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RNS Number : 3214Q
Pennon Group PLC
05 June 2018
PENNON GROUP PLC
PUBLICATION OF ANNUAL REPORT AND ACCOUNTS 2018
AND NOTICE OF ANNUAL GENERAL MEETING
In compliance with Listing Rule 9.6.1 Pennon Group Plc (the
"Company") announces that the following documents have been
submitted to the Financial Conduct Authority electronically via the
National Storage Mechanism and will shortly be available for
inspection at www.morningstar.co.uk/uk/NSM
-- Annual Report and Accounts 2018
-- Notice of Annual General Meeting
-- Form of Proxy
The Annual Report and Accounts 2018 and Notice of Annual General
Meeting may also be viewed on the Company's website at
www.pennon-group.co.uk
The Company will hold its 2018 Annual General Meeting at Sandy
Park Conference Centre, Sandy Park Way, Exeter, Devon, EX2 7NN on
Thursday 5 July 2018 at 11.00am.
The following information in the Appendix to this announcement
is as set out in the Company's Annual Report and Accounts 2018. It
should be read in conjunction with the Company's Full Year Results
announcement released on 25 May 2018 which included a set of
consolidated financial statements, a fair review of the development
and performance of the business and the position of the Company and
its main trading subsidiary companies. Together these documents
constitute the information required by Disclosure and Transparency
Rule 6.3.5.
Helen Barrett-Hague
Group General Counsel & Company Secretary
5 June 2018
APPIX
PRINCIPAL RISKS AND UNCERTAINTIES
Strategic impact - long-term priorities
affected
----------------------------------------------------------------------------------------------
1 2 3
Leadership Leadership Driving sustainable
in UK in cost growth
water and base efficiency
waste
------------------------------- ------------------- ----------------------------------------
Risk level
Green Amber Red
Low Medium High Increasing Stable Decreasing
----------------------------- ------------------- ------- ----------- ------- -----------
The low, medium and Current assessment
high risk level is of direction of travel
our estimate of the of risk level.
net risk to the Group
after mitigation. It
is important to note
that risk is difficult
to estimate with accuracy
and therefore may be
more or less than indicated.
Law, regulation and finance
Principal risks Strategic impact Mitigation Net Direction Risk appetite
risk
-------------------- ------------------------ ------------------------ ------ ---------- ------------------------
Changes in Long-term priorities (i) The Red We recognise
Government affected: renationalisation that
policy 1,2 of the water industry Government
Changes in Government continues to be policy
policy a central policy evolves and
may fundamentally of the Opposition seek to
impact our and remains a minimising
ability to deliver possibility potential
the Group's in the event of risk and maximising
strategic priorities, a change of Government. opportunities
impacting We recognise, however through
shareholder value. the existing Government regular communication
is supportive of and robust
the existing regulatory scenario
model. We engage planning.
regularly with
all political parties
as well as customers
and stakeholders
demonstrating the
value
they receive based
on our operational
performance and
continued investment
in the network
infrastructure.
(ii) The Government Green
is considering
legislating on
the use of specific
single-use
plastics to reduce
the environmental
impact
and improve recycling
rates. Viridor
is well positioned
to leverage this
opportunity
in the event that
legislation is
introduced and
continue to invest
in its sorting
and
reprocessing
technology.
Viridor is also
a founding signatory
to the UK Plastic
Pact.
-------------------- ------------------------ ------------------------ ------ ---------- ------------------------
Regulatory Long-term priorities During the year Amber We accept
reform affected: Ofwat finalised that regulatory
1,2 their price review reform occurs
Reform of the methodology for and seek to
regulatory 2020-25. There leverage the
framework may result has also been a opportunities
in changes to the focus by the Government this
Group's and Ofwat on the creates while
priorities and governance of companies mitigating
the service we in the water sector. the associated
provide to our We are well positioned risk.
customers. It may for the new regulatory
have a significant period with a
impact on our dedicated,
performance which experienced PR19
can impact project team, supported
shareholder value. by external
consultants,
which is monitored
through a robust
governance framework.
We are broadly
supportive of Ofwat's
proposed reforms
and engage fully
with the regulator
during each
consultation.
South West Water
already carries
out its business
in line with the
improvements set
out.
-------------------- ------------------------ ------------------------ ------ ---------- ------------------------
Compliance Long-term priorities Our robust regulatory Green The Group
with laws and affected: framework ensures has the
regulations 1,2 compliance with highest standards
The Group is required Ofwat, Environment of
to comply Agency and other compliance
with an ever increasing relevant requirements. and has
range of Employees, contractors no appetite
regulated and and partners receive for legal
non-regulated a rolling programme or regulatory
laws and regulation of training and breaches.
across our water guidance. Additionally,
and waste businesses. during the year We aim to
Non-compliance we have launched minimise the
with one or a number our 'Speak Up' impact of
of these may result whistleblowing regulatory
in financial penalties, policy. reform by
a negative impact We have been proactive targeting
on our ability in reviewing our changes which
to operate effectively policies and processes are NPV neutral
and reputational in preparation over the longer
damage which could for the introduction term to protect
affect of the General customer affordability
shareholder value. Data Protection and shareholder
Regulation and value.
have appointed
a dedicated Data
Protection Officer.
-------------------- ------------------------ ------------------------ ------ ---------- ------------------------
Maintaining Long-term priorities The Group have Green We operate
sufficient affected: mature treasury, a prudent
finance and 1,3 funding and cash approach to
funding, within Failure to maintain flow policies in our financing
our debt covenants, funding requirements place. We regularly strategy in
to meet ongoing could lead to consider how political, order to ensure
commitments additional economic and regulatory our funding
finance costs and risks may impact requirements
put our growth on the Group's are fully
agenda at risk. financing commitments met.
Breach of covenants and cashflow.
could result in
the requirement The Group operates
to repay certain with strong liquidity
debt. position and
diversified
funding mix. South
West Water is funded
to March 2020 while
the Viridor committed
energy recovery
facility (ERF)
programme is also
fully funded.
The successful
refinancing of
the GBP300 million
hybrid in September
2017has also
strengthened
our investment
capacity and covenant
position.
-------------------- ------------------------ ------------------------ ------ ---------- ------------------------
Non-compliance Long-term priorities The effective Amber The Group
or occurrence affected: management has no
of avoidable 1,2,3 of health and safety appetite for
health and A breach of health related risks continue health and
safety incident and safety law to be a priority safety related
could lead to financial for the Board and incidents
penalties, significant Pennon Executive. and has the
legal costs and highest standards
damage to the Group's The HomeSafe programme of compliance
reputation. was within the
successfully piloted Group and
in Viridor's materials third parties.
recycling facility
site in Plymouth,
nationwide rollout
commenced in April
2018. This is supported
by a programme
of capital investment
for existing assets.
The Group has also
invested in people,
processes and systems
within its HSSA
function during
the year which
will assist in
driving consistency
and monitoring
compliance with
the Group's health
and safety standards.
-------------------- ------------------------ ------------------------ ------ ---------- ------------------------
Market and economic conditions
Principal risks Strategic impact Mitigation Net Direction Risk appetite
risk
----------------- ------------------------- -------------------------- ------ ---------- ------------------------
Non-recovery Long-term priorities Mature and embedded Amber While seeking
of customer affected: debt collection to minimise
debt 1,2 strategies are non-recoverable
Potential impact in place for the debt,
on revenue recovery of South we recognise
as a result of West Water domestic customer affordability
reduced customer customer debt. challenges
debt collection, This is supplemented and the inability
particularly with by affordability to disconnect
regards to vulnerable tariffs such as domestic customers,
customers Restart, WaterCare some risk
and affordability. and Freshstart of uncollectable
to help reduce debt remains.
our bad debt exposure
for those customers
who are struggling
to pay. Within
the non-household
market there has
been renewed focus
on the collection
of older debt which
has proved effective.
Due to high proportion
of public sector
contracts, Viridor's
debt collection
risk is lower,
however, customer
debt is regularly
reviewed and proactively
managed.
----------------- ------------------------- -------------------------- ------ ---------- ------------------------
Macroeconomic Long-term priorities We work closely Red We seek to
risks arising affected: in partnership take
from a downturn 3 with our local well-judged
in the global Challenges such authority customers and
and UK economy as continued local in the delivery informed decisions
and commodity authority, reduced of our services, while ensuring
and power prices global demand for while Viridor remains plans are
our recycled commodities well positioned in place to
and decreases in across the waste mitigate the
power prices have hierarchy, with potential
a direct impact long term contracts impact of
on the revenues supporting the macroeconomic
generated by our ERF segment. risks.
recycling business.
We have secured
new markets for
our paper and plastic
recyclate in response
to changes in quality
requirements announced
by China. We continue
to invest in our
assets
and are working
with our supply
chain to improve
the quality of
paper recycling,
we are also implementing
self-help measures
to drive operational
efficiencies.
Energy risk management
at a Group level
acts as a natural
hedge between South
West Water and
Viridor, offsetting
any
drop in power prices.
Existing investments
that qualified
for Renewable Obligation
Certificates are
protected by the
'grandfathering'
principle.
----------------- ------------------------- -------------------------- ------ ---------- ------------------------
Operating performance
Principal risks Strategic impact Mitigation Net Direction Risk appetite
risk
--------------------- ------------------------- ------------------------- ------ ---------- ---------------------
Poor operating Long-term priorities Contingency plans, Green We seek to
performance affected: emergency resources reduce
due to extreme 1 and investment both the likelihood
weather or Failure of our through a planned and impact
climate change assets to cope capital through long-term
with extreme weather programme assist planning to
conditions may in mitigating this ensure sufficient
lead to an inability risk. Extreme weather measures are
to meet our customers' conditions, such in place.
needs, environmental as those
damage, additional experienced in
costs being incurred March 2018, are
and reputational expected to test
damage. the resilience
of South West Water's
assets, while the
expectations of
both customers
and Ofwat with
regards to operational
performance during
such
an event have increased.
We also prepare
drought plans every
three years which
are reviewed annually
for a range of
climate change
and demand
scenarios. The
recently published
Water Resources
Management Plan
has not
identified an overall
significant increase
in the risk to
water resources,
however ongoing
climate change
will continue
to challenge this.
Viridor has in
place a regional
adverse weather
management strategy,
aimed at reducing
disruption to site
operations
and transport logistics.
--------------------- ------------------------- ------------------------- ------ ---------- ---------------------
Poor customer Long-term priorities Targeted improvements Amber We continually
service/ increased affected: have been made seek
competition 1, 3 to continually to increase
leading to Poor customer service improve customer customer
loss of customer has a direct impact service satisfaction
base on South West Water's within South West and
delivery of the Water has contributed maximise customer
PR14 business plan to the achievement retention
and the ability of the ServiceMark while taking
of both Viridor accreditation during well-informed
and Pennon Water the year and we risk to
Services to retain continue to secure develop further
and grow market high service incentive markets.
share. mechanism (SIM)
scores.
There has been
a significant focus
within Viridor
on our customer
experience during
the year and the
reorganisation
of the marketing
and sales, service
delivery and customer
service functions
has improved
this further, alongside
the launch of an
annual customer
survey.
Both Viridor and
Pennon Water Services
have a large and
diverse customer
base and
are not materially
exposed to the
loss of any one
customer.
--------------------- ------------------------- ------------------------- ------ ---------- ---------------------
Business interruption Long-term priorities A continued reduction Amber We operate
or significant affected: in the number of a low
operational 1,3 pollution events tolerance
failures/ Operational failure in wastewater has for significant
incidents in our water been identified operational
business could as a priority and failure or
mean that we are a programme incidents
not able to supply of targeted action and seek to
clean water to is currently underway mitigate these
our customers or to address these risks
provide safe wastewater risks. where possible.
services. This
has a direct impact Both South West
on the successful Water and Viridor
delivery of the maintain detailed
PR14 business plan. contingency plans
and incident
Additionally, business management procedures
interruption caused which are regularly
by defects, outage reviewed. Equipment
or fire could impact failure is managed
the availability through a programme
and optimisation of
of our ERFs and sophisticated planned
recycling facilities. and preventive
maintenance regime
and effective management
of stores. The
focus on the
effective optimisation
of ERFs in particular
has resulted in
availability exceeding
the
Group's original
forecasts.
The Group also
maintains comprehensive
insurance across
its asset base
in the event of
an incident occurring.
--------------------- ------------------------- ------------------------- ------ ---------- ---------------------
Difficulty Long-term priorities The people strategy, Amber While turnover
in recruitment, affected: underpinned by does occur,
retention and 1,2,3 six threads, has we ensure
development Failure to have been rolled out the appropriate
of appropriate a workforce of across the skills and
skills, which skilled and motivated Group and is designed experience
are required individuals to ensure we have is in place
to deliver will detrimentally the workforce necessary with succession
the Group's impact all of our to deliver our plans to provide
strategy strategic priorities. strategic priorities. resilience
We need the right This has included in mitigating
people in the right our refreshed Vision, the impact
places to share increased workforce of this.
best practice, engagement, continued
deliver synergies commitment to training
and move the Group and development
forward in the and the introduction
new shared services of a Pennon Code
structure. of Conduct.
Succession plans
remain in place
for senior and
other key positions.
Challenges remain,
however, in sourcing
skills and expertise
externally for
specific senior
and operational
roles with the
implications of
Brexit
continuing to add
additional uncertainty.
--------------------- ------------------------- ------------------------- ------ ---------- ---------------------
Business systems and capital investment
Principal risks Strategic impact Mitigation Net Direction Risk appetite
risk
-------------------- ------------------------- ------------------------ ------ ---------- -----------------------
Failure or Long-term priorities All capital projects Red Pennon's investment
increased cost affected: are subject to activities
of capital 1,3 a robust business are taken
projects/ exposure Inability to case process and on an informed
to contract successfully skilled project basis with
failures deliver our capital management resource risks weighed
programme may result and senior oversight against appropriate
in increased costs is utilised to returns.
and delays and provide additional
detrimentally impacts rigour in the delivery
our ability to of major projects.
provide top class
customer service Robust due diligence
and achieve our is undertaken on
growth agenda. key suppliers,
technologies and
acquisitions. Back
to back agreements
and supplier guarantees
also provide additional
protection.
Commissioning at
Beddington, Dunbar
and Glasgow Recycling
and Renewable Energy
Facility (GRREC)
continued through
the year, with
financial contributions
from Dunbar ERF
protected by
contractual
mechanisms. Expenditure
at GRREC is above
initial expectations.
Viridor is
contractually entitled
to recover incremental
costs under certain
circumstances.
Avonmouth ERF and
Mayflower water
treatment works
remain on schedule
and on budget.
-------------------- ------------------------- ------------------------ ------ ---------- -----------------------
Failure of Long-term priorities The Group operates Amber We seek to
information affected: a mature and embedded minimise the
technology 1 governance framework risk of informational
systems, management Failure of our over the business technology
and protection, information technology as usual IT environment failure and
including cyber systems, due to and cyber security
risks inadequate internal major project threats to
processes or external implementations. the lowest
cyber threats could This is aligned level without
result in the business to ISO27001 standards detrimentally
being unable to and regular internal impacting
operate effectively and external on business
and the assessments operations
corruption or loss are
of data. This would undertaken to maintain
have a detrimental this accreditation.
impact on our customers Disaster recovery
and result in financial plans are in place
penalties and for corporate and
reputational operational technology
damage for the and
Group. these are regularly
reviewed and tested.
Cyber risks are
mitigated by a
strong information
security framework.
This is aligned
with guidance issued
by the National
Cyber Security
Centre (NCSC).
Awareness campaigns
have been undertaken
during the year
aligned with
preparations
for GDPR. A variety
of internal and
external assessments
are also undertaken,
including annual
penetration testing,
to test the robustness
of our controls.
-------------------- ------------------------- ------------------------ ------ ---------- -----------------------
DIRECTORS' RESPONSIBILITIES STATEMENTS
(This statement is extracted from the governance section of the
Annual Report 2018 and page numbers referred to are those in the
Annual Report 2018.)
The Directors are responsible for preparing the annual report,
the Directors' remuneration report and the financial statements in
accordance with applicable law and regulations. Company law
requires the Directors to prepare financial statements for each
financial year. Under that law the Directors have prepared the
Group and Company financial statements in accordance with
International Financial Reporting Standards (IFRSs) as adopted by
the European Union.
Under company law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Group and the Company and of
the profit or loss of the Group for the year.
In preparing these financial statements the Directors are
required to:
-- select suitable accounting policies and then apply them consistently
-- make judgements and accounting estimates which are reasonable and prudent
-- state whether applicable IFRSs as adopted by the European
Union have been followed, subject to any material departures
disclosed and explained in the financial statements.
The Directors confirm that they have complied with the above
requirements in preparing the financial statements.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company's
transactions, and disclose with reasonable accuracy at any time the
financial position of the Group and the Company; and enable them to
ensure that the financial statements and the Directors'
remuneration report comply with the Companies Act 2006 and, as
regards the Group financial statements, Article 4 of the
International Accounting Standards (IAS) Regulation. They are also
responsible for safeguarding the assets of the Group and the
Company and hence for taking reasonable steps for the prevention
and detection of fraud and other irregularities.
Each of the Directors, whose names and functions are listed on
pages 66 and 67, confirms that, to the best of his or her
knowledge:
i) The financial statements, which have been prepared in
accordance with International Financial Reporting Standards (IFRSs)
as adopted by the European Union, give a true and fair view of the
assets, liabilities, financial position and profit of the Group and
of the Company.
ii) The strategic report (pages 1 to 61) and the Directors'
report(pages 102 to 105) include a fair review of the development
and performance of the business during the year and the position of
the Company and the Group at the year end, together with a
description of the principal risks and uncertainties they face.
iii) Following receipt of advice from the Audit Committee, that
the annual report, taken as a whole, is fair, balanced and
understandable, and provides the information necessary for the
shareholders to assess the Group's performance, business model and
strategy.
The Directors are responsible for the maintenance and integrity
of the Company's website www.pennon-group.co.uk.
Legislation in the United Kingdom governing the preparation and
dissemination of financial statements may differ from legislation
in other jurisdictions.
RELATED PARTY TRANSACTIONS
(The following is Note 45 to the Financial Statements set out in
the Annual Report 2018.)
During the year Group companies entered into the following
transactions with joint ventures and associate related parties who
are not members of the Group:
2018 2017
GBPm GBPm
============================================ ===== =====
Sales of goods and services
-------------------------------------------- ----- -----
Viridor Laing (Greater Manchester) Limited 38.4 80.1
-------------------------------------------- ----- -----
INEOS Runcorn (TPS) Limited 15.9 15.8
============================================ ===== =====
Purchase of goods and services
-------------------------------------------- ----- -----
Lakeside Energy from Waste Limited 12.0 10.4
-------------------------------------------- ----- -----
INEOS Runcorn (TPS) Limited 6.0 6.6
-------------------------------------------- ----- -----
Dividends received
-------------------------------------------- ----- -----
Lakeside Energy from Waste Holdings Limited 6.5 4.5
============================================ ===== =====
Year-end balances
2018 2017
GBPm GBPm
============================================================= ===== =====
Receivables due from related parties
------------------------------------------------------------- ----- -----
Viridor Laing (Greater Manchester) Limited (loan balance) - 40.2
------------------------------------------------------------- ----- -----
Lakeside Energy from Waste Limited (loan balance) 8.2 8.6
------------------------------------------------------------- ----- -----
INEOS Runcorn (TPS) Limited (loan balance) 32.5 37.8
============================================================= ===== =====
40.7 86.6
============================================================= ===== =====
Viridor Laing (Greater Manchester) Limited (trading balance) - 15.3
------------------------------------------------------------- ----- -----
Lakeside Energy from Waste Limited (trading balance) 1.0 1.0
------------------------------------------------------------- ----- -----
INEOS Runcorn (TPS) Limited (trading balance) 2.0 1.3
============================================================= ===== =====
3.0 17.6
============================================================= ===== =====
Payables due to related parties
------------------------------------------------------------- ----- -----
Lakeside Energy for Waste Limited (trading balance) 1.2 2.7
------------------------------------------------------------- ----- -----
INEOS Runcorn (TPS) Limited (trading balance) 2.5 1.5
============================================================= ===== =====
3.7 4.2
============================================================= ===== =====
The GBP40.8 million (2017 GBP86.6 million) receivable relates to
loans to related parties included within receivables and due for
repayment in instalments between 2017 and 2033. Interest is charged
at an average of 13.0% (2017 13.0%).
Company
The following transactions with subsidiary undertakings occurred
in the year:
2018 2017
GBPm GBPm
================================================== ===== =====
Sales of goods and services (management fees) 12.2 11.2
================================================== ===== =====
Purchase of goods and services (support services) 1.5 0.5
================================================== ===== =====
Interest receivable 39.9 39.6
================================================== ===== =====
Interest payable 0.1 0.1
================================================== ===== =====
Dividends received 202.3 247.0
================================================== ===== =====
Sales of goods and services to subsidiary undertakings are at
cost. Purchases of goods and services from subsidiary undertakings
are under normal commercial terms and conditions which would also
be available to unrelated third parties.
Year-end balances
2018 2017
GBPm GBPm
============================================= ===== =======
Receivables due from subsidiary undertakings
--------------------------------------------- ----- -------
Loans 870.8 1,124.3
============================================= ===== =======
Trading balances 16.2 13.4
============================================= ===== =======
Interest on GBP425.3 million of the loans has been charged at a
fixed rate of 5.0%, on GBP20.3 million at a fixed rate of 6.0%
(2017 GBP70.0 million at 4.5%, GBP428.0 million nil at 5.0% and
GBP28.0 million at 6.0%). Interest on GBP411.8 million of the loans
is charged at 12 month LIBOR +1.0% (2017 GBP497.8 million) and on
GBP13.4 million at 12 month LIBOR + 3.0% (2017 nil). These loans
are due for repayment in instalments over the period 2018 to
2056.
Loans of GBP100.0 million at 1 month LIBOR + 1.0% and GBP0.5
million at base rate +1.0% were repaid during the year.
During the year there were no provisions (2017 nil) in respect
of loans to subsidiaries not expected to be repaid.
2018 2017
GBPm GBPm
======================================== ===== =====
Payables due to subsidiary undertakings
---------------------------------------- ----- -----
Loans 283.6 322.0
======================================== ===== =====
Trading balances 14.4 9.5
======================================== ===== =====
The loans from subsidiary undertakings are unsecured and
interest-free without any terms for repayment.
5 June 2018
www.pennon-group.co.uk
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