Annual Report and Accounts 2017 and Notice of AGM

RNS Number : 9855G

Pennon Group PLC

02 June 2017

 

PENNON GROUP PLC

PUBLICATION OF ANNUAL REPORT AND ACCOUNTS 2017

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 2017

Notice of Annual General Meeting

Form of Proxy

The Annual Report and Accounts 2017 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 2017 Annual General Meeting at Sandy Park Conference Centre, Sandy Park Way, Exeter, Devon, EX2 7NN on Thursday 6 July 2017 at 11.00am.

The following information in the Appendix to this announcement is as set out in the Company's Annual Report and Accounts 2017.  It should be read in conjunction with the Company's Full Year Results announcement released on 24 May 2017 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

2 June 2017

APPENDIX

PRINCIPAL RISKS AND UNCERTAINTIES

Strategic impact - long-term priorities affected
1		2		3
Leadership in UK water and waste		Leadership in cost base efficiency		Driving sustainable growth
Risk level
Green	Amber		Red		↑	↔	↓
Low	Medium		High		Increasing	Stable	Decreasing
The low, medium and high risk level is our estimate of the 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.					Current assessment of direction of travel of risk level.

Law, regulation and finance

Principal risks	Strategic impact	Mitigation	Net risk	Direction	Risk appetite
Compliance with law, regulation or decisions by Government and regulators, including water industry reform	Long-term priorities affected: 1 2 Non-compliance could lead to financial penalties and other additional costs which could undermine our efforts to maximise cost base efficiency. Damage to reputation could affect shareholder value. Regulatory reform could lead to inefficiencies and have a consequential affect on customer affordability. The June 2017 General Election could lead to a changed regulatory environment.	Robust regulatory framework ensures compliance with Ofwat, Environment Agency and other requirements. Full engagement in consultations on reform of policy and legislation, helps influence change through effective stakeholder relationships. Clear and accessible guidance for employees is in place and training programmes have been rolled out and are ongoing. Good progress has been made in preparing for regulatory reform and we entered the non-household retail market on1 April 2017. We are fully engaged in the programme for the next regulatory price review. External reviews support the assurance provided by the water business to its regulators.	Green	↔	High standards of compliance are sought with no appetite for legal and regulatory breaches. As regulatory reform is progressing, we aim to minimise the impact by targeting changes which are NPV neutral over the longer term, to protect shareholder value and customer affordability.
Maintaining sufficient finance and funding to meet ongoing commitments	Long-term priorities affected: 1 3 Failure to maintain funding requirements could lead to additional finance costs and put our growth agenda at risk.	Clear treasury and funding policies and an effective Group Treasury team. Funding in place at effective average interest rates below many in its sector, with prefunding and headroom, including revolving credit facilities, to meet future funding requirements.	Green	↔	Ensure funding requirements are fully met by maintaining prudent headroom.
Non-compliance or occurrence of avoidable health and safety incident	Long-term priorities affected: 1 2 3 Breach of health and safety laws and regulations could lead to financial penalties, significant legal costs, damage to reputation and loss of shareholder value.	Risk is reduced through health and safety compliance systems, policies and procedures, which are currently being reviewed and enhanced, supported by a programme of capital investment.	Amber	↑	High standards of compliance are sought with no appetite for compliance breaches within the Group and third party operations.
Uncertainty arising from open tax computations where liabilities remain to be agreed	Long-term priorities affected: 2 Censure for non-compliance with HMRC requirements could lead to financial penalties, significant legal costs, damage to reputation and loss of shareholder value.	Professionally qualified and experienced in-house tax team, supported by external specialists. Significant progress made during 2016/17 to agree outstanding tax items with HMRC.	Green	↔	Full compliance with HMRC requirements.
Increase in defined benefit pension scheme deficit	Long-term priorities affected: 2 The Group could be called upon to increase funding to reduce the deficit, impacting our cost base.	Use of professional advisers to manage the pension scheme's investment strategy to ensure the scheme can pay its obligations as they fall due. Risk increased post-Brexit vote due to market uncertainties. The situation has since stabilised, as evidenced by the outcome of the recent triennial evaluation, which demonstrates the recovery plan from 2013 is still on track.	Green	↔	Expectation that pension benefits can be paid in full without increased costs to the Company.

Market and economic conditions

Principal risks	Strategic impact	Mitigation	Net risk	Direction	Risk appetite
Non-recovery of customer debt	Long-term priorities affected: 1 2 Potential impact on customer debt collection, particularly with regard to vulnerable customers and affordability.	Water business debt collection strategies kept under review with new initiatives regularly implemented: ·  Targeting previous occupier debt after customer moves ·  Specific case management and use of court claims and ·  Use of charging orders. Affordability tariffs (e.g. Restart, WaterCare, FreshStart) help to reduce bad debt exposure for customers struggling to pay. Viridor's debt collection risk is lower due to the high proportion of public sector accounts.	Amber	↔	Minimise non-recoverable debt. We recognise customer affordability challenges and that given the inability to disconnect domestic customers, some risk of uncollectable debt remains.
Macro-economic risks arising from the global and UK economic downturn commodity and power prices	Long-term priorities affected: 3 The economic climate and falling commodity and energy prices have a direct impact on the revenues generated by our recycling business.	Viridor is well positioned across the waste hierarchy, with long-term contracts supporting the ERF segment. The recycling self help measures focus on performance, in mitigating the impact of global economic conditions on commodity prices. 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.	Amber	↔	Taking well-judged risks and having response plans in place to mitigate external macro-economic risk factors down to an acceptable level.

Operating performance

Principal risks	Strategic impact	Mitigation	Net risk	Direction	Risk appetite
Poor operating performance due to extreme weather or climate change	Long-term priorities affected: 1 Failure of our assets to cope with extreme weather conditions may lead to an inability to meet our customers' needs, environmental damage, additional costs and loss of reputation.	Contingency plans, emergency resources and investment through a planned capital programme mitigates the risks of extreme weather incidents. We prepare a Water Resources Management Plan every five years and drought plans every three years, which are both reviewed annually for a range of climate change and demand scenarios, with schemes promoted to maintain water resources (e.g. pumped storage for reservoirs), conservation and customer water efficiency measures. While no water restrictions are envisaged, the risk is rising due to the recent prolonged period of dry weather. Viridor has in place a regional adverse weather management strategy, aimed at reducing disruption to site operations and transport logistics.	Green	↑	Reduce both the likelihood and impact through long-term planning and ensuring sufficient measures are in place to mitigate risk.
Poor customer service/ increased competition leading to loss of customer base	Long-term priorities affected: 1 3 Poor customer service has a direct impact on South West Water's delivery of the PR14 business plan and Viridor's ability to retain and grow market share. The opening up of the non-household retail market to competition means that we must ensure we understand and meet the needs of our business customers if we are to deliver growth in this area.	Targeted improvements made to improve customer service including South West Water's relative industry standing during the K6 period. Viridor's strategy to diversify into energy recovery has offset the decline in landfill and current challenges in recycling. Viridor is exploring alternative uses for its landfill assets.	Amber	↑	Good customer service is at the heart of everything we do. Continually seek to increase customer satisfaction. Minimise the impact of market reform by defending the existing customer base whilst developing further markets.
Business interruption or significant operational failures/ incidents	Long-term priorities affected: 1 Operational failure in our Water business could mean that we are not able to supply clean water to our customers or provide safe wastewater services. This has a direct impact on successful delivery of the PR14 business plan. Business interruption caused by defects, outages or fire could impact the availability and optimisation of our ERFs and recycling facilities.	Detailed contingency plans and incident management procedures. Equipment failure is managed through sophisticated planned preventative maintenance regimes. Any disruption is alleviated by good liaison and communication.	Amber	↑	Effective business continuity and contingency plans in place to mitigate the risk and accelerate the recovery from an incident, with residual risk covered by insurance.
Difficulty in recruitment, retention and development of appropriate skills, which are required to deliver the Group's strategy	Long-term priorities affected: 1 2 3 Ensuring we have a workforce of skilled and motivated individuals is key to delivery of all our strategic priorities. We need the right people in place to share best practice, deliver synergies and move the Group forward in the new 'shared services' structure. We need a team with the necessary commercial acumen to help our businesses grow and prosper.	Succession plans are in place. The recent Group restructure, Viridor transformation and integration of Bournemouth Water have strengthened the executive team, but in turn has the potential to impact morale across the Group. With reliance on EU nationals, uncertainties across the Group following the Brexit vote mean the current assessment of the direction of travel of the risk is increasing.	Amber	↑	Appropriate skills and experience in place, with good succession plans to mitigate impact on strategic plan.

Business systems and capital investment

Principal risks	Strategic impact	Mitigation	Net risk	Direction	Risk appetite
Failure or increased cost of capital projects/ exposure to contract failures	Long-term priorities affected: 1 3 The success of our capital programme and long-term contracts is key to our ability to provide top class customer service, the delivery of our growth agenda and our aspirations to grow market share in our waste recycling and recovery business.	Skilled project management resource and oversight boards provide rigour to the delivery of major projects. Due diligence on suppliers, technologies and acquisitions. Back-to-back agreements and supplier guarantees provide protection. Regular reporting of performance on major contracts and post project appraisals. The Greater Manchester Waste Disposal Authority has publicly stated it is seeking an exit from the Greater Manchester Waste PFI. Pennon/Viridor is working closely with its JV partners to secure a mutually acceptable outcome.	Amber	↔	Pennon's investment activities are based on taking well-judged risks for appropriate returns.
Failure of information technology systems, management and protection, including cyber risks	Long-term priorities affected: 1 Failure of our systems due to inadequate cyber security could lead to significant business interruption. Corruption or loss of data could result in detriment to our customers, financial penalties and reputational damage.	Major systems implementation is supported by a formal programme governance framework, supplemented by specialist consultants. Viridor systems are in the process of migrating to a Group shared service platform. Cyber risks are mitigated by a strong information security framework, cyber security awareness campaigns, plus internal and external testing and formal ISO accreditation. Ensure all possible measures are in place, aligned to guidance issued by the National Cyber Security Centre (NCSC), commensurate with the fast changing cyber risk landscape.	Amber	↔	Robust systems in place to support business activity, with strong cyber protection to minimise a growing risk.

DIRECTORS' RESPONSIBILITIES STATEMENTS

(This statement is extracted from the governance section of the Annual Report 2017 and page numbers referred to are those in the Annual Report 2017.)

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 56 and 57, 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 51) and the Directors' report (pages 100 to 103) 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 44 to the Financial Statements set out in the Annual Report 2017.)

During the year Group companies entered into the following transactions with joint ventures and associate related parties who are not members of the Group:

	2017 £m	2016 £m
Sales of goods and services
Viridor Laing (Greater Manchester) Limited	80.1	87.3
INEOS Runcorn (TPS) Limited	15.8	18.5
Purchase of goods and services
Viridor Laing (Greater Manchester) Limited	-	0.3
Lakeside Energy from Waste Limited	10.4	12.1
INEOS Runcorn (TPS) Limited	6.6	4.3
Dividends received
Lakeside Energy from Waste Holdings Limited	4.5	6.0

Year-end balances

	2017 £m	2016 £m
Receivables due from related parties
Viridor Laing (Greater Manchester) Limited (loan balance)	40.2	36.8
Lakeside Energy from Waste Limited (loan balance)	8.6	8.9
INEOS Runcorn (TPS) Limited (loan balance)	37.8	35.5
	86.6	81.2
Viridor Laing (Greater Manchester) Limited (trading balance)	15.3	11.3
Lakeside Energy from Waste Limited (trading balance)	1.0	1.0
INEOS Runcorn (TPS) Limited (trading balance)	1.3	2.7
	17.6	15.0
Payables due to related parties
Lakeside Energy for Waste Limited (trading balance)	2.7	2.3
INEOS Runcorn (TPS) Limited (trading balance)	1.5	1.6
	4.2	3.9

The £86.6 million (2016 £81.2 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% (2016 13.0%).

Company

The following transactions with subsidiary undertakings occurred in the year:

	2017 £m	2016 £m
Sales of goods and services (management fees)	11.2	10.5
Purchase of goods and services (support services)	0.5	0.4
Interest receivable	39.6	38.6
Interest payable	0.1	0.1
Dividends received	247.0	140.7

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

	2017 £m	2016 £m
Receivables due from subsidiary undertakings
Loans	1,124.3	965.6
Trading balances	13.4	8.6

Interest on £70.0 million of the loans has been charged at a fixed rate of 4.5%, on £428.0 million at a fixed rate of 5.0% and on £28.0 million at a fixed rate of 6.0% (2016 £70.0 million at 4.5%, £373.6 million nil at 5.0%, £28.0 million at 6.0% and £0.5 million at 1.4%). Interest on £497.8 million of the loans is charged at 12 month LIBOR +1.0% (2016 £443.5 million) and on £0.5 million at base rate +1.0%. These loans are due for repayment in instalments over the period 2016 to 2043.

Interest on £100.0 million of the loans has been charged at 1 month LIBOR + 1.0% (2016 £50.0 million). This loan is expected to be repaid in 2017/18. During the year there were no provisions (2016 nil) in respect of loans to subsidiaries not expected to be repaid.

	2017 £m	2016 £m
Payables due to subsidiary undertakings
Loans	322.0	287.2
Trading balances	9.5	14.6

The loans from subsidiary undertakings are unsecured and interest-free without any terms for repayment.

2 June 2017

www.pennon-group.co.uk

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