Pennon Group Half Year Results 2015/16

Outperforming the Business Plan - Operational Returns

South West Water has the highest potential rewards in the sector for K6. At 30 September 2015 the combined water business (South West Water and Bournemouth Water) has delivered an indicative annual equivalent Return on Regulated Equity (RoRE)⁽¹⁾ of 11.5% arising from base, financing and operational returns. Of the 11.5%, 6% is the base return, 3.0% reflects the difference between actual and assumed financing costs, 2.2% reflects Totex savings and efficiencies, and 0.3% reflects Outcome Delivery Incentives (ODIs) outperformance with 0.0% for Service Incentive Mechanism (SIM).

Totex strategy - securing outperformance

South West Water is striving for ever greater efficiency in K6, with a strong track record from K5. The company was deemed to be at the frontier of cost efficiency when it was awarded an enhanced Business Plan assessment with the largest element of potential operational outperformance over K6 coming from Totex savings and efficiencies.

South West Water is 'front-end-loading' efficiencies and savings to allow early and more certain delivery of outperformance. £28m of Totex savings⁽²⁾ have been delivered in H1 2015/16, despite costs of delivering growth. Bournemouth Water has also delivered Totex savings and efficiencies of £1m⁽²⁾. These Totex savings reflect the timing differences from the determination and equate to an indicative annual equivalent Return on Regulated Equity (RoRE) of 2.2%.

ODI rewards secured

South West Water has 23 ODIs, including SIM, which have potential financial rewards or penalties. Incentives for performance are recognised in the year of delivery, whether the measure is recovered in period or as a regulatory true-up at the end of the period. Operational performance for the half-year has resulted in an ODI reward. Rewards were secured across bathing water quality, odour complaints and water restrictions. Work is ongoing to improve in areas where pollution incidents and interruptions in supply occurred, as this is where penalties were received. Bournemouth Water has 10 ODIs, including SIM, which have financial rewards and penalties.

Combined ODI rewards result in a £2.2m benefit (£1.8m net of tax impacts) and reflects an indicative annual equivalent RoRE of 0.3%. Whilst Bournemouth Water's SIM performance results in a £0.1m benefit, the combined performance for SIM is 0.0%.

 ⁽¹⁾RoRE calculated using actual results against the Final Determination allowances sourced from Ofwat published models at outturn prices. Regulatory reporting requirements still to be confirmed by Ofwat for 2015/16 and therefore approach to calculating returns may be amended when further guidance published

⁽²⁾Based on assumed H1 Final Determination allowances and taking account of changes in the profile of investment delivery. £29m combined Totex saving equates to £12.5m RoRE benefit after applying company sharing rate and tax impacts

Strong operational performance

South West Water continued to deliver strong operational performance and the beginning of K6 has seen improvements in a number of areas targeting delivery of the outcomes and promises included in the Business Plan.

The 2015 bathing season ended with high standards of bathing water quality. Despite the introduction of the more stringent EU Revised Bathing Water Directives this year, 141 or 97.2% of the 145 designated bathing waters sampled in the region achieved the new sufficient standard.

Significant investment through the 'Even Cleaner Seas' programme was advanced into 2014/15 ensuring that 12 of the 15 beaches identified as at risk of failing the new standards achieved the required quality and passed

Both site and process compliance at wastewater treatment works carry potential penalties for not meeting targeted 2020 standards. South West Water has seen improvements in descriptive site compliance and improvements along the glidepath to deliver higher process compliance.

Whilst the total number of pollution incidents has declined from 259 to 204 in the first half of the year, five incidents, provisionally classed as Category 2 (serious), have occurred and as a result South West Water expects an ODI penalty this year.

South West Water is continuing to focus on delivering a robust leakage performance and maintaining asset reliability.

Focus on delivering excellent customer service

Safe, clean and reliable supply of drinking water is always the top priority for customers. South West Water is delivering consistently high water quality again this year and further investments are underway to ensure this continues into the future.

Overall customer demand has remained broadly similar to the same period last year. South West Water successfully managed its water resources to enable a continued secure supply of water for the region. This has resulted in the 19^th consecutive summer without water restrictions and will deliver an ODI reward this year.

Throughout K5, and continuing into K6, South West Water is targeting improvements in customer service. The Service Incentive Mechanism (SIM) continues to improve and is focused on delivering

a high quality customer experience. The first two Customer Experience Surveys(1) (CES) for 2015/16 show a step change in the retail customer service quality, which is now above the industry average at 4.65 compared to 4.45. Wholesale customer service remains an area of focus and improvements are targeted with 94% of clean water contacts and 87% of wastewater contacts resolved first time.

In addition to improving the quality of service, the number of complaints received as a result of odour issues at wastewater treatment works has reduced and an ODI reward is expected to be achieved.  This improvement has been a result of the completion of investments in 2014/15 at Countess Wear in Exeter and further improvements at Camelshead in Plymouth are planned this year.

Bournemouth Water continues to focus on delivering strong customer service with SIM performance expected to remain in the upper quartile for the industry. Leakage reduction and maintaining serviceable assets remains on track.

Non-household market opening

As the water industry works towards market liberalisation in 2017 South West Water has made strong progress in preparing both its non-household retail and wholesale operations for market opening and its internal programme 'MarketReady' is on track to deliver.

Having established a separate customer service and contact centre over ten years ago South West Water has a clear approach for separating the retail activities and through the implementation of the £50 Government Payment in 2013/14 made an early start to preparing customer data ahead of market opening.

South West Water has a strategy in place ahead of market liberalisation in 2017 to retain incumbent customers and target growth out of area. South West Water is in the process of establishing a legally separate combined non-household retail company, which will maximise the economies of scale, synergies and capitalise on opportunities from Viridor's national footprint and customer relationships.

South West Water continues to engage with the national programme and has established a robust integrated assurance process to meet the requirements of the market operator and key dates within the national programme.

(1)Customer Experience Surveys (CES) are completed quarterly for each company by independent external consultants. The surveys identify the quality of service and the overall customer experience for a range of activities and is selected from contacts received by each company across the industry. The maximum score achievable is 5

Preparing for Water 2020

South West Water has fully engaged in Ofwat's development of its Water 2020 strategy and has shared with the regulator some key areas of work already undertaken including:

·     Development of upstream markets, including the paid ecosystem services approach incorporated in the Upstream Thinking programme

·     Potential RCV allocation in considering wholesale competition

·    Impact of changes to indexation on the regulatory framework. 

This collaborative approach on potential industry reforms emphasises that continued trust and confidence in the Regulator is important in retaining stakeholder support and engagement. Early engagement for the next Price Review (PR19) is essential and any further reform will need to align with the timetables already set out which targets PR19 methodologies at the end of 2017 and business plan submissions in summer 2018. As a result it is likely that industry changes originally proposed for PR14 will be progressed, such as water resources and sludge management.

Outlook

South West Water has made a strong start to K6 and is already delivering and outperforming its Business Plan for the benefit of customers, the environment and shareholders and is confident in continuing this strong performance throughout K6.

VIRIDOR

Overview

Viridor has delivered a strong performance in H1 2015/16 as operational ERFs contributed to earnings growth, despite ongoing weakness in the recycling market. The move from construction to operation of ERFs continues and the seven operational plants, including the five brought on-stream during 2014/15, are ramping up to full operational performance over c.12 months. This is the same process performed at Lakeside.

All seven operational ERFs are full and through successful implementation of its strategy, Viridor is realising the opportunity to secure additional long-term contracts. Across the total ERF portfolio (operational and under construction) c.80% of waste inputs have been secured under long-term, index-linked contracts. Viridor is also focusing on securing more medium-term C&I contracts, as customers increasingly want to contract out for longer periods. Recent C&I contract wins include a 10-year 50,000 tpa contract. Viridor continues to contract its volumes as Pennon works towards a more homogeneous risk profile across the Group, whilst delivering growth.

Viridor has been a consistent leader in its sector as the company has moved from "waste as a problem" to "waste as a resource" for heat and energy production and manufacturing using recycled materials. With its leading role in the Greater Manchester Waste Management model, Viridor is at the forefront of looking at integrated waste systems, rather than a more traditional divisional split between waste treatments. This is changing the way Viridor runs its business as Local Authorities increasingly seek to form consortia for larger, multi-service contracts for resource management.

Recent large-scale integrated resource management contract successes include a signed contract for Tomorrow's Valley in Wales (where four Local Authorities have come together to create a £190m Residual Waste Contract for 90ktpa over 25 years) and achieving preferred bidder status for Clyde Valley in Scotland (where five Local Authorities have come together to create a £450m Residual Waste Contract for 190ktpa over 25 years).

Long-term drivers for recycling remain compelling particularly with the new EU Circular Economy measures likely to be adopted. In the short-term, Viridor is working through a restructuring of parts of that business alongside renegotiation of contracts to ensure sustainable returns. Landfill energy remains a significant cash generator and alternative uses for sites are being explored as the move away from landfill towards recycling and energy recovery is managed.

Strong Results for H1 2015/16

As expected, revenues were broadly flat, down 3.4% (£14.3m) to £410.1m, reflecting lower construction revenue from service concession arrangements as the facilities come on stream and lower landfill tax as volumes continue their expected decline, offset by higher operating revenue from ERFs.

However, Viridor's EBITDA before prior period exceptional items was up £32.9m to £61.0m (H1 2014/15 £28.1m). Viridor's underlying EBITDA was up £35.6m to £90.9m.

Viridor's underlying EBITDA is a non-statutory earnings measure that aggregates all of Viridor's earnings into a single figure, consisting of EBITDA of £61.0m (H1 2014/15 £28.1m) plus IFRIC 12 finance income of £8.3m (H1 2014/15 £5.8m) and share of Joint Venture EBITDA of £21.6m (H1 2014/15 £21.4m).

Indirect costs increased to £30.6m in H1 2015/16 from £27.2m in H1 2014/15 due mainly to increased spending on information technology and staffing costs as Viridor's new business-wide systems are integrated and advanced.

Profit before tax and exceptional items increased £8.2m to £12.9m reflecting higher EBITDA, net of higher depreciation and interest expense reflecting the greater number of operational ERFs.

Capital expenditure including spend on service concession arrangements for the period was £107.9m (H1 2014/15 £127.3m), reflecting the continued focus on ERFs. 

Total share of Joint Venture profit after tax was £1.0m, down £1.4m from H1 2014/15, predominantly as a result of the planned maintenance outage at Lakeside. This outage did not take place last year, but was an exception. ERFs have planned maintenance shutdowns as a matter of course in order to ensure they operate effectively and efficiently.

Viridor's share of non-recourse net debt in the Joint Ventures, excluding shareholder loans, was £212m (Viridor's share including shareholder loans was £295m).

During the period, Levy Exemption Certificates (LECs) were discontinued with a modest impact on Viridor. There have also been changes to the Renewable Obligation Certificates (ROC) regime. However, Viridor's ROC accreditations are unaffected by these changes. Energy generation continues to be a profitable business for Viridor

Operational Highlights

Strong regulatory drivers for Viridor

The UK is required under the EU Landfill Directive to reduce the amount of biodegradable municipal waste going to landfill sites. This is being achieved by a continued drive for recycling, with residual waste increasingly being used for energy recovery. A new EU Circular Economy legislative package is expected in December 2015. The package is expected to contain enhanced recycling targets, higher level packaging recycling targets and material specific landfill bans, alongside measures to enhance the recyclability of consumer goods.

The EU Renewable Energy Directive requires the production of 20% of energy from renewable sources by 2020. The EU Energy Union Strategy will also drive towards greater member state energy security, diversification of supply and de-carbonisation of the economy. Energy recovery from waste in all its forms has a clear role within the Government's UK Renewable Energy Roadmap and continues to deliver a substantial proportion of total UK renewable energy generated.

The Government's main mechanism for diverting waste from landfill and incentivising recycling and ERFs remains landfill tax. The UK and Scottish Governments have confirmed that landfill tax will rise from the current position of £82.60 per tonne in line with inflation to £84.40 in April 2016. This continues to influence the long-term economics of both recycling and energy recovery.

In addition, using recycled materials can deliver substantial energy and cost reductions for manufacturers.

Viridor is focused on giving resources new life through recycling and renewable and decentralised energy. Investment in technology and operational practices, including ITOO, continues to enhance recyclate quality to differentiate Viridor from its competitors and to position it strongly within a consolidating sector. Significant progress has also been made in the delivery and de-risking of the ERF business, with a substantial asset base now operational in conjunction with associated business capability processes across the whole "source to supply" ERF cycle. 

Delivering the ERF programme, reducing construction risk

Viridor is successfully establishing a significant asset base of ERFs, with seven plants representing two thirds of the portfolio capacity now in operation. c.80% of the ERF portfolio is expected to be

operational by the end of 2016/17 and delivering c.£100m of EBITDA. Viridor expects to have c.15% ERF market share by 2020, with its network of strategic facilities driving the company's longer-term profit growth.

Viridor currently has c.140 Megawatts (MW) of renewable energy capacity from its fleet of seven operational ERFs and including its share of Joint Ventures at Lakeside ERF, Bolton ERF, and the Greater Manchester and Walpole AD plants. The total committed ERF portfolio including the four ERFs under construction will provide c.242MW. Viridor and its Joint Venture partners have a total operational/committed ERF capacity of over 2.8m tonnes.

The four ERFs under construction are progressing well and to budget. Of these, Peterborough ERF is in testing, Glasgow ERF will soon enter commissioning and construction of Dunbar and Beddington ERFs is progressing as planned.

Optimising the energy portfolio

Viridor's total energy capacity is changing in scale and across its energy division, Viridor currently has 241MW of operating capacity from both ERFs and AD (142MW) and landfill gas (99MW) and expects to export over 1 Terawatt hour (TWh) of power to the national grid in 2016/17. Once the total committed ERF portfolio is completed in 2018/19, ERFs alone will provide 242MW of energy generation. Landfill gas, biodegradable waste in ERFs and AD accounted for 25% of total UK renewable energy fuel use according to the Digest of UK Energy Statistics 2014.

Viridor has developed a 'Portfolio Management' strategy to help realise the full potential of this growth, with a team of experienced energy market professionals to actively manage its market position. Viridor has also implemented framework contracts to enable it to 'hedge out' market risk where appropriate in the longer term. The business now has the ability to hedge its market position for periods up to 5 years ahead.

Landfill gas power generation

Viridor's landfill energy business is being managed to maximise the value of landfill gas power generation, whilst exploring alternative energy uses such as photovoltaic (PV) and energy storage. At Pilsworth landfill in Greater Manchester, an £8m cryogenic energy storage pilot project is nearing completion and due to be operational in early 2016. Landfill sites have very good potential as "energy reservoirs" as they already have grid connections, making them valuable for energy generation and storage.

Viridor currently has 99MW of landfill gas capacity (excluding 3MW capacity at sub-contract sites in Suffolk). Gas volumes reached peak production in 2012/13 and have been reducing gradually. In H1 2015/16 the landfill gas power generation output was marginally down to 287 Gigawatt hours (GWh) (H1 2014/15 297 GWh), reflecting a successful output optimisation programme. Landfill gas power generation EBITDA was £16.0m (H1 2014/15 £15.4m).

Average revenue per Megawatt hour (MWh) was 1.7% higher at £89.93 (H1 2014/15 £88.42) reflecting the higher proportion of ROCs. The switch from legacy Non Fossil Fuel Obligation (NFFO) contracts to 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. Average costs decreased to £34.06 per MWh (H1 2014/15 £36.51). 

Working towards more profitable Recycling and Resources activities

During the half year, Viridor's recycling volumes traded increased by 32k tonnes (3.8%) to 0.9m tonnes. Recyclate prices were slightly lower for the first half year of 2015/16 compared to H1 2014/15. Prices have now stabilised to some degree for most commodities, but remain under pressure, reflecting world economic conditions and competitive markets.

Despite lower recyclate prices, Viridor's average revenues per tonne (recyclate sales plus gate fees) for the half year rose to £87 per tonne (from £86/t FY 2014/15) thanks to management actions in recycling from the ITOO programme. Viridor remains cautious about future recyclate price growth.

Through the ITOO programme, Viridor is targeting a substantial enhancement in its EBITDA margin through improvements in source material quality (including contract renegotiation where required), restructuring and asset efficiency, productivity and yield, and specific quality of outputs.  A number of input contracts have been successfully renegotiated enhancing value and quality of inputs. Where new recycling contracts have been secured, better gate fees reflect the sharing of recyclate price risks with customers and securing a better quality of inputs.

Viridor continues to operate the most extensive Material Recycling Facility (MRF) capacity in the UK with accreditations for export to China, and is established as a quality brand in the UK, Europe and other far eastern markets. There are clear long-term regulatory drivers for recycling from the EU and UK Government, alongside expectations from leading companies.

Contracts and Collections

Profits in "Contracts & Other" are slightly ahead reflecting higher asset sales in the period compared with the same period last year. Profits across the 15 local authority contracts around the UK (the more significant contracts include Greater Manchester, Glasgow, Lancashire, Somerset and West Sussex) and the Thames Water contract remain broadly in-line with the same period last year.

Profits in the collection business were also slightly ahead compared to the same period last year, reflecting the benefits of sustained management action. Collection remains a key focus in securing increased input tonnages for the business.

Landfill energy sites being managed for cash and alternative use

Viridor has a strategy in place for landfill that will see the business reduce the number of sites taking new waste inputs from 18 at the end of 2014/15 to 3 strategic sites by 2020. This is in-line with the legislative move to divert waste away from landfill. While sites are being wound down to closure and aftercare, our emphasis is on maximising the value of electricity generation from landfill gas and reducing costs. A higher proportion of sites are likely to close in the next two years as closures are determined by the profile of contracts to the site and closure requirements.

Future alternative uses and development potential for landfill sites is being assessed as most of Viridor's landfill operations accelerate into closure. Viridor completed the divestment of Whitehead landfill and its associated environmental liability generating an operating profit on disposal of £2.4m (recorded within asset sales) and continues to promote similar opportunities for other sites with development potential.

The business continues to be cash generative. Although EBITDA in H1 2015/16 was down to £4.5m from £9.3m in H1 2014/15, it was ahead of management expectations. This was due to a lower than expected drop in volumes on the back of a more buoyant construction market, with volumes of 1.0m tonnes down 25% on H1 2014/15.

Viridor's average gate fees increased by 4.5% to £20.62 per tonne. Consented landfill capacity reduced from 51.7 million cubic metres (mcm) at 31 March 2015 to 48.8 mcm at 30 September 2015, reflecting usage during the period and a disposal. As previously provided for, c.38 mcm of Viridor's consented landfill capacity is not expected to be used. Overall, Viridor is planning to utilise c.11mcm in on-going operations

Viridor Outlook

Viridor is delivering a successful strategy, with a focus on securing long-term municipal and C&I contracts, supporting a more homogeneous risk profile across the Pennon Group, whilst delivering growth.

Viridor has a clear plan to combat short-term challenges in recycling through ITOO, restructuring and contract renegotiation.

Viridor is becoming a significant energy player with 99MW of landfill gas capacity and total consented ERF portfolio capacity of 242MW.

c.80% of the ERF portfolio is expected to be operational by the end of 2016/17 and delivering c.£100m of EBITDA. Viridor is focusing on delivering the remaining four ERFs under construction between now and H1 2018/19. Peterborough ERF is in testing, Glasgow ERF is moving into early commissioning and Dunbar and Beddington (South London) ERFs are under construction and progressing well. Dunbar is due to be commissioned in H2 2017/18 and Beddington is due to be commissioned in H1 2018/19. Avonmouth ERF remains in the strategic plan.

GROUP FINANCIAL POSITION 

Strong liquidity position

The Group has a strong liquidity and funding position and is well placed in current financial market conditions. The Group has committed funding in place for South West Water to March 2018 and is fully funded for the build-out of Viridor's committed ERF pipeline. Cash resources used for the Bournemouth Water acquisition on 15 April 2015 were replenished through an equity placing of £100.3m.

The Group had cash resources and committed funding as at 30 September 2015 totalling £1,816m comprising:

-        cash balances of £806m (SWW £267m), including £211m restricted cash

-        undrawn committed facilities of £1,010m

During the six months to 30 September 2015 the Group raised or renewed £320m of facilities:

-        £130m new EIB facility

-        £100m new 20 year facility with deferred drawdown

-        £40m new Revolving Credit Facilities (RCF) for SWW

-        £50m renewed Revolving Credit Facilities (RCF) for Pennon

Efficient long-term financing strategy

Group net finance costs for H1 2015/16 increased by £7.9m to £29.5m from £21.6m at H1 2014/15. This increase reflects a reduction in capitalised interest due to the full year effect of operational ERFs, net of higher IFRIC 12 interest receivable reflecting ongoing ERF capital investment. 

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. Net interest cover at H1 2015/16 was 4.4 times (H1 2014/15: 5.9 times).

The Group has fixed the substantial majority of South West Water's remaining 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. In addition, £393.1m of South West Water's debt is index-linked at an overall real rate of 1.7%. c.93% of Bournemouth Water's debt is index-linked through Artesian financing which is currently under review. At Pennon Group level, the average effective rate achieved on net debt was 3.4% for H1 2015/16. For South West Water this figure was 3.2%.

Capital expenditure focused on regulatory expenditure and ERF build out

Group capital investment was £165.9m in H1 2015/16 compared to £192.0m in H1 2014/15, reflecting the ongoing investment needs of the Group.

South West Water and Bournemouth Water expenditure was £58.0m compared to £64.6m for South West Water in H1 2014/15. South West Water's spending has focused on preparations for the innovative new water treatment works at North Plymouth, schemes to improve water quality and investment in digital infrastructure. Bournemouth Water has focused on continued pressure management and commissioning two ultra violet treatment plants at Beaulieu and Knapp Mill. Both South West Water and Bournemouth Water have made a good start to delivering their K6 capital programme.

Viridor capital investment was £107.9m compared to £127.3m in H1 2014/15, predominantly driven by ERF expenditure. Before capitalised interest, cumulative ERF expenditure to date is £934m, leaving £345m left to invest on the ERF programme. So far, £20m of efficiencies have been realised across Viridor's ERF capital investment programme.

The Group is making significant ongoing capital investment to support future growth.

Stable net debt position

Group net debt has increased by £148m to £2,345m, from £2,197m at 31 March 2015. The increase largely reflects the net debt assumed in the acquisition of Bournemouth Water. Group net gearing⁽¹⁾ has marginally increased from 61.9% at 31 March 2015 to 62.6%.

South West Water's net debt to RCV marginally increased from 62.1% at 31 March 2015 to 62.4%.

Debt includes £868m (before capitalised interest) for ERFs operational or under construction (Runcorn II, Oxford, Exeter, Cardiff, Glasgow, Dunbar and South London).

Pensions

The Group's defined benefit pension schemes had a deficit (net of deferred tax) under IAS 19 at  30 September 2015 of £54m (£68m gross), an increase of £6m on the 31 March 2015 net balance.

Excluding the acquisition of Bournemouth Water, the aggregate schemes' asset value decreased from £692m at 31 March 2015 to £667m at 30 September 2015. Over the same period, the aggregate schemes' liability value decreased from £752m at 31 March 2015 to £737m, resulting in an increase in the gross deficit of £10m (before Bournemouth Water).

At 30 September the Bournemouth Water pension scheme had assets of £83m and liabilities of £81m, resulting in a gross surplus of £2m.

Together the total Group's schemes' asset value increased from £692m at 31 March 2015 to £750m at 30 September 2015. Over the same period, the aggregate schemes' liability value increased from £752m at 31 March 2015 to £818m, resulting in an increase in the gross deficit of £8m (£6m net of deferred tax).

⁽¹⁾Net borrowings/(equity + net borrowings)

Taxation

The mainstream corporation tax charge for the half year (before prior year) was £18.5m (H1 2014/15 £19.8m) giving a current year current tax rate of 17.3% (H1 2014/15 19.8%).

The reduced charge compared to last year reflects increased capital allowances due to the full year contribution of new operational ERFs and the 1% reduction in the corporation tax rate.

The deferred tax for the half year was a charge of £18.1m (H1 2014/15 £14.2m). In addition, H1 2014/15 included an exceptional charge of £3.0m reflecting the impact of tax on exceptional items.

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 conditions, results, operations and reputation are:

·     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

·     Global economic downturn pressuring volumes and margins

·     Downward pressure on UK wholesale power prices

·     Business interruption or  significant operational failures/ incidents

·     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

·     Reduced customer base, increased competition affecting prices or reduced demand for services

·     Information technology systems requiring replacement, development or upgrading to meet growing  requirements of the business

·     Uncertainty arising from open tax computations where liabilities remain to be agreed

CORPORATE REPORTING

It has been the practice of the Company to publish Preliminary Results towards the end of May followed by its Annual Report a few weeks later.  The Board has decided with effect from the next Annual Results Announcement in May 2016 that it will no longer issue Preliminary Results as permitted by the Listing Rules.  Instead the Company will make a Final Results Announcement on 25 May 2016 which will be followed shortly thereafter by the publication of the Company's 2016 Annual Report & Accounts.  This will enable the Company to bring forward its Annual General Meeting by approximately one month to 1 July 2016 and also its dividend timetable which is set out on page 30.

BOARD MATTERS

As previously announced, Ken Harvey retired from the Board on 31 July 2015 after over 18 years as Chairman.  Mr Harvey was succeeded by Sir John Parker who initially joined the Board on 1 April 2015 as an independent Non-executive Director and Deputy Chairman. In addition Gerard Connell, Non-executive Director and Senior Independent Director, retired from the Board on 31 July 2015 marking the end of a term of office lasting twelve years. Gill Rider, an existing Non-executive Director, replaced Mr Connell as the Senior Independent Director.

Sir John Parker

Chairman

27 November 2015

FINANCIAL TIMETABLE FOR THE YEAR ENDING 31 MARCH 2016

* These dates are provisional and, in the case of the final dividend, subject to obtaining

shareholder approval at the 2016 Annual General Meeting.

CAUTIONARY STATEMENT IN RESPECT OF FORWARD-LOOKING STATEMENTS

This Report contains forward-looking statements relating to the Pennon Group's operations, performance and financial position based on current expectations of, and assumptions and forecasts made by, Pennon Group management. Forward-looking statements are identified in this Report 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 pages 28 and 29 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 to revise or update publicly these forward-looking statements or adjust them as a result of new information or for future events or developments, except to the extent legally required.

UNSOLICITED COMMUNICATIONS WITH SHAREHOLDERS

A number of companies, including Pennon Group Plc, continue to be aware that their shareholders receive from time to time unsolicited telephone calls or correspondence concerning investment matters which imply a connection to the company concerned.  If shareholders have any concerns about any contact they have received then please refer to the Financial Conduct Authority's website www.fca.org.uk/scamsmart.  Details of any share dealing facilities that the Company endorses will be included in Company mailings.