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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.
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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.
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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
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110
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Financial year
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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.