Pennon Group PLC (LON:PNN), one of the UK’s largest environmental infrastructure groups, has today issued its Full Year Results for the year ended 31 March 2020.
Solid 2019/20 performance
· We continue to do all we can to support our employees, customers and communities through this unprecedented COVID-19 pandemic, with the vast majority of operations continuing as usual
· Pennon is well positioned with strong funding and liquidity of £1.6 billion, prior to receipt of net cash proceeds from Viridor sale, to weather ongoing uncertainty
· Solid financial and operational performance across the Group, in line with management expectations, delivering for all our stakeholders, well positioned for K7 (2020-25)
· South West Water finished K6 (2015-20) with sector leading cumulative RORE of 11.8%
· Viridor has performed well, successfully delivering key priorities and growth investment
· Delivering on dividend commitment for 2019/20, announcing a sustainable 2020-25 dividend policy for the Continuing Group of CPIH +2% per annum
Financial impact of COVID-19
· Financial impacts for 2019/20 focused on expected credit losses (ECL) – related to customer debt – provision of £9.0 million across the Pennon Group
· Pennon Water Services not requiring deferral of wholesale payments at this stage – a number of other retailers taking advantage of wholesaler regulatory support
· Impact for 2020/21 – assumes a three month lockdown with ramp-up over the remaining year
o non-household revenue expected to reduce, offset by increased household demand
o risk from ECL for businesses, retailers and households. Support schemes to mitigate impacts
o Viridor resilient through ERF contracts
Sale of Viridor on track for early summer completion
· Sale of Viridor to KKR for an Enterprise Value of £4.2 billion representing an EV / EBITDA multiple of 18.5x
· Shareholder approval and European Commission merger clearance received, now finalising the last condition precedent
· Net cash proceeds expected to be £3.7 billion, to be used to reduce Pennon company borrowings, reduce the pension deficit, retain headroom for future value creating opportunities, and make a return to shareholders
· Following the sale of Viridor, Pennon will focus on its sector leading water and wastewater businesses and will continue to pursue growth within the UK water industry.
IFRS 16: Leases
From 1 April 2019 the Group adopted the new accounting standard IFRS 16: Leases resulting in a marginal net impact on the income statement. A full reconciliation is included in note 15 on pages 62 to 65 of this announcement.
On 18 March 2020, the Group entered into a formal sale agreement to dispose of Viridor to Planets UK Bidco Limited (Bidco), a newly formed company established by funds advised by Kohlberg Kravis Roberts & Co. L.P. (KKR). In accordance with IFRS 5 ‘Non-current assets held for sale and discontinued operations’, the operations of Viridor have been classified as discontinued operations in both the current and prior year. The ‘Continuing Group’ consists of South West Water, Pennon Water Services and Pennon Group (the Company).
The results of the Continuing Group compared to 2018/19 reflect:
· Revenue up marginally, from £632.6 million to £636.7 million as growing retail revenues from Pennon Water Services from outside of South West Water’s operational region offsets lower wholesale revenues from South West Water due to weather driven reduced demand
· EBITDA is marginally lower at £365.3 million from £367.3 million, reflecting the mix of margin on retail and wholesale revenues, with South West Water’s wholesale margin reducing as a result of lower customer consumption
· Profit before tax reduces by £8.7 million from £191.7 million to £183.0 million reflecting lower EBITDA, increased depreciation on asset growth and higher absolute interest
· Non-underlying items of £10.1 million reflect the gain from efficient financing, net of COVID-19 related ECL adjustments
· Tax of £70.6 million (increased from £32.8 million) primarily reflects the change in the legislated tax rate from 17% up to 19% which has increased the deferred tax charge
· Discontinued operations of £83.8 million (up from £54.0 million) reflects the delivery of growth and expansion of Energy Recovery Facilities in Viridor
· Adjusted earnings per share up +6.7% to 61.7p, statutory earnings per share down (6.7%) to 47.7p reflecting the deferred tax charge from changes in enacted headline rates
· Dividend per share up +6.6% to 43.77p.
To aid the comparability of reported results year on year, the figures and narrative in this statement will focus primarily on the results of the aggregate Continuing Group and Viridor. A full reconciliation of the statutory reported results is included in Item (i) in the Alternative Performance Measures on pages 67 to 72 of this announcement.
Continuing Group and Viridor
· As expected, Group revenue reduced 6.0% to £1,389.9 million, reflecting the exit from Viridor’s Greater Manchester contract and lower demand at South West Water due to weather driven lower volume consumption by customers
· Underlying profit before tax increased +2.6% to £287.6 million, supported by efficiencies across the Group and earnings growth from Energy Recovery Facilities (ERF) at Viridor
· Profit before tax for the year increased +15.8% to £301.5 million, due to efficient financing providing a non-underlying gain
· The increase in the tax charge largely reflects the deferred tax impact of the Government’s decision not to go ahead with the planned reduction in corporation tax rate from 19% to 17%
· Adjusted earnings per share up +6.7% to 61.7p, statutory earnings per share down (6.7%) to 47.7p reflecting the deferred tax charge from changes in enacted headline tax rates
· Dividend per share up +6.6% to 43.77p
· Group has £1.6 billion of cash and committed facilities providing strong liquidity and funding
o £840 million of new or renewed finance was raised in 2019/20, including £245 million of funding through the Sustainable Financing Framework for South West Water.
Completion of the Viridor disposal is expected early summer 2020, following which the Continuing Group of South West Water and Pennon Water Services and Pennon Group (the Company) will be a UK focused water infrastructure group.
Entering the new K7 regulatory period (2020-25), South West Water is the only water and wastewater company to have achieved fast-track status for two consecutive price reviews. Work is underway to deliver the commitments in the Business Plan focusing on cost base efficiency, operational performance, customer service and sustainable growth. South West Water is focused on providing services in the most efficient and sustainable way, using innovation and new technologies to serve its customers, communities and the environment.
Chris Loughlin, Pennon Group Chief Executive, commented:
“We are pleased with the solid operational and financial performance delivered this year. Viridor has continued to drive growth while South West Water has maintained its sector leading returns. In these uncertain and difficult times arising from the COVID-19 pandemic we would like to thank all our employees across the Group for the incredible hard work and dedication that has contributed to this performance. The health, safety and wellbeing of our employees and customers is paramount and continues to be our number one priority.
The performance for 2019/20 underpins the dividend of 43.77p per share.
It has been a landmark year for Pennon, culminating in the announcement in March of the proposed sale of Viridor to KKR for an Enterprise Value of £4.2 billion. Viridor has become a leader in engineering excellence, new technology and tackling environmental challenges, and the transaction recognises the strategic value that has been created over many years, accelerating the realisation of that value for shareholders.
Following the sale, Pennon will be a leading UK-focused water infrastructure group, delivering for customers and providing services in the most efficient and sustainable way possible. We are pleased to announce our Continuing Group dividend policy of CPIH + 2% growth per annum through to 2025, with additional returns to shareholders to come from the sale of Viridor.”