REG - Pennon Group PLC - Half Yearly Report <Origin Href="QuoteRef">PNN.L</Origin> - Part 27

PennonAnnouncement

28/11/2014 07:11

RNS Number : 2520Y
Pennon Group PLC
28 November 2014


 
PENNON GROUP PLC
28 November 2014

HALF YEAR REPORT ON THE SIX MONTHS ENDED 30 SEPTEMBER 2014

Pennon Group announces its unaudited results for the half year ended 30 September 2014. 

A presentation for City audiences will be held today, Friday, 28 November 2014, at 09:00am at Haberdashers' Hall, 18 West Smithfield, London, EC1. A live audio webcast of the results presentation will be available at pennon-group.co.uk/investor/presentations and a recording of the presentation will be available thereafter.

For further information today, 28 November 2014, please contact :

David Dupont
Group Director of Finance - Pennon
}
0207 251 3801
Jo Finely
Investor Relations Manager - Pennon
}

Sarah Heald
Finsbury 
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Highlights

 
Pennon

-
results in line with management expectations and previous guidance 

-
H1 revenue up 3.8% to 692.3m; H1 PBT(1) down 9.8% to 100.0m

-
dividend up 6.3%, reflecting the continued underlying strength of the business and management's expectations for long term growth

 
South West Water

-
performing strongly against 2010-2015 regulatory contract and well placed to outperform assumptions

-
robust operational performance improving standards of service 

-
maintained broadly stable operating profit despite tariff freeze, due to continued cost efficiency

-
early receipt of Ofwat's Draft Determination allowing accelerated delivery of key projects

 
Viridor

-
reached point of inflexion in the strategic re-orientation of the business around 'Energy' and 'Recycling & Resources' divisions

-
strong progress in the development of ERF(2) asset base; five ERFs coming on stream in 2014/15

-
full year EBITDA(3) expected to exceed 2013/14 figure

(1)  Before exceptional credit of 14.9m (post tax 11.9m). Statutory profit before tax 114.9m.

(2)  Energy Recovery Facility. Previously referred to as Energy from Waste (EfW) facility

(3)  Earnings before interest, tax, depreciation, amortisation and exceptional credit


Ken Harvey, Chairman said:

"South West Water is continuing its strong performance against the 2010-2015 regulatory contract and is well placed to outperform its assumptions. The company continues to deliver robust operational performance and efficiencies, and improving standards of customer service. Half Year 2014/15 profits reflect the 2014/15 tariff freeze already announced. However, operating profits remain broadly stable and the revenues foregone are included in the Draft Determination for K6 (2015-2020) on an NPV neutral basis. Early receipt of Ofwat's Draft Determination is allowing the accelerated delivery of key projects identified in the company's business plan for K6. With South West Water's track record of efficiency and outperformance, the company is well placed to deliver its business plan and will have an opportunity to outperform the assumed returns on equity. 

"Financial performance at Viridor has been in line with management expectations. The company flagged at the last Preliminary Results that EBITDA in the first half of 2014/15 would be materially lower than in the first half of 2013/14. However, the ERFs coming on stream this year are expected to boost EBITDA in the second half of 2014/15 and result in 2014/15 full year EBITDA for Viridor exceeding 2013/14. The company has made excellent progress in establishing its ERF business - two plants have come on stream already this year. They contribute to Viridor's bottom line, reflecting the realisation of a strategy which is expected to contribute circa 100m to Viridor's EBITDA in 2016/17." 


FINANCIAL HIGHLIGHTS 

 
Revenue up by 3.8% to 692.3m


 
EBITDA(1) down 15.4m (7.1%) to 200.0m

-
South West Water down 1.6m to 172.2m


-
Impact of 2014/15 tariff freeze: revenues foregone included in Draft Determination on NPV neutral basis

-
Viridor statutory EBITDA down 13.3m to 28.1m


-
Significant reduction as expected in H1 and flagged at the last preliminary results



-
Share of joint venture EBITDA up 2.0m to 21.4m



-
IFRIC 12 interest up 1.6m to 5.8m


-
Underlying EBITDA down 9.7m to 55.3m


 
Profit before tax(1) down 10.9m (9.8%) to 100.0m

-
South West Water down 1.1m to 86.2m

-
Viridor down 10.6m to 4.7m

-
Viridor PBIT plus joint ventures down 15.2m to 8.2m



 
Exceptional credit of 14.9m relating to reduced retirement benefit obligations following pension scheme benefit change



 
Adjusted earnings per share(2) down 7.1% to 22.1p



 
Dividend

-
Interim dividend per share up 6.3% to 9.98p



 
Strong liquidity and funding position - 650m of new facilities secured since 
31 March 2014 including

-
Schuldschein issue of 130m



 
The 125m Convertible Bonds due 2014 have all converted resulting in the issuance of 20.9m Pennon shares



 
Group businesses well positioned for the future


Reconciliation of Viridor statutory EBITDA to underlying EBITDA:

For the half year ended 30 September

 Full year

2014(3)
 2013
Change
2013/14(1)

  m
 m
 m
 m
Viridor statutory EBITDA
28.1
41.4
(13.3)
76.3
Share of joint venture 





EBITDA
21.4
19.4
2.0
41.1
IFRIC 12 interest
5.8
4.2
1.6
8.5
Viridor underlying EBITDA
55.3
65.0
(9.7)
125.9





 
(1)  Before exceptional credit of 14.9m
(2)  Before exceptional credit, deferred tax and adjusted proportionately to reflect the half year impact of the annual
 hybrid periodic return. Basic earnings per share (statutory basis) 19.4p
(3) Before exceptional items



OPERATIONAL HIGHLIGHTS
 
South West Water:

-
Strong performance against 2010 - 2015 (K5) regulatory contract


 
Well placed to deliver outcomes and outperform


Robust operating performance base supporting delivery into the next K6 regulatory period


 
Strong bathing water compliance performance


Improved environmental performance


 
Highest ever scores for customer service

-
Operating profit and EBITDA broadly stable 


 
Revenue impacted by 2014/15 tariff freeze (recovered in K6 on NPV neutral basis)


 
Good cost control and continued efficiency delivery

-
Enhanced business plan for 2015-20 (K6)


 
Fast track Draft Determination enabling early K6 implementation


 
'Do no harm' certainty to the Final Determination


 
Highest potential Return on Regulated Equity across the sector
 
Viridor:

-
Excellent continuing progress in the strategic re-orientation of Viridor's business model from landfill to ERFs - has now reached point of inflexion

-
As flagged, H1 2014/15 EBITDA materially lower than H1 2013/14


 
but full year 2014/15 EBITDA expected to exceed 2013/14

-
Further successful ERF developments 


 
Exeter handed over in July and Oxford in November. Runcorn I, Runcorn II and Cardiff either in or approaching handover testing


 
Lakeside operating consistently ahead of design parameters. Exeter and Oxford following similar pattern


 
All plants(1) are full at opening with more than 60% of feedstock coming from long term contracts and the balance from shorter term Industrial and Commercial (I&C) contracts. Average gate fees are at modelled rates


 
ERFs to make a significant financial contribution in H2 2014/15


 
Dunbar go-ahead approved, construction to start Q1 2015

-
Landfill energy remains strongly cash generative


GROUP OVERVIEW 

 
Revenue up by 3.8% to 692.3m

 
EBITDA(1) down 7.1% to 200.0m

 
Operating profit(1) down 14.7% to 119.2m


 
Net interest payable reduced 27.0% to 21.6m


 
Profit before tax(1) down 9.8% to 100.0m


 
Exceptional credit before tax of 14.9m relating to reduced retirement benefit obligations following pension scheme benefit change

 
Adjusted earnings per share down by 7.1% to 22.1p(2). Basic earnings per share (statutory basis) decreased from 29.4p to 19.4p

 
Capital investment(3) down 6.4% to 192.0m

 
Net borrowings 2,106m, a decrease of 88m since 31 March 2014. Gearing, being net borrowings to (shareholders' funds plus net borrowings), was 62% (2013/14 - 65%). Net debt includes 742m for ERFs operational or under construction (Runcorn II, Exeter, Oxford, Cardiff and Glasgow)


 
Substantial cash resources and committed facilities of 1,785m(4) to fund future investment - well placed in current financial market conditions

 
South West Water net debt to Regulatory Capital Value (RCV) was 56.9% (31 March 2014 - 55.6%)

 
Net interest cover was 5.9 times (H1 2013/14 - 5.2 times)(5)
 
Average debt maturity 21 years


 
Fair value of debt 190m less than book value


(1)Before exceptional credit of 14.9m (post tax 11.9m)

(2) Earnings per share before exceptional credit, deferred tax and adjusted proportionately to reflect the

half year impact of the annual hybrid capital periodic return

(3) Including construction spend on service concession arrangements


(4) Including 174m deposits with Letter of Credit providers and lessors


(5) Excluding pensions net interest, IFRIC 12 contract interest receivable and discount unwind on

 provisions 

DIVIDEND 

The interim dividend of 9.98p per share represents an increase of 6.3%, in line with the previously announced policy to grow the Group dividend by 4% per annum above inflation up to the end of 2014/15. 

The dividend will be paid on 2 April 2015 to shareholders on the register on 30 January 2015. The Company is also offering a scrip dividend alternative. The final date for receipt of forms of election/mandate in respect of the scrip dividend alternative for the interim dividend will be 9 March 2015. 
As announced at our Preliminary Results last June, the Board will review the dividend policy for the K6 period following the Final Determination for South West Water and will make an announcement at the 2014/15 Preliminary Results.

OUTLOOK

The Board's priority continues to be the creation of shareholder value through its strategic focus on water and sewerage services; and recycling, renewable energy and waste management.

South West Water is continuing its strong performance with robust operational delivery and high standards of customer service and financial performance. Early receipt of Ofwat's Draft Determination is allowing the accelerated delivery of key projects identified in the company's business plan for K6 (2015-2020). With South West Water's track record of efficiency and outperformance, the company is well placed to deliver its business plan and will have an opportunity to outperform the assumed returns on equity. 

Viridor's financial performance in the first half of this year has been in line with management expectations. The ERFs coming on stream this year are expected to boost EBITDA in the second half of 2014/15 and result in 2014/15 full year EBITDA for Viridor exceeding 2013/14. The company has made excellent progress in establishing its ERF business - two plants came on stream this half year. These projects and contracts already contribute to Viridor's bottom line and reflect the realisation of a strategy which is expected to contribute circa 100m to Viridor's EBITDA in 2016/17.

The Group is well positioned for the future, with efficient long term financing.

SOUTH WEST WATER 

South West Water has continued to deliver good operational performance in the last year of the K5 (2010-2015) regulatory period alongside further improvements to customer service. This is supported by strong financial results - arising from good cost control and continued efficiency delivery.

South West Water's business plan for K6 (2015-20) was assessed as 'enhanced' by Ofwat on 4 April 2014, the only water and sewerage company to achieve the top assessment, following which the Draft Determination was received on 30 April 2014. 

This early Draft Determination has given South West Water greater certainty over the plans and expectations for the next five years and has allowed delivery of key projects to be accelerated and advanced into 2014/15. This provides a strong platform for implementation and targeting enhanced equity returns.

Financial Highlights

As anticipated South West Water's revenues reflect the 2014/15 tariff freeze announced last year. However, good cost control and the continued delivery of cost efficiency has ensured that profit before tax and exceptional items at the half year has remained broadly stable.

Revenue decreased by 0.3% to 268.3m as a result of the 2014/15 tariff freeze and the effects of customers switching to a metered tariff net of new connections and higher other sales. Customers switching from unmeasured to metered charging and assessed charges reduced revenue by 2.8m. 79% of South West Water's domestic customers are metered. 3,700 new customer connections contributed 1.6m of additional revenue and other sales increased by 0.4m as a result of greater developer activity. Customer demand is in line with the same period last year reflective of the relatively dry weather over the summer.

Good operational cost control has ensured 2.5m of efficiencies fully offset cost increases (including power and business rates) of 2.4m. Cumulative cost increases over K5 continue to be lower than average RPI for the same period. Other cost drivers were:



 
1.0m
increased other costs including increased cost of sales from other sales activity
 
0.4m
increased depreciation and costs of new capital schemes

EBITDA(1) decreased by 1.6m to 172.2m and operating profit(1) decreased by 2.1m to 119.2m.

The net interest charge for the half year of 33.0m is lower than the same period last year (34.0m) as a result of lower RPI on index-linked facilities and lower net pension interest net of new funding costs.

Profit before tax and exceptional items decreased by 1.1m to 86.2m.

During the year Pennon Group reviewed the long term sustainability of its defined pension benefits, of which South West Water represents 80%, and changes in benefits were agreed following extensive employee engagement. As a result an exceptional credit of 11.8m for South West Water arose from the capping of future pension increases and was recognised at the date that benefit changes were implemented (July 2014).

Capital expenditure in the first half year of 2014/15 was 64.6m compared to 58.5m in the first half of 2013/14. Regulatory net capital expenditure(2) was 68.9m, compared to 64.7m in the first half of 2013/14. The focus for the programme remains weighted towards the maintenance of existing assets, increasing infrastructure resilience and delivering environmental improvements. Investments during the half year include:


 
continued improvements to safeguard water quality with treatment upgrades at two key sites 
 
upgrades at wastewater treatment sites to improve compliance
 
innovative investments to reduce the number of customers' properties previously highlighted as at risk from flooding.

Expenditure has been accelerated into 2014/15 from K6 to deliver early benefits to customers and the environment. This includes asset enhancements to deliver bathing water quality improvements, preparatory expenditure for the innovative new water treatment works at North Plymouth and asset interventions focused on delivering compliance benefits. 

The robustness of networks and assets is illustrated by South West Water achieving Ofwat's 'stable serviceability' status across all areas.

Regulatory capital value at 31 March 2014 was 2,959m and with an increase in net debt this has led to gearing of 57% (31 March 2014: 56%) - within Ofwat's optimum range for K5. Increased projected RCV growth of 19% by 2020(3) in K6 reflects the Draft Determination inclusive of enhanced assessment benefits. South West Water's dividend to Pennon is ahead of the Final Determination 2009 (FD09) assumptions reflecting outperformance delivered during K5. 
(1) before exceptional credit
(2) capital expenditure including infrastructure renewals expenditure less grants and contributions
(3) nominal prices, RPI 3.2% assumed over K6

Efficiencies
South West Water remains ahead of target in delivering the required operating cost efficiencies for K5. Cumulatively, the efficiency delivered over K5 is ahead of target reflecting the benefit of front end loading delivery during the K5 period. 

Annual operating costs are 24.7m lower as a consequence, with 2.5m cost savings delivered in the first half of 2014/15 (compared with 1.7m in the first half of 2013/14). This reflects an annual equivalent of 3.2% compared to the required 2.8%(1)pa average operating cost efficiencies included within FD09.This is being achieved through South West Water's ongoing improvement programmes with specific initiatives this year in the areas of:


 
operational ways of working - finalised asset improvements through the PUROS(2) programme
 
energy procurement and usage - continuing energy efficiency schemes alongside additional power generation through renewable sources
 
right-sourcing and innovative contracting - tendering to achieve the 'right price', including in-sourcing of key strategic contracts.

South West Water continues to deliver capital projects in line with Ofwat, Drinking Water Inspectorate and Environment Agency expectations. Expenditure for the K5 period to date is lower than the Capital Incentive Scheme baseline and is set to achieve a 6% efficiency outperformance on the Final Determination. Performance cumulatively to date is in line with expectations and has been reflected in the Draft Determination for K6.

South West Water will continue to target further efficient ways of working and the robust base gives a solid platform into the K6 regulatory period.

(1) average over K5 (2010-2015)
(2) PUROS - Phased Utilisation of Remote Operating Systems

Operational Highlights

Driven by its strategic vision for delivering 'Pure Water, Pure Service and Pure Environment', South West Water targets the provision of high quality water and wastewater services in the most efficient and sustainable way possible. 

Pure Water
The focus on delivering a water supply to a high level of water quality compliance in accordance with the tough standards set by the Drinking Water Inspectorate remains a key aim of South West Water. As a result, a significant proportion of the company's capital programme is focused on this outcome, including an upgrade to its largest water treatment works - Restormel - which provides water to 50% of customers in Cornwall. South West Water is on track to deliver outstanding water quality again this year.

South West Water is continuing to deliver industry-leading leakage performance. Leakage targets have been met every year since their introduction. 

Whilst the region experienced drier weather over the summer period, as predicted South West Water successfully managed its water resources to enable a continued secure supply of water for the region, resulting in the 18th consecutive year without a hosepipe ban or drought order.
In June 2014 the company published its Water Resources Management Plan. This highlighted the company's strong water resources position and confidence in a forecast net surplus of water until at least 2040.

Pure Service
Throughout this regulatory period South West Water has sought to improve the service delivered to customers. The improving trend has seen South West Water's customer service score (as measured by the Service Improvement Mechanism (SIM)) continue to improve with the current year forecast to be the highest yet. Written complaints for the first half of the year are 16% lower than the same period last year.

South West Water continues to build on strategic investment made during the K5 period, such as using its customer relationship system to manage customer contacts through to first time resolution and providing online offerings such as 'My Account' account management and smartphone apps. In addition South West Water is continuing to focus on increasing customer satisfaction and a number of improvement initiatives have been expanded to support this including web improvements and outbound SMS messaging notifying customers of any events or incidents within their area. 

The cost of bad debts as a proportion of revenue at 1.8% is comparable with the prior half year. South West Water continues to target collection initiatives to improve the bad debt position including reducing the debt impacts of newly vacated properties and the use of tracing tools to identify the location of former occupiers. South West Water continues to fund and promote ways to help customers who struggle to pay their debt through initiatives such as the Restart programme which incentivises customers into regular payment plans. Almost 38,000 customers have been assisted through the company's industry leading approach to debt support schemes. South West Water has the highest number of customers on the Watersure tariff and is one of the only companies to have introduced a regional social tariff.

Pure Environment
The 2014 bathing season ended again with strong bathing water quality results, with 125 (86%) of the region's beaches achieving the EU guideline standard (excellent status) and 144 (99%) of beaches achieving the mandatory standard (good status). 

South West Water is committed to working with other organisations and local communities so that residents and visitors alike can continue to enjoy the region's beautiful beaches. Investment to further protect and improve the region's bathing water quality will be made during 2015-20. Ahead of the European Union's Revised Bathing Water Directive coming into force in 2015 work has already begun on a range of targeted improvements in seven locations under the company's 20m 'Even Cleaner Seas' programme. This includes additional storm water storage capacity, improved monitoring and treatment facilities.

A significant increase in the treatment compliance at wastewater works has been delivered with current compliance at over 97%, compared to 92.5% for the year to March 2014. In addition, the number of pollution incidents has fallen, with the number of Category 2 (significant) incidents falling to two in the first half of the year compared to eight over the same period last year. There have also been no Category 1 (serious) pollution incidents again this year. Tougher sentencing guidelines are now in place for pollutions and the company continues to invest in ways to minimise the risk of a pollution incident occurring. 

South West Water recognises the impact that flooding has on its customers and is investing in ways to reduce the number of customers' properties at risk. In 2014 this has included the 2m scheme at Colebrook in Devon which has seen a range of sewer improvements carried out thanks to joint funding between South West Water, the Environment Agency, and Plymouth City Council.

As well as traditional engineering solutions, the company is also piloting a new approach to flood alleviation known as 'Downstream Thinking'. This involves the use of sustainable cost-effective measures to improve urban drainage. The first of a series of pilot schemes - known as 'WaterShed' - has been launched in Truro following consultation with local residents and in partnership with a range of local agencies and organisations.

The company has continued to strive for improved performance against a number of Ofwat's Key Performance Indicators (KPIs). In particular improvements have been made on key environmental measures including wastewater treatment compliance and sewerage pollution incidents. Customer service, leakage and greenhouse gas emissions all achieved 'green' status at March 2014 and are on track to remain stable for the final year of K5.

Regulatory and Political Developments

K6 (2015-2020) Business Plan
As the only water and sewerage company to have their K6 (2015-20) business plan assessed by Ofwat as 'enhanced' South West Water received an early Draft Determination on proposed pricing for K6 on 30 April 2014. As a result of this fast track determination, alongside the opportunities for early implementation, financial benefits received included an initial financial award of 11m reflected as an addition to the RCV with up to 50% reinvested and an enhanced total expenditure (Totex) menu with an extra 5% enhanced sharing rate.

The early certainty received enables South West Water to transition swiftly and smoothly into the next regulatory period. Delivery of key projects - including those which improve the regions bathing waters and water quality - has been advanced. Accelerating projects assists in delivering outcomes and cost efficiencies in a timely fashion.

The enhanced assessment of the business plan means South West Water also benefits from Ofwat's "Do No Harm" principle in respect of its Final Determination. 

The key elements of the Draft Determination for K6 are:


 
Equity returns up to 10% from outperformance of cost base, outcome delivery incentives (ODIs) and financing
 
Appointee vanilla WACC(1) of 3.85%, (3.7% WACC for wholesale only)
 
Retail margins of 1.0% and 2.5% for retail household and non-household respectively, equivalent to an RCV return of 0.15%
 
47m additional allowed totex plus 8m menu incentive award as a result of cost bases for both water and waste water being assessed as efficient and below Ofwat's calculated baseline
 
RCV growth of 19%(2) and no adjustments to the planned K6 capital investment programme of 868m(3)


(1) pre tax debt and post-tax equity weighted average cost of capital
(2) nominal prices assuming 3.2% pa RPI
(3) 2012/13 price base

Water Act

The new Water Act became a statute on 14 May 2014. As well as setting out a range of reforms for the water sector in England, the Act enables retail competition for all non-household customers. 

South West Water is fully engaged in the 'Open Water' programme, governed by the Department for Environment, Food and Rural Affairs and Ofwat, which will shape the retail market architecture and operational codes for the sector. 

Preparations are under way for the planned non-household retail market opening in April 2017. South West Water's operational structure is already aligned with the K6 approach of recognising separate revenue controls, with the majority of non-household retail activities located within a separate operation. In addition the dedicated brand of 'Source for Business' established in 2011 offers a range of specialist advice and support measures to non-household customers and the company obtained supply licences covering Scotland and England, enabling customers to be served both within and outside the South West region.

South West Water Outlook

South West Water continues to focus on maintaining an efficient service delivery, improvements in service to customers and the satisfaction of its regulatory and legislative obligations for the remainder of 2014/15.

In addition to the immediate financial benefits of having an enhanced business plan for K6, projects have been advanced into 2014/15 enabling a swift and smooth transition into the K6 period.

South West Water is already considering the impacts of future legislative changes which include the potential for "Upstream Reform". The company is engaging on key industry consultations on the development of Ofwat's ongoing regulatory reform agenda in order to influence the direction of travel in this area.


VIRIDOR 

Viridor's strategy remains focused on transforming waste, adding substantial value through renewable energy generation and recycling. The half year results come at a point of inflexion for the company as it continues its strong progress on the construction and delivery of its growing PPP/ERF asset base. ERFs are central to the UK's waste and renewable energy strategies as the long term low cost alternative to landfill for treatment of residual waste, aligned with higher levels of recycling. Viridor expects to have at least 15% ERF market share by 2020 with a network of strategic ERFs which will underpin the company's long term profit growth.

Given this inflexion, Viridor has implemented a strategic re-orientation of its business around its 'Energy' and 'Recycling & Resources' divisions and has strengthened its Board with new hires.

The strong progress in the construction and operational delivery of Viridor's ERF asset base, and in the development of the Energy division, is underlined by the fact that all plants(1) are full at the time of opening. ERF asset and feedstock markets are now maturing, with a few major players emerging. In addition, the majority of long term municipal contracts have now been let. 

The focus for Viridor's Recycling division is on margin enhancement via quality optimisation, investment in technology and efficiency improvements, thereby reducing exposure to recyclate price movements.

Landfill gas generation remains very profitable, albeit generation is slowly declining. Landfill continues to provide good cash generation whilst alternative uses for sites are being explored as they accelerate into closure.
Financial Highlights

As previously flagged, Viridor's financial performance was materially lower in the first half of 2014/15. This reflects the point of inflexion in the company's strategy, with full year 2014/15 EBITDA expected to exceed that of 2013/14.

Revenues in the first half of 2014/15 were up 6.6% to 424.4m. Landfill tax collected increased by 10.4% to 106.8m driven by the increase in landfill tax to 80 per tonne from 1 April 2014. Construction revenue was also up reflecting growth in assets under construction. 

Viridor'sEBITDA(1)forthe halfyear decreased by13.3m(32.1%) to28.1m.PBIT fell 17.8m(98.9%)to 0.2m, but joint ventures were up 2.6m (48.1%) to 8.0m, resulting in PBIT plusjoint venturesdecreasing by 15.2m(65.0%)to 8.2m. Viridor underlying EBITDA was down 9.7m (14.9%) to 55.3m.

Viridor underlying EBITDA is a new non-statutory earnings measure that aggregates all of Viridor's earnings into a single figure, consisting of EBITDA 28.1m (H1 2013/14 41.4m) plus IFRIC 12 finance income 5.8m (H1 2013/14 4.2m) and share of joint venture EBITDA 21.4m (H1 2013/14 19.4m). Viridor's share of non-recourse debt in its joint ventures was 303m. The introduction of this measure is timed to coincide with the significant progress made in the build out of Viridor's ERF business and will ensure earnings from ERFs contracted and accounted for in differing ways are captured in a single measure. 

Profitbeforetaxdecreased 10.6m(69.3%) to4.7mreflectinglowerPBITplusjointventures partly offset by the benefit of reduced interest from intra group funding.

Capitalexpenditureforthe halfyearwas 127.3m(H1 2013/14146.6m)ofwhich circa 116mwasforViridorgrowth projects(largelyERFs, but including recycling technology investment).

Following an extensive strategy planning exercise, Viridor is now actively implementing a major transformation of its business processes and procedures, including installation of a new enterprise IT platform. The first elements have recently been successfully delivered. As a result, over the next five years ongoing benefits in excess of the c. 30m capital investment are expected to be realised. 
(1) All figures before exceptional credit
OperationalHighlights

UK context

The UK isrequired underthe EU Waste Framework and Landfill Directives to increase recycling, to achieve greater resource efficiency and to reducetheamountofbiodegradable municipal waste going to landfill sites.This isbeing achieved by incentivising a majorincrease inrecycling levels with residualwasteincreasinglybeingusedforenergyrecovery. 

TheGovernment'smainmechanismfordiverting wastefromlandfill, and incentivisingrecycling and ERFsremains landfill tax.The Governmenthasimplemented its landfill tax escalator to reach 80 pertonne from1April2014 and has confirmed a further inflationary rise next year.Thisongoingincrease continues toenhancethe long term economicsof bothrecyclingand UK energyrecovery. Inaddition,recyclatecostsaretypicallysignificantly lower thanthe costofusingvirginmaterialsformanufacturers. The EU and the UK Government have also introduced policy and regulation to deliver greater quality in recycled materials.

Viridorisclearlyfocused onrecyclingand renewable energy using waste as fuel.Investmentin technologyandoperationalpracticescontinues to bemadesuccessfully to enhancerecyclatequality to differentiateViridorfromitscompetitors.Significantprogresshasalso been made inthe development and delivery oftheERFbusiness,with asubstantialassetbasebeing constructed and now becoming operational. This is being delivered in conjunction withthe developmentoftheassociated businesscapabilityprocessacrossthe whole "sourcetosupply" ERF and recyclingvalue chains.

Recycling

During thehalfyearrecyclingvolumesremained relatively stable at 0.9mtonnes. Recyclatepriceshave stabilised to somedegreeformostcommodities butremain underpressure,reflectingglobal economic conditionsand competitive markets.Overall averagerevenuespertonne fromrecyclatesales andgatefeesforthehalfyearfellto 86,7.5% lowerthanfor the same period last year. Viridor remains cautious about future recyclate price growth and shipping costs.

Recycling EBITDA in the first half of 2014/15 was 10.0m (H1 2013/14 13.1m). Viridor is implementing a two year Input, Throughput, Output Optimisation programme (ITOO) to provide an enhanced focus on increasing margins by taking actions across the value chain. The company is targeting a substantial enhancement in EBITDA margin through improvements in asset productivity. Future actions are focused on the three key parts of the value chain:

 
Inputs: Enforcing contractual waste specifications to ensure optimum quality and further reduce reject levels

 
Throughput: A two year asset management optimisation process has commenced to improve availability and productivity at recycling facilities

 
Outputs: Aiming for customer-centric quality production aided by investment in technology. A new polymers separation plant at Rochester is now operational, and a new glass reprocessing plant in Scotland is now in commissioning. These represent an investment of c. 25m.

Two underperforming MaterialsRecyclingFacilities (MRFs) were closed in the first half of 2014/15 to reduce the cost base and improve portfolio efficiency.

Viridorcontinues to operatethemostextensiveMRF capacity in the UKwith accreditationsforexportto China, andisestablished as aqualitybrand in the UK and other far eastern markets.

Contractsand collection

Viridor's contract base and collection operations remain a key element of Viridor's integrated offering. Collections play an increasing role in securing in-house recycling materials and fuel for ERFs. EBITDA for collections reduced slightly to 5.4m (H1 2013/14 6.1m). 

As previously flagged, in the first half of 2014/15 contracts (comprising 15 local authority contracts plus Thames Water and ERFs) profits were slightly lower due to contract expiry but the profit reduction was lower than expected given asset disposals and contract wins including:

 
Hertfordshire County Council residual waste, 75,000 tonnes p.a.
 
Extension of the Borough of Poole contract, residual and recycling to 2027
 
Kent County Council recyclables for processing, 60,000 tonnes p.a.

Joint Ventures

Total share of jointventures'EBITDA (comprising VLGM (including IFRIC 12 interest), TPSCo and Lakeside) was up 10.3% to 21.4m(H1 2013/1419.4m). Total share of joint ventures' profit after tax was 2.4m, up 1.6m from H1 2013/14. 

(a)
ViridorLaing (GreaterManchester)(VLGM)

The25 yearGreaterManchesterWastePFIcontract(beingdelivered throughVLGM) isthe UK'slargestevercombined wasteandrenewable energyproject.The companyisa joint venturebetween Viridorand John Laing Infrastructure.Operation oftheassociatedfacilities (bothexisting facilities and thosewhich areto bedeveloped)isbeing carried outonasub- contractbasisbyViridor.

Asreportedpreviously,solid recoveredfuel producedfromthewastewill be usedtogenerate heatandpowerata plantbeingbuiltatRuncorn. PhaseIisbeingbuiltprimarilyfor theGreaterManchesterWastePFIcontractandPhase IIwill be available forthemarket generally,as high landfill taxdrives residualwasteawayfromlandfill towards recyclingand ERFs.

Aspartofthe VLGMcontract,a separate contractorwas mandatedtoconstruct43facilities.As at30September2014, 42ofthesefacilitieshad beenformallytaken overbyViridor.The final plant is nearing completion of its commissioning tests. 

Viridor's share of VLGM's EBITDA was 1.5m (H1 2013/14 1.2m). Viridor's share of IFRIC 12 interest was 6.0m (H1 2013/14 6.2m). 

(b)
RuncornI(TPSCo)

Viridor's share of TPSCo's EBITDAwas4.5m (H1 2013/14 5.5m).

The RuncornERFPhaseIprojectis about to move into final takeover tests (after first waste burn in March 2014), moving towards scheduled takeover in early 2015.Phase IIhasbeenonlyslightlyaffected bythePhaseIdelays, is on budgetand first waste burn is imminent.

(c) 
Lakeside

Lakeside,thefirstofViridor'sERFprojects,continues to outperform its financial close assumed powergeneration andwasteprocessingtargets. Viridor's share of Lakeside's EBITDAwas 9.4m(H12013/146.4m).

Results in the first half of 2014/15 benefitted from different scheduled outage timing (H1 2013/14 vs H2 2014/15) and continued good performance.

RenewableEnergy

Energy recovery from waste (both biodegradable and non-biodegradable) accounted for 8% of total UK renewable energy generated in 2012. Viridor believes that by 2020 UK energy recovery from waste could produce 15,000 GWh of the total forecasted UK renewable energy generation (120,000 GWh) accounting for circa 13%. This is particularly significant given predicted capacity shortages in the energy sector.

(a)
Energy Recovery Facilities

Viridor continues to make excellent progress on the construction and delivery of its PPP/ERFs asset base. In 2014/15, two plants (Exeter and Oxford) have become operational to date - in addition to the already operating Lakeside and Bolton plants - with three further plants (Cardiff, and Runcorn I and II) expected to be operational by year end. 

With regards to securing fuel, of the new and developing facilities, five are full. All plants (excluding Dunbar) are full at opening with more than 60% of feedstock coming from long term contracts and the balance from shorter term Industrial and Commercial (IC) contracts. Average gate fees are at modelled rates. The proportion of long-term local authority contracted material (circa 60%) versus commercial inputs providing well-balanced risk.

Progress on delivery of the ERF asset base can be summarised as:

 
Exeter ERF - Safely completed on time (July), meeting capital budget and performing better than specification
 
Oxford ERF - Takeover completed in November and plant fully operational. Below capital budget spend and performing better than specification 
 
Cardiff ERF - Construction complete and first waste burn has just occurred. On schedule and to capital budget
 
Runcorn Phase I - Plant about to move into final takeover test
 
Runcorn Phase II - construction complete, to capital budget and first waste burn is imminent 
 
Peterborough ERF - Progressing well to schedule and to capital budget
 
Glasgow Recycling and Renewable Energy Centre - Construction progressing well and on schedule for completion 2016 as planned
 
Beddington ERF - Judicial review challenge strongly dismissed. Well prepared for project commencement
 
Dunbar ERF - Board approval to proceed. Construction commencement expected Q1 2015
 
Overall programme is being delivered at world class safety levels and to good quality standards

The Pennon Board has given its approval to proceed with the 177m Dunbar ERF at its existing Oxwellmains waste treatment hub in East Lothian, Scotland. This follows an extensive assessment of market conditions and an appraisal of current competitive advantages.

The facility is integral to the Scottish Government's ambitions to deliver a zero waste, circular economy which encourages landfill diversion and maintains price regulation. There is good support for the project as evidenced by all necessary planning, environmental and operational consents having been secured. Following a competitive procurement process, an EPC contract is also already in place with trusted suppliers. The project is therefore "shovel ready" and construction is expected to commence in Q1 2015. 

The plant will treat 300,000 tonnes per annum (tpa) of waste and is supported by a potential feedstock market of 1.25m tpa in the direct catchment area. The market comprises 570,000tpa Municipal Solid Waste (MSW) and 680,000tpa Commercial and Industrial (C&I) arisings. Viridor already has long term tonnages readily available to feed the plant as it currently services 110,000tpa of C&I waste in the central belt of Scotland. The company is well placed for the active MSW procurements and has qualified for three currently in progress: Clyde Valley (minimum 98,000tpa, likely 180,000tpa); Edinburgh and Midlothian (75,000tpa, likely 120,000 tpa) and South Lanarkshire (60,000tpa, likely 85,000tpa). The Dunbar facility is not reliant, however, on MSW procurement to achieve successful commercial returns. Being the first to commit to building an ERF in the Dunbar area provides Viridor with a significant first mover advantage over any potential competitors and there are no competitor facilities currently in progress.

At 30 September 2014, Viridorhad 34MWofrenewable energy capacityacross itsshareofLakeside ERF, Bolton and Exeter ERFandits AnaerobicDigestion(AD)operations, in addition to its 105 MW oflandfill gascapacity. Since the end of the period, a further 24MW has been added with the takeover of Oxford ERF. The ERF asset base coming on stream in 2014/15 and in development will raise cumulative electricity generation capacity to over
300MW and cumulative ERF waste treatment capacity to around 2.8m tonnes. 

ERFcontractsandprojectsalreadycontributetothe bottomline andreflecttherealisation ofa strategywhichisexpected toadd circa 100mtoViridor'sEBITDA in 2016/17. 


(b)
Landfill gaspowergeneration

Viridor's landfill energy business is being managed to maximise the value of landfill gas power generation, whilst exploring photovoltaic (PV) and cryogenic energy generating developments as alternative uses for landfill sites with existing grid connections.

Gas volumes reached peak production in 2012/13 and are expected to gradually reduce over the coming years. In the first half of 2014/15 the landfill gaspowergeneration outputwas marginally down to 297Gigawatt hours(GWh) (H1 2013/14 303 GWh), reflectingasuccessfuloutputoptimisation programme. Landfill gas power generation EBITDA was 15.4m (H1 2013/14 18.1m).

Averagerevenue perMegawatthour(MWh) was flat, while average costsincreased to36.51perMWh due to maintenance costs to improve gas capture. Theswitchfromlegacy Non Fossil FuelObligation(NFFO)contractstoRenewables Obligation Certificates(ROCs) continues with 94% of energy now sold under the higher value ROCs. The remaining 6% NFFO component will migrate to ROCs by 2016/17.Total landfillgaspower generation operationalcapacity reduced to105MW(excluding 3MWcapacityatsub-contractsites in Suffolk), from 107MW last half year.

Future alternative uses for landfill sites are now being assessed as most of our landfill operations accelerate into closure. A 2.75MW PV installation at Westbury landfill was completed during the first half of 2014/15. Other alternative uses are also being explored, including an 8m cryogenic energy storage pilot project at Pilsworth landfill, funded by the Department of Energy and Climate Change.

Landfill

Thebusinessplannowbeingimplementedforthelandfill businessis seeingoperationsreduced to afewstrategic landfill sites,reflecting thefactthattherewill still be demandforlandfillingof certainmaterialsfortheforeseeablefuture.Othersites are being runtoclosure withan emphasisonmaximisingthevalue ofelectricitygenerationfromlandfillgas and reducing costs. Non-strategic sites and closed sites are being assessed for alternative uses - both for energy and for development potential. Three sites are being closed in 2014/15 and a similar closure rate is forecast for the next five years.

Thebusinesscontinues to becashgenerative and contributed9.3m toEBITDA in thefirsthalfoftheyear. Volumeswerestable at 1.4m tonnes.

Averagegatefeesdecreasedby15.2%to 19.73pertonne.Consented landfillcapacity reducedfrom 58.0millioncubicmetres (mcm)at31 March2014 to56.1 mcmat30September 2014,reflectingusage during theperiod. Aspreviouslystated,andprovidedfor, 39 mcmisnotexpected to be used.

Landfill taxhas increasedto its maximum level under the Landfill Tax Escalator of 80 pertonne. The Government has confirmed that it will rise next year by the rate of inflation. 

OutlookforViridor

Viridor has reached its expected point of inflexion in its ongoing transformation from being predominantly a landfill business to becoming a leading recycling and renewable energy provider.

As forecast and previously flagged, EBITDA in the first half of 2014/15 is materially lower than in the same period last year. The new ERFs will boost results in the second half of 2014/15 significantly such that full year 2014/15 EBITDA is expected to exceed full year 2013/14.

Viridor's full year performance is predicated on the continued successful delivery of the ERF business. Two ERFs have already been handed over in 2014/15, with a further three ERFs set to become operational this financial year.

Importantly, all plants(1) are full at opening with more than 60% of feedstock coming from long term contracts and the balance from shorter term Industrial and Commercial (IC) contracts. Average gate fees are at modelled rates. The committed ERF projects are expected to contribute 100m to Viridor's EBITDA in 2016/17.

A two year asset optimisation programme in recycling has commenced. The focus for the recycling division is on margin enhancement driven via quality, investment in technology and managing the cost base.

Viridor's transformational strategy is now being realised. Its asset base of ERFs will drive long term profitability together with a complementary quality focus in recycling.

(1) excluding Dunbar
GROUP FINANCIAL POSITION 

The Group funding strategy utilises a mix of fixed, floating and index-linked rate borrowings. A substantial portion of debt is finance leasing which provides a long maturity profile and secured credit margins. 

The Group has fixed or put in place swaps to fix the interest rate on at least 50% of South West Water's net debt for the remainder of the K5 period. The average rate achieved on the fixed rate debt is circa 3.4%. In addition 391m of South West Water's debt is index-linked at an overall real rate of 1.7%. Pennon Group's average interest rate for the half year to 30 September 2014 was 3.7% and South West Water's was 3.8%.

The Group has also fixed the substantial majority of South West Water's existing floating rate debt to the end of K6. The rates reflect the fall in interest rates since 2009 taken account of by Ofwat in setting the cost of capital for K6.

The Group had substantial cash resources and committed funding as at 30 September 2014 and is well placed in current financial market conditions: 


-
cash balances of 694m (SWW 254m), including 174m restricted cash

-
undrawn facilities of 1,091m

During the six months to 30 September 2014 650m of new facilities were secured:


-
410m of new Revolving Credit Facilities (RCF's) and term loans; including


 
125m 17 year facility for Plc


 
130m Schuldschein for Plc


 
80m 15 year facility for SWW


 
75m RCF's for both Plc and SWW


-
240m of new finance leases


 
175m of finance leases for Viridor ERF's


 
65m finance lease for SWW

The 125m Convertible Bonds due 2014 have all converted resulting in the issuance of 20.9m Pennon shares.

The Group's average debt maturity is 21 years.

The fair value of the Group's debt is 190m less than its book value.

PENSIONS 

The Group's defined benefit pension schemes had a deficit (net of deferred tax) under IAS 19 at 30 September 2014 of circa 75m (94m gross), an increase of 12m on the 31 March 2014 balance.

Schemes' assets increased from 608m at 31 March 2014 to 629m at 30 September 2014 and schemes' liabilities increased from 687m to 723m over the same period, driven by a decrease in the long term AA corporate bond rates used to discount scheme liabilities.

The net deficit represents circa 2% of current market capitalisation.

During the year the Group reviewed the long term sustainability of its main defined pension benefit scheme and agreed to changes in benefits with the scheme trustee following extensive employee engagement. An exceptional credit of circa 15m (12m net of tax) relating to past service cost has been recognised in operating profit following changes in scheme design, in particular the introduction of a cap on increases in pensionable pay.

South West Water's pension cash contributions continue to be within the Final Determination for the K5 period.

The March 2013 actuarial valuation has been completed. 

TAXATION 

Pennon takes seriously its responsibility for paying its fair share of tax.

The mainstream corporation tax charge for the half year (before prior year adjustment) was 19.8m (H1 2013/14 27.0m) giving an effective current tax rate of 20% (H1 2013/14 24%) which is close to the current UK statutory corporation tax rate of 21%. The reduced rate compared to last year reflects the increase in capitalised interest, increased capital allowances and the 1% reduction in the corporation tax rate. 

Before exceptional items deferred tax for the half year was a debit of 14.2m (H1 2013/14 credit 28.2m). 

The 2013/14 credit included a credit of 40.1m from the impact of the reductions in the rate of corporation tax enacted in July 2013.


PRINCIPAL RISKS AND UNCERTAINTIES 

In accordance with DTR4.2.3 and 4.2.7 of the Disclosure & Transparency Rules the principal risks and uncertainties for the remaining six months of the financial year for the Group which could have a material adverse affect on the Group's business, financial condition, results, operations and reputation:


South West Water

 
changes in law, regulation or decisions by governmental bodies or regulators
 
non-recovery of customer debt
 
poor operating performance due to extreme weather and climate change
 
poor service provided to customers
 
non-compliance or occurrence of avoidable health and safety incidents
 
significant operational failures or incidents
 
uncertainty arising from regulatory market reforms


Viridor

 
changes in law, regulation or decisions by governmental bodies or regulators
 
reduced waste volumes to landfill and in the overall market
 
business interruption particularly in growing energy recovery facilities business
 
downward pressure on UK wholesale power prices
 
non-compliance or occurrence of avoidable health and safety incidents
 
failure or increased cost of capital projects and/or joint ventures not achieving predicted revenues or performance
 
exposure to contractor failure to deliver construction progress, increasing costs and potentially requiring lengthy legal action or other redress
 
reliability and performance of assets and obsolescence of plants
 
reduced customer base, increased competition affecting prices or reduced demand for services
 
potential over capacity in the UK and in other parts of the European ERF markets impacting demand for Viridor's new plants
 
information technology systems requiring replacement, development or upgrading to meet growing requirements of the business

Group

 
an inability to raise sufficient funds to finance its activities or such funds only being available at higher cost
 
pension costs increasing due to higher cost for future service and growing deficit in relation to past service in the Defined Benefit Scheme.

These principal risks and uncertainties are largely as set out, together with the mitigating actions of the Group, in the Group's 2014 Annual Report & Accounts which can be viewed on or downloaded from the Group's website, http://www.pennonannualreport.co.uk/2014/group/principal-risks-and-uncertainties.php or obtained from the Group Company Secretary at the Company's registered office.



BOARD MATTERS

The Board announced in September the planned retirement of David Dupont, Group Director of Finance and an Executive Director of Pennon Group Plc, on 31 January 2015. The Board would like to take this opportunity to express its gratitude to David for his significant contribution to the success of the Group and the strategic development of both South West Waterand Viridor. In his 12 years as Group Director of Finance, David has successfully managed the financial affairs of Pennon during a period of substantial development and growth. He has put in place the funding required to take South West Water forward into the K6 period and to finance the construction of Viridor's committed ERF programme. The Board wishes him well for the future.

The Board also announced in September that David's successor will be Susan Davy, currently Finance and Regulatory Director of South West Water. Susan was appointed to the South West Water Board 7 years ago and is well placed to take on the role immediately upon David's retirement.

Neil Cooper joined the Board on 1 September 2014 as a Non-Executive Director and as chairman of the Audit Committee. Neil is Group Finance Director of William Hill PLC and previously was Group Finance Director of Bovis Homes Group PLC.

INTERIM MANAGEMENT STATEMENTS AND PRE-CLOSE TRADING UPDATES

With effect from 7 November 2014, the Financial Conduct Authority removed the requirement in the Disclosure and Transparency Rules to publish Interim Management Statements (IMSs). Before IMSs were introduced, Pennon published pre-close trading updates that were released immediately prior to pre-close meetings with analysts and investors. The Group intends to revert back to this policy and the next pre-close trading update will be released in late March 2015.

Accordingly, the Group does not intend to issue IMSs in the future and will not issue one next February. 

Ken Harvey
Chairman
28 November 2014

FINANCIAL TIMETABLE FOR THE YEAR ENDED 31 MARCH 2015
29 January 2015
Ordinary shares quoted ex-dividend
30 January 2015
Record date for interim cash dividend 
16 February 2015
Posting of Scrip dividend offer
March 2015
Pre-close trading update
9 March 2015
Final date for receipt of Forms of Election/Mandate
2 April 2015
Interim cash dividend payment date
20 May 2015
2014/15 Preliminary Results
Late June 2015
Annual Report & Accounts published
30 July 2015
Annual General Meeting
August 2015 *
Ordinary shares quoted ex-dividend
August 2015 *
Record date for final cash dividend
September 2015 
Pre-close trading update
September 2015 *
Final date for receipt of Forms of Election/Mandate
October 2015 *
Final cash dividend payment date


* These dates are provisional and, in the case of the final dividend, subject to obtaining shareholder approval at the 2015 Annual General Meeting.

CAUTIONARY STATEMENT IN RESPECT OF FORWARD-LOOKING STATEMENTS 

This Results Statement 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. Forward-looking statements are identified by words such as "anticipate", "aim", "believe", "continue", "could", "due", "estimate", "expect", "forecast", "goal", "intend", "may", "plan", "project", "remain", "seek", "should", "target", "will" and related and similar expressions, as well as statements in the future tense. 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 including but not limited to those set out on page 30 and 31 of this Statement. Undue reliance should not be placed on forward-looking statements which are made only as of the date of this Statement. 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 and nothing in this Statement should be construed as a profit forecast.

The Group accepts no obligation publicly to revise or update 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. These are typically from overseas based 'brokers' who target UK shareholders, offering to buy their shares. Shareholders are advised to be wary of any unsolicited advice, offers to buy shares or offers of free reports on the Company. Details of any share dealing facilities that the Company endorses will be included in Company mailings.

Consolidated income statement for the half year ended 30 September 2014



Unaudited








Before
Exceptional




exceptional
items half year




items half year
ended
Total half year
Half year


ended
30 September 
ended 
ended 


30 September
2014
30 September
30 September


2014
(note 5)
2014
2013

Note
m
m
m
m






Revenue
4
692.3
-
692.3
667.0






Operating costs 





Manpower costs

(85.0)
14.9
(70.1)
(80.0)
Raw materials and consumables used

(56.3)
-
(56.3)
(57.4)
Other operating expenses

(351.0)
-
(351.0)
(314.2)






Earnings before interest, tax, depreciation 






and amortisation 

200.0
14.9
214.9
215.4
Depreciation and amortisation 

(80.8)
-
(80.8)
(75.7)






Operating profit
4
119.2
14.9
134.1
139.7






Finance income
6
18.3
-
18.3
27.3
Finance costs
6
(39.9)
-
(39.9)
(56.9)
Net finance costs
6
(21.6)
-
(21.6)
(29.6)
Share of post-tax profit from joint ventures

2.4
-
2.4
0.8






Profit before tax
4
100.0
14.9
114.9
110.9






Taxation
7
(21.4)
(3.0)
(24.4)
11.9






Profit for the period

78.6
11.9
90.5
122.8






Attributable to:





Ordinary shareholders of the parent

62.6
11.9
74.5
107.2
Perpetual capital security holders

16.0
-
16.0
15.6






Earnings per ordinary share (pence per share)
8





- Basic



19.4
29.4

- Diluted



19.3
29.3




















The notes on pages 40 to 54 form part of this condensed half year financial information.







Consolidated statement of comprehensive income for the half year ended 30 September 2014




Unaudited








Before
Exceptional




exceptional
items half year




items half year
ended
Total half year
Half year


ended
30 September 
ended 
ended 


30 September
2014
30 September
30 September


2014
(note 5)
2014
2013


m
m
m
m






Profit for the period

78.6
11.9
90.5
122.8












Other comprehensive (loss)/income:











Items that will not be reclassified to profit or loss











Remeasurement of defined benefit obligations

(28.1)
-
(28.1)
5.9






Income tax on items that will not be reclassified

5.6
-
5.6
(5.8)






Total items that will not be reclassified to






profit or loss

(22.5)
-
(22.5)
0.1






Items that may be reclassified subsequently 






to profit or loss











Share of other comprehensive income from






joint ventures

(2.4)
-
(2.4)
2.7
Cash flow hedges

(5.0)
-
(5.0)
24.4
Income tax on items that may be reclassified

(0.3)
-
(0.3)
1.1






Total items that may be reclassified






subsequently to profit or loss

(7.7)
-
(7.7)
28.2






Other comprehensive (loss)/income for






the period net of tax

(30.2)
-
(30.2)
28.3






Total comprehensive income for the period

48.4 
11.9
60.3
151.1






Total comprehensive income attributable to: 





Ordinary shareholders of the parent

32.4
11.9
44.3
135.5
Perpetual capital security holders

16.0
-
16.0
15.6















The notes on pages 40 to 54 form part of this condensed half year financial information.



Consolidated balance sheet at 30 September 2014



Unaudited







30 September
31 March 


2014
2014

Note
m
m
ASSETS



Non-current assets



Goodwill

339.3
339.3
Other intangible assets

47.6
30.6
Property, plant and equipment
15
3,506.9
3,450.4
Other non-current assets

269.3
230.3
Financial assets at fair value through profit

0.4
-
Derivative financial instruments

28.8
25.9
Investments in joint ventures

0.1
0.1


4,192.4
4,076.6
Current assets



Inventories

12.2
12.1
Trade and other receivables

296.8
278.2
Financial assets at fair value through profit

-
0.4
Derivative financial instruments

6.1
2.6
Cash and cash deposits
13
694.1
613.1


1,009.2
906.4
LIABILITIES



Current liabilities



Borrowings
13
(61.5)
(273.9)
Financial liabilities at fair value through profit

(0.2)
-
Derivative financial instruments

(12.4)
(20.8)
Trade and other payables

(375.3)
(298.8)
Current tax liabilities

(44.9)
(37.7)
Provisions 

(26.4)
(33.3)


(520.7)
(664.5)
Net current assets

488.5
241.9




Non-current liabilities



Borrowings
13
(2,738.1)
(2,533.2)
Other non-current liabilities

(86.1)
(82.8)
Financial liabilities at fair value through profit

(27.3)
(15.6)
Derivative financial instruments

(8.9)
(3.9)
Retirement benefit obligations

(94.3)
(79.3)
Deferred tax liabilities

(239.0)
(227.1)
Provisions 

(185.6)
(179.0)


(3,379.3)
(3,120.9)
Net assets

1,301.6
1,197.6




Shareholders' equity



Share capital
10
162.4
151.3
Share premium account

118.6
4.9
Capital redemption reserve

144.2
144.2
Retained earnings and other reserves

581.6
602.4
Total shareholders' equity

1,006.8
902.8
Perpetual capital securities
11
294.8
294.8
Total equity

1,301.6
1,197.6




The notes on pages 40 to 54 form part of this condensed half year financial information.


Consolidated statement of changes in equity

Unaudited




Retained
Perpetual


Share
Share
Capital
earnings
capital


capital
premium
redemption
and other
securities
Total

(note 10)
account
reserve
reserves 
(note 11)
equity

m
m
m
m
m
m







At 1 April 2013
149.2
7.0
144.2
476.9
294.8
1,072.1







Profit for the period
-
-
-
107.2
15.6
122.8
Other comprehensive income for the period
-
-
-
28.3
-
28.3
Total comprehensive income for the period
-
-
-
135.5
15.6
151.1







Transactions with equity shareholders






Dividends paid or approved
-
-
-
(103.9)
-
(103.9)
Adjustment for shares issued or to be 







issued under the scrip dividend 







alternative
0.2
(0.2)
-
34.6
-
34.6
Distributions due to perpetual capital







security holders
-
-
-
-
(20.3)
(20.3)
Current tax relief on distributions to







perpetual capital security holders
-
-
-
-
4.7
4.7
Adjustment in respect of share-based 







payments
-
-
-
1.7
-
1.7
Own shares acquired by the Pennon 







Employee Share Trust in respect of 







share options granted
-
-
-
(0.5)
-
(0.5)
Proceeds from treasury shares re-issued
-
-
-
2.2
-
2.2

0.2
(0.2)
-
(65.9)
(15.6)
(81.5)







At 30 September 2013
149.4
6.8
144.2
546.5
294.8
1,141.7








Unaudited




Retained
Perpetual


Share
Share
Capital
earnings
capital


capital
premium
redemption
and other
securities
Total

(note 10)
account
reserve
reserves
(note 11)
equity

m
m
m
m
m
m







At 1 April 2014
151.3
4.9
144.2
602.4
294.8
1,197.6







Profit for the period
-
-
-
74.5
16.0
90.5
Other comprehensive loss for the period
-
-
-
(30.2)
-
(30.2)
Total comprehensive income for the period
-
-
-
44.3
16.0
60.3







Transactions with equity shareholders






Dividends paid or approved
-
-
-
(117.0)
-
(117.0)
Adjustment for shares issued or to be







issued under the scrip dividend







alternative
2.6
(2.6)
-
48.0
-
48.0
Convertible bond - equity issuance 
8.5
116.3
-
(0.5)
-
124.3
Distributions due to perpetual capital security







holders 
-
-
-
-
(20.3)
(20.3)
Current tax relief on distributions to 







perpetual capital security holders
-
-
-
-
4.3
4.3
Adjustment in respect of share-based 







payments
-
-
-
1.9
-
1.9
Own shares acquired by the Pennon 







Employee Share Trust in respect of 







share options granted
-
-
-
(0.8)
-
(0.8)
Proceeds from treasury shares re-issued
-
-
-
3.3
-
3.3

11.1
113.7
-
(65.1)
(16.0)
43.7







At 30 September 2014
162.4
118.6
144.2
581.6
294.8
1,301.6







The notes on pages 40 to 54 form part of this condensed half year financial information.








Consolidated statement of cash flows for the half year ended 30 September 2014











Unaudited




Half year
ended
30 September
2014
Half year 
ended
30 September
2013


Note

m
m

Cash flows from operating activities





Cash generated from operations
12

140.9
157.1

Interest paid 


(24.0)
(39.2)

Tax repaid/(paid)


4.3
(31.3)







Net cash generated from operating activities


121.2
86.6







Cash flows from investing activities





Interest received 


7.3
19.2

Loan repayments received from joint ventures


0.1
0.1

Dividends received from joint venture


-
3.5

Purchase of property, plant and equipment


(138.2)
(174.6)

Proceeds from sale of property, plant






and equipment


3.4
1.7







Net cash used in investing activities


(127.4)
(150.1)







Cash flows from financing activities





Proceeds from treasury shares re-issued
10

3.3
2.2

Deposit of restricted funds


(0.6)
(2.7)

Purchase of ordinary shares by the Pennon 






Employee Share Trust


(0.8)
(0.5)

Proceeds from new borrowing 


130.0
90.0

Repayment of borrowings


(20.1)
(140.1)

Finance lease sale and leaseback


89.6
40.5

Finance lease principal repayments


(88.0)
(6.3)

Dividends paid 


(26.8)
(29.5)







Net cash received from/(used in) financing 






activities


86.6
(46.4)







Net increase/(decrease) in cash and cash equivalents 

80.4
(109.9)







Cash and cash equivalents at beginning of period
13

439.9
490.5







Cash and cash equivalents at end of period
13

520.3
380.6













The notes on pages 40 to 54 form part of this condensed half year financial information.












Notes to the 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 54. Pennon Group's business is operated through two main subsidiaries. South West Water Limited holds the water and sewerage appointments for Devon, Cornwall and parts of Dorset and Somerset. Viridor Limited's business is recycling, renewable energy and waste management.



This condensed half year financial information was approved by the Board of Directors on 
27 November 2014. 



The financial information for the period ended 30 September 2014 does not constitute statutory accounts within the meaning of section 435 of the Companies Act 2006. The statutory accounts for 31 March 2014 were approved by the Board of Directors on 23 June 2014 and have been delivered to the Registrar of Companies. The independent auditors' 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 with IAS 34 "Interim financial reporting" as adopted by the European Union (EU). 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 2014, which were prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU. 



Having made enquiries, the Directors consider that the Company and its subsidiary undertakings have adequate resources to continue in business for the foreseeable future, and that it is therefore appropriate to adopt the going concern basis in preparing the condensed half year financial information. 



This condensed half year financial information has been reviewed but not audited by the independent auditors 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 2014, with the exception of changes in estimates that are required in determining the provision of income taxes.




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 2014, except as described below, and are also in accordance with all IFRSs and interpretations of the IFRS Interpretations Committee expected to be applicable for the year ended 31 March 2015 in issue which have been adopted by the EU. 



 
IFRS 10, 'Consolidated financial statements'. Under IFRS 10, subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group has power over an entity, is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect these returns through its power over the entity.




The new standard IFRS 10 has no financial impact on the Group. 



 
IFRS 11, 'Joint arrangements'. Under IFRS 11, investments in Joint arrangements are classified as Joint ventures based on contractual rights and obligations each investor has rather than the legal structure of the joint arrangement.




Under IFRS 11 entities can no longer account for an interest in a joint venture using the proportionate consolidation method and must use the equity method in accordance with IAS 28, Investments in associates. 




The new standard IFRS 11 has no financial impact on the Group. All joint ventures continue to be recognised using the equity method.



 
IFRS 12, 'Disclosure of interests in other entities'. IFRS 12 sets out the required disclosures for entities reporting under the two new standards noted above. The new standard requires additional disclosure in relation to subsidiaries, associates and joint arrangements.




The new standard IFRS 12 has no financial impact on the Group, although further disclosure of joint arrangements will be presented in the 2014/15 financial statements.



Other standards or interpretations which were mandatory for the first time in the year beginning 1 April 2014 did not have a material impact on the net assets or results of the Group.



The tax charge for September 2014 and September 2013 has been derived by applying the anticipated effective annual rate to the first half year profit before tax.




4.
Segmental information



Operating segments are reported in a manner consistent with internal reporting provided to the Chief Operating Decision-Maker, which has been identified as the Pennon Group Plc Board.



The water and sewerage business comprises the regulated water and sewerage services undertaken by South West Water Limited. The waste management business is the recycling, renewable energy and waste management services provided by Viridor Limited.








Unaudited




Half year ended 
30 September
2014
Half year
ended
30 September
2013




m
m


Revenue 




Water and sewerage
268.3 
269.1


Waste management
424.4 
398.2


Other
5.3
5.6


Less intra-segment trading 
(5.7) 
(5.9)


692.3
667.0


Segment result









Operating profit before depreciation, amortisation





and exceptional items (EBITDA)




Water and sewerage
172.2  
173.8


Waste management
28.1  
41.4


Other
(0.3)  
0.2


200.0  
215.4


Operating profit before exceptional items




Water and sewerage
119.2  
121.3


Waste management
0.2  
18.0


Other
(0.2)  
0.4



119.2  
139.7


Profit before tax and exceptional items




Water and sewerage
86.2  
87.3


Waste management
4.7  
15.3


Other
9.1  
8.3



100.0  
110.9


Profit before tax 




Water and sewerage
98.0  
87.3


Waste management
6.6  
15.3


Other
10.3  
8.3



114.9  
110.9







Intra-segment transactions between and to other segments are under normal commercial terms and conditions. Intra-segment revenue or interest receivable of one segment is a cost or interest payable of another.







Factors such as seasonal weather patterns can affect sales volumes, income and costs in both the water and sewerage and waste management segments.








Geographic analysis of revenue based on location of customers





Unaudited




Half year ended 
30 September
2014
Half year
ended
30 September
2013




m
m


UK

671.5
640.5


Rest of European Union

5.0
6.6


China

13.7
15.2


Rest of World

2.1
4.7




692.3
667.0








The UK is the Group's country of domicile and generates the majority of its revenue from external customers in the UK. The Group's non-current assets are located in the UK.


5.
Exceptional items



Exceptional items are those that in the Directors' view are required to be separately disclosed by virtue of their size or incidence to enable a full understanding of the Group's financial performance.





Unaudited




Half year ended 
30 September
2014
Half year
ended
30 September
2013




m
m


Operating costs





Pension costs - past service

14.9
-


Tax charge on exceptional items

(3.0)
-


Credit for the period

11.9
-










During the period an exceptional credit before tax of 14.9m was recognised relating to changes made to the Group's defined benefit pension scheme. Changes implemented during the period capped pensionable pay for active members, reducing past service cost.




6.
Net finance costs


Unaudited


Half year ended
Half year ended


30 September 2014
30 September 2013


Finance 
Finance

Finance
Finance



cost
income
Total
cost
income
Total


m
m
m
m
m
m

Cost of servicing debt







Bank borrowings and overdrafts
(12.5)
-
(12.5)
(19.0)
-
(19.0)

Interest element of finance lease 








rentals
(18.3)
-
(18.3)
(18.6)
-
(18.6)

Other finance costs
(1.9)
-
(1.9)
(1.9)
-
(1.9)

Interest receivable
-
2.8
2.8
-
2.4
2.4

Interest receivable on shareholder 








loans to joint ventures
-
5.6
5.6
-
4.6
4.6










(32.7)
8.4
(24.3)
(39.5)
7.0
(32.5)









Other finance income







Investment income received
-
-
-
-
11.3
11.3

Fair value losses on derivative 








financial instruments providing 








commercial hedges
-
-
-
(10.7)
-
(10.7)










-
-
-
(10.7)
11.3
0.6









Notional interest







Interest receivable on service 








concession arrangements
-
5.8
5.8
-
4.2
4.2

Retirement benefit obligations
(1.7)
-
(1.7)
(2.1)
-
(2.1)

Unwinding of discounts on 








provisions
(5.5)
-
(5.5)
(4.6)
-
(4.6)










(7.2)
5.8
(1.4)
(6.7)
4.2
(2.5)









Net gains on non-designated








derivative financial instruments
-
4.1
4.1
-
4.8
4.8










(39.9)
18.3
(21.6)
(56.9)
27.3
(29.6)









Other finance income represents enhanced yields from investment income received on deposits held, partially offset by fair value losses on derivative financial instruments which provided commercial hedges against these short-term structured deposits. These transactions commenced and matured during the prior period.




7.
Taxation



Unaudited










Half year
Half year




ended
ended




30 September
30 September




2014
2013




m
m







Analysis of charge/(credit) :









Current tax charge
7.2
16.3







Deferred tax - other
14.2
11.9


Deferred tax arising on change of rate of corporation tax
-
(40.1)












Total deferred tax charge/(credit)
14.2
(28.2)







Tax charge/(credit)before exceptional items
21.4
(11.9)







Tax on exceptional items 
3.0
-



24.4
(11.9)







UK corporation tax is calculated at 21% (2013 23%) of the estimated assessable profit for the year.The tax charge for September 2014 and September 2013 has been derived by applying the anticipated effective annual tax rate to the first half year profit before tax.



The 2013 deferred tax credit includes a credit of 40.1m reflecting a reduction in the rate of UK corporation 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 before the impact of the change of rate and exceptional items was 21% (2013 25%). 










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 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
2014
Half year
ended
30 September
2013







Number of shares (millions)









For basic earnings per share
383.5
364.8







Effect of dilutive potential ordinary shares from





share options
1.7
1.8







For diluted earnings per share
385.2
366.6







Basic and diluted earnings per ordinary share





Adjusted earnings per share are presented to provide a more useful comparison on business trends and performance. Exceptional items are adjusted for as by nature and size they can distort comparison of business trends. Deferred tax is adjusted for as it reflects distortive effects of changes in corporation tax rates and the level of long term investment. The annual perpetual capital return is recognised in full at the half year, so is proportionately adjusted to allow a more useful comparison at the half year. Earnings per share have been calculated: 



Unaudited










Half year ended
Half year ended


30 September 2014
30 September 2013



Earnings per

Earnings per


Profit
ordinary share
Profit
ordinary share


after tax
Basic
Diluted
after tax
Basic
Diluted


m
p
p
m
p
p









Statutory earnings
74.5
19.4
19.3
107.2
29.4
29.3









Deferred tax charge/(credit)








before exceptional items








(note 7)
14.2
3.7
3.7
(28.2)
(7.7)
(7.7)









Exceptional items (net of tax)








(note 5)
(11.9)
(3.1)
(3.1)
-
-
-









Proportionate impact of








perpetual capital returns
8.0
2.1
2.1
7.8
2.1
2.1

















Adjusted earnings
84.8
22.1
22.0
86.8
23.8
23.7






















9.
Dividends to ordinary shareholders






Amounts recognised as distributions to Ordinary shareholders in the period :




Unaudited




Half year
ended 
30 September
2014
Half year
ended
30 September
2013


m
m






Interim dividend paid for the year ended




31 March 2014 : 9.39p (2013 8.76p) per share
34.8
31.9










Final dividend approved for the year ended 




31 March 2014 : 20.92p (2013 19.70p) per 




per share
82.2
72.0




117.0
103.9




Proposed interim dividend
Unaudited




Half year
ended 
30 September
2014
Half year
ended
30 September
2013


m
m






Proposed interim dividend for the year ended 




31 March 2015 : 9.98p (2014 9.39p) per share
39.8
34.8






The proposed interim dividend of 9.98p per share will be paid on 2 April 2015 to shareholders 
on the register on 30 January 2015.



The proposed interim dividend has not been included as a liability in this condensed half year financial information. 







10.
Share capital









Allotted, called up and fully paid









1 April 2013 to 30 September 2013
Number of shares



Treasury shares
Ordinary shares
m

At 1 April 2013




Ordinary shares of 40.7p each
2,105,836
364,657,522
149.2






Shares issued under the scrip dividend 




alternative
-
356,637
0.2






Shares re-issued under the Company's 




Performance and Co-investment Plan
(276,114)
276,114
-






For consideration of 0.5m, shares re-issued 




to the Pennon Employee Share Trust
(97,596)
97,596
-






For consideration of 1.6m, shares re-issued 




under the Company's Sharesave Scheme
(368,207)
368,207
-






For consideration of 0.1m, shares re-issued 




under the Executive Share Option Scheme
(11,134)
11,134
-






At 30 September 2013 ordinary shares of 




40.7p each
1,352,785
365,767,210
149.4






1 April 2014 to 30 September 2014
Number of shares



Treasury shares
Ordinary shares
m

At 1 April 2014




Ordinary shares of 40.7p each
1,282,690
370,552,276
151.3






Shares issued in respect of the 125m 




convertible bond
-
20,909,635
8.5






Shares issued under the scrip 




dividend alternative
-
1,982,455
0.8






Shares re-issued under the Company's 




Performance and Co-investment Plan
(131,685)
131,685
-






For consideration of 0.8m, shares re-issued 




to the Pennon Employee Share Trust
(104,482)
104,482
-






For consideration of 2.5m, shares re-issued 




under the Company's Sharesave Scheme
(587,156)
587,156
-






At 30 September 2014 ordinary shares in issue 




of 40.7p each
459,367
394,267,689
160.6






Shares to be issued under the scrip




dividend alternative
-
4,383,167
1.8







459,367
398,650,856
162.4



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 Sharesave Scheme options during the half year was 808p (2013 701p).





11.
Perpetual capital securities



Unaudited





Half year
ended 
30 September
2014
Year ended 
31 March 
2014


m
m






GBP 300m 6.75% perpetual subordinated 





capital securities
294.8
294.8








On 8 March 2013 the Company issued 300m perpetual capital securities. They have no fixed redemption date but the Company may, at its sole discretion, redeem all, but not part, of these securities at their principal amount on 8 March 2018 or any subsequent periodic return payment date after this.



The Company has the option to defer periodic returns on any relevant payment date, as long as a dividend on the Ordinary Shares has not been paid or declared in the previous 12 months. Deferred periodic returns shall be satisfied only on redemption or payment of dividend on Ordinary Shares, all of which only occur at the sole discretion of the Company.



As the Company paid a dividend on 3 April 2014 the periodic return of 20.3m scheduled 8 March 2015 is payable and consequently has been recognised as a liability at 30 September 2014.



12.
Cash flow from operating activities









Reconciliation of profit to net cash inflow from operating activities:







Unaudited








Half year
ended
30 September
2014
Half year
ended
30 September
2013


m
m


Cash generated from operations









Profit for the period
90.5
122.8


Adjustments for:





Share-based payments
1.9
1.8



Profit on disposal of property, plant 






and equipment
(2.9)
(1.4)



Depreciation charge
79.4
74.3



Amortisation of intangible assets
1.3
1.4



Exceptional credit from defined benefit






pension change
(14.9)
-



Share of post-tax profit from joint ventures
(2.4)
(0.8)



Finance income
(18.3)
(27.3)



Finance costs
39.9
56.9



Taxation charge/(credit)
24.4
(11.9)








Changes in working capital : 





Increase in inventories
(0.1)
(1.1)



Increase in trade and other receivables
(24.8)
(40.1)



Increase in service concession 






arrangements receivable
(45.0)
(26.5)



Increase in trade and other payables
14.5
14.3



Increase/(decrease) in retirement






benefit obligations
0.1
(0.3)



Decrease in provisions
(2.7)
(5.0)












Cash generated from operations
140.9
157.1











Unaudited




Half year 
ended 
30 September
Half year
ended
30 September


2014
2013


Total interest paid
m
m







Interest paid in operating activities
24.0
39.2


Interest paid in investing activities (purchases of 





property, plant and equipment)
13.9
9.9







Total interest paid
37.9
49.1








13.
Net borrowings





Unaudited





Half year 
ended 
30 September
Year ended
31 March


2014
2014


m
m







Cash and cash deposits
694.1
613.1







Borrowings - current




Other current borrowings
(32.0)
(155.4)


Finance lease obligations
(29.5)
(118.5)


Total current borrowings
(61.5)
(273.9)







Borrowings - non-current




Bank and other loans
(1,206.1)
(1,077.8)


Other non-current borrowings
(284.2)
(304.3)


Finance lease obligations
(1,247.8)
(1,151.1)


Total non-current borrowings
(2,738.1)
(2,533.2)


Total net borrowings
(2,105.5)
(2,194.0)






During the period the 125 million convertible bond due to mature in August 2014 was fully converted to 20.9 million Pennon Group Plc shares.



For the purposes of the cash flow statement cash and cash equivalents comprise:




Unaudited





Half year 
ended 
30 September
Year ended 
31 March

2014
2014


m
m







Cash and cash deposits as above
694.1
613.1







Less : deposits with a maturity of three months





or more (restricted funds)
(173.8)
(173.2)







520.3
439.9




14.
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 2014
31 March 2014




Book value
Fair value
Book value
Fair value




m
m
m
m










Non-current borrowings :







Bank and other loans

1,206.1
1,203.5
1,077.8
1,018.9


Other non-current 








borrowings

284.2
247.8
304.3
260.1


Finance lease obligations

1,247.8
1,097.2
1,151.1
978.8


Total non-current








borrowings

2,738.1
2,548.5
2,533.2
2,257.8










Other non-current assets

269.3
376.3
230.3
307.6




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.





Valuation hierarchy of financial instruments carried at fair value (continued)



The Group's financial instruments are valued principally using level 2 measures:




Unaudited




Half year
ended
30 September
Year ended
31 March 



2014
2014




m
m


Level 2 inputs





Assets





Derivatives used for hedging

33.2
28.5







Liabilities





Derivatives used for hedging

18.0
20.1


Derivatives deemed held for trading

3.3
2.2


Total liabilities

21.3
22.3




Financial instruments valued using level 3 measures are valued by the counterparty using cash flows discounted at prevailing mid-market rates. The fair value of such financial instruments is not significantly sensitive to unobservable inputs.






Level 3 inputs





Assets





Derivatives deemed held for trading

1.7
-







Liabilities





Derivatives deemed held for trading

-
2.4







The table below shows the summary of changes in the fair value of the Group's level 3 financial instruments:






Unaudited




Half year




ended
Year ended



30 September
31 March



2014
2014



m
m







Opening balance
(2.4)
9.7


Gains and losses recognised in net 





finance costs
4.1
8.4


Settlement of recognised gains
-
(20.5)


Closing balance
1.7
(2.4)






15.
Capital expenditure

Unaudited



Half year 
ended 
30 September
Year ended
31 March


2014
2014



m
m


Property, plant and equipment




Additions
137.3
360.8


Net book value of disposals
0.5
1.2







Capital commitments




Contracted but not provided
292.6
373.1










16.
Contingent liabilities

Unaudited



Half year 
ended 
30 September
Year ended
31 March 


2014
2014



m
m







Performance bonds
150.7
150.0


Other
4.0
6.9








154.7
156.9






Performance bonds are entered into in the normal course of business. No liability is expected to arise in respect of the bonds.



The Group is subject to litigation from time to time as a result of its activities. The Group establishes provisions in connection with litigation where it has a present legal or constructive obligation as a result of a past event 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.


17.
Related party transactions


The Group's significant related parties are its joint ventures in Lakeside Energy from Waste Holdings Limited and Viridor Laing (Greater Manchester) Holdings Limited and its associate INEOS Runcorn (TPS) Holdings Limited, for which disclosures were made in the Pennon Group Plc Annual Report and Accounts for the year ended 31 March 2014. There was no material change during the half year to September 2014 in the nature of transactions with these related parties.


Pennon Group Plc 

Registered Office : Registered in England No 2366640

Peninsula House

Rydon Lane 

Exeter 

EX2 7HR

pennon-group.co.uk



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 IAS 34 "Interim financial reporting" as adopted by the European Union 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 are as listed on pages 52 and 53 of the Annual Report and Accounts of the Company for the year ended 31 March 2014 with the exception of Mr Neil Cooper who was appointed as a Non-executive Director on 1 September 2014. 



For and on behalf of the Board of Directors who approved this half year report on 27 November 2014.





K G Harvey
D J Dupont
Chairman
Group Director of Finance







PENNON GROUP PLC

INDEPENDENT REVIEW REPORT TO PENNON GROUP PLC
Introduction

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 2014 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. 

This report is made solely to the company in accordance with guidance contained in International Standard on Review Engagements 2410 (UK and Ireland) "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our work, for this report, or for the conclusions we have formed.

Directors' Responsibilities 

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority. 

As disclosed in note 2, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union. 

Our Responsibility 

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review. 

Scope of Review 

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. 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 Ireland) 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. 

Conclusion 

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 2014 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority. 

Ernst & Young LLP
Bristol
27 November 2014


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