Pennon Group
Annual Report 2009

Plain-text annual report

P E N N O N G R O U P P L C A N N U A L R E P O R T & A C C O U N T S 2 0 0 9 2009 Annual Report & Accounts This report is printed on 100% recycled paper Pennon Group Plc Registered Office: Peninsula House, Rydon Lane, Exeter, Devon, England EX2 7HR pennon-group.co.uk Registered in England No. 2366640 Contents Financial highlights and Group strategy ............................................ 1 Directors’ report Business review*: Chairman’s statement ............................................................ 2 Pennon Group: Financial performance ............................................................ 4 Funding position ........................................................................... 5 Chief Executives’ overviews: South West Water ........................................................................ 6 Viridor ................................................................................................ 10 About our businesses: South West Water: Regulatory and competitive environment ............. 14 Customers, community and employees ................. 17 Key relationships ...................................................................... 20 Risks and uncertainties ....................................................... 21 Viridor: Regulatory and competitive environment ............. 22 Customers, community and employees ................. 24 Key relationships ...................................................................... 25 Risks and uncertainties ....................................................... 26 Pennon Group: Other financial information............................................... 28 Key relationships ...................................................................... 30 Risks and uncertainties ....................................................... 32 Our corporate responsibility .......................................... 34 Interpretation ............................................................................. 38 Other statutory information ......................................................... 40 Board of Directors ............................................................................................. 42 Directors’ remuneration report ............................................................. 43 Corporate governance and internal control ................................ 50 Independent Auditors’ report .................................................................. 53 Financial statements ....................................................................................... 54 Five-year financial summary ................................................................ 109 Shareholder information .......................................................................... 110 * Throughout the business review ‘key performance indicators’ of the Group are denoted by KPI Designed by AB Design Group, ab-uk.com Printed on 100% recycled material by Burlington Press, Cambridge. < REVENUE UP 8.9% TO £953 MIllION UNDERlyING OPERATING PROFIT UP 7.0% TO £259 MIllION UNDERlyING PROFIT bEFORE TAX UP 6.7% TO £165 MIllION UNDERlyING EARNINGS PER SHARE UP 3.5% TO 38.2p DIVIDEND PER SHARE UP 6.0% TO 21.0p Statutory results are: operating profit £253 million (2007/08 £237 million) profit before tax £159 million (2007/08 £150 million) earnings per share 26.3p (2007/08 38.2p). A reconciliation to underlying measures of performance is given on page 4. PENNON GROUP OPERATES AND INVESTS IN WATER AND SEWERAGE SERVICES, WASTE MANAGEMENT AND RENEWAblE ENERGy. IT HAS ASSETS OF AROUND £3.5 bIllION AND A WORKFORCE OF OVER 4,000 PEOPlE. Pennon Group’s business is operated through two main subsidiaries: South West Water Limited holds the water and sewerage appointments for Devon, Cornwall and parts of Dorset and Somerset PENNON GROUP BOARD’S STRATEGY is to promote the success of the Group for the benefit of its shareholders through its focus on water and sewerage services, waste management and renewable energy. In pursuit of its strategy the Group aims to be a pre-eminent provider of customer services to high standards of quality, efficiency and reliability whilst having regard to a wide range of matters including: the impact of its operations and activities on the community and the environment the maintenance of high standards of business conduct the need to foster business relationships with suppliers, customers and other key persons important to the success of the Group the likely long-term consequences of any decisions Viridor Limited is one of the leading waste management and renewable energy businesses in the United Kingdom. the interests of employees. Pennon Group Annual Report and Accounts 1 1 DIRECToRs’ REPoRT | BUsINEss REVIEW Ken Harvey Chairman Pennon Group Plc Chairman’s statement Another year of profitable BUSINESS OVERVIEW DIVIDEND growth with Group businesses well positioned in the current economic slow-down I am pleased to say that it has been another successful year for Pennon Group despite the extremely difficult business environment. The prudent approach to financing in the Group and the actions taken by the Directors, management and staff have ensured that the effects of the difficult economic conditions on our businesses have been minimised to date. I am confident that we are as prepared as we can be for what will undoubtedly be further challenges in 2009/10. We are recommending to shareholders a final dividend per share of 14.25p, a 5.1% increase on last year’s final dividend. This represents a full year dividend of 21.0p which is an increase of 6.0% compared with 2007/08. We are continuing our dividend policy of 3% per annum real increases to the end of 2009/10. The Board will then review the dividend policy following the setting of price limits for South West Water by Ofwat. Dividends have increased over the last five years as follows: FINANCIAL OVERVIEW DIVIDENDs PER oRDINARy sHARE We have seen our Group revenue increase by 8.9% to £952.9 million, our underlying* profit before tax increase by 6.7% to £165.3 million and our underlying* earnings per share rise by 3.5% to 38.2p. At the year-end we had Group cash balances of £353 million and debt facilities of £205 million were established/renewed during the year. South West Water’s Regulatory Capital Value (RCV) continues to grow with an expectation that it will reach £2.5 billion by March 2010 and Viridor’s compound annual growth rate in profit before tax since 2001 has been 17%. * Underlying measures are defined on page 4. 22 20 18 16 14 12 10 8 6 4 2 0 e c n e P 5 0 / 4 0 0 2 6 0 / 5 0 0 2 7 0 / 6 0 0 2 8 0 / 7 0 0 2 9 0 / 8 0 0 2 Financial year 2 Pennon Group Annual Report and Accounts < Underlying* profit before tax up 6.7% to £165.3m < Full year dividend up 6% to 21.0p BUSINESS PERFORMANCE GOVERNANCE South West Water increased its revenue in the year by 2.5% and operating profit was up by 3.6%. There were improvements in operational performance together with the outperformance of the operating cost efficiency target set by Ofwat for 2005-10. The company has submitted its Final Business Plan to Ofwat for the setting of price limits for the period 2010 – 2015. The focus of the plan has been to keep customers’ bills as stable as possible whilst ensuring that the improvements in the company’s infrastructure made over the last 20 years are protected and maintained and that further improvements can be made to ensure compliance with EU Directives. This is the third price review whilst I have been Chairman. What I have noticed is that each review has become increasingly detailed and time-consuming resulting in escalating costs for the company – a process which I do not believe is in the best interests of either shareholders or customers. I think that once the present review has been completed, it would be sensible for Ofwat and the industry to review the process with the objective of achieving simplification whilst maintaining the integrity of a utility review. Viridor has once again delivered a strong financial performance in very challenging market conditions. It is apparent that the waste industry is changing rapidly with landfill becoming an increasingly scarce resource and with ambitious EU/UK waste management targets for recycling, landfill diversion and renewable energy. Viridor’s strategy has developed to reflect these changes and the company is successfully pursuing a range of new opportunities. These include private finance initiative (PFI) and public private partnership (PPP) contracts and also energy from waste (EfW) projects. Recently Viridor has successfully completed the UK’s largest ever combined waste and renewable energy project with the Greater Manchester Waste Disposal Authority and a 14-year recycling, anaerobic digestion and disposal contract with the South London Waste Partnership. Other major schemes are the Lakeside EfW plant joint venture at Colnbrook near Heathrow and other EfW projects for which planning permission has been obtained or is currently being sought. HEALTH & SAFETY Ensuring the health and safety of all our employees is central to our ethos as a responsible Group. We continually strive to improve our occupational health and safety performance and where, regrettably, incidents do occur they are fully investigated and every effort is made to ensure that they cannot be repeated. In Pennon Group we strive to achieve best practice in all our business areas whilst ensuring that we are environmentally sustainable and socially responsible in all the communities in which we operate. We take into account the views of our shareholders and major institutional groups on what they regard to be the key governance issues. Where necessary we revise our practices, policies and procedures to enable us to demonstrate that we have a strong and appropriately experienced Board with governance structures in place which ensure that we can successfully respond to the challenges that we face in the best interests of our shareholders and other stakeholders. OUR PEOPLE The support and commitment of all our staff is key to our success. My personal thanks go to them all for their dedication and commitment to the Group as we continually strive to improve performance and successfully develop our businesses which inevitably leads to more change. During the year Kate Mortimer, one of our Non-executive Directors, sadly died. Kate brought to the Board extensive business experience and sound judgement which are missed. Martin Angle was appointed as a new Non-executive Director in December 2008. Martin has had a successful investment banking career and also has wide ranging business experience, not least of the waste industry. He is a most welcome and valued addition to the Board. Once again, my personal thanks also go to both the Executive and Non- executive Directors for their support and significant contributions to what has been yet another successful and demanding year. OUTLOOK There will undoubtedly be major challenges for all our businesses in 2009/10 and beyond. I am confident that we have the right strategy for the Group and that this strategy together with the management skills in the Group will steer us through to a successful future. Ken Harvey, Chairman Pennon Group Plc 25 June 2009 Pennon Group Annual Report and Accounts 3 DIRECToRs’ REPoRT | BUsINEss REVIEW David Dupont Group Director of Finance Pennon Group Plc Pennon Group The Group’s 2008/09 FINANCIAL PERFORMANCE financial results showed continued growth in revenue and profit from both main businesses KPI The Board’s strategy is to promote the success of the Group for the benefit of its shareholders through its focus on water and sewerage services, waste management and renewable energy. The key measures used by the Directors to assess the financial performance of the Group are: PRoFIT BEFoRE TAx (PBT) PBT has grown by 16.3% Compound Annual Growth Rate (CAGR) over the five-year period. EARNINGs PER sHARE (EPs) EPS have grown by 15.0% CAGR over the five-year period. 170 150 130 110 90 0 n o i l l i m £ 39 33 27 21 0 e c n e P 5 0 / 4 0 0 2 6 0 / 5 0 0 2 7 0 / 6 0 0 2 8 0 / 7 0 0 2 9 0 / 8 0 0 2 Financial year 5 0 / 4 0 0 2 6 0 / 5 0 0 2 7 0 / 6 0 0 2 8 0 / 7 0 0 2 9 0 / 8 0 0 2 Financial year The Group’s 2008/09 financial results showed continued growth in revenue and profit from both main businesses. The Directors believe that underlying measures provide a more useful comparison on businesses trends and performance. Underlying results exclude restructuring costs, intangibles amortisation and deferred tax. The term underlying is not a defined term under International Financial Reporting Standards (IFRS) and may not be comparable with similarly titled measures used by other companies. RECoNCILIATIoN oF UNDERLyING AND sTATUToRy REsULTs OPERATING PROFIT Statutory operating profit Non-underlying costs : - - Restructuring – South West Water Intangibles amortisation – Viridor 2008/09 £m 2007/08 £m Growth 252.8 236.8 6.8% 5.0 1.2 4.0 1.3 Underlying operating profit 259.0 242.1 7.0% PROFIT BEFORE TAX Statutory profit before tax Non-underlying costs : - - Restructuring – South West Water Intangibles amortisation – Viridor 159.1 149.6 6.4% 5.0 1.2 4.0 1.3 Underlying profit before tax 165.3 154.9 6.7% EARNINGS PER SHARE - pence Statutory earnings per share Non-underlying costs : - - Deferred tax Restructuring (after tax) – South West Water Intangibles amortisation – Viridor Underlying earnings per share 26.3p 0.9 0.4 10.6 38.2p 38.2p -31.2% 0.9 0.4 (2.6) 36.9p 3.5% 4 Pennon Group Annual Report and Accounts All profit and earnings per share figures in this business review on pages 2 to 38 relate to underlying business performance (as defined above) unless otherwise stated.

Continue reading text version or see original annual report in PDF format above