Half Year Results 2018/19

27 November 2018                                                                           

 Half Year Results 2018/19

for the period ended 30 September 2018

 

Delivering for customers, communities and shareholders

 

Chris Loughlin, Pennon Chief Executive said:

 

 "Momentum for Pennon continues with a strong performance in the first half of 2018/19 across both water and waste.  We are delivering on our promises to customers and communities and our investment across the Group is driving tangible and positive results.

In water, we demonstrated our service resilience in extreme weather conditions, with the aftermath of the exceptional cold weather in March followed by the hottest summer on record. Our focus on customers has been reflected in South West Water's best ever customer service score for this half year. With a relentless focus on efficiency and cost savings, average bills are lower than they were 9 years ago, with a further 11% decrease expected in the next regulatory period 2020-2025 under our new business plan. Customers will be empowered as part of a New Deal giving them a tangible stake and say in South West Water.    

The focus for Viridor is UK recycling and residual waste processing and transformation. Waste market dynamics are favourable, with the 'Blue Planet' effect spurring action, and we are optimistic that positive changes will be announced in the Government's Resources & Waste Strategy later this year enabling a UK recycling system fit for the future. The operating fleet of Energy Recovery Facilities (ERFs) is performing well, transforming waste into electricity and heat. Progress continues bringing Viridor's remaining four ERFs in the portfolio on stream, with three now in operational ramp up and the final facility under construction. We have further consolidated our position through increasing our holding in one of our joint venture ERFs, Runcorn I. The development of Viridor's ERF portfolio will support Pennon's earnings growth to 2020 and beyond".

 

Financial Highlights

Underlying[1]	H1 2018/19	H1 2017/18	Change
Revenue	£746.7m	£723.9m	+3.1%
EBITDA[2]	£274.0m	£253.5m	+8.1%
Adjusted EBITDA[3]	£294.7m	£285.8m	+3.1%
Operating profit	£178.5m	£162.4m	+9.9%
Profit before tax (PBT)	£142.5m	£131.1m	+8.7%
Non-underlying items before tax[4]	(£8.9m)	(£1.3m)	-
Statutory profit before tax	£133.6m	£129.8m	+2.9%
Tax	(£17.6m)	(£17.5m)	(0.6%)
Statutory profit after tax (PAT)	£116.0m	£112.3m	+3.3%
Earnings per share[5]	30.0p	25.3p	+18.6%
Statutory earnings per share	25.6p	21.8p	+17.4%
Dividend per share[6]	12.84p	11.97p	+7.3%

Pennon Group

·    Pennon is on track to meet management expectations for full year 2018/19

·    Underlying PBT up +8.7% following: 

o  Higher revenues and EBITDA at South West Water reflecting increased customer demand over the summer

o  Continued cost saving focus, leading to Total Expenditure (Totex) outperformance, at South West Water, a key component to RORE[7]. On track for continued outperformance for 2018/19

o  EBITDA growth of +17.7% at Viridor supported by the build out of new ERFs

o  Momentum in group efficiencies maintained with c.£15 million p.a of the £17 million p.a expected from 2019 already secured

·    Statutory PBT up +2.9% to £133.6 million

·    Statutory earnings per share growth of +3.8p to 25.6p

·    Interim dividend per share up +7.3% to 12.84p

·    Cash flow from operations reflecting robust operational performance, whilst significant capital investment continues

·    Development of our sustainable financing framework, with £350 million of £480 million secured linked to the sustainable nature of the business, reducing our cost and reflecting our environmental and social credentials

South West Water

·   Strong performance, demonstrating service resilience through extreme climatic conditions

o  Highest ever Customer Service (SIM) score achieved with South West Water now ranked 2^nd overall in England and Wales in H1 2018/19[8]

o  Cumulative Return on Regulated Equity (RORE) at 11.8%[9] - WaterShare delivering c.£100 million of outperformance for sharing with customers to date

·   On track to deliver all our business plan commitments by 2020

o  Cumulative net ODI reward of £9.3 million[10] to H1 2018/19

o  Continued strong focus on efficiency, on track to deliver the c.£300 million Totex outperformance to 2020 - £209 million delivered cumulatively to H1 2018/19

·   New Deal launched in our Business Plan to Ofwat for the next five year period 2020-2025 (K7), giving customers a tangible stake and say in the business

o  Operational delivery preparations already underway    

Viridor

·   Focused on UK recycling and residual waste processing and transformation

·   Favourable recycling market dynamics

o  Public perception, 'Blue Planet' effect - driving Government support for recycling 

o  Recovery in recycling markets since H2 2017/18 - EBITDA of £7.4 million in H1 2018/19 ahead of £4.4 million achieved in H2 2017/18

·   Strong residual waste market opportunities

o  Build out of ERFs supporting strong growth in EBITDA of +17.7%[11]

o  Operational ERFs outperforming base case.  On track for full year availability >90%[12] with planned maintenance weighted to H1

o  The three new ERFs at Glasgow, Beddington and Dunbar are all processing waste. Optimisation is ongoing and operations will ramp up over the next 18 months as has previously occurred at the other ERFs in our portfolio

o  Further consolidated our position through increasing the holding in Viridor's joint venture (TPSCo)[13] which owns Runcorn I ERF

·   Maximising value from landfill energy

o  Robust landfill demand forecast into the medium term.

o  10 sites open to waste arisings, with volumes and gate fees holding up well  

o  Investing in landfill gas for improved longer term yields

Pennon Water Services

·   Pennon Water Services, one of only five associated retailers to have achieved net growth in the new competitive non-household market. Focused on value enhancing contracts and future cost base efficiencies.

 

Presentation of Results

A presentation for City audiences will be held today, Tuesday 27 November 2018, at 09.00am at the ICAEW (The Auditorium), One Moorgate Place, London, EC2R 6EA.

A live webcast of the presentation can also be accessed using the following link:

http://www.pennon-group.co.uk/investor-information

 

For further information, please contact:

Susan Davy Jennifer Cooke	Chief Financial Officer - Pennon Investor Relations Officer - Pennon	} }	01392 443 168
James Murgatroyd Faeth Birch	Finsbury		020 7251 3801

 

About Pennon Group

Pennon is one of the largest environmental infrastructure FTSE 250 groups in the UK with assets of around £6.2 billion and a workforce of around 5,000 people. Around 63% of Pennon's shareholders are UK pensions, savings, charities, individuals and employees, with two thirds of South West Water's employees being shareholders.

The integrated water company of South West Water and Bournemouth Water provides water and wastewater services to a population of c.1.7 million in Cornwall, Devon and parts of Dorset and Somerset and water only services to c.0.5 million in parts of Dorset, Hampshire and Wiltshire.

Since 1989 South West Water has invested around £7 billion to improve water and wastewater services.  This investment means that we will supply some of the best quality drinking water in the UK and have achieved record bathing water quality in recent years.

South West Water was awarded enhanced status for its 2015-2020 Business Plan, and has the highest potential returns in the water sector to 2020.

Viridor is a leading UK recycling and residual waste processing and transformation business providing services to more than 150 local authorities and major corporate clients as well as over 32,000 customers across the UK.

Pennon Water Services provides water and wastewater retail services to over 160,000 non-household customer accounts across Great Britain, and is an 80:20 venture with South Staffordshire Plc.    

10 year sector-leading dividend policy

Pennon's purpose is bringing resources to life. We aim to protect the environment, provide an outstanding service to customers and communities, while creating value for our shareholders. Pennon is investing significantly in its UK water and waste infrastructure and estimates capital expenditure of c.£1.7 billion between 2015 and 2020, with £1.3 billion invested to date. The Group generates robust operating cash flows, and has a strong liquidity and balance sheet position, underpinning a well established sector leading dividend policy.

South West Water has delivered further benefits for customers through our innovative WaterShare mechanism with around £100 million of benefits achieved since 2015. Customers will continue to benefit from reinvestment in services and lower bills into the next period.

Whilst delivering on our promises to customers and communities for investors Pennon's long established 10 year dividend policy of 4% year-on-year growth above RPI inflation to 2020 results in an expected doubling of dividend over 10 years (2010-2020)^[14]. This policy reflects the Board's confidence in our sustainable strategy and is underpinned by the highest potential Return on Regulated Equity in the water sector over K6 (2015-2020) and the growth in earnings being delivered by Viridor's ERFs.

For H1 2018/19, the Board has recommended an interim dividend of 12.84p, up 7.3%. The interim dividend will be paid on 4 April 2019 to shareholders on the register on 25 January 2019.

Pennon now offers shareholders the opportunity to invest their dividend in a Dividend Reinvestment Plan (DRIP).

 

Interim dividend payment information

24 January 2019                     Ex-dividend date

25 January 2019                     Record date

8 March 2019                          Final date for receipt of DRIP applications

4 April 2019                             Interim dividend payment date

Upcoming Events

January 2019	Viridor Waste Capital Markets Day
25 March 2019	Trading Statement
4 June 2019	Full Year Results 2018/19
25 July 2019	Annual General Meeting
September 2019	Trading Statement
26 November 2019	Half Year Results 2019/20

 

PENNON BUSINESS REVIEW 

We know that inspiring trust and delivering transparency are fundamental to our strong relationship with customers and communities. Our vision and core values: 'Trusted, Collaborative, Responsible, Progressive' emphasise to employees and external stakeholders that we strive to be a trusted and responsible Company delivering high quality resilient services in a safe, reliable and sustainable manner. As a UK-listed Company, Pennon has a transparent corporate structure. Our Board is focused on strong financial control, sound administration and good governance.

Delivering on our promises for customers and communities

We know that delivering a resilient service in South West Water is a key promise to our customers.  Despite the periods of extreme weather during 2018 with the 'freeze and thaw' in March and the hot dry summer, giving rise to unprecedented demand, we continued to deliver an excellent service to our customers.  This has been reflected in our best ever quality service score in H1 2018/19, with South West Water ranked 2^nd out of all water and sewerage companies in England and Wales.

South West Water has delivered further benefits for customers through our innovative WaterShare mechanism with around £100 million of benefits achieved since 2015. Customers will continue to benefit from reinvestment in services and lower bills into the next period.

Viridor continues to expand the ERF portfolio with three new facilities Glasgow, Beddington and Dunbar all processing waste with operations due to ramp up over the next 18 months. We continue to work closely with our key customers and partners across our whole portfolio to deliver service in line with expectations.

Delivering strong sustainable financial performance across the Group

Confidence in our financial resilience is driven by robust operating cash flows, a strong liquidity and balance sheet position and a diversified mix of low cost and flexible funding which underpins a sector leading dividend policy.     

Pennon through its operating businesses performed well in H1 2018/19 and is on track to be in line with management expectations for 2018/19.

Earnings growth for 2018/19 has been driven by ERF portfolio growth, weather related higher revenue in South West Water, and a strong focus on cost savings, benefitting both customers and shareholders.    

The cost savings and synergy targets of c.£17 million p.a. from 2019, identified through our targeted overhead review in 2015/16, are on track with c.£15 million p.a. delivered to date. 

South West Water continues to deliver sector leading Totex outperformance and is on track to deliver c.£300 million over the 2015-2020 regulatory period. Together with delivery of net ODI rewards and outperformance in our cost of financing, momentum of delivery has been maintained with a cumulative Return on Regulated Equity (RORE) of 11.8%[15] to H1 2018/19.

The build out of the ERF portfolio is supporting growth in Viridor and the recycling activities have recovered from the challenging position in H2 2017/18. Viridor has continued to focus on cost savings with initiatives delivering indirect cost efficiencies of 17% in real terms since 2015/16.

Balanced business plan for 2020-2025

In September South West Water submitted its business plan for 2020-2025 (K7).  As a responsible and transparent water business a fundamental part of our proposals is for a New Deal which signals a new way of doing business for our customers and stakeholders. This approach is focused on empowering our customers by giving them the option of a tangible financial stake and a share in the business and the power to hold us to account, with a say in our business through a Customer AGM.  

The initial assessment of the business plan by Ofwat is expected at the end of January 2019. Given customer acceptance of our plan was at 88% preparations are already underway for a fast start in K7, with key supply chain delivery partnerships in place, pilot trials for new water treatment technology completed and preparatory work for taking on the expanded licence area of the Isles of Scilly is in progress.    

 

Leading, responsible and sustainable UK waste operator

Viridor is focused on delivering UK recycling and residual waste processing and transformation. We believe there are continued favourable waste market dynamics in both recycling and residual waste.  

Whilst the recycling market has been challenging, Viridor has delivered improvements to its recycling performance in H1 2018/19 compared with H2 2017/18, with EBITDA increasing from £4.4 million to £7.4 million. With Government support for recycling and the UK Plastics Pact outlining a roadmap with targets to 2025 we believe there are opportunities for growth.  The 'Blue Planet' effect continues to encourage action and we expect positive changes to be announced in the Government's Resources & Waste Strategy when published. 

We continue to expect UK residual waste market dynamics to be favourable with demand for ERFs exceeding capacity into the long term.  We anticipate the capacity gap to be greater than seven million tonnes (mT) by 2030. Household waste arisings have increased annually since 2012 and expenditure on waste services is up c.16%[16] from 2008/09. The operational ERF portfolio is on track to achieve availability in excess of 90%[17] in 2018/19 with the operational performance of the facilities above management's initial base case expectations which assume a real post tax IRR (internal rate of return) of 8%. EBITDA margin in H1 2018/19 was 60%. Three of the four remaining ERFs are processing waste with operational ramp up over the next 18 months. Construction is progressing well at Avonmouth near Bristol.

We see further opportunities to deliver capacity expansion at existing facilities, having secured planning permissions and permits for additional capacity at Cardiff (75,000 tonnes) and Ardley (27,000 tonnes), as well as an increase in power output at Runcorn II.

We have further consolidated our position through increasing our holding in Viridor's joint venture (TPSCo)[18], which owns Runcorn I ERF, from 37.5% to 75.0% of the economic interest.

We believe our landfill portfolio complements the combustible residual waste strategy, with a requirement for a landfill solution into the medium term.

We also continue to consider further expansion and investment, with development of energy park opportunities across the landfill and ERF portfolio capitalising on the potential of existing grid connections.

Pennon continues to seek and identify further growth opportunities within the UK, assessing the long-term viability of the markets in which we operate and achieving an appropriate risk/reward balance and is confident of delivering sustainable, long-term returns from water and waste.

Pennon Group

Underlying[19]	H1 2018/19	H1 2017/18	Change
Revenue	£746.7m	£723.9m	+3.1%
EBITDA	£274.0m	£253.5m	+8.1%
Adjusted EBITDA[20]	£294.7m	£285.8m	+3.1%
Depreciation and amortisation	(£95.5m)	(£91.1m)	(4.8%)
Operating profit	£178.5m	£162.4m	+9.9%
Net interest	(£40.8m)	(£36.6m)	(11.5%)
Share of JV profit after tax	£4.8m	£5.3m	(9.4%)
Profit before tax	£142.5m	£131.1m	+8.7%
Non-underlying items before tax[21]	(£8.9m)	(£1.3m)	-
Statutory profit before tax	£133.6m	£129.8m	+2.9%
Tax	(£17.6m)	(£17.5m)	(0.6%)
Statutory profit after tax (PAT)	£116.0m	£112.3m	+3.3%
PAT (attributable to holders of hybrid capital)	£8.6m	£21.5m	(60.0%)
PAT (attributable to minority interests)	(£0.1m)	(£0.1m)	-
PAT (attributable to shareholders)	£107.5m	£90.9m	+18.3%
Earnings per share[22],[23]	30.0p	25.3p	+18.6%
Statutory earnings per share23	25.6p	21.8p	+17.4%
Dividend per share[24]	12.84p	11.97p	+7.3%
Capital investment[25]	£200.6m	£222.3m	(9.8%)
South West Water	£68.6m	£97.6m	(29.7%)
Viridor[26]	£131.9m	£124.3m	+6.1%
Other	£0.1m	£0.4m	(75.0%)
	30 September 2018	31 March 2018	Change
Net debt[27]	£3,041.9m	£2,801.5m	+8.6%

 

Non-underlying Items

There is one non-underlying item in H1 2018/19 which arises as a result of the movement in the fair value of long-dated derivatives associated with South West Water's 2040 bond. This results in a charge of £8.9 million (H1 2017/18 charge of £7.8 million).  The tax impact of this non-underlying item is a credit of £1.7 million, resulting in an after tax position of £7.2 million. 

In the prior period, the net charge before tax for H1 2017/18 was £1.3 million and included a £6.5 million credit as a result of the reset of the Greater Manchester contracts as well as the £7.8 million charge for the movement in the fair value of long-dated derivatives associated with South West Water's 2040 bond. Net non-underlying items after tax for the prior period resulted in a £3.0 million credit.    

South West Water

Underlying	H1 2018/19	H1 2017/18	Change
Revenue[28]	£301.5m	£292.2m	+3.2%
Operating costs	(£106.8m)	(£105.1m)	(1.6%)
EBITDA	£194.7m	£187.1m	+4.1%
Depreciation and amortisation	(£58.8m)	(£56.4m)	(4.3%)
Operating profit	£135.9m	£130.7m	+4.0%
Net interest	(£35.6m)	(£34.5m)	(3.2%)
Profit before tax	£100.3m	£96.2m	+4.3%

Viridor

Underlying	H1 2018/19	H1 2017/18	Change
Revenue[29]	£422.3m	£407.0m	+3.8%
EBITDA	£78.4m	£66.6m	+17.7%
ERFs	£66.6m	£51.7m	+28.8%
Landfill	£3.8m	£3.3m	+15.2%
Landfill gas	£8.1m	£9.2m	(12.0%)
Recycling	£7.4m	£10.6m	(30.2%)
Contracts, Collections & Other	£20.3m	£20.0m	+1.5%
Indirect costs	(£27.8m)	(£28.2m)	+1.4%
Depreciation and amortisation	(£36.2m)	(£34.2m)	(5.8%)
Share of JV profit after tax	£4.8m	£5.3m	(9.4%)
Net interest	(£10.8m)	(£7.1m)	(52.1%)
Profit before tax	£36.2m	£30.6m	+18.3%
Share of JV EBITDA	£13.4m	£25.4m	(47.2%)
IFRIC 12 interest receivable	£7.3m	£6.9m	+5.8%
Adjusted EBITDA[30]	£99.1m	£98.9m	+0.2%

Pennon Water Services

	H1 2018/19	H1 2017/18	Change
Revenue	£84.1m	£83.5m	+0.7%
EBITDA	£0.9m	£0.5m	+80.0%
Depreciation and amortisation	(£0.4m)	(£0.3m)	(33.3%)
Operating profit	£0.5m	£0.2m	+150.0%
Net interest	(£1.0m)	(£0.7m)	(42.9%)
Profit before tax	(£0.5m)	(£0.5m)	-

 

Strong Group underlying financial performance

Group revenue in H1 2018/19 increased by 3.1% (£22.8 million) to £746.7 million. 

Revenue from South West Water increased by 3.2% (£9.3 million) to £301.5 million due to customer demand increases of 2.7%, from the hot and dry weather over the summer, tariff increases of 1.0% and increased infrastructure connections. Viridor revenues increased by 3.8% (£15.3 million) to £422.3 million primarily due to the ERF build out (net of reduced construction IFRIC 12 revenue). 

Group EBITDA and adjusted EBITDA were ahead of the same period last year by 8.1% and 3.1% respectively, with South West Water, Viridor and Pennon Water Services all ahead of H1 2017/18.  The gap between EBITDA and adjusted EBITDA narrowed in the period as expected due to reduced share of JV EBITDA following the reset of the Greater Manchester waste contract in 2017/18.

South West Water's EBITDA and operating profit increased by 4.1% and 4.0% respectively.  Strong cost management and efficiency delivery has resulted in lower than inflation cost increases, despite the increased costs required to meet higher customer demand of c.£3 million in H1 2018/19. In addition, South West Water's bad debt performance remains strong with a charge of 0.6% of revenues (H1 2017/18 0.9%) reduced from 1.7% at March 2015. This continues to be driven by efficient collections as we work with our customers to manage their debt and strive to support those customers in vulnerable circumstances with affordability challenges. 

Viridor's EBITDA for the first half of 2018/19 increased by 17.7% (£11.8 million) compared with H1 2017/18.

The ERF business has performed strongly during the period, in line with expectations. The EBITDA generated from our portfolio was 28.8% higher at £66.6 million (H1 2017/18 £51.7million) reflecting financial contributions from Beddington and Dunbar.  We are on track to deliver another year of availability for our current operational assets in excess of 90%[31] across the portfolio (including Joint Ventures). As we continue to optimise our performance, more of our planned maintenance outages have been completed in the first half of this financial year, when electricity demand and pricing is lower.  Planned maintenance has been performed at all major sites during the half year and as a result availability during H1 2018/19 was 89%. 

Landfill EBITDA has increased by 15.2% to £3.8 million since H1 2017/18 (£3.3 million). Volumes and pricing have held up, with cost savings contributing to the higher EBITDA.  We continue to see demand for a landfill solution into the medium term, and have sites well positioned to meet these demands, with 11 sites operational for H1 2018/19.  As part of the planned closure profile, one site (Rigmuir) closed in September leaving 10 operational sites.

In our landfill gas business we are currently progressing our engine replacement strategy, including investing in maintenance and more efficient engines. This is improving reliability and securing generation for the longer term, whilst optimising the generating capacity potential at our sites.  EBITDA for the period at £8.1 million, is down 12.0% from the prior year (H1 2017/18 £9.2 million). This has been driven by higher planned maintenance activities during the summer period to secure reliable generation during the winter and a natural decline in gas volumes produced from sites (although at 4% this is at a lower rate than previous years). The benefit of higher year on year hedged electricity prices has helped support the overall performance.

Recycling EBITDA at £7.4 million is £3.0 million higher than H2 2017/18, with EBITDA margin increasing by £5 per tonne to £12 per tonne reflecting some recovery in the global recycling markets following import restrictions by China in H2 2017/18. EBITDA is £3.2 million lower than the first half of last year (H1 2017/18 £10.6 million) which was before the Chinese restrictions were implemented, consequently EBITDA margin per tonne has decreased from £14 (H1 2017/18) to £12 (H1 2018/19). Market led quality demands have remained challenging, and we have continued to face challenges with poor input quality.  We have continued to focus on producing high quality outputs which has contributed to an increase in revenue per tonne to £110 (H2 2017/18 £97; H1 2017/18 £97).  We have seen an overall reduction in recyclate volumes sold, higher waste output and an increase in costs of production. Our focus continues to be on the production of higher quality recyclates as well as adopting 'self-help' measures to create margin improvement. To help mitigate our exposure to recyclate price volatility we continue to share commodity risks and rewards with our customers.

In the period Contracts, Collections and Other EBITDA was broadly comparable with the prior period at £20.3 million (H1 2017/18 £20.0 million).  Following last year's reset, the Greater Manchester run off contract financial results are in line with our expectations. In November 2018 Viridor withdrew from the Greater Manchester waste operating contract tender process and we expect the run-off contract to cease in early 2019/20. The financial impact of not continuing with this operational contract is not material to the Group, and our position with the ERFs at Runcorn is unaffected.

Viridor's indirect costs have continued to fall, marginally down this period to £27.8 million from £28.2 million in H1 2017/18, and are 17% lower in real terms than 2015/16.

Joint venture EBITDA has reduced from £25.4 million in H1 2017/18 to £13.4 million. This is a result of the contract reset at Greater Manchester in September last year. This saw both the disposal of our Viridor Laing joint venture and the introduction of a lower contractual EBITDA for our TPSCo joint venture following the repayment of external debt as part of the reset. Interest savings mean that TPSCo profit after tax was not significantly impacted by the reset. TPSCo continues to deliver strong operational and financial performance.

Planned maintenance profiling in H1 2018/19 at our Lakeside joint venture has resulted in financial performance slightly below last year, however, underlying operational and financial performance has remained strong, again exceeding our original expectations, for both waste processing and power generation.

IFRIC 12 interest receivable at £7.3 million is broadly comparable with H1 2017/18 of £6.9 million.

Pennon Water Services has continued to successfully gain new customers during its second year of trading. Overall EBITDA for the first half is £0.9 million (H1 2017/18 £0.5 million), with a focus on improving operating cost efficiencies.

Group efficiencies achieved as a result of the Shared Services initiatives have delivered a further £2 million of cost savings and synergy benefits during the first half of the year bringing the cumulative position to c.£15 million p.a. to date, and we are on track for the cumulative c.£17 million p.a. targeted from 2019.

Net Finance Costs

Underlying net finance costs of £40.8 million are £4.2 million higher than last half year (H1 2017/18 £36.6 million). This is attributable to higher net debt from continuing capital investments and lower interest receivable on shareholder loans following the Greater Manchester contract reset.

We have secured funding at a cost that is efficient and effective with the effective interest rate reducing marginally to 3.6% (H1 2017/18 3.7%), remaining sector leading.

The effective interest rate is calculated after adjusting for capitalised interest of £8.3 million, notional interest items totalling £6.3 million, interest received from shareholder loans to joint ventures of £2.5 million and IFRIC 12 interest receivable of £7.3 million. The effective interest rate for South West Water in the period was 3.5% (H1 2017/18 3.5%).

During H1 2018/19 underlying net finance costs (excluding pensions net interest costs of £0.9 million, discount unwind of provisions of £5.4 million and IFRIC 12 notional interest receivable of £7.3 million) were £52.6 million, covered 4.3 times by Group operating profit (H1 2017/18 £51.1 million and 4.3 times).  

Profit before tax

Group underlying profit before tax was £142.5 million, an increase of 8.7%, compared with the prior half year (H1 2017/18 £131.1 million). Included in profit before tax is our share of joint venture profit after tax of £4.8 million (H1 2017/18 £5.3 million). On a statutory basis, profit before tax was £133.6 million (H1 2017/18 £129.8 million) reflecting a non-underlying charge before tax of £8.9 million (H1 2017/18 £1.3 million).

Taxation

The Group's underlying mainstream UK corporation current tax charge for the half year (before prior year adjustments) was £15.6 million, reflective of an effective tax rate of 10.9% (H1 2017/18 £14.3 million, 10.9%). The lower effective rate versus the UK's mainstream corporation tax rate of 19% reflects the accelerated level of capital allowance claims available to the Group compared to the Group depreciation charge.  There was a prior year credit of £3.2 million recognised for the period (H1 2017/18 credit of £4.3 million), the credits reflect the resolution of minor outstanding tax items with HMRC.

Underlying deferred tax for the period (before prior year adjustments) was a charge of £12.2 million (2017/18 H1 charge £10.2 million). The charge for H1 2017/18 primarily reflects capital allowances across the Group in excess of depreciation charged. There was a prior year deferred tax credit of £5.3 million recognised for the period (H1 2017/18 £1.6 million charge), reflecting finalisation of capital allowance claims.

In addition, in H1 2018/19 there is a non-underlying £1.7 million current year deferred tax credit (2017/18 H1 £1.3 million deferred tax credit) relating to the non-underlying movement in the fair value of long-dated derivatives associated with South West Water's 2040 bond. There was also a £3.0 million non-underlying current tax credit in H1 2017/18 (relating to the reset of the Greater Manchester Contract); there is no current tax effect of the non-underlying items in H1 2018/19.

Overall the total tax charge for the period was £17.6 million (H1 2017/18 £17.5 million).

Earnings per share

 

Earnings per share on both a statutory and underlying basis before deferred tax has been positively impacted by a reduction in hybrid costs[32] period on period in addition to increased profits. As a consequence earnings per share on both a statutory and underlying basis has increased by 17.4% at 25.6p (H1 2017/18 21.8p) and 18.6% at 30.0p (H1 2017/18 25.3p) respectively. 

 

 

Robust cash inflow from operations, continuing investment in future growth

The Group's operational cash inflows in H1 2018/19 were £266.6 million[33] (H1 2017/18 £308.9 million). These funds have been put to use in efficiently financing the Group's capital structure and investing in future growth. This investment has resulted in higher Group net debt.

Contributions into the Group's pension schemes for the half year were £8.5 million, and corporation tax payments were £12.2 million. Included in other movements of £48.0 million is the 2017 unwind settlement of the PMB derivative. Total tax payments reflecting all taxes borne by the Group in H1 2018/19 were £63.4 million[34] (H1 2017/18 £59.0 million).

Sustainable funding position underpinning investment

The Group has a strong liquidity and funding position with £1,056 million cash and committed facilities at 30 September 2018. This consists of cash and deposits of £406 million (including £186 million of restricted funds representing deposits with lessors against lease obligations) and undrawn facilities of £650 million. At 30 September 2018 the Group's borrowings totalled £3,448 million.

Pennon has pioneered a sustainable financing framework to integrate commitments to environmental and social objectives into a variety of funding opportunities across the Group. The framework allows Pennon to access future funding opportunities aligned with the green loan principles, green bond principles and social bond principles.  The framework has been certified by DNV GL a leading sustainability verifier.  Pennon is committed to continuous annual improvements in sustainability ratings and KPIs which may lead to improved interest rate margins.

During the period, £480 million of new and renewed facilities have been signed, £340 million in Pennon Group plc and £140 million in South West Water. In total, £350 million of the new facilities signed in the half year are linked to the sustainable nature of the business. Included in these facilities is an inaugural Pennon Group loan from the EIB[35].

Pennon has cash and committed facilities for the remainder of South West Water's planned K6 capital programme and our ERF investments. Further funding will be sourced over K6 to:

·  Maintain an appropriate headroom of cash and committed facilities, including replacing maturing finance

·  Prepare for the next regulatory period.

 

Efficient long-term financing strategy

The Group has a diversified funding mix of fixed (£1,771 million, 58%), floating (£708 million, 23%) and index-linked borrowings (£563 million[36], 19%). The Group's debt has a maturity of up to 39 years with a weighted average maturity of c.20 years. Much of the Group's debt is floating rate and derivatives are used to fix the rate on that debt. The Group has fixed, or put swaps in place to fix, the interest rate on a substantial portion of the existing water business debt for the entire K6 period, in line with the Group's policy for this regulatory period to have at least 50% of funding fixed.

South West Water's cost of finance is amongst the lowest in the industry.  Around two thirds of South West Water's net debt is from finance leases which provide a long maturity profile.  Interest payable benefits from the fixed credit margins which are secured at the inception of each lease. £563 million (c.25%) of South West Water's debt is index-linked at an overall real rate under 2.0%. This represents a quarter of the net funding for South West Water, a level below Ofwat's notional level of 33%, which we believe gives an advantageous position given the RPI to CPIH transition.

Following the submission of the South West Water business plan the Group is looking to align the hedging for the next regulatory period with the changed regulatory methodology. A proportion of new debt will be hedged in K7 on a rolling ten year basis whilst still maintaining flexibility within the overall portfolio. Embedded debt hedging will be aligned with the regulatory delivery period.   

Net debt position

In the first half of 2018/19 the Group's net debt increased by £240 million to £3,042 million. Cash inflow from operations was £267 million.  Cash outflows relating to the capital programme totalled £192 million[37], slightly reduced as expected from the peak years of the Group's capital expenditure in 2016/17 and 2017/18.  The gearing ratio at 30 September 2018, being the ratio of net debt to (equity plus net debt) was 65.5% (31 March 2018 63.1%, 30 September 2017 64.8%) and is expected to reduce by the year end.

The combined South West Water and Bournemouth Water debt to RCV ratio is 62.1%[38] (31 March 2018 60.3%, 30 September 2017 62.1%) which broadly aligns with Ofwat's K6 target for efficient gearing of 62.5%.

Group net debt includes £2,125 million for South West Water with the remaining £917 million supporting investment in Viridor growth and expansion including the amount invested in joint ventures, through shareholder loans of £41 million for TPSCo and Lakeside.

 

Capital investment focused on regulatory expenditure and ERF build out

Group capital investment was £201 million[39] in H1 2018/19 compared with £222 million³⁹ in H1 2017/18. 

Viridor

Viridor's capital spend³⁹ in the period was £131.9 million (H1 2017/18 £124.3 million), an increase of £7.6 million over H1 2017/18. 

The majority of capital investment continues to relate to the delivery of the ERF fleet[40], with £103 million of total spend relating to the three ERFs in operational ramp up and Avonmouth under construction.  Our ERFs at Glasgow, Beddington and Dunbar are all processing waste. 

Other capital expenditure included lifecycle capital expenditure on our operational ERF fleet and development of our Clyde Valley ERF fuel supply facility. On-going restoration and remediation programmes continue for our landfill assets, ensuring we meet or exceed our environmental duties and responsibilities.

South West Water

South West Water's capital expenditure in the first half of the year was £68.6 million, compared with £97.6 million in H1 2017/18 with the profile aligned with the K6 capital plan reflecting the completion of specific large investment programmes at Mayflower Water Treatment Works and the bathing and shellfish water improvements.

Key areas of drinking water investment and activity during H1 2018/19 included:

·  Completion of the new state-of-the-art Mayflower water treatment works which has entered commissioning, with c.£6 million of expenditure in H1 2018/19 (H1 2017/18 c.£19 million)

·    Investment in our infrastructure to reduce the number of bursts and leakage impacted by the 'freeze and thaw' in March 2018 and costs associated with the hot dry summer (c.£6 million).

Key areas of wastewater investment and activity during H1 2018/19 included:

·    Finalisation and completion of the Plymouth bathing water scheme

·    Continued improvements at wastewater treatment works including flood resilience

·    Investment for growth in order to meet increases in supply and demand.

Pensions

The Group operates defined benefit pension schemes for certain employees of Pennon Group. The main schemes were closed to new entrants on or before 1 April 2008.

At 30 September 2018 the Group's pension schemes showed an aggregate deficit (before deferred tax) of £44.8 million (March 2018 £49.5 million), a reduction of £4.7 million.  Pension liabilities decreased by £3.8 million mainly due to higher corporate bond yields, while asset values increased marginally by £0.9 million.

The net aggregate liabilities of £37 million (after deferred tax) represented around 1% of the Group's market capitalisation at 30 September 2018.

Energy hedging

Pennon has adopted a group portfolio management approach to energy hedging, and has the ability to hedge its market position for periods up to five years ahead, further helping to protect revenues.

Forward hedges have been put in place in the liquid market with the Group c.80% hedged until March 2020 and c.55% hedged until 2021 for its energy (generation net of internal usage of electricity). In addition, the Group has a natural hedging opportunity which represents one third of Viridor's energy generation, as South West Water is a net user of electricity.

The energy portfolio management team continues to actively manage the Group net energy generation position in liquid markets.

 

SOUTH WEST WATER

OPERATIONAL PERFORMANCE

Delivering a resilient service for customers - excellent management of operational challenges

Despite the challenges of extreme weather, South West Water has continued to deliver a resilient service to its customers. During the exceptional cold weather[41] in March, with the first red weather warning for snow in the South West, our proactive planning and management ensured we were able to manage the impacts of the 'freeze and thaw' effectively. We have also supported customers with leak repair activity and focused on fixing visible leaks within two days.

Alongside this increased activity we have maintained supplies to customers despite the unprecedented demand over the hot dry summer.  This has been the hottest summer on record and water through our network has increased c.6.0% from last year. This increased demand has been further challenged with the significant increase in visitors to the region over the summer period (c.20% increase). Despite this, 2018 has been our 22^nd year without water restrictions and supply interruptions have reduced this period.  In addition, we have supported the Isles of Scilly over the summer months to maintain supplies in that area when water levels fell to extreme lows.

Customers at the heart of our delivery

Improving customer service is at the heart of our delivery plans. South West Water achieved its best ever quality service score in H1 2018/19, ranked 2^nd out of all water and sewerage companies in England and Wales. Our customer service score (SIM) increased again and is now expected to be above average for the industry this year, with no penalty forecast for the K6 period. The SIM score is calculated against a qualitative element (based on a customer survey) and a quantitative element that takes into account, amongst other things, the number of complaints received in writing or by phone, which continue to fall.

The improvement in service is driven by a range of activities including enhanced 'customer journeys', which have been developed jointly with customers, increasing customer resolution as well as improving the channels with which customers can contact us, such as online and social media.

South West Water has been leading the way for the last 10 years in providing support to customers who find themselves in vulnerable circumstances or who struggle to pay their bills. We have continued to focus on this and are targeting to eliminate water poverty in our 2020-2025 Business Plan. Preparation for these additional activities is already underway and those currently receiving support through reduced tariffs has increased to c.23,000 customers, the highest proportion in the industry[42], and over 55,000 customers are supported through other programmes.

Since the opening of the non-household retail market in April 2017, South West Water has operated successfully with 19 different retailers and our wholesale service desk has been operating effectively.

Maintaining momentum - continued sector leading outperformance

South West Water has performed well in H1 2018/19, and has delivered in line with management expectations. Strong operational and financial performance underpins our sector leading RORE[43], which has been consistently above 11%[44] annually and remains 11.8% cumulatively since the start of the K6 business plan period. Of the 11.8%, 6.0% is the base return, 2.6%[45] reflects Totex savings and efficiencies, 0.3% reflects a net reward on Outcome Delivery Incentives (ODIs) and 2.9%[46] reflects the difference between actual and assumed financing costs using a cumulative forecast RPI over K6 of 2.8%, which is consistent with the approach adopted for calculating our innovative WaterShare mechanism.  Cumulatively the WaterShare RORE outperformance over K6 is consistent with the approach adopted by Ofwat.

	H1 2018/19[47]	K6 to date
Base return	6.0%	6.0%
Totex outperformance45	2.6%	2.6%
ODI outperformance47	0.2%	0.3%
Financing Outperformance46	2.8%	2.9%
WaterShare RORE	11.6%	11.8%
Ofwat RORE44	12.3%	11.8%

 

Totex efficiency reducing customer bills

South West Water is striving for ever greater efficiency. Totex outperformance has already achieved cumulative savings of £209 million[48] to H1 2018/19 and we are on track to deliver c.£300 million of Totex savings by 2020, which are embedded into our 2020-2025 business plan.

 

These savings are being driven by:

·    Managing upward cost pressures, with actual net price rises being below annual average inflation rates

·    Continuing advantages from our strategic alliances and driving efficiency from our procurement processes

·    Reducing customer debt through enhanced collections activities and increasing our affordability schemes (such as social tariffs), with the cost of bad debt now below the level assumed within the 2014 Final Determination

·    Efficiencies from the Bournemouth Water integration, including delivery of key capital schemes in the region, with c.£19 million of net synergies delivered to date

·    Ensuring efficient capital investment through the use of data analytics, optimising capital and operating solutions and promoting efficient off-site build techniques.

This focus on cost efficiency is reducing bills for customers, and our 2020-2025 business plan continues to target cost efficiency, supporting an 11% real reduction in customer bills by 2025.

ODIs continue to deliver net reward

Operational performance for the half-year based on delivery by 30 September 2018 resulted in a net ODI reward of £1.2 million[49] (£9.3 million cumulatively for K6) reflecting RORE outperformance of 0.2%[50], a slight reduction from last year. Good asset reliability with stable serviceability across all water and wastewater areas has been maintained. Rewards were delivered across bathing water quality and water restrictions, as well as significant improvements in external and internal sewer flooding, which continue to deliver rewards. The cumulative net reward of £9.3 million to H1 2018/19 comprises £15.4 million of total rewards and £6.1 million of total penalties. ODI penalties which apply within the regulatory period will reduce customer bills as they are 'passed back'. ODI net penalties of £2.1 million have been adjusted in customer bills for 2018/19 and £0.3 million will be adjusted in the 2019/20 tariffs.

Whilst the overall net value of ODI reward has fallen in 2018/19, this is a result of the profile of ODI rewards over the current regulatory period. South West Water is forecasting to meet all its ODI commitments this year with a number of areas moving out of penalty.

 

 

·    Pollution incidents

Pollution incidents in the year have continued to fall, with only one significant pollution incident in the calendar year so far. This would result in zero penalties for the year (compared to the cumulative penalty of £3.6 million). 

·    Flooding

Continuing the strong performance in 2017/18, the number of flooding incidents in H1 2018/19 has reduced and based on this performance is expected to result in further rewards this year.

·    22^nd consecutive year without water restrictions

Despite the unprecedented increase in customer demand over the hot dry summer, water resources in the South West Water region remained unrestricted for a twenty-second consecutive year and the Bournemouth water region maintained its position of having no water restrictions since privatisation.  As the weather continues to remain drier than usual South West Water is actively managing our water resources and may implement storage schemes to protect future supplies.

·    Bathing water quality - c.99% achieving sufficient quality, over 78% excellent

Our legacy of major investment to protect bathing waters continues to be reflected in extremely positive results for the 2018 bathing water season. Of the 151 bathing waters tested in the South West Water region, 149 (c.99%) were classified 'sufficient' or better, with more than 78% classified as 'excellent'. Neither of the two bathing waters rated as 'poor' were attributed to any failure of South West Water's assets.

·    Leakage

The impact of the 'freeze and thaw' in March 2018 has seen leakage levels increase along with the number of bursts in the region. South West Water is targeting investment and operational resources to meet our leakage target of 84 megalitres per day in 2018.

·    Supply interruptions - meeting targets

Demand over the summer months placed pressure on both our treatment works and network to meet customer demand. Despite this the average duration of supply interruptions per property for South West Water remains on track to meet the target for the year based on performance in H1 2018/19.  

 

 

Financing investment efficiently

Alongside strong operational outperformance, South West Water is confident that the efficient and effective financing strategy in place will continue to deliver cumulative K6 financing outperformance, with £115 million delivered in the K6 period to date. Since the year end a £60 million lease has been agreed under the Pennon sustainable financing framework, specifically linked to the new innovative Mayflower water treatment works. Gearing levels remain aligned with Ofwat's current notional level and South West Water is the only UK water company to share the benefits of lower interest rates with customers.

Sharing outperformance between customers and shareholders

South West Water is sharing the benefits of business outperformance between customers and shareholders through our unique WaterShare mechanism. Since 2015 c.£100 million of cumulative benefits^[51] have been identified to share with customers through investment in services and lower future bills. This reflects £71 million of Totex savings, £9 million of net ODI benefits and £16 million of other benefits (including financing). These Totex savings and efficiencies (including the forecast to 2020) have been reflected in the 2020-2025 business plan, lowering bills for customers over the next regulatory period.  The other savings identified in recent years and expected out to 2020 will provide the basis for delivering the New Deal for customers.     

New Deal 2020-2025 - delivery preparations underway

Empowering customers through a New Deal

The key focus for our 2020-2025 business plan is empowering customers through a New Deal.  It will ensure customers are sharing in our success and having a say through a Customer AGM, which will allow customers to hold us directly to account.  In addition, the option for customers to have a shareholding gives them a tangible stake in our business through the outperformance delivered and will further ensure customers are at the heart of our business.

The business plan proposes new benchmarks for service and efficiency, with a key target being to eliminate water poverty by 2025.

Delivery preparations underway

The next regulatory period includes specific comparative service and environmental targets which will be measured consistently across the whole industry every year. Based on existing performance South West Water is already delivering above average performance in 10 ODIs[52].

A successful part of our delivery has been our commitment to strong partnerships.  For the next regulatory period we have already put in place a number of key partnerships, including our capital investment partners who will transition to our capital alliance H5O.  In addition we have secured a number of other partners including universities, housing associations, customer advocates and environmental charities.

South West Water has also focused on preparing for operational excellence and early planning of our investment programme. This includes pilot trials of new water treatment technology in Bournemouth and supporting the Isles of Scilly operations over the summer months with preparatory work for take-over already in progress.

 

VIRIDOR

Confident outlook for Viridor in the waste sector

Viridor is focused on UK recycling and residual waste processing and transformation.

Recycling

The Government's Resource & Waste Strategy is expected to confirm the fundamentals of the waste market and provide a stimulus to recycling.  The 'Blue Planet' effect continues to drive Government action and there are potential opportunities arising from Brexit which also require consideration.

The UK Plastics Pact (a unique pact between governments, businesses, local authorities, NGOs and citizens) is seeking to transform the UK's plastics system.  The pact has targets including:

·    100% of plastic packaging to be reusable or recyclable

·    70% of plastic packaging effectively recycled (from current 43%)

·    Problematic or unnecessary single-use plastics eliminated

·    30% average recycled content across all plastic packaging.

 

EPR & PRN[53] reform is also recommended by the National Audit Office and is expected to improve the returns from investments in recycling, a key factor being standardised collections increasing household waste quality.

Viridor's 2018 Recycling Index Report shows that over 80% of the public is worried about plastics in the oceans, and over 60% of consumers were more likely to buy products with packaging made from recycled materials. 

Residual waste activities (ERFs and Landfill)

The market fundamentals for ERFs remain strong, with the gap between combustible residual waste arisings and ERF capacity forecast to remain over 7 million tonnes (mT) per annum to 2030.  In addition the Autumn Budget noted that 'the Government recognises the important role incineration currently plays in waste management in the UK...'.

The Viridor portfolio processes a fifth of the UK ERF combustible waste tonnage and continues to optimise its assets through capacity expansions, heat transfer and offtake opportunities. 

Viridor recognises that the landfill portfolio complements its residual waste strategy. We continue to foresee a requirement for a landfill solution into the medium term.  As landfill sites close over the coming years, parts of the country will experience a shortage of capacity.  Viridor's landfill sites are well positioned to support future market requirements.  Available void on operating sites is c.30 million cubic metres, equivalent to c.15 years overall capacity at current run rates, with 5 sites having capacity to 2030 and beyond.

Strong operational focus

	H1 2018/19	H1 2017/18
Total Waste Inputs (mT)	3.5	3.9
ERFs	1.0	1.1
Landfill	0.9	0.9
Recycling and Other	1.6	1.9
Recycling Volumes Traded	0.6	0.7
ERF availability[54]	89%	90%

 

ERFs continuing to perform strongly

Our ERFs have delivered strong operational performance in the first half of 2018/19.

We are on track to deliver another year of availability in excess of 90% across our operational portfolio (including joint ventures). As we continue to optimise our performance, more of our planned maintenance outages have been completed in the first half of the financial year, when electricity demand and pricing is lower. Planned maintenance has been performed at all major sites during the half year.  Cumulatively to date maintenance is running at c.2.1% of capital expenditure. This is expected to increase over the life of the assets with an underlying future average rate of c.3.5%.

Glasgow, Beddington and Dunbar are all processing waste. Optimisation is ongoing and operations will ramp up over the next 18 months, as has previously occurred at the other ERFs in our portfolio.

As previously reported, completion of construction of our Glasgow Recycling and Renewable Energy Centre has required a higher level of remediation and expenditure than predicted. This has been driven by the high level of non-conformances that have required rectification for work performed by our previous Engineering, Procurement and Construction (EPC) contractor.  Viridor is contractually entitled to recover incremental costs from the original principal contractor, Interserve, under certain circumstances.  Discussions with Interserve are ongoing with regard to the contractual settlement. The gross receivable is £72 million, after taking into account an assessment of market indicators of credit risk for the EPC contractor, a provision of £8 million has been recognised resulting in a net receivable of £64 million at 30 September 2018.

Construction work progresses at Avonmouth and is on track for takeover in line with the planned costs and timetable.  Processing equipment is now being erected within the structural steel frame.

With the new facilities burning waste, our operational design capacity has increased to 2.9 million tonnes of waste and 242 megawatts (MW) per annum, including joint ventures.  This will extend to 3.2 million tonnes of waste and 276 MW by 2021.

Responding to recycling markets

Following the impact that import restrictions imposed by China had on global recycling markets in H2 2017/18, we have seen some recovery in H1 2018/19.  Paper prices have improved from their low point, and pricing on other commodities are slightly ahead of last year.

We have continued to focus on producing higher quality recyclates to fulfil market demands and revenue per tonne has increased 13.4% to £110 (H1 2017/18 £97, H2 2017/18 £97). This increase in quality requirement has resulted in increased costs of production and a reduction in volumes being produced.

We remain confident that our recycling business is on track for full year results in line with our expectations.

We have made good progress with our FMCG[55] customers in the period in developing 'closed-loop' solutions, providing high quality recycled plastics and polymers. Utilising innovative technology and processes we are creating value from the requirement for recycled materials, to replace virgin material in premium consumer packaging.

Landfill portfolio complements residual waste strategy

Viridor continued to operate 11 landfill sites in H1 2018/19, with one site at Rigmuir (Glasgow) closed in September as part of the planned closure profile leaving 10 operational sites. Consented landfill capacity reduced from 40.5 million cubic metres (mcm) to 30 mcm in the 6 months to September 2018, reflecting usage during the period and the closure of Rigmuir.  We have a track record of effectively restoring our sites and repurposing these for alternative uses with 3 closed landfill sites repurposed for development in recent years.

Landfill volumes and average gate fees are comparable with H1 last year at 0.9 million tonnes and £22 per tonne. Our landfill energy business continues to be managed to maximise the value of landfill gas power generation. We continue to explore alternative commercial development opportunities and other renewable energy solutions at our landfill sites, such as photovoltaic (PV) and energy storage.

At present, Viridor's landfill gas engines contribute 86MW of landfill gas generation capacity, a decrease from 88MW at March 2018. This reflects the replacement of larger older engines with smaller more efficient engines designed to optimise the gas volumes produced at the sites.  Viridor also has a PV capacity of 3.2MW. We currently have surplus grid connection capacity at some sites, which presents an opportunity for growth subject to suitable capital investment.  Investment opportunities to create energy parks, including private wire connections to local industry and developments are being assessed.

Average revenue per Megawatt hour (MWh) increased by 7.4% to £87 (H1 2017/18 £81).  Average operating costs increased 23.1% to £48 per MWh (H1 2017/18 £39) reflecting increased investment in planned preventative maintenance to secure reliable generation, including for the upcoming winter period.

Revenue during the period has increased by 2.8% compared to H1 2017/18, with a 4% reduction in gas volumes in H1 2018/19 being offset by the higher energy prices. 

Contracts and Collections

The run-off contract to operate the recycling assets of the Greater Manchester Combined Authority has delivered in line with expectations. In November 2018 Viridor withdrew from the Greater Manchester waste operating contract tender process and we expect the run-off contract to cease in early 2019/20. The financial impact of not continuing with an operational contract is not material to the Group, and our position with the ERFs at Runcorn is unaffected.

Our Contract and Collections business continues to provide a valuable service to all our customers and secures the volume of input materials needed to operate our ERF, landfill and recycling assets.

Joint Ventures continue to perform strongly

The joint venture at Lakeside ERF (a 50:50 joint venture with Grundon Waste Management) has had another strong half year.  In its ninth year of operation it continues to outperform its original targets for both waste processing and power generation.

The TPSCo joint venture (between Viridor, John Laing Investments and Inovyn) has also performed strongly during the half year. 

 

In November 2018, Viridor exercised its pre-emption rights and agreed a £54.5 million cash consideration to acquire John Laing Investments Limited's 37.5% economic interest and 20% voting rights in the Runcorn I ERF. The acquisition consolidates further Viridor's leading market position in UK Energy Recovery and results in an increase to Pennon's economic interest in INEOS Runcorn (TPS) Holdings Limited from 37.5% to 75.0%, with the associated voting rights moving from 20% to 40%.

 

PENNON WATER SERVICES

Focus on delivering operating cost efficiencies

Pennon Water Services (PWS), our 80:20 retail venture with South Staffordshire Plc, continues to deliver net customer[56] and revenue growth during its second year of operation, with continued success with the dual service position.

Serving over 160,000 customer accounts across 18 different wholesale regions, Pennon Water Services has c.10,000⁵⁶ new customer accounts generating around £31 million of new revenue, with 100% new contract renewal rate to date.

We continue to focus on delivering customer service that reflects the needs of our business customers with satisfaction scores increasing in the period. We are now implementing further strategies to improve operating cost efficiency within the competitive market including within billing and cash management.

 

Board Matters

As previously announced and in line with governance best practice, Martin Angle, Non-Executive Director and chairman of the Remuneration Committee, who has been a Director for nine years, will stand down from the Board on 31 December 2018. Iain Evans has been appointed as his successor and joined the Board in September 2018.  We thank Martin for his considerable contribution to the Group's success and strong governance over the years.

 

Chris Loughlin

Group Chief Executive Officer

27 November 2018

 

 

Financial Timetable

24 January 2019	Ex-dividend date
25 January 2019	Record date
January 2019	Viridor Waste Capital Markets Day
8 March 2019	Final date for receipt of DRIP applications
25 March 2019	Trading Statement
4 April 2019	Interim dividend payment date
4 June 2019	Full Year Results 2018/19
Early June 2019	Annual Report & Accounts published
25 July 2019	Annual General Meeting
25 July 2019*	Ordinary shares quoted ex-dividend
26 July 2019*	Record date for final dividend
12 August 2019*	Final date for receipt of DRIP applications
3 September 2019*	Final dividend paid
September 2019	Trading Statement
26 November 2019	Half Year Results 2019/20

* These dates are provisional and, in the case of the final dividend subject to obtaining shareholder approval at the 2019 Annual General Meeting.
 

PRINCIPAL RISKS AND UNCERTAINTIES

 

In accordance with DTR4.2.3 and 4.2.7 of the Disclosure & Transparency Rules, the principal risks and the associated residual risk exposure for the remaining six months of the financial year have been reviewed by the Directors and are considered to be unchanged from those reported on pages 55 to 60 of the Annual Report and Accounts 2018. A summary of Pennon Group's principal risks is detailed below.

 

These principal risks have been reconsidered against a continued back drop of broader macro political and economic uncertainties; including the potential renationalisation of the water industry in the event of a change in Government and ongoing negotiations between the UK and the EU on any withdrawal agreement.

 

Specifically, the Board has considered the potential implications of a 'no deal' scenario between the UK and the EU on the Group's principal risks, which was informed by guidance documentation issued by the UK Government. Appropriate mitigation strategies have been developed in order to minimise any potential impact on the Group.

 

The Board considers the principal risks to be:

 

Law, Regulation and Finance

·    Changes in Government Policy - renationalisation

·    Changes in Government Policy - single use plastics

·    Regulatory reform

·    Compliance with laws and regulations

·    Maintaining sufficient finance and funding to meet ongoing commitments

·    Non-compliance or occurrence of avoidable health and safety incidents

·    Tax compliance and contribution

·    Increase in the defined benefit pension scheme deficit

Market and Economic Conditions

·    Non-recovery of customer debt

·    Macro-economic risks arising from global and UK economic downturn impacting commodity and power prices

Operating Performance

·    Poor operating performance due to extreme weather or climate change

·    Poor customer service and/or increased competition leading to loss of customer base

·    Business interruption or significant operational failures/ incidents

·    Difficulty in recruitment, retention and development of appropriate skills required to deliver the Group's strategy

 

Business Systems and Capital Investment

·    Failure or increased cost of capital projects and/or exposure to contract failures

·    Failure of information technology systems, management and protection including cyber risks

 

 

 

 

CAUTIONARY STATEMENT IN RESPECT OF FORWARD-LOOKING STATEMENTS

 

This Report contains forward-looking statements relating to the Pennon Group's operations, performance and financial position based on current expectations of, and assumptions and forecasts made by, Pennon Group management which may constitute "forward-looking statements" within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are identified in this Report by words such as "anticipate", "aim", "believe", "continue", "could", "due", "estimate", "expect", "forecast", "goal", "intend", "may", "outlook", "plan", "probably", "project", "remain", "seek", "should", "target", "will", "would" and related and similar expressions, as well as statements in the future tense. All statements other than of historical fact may be forward-looking statements and represent the Group's belief regarding future events, many of which, by their nature, are inherently uncertain and outside the Group's control.  Various known and unknown risks, uncertainties and other factors could lead to substantial differences between the actual future results, financial situation development or performance of the Group and the estimates and historical results given herein. Important risks, uncertainties and other factors that could cause actual results, performance or achievements of Pennon Group to differ materially from any outcomes or results expressed or implied by such forward-looking statements include, among other things, changes in Government policy on renationalisation and use of single use plastics; regulatory reform; compliance with laws and regulations; maintaining sufficient finance and funding to meet ongoing commitments; non-compliance or occurrence of avoidable health and safety incidents; tax compliance and contribution; increase in defined benefit pension scheme deficit; non-recovery of customer debt; poor operating performance due to extreme weather or climate change; macro-economic risks impacting commodity and power; poor service and/or increased competition leading to loss of customers; business interruption or significant operational failure/incidents; difficulty in recruitment, retention and development of skills; failure or increased cost of capital projects/exposure to contract failures; and failure of information technology systems, management and protection, including cyber risks.  These risks were described in greater detail in the Pennon Group Annual Report published at the beginning of June 2018. Such forward looking statements should therefore be construed in light of such risks, uncertainties and other factors and undue reliance should not be placed on them. Nothing in this report should be construed as a profit forecast.

Any forward-looking statements are made only as of the date of this document and no representation, assurance, guarantee or warranty is given in relation to them including as to their accuracy, completeness, or the basis on which they are made. The Group accepts no obligation to revise or update publicly these forward-looking statements or adjust them as a result of new information or for future events or developments, except to the extent legally required.

 

 

UNSOLICITED COMMUNICATIONS WITH SHAREHOLDERS

 

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

 

 

PENNON GROUP PLC
Consolidated income statement for the half year ended 30 September 2018
											Unaudited
										Before non-underlying items half year ended 30 September 2018				Non-underlying items (note 5) half year ended 30 September 2018		Total half year ended 30 September 2018		Before non-underlying items half year ended 30 September 2017	Non-underlying items (note 5) half year ended 30 September 2017			Total half  year ended 30  September 2017
				Notes						£m				£m		£m		£m	£m			£m
Revenue								4		746.7				-		746.7		723.9	3.2			727.1
Operating costs
Employment costs										(101.5)				-		(101.5)		(99.1)	-			(99.1)
Raw materials and consumables used										(70.2)				-		(70.2)		(60.0)	-			(60.0)
Other operating expenses										(301.0)				-		(301.0)		(311.3)	-			(311.3)
Earnings before interest, tax,
		depreciation and amortisation						4		274.0				-		274.0		253.5	3.2			256.7
Depreciation and amortisation										(95.5)				-		(95.5)		(91.1)	-			(91.1)
Operating profit								4		178.5				-		178.5		162.4	3.2			165.6
Finance income								6		11.5				-		11.5		13.5	-			13.5
Finance costs								6		(52.3)				(8.9)		(61.2)		(50.1)	(27.0)			(77.1)
Net finance costs								6		(40.8)				(8.9)		(49.7)		(36.6)	(27.0)			(63.6)
Share of post-tax profit from
	joint ventures									4.8				-		4.8		5.3	22.5			27.8
Profit before tax								4		142.5				(8.9)		133.6		131.1	(1.3)			129.8
Taxation								7		(19.3)				1.7		(17.6)		(21.8)	4.3			(17.5)
Profit for the period										123.2				(7.2)		116.0		109.3	3.0			112.3
Attributable to:
Ordinary shareholders of the
		parent								114.7				(7.2)		107.5		87.9	3.0			90.9
Non-controlling interests										(0.1)				-		(0.1)		(0.1)	-			(0.1)
Perpetual capital security
		holders								8.6				-		8.6		21.5	-			21.5
Earnings per ordinary share (pence per share)								8
		-	Basic													25.6						21.8
		-	Diluted													25.5						21.7
The notes on pages 39 to 58 form part of this condensed half year financial information.
PENNON GROUP PLC
Consolidated statement of comprehensive income for the half year ended 30 September 2018
									Unaudited
							Before non-underlying items half year ended 30 September 2018					Non-underlying items (note 5) half year ended 30 September 2018				Total half year  ended 30 September 2018		Before non-underlying items half year ended 30 September 2017	Non-underlying items (note 5) half year ended 30 September 2017				Total half year  ended 30 September 2017
									£m			£m				£m		£m	£m				£m
Profit for the period									123.2			(7.2)				116.0		109.3	3.0				112.3
Other comprehensive
	income
Items that will not be reclassified
	to profit or loss
Remeasurement of defined
	benefit obligations (note 16)								7.6			-				7.6		15.3	-				15.3
Income tax on items that will not
	be reclassified								(1.3)			-				(1.3)		(2.5)	-				(2.5)
Total items that will not be
	reclassified to profit or loss								6.3			-				6.3		12.8	-				12.8
Items that may be reclassified
	subsequently to profit or loss
Share of other comprehensive
	income from joint ventures								0.7			-				0.7		(3.9)	-				(3.9)
Cash flow hedges									4.1			-				4.1		15.0	-				15.0
Income tax on items that may be
	reclassified								(1.1)			-				(1.1)		(2.6)	-				(2.6)
Total items that may be
	reclassified subsequently to
	profit or loss								3.7			-				3.7		8.5	-				8.5
Other comprehensive
	income for the period net of tax								10.0			-				10.0		21.3	-				21.3
Total comprehensive income
	for the period								133.2			(7.2)				126.0		130.6	3.0				133.6
Total comprehensive income
	attributable to:
Ordinary shareholders of the
	parent								124.7			(7.2)				117.5		109.2	3.0				112.2
Non-controlling interests									(0.1)			-				(0.1)		(0.1)	-				(0.1)
Perpetual capital security
	holders								8.6			-				8.6		21.5	-				21.5
The notes on pages 39 to 58 form part of this condensed half year financial information.
PENNON GROUP PLC
Consolidated balance sheet at 30 September 2018
																	Unaudited
																	30 September 2018			31 March 2018
													Notes				£m			£m
ASSETS
Non-current assets
Goodwill																	385.0			385.0
Other intangible assets																	73.0			72.6
Property, plant and equipment																	4,412.3			4,310.6
Other non-current assets																	266.2			263.5
Derivative financial instruments																	60.0			70.5
Investments in joint ventures																	28.3			22.8
																	5,224.8			5,125.0
Current assets
Inventories																	30.2			24.6
Trade and other receivables																	483.2			416.0
Derivative financial instruments																	10.1			12.9
Cash and cash deposits													14				405.7			585.3
																	929.2			1,038.8
LIABILITIES
Current liabilities
Borrowings													14				(109.4)			(209.8)
Financial liabilities at fair value through profit																	(2.6)			(2.6)
Derivative financial instruments																	(9.5)			(9.4)
Trade and other payables													18				(311.1)			(342.0)
Current tax liabilities																	(24.6)			(24.4)
Provisions																	(41.3)			(38.0)
																	(498.5)			(626.2)
Net current assets																	430.7			412.6
Non-current liabilities
Borrowings													14				(3,338.2)			(3.177.0)
Other non-current liabilities													18				(148.0)			(140.1)
Financial liabilities at fair value through profit																	(45.6)			(46.6)
Derivative financial instruments																	(4.6)			(8.2)
Retirement benefit obligations													16				(44.8)			(49.5)
Deferred tax liabilities																	(303.1)			(295.6)
Provisions																	(172.6)			(181.5)
																	(4,056.9)			(3,898.5)
Net assets																	1,598.6			1,639.1
Shareholders' Equity
Share capital													10				171.0			170.8
Share premium account													11				222.3			218.8
Capital redemption reserve																	144.2			144.2
Retained earnings and other reserves																	763.0			807.1
Total shareholders' equity																	1,300.5			1,340.9
Non-controlling interests																	1.4			1.5
Perpetual capital securities													12				296.7			296.7
Total equity																	1,598.6			1,639.1
The notes on pages 39 to 58 form part of this condensed half year financial information.