Pennon Annual Report & Accounts 2019 & Accounts Annual Report Bringing resources to life Annual Report & Accounts 2019 As the UK’s leading water and waste infrastructure business, Pennon is focused on responsible, sustainable growth. Our dedicated colleagues deliver essential services for our customers and communities across the UK. STRATEGIC REPORT OVERVIEW 02 Resource efficiency & natural capital stewardship 04 Our business at a glance 06 Business model 08 Strategic priorities 10 Sustainability at our core 12 Group highlights 14 Chairman’s statement 18 Market and regulatory overview 20 Our stakeholders STRATEGIC REPORT GROUP PERFORMANCE 24 Healthy places & habitats 26 Chief Executive Officer’s review 30 Key performance indicators 32 People 36 Our operations 36 Waste management 42 Water and wastewater 49 Water retail services Find out more about Pennon Integrated reporting 50 Report of the Chief Financial Officer Our business touches the lives of many 58 Risk report including viability statement Corporate website stakeholders, from customers, employees, 70 Customer ownership www.pennon-group.co.uk investors and suppliers, to our communities and regulators. GOVERNANCE Annual report 72 Good governance enabling www.pennon-group.co.uk/annualreport2019 Reflecting the integrated nature of our business, investment, innovation & we have integrated our reporting on financial, sustainable growth economic, social and environmental aspects 73 Index to the Governance section of our performance and how they contribute to long-term value creation. In preparing the FINANCIAL STATEMENTS integrated report, we have referred to the principles of the International Integrated 110 Environmental leadership Reporting Council’s <IR> Framework. 111 Index to the financial statements Our vision is bringing resources to life Our values Strategic priorities Our core businesses Trusted Leadership Pennon provides services in waste We do the right thing for our in UK water management, water and wastewater, customers and stakeholders 1 and water retail services through our and waste three businesses Viridor, South West Collaborative infrastructure Water and Pennon Water Services. We forge strong relationships, working together to make Leadership a positive impact Waste management 2 in cost base Find out more starting on page 36 Responsible efficiency We keep our promises to our customers, communities Driving Water and wastewater and each other 3 sustainable Find out more starting on page 42 Progressive growth We are always looking for new ways Water retail services to improve and make life better Find out more on pages 8 and 9 Find out more on page 49 Pennon Group plc Annual Report 2019 01 Our investment in an energy recovery facility and a plastics recycling facility at Avonmouth epitomises UK resource and energy efficiency goals. These new plants are an example of our responsible approach to natural capital stewardship, providing solutions to society’s concerns about the environmental impact of plastics. Viable alternatives to virgin plastic Comprising a £252 million energy recovery facility and a £65 million plastics recycling facility, our energy park at Avonmouth will use non-recyclable waste to power a circular economy solution for a range of plastics, including a new process focusing on pots, tubs and trays – which a growing number of local authorities are seeking to include in kerbside collections. As manufacturers and retailers work to achieve sustainability targets by increasing recycled content in their packaging, this innovative new facility will put used plastic back into the economy as a viable and sustainable alternative to virgin plastic. South West Water continues to work with partners on innovative alternatives to plastic biobeads, used at a small number of wastewater treatment works. Sustainability focus area See sustainability strategy on page 11 02 Pennon Group plc Annual Report 2019 STRATEGIC REPORT – OVERVIEW 04 Our business at a glance 06 Business model 08 Strategic priorities 10 Sustainability at our core 12 Group highlights 14 Chairman’s statement 18 Market and regulatory overview 20 Our stakeholders Resource efficiency & natural capital stewardship Pennon Group plc Annual Report 2019 03 STRATEGIC REPORT – OVERVIEW 2 Our business 1 at a glance We aim to provide an outstanding level of service to our customers and communities, while protecting the environment and creating value for our shareholders. Water and wastewater We are focused on providing water and wastewater services in the most efficient and sustainable way possible. Innovation, new technologies, and the pioneering of an holistic approach to water and wastewater management are delivering service improvements and long-term value. Find out more starting on page 42 1 Raw water reservoirs 6 Surface water catchment /water resources 7 Wastewater mains network 2 Upstream catchment 8 Wastewater treatment works 3 Water treatment works 9 Sewage sludge/bio-resources 4 Drinking water mains network 10 Improved bathing and 5 Customer support shellfish water quality Waste management 7 Our purpose is to bring resources to life. We remain at the forefront of the resource sector in the UK, transforming waste into energy, high-quality recyclates and raw materials. Find out more starting on page 36 11 Landfill sites and 16 A fleet of waste power generation collection vehicles 12 Energy parks 17 Materials recycling 8 facilities (MRFs) 13 Powering homes 18 Household waste and businesses recycling centres 14 Plastics recycling facilities 19 Trading recycled materials (PRFs) 15 Energy recovery facilities (ERFs) Water retail services 9 Business water specialists providing water retail services for all business customers’ water management needs. Find out more on page 49 20 UK-based customer service centre 04 Pennon Group plc Annual Report 2019 12 11 3 13 14 4 13 15 5 6 16 17 20 18 19 10 Pennon Group plc Annual Report 2019 05 STRATEGIC REPORT – OVERVIEW Through our business model, we fulfil our objective to Business deliver sustainable shareholder value by providing high- model quality environmental infrastructure and customer service. Our strategy is to lead in the UK’s water and waste sectors, drive value through efficiency and invest for sustainable growth. What we do... ...the strengths we rely on Our core businesses Our strengths Waste management The best people The talent, commitment and hard work of our people is the foundation We transform waste into energy, of our success. As a responsible employer, we are focused on employee high-quality recyclates and raw materials. retention, training and development, productivity and, above all, an unwavering commitment to health, safety and wellbeing. See pages 36 to 41 for further information Effective governance A strong governance framework provides oversight and support to Group businesses including robust decision-making and performance Water and wastewater management processes. We provide water and wastewater High-quality assets services in the most efficient and We invest in the construction of world-class facilities and plants that use state-of-the-art technology. We engage the best people to maintain sustainable way possible. and operate our fleet of assets, to ensure we always maximise returns. See pages 42 to 48 for further information Efficient financing The strength of our proposition, and investor confidence in our performance and reputation, means we are well funded with efficient long-term financing. Water retail services Environmental stewardship We provide water retail services We invest in the maintenance and improvement of our services, operations and assets and constantly seek more sustainable ways of working to for all business customers’ water protect, enhance and reduce our impact on the natural environment. management needs. Strong relationships with our suppliers See page 49 for further information We work closely with our suppliers and take the steps necessary to ensure their performance meets our expectations. We expect them to uphold our standards, align with our policies, protect human rights and promote good working conditions. Well-managed risk Comprehensive and fully embedded risk management processes assist us in identifying and managing risks and opportunities to deliver the Group’s strategy and objectives. Underpinned by our values Trusted Collaborative We do the right thing for our We forge strong relationships, working customers and stakeholders together to make a positive impact 06 Pennon Group plc Annual Report 2019 ...delivering our strategy ...to create value Our long-term priorities Value created for our stakeholders Leadership in UK water and waste Customers Community infrastructure 1 We aim to lead in the water and waste sectors 88pts 98.7% by capitalising on Group strengths, capabilities, best ever customer 149 bathing waters out service score for of 151 classified as best practice and synergies, and achieving (1) (3) the right balance between risk and reward. South West Water ‘sufficient’ or better See pages 8, 26 and 27 for further information Investors Environment Leadership in cost base efficiency +13.6% 4.9m earnings per share tonnes of waste We are focused on driving down overheads increased to 57.8p(2) materials recycled 2 and operating in the most efficient way or recovered to minimise costs. See pages 8 and 53 for further information People (1) As measured by the service incentive mechanism (SIM). See page 44 for details. 19,221 (2) Before non-underlying items and deferred tax. See note 6 Driving