About our businesses - Pennon Group
OTHER FINANCIAL INFORMATION
OPERATING COSTS
Group operating costs for the year totalled £799.3 million and included the following major categories of expenditure:
| £m | |
| Landfill tax | 150 |
| Depreciation | 135 |
| Manpower | 132 |
| Transport | 51 |
| Raw materials and consumables | 27 |
| Property | 26 |
| Power | 24 |
| Abstraction and discharge consents | 8 |
| Lease rentals - plant and machinery | 8 |
| Statutory operating licences and royalties | 8 |
ASSET VALUE OPINION
In the opinion of the Directors, the current market value of land and buildings is not significantly different from the holding cost shown in the financial statements.
GROUP INVESTMENT
Capital expenditure by the Group on property, plant and equipment was £190.2 million (2008/09 £231.8 million). The major categories of expenditure were:
CASH FLOW
In 2009/10 the Group once again had a strong operating cash flow, with net borrowing increasing by only £3 million. The operating cash flow was offset by capital expenditure and investment in acquisitions and joint ventures.
| Summarised cash flow | 2009/10 | 2008/09 |
| £m | £m | |
| Cash inflow from operations | 380 | 341 |
| Pension contributions | (16) | (40) |
| Net cash inflow from operations | 364 | 301 |
| Net interest paid | (70) | (80) |
| Dividends and tax paid | (68) | (100) |
| Capital expenditure payments | (192) | (236) |
| Acquisitions/joint ventures | (40) | (3) |
| Net cash outflow | (6) | (118) |
| Shares issued | 2 | 2 |
| Equity component of convertible bond issued | 10 | - |
| Debt acquired with acquisitions | (5) | - |
| Debt indexation/interest accruals | (4) | (13) |
| Increase in net borrowings | (3) | (129) |
LIQUIDITY AND DEBT PROFILE
At 31 March 2010 the Group held cash and deposits of £494 million, and also had committed undrawn facilities of £200 million. During the year new borrowings and finance lease drawdowns, less debt repayments, amounted to £145 million. In April 2010 a further £100 million of debt facilities have been established or renewed.
At 31 March 2010 loans and finance lease obligations were £2,389 million, giving net debt (after the £494 million cash) of £1,895 million, an increase of £3 million during the year.
The major components of debt finance at 31 March 2010 were:
During the year the following finance initiatives were implemented:
- £125 million convertible bond
- £215 million term loans and RCFs renewed
- £89 million of new term loans
- circa £200 million finance lease extended to 2052 and converted to 'bullet' repayment
- £25 million finance lease for South West Water
- £25 million 5-10 year finance lease for Viridor
- new provider for £35 million of Environment Agency bonds sourced.
Pennon Group debt has a maturity of 0-47 years with an average maturity of 23 years.
The Group has fixed or put in place swaps to fix the interest rate on 50% of South West Water's net debt for the entire K5 period. The average rate achieved on the £803 million fixed rate debt is circa 3.65%.
In addition, South West Water has approximately 23% of its debt index-linked to 2041-2057, at an overall real rate of 1.66%.
South West Water held cash and deposits of £265 million at 31 March 2010 as a result of the prudent pre-funding of the capital programme.
Over 50% of gross debt relates to finance leasing which provides a long maturity profile and secured credit margins.
The fair value of borrowings, based on the market value of equivalent instruments at the balance sheet date, is detailed in note 27 to the financial statements and amounted to a £296 million funding benefit compared with book value as at 31 March 2010 (2009 £221 million).
The interest payable on the Group's finance leases benefits from the fixed credit margins secured at the inception of the lease.
The above measures and financing structure have ensured that the Group has the appropriate financing in place to:
- meet its current requirements from existing borrowing facilities without breaching covenants or other borrowing restrictions
- give sufficient flexibility to implement the Group's strategic objectives and thereby maximise shareholder value.
CAPITAL STRUCTURE - OVERALL POSITION
With year-end net debt of £1,895 million, the Group year-end ratio of net debt to (equity plus net debt) was 74% (31 March 2009 76%).
South West Water's debt to Regulatory Capital Value (RCV) was 60.6% at 31 March 2010 (2009 63.8%), within Ofwat's 'optimum range' of 55% - 65%.
Viridor is funded by a combination of Pennon Group equity and debt (raised by Pennon Group) and direct borrowing by Viridor. At the year-end Viridor's net debt stood at £420 million (2009 £443 million), equivalent to 3.7 times EBITDA (2008/09 4.2 times).
TREASURY POLICIES
The Group's treasury function seeks to ensure that sufficient funding is available to meet foreseeable needs, maintain reasonable headroom for contingencies and manage interest rate risk. It operates within policies approved by the Board and does not undertake any speculative trading activity.
The Board regularly monitors the Group's expected financing requirements for at least the next 12 months. These are expected to be met from existing cash balances, loan facilities and operating cash flows for the coming year.
The Group has considerable financial resources together with a broad spread of business activities. Consequently the Directors believe that the Group is well positioned to manage its business risks successfully despite the current uncertain economic outlook.
INTERNAL BORROWING
For regulatory purposes, South West Water funding is treated as effectively ring-fenced. Funds raised by, or for, South West Water are used in the appointed business (provision of water and sewerage services) and are not available as long-term funding for the rest of the Group.
GOING CONCERN
Having considered the Group's funding position and financial projections as outlined above, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the financial statements.
TAXATION OBJECTIVES AND POLICIES
Pennon Group's tax strategy is to enhance shareholder value by legally minimising taxes whilst having regard to the longer-term relationships with the taxing authorities. The Group will consider bona fide business arrangements which qualify for tax exemption or tax relief.
The Group made a net payment of £4 million for UK corporation tax in the year (2009 £31 million). The significant reduction in the net payment, compared to the prior year, is due to refunds received from HMRC arising on the reassessment of payments made in previous years.
The UK corporation tax charge of £43 million was less than the charge which would have arisen from the accounting profit of £184 million taxed at the statutory corporation tax rate of 28%. A reconciliation is provided in note 9 to the financial statements.
The Group's total tax contribution extends beyond the corporation tax charge. A variety of taxes are incurred by the Group:
Total taxes amounted to £250 million, of which £43 million was collected on behalf of the authorities for net VAT and employee payroll taxes.
The most significant taxes involved and their profit impact were:
- landfill tax of £146 million was accounted for by the Group on behalf of HMRC. Landfill tax is an operating cost which is chargeable to customers in turnover. In addition the Group incurred landfill tax of £24 million on the disposal of waste to third parties. This element is an operating cost for the Group and reduces profit before tax
- Value Added Tax (VAT) of £7 million (net) was collected by the Group and paid to the taxation authorities. VAT has no material impact on profit before tax
- business rates of £20 million were paid during the year to local authorities. These are a direct cost to the Group and reduce profit before tax
- employment taxes of £36 million included employees' 'Pay As You Earn' (PAYE) and total National Insurance Contributions (NICs). Employer NICs of £9 million were expensed around 93% to operating costs and around 7% capitalised to property, plant and equipment
- Fuel Excise Duty of £11 million related to transport costs. This reduced profit before tax.
PENSIONS
The Group operates defined benefit pension schemes for certain existing staff of Pennon, South West Water and Viridor. The main schemes were closed to new entrants on or before 1 April 2008.
The Group pension schemes had net liabilities (before deferred tax) at 31 March 2010 of £108 million (2009 £66 million). The deficit increase was due to increased liabilities from a reduced discount rate and higher expected long-term inflation partially offset by employer contributions of £16m and increases in asset values from market movements.
The increase in fund assets from £276 million to £402 million includes £55 million from the acquisition of Greater Manchester Waste Limited.
The net liabilities (after deferred tax) of £78 million represented less than 5% of the Group's total market capitalisation at 31 March 2010.
INSURANCE
The Group manages property and third party risks by the purchase of insurance policies. The main insurance policies cover property, business interruption, public liability, environmental pollution and employers' liability.
There are three tiers of insurance covering operating risks. The first tier is self-insurance in the form of a moderate deductible. The second tier is covered by the Group's subsidiary, Peninsula Insurance Limited, which insures the layer of risk between the deductible and the cover provided by external insurers. The third tier of risk is placed with the external insurance market. The Group's insurance brokers assist in sourcing appropriate insurance cover from insurance companies which have good credit ratings.