to the current volatility in its
finance costs.
Profit before tax
Group underlying profit before tax in the period is £22.5 million, compared
with the prior half year of £90.4 million. This outturn reflects the
significant impact of higher operating costs, notably from power and higher
interest charges.
Non-underlying items and acquisition accounting
Non-underlying items for H1 2022/23 total a charge before tax of £1.6 million
(H1 2021/22 charge of £10.5 million) and in both periods relate to costs
incurred in connection with the acquisition and integration of Bristol Water.
The Directors believe excluding non-underlying items provides a more useful
comparison of business trends and performance.
The non-underlying charges in H1 2022/23 give rise to a current tax credit of
£0.3 million. In H1 2021/22 a £96.9 million non-underlying deferred tax
charge was recognised for the change in future tax rate which was
substantively enacted during the period.
As part of the requirements of acquisition accounting, we have finalised the
fair values of the acquired balance sheet of Bristol Water. The provisional
values reported in the Group's results to 31 March 2022 have been revised to
reflect the fair value of the acquired tax balances.
Goodwill arising from the acquisition of £121.6 million has been recorded in
the Group consolidated balance sheet and is attributed to the synergies
expected to be derived from the combination and the value of the workforce
which cannot be recognised as a separately identifiable intangible asset.
Responsible approach to tax
The Group is pleased to confirm it has once again maintained the Fair Tax Mark
accreditation for the year. This is the fifth year that the Group has been
awarded the accreditation and is proud of our responsible approach to tax and
that that we pay our fair share.
The overall H1 2022/23 tax charge for the Group is £2.4 million (H1 2021/22
charge of £102.1 million). On an underlying basis, the net tax charge for
H1 2022/23 for the Group of £2.7 million (H1 2021/22 charge of £5.2 million)
consists of:
· Current tax charge of £1.5 million, reflecting an effective tax rate
of 6.7% (H1 2021/22 charge of £4.5 million, 5.0%). This increase reflects
the tax effect on the Bristol Water accounting policy alignment which is
subject to tax this year offset by an accelerated level of tax allowances as a
result of super-deductions, along with relief for pension payments made during
the year and in recent years. Around 40% of the group's capital additions
qualify for super-deductions/first-year allowances.
· Deferred tax charge of £1.2 million (H1 2021/22 charge of £0.7
million) which primarily reflects the capital allowances across the Group in
excess of depreciation charged largely due to super-deductions, together with
relief on pension contributions. These are offset by a deferred tax credit
as a result of the Bristol Water accounting policy alignment which becomes a
current tax item in the period.
· There is also a non-underlying current tax credit of £0.3 million in
H1 2022/23 relating to the cost of the ongoing integration of Bristol Water.
Despite the current tax charge in the period, we anticipate a current tax
credit for the full year, as the full year effect of super-deductions flows
through. There was no announcement on capital allowances in the Autumn
statement, as such we expect capital allowance claims in future years to
return to standard capital allowance rates. We therefore anticipate current
tax charges in future years.
Earnings per share
The Group has recorded statutory earnings per share of 7.0 pence for the six
months ended 30 September 2022 (H1 2021/22 loss of 6.3 pence per share). This
includes a non-underlying charge before tax of £1.6 million and a net
non-underlying tax credit of £0.3 million. Statutory earnings per share for
H1 2021/22 were impacted by the significant non-underlying deferred tax charge
in respect of the change in corporation tax rate and also the average number
of shares used to derive the earnings per share were impacted by the share
consolidation in July 2021.
Our adjusted earnings per share excludes the impact of deferred tax charges
and non-underlying items. For the Group, we have generated adjusted earnings
per share(^) for H1 2022/23 of 7.9 pence compared to 30.6 pence in H1 2021/22.
This reduction in earnings reflects the significant near-term headwinds from
higher power costs and the impacts of inflation on finance costs and operating
costs more generally. The full year impact of the accounting policy alignments
on the current tax charge is recognised in its entirety in H1 2022/23 reducing
the adjusted earnings per share by 2.2 pence. There will be no further
impact for this in the current tax charge in the second half of the year.
Sustainable net debt position
Cash collections have remained robust throughout H1 2022/23. The Group's cash
generated from operations for H1 2022/23 was £160.2 million (H1 2021/22
£135.9 million). We continue to monitor cash collections closely and are
focused on providing a broad range of affordability measures to support those
in need of support.
Net interest payments were a similar level to the same period last year at
£41.8 million (H1 2021/22 £32.4 million). A significant element of the
increased finance costs arising from our index-linked debt is non-cash as the
indexation element accretes to the debt principal.
Our accelerated environmental investment programme has resulted in an increase
in capital investment of £34.5 million to £155.4 million (H1 2021/22 £120.9
million).
In September 2022 we repaid one of our finance leases of c.£145 million, the
funding for which primarily came from restricted cash funds of £120 million
held against this lease.
Other significant movements in net debt in H1 2022/23 include the final
tranche of the share buy-back programme of c.£40 million, payment of our
interim and final dividends for 2021/22 and other movements of £13.3 million
(including £7.3 million of non-cash movements), primarily in respect of
indexation on our loan instruments.
The Group's net debt at 30 September 2022 was £2,877.8 million (31 March 2022
£2,682.9 million). This includes fair value adjustments on acquired debt of
£162.4 million(( 23 (#_ftn23) )) 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
£2,715.4 million.
South West Water Group net debt at 30 September 2022 has increased to
£2,322.6 million (31 March 2022 £2,233.8 million) this is due to an increase
in capital expenditure and operational costs incurred during these volatile
times.
Bristol Water Group net debt at 30 September 2022 has increased to £416.4
million (31 March 2022 £405.3 million) reflecting the higher costs and
inflation accretion added to the debt during H1 2022/23.
Agile and efficient financing
The water business' cost of finance, with an effective rate(^) in H1 2022/23
of 5.8% remains among the lowest in the industry, continuing to benefit from
the diverse portfolio of debt.
The water business net debt is a mix of fixed / swapped (£1,403 million,
51%), floating (£500 million, 18%) and index-linked borrowings (£836
million, 31%). The debt has a maturity of up to 35 years with a weighted
average maturity of c.15 years. New debt raised during this AMP has been fixed
to align to iBoxx indices in line with Ofwat's approach to allowed cost of
debt. Where appropriate, derivatives are used to fix the rate on floating rate
debt.
The gross debt position of the water business is a mix of fixed / swapped 50%,
floating 20% and index-linked 30% as at 30 September 2022, which reflects our
diverse debt portfolio and compares to an industry average 24 (#_ftn24) of
fixed / swapped 42%, floating 4% and index linked 54%.
South West Water Ltd's gross debt at 30 September 2022 remains stable at
£2,431 million (31 March 2022 £2,494 million). This is due to the repayment
and restructuring of the lease portfolio to ensure its continued efficient and
effective management with a further c.£145 million repaid in September 2022,
offset by the drawing of new debt during the period. The lease portfolio will
continue to deliver long term benefits as part of our diverse range of
facilities as we look to further diversify our portfolio going forward, as
part of our Sustainable Financing Framework.
As noted in the net finance costs section above, given that the level of the
Group's inflation-linked debt is currently above the stable level historically
maintained, and the current elevated inflationary environment, we have sought
to manage this in the short-term by entering into c.£300 million of RPI to
fixed rate swaps, reducing our overall exposure to inflation between now and
2025. This will allow the Group to maintain its financing flexibility, whilst
remaining within our treasury policy of at least 60% fixed rate debt, and
ahead of any changes to the Ofwat's notional company expectations in K8.
In addition, the Group has taken further steps to re-balance the proportion of
index-linked debt to align with previously maintained levels for the
longer-term. During October 2022, we reduced our index-linked debt proportion
by giving notice on the £40 million Bristol Water plc index linked bond due
2041, which has subsequently been repaid in November 2022. This facility for
Bristol Water plc has been temporarily replaced with an intercompany facility
from Pennon Group plc ahead of the planned merger of the water businesses.
At 30 September 2022, the water business debt to RCV ratio stood at
58.4%(4)(,) (31 March 2022 62.7%). This is below Ofwat's notional structure of
60% and is lower than at March 2022 reflecting the inflationary increase
forecast for RCV at March 2023.
Following the conclusion of the South West Water and Bristol Water licence
merger consultation, the Group plans to obtain a credit rating by 2025.
The water business will require c.£600 million in new funding by 2025 and
plans are in place to raise this over the remainder of AMP7 - maintaining
c.£200 million per year run rate, and in line with the Ofwat notional new
debt assumptions of 20% new debt over the period. As the Group continues to
develop, and we see our funding requirement grow, we expect the Group to
manage its portfolio with larger debt issuances, taking advantage of the
public rating once established.
Responsible and sustainable balance sheet
The Group has a strong liquidity and funding position with £583 million of
cash and committed facilities as at 30 September 2022. This consists of cash
and short-term loan receivables of £242 million (including £28 million of
restricted funds representing deposits with lessors against lease obligations)
and £341 million of undrawn facilities. £172 million of the cash holdings
are held at the Pennon company level.
Following the continued success of our Sustainable Financing Framework, in
September 2021 we issued our updated framework to incorporate the latest
sustainable principles; in particular in respect of sustainability linked
loans and bonds. The Group was the first UK corporate to issue sustainability
linked loans in 2018 and the new principles have helped to develop this market
further. Since March 2022, the Group has signed c.£275 million of new and
renewed facilities across Pennon and South West Water.
Pensions
At 31 March 2022, the surplus on retirement obligations of £66.3 million
comprised a surplus on the Group's principal pension scheme, Pennon Group
Pension Scheme (PGPS) of £59.5 million and a surplus of £6.8 million in
respect of Bristol Water's defined benefit pension obligations.
The surplus on PGPS has reduced to c.£44 million with the main elements of
the reduction being:
· £17 million increase on surplus from movements in financial
assumptions
· £33 million reduction adjusting for known pension increases.
The funding of PGPS has improved over recent years supported by the
responsible payments made by the Group in the previous two financial years. As
at 30 September 2022, the scheme is approximately 100% funded against its
technical provisions.
As funding of PGPS has improved the investment portfolio has been de-risked
through increasing the scheme's real gilts hedging position through LDIs
(Liability Driven Investments), which are commonly used by UK pension
schemes. As has been widely reported, the unprecedented increases in gilt
yields in late September 2022 resulted in rapid reductions in collateral in
LDI arrangements which schemes are required to increase or the hedging
structure is unwound. As permitted by the scheme rules and legislation,
Pennon approved a temporary loan facility to PGPS on 28 September 2022 to
provide short-term liquidity to the scheme whilst investments were
re-balanced. £25 million was provided on this date and this was fully repaid
within 6 days.
Bristol Water's pension surplus relates to the Bristol Water Section of the
Water Companies Pension Scheme (WCPS). The liabilities of the scheme are fully
insured, securing the pension promises made to the benefit of members through
a bulk annuity policy. Changes in actuarial assumptions have little impact on
the surplus recognised as the change in liabilities is materially matched by
the change in asset values through the bulk annuity policy as a result the net
surplus of c.£7 million remains largely unchanged. The surplus recognised is
restricted by a tax deduction of 35% under UK tax legislation.
Dividends
The Group continues to deliver on its commitments to customers, shareholders
and stakeholders as our investments drive tangible, positive and sustainable
results. Around half of Pennon's shareholders are UK pension funds, savings,
charities and individuals with over half of the Group's employees, now
including Bristol Water, also being shareholders.
Pennon's sector-leading dividend policy of growth of CPIH +2% reflects the
Board's ongoing confidence in the Group's long term sustainable growth
strategy and is underpinned by continued RORE outperformance in South West
Water.
For H1 2022/23 the Board has declared an interim dividend of 12.96 pence,
representing an increase of 10.8% on (H1 2020/21 11.70 pence). The interim
dividend will be paid on 5 April 2023 to shareholders on the register on 27
January 2023. Pennon offers shareholders the opportunity to invest their
dividend in a Dividend Reinvestment Plan (DRIP).
Financial outlook
The global economy continues to be volatile reflecting the current
geopolitical situation, including the ongoing conflict in Ukraine. The impacts
on the supply chain, rising power prices and higher levels of inflation are
affecting all businesses.
Overall, our underlying results for the Group for the full year are expected
to be H1 weighted. The initiatives we announced earlier in November that are
focused on helping reservoir levels recover in Cornwall, are expected to
reduce underlying revenues through lower customer demand as a result of
continued water efficiency promotion and initiatives. Operating costs in H2
2022/23 are anticipated to increase with seasonal increases in power usage and
prices and increasing inflationary impacts on input costs. The impact of lower
revenue and increased operating costs in H2 2022/23 are expected to be
partially offset by anticipated lower levels of financing costs, achieved from
the re-balancing of the proportion of our index-linked debt, which has been
undertaken since 30 September.
A number of significant items are also expected in H2 2022/23:
· £20 million non-underlying revenue reduction for the second issuance
of our pioneering WaterShare+ scheme, which now includes Bristol Water
customers.
· c.£5 million of costs to integrate Bristol Water into the water
business.
· c.£40 million investment in Cornwall resilience schemes 25
(#_ftn25)
· One-off benefit to net finance costs of c.£20 million arising on the
settlement of Bristol Water's index-linked 2041 bond.
Looking beyond the current financial year, we recognise the pressure that
inflationary pricing increases may pose to our customers, and customer bill
affordability is a key consideration for us. Our broad range of affordability
measures ensures we are able to support those in need of support, and we
continue to focus on delivering improvements efficiently and effectively.
We have taken decisive actions to reduce the level of volatility on our
interest costs by reducing our exposure to index-linked debt, however finance
costs will remain higher in comparison to previous levels seen in the
relatively low interest rate environment.
In order to significantly accelerate the Group's pathway to c.50%
self-generation 26 (#_ftn26) by 2030, and our wider environmental Net Zero
2030 commitment, we announced in September our plan to invest the remaining
c.£160 million in renewable energy generation projects. We are currently
engaging with multiple counterparties on solar development opportunities in
the UK, ranging from 20-50MW capacity. These projects would supply power to
our water businesses, and alongside the current rollout of solar at
operational sites would decrease our reliance on global power markets.
We expect our earnings to continue to be impacted by the higher inflationary
environment, in particular from power costs. For 2022/23, more than 95% of the
Group's energy usage is hedged and we have previously announced that we
anticipate total power costs across the Group will now increase by c.£50
million 27 (#_ftn27) for the financial year 2023. For 2023/24 and 2024/25
c.60% and c.33% of our power needs have been de-risked, respectively, reducing
volatility. The hedging in place reflects c.30% lower cost than current
forward market pricing.
However, in the longer term the elevated inflationary environment provides the
Group with additional growth in long-term sustainable value, with revenues and
RCV linked to November and March outturn inflation, respectively. The elevated
inflationary environment in this regulatory period is forecast to increase RCV
by a further c.10% over K7, bringing total RCV growth in K7 to c.50%, more
than offsetting the near-term headwinds.
Technical Guidance - full year 2022/23
Pennon Group FY 2021/22 Change
Revenue • Full year revenue contribution from Bristol Water £792.3m ▼
• Pennon Water Services growth through contract wins and continued
non-household demand recovery
• Offset by impact of lower customer bills
• Reduced demand from customer water saving incentive
• Non-underlying impact of customer water saving financial
incentives
• WaterShare+ sharing of outperformance
Net debt • Share buy-back programme complete - c.£40 million deployed in £2,682.9m ▲
H1 2022/23
• Continued acceleration of environmental capital investment
across the Group
• Accretion on index-linked debt
Current tax • 2021/22 effective rate reflects additional pension contributions 3.5% ▼
made during the year
• Continued super-deductions anticipated in 2022/23
• Net current tax credit expected
Water business FY 2021/22 Change
Operating costs • Operating cost increases due to increasing inflationary impact £303.0m ▲
on input costs
• Full year impact of Bristol Water
• c.£50 million increase in power costs
Net interest • Elevated inflation increases in charges related to index-linked £98.0m ▲
debt
• Full year impact of Bristol Water
• Minimised future volatility through reduced exposure to
index-linked debt. Overall net finance costs expected of c. £130 million -
£140 million
Capex • Capital expenditure reflects K7 existing profile of investment £240.4m ▲
along with accelerated environmental investment
• Full year impact of Bristol Water
• Accelerated delivery of water resilience capital interventions
• Overall capex expected in excess of £300 million
Water business RORE(^) • Continued doubling of base returns for the water business - 7.5% ▲
targeting improved net reward on ODIs, increasing level of financing
(Ofwat K7 cumulative) outperformance more than offsetting increased cost pressures reflected in
Totex
RCV • Increase in line with K7 business plan levels of investment and £4.2bn ▲
inflationary impact
Pennon Water Services FY 2021/22 Change
Operating costs • Non-household recovery and contract wins leading to higher £191.9m ▲
wholesale supply charges
• Impact of increased inflationary environment
Underlying EBITDA(^) • Impact of increased non-household demand on margins £3.4m ▲
• Focus on continued cost efficiency with strong collections
Board Matters
On 18 November 2022 the Group was delighted to announce the appointments of
new Non-Executive Directors Loraine Woodhouse and Dorothy Burwell to the
Boards of Pennon Group plc, South West Water Limited and Bristol Water plc,
effective 1 December 2022. Their appointments support building internal
succession ahead of the planned departure of Neil Cooper, Senior Independent
Director and Audit Chair, who will step down in 2023 after serving nine years
on the Board.
Loraine is currently a Non-Executive Director of The Restaurant Group plc, and
is also Non-Executive Director & Chair of the Audit Committee at British
Land Company plc.
Dorothy is a Partner and Global Partnership Board Member of FGS Global, a
Non-Executive Director of Post Holdings, Inc. and a Trustee of the charity the
Consumers' Association.
In addition, the Company will be appointing Andrew Garard as Interim General
Counsel and Group Company Secretary following the retirement of Simon Pugsley
on 1 December 2022.
Susan Davy
Group Chief Executive
29 November 2022
Financial Timetable
26 January 2023 Ordinary shares quoted ex-dividend
27 January 2023 Record date for interim dividend
10 March 2023 Final date for receipt of DRIP applications
31 March 2023 Trading Statement
05 April 2023 Interim dividend payment date
01 June 2023 Full Year Results 2022/23
June 2023 Annual Report and Accounts published
20 July 2023 Annual General Meeting
20 July 2023* Ordinary shares quoted ex-dividend
21 July 2023* Record date for final dividend
10 August 2023* Final date for receipt of DRIP applications
04 September 2023* Final dividend payment date
02 October 2023 Trading Statement
29 November 2023 Half Year Results 2023/24
* Subject to obtaining shareholder approval at the 2023 Annual General
Meeting.
PRINCIPAL RISKS AND UNCERTAINTIES
Principal Risks
The Board continues to regularly consider and review the principal risks of
the Group within the context of its risk appetite. This includes the impact of
changes to the external macro-economic, legal and regulatory environment
within which the Group operates.
The Board have reviewed the Group's principal risks and consider them to be
consistent with those reported within the Pennon 2022 Annual Report:
Law, Regulation and Finance
1. Changes in Government Policy
2. Regulatory frameworks
3. Non-compliance with laws and regulations
4. Inability to secure sufficient finance and funding, within our debt
covenants, to meet ongoing commitments
5. Non-compliance or occurrence of avoidable health and safety incidents
6. Failure to pay all pension obligations as they fall due & increased
costs to the Group should the defined benefit pension scheme deficit increase
Market and Economic Conditions
7. Non-recovery of customer debt
8. Macro-economic near-term risks impacting on inflation, interest rates
and power prices
Operating Performance
9. The Group's operations and assets are impacted as a result of climate
change and extreme weather events
10. Failure of operational water treatment assets and processes resulting in
an inability to produce or supply clean drinking water
11. Failure of operational wastewater assets and processes resulting in an
inability to remove and treat wastewater and potential environmental impacts,
including pollutions
12. Failure to maintain excellent service or effectively engage with our
customers and wider stakeholders
13. Insufficient skills and resources to meet the current and future business
needs and deliver the Group's strategic priorities
14. Non-delivery of Regulatory Outcomes and performance commitments
Business Systems and Capital Investment
15. Inefficient or ineffective delivery of capital projects
16. Inadequate technological security results in a breach of the Group's
assets, systems and data
17. Failure to fully realise the strategic value arising from the acquisition
of Bristol Water.
CAUTIONARY STATEMENT IN RESPECT OF FORWARD-LOOKING STATEMENTS
This Report contains forward-looking statements relating to the Pennon Group's
operations, performance and financial position based on current expectations
of, and assumptions and forecasts made by, Pennon Group management which may
constitute "forward-looking statements" within the meaning of the U.S. Private
Securities Litigation Reform Act of 1995. Forward-looking statements are
identified in this Report by words such as "anticipate", "aim", "believe",
"continue", "could", "due", "estimate", "expect", "forecast", "goal",
"intend", "may", "outlook", "plan", "probably", "project", "remain", "seek",
"should", "target", "will", "would" and related and similar expressions, as
well as statements in the future tense. All statements other than of
historical fact may be forward-looking statements and represent the Group's
belief regarding future events, many of which, by their nature, are inherently
uncertain and outside the Group's control. Various known and unknown risks,
uncertainties and other factors could lead to substantial differences between
the actual future results, financial situation, development or performance of
the Group and the estimates and historical results given herein. Important
risks, uncertainties and other factors that could cause actual results,
performance or achievements of Pennon Group to differ materially from any
outcomes or results expressed or implied by such forward-looking statements
include, among other things, changes in Government policy; regulatory and
legal reform; compliance with laws and regulations; maintaining sufficient
finance and funding to meet ongoing commitments; non-compliance or occurrence
of avoidable health and safety incidents; tax compliance and contribution;
failure to pay all pension obligations as they fall due and increased costs to
the Group should the defined benefit pension scheme deficit increase;
non-recovery of customer debt; poor operating performance due to extreme
weather or climate change; macro-economic risks impacting commodity and power
prices and other matters; poor customer service and/or increased competition
leading to loss of customer base; business interruption or significant
operational failure/incidents; difficulty in recruitment, retention and
development of skills; non-delivery of regulatory outcomes and performance
commitments; failure or increased cost of capital projects/exposure to
contract failures; failure of information technology systems, management and
protection, including cyber risks; and all other risks in the Pennon Group
Annual Report published in June 2022. Such forward looking statements should
therefore be construed in light of all risks, uncertainties, and other
factors, including without limitation those identified above, and undue
reliance should not be placed on them. Nothing in this report should be
construed as a profit forecast.
Any forward-looking statements are made only as of the date of this document
and no representation, assurance, guarantee or warranty is given in relation
to them including as to their accuracy, completeness, or the basis on which
they are made. The Group accepts no obligation to revise or update publicly
these forward-looking statements or adjust them as a result of new information
or for future events or developments, except to the extent legally required.
UNSOLICITED COMMUNICATIONS WITH SHAREHOLDERS
A number of companies, including Pennon Group plc, continue to be aware that
their shareholders have received unsolicited telephone calls or correspondence
concerning investment matters which imply a connection to the company
concerned. If shareholders have any concerns about any contact they have
received, then please refer to the Financial Conduct Authority's website
www.fca.org.uk/scamsmart. Details of any share dealing facilities that the
Company endorses will be included in Company mailings.
PENNON GROUP PLC
Consolidated income statement for the half year ended 30 September 2022
Unaudited
Before non-underlying items Non-underlying items (note 5) half year ended 30 September 2022 Total Before non-underlying items Non-underlying items (note 5) half year ended 30 September 2021 Total
half year
half year
half year
half year ended 30 September 2021
ended 30 September 2022
ended 30 September 2022
ended 30 September 2021
Notes £m £m £m £m £m £m
Revenue 4 425.5 - 425.5 389.3 - 389.3
Operating costs
Employment costs (50.7) - (50.7) (43.0) - (43.0)
Raw materials and consumables used (15.9) - (15.9) (9.8) - (9.8)
Other operating expenses (184.3) (1.6) (185.9) (137.1) (10.5) (147.6)
Earnings before interest, tax, 4 174.6 (1.6) 173.0 199.4 (10.5) 188.9
depreciation and amortisation
Depreciation and amortisation (77.4) - (77.4) (72.0) - (72.0)
Operating Profit 4 97.2 (1.6) 95.6 127.4 (10.5) 116.9
Finance income 6 3.4 - 3.4 2.2 - 2.2
Finance costs 6 (78.1) - (78.1) (39.2) - (39.2)
Net finance costs 6 (74.7) - (74.7) (37.0) - (37.0)
Profit before tax 4 22.5 (1.6) 20.9 90.4 (10.5) 79.9
Taxation 7 (2.7) 0.3 (2.4) (5.2) (96.9) (102.1)
Profit / (loss) for the period 19.8 (1.3) 18.5 85.2 (107.4) (22.2)
Attributable to:
Ordinary shareholders of the parent 19.6 (1.3) 18.3 85.1 (107.4) (22.3)
Non-controlling interests 0.2 - 0.2 0.1 - 0.1
Earnings per ordinary share 8
(pence per share)
- Basic 7.0 (6.3)
- Diluted 6.9 (6.3)
The Group activities above are derived from continuing activities.
The notes on pages 44 to 60 form part of this condensed half year financial
information.
PENNON GROUP PLC
Consolidated statement of comprehensive income for the half year ended 30
September 2022
Unaudited
Before non-underlying items Non-underlying items (note 5) half year ended 30 September 2022 Total Before non-underlying items Non-underlying items (note 5) half year ended 30 September 2021 Total
half year
half year
half year
half year ended 30 September 2021
ended 30 September 2022
ended 30 September 2022
ended 30 September 2021
£m £m £m £m £m £m
Profit / (loss) for the period 19.8 (1.3) 18.5 85.2 (107.4) (22.2)
Other comprehensive income
Items that will not be reclassified to profit or loss
Remeasurement of defined benefit (15.6) - (15.6) 15.9 - 15.9
obligations (note 16)
Income tax on items that will not be reclassified 3.6 - 3.6 4.3 - 4.3
Total items that will not be (12.0) - (12.0) 20.2 - 20.2
reclassified to profit or loss
Items that may be reclassified subsequently
to profit or loss
Cash flow hedges 64.6 - 64.6 10.2 - 10.2
Income tax on items that may be reclassified (16.1) - (16.1) (0.7) - (0.7)
Total items that may be reclassified 48.5 - 48.5 9.5 - 9.5
subsequently to profit or loss
Other comprehensive income for the period 36.5 - 36.5 29.7 - 29.7
net of tax
Total comprehensive income for the period 56.3 (1.3) 55.0 114.9 (107.4) 7.5
Total comprehensive income attributable to:
Ordinary shareholders of the parent 56.1 (1.3) 54.8 114.8 (107.4) 7.4
Non-controlling interests 0.2 - 0.2 0.1 - 0.1
The notes on pages 44 to 60 form part of this condensed half year financial
information.
PENNON GROUP PLC
Consolidated balance sheet at 30 September 2022
Unaudited
30 September 2022 31 March
2022*
Notes £m £m
ASSETS
Non-current assets
Goodwill 163.9 163.9
Other intangible assets 14.5 13.9
Property, plant and equipment 17 4,328.3 4,264.0
Derivative financial instruments 57.6 14.8
Retirement benefit assets 16 51.0 66.3
Trade and other receivables 9.6 9.6
4,624.9 4,532.5
Current assets
Inventories 8.7 7.7
Trade and other receivables 288.6 270.9
Current tax receivable 3.4 1.5
Derivative financial instruments 26.9 5.6
Short-term loan receivable 14 25.0 -
Cash and cash deposits 14 217.2 519.0
569.8 804.7
LIABILITIES
Current liabilities
Borrowings 14 (123.4) (240.2)
Financial liabilities at fair value through profit and loss (2.4) (2.5)
Trade and other payables 18 (187.4) (171.5)
Provisions (0.7) (1.0)
(313.9) (415.2)
Net current assets 255.9 389.5
Non-current liabilities
Borrowings 14 (2,996.6) (2,961.7)
Other non-current liabilities 18 (137.7) (137.2)
Financial liabilities at fair value through profit and loss (34.1) (36.1)
Deferred tax liabilities (526.4) (512.4)
(3,694.8) (3,647.4)
Net assets 1,186.0 1,274.6
Shareholder's equity
Share capital 10 159.5 161.7
Share premium account 11 237.0 235.5
Capital redemption reserve 12 157.1 154.7
Retained earnings and other reserves 632.1 722.6
Total shareholders' equity 1,185.7 1,274.5
Non-controlling interests 0.3 0.1
Total equity 1,186.0 1,274.6
*An adjustment to the preliminary accounting for the Bristol Water acquisition
has been made within the measurement period ending 2 June 2022, this
adjustment is presented retrospectively and the 31 March 2022 balance sheet
figures have been adjusted accordingly.
The notes on pages 44 to 60 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 2022
Unaudited
Share capital Share premium account (note 11) Capital redemption reserve Retained earnings and other reserves Non-controlling interests Total equity
(note 10)
(note 12)
£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
Unaudited
Share Share premium account (note 11) Capital redemption reserve Retained earnings and other reserves Non-controlling interests Total equity
capital
(note 10) (note 12)
£m £m £m £m £m £m
At 1 April 2022 161.7 235.5 154.7 722.6 0.1 1,274.6
Profit for the period - - - 18.4 0.2 18.6
Other comprehensive income for the period - - - 36.5 - 36.5
Total comprehensive income for the period - - - 54.9 0.2 55.1
Transactions with equity shareholders:
Dividends paid - - - (101.5) - (101.5)
Shares purchased for cancellation - - - (40.0) - (40.0)
Shares cancelled (note 10) (2.4) - 2.4 - - -
Adjustments in respect of share-based - - - 0.8 - 0.8
payments (net of tax)
Own shares acquired by the Pennon Employee - - - (4.7) - (4.7)
Share Trust in respect of Share options
Proceeds from shares issued under 0.2 1.5 - - - 1.7
the Sharesave Scheme
Total transactions with equity shareholders (2.2) 1.5 2.4 (145.4) - (143.7)
At 30 September 2022 159.5 237.0 157.1 632.1 0.3 1,186.0
The notes on pages 44 to 60 form part of this condensed half year financial
information.
PENNON GROUP PLC
Consolidated statement of cash flows for the half year ended 30 September 2022
Unaudited
Half year ended 30 September 2022 Half year
ended 30 September
2021
Notes £m £m
Cash flows from operating activities
Cash generated from operations 13 160.2 135.9
Interest paid (45.2) (34.6)
Tax paid (3.1) (6.3)
Net cash generated from operating activities 111.9 95.0
Cash flows from investing activities
Interest received 3.4 2.2
Purchase of property, plant and equipment (153.0) (119.9)
Purchase of intangible assets (2.4) (1.3)
Acquisition of subsidiaries, net of cash acquired 21 - (412.3)
Proceeds on disposal of subsidiaries, net of cash - 9.2
disposed and transaction costs
Proceeds from sale of property, plant and equipment - 0.3
Advance of short-term loan 14 (25.0) -
Movement of restricted deposits 140.3 (3.0)
Net cash used in investing activities (36.7) (524.8)
Cash flows from financing activities
Proceeds from issuance of ordinary shares 1.7 3.1
Purchase of ordinary shares by the Pennon Employee Share Trust (4.7) (1.1)
Proceeds from new borrowings 108.0 50.9
Repayment of borrowings (57.2) (20.2)
Cash inflows from lease financing arrangements 13 5.0 15.0
Lease principal repayments (including net recoverable VAT) (148.0) (10.5)
Dividends paid 9 (101.5) (1,590.3)
Repurchase of own shares (40.0) (60.5)
Net cash used in financing activities (236.7) (1,613.6)
Net decrease in cash and cash equivalents (161.5) (2,043.4)
Cash and cash equivalents at beginning of period 14 351.2 2,668.5
Cash and cash equivalents at end of period 14 189.7 625.1
The notes on pages 44 to 60 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
60. 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. 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. 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.
This condensed half year financial information was approved by the Board of
Directors on 29 November 2022.
The financial information for the period ended 30 September 2022 does not
constitute statutory accounts within the meaning of section 435 of the
Companies Act 2006. The statutory accounts for 31 March 2022 were approved
by the Board of Directors on 30 May 2022 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 2022, which
were prepared in accordance with UK-adopted international accounting standards
and in conformity with the requirements of the Companies Act 2006.
The going concern basis has been adopted in preparing the condensed half year
financial information (interim accounts). At 30 September 2022, the Group has
access to undrawn committed funds and cash and other short-term deposits
totalling £583 million, including cash, other short-term deposits and
short-term loan receivable of £242 million and £341 million of undrawn
facilities. Cash and other short-term deposits include £28 million of
restricted funds deposited with lessors which are available for access,
subject to being replaced by an equivalent valued security. The Group has
considered its strong funding position and prudent financial projections
prepared to 30 November 2023 and beyond, which take into account a range of
possible scenarios. These include the modelling of the impact of
cost-of-living pressures on the ability of customers to pay amounts due
through reduced cash inflows from increased customer bad debt levels and the
impact of higher inflation on the Group's index-linked borrowings. As a result
of this forecast scenario the Directors have a reasonable expectation that the
Group will meet the requirements of its covenants and has adequate resources
to continue in operational existence for the period to at least the end of the
going concern assessment period of 30 November 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
2022.
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 2022 and are in
accordance with IFRS and interpretations of the IFRS Interpretations Committee
expected to be applicable for the year ending 31 March 2023 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 2022 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 2023 are not expected to have a material impact on the
Group's net assets or results.
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
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.
Unaudited
Half year ended 30 September 2022 Half year ended 30 September 2021
Revenue £m £m
Water total 363.8 339.7
Non-household retail 108.2 92.7
Other 1.1 1.0
Less intra-segment trading (47.6) (44.1)
Total revenue 425.5 389.3
Segment result
Operating profit before depreciation, amortisation and
non-underlying items (Underlying EBITDA)
Water total 172.6 200.0
Non-household retail 2.3 1.6
Other (0.3) (2.2)
174.6 199.4
Operating profit before non-underlying items
Water total 97.8 130.3
Non-household retail 1.9 1.2
Other (2.5) (4.1)
97.2 127.4
Profit before tax before non-underlying items
Water total 19.2 91.9
Non-household retail 1.1 0.3
Other 2.2 (1.8)
22.5 90.4
Profit before tax
Water total 19.2 91.9
Non-household retail 1.1 0.3
Other 0.6 (12.3)
20.9 79.9
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
4. Segmental information (continued)
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 2021 UK total
Water Non-household Other Total
retail
£m £m £m £m
Segment revenue 339.7 92.7 1.0 433.4
Inter-segment revenue (43.6) (0.1) (0.4) (44.1)
Revenue from external customers 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
Six months ended 30 September 2022 UK total
Water Non-household Other Total
retail
£m £m £m £m
Segment revenue 363.8 108.2 1.1 473.1
Inter-segment revenue (46.7) - (0.9) (47.6)
Revenue from external customers 317.1 108.2 0.2 425.5
Significant service lines
Water 317.1 - - 317.1
Non-household retail - 108.2 - 108.2
Other - - 0.2 0.2
317.1 108.2 0.2 425.5
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
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 2022 Half year ended 30 September 2021
£m £m
Operating Costs
Bristol Water integration (1) (1.6) -
Bristol Water acquisition (2) - (10.5)
Non-underlying tax credit/(charge) (3) 0.3 (96.9)
Net non-underlying charges (1.3) (107.4)
(1) The Group incurred expenses of £1.6 million in the half year ended 30
September 2022 in relation to the costs of integration of Bristol Water.
(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 non-underlying tax credit of £0.3 million for the half year ended 30
September 2022 represents the tax impact of the Bristol Water integration
costs.
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.
6. Net finance costs
Unaudited
Half year ended Half year ended
30 September 2022
30 September 2021
Finance costs Finance income Total Finance Finance income Total
costs
£m £m £m £m £m £m
Cost of servicing debt
Bank borrowings and overdrafts (60.1) - (60.1) (26.4) - (26.4)
Interest element of lease payments (16.3) - (16.3) (11.4) - (11.4)
Other finance costs (1.7) - (1.7) (0.5) - (0.5)
Interest receivable - 2.4 2.4 - 1.0 1.0
(78.1) 2.4 (75.7) (38.3) 1.0 (37.3)
Notional interest
Retirement benefit obligations - 1.0 1.0 (0.9) 1.2 0.3
Net finance costs (78.1) 3.4 (74.7) (39.2) 2.2 (37.0)
In addition to the above, finance costs of £1.6 million have been capitalised
on qualifying assets included in property, plant and equipment (H1 2021/22
£0.3 million).
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 2022 Total Before non-underlying items half year ended 30 September 2021 Non-underlying items (note 5) half year ended 30 September 2021 Total
half year
half year
half year ended 30 September 2021
ended 30 September 2022
ended 30 September 2022
£m £m £m £m £m £m
Analysis of charge
Current tax charge / (credit) 1.5 (0.3) 1.2 4.5 - 4.5
Deferred tax charge 1.2 - 1.2 0.7 96.9 97.6
Tax charge for the period 2.7 (0.3) 2.4 5.2 96.9 102.1
UK corporation tax is calculated at 19% (H1 2021/22 19%) of the estimated
assessable profit for the year. The tax charge for September 2022 and
September 2021 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 an effective
charge of 12% (H1 2021/22 charge of 6%).
The effective tax rate for the period for the group including prior year
adjustments and the impact of non-underlying items was a charge of 11% (H1
2021/22 charge of 128%).
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 and earnings used in the calculations
were:
Unaudited
Half year ended 30 September 2022 Half year ended 30 September 2021
Number of shares (millions)
For basic earnings per share 262.6 353.3
Effect of dilutive potential ordinary shares from share options 1.1 1.9
For diluted earnings per share 263.7 355.2
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 2022
30 September 2021
Profit Earnings per share Profit Earnings per share
after tax Basic Diluted after tax Basic Diluted
£m p p £m p p
Statutory earnings 18.3 7.0 6.9 (22.3) (6.3) (6.3)
Deferred tax before non-underlying items 1.2 0.4 0.4 0.7 0.2 0.2
Non-underlying items (net of tax) 1.3 0.5 0.5 107.4 30.4 30.3
Adjusted earnings before non-underlying items 20.8 7.9 7.8 85.8 24.3 24.2
and deferred tax
9. Dividends
Amounts recognised as distributions to ordinary equity holders in the period: Unaudited
Half year ended 30 September 2022 Half year ended 30 September 2021
£m £m
Interim dividend paid for the year ended 31.5 28.6
31 March 2022: 11.70 pence (2021: 6.77 pence) per share
Final dividend paid for the year ended 70.0 63.2
31 March 2022: 26.83 pence (2021: 14.97 pence) per share
Special dividend paid for the year ended - 1,498.5
31 March 2022: nil pence (2021: 355.00 pence) per share
101.5 1,590.3
In the six months to 30 September 2022 the 2021/22 interim and final dividends
were paid resulting in a cash outflow of £101.5 million.
Unaudited
Half year ended 30 September 2022 Half year ended 30 September 2021
£m £m
Proposed interim dividend for the year ended
31 March 2023: 12.96 pence per share (31 March 2022: 11.70 pence)
33.9 32.4
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 2023 will be paid on 5 April 2023 to shareholders on
the register on 27 January 2023.
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
10. Share capital
Allotted, called up and fully paid:
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
1 April 2022 to 30 September 2022 Unaudited
Number of shares
Treasury shares Ordinary shares £m
At 1 April 2022 ordinary shares of 61.05 pence each 5,628 264,841,320 161.7
For consideration of £1.7 million, shares issued in - 280,605 0.2
respect of the Company's Sharesave Scheme
Cancelled Shares (acquired via share buy-back)*** - (3,910,503) (2.4)
At 30 September 2022 ordinary shares of 61.05 pence each 5,628 261,211,422 159.5
* 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 to 30 September 2021, the Group announced and began a
process to purchase ordinary shares at an aggregate cost of up to £400
million by September 2022 (the 'Buy-back programme'). The Group purchased
£59.7 million of ordinary shares from the market at an average ordinary share
price of 1,266 pence during H1 2021/22. The shares acquired under the tender
offer were immediately cancelled, creating a capital redemption reserve of
£2.9 million.
*** During the period to 30 September 2022, the Group concluded the Buy-back
programme, with the total aggregate cost of the programme being £239.5
million. The Group purchased £39.9 million of ordinary shares from the market
at an average ordinary share price of 1,022 pence during H1 2022/23. The
shares acquired under the tender offer were immediately cancelled, creating a
capital redemption reserve of £2.4 million.
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 941 pence (H1 2021/22
1,236 pence).
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
11. Share premium account
Unaudited
1 April 2021 to 30 September 2021 £m
At 1 April 2021 232.1
Shares issued under the Sharesave Scheme 2.8
At 30 September 2021 234.9
1 April 2022 to 30 September 2022
At 1 April 2022 235.5
Shares issued under the Sharesave Scheme 1.5
At 30 September 2022 237.0
12. Capital redemption reserve
Unaudited
1 April 2021 to 30 September 2021 £m
At 1 April 2021 144.2
Share capital redeemed 2.9
At 30 September 2021 147.1
1 April 2022 to 30 September 2022
At 1 April 2022 154.7
Share capital redeemed 2.4
At 30 September 2022 157.1
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 2022 Half year ended 30 September 2021
£m £m
Cash generated from operations
Profit / (loss) for the period 18.5 (22.2)
Adjustments for:
Share-based payments 1.2 1.1
Loss / (profit) on disposal of property, plant and equipment 0.1 (0.3)
Depreciation charge 75.6 70.7
Amortisation of intangible assets 1.8 1.3
Non-underlying Bristol Water integration costs 1.6 -
Finance income (3.4) (2.2)
Finance costs 78.1 39.2
Taxation charge 2.4 102.1
Changes in working capital:
Increase in inventories (1.0) (0.1)
Increase in trade and other receivables (14.5) (20.5)
Decrease in trade and other payables (0.6) (8.9)
Increase / (decrease) in retirement benefit obligations from 0.7 (23.7)
contributions
Decrease in provisions (0.3) (0.6)
Cash generated from operations 160.2 135.9
Unaudited
Half year ended 30 September 2022 Half year ended 30 September 2021
Total interest paid £m £m
Interest paid in operating activities 45.2 34.6
Interest paid in investing activities 1.6 0.3
Total interest paid 46.8 34.9
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 £5.0 million (H1 2021/22 £15.0
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 2022 Year ended 31 March 2022
£m £m
Cash and cash deposits 217.2 519.0
Short-term loan receivable 25.0 -
Borrowings - current
Bank and other current borrowings (89.9) (70.0)
Lease obligations (33.5) (170.2)
Total current borrowings (123.4) (240.2)
Borrowings - non-current
Bank and other non-current borrowings (1,949.4) (1,907.4)
Listed preference shares (12.5) (12.5)
Lease obligations (1,034.7) (1,041.8)
Total non-current borrowings (2,996.6) (2,961.7)
Total net borrowings (2,877.8) (2,682.9)
The short-term loan receivable, as described in more detail in note 20, is
included within net borrowings. This temporary facility was provided to the
pension scheme to provide short-term liquidity and was repaid within 6 days,
it is therefore appropriate to include this balance within net borrowings to
aid comparison to previous periods.
For the purposes of the cash flow statement cash and cash equivalents
comprise:
Unaudited
Half year ended 30 September 2022 Year ended 31 March 2022
£m £m
Cash and cash deposits as above 217.2 519.0
Less: deposits with a maturity of three months or more (restricted funds) (27.5) (167.8)
189.7 351.2
Restricted funds of £27.5 million (31 March 2022 £167.8 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 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 current borrowings (40.1) 20.2 (50.2) - (8.4) (78.5)
Current lease obligations (48.2) 10.5 (53.1) (1.6) (0.2) (92.6)
Bank and other non-current borrowings (1,375.7) (50.9) 50.2 3.6 (517.3) (1,890.1)
Listed preference shares - - - - (12.5) (12.5)
Non-current lease obligations (1,391.0) (15.0) 53.1 (0.1) (1.2) (1,354.2)
Net cash / (borrowings) 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.
Net cash/ (borrowings) at 1 April 2022 Cash Transfer between non-current and current Other non-cash movements Net cash/ (borrowings) at 30 September 2022
flows
£m £m £m £m £m
Cash and cash deposits 519.0 (301.8) - - 217.2
Short-term loan receivable - 25.0 - - 25.0
Bank and other current borrowings (70.0) 0.2 (20.2) 0.1 (89.9)
Current lease obligations (170.2) 145.0 (11.7) 3.4 (33.5)
Bank and other non-current borrowings (1,907.4) (51.0) 20.2 (11.2) (1,949.4)
Listed preference shares (12.5) - - - (12.5)
Non-current lease obligations (1,041.8) (5.0) 11.7 0.4 (1,034.7)
Net borrowings (2,682.9) (187.6) - (7.3) (2,877.8)
In the Annual Report and Accounts for the year ended 31 March 2022, European
Investment Bank loans, which were previously included as a separate line item
in the table above, were aggregated with Bank and other borrowings. This
change was made as EIB loans are less significant now and share similar
characteristics to bank loans. The presentation at 30 September 2022 is
consistent with 31 March 2022.
The comparative table at 30 September 2021, has been restated for consistency,
with the line items "Bank and other current borrowings" and "Bank and other
non-current borrowings" increasing, but the overall net borrowings total
remaining unchanged. There is no change in the figures reported in the balance
sheet for the relevant comparative periods.
The Group has entered into covenants with lenders and, while terms vary, these
typically provide for limits on gearing and interest cover. The Group has been
in compliance with its covenants during the year to date.
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 2022
31 March 2022
Book value Fair value Book value Fair value
£m £m £m £m
Non-current borrowings:
Bank and other loans 1,949.4 1,768.1 1,907.4 2,065.1
Other non-current borrowings 12.5 20.2 12.5 24.9
Non-current borrowings excluding leases 1,961.9 1,788.3 1,919.9 2,090.0
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 2022 Year ended 31 March 2022
£m £m
Level 2 inputs
Assets
Derivatives used for cash flow hedging 84.1 19.2
Derivatives used for fair value hedging 0.4 1.2
Total assets 84.5 20.4
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
16. Retirement benefit assets
Defined benefit schemes
All the Group's defined benefit pension schemes are closed to future accrual.
The principal actuarial assumptions were the rate used to discount schemes'
liabilities and expected return on scheme assets with the same rate of 5.15%
(March 2022 2.75%) and the inflation assumption of 3.65% (March 2022 3.6%).
Unaudited
Half year ended Year ended
30 September 2022
31 March 2022
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 (985.9) 1,052.2 66.3 (901.7) 910.5 8.8
Amounts recognised in the (13.7) 14.1 0.4 (23.8) 20.8 (3.0)
income statement
Remeasurements through other 281.7 (297.3) (15.6) 57.5 (32.6) 24.9
comprehensive income
Company contributions - - - - 27.8 27.8
Benefits and expenses paid 22.5 (22.6) (0.1) 57.5 (57.5) -
Acquisition of Bristol Water Group - - - (175.4) 183.2 7.8
At end of period (695.4) 746.4 51.0 (985.9) 1,052.2 66.3
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, 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.
Temporary loan facility
Pennon approved a temporary loan facility to its principal scheme on 28
September 2022. This is classified in the balance sheet as a short-term loan
receivable and is disclosed further in note 20.
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
17. Capital expenditure
Unaudited
Half year ended 30 September 2022 Year ended 31 March 2022
£m £m
Property, plant and equipment
Additions 140.2 237.3
Net book value of disposals - 0.3
Assets acquired with Bristol Water Group - 944.8
Capital commitments
Contracted but not provided for the Group 86.8 59.5
Assets acquired with Bristol Water Group are stated at their fair value at the
date of acquisition.
18. Trade and other payables & other non-current liabilities
Unaudited
Half year ended 30 September 2022 Year ended 31 March 2022
£m £m
Trade and other payables - current
Trade payables 92.3 107.5
Contract liabilities 5.9 3.3
Other tax and social security 4.4 4.3
Accruals 34.7 29.5
Other payables 48.4 25.1
Amounts owed to joint ventures 1.7 1.8
187.4 171.5
Other non-current liabilities
Other liabilities 0.3 -
Contract liabilities 137.4 137.2
19. Contingencies
Unaudited
Half year ended 30 September 2022 Year ended 31 March 2022
£m £m
Performance bonds 9.7 9.7
Guarantees in respect of performance bonds are entered into in the normal
course of business. No liability is expected to arise in respect of the
guarantees.
Other contractual and litigation uncertainties
Ofwat and the Environment Agency announced an industry-wide investigation into
sewage treatment works on 18 November 2021. On 27 June 2022, as part of its
ongoing investigation, Ofwat announced enforcement action against South West
Water Limited, the company is now included alongside the five companies which
received enforcement notices in March 2022. The company will continue to work
openly with Ofwat to comply with the notice as part of this ongoing
investigation. The potential outcome of these investigations continues to be
unknown.
The Group establishes provisions in connection with contracts and litigation
where it has a present legal or constructive obligation as a result of past
events and where it is more likely than not an outflow of resources will be
required to settle the obligation and the amount can be reliably estimated.
Where it is uncertain that these conditions are met a contingent liability is
disclosed unless the likelihood of the obligation arising is remote or the
matter is not deemed material.
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
20. Related party transactions
Group companies entered into the following transactions with joint ventures
which were not members of the Group. Bristol Wessex Billing Services Limited
("BWBSL") and Water 2 Business Limited ("Water 2 Business") are joint venture
investments of Bristol Water plc.
Transactions with joint ventures Unaudited
Half year ended 30 September 2022 Half year ended 30 September 2021
£m £m
Sales to Water 2 Business 8.9 5.7
Purchases from BWBSL 1.4 0.8
Balances with joint ventures Unaudited
Half year ended 30 September 2022 Year ended 31 March 2022
£m £m
Trade and other receivables - current
Water 2 Business (including loan receivable of £9.6m) 11.1 11.1
BWBSL 0.6 0.9
Trade and other payables - current
Water 2 Business - 0.4
BWBSL 1.7 1.4
As funding of our principal pension scheme has improved the investment
portfolio has been de-risked through increasing the scheme's real gilts
hedging position through LDIs (Liability Driven Investments), which are
commonly used by UK pension schemes. As has been widely reported, the
unprecedented increases in gilt yields in late September 2022 resulted in
rapid reductions in collateral in LDI arrangements which schemes are required
to increase or the hedging structure is unwound. As permitted by the scheme
rules and legislation, Pennon approved a temporary loan facility on 28
September 2022 to provide short-term liquidity to the scheme whilst
investments were re-balanced. £25 million was provided on this date and this
was fully repaid within 6 days. The temporary loan was outstanding as at 30
September 2022 and the balance is included as a short-term loan receivable
within the Group's balance sheet.
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
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 water2business Limited, a
joint venture with Wessex Water. The purpose of the acquisition was to grow
the Group's core water business by expanding into a geographically contiguous
region. The acquisition of the Bristol Water Group was reviewed by the
Competition and Markets Authority and given full clearance on 7 March 2022.
The Bristol Water Group is consolidated in Pennon's accounts with effect from
the completion of acquisition at midnight on 2 June 2021.
The net assets recognised in the 31 March 2022 financial statements were based
on a provisional assessment of their fair value. The Group had not completed a
full tax review by the date the 2022 financial statements were approved for
issue by the Board of Directors. In early June 2022 the final review of tax
balances was completed, this has led to an increase in the deferred tax
liability with an offsetting increase in the total value of goodwill
recognised on acquisition of £5.5 million, the amortisation of this deferred
tax liability to 30 September 2022 is immaterial. Final fair values on
acquisition are shown in the table below. Corresponding amounts for the
financial year ended 31 March 2022 have also been restated.
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 a separately identifiable intangible asset.
Goodwill has been allocated to the water segment. The goodwill arising is not
expected to be tax deductible.
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 22.3
Cash and cash deposits (including restricted cash of £6.1 million) 18.9
Current tax liability (2.2)
Borrowings (545.1)
Trade and other payables (32.2)
Provisions (0.3)
Retirement benefit obligations 7.8
Deferred tax liabilities (140.4)
Identifiable net assets 298.0
Goodwill on acquisition 121.6
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
PENNON GROUP PLC
Notes to condensed half year financial information (continued)
22. Post balance sheet events
On 11 November 2022 South West Water Limited announced a new customer
incentive scheme. "Stop the Drop" will see customers offered a financial
incentive to encourage them to reduce consumption in exchange for a rebate on
their bill. If Colliford reservoir recovers to 30% by 31 December 2022,
customers in Cornwall will receive a £30 rebate on their bill. The payment of
the financial incentive to customers would result in a reduction to
(non-underlying) revenue of up to c.£10 million in H2 2022/23. In addition,
we would also anticipate lower customer demand which would be reflected in
underlying revenue as customer behaviour changes.
On 14 November 2022, the Group offered an extension of 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 equates to
£13 per customer and the total value of c.£20 million will be recognised in
full as a non-underlying reduction to revenue during H2 2022/23.
On 17 October 2022 Bristol Water plc gave notice of redemption of the £40m
bonds due to be repaid in March 2041, the Group carrying value of the bonds at
30 September 2022 was £91.3 million. The bonds were redeemed on 17 November
2022 for £72.3 million, the difference arising on early settlement will be
credited to non-underlying interest in the second half of the financial year.
The Group has entered into interest rate swaps on £300 million of index
linked debt to fix the interest charge over the period to 2025. The RPI used
to calculate the interest charge on the debt is set on a future date and
therefore the financial effect of this swap cannot be reliably estimated.
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 2022.
S J Davy P M Boote
Group Chief Executive Officer Group Chief Financial Officer
PENNON GROUP PLC
INDEPENDENT REVIEW REPORT TO PENNON GROUP PLC
Conclusion
We have been engaged by the Company to review the condensed consolidated set
of financial statements in the half-yearly financial report for the six months
ended 30 September 2022 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 2022 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 United Kingdom'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" (ISRE) issued by the
Financial Reporting Council. 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 Group are
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".
Conclusions Relating to Going Concern
Based on our review procedures, which are less extensive than those performed
in an audit as described in the Basis of Conclusion section of this report,
nothing has come to our attention to suggest that management have
inappropriately adopted the going concern basis of accounting or that
management have identified material uncertainties relating to going concern
that are not appropriately disclosed.
This conclusion is based on the review procedures performed in accordance with
this ISRE, however future events or conditions may cause the entity to cease
to continue as a going concern.
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
United Kingdom's Financial Conduct Authority.
In preparing the half-yearly financial report, the directors are responsible
for assessing the company's ability to continue as a going concern,
disclosing, as applicable, matters related to going concern and using the
going concern basis of accounting unless the directors either intend to
liquidate the company or to cease operations, or have no realistic alternative
but to do so.
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, including our Conclusions
Relating to Going Concern, are 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 Financial Reporting Council. 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 2022
PENNON GROUP PLC
Alternative performance measures
Alternative performance measures (APMs) are financial measures used in this
report that are not defined by International Financial Reporting Standards
(IFRS). The Directors believe that these APMs assist in providing additional
useful information on the underlying trends, performance and position of the
Group as well as enhancing the comparability of information between reporting
periods.
As the Group defines the APMs they might not be directly comparable to other
companies' APMs. They are not intended to be a substitute for, or superior to,
IFRS measurements. The following APMs have been added or amended to those
presented previously:
· 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.
· Operational cash inflows and other movements are no longer
presented. The Group's statutory operating cash flows, as presented in note
13, adequately reflect the Group's performance in the period following the
completion of Pennon's pension deficit recovery contributions in 2021.
(i) Underlying earnings
Underlying earnings are presented alongside statutory results as the Directors
believe they provide a more useful comparison on business trends and
performance. Note 5 in the notes to the financial statements provides more
detail on non-underlying items, and a reconciliation of underlying earnings
for the current year and the prior year is as follows:
Non-underlying items
Underlying earnings reconciliation Underlying Bristol integration costs Statutory results Earnings
per share
30 September 2022
£m £m £m p
EBITDA (see below) 174.6 (1.6) 173.0
Operating profit 97.2 (1.6) 95.6
Profit before tax 22.5 (1.6) 20.9
Taxation (2.7) 0.3 (2.4)
Profit after tax 19.8 (1.3) 18.5
Non-controlling interests (0.2)
Profit after tax attributable to shareholders 18.3 7.0
Non-underlying items
Underlying earnings reconciliation Underlying Deferred tax change of rate Acquisition related costs Statutory results Earnings
per share
30 September 2021
£m £m £m £m p
EBITDA (see below) 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 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)
(ii) Underlying EBITDA
Underlying EBITDA (earnings before interest, tax, depreciation and
amortisation and non-underlying items) is used to assess and monitor
operational underlying performance.
(iii) Basic adjusted earnings per share (adjusted for share consolidation)
H1 2023 H1 2022
Basic weighted average number of shares
Basic weighted average number of shares (millions) (note 8) 262.6 353.3
Adjustment to reflect the post-consolidation share base as if it had been in - (73.0)
place
from the start of the previous financial year (millions)
Adjusted basic weighted average number of shares (adjusted for share 262.6 280.3
consolidation) (millions)
Basic adjusted earnings per share before exceptional items and 7.9 24.3
deferred tax (pence) (note 8)
Adjustment to reflect the post-consolidation share base as if it had been in - 6.3
place
from the start of the previous financial year (pence)
Basic adjusted earnings per share before exceptional items and deferred 7.9 30.6
tax (adjusted for share consolidation) (pence)
(iv) Effective interest rate
A measure of the mean average interest rate payable on net debt, which
excludes interest costs not directly associated with net debt. This measure is
presented to assess and monitor the relative cost of financing for South West
Water Limited, Bristol Water Group and together the water business.
South West Water Limited
A measure of the mean average interest rate payable on South West Water
Limited's net debt, which excludes interest costs not directly associated with
South West Water Limited net debt. This measure is presented to assess and
monitor the relative cost of financing for South West Water Limited.
H1 2023 H1 2022
£m £m
Net finance costs after non-underlying items 58.3 32.7
Net interest on retirement benefit obligations 0.8 0.2
Capitalised interest 1.1 0.3
Net finance costs for effective interest rate calculation 60.2 33.2
Opening net debt 2,305.2 2,273.5
Closing net debt 2,391.6 2,314.6
Average net debt (opening net debt + closing net debt divided by 2) 2,348.4 2,294.1
Effective interest rate (%) 5.1 2.9
PENNON GROUP PLC
Alternative performance measures (continued)
(iv) Effective interest rate (continued)
Bristol Water Group
A measure of the mean average interest rate payable on Bristol Water Group's
net debt, which excludes interest costs not directly associated with Bristol
Water Group net debt. This measure is presented to assess and monitor the
relative cost of financing for Bristol Water Group.
H1 2023
£m
Net finance costs after non-underlying items 19.8
Net interest on retirement benefit obligations 0.2
Capitalised interest 0.5
Net finance costs for effective interest rate calculation 20.5
Opening net debt 405.3
Closing net debt 416.4
Average net debt (opening net debt + closing net debt divided by 2) 410.9
Effective interest rate (%) 10.0
Water business
A combined measure reflecting the mean average interest rate payable on the
water business' net debt, which excludes interest costs not directly
associated with water business net debt. This measure is presented to assess
and monitor the combined relative cost of financing for the water business.
H1 2023
£m
Net finance costs for effective interest rate calculation 80.7
Opening net debt 2,710.5
Closing net debt 2,808.0
Average net debt (opening net debt + closing net debt divided by 2) 2,759.3
Effective interest rate (%) 5.8
(v) Underlying interest cover
Underlying net finance costs (excluding pensions net interest cost) divided by
operating profit before non-underlying items.
H1 2023 H1 2022
£m £m
Net finance costs after non-underlying items 74.7 37.0
Net interest on retirement benefit obligations 1.0 0.3
Net finance costs for interest cover calculation 75.7 37.3
Operating profit before non-underlying items 97.2 127.4
Interest cover (times) 1.3 2.2
(vi) Capital investment
Property, plant and equipment and intangible asset additions. The measure is
presented to assess and monitor the total capital investment by the Group.
H1 2023 H1 2022
£m £m
Additions to property, plant and equipment 140.2 110.3
Additions to intangible assets 2.4 1.2
Capital investment 142.6 111.5
PENNON GROUP PLC
Alternative performance measures (continued)
(vii) Capital payments
Payments for property, plant and equipment (PPE) and intangible asset
additions net of proceeds from sale of PPE and intangible assets. The measure
is presented to assess and monitor the net cash spend on PPE and intangible
assets.
H1 2023 H1 2022
£m £m
Cash flow statements: purchase of property, plant and equipment 153.0 119.9
Cash flow statements: purchase of intangible assets 2.4 1.3
Cash flow statements: proceeds from sale of property, plant and equipment - (0.3)
Capital payments 155.4 120.9
(viii) Return on Regulated Equity (RORE)
This is a key regulatory metric which represents the returns to shareholders
expressed as a percentage of regulated equity.
Returns are made up of a base return (set by Ofwat, the water business
regulator, at c.3.9% for South West Water and c.4.4% for Bristol Water for the
period 2020-25) plus Totex (see ix) outperformance, financing outperformance
and ODI outperformance. Returns are calculated post tax and post sharing (only
a proportion of returns are attributed to shareholders and shown within RoRE).
The three different types of return calculated and added to the base return
are:
· Totex outperformance - Totex is defined below, and outperformance
is the difference between actual reported results for the regulated business
compared to the Final Determination (Ofwat published document at the start of
a regulatory period), in a constant price base
· Financing outperformance - is based on the difference between a
company's actual effective interest rate compared with Ofwat's allowed cost of
debt
· ODI outperformance - the net reward or penalty a company earns
based on a number of different key performance indicators, again set in the
Final Determination.
Regulated equity is a notional proportion of regulated capital value (RCV
which is set by Ofwat at the start of every five-year regulatory period,
adjusted for actual inflation). For 2020-25, the notional equity proportion is
40.0%.
References are made to Ofwat RORE and Watershare RORE which utilise differing
inflation assumptions and the disclosure of tax.
Further information on this metric can be found in South West Water and
Bristol Water's annual performance report and regulatory reporting, published
in July each year.
(ix) Total Expenditure (Totex)
Operating costs and capital expenditure of the regulated water and wastewater
business (based on the Regulated Accounting Guidelines).
(x) 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.
(#_ftnref1) (^) Measures with this symbol are defined in the Alternative
Performance Measures (APMs) as outlined on pages 63 to 66.
1 Based on our preliminary analysis of Environment Agency data ahead of the
Environment Agency's formal publication of results
2 (#_ftnref2) Water business capital expenditure excludes c.£0.1 million
other investment
3 (#_ftnref3) Group RORE for H1 2022/23
4 (#_ftnref4) Calculated using forecast RCV for 31 March 2023 and water
business net debt as at 30 September 2022
5 (#_ftnref5) Bristol Water contributing c.19% RCV growth from acquisition
to 2025
6 (#_ftnref6) Dividend policy of CPIH + 2%. The CPIH rate used is 8.8% as of
30 September 2022.
7 (#_ftnref7) Non-underlying items are adjusted for by virtue of their size,
nature or incidence to enable a full understanding of financial performance
8 (#_ftnref8) Ofwat RORE - H1 2022/23 Group RORE, calculated on Ofwat basis
(( 9 (#_ftnref9) )) 80:20 joint venture with South Staffs
10 (#_ftnref10) PWS: 80:20 joint venture with South Staffs, water2business:
30% share a joint venture with Wessex Water
11 (#_ftnref11) Reflects WaterShare+, customer support schemes and 'Stop the
Drop' financial incentive
12 (#_ftnref12) Includes up to c.£10m financial incentive for customers
associated with SWW's Stop the Drop initiative, c.£20m water resilience Totex
- accelerating initiatives (capex/opex split roughly 50/50) and estimated
c.£10m to progress de-salination and other water resource opportunities in
Cornwall, including re-purposing ex-quarries and mines with c.£35 million
anticipated in FY2023/24 to deliver these schemes
13 (#_ftnref13) Reduction to date from 2020 and reflecting 9 months of 2022
- wastewater pollutions are measured on a calendar year basis
14 (#_ftnref14) Includes c.£15 million tax
15 (#_ftnref15) Excludes the impact of the third-party Carland Cross event
in 2021 which we are seeking to recover from the third-party
16 (#_ftnref16) Based on Ofwat's K7 approach to RORE, including total tax
impacts and using actual average inflation for Totex and financing
17 (#_ftnref17) ODIs on track or within regulatory tolerances
18 (#_ftnref18) Watershare RORE - financing outperformance is based on the
outturn effective interest rate translated into a real rate using a forecast
average inflation assumption of 4.4% CPIH.
19 (#_ftnref19) Based on total company performance to 30 June 2022 included
within consolidated financial statements of Wessex Water Limited. Accounted
for under the equity method with share of any post acquisition profits
recognised in Pennon Group's income statement to the extent these profits
exceed losses previously unrecognised.
20 (#_ftnref20) Includes full six-month Bristol Water performance during H1
2021/22
21 (#_ftnref21) Includes wholesale revenue for non-household customers
22 (#_ftnref22) Includes wholesale costs for non-household customers
23 (#_ftnref23) Carrying value of fair value acquisition adjustments to net
debt at 30 September 2022 - £38.2 million Bournemouth Water, £124.2 million
Bristol Water
24 (#_ftnref24) UK water position as at 31 March 2022 - weighted average
25 (#_ftnref25) Includes usage - up to c.£10m financial incentive for
customers associated with SWW's Stop the Drop initiative, c.£20m water
resilience Totex - accelerating initiatives (capex/opex split roughly 50/50)
and estimated c.£10m to progress de-salination and other water resource
opportunities in Cornwall, including re-purposing ex-quarries and mines with
c.£35 million anticipated in FY2023/24 to deliver these schemes
26 (#_ftnref26) Current electricity usage - c.400GWh, targeted generation -
c.200GWh per annum
27 (#_ftnref27) Assuming a benefit of c.£10 million from the application of
the Government's Energy Bill Relief Scheme.
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