Pennon Group PLC (PNN) - Half Yearly Report RNS Number : 2698S Pennon Group PLC 29 November 2012 PENNON GROUP PLC 29 November 2012 HALF YEAR REPORT ON THE SIX MONTHS ENDED 30 SEPTEMBER 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 pennon-group.co.uk /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 2012^(3) ^(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 lessors 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 Viridor: · 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 DBFO^(1) - 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 - 56.1%). · 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 arrangements ^(2) including £126m deposits with Letter of Credit providers and lessors DIVIDEND 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 Efficiency 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 Determination · 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 (COPI) ^(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 Awards. 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 sites. 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 economy. 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 Business'. 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 investment) · 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 - southwestwater.co.uk/waterfuture 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 Viridor's strategy is to add value through recycling and renewable energy generation whilst capitalising on its strong position in landfill. 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 landfill. 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 onwards. 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. Recycling 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 reduction. 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. Acquisitions 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 Viridor. 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). Landfill 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 margins. The Group has fixed or put in place swaps to fix the interest rate on at least 50% of South West Water's net debt for the remainder of the 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 4.0%. The Group had substantial cash resources and committed funding as at 30 September 2012 and is well placed in current financial market conditions: - 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. PENSIONS 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. TAXATION 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 reputation; · 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 reputation. 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, pennon-group.co.uk/investor/reports 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 management. 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 Chairman 29 November 2012 FINANCIAL TIMETABLE FOR THE YEAR ENDED 31 MARCH 2013 30 January 2013 Ordinary shares quoted ex-dividend 1 February 2013 Record date for interim cash dividend Mid-February 2013 Interim Management Statement 18 February 2013 Posting of Scrip dividend offer 11 March 2013 Final date for receipt of Forms of Election/Mandate 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 dividend 16 September 2013 * Final date for receipt of Forms of Election/Mandate 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 Meeting. CAUTIONARY STATEMENT IN RESPECT OF FORWARD-LOOKING STATEMENTS 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. UNSOLICITED COMMUNICATIONS WITH SHAREHOLDERS 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. PENNON GROUP PLC Consolidated income statement for the half year ended 30 September 2012 Unaudited Half year ended Half year ended 30 30 September Year ended September 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) used 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 shareholders Earnings per share (pence per 8 share) - 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 information. Consolidated statement of comprehensive income for the half year ended 30 September 2012 Unaudited Half year ended Half year ended 30 September 30 September 2012 Year ended 2011 31 March 2012 £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 equity 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 period Total comprehensive income 80.1 44.9 106.6 attributable to equity shareholders The notes on pages 33 to 42 form part of this condensed half year financial information. Consolidated balance sheet at 30 September 2012 Unaudited 31 March 2012 (Restated 30 September 30 September note 4) 2012 2011 Note £m £m £m ASSETS Non-current assets Goodwill 330.6 301.5 325.6 Other intangible 18.9 4.1 20.6 assets Property, plant and 3,184.3 2,952.7 3,083.7 equipment Other non-current 163.3 112.4 138.4 assets Derivative financial 31.3 19.3 21.9 instruments Investments in joint 0.1 0.1 0.1 ventures 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 receivables Financial assets at 0.8 - 0.5 fair value through profit Derivative financial 13.3 5.4 9.7 instruments Cash and cash 12 458.8 510.1 425.3 deposits 761.1 776.9 682.9 LIABILITIES 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) instruments Trade and other (333.5) (311.7) (241.6) payables Current tax (60.4) (69.9) (59.8) liabilities Provisions (27.2) (23.8) (25.6) (829.0) (468.8) (669.1) Net current (67.9) 308.1 13.8 (liabilities)/assets Non-current liabilities Borrowings 12 (2,248.8) (2,390.4) (2,204.4) Other non-current (77.7) (39.7) (76.9) liabilities Financial (23.7) (19.3) (16.7) liabilities at fair value through profit Derivative financial (37.8) (34.2) (32.0) instruments Retirement benefit (103.7) (108.5) (98.6) obligations Deferred tax (269.1) (272.5) (277.1) liabilities 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 account Capital redemption 144.2 144.2 144.2 reserve Retained earnings 528.7 457.7 521.7 and other reserves Total shareholders' 829.1 758.1 822.1 equity The notes on pages 33 to 42 form part of this condensed half year financial information. Consolidated statement of changes in equity Unaudited Retained Share Share Capital earnings capital premium redemption and other Total (note account reserve reserves equity 10) £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 shareholders Dividends paid or - - - (88.2) (88.2) approved 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 granted 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 Unaudited Retained Share Share Capital earnings capital premium redemption and other Total (note account reserve reserves equity 10) £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 shareholders Dividends paid or - - - (96.1) (96.1) approved 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 information. Consolidated statement of cash flows for the half year ended 30 September 2012 Unaudited 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 operations 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 activities Cash flows from investing activities Interest received 7.6 9.9 13.2 Acquisition of subsidiary undertakings (net of cash (6.5) (1.5) (29.2) acquired) Loans advanced to (4.2) (13.4) joint ventures - Loan repayments 0.1 3.6 3.6 received from joint ventures Dividends received 4.0 from joint venture - - Purchase of (169.7) (94.8) (262.2) property, plant and equipment Proceeds from sale of property, plant and equipment The story has been truncated, [TRUNCATED]
Pennon Group PLC PNN Half Yearly Report
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