Pennon Group PLC PNN Half Yearly Report

  Pennon Group PLC (PNN) - Half Yearly Report

RNS Number : 2698S
Pennon Group PLC
29 November 2012

   PENNON GROUP PLC                                        29 November 2012 
   Pennon Group announces its unaudited results for the half year ended 30  
    September 2012.
    A presentation for City audiences will be held today, Thursday 29
    November 2012, at 08:30am at the Auditorium, The Bank of America Merrill
   Lynch Financial Centre, 2 King Edward Street, London, EC1. A live       
    webcast of the results presentation will be available at /investor/presentations, and a recording of the
    presentation will be available thereafter.
   For further information today, 29 November 2012, please contact :        
   David Dupont                   Group Director of     }    0207 251 3801  
                                   Finance - Pennon
   Jo Finely                      Investor Relations    }                   
                                   Manager - Pennon
   Sara Evans                     RLM Finsbury          }                   
Ken Harvey, Chairman said:                                                   
"We announced on 15 November that trading in Viridor has been significantly
below the high level of last year's first half with recyclate prices
remaining under pressure reflecting world economic and market conditions.
Viridor is responding to the near-term challenges and has recovered about
half of the impact of the reduction in recyclate prices through the terms of 
customer supply contracts and cost reductions. We remain cautious about the
future prospects for recyclate prices. We have, however, made further strong
progress on our PPP and EfW pipeline this half year which will form the
basis for future growth.

"South West Water is continuing its strong operational performance against
the 2010-2015 regulatory contract with further advances in operating
efficiency and customer service. Despite the wettest summer in 100 years
impacting customer demand and operating costs, the company's profit before   
tax has increased through rigorous cost control, efficiency delivery and
stable interest costs.South West Water was unable to consent to Ofwat's
licence change proposals but has responded constructively on how its
concerns can be addressed.
"Notwithstanding current challenges, the Group has delivered increased
overall profit before tax for the first half year and an increase in         
dividend in line with our stated policy."
   H1 2012/13 FINANCIAL HIGHLIGHTS                                         
         · Profit before tax up 3.4% to £111.1m                         
                    - South West Water up 10.0% to £83.8m                   
                    - Viridor down 26.5% to £22.5m                          
         · Earnings per share before deferred tax up 3.4% to 24.3p^(1)  
         · Dividend                                                     
                    - Interim dividend per share up 6.6% to 8.76p           
         · Capital investment up 88% to £188m^(2)                       
                    - Includes 4 EfWs under construction                    
         · Substantial cash resources and committed funding             
                    - £85m new/refinanced facilities since 31 March 2012    
                    - £995m cash/committed facilities at 30 September       
   ^(1) Basic earnings per share were 26.2p                                
   ^(2) Including construction spend on service concession arrangements    
   ^(3) Including £126m deposits with Letter of Credit providers and       
   H1 2012/13 OPERATIONAL HIGHLIGHTS                                        
   South West Water:                                                        
         · Strong performance against 2010 - 2015 regulatory contract   
         · PBT up in spite of atypical weather                          
         · Average funding cost 4.0%                                    
         · Strong operational performance                               
         · Preparing for PR14                                           
         · Unable to accept Ofwat Section 13 licence proposals but      
                responded constructively on how concerns can be addressed
         · Continuing growth in profits from joint ventures outweighed  
                by reduction in recycling
                          - primarily price as flagged previously           
         · Significant progress in developing pipeline of long-term     
                projects including
                          - financial close reached for the Glasgow         
                          - financial close reached^(2) for the South      
                             London Waste Partnership PPP
                          - preferred bidder for the Peterborough PPP       
                          - Dunbar planning relaxed;^(2) proposed EfW can   
                             now serve all of Scotland
                             ^(1) DBFO - Design Build Finance Operate        
                             ^(2) Post half year                             
   GROUP OVERVIEW                                                           
         · Revenue down by 1.4% to £633.7m.                             
         · Operating profit down by 4.8% to £136.3m.                    
         · Net interest payable reduced by 26% to £27.4m.               
         · Profit before tax up 3.4% to £111.1m.                        
         · Earnings per share before deferred tax up by 3.4% to 24.3p. 
                Basic earnings per share increased from 26.1p to 26.2p.
         · Capital investment^(1) up 88% to £188.2m.                    
          · Net borrowings £2,173m, an increase of £68m since 31 March
                2012. Gearing, being net borrowings to (shareholders' funds
               plus net borrowings) was 72% (H1 2011/12 - 72%). Net debt   
                includes £252m for EfW plants under construction (Runcorn
                II, Exeter, Oxfordshire and Cardiff).
          · Substantial cash resources and committed facilities of
               £995m^(2) to fund future investment - well placed in        
                current financial market conditions.
         · South West Water net debt to RCV was 58.6% (31 March 2012 -  
          · Net interest cover (excluding pensions net interest, IFRIC
               12 contract interest receivable and discount unwind on       
                provisions) was 4.6 times (H1 2011/12 - 3.7 times).
         · Average debt maturity 22 years.                              
               ^(1) including construction spend on service concession      
               ^(2) including £126m deposits with Letter of Credit          
                providers and lessors
    The interim dividend of 8.76p per share represents an increase of 6.6%,
   in line with the previously announced policy to grow the Group dividend  
    by 4% per annum above inflation up to the end of 2014/15.
    The dividend will be paid on 4 April 2013 to shareholders on the
    register on 1 February 2013. The Company is also offering a scrip
   dividend alternative. The final date for receipt of forms of            
    election/mandate in respect of the scrip dividend alternative for the
    interim dividend will be 11 March 2013. 
   SOUTH WEST WATER                                                       
    South West Water is continuing its strong operational performance
    against the 2010-2015 regulatory contract with further advances in
   operating efficiency and customer service. Despite the wettest summer  
    in 100 years impacting customer demand, the company's profit before
    tax has increased as a result of rigorous cost control, continued
    efficiency delivery and lower interest costs.
   Financial Highlights                                                  
   South West Water's operating profit for the half year increased by     
    £7.1m (6.6%) to £115.0m.
    Revenues rose 5.0% to £256.5m as a result of tariff increases and new
    connections, offset by an overall reduction in demand and the effects
    of customers switching to a metered tariff. Approved tariff increases,
    including the 2.5% K factor, amounted to £20.4m and 2,600 new customer
   connections contributed £1.2m of additional revenue. Customers        
    switching from unmeasured to metered charging reduced revenue by
    £4.5m. 74.7% of South West Water's domestic customers are now
    metered. Customer demand has fallen by 3.5% on the same period last
    year affected by the very wet weather experienced throughout the
    spring and summer this year.
   Operating costs, including depreciation and restructuring costs,       
    increased from £136.4m to £141.5m.
    Cost increases (including business rates) for H1 2012/13 were £4.9m.
    Cumulative cost increases over K5 continue to be lower than RPI for
   the same period. £2.0m of efficiencies have been delivered in this    
    half year bringing the cumulative K5 delivery to £17.1m. Other cost
    increases were:
           · Costs from new capital schemes of £1.9m (reflecting
               additional asset maintenance relating to the increased     
                emphasis on maintenance in the investment programme and
                the growing asset base);
           · Bad debt charges of £0.6m, equivalent to 2.1% of revenue,
               marginally higher than full year 2011/12 but consistent    
                with H1 2011/12;
           · Changes of £0.5m reflecting increased private sewer
               operational costs and atypical costs as a result of the    
                wet weather.
    The net interest charge of £31.2m was £0.5m below the first half of
   2011/12, primarily reflecting the lower RPI on indexed linked          
    facilities, net of the costs of new borrowings.
   Profit before tax increased by 10.0% to £83.8m.                       
    Capital expenditure in the first half of 2012/13 was £42.7m compared
    with £50.9m in the first half of last year. Regulatory net capital
    expenditure^(1) was £49.5m. The focus for the capital programme
    remains weighted towards asset maintenance schemes and increasing the
    resilience of the company's infrastructure. Major investments for the
   year include improvements at waste water works targeting compliance    
    and reduced pollution incidents through investment in storm tanks and
    increasing sewerage system capacity. Clean water network improvements
    are targeting reliability, water quality, security of supply, and
    asset enhancements enabling changed operational ways of working
    through the PUROS^(2) programme.
   The robustness of the company's networks and assets is illustrated by  
    achieving Ofwat's 'stable serviceability' status in all areas.
    On 1 October 2011 the Government transferred the ownership of private
    sewers and lateral drains to water and sewerage companies. As a
   result, South West Water's sewer network length is estimated to have   
    increased by over 50%. £1.6m of operating costs and £0.6m of
    maintenance costs were incurred in H1 2012/13, bringing cumulative
    expenditure since the transfer to £4.1m and £1.2m respectively.
    Shareholders are expected to receive appropriate returns for K5
    private sewers and pumping stations expenditure, provided that the
   money is spent efficiently, through the regulatory Interim             
    Determination of K (IDoK) mechanism, with a submission currently
    planned for 2013 and revenue reflected in subsequent financial years.
   ^(1) Capital expenditure including infrastructure renewals            
    expenditure, less grants and contributions
   ^(2) PUROS - Phased Utilisation of Remote Operating Systems           
   South West Water remains ahead of target in delivering the required    
    operating cost efficiency over K5.
    The company has front end loaded delivery of the required 2.8%^(1)
    p.a. average operating cost efficiencies with an average 4.8% p.a.
   delivered in this K period to date. This targeted savings programme    
    has delivered £2.0m of efficiencies in H1 2012/13, bringing the K5
    total to date to £17.1m. This is being achieved through ongoing
    improvement programmes including:
          · Operational ways of working (PUROS)                        
           · Energy procurement and usage with 96% of energy
               requirements fixed for K5 at rates favourable to the Final 
          · Rationalising administration and support services, and     
          · Right-sourcing and innovative contracting                  
    South West Water continues to deliver capital projects in line with
    Ofwat, Drinking Water Inspectorate and Environment Agency
   expectations. Expenditure for the K5 period to date continues to be   
    favourable compared with the Capital Incentive Scheme baseline^(2) and
    is targeted to achieve 5% outperformance of the Final
    Determination^(3) K5 capital programme.
   ^(1) average over K5 (2010-2015)                                      
   ^(2) based on current published Construction Output Price Index       
   ^(3) using 2009 Final Determination estimates of COPI                 
   Operational Highlights                                                 
    South West Water's company-wide 'Pure Water, Pure Service, Pure
   Environment' strategy is the cornerstone of the company's operations,  
    with robust operational performance and high standards of customer
    service underpinned by strong financial results.
   Pure Water                                                             
    A significant proportion of the company's capital programme in 2012/13
   is focused on maintaining drinking water quality. South West Water    
    aims to deliver a high level of water quality compliance as measured
    against the Drinking Water Inspectorate's tough quality standards.
    South West Water is continuing to deliver industry-leading performance
    in reducing leakage levels. In 2011/12 the company achieved a new
   record low of 81Ml of water lost on average per day over a 12 month    
    period in addition to beating the rolling three year average target.
    Leakage targets have been met every year since their introduction.
    South West Water has successfully managed its water resources to
    enable a continued secure supply of water for the region. In March
   this year it was announced that the company expected 2012 to be the    
    sixteenth consecutive year without water restrictions - confidence
    expressed in the water resource position before what was in the event
    the wettest summer in 100 years.
    Work continues on the innovative industry leading programme of work
    called 'Upstream Thinking' to improve raw water quality and quantity
    in a sustainable way. South West Water is working on six major
   catchment management projects, including a significant programme on    
    the main moor sources on Exmoor and a pilot project on Dartmoor, to
    re-establish the wetlands that naturally cleanse water thereby
    improving water quality in rivers and reservoirs. 
    The project has been recognised for leading the way in business
   sustainability and for its positive environmental impact. In June it  
    won the "Large Business Award" at the ICAEW Finance for the Future
   Pure Service                                                           
    South West Water's emphasis on excellent service is delivering
    tangible improvements for customers and is reflected in reducing
    levels of contacts and customer complaints. South West Water is
    driving higher levels of customer satisfaction with its highest
   service quality score recorded in the first half of 2012/13. The      
    trend of improvements in this area continues and is reflected in
    Ofwat's Service Improvement Mechanism (SIM) score which is increasing
    during 2012/13. This is in addition to a 78% improvement in the score
    seen in the previous two years.
    The introduction of a customer relationship system to manage customer
    contacts through to resolution and online offerings such as 'My
    Account' online account management and smartphone apps further reflect
    the commitment to customer service improvements. The Consumer Council
   for Water in September confirmed that complaints in 2011/12 were 25%   
    lower than in 2010/11 and halved in the last two years. More than 95%
    of customers' complaints are resolved first time - making South West
    Water one of the best performing water and sewerage companies in the
    country on this measure.
    The cost of bad debts marginally increased in the period. The charge
    as a proportion of revenue at 2.1% is consistent with H1 2011/12, but
    slightly higher than the full year 2011/12, reflecting the general
    economic conditions. Collection initiatives to improve the bad debt
   position, including tracing previous customers through third party     
    data traces, and working with social housing partners, are being
    targeted. The Restart programme continues to incentivise customers
    into regular payment plans and the company has a number of schemes in
    place to assist vulnerable customers.
   Pure Environment                                                       
   The wettest summer in 100 years has inevitably resulted in an increase 
    in operational incidents.
    The focus has been on effectively managing the impact of extreme wet
    weather conditions. Regrettably the exceptional rainfall resulted in
   an increase in flooding incidents for customers. South West Water has 
    proactively managed these incidents and supported customers with
    flooding surgeries held in the worst affected areas.
    Despite these weather impacts 133 out of 146 bathing waters (91%)
    achieved the European 'mandatory' standard (good status) and 88
    beaches (60%) achieved the 'guideline' standard (excellent status).
   South West Water is committed to delivering sustainable environmental  
    improvements to the region's bathing waters, with investments in storm
    tanks, filtration and cleaning processes in progress at two key
    South West Water consistently delivers a strong compliance performance
    at waste water treatment works. Waste water was treated to required
    standards for 99.57% of the population in 2011. The focus is now on
   addressing smaller works which are more challenged in meeting          
    standards, and investment in this area has targeted modifications to
    treatment processes including filtration, screening and improved
    automation of monitoring.
    The company achieved good performance against Ofwat's new Key
   Performance Indicators (KPIs). Customer experience, reliability and   
    availability of supply, and key environmental impact measures all
    achieved 'green' status.
    In addition, the company delivered sector-leading performance for
    current serviceability, sludge disposal, security of supply, leakage
   and sewer flooding incidents. Further improvements and investments    
    are targeted for reducing pollution incidents and further improving
    compliance at waste water treatment works.
   Political and Regulatory Developments                                  
   Government Payment                                                     
    The Government's commitment to fund a cut in eligible household
    customer bills in the region by £50 from 2013/14 was welcomed by South
    West Water. The agreement with Defra to secure this reduction has
   been signed and is ready for implementation for the 2013/14 charging   
    year. The bill reduction will directly benefit customers and will be
    passed straight through to them, having no impact on the regulatory
    and financial structure of the business.
   Draft Water Bill                                                       
    The 'Water for Life' White Paper set out a clear direction for
    evolutionary change within the industry. The future of the water
    industry, with reforms to regulation and, where appropriate, market
   competition could deliver significant benefits if implemented with     
    careful regard as to how they interlink with the interests of
    customers, companies, investors, the environment and the wider
    The retention of investor and customer confidence is noted as being
   key; sentiments which are echoed in Defra's consultative Strategic     
    Policy Statement to Ofwat.
    The Draft Water Bill focuses on regulatory and competition reforms.
    South West Water supports further market development for non-domestic
   customers and is preparing for this through its new and enhanced       
    services for business customers via the launch of 'Source for
   PROPOSED LICENCE CHANGES                                               
    South West Water, in common with the majority of the other water
   companies, on 23 November notified Ofwat that it was unable to accept  
    the proposed changes to its operating Licence conditions set out in
    the Section 13 Notice from Ofwat dated 26 October 2012.
    Whilst the company supports the need to make Licence changes for the
    next price review process in 2014 to find new and more innovative ways
   to deliver sustainable water and sewerage services, it is believed     
    that the Licence proposals set out by Ofwat in the Notice are not in
    the long-term interests of customers and are insufficient to maintain
    investor confidence.
    The company welcomes Ofwat's latest statement to the industry which
    clarifies some of the Section 13 Notice proposals. Whilst it has not
    been able to consent to the proposals it has responded to Ofwat
   constructively on its concerns and how these can be addressed. The    
    company looks forward to continuing discussions with Ofwat to achieve
    a mutually acceptable conclusion which will protect the interests of
    investors and South West Water customers.
   Preparing for PR14                                                     
    Ahead of the next Price Review in 2014 (PR14) South West Water is
   currently focusing on:                                                 

          · an updated 25-year outlook                                 
           · significant customer and stakeholder engagement and
               research (to gauge long-term and short-term priorities for 
          · short and long-term investment scenario planning.          
    Initial phases of customer research have been carried out in order to
    understand further customers' priorities for service delivery and
   change since the last Price Review in 2009. The overarching message is 
    that the top priority for customers remains the provision of a
    "reliable, safe and clean drinking water supply".
    Communication and engagement with customers is essential. The company
   has launched its 'WaterFuture' brand. This has been used across a      
    suite of communication materials including presentations, leaflets,
    videos and a new website -
    In order to keep customers' priorities central to the
    business-planning process the company has also created a 'WaterFuture'
   customer challenge panel which comprises representatives from various  
    regulatory, stakeholder and consumer groups. Their involvement has
    helped shape the updated 25-year outlook which provides a long-term
    context for the next business plan.
    Investment scenario planning is currently under way and includes
    identification and discussion with Regulators on long-term legislative
   obligations which drive investment plans and priorities. The outcomes  
    will be captured in the updated 25-year outlook which is due for
    publication in the near future.
   South West Water Outlook                                               
    The company has delivered successfully its operational strategy,
    underpinned by strong financial performance. It is focusing on
   continued delivery of efficiencies whilst satisfying regulatory and    
    legislative obligations and improving services to customers. The K5
    outlook for South West Water is focused on outperforming the
    regulatory contract.
    South West Water is preparing for PR14, is actively engaged in the
   development of Ofwat's regulatory reform agenda and is well          
    positioned for legislative changes.
    Viridor's strategy is to add value through recycling and renewable
   energy generation whilst capitalising on its strong position in      
    From 2007/08 until H1 2011/12, growth in profits from recycling had
    more than offset the decline in annual landfill profits. As noted
    since February 2012, Viridor's performance has been impacted by
    recyclate prices which have remained under pressure reflecting world
    economic conditions. Overall average price per tonne for the half
    year fell to £103, 17.6% lower than for H1 2011/12. However prices
    were significantly lower than this by the end of the second
    quarter. Recycling revenues for H1 2012/13 were £18.8m lower than
    the same period last year. While action has been taken to reduce
   the cost base as described below, about half of the impact of the  
    reduction in recyclate prices has been recovered through the terms
    of customer supply contracts and cost reductions. PBIT plus joint
    ventures was £27.8m in H1 2012/13, down 30.5% on H1 2011/12. The
    company has not seen an overall improvement in prices to date in the
    third quarter and is therefore cautious on the prospects for
    recyclate prices and continues to focus on revenue optimisation and
    facilities rationalisation/cost reduction. Viridor's financial
    performance will continue to be impacted by trends in recycling and
    However, Viridor continues to make strong progress on its growing
    pipeline of PPP/EfW projects which underpins its long-term profit
    momentum. In addition to facilities currently under construction,
    since March it has reached financial close on both the Glasgow DBFO
    and the South London PPP, become preferred bidder on the
   Peterborough PPP and achieved a planning relaxation for its proposed 
    Dunbar EfW enabling it to serve the whole of Scotland. PPP and EfW
    projects already contribute to the bottom line and the healthy
    pipeline could add more than £100m to Viridor's EBITDA within the
    next four years as more facilities come on stream from 2013/14
   Financial Highlights                                                 
    Revenue was down 5.3% to £378.1m. Recycling revenue decreased
   £18.8m due to lower prices, and landfill plus landfill tax was down  
    £7.5m due to lower volumes.
    Viridor's earnings before interest, tax, depreciation and
   amortisation (EBITDA) for the half year decreased by £13.5m (23.1%)  
    to £44.9m. PBIT fell £14.2m to £21.0m. PBIT plus joint ventures
    decreased by £12.2m (30.5%) to £27.8m.
   Profit before tax decreased £8.1m to £22.5m, including the benefit   
    of reduced interest from intra group funding.
    Capital expenditure and investment in joint ventures for the half
   year was £145.4m (H1 2011/12 - £49.0m) of which c£132m was for       
    Viridor growth projects (largely EfW) with the balance being
    maintenance of existing assets.
   Operational Highlights                                               
   UK context                                                             
    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 major increase in recycling, with residual
    waste increasingly being used for energy recovery. The latter is a
    form of biomass and is a significant source of renewable energy
   already accounting for approaching 2% of total UK electricity          
    production. Viridor believes that up to 6% of electricity could come
    from waste sources by 2015. At present there is about 6m tonnes of
    EfW capacity in the UK and it is estimated that at least 15m tonnes
    capacity will be required by 2020 to meet the Government's landfill
    diversion targets.
    The Government's main mechanism for diverting waste from landfill
    and incentivising recycling and EfW facilities remains landfill
    tax. The Chancellor's Budget announcement in March 2012 reconfirmed
    the continuation of the increase in landfill tax of £8 a year from
   £64 per tonne from 1 April 2012 to £80 per tonne from 1 April 2014. 
    This increase will enhance further the long-term economics of
    recycling and energy recovery. In addition, recyclate costs are
    typically significantly lower than the cost of using virgin
    materials for manufacturers.
    Viridor's clearly stated strategy is to add value by focusing on
    recycling and waste based renewable energy whilst exploiting its
   existing landfill void. Viridor has substantially increased its     
    recycling business over the past 5 years to a total of c2m tonnes
    per annum. The next phase of its strategy involves substantial
    growth in our EfW capacity. 
    During the half year recycling volumes traded increased by 23k
    tonnes (2.6%) to 936k tonnes. An extra 27k tonnes from acquisitions
    was offset by weak UK economic conditions. Overall average
    recycling revenues from gate fees and recyclate sales in H1 2012/13
    were down 17.6% to £103 per tonne compared to £125 in the previous
   half year with prices significantly below £103 per tonne by the end  
    of Q2. No overall improvement has been seen in prices to date in Q3
    and the company is cautious on prospects for recovery. To help
    mitigate the down turn in recycling, the company continues to be
    focused on revenue optimisation and facilities rationalisation/cost
    Viridor now has the largest Materials Recycling Facilities (MRFs)
   capacity in the UK. To feed its recycling and renewable energy plants  
    Viridor relies on both its own and third party collection services.
   Viridor has made two acquisitions since 31 March 2012 targeted to      
    support its recycling and EfW strategies.
    In July 2012 Viridor acquired JWT Holdings Limited, a waste collection
   and recycling business based in Greater Manchester, for £7.6m. It has 
    an annual volume of around 70k tonnes of material.
    In October 2012 Viridor acquired Pulp Friction Limited, a paper
   collection and processing business based in Kent, and the business and 
    assets of a related business, SBS Paper LLP, for £9.0m. It has an
    annual volume of around 100k tonnes of paper and card per annum.
   The above acquisitions were made on a debt-free basis.                 
   Contracts and collection                                               
    Profits in "Contracts & Other" were up overall across the 16 municipal
    contracts around the UK (the more significant ones include Lancashire,
    Glasgow, Lakeside, Manchester, Somerset, W Sussex PFI and Bedfordshire
   (last full year)) and the Thames Water contract. Profits in the       
    collection business were down reflecting reduced volumes and price
    pressure. Viridor's collection fleet plays an increasing role in
    feeding the company's recycling plants.
   Renewable Energy                                                     
    Energy can be recovered from waste in two ways, either via gas
    (notably landfill gas and anaerobic digestion) or combustion (in EfW
    plants and similar facilities, some of which may be a part of
   Combined Heat and Power (CHP) schemes). Energy recovery from waste  
    currently accounts for approaching 30% of total UK renewable energy
    (20% from landfill gas and the balance from combustion). As noted
    above, this equates to approaching 2% of total UK electricity
    production (from both renewable and non-renewable sources).
    Viridor's landfill gas power generation output increased by a
    further 8% to 303 Gigawatt hours (GWh) (the figure excludes a small
    amount of sub-contract capacity in Suffolk) during the half year
    reflecting a successful output optimisation programme and is
    approaching its peak. Average revenue per Megawatt hour (MWh) was
    down by 3% to £77.7 per MWh (from £79.8 per MWh in H1 2010/11)
    reflecting the reduced Renewables Obligation Buyout Recycle (ROBOR)
   fund payment element of ROC prices. Total landfill gas power         
    generation operational capacity decreased by 1MW during the half
    year to 105MW, (excluding 3MW capacity at sub-contract sites in
    Suffolk), reflecting rebalancing of capacity between sites. The
    proportion of operational capacity eligible for ROCs remained at
    74%, with the remaining 26% being on (lower priced) NFFO contracts.
    Viridor's NFFO contracts end in tranches, after which the capacity
    for all Viridor's sites will transfer to ROCs (about 60% will move
    across in 2013/14 with the balance in the period up to 2016/17).
    As well as the 105MW of landfill gas capacity, Viridor has a further
   29MW of renewable energy capacity across its share of the Lakeside   
    EfW, the Bolton EfW facility and the Greater Manchester Anaerobic
    Digestion (AD) operations.
    In addition to the above operational projects, Viridor is pursuing a
    number of other renewable energy opportunities. Five EfWs are
    already under construction - Runcorn I and II, Exeter, Oxfordshire
   and Cardiff. Viridor has a total of 1.7m tonnes of EfW capacity     
    under construction or committed subject to planning permission (of
    which 0.9m is already backed by municipal contracts and Viridor
    collection) which will give it a total capacity of at least 2.0m
    tonnes by the end of 2015/16.
    Since the start of 2012/13 Viridor has made significant further
   progress in developing its pipeline of long term PPP and EfW         
    projects :
         · Glasgow recycling and residual waste Design Build Finance  
                Operate (DBFO) - contract signed July 2012
         · South London Waste Partnership residual waste PPP -        
                contract signed November 2012
         · Peterborough recycling and residual waste contract -       
                preferred bidder
          · Planning restriction on Dunbar's future EfW relaxed in
               October 2012 - proposed plant will now be able to take    
                waste from the whole of Scotland
    Viridor continues to bid selectively for other PPP projects. The
   company is one of the last two for Central Bedfordshire residual     
    waste, South East Wales (Prosiect Gwyrdd) residual waste and West
    Lothian residual waste.
   Joint Ventures                                                         
    Total joint ventures' contribution (comprising both Lakeside and
   VLGM), which consists of interest on shareholder's loans and share of  
    profit after tax, rose 42% to £6.8m (H1 2011/12 - £4.8m). 
   (a)         Lakeside                                                   
    Lakeside, the first of Viridor's EfW pipeline projects, continues to
    perform very strongly and is ahead of management expectations in terms
    of both waste inputs and energy output. H1 2012/13 contribution was
   £3.0m (H1 2011/12 £1.8m): interest receivable on shareholder loans was 
    £0.8m, up £0.2m; and share of profit after tax from Lakeside was £2.2m
    (up £1.0m on the previous half year reflecting strong waste inputs and
    electricity generation). A further £1.5m contribution came from the
    sub-contract profit (included in the contracts segment above).
   (b)         Viridor Laing (Greater Manchester)                         
    The 25 year Greater Manchester Waste PFI contract (being delivered
    through VLGM) is the UK's largest ever combined waste and renewable
    energy project. The company is a joint venture between Viridor and
   John Laing Infrastructure. Operation of the associated facilities     
    (both existing facilities and those which are to be developed) is
    being carried out on a sub-contract basis by Viridor. At 30 September
    2012, 39 of the 43 facilities planned had been formally taken over by
    As reported previously, solid recovered fuel produced from the waste
    will be used to generate heat and power at a plant being built at
   Runcorn in Cheshire. Phase I is being built primarily for the Greater 
    Manchester Waste PFI contract and Phase II will be available for the
    market generally, as steeply rising landfill tax drives residual waste
    disposal away from landfill towards recycling and EfW.
    As part of the VLGM contract, a separate contractor was mandated to
    construct 43 facilities. As noted above, 39 of these facilities have
    now been formally taken over by Viridor and one facility is due to be
    completed as planned in 2013. The 43 facilities include 4 mechanical
   biological treatment (MBT) plants. One of these MBTs has been taken    
    over and the remaining 3 are substantially complete, but have not yet
    been taken over. The delays in takeover of these 3 remaining plants
    are impacting the VLGM joint venture credit agreements but are being
    addressed and are not expected to affect the financing of the project
    or have a material impact on the performance of the PFI.
    Interest receivable on shareholder loans from the VLGM joint venture
   was £3.8m, up £1.1m due to increased shareholder loans (H1 2011/12 -   
    £2.7m). Share of profit after tax from VLGM on an IFRIC 12 basis was
    £nil, down £0.3m (£3.2m profit UK GAAP, up £1.8m).
    Viridor's strategy is focused on recycling and renewable energy whilst
    capitalising on its strong position in landfill as the landfill market
    declines in line with Government policies. The overall profit
    contribution from this segment was maintained in the half year even
    though Viridor's landfill disposal volumes decreased by 0.3m tonnes
    (17.0%) to 1.4m tonnes in H1 2012/13. The closure of the landfill
   site at Horton and the mothballing of the site at Whitehead accounted  
    for one third of the decline. Increased recycling and landfill
    diversion by third party industrial and commercial customers and the
    weak UK economy were also important factors. Average gate fees
    increased by 15.7% to £26 per tonne with the gain only partially
    offset by increased costs on lower volumes. Consented landfill void
    reduced from 65.4 million cubic metres (mcm) at 31 March 2012 to
    64.0mcm at 30 September 2012, reflecting usage during the period.
   Outlook for Viridor                                                    
    Viridor has successfully transformed itself over the last decade from
    predominantly a landfill operator to being one of the country's
    leading recycling, renewable energy and waste management companies.
    Viridor is facing near-term headwinds and the company remains cautious
    about the future prospects for recyclate prices; it is therefore
   focusing strongly on a stringent programme of revenue optimisation and 
    facilities rationalisation/cost reduction. Strong progress has,
    however, been made on the PPP/EfW pipeline this half year and these
    projects are already making a significant contribution to Viridor's
    bottom line. The growing pipeline of current and future projects
    underpins the company's long-term profit momentum.
   GROUP FINANCIAL POSITION                                                
    The Group funding strategy utilises a mix of fixed, floating and
   index-linked rate borrowings. A substantial portion of debt is finance   
    leasing which provides a long maturity profile and secured credit
    The Group has fixed or put in place swaps to fix the interest rate on at
    least 50% of South West Water's net debt for the remainder of the entire
    K5 period. The average rate achieved on the fixed rate debt is circa
   3.4%. In addition £380m of South West Water's debt is index-linked at   
    an overall real rate of 1.7%. Pennon Group's average interest rate for
    the half year to 30 September 2012 was 3.2% and South West Water's was
    The Group had substantial cash resources and committed funding as at 30
   September 2012 and is well placed in current financial market            
                          - cash balances of £459m (SWW £196m), including   
                             £126m restricted cash
                          - undrawn facilities of £536m                     
    During the six months to 30 September 2012 £85m of new and renewed
   facilities were secured. A further £213m has been renewed/secured since 
    30 September.
   The Group's average debt maturity is 22 years.                           
    During the period the Group recorded fair value losses of £11.7m on
   swaps, as indicated in the Statement of Comprehensive Income on page     
    29. These swaps are expected to be held to maturity and hence these
    losses will reverse over time.
    The Group's defined benefit pension schemes had a deficit (net of
   deferred tax) under IAS 19 at 30 September 2012 of circa £80m (£104m     
    gross), an increase of £5m since 31 March 2012.
   The net deficit represents circa 4% of current market capitalisation.    
    Schemes' assets increased from £517m at 31 March 2012 to £526m at 30
   September 2012, and schemes' liabilities increased from £616m to £630m   
    over the same period.
   South West Water's pension cash contributions continue to be within the  
    Final Determination for the K5 period.
    The mainstream corporation tax charge for the half year was £23.2m
   (2011/12 - £23.4m) giving an effective current tax rate of 21% (2011/12  
    - 22%).
    Deferred tax for the half year was a credit of £7.1m (2011/12 credit -
   £9.3m) which included a credit of £13.9m from the impact of the          
    reduction in the rate of corporation tax from April 2013.
   PRINCIPAL RISKS AND UNCERTAINTIES                                        
    In accordance with DTR 4.2.7 of the Disclosure and Transparency Rules
   the principal risks and uncertainties for the remaining six months of    
    the financial year of the Group remain as set out on pages 28 to 33
    inclusive of the Group's 2012 Annual Report and Accounts, namely:
          · changes in law, regulation or decisions by governmental
               bodies or regulators could have a material adverse effect on 
                financial results or operations;
         · economic and tough trading conditions could materially       
                affect the Group's revenues and profitability;
          · access to finance and funding costs may be adversely
                affected by perceived credit rating and by prolonged periods
               of market volatility or liquidity. The Group is subject to   
                limitations and restrictive obligations in respect of
                borrowing and debt arrangements;
          · poor operating performance or a failure of, or interruption
                to, operating systems or the inability to carry out network
               operations or damage to infrastructure may have a material   
                adverse impact on both the Group's financial position and
          · the failure or increased costs of capital projects or
               acquisitions or joint ventures not achieving predicted       
                revenues or performance could have a material adverse effect
                on both the Group's financial position and reputation;
          · a reduced customer base, increased competition affecting
               prices or reduced demand for services could have a material  
                adverse impact on the Group's financial position; and
          · information technology and business continuity systems and
                processes may fail which may cause material disruption to
               the Group's businesses and could have a material adverse     
                impact on both the Group's financial position and
    Further details of these principal risks and uncertainties and the
    mitigating actions of the Group can be viewed on or downloaded from the
   Group's website, or obtained from    
    the Group Company Secretary at the Company's registered office.

STRATEGY AND PROSPECTS                                             
The Pennon Board's priority continues to be the creation of
shareholder value through its strategic focus on water and         
sewerage services, recycling, renewable energy and waste
South West Water has continued its excellent start to K5 with very
strong operational delivery, high standards of customer service    
and a robust financial performance.
Viridor is facing near-term headwinds from recyclate prices which
have fallen significantly below the peak level of last year's
first half. We remain cautious about the prospect for a recovery  
in recyclate prices but Viridor's growing Public Private
Partnership and Energy from Waste pipeline form the basis for
future growth.
Ken Harvey


29 November 2012
30 January 2013                           Ordinary shares quoted ex-dividend
1 February 2013                           Record date for interim cash
Mid-February 2013                         Interim Management Statement
18 February 2013                          Posting of Scrip dividend offer
11 March 2013                             Final date for receipt of Forms of
4 April 2013                              Interim cash dividend payment date
23 May 2013                               2012/13 Preliminary Results
Late June 2013                            Annual Report & accounts published
1 August 2013                             Annual General Meeting
August 2013                               Interim Management Statement
7 August 2013 *                           Ordinary shares quoted ex-dividend
9 August 2013 *                           Record date for final cash
16 September 2013 *                       Final date for receipt of Forms of
4 October 2013 *                          Final cash dividend payment date
* These dates are provisional and, in the case of the final dividend,
subject to obtaining shareholder approval at the 2013 Annual General
This Report contains forward-looking statements relating to Pennon Group's
operations, performance and financial position based on current expectations
of, and assumptions and forecasts made by, Pennon Group management. Words
such as "anticipates", "aims", "believes", "continue", "could", "due",
"estimates", "expects", "goal", "intends", "may", "plans", "project",
"seeks", "should", "targets", "will" and related and similar expressions, as
well as statements in the future tense, identify forward-looking statements
in this Report. 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. Undue reliance should not be
placed on forward-looking statements which are made only as of the date of
this document. Nothing in this report should be construed as a profit
forecast. The Group accepts no obligation publicly to revise or update
these forward-looking statements or adjust them as a result of new
information or for future events or developments, except to the extent
legally required.
A number of companies, including Pennon Group Plc, continue to be aware that
their shareholders have received unsolicited phone calls or correspondence
concerning investment matters which imply a connection to the company
concerned. These are typically from overseas based 'brokers' who target UK
shareholders offering to buy their shares. Shareholders are advised to be
wary of any unsolicited advice, offers to buy shares or offers of free
reports into the Company. Details of any share dealing facilities that the
Company endorses will be included in Company mailings.

Consolidated income statement for the half year ended 30 September 2012
                                   Half year ended Half year ended          

                                               30    30 September Year ended
                                                               2011  31 March
                                               2012                       2012
                              Note               £m              £m         £m
Revenue                        5             633.7          642.6   1,233.1
Operating costs
Manpower costs                               (79.8)          (77.8)    (155.4)
Raw materials and consumables                (60.3)          (72.8)    (133.9)
Other operating expenses                    (282.9)         (275.3)    (528.0)
Depreciation and amortisation                (74.4)          (73.6)    (147.0)
Operating profit               5             136.3          143.1     268.8
Finance income                 6              92.1           91.5     119.3
Finance costs                  6            (119.5)         (128.7)    (191.6)
Net finance costs              6             (27.4)          (37.2)     (72.3)
Share of post-tax profit from                  2.2            1.5       4.0
joint ventures
Profit before tax              5             111.1          107.4     200.5
Taxation                       7             (16.1)          (14.1)     (28.1)
Profit for the period                         95.0           93.3     172.4
Profit attributable to equity                 95.0           93.3     172.4
Earnings per share (pence per  8
         -     Basic                          26.2           26.1      48.1
         -     Diluted                    26.0           25.9      47.8
The notes on pages 33 to 42 form part of this condensed half year financial

 Consolidated statement of comprehensive income for the half year ended 30          
  September 2012
                                           Half year ended      Half year          
                                              30 September                         
                                                            30 September            
                                                      2012                Year ended
                                                                           31 March
                                                       £m             £m         £m 
 Profit for the period                             95.0          93.3     172.4 
 Other comprehensive loss                                                           
 Actuarial losses on defined                        (6.9) (26.3)      (51.7) 
  benefit pension schemes
 Cash flow hedges                                                                   
 Net fair value losses                             (11.7)         (29.9)     (24.7) 
 Amount recognised in property,                      0.9   -       - 
  plant and equipment
 Share of other comprehensive                        1.8   (2.9)      (5.4) 
  gain/(loss) from joint ventures
  Deferred tax on items taken                        1.0          10.7      16.0
 directly to or transferred from                                                    
 Other comprehensive loss for the period           (14.9)         (48.4)     (65.8) 
  net of tax
 Total comprehensive income for the                 80.1          44.9     106.6 
  Total comprehensive income                         80.1          44.9     106.6
 attributable to equity                                                             
 The notes on pages 33 to 42 form part of this condensed half year financial        
 Consolidated balance sheet at 30                                                 
  September 2012
                                                                        31 March
                                          30 September    30 September
                                                                           note 4)
                                                  2012            2011
                        Note                       £m              £m          £m 
 Non-current assets                                                               
 Goodwill                                      330.6          301.5      325.6 
 Other intangible                               18.9            4.1       20.6 
 Property, plant and                         3,184.3        2,952.7    3,083.7 
 Other non-current                             163.3          112.4      138.4 
 Derivative financial                           31.3           19.3       21.9 
 Investments in joint                            0.1            0.1    0.1 
                                             3,728.5        3,390.1    3,590.3 
 Current assets                                                                   
 Inventories                                    10.4            7.0        9.0 
 Trade and other                               277.8          254.4      238.4 
  Financial assets at                             0.8             -        0.5
 fair value through                                                               
 Derivative financial                           13.3            5.4        9.7 
 Cash and cash          12                     458.8          510.1      425.3 
                                               761.1          776.9      682.9 
 Current liabilities                                                              
 Borrowings             12                    (383.0)          (49.6)     (325.5) 
  Financial                                        -           (0.6)         -
 liabilities at fair                                                              
  value through profit
 Derivative financial                          (24.9)          (13.2)      (16.6) 
 Trade and other                              (333.5)         (311.7)     (241.6) 
 Current tax                                   (60.4)          (69.9)      (59.8) 
 Provisions                                    (27.2)          (23.8)      (25.6) 
                                              (829.0)         (468.8)     (669.1) 
 Net current                                   (67.9)          308.1       13.8 
 Borrowings             12                  (2,248.8)       (2,390.4)   (2,204.4) 
 Other non-current                             (77.7)          (39.7)      (76.9) 
  Financial                                     (23.7)          (19.3)      (16.7)
 liabilities at fair                                                              
  value through profit
 Derivative financial                          (37.8)          (34.2)      (32.0) 
 Retirement benefit                           (103.7)         (108.5)      (98.6) 
 Deferred tax                                 (269.1)         (272.5)     (277.1) 
 Provisions                                    (70.7)          (75.5)      (76.3) 
                                            (2,831.5)       (2,940.1)   (2,782.0) 
 Net assets                                    829.1          758.1      822.1 
 Shareholders' equity                                                             
 Share capital          10                     148.9          147.3      148.2 
 Share premium                                   7.3            8.9       8.0 
 Capital redemption                            144.2          144.2      144.2 
 Retained earnings                             528.7          457.7      521.7 
  and other reserves
 Total shareholders'                           829.1          758.1      822.1 
 The notes on pages 33 to 42 form part of this condensed half year financial      
 Consolidated statement of changes in equity                                        
                              Share       Share      Capital       earnings         
                            capital     premium   redemption      and other   Total 
                              (note     account      reserve       reserves  equity 
                                 £m          £m           £m             £m      £m 
 At 1 April 2011              147.0       9.2       144.2         479.1  779.5 
 Profit for the period           -         -          -          93.3   93.3 
 Other comprehensive loss        -         -          -         (48.4)  (48.4) 
  for the period
 Total comprehensive             -         -          -          44.9   44.9 
  income for the period
 Transactions with equity                                                           
 Dividends paid or               -         -          -        (88.2)  (88.2) 
 Adjustment for shares                                                              
  issued or to be issued
     under the scrip            0.3     (0.3)          -          19.1   19.1 
      dividend alternative
 Adjustment in respect of        -         -          -           1.5    1.5 
  share-based payments
 Own shares acquired by                                                             
  the Pennon Employee Share
        Trust in respect of       -         -          -          (0.3)   (0.3)
       share options                                                                
 Proceeds from treasury          -         -          -           1.6    1.6 
  shares re-issued
                                0.3       (0.3)          -         (66.3)  (66.3) 
 At 30 September 2011         147.3       8.9       144.2         457.7   758.1 
                              Share       Share      Capital       earnings         
                            capital     premium   redemption      and other   Total 
                              (note     account      reserve       reserves  equity 
                                 £m          £m           £m             £m      £m 
 At 1 April 2012              148.2       8.0       144.2         521.7   822.1 
 Profit for the period           -         -          -           95.0   95.0 
 Other comprehensive loss        -         -          -         (14.9)  (14.9) 
  for the period
 Total comprehensive             -         -          -         80.1  80.1 
  income for the period
 Transactions with equity                                                           
 Dividends paid or               -         -          -    (96.1)  (96.1) 
 Adjustment for shares                                                              
  issued or to be issued
     under the scrip            0.7     (0.7)          -          18.1   18.1 
      dividend alternative
 Adjustment in respect of        -         -          -           1.5    1.5 
  share-based payments
 Own shares acquired by                                                             
  the Pennon Employee Share
     Trust in respect of         -         -          -          (0.9)   (0.9) 
      share options granted
 Proceeds from treasury          -         -          -           4.3    4.3 
  shares re-issued
                                0.7       (0.7)          -         (73.1)  (73.1) 
 At 30 September 2012         148.9       7.3       144.2         528.7   829.1 
 The notes on pages 33 to 42 form part of this condensed half year financial        
 Consolidated statement of cash flows for the half year                             
  ended 30 September 2012
                                             Half year       Half year             

                                                 ended           ended    Year ended
                                          30 September    30 September 31 March 2012

                                                  2012            2011
                         Note                      £m              £m            £m 
 Cash flows from                                                                    
  operating activities
 Cash generated from      11                   166.5          176.5        324.7 
 Interest paid                                 (38.9)          (42.4)        (74.5) 
 Tax paid                                      (15.2)          (23.2)        (41.4) 
  Net cash generated                            112.4          110.9        208.8
 from operating                                                                     
 Cash flows from                                                                    
  investing activities
 Interest received                               7.6            9.9         13.2 
  Acquisition of
     (net of cash                               (6.5)           (1.5)        (29.2) 
 Loans advanced to                                 (4.2)        (13.4) 
  joint ventures                                   -
  Loan repayments                                 0.1            3.6          3.6
 received from joint                                                                
 Dividends received                              4.0     
  from joint venture                                              -           -
  Purchase of                                  (169.7)          (94.8)       (262.2)
 property, plant and                                                                
 Proceeds from sale                                                                 
  of property, plant
      and equipment           The story
                              has been
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