Pennon Regulatory News (PNN)

PENNON GROUP PLC

28 November 2013

HALF YEAR REPORT ON THE SIX MONTHS ENDED 30 SEPTEMBER 2013

Pennon Group announces its unaudited results for the half year ended 30 September 2013.

A presentation for City audiences will be held today, Thursday 28 November 2013, at 09:00am at the Auditorium, Bank of America Merrill Lynch Financial Centre, 2 King Edward Street, London, EC1A 1HQ. A live audio 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, 28 November 2013, please contact :

David Dupont

Group Director of Finance - Pennon

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0207 251 3801

Jo Finely

Investor Relations Manager - Pennon

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Sarah Heald

RLM Finsbury

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H1 2013/14 FINANCIAL AND CORPORATE HIGHLIGHTS

·

Profit before tax(1) up 3.5% to £110.9m

-

South West Water up 7.6% to £87.3m

-

Viridor down 28.8% to £15.3m

·

Viridor PBIT plus joint ventures down 15.8% to £23.4m

-

Viridor PBIT plus joint ventures up 31% compared with H2 2012/13

·

Adjusted earnings per share up 2.6% to 23.8p(1) (2) (3)

·

Dividend

-

Interim dividend per share up 7.2% to 9.39p

·

Capital investment(4) up 9.0% to £205m

·

Strong liquidity and funding position

-

£210m facilities secured/renewed since 31 March 2013

-

Total of £1,132m cash/committed facilities at 30 September 2013

·

Pennon Group achieved top 10% position in FTSE350 Carbon Disclosure Project participants for quality of disclosure

(1)

Comparatives restated for IAS 19 (Revised)

(2)

Earnings per share before deferred tax and adjusted proportionately to reflect the half year impact of the annual hybrid capital periodic return

(3)

Basic earnings per share (statutory basis) were 29.4p

(4)

Including construction spend on service concession arrangements and on Peterborough EfW

H1 2013/14 OPERATIONAL HIGHLIGHTS

·

South West Water :

-

Continued strong performance against the 2010-2015 regulatory contract

-

Robust operational performance and improving standards of customer service

•

Strong performance against bathing water compliance

•

Further improvement in

-

SIM(1) performance at the half year

-

first time resolution of written complaints

-

PBT up due to

•

Higher revenues and rigorous cost control

•

Efficiency delivery ahead of expectations

-

PR14 - Business Plan for 2015 - 2020 submission to Ofwat 2 December

•

a balanced, well evidenced and supported plan

•

Tariff freeze in 2014/15

-

no impact on shareholder value due to 6 year revenue NPV neutral smoothing supported by Ofwat

•

Followed by average bills below RPI through to 2020

(1)

Service Incentive Mechanism

·

Viridor:

-

Financial performance in line with management expectations

•

PBIT plus joint ventures in 2013/14 expected to be broadly similar to 2012/13

-

Improvement in recycling margins

-

Landfill energy focus

•

Maximising value of landfill gas generation

•

Managing decline in landfill inputs by concentrating on strategic sites and alternative uses

-

Key long term Energy from Waste (EfW) developments

•

Runcorn I commissioning under way

•

Significant progress in construction at Oxford, Cardiff and Exeter

•

Glasgow and Peterborough construction commenced

•

Beddington EfW planning permission approved May 2013. The Secretary of State and Mayor of London have elected not to exercise their right to call the approval in to appeal

•

South East Wales residual waste project (Prosiect Gwyrdd) expected to sign shortly

•

Down to last two bidders for Edinburgh and Midlothian, Central Bedfordshire and Wigan waste contracts

Ken Harvey, Chairman said:

"I am pleased to report further progress in the Group in the half year.

"South West Water is continuing its strong performance against the 2010-2015 regulatory contract and is well placed to outperform its assumptions. The company continues to deliver robust operational performance and improving standards of customer service, notwithstanding the extreme flooding and then the dry summer experienced during the first half of this year. South West Water is well prepared for PR14 and will publish its Business Plan on 2 December.

"I am also pleased to report that financial performance at Viridor in the first half of this year has been in line with management expectations. As previously stated this will be a transitional year for Viridor and the company expects PBIT plus joint ventures in 2013/14 to be broadly similar to 2012/13. Cost reductions are delivering an improvement in recycling margins per tonne compared with the second half of 2012/13, offsetting the trend decline in landfill. Viridor has continued to make strong progress on building its EfW business and securing base-load contracts. These projects are expected to drive the company's long term profit growth."

GROUP OVERVIEW(1)

·

Revenue up by 5.3% to £667.0m

·

Operating profit up by 2.6% to £139.7m

·

Net interest payable reduced by 5% to £29.6m

·

Profit before tax up 3.5% to £110.9m

·

Adjusted earnings per share up by 2.6% to 23.8p(2). Basic earnings per share increased from 25.4p to 29.4p

·

Capital investment(3) up 9.0% to £205.1m

·

Net borrowings £2,098m, an increase of £89m since 31 March 2013. Gearing, being net borrowings to (shareholders' funds plus net borrowings) was 65% (2012/13 - 65%). Net debt includes £549m for EfW plants under construction (Runcorn II, Exeter, Oxford, Cardiff and Glasgow)

·

Substantial cash resources and committed facilities of £1,132m(4) to fund future investment - well placed in current financial market conditions

·

South West Water net debt to RCV was 56.1% (31 March 2013 - 54.9%)

·

Net interest cover (excluding pensions net interest, IFRIC 12 contract interest receivable and discount unwind on provisions) was 5.2 times (H1 2012/13 - 4.6 times)

·

Average debt maturity 22 years

·

Fair value of debt £261m less than book value

(1) Comparatives restated for IAS 19 (Revised)

(2) Earnings per share before deferred tax and adjusted proportionately to reflect the half year impact of the annual hybrid capital periodic return

(3) Including construction spend on service concession arrangements and on Peterborough EfW

(4) Including £146m deposits with Letter of Credit providers and lessors

DIVIDEND

The interim dividend of 9.39p per share represents an increase of 7.2%, 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 3 April 2014 to shareholders on the register on 31 January 2014. 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 10 March 2014.

SOUTH WEST WATER

South West Water is continuing its strong performance against the 2010-2015 regulatory contract with further advances in customer service. The company's profit before tax has increased benefiting from good cost control and continued efficiency delivery.

Financial Highlights

South West Water's operating profit for the half year increased by £6.5m (5.7%) to £121.3m.

Revenues rose 4.9% to £269.1m as a result of tariff increases, higher other sales and new connections, slightly offset by the effects of customers switching to a metered tariff. Approved tariff increases, including the 1.3% K factor, amounted to £12.7m and 3,100 new customer connections contributed £1.2m of additional revenue. Other sales increased by £1.2m predominantly as a result of higher developer services activity. Customers switching from unmeasured to metered charging reduced revenue by £2.5m. 78% of South West Water's domestic customers are now metered. Customer demand is in line with the same period last year, with lower demand at the start of the year from cold weather offset by higher demand over the summer period due to the drier weather.

Operating costs for the half year, including depreciation, increased from £141.7m to £147.8m.

Cost increases (including power, business rates and pensions) for H1 2013/14 were £4.8m. Cumulative cost increases over K5 continue to be lower than RPI for the same period. £1.7m of efficiencies have been delivered in this half year bringing the cumulative K5 delivery to £20.3m. Other cost increases were:

·

costs from capital schemes of £1.8m (depreciation and asset maintenance costs relating to the increased emphasis on maintenance in the investment programme)

·

£1.2m increased cost of sales from developer services income

South West Water's programme of organisational restructuring was weighted towards the beginning of K5. Costs this half year in relation to ongoing operational and organisational changes of £0.2m are in line with the same period last year.

The net interest charge of £34.0m was broadly in line with the first half of 2012/13, with higher RPI on indexed linked facilities and the costs of new borrowings being offset by lower LIBOR rates on other borrowings.

Profit before tax increased by 7.6% to £87.3m.

Capital expenditure in the first half of 2013/14 was £58.5m compared with £42.7m in the first half of 2012/13. Regulatory net capital expenditure(1) was £64.7m. 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 half year include:

·

A focus on improving water quality; upgrades at biggest water treatment works

·

Safeguarding water supply and reducing interruptions; upgrades to strategic reservoir

·

Targeting compliance; investment in 113 sites in past 2 years

·

Investment in assets to improve shellfish and bathing water quality

The robustness of South West Water's networks and assets is illustrated by achieving Ofwat's 'stable serviceability' status in all areas.

(1)  Capital expenditure including infrastructure renewals expenditure, less grants and contributions

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 3.8% p.a. delivered in the K period to date. This is being achieved through ongoing improvement programmes including:

·

operational ways of working - integration of customer services management and asset improvements through the PUROS(2) programme

·

energy procurement and usage - energy efficiency schemes alongside additional power generation through renewable sources

·

rationalising administration and support services

·

right-sourcing and innovative contracting - continued tenders to achieve the 'right price'

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(3) and is targeted to achieve 5% outperformance of the Final Determination(4) K5 capital programme.

(1)  average over K5 (2010-2015)

(2)  PUROS - Phased Utilisation of Remote Operating Systems

(3)  based on current published Construction Output Price Index (COPI)

(4)  using 2009 Final Determination estimates of COPI

Operational Highlights

The 'Pure Water, Pure Service, Pure Environment' strategy is the cornerstone of South West Water's operations, targeting robust operational K5 performance and high standards of customer service underpinned by strong financial results.

Pure Water

A significant proportion of the company's capital programme in 2013/14 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 and leakage targets have been met every year since their introduction.

Despite the drier weather over the summer South West Water successfully managed its water resources to enable a continued secure supply of water for the region, resulting in the 17th consecutive summer without hosepipe bans or drought orders.

Work continues on South West Water's innovative catchment management programme known as 'Upstream Thinking'. Designed to improve raw water quality and natural water storage in the landscape through improvements to agricultural land and moorland areas, the project remains on track to deliver the required activities for K5.

The project has been recognised for leading the way in business sustainability and for its positive environmental impact. This year it won the 'Living Wetlands Award' from the Chartered Institution of Water and Environmental Management (CIWEM).

Pure Service

South West Water's emphasis on service is delivering tangible improvements for customers and is reflected in reducing levels of customer complaints and an increase in the number of customer contacts resolved first time. South West Water is improving levels of customer satisfaction with continued improvements reflected in Ofwat's Service Improvement Mechanism (SIM) score which is increasing during 2013/14. In addition more customers feel they are receiving value for money, written complaints continue to fall for the fifth successive year and the company was recently ranked as a leading performer for resolving complaints first time.

South West Water continues to build on strategic investment made during the K5 period, such as using its customer relationship system to manage customer contacts through to first time resolution and providing online offerings such as 'My Account' account management and smartphone apps. In addition South West Water is working with the Institute of Customer Service (ICS) to invest in external benchmarked training for staff.

The cost of bad debts is comparable with the first half of the prior year. The charge, as a proportion of revenue at 1.8%, is consistent with the full year 2012/13, reflecting general economic conditions. Collection initiatives to further improve the bad debt position include using tracing tools to target former occupiers of newly vacated properties. The 'Restart' programme continues to incentivise customers to enter into regular payment plans. A number of schemes are in place to assist vulnerable customers in the region, including the successful introduction this year of a new social tariff 'WaterCare' which aims to assist customers by reducing their bills to an amount they can better afford to pay.

Pure Environment

The 2013 bathing season ended with the best bathing water quality results for seven years, with 132 (91%) of the region's beaches achieving the EU guideline standard (excellent status) and 144 (99%) of beaches achieving the mandatory standard (good status). This is a significant improvement on last year's results when 91 (62%) achieved the guideline and 133 (91%) the mandatory standards.

South West Water is committed to working with other organisations and local communities so that residents and visitors alike can continue to enjoy the region's beautiful beaches:

·

the award winning 'Beach Live' service continues to provide beach users with real-time information about bathing water quality with new feeds and features implemented this year.

·

South West Water has committed to spend up to £20m on a range of schemes to improve bathing water quality ahead of the European Union's Revised Bathing Water Directive coming into force in 2015.

Following an increase last year in the number of operational incidents giving rise to internal sewer floodings due to extreme wet weather, so far this year the company has achieved a major improvement in these results and incidents have fallen.

South West Water has maintained its investment in renewable energy, bringing the total expenditure for K5 to over £4m. Solar energy represents a significant proportion of this expenditure, with over one million kilowatt hours of solar energy generated last year.

The company continued its good performance against Ofwat's Key Performance Indicators (KPIs). Customer service, reliability and availability of supply, and key environmental impact measures all achieved 'green' status in 2012/13.

In addition South West Water delivered sector leading performance for current serviceability, security of supply and sludge disposal satisfaction.

Further improvements and investments are targeted at reducing waste water pollution incidents and improving treatment compliance at waste water treatment works.

Political and Regulatory Developments

Water Bill

The Government published the Water Bill on 27 June 2013 setting out a range of reforms for the water sector in England and to a lesser extent in Scotland and Wales. The Bill proposes to introduce both retail and wholesale competition and is expected to be enacted through Parliament next year. Preparations for market reform are under way with the retail market opening expected from April 2017.

South West Water is fully engaged in the 'Open Water' programme, governed by the Department for Environment, Food and Rural Affairs & Ofwat, which will shape market reform in the sector.

Building on the success of the 'Source for Business' range of specialist advice and support measures, the company has also applied for a retail water supply licence which will allow it to retail water to customers outside the region currently served.

PR14 Business Plan

On 2 December 2013 South West Water will be submitting its PR14 Business Plan to Ofwat. A City conference call will be held at 9.00am on 3 December.

The Plan reflects the most extensive customer/stakeholder engagement and research ever undertaken by the company and feedback indicates it has achieved 84% acceptability from customers.

The company said during this customer engagement process that it expected its prices would rise by less than inflation between 2015/16 and 2019/20, driven by efficiencies and a lower industry cost of capital. However under current plans customers would face an increase in bills in 2014/15. Research indicated that a price increase followed by reductions would not match customer preferences.

To reflect customer preferences South West Water is therefore announcing a tariff freeze for 2014/15, which will be achieved without loss of shareholder value. This is due to Ofwat's support for the company's proposal that the revenue foregone in 2014/15 will be taken into account in the forthcoming price review.

In addition to the 2014/15 tariff freeze the company is proposing that there will be no average bill increase in 2015/16 followed by below forecast inflation increases to 2019/20.

A summary of the Business Plan and other related documents, including an investor summary, will be available from 2 December 2013 on South West Water's website at www.southwestwater.co.uk/waterfuture

South West Water Outlook

South West Water continues to focus on efficient service delivery, improvements in service to customers, and the satisfaction of its regulatory and legislative obligations. It is on track to outperform the K5 regulatory contract.

South West Water has prepared a balanced Business Plan for the 2015-20 period, is engaged in the development of Ofwat's regulatory reform agenda and is well positioned for Government legislative changes.

VIRIDOR

Viridor's strategy is focussed on "transforming waste", adding substantial value through recycling and renewable energy generation. The focus for recycling activities is on the production of high quality materials, and management of the cost base to improve margins. The focus for the Landfill energy business is to maximise the value of landfill gas generation and to manage the expected decline in landfill inputs by concentrating on strategic sites and alternative uses. Viridor has made strong progress on the construction of its growing PPP/EfW asset base. EfW is central to the UK's waste and renewable energy strategies as the long term low cost alternative to landfill for disposal of residual waste. Viridor expects to have 15% market share by 2020 with a network of strategic facilities which will underpin the company's long term profit growth.

Financial Highlights

Revenue was up 5.3% to £398.2m. Recycling revenue decreased £5.5m due to lower prices, landfill was up £5.5m due to higher landfill tax and construction revenues were up, reflecting growth in assets under construction.

Viridor's earnings before interest, tax, depreciation and amortisation (EBITDA) for the half year decreased by £3.5m (7.8%) to £41.4m. PBIT fell £3.0m (14.3%) to £18.0m. PBIT plus joint ventures decreased by £4.4m (15.8%) to £23.4m, but was 30.7% higher than H2 2012/13.

Profit before tax decreased £6.2m (28.8%) to £15.3m reflecting lower PBIT plus joint ventures and the increased interest charge from higher provisions.

Capital expenditure including spend on service concession arrangements and on Peterborough EfW for the half year was £146.6m (H1 2012/13 - £145.4m) of which circa £131m 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. This is particularly significant given recent issues in the energy sector.

The Government's main mechanism for diverting waste from landfill and incentivising recycling and EfW facilities remains landfill tax. The Government has reconfirmed the continuation of the increase in landfill tax of £8 a year from £72 per tonne from 1 April 2013 to £80 per tonne from 1 April 2014. This ongoing increase continues to enhance the long term economics of both recycling and energy recovery. In addition recyclate costs are typically significantly lower than the cost of using virgin materials for manufacturers.

Viridor is clearly focussed on recycling and waste based renewable energy. Investment in technology and operational practices has been successfully made to enhance recyclate quality to differentiate Viridor from its competitors. Significant progress has also been made in the development of the EfW business, with a substantial asset base being constructed in conjunction with the development of the associated business capability process across the whole "source to supply" EfW production.

Recycling

During the half year recycling volumes traded increased by 38k tonnes (4.0%) to 974k tonnes, of which 14k tonnes were from prior year acquisitions. Recyclate prices have stabilised to some degree for most commodities but remain under pressure, reflecting world economic conditions and competitive markets. Overall average revenues per tonne from recyclate sales and gate fees for the half year fell to £93, 9.4% lower than for H1 2012/13 and 6.1% lower than for H2 2012/13.

Action has been, and continues to be, taken to reduce the cost base with average cost per tonne reduced to £82 from last year's total of £93, including the impact of circa £3 per tonne from the 2012/13 impairment charge. Allied to an emphasis on production of high quality recyclate, the business is now benefitting from modest increases in volumes with continuing improvement in margins. The company remains cautious on the prospects for recyclate prices and therefore continues to focus on revenue optimisation and facilities rationalisation/cost reduction. Investment is also being made in technology, e.g. a new plastic/polymer separation plant at Rochester, to enhance product quality and continue to differentiate Viridor in the sector costing circa £15m. Viridor now has the most extensive Materials Recycling Facility (MRF) capacity in the UK with accreditations for export to China and is established as a quality brand in other far eastern markets.

Contracts and collection

Profits in "Contracts & Other" were up overall across the 15 municipal contracts around the UK (the more significant ones include Lancashire, Glasgow, Lakeside, Manchester, Somerset, West Sussex PFI and Bedfordshire (last full year)) and the Thames Water contract. Profits in the collection business were also up, reflecting increased management action. Viridor's collection fleet continues to play an increasing role in feeding the company's recycling and EfW plants.

Renewable Energy

Energy recovery from waste currently accounts for approaching 30% of total UK renewable energy (20% from landfill gas and the balance from combustion). Energy can be recovered 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.

(a)

Landfill gas power generation

Profit from gas generation was £14.3m, an increase of 36.1% on H1 2012/13.

Viridor's landfill gas power generation output remained unchanged at its peak of 303 Gigawatt hours (GWh) reflecting a successful output optimisation programme.

Average revenue per Megawatt hour (MWh) increased reflecting the switch from legacy Non Fossil Fuel Obligation (NFFO) contracts to Renewables Obligation Certificates (ROCs) and average prices increased by 14.4% to £88.88 per MWh. Total landfill gas power generation operational capacity remained at 107MW (excluding 3MW capacity at sub-contract sites in Suffolk). The proportion of operational capacity eligible for ROCs increased to 80%, with the remaining 20% being on (lower priced) NFFO contracts. Further NFFOs migrate to ROCs during 2013/14 with the balance moving across by 2016/17.

Average costs were reduced by 3.2% to £41.55 per MWh.  

(b)

Energy from Waste (EfW) and Anaerobic (AD)

As well as the 107MW of landfill gas capacity, Viridor has a further 31MW 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. Most notably, the company has been successfully implementing its strategic plan to develop the EfW business which underpins long term profit momentum. This includes establishing a significant asset base of EfW plants. A total capacity of at least 2.0m tonnes is expected to be constructed and operational by the end of 2015/16.

Five plants, being Runcorn I and II, Exeter, Ardley (Oxfordshire) and Cardiff, have reached advanced stages of build with all expected to burn waste and come on-stream in financial year 2014/15. Two others, Glasgow and Peterborough, commenced construction in the period.

Planning consent for the Beddington EfW was approved in May 2013. The Mayor of London and the Secretary of State both elected to waive their right to call the approval in for appeal and 'Notice to Proceed' is expected in spring 2014.

As part of continuing to secure waste for the EfW plants, the South East Wales residual waste project (Prosiect Gwyrrd) contract signing is expected shortly. Viridor has also reached the final bid stage as one of two bidders on the Central Bedfordshire, Wigan, and Edinburgh and Midlothian residual waste contracts, all of which are expected to be determined in H2 2013/14.

The Walpole AD plant, which has a 1MW export capacity, is now producing power. A further "closed loop" opportunity to use digestate as a biofertiliser is being assessed with the Environment Agency.

EfW contracts and projects already contribute to the bottom line and reflect the realisation of a strategy which is expected to add more than £100m to Viridor's EBITDA within the next three years.

Joint Ventures

Total joint ventures' contribution (comprising Lakeside, VLGM and TPSCo), which consists of interest on shareholder loans and share of profit after tax, fell 21% to £5.4m (H1 2012/13 - £6.8m).

(a)

Lakeside

Lakeside, the first of Viridor's EfW pipeline projects, continues to perform well and has outperformed power generation and waste processing targets. H1 2013/14 contribution was £1.8m (H1 2012/13 £3.0m): interest receivable on shareholder loans was £0.7m, down £0.1m; and share of profit after tax from Lakeside was £1.1m (down £1.1m on the previous half year reflecting the expiry of the NFFO contract and higher maintenance costs). A further £1.3m contribution came from the sub-contract profit (included in the contracts segment above).

(b)

Viridor Laing (Greater Manchester) (VLGM)

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.

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 at 30 September 2013, 41 of these facilities had been formally taken over by Viridor. Since the half year end one further facility has been taken over. The 43 facilities include 4 mechanical biological treatment (MBT) plants. Three of these MBTs have been taken over and the remaining one is substantially complete, but has not yet been taken over due to isolated process elements not performing satisfactorily. The delay in takeover of the remaining plant is being addressed and is 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 £2.4m, down £0.1m (H1 2012/13 - £2.5m). Share of results after tax from VLGM on an IFRIC 12 basis was a loss of £0.3m, down £0.3m.

(c) Runcorn I (TPSCo)

Interest receivable on shareholder loans from the Runcorn I EfW joint venture was £1.5m, up £0.2m on H1 2012/13. Share of profit after tax was nil, in line with H1 2012/13.

The Runcorn EfW Phase I project is running around fifteen months behind schedule and in October reached the contractual longstop date which impacts both the TPSCo and VLGM credit agreements. Extensive discussions have been held between all involved parties, including lenders, and agreement in principle has been reached to allow the contractor to complete the project and bear further delay costs. The contractor has also committed significant additional manpower resources and the project has subsequently moved positively toward completion. Cold commissioning has now commenced on site and first burn of waste is scheduled for early 2014. Phase II has been only slightly affected by the Phase I issues and is on budget and at an advanced state of completion. At this point in time Viridor does not expect this delay to have a material impact on the completion and operation of the Greater Manchester PFI or TPSCo.

Landfill

The business continues to be strongly cash generative and contributed £13.2m to EBITDA in the first half of the year. Volumes were stable.

Average gate fees decreased by 11.8% to £23.28 per tonne. Consented landfill capacity reduced from 61.5 million cubic metres (mcm) at 31 March 2013 to 60.0mcm at 30 September 2013, reflecting usage during the period. As previously stated and provided for last year, 39mcm is not expected to be used.

The business plan now being implemented for the landfill business will see operations reduced to a few strategic landfill sites, reflecting the fact that there will still be demand for landfilling of certain materials for the foreseeable future. Other sites are being run to closure with an emphasis on maximising the value of electricity generation from landfill gas. Operations and management are being streamlined across the combined landfill and gas generation facilities. Provisioning has been increased by circa £2.5m to meet end of life obligations which now cover a longer period.

Future alternative uses for sites are now also being assessed in detail. Early success has been achieved at Westbury with planning permission granted for a 2.75MW photovoltaic installation.

Landfill tax, which is passed directly to the customer, has increased to £72 per tonne and will rise further to £80 per tonne in April 2014.

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.

While there are some signs of improving economic trends, the company remains prudently cautious about the future prospects for recyclate prices. Viridor remains strongly focused on a stringent programme to optimise revenues and achieve efficiencies through facilities rationalisation/cost reduction to sustain margin improvement.

However, strong progress has been achieved in the development of the EfW business this half year with a number of major facilities nearing construction completion and two others being started. These assets represent a strategic EfW portfolio which is already making a significant contribution to Viridor's bottom line. The developing EfW business is expected to underpin the company's long term profit growth.

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 £382m 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 2013 was 3.6% and South West Water's was 4.0%.

The Group had substantial cash resources and committed funding as at 30 September 2013 and is well placed in current financial market conditions:

-

cash balances of £527m (SWW £288m), including £146m restricted cash

-

undrawn facilities of £605m

During the six months to 30 September 2013 £210m of new and renewed facilities were secured. A further £30m has been renewed/secured since 30 September.

The Group's average debt maturity is 22 years.

The fair value of the Group's debt is £261m less than its book value.

PENSIONS

The Group's defined benefit pension schemes had a deficit (net of deferred tax) under IAS 19 at 30 September 2013 of circa £77m (£95m gross), a reduction of £3m on the 31 March 2013 balance (as restated for IAS 19R).

The net deficit represents circa 3% of current market capitalisation.

Schemes' assets increased from £580m at 31 March 2013 to £583m at 30 September 2013 and schemes' liabilities reduced from £680m to £678m over the same period.

South West Water's pension cash contributions continue to be within the Final Determination for the K5 period.

The March 2013 actuarial valuation is under way.

TAXATION

Pennon takes seriously its responsibility for paying its fair share of tax.

The mainstream corporation tax charge for the half year (before prior year adjustment) was £27.0m (2012/13 - £32.9m) giving an effective current tax rate of 24% (2012/13 - 31%) which is above the current UK statutory corporation tax rate of 23%. The reduced rate reflects the increase in capitalised interest, increased capital allowances and the 1% reduction in the corporation tax rate.

Deferred tax for the half year was a credit of £28.2m (2012/13 credit - £8.0m) which included a credit of £40.1m from the impact of the reduction in the rate of corporation tax from April 2014.

CARBON DISCLOSURE PROJECT

For the first time Pennon Group has been commended for the quality of its disclosure of climate change information by the Carbon Disclosure Project (CDP) and is ranked in the top 10% of FTSE350 CDP respondents. As one of the largest environmental and resource management groups in the UK, Pennon is committed to leading the way in good environmental practice, both in how the Company operates in reducing its carbon emissions and in transparently recording and reporting its energy use.

The Group is featured in the CDP's "Climate Disclosure Leadership Index", a key component of the CDP's annual FTSE350 report which highlights the constituent companies within the FTSE350 Index which have displayed a strong approach to information disclosure regarding climate change. Companies are scored on their climate change disclosure and high scores indicate good internal data management and understanding of climate change-related issues affecting the company.

PRINCIPAL RISKS AND UNCERTAINTIES

In accordance with DTR 4.2.3 and 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 36 to 47 inclusive of the Group's 2013 Annual Report and Accounts, namely:

South West Water

·

changes in law, regulation or decisions by governmental bodies or regulators could have a material adverse effect on South West Water's financial results or operations;

·

economic conditions could materially affect the company's revenues and profitability;

·

poor operating performance or a failure or interruption of operating systems or the inability to carry out network operations or damage to infrastructure may have a material adverse impact on both the company'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 company's financial position and reputation;

·

major failure of information technology systems could have a material adverse impact on South West Water's operations;

·

uncertainty arising from market reforms could reduce the company's revenues; and

·

loss of key stakeholder support and prolonged negative media campaign could materially affect the company's revenues and reputation.

Viridor

·

changes in law, regulation or decisions by governmental bodies or regulators could have a material adverse effect on Viridor's financial results or operations;

·

economic conditions could materially affect the company's revenues and profitability;

·

poor operating performance or a failure or interruption of Viridor's operations may have a material adverse impact on both its financial position and reputation;

·

landfill aftercare and restoration liabilities are long term in nature and could increase which may have a material adverse impact on the company's financial position;

·

the failure or increased costs of capital projects and acquisitions or joint ventures not achieving predicted revenues or performance could have a material adverse effect on both the company'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 company's financial position; and

·

information technology and business continuity systems and processes may fail which may cause material disruption to Viridor's business and could have a material adverse impact on both its financial position and reputation.

Group

·

an inability to raise sufficient funds to finance its activities or such funds only being available at higher cost;

·

pension costs may increase due to higher costs for future service and growing deficits in relation to past service in the defined benefit schemes; and

·

Pennon's employees are the cornerstone to its success and further development. High quality, well motivated, trained and competent people at all levels must be in place to ensure sustained business development.

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,

http://www.pennonannualreport.co.uk/2013/group/principal-risks-and-uncertainties.php

or obtained from the Group Company Secretary at the Company's registered office.

BOARD MATTERS

Colin Drummond retired as an Executive Director of Pennon Group Plc and Chief Executive of Viridor in September 2013 whereupon he became non-executive Chairman of Viridor. Ian McAulay joined the Pennon Board on 9 September 2013 as an Executive Director of Pennon Group Plc and Chief Executive of Viridor. Dinah Nicholls retired as a Non-executive Director on 1 August 2013.

STRATEGY AND PROSPECTS

The Board's priority continues to be the creation of shareholder value through its strategic focus on water and sewerage services; and recycling, renewable energy and waste management.

South West Water is continuing its strong performance with robust operational delivery, high standards of financial performance and improving standards of customer service. The company's Business Plan for 2015 - 2020 will be submitted to Ofwat on 2 December.

Viridor's financial performance in the first half of this year has been in line with management expectations. This will be a transitional year for Viridor and the company's PBIT plus joint ventures in 2013/14 is expected to be broadly similar to 2012/13. The company has continued to make strong progress on building its EfW business and securing base-load contracts. These projects are expected to drive Viridor's long term profit growth.

The Group is well funded with efficient financing structures.

Ken Harvey

Chairman

28 November 2013

FINANCIAL TIMETABLE FOR THE YEAR ENDED 31 MARCH 2014

29 January 2014

Ordinary shares quoted ex-dividend

31 January 2014

Record date for interim cash dividend

Mid-February 2014

Interim Management Statement

17 February 2014

Posting of Scrip dividend offer

10 March 2014

Final date for receipt of Forms of Election/Mandate

3 April 2014

Interim cash dividend payment date

21 May 2014

2012/13 Preliminary Results

Late June 2014

Annual Report & Accounts published

31 July 2014

Annual General Meeting

August 2014

Interim Management Statement

August 2014 *

Ordinary shares quoted ex-dividend

August 2014 *

Record date for final cash dividend

September 2014 *

Final date for receipt of Forms of Election/Mandate

October 2014 *

Final cash dividend payment date

* These dates are provisional and, in the case of the final dividend, subject to obtaining shareholder approval at the 2014 Annual General Meeting.

CAUTIONARY STATEMENT IN RESPECT OF FORWARD-LOOKING STATEMENTS

This Results Statement contains forward-looking statements relating to the Pennon Group's operations, performance and financial position based on current expectations of, and assumptions and forecasts made by, Pennon Group management. Forward-looking statements are identified by words such as "anticipate", "aim", "believe", "continue", "could", "due", "estimate", "expect", "forecast", "goal", "intend", "may", "plan", "project", "remain", "seek", "should", "target", "will" and related and similar expressions, as well as statements in the future tense. 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 including but not limited to those set out on page 22 and 23 of this Statement. Undue reliance should not be placed on forward-looking statements which are made only as of the date of this Statement. No representation, assurance, guarantee or warranty is given in relation to them including as to their accuracy, completeness, or the basis on which they are made and nothing in this Statement 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 telephone 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 on 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 2013

Unaudited

Before

Half year

exceptional

ended

items

Total

Half year

30

Year ended

Exceptional

Year ended

ended

September

31 March

items

31 March

30

2012

2013

Year ended

2013

September

(Restated

(Restated

31 March

(Restated

2013

note 4)

note 4)

2013

note 4)

Note

£m

£m

£m

£m

£m

Revenue

5

667.0

633.7

1,201.1

-

1,201.1

Operating costs

Manpower costs

(80.0)

(80.0)

(159.3)

-

(159.3)

Raw materials and consumables used

(57.4)

(60.3)

(125.2)

-

(125.2)

Other operating expenses

(314.2)

(282.9)

(521.8)

(104.9)

(626.7)

Depreciation, amortisation and impairment

(75.7)

(74.4)

(149.2)

(84.0)

(233.2)

Operating profit

5

139.7

136.1

245.6

(188.9)

56.7

Finance income

6

27.3

75.9

95.3

15.4

110.7

Finance costs

6

(56.9)

(107.1)

(156.7)

(2.9)

(159.6)

Net finance costs

6

(29.6)

(31.2)

(61.4)

12.5

(48.9)

Share of post-tax profit from joint

ventures

0.8

2.2

5.8

-

5.8

Profit before tax

5

110.9

107.1

190.0

(176.4)

13.6

Taxation

7

11.9

(15.2)

(29.2)

36.2

7.0

Profit for the period

122.8

91.9

160.8

(140.2)

20.6

Attributable to:

Ordinary shareholders of the parent

107.2

91.9

160.8

(140.2)

20.6

Other equity holders

15.6

-

-

-

-

Earnings per ordinary share

(pence per share)

8

-

Basic

29.4

25.4

5.7

-

Diluted

29.3

25.2

5.7

The notes on pages 32 to 46 form part of this condensed half year financial information.

Consolidated statement of comprehensive income for the half year ended 30 September 2013

Unaudited

Before

Half year

exceptional

ended

items

Total

Half year

30

Year ended

Exceptional

Year ended

ended

September

31 March

items

31 March

30

2012

2013

Year ended

2013

September

(Restated

(Restated

31 March

(Restated

2013

note 4)

note 4)

2013

note 4)

£m

£m

£m

£m

£m

Profit for the period

122.8

91.9

160.8

(140.2)

20.6

Other comprehensive income/(loss):

Items that will not be reclassified to profit or loss

Actuarial gains/(losses) relating to retirement

benefit obligations

5.9

(2.6)

(6.0)

-

(6.0)

Income tax on items that will not be reclassified

(5.8)

(0.8)

-

-

-

Total items that will not be reclassified to

profit or loss

0.1

(3.4)

(6.0)

-

(6.0)

Items that may be reclassified subsequently

to profit or loss

Share of other comprehensive income

from joint ventures

2.7

1.8

2.7

-

2.7

Cash flow hedges

24.4

(10.8)

(0.9)

2.9

2.0

Income tax on items that may be reclassified

1.1

0.9

0.7

(0.7)

-

Total items that may be reclassified subsequently

to profit or loss

28.2

(8.1)

2.5

2.2

4.7

Other comprehensive income/(loss)

for the period net of tax

28.3

(11.5)

(3.5)

2.2

(1.3)

Total comprehensive income for

the period

151.1

80.4

157.3

(138.0)

19.3

Total comprehensive income attributable to:

Ordinary shareholders of the parent

135.5

80.4

157.3

(138.0)

19.3

Other equity holders

15.6

-

-

-

-

The notes on pages 32 to 46 form part of this condensed half year financial information.

Consolidated balance sheet at 30 September 2013

Unaudited

30 September

2013

30 September

2012

(Restated

note 4)

31 March 2013

(Restated

note 4)

Note

£m

£m

£m

ASSETS

Non-current assets

Goodwill

339.3 

331.5 

339.3 

Other intangible assets

12.3 

18.9 

13.7 

Property, plant and equipment

15

3,375.0 

3,183.8 

3,278.6 

Other non-current assets

213.6 

163.3 

183.3 

Derivative financial instruments

26.0 

31.3 

31.0 

Investments in joint ventures

0.1 

0.1 

0.1 

3,966.3 

3,728.9 

3,846.0 

Current assets

Inventories

11.6 

10.4 

10.5 

Trade and other receivables

307.4 

277.7 

267.6 

Financial assets at fair value through profit

0.5 

0.8 

1.2 

Derivative financial instruments

3.4 

13.3 

10.5 

Cash and cash deposits

13

526.9 

458.8 

634.5 

849.8 

761.0 

924.3 

LIABILITIES

Current liabilities

Borrowings

13

(91.2)

(383.0)

(138.6)

Derivative financial instruments

(19.0)

(24.9)

(21.7)

Trade and other payables

(351.2)

(333.3)

(276.7)

Current tax liabilities

(45.5)

(60.3)

(66.9)

Provisions

(41.1)

(28.0)

(41.9)

(548.0)

(829.5)

(545.8)

Net current assets/(liabilities)

301.8 

(68.5)

378.5 

Non-current liabilities

Borrowings

13

(2,533.3)

(2,248.8)

(2,504.6)

Other non-current liabilities

(78.7)

(77.7)

(77.9)

Financial liabilities at fair value through profit

(13.5)

(23.7)

(23.0)

Derivative financial instruments

(12.7)

(37.8)

(31.5)

Retirement benefit obligations

(95.5)

(94.2)

(99.6)

Deferred tax liabilities

(221.6)

(271.1)

(245.1)

Provisions

(171.1)

(70.7)

(170.7)

(3,126.4)

(2,824.0)

(3,152.4)

Net assets

1,141.7 

836.4 

1,072.1 

Shareholders' equity

Share capital

10

149.4 

148.9 

149.2 

Share premium account

6.8 

7.3 

 7.0 

Capital redemption reserve

144.2 

144.2 

144.2 

Retained earnings and other reserves

546.5 

536.0 

476.9 

Total shareholders' equity

846.9 

836.4 

777.3 

Perpetual capital securities

11

294.8 

-

294.8 

Total equity

1,141.7 

836.4 

1,072.1 

The notes on pages 32 to 46 form part of this condensed half year financial information.

Consolidated statement of changes in equity

Unaudited

Retained

earnings

and other

Perpetual

Total

Share

Share

Capital

reserves

capital

equity

capital

premium

redemption

(Restated

securities

(Restated

(note 10)

account

reserve

note 4)

(note 11)

note 4)

£m

£m

£m

£m

£m

£m

At 1 April 2012

148.2

8.0

144.2

528.7

-

829.1

Profit for the period

-

-

-

91.9

-

91.9

Other comprehensive loss for the period

-

-

-

(11.5)

-

(11.5)

Total comprehensive income for the period

-

-

-

80.4

-

80.4

Transactions with equity shareholders

Dividends paid or approved

-

-

-

(96.0)

-

(96.0)

Adjustment for shares issued or to be

issued under the scrip dividend

alternative

0.7

(0.7)

-

18.1

-

18.1

Adjustment in respect of share-based

payments

-

-

-

1.4

-

1.4

Own shares acquired by the Pennon

 Employee Share Trust in respect of

share options granted

-

-

-

(0.9)

-

(0.9)

Proceeds from treasury shares re-issued

-

-

-

4.3

-

4.3

0.7

(0.7)

-

(73.1)

-

(73.1)

At 30 September 2012

148.9

7.3

144.2

536.0

-

836.4

Unaudited

Retained

earnings

and other

Perpetual

Total

Share

Share

Capital

reserves

capital

equity

capital

premium

redemption

(Restated

securities

(Restated

(note 10)

account

reserve

note 4)

(note 11)

note 4)

£m

£m

£m

£m

£m

£m

At 1 April 2013

149.2