REG - Pennon Group PLC - Pennon Group Full Year Results 2016/17 <Origin Href="QuoteRef">PNN.L</Origin> - Part 4

PennonAnnouncement

24/05/2017 07:07

- Part 4: For the preceding part double click  ID:nRSX0435Gc 

                        Review. The £10.7m charge consists           
                                                                                                                                                                                                                                                                                    of a £9.5m non-cash charge to other          
                                                                                                                                                                                                                                                                                    operating expenses relating to a             
                                                                                                                                                                                                                                                                                    rationalisation of systems leading           
                                                                                                                                                                                                                                                                                    to an asset de-recognition, and a            
                                                                                                                                                                                                                                                                                    £1.1m charge to manpower costs and a          
                                                                                                                                                                                                                                                                                    £0.1m charge to other operating              
                                                                                                                                                                                                                                                                                    costs in relation to restructuring           
                                                                                                                                                                                                                                                                                    provisions. The charge is considered          
                                                                                                                                                                                                                                                                                    non-underlying due to its size and           
                                                                                                                                                                                                                                                                                    non-recurring nature. Last year a            
                                                                                                                                                                                                                                                                                    one-off charge of £10.2m was made to          
                                                                                                                                                                                                                                                                                    the restructuring provision                  
                                                                                                                                                                                                                                                                                    reflecting announced reorganisations          
                                                                                                                                                                                                                                                                                    across the Group.                            
                                                                                                                                                                                                                                                                                                                                 
                    (b)                                                                                                                                                                                                                                                             In the year a credit of £16.0m was           
                                                                                                                                                                                                                                                                                    recognised relating to non-cash              
                                                                                                                                                                                                                                                                                    derivative fair value movements              
                                                                                                                                                                                                                                                                                    associated with derivatives that are          
                                                                                                                                                                                                                                                                                    not designated as being party to an          
                                                                                                                                                                                                                                                                                    accounting hedge relationship. These          
                                                                                                                                                                                                                                                                                    movements are non-underlying due to          
                                                                                                                                                                                                                                                                                    the nature of the item being market          
                                                                                                                                                                                                                                                                                    dependant and potentially can be             
                                                                                                                                                                                                                                                                                    significant in value (size).                 
                                                                                                                                                                                                                                                                                                                                 
                    (c)                                                                                                                                                                                                                                                             Since 2011 the Group has received a          
                                                                                                                                                                                                                                                                                    fixed interest rate on a £200m               
                                                                                                                                                                                                                                                                                    financial asset and paid an index            
                                                                                                                                                                                                                                                                                    -linked interest rate on a £200m             
                                                                                                                                                                                                                                                                                    loan, designed to improve the                
                                                                                                                                                                                                                                                                                    Group's overall interest rate                
                                                                                                                                                                                                                                                                                    performance. The counterparty to             
                                                                                                                                                                                                                                                                                    both instruments was Peninsula MB            
                                                                                                                                                                                                                                                                                    Limited (PMB). In combination, these          
                                                                                                                                                                                                                                                                                    instruments were accounted for as a          
                                                                                                                                                                                                                                                                                    derivative, with a net interest              
                                                                                                                                                                                                                                                                                    income of £8m p.a. cash settled              
                                                                                                                                                                                                                                                                                    (c.£7m in 2016/17). In periods of            
                                                                                                                                                                                                                                                                                    index underperformance, losses arose          
                                                                                                                                                                                                                                                                                    in PMB which were group relieved             
                                                                                                                                                                                                                                                                                    with the Group. Following a change           
                                                                                                                                                                                                                                                                                    in legislation, which saw the value          
                                                                                                                                                                                                                                                                                    of the derivative to the Group               
                                                                                                                                                                                                                                                                                    moving from a liability of £4m to a          
                                                                                                                                                                                                                                                                                    liability of c.£40m, the Group made          
                                                                                                                                                                                                                                                                                    the decision to exit the                     
                                                                                                                                                                                                                                                                                    transaction. On 10 February 2017 the          
                                                                                                                                                                                                                                                                                    Company unwound this transaction.            
                                                                                                                                                                                                                                                                                    The derivative had been due to end           
                                                                                                                                                                                                                                                                                    in 2027, however, following a change          
                                                                                                                                                                                                                                                                                    in the economic benefit of this              
                                                                                                                                                                                                                                                                                    derivative due to a change in                
                                                                                                                                                                                                                                                                                    legislation which impacted the               
                                                                                                                                                                                                                                                                                    derivative's future cash flows, the          
                                                                                                                                                                                                                                                                                    Company exercised its option to              
                                                                                                                                                                                                                                                                                    unwind the transaction early. The            
                                                                                                                                                                                                                                                                                    process for unwinding the derivative          
                                                                                                                                                                                                                                                                                    resulted in the Group acquiring a            
                                                                                                                                                                                                                                                                                    financial asset for £283m and a              
                                                                                                                                                                                                                                                                                    financial liability for £239m from           
                                                                                                                                                                                                                                                                                    Nomura Structured Holdings plc. The          
                                                                                                                                                                                                                                                                                    counterparty to both these                   
                                                                                                                                                                                                                                                                                    transactions was PMB.                        
                                                                                                                                                                                                                                                                                    Simultaneously, the Company also             
                                                                                                                                                                                                                                                                                    acquired the remaining 25% of PMB's          
                                                                                                                                                                                                                                                                                    share capital from Nomura Structured          
                                                                                                                                                                                                                                                                                    Holdings plc, for a consideration of          
                                                                                                                                                                                                                                                                                    £36,000, with all PMB's liabilities          
                                                                                                                                                                                                                                                                                    being due to the Company from that           
                                                                                                                                                                                                                                                                                    point. The Company has since settled          
                                                                                                                                                                                                                                                                                    these liabilities through                    
                                                                                                                                                                                                                                                                                    intercompany transactions with PMB.          
                                                                                                                                                                                                                                                                                    PMB has ceased all operating                 
                                                                                                                                                                                                                                                                                    activities and will be liquidated in          
                                                                                                                                                                                                                                                                                    due course. The net consideration            
                                                                                                                                                                                                                                                                                    due to Nomura Structured Holdings            
                                                                                                                                                                                                                                                                                    plc in respect of these transactions          
                                                                                                                                                                                                                                                                                    is £44m with an agreed payment date          
                                                                                                                                                                                                                                                                                    of June 2018. The impact for the             
                                                                                                                                                                                                                                                                                    Group is a net cost of £35m post             
                                                                                                                                                                                                                                                                                    tax.                                         
                                                                                                                                                                                                                                                                                                                                                     
 
 
 PENNON GROUP PLC   
 Notes (continued)                                    
 5.                 Non-underlying items (continued)                                                                                                                                  
                                                      PMB is a private limited company, incorporated in England and Wales on 5 December 2011 as a subsidiary of Nomura Structured       
                                                      Holdings plc, part of the 'Nomura Group'. Prior to the transaction on 10 February 2017, PMB's share capital was 75% owned by the   
                                                      Company and 25% owned by Nomura Structured Holdings plc, who had control of PMB for accounting purposes.  The group relief        
                                                      claimed by the Group has been treated as an uncertain tax item and has been substantially provided for over recent years.         
                                                      Following the conclusion of discussions with HMRC, no further amounts are required to be recognised by the Group. A tax credit    
                                                      of £8m relates to the overall cost to unwind this derivative transaction. Post the unwind of the transaction the Group's          
                                                      interest will no longer include the finance income of c.£8m p.a. (c.£7m in 2016/17) and the underlying tax charge will reduce by   
                                                      a similar amount. The liability recognised is non-underlying by its size and nature.                                              
                                                                                                                                                                                        
                    (d)                               Following the enactment during the year the rate of corporation tax reduced from 18% to 17% from April 2020, resulting in a one   
                                                      -off credit of £21.3m being recognised in the income statement. In addition a charge of £1.7m has been recognised in the          
                                                      statement of comprehensive income and a credit of £0.1m was recognised directly in equity. Last year the rate of corporation tax   
                                                      reduced from 20% to 19% from April 2017, reducing further to 18% from April 2020, resulting in a one-off credit of £33.1m         
                                                      recognised in the income statement. In addition, a charge of £3.8m was recognised in the statement of comprehensive income and a   
                                                      charge of £0.1m was recognised directly in equity. These movements are non-underlying as are dependent on changes in UK tax law   
                                                      and are non-underlying due to their size.                                                                                         
 
 
 PENNON GROUP PLC   
                    
 Notes (continued)  
                                                                                                                                                                                                       
 6.                 Net finance costs                                                                                                                                                                  
                                                                                                                                                                                                       2017                                                                          2016     
                                                                                                                                                                                                       Finance                                                                       Finance          Finance  Finance          
                                                                                                                                                                                                       cost                                                                          income   Total   cost     income   Total   
                                                                                                                                                                                                       £m                                                                            £m       £m      £m       £m       £m      
                                                                                                                                                                                                                                                                                                                                
                    Cost of servicing debt                                                                                                                                                                                                                                                                                      
                    Bank borrowings and overdrafts                                                                                                                                                     (49.4)                                                                        -        (49.4)  (48.7)   -        (48.7)  
                    Interest element of finance lease                                                                                                                                                                                                                                                                           
                                                                                                                                                                                                       rentals                                                                       (31.9)   -       (31.9)   (33.5)   -       (33.5)  
                    Other finance costs                                                                                                                                                                (3.5)                                                                         -        (3.5)   (2.8)    -        (2.8)   
                    Interest receivable                                                                                                                                                                -                                                                             3.2      3.2     -        6.3      6.3     
                    Interest receivable on                                                                                                                                                                                                                                                                                      
                                                                                                                                                                                                       shareholder loans to joint                                                                                                       
                                                                                                                                                                                                       ventures                                                                      -        10.2    10.2     -        10.7    10.7    
                                                                                                                                                                                                                                                                                                                                
                                                                                                                                                                                                       (84.8)                                                                        13.4     (71.4)  (85.0)   17.0     (68.0)  
                                                                                                                                                                                                                                                                                                                                
                    Notional interest                                                                                                                                                                                                                                                                                           
                    Interest receivable on service                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                       concession arrangements                                                       -        16.1    16.1     -        16.7    16.7    
                    Retirement benefit obligations                                                                                                                                                     (1.2)                                                                         -        (1.2)   (1.8)    -        (1.8)   
                    Unwinding of discounts on                                                                                                                                                                                                                                                                                   
                                                                                                                                                                                                       provisions                                                                    (9.1)    -       (9.1)    (9.4)    -       (9.4)   
                                                                                                                                                                                                                                                                                                                                
                                                                                                                                                                                                       (10.3)                                                                        16.1     5.8     (11.2)   16.7     5.5     
                                                                                                                                                                                                                                                                                                                                
                    Net gains on derivative financial                                                                                                                                                                                                                                                                           
                                                                                                                                                                                                       instruments arising from the combination of non-derivative instruments        -        6.8     6.8      -        8.4     8.4     
                                                                                                                                                                                                                                                                                                                                
                    Net finance costs before                                                                                                                                                                                                                                                                                    
                                                                                                                                                                                                       non-underlying items                                                          (95.1)   36.3    (58.8)   (96.2)   42.1    (54.1)  
                                                                                                                                                                                                                                                                                                                                
                    Non-underlying items (note 5)                                                                                                                                                                                                                                                                               
                    Fair value remeasurement of                                                                                                                                                                                                                                                                                 
                                                                                                                                                                                                       non-designated derivative financial instruments, providing commercial hedges  -        16.0    16.0     -        5.2     5.2     
                    Unwind of synthetic derivative                                                                                                                                                     (44.8)                                                                        -        (44.8)  -        -        -       
                    Net finance costs after                                                                                                                                                                                                                                                                                     
                                                                                                                                                                                                       non-underlying items                                                          (139.9)  52.3    (87.6)   (96.2)   47.3    (48.9)  
                                                                                                                                                                                                                                                                                                                                
                    In addition to the above, finance costs of £12.9m (2016 £9.4m) have been capitalised on qualifying assets included in property, plant and equipment, and other intangible assets.  
                                                                                                                                                                                                                                                                                                                                          
 
 
 PENNON GROUP PLC   
                    
 Notes (continued)  
                    
 7.                 Taxation                                                                                                                                                                         
                                                                                                                                                                                                     
                                                                                                                                                                                                                                                                                                               
                                                                                                                                                                                                     Before non-underlying  Non-underlying items          Before non-underlying  Non-underlying items          
                                                                                                                                                                                                     items                  (note 5)              Total   items                  (note 5)              Total   
                                                                                                                                                                                                     2017                   2017                  2017    2016                   2016                  2016    
                                                                                                                                                                                                     £m                     £m                    £m      £m                     £m                    £m      
                                                                                                                                                                                                                                                                                                               
                    Analysis of charge                                                                                                                                                                                                                                                                         
                                                                                                                                                                                                                                                                                                               
                    Current tax charge                                                                                                                                                               39.5                   (9.4)                 30.1    32.9                   (1.7)                 31.2    
                                                                                                                                                                                                                                                                                                               
                    Deferred tax - other                                                                                                                                                             18.9                   2.3                   21.2    39.2                   0.7                   39.9    
                                                                                                                                                                                                                                                                                                               
                    Deferred tax - arising on                                                                                                                                                                                                                                                                  
                                                                                                                                                                                                     change of rate of                                                                                                 
                                                                                                                                                                                                     corporation tax        -                     (21.3)  (21.3)                 -                     (33.1)  (33.1)  
                                                                                                                                                                                                                                                                                                               
                                                                                                                                                                                                                                                                                                               
                    Tax charge for the year                                                                                                                                                          58.4                   (28.4)                30.0    72.1                   (34.1)                38.0    
                                                                                                                                                                                                                                                                                                               
                    UK corporation tax is calculated at 20% (2016 20%) of the estimated assessable profit for the year.                                                                              
                                                                                                                                                                                                     
                    The tax charge is stated after release of prior year current tax credits of £1.8m (2016 credit of £1.4m) and a prior year deferred tax charge of £1.1m (2016 charge of £15.9m).  
                                                                                                                                                                                                     
                    Tax on amounts included in the consolidated statement of comprehensive income, or directly in equity, is included in those statements respectively.                              
                                                                                                                                                                                                     
                    The 2017 deferred tax credit includes a credit of £21.3m (2016 charge included a credit of £33.1m) reflecting a reduction in the rate of UK corporation tax.                     
                                                                                                                                                                                                     
 
 
 PENNON GROUP PLC   
                    
 Notes (continued)  
                                                                                                                                                                                                                                                                                                                                                                                                       
 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 year, excluding those held in the employee share trust which are treated as cancelled.                                                                                                             
                                                                                                                                                                                                                                                                                                                                                                                                       
                    For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to include all dilutive potential ordinary shares.                                                                                                                                                                                                                             
                                                                                                                                                                                                                                                                                                                                                                                                       
                    The weighted average number of shares and earnings used in the calculations were:                                                                                                                                                                                                                                                                                                  
                                                                                                                                                                                                                                                                                                                                                                                                       
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
                                                                                                                                                                                                                                                                                                                                                                                                       2017                                                                2016                
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
                    Number of shares (millions)                                                                                                                                                                                                                                                                                                                                                                                                                                                
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
                    For basic earnings per share                                                                                                                                                                                                                                                                                                                                                       413.0                                                               410.9               
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
                    Effect of dilutive potential ordinary shares from share options                                                                                                                                                                                                                                                                                                                    1.9                                                                 1.8                 
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
                    For diluted earnings per share                                                                                                                                                                                                                                                                                                                                                     414.9                                       

- More to follow, for following part double click  ID:nRSX0435Ge