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AnnuAl RepoRt & Accounts 2010
This document is printed
on 100% recycled paper
When you have finished with this
document please recycle it
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 .................................................7
Chief Executives’ overviews:
South West Water ............................................8
V iridor ................................................................. 12
Directors’ Report continued
About our businesses:
South West Water:
Regulatory and competitive environment ...16
Customers, community and employees ......18
Key relationships ............................................. 20
Principal risks and uncertainties ................ 21
V iridor:
Regulatory and competitive environment ..22
Customers, community and employees.. 24
Key relationships ............................................. 25
Principal risks and uncertainties ................ 26
The Group’s key performance indicators are shown throughout the Business Review by:
KPI
Directors’ Report continued
Pennon Group:
Other financial information ......................... 28
Key relationships ............................................. 30
Principal risks and uncertainties ................ 30
Our corporate responsibility ...................... 32
Interpretation ................................................... 37
Other statutory information ........................... 38
Board of Directors .................................................. 40
Directors’ Remuneration Report ...................... 41
Corporate Governance and
Internal Control ....................................................... 49
Independent Auditors’ Report ............................ 53
Financial statements ................................................ 54
Five-year financial summary ...............................109
Shareholder information ..................................... 110
PENNON GROUP ANNUAL REPORT AND ACCOUNTS | 2010
Designed by AB Design Group, ab-uk.com Printed on 100% recycled material by Burlington Press, Cambridge.
Revenue up
11.6% to
£1,069 million
Underlying profit
before tax up
14.2% to
£189million
Underlying earnings
per share up
9.2% to
41.6 p
Dividend per share up
7.4% to
22.55 p
PENNON GROUP OPERATES
AND INVESTS IN WATER AND
SEWERAGE SERVICES, WASTE
MANAGEMENT, RECYCLING AND
RENEWABLE ENERGY. IT HAS
ASSETS OF AROUND £3.9 BILLION
AND A WORKFORCE OF OVER
4,100 PEOPLE.
Statutory results are:
• Profit before tax £184 million
(2008/09 £159 million)
• Earnings per share 39.9p (2008/09 25.8p)
A reconciliation to underlying measures of performance
is given on page 5.
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, recycling 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
• the interests of its employees.
Pennon Group’s business is operated through two subsidiaries:
• South West Water Limited – holds the water and sewerage appointments for Devon, Cornwall and parts of Dorset and Somerset
• Viridor Limited – one of the leading waste management, recycling and renewable energy businesses in the United Kingdom.
PENNON GROUP ANNUAL REPORT AND ACCOUNTS | 2010 | P.1
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ChAirmAn’s stAtement
Another excellent year with significant achievements
despite difficult economic conditions
KEN HARVEY
CHAIRmAN
PENNON GROUP PLC
BUSINESS OVERVIEW
I am pleased to say that it has been another excellent year for Pennon
Group with significant achievements by both businesses, despite
difficult economic conditions.
South West Water has delivered strong operational results and has
outperformed the operating cost efficiency and financing targets set by
Ofwat for the K4 period (2005-2010).
Viridor has once again delivered a very strong financial performance.
The Greater Manchester Waste PFI contract, the Lakeside Energy from
Waste (EfW) project and the latest acquisitions are further major steps
forward in the successful evolution of Viridor.
The continuing prudent approach to financing in the Group, combined
with a dedicated Board, management and staff, has also significantly
contributed to our success.
FINANCIAL OVERVIEW
Group revenue increased by 11.6% to £1,068.9 million, exceeding
£1 billion for the first time. Underlying* profit before tax increased by
14.2% to £189.1 million and underlying* earnings per share increased by
9.2% to 41.6p. The Group also has a strong liquidity and funding position.
South West Water’s Regulatory Capital Value (RCV) grew by 31%
over the K4 (2005-2010) period to £2.6 billion by March 2010, the
highest percentage increase for any quoted UK water company. Viridor’s
underlying* profit before tax was up by 34.8%, building on the growth
achieved by the company over the last eight years.
* Underlying measures are defined in the Pennon Group financial performance section on page 5
P.2 | PENNON GROUP ANNUAL REPORT AND ACCOUNTS | 2010
DIVIDEND
The Board is recommending to shareholders a final dividend per share
of 15.60p, a 9.5% increase on last year’s final dividend. This represents
a full year dividend of 22.55p which is an increase of 7.4% compared
with 2008/09 reflecting RPI of 4.4% to March 2010. We have therefore
delivered the policy to increase dividends from 2005/06 by 3% per annum
above inflation.
Following the setting of price limits for South West Water by Ofwat for
delivery of the K5 (2010-2015) regulatory contract and the expectation
that Viridor will continue to deliver strong long-term growth, the
Board has reviewed its dividend policy and is pleased to announce that
it intends to enhance its progressive dividend policy to 4% per annum
real increases from 2010/11 to at least until the end of 2014/15.
Dividends have increased over the last five years as follows:
DIVIDENDS PER ORDINARY SHARE
5
5
2
2
.
0
0
1
2
.
1
8
9
1
.
5
5
8
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24
22
20
18
16
14
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KPi
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6
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2
BUSINESS PERFORmANCE
South West Water increased its revenue in
the year by 2.9% and profit before tax was
up by 8.7%. The operating cost efficiency
target set by Ofwat for K4 was achieved in
2008/09, ahead of schedule. The company
has accepted Ofwat’s Final Determination for
the setting of price limits for the K5 period.
Notwithstanding the lower returns envisaged
by Ofwat’s Final Determination and the
impact of current economic conditions which
represent a very tough challenge for South
West Water, the company is determined to
achieve additional efficiencies despite having
already delivered substantial efficiencies over
the last two decades.
Viridor has yet again delivered a strong
financial performance in difficult market
conditions with revenue up by 18.7% and
profit before tax up by 34.8%. The company
expects to continue to deliver long-term
growth through successfully leading the way
in exploiting opportunities arising from the
Government’s targets for recycling, landfill
diversion and renewable energy.
Plastics, waste electrical and electronic
equipment (WEEE) and paper processing
in particular are a growing part of Viridor’s
recycling business. These recycling activities
were enhanced in the year with two
acquisitions: Intercontinental Recycling Limited
which processes plastics into pellet or flake
form and London Recycling Limited with
WEEE and paper processing facilities.
I am also pleased to say that the Greater
Manchester PFI waste and renewables
contract and another major scheme,
the Lakeside EfW plant joint venture at
Colnbrook, near Heathrow, are now
operational and trading profitably.
HEALTH & SAFETY
Ensuring the health and safety of all our
employees continues to be central to our
ethos as a responsible Group. The Corporate
Responsibility Committee and the Board
pay particular attention to ensuring that we
continually strive to improve occupational
health and safety performance. We are
therefore very disappointed to report that
last year our recorded number of incidents in
Viridor increased. Where incidents do occur
they are fully investigated and every effort is
made to ensure that they cannot be repeated
through, in particular, raising the level of
training and support available to staff and
reinforcing strong positive attitudes to health
and safety at all levels in the Group.
GOVERNANCE
We operate businesses which can and do
have a material impact on the environment.
We believe that a responsible approach to
environmental, social and governance (ESG)
matters and our sustainable practices not
only benefit the communities in which we
operate, but also enable our businesses to be
more successful. This year we have set out
in full in this Annual Report our Corporate
Responsibility Report which demonstrates our
commitment to ESG and the improvements
we have made in protecting the environment,
carbon capture, energy savings and resource
recovery which all contribute to a more
sustainable future for everyone. We also take
into account the views of our shareholders and
major institutional groups on what they regard
to be the key governance issues in reviewing
annually our practices, policies and procedures.
This ensures that we continue to have a strong
and appropriately experienced Board with
governance structures in place which can
successfully respond to the challenges we face
in the best interests of our shareholders and
other stakeholders.
OUR PEOPLE
We fully recognise that the Group’s success
is due to the quality of the staff and their
support and commitment.
I once again express my personal thanks to all
members of staff for their continuing dedication
and commitment particularly as we continue to
implement further efficiences and develop new
systems and processes to strengthen further
governance across the Group.
In addition I am extremely grateful to
my Board colleagues for their support
and significant contributions to another
successful year.
OUTLOOK
Notwithstanding the lower returns envisaged
by Ofwat’s Final Determination and the
impact of current economic conditions, the
Group remains well positioned to continue
to deliver shareholder value and meet future
challenges. South West Water is well placed
to achieve Ofwat’s efficiency targets and
outperform its financing cost assumptions for
K5. Viridor expects to continue to deliver
strong long-term growth through successfully
leading the way in exploiting opportunities
arising from the Government’s landfill
diversion, recycling and renewable energy
targets. This anticipated success has enabled
the Board to announce an enhanced dividend
policy for the next five years.
I am confident that we have the right strategy
in place for the Group to succeed 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, 24 June 2010
Underlying profit before tax up
14.2% to £189.1 million
Full year dividend up
7.4% to 22.55 p
PENNON GROUP ANNUAL REPORT AND ACCOUNTS | 2010 | P.3
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PennOn GrOUP
the Group’s 2009/10 financial results showed continued
growth in revenue and profit from the main businesses
DAVID DUPONT
GROUP DIRECTOR
OF FINANCE
PENNON GROUP PLC
FINANCIAL PERFORmANCE
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, recycling and renewable energy.
The Group’s 2009/10 financial results showed continued growth in
revenue and profit from both main businesses.
All profit and earnings per share figures in this Business Review
on pages 2 to 37 relate to underlying business performance
unless otherwise stated.
The Directors believe that underlying measures provide a more useful
comparison on business 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.
The key measures used by the Directors to assess the financial
performance of the Group are profit before tax and earnings per
share, shown below:
PROFIT BEFORE TAx (PBT)
EARNINGS PER SHARE (EPS)
200
175
150
125
100
75
KPi
n
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£
Financial
year
.
5
2
1
1
6
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/
5
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1
9
8
1
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6
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6
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6
7
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1
.
2
3
3
1
7
0
/
6
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2
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7
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2
9
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45
40
35
30
25
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KPi
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6
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2
P.4 | PENNON GROUP ANNUAL REPORT AND ACCOUNTS | 2010
Revenue above £1 billion for
the first time
Effective management of
interest rates – Group
average 4.1%
REVENUE
Group revenue increased by 11.6%
(£110.7 million) to £1,068.9 million. South
West Water’s revenue rose 2.9% (£12.5
million) to £444.2 million as a result of
tariff increases and new connections.
Approved tariff increases, including the
1.4% K factor, amounted to £20.9 million.
Customers switching from unmeasured to
metered charging reduced turnover by £7.0
million but around 5,000 new customer
connections contributed £0.6 million of
additional turnover. Customer demand
remained constant, reversing the trend
of consumption decline seen in recent
years. Viridor’s revenue rose by 18.7%
(£98.5 million) to £626.5 million of which
the acquisitions of London Recycling and
Intercontinental Recycling plus the Greater
Manchester Waste sub-contract accounted
for £89.7 million. Existing business increased
by £8.8 million (including an increase in
landfill tax of £6.3 million).
OPERATING PROFIT
Group operating profit increased by 4.9%
(£12.6 million) to £269.6 million with South
West Water up 2.6% (£4.9 million) to £196.5
million and Viridor up 15.1% (£9.6 million) to
£73.1 million.
Details of the financial performance of
South West Water and Viridor are set out
in this Business Review on pages 11 and 12
respectively.
FINANCE COSTS
Excluding pensions net interest, discount
unwind on provisions and IFRIC12 contract
interest receivable, net finance costs were
£78.2 million (2008/09 £88.4 million) and
were 3.4 times covered by Group operating
profits (2008/09 2.9 times). On this measure,
net interest payable equated to a rate of
4.1% on average net debt (2008/09 4.8%)
and demonstrates the Group’s effective
management of interest rates.
South West Water’s interest rate on
average net debt for the year was 4.0%
(2008/09 4.6%).
Over the last five years the average interest
rate on Group net debt has been:
INTEREST RATE ON AVERAGE
NET DEBT
KPi
5.5
5
4.5
4
3.5
3
%
Financial
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8
4
.
9
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1
4
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Interest rate management is analysed further
on page 31.
RECONCILIATION OF UNDERLYING AND STATUTORY RESULTS
2009/10
£m
2008/09 (restated)
£m
Growth
OPERATING PROFIT
Statutory operating profit
Non-underlying costs :
- Restructuring – South West Water
-
Underlying operating profit
Intangibles amortisation – Viridor
PROFIT BEFORE TAx
Statutory profit before tax
Non-underlying costs :
- Restructuring – South West Water
-
Underlying profit before tax
Intangibles amortisation – Viridor
EARNINGS PER SHARE - pence
Statutory earnings per share
Non-underlying costs :
- Restructuring (after tax) – South West Water
-
Deferred tax
Underlying earnings per share
Intangibles amortisation – Viridor
264.3
5.0
0.3
269.6
183.8
5.0
0.3
189.1
39.9
1.2
0.1
0.4
41.6
250.8
5.0
1.2
257.0
159.4
5.0
1.2
165.6
25.8
0.9
0.3
11.1
38.1
5.4%
4.9%
15.3%
14.2%
54.7%
9.2%
The 2008/09 results have been restated for the application of IFRIC 12 “Service concession arrangements” as described in note 5 to the
financial statements on page 71.
PENNON GROUP ANNUAL REPORT AND ACCOUNTS | 2010 | P.5
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PROFIT BEFORE TAx
Profit before tax was £189.1 million, an increase of 14.2% (£23.5 million).
DIVIDENDS AND RETAINED EARNINGS
The statutory net profit of £139.5 million has been transferred to reserves.
TAxATION
The UK corporation tax charge for the year was £43.0 million, including
£0.6 million tax relief on restructuring costs (2008/09 £31.3 million
including £1.7 million of relief on restructuring costs). Employer pension
contributions to defined benefit schemes resulted in corporation tax
relief of £5.2 million in 2009/10 (2008/09 £10.7 million).
The deferred tax charge for the year was £1.3 million (2008/09
£38.3 million). 2008/09 included a non-recurring charge of £24.9
million relating to the abolition of industrial buildings allowances as
contained in the Finance Act 2008.
EARNINGS PER SHARE
Earnings per share increased by 9.2% to 41.6p.
The weighted average number of shares in issue during the year was
350.0 million (2008/09 348.1 million). Net assets per share at book
value at 31 March 2010 were 189p.
The Directors recommend the payment of a final dividend of 15.60p
per share for the year ended 31 March 2010. Together with the interim
dividend of 6.95p per share paid on 1 April 2010, this gives a total
dividend for the year of 22.55p per share, an increase of 7.4% compared
with 2008/09, reflecting RPI of 4.4% at March 2010.
Proposed dividends of £79.6 million (2008/09 £73.4 million) are
covered 1.8 times (2008/09 1.8 times) by net profit. Dividends are
charged against retained earnings in the year in which they are paid.
DIVIDEND POLICY
Notwithstanding the lower returns envisaged by Ofwat’s Final
Determination and the impact of current economic conditions, the
Group remains well positioned to continue to deliver shareholder
value and meet future challenges. As a result the Board has announced
its intention to increase the dividend by 4% per annum above inflation
from 2010/11 at least until 2014/15.
Adding value for
shareholders with a
progressive dividend policy
DIVIDENDS PER ORDINARY SHARE
5
5
2
2
.
0
0
1
2
.
1
8
9
1
.
5
5
8
1
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0
2
7
1
.
24
22
20
18
16
14
12
10
KPi
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6
0
/
5
0
0
2
7
0
/
6
0
0
2
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/
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P.6 | PENNON GROUP ANNUAL REPORT AND ACCOUNTS | 2010
Diversified funding sources
FUNDING POSITION
The Group had a strong liquidity and funding position as at 31 March
2010 and is well placed in current financial market conditions:
During the year the following finance initiatives were implemented:
• cash and deposits of £494 million (including circa £92 million of
restricted cash from deposits with lenders)
• committed undrawn facilities of £200 million
• South West Water has committed funding in place to at least mid-
2011/12 and its funding requirements for the remainder of the K5
period thereafter are modest.
Efficient long-term funding
Average debt maturity
23 years
• £125 million convertible bond
• £215 million term loans and Revolving Credit Facilities (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.
£216 million of loan repayments are required during 2010/11.
Refinancing of existing facilities is being progressed and £100 million of
debt facilities have been established or renewed in April 2010.
The fair value benefit (i.e. the difference between the book value and
fair value) of Group debt has increased over the year by £75 million
to £296 million at 31 March 2010 as a result of the rise in medium and
long-term gilt rates.
The Group’s average debt maturity is now 23 years.
PENNON GROUP ANNUAL REPORT AND ACCOUNTS | 2010 | P.7
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sOUth West WAter
turning to the future after a successful conclusion
to the 2005-2010 regulatory cycle
CHRIS LOUGHLIN
CHIEF ExECUTIVE
SOUTH WEST WATER LImITED
CHIEF ExECUTIVE’S OVERVIEW
South West Water performed strongly this year, improving its
customer service, delivering further operational efficiencies and
achieving sound financial results. It has now successfully completed
the 2005 – 2010 regulatory contract and has a solid platform in place
for continued success during the next regulatory period (2010 – 2015).
The company continues to be led by its vision of ‘Pure Water, Pure
Service and Pure Environment’. Underpinning this vision is the strategy
of striking the right balance between investing to improve our services,
customer affordability and financeability.
In November 2009 Ofwat announced its Final Determination of the
company’s business plans and set price limits for the period 2010-
2015. This confirmed average real price increases of 1.9% over the
next five years.
Throughout the Periodic Review process, our focus was on
safeguarding our many achievements of the last 20 years through
investment where needed whilst delivering stable bills for our
customers. Our future plans continue to reflect customer priorities but
we have also challenged ourselves to deliver further cost efficiencies
beyond those set by Ofwat.
Many of our key operational results and achievements over the last
12 months demonstrate the benefits of our ‘Pure Water, Pure Service
and Pure Environment’ vision.
P.8 | PENNON GROUP ANNUAL REPORT AND ACCOUNTS | 2010
During 2009/10, the company delivered significant improvements
in both operational and customer service performance across a
range of key measures, which will provide a springboard to meet the
challenges to come.
PURE WATER
Tap water quality is measured by Mean Zonal Compliance (MZC)
which is the Drinking Water Inspectorate’s preferred method for
water quality assessment. It was maintained for a second year at its
highest ever level of 99.98% in 2009.
Maintaining high water quality levels was the target of our recently
completed £220 million water mains renewal programme undertaken
between 2005 and 2010. During the final year of the project,
104 kilometres of mains pipes were relined or replaced and all five
DWI-approved programme milestones were successfully completed.
The final milestone was achieved ahead of schedule.
Carrying out repairs on the network can cause the interruption of
water supplies to customers. However during 2009/10 there was a
welcome improvement in this area with the number of properties
experiencing unplanned interruptions reducing to 514 properties
from 1,407 in 2008/09.
DRINKING WATER QUALITY (MZC)
6
9
9
9
.
5
9
9
9
.
5
9
9
9
.
8
9
9
9
.
8
9
9
9
.
KPi
100
99.9
99.8
99.7
99.6
99.5
99.4
99.3
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5
0
0
2
6
0
0
2
7
0
0
2
8
0
0
2
9
0
0
2
This has been our 13th consecutive
year without water restrictions
Despite the coldest winter for nearly 30 years
causing a surge in burst pipe incidents for both
our customers and network, we still beat
our leakage control target of 84 Megalitres
per day (Ml/d), and achieved a best ever
performance of 82 Ml/d.
We have now achieved or beaten our leakage
targets every year since they were first
introduced by Ofwat in 1999/2000. Our
leakage rate remains amongst the lowest in
the industry at 5.5 cubic metres per kilometre
of mains per day.
This has been our 13th consecutive year
without water restrictions. The company
has put in place a comprehensive strategy to
ensure a continued secure supply of water for
the region.
During the year work on two major new
trunk mains serving South Devon and East
Cornwall was completed, strengthening water
supplies in each area for decades to come.
Park Lake on Bodmin Moor is now
operational while work has started on
converting nearby Stannon Lake into the
company’s fourth biggest reservoir. These
former china clay pits were purchased in
2006 as a cost-effective alternative to building
new reservoirs.
PURE SERVICE
Renewing its emphasis on excellent service
has helped the company improve its
performance for customers.
We are achieving year-on-year reductions
in operational service contacts, with a 24%
reduction in the last year, and reductions in
repeat service contacts. Improvements to
the handling of service contacts have helped
reduce the number of complaints received.
Customer satisfaction with the way their
contact with the company has been handled
and the ease of contacting us has improved
resulting in a best ever performance of 4.53
out of a possible 5.0 maximum.
However there is always room for
improvement to ensure that we have systems
in place which will provide continuous
advances in our customer service.
Between 2010 and 2015 we will also be
expanding our involvement with consumer
organisations such as Citizens Advice and will be
implementing a personalised debt advice initiative.
This will include extending a range of
measures to assist those customers in genuine
financial difficulty as a result of the recession
whilst still actively pursuing those who can pay
their bills but do not.
In particular, we will be continuing to support
our innovative ‘WaterCare’ programme,
which has assisted over 7,000 households
since its introduction in 2007.
Through WaterCare, customers are advised
on how to better manage their water use and
household budgets including claiming all the
benefits to which they are entitled. The free
installation of water-saving devices has proved
popular with customers and both they and the
company have benefited from moving them on
to affordable and regular payment plans.
A number of the customers on this
programme are now paying more than double
the level of payments they did before, thereby
reducing the company’s outstanding debt.
PURE ENVIRONmENT
South West Water’s record of environmental
achievements was further strengthened
during 2009/10.
The company’s focus on proactive maintenance
of its waste water network resulted in an 11th
consecutive year without a major Category
1 pollution incident and the number of more
minor Category 2 and 3 incidents remained at
a low level.
The long-term transformation of bathing
water quality in the South West, due to the
£2 billion Clean Sweep programme, was also
safeguarded with 96.5% of bathing waters
complying with the EU mandatory standard.
A decade ago this figure was only 42.6%. This
major improvement in quality has also helped
the South West gain the most Blue Flag
beaches of any region in the UK.
The region’s bathing water quality has been
affected by significant rainfall for the last three
summers. This has carried agricultural and
other surface water pollutants into the sea.
BATHING WATER COMPLIANCE WITH CURRENT MANDATORY
STANDARD / CURRENT GUIDELINE STANDARD
Current % mandatory
Current % Guideline
.
3
9
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0
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8
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5
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PENNON GROUP ANNUAL REPORT AND ACCOUNTS | 2010 | P.9
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The percentage population equivalent served by sanitary-compliant
waste water treatment works in the calendar year 2009 was 99.7%.
This consistently high performance contributes to the region having
the highest percentage of high quality rivers in England.
POPULATION EQUIVALENT SANITARY COMPLIANCE
KPi
100
99.9
99.8
99.7
99.6
99.5
99.4
99.3
99.2
99.1
99
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A pilot moorland restoration project ‘Mires’, undertaken on Exmoor
between 2003 and 2010, beat strong competition to win a Water
Industry Achievement Award for ‘Sustainable Drainage and Flood
Management Initiative of the Year’. The success of Mires and other
environmental initiatives has led to a more extensive programme of
catchment management which is being implemented called ‘Upstream
Thinking’. Restoring wetlands will allow slower and steadier flows and
cleaner water from the moors to rivers and reservoirs. This in turn
will help minimise long-term treatment costs.
Mires will be expanded across the region with moorland and
farmland projects between 2010 and 2015 in partnership with
Exmoor National Park Authority, Dartmoor National Park
Authority, Natural England, the Environment Agency, English
Heritage, local farmers and landowners.
Focussing on our ‘Pure’ vision has assisted the company in delivering
a strong set of results both financially and operationally. This has
also ensured there is a solid platform in place for further progress
to be made. Ofwat’s Final Determination represents a tough
challenge for the company but it is one we have accepted and are
determined to deliver.
To meet this challenge, we have:
• renegotiated our key operational contracts with service partners to
create more innovative ways of working and further cost efficiencies
through establishing the new incentivised ‘H5O’ Delivery Alliance to
deliver the capital programme
• invested in a more centralised operating structure employing
increased levels of automation
• continued our organisational restructuring drive to sustain our
services through flexible working while securing efficiencies. It is
expected that a further £4 million will be provided for restructuring
costs in 2010/11
• successfully reduced our energy consumption through our ‘Megawatt
Challenge’ company-wide initiative. Staff led energy saving projects
resulted in overall energy savings of 6.5 GWh, a reduction of around
3,500 tonnes of CO2 and a cost saving of around £600,000 per
annum. Further energy savings will be delivered by our ‘PowerDown’
programme which is in place to achieve more efficiencies and cost
reductions between 2010 and 2015.
This has been another successful year for South West Water.
Further significant improvements have been made in achieving service
excellence and new operational efficiencies.
I would like to thank all our staff and our suppliers for their dedicated
and innovative work. Their achievements this year have ensured we are
in the strongest position possible to deliver in the years ahead.
P.10 | PENNON GROUP ANNUAL REPORT AND ACCOUNTS | 2010
Well positioned
to deliver the K5
Regulatory Contract
FINANCIAL REVIEW
Against the background of an uncertain economic recovery, South West Water has had another strong year, with sound financial
performance being supplemented by improved customer service and delivery of further operational efficiencies.
Operating profit up by £4.9 million (2.6%) to £196.5 million (2009 £191.6 million). For the five-year period 2005/06 to
2009/10 operating profit is shown in the graph below.
The company’s revenue increased by £12.5 million to £444.2 million:
•
Increases: tariff increases approved by Ofwat (£20.9 million) and around 5,000 new customer connections (£0.6 million).
• Decreases: customers switching to metered tariffs (£7.0 million) with income from other sales decreasing by £2.0 million.
68% of our domestic customers now receive a metered supply.
Operating costs, excluding depreciation, increased by £3.8 million to £154.1 million:
Efficiency savings were £4.4 million in the year.
•
• Additional costs from new capital schemes, £1.8 million.
•
•
• Other cost increases £0.4 million, offset by a reduction in costs of other sales £1.6 million.
Price increases, including inflation, £6.5 million.
Lower income from assets, including property sales, £1.1 million.
Restructuring costs were £5.0 million in 2009/10 and a further £4.0 million is expected to be provided in 2010/11.
Despite the downturn in the property market, property disposals in the year contributed £1.0 million to profit (2009 £1.7 million).
The bad debt charge increased by £0.9 million from £6.4 million to £7.3 million. Collections performance on older debt
marginally improved over the year.
Capital expenditure was £143.3 million, including £9.7 million on advanced spend for K5. £37.6 million was spent on
quality schemes, principally on concluding the water mains rehabilitation programme and making progress on waste water
programmes, including the new sewage treatment works for Bossiney, Boscastle and Tintagel.
Further contributions totalling £9.9 million were made to the defined benefit pension schemes.
OPERATING PROFIT
KPi
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175
150
125
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Further efficiencies
achieved in the year
PENNON GROUP ANNUAL REPORT AND ACCOUNTS | 2010 | P.11
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ViriDOr
Viridor profits grew strongly in 2009/10 as it continued to expand
its resource management activities
COLIN DRUmmOND
CHIEF ExECUTIVE
VIRIDOR LImITED
CHIEF ExECUTIVE’S OVERVIEW
V iridor is one of the UK’s leading waste management, recycling
and renewable energy companies. Over the past 10 years we
have evolved from waste collection and disposal into a more
broadly based resource recovery business with major activities in
recycling and waste-based renewable energy generation. At the same
time we have increased our profits at an average rate of over 20%
(PBITA plus joint ventures) per annum since 2001. Over 40% of our
profit contribution now comes from recovering value from waste.
We have core competencies in landfill disposal, recycling and waste-
based renewable energy generation. The company operates materials
recycling facilities (MRFs), waste transfer stations, treatment plants,
household waste recycling sites (HWRS), composting facilities, landfills
and renewable energy generation facilities in most regions of the UK and
has a collection fleet focussed on the industrial and commercial market.
Continuing developments in the UK’s waste management and
renewable energy policies, driven by climate change and environmental
awareness, create major opportunities for Viridor.
In 2009/10 Viridor delivered another year of very strong profit growth
despite the difficult economic conditions in the UK and worldwide.
At the same time we progressed various major strategic initiatives,
including in particular the Greater Manchester waste and renewable
energy project (the largest of its kind in the UK) and the Lakeside
Energy from Waste (EfW) plant, both of which commenced profitable
operations. We also completed the acquisition of two further recycling
companies. These and other initiatives are expected to enhance our
business significantly in future years.
P.12 | PENNON GROUP ANNUAL REPORT AND ACCOUNTS | 2010
This reflects our focussed strategy of:
• capitalising on our strong position in landfill waste disposal
• proactively developing new recycling operations to meet ambitious
EU/UK targets
• successfully exploiting the huge potential in waste-based renewable
energy generation.
Further detail on the climate change and environmental drivers behind
governments’ policies and Viridor’s strategy is given in the sections on
main trends and business and strategy on pages 14 and 15.
FINANCIAL HIGHLIGHTS
Viridor traded very strongly in 2009/10, building further on the
growth achieved over the past eight years. Revenue was up 18.7%
(£98.5 million) to £626.5 million, of which acquisitions accounted for
£89.7 million and existing business £8.8 million (including landfill tax
of £6.3 million).
Viridor’s earnings before interest, tax, depreciation and amortisation
of intangibles (EBITDA) rose 9.1% from £105.2 million to £114.8
million. Profit before interest, tax and amortisation of intangibles
(PBITA) for the year increased by 15.1% (£9.6 million) to £73.1
million, compared with £63.5 million in 2008/09.
With the commencement of the Greater Manchester and Lakeside
projects, joint ventures now account for a significant part of
Viridor’s profits (£4.2 million in 2009/10) and we now focus on
PBITA plus joint ventures as a key performance indicator. We profit
from our joint ventures both via interest on shareholder loans
and via share of the joint ventures’ profit after tax (PAT). PBITA
plus joint ventures grew by 19% in 2009/10 and has grown by a
compound rate of 22% since 2001.
Profit before tax (PBT) at £55.4 million was up 34.8% on the previous
year and has grown at a compound rate of 19% since 2001. Capital
expenditure for the year was £46.6 million (2008/09 £84.0 million)
and we invested £30.8 million in our Greater Manchester, Runcorn
Combined Heat and Power (CHP) and Lakeside joint ventures.
KPi
Year ended 31 March
2001*
£m
13.1
PBITA plus joint ventures
PBT
11.7
Return on equity investment 6.1%
*UK GAAP
2002*
£m
15.2
13.8
7.2%
2003*
£m
19.1
15.7
8.2%
2004*
£m
22.7
17.2
8.8%
2005
£m
30.0
21.5
11.0%
2006
£m
35.9
23.5
11.3%
2007
£m
46.8
29.4
14.2%
2008
£m
58.1
35.5
17.1%
2009
£m
64.9
40.8
19.7%
CAGR
2001-10
22%
19%
2010
£m
77.3
55.4
22.0% –
FINANCIAL YEAR 2009/10
FINANCIAL YEAR 2008/09
Contracts and other 15%
Collection 6%
JVs 4%
Recycling 16%
Contracts and other 3%
JVs 2%
Collection 9%
Recycling 16%
Power generation 25%
Power generation 28%
Landfill 31%
Landfill 45%
CONSENTED LANDFILL VOID
As at 31 March 2010 Viridor had a consented void capacity of 77
million cubic metres.
POWER GENERATION CAPACITY
Electricity generated is sold to electricity suppliers, usually under NFFO
contracts or under shorter term contracts with ROCs. As at 31 March
2010 Viridor had 100 MW of operational landfill gas generating capacity
which is virtually the same as the previous year. These figures exclude 3
MW of sub-contract capacity in Suffolk. In addition there is 27.5 MW of
energy from waste combustion capacity (Bolton and 50% of Lakeside).
0
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As at 31 march
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As at 31 march
PBITA PLUS JOINT VENTURES, PBT AND RETURN ON EQUITYPBITA plus joint ventures (which contributed from 2008) and PBT are key overall measures of Viridor’s performance and are set out in the table below for the ten-year period 2001 to 2010. The table also sets out the Compound Annual Growth Rate (CAGR) for these measures, being the rate of growth between 2001 and 2010 expressed as a single annual average figure over the period. Return on equity is also a key measure of Viridor’s performance and is calculated as PBT expressed as a percentage of Pennon Group’s equity investment in Viridor (£252 million at 31 March 2010).VIRIDOR PROFIT CONTRIBUTION BY SEGmENTThe pie charts below provide a breakdown of Viridor’s profit contribution by segment (before amortisation of intangibles and central overhead costs including pensions). In 2009/10 landfill accounted for 31% and landfill gas power generation 28% of Viridor’s profit contribution, compared with the previous year’s 45% and 25% respectively. Recycling accounted for 16% (last year 16%) and contracts grew to 15% from 3% in the previous year whilst joint ventures accounted for 4% (last year 2%). In total 44% of Viridor’s profits come from recovering value in waste either by power generation or recycling.LANDFILLTotal landfill disposal volumes decreased by 0.7 million tonnes (15%) to 3.9 million tonnes in the year. Approximately 0.2 million tonnes of this was due to landfill closures, as reported last year. The bulk of the remaining reduction was in third party industrial and commercial volumes which were heavily impacted by the general weakness in the UK economy. Average revenue per tonne increased by 1.1% to approaching £22 per tonne (3.1% like for like excluding site closures). Consented landfill void reduced from 81 million cubic metres at 31 March 2009 to 77 million cubic metres at 31 March 2010, reflecting 1.2 million cubic metres planning gains and usage during the period of 4.8 million cubic metres.LANDFILL GASViridor’s landfill gas power generation output increased by a further 10% to 555 Gigawatt hours (GWh) during the year particularly reflecting capacity brought on in late 2008/09. All of the output increase was accredited for full ROCs in advance of the banding change. Viridor’s average revenues per Megawatt hour (MWh) grew by 21% to approaching £90 reflecting the growth in the proportion of output eligible for Renewables Obligation Certificates (ROCs). Taking advantage of favourable market conditions in May 2008, Viridor sold forward the brown element of its ‘ROC-able’ electricity to March 2010 at May 2008 prices. Current power generation prices are significantly (circa £30 per MWh) lower. This will materially affect power generation segment performance for 2010/11.At 31 March 2010 Viridor’s landfill gas power generation capacity was 100 Megawatts (MW) including a small amount of sub-contract capacity. At 31 March 2010 63% of Viridor’s power generating capacity was eligible for ROCs and 37% for the Non Fossil Fuel Obligation (NFFO).PENNON GROUP ANNUAL REPORT AND ACCOUNTS | 2010 | P.13
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RECYCLING
The UK is required under the EU Landfill Directive to reduce the
amount of biodegradable municipal waste going to landfill sites. To meet
the requirements of the Landfill Directive the UK Government uses
landfill tax as a price mechanism. At the same time the Government
has set clear targets for the recycling of household waste, and
local authorities must also implement strategies for the diversion
of biodegradable municipal waste away from landfill. The former
Chancellor’s Budget announcement on 24 March 2010, continuing the
increase in landfill tax of £8 a year from £48 per tonne currently to £80
per tonne in 2014/15, will further enhance the long-term economics of
recycling. In general, recyclate costs are typically significantly lower than
the cost of using virgin materials for manufacturers.
As reported last year recyclate prices were high in the first half of
2008/09 and low in the second half, reflecting the prevailing general
world economic conditions. Since then recyclate prices have recovered,
ending the year at around the peak levels seen in early 2008/09.
Viridor’s recycling traded volumes grew 3.5% to a little over 1.4
million tonnes, with an improved recyclate mix. Recyclate prices have
continued to strengthen since the year-end but are expected to ease
back later in the year.
In June 2009 Viridor acquired London Recycling Limited for a cash
consideration of £10.6 million, plus debt acquired of £1.5 million. With
its headquarters in East London, the business comprises a full range of
recycling operations including a fleet of collection vehicles, a ‘WEEE’
facility, paper processing, confidential material destruction, a MRF and
a waste auditing facility. It handles approximately 50,000 tonnes of
material per annum. London Recycling has had a good track record
over recent years in providing essential recycling services to businesses
in the capital and has an excellent geographic and business fit with
Viridor’s operations in the South East of England.
Plastics in particular are a significant and growing part of Viridor’s
recycling business and in July 2009 Viridor acquired Intercontinental
Recycling Limited for a cash consideration of £4.2 million, plus
debt acquired of £3.9 million. Based in Skelmersdale, Lancashire,
the company processes High Density Polyethylene (HDPE) and
Polyethylene Terephthalate (PET) plastic bottles, such as are recovered
by Viridor’s MRFs. It converts the bottles to pellet or flake for sale
to plastic product manufacturers, mostly within the UK. The plant
has the capacity to treat 40,000 tonnes of plastics waste per annum.
Intercontinental Recycling also has a good geographic and business
fit with Viridor’s existing operations and is particularly well-placed to
receive volumes from the Greater Manchester Waste PFI.
CONTRACTS
Contracts profits were well ahead with continued good performance
from the West Sussex PFI and 10 other municipal contracts. The
sludge contracts business which performed poorly in the second half
of 2008/09 was back in profit. There was also a significant contribution
from the Greater Manchester Waste PFI sub-contract.
PUBLIC PRIVATE PARTNERSHIPS AND PRIVATE
FINANCE INITIATIVES
Public Private Partnership (PPP) and Private Finance Initiative (PFI)
contracts are a key part of Viridor’s strategy.
Financial close on the Greater Manchester Waste PFI 25-year contract
was achieved on 8 April 2009. It is the UK’s largest ever combined waste
and renewable energy project, managing 1.3 million tonnes of waste per
year. The total potential energy generation will be approaching 140 MW
from Phases I and II of the Runcorn plant, the four anaerobic digesters
(ADs) and the existing Bolton Energy from Waste (EfW) plant.
The PFI is a joint venture between Viridor and John Laing
Infrastructure. Operation of the associated facilities is being carried out
on a sub-contract basis by Viridor. In October 2009 it was confirmed
that all required facilities planned for development had received
planning permission. At 31 March 2010 of these 42 facilities 22 had been
completed and handed over to Viridor to operate.
Associated with the Greater Manchester PFI is an EfW CHP facility
(Runcorn Phase I) which is a three-way joint venture between Ineos
Chlor, Viridor and John Laing Infrastructure. Planning permission was
achieved by Ineos Chlor for both phases of the EfW CHP plant at
Runcorn in September 2008 and construction of the first phase has
commenced. Total capital expenditure for the Greater Manchester
PFI is projected to be £405 million with an additional £235 million for
the associated EfW CHP plant (Runcorn Phase I). Viridor’s funding
contribution will be £85 million. In addition we have secured all of the
rights to Phase II of the planned EfW CHP facility at Runcorn. This
will be targeted at the North West market more generally and is a
significant upside to the initial project given rising landfill tax and the
shortage of competing capacity in the North West.
In addition to the above contracts we continue to bid selectively for
other projects. We are the preferred bidder for the Oxfordshire PPP
and one of the last two for the Cheshire PFI and the South West Devon
Waste Partnership. We are one of the last three for the Peterborough
EfW and MRF contracts and one of four still in the bidding for the
Gloucestershire PFI and South London Waste Partnership contracts.
Most of these projects include renewable energy.
mAIN TRENDS AND FACTORS LIKELY TO AFFECT THE
FUTURE DEVELOPmENT, PERFORmANCE AND POSITION
OF THE COmPANY’S BUSINESS
The waste management and renewable energy business is heavily
influenced by environmental and climate change considerations and
associated Government policies. Viridor’s strategy reflects this. Our
belief is that being green is good for business, as is demonstrated by the
company’s financial performance.
Government policies are designed in the first instance to minimise the
amount of waste generated, then to maximise reuse and recycling,
followed by treatment and energy recovery via EfW facilities and other
technologies. This is underpinned by final safe disposal in landfills. The
Government is implementing the EU Landfill Directive and reducing the
amount of waste to go to landfill. This Directive was a response in part
to methane emissions from landfills, although in fact the bulk of this in
the UK is now captured for renewable energy generation.
Continued strong
growth in PBT
P.14 | PENNON GROUP ANNUAL REPORT AND ACCOUNTS | 2010
Government targets of diverting municipal
waste away from landfill up to 2020 are leading
to a decline in the landfill market. However,
with only around six or seven years’ consented
capacity in the UK as a whole (according to
Environment Agency estimates) and with
new consents difficult to achieve, Viridor’s
77 million cubic metres is regarded as a very
valuable resource, with 15 years’ average
capacity available at current rates of fill.
At the same time it is increasingly recognised
that waste is a major renewable energy
source, accounting for approximately 25%
of the current UK’s renewable energy or
roughly 1.5% of the total UK’s electricity
production. 1.2% of this comes from landfill
gas utilisation, which has grown by 600% over
the past 10 years, and 0.3% from energy from
waste combustion. As the energy produced
from waste is a product of waste treatment,
it is effectively low cost. Unlike certain other
renewables it provides baseload power which
is distributed around the grid typically close
to where energy is required.
There is scope for a major increase in
the amount of energy recovered from
waste in the UK particularly in EfW
facilities (especially with CHP) as well as in
developing technologies such as Anaerobic
Digestion (AD). Viridor estimates that waste
could account for 6% of UK electricity
production by 2015 if planning barriers could
be addressed, and has called upon the UK
Government to set this as a target.
The need for councils to avoid steeply
increasing landfill tax and to achieve their
landfill diversion targets creates attractive
opportunities for PFI/PPP and other contracts.
Examples include Viridor’s contracts with
West Sussex, Somerset, Greater Manchester
and the South London Waste Partnership,
facilities such as the Lakeside EfW plant and
the Runcorn EfW CHP plants, recycling
operations such as those of Viridor Resource
Management and our electrical goods and glass
recycling services.
Whilst the long-term trends in favour of
Viridor’s business are very positive, the
weakness of the UK economy is having a
significant effect on waste volumes and power
generation prices. It is certain that public
expenditure will be reduced in the face of the
UK’s massive budget deficit.
This is likely to put particular pressure on
local councils’ budgets and may result in their
delaying new major waste PPPs/PFIs or in
seeking other ways to reduce their waste
management costs.
BUSINESS AND STRATEGY
Our strategy is to deliver strong growth and
add value by:
• capitalising on our strong position in landfill
waste disposal
• proactively developing new recycling
operations to meet ambitious EU/UK
targets
• successfully exploiting the huge potential in
waste-based renewable energy generation.
Viridor’s landfill market consists of municipal,
commercial and industrial wastes, along with
certain other special types of waste. Landfill
is currently the major final disposal route for
these wastes.
Viridor is a major landfill site operator within
the UK with a total consented landfill capacity
of approximately 77 million cubic metres as
at 31 March 2010. Viridor is at present filling
this at a rate of around five million cubic
metres per annum, which results in an average
remaining life of 15 years at current rates of
fill, which is significantly longer than for the
industry as a whole.
Gas produced from decomposing waste on
landfill sites is increasingly used to generate
electricity. It is a form of renewable energy
and now represents 1.2% of the UK’s total
electricity generation. EfW represents
a further 0.3% according to Defra. The
Government’s stated strategy is to increase
the percentage of electricity generated
from all renewable sources from the
current figure of around 5% to a target of
10% in 2010 and 15% in 2015. Viridor has
called on the Government to set a target
of 6% of electricity to be generated from
waste sources by 2015. The UK has an EU
target of generating 15% of total energy
from renewable sources by 2020, which
is likely to require over 30% of electricity
to be generated from renewable sources.
Historically, renewable energy projects were
supported by the Government through
the NFFO scheme. Under this fixed price,
Retail Prices Index (RPI) contracts with
terms of up to 15 years were awarded to
the most competitive renewable projects
in five tranches of bidding. In April 2002
the NFFO regime was replaced by the
Renewables Obligation (RO) regime. Under
the RO, eligible generators receive the brown
energy price plus the value of the associated
Renewables Obligation Certificate as
described on page 23.
The overall price for electricity supplied
under the RO regime is currently substantially
higher than that achieved under the most
recent NFFO scheme. This has facilitated the
increase of Viridor’s total landfill gas power
generation capacity to 100 MW at 31 March
2010, compared with 27 MW in March 2002.
Of this power generation capacity, 63%
is under the RO regime and 37% is under
NFFO. Viridor’s existing NFFO contracts end
in tranches over the next six years after which
the capacity can transfer to ROCs.
To take advantage of opportunities presented
by the Government’s developing waste
strategy, Viridor is pursuing EfW schemes
detailed below (including, where feasible,
CHP) and a range of recycling or related
treatment opportunities, including materials
recycling facilities, mechanical-biological
treatment, anaerobic digestion, composting
and household waste recycling sites. These
facilities may be combined in integrated waste
management contracts.
Viridor is pursuing possible long-term EfW
opportunities, including proposals in Cardiff
(which received planning permission in June
2010), Avonmouth, Dunbar and Oxfordshire
(which have had planning permission turned
down locally and are being appealed), and near
Plymouth. Construction of the consented
Exeter EFW plant is expected to start
during 2010/11.
In pursuing its strategy, Viridor seeks to grow
its recycling, renewable energy and waste
management business, both organically and
through acquisition. It has continued to be
an active participant in the consolidation of
the UK waste market to date and, between
October 2001 and March 2010, has made 17
acquisitions in the waste sector for an aggregate
consideration of over £310 million. These
businesses have now been integrated into the
Viridor group.
Greater Manchester 25-year PFI
contract operating successfully
Lakeside Energy from Waste
plant commenced operations
PENNON GROUP ANNUAL REPORT AND ACCOUNTS | 2010 | P.15
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ABOUt OUr BUsinesses – sOUth West WAter
REGULATORY AND
COmPETITIVE ENVIRONmENT
South West Water is the licensed water
and sewerage service provider for Devon,
Cornwall and parts of Dorset and Somerset.
The company serves a region of nearly
10,300 square kilometres with over 1.65
million residents. In addition over 39 million
visitor nights as recorded by South West
Tourism were spent in the region in 2009.
On average each day it distributes over
420 Megalitres (Ml) of treated water and
disposes of around 235 Ml of waste water
through an asset base comprising:
Water distribution mains
15,058km
Sewers
9,288km
Impounding reservoirs
Water treatment works
Waste water treatment works,
including 55 works with
ultra-violet treatment and
three with membrane filtration
Intermittent discharge points,
including 1,029 combined
sewer overflows
15
39
634
1,668
Since privatisation in 1989 the company
has successfully delivered the largest capital
programme per capita of any of the water
and sewerage companies with an initial focus
on improving coastal waste water treatment
and disposal. The region currently has 144 EU
designated bathing waters, almost one third
of the total in England and Wales, and 132 of
these have benefited over the last 19 years from
the company’s marine investment programme.
Following completion of an entire overhaul
of water resources, water treatment and
distribution over the same period we are able
to demonstrate major improvements in water
supply quality and reliability for our customers.
Over 420 Ml
of treated
water supplied
per day
South West Water expects to create value
through delivering the regulatory contract
agreed with Ofwat. The contract scope
is reviewed every five years. As well as
determining outputs, Ofwat sets prices
to enable efficient companies to earn a
reasonable rate of return on their assets.
For the new regulatory period which started
in April 2010 Ofwat assumed that the equity
cost of capital for all companies will be 7.1%
real after tax with an overall weighted average
cost of capital of 4.5% real after tax.
Customers using more than 50 Ml of water
per year can contract with alternative
suppliers for water supply. South West
Water has 36 customers in this category
whose aggregate water charges account
for approximately 1.5% of its total water
and sewerage revenue or 3.2% of its water
revenue. No single customer accounts for
more than 1% of revenue.
The Government’s independent review of
competition and innovation in the water
industry led by Professor Martin Cave
published its final recommendations in April
2009. Legislation will be required for any
further significant extension of competition
in the water and sewerage markets. During
the year Ofwat consulted on extending the
current 50 Ml criteria for competition under
water supply licensing arrangements to
cover customers using more than 5 Ml. This
extension to the existing competition regime
is expected to apply during 2010/11. Ofwat
has published a number of consultation papers
concerning the potential for future retail and
upstream market reform.
The review into fairer water charges
commissioned by Defra, known as the
Walker Review, was concluded in 2009.
The review noted that, while the regulatory
regime in the water industry has served
customers well over the last 20 years,
improvements can be made to address the
twin aspects of affordability and fairness
for water customers. The Government has
asked Ofwat to advise it on one or more of
a number of options to address the issue of
water bills in the South West:
• a one-off or other financial adjustment
by Government
• contributions by other water customers
across the country
• a package of tariff proposals for South
West Water customers.
Ofwat and South West Water have
established a joint working group to develop
and examine the options which could address
the recommendations in the Walker Review.
PRICE CAP REGULATION
Ofwat regulates water and waste water
charges by determining the maximum
increase in charges which a company can
impose in any year. The water regulator
conducts a Periodic Review and sets price
limits every five years. Prices are set by
reference to inflation as measured by the
Retail Prices Index (RPI) plus an adjustment
factor known as ‘K’ which is specific for
each company.
The ‘K’ factors for the period 2010 to 2015
for South West Water were determined
by Ofwat in its Final Determination in
November 2009 and are shown in the
table below:
‘K’ FACTORS FOR THE
PERIOD 2010-15
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P.16 | PENNON GROUP ANNUAL REPORT AND ACCOUNTS | 2010
The 2004 Final Determination provided for total capital expenditure of £762 million (2002/03
prices) over the five-year period 2005-2010. All major projects required in the period
2005-2010 were delivered in line with Ofwat’s, the Drinking Water Inspectorate’s and the
Environment Agency’s expectations. The required customer service and infrastructure
outputs at 31 March 2010 included:
Activity
2005-2010 Target
Status at 31 march 2010
Adequacy of water resources
Security of Supply Index to be
maintained at 100
Security of Supply Index was
100. No water restrictions
for the 13th consecutive year
Leakage control based on
three-year rolling average
Maintain at 84Ml/d
82Ml/d achieved in 2009/10
Asset condition above ground Maintain stable
Asset condition below ground Maintain stable
Stable
Stable
Meet Drinking Water
Inspectorate milestones for
water mains rehabilitation
Complete five milestone
packages of improvements
Completed
Improvements to continuous
discharges
Complete 95 schemes by
31 March 2010
Completed
Improvements to intermittent
sewage overflows
Complete 113 schemes by
31 March 2010
Completed
PERIODIC REVIEW 2009
Following submission of South West Water’s Final Business Plan in April 2009, the company’s
Final Determination was made by Ofwat on 26 November 2009. Key elements of the Final
Determination for the company included:
• a cost of capital of 4.5% (real, post tax basis), applicable to the whole industry
• ‘K’ price increases (above RPI inflation) averaging 1.9% per annum over the five years
• a capital programme of around £705 million at 2007/08 prices
• a Capital Incentive Scheme (CIS) score of 105 (water) and 110 (sewerage), in line with the
industry average
• operating efficiency improvements of 2.8% per annum, comparable with K4 delivery
• over the period 2010-2015 average bills decreasing by 1% before inflation
• capital investment priorities, including protection and maintenance of the improvements made
over the last 20 years, further improvements to meet EU Directives and their corresponding
UK legislation, achievement of operating cost savings and delivery of projects to increase levels
of renewable energy generation and to improve sustainability of the company’s activities.
Further information on the Final Determination is available on the company’s website
southwestwater.co.uk
GROWTH IN REGULATORY
CAPITAL VALUE
Regulatory Capital Value (RCV) is the financial
base used by Ofwat to allow a rate of return
and set prices at each Periodic Review.
The RCV at 31 March 2010 amounted to
£2.621 billion. After adjustment for PR09
log up/down and other Final Determination
adjustments the figure is £2.555 billion which
represents an increase of 3.8% in the year.
From 31 March 2005 to 31 March 2010 the
company achieved a 31% growth in RCV, the
highest percentage increase of any quoted UK
water company.
The gearing ratio in relation to adjusted year-
end Regulatory Capital Value improved to
60.6% from 63.8% in 2008/09.
The growth in RCV adds directly to shareholder
value as the allowed return is attributed to
South West Water’s asset base by Ofwat.
REGULATORY CAPITAL VALUE
Notes
+ Source: Ofwat, adjusted for logging up/down of
capital expenditure, K5 to K4 capital advancement,
land sales and COPI adjustments from Ofwat’s Final
Determination
KPi
2.7
2.5
2.3
2.1
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PENNON GROUP ANNUAL REPORT AND ACCOUNTS | 2010 | P.17
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LEGISLATIVE DRIVERS
The water industry in the UK is subject to
substantial national and EU regulation. This places
significant statutory obligations on South West
Water with regard to, amongst other things, the
quantity of water abstracted, and the quality and
quantity of waste water discharged. Examples
of relevant EU directives include the Drinking
Water Directive, the Habitats Directive, the
Urban Waste Water Treatment Directive and
the updated Bathing Water Directive.
CLImATE CHANGE
South West Water is working closely with
many organisations to assess the implications
of climate change for water supply and waste
water services. Adaptation and mitigation
plans are being developed which will involve
innovative approaches and new methods of
influencing catchment behaviour upstream of
its water supply systems, in sewered areas and
downstream of its waste water systems to
protect the wider environment.
The Water Framework Directive was
incorporated into UK law in 2003. It
provides a framework for the protection
and improvement of the quality of water
resources, together with the promotion of
sustainable water consumption. To comply
with the Water Framework Directive,
EU member states will have to achieve
the challenging target of ‘good’ status for
groundwater, rivers, estuarine waters and
coastal waters, in three six-year cycles, the
first running from 2009 to 2015. The Final
River Basin Management Plan, published by
the Environment Agency in December 2009,
confirmed that the Plan’s implications are
unlikely to require changes to South West
Water’s assets at least until 2015, due to the
successful delivery of a wide range of river,
estuarine and coastal water environmental
improvements by the company since 1989.
Further legislative regulations are expected
for the water industry following introduction
of the Flood and Water Management Act in
April 2010. Many of the changes are expected
to implement the recommendations of the
Pitt Report which was commissioned after the
severe flooding in other parts of the country
in summer 2007.
The company’s final Water Resources Plan
for the next 25 years was published in the
summer of 2009 and was approved by Defra.
It includes information relating to rainfall and
temperature variations. The plan includes
allowances for demand changes associated
with climate change. Predictive models are in
place to address uncertainty. Infrastructure
developments have been identified, the timing
of which can be adjusted if the expected rate
of climate change alters. Increasingly efficient
and careful use of water plays a major part in
adapting to the expected effects.
INCIDENTS
There were no Category 1 incidents for the
11th year in succession. Two Category 2
(significant pollution) events and 69 Category
3 events were recorded by the Environment
Agency in 2009 which were deemed non-
compliant with discharge consents. This
compares with three Category 2 incidents and
64 Category 3 incidents in 2008. The total
number of waste water pollution incidents in
2009 was 106 (2008 92). 41% of the Category
2 and 3 incidents in 2009 were identified by
the company and self-reported.
Flexible plans in place
for climate change
PROSECUTIONS
During the year the company was convicted
on four occasions for environmental offences
and fined a total of £11,500 (2008/09 four
convictions and fines of £28,100).
The company always self-reports incidents it
becomes aware of and co-operates fully with
any investigation undertaken by the relevant
regulatory authority. After each pollution
incident, the company takes such steps as are
necessary to ensure as far as possible that the
incident will not be repeated and also seeks
to ensure that lessons learned are widely
disseminated throughout the company.
CUSTOmERS, COmmUNITY
AND EmPLOYEES
HEALTH AND SAFETY
PERFORmANCE
The health, safety and welfare of South West
Water’s employees remain paramount in all its
activities. The company has a health and safety
strategy which focuses on providing strong
leadership, engaging with employees, building
competence and measuring performance.
These principles are promoted by a health and
safety steering group including a cross-section
of the company’s directors, managers and
employee representatives.
Occupational health and safety are key
elements of South West Water’s risk
management and internal control processes.
We continue to pursue initiatives to improve
further the welfare of the company’s
employees through the provision of training
on, and promotion of, good health and
safety practices.
RIDDOR accidents and incidents per 1,000
employees totalled 13 in 2009 compared
with 21 in 2008 and we welcome this
improvement.
RATES PER 1,000 EMPLOYEES
KPi
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P.18 | PENNON GROUP ANNUAL REPORT AND ACCOUNTS | 2010
Business customers continue to have access
to a secure online system which tracks and
displays consumption on their sites. South
West Water’s ‘Business Accounts Online’ also
offers a water efficiency calculator with a free
water audit. Since the launch of the calculator
tool in November 2007 211 businesses with
over 7,250 water service accounts have
registered to use the water efficiency element
of this service.
OVERALL PERFORmANCE
ASSESSmENT
The Overall Performance Assessment (OPA)
index is maintained by Ofwat as a comparative
tool to measure companies’ performance.
The OPA is based on performance in areas
such as customer service, complaint handling,
billing, debt collection, asset serviceability,
environmental compliance and quality of
drinking water delivered. In 2008/09 South
West Water’s performance moved to eighth
place amongst the ten water and sewerage
companies (seventh in 2007/08).
Ofwat has announced that OPA will be
replaced with a new measure of water
industry customer performance, called the
Service Incentive Mechanism. 2010/11 data will
be reported on this new basis.
CUSTOmER SATISFACTION OVERALL
South West Water’s ‘Customer Plus’
programme is transforming the customer
experience with the aim of making it
amongst the best in the industry. In 2009/10
customer contact performance improved
significantly. The number of complaints
about billing, charges and water and
sewerage services has fallen.
CUSTOmER SATISFACTION CALL
HANDLING
Ofwat measures the overall manner in which
a customer call is handled. The measure
is obtained by quarterly tracking surveys
undertaken by an independent company
engaged and managed by Ofwat. The data is
averaged for the year to assess a performance
trend. For 2009/10 the satisfaction score was
4.53 (2008/09 4.5). The maximum score is 5.0.
The company continues to promote the
efficient use of water with advice and practical
support for householders and non-domestic
customers. An education programme for
schools has also been developed this year to
extend the spread and reach of this work.
As part of the WaterCare programme
and to investigate customers’ high water
consumption queries, 2,831 audits were
completed in 2009/10 (2008/09 3,088).
South West Water continues to support
business customers through water
efficiency reviews, waste minimisation
projects, providing advice for water
management plans and by highlighting
opportunities for reduction, re-use or
alternative sources of supply.
CUSTOmERS
South West Water has consulted with
customers about its priorities for 2010-
2015 and this feedback has been central
to the development of customer service
improvement plans to deliver its Pure Water,
Pure Service and Pure Environment strategy.
Providing help and support to customers in
need is at the heart of the company’s Pure
Service strategy and accordingly the company
remains an industry leader in the provision
of priority services to vulnerable customers.
In 2009/10 the company helped thousands of
such customers with reading their meters or
by providing extra help in an emergency.
‘WaterCare’, the company’s industry-leading
programme to support customers who have
difficulty in paying their bills, completed a
third successful year. Since the start of the
programme over 7,000 customers have been
helped with benefit entitlement checks, tariff
advice and water-saving measures.
The WaterCare programme has been
commended by the Government.
Customers are kept informed about
our services through ‘WaterLevel’ (our
company newspaper), leaflets, the media
and our website southwestwater.co.uk
Consultation with customers and stakeholders
has an influence on the improvements made
to our literature and website as we seek to
provide information of interest in increasingly
accessible ways.
The company meets regularly with the
Consumer Council for Water (CCWater),
which champions the interests of water
customers. It consults with CCWater and
other stakeholders such as pensioners’ forums
and Citizens Advice, prior to introducing
major changes or initiatives.
CUSTOMER SATISFACTION
OVERALL
CUSTOMER SATISFACTION
CALL HANDLING
OVERALL PERFORMANCE
ASSESSMENT
KPi
100
90
80
70
60
50
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20
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COmmUNITY, CORPORATE
RESPONSIBILITY AND SPONSORSHIP
South West Water concentrates its
sponsorship on community projects and
organisations within its service area which are
linked to water, benefit the environment or
promote youth participation.
Highlights in 2009/10 included the staging
of a series of environmental walks with
Cornwall Wildlife Trust around the coastline
to mark the completion of a pipe replacement
scheme at Looe and sponsoring the ‘Nipper’
youth championships of the Surf Life Saving
Association of Great Britain at Falmouth.
Other supported events ranged from the
TRAIL environmental art sculpture festival on
the South West Coast Path between Dawlish
and Shaldon and the opening of Pynes water
treatment works, Brokenbury waste water
treatment works and Mary Tavy hydro power
station for guided public tours during the
national Heritage Open Days.
For the third year the company also
co-sponsored South West Tourism’s annual
awards and funded the sustainable tourism
prize. This demonstrates how its ‘Clean
Sweep’ project has helped underpin the
renaissance of tourism, the region’s number
one industry.
The company is proud to support the
water industry charity, WaterAid, through
sponsorship and many other fund-
raising activities such as the publication
of a calendar featuring water-themed
photographs taken by Group employees.
EmPLOYEES
South West Water’s people strategy
continues to focus on recruiting and
developing individuals who can support
the delivery of the company’s ‘Pure’ vision,
enabling the provision of a high quality
service to customers and the achievement of
operational efficiencies.
Technical and managerial skills training have
underpinned the company’s Puros project.
A range of other learning programmes to
support the development of customer facing
and operational skills continue to form a
fundamental part of our strategy.
Employee involvement and participation in
all aspects of business and organisational
change is encouraged and supported through
the company’s Staff Council and craft and
industrial consultative forums.
KEY RELATIONSHIPS
REGULATORS AND OTHERS
Relationships with regulators, Government
and its agencies, customer representative
organisations and its customers are central
to South West Water’s operations. The
company maintains a continuing dialogue with
Ofwat, the Environment Agency and the
Drinking Water Inspectorate. It contributes
to national policy on developing issues
through its membership of Water UK, the
industry trade body.
The company works with the Consumer
Council for Water to ensure that customers’
issues and concerns are addressed and a full
understanding of the company’s activities is
maintained.
PROCUREmENT AND SUPPLIERS
South West Water’s procurement strategy
is focussed on partnering and strategic
alliances with 60 key suppliers who account
for the large majority of expenditure.
Regular meetings are held to manage
performance, encourage sustainable
business activity and to identify and deliver
continuous improvement opportunities for
reducing costs further whilst improving
performance and service levels.
The company has successfully completed a
programme of tendering strategic contracts
in preparation for the K5 period and has
established a new ‘H5O’ Delivery Alliance
structure for delivery of its 2010-15 capital
programme. This will enable the company
to work closely with suppliers, particularly
small and medium-sized businesses
across the South West, ensuring value for
money for customers and supporting the
regional economy.
No supplier (revenue) accounts for more
than 5% of revenue and South West Water
sources all its purchases from competitive
markets. South West Water’s electricity
supplies have been secured to 2014 through
recently negotiated fixed price contracts.
South West Water achieved a ‘Green Apple’
award for transforming a disused sludge lagoon
into a pond for wildlife with a number of
other habitat improvements around its water
treatment works site at Tottiford, near Bovey
Tracey. This project was shortlisted as a finalist
in the Community Campaign of the Year
category of the Water Industry Achievement
Awards. This recognises the way South West
Water engaged with adults with learning
difficulties for the supply of bat, bird and
dormouse boxes now fitted across the site.
‘H5O’ Delivery Alliance in place for
the 2010-15 capital programme
P.20 | PENNON GROUP ANNUAL REPORT AND ACCOUNTS | 2010
SOUTH WEST WATER’S PRINCIPAL RISKS AND UNCERTAINTIES
Risk
mitigation
Tighter price controls over the revenue of
the company’s regulated business
The current periodic review was completed in November 2009 when Ofwat set water
company charges for the years 2010-2015. South West Water has met Ofwat’s efficiency
targets in the last three Periodic Review periods.
Failure to deliver the capital investment
programme
The company may be unable to raise
sufficient funds to finance its functions
The company has a track record of delivering its capital programme in accordance with
regulatory requirements and progress is regularly monitored and reviewed. The K4
capital programme has been delivered and the company has developed plans to deliver
the K5 programme.
Pennon Group and the company have robust treasury policies in place. These include policies
that there are always pre-drawn or committed facilities to cover at least one year’s estimated
cashflow and that no more than 20% of borrowing matures in any one year. Treasury policies
and risk management are described in more detail on pages 29 to 31.
Failure to deliver operating cost savings
implicit in the regulatory review
In line with its track record, the company remains confident of delivering the assumed
operating cost savings. A major restructuring programme is currently being implemented to
contribute towards the additional efficiencies required for the K5 period.
Environmental regulations and quality
standards could increase the company’s
costs
Climate change
Contamination of water supplies
Non-recovery of customer debt
These issues are addressed through the five-year regulatory review mechanism.
The company has plans ready and will adapt the way it conducts its business to respond
effectively to the hotter, drier summers and wetter winters which are anticipated.
The company has established procedures and controls in place, as well as contingency plans
and incident management procedures. It also maintains insurance policies in relation to these
risks, although there can be no assurance that all or any of the costs associated with these risks
would be covered or that coverage will continue to be available in the future.
In addition to existing strategies, which are kept under review, South West Water continues to
implement new initiatives to improve and secure cash collection, including the use of property
charging orders. Stretching debt and collection targets – with incentives – have been agreed
with the customer service contractor. The accounts of major customers are kept under close
review. Provision has been made in the K5 Final Determination for companies to make an
application for an Interim Determination in the event of household bad debts being significantly
above the amount allowed by the water regulator due to worsening economic circumstances in
the company’s operating area.
Water resource adequacy
The company has a number of schemes in place to maintain water resources (such as pumped
storage for certain reservoirs) and promotes conservation measures.
Operational failures
Reduced revenue from falling customer
demand for water
In particular, South West Water prepares a new Water Resources Plan every five years and
reviews it annually for a range of climate change and demand scenarios. The Water Resources
Plan indicates that no new reservoirs are required before the planning horizon of 2035.
However, investment is needed to develop the overall trunk main infrastructure, to expand
treatment capacity and to enhance certain pumped storage facilities.
The company is able to monitor its significant assets by automated and remote operation and
has routine controls and operating procedures in place that are constantly kept under review.
Asset management techniques are employed to pre-empt the failure of assets.
The reduced demand experienced in the K4 regulatory period has been taken into account
by the regulator in setting a baseline turnover level for the K5 period. A revenue correction
mechanism is in place from the start of the K5 period, which allows water companies to
recover a shortfall in income for a five-year regulatory period in the next period.
Financial loss arising from the insolvency of
a major supplier or contractor
The company uses a third party credit monitoring service to track changes to major
suppliers’ financial status and creditworthiness to supplement an annual risk review of key
and strategic suppliers.
Impact of competition in the industry
South West Water continues to consider and evaluate developments and proposals in relation
to the development of competition as part of its risk management and business strategic
planning processes. Legislation will be required for any further extension of competition in the
water and sewerage markets.
PENNON GROUP ANNUAL REPORT AND ACCOUNTS | 2010 | P.21
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ABOUt OUr BUsinesses – ViriDOr
REGULATORY AND
COmPETITIVE ENVIRONmENT
The UK is required under the EU Landfill
Directive to reduce the amount of
biodegradable municipal waste going to
landfill sites to:
– 75% of 1995 level by 2010
– 50% of 1995 level by 2013
– 35% of 1995 level by 2020.
The Pre-Treatment Regulations 2007
require all waste going to landfill to have
undergone some form of pre-treatment
(including recycling).
At the same time the Government has
set targets in England for recycling and
composting of municipal waste to increase
from the current level of around 35%
to 40% by 2010, 45% by 2015 and 50%
by 2020. Higher targets are in place for
some of the devolved administrations. The
Government is promoting recycling by
various measures including encouraging
councils to provide separate collection of
recyclables which enhances the recycling
rate obtainable at MRFs. There are specific
targets for recycling of all packaging with
financial incentives in the form of Packaging
Recovery Notes (PRNs) and Packaging
Export Recovery Notes (PERNs). Specific
regulations affect waste electrical and
electronic equipment (WEEE) which has its
own system of Evidence Notes.
The Government introduced landfill tax
as an incentive to divert waste away from
landfill sites. Landfill tax applies to all waste
disposed of at a licensed landfill site, unless
the waste is specifically exempt, such as soil
from historically contaminated sites up to
2012. Landfill tax is chargeable by weight.
For inert waste, landfill tax was chargeable
at £2.50 per tonne from 1 April 2008 and
this has been frozen to 2010/11. A standard
rate of £48 per tonne applies to all other
taxable waste (up from £32 in 2008/09)
which is due to rise by a further £8 per
tonne per annum to reach a level of £80 per
tonne in 2014/15.
In order to meet the requirements of
the Landfill Directive, individual local
authorities have also been set statutory
targets for the diversion of biodegradable
municipal waste from landfill. Each waste
disposal authority has been allocated an
allowance of the amount of biodegradable
waste it may dispose of to landfill for the
years 2005 to 2020. These allowances are
designed to ensure that the UK as a whole
achieves the requirements of the EU Landfill
Directive. Subject to some constraints,
local authorities can carry forward or trade
allowances under the Landfill Allowance
Trading Scheme (LATS). Any authority
exceeding its allocation without such an
allowance faces a penalty of £150 per
tonne in addition to the cost of disposing
of the waste. This is expected to result in
the introduction of alternative treatment
and disposal processes at higher cost than
current routes.
The Government is currently consulting on
possible long-term bans on the disposal of
certain types of waste to landfill.
Under the Environmental Permitting (England
and Wales) Regulations 2007 all waste
handling, treatment and disposal facilities
previously operating under either a waste
management licence or a Pollution Prevention
and Control (PPC) permit require an
Environmental Permit.
PLANNING FOR WASTE AND
RECYCLING INFRASTRUCTURE
All waste management facilities, including the
development and expansion of landfill sites,
are subject to planning permission from the
relevant local authority. Major facilities such
as EfW plants above 50 MW must receive
consent from the relevant Secretary of State.
Viridor believes that good environmental
and operational management is important
to winning future planning consents. It has
now implemented its integrated Business
Management System incorporating externally
accredited environmental, quality and health
and safety management standards (ISO 14001,
ISO 9001 and OHSAS 18001).
Planning applications are subject to rigorous
assessment by local authorities who
will consider them against the backdrop
of policies contained within the local
development plan framework which have
been adopted for their areas. Applications
have to address a wide range of issues
and the relevant regulators are statutory
consultees in this process.
Viridor’s growth
strategy is
focussed on
recovering value
from waste
through recycling
and generation of
renewable energy
P.22 | PENNON GROUP ANNUAL REPORT AND ACCOUNTS | 2010
INTEGRATED mUNICIPAL WASTE
mANAGEmENT CONTRACTS AND
THE ROLE OF PRIVATE FINANCE
INITIATIVES OR PUBLIC PRIVATE
PARTNERSHIPS
To assist in meeting their landfill diversion
targets, many local authorities are seeking to
let integrated waste management contracts
covering a range of activities often including
household waste recycling sites (HWRS),
composting, recycling and recovery, EfW, waste
transfer and bulk transport and final disposal.
In a number of instances these will be financed
under PFI arrangements where local authorities
apply to the Government for the funding of
capital projects which fall within the eligibility
criteria. Successful applicants receive cash
funds (known as PFI credits) which do not
have to be repaid and can be used by the local
authorities to fund a proportion of the capital
and operating expenditures needed for projects.
Councils may also choose to let long-term
contracts using PPP arrangements. Under this
they avoid the complexities of securing PFI
credits. Viridor considers that the operational
nature of the contract is very similar whether
it is a PFI or a PPP.
Viridor has been operating a 25-year PFI
contract with West Sussex County Council
since 2004, and a 25-year PPP contract with
Somerset County Council since 2006. In
early April 2009 the Viridor/Laing consortium
reached financial close for the 25-year Greater
Manchester PFI waste and renewable energy
contract, the largest of its kind in the UK.
WASTE REGULATION
ENVIRONmENT
EU Directives and related UK legislation,
as well as planning and licensing, have been
referred to previously.
The Environment Agency (EA) and the
Scottish Environment Protection Agency
(SEPA) monitor performance against
permit and licence conditions and general
environmental law. Major breaches are
subject to prosecution. The EA and SEPA
can also require the operator to
undertake upgrades to ensure future
compliance and, where a pollution incident
or permit or licence breach has occurred,
remedial action.
Waste facilities are also subject to the same
regulations as other industries, including
health and safety, Control of Substances
Hazardous to Health (CoSHH) and the
Working Time Directive. In addition the
transport of waste and recycled materials is
subject to specific regulation and controls.
RENEWABLES OBLIGATION (RO)
ORDER 2009 (ROO 2009)
Under the RO the Government has a target
to generate 10% of UK electricity usage
from renewables by 2010, and 15% by 2015
(compared with around 6% generation from
renewables at present). The EU has set the
UK a target of 15% of total energy, including
heating, transport and other energy
uses, to be generated from renewables.
This potentially equates to over 30% of
electricity from renewables in the UK.
Viridor recognises that there is a range of risks
associated with entering into such contracts,
which are often for a 25-year term. However,
subject to a careful assessment of the risks on
a contract-by-contract basis, the company will
continue seeking to secure such contracts.
Production of renewable energy is
incentivised under the RO whereby
renewable energy generators get a premium
for the Renewables Obligation Certificate
(ROC) in addition to the underlying ‘brown
energy’ price for their production.
This premium relates to the balance
between actual UK output and target UK
output. At present the UK is behind target
and many believe it will remain so for some
considerable time. In addition, ROO 2009
has introduced a mechanism so that such
‘headroom’ will be maintained. Eligibility for
ROCs is governed by complex rules. Landfill
gas, anaerobic digestion (AD) and certain
other waste technologies including ‘good
quality’ CHP (such as the planned Runcorn
EfW CHP plant) are eligible.
A recent change in RO in 2009 was the
introduction of the banding of ROCs. The
impact of this change is that all landfill gas
projects accredited by 1 April 2009 will
continue to receive one ROC per Megawatt
hour. This will also apply to any additional
capacity provided it is commissioned by
1 April 2011. Those accredited after that
date will only receive 25% of one ROC.
Viridor ensured that the vast majority of
its potential capacity was appropriately
accredited by 1 April 2009. In addition
certain technologies such as AD have been
incentivised with double ROCs. Viridor is
pursuing a number of AD opportunities and
has currently secured six planning consents.
37% of Viridor’s landfill gas power
generation output is under NFFO schemes.
These contracts are due to end in tranches
over the next six years after which the
output can transfer to the RO. Prior to
the RO renewable energy generation was
incentivised under the NFFO. Under this,
users of relevant technologies could sell
their output on medium/long fixed price
contracts rising in line with inflation. The
overall price per MWh achievable under
NFFO contracts is lower than that currently
received under the RO.
44% of Viridor’s profit now comes from recovering
value from waste
PENNON GROUP ANNUAL REPORT AND ACCOUNTS | 2010 | P.23
CUSTOmERS, COmmUNITY
AND EmPLOYEES
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The company employs a comprehensive range
of technical and professional managerial and
operational and support personnel. Many
are vocationally trained and have extensive
operational experience. Membership of
relevant trade unions and professional bodies
is widespread and is encouraged.
Viridor’s equal opportunities policies and
procedures seek to ensure that bias and
discrimination in the treatment of job
applicants and employees are eliminated.
Training and appropriate support is provided
to implement this throughout the company.
Every effort is made to accommodate any
form of disability by the use of reasonable
adjustments in the workplace.
Viridor is pursuing a number of occupational
health and safety initiatives, particularly
focusing on reducing slip, trip and fall type
accidents, continuing improvements in
transport management, reducing vehicle/
personnel interfaces and improving manual
handling performance. Accreditation to the
OHSAS 18001 international health and safety
standard has been achieved across all sites
with the exception of two electrical recycling
sites which are planned to be certified by
the end of this year. This accreditation is
part of the company’s integrated business
management system (BMS), which provides
the vehicle for delivering health and safety
standards and procedures.
Viridor’s reportable accident and incident rate
per 100,000 employees is an important KPI
and is set out below for the period 2005 to
2009. The company is very disappointed that
the rate rose from 1,505 in 2008 to 2,445 per
100,000 employees in 2009.
This increase in reportable accidents (to
67 in total) was due primarily to manual
handling type injuries and slips, trips and falls
which are the company’s largest cause of
accidents. Despite comparing favourably with
industry averages in previous years, Viridor’s
focus on health and safety improvement and
performance has been further strengthened.
The company has recruited additional health
and safety professionals and continues to raise
the level of training and support available to
its staff. Particular efforts are being made
to reinforce strong positive attitudes to
health and safety at all levels in the company
and health and safety is a key aspect of
management incentive schemes.
KPi
5
4
4
2
,
RIDDOR ACCIDENT AND
INCIDENT RATES
2500
2250
2000
1750
1500
1250
1000
s
e
e
y
o
p
m
e
l
0
0
0
0
0
1
,
r
e
p
e
t
a
r
t
n
e
d
c
n
i
i
2
4
1
2
,
9
0
8
1
,
8
1
8
1
,
5
0
5
1
,
Calendar
year
5
0
0
2
6
0
0
2
7
0
0
2
8
0
0
2
9
0
0
2
ENVIRONmENT
Viridor’s operations create significant positive
environmental impacts including: safe and
efficient treatment and disposal of society’s
waste materials; increased resource and
energy efficiency from its recycling and energy
recovery operations; the capture of methane
(a greenhouse gas 21 times as potent as
carbon dioxide (CO2)); the generation of
renewable energy; and the restoration of
despoiled landscapes such as disused mineral
workings through the controlled deposit of
waste materials. Significant negative impacts
include: transportation and associated
emissions; methane production (where not
harnessed for energy generation or flared);
leachate production; energy use in materials
processing; and potential local impacts such as
dust, noise, litter and odour.
Having led the industry in the development
and implementation of an Environmental
Management System, Viridor’s integrated
Business Management System (BMS)
now incorporates externally accredited
environmental, quality and health and safety
systems. This allows clear targets to be set
and met to maximise benefits and positive
impacts and reduce and prevent adverse
impacts, resulting in continuous improvement
in these key areas.
Accreditation to the BMS across all sites and
operations has been retained during 2009/10,
accredited shortly. The company continues to
report against the environmental performance
indicators for the waste industry which it
helped to develop and which are endorsed by
the Green Alliance.
The amount of waste recycled and traded by
the company grew by 3.5% to a little over 1.4
million tonnes.
Accreditation
to OHSAS 18001
international health and
safety standard planned
across all sites
P.24 | PENNON GROUP ANNUAL REPORT AND ACCOUNTS | 2010
Viridor promotes positive
working relationships with regulators
and communities
SOCIAL AND COmmUNITY ISSUES
A ‘good neighbour’ policy is implemented at all facilities managed by
Viridor. This includes local liaison groups meeting regularly at major
sites, enabling local community stakeholders to be consulted and to
be informed about the company’s plans and operating procedures.
Liaison group members include locally elected representatives of the
community as well as representatives of the regulator, the relevant
planning and waste authority and other local stakeholders.
Viridor supports two ‘adopted’ charities, Scope and the Primary
Immunodeficiency Association (PIA). The company match-funds
amounts raised by employees for these charities and also provides
a ‘payroll giving’ facility enabling employees to directly donate to
their chosen charity. Viridor also fully participates in the Landfill
Communities Fund, a scheme whereby a proportion of Landfill Tax
can be claimed as credits and distributed to qualifying community and
environmental projects. During the year Viridor provided £9.4 million
to Viridor Credits Environmental Company, an independent distributive
environmental body. Funding is allocated at grassroots level by steering
groups established to serve areas close to operational landfill sites.
KEY RELATIONSHIPS
All waste and recycling facilities in England and Wales require
environmental permits, or waste management licences or PPC permits
in Scotland. These are issued and monitored by the EA and SEPA
respectively. Viridor maintains a positive working relationship with the
regulators via proactive liaison and issues management, at both a site-
specific and strategic level.
Local authorities are the largest single customer group accounting
in total for 31% of the company’s revenue. No individual authority
accounts for more than 11%. Viridor’s ROC contracts account for
7% of revenue primarily with one customer. No supplier accounts
for more than 6% of Viridor’s revenue. The company sources from
competitive markets.
PENNON GROUP ANNUAL REPORT AND ACCOUNTS | 2010 | P.25
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VIRIDOR’S PRINCIPAL RISKS AND UNCERTAINTIES
Risk
mitigation
RISKS ASSOCIATED WITH CURRENT UK
AND WORLD ECONOMIC CONDITIONS
Current UK and world economic conditions are highly uncertain. Though less affected than many
companies, Viridor is by no means immune to general economic conditions. A full assessment of
the key risks to Viridor’s business arising from current economic uncertainties has been conducted,
including the following:
Landfill volumes may decline due to
contraction in economy
The majority of inputs are from long-term local authority contracts or Viridor’s own collection fleet.
This risk is most pertinent to the 40% of Viridor’s volumes which are not from these inputs. Local
authority and Viridor volumes have been less affected to date.
Landfill prices
Recyclate prices
Collection volumes (particularly industrial
customers) are subject to economic conditions
Bad debt collection more challenging in an
economic downturn
Government funding cutbacks may lead to
the delay or abandonment of major waste
projects.
To date, landfill prices in general have proved robust. In a prolonged recession such prices may be
impacted by increased price competition.
Recyclate prices are, like any commodity, volatile and are directly impacted by world economic
conditions. The effect is most significant on the 40% of Viridor’s recycling volumes of
internationally traded commodities such as paper, card, plastics and metals. However
recyclate is typically cheaper than virgin materials which limits the impact on prices for good
quality recyclate. Recyclate prices have recovered to the levels pertaining before the global
financial crisis.
Currently margins are holding up. However volumes have fallen significantly.
Viridor’s record of bad debts has been, and remains, good based on tight management controls and
the ability to put customers ‘on stop’ and, for example, refusing to accept waste at its landfills if
debts are not being paid.
Viridor’s existing business with local authorities is covered by contracts on a variety of terms
up to 25 years.
INCREASES IN LANDFILL COSTS MAY
NOT BE RECOVERED THROUGH PRICE
INCREASES
The raising of environmental standards is leading to a gradual increase in landfill costs in general,
including engineering (resulting in increased depreciation) and restoration and aftercare costs.
Viridor, with landfills engineered to modern standards with good environmental control systems,
should incur lower than average increases in costs.
Recovery of costs of legislative change
Aftercare costs levels
Residual contamination
Municipal contracts typically last for up to seven years. They usually have provision for price
increases under set formulae related to inflation and some include legislative or technical changes.
Prices for other types of waste depend more on local markets and competitive conditions. Prices, as
a long-term trend, have risen fast enough at least to cover cost increases.
Costs which are assessed over 30 years are best estimates based on Viridor’s own experience and
are updated at each stage of the capital expenditure programme.
Viridor’s landfill aftercare management includes restoration, maintenance, supervision,
monitoring and management of gas and leachate levels after the landfilling activities have ceased.
Provision is also made for estimated costs of remediation if required. The EA or SEPA will only
grant a full or partial surrender of the permit once it is satisfied that the landfill no longer poses
any environmental risk.
Estimated compaction rates
(tonnes per cubic metre)
These are best estimates, based on current information, which are reviewed every year based on
actual compaction rates assessed by external consultants.
P.26 | PENNON GROUP ANNUAL REPORT AND ACCOUNTS | 2010
Risk
mitigation
THE UK GOVERNMENT’S WASTE
STRATEGY, STEMMING FROM THE
LANDFILL DIRECTIVE, WILL LEAD TO A
REDUCTION IN VOLUMES OF WASTE
BEING DISPOSED TO LANDFILL.
Government initiatives are having an impact and the amount of municipal waste being disposed of
to landfill is declining. Assuming Landfill Directive targets are met, the total amount of municipal
solid waste which will be landfilled in 2020 will be five to 10 million tonnes. The Government is
now seeking to reduce the amount of industrial and commercial waste to be landfilled. However
it is believed there will still be a significant total landfill market in 2020 and beyond.
Scarcity of landfill will ensure available voidspace remains a valuable asset. With the exception
of the most recent year, Viridor has seen its underlying landfill volumes holding steady probably
reflecting a greater share of the landfill market.
PRICING AND OTHER RISKS RELATING
TO RENEWABLE ENERGY:
Fluctuating ‘brown energy’ prices
Changes in ROC pricing mechanism
UK renewable energy generating capacity &
licensed electricity suppliers
Viridor’s ‘brown energy’ prices were fixed at high levels through to the end of March 2010. Brown
energy prices will continue to be determined by the world and UK energy market and may go down
as well as up. Current prices are around £30 per MWh lower than achieved in 2009/10 which will
affect the company’s 2010/11 power generation comparative performance in 2010/11.
The Government has made a strong commitment to renewables which are key to meeting the
UK’s long-term carbon reduction strategy. To date the major political parties have stressed
their commitment to ‘grandfather’ rights under current ROC schemes, which are not subject to
retrospective changes. Renewables are also important in minimising the UK’s increasing reliance on
imported energy.
The value of ROCs is increased by the sharing of the buy-out price monies among holders of ROCs.
The value of a ROC depends on the supply of renewable electricity relative to the UK’s annual
increasing targets. It is also dependent on the financial strength of those suppliers who opt to pay the
buy-out price. The insolvency of a licensed electricity supplier could lead to a drop in the value of the
ROCs which Viridor sells.
Volume of gas generated
Current and future waste composition (including Biodegradable Municipal Waste (BMW) diversion due
to Landfill Directive and calorific value) is assessed against costs on each landfill gas project.
THE CURRENT PLANNING REGIME
MAY RESTRICT THE AVAILABILITY OF
FUTURE WASTE TREATMENT FACILITIES
Achievement of the Government’s targets for waste management is critically dependent on the
planning system delivering sufficient waste treatment facilities. Viridor employs best practice
throughout the planning process.
RISKS ASSOCIATED WITH LONG-
TERM INTEGRATED CONTRACTS
(RISK TRANSFER IS A KEY PART OF
GOVERNMENT PFI PROCUREMENT
GUIDELINES)
Risks include waste volumes and mix, planning, technology, input costs and recyclate prices.
A careful assessment of the risks and apportionment of them between client, main contractor,
technology and equipment suppliers, and sub-contractors is a key part of the process of bidding
and finalising a contract. Extensive due diligence is conducted so that risks are correctly identified.
Viridor then seeks to protect itself through contractual documentation with its client, sub-
contractors and sub-suppliers.
Viridor takes a robust approach to this issue. If it cannot mitigate the risks satisfactorily or cannot
get a reasonable commercial return for taking such risks, its policy is to accept the loss of such a
contract rather than win it on unsatisfactory terms.
PENNON GROUP ANNUAL REPORT AND ACCOUNTS | 2010 | P.27
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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:
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.
Landfill tax
Depreciation
Manpower
Transport
Raw materials and consumables
Property
Power
Abstraction and discharge consents
Lease rentals – plant and machinery
Statutory operating licences and royalties
£m
150
135
132
51
27
26
24
8
8
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:
Summarised cash flow
2009/10 2008/09
£m
£m
Cash inflow from operations
Pension contributions
Net cash inflow from operations
Net interest paid
Dividends and tax paid
Capital expenditure payments
Acquisitions/joint ventures
Net cash outflow
Shares issued
380
(16)
364
(70)
(68)
(192)
(40)
(6)
2
Equity component of convertible bond issued 10
Debt acquired with acquisitions
Debt indexation/interest accruals
Increase in net borrowings
(5)
(4)
(3)
341
(40)
301
(80)
(100)
(236)
(3)
(118)
2
–
–
(13)
(129)
SOUTH WEST WATER CAPITAL ExPENDITURE
VIRIDOR CAPITAL ExPENDITURE
Other £25m
Waste water treatment
works and sludge £35m
Other £3m
Contracts £1m
Collection £3m
Information Technology £4m
Water treatment works £12m
Landfill £21m
Water mains £21m
Water distribution £19m
Sewerage £20m
Metering £7m
Recycling £15m
Renewable Energy £4m
Strong operating cash flow in the year
P.28 | PENNON GROUP ANNUAL REPORT AND ACCOUNTS | 2010
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:
Convertible bond £113m Other £13m
Index-linked bond 2057 £219m
Private Placements £200m
Bank Bilateral Debt £319m
European Investment
Bank loans £288m
Finance Leasing £1,237m
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.
Interest rates fixed for 50% of
South West Water’s debt to 2015
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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:
TAx CONTRIBUTION 2009/10
Landfill Tax £170m
Employment taxes £36m
Business rates £20m
Fuel excise duty £11m
VAT £7m
Corporation tax £4m
Other £2m
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.
Total taxes amounted to £250 million, of which £43 million was collected
on behalf of the authorities for net VAT and employee payroll taxes.
KEY RELATIONSHIPS
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.
The key relationships and contractual arrangements for the Group are
with its debt providers which include a number of financial institutions.
The majority of the Group’s debt is sourced from:
• finance leasing
• European Investment Bank loans
• bank bilateral facilities
• private placements
• index-linked bonds
• convertible bonds.
Contract terms include financial and legal covenants as outlined in the
covenant compliance risk section on page 31.
PENNON’S PRINCIPAL RISKS AND UNCERTAINTIES
Risk
Commentary and mitigation
EARNINGS GROWTH/
SHAREHOLDER VALUE
It may not be possible to continue to
sustain the same level of earnings and
growth of the Group as in the past
There is a risk to shareholder value if the
Group is not able to continue to grow its
key businesses and produce sustainable
earnings growth
This is dependent upon the correct strategies being pursued by strong and able management
within the Group as well as on external factors.
The Group has maintained earnings and has successfully grown both South West Water and
Viridor and intends to continue to create shareholder value through its strategic focus on water
and waste water services and waste management.
P.30 | PENNON GROUP ANNUAL REPORT AND ACCOUNTS | 2010
Risk
TREASURY
The Company may be unable to raise
sufficient funds to finance its activities
Liquidity risk
Commentary and mitigation
Pennon Group has robust treasury policies in place, as listed below:
Ensuring that the Group has cash and committed loan facilities equivalent to at least one year’s
forecast requirements at all times. Borrowing repayment commitments are expected to be met
as required during the coming period.
Refinancing risk
Ensuring that no more than 20% of Group net debt is permitted to mature in any one financial year.
At 31 March 2010 the Group had cash and deposits of £494 million, and undrawn committed
bank facilities of £200 million, giving access to total cash resources of £694 million.
Loan repayments falling due by 31 March 2011 amount to £216 million.
Pennon Group and South West Water have entered into covenants with lenders. Whilst terms
vary, these typically provide for limits on gearing (primarily based on South West Water’s
Regulatory Capital Value and Viridor’s EBITDA) and interest cover.
Redemption penalties included in the facility documentation can be invoked if debt facilities are
redeemed early. The redemption penalties vary in each facility.
The financial covenants included in the Group’s debt facilities are monitored on a regular basis.
The financial covenants offered by the Group include a provision to re-test the covenants applying
frozen UK GAAP accounting standards. This is to protect the Group from changes in accounting
standards which may have a detrimental impact on the financial covenant testing methodology.
Surplus funds of the Group are usually placed in short-term fixed interest deposits or the
overnight money markets. Counterparty risk arises from the investment of surplus funds and
from the use of derivative instruments.
The Board has agreed a policy for managing such risk, which is controlled through credit
limits, counterparty approvals, and rigorous monitoring procedures. All deposits are
with counterparties which have a credit rating approved by the Board (Aa2 Moody’s/ AA
Standard & Poor’s).
The Group’s exposure to interest rate movements is managed by the use of interest rate
derivatives. The Board’s policy is that in any one year at least 50% of net debt is fixed. Interest
rate swaps are used to manage the mix of fixed and floating rates. The Group has fixed
approximately 50% of South West Water’s existing net debt up to 31 March 2015.
At 31 March 2010 the Group had interest rate swaps to convert floating rate liabilities to fixed
rate, and hedge financial liabilities, with a notional value of £775 million and a weighted average
maturity of 3.0 years (2009 £760 million, with 2.4 years). The weighted average interest rate of
the swaps for their nominal amount was 4.0% (2009 4.5%). The notional principal amounts of the
interest rate swaps are used to determine settlement under those swaps and are not therefore
an exposure for the Group. These instruments are analysed in more detail in note 23 to the
financial statements.
In addition South West Water has index-linked approximately 23% of its current net debt up
to 2041-2057. South West Water’s total index-linked debt of £353 million has an average real
interest rate of 1.66%. The interest rate for index-linked debt is based upon an RPI measure
which is also used in determining the tariff increase for South West Water customers.
A material tax risk for the Group is the possibility that the capital expenditure qualifying for
capital allowances is mis-allocated or categorised incorrectly, resulting in under-claims or over-
claims of tax reliefs. Professional tax consultants are employed with experience of analysing the
types of specialist assets involved.
Covenant compliance risk
Counterparty risk
Interest rate risk
TAxATION
PENSIONS
The future costs of defined benefit
schemes are subject to a number of risks
The returns achieved on pension fund
investments
Movements in interest rates and inflation
New employees are generally offered defined contribution arrangements.
Pension trustees keep investment policy under review and use professional investment advisers.
The pension trustees review the investment strategy to improve the match of investments
and liabilities. Employee and employer contributions are also kept under review and have been
increased. Further employer contributions of £16 million were made in the year.
Pensioner longevity
Independent actuaries have identified scheme-specific mortality experience which is
reflected in liabilities.
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PennOn GrOUP’s COrPOrAte resPOnsiBility
OUR OBJECTIVES
We have the following corporate responsibility
objectives, to which the targets of South West
Water and Viridor are aligned to:
• manage Pennon Group as a sustainable and
its operations, landfill generated leachate
and gas. Since 2002 Viridor has invested
£13 million in leachate control systems
and £80 million in landfill gas control and
power generation.
successful business for the benefit
of shareholders
b. Climate Change/Greenhouse Gases
Both our two main subsidiaries generate
• aim to ensure that all our business activities
have a positive economic, social and
environmental impact on the communities
in which we operate
• engage with all our stakeholders and to
foster good relationships with them
• strive for the highest standards of health
and safety in the workplace so as to
minimise accidents, incidents and lost time
• develop and motivate our employees, to
treat them fairly and ensure that they
are fully engaged in all aspects of the
Group’s objectives
• aspire to leadership in minimising
emissions that contribute to climate
change, and to develop climate change
adaptation strategies
• aspire to leadership in all aspects of
resource efficiency
• comply with all legislative environmental
standards and to exceed them where
appropriate.
OUR APPROACH TO SUSTAINABILITY
Sustainability in all its three aspects
– environmental, social and economic – is
fundamental to the Group’s business models
and is reflected in our corporate responsibility
objectives listed above. We believe that green
business is good business.
1. Environmental Sustainability
The key linked environmental issues facing the
world are climate change, excessive resource
use, environmental degradation and loss of
biodiversity. The Pennon Group has a role to
play in all these areas and is concerned that
the high profile rightly given to climate change
may lead to the other equally pressing and
related challenges being overlooked.
a. Environmental Improvement
South West Water’s £2 billion Clean
Sweep programme has transformed the
coastal and estuarial environment of the
South West, which has over 30% of the
bathing waters of England and Wales. With
other improvements carried out by South
West Water under the Urban Waste
Water Treatment Regulations to protect
river quality, the company’s operating area
now has the best river quality in England.
The investment made since 1989 has
also largely met the Water Framework
Directive’s first cycle of requirements
for 2010-2016.
Similarly Viridor has invested heavily to
control and mitigate the two most serious
potential adverse environmental effects of
significant amounts of CO2 and are
striving to reduce this. Viridor’s strategy
is based upon helping the UK to meet its
landfill diversion, recycling and renewable
energy targets which are in turn driven,
in significant part, by climate change
considerations. Methane emissions from
landfill are the most important greenhouse
gas pollutant source for Viridor and for
the waste industry as a whole, methane
being 21 times as harmful as CO2. Huge
achievements have been made in the waste
industry in reducing methane emissions
from landfill and putting it to beneficial use
in the generation of renewable electricity.
This is the key factor behind the waste
industry’s 57% reduction in CO2 emissions
since 1990, the best of any sector in
the UK. At the same time the waste
industry has increased renewable energy
generation from landfill gas by 600% which
now provides nearly 25% of the total
renewable energy in the UK. Viridor has
increased its landfill gas renewable energy
generation capacity from 27 MW in 2002
to 100 MW in 2009/10 and it captures
90% of the methane from its landfills for
power generation. This provides major
environmental benefits and produces a
return for shareholders.
South West Water recognises that the
water industry is a major user of energy,
requiring 2% of the UK’s total consumption.
Following a successful submission in
South West Water’s price setting to
Ofwat, moorland restoration through the
company’s ‘Mires’ programme is being
undertaken. One of the most valuable
outputs is the ability of wetted peat to
capture significant quantities of CO2. South
West Water secured in Ofwat’s Final
Determination £5 million of funding to
increase its renewable energy output from
15 GWh in 2010 to 30 GWh by 2015. This
investment will help South West Water
to meet its CO2 emissions reduction
target by 18% over the five-year period.
The company’s longer term targets are to
produce 50 GWh from renewable energy
by 2030 and to reduce energy consumption
by 10% by 2015 and by 30% by 2030.
c. Resource Productivity
It is generally believed that the world has
used as much resource since 1950 as in
all previous history. There are developing
shortages in a number of key areas
including hydrocarbons, water, topsoil and
in a number of key metals.
Minimising resource use has become a
major priority for society. Viridor has
invested heavily in maximising recycling
and composting, at a value approaching
£200 million in the past three years. We
are convinced that such investment makes
long-term economic and environmental
sense. Our total recycling traded volumes
and composting have grown from about
100,000 tonnes in 2001 to 1.4 million
tonnes in 2010. The supply of good quality
recyclate is a profitable business yielding
twice as much profit per tonne for Viridor
as does landfill. This is an example of where
the interests of shareholders and the needs
of the environment are aligned.
The best use for low quality residual
waste, after recycling has been optimised,
is to generate renewable energy either
by anaerobic digestion of organic wastes
or through controlled energy from waste
combustion. These are the main current
alternatives to landfill with methane
capture and utilisation. Including its Bolton
EfW plant and its 50% share in the recently
opened Lakeside EfW plant, as well as
landfill gas utilisation, Viridor now has a
total renewable energy capacity of close
to 130 MW and plans to increase this to
300 MW in the next five years. Pennon
is pleased that the Government now
recognises the significant contribution that
energy from waste in all its forms can make
to UK renewables and energy production.
Energy from waste currently accounts
for 1.5% of the UK’s total electricity
production. As the energy generated is a
by-product of required waste treatment it
is cheaper than other forms of renewable
energy. It also provides base load energy
distributed round the electricity grid, which
is a significant advantage over wind power.
Our estimate is that energy from waste
could provide 6% of the UK’s electricity
by 2015 and we have called upon the
Government to set this as a specific target.
South West Water is ensuring, as part of
its environmental and quality management
systems, that all wastes are minimised and
segregated for recycling so that wastes
taken off site for disposal are kept to
the absolute minimum. We work with
contractors and our partners to minimise
the quantities of waste produced. Site
waste management plans are in place for all
capital schemes.
2. Social Sustainability
Both our businesses strive to be good
neighbours and to show exemplary concern
for our employees. It is acknowledged that
required waste water or waste management
installations may be opposed in certain
locations. Our policy is to consult and engage
fully with communities and stakeholders on
planning applications.
P.32 | PENNON GROUP ANNUAL REPORT AND ACCOUNTS | 2010
Where new infrastructure is built we work
closely with the communities in which we
operate to be as good neighbours as possible.
Viridor continues to benefit from the high levels
of skill and expertise amongst its workforce
and acknowledges their valuable contribution.
The company employs around 3,000 people at
all levels and across all socio-economic groups.
During this recessionary period we have striven
to maintain morale and motivation despite
having to implement a modest programme
of downsizing and restructuring. We have
maintained our training programmes and are
confident that as the recession lifts we will still
have first class, well qualified teams of capable
people ready to meet future challenges.
South West Water’s focus is on achieving an
appropriate balance for customers, investors
and other stakeholders. Costs are being
rigorously controlled to outperform the
Regulatory Contract. Capital is being invested
in assets to secure operating cost savings
and to protect the improvements made over
the last 20 years through increased capital
maintenance expenditure. The combined effects
of these approaches are to ensure long-term
improvements in quality of service for our
customers, supported by enhanced employee
training and development programmes for our
managers and staff.
3. Economic Sustainability
This involves having business strategies and
policies which are geared towards long-term
shareholder value creation. The Company’s
strategy is to aim for long-term shareholder
value creation while being fully aware of our
environmental impacts. Both businesses are
planning and investing on a 25-year basis. Our
financial policies are designed to avoid short-
term gains which might damage long-term
shareholder value creation. Debt funding is an
important component of South West Water’s
capital structure and its debt/RCV ratio
and other financial ratios remain well within
Ofwat’s guidelines.
Our Corporate Responsibility objectives
link with our sustainability aims. Progress is
monitored by measuring performance against
a number of associated KPIs listed below.
Both South West Water and Viridor publish
detailed verified corporate responsibility
reports which support and amplify the Group’s
overall objectives. The 2010 Corporate
Responsibility Reports, which will be available
at the end of August, will include an audited
assessment of the businesses’ performance
against published targets for 2009/10 and will
set out their new targets for 2010/11.
OUR KPIs
The target for 2009/10 of ‘maintain
corporate standing of Pennon Group Plc on
sustainability credentials’ was measured by:
• the Carbon Disclosure Project awarded
Pennon Group of 55th place out of the
FTSE350 in the 2009 Carbon Disclosure
Leadership Index for the Group’s ability
to log its carbon footprint and assess how
climate change will affect its business
• membership of the FTSE Environmental
Opportunities All-Share Index
• continued participation in the FTSE4Good
Index which measures corporate responsibility.
For 2010/11 the Board has agreed the
following six KPIs for the Pennon Group.
Performance will be measured and reported
against them:
• capital investment
• community support and donations
• RIDDOR statistics
• renewable energy generation
• CO2 emissions data
• recycling volumes achieved.
OUR SOCIAL AND
ENVIRONmENTAL POLICY
Our objectives demonstrate that we are
committed to exemplary engagement
with society and to the conservation and
enhancement of the natural environment.
Our social and environmental policy ensures
that these activities are pursued. Particular
attention is given to:
• operating through best practice to ensure
the sustainability of our activities by
maximising the efficiency of resource
uses; effective project and programme
delivery; and minimising waste
• ensuring compliance with all health and
safety and environmental legislation,
regulations and codes of practice so
that our conduct is of the highest
possible standard
• undertaking our activities in a way that
minimises potential adverse effects on
society, the environment and those
living or working in proximity to the
Group’s sites
• procuring goods and services through
approved suppliers and contractors
whose products and services meet the
Group’s requirements and whose quality
and environmental practices correspond
with our own
• undertaking longer term strategic
assessments of our activities and
opportunities and adopting whole life
assessment methods for approaches
which are designed to benefit society;
customers of the Group; suppliers and
partners; all other stakeholders; and
the environment
• the challenges of climate change involve
action to optimise energy and resource
efficiency; maximising opportunities
for renewable energy generation;
and reducing the emissions of
greenhouse gases
• reporting openly and transparently on
Group performance; setting targets for
continuous improvement and monitoring
progress; and addressing risk and adopting
policies related to wider sustainability
considerations in relation to our key
activities of water supply, waste water
treatment, waste management, recycling
and renewable energy generation
• regularly assessing the Group’s built
heritage and ensuring its long-term
preservation
• making non-operational land accessible to
the public where practicable to satisfy, as
a minimum, the Group’s obligations under
the Countryside and Rights of Way Act.
Wherever possible additional opportunities
for conservation, access and recreation are
provided for, subject to health and safety
and environmental considerations.
OUR ETHICAL BUSINESS POLICY
Alongside our social and environmental policy
is our ethical policy. The preservation of a
reputation for integrity and fair dealing is of
paramount importance to the Group. Such a
reputation is essential to the long-term well-
being of the Group itself, its shareholders,
employees, customers, suppliers and
the communities in which it operates.
To maintain this reputation, our Group
companies are required to:
• conduct all transactions with fairness and
honesty and in a professional manner
• build and maintain relationships with all
parties based on trust and the treatment of
everyone with respect and dignity
• not make any promises and commitments
which our businesses do not have the
intention to fulfil or which they do not
believe they have the resources to meet
• carry out all financial transactions and
financial reporting with due observance
of all relevant laws, regulations and
financial standards
• avoid any activities that could involve or lead
to involvement in any unlawful practice or
harm the Group’s reputation or image.
We have a ‘whistleblowing’ policy which
supports our approach to ethical employment
practices by encouraging employees to raise,
in accordance with a formalised procedure,
concerns which relate to potential unlawful
conduct, financial malpractice, dangers to
the public or damage to the environment.
This policy is reviewed regularly.
Through our Corporate Responsibility
Committee, we monitor performance against
our ethical business policy, our social and
environmental policy and our health and
safety policy and related targets. Further
details of the work of the Committee are set
out on page 51.
CORPORATE RESPONSIBILITY
HIGHLIGHTS
Both South West Water and Viridor have
continued to advance their environmental
performance, and their engagement with the
community, as detailed in their respective
Corporate Responsibility Reports which will
be available online in August on the Company’s
website pennon-group.co.uk
ENVIRONmENT AND CLImATE
CHANGE
The Group’s strategy to combat climate
change is to maximise its opportunities for
renewable energy generation, to promote
energy efficiency and to reduce its emissions of
greenhouse gases wherever possible. In planning
for the future it strives to ensure that it can
adapt to the impacts of a changing climate while
maintaining high standards of customer service.
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Green energy generation
Renewable energy is generated by both
subsidiaries. Viridor’s renewable power
generation capacity from landfill gas at 31
March 2010 was 100 MW. In addition during
the year the Lakeside joint venture EfW
plant commenced operation with a total
power generation capacity of 37 MW (50%
Viridor) and Viridor also took over the 9
MW Bolton EfW plant bringing Viridor’s
total renewable energy capacity to 127.5
MW. Its Greater Manchester combined
waste and renewable energy project has the
potential to provide a further 130 MW of
power generation capacity (making a total of
around 140 MW including the Bolton EfW).
Viridor captures nearly 90% of the methane
arising from its landfills and uses 70% of this
for energy generation.
South West Water generates renewable
energy from hydropower facilities in dams
and other structures. Combined heat and
power is available at nine waste water
treatment works. South West Water has a
total installed capacity of 7.4 MW.
Net electricity export
Since 1999/2000, the Group has exported
more electrical energy each year than it
has consumed. Recent renewable energy
projects commissioned by the Group’s
operating companies have surpassed
the milestone of 200% generation to
consumption for the first time. In 2009/10
Viridor and South West Water generated
652.0 GWh of renewable energy through
their operations. This is 223% (2009:
188%) of the Group’s on-site electricity
consumption of 291.7 GWh.
Greenhouse gas emissions
Pennon has registered for the Carbon
Reduction Commitment Energy Efficiency
Scheme which puts the Government’s
carbon reduction scheme in place for 5,000
UK companies in the mid-range of CO2
producers. Pennon will be purchasing its
first allowances in April 2011. The price of
carbon will be fixed at £12 per tonne for
the first three years of the scheme; active
trading is expected to follow.
Pennon Group made its third submission
to the Carbon Disclosure Project in 2009
and was placed 55th in the report. The
reporting criteria differ from one year to
the next making annual score comparisons
unreliable. However, year by year scores
within a sector are made and the Pennon
Group’s perfomance in relation to its
peers in 2009 was good – it achieved third
place amongst the six water companies
who responded.
Greenhouse gas emissions reporting
requirements have changed since last
year. The Group is reporting against the
Greenhouse Gas Protocol, with different
methodologies used for South West Water
and Viridor to match each company’s
operating characteristics.
Group transport
South West Water and Viridor review their
transport fleets regularly to meet their
operational requirements. Environmental
criteria such as clean engine technology,
fuel efficiency, reliability and end-of-life
recyclability are considered during the
selection process.
KPi
0
8
4
1
.
.
0
2
7
3
6
GREEN ENERGY GENERATED
south West Water
Viridor
700
650
600
550
500
450
400
350
300
s
r
u
o
h
t
t
a
w
a
g
G
i
.
4
0
7
1
.
7
0
9
9
4
7
0
8
1
.
.
2
0
5
0
5
.
8
9
5
1
.
9
2
4
4
4
3
7
5
1
.
.
1
5
1
2
4
Financial
year
6
0
/
5
0
0
2
7
0
/
6
0
0
2
8
0
/
7
0
0
2
9
0
/
8
0
0
2
0
1
/
9
0
0
2
ON-SITE ELECTRICITY USE IN
PENNON GROUP
south West Water
0
7
1
2
.
.
8
2
8
6
2
0
8
4
1
.
.
9
9
5
5
2
4
9
0
1
.
.
3
6
8
5
2
0
0
9
1
.
.
0
7
0
6
2
0
5
6
2
.
.
0
2
5
6
2
Viridor
300
250
200
150
s
r
u
o
h
t
t
a
w
a
g
G
i
Financial
year
6
0
/
5
0
0
2
7
0
/
6
0
0
2
8
0
/
7
0
0
2
9
0
/
8
0
0
2
0
1
/
9
0
0
2
ELECTRICITY CONSUmPTION AND GENERATION
On-site electricity consumed
South West Water (1) (3)
Viridor
Total consumed
Electricity generation
South West Water
– Hydro
– Biogas from combined heat and power
Viridor
– Landfill – biogas (2)
– Energy from waste combustion
Total generated
Generated/consumed ratio
No of sites
Capacity MW
7
9
27
2
5.7
1.7
100.0
27.5
GWh
265.2
26.5
291.7
GWh
11.3
3.5
555.0
82.2
652.0
223%
(1) Includes activity of Pennon Group Plc and partners working from Pennon’s locations
(2) Excludes sub-contracted sites in Suffolk
(3) South West Water on-site electricity consumed includes electricity generated and used from on-site renewable plants and stand-by diesel generators and excludes non-electrical sources
of energy such as the consumption of natural gas and LPG used for heating
P.34 | PENNON GROUP ANNUAL REPORT AND ACCOUNTS | 2010
Pennon Environmental Awards
In 2009 the winning prize was awarded to the operating team at Tottiford Water Treatment Works for enhancing wildlife and amenity on site.
The project subequently won a Green Apple Award and was chosen as a finalist in the Water Industry Achievement Awards’ Community Campaign
of the Year category, as a number of the site features had been provided by a local business which employs adults with learning difficulties.
PEF Award Photo: the Tottiford team receives the award from Ken Harvey, Pennon Group Chairman.
PEF Award Photo: former process tank converted for wildlife and amenity use.
EmPLOYEES
Health and Safety Policy
Pennon Group Board and the Boards of each subsidiary company have
established health and safety policies which are reviewed annually to
ensure the health, safety and welfare at work of all their employees.
These focus in particular on the:
• provision and maintenance of a working environment for our
employees that is safe, prevents injury and ill health and is adequate
as regards facilities and arrangements for welfare
• protection of members of the public who may be affected by
our work
• promotion of an improved health and safety culture by consulting
with and training the workforce and by making all employees and
contractors aware of their individual responsibilities
• setting of health and safety objectives and targets within a
continuous improvement framework that will be used to monitor
and measure performance
• continual improvement of our health, safety and security
performance through the revitalisation of our health and safety
management systems.
Pennon Group and each of its operating subsidiary companies:
• has prepared a statement on their organisation and responsibilities
in respect of health and safety which, together with this policy
statement, is brought to the attention of all employees and is
displayed on notice boards and each company’s intranet
• complies with all legislation, regulations and codes of practice relevant
to their business and consults employees on measures for promoting
health and safety at work
• requires its contractors and consultants working for each company
within the Group to comply with each company’s health and safety
policy. Each company communicates openly its policy, related
objectives and performance to stakeholders.
International Labour Organisation core conventions
We support the principles of the International Labour Organisation’s
eight core conventions for the protection and safety of workforces.
Details of our employment practices are set out on pages 18, 20 and 24.
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STAKEHOLDER ENGAGEmENT
Pennon Group maintains a regular dialogue
with institutional investors, City analysts,
retail shareholders, local stockbrokers and
the financial press through its proactive
investor relations programme. Other key
stakeholders are our customers and our
regulators, including the Environment
Agency, local authorities, the Drinking Water
Inspectorate, Natural England, the Consumer
Consumer Council for Water and English
Heritage. Viridor has on-going stakeholder
and community relations programmes
with local liaison groups in place for all
major operational sites. South West Water
proactively worked with customers to identify
their priorities for investment from 2010 to
2015 as part of the recent Periodic Review
process, and surveys 130 customers’ opinions
every month to assess their perceptions of
overall service, value for money, quality and
reliability of drinking water supplied.
South West Water’s Chief Executive chairs
Water UK, the representative organisation
which brings together all of the UK’s water
and waste water utilities. He also represents
the regulated industries on the Environment
Agency’s Regional Environmental Protection
Advisory Committee.
Viridor’s Chief Executive chairs the
Government’s Living with Environmental
Change Business Advisory Board and its
Environmental Sector Advisory Group, which
provides strategic advice to the Government
on the promotion of exports and inward
investment in the UK environmental sector.
He is also chairman of the UK’s Environmental
Sustainability Knowledge Transfer Network,
which improves the competitiveness of UK
environmental industries, a Director of
Sustainability South West, past Master of the
Worshipful Company of Water Conservators,
a senior visiting research fellow in Earth
Sciences at Oxford University and a patron of
Energy and Utility Skills.
Pennon’s Group Director of Finance is a
member of the CBI Environmental Affairs
Committee and the CBI South West
Regional Council.
CORPORATE RESPONSIBILITY
VERIFICATION
Pennon Group’s corporate responsibility
performance for 2009/10 will be audited
by Acona Limited, an independent risk and
compliance management company. The
verification statements for South West
Water and Viridor will be provided on their
respective websites with their Corporate
Responsibility Reports.
COmmUNITY ENGAGEmENT
Pennon Group and its subsidiary companies aim to be good neighbours in all the communities in
which they operate. An important element of this is to provide support to projects which bring
lasting benefit to local communities and which are aligned with the Group’s business.
South West Water’s support focuses on water, the environment and youth education in the
South West. A small proportion of its support also goes to Water Aid, which assists water
projects in developing countries.
Viridor’s business is UK wide. Its community support focuses on environmental and science
education, and on engagement with the communities in which it operates.
Pennon Charitable Donations
The Pennon Charitable Donations Committee made 199 donations including pledges to
individuals, local charities, volunteer groups and small community organisations in the South
West Water and Viridor service areas. £63,784 was awarded in 2009/10 (2008/09 £65,624).
Pennon Environmental Fund
The Pennon Environmental Fund allocates awards derived from the Landfill Community Fund to
qualifying projects developed by local community bodies based in South West Water’s operating
area. In 2009/10 it awarded £68,443 to 15 projects, including to church repairs, community
amenities, and a number of habitat creation schemes in Devon and Cornwall to benefit biodiversity
(2008/09 £47,404 to 11 projects).
Viridor Credits Environmental Company
During the year Viridor donated £9.4 million (£9.7 million in the previous year) via the Landfill
Communities Fund to Viridor Credits Environmental Company, an independent charity
established to distribute LCF funding in areas close to landfill sites. Decisions on funding use
criteria of sustainability, value for money and proven need are made at grass roots level by
established local steering groups for each area. Projects supported during the year included
creating, improving and restoring important habitats, new and improved village and amenity
halls, sports and playgrounds, vital support for local museums and similar community assets.
For further details see Viridor Credits’ website viridor-credits.co.uk
‘Back from the Brink’, Slimbridge Wetlands Centre, Gloucester. Viridor Credits granted
£106,500 for new wetland homes for once abundant mammals.
‘Cricket for Change’, Wallington, Sutton. Viridor Credits granted £60,000 towards a new
indoor school for young cricketers from mixed backgrounds.
P.36 | PENNON GROUP ANNUAL REPORT AND ACCOUNTS | 2010
interPretAtiOn
FORWARD-LOOKING STATEmENTS
This Business Review contains forward-
looking statements regarding the financial
position; results of operations; cash
flows; dividends; financing plans; business
strategies; operating efficiencies; capital
and other expenditures; competitive
positions; growth opportunities; plans
and objectives of management; and
other matters. These forward-looking
statements, including, without limitation,
those relating to the future business
prospects, revenues, working capital,
liquidity, capital needs, interest costs and
income in relation to the Pennon Group
and its subsidiaries, wherever they occur
in this Business Review, are necessarily
based on assumptions reflecting the
views of Pennon Group and its subsidiary
companies, as appropriate. They involve
a number of risks and uncertainties
that could cause actual results to differ
materially from those suggested by the
forward-looking statements. Such forward-
looking statements should, therefore, be
considered in the light of relevant factors,
including those set out in the sections
entitled ‘Principal Risks and Uncertainties’
within this Business Review.
GLOSSARY
The following are descriptions of some of the terms used in this Business Review:
AD .................................................................................... Anaerobic digestion
BMS .................................................................................. Viridor’s integrated business management system
CAGR ............................................................................. Compound Annual Growth Rate, being the rate of
growth over a period, expressed as a single annual
average figure
Category 1 incident ................................................ A major water pollution incident as assessed by the
Environment Agency
Category 2 and 3 incidents ................................ Significant and less significant water pollution incidents
CHP ................................................................................. Combined Heat and Power
Determination ........................................................... The price limits and expenditure plans determined by
Ofwat for South West Water for a five-year period
as assessed by the Environment Agency
DWI ................................................................................. Drinking Water Inspectorate
EA ..................................................................................... Environment Agency
EfW .................................................................................. Energy from waste
Financial year .............................................................. Financial year of the Group ending 31 March
GWh ............................................................................... Gigawatt hours
HWRS ............................................................................ Household waste recycling sites
IFRS .................................................................................. International Financial Reporting Standards
IDoK ................................................................................ Interim Determination of K
ISO 9001 ....................................................................... International quality management
ISO 14001 .................................................................... International environmental management
accreditation standard
accreditation standard
June Return ................................................................. The annual return to Ofwat made by South West Water
on its performance during the previous financial year
KPIs .................................................................................. Key Performance Indicators
LATS ................................................................................ Landfill Allowance Trading Scheme
Ml ...................................................................................... Megalitres
MW .................................................................................. Megawatts
MZC ................................................................................ Mean Zonal Compliance or ‘Overall Water Quality’ as
NFFO .............................................................................. Non Fossil Fuel Obligation
Ofwat or water regulator .................................. Water Services Regulation Authority
OHSAS 18001 ........................................................... International occupational health and safety
assessed by the Drinking Water Inspectorate
management system
Percentage population equivalent .................. Waste water treatment works loadings from domestic,
industrial and diffuse sources, averaged and stated as a
population equivalent load, expressed as a percentage
Periodic Review ........................................................ The process of determining the water industry’s
price limits and expenditure plans for five-year
regulatory periods
PFI ..................................................................................... Private Finance Initiative
PPC .................................................................................. Pollution Prevention and Control
PPP ................................................................................... Public Private Partnership
RCV ................................................................................... Regulatory Capital Value
RO .................................................................................... Renewables Obligation
RIDDOR ....................................................................... Reporting of Injuries, Diseases and Dangerous
Occurrences Regulations (1995)
ROC ................................................................................ Renewables Obligation Certificate
RPI .................................................................................... The UK Government’s Retail Prices Index
SEPA ................................................................................ Scottish Environment Protection Agency
UK GAAP .................................................................... United Kingdom Generally Accepted
Accounting Principles
Viridor .............................................................................. Viridor Limited (a subsidiary of Pennon Group Plc) or
a Viridor operating subsidiary, depending on the nature
of the activity described
WEEE .............................................................................. Waste electrical and electronic equipment
PENNON GROUP ANNUAL REPORT AND ACCOUNTS | 2010 | P.37
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Other stAtUtOry inFOrmAtiOn
PRINCIPAL ACTIVITIES AND
BUSINESS REVIEW
The principal activities of the Company
and its subsidiaries (‘the Group’) are the
provision of water and sewerage services,
waste management, recycling and renewable
energy. Information regarding the Group,
including events and its progress during the
year, events since the year-end and likely future
developments is contained in the Business
Review set out on pages 2 to 37 of this
Directors’ report.
In addition the Business Review contains a fair
and balanced review of the business of the
Group, including its position and prospects, Key
Performance Indicators and a description of
the principal risks and uncertainties facing the
Group in accordance with the requirements
of the Combined Code and Section 417 of the
Companies Act 2006. In addition in accordance
with the ABI Corporate Social Responsibility
Guidelines, statements are included on any
significant environmental, social and governance
(ESG) risks and the actions taken in mitigating
these risks within the Business Review on
pages 21, 26, 27, 30 and 31. Further information
on ESG aspects of the Group’s business are
included in the Corporate Responsibility Report
on pages 32 to 36. The principal subsidiaries
of the Company are listed in Note 39 to the
financial statements on page 106.
CORPORATE GOVERNANCE
STATEmENTS
The following disclosures are made pursuant to
Part 6 of Schedule 7 of the Large and Medium-
sized Companies and Groups (Accounts &
Reports) Regulations 2008 and Rule 7.2.3.R
of the UK Listing Authority’s Disclosure
and Transparency Rules (DTR). The further
information required by DTR 7.2 is set out in
the Company’s Corporate Governance and
Internal Control Report set out on pages 49
to 52 of this Annual Report which is hereby
included within this Directors’ Report by
reference.
As at 31 March 2010:
a) details of the Company’s issued share
capital, which consists of ordinary shares of
nominal value 40.7 pence each, are set out
in Note 32 to the financial statements on
pages 97 to 99. All of the Company’s issued
shares are fully paid up, rank equally in all
respects and are listed on the Official List
and traded on the London Stock Exchange.
The rights and obligations attaching to the
Company’s shares, in addition to those
conferred on their holders by law, are set
out in the Company’s Articles of Association
(“Articles”), copies of which can be obtained
from Companies House in the UK or by
writing to the Company Secretary at the
Company’s registered office.
The holders of the Company’s shares are
entitled to receive the Company’s reports
and accounts and in relation to general
meetings of the Company they have the
right to attend and speak, exercise voting
rights and appoint proxies;
b) there are no restrictions on the transfer
of issued shares of the Company or on the
exercise of voting rights attached to them,
except where the Company has exercised
its right to suspend their voting rights or to
prohibit their transfer following the omission
of their holder or any person interested
in them to provide the Company with
information requested by it in accordance
with Part 22 of the Companies Act 2006
or where their holder is precluded from
exercising voting rights by the Financial
Services Authority’s Listing Rules or the City
Code on Takeovers and Mergers;
c) details of significant direct or indirect holdings
of securities of the Company are set out in
the shareholder analysis on page 110;
d) the Company’s rules about the appointment
and replacement of Directors are contained
in the Articles and accord with usual English
company law provisions. The powers of
Directors are determined by UK legislation
and the Articles in force from time to time.
Changes to the Articles must be approved
by the Company’s shareholders by passing a
special resolution;
e) the Directors have the power to make
purchases of the Company’s own shares in
issue as set out in the section on page 39
‘Purchase of Own Ordinary Shares’. No
such purchases have been made during the
year. The Directors also have the authority
to allot shares up to an aggregate nominal
value of £30,448,075 which was approved
by shareholders at the 2009 Annual General
Meeting (AGM). In addition, shareholders
approved a resolution giving the Directors
a limited authority to allot shares for cash
other than pro rata to existing shareholders.
These resolutions remain valid until the
conclusion of this year‘s AGM. Similar
resolutions will be proposed at this year’s
AGM. The Directors have no present
intention to issue ordinary shares other than
persuant to the Company’s Scrip Dividend
Alternative; and
f) there are a number of agreements which
take effect, alter or terminate upon
a change of control of the Company
following a takeover bid, such as bank loan
agreements, Eurobond documentation,
private placement debt and employees‘
share plans. None of these is considered
to be significant in terms of their
potential impact on the business of
the Group as a whole.
FINANCIAL RESULTS AND DIVIDEND
Statutory Group profit on ordinary activities
after taxation was £139.5 million. The
Directors recommend a final dividend of
15.60p per ordinary share to be paid to
shareholders on the register on 13 August
2010, making a total dividend for the year of
22.55p, the cost of which will be £79.6 million,
leaving a credit to reserves of £59.9 million.
The Business Review on pages 4 and 5 and
28 to 30 analyses the Group’s financial results
in more detail and sets out other financial
information, including the Directors’ opinion
on asset values on page 28.
DIRECTORS
Gerard Connell and Chris Loughlin are due to
retire at the AGM on 29 July 2010 and offer
themselves up for re-election. In addition, in
accordance with best practice as set out in
the Combined Code, Ken Harvey continues
to offer himself up for re-election annually as
he has been a Director for over nine years.
The Board continues to believe that Gerard
Connell, as a Non-executive Director standing
for re-election is independent, and that he
makes an effective and valuable contribution
to the Board, demonstrating continued
commitment to the role. Ken Harvey and
Gerard Connell do not have service contracts.
Ken Harvey does have a contract for services
which is terminable upon 12 months’ notice.
Chris Loughlin has a service contract which
is due to expire in three years’ time, being
upon his normal retirement date. Resolutions
for the above Directors’ re-election will
be proposed at the AGM. The Directors’
biographies are set out on page 40.
No Director has, or has had, a material
interest, directly or indirectly, at any time
during the year under review in any contract
significant to the Company’s business. A list
of all the Directors during the year is set out
in the emoluments table on page 44. Further
details relating to the Directors and their
service agreements or contracts for services
are set out on pages 43 and 44 and details
of the Directors’ interests in shares of the
Company are given on pages 45 to 48.
DIRECTORS’ INSURANCE AND
INDEmNITIES
The Directors have the benefit of the
indemnity provisions contained in the
Company’s Articles and the Company has
maintained throughout the year Directors and
Officers liability insurance for the benefit of
the Company, the Directors and its Officers.
The Company has entered into qualifying
third party indemnity arrangements for the
benefit of all its Directors in a form and scope
which comply with the requirements of the
Companies Act 2006 and which was in force
throughout the year and remains in force.
P.38 | PENNON GROUP ANNUAL REPORT AND ACCOUNTS | 2010
STATEmENT AS TO DISCLOSURE
OF INFORmATION TO AUDITORS
a) So far as each of the Directors in office
at the date of the signing of the report is
aware, there is no relevant audit information
of which the Company’s auditors are
unaware; and
b) each of the Directors has taken all the
steps each Director ought to have taken
individually as a director in order to make
themselves aware of any relevant audit
information and to establish that the
Company’s auditors are aware of that
information.
RESPONSIBILITY STATEmENTS
Each of the Directors, whose names and
functions are listed on page 40, confirms
that, to the best of each person’s knowledge
and belief:
a) the financial statements, prepared in
These forums, together with regular meetings
with particular groups of employees, are used
to ensure that employees are kept up to date
with the operating and financial performance
of their employer.
The Group also uses a monthly information
cascade process to provide employees
with important and up to date information
about key events and to receive feedback
from employees.
Further information about employment
matters relating to the Group are set out on
pages 18-20, 24 and 35 of the Business Review.
The Group encourages share ownership
amongst its employees by operating an HM
Revenue & Customs (HMRC) approved
Sharesave Scheme and Share Incentive Plan.
At 31 March 2010 around 36% of the Group’s
employees participated in these plans.
accordance with International Financial
Reporting Standards (IFRS) as adopted by
the EU, give a true and fair view of the assets,
liabilities, financial position and profit of the
Group and of the Company; and
RESEARCH AND DEVELOPmENT
Research and development activities within the
Group involving water and waste treatment
processes amounted to £0.2 million during the
year (2008/09 £0.2 million).
b) this Directors’ Report includes a fair review
of the development and performance of the
business and position of the Company and
the Group, together with a description of the
principal risks and uncertainties they face.
The Directors are responsible for the
maintenance and integrity of the Company’s
website pennon-group.co.uk Legislation in
the United Kingdom governing the preparation
and dissemination of financial statements may
differ from legislation in other jurisdictions.
FINANCIAL INSTRUmENTS
Details of the financial risk management
objectives and policies of the Group and
the exposure of the Group to price, credit,
liquidity and cash flow risks are set out in the
Business Review on page 31.
EmPLOYmENT POLICIES AND
EmPLOYEE INVOLVEmENT
The Group has a culture of continuous
improvement through investment in people
at all levels within the Group. The Group is
committed to pursuing equality and diversity
in all its employment activities including
recruitment, training, career development
and promotion and ensuring there is no bias
or discrimination in the treatment of people.
In particular, applications for employment
are welcomed from persons with disabilities
and special arrangements and adjustments
as necessary are made to ensure that
applicants are treated fairly when attending
for interview or for pre-employment aptitude
tests. Wherever possible, the opportunity is
taken to retrain people who become disabled
during their employment in order to maintain
their employment within the Group.
Employees are consulted regularly about
changes which may affect them either
through their trade union appointed
representatives or by means of the elected
Staff Council which operates in South West
Water for staff employees.
PENNON GROUP DONATIONS
During the year donations amounting to
£63,609 (2008/09 £74,781) were made.
Further details are included on page 36 of the
Business Review. No political donations were
made (2008/09 Nil).
TAx STATUS
The Company is not a close company within
the meaning of the Income and Corporation
Taxes Act 1988.
PAYmENTS TO SUPPLIERS
It is the Group’s payment policy for the
year ending 31 March 2011 to follow the
Code of The Better Payment Practice
Group on supplier payments. Information
about the Code can be obtained from
the website payontime.co.uk The
Company will agree payment terms with
individual suppliers in advance and abide
by such terms. The ratio, expressed in
days, between the amount invoiced to the
Company by its suppliers during 2009/10
and the amount owed to its trade creditors
at 31 March 2010, was 34 days.
PURCHASE OF OWN
ORDINARY SHARES
The Company has authority from shareholders
to purchase up to 10% of its own ordinary
shares (as renewed at the AGM in 2009)
which was valid as at 31 March 2010 and
remains currently valid. Of the 5,724,131
shares held in Treasury at 31 March 2009,
631,557 were subsequently re-issued under
the Company’s Sharesave Scheme for
proceeds of £1.9 million.
AUDITORS
PricewaterhouseCoopers LLP were
appointed auditors until the conclusion of
the twenty-first Annual General Meeting. A
resolution for their re-appointment upon the
recommendation of the Audit Committee of
the Board will be proposed at the AGM.
APPOINTED BUSINESS
South West Water Limited is required
to publish additional financial information
relating to the ‘appointed business’ as water
and sewerage undertaker in accordance
with the Instrument of Appointment from
the Secretary of State for the Environment.
A copy of this information will be available
from 15 July 2010 upon application to the
Company Secretary at Peninsula House, Rydon
Lane, Exeter Ex2 7HR or on the website
southwestwater.co.uk
ANNUAL GENERAL mEETING
The twenty-first Annual General Meeting of
the Company will be held at the Sandy Park
Conference Centre, Sandy Park Way, Exeter,
Devon Ex2 7NN on 29 July 2010 at 11.00am. In
addition to routine business, resolutions will be
proposed at the Annual General Meeting to:
• renew the existing authorities to issue a
limited number of shares (with updating
to accord with the latest institutional
guidelines and the Companies Act 2006)
and to purchase up to 10% of the issued
share capital of the Company
• seek authority to make political donations
under the Political Parties, Elections and
Referendums Act 2000, as amended. (It
is not the Group’s policy to make political
donations. This is a precautionary measure
which is followed by many companies to
ensure that there is no inadvertent breach
of the law)
• re-elect Mr K G Harvey, Mr G D Connell
and Mr C Loughlin as Directors of the
Company
• adopt new Articles of Association. This is
proposed principally to bring the Articles up
to date in accordance with the provisions of
the Companies Act 2006 which are all now
in force and include changes to the limits
set out in the existing Articles relating to
Directors’ fees
• increase the Company’s borrowing
power from 21/2 to 3 times capital and
reserves (and amend the definition of
capital and reserves to exclude therefrom
the impact of market price movements
on the accounting treatment of financial
derivatives to which the Company is a
party) as set out in the Company’s Articles
• seek authority to continue to call general
meetings other than an annual general
meeting on not less than 14 clear days’
notice (pursuant to the EU Shareholder
Rights Directive (effective in August 2009),
shareholder authority is required to
continue to call meetings on at least 14 clear
days’ notice).
Details of the resolutions are set out in the
separate Notice of Annual General Meeting
which is circulated to shareholders with this
Annual Report or provided by electronic
communication via the Company’s website
pennon-group.co.uk Information required
by Section 311A of the Companies Act 2006 is
also on the Company’s website.
By Order of the Board
KEN WOODIER,
Group General Counsel & Company Secretary
24 June 2010
PENNON GROUP ANNUAL REPORT AND ACCOUNTS | 2010 | P.39
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BOArD OF DireCtOrs
KENNETH GEORGE HARVEY
BSC, 69
CHAIRmAN
Appointed on 1 March 1997. Ken was formerly
chairman and chief executive of Norweb Plc.
He was chairman of National Grid Holdings
in 1995 and was previously deputy chairman
of London Electricity and earlier its engineering director. He has
also been chairman of a number of limited and private equity funded
companies. Currently he is the senior independent non-executive
director of National Grid Plc.
COLIN IRWIN JOHN HAmILTON
DRUmmOND mA, mBA, LTCL, CCmI, 59
CHIEF ExECUTIVE, VIRIDOR LImITED
Appointed on 1 April 1992. Prior to joining
the Company Colin was a divisional chief
executive of Coats Viyella, having previously
been corporate development director of Renold
plc, a strategy consultant with the Boston Consulting Group and an
official of the Bank of England. He is chairman of the Government’s
Living with Environmental Change Business Advisory Board; of UKTI’s
Environmental Sector Advisory Group; and of the Environmental
Sustainability Knowledge Transfer Network. He is a senior visiting
research fellow in Earth Sciences at Oxford University; an adviser
to Beehive Water and Waste Holdings LP; and a Past Master of the
Worshipful Company of Water Conservators.
mARTIN DAVID ANGLE
BSC HONS, FCA, 60
NON-ExECUTIVE DIRECTOR
Appointed on 1 December 2008. Martin
currently holds non-executive directorships
with Savills plc, JSC Severstal, Shuaa Capital
and The National Exhibition Centre where
he is Chairman. Until November 2009, he was also on the Board
of Dubai International Capital. In addition he sits on the Advisory
Board of the Warwick Business School. Formerly he held senior
positions with Terra Firma Capital Partners and various of its
portfolio companies, including the executive chairmanship of Waste
Recycling Group Limited. Before that he was the Group Finance
Director of TI Group plc and held a number of senior investment
banking positions with SG Warburg & Co Ltd, Morgan Stanley and
Dresdner Kleinwort Benson.
GERARD DOmINIC CONNELL mA, 52
SENIOR INDEPENDENT
NON-ExECUTIVE DIRECTOR
Appointed on 1 October 2003. Gerard is
currently group finance director of Wincanton
Plc. Previously he was a director of Hill Samuel
and a managing director of Bankers Trust having
trained originally at Price Waterhouse and has held other corporate
finance and business development positions in the City and in industry.
He is also a governor of King’s College School, Wimbledon.
DAVID JEREmY DUPONT mA, mBA, 56
GROUP DIRECTOR OF FINANCE
Appointed on 2 March 2002. David was formerly
regulatory and finance director of South West
Water Limited, having joined Pennon Group Plc
(then South West Water Plc) in 1992 as strategic
planning manager. Previously he held business
planning and development roles with Gateway
Corporation. He is a member of the CBI Environmental Affairs
Committee and the CBI South West Regional Council.
CHRISTOPHER LOUGHLIN
BSC HONS, mICE, CENG, mBA, 57
CHIEF ExECUTIVE, SOUTH WEST
WATER LImITED
Appointed on 1 August 2006. Chris was most
recently chief operating officer with Lloyd’s
Register and previously was an executive director
of British Nuclear Fuels Plc and executive
chairman of Magnox Electric Plc. Chris started his career as a chartered
engineer and subsequently held a number of senior positions with
British Nuclear Fuels. He was appointed chairman of Water UK with
effect from 1 April 2008.
GROUP GENERAL COUNSEL &
COmPANY SECRETARY
Ken Woodier, Solicitor
REGISTERED OFFICE
Peninsula House,
Rydon Lane,
Exeter
Ex2 7HR
Registered in England No 2366640
P.40 | PENNON GROUP ANNUAL REPORT AND ACCOUNTS | 2010
DINAH ALISON NICHOLS
CB, BA HONS, 66
NON-ExECUTIVE DIRECTOR
Appointed on 12 June 2003. Dinah was formerly
Director General Environment at the Department
for Environment, Food and Rural Affairs and
previously held various senior appointments
within Government, including being head of
the water directorate during the period of water privatisation. She is
also a Crown Estate Commissioner, a non-executive director of Shires
Smaller Companies Plc, chair of the National Forest Company and a
director of several charitable Trusts.
COMMITTEES OF THE BOARD
AUDIT
Gerard Connell (Chairman)
Martin Angle
Dinah Nichols
CORPORATE
RESPONSIBILITY
Dinah Nichols (Chairman)
Martin Angle
Gerard Connell
Colin Drummond
Chris Loughlin
NOmINATION
Ken Harvey (Chairman)
Martin Angle
Gerard Connell
Dinah Nichols
REmUNERATION
Martin Angle (Chairman)
Gerard Connell
Dinah Nichols
DIRECTORS’ REmunERaTIOn REpORT
PurPose
remuneration PoliCy
the directors’ remuneration report is designed to provide for the
benefit of shareholders details of:
• the role of the Remuneration Committee
• the Group’s Remuneration Policy
• Directors’ remuneration
• remuneration disclosures required by the Directors’ Remuneration
report regulations which are audited.
The Company understands investors’ concerns relating to executive
director remuneration and, whilst focus has been on the financial
sector primarily, it is fully recognised that there is a need for other
sectors to reflect this concern in their remuneration policies and
overall remuneration practice. This is why last year, despite the
Group’s businesses being well positioned in the economic slowdown,
the remuneration committee decided not to increase salaries for
Executive Directors beyond those set in 2008.
remuneration Committee
the remuneration committee of the Board comprises three
Non-executive Directors who are all regarded by the Company as
independent. Martin Angle is the chairman of the committee and the
other two members are Gerard connell and dinah nichols.
the committee’s terms of reference is available from the Group
Company Secretary and can be found on the Company’s website
pennon-group.co.uk It includes:
• advising the Board on the framework of executive remuneration for
the Group
• determining the remuneration and terms of engagement of the
Chairman, the Executive Directors and Senior Management of
the Group.
No Director or any other attendee participates in any discussion on, or
determination of, his or her own remuneration.
During the year the Committee met on seven occasions and received
advice or services which materially assisted the Committee in the
consideration of remuneration matters from Ken Harvey, Chairman
of the Company, and from the following advisors who were appointed
directly by the Committee:
• Ken Woodier, Group General Counsel & Company Secretary on
remuneration and share scheme matters. He also provides legal
advice and company secretarial services to the Company
• Hewitt Associates Limited, pensions and remuneration consultants,
on calculating total shareholder return for the Company’s Restricted
Share Plan (now replaced by the Company’s Performance &
co-investment Plan). Hewitt also provide actuarial and investment
pensions advice to the trustees of the Group’s Pension schemes
• Towers Perrin Limited (now Towers Watson Limited), remuneration
consultants, who undertook a review of the Group’s remuneration
policy and practice for the Committee during the year.
Last year the Remuneration Committee reported that it would
undertake a review of Remuneration Policy in September 2009. Having
undertaken this review with advice from Towers Perrin the Committee
concluded that the current policy remained appropriate. This policy
which will be applied in 2010/11, and is also currently intended to be
applied in each subsequent year, is to provide for Executive Directors
a remuneration package which is adequate to attract, retain and
motivate good quality executives and which is commensurate with
the remuneration packages provided by companies of similar size and
complexity. The key guiding principles of this policy are to:
• design an overall package to be competitive and to take account of
the markets in which the Group’s businesses operate
• support the overarching business strategy for the Group
• adopt incentive arrangements designed to reward performance
and align the interests of the Executive Directors with those of
shareholders
• reinforce the incentive element of the package by maintaining base
salaries for Executive Directors at the relevant market median
• have a remuneration package which is fair and consistent with
other companies in the sector and which provides incentives for
outperformance.
The policy in respect of Non-executive Directors’ fees is set out on
page 44 in the Non-executive Directors remuneration section.
In setting executive remuneration the Remuneration Committee not
only takes account of employment market conditions, but seeks to
ensure that there are coherent pay and benefit structures across the
Group which are consistent with the remuneration packages of the
Executive Directors and Senior Management. From summary reports
on workforce remuneration and terms and conditions of employment
by the Executive Directors with regard to their respective business
areas, the Committee has regard to the general levels of responsibility,
qualifications and experience required throughout the Group in
setting salary and other benefits of the Executive Directors and Senior
Management. the committee also ensures the incentive structures do
not raise environmental, social or governance risks by inadvertently
motivating irresponsible behaviour. A number of individual performance
objectives specifically relate to achieving non-financial targets.
The balance between maximum performance-related remuneration
receivable and direct remuneration (ie. excluding pensions, car benefit
and health cover) is the same as last year with one-third direct and
two-thirds performance-related. This is expected to continue for the
foreseeable future. The Company also has a Shareholding Guideline
which applies to Executive Directors and Senior Management. It is
structured to demonstrate their commitment to the future success
of the Group. Executive Directors are expected to build up their
shareholding over a five-year period to a value which is at least
equivalent to their basic annual salary.
remuneration of exeCutive DireCtors
Below is an outline of the total remuneration package for Executive Directors.
fixed
Base Salary
Pension – Final Salary (Defined
Benefit) or cash alternative
other – car benefit and
health cover
variable (Performance-related)
short-term – Annual
Annual Incentive Bonus Plan - Maximum 100% of
basic salary with 50% paid in cash and 50% in shares
deferred for 3 years
Assessed against corporate financial performance
and individual personal achievements relating to a
range of operational and compliance targets.
Long-term – 3 years
Performance and co-investment Plan (PcP) –
future performance over 3 years
50% linked to water and waste comparator group
and 50% linked to relative FTSE 250 with an underpin
relating to operational and economic performance.
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The following is a detailed summary of the
elements of remuneration:
Performance & Co-investment Plan referred
to below.
to key initiatives, projects and compliance
targets for South West Water).
(i) Basic salary and benefits – these
are set out on page 44 for each Executive
director and are not related to performance.
The Committee reviews salaries annually
taking account of market data available from
independent remuneration consultants. A
pay freeze was applied in 2009/10. When
reviewing base salaries the Committee takes
account of the performance of the individual
Executive Directors which the Committee
assesses with the advice of Ken Harvey,
Chairman of the Company. Other benefits,
not mentioned below, include contributory
pension provision (or a cash alternative),
four times salary life assurance cover, a
fully expensed car, or a cash alternative and
health cover.
(ii) Performance-related Bonus – annual
performance related bonuses are awarded in
accordance with the Group’s Annual Incentive
Bonus Plan (the Bonus Plan) and are based on
the achievement by the Executive Directors
of overall corporate and individual objectives
set by the Committee. The maximum
bonus achievable under the Bonus Plan for
Executive Directors for 2009/10 was 100%
of basic salary. To achieve the maximum
percentage bonus allocated in respect of
the corporate targets of earnings per share
and profit before tax it is necessary for the
Company to achieve a specified level of
superior outperformance. Half of any bonus
awarded is in the form of ordinary shares
in the Company which must usually be held
for a period of three years before release
(deferred Bonus shares). during this period
the directors, in respect of the deferred
Bonus Shares, are entitled to receive any
dividends declared by the Company. No
additional performance conditions applicable
to the release of the deferred Bonus shares
apart from maintaining continuous service
with the Company, are considered appropriate
by the Committee in view of the stretching
performance conditions applicable to achieve
the initial award of the deferred Bonus shares.
the committee, in setting the performance
objectives for Executive Directors, takes
account of corporate performance on
environmental, social and governance (esG)
matters. objectives set embrace appropriate
esG parameters which are important to
the success of the Group and which seek
to ensure that the Group meets a number
of its esG targets as set out in the Group’s
Corporate Responsibility Report on pages 32
to 36 of the Business review. the committee
in setting such objectives and in determining
its remuneration policy overall ensures
that the relevant incentives to directors
and Senior Management raise no ESG risks
by inadvertently motivating irresponsible
behaviour. In addition the Committee will take
into account esG matters in determining the
vesting of any awards under the Company’s
In 2009/10 the Committee structured and
operated the Bonus Plan on a different
basis. The Bonus Plan was amended by
the committee to permit its operation in
conjunction with the Company’s Executive
share option scheme (esos) which received
shareholder approval in 2001 on the basis
that the aggregate pre-tax value of the
awards made under both the Bonus Plan
and the ESOS would be the same as they
would have been if the Bonus Plan had been
operated alone, as in previous years. This
has been achieved by providing for Deferred
Bonus Shares awarded to be forfeited by the
Directors up to the same value as that of any
gain made in respect of options exercised by
the directors pursuant to the esos at the
end of the three-year restricted period. Only
the HMrc approved part of the esos was
operated in 2009/10 which enabled options
over ordinary shares in the Company to be
granted to directors to the value of £30,000
at the then prevailing price. details of the
options granted are set out in the table in
paragraph (d) on page 47.
Set out below is a summary of the
performance targets determined by the
Committee for each Executive Director for
2009/10 and for 2010/11.
colin drummond – A bonus of up to 40%
for outperformance of Group earnings per
share against budget; up to 40% calculated
by reference to outperformance of the profit
before tax and net debt budgets of Viridor;
and up to 20% for personal objectives relating
to key business targets for Viridor.
david dupont – A bonus of up to 40% for
outperformance of Group earnings per share
against budget; up to 40% for outperformance
against budget relating to net debt and net
interest of the Group and profit before tax
of South West Water and Viridor; and up to
20% for personal objectives relating to Group
financing and other Group initiatives.
chris loughlin – A bonus of up to 40% for
outperformance of Group earnings per
share against budget; up to 20% for personal
objectives relating to implementing south
West Water’s new strategies and projects
and meeting compliance targets; and up to
40% calculated by reference to the average
bonus earned by the other executive directors
of South West Water (which relate to
outperformance against the operating costs,
profit before tax, capital expenditure and net
debt budgets of the company; the position the
company achieves in the ‘Overall Performance
Assessment’ of water and sewerage companies
established by the Water Services Regulatory
Authority (WSRA); the achievement of a
range of service standards set for the company
by the WSRA; and personal objectives relating
The achievements of the Executive Directors
against their individual performance objectives
are assessed by the Committee following the
financial year-end when the audited results
of the Company and performance against the
parameters set are known. This enables the
Committee to apply largely objective criteria
in determining the level of bonus (if any) which
should be awarded, with the advice of the
Chairman of the Company, Ken Harvey.
(iii) long-term incentive plan – A
Performance and co-investment Plan (PcP)
was operated by the Company during the
year for Executive Directors and Senior
Management.
the purpose of the PcP is to award shares
to participants subject to the achievement of
stretching performance conditions measured
over three years. Awards under the PCP, in
the form of a conditional right over ordinary
shares in the Company, were made by the
Committee in July 2009 and, for Executive
directors, the award was over shares worth
100% of basic salary. In accordance with
its discretion pursuant to the rules of the
PcP, the committee made the vesting of
the awards also subject to the fulfilment of a
co-investment condition whereby Executive
Directors were required to invest and hold
shares in the Company equal to 20% of the
value of their award over the restricted Period
(being a period of three years from the date of
the award). The percentage requirement for
senior management was suitably scaled back.
the number of shares subject to each award in
the event of vesting will be increased by such
number of shares as could have been acquired
by reinvesting the dividends which would
otherwise have been received on those shares
prior to vesting or exercise.
The PCP awards made in July 2009 will vest
based on the Company’s total shareholder
return (TSR) performance over a three-year
performance period against two different
comparator groups as set out below. this
is the same performance criteria that was
applied to the PCP awards made in July
2008. TSR measures the value created for
shareholders through increases in share price
and the payment of dividends and was applied
by the Committee because, based upon advice
received from remuneration consultants,
Deloitte & Touche LLP, it believes that this is
an appropriate measure to align the interests
of the Executive Directors with those of
shareholders:
• Up to 50% of an award will vest according
to the Company’s TSR performance
measured against an index made up of
the following six listed water and waste
comparator companies:
P.42 | Pennon GrouP AnnuAl rePort And Accounts | 2010
Northumbrian Water Group
séché environnement
severn trent
Shanks Group
Suez Environnement
united utilities
These are the Company’s key listed sector
comparators.
Water/Waste GrouP
vesting
% of total award
Above the index
+15%
Equal to the index
straight-line vesting in between
the above points
Below the index
50%
15%
0%
• Up to 50% of the award will vest according
to the Company’s ranked TSR performance
against the constituents of the FTSE 250
index (excluding investment trusts). This
is the FTSE index to which the Company
belonged at the time of the award.
ftse 250 GrouP
vesting
% of total award
At or above the 75th percentile
Above 50th percentile
straight-line vesting in between
the above points
50%
15%
At or below the 50th percentile
0%
In addition to this TSR condition, before any
award is capable of vesting, the committee will
also need to be satisfied that the underlying
operational and economic performance of
the Company is at a satisfactory level. This
will include consideration of sustainability and
environmental factors and safety performance,
as well as financial performance.
For the first PCP awards made in August
2007 (following shareholder approval at the
Annual General Meeting in July 2007) the same
performance measures were used as set out
above save that the sector comparator group
included Biffa and Kelda Group (instead of
Séché and Suez). As these companies have now
de-listed, the committee in respect of the 2007
award at the end of the three-year Restricted
Period will have discretion to include them in
the calculation of the index up to the date of
de-listing (or other earlier date at its discretion)
and exclude them from that date onwards or
adopt an alternative approach.
Whilst the Committee intends currently to
apply similar performance conditions to those
set out above to any future PCP awards, they
will be reviewed on an annual basis to ensure
that they remain appropriate and suitably
stretching for future awards.
Between 1997 and 2006 the Company
operated a restricted share Plan (rsP). the
final award made in september 2006 reached
the end of its three-year restricted period in
September 2009 with the TSR performance
of the Company against a comparator group
being measured over the three-year period
ended on 31 March 2009 (details of the RSP
and the tsr performance condition applied
are set out in the notes to table (b) ‘Restricted
share Plan and Performance co-investment
Plan’ on page 46). over this period the
Company achieved the position equivalent to
the 50th percentile of the comparator group
which resulted in no shares vesting from the
award. For at least part of the award to have
vested the Company would have needed to
achieve a position at least above the position
of the company at or nearest to (but not
above) the 50th percentile position of the
comparator group. For the 2004 RSP award
which vested in 2007, 85% of the award
vested and for the 2005 award which vested
in 2008, 70% of the award vested. Any awards
which did not vest at the end of the relevant
Restricted Period lapsed and therefore 15%
and 30% of the awards which vested in 2007
and 2008 respectively lapsed and 100% of the
2006 award lapsed in September 2009.
(iv) other share schemes – Executive
directors are entitled to participate in the
Company’s Sharesave Scheme and Share
Incentive Plan. Both are all-employee plans to
which performance conditions do not apply.
(v) service contracts – In accordance
with Company policy, all Executive Directors
have service contracts subject to one year’s
notice. They are due to expire when Executive
directors reach their normal retirement age
of 60 unless extended by agreement between
the Director and the Company. No provision
is made for termination payments under the
service contracts. In the event of termination
by the Company of any Executive Director’s
service contract, the Board would determine
what payments (if any) should be made to the
director depending on the circumstances of
the termination. the dates of the contracts
are:
Colin Drummond
David Dupont
Chris Loughlin
5 March 1992
2 January 2003
16 May 2006
(vi) Provision for pensions – colin
drummond and david dupont participate in
the Pennon Group Pension scheme and the
Pennon Group Executive Pension Scheme.
these are funded defined benefit schemes
which, dependent on length of service at
normal retirement date, could amount to
two-thirds of final pensionable pay, with the
exception of service to 5 April 2006 where
an earnings cap applied in these schemes to
these two directors.
Both were provided with additional pension
benefits under an unapproved funded
Supplementary Pension Scheme of the
Company in order to bring their pension
benefits up to a level which would have been
provided under the other schemes as if the
Earnings Cap had not applied. With effect
from 6 April 2006 the earnings cap no longer
applied to pension schemes as part of the
simplification of taxation of pensions legislation.
The Committee accordingly decided to provide
all of the directors’ future service pension
benefits above the earnings cap level from the
Pennon Group Executive Pension Scheme. The
Supplementary Pension Scheme was therefore
closed and the accrued benefits were paid out
to its members in April 2006.
The pensionable pay for Executive Directors
consists of the highest basic salary in any
consecutive 12-month period of service within
five years of retirement. Bonuses are not
included in pensionable pay.
In lieu of the provision of pension benefits,
Chris Loughlin receives an annual payment
equivalent to 30% of his annual basic salary.
In determining remuneration arrangements
for Executive Directors, the Committee
gives full consideration to their impact on the
pension schemes’ funds and costs of providing
individual pension arrangements or payments
in lieu of pension provision.
total sHareHolDer return (tsr)
tsr
250
200
150
100
50
2005
2006
2007
2008
Calendar year
2009
2010
Pennon Group
ftse 250
the graph above shows the value, over the
five-year period ending on 31 March 2010,
of £100 invested in Pennon Group on 31
March 2005 compared with the value of £100
invested in the FTSE 250 Index. The other
points plotted are the values at intervening
financial year-ends. This Index is considered
appropriate as it is a broad equity market
index of which the Company has been a
constituent over most of the period covered.
the graph above has been produced in
accordance with regulations made pursuant to
section 421 of the companies Act 2006.
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non-exeCutive DireCtors anD
tHe CHairman
Non-executive Directors’ remuneration
(excluding that of the Chairman, Ken Harvey)
consisting of fees only as set out below,
is determined by the Board of Directors,
including the chairman, but in the absence
of the other Non-executive Directors. It is
usually reviewed each year to take account of
market changes in non-executive directors’
fees. The Non-executive Directors’ fees were
not increased for 2009/10 in line with the
Executive Directors. In reviewing the fees, the
Board takes into account market information
on non-executive directors’ fees. For 2009/10
the Non-executive Directors received a
base fee of £35,000 per annum. The Audit,
Remuneration and Corporate Responsibility
committee chairs were paid fees of £10,000,
£7,000 and £7,000 per annum respectively
and the committee members received
£4,000 each. For this and subsequent years
the policy expected to be applied in respect
of Non-executive Director fees will be to
set fees around the median level compared
with the market, which the Board believes
is appropriate to attract and retain suitably
experienced non-executive directors.
The Chairman’s remuneration is set by the
remuneration committee. the chairman’s fee
was not increased for 2009/10 in line with the
Executive Directors.
The policy of the Committee to be applied
for this and in subsequent years is the same as
that of the Executive Directors in reviewing
the fees of the Non-executive Directors as set
out above. In addition to a fee the chairman
receives a fully-expensed car benefit and
health cover.
no other benefits or remuneration are
received by the Chairman.
The Non-executive Directors (excluding
the chairman) have contracts for services
setting out their terms and conditions of
The dates of the Non-executive Directors’ contracts are:
appointment which are subject to the Articles
of Association of the Company and which
may be extended by agreement between the
Company and the Non-executive Directors.
No provision is made for any termination
payment under these contracts.
the chairman has a contract for services
dated 1 April 2005 which is subject to 12
months’ notice to provide the Company
with reasonable security with regard to his
ongoing service. No provision is made for any
termination payments under this contract.
the contracts for services of the chairman and
the Non-executive Directors reflect corporate
governance best practice and, together with
the Executive Directors’ service contracts,
are available for inspection at the Company’s
registered office during normal business hours.
Director
Martin Angle
Gerard connell
dinah nichols
Date of contract
28 November 2008
30 september 2003
10 June 2003
expiry date of contract
30 november 2011
30 september 2012
11 June 2012
The above contracts do not contain any notice periods.
The information set out below and on the remaining pages of this Remuneration Report (pages 44 to 48) has been audited by the Group’s
independent auditors, Pricewaterhousecoopers llP.
emoluments of DireCtors
The emoluments of individual Directors holding office during 2009/10 were:
director
Chairman:
Ken Harvey
Executive Directors:
colin drummond
david dupont
chris loughlin
Non-executive Directors:
Martin Angle
Gerard connell
dinah nichols
Performance
related cash
bonus paid or
payable2
£000
Salary/fees
£000
other
emoluments1
£000
Payment in lieu
of pension3
total 2010 -
year to 31 march
Total 2009 -
Year to 31 March
£000
£000
£000
220
330
330
315
50
53
50
–
155
1524
1514
–
–
–
26
22
21
22
–
–
–
91
–
–
–
95
–
–
–
95
246
507
503
583
50
53
50
246
432
435
527
17
50
48
1,992
1,755
total
1,348
458
1 other emoluments are car benefit and health cover.
2 In addition to the performance-related cash bonus, Executive Directors are due to receive a conditional award of shares as referred to in a note
to (c) ’Annual Incentive Bonus Plan – deferred Bonus shares (long-term incentive element)’ on page 47.
3 In lieu of any pension provision by the Company, Chris Loughlin receives a cash payment equivalent to 30% of his annual basic salary.
4 The performance-related cash bonus payable to David Dupont includes £4,000 and to Chris Loughlin includes £6,600 which were paid in
February 2010. This was an additional bonus paid to the two Directors for the year 2008/09 due to a reassessment of performance against
budgeted parameters.
No expense allowances chargeable to tax or termination or compensation payments were made during the year.
P.44 | Pennon GrouP AnnuAl rePort And Accounts | 2010
exeCutive DireCtors’ Pensions
Defined benefit pensions accrued and payable on retirement for Executive Directors holding office during 2009/10 were:
Increase in
accrued pension
during 2009/10
(net of inflation)
£000
a
Increase in
accrued pension
during 2009/10
£000
b
Accrued
pension at
31 March 2010
£000
c
transfer
value at
31 march 2010
£000
d
transfer
value at
31 March 2009
£000
e
Increase in
transfer value
(net of directors’
contributions)
£000
f
transfer value of
column a (net
of directors’
contributions)
£000
g
5
6
8
9
146
131
3,424
2,798
2,930
2,319
464
450
79
91
director
colin drummond
david dupont
Column a above is the increase in accrued pension during 2009/10 (net of inflation). It recognises:
i the accrual rate for the additional period’s service based upon the pensionable pay at the end of the period; and
ii the effect of pay changes in real terms (net of inflation) upon the accrued pension at the start of the year.
Column b is the actual increase in accrued pension during 2009/10.
Column c is the accrued pension at 31 March 2010 payable at normal retirement age.
column d is the transfer value of the accrued pension set out in column c as at 31 March 2010.
Column e is the transfer value of the accrued pension at the end of the previous financial year on 31 March 2009.
Column f is the increase in the transfer value during the year (column d minus column e) after deducting Directors’ contributions.
column g is the transfer value of column a, less directors’ contributions.
columns d, e, f and g have been calculated in accordance with Actuarial Guidance note Gn11.
Under the Company’s pension salary deduction arrangements, the Company pays all pension scheme members’ contributions to the Group pension
schemes and salaries are reduced by the same amount. The figures quoted above have not been adjusted to reflect this arrangement.
The above Directors have the option to pay additional voluntary contributions; neither the contributions nor the resulting benefits are included in
the table shown above.
DireCtors’ sHare interests
(a) shareholdings
The number of ordinary shares of the Company in which Directors held beneficial interests at 31 March 2010 and 31 March 2009 were:
Director
Martin Angle
Gerard connell
colin drummond
david dupont
2010
ordinary shares
(40.7p each)
2009
ordinary shares
(40.7p each)
–
4,000
239,218
213,510
–
–
216,363
193,819
Director
Ken Harvey
chris loughlin
dinah nichols
2010
ordinary shares
(40.7p each)
2009
ordinary shares
(40.7p each)
18,209
38,876
4,549
13,209
29,442
4,549
Since 31 March 2010 389 additional ordinary shares (40.7p each) have been acquired by Chris Loughlin as a result of participation in the Company’s
Scrip Dividend Alternative and the Company’s Share Incentive Plan and 92 additional ordinary shares (40.7p each) have been acquired by David
dupont as a result of dividend reinvestment in an IsA.
There have been no other changes in the beneficial interests or the non-beneficial interests of the Directors in the ordinary shares of the Company
between 1 April 2010 and 4 June 2010.
Pennon GrouP AnnuAl rePort And Accounts | 2010 | P.45
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(b) restricted share Plan and Performance and Co-investment Plan (long-term incentive Plans)
In addition to the above beneficial interests, the following Directors have or had a contingent interest in the number of 40.7p ordinary shares shown
below, representing the maximum number of shares to which they would become entitled under the Group’s Long-Term Incentive Plans should the
relevant criteria be met in full:
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director and date
of award
colin drummond
18/9/06 ¹
29/8/07 ²
10/7/08 ²
1/7/09 ²
david dupont
18/9/06 ¹
29/8/07 ²
10/7/08 ²
1/7/09 ²
chris loughlin
18/9/06 ¹
29/8/07 ²
10/7/08 ²
1/7/09 ²
conditional
awards held
at 1 April 2009
conditional
awards made
in year
Market price
of each share
upon award
in year
Value of shares
upon vesting
(before tax)
£000
Conditional
awards held at
31 march 2010
date of end of
period for qualifying
condition to be
fulfilled
Vesting in
year
41,363
53,859
51,764
–
–
–
–
67,831
498.62p
lapsed
Nil Value
557.00p
637.50p
486.50p
–
–
–
–
–
–
498.62p
lapsed
Nil Value
41,363
53,859
51,764
–
–
–
557.00p
637.50p
–
67,831
486.50p
–
–
–
–
–
–
36,099
49,371
49,411
–
–
–
–
64,748
498.62p
lapsed
Nil Value
557.00p
637.50p
486.50p
–
–
–
–
–
–
–
53,859
51,764
67,831
–
53,859
51,764
67,831
–
49,371
49,411
64,748
17/9/09
28/8/10
9/7/11
30/6/12
17/9/09
28/8/10
9/7/11
30/6/12
17/9/09
28/8/10
9/7/11
30/6/12
1 These awards relate to the Company’s Restricted Share Plan (RSP).
2 These awards relate to the Company’s Performance and Co-investment Plan (PCP) which succeeded the RSP in 2007. Details of the PCP and the
performance conditions applicable to these Awards are set out in section (iii) ‘Long-Term Incentive Plan’ on page 42 of this report.
None of the 2006 RSP Award vested in September 2009 because the performance criterion had not been met. The Award therefore lapsed in its
entirety. The performance criterion applicable to this Award was: the total shareholder return (TSR) achieved by the Company in the performance
period must be greater than that of the company at or nearest to (but not above) the 50th percentile position of the comparator group. If the
TSR performance condition had been met then 50% of an award would have vested with 100% vesting if the Company had achieved the position
equal or closest to, but not above, the 75th percentile position of the comparator group. The achievement of a position between the 50th and the
75th percentile positions would have resulted in vesting in steps reflecting the number of companies within that third quartile of the comparator
group. The comparator group consisted of nine of the water only, water and sewerage, electricity and gas companies in the FTSE Utilities Index and
quoted on the London Stock Exchange. The TSR of each company in the comparator group was measured by Hewitt Associates Limited assuming
that all dividends were reinvested and was calculated by taking the average market value of each company’s shares for the whole of March before
the beginning of the relevant three-year performance period and comparing this to the average market value of the same shares for the whole of
March at the end of the three-year period. Based upon independent remuneration consultant’s advice this method of measurement was considered
to be fair and transparent to participants in the Plan and also an accurate measure of actual performance. the above performance criterion was
chosen by the Remuneration Committee because it was considered to be an appropriate measure of the Group’s performance which also aligned
itself to the interests of shareholders.
During the year the Directors received dividends on the above shares in accordance with the conditions of the RSP as follows:
Colin Drummond £8,686; David Dupont £8,686; Chris Loughlin £7,580.
As the 2006 rsP Award was the final award made pursuant to that Plan (having been replaced in 2007 with the Performance and co-investment
Plan) no further dividends pursuant to the RSP will be payable to the Directors.
P.46 | Pennon GrouP AnnuAl rePort And Accounts | 2010
(c) annual incentive Bonus Plan – Deferred Bonus shares (long-term incentive element)
The following Directors have or had a contingent interest in the number of 40.7p ordinary shares shown below, representing the total number of
shares to which they have (or would) become entitled under the deferred bonus element of the Annual Incentive Bonus Plan (the Bonus Plan) at
the end of the relevant qualifying period:
director and date
of award
colin drummond
26/7/06 ¹
26/7/07 ²
27/6/08
30/9/09 ³
david dupont
26/7/06 ¹
26/7/07 ²
27/6/08
30/9/09 ³
27/2/10
chris loughlin
26/7/07 ²
27/6/08
30/9/09 ³
27/2/10
conditional
awards held
at 1 April 2009
conditional
awards made
in year
Market price
of each share
upon award
in year
Value of shares
upon vesting
(before tax)
£000
Conditional
awards held at
31 march 2010
Vesting in
year
normal date of
end of period for
qualifying
condition to be
fulfilled
16,527
17,798
22,838
–
–
–
–
16,730
16,095
17,018
21,145
–
–
8,767
18,806
–
–
–
–
–
17,880
755
–
–
19,562
1,261
486.00p
599.50p
620.00p
473.40p
486.00p
599.50p
620.00p
473.40p
524.50p
599.50p
620.00p
473.40p
524.50p
16,527
17,798
–
–
16,095
17,018
–
–
–
8,767
–
–
–
75
94
–
–
73
90
–
–
–
46
–
–
–
–
–
22,838
16,730
–
–
21,145
17,880
755
–
18,806
19,562
1,261
25/7/09
25/7/10
26/6/11
29/9/12
25/7/09
25/7/10
26/6/11
29/9/12
26/2/13
25/7/10
26/6/11
29/9/12
26/2/13
1 The amount of the awards made on 26 July 2006 were adjusted in the ratio three-for-one consequent upon the Company’s share capital split on
31 July 2006 and the awards vested on 25 July 2009 at a market price of 454.36p per ordinary share as the performance condition had been met.
2 The 26 July 2007 awards vested on 12 March 2010 at a market price of 527.60p per ordinary share. The Remuneration Committee varied the
terms of the Bonus Plan to bring forward the vesting of these awards from 25 July 2010 subject to possible clawback in the event that the Bonus
Plan performance condition (relating to service) would not be met at the end of the original qualifying period on 25 July 2010.
3 In addition to the awards made on 30 September 2009 the Directors also received options pursuant to the Company’s Executive Share Option
scheme (the esos), details of which are set out in the table of paragraph (d) below. these awards were made in conjunction with the operation
of the Bonus Plan, the provisions of which have been varied by the Remuneration Committee to provide for forfeiture of equivalent shares from
the Bonus Plan in the event that the ESOS options are exercised by the Directors. Further details of this variation to the Bonus Plan and to the
operation of the ESOS are set out in paragraph (ii) ‘Performance-related bonus’ on page 42.
During the year the Directors received dividends on the above shares in accordance with the conditions of the Bonus Plan as follows: Colin
Drummond £9,649; David Dupont £9,100; Chris Loughlin £5,790.
A further conditional award of shares will be made in 2010/11 to the value of the amount of the performance-related cash bonus shown in
the Emoluments of Directors table on page 44. (Paragraph (ii) ‘Performance-related bonus’ on page 42 sets out the provisions relating to the
conditional award of shares pursuant to the Plan), save to the extent already awarded on 27 February 2010 as set out in the table above.
(d) executive share option scheme
The following Directors have a contingent interest in the number of share options pursuant to the Company’s Executive Share Option Scheme shown
below. Further details relating to the operation of the Scheme are set out in paragraph (ii) ‘Performance-related bonus’ on page 42.
Director and
date of grant
colin drummond
30/9/09
david dupont
30/9/09
chris loughlin
30/9/09
options
held at
1 april 2009
Granted
in year
exercised
in year
exercise
price per
share
market price
of each share
on exercising
market value of
each share at
31 march 2010
options
held at
31 march 2010
maturity
date
–
–
–
6,337
6,337
6,337
–
–
–
473.40p
473.40p
473.40p
–
–
–
522.50p
6,337
29/9/12
522.50p
6,337
29/9/12
522.50p
6,337
29/9/12
Pennon GrouP AnnuAl rePort And Accounts | 2010 | P.47
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(e) sharesave scheme
Details of options to subscribe for shares of the Company under the all-employee Sharesave Scheme were:
director and
date of grant
colin drummond
4/7/06 †
6/7/09
david dupont
3/7/07
chris loughlin
3/7/07
options
held at
1 April 2009
Granted
in year
Exercised
in year
Exercise
price per
share
Market price of
each share
on exercising
Value of each
share at
31 March 2010
options
held at
31 march 2010
Exercise period/
maturity date
2,613
–
2,613
357.66p
461.00p
–
–
1/9/09 – 28/2/10
–
2,351
–
386.00p
3,136
3,136
–
–
–
522.00p
–
522.00p
–
–
–
522.50p
2,351
1/9/12 – 28/2/13
522.50p
3,136
1/9/12 – 28/2/13
522.50p
3,136
1/9/12 – 28/2/13
† The options held and the exercise price have been adjusted in the ratio three-for-one consequent upon the Company’s share capital split on
31 July 2006.
(f) share price
The market price of the Company’s 40.7p ordinary shares at 31 March 2010 was 522.50p (2009 405.00p) and the range during the year was
404.00p to 549.50p (2008/09 380.75p to 663.00p).
By Order of the Board
KEN WOODIER, Group General Counsel & Company Secretary
24 June 2010
P.48 | Pennon GrouP AnnuAl rePort And Accounts | 2010
CORpORaTE GOVERnanCE anD
InTERnaL COnTROL
introDuCtion anD ComPlianCe
the Board is committed to the highest
standards of corporate governance with the
aim of continuing to enhance its effectiveness.
the Annual report is the principal means
of reporting to shareholders on the Board’s
governance policies. this section sets out
how the main and supporting principles
of good corporate governance contained
in section 1 of the combined code (June
2008 version) which apply to the Company,
have been applied in practice. the code is
publicly available on the Financial Reporting
council website frcpublications.com or by
telephoning 020 8247 1264.
The Company considers that it has complied
with the provisions of the code throughout
the year.
The information required to be published
by Rule 7.2.6R of the UK Listing Authority’s
Disclosure and Transparency Rules is set out
in the Directors’ Report on page 38.
tHe BoarD anD its Committees
tHe BoarD
The Board of Directors at the end of the year
comprised the Chairman, three Executive
Directors and three Non-executive Directors.
All three of the Non-executive Directors
are considered to be independent as none
of the relationships or circumstances set out
in paragraph A.3.1 of the combined code
apply to them. They are also considered to
have the appropriate skills, experience in
their respective disciplines and personality to
bring independent and objective judgement
to the Board’s deliberations. Gerard connell
is the Senior Independent Non-executive
director. the biographies on page 40
demonstrate a broad range of business and
financial experience. There is a clear division
of responsibilities between the roles of
Chairman and the Chief Executives of South
West Water and Viridor as recorded in the
descriptions of the roles approved by the
Board. All directors are subject to re-election
when they have held office for three years.
The Directors on the Board during the year
were as listed in the emoluments table on
page 44 (directors’ remuneration report).
the Board met in accordance with its
schedule of meetings on twelve occasions.
All directors were present at each meeting
with the exception of Martin Angle who was
absent on one occasion. In accordance with
Group policies the Board has a schedule
of matters reserved for its decision and
delegates more detailed consideration of
certain matters to Board committees; to
the subsidiary boards of South West Water
and Viridor; to the Executive Directors; and
to the Group General Counsel & Company
Secretary, as appropriate. Recognising this
policy, the matters reserved to the Board
include the approval of financial statements;
acquisitions and disposals; major items of
capital expenditure; authority levels for
other expenditure; risk management; and
approval of the strategic Plan and annual
operating budgets.
The Board operates by receiving written
reports circulated in advance of its meetings
from the Executive Directors and the Group
General Counsel & Company Secretary on
matters within their respective business
areas in the Group. under the guidance of
the chairman, all matters before the Board
are discussed openly and presentations and
advice are received on occasions from other
senior executives within the Group or from
external advisers.
directors have access to the advice and
services of the Group General counsel
& Company Secretary and the Board has
established a procedure whereby Directors,
in order to fulfil their duties, may seek
independent professional advice at the
Company’s expense. The training needs of
directors are reviewed on a regular basis.
the Board has internal procedures to evaluate
the performance of the whole Board, each
committee, the chairman, each individual
Director and the Group General Counsel &
Company Secretary. The evaluation procedure
relating to the Board and its committees
was administered for the year by the Group
General Counsel & Company Secretary. All
participants’ views were sought on a range of
questions which were specifically designed to
ensure objective evaluation of performance for
the year 2009/10. The participants’ responses
were then summarised and evaluated by
the Group General Counsel & Company
Secretary for the Board and each Committee
to consider and determine whether any
changes should be made to be more effective.
overall performance was considered to be
satisfactory but a number of views expressed
by Directors on the operation of the Board
and certain committees were considered with
a view to improving performance and overall
governance. Arising from the evaluation the
Board agreed that it would be appropriate to
review the Matters reserved to the Board and
the financial limits on delegations to directors.
the Board also considered whether there
was a need in the forthcoming year for
an independent and externally facilitated
performance review to be carried out
and noted that the new uK corporate
Governance Code of the Financial Reporting
Council which applies to financial years
commencing on or after 29 June 2010 stated
that evaluation of the Board should be
externally facilitated at least every three years.
the Board agreed to consider the options
available for an externally facilitated evaluation
later in the year.
the chairman’s performance was evaluated
separately by the Non-executive Directors,
led by the Senior Independent Non-executive
director. the chairman’s other significant
commitments outside the Group have not
changed during the year and the Board is
satisfied that such commitments do not
prejudice the chairman’s performance in
relation to his Group role.
All Directors are equally accountable for the
proper stewardship of the Group’s affairs
with the Non-executive Directors having
a particular responsibility for ensuring that
strategies proposed for the development of
the business are critically reviewed. The Non-
executive Directors also critically examine
the operational and financial performance of
the Group and fulfil a key role in corporate
accountability through their membership of
the committees of the Board. In addition
the Chairman during the year holds meetings
with the Non-executive Directors without
the Executive Directors present, to discuss
performance and strategic issues.
the Board has in place a procedure for the
consideration and authorisation of conflicts
or possible conflicts with the Company’s
interests. this is in accordance with the
directors’ interests provisions of the
Companies Act 2006 and the Company’s
Articles of Association which grants to
Directors authority to approve such conflicts
subject to appropriate conditions.
Group policies allocate the tasks of giving
detailed consideration to specified matters, to
monitoring executive actions and to assessing
reward, to the Board committees as set
out overleaf.
Pennon GrouP AnnuAl rePort And Accounts | 2010 | P.49
The Committee has been keeping the balance
between audit and non-audit work under
close review and continues to ensure that
it is satisfied the auditors’ independence
and objectivity are safeguarded before
granting permission for non-audit work to
be undertaken.
The Executive Directors, South West Water
and Viridor Finance Directors, the Group
Financial Controller, the Group Internal
Auditor and the external auditors attend
meetings of the Committee by invitation.
Provision is made for both the external and
internal auditors to have the right of direct
access to the committee, and in particular the
committee chairman, without the presence
of any Executive Director or other Senior
Management.
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auDit Committee
The Audit Committee was chaired by Gerard
connell, who has current and relevant
financial experience. The other members of
the committee were Martin Angle and dinah
Nichols. During the year the Committee
met on five occasions and all members were
present at each meeting with the exception
of Martin Angle who was absent on one
occasion. In discharging its terms of reference
the committee receives reports and meets
regularly in particular to:
– monitor the integrity of the financial
statements of the Group, including a review
of significant reporting judgements, prior to
approval by the Board;
– keep under review the effectiveness of the
Group’s internal controls, including all
material financial, operational and
compliance controls and risk management
systems;
– monitor and annually review the
effectiveness of the Group’s internal audit
function and approve the annual internal
audit plan;
– review the findings of the internal audit
function and review and monitor
management’s responsiveness to such
findings;
– oversee the relationship with the external
auditors including their appointment;
remuneration; re-appointment; removal;
the monitoring of their independence and
objectivity particularly having regard to the
supply of any non-audit services by the
auditors; and
– receive internal control reports from the
external auditors and meet with them in
the absence of management at least once a
year to discuss their remit and any issues
arising from the audit.
In addition the Committee periodically reviews
the arrangements for, and the effectiveness of,
the Group’s ‘whistleblowing’ policies (details of
which are set out on page 33 of the Business
review).
The Committee pays particular attention
to the independence and objectivity of
the auditors having regard to the Auditing
Practices Board’s ethical standards.
Periodically a review of the provision of
external audit services is undertaken in
accordance with guidance issued by the
Committee. The last review was undertaken
in 2006 when the current auditors were
appointed following the carrying out of a
detailed competitive tender process. the
Committee also has an established policy for
the engagement of the auditors for non-audit
work by the Group. This involves the Group
Director of Finance setting out in a report
to the committee reasons for appointing
the auditors for any material work and
obtaining the approval of the committee.
Such appointment will only be granted if the
committee is satisfied that the auditors’
independence and objectivity are safeguarded.
This is achieved by reviewing the appointment
with the auditors as considered appropriate
and receiving from the auditors at the year-end
a letter setting out how the auditors believe
their independence and objectivity have been
maintained. The Company’s current auditors
ensure that the senior partner responsible
for the external audit of the Group remains
responsible for such audit for no more than
five years and that there is an independent
partner who is involved in planning the audit
and in the reviewing of the final accounts of
the Company including assessing any critical
matters which may be identified in the audit.
the Auditing Practices Board ethical standards
recognise that fee arrangements (both their
nature and size) may give rise to a self interest
threat regarding auditor independence. Where
such circumstances arise there is a need to put
in place appropriate safeguards. the auditors
have confirmed to the Committee that they
have complied with all relevant guidance and
have implemented appropriate safeguards
including:
• all non-audit related services, where
necessary, being performed by personnel
independent of the audit engagement team;
• no work being undertaken that would
require the auditors to act in a capacity as
an advocate; and
• no aspect of the audit engagement partner’s
performance being assessed on the level of
non-audit fees charged to the Company.
Taking account of the above the Committee
acknowledges that on occasion it is necessary
to appoint the auditors to perform non-audit
work in view of their specialist knowledge
of such matters as the financial modelling of
Private Finance Initiative (PFI) projects. There
is a limited number of other professional
services firms with appropriate PFI project
knowledge and they are often engaged by
other parties to the projects. They would
therefore be unable to act for the Company
due to conflicts of interest. this has been a
particular issue for the committee and the
Company over the last year because it has
been considered appropriate to engage the
auditors on a number of waste PFIs for the
reasons stated above. In addition as reported
last year, the auditors provided non-audit
financial advice in connection with the Greater
Manchester waste PFI which reached financial
close in April 2009. The fees due for successful
completion of circa £1.2 million are included in
note 7 to the financial statements on page 74.
the auditors are also being considered for
other non-audit work during 2010/11.
P.50 | Pennon GrouP AnnuAl rePort And Accounts | 2010
serve to ensure that a culture of effective
control and risk management is embedded
within the organisation and that the Group
is in a position to react appropriately to new
risks as they arise. Details of key risks affecting
the Group are set out in the Business review.
internal Control frameWorK
As well as the risk management policy
and procedures of the Group there is an
established internal control framework which
is operated and which applies in relation
to the process for preparing the Group’s
consolidated accounts. This framework
comprises:
(a) a clearly defined structure which delegates
an appropriate level of authority,
responsibility and accountability, including
responsibility for internal financial control,
to management of operating units;
(b) a comprehensive budgeting and reporting
function with an annual budget approved
by the Board of Directors, which also
monitors the financial reporting process,
monthly results and updated forecasts for
the year against budget;
(c) documented financial control procedures.
Managers of operating units are required
to confirm annually that they have
adequate financial controls in operation
and to report all material areas of financial
risk. Compliance with procedures is
reviewed and tested by the Company’s
internal audit function;
(d) an investment appraisal process for
evaluating proposals for all major capital
expenditure and acquisitions, with defined
levels of approval and a system for
monitoring the progress of capital
projects; and
(e) a post-investment evaluation process for
major capital expenditure and acquisitions
to assess the success of the project and
learn any lessons to be applied to future
projects.
remuneration Committee
the remuneration committee was chaired
by Martin Angle during the year and also
comprised Gerard connell and dinah nichols.
the committee met on seven occasions
during the year. All members were present at
each meeting. the committee is responsible
for determining the Group’s remuneration
policy, remuneration and terms of engagement
of the chairman and the remuneration
and terms of employment of the Executive
directors and senior Management of the
Group. Members of the remuneration
committee do not participate in decisions
concerning their own remuneration. the
directors’ remuneration report, which also
provides more information on the activities
of the remuneration committee, appears on
pages 41 to 48.
nomination Committee
The Nomination Committee was chaired by
Ken Harvey and also comprised Martin Angle,
Gerard connell and dinah nichols. It meets as
and when required to select and recommend
to the Board suitable candidates for
appointment as Executive and Non-executive
directors, determine the nomination process
and review succession plans. It is the practice
of the Committee, led by the Chairman, to
appoint an external search consultancy to
assist in any Board appointments. During the
year it met on three occasions to consider
the annual performance evaluation results for
the committee, to review succession planning
for the Group and to consider an Executive
Director’s appointment in an advisory role to
an external body. All members were present
at each meeting.
CorPorate resPonsiBility
Committee
The Corporate Responsibility Committee
was chaired by Dinah Nichols and also
comprised Martin Angle, Gerard connell and
the Chief Executives of South West Water
and Viridor. It met on five occasions during
the year at which all members were present.
The Committee’s duties, in the context of the
requirement for companies to conduct their
business in a responsible manner (including
in relation to environmental, social and
governance (esG) matters), are to review the
strategies, policies, management, initiatives,
targets and performance of the Pennon Group
of companies in the areas of occupational
health and safety and security; environment;
workplace policies; corporate policies; non-
financial regulatory compliance and the role of
the Group in society.
In reporting on corporate responsibility, the
Company has sought to comply with the
Association of British Insurers’ Guidelines
on responsible Investment disclosure. the
Business review on pages 2 to 37 contains the
Group’s 2010 Annual Corporate Responsibility
report which includes esG matters.
Committees’ terms of referenCe
the terms of reference of the Audit,
remuneration, nomination and corporate
Responsibility Committees are available
upon request to the Company Secretary and
are also set out on the Company’s website
pennon-group.co.uk
internal Control
WiDer asPeCts of internal
Control
the Board is responsible for maintaining
the Group’s system of internal control to
safeguard shareholders’ investment and
the Group’s assets and for reviewing its
effectiveness. The system is designed to
manage rather than eliminate the risk of failure
to achieve business objectives and can only
provide reasonable and not absolute assurance
against material misstatement or loss. there is
an ongoing process for identifying, evaluating
and managing the significant risks faced by
the Group that has been in place throughout
the financial year 2009/10 and up to the date
of the approval of this Annual report and
Accounts.
The Board confirms that it continues to apply
procedures in accordance with the combined
Code and the ‘Guidance on Internal Control’
(the turnbull Guidance) which suggests
means of applying the internal control part
of the code. As part of these procedures
the Board has a formalised risk management
policy which provides for the identification of
key risks in relation to the achievement of the
business objectives of the Group. This policy is
applied by all business units within the Group
in accordance with an annual timetable.
risK iDentifiCation
A full risk and control assessment is
undertaken annually by the management of
each business to identify financial and non-
financial risks and is continuously updated.
each business compiles (as part of its regular
management reports) an enhanced and
focussed assessment of key risks against
corporate objectives. the Board at each
meeting receives from the Executive Directors
details of any new high-level risks identified
and how they are to be managed, together
with details of any changes to existing risks
and their management. The subsidiary Boards
of South West Water and Viridor also receive
at each meeting similar reports in respect of
their own areas of responsibility. All Executive
Directors and senior managers are required
to certify on an annual basis that they have
effective controls in place to manage risks and
to operate in compliance with legislation and
Group procedures. All of these processes
Pennon GrouP AnnuAl rePort And Accounts | 2010 | P.51
L
O
R
T
n
O
C
L
a
n
R
E
T
n
I
D
n
a
E
C
n
a
n
R
E
V
O
G
E
T
a
R
O
p
R
O
C
internal Control revieW
An evaluation of the effectiveness of overall
internal control compliance by the Group
is undertaken in respect of each financial
year (and subsequently up to the date of
this report) to assist the Audit committee
in considering the Group internal audit plan
for the forthcoming financial year and also
the Business review for the Annual report.
The Group General Counsel & Company
Secretary initially carries out the evaluation
with directors and senior Management for
consideration by the Audit Committee and
subsequently for final evaluation by the Board.
In addition the Audit Committee regularly
reviews the operation and effectiveness of
the internal control framework and annually
reviews the scope of work, authority and
resources of the Company’s internal audit
function. The Committee reports and makes
recommendations to the Board on such
reviews. For 2009/10 and up to the date
of the approval of the Annual report and
Accounts, both the Audit committee and the
Board were satisfied with the effectiveness of
the risk management policy and the internal
control framework and their operation within
the Group.
GoinG ConCern
The Directors consider, after making
appropriate enquiries, that the Company
and the Group have 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.
DireCtors’ resPonsiBilities
statement
the directors are responsible for preparing
the Annual report, the directors’
remuneration report and the financial
statements in accordance with applicable law
and regulations.
Company law requires the Directors to
prepare financial statements for each financial
year. Under that law the Directors have
prepared the Group and Company financial
statements in accordance with International
Financial Reporting Standards (IFRS) as
adopted by the European Union. The financial
statements are required by law to give a true
and fair view of the state of affairs of the
Group and the Company and of their profits
and cash flows for the year.
In preparing these financial statements the
Directors are required to:
• select suitable accounting policies and then
apply them consistently
• make judgements and estimates which are
reasonable and prudent
• state that the financial statements comply
with IFRS as adopted by the European
union.
The Directors confirm that they have
complied with the above requirements in
preparing the financial statements.
statements and the directors’ remuneration
Report comply with the Companies Act 2006
and, as regards the Group financial statements,
article 4 of the International Accounting
Standards (IAS) Regulation. They are also
responsible for safeguarding the assets of
the Group and the Company and hence for
taking reasonable steps for the prevention and
detection of fraud and other irregularities.
relations WitH sHareHolDers
the Board encourages the participation of
shareholders at the Annual General Meeting
and complies with the provisions of the
combined code in respect of relations with
shareholders.
A regular dialogue with the Company’s
institutional shareholders is maintained
through a comprehensive investor relations
programme. During the year meetings with
institutional shareholders were held and
attended by the Group Director of Finance
and the Company’s Investor Relations
Manager. on certain occasions the chairman,
the Chief Executive of South West Water and
the Chief Executive of Viridor also attended.
The Group Director of Finance reports to the
Board regularly on major shareholders’ views
about the Company.
The Directors are responsible for keeping
proper accounting records which disclose with
reasonable accuracy at any time the financial
position of the Group and the Company and
to enable them to ensure that the financial
By Order of the Board
KEN WOODIER, Group General Counsel
& Company Secretary
24 June 2010
P.52 | Pennon GrouP AnnuAl rePort And Accounts | 2010
• certain disclosures of Directors’
remuneration specified by law are not
made; or
• we have not received all the information and
explanations we require for our audit; or
• a corporate governance statement has not
been prepared by the Company.
Under the Listing Rules we are required to
review:
• the Directors’ statement, set out on
page 29, in relation to going concern; and
• the parts of the Corporate Governance
Statement relating to the Company’s
compliance with the nine provisions of the
June 2008 Combined Code specified for
our review.
David Charles (Senior Statutory Auditor)
for and on behalf of
Pricewaterhousecoopers llP
chartered Accountants and
Statutory Auditors
Bristol
24 June 2010
InDEpEnDEnT auDITORS’ REpORT
inDePenDent auDitors’ rePort
to tHe memBers of Pennon
GrouP PlC
We have audited the financial statements
of Pennon Group Plc for the year ended 31
March 2010 which comprise the consolidated
income statement, the Group and Company
statements of comprehensive income, the
Group and Company Balance sheets, the
Group and Company Statements of changes
in equity, the Group and Company Cash
flow statements and the related notes. the
financial reporting framework that has been
applied in their preparation is applicable law
and International Financial Reporting Standards
(IFRSs) as adopted by the European Union
and, as regards the parent company financial
statements, as applied in accordance with the
provisions of the companies Act 2006.
resPeCtive resPonsiBilities of
DireCtors anD auDitors
As explained more fully in the Directors’
responsibilities statement set out on page
52, the directors are responsible for the
preparation of the financial statements and
for being satisfied that they give a true and fair
view. Our responsibility is to audit the financial
statements in accordance with applicable law
and International standards on Auditing (uK
and Ireland). Those standards require us to
comply with the Auditing Practices Board’s
ethical standards for Auditors.
this report, including the opinions, has been
prepared for and only for the Company’s
members as a body in accordance with
chapter 3 of Part 16 of the companies Act
2006 and for no other purpose. We do not,
in giving these opinions, accept or assume
responsibility for any other purpose or to any
other person to whom this report is shown
or into whose hands it may come save where
expressly agreed by our prior consent in
writing.
sCoPe of tHe auDit of tHe
finanCial statements
An audit involves obtaining evidence about
the amounts and disclosures in the financial
statements sufficient to give reasonable
assurance that the financial statements are
free from material misstatement, whether
caused by fraud or error. This includes an
assessment of: whether the accounting
policies are appropriate to the Group’s and
the Company’s circumstances and have
been consistently applied and adequately
disclosed; the reasonableness of significant
accounting estimates made by the Directors;
and the overall presentation of the financial
statements.
oPinion on finanCial
statements
In our opinion:
• the financial statements give a true and
fair view of the state of the Group’s and of
the Company’s affairs as at 31 March 2010
and of the Group’s profit and Group’s and
Company’s cash flows for the year then
ended;
• the Group financial statements have been
properly prepared in accordance with IFRSs
as adopted by the European Union;
• the Company financial statements have been
properly prepared in accordance with IFRSs
as adopted by the European Union and as
applied in accordance with the provisions of
the companies Act 2006; and
• the financial statements have been prepared
in accordance with the requirements of the
companies Act 2006 and, as regards the
Group financial statements, Article 4 of the
lAs regulation.
oPinion on otHer matters
PresCriBeD By tHe ComPanies
aCt 2006
In our opinion:
• the part of the Directors’ Remuneration
Report to be audited has been properly
prepared in accordance with the companies
Act 2006;
• the information given in the Directors’
Report for the financial year for which
the financial statements are prepared is
consistent with the financial statements; and
• the information given in the Corporate
Governance Statement set out on pages 49
to 52 with respect to internal control and
risk management systems and about share
capital structures is consistent with the
financial statements.
matters on WHiCH We are
requireD to rePort By
exCePtion
We have nothing to report in respect of the
following:
under the companies Act 2006 we are
required to report to you if, in our opinion:
• adequate accounting records have not been
kept by the Company, or returns adequate
for our audit have not been received from
branches not visited by us; or
• the Company financial statements and the
part of the directors’ remuneration report
to be audited are not in agreement with the
accounting records and returns; or
Pennon GrouP AnnuAl rePort And Accounts | 2010 | P.53
COnSOLIDaTED InCOmE STaTEmEnT FOR THE YEaR EnDED 31 maRCH 2010
notes
2010
£m
2009
(Restated note 5)
£m
revenue
operating costs
Manpower costs (excluding restructuring costs)
raw materials and consumables used
Other operating expenses
depreciation
restructuring costs
Amortisation of intangibles
operating profit
Finance income
Finance costs
Share of post-tax profit from joint ventures
Profit before tax
Taxation
Profit for the year
Profit attributable to equity shareholders
6
7
6
8
8
6
9
earnings per share (pence per share)
11
– Basic
– diluted
The notes on pages 59 to 108 form part of these financial statements.
1,068.9
958.2
(132.3)
(76.3)
(455.6)
(135.1)
(5.0)
(0.3)
264.3
34.4
(116.0)
1.1
183.8
(44.3)
139.5
139.5
39.9
39.7
(108.6)
(59.1)
(402.2)
(131.3)
(5.0)
(1.2)
250.8
45.8
(138.0)
0.8
159.4
(69.6)
89.8
89.8
25.8
25.7
P.54 | Pennon GrouP AnnuAl rePort And Accounts | 2010
STaTEmEnTS OF COmpREHEnSIVE InCOmE FOR THE YEaR EnDED 31 maRCH 2010
2010
£m
Group
2009
(Restated note 5)
£m
Company
2010
£m
2009
£m
notes
Profit for the year
139.5
89.8
81.6
140.1
other comprehensive income
Actuarial losses on defined benefit pension schemes
29
(44.4)
(66.8)
(4.3)
(8.0)
Cash flow hedges
net fair value (losses)/gains
share of other comprehensive loss from joint ventures
–
(3.2)
Tax on items taken directly to or transferred from equity
9,30
17.4
(21.0)
1.1
(1.9)
–
18.7
–
0.9
–
2.2
other comprehensive loss for the period net of tax
35
(30.2)
(69.1)
(2.3)
(7.7)
total comprehensive income for the year
Total comprehensive income attributable to equity shareholders
109.3
109.3
20.7
20.7
79.3
132.4
79.3
132.4
The notes on pages 59 to 108 form part of these financial statements.
Pennon GrouP AnnuAl rePort And Accounts | 2010 | P.55
BaLanCE SHEETS aT 31 maRCH 2010
assets
non-current assets
Goodwill
other intangible assets
Property, plant and equipment
other non-current assets
derivative financial instruments
Deferred tax assets
Investments in subsidiary undertakings
Investments in joint ventures
Current assets
Inventories
trade and other receivables
derivative financial instruments
Current tax recoverable
cash and cash deposits
liabilities
Current liabilities
Borrowings
derivative financial instruments
Trade and other payables
Current tax liabilities
Provisions
net current assets/(liabilities)
non-current liabilities
Borrowings
other non-current liabilities
derivative financial instruments
retirement benefit obligations
Deferred tax liabilities
Provisions
net assets
shareholders’ equity
share capital
share premium account
capital redemption reserve
retained earnings and other reserves
total shareholders’ equity
2010
£m
Group
2009
(Restated note 5)
£m
2008
(Restated note 5)
£m
Company
2010
£m
2009
£m
notes
15
16
17
19
23
30
20
20
21
22
23
26
24
27
23
25
26
31
27
28
23
29
30
31
32
33
34
35
254.4
5.1
2,822.7
101.0
–
–
–
0.2
236.5
5.4
2,745.8
46.2
0.2
–
–
2.2
235.9
6.6
2,644.7
38.4
4.0
–
–
1.4
–
–
0.2
338.5
–
5.0
1,032.0
–
–
–
0.2
271.3
–
2.6
944.8
–
3,183.4
3,036.3
2,931.0
1,375.7
1,218.9
6.4
194.9
3.4
–
493.9
698.6
(229.0)
(3.6)
(195.8)
(83.6)
(21.5)
5.8
178.3
–
–
353.3
537.4
(262.9)
(3.6)
(166.8)
(44.8)
(18.8)
6.6
164.7
11.9
–
357.4
–
84.5
3.4
1.3
174.6
–
70.2
–
2.4
168.7
540.6
263.8
241.3
(57.7)
(17.0)
(204.0)
(44.1)
(18.1)
(351.2)
–
(17.3)
–
–
(486.0)
(1.4)
(7.6)
–
–
(533.5)
(496.9)
(340.9)
(368.5)
(495.0)
165.1
40.5
199.7
(104.7)
(253.7)
(2,160.2)
(16.0)
(14.1)
(107.9)
(311.2)
(78.2)
(1,982.4)
(3.7)
(16.5)
(66.0)
(328.4)
(79.2)
(2,062.8)
(4.0)
(0.5)
(26.3)
(307.4)
(84.2)
(462.8)
(8.7)
–
(11.7)
–
–
(189.5)
(8.7)
–
(7.3)
–
–
(2,687.6)
(2,476.2)
(2,485.2)
(483.2)
(205.5)
660.9
600.6
645.5
787.8
759.7
145.3
10.9
144.2
360.5
660.9
144.5
11.7
144.2
300.2
600.6
144.5
11.7
144.2
345.1
145.3
10.9
144.2
487.4
144.5
11.7
144.2
459.3
645.5
787.8
759.7
The notes on pages 59 to 108 form part of these financial statements.
The financial statements on pages 54 to 108 were approved by the Board of Directors and authorised for issue on 24 June 2010 and
were signed on its behalf by:
K G HARVEY Chairman
Pennon Group Plc Registered Office: Peninsula House, Rydon Lane, Exeter, Devon, England EX2 7HR Registered in England No. 2366640
P.56 | Pennon GrouP AnnuAl rePort And Accounts | 2010
STaTEmEnTS OF CHanGES In EQuITY
share capital
£m
share premium
account
£m
Capital
redemption
reserve
£m
retained earnings
and other reserves
(restated note 5)
£m
total equitya
(restated
note 5)
£m
Group
At 1 April 2008
Profit for the year
Other comprehensive loss for the year
Total comprehensive income for the year
Transactions with equity shareholders
dividends paid or approved
Adjustment in respect of share-based payments
Proceeds from treasury shares re-issued
Total transactions with equity shareholders
144.5
11.7
144.2
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
At 31 March 2009
144.5
11.7
144.2
Profit for the year
Other comprehensive loss for the year
Total comprehensive income for the year
transactions with equity shareholders
dividends paid or approved
Adjustment for shares issued under the scrip
dividend alternative
Adjustment in respect of share-based payments
Proceeds from treasury shares re-issued
Equity component of convertible bond issued
Total transactions with equity shareholders
–
–
–
–
0.8
–
–
–
0.8
–
–
–
–
(0.8)
–
–
–
(0.8)
–
–
–
–
–
–
–
–
–
at 31 march 2010
145.3
10.9
144.2
Company
At 1 April 2008
Profit for the year
Other comprehensive loss for the year
Total comprehensive income for the year
Transactions with equity shareholders
dividends paid or approved
Adjustment in respect of share-based payments
Proceeds from treasury shares re-issued
Total transactions with equity shareholders
144.5
11.7
144.2
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
At 31 March 2009
144.5
11.7
144.2
Profit for the year
Other comprehensive loss for the year
Total comprehensive income for the year
transactions with equity shareholders
dividends paid or approved
Adjustment for shares issued under the scrip
dividend alternative
Adjustment in respect of share-based payments
Proceeds from treasury shares re-issued
Equity component of convertible bond issued
Total transactions with equity shareholders
–
–
–
–
0.8
–
–
–
0.8
–
–
–
–
(0.8)
–
–
–
(0.8)
–
–
–
–
–
–
–
–
–
–
at 31 march 2010
145.3
10.9
144.2
The notes on pages 59 to 108 form part of these financial statements.
345.1
89.8
(69.1)
20.7
(69.1)
1.9
1.6
(65.6)
300.2
139.5
(30.2)
109.3
645.5
89.8
(69.1)
20.7
(69.1)
1.9
1.6
(65.6)
600.6
139.5
(30.2)
109.3
(73.4)
(73.4)
9.6
2.9
1.9
10.0
(49.0)
360.5
9.6
2.9
1.9
10.0
(49.0)
660.9
394.0
140.1
(7.7)
132.4
(69.1)
0.4
1.6
(67.1)
459.3
81.6
(2.3)
79.3
694.4
140.1
(7.7)
132.4
(69.1)
0.4
1.6
(67.1)
759.7
81.6
(2.3)
79.3
(73.4)
(73.4)
9.6
0.7
1.9
10.0
(51.2)
487.4
9.6
0.7
1.9
10.0
(51.2)
787.8
share capital
£m
share premium
account
£m
Capital
redemption
reserve
£m
retained earnings
and other reserves
£m
total equity
£m
Pennon GrouP AnnuAl rePort And Accounts | 2010 | P.57
CaSH FLOW STaTEmEnTS FOR THE YEaR EnDED 31 maRCH 2010
Cash flows from operating activities
cash generated/(outflow) from operations
Interest paid
Tax (paid)/repaid
notes
36
Group
Company
2010
£m
2009
(Restated note 5)
£m
2010
£m
363.4
(84.2)
(3.8)
300.6
(113.8)
(103.9)
(19.4)
(30.8)
(0.2)
2009
£m
(5.8)
(48.4)
6.0
net cash generated/(outflow) from operating activities
275.4
165.9
(133.4)
(48.2)
Cash flows from investing activities
Interest received
dividends received
Acquisition of subsidiary undertakings (net of cash acquired)
38
Investments in subsidiary undertakings
loans advanced to joint ventures
Proceeds from investment disposal
Purchase of property, plant and equipment
Proceeds from sale of property, plant and equipment
14.5
–
(9.3)
(0.1)
(30.7)
–
23.8
–
(3.4)
–
–
–
20.7
80.6
–
(45.0)
–
–
(195.2)
(237.9)
(0.1)
3.5
2.6
–
22.6
128.6
–
–
–
100.0
–
–
net cash (used in)/from investing activities
(217.3)
(214.9)
56.2
251.2
1.9
121.9
(73.3)
237.2
1.6
–
1.9
121.9
93.0
(0.5)
100.0
238.9
1.6
–
(0.3)
304.9
(234.9)
(14.9)
(215.8)
(321.4)
38.9
(18.5)
(63.8)
9.4
67.5
322.0
389.5
12
24
24
–
–
–
–
(63.8)
(69.1)
49.8
(16.8)
(69.1)
143.6
94.6
82.6
5.4
227.4
167.8
322.0
173.2
(84.3)
118.7
49.1
167.8
Cash flows from financing activities
Proceeds from treasury shares re-issued
convertible bond issued (net proceeds)
(deposit)/return of restricted funds (net)
Proceeds from new borrowing
Repayment of borrowings
Finance lease sale and lease back
Finance lease principal repayments
dividends paid
net cash received/(outflow) from financing activities
net increase in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of the year
The notes on pages 59 to 108 form part of these financial statements.
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1. General information
Pennon Group Plc is a company incorporated in the United Kingdom under the Companies Act 2006. The address of the registered office
is given on page 40. Pennon Group’s business is operated through two main subsidiaries. South West Water Limited holds the water and
sewerage services appointments for Devon, Cornwall and parts of Dorset and Somerset. Viridor Limited’s business is waste management,
recycling and renewable energy.
2. PrinCiPal aCCountinG PoliCies
the principal accounting policies adopted in the preparation of these financial statements are set out below. these policies have been
consistently applied to all the years presented.
(a) Basis of preparation
These financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and International
Financial Reporting Interpretations Committee (IFRIC) interpretations as adopted by the European Union, with those parts of
the Companies Act 2006 applicable to companies reporting under IFRS and the requirements of the Financial Services Authority.
A summary of the principal accounting policies is set out below, together with an explanation where changes have been made to
previous policies on the adoption of new accounting standards and interpretations in the year.
The following revisions and amendments to existing standards together with new standards and interpretations have been adopted as
of 1 April 2009 and are relevant to the Group:
IAs 1 “Presentation of financial statements” (revised)
The revised standard requires non-owner changes in equity to be presented separately from owner changes in equity. The Group has
elected to present two statements; an income statement and a statement of comprehensive income.
IFRS 7 “Financial Instruments: Disclosures” (amendment)
The amended standard requires the classification of fair value measurements using a fair value hierarchy which reflects the significance
of the inputs used in making the measurement. Additional disclosure has been made in these financial statements.
IFRS 8 “Operating segments”
The adoption of this standard has not required any change in reported segments.
IFRIC 14 “IAS 19 – the limit on a defined benefit asset, minimum funding requirements and their interaction”
The application of this interpretation restricts the circumstances under which a defined benefit scheme asset (surplus) may be recognised.
During the year the Group’s acquisition of Greater Manchester Waste Limited involved two defined benefit pension schemes which had a
combined surplus of £6.9m at 31 March 2010. This surplus was not recognised in accordance with requirements of IFRIC 14.
The following new interpretation is mandatory for the first time in the financial year beginning 1 April 2009 and the Group’s
accounting policies have been amended accordingly:
IFRIC 12 “Service concession arrangements”
The application of this interpretation has necessitated a restatement of amounts for prior years. Where a contract for the provision
of public services meets the scope of IFRIC 12 the service concession is to be treated as a contract receivable, split between the
profit on the construction of assets, operation of the service and provision of finance through interest receivable. The Group’s existing
contract with West Sussex County Council for the provision of waste collection and disposal services falls within the scope of IFRIC
12 and accordingly comparatives have been restated. The effect of the restatement on the comparative figures is set out in note 5.
The following revised standards, amended standards and interpretations, which are mandatory for the first time in the financial year
beginning 1 April 2009, are relevant to the Group but have no material impact:
IAs 23
IFRS 2
IAS 32
“Borrowing costs” (revised)
“Share-based payment” (amendment)
“Financial instruments: presentation” (amendment) and consequential amendments to IAS 1
“Presentation of financial statements”
Improvements to IFRS 2008
IAS 39
IAS 39
“Financial instruments: recognition and measurement” (amendment)
“Financial instruments: recognition and measurement” (amendment) and consequential amendments to IFRS 7 “Financial
instruments: disclosures”
IFRIC 9 “Embedded derivates” (amendments to IFRIC 9 and IAS 39)
& IAS 39
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2. PrinCiPal aCCountinG PoliCies continued
At the date of approval of these financial statements the following revised standards, amended standards and interpretations, which
have not been applied in these financial statements, were in issue, but not yet effective:
“consolidated and separate financial statements” (revised)
“Business combinations” (revised)
“First-time adoption of IFRS” (revised)
“Share-based payment” (amendment)
“Financial instruments: presentation”
“Financial instruments”
“Related party disclosures”
“First-time adoption of IFRS” (amendment)
IAs 27
IFRS 3
Improvements to IFRS 2009
IFRS 1
IFRS 2
IAS 32
IFRS 9
IAS 24
IFRS 1
IFRIC 14 “Prepayments of a minimum funding requirement” (amendment)
IFRIC 15 “Agreements for the construction of real estate”
IFRIC 16 “Hedges of a net investment in a foreign operation”
IFRIC 17 “Distribution of non-cash assets to owners”
IFRIC 18 “Transfers of assets from customers”
IFRIC 19 “Extinguishing financial liabilities with equity instruments”
The presentational impact of these standards and interpretations is being assessed. The Directors expect that the adoption of these
standards and interpretations will have no material impact on the financial statements of the Group.
The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates
and assumptions which affect the reported amounts of assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Although these estimates are based on management’s best assessment
of the amounts, actual events or actions and results may ultimately differ from those estimates.
(b) Basis of consolidation
The Group financial statements include the results of Pennon Group Plc and its subsidiary and joint venture undertakings.
The results of subsidiaries and joint venture undertakings are included from the date of acquisition or incorporation, and excluded from
the date of disposal. The results of subsidiaries are consolidated where the Group has the power to control a subsidiary. The results of
joint venture undertakings are accounted for on an equity basis where the Group exercises joint control under a contractual arrangement.
Intra-group trading and loan balances and transactions are eliminated on consolidation.
On acquisition the assets and liabilities and contingent liabilities of a subsidiary or joint venture acquired are measured at their fair
values and any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill.
Where the cost of acquisition is below the fair values of the identifiable net assets acquired a credit is recognised in the income
statement in the year of acquisition.
(c) revenue recognition
Revenue represents the fair value of consideration receivable, excluding value added tax, trade discounts and inter company sales, in
the ordinary course of business for goods and services provided.
revenue is recognised once the services or goods have been provided to the customer.
Income from main water and waste water charges includes billed amounts for estimated usage and also an estimation of the amount of
unbilled charges at the period end based upon a defined methodology reflecting historical consumption and current tariffs.
Income from electricity generated from waste management landfill gas production includes an estimation of the amount to be received
under renewables obligation certificates.
Accrued income from waste management contracts at the Balance Sheet date is recognised using management’s expectation of
amounts to be subsequently billed for services rendered to the client in accordance with the terms of the contract.
Income from recycling activities within waste management includes amounts based upon market prices for recyclate products and
industry schemes for waste electrical and electronic equipment (“WEEE” notes) and packaging volumes (“PRNs”) processed.
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2. PrinCiPal aCCountinG PoliCies continued
(c) revenue recognition continued
Revenue from long-term service concession arrangements is recognised based on the fair value of work performed. Where an
arrangement includes more than one service, such as construction and operation of waste management facilities, revenue and profit are
recognised in proportion to a fair value assessment of the total contract value split across the service provided.
Interest income is recognised on a time-apportioned basis using the effective interest method.
(d) landfill tax
Landfill tax is included within both revenue and operating costs. It is determined by the Government and is a cost to the Group but is
chargeable to customers.
(e) segmental reporting
Each of the Group’s business segments provides services which are subject to risks and returns which are different from those of the
other business segments. The Group’s internal organisation and management structure and its system of internal financial reporting is
based primarily on business segments. The principal business segments comprise the regulated water and sewerage services
undertaken by South West Water Limited and the waste management business of Viridor Limited. Segmental revenue and results
include transactions between businesses. Inter-segmental transactions are eliminated on consolidation.
(f) Goodwill
Goodwill arising on consolidation from the acquisition of subsidiary and joint venture undertakings represents the excess of the
purchase consideration over the fair value of net assets acquired.
Goodwill is recognised as an asset and reviewed for impairment at least annually. Any impairment is recognised immediately in the
income statement and is not subsequently reversed. Further details are contained in accounting policy (j).
When a subsidiary or joint venture undertaking is sold, the profit or loss on disposal is determined after including the attributable
amount of unamortised goodwill.
Goodwill arising on acquisitions before 1 April 2004 (the Group’s date of transition to IFRS) has been retained at the previous UK GAAP
amounts, subject to being tested for impairment at that date and annually thereafter. Goodwill written-off to reserves under UK GAAP
prior to 1998 was not reinstated on transition to IFRS and will not be included in determining any subsequent profit or loss on disposal.
(g) other intangible assets
Other intangible assets acquired in a business combination are capitalised at fair value at the date of acquisition. Following initial
recognition, finite life intangible assets are amortised on a straight-line basis over their estimated useful economic lives, with the
expense taken to the income statement through operating costs.
(h) Property, plant and equipment
i)
Infrastructure assets (being water mains and sewers, impounding and pumped raw water storage reservoirs, dams, pipelines and sea outfalls)
Infrastructure assets were included at fair value on transition to IFRS and subsequent additions are recorded at cost less accumulated
depreciation. Expenditure to increase capacity or enhance infrastructure assets is capitalised where it can be reliably measured and
it is probable that incremental future economic benefits will flow to the entity. The cost of day-to-day servicing of infrastructure
components is recognised in the income statement as it arises.
Infrastructure assets are depreciated over their useful economic lives, and are principally:
Dams and impounding reservoirs
Water mains
Sewers
200 years
40 – 100 years
40 – 100 years
Assets in the course of construction are not depreciated until commissioned.
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2. PrinCiPal aCCountinG PoliCies continued
(h) Property, plant and equipment continued
ii) Landfill sites
Landfill sites are included within land and buildings at cost less accumulated depreciation. Cost includes acquisition and development
expenses. The cost of a landfill is depreciated to its residual value (which is linked to gas production at the site post-closure) over its
estimated operational life taking account of the usage of void space.
Where the obligation to restore a landfill site is an integral part of its future economic benefits, a non-current asset within property,
plant and equipment is recognised. The asset recognised is depreciated based on the usage of void space.
iii) Other assets (including properties, overground plant and equipment)
other assets are included at cost less accumulated depreciation.
Freehold land is not depreciated. Other assets are depreciated evenly to their residual value over their estimated economic lives, and
are principally:
Freehold buildings
leasehold buildings
Operational structures
Fixed plant
Vehicles, mobile plant and computers
30 – 60 years
over their estimated economic lives or the finance lease period, whichever is the shorter
40 – 80 years
20 – 40 years
3 – 10 years
Assets in the course of construction are not depreciated until commissioned.
The cost of assets includes directly attributable labour and overhead costs which are incremental to the Group. Borrowing costs
directly attributable to the construction of a qualifying asset (an asset necessarily taking a substantial period of time to be prepared for
its intended use) are capitalised as part of the asset.
Asset lives and residual values are reviewed annually.
(i) leased assets
Assets held under finance leases are included as property, plant and equipment at the lower of their fair value at commencement or
the present value of the minimum lease payments and are depreciated over their estimated economic lives or the finance lease period,
whichever is the shorter. The corresponding liability is recorded as borrowings. The interest element of the rental costs is charged
against profits using the actuarial method over the period of the lease.
Rental costs arising under operating leases are charged against profits in the year they are incurred.
(j) impairment of non-financial assets
Assets with an indefinite useful life are not subject to amortisation and are tested annually for impairment, or whenever events or
changes in circumstance indicate that the carrying amount may not be recoverable.
Assets subject to amortisation or depreciation are tested for impairment whenever events or changes in circumstances indicate that
the carrying amount may not be recoverable.
An impairment loss is recognised for the amount by which an asset’s carrying amount exceeds its recoverable amount. The
recoverable amount is the higher of an asset’s fair value, less costs to sell, and value in use. For the purposes of assessing impairment,
assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Value in use
represents the present value of projected future cash flows expected to be derived from a cash-generating unit, discounted using a
pre-tax discount rate which reflects an assessment of the market cost of capital of the cash-generating unit.
Impairments are charged to the income statement in the year in which they arise.
(k) investment in subsidiary undertakings
Investments in subsidiary undertakings are initially recorded at cost, being the fair value of the consideration paid, including associated
acquisition costs. Subsequently, investments are reviewed for impairment on an individual basis annually or if events or changes in
circumstances indicate that the carrying value may not be fully recoverable.
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2. PrinCiPal aCCountinG PoliCies continued
(l) Joint ventures
Joint ventures are entities over which the Group exercises joint control. Investments in joint ventures are accounted for using the equity
method of accounting. Any excess of the cost of acquisition over the Group’s share of the fair values of the identifiable net assets of the joint
venture at the date of acquisition is recognised as goodwill and is included in the carrying value of the investment in the joint venture.
The carrying value of the Group’s investment is adjusted for the Group’s share of post-acquisition profits or losses recognised in
the income statement and statement of comprehensive income. Losses of a joint venture in excess of the Group’s interest are not
recognised unless the Group has a legal or constructive obligation to fund those losses.
(m) Cash and cash deposits
Cash and cash deposits comprise cash in hand and short-term deposits held at banks. Bank overdrafts are shown within current borrowings.
(n) Derivatives and other financial instruments
the Group classifies its financial instruments in the following categories:
i) Loans and receivables
All loans and borrowings are initially recognised at fair value, net of transaction costs incurred. Following initial recognition interest-
bearing loans and borrowings are subsequently stated at amortised cost using the effective interest method.
Gains and losses are recognised in the income statement when the instruments are derecognised or impaired. Premia, discounts and
other costs and fees are recognised in the income statement through the amortisation process.
Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least
12 months after the balance sheet date.
The fair value of the liability component of a convertible bond is determined using the market interest rate for an equivalent non-convertible
bond. This amount is recorded as a liability on an amortised cost basis using the effective interest method until extinguished on conversion or
maturity of the bonds. The remainder of the proceeds are allocated to the conversion option. This is recognised in shareholders’ equity.
ii) Derivative financial instruments and hedging activities
The Group uses derivative financial instruments, principally interest rate swaps, to hedge risks associated with interest rate
fluctuations. Derivative instruments are initially recognised at fair value on the date the derivative contract is entered into and
subsequently remeasured at fair value for the reported balance sheet.
The gain or loss on remeasurement is taken to the income statement except for cash flow hedges which meet the conditions for
hedge accounting, when the portion of the gain or loss on the hedging instrument which is determined to be an effective hedge is
recognised directly in equity, and the ineffective portion in the income statement. The gains or losses deferred in equity in this way are
subsequently recognised in the income statement in the same period in which the hedged underlying transaction or firm commitment
is recognised in the income statement.
In order to qualify for hedge accounting the Group is required to document in advance the relationship between the item being
hedged and the hedging instrument. The Group is also required to document and demonstrate an assessment of the relationship
between the hedged item and the hedging instrument which shows that the hedge will be highly effective on an ongoing basis. This
effectiveness testing is reperformed at the end of each reporting period to ensure that the hedge remains highly effective.
The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the hedged item
is more than one year, and as a current asset or liability when the remaining maturity of the hedged item is less than one year.
Derivative financial instruments which do not qualify for hedge accounting are classified as a current asset or liability with any change in
fair value recognised immediately in the income statement.
iii) Trade receivables
Trade receivables do not carry any interest and are recognised initially at fair value and subsequently at amortised cost using the
effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is
objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables.
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2. PrinCiPal aCCountinG PoliCies continued
(n) Derivatives and other financial instruments continued
iv) Trade payables
Trade payables are not interest-bearing and are recognised initially at fair value and subsequently measured at amortised cost using the
effective interest method.
(o) taxation including deferred tax
The tax charge for the year is calculated on the basis of tax laws enacted or substantively enacted at the balance sheet date.
Deferred tax is provided in full using the liability method on temporary differences between the tax basis of assets and liabilities and
their carrying amounts in the financial statements. A deferred tax asset is only recognised to the extent it is probable that sufficient
taxable profits will be available in the future for it to be utilised.
(p) Provisions
Provisions are made where there is a present legal or constructive obligation as a result of a past event and it is probable that there
will be an outflow of economic benefits to settle this obligation and a reliable estimate of this amount can be made. Where the effect
of the time value of money is material the current amount of a provision is the present value of the expenditures expected to be
required to settle obligations. The unwinding of the discount to present value is included as a financial item within finance costs.
the Group’s policies on provisions for specific areas are:
i) Landfill restoration costs
Provisions for the cost of restoring landfill sites are made when the obligation arises. Where the obligation recognised as a provision
gives access to future economic benefits, an asset in property, plant and equipment is recognised. Provisions are otherwise charged
against profits.
ii) Environmental control and aftercare costs
environmental control and aftercare costs are incurred during the operational life of each landfill site and for a considerable period
thereafter. Provision for all such costs is made over the operational life of the site and charged to the income statement on the basis of
the usage of void space at the site.
iii) Restructuring costs
Provisions for restructuring costs are recognised when a detailed formal plan for the restructuring has been communicated to
affected parties.
Where the effect of the time value of money is material the current amount of a provision is the present value of the expenditures
expected to be required to settle obligations. The unwinding of the discount to present value is included as a financial item within
finance costs.
(q) share capital and treasury shares
Ordinary shares are classified as equity.
Where the Company purchases the Company’s equity share capital (treasury shares) the consideration paid, including any directly
attributable costs, is deducted from equity until the shares are cancelled or reissued. Where such shares are subsequently re-issued
any consideration received, net of any directly attributable transaction costs, is included in equity.
The Group balance sheet includes the shares held by the Pennon Employee Share Trust and which have not vested by the balance
sheet date. These are shown as a deduction from shareholders’ equity until such time as they vest.
(r) Dividend distributions
Dividend distributions are recognised as a liability in the financial statements in the period in which the dividends are approved by the
Company’s shareholders. Interim dividends are recognised when paid; final dividends when approved by shareholders at the Annual
General Meeting.
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2. PrinCiPal aCCountinG PoliCies continued
(s) employee benefits
i) Retirement benefit obligations
the Group operates defined benefit and defined contribution pension schemes.
Defined benefit pension schemes
Defined benefit pension scheme assets are measured using bid price. Defined benefit pension scheme liabilities are measured by
independent actuaries who advise on the selection of Directors’ best estimates. The projected unit credit method is employed and
liabilities discounted at the current rate of return on high quality corporate bonds of equivalent term to the liabilities. The increase
in liabilities of the Group’s defined benefit pension schemes expected to arise from employee service in the period is charged against
operating profit.
The expected return on scheme assets and the increase during the period in the present value of scheme liabilities are included in other
finance income or cost.
Past service costs arising from changes in benefits are recognised immediately in income.
Actuarial gains and losses arising from experience items and changes in actuarial assumptions are charged or credited to equity through
inclusion in the statement of comprehensive income.
Defined contribution scheme
Costs of the defined contribution pension scheme are charged to the income statement in the period in which they arise.
ii) Share-based payment
The Group operates a number of equity-settled share-based payment plans for employees. The fair value of the employee services
required in exchange for the grant is recognised as an expense over the vesting period of the grant.
Fair values are calculated using an appropriate pricing model. Non market-based vesting conditions are adjusted for in assumptions as
to the number of shares which are expected to vest.
(t) Pre-contract costs
Pre-contract costs are expensed as incurred, except where it is probable that the contract will be awarded, in which case they are
recognised as an asset which is amortised to the income statement over the life of the contract.
(u) fair values
The fair value of the interest rate swaps is based on the market price of comparable instruments at the balance sheet date if they are
publicly traded.
The fair values of short-term deposits, loans and overdrafts with a maturity of less than one year are assumed to approximate to
their book values. In the case of non-current bank loans and other loans the fair value of financial liabilities for disclosure purposes
is estimated by discounting the future contractual cash flows at the current market interest rate available to the Group for similar
financial instruments.
(v) service concession arrangements
Where the provision of waste management services is performed through a contract with a public sector entity who controls a
significant residual interest in asset infrastructure at the end of the contract, then consideration is treated as contract receivables, split
between profit on the construction of assets, operation of the service and provision of finance recognised as interest receivable.
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3. finanCial risK manaGement
(a) financial risk factors
The Group’s activities expose it to a variety of financial risks: market risk (interest rate risk), liquidity risk and credit risk. The Group’s
treasury function seeks to ensure that sufficient funding is available to meet foreseeable needs, maintains reasonable headroom for
contingencies and manages inflation and interest rate risk.
The principal financial risks faced by the Group relate to interest rate and counterparty credit risk.
These risks and treasury operations are managed by the Group Director of Finance in accordance with policies established by the
Board. Major transactions are individually approved by the Board. Treasury activities are reported to the Board and are subject to
review by internal audit.
Financial instruments are used to raise finance, manage risk and optimise the use of surplus funds. The Group does not engage in
speculative activity.
i) Market risk
The Group has a policy of maintaining at least 50% of interest bearing liabilities at fixed rates. The Group uses a combination of fixed
rate and index-linked borrowings and fixed rate interest swaps as cash flow hedges of future variable interest payments to achieve
this policy. At the year end 65% of net borrowings were at fixed rates (including 50% of South West Water’s borrowings fixed for the
period to March 2015) and 23% index-linked after the impact of financial derivatives. The notional principal amounts of the interest rate
swaps are used to determine settlement under those swaps and are not therefore an exposure for the Group. These instruments are
analysed in note 27.
The interest rate for index-linked debt is based upon an RPI measure which is also used in determining the amount of income from
customers in South West Water.
The Group has no significant interest-bearing assets upon which the net return fluctuates from market risk. Deposit interest receivable
is expected to fluctuate in line with interest payable on floating rate borrowings. Consequently the Group’s income and operating cash
flows are substantially independent of changes in market interest rates.
For 2010 if interest rates on net borrowings had been on average 0.5% higher/lower with all other variables held constant, post-tax
profit for the year would have decreased/increased by £2.3m (2009 £2.0m).
ii) Liquidity risk
The Group actively maintains a mixture of long-term and short-term committed facilities which are designed to ensure the Group has
significant available funds for operations and planned expansions equivalent to at least one year’s forecast requirements at all times.
details of undrawn committed facilities and short-term uncommitted facilities are provided in note 27.
Refinancing risk is managed under a Group policy that permits no more than 20% of Group net borrowings to mature in any
financial year.
The Group and South West Water have entered into covenants with lenders. Whilst terms vary, these typically provide for limits on
gearing (primarily based on South West Water Limited’s Regulatory Capital Value and Viridor Limited’s EBITDA) and interest cover.
More details are provided in the directors’ report on page 31.
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3. finanCial risK manaGement continued
(a) financial risk factors continued
ii) Liquidity risk (continued)
contractual undiscounted cash flows were:
Group
31 March 2010
Non-derivative financial liabilities
Borrowings excluding finance lease liabilities
Interest payments on borrowings
Finance lease liabilities
Derivative financial liabilities
due within
1 year
£m
due between
1 and 2 years
£m
due between
2 and 5 years
£m
Over 5
years
£m
total
£m
197.3
27.1
46.9
31.7
22.9
47.0
425.2
43.0
193.7
949.6
348.2
1,603.8
441.2
2,322.9
2,610.5
Derivative contracts – net payments
14.3
8.3
12.9
–
35.5
31 March 2009
Non-derivative financial liabilities
Borrowings excluding finance lease liabilities
232.8
194.1
Interest payments on borrowings
Finance lease liabilities
Derivative financial liabilities
24.0
62.3
17.8
62.2
73.3
32.5
997.4
367.4
1,497.6
441.7
264.6
1,951.1
2,340.2
Derivative contracts – net payments
17.9
4.4
3.2
0.3
25.8
Company
31 March 2010
Non-derivative financial liabilities
Borrowings excluding finance lease liabilities
Interest payments on borrowings
31 March 2009
Non-derivative financial liabilities
Borrowings excluding finance lease liabilities
Interest payments on borrowings
Derivative financial liabilities
70.6
19.3
205.8
11.3
10.6
14.5
80.0
7.2
351.9
13.9
10.0
0.1
Derivative contracts – net payments
1.5
–
–
iii) Credit risk
99.8
–
100.0
–
–
532.9
47.7
395.8
18.6
1.5
Credit and counterparty risk arises from cash and cash deposits, derivative financial instruments and deposits with bank and
financial institutions, as well as exposure to customers, including outstanding receivables. Further information on the credit risk
relating to trade receivables is given in note 22.
Counterparty risk arises from the investment of surplus funds and from the use of derivative financial instruments. The Board has
agreed a policy for managing such risk which is controlled through credit limits, counterparty approvals, and rigorous monitoring
procedures. The Group has no other significant concentration of credit risk. The Group’s surplus funds are usually placed in
short-term fixed interest deposits or the overnight money markets. Deposit counterparties must meet a credit rating threshold
set by the Board of Aa2 (Moody’s) or AA (Standard and Poor’s).
iv) Foreign currency risk
Foreign currency risk occurs at transactional and translation level from borrowings in foreign currencies. These risks are managed
through cross-currency interest rate swaps which provide certainty over all interest and principal repayments.
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3. finanCial risK manaGement continued
(b) Capital risk management
The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide
returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to minimise the cost of capital.
In order to maintain or adjust the capital structure the Group seeks to maintain a balance of returns to shareholders through
dividends and an appropriate capital structure of debt and equity for each business segment and the Group.
The Group monitors capital on the basis of the gearing ratio. This ratio is calculated as net borrowings divided by total capital. Net
borrowings are analysed in note 37 and calculated as total borrowings less cash and cash deposits. Total capital is calculated as total
shareholders’ equity plus net borrowings.
the gearing ratios at the balance sheet date were:
net borrowings (note 37)
Total shareholders’ equity
total capital
Gearing ratio
2010
£m
1,895.3
660.9
2,556.2
2009
(Restated note 5)
£m
1,892.0
600.6
2,492.6
74.1%
75.9%
South West Water Limited is also monitored on the basis of the ratio of its net borrowings to Regulatory Capital Value. Ofwat’s
optimum range for gearing is 55% – 65%.
The Group has entered into covenants with lenders, whilst terms vary, these typically provide for limits on gearing and interest
cover. The Group has been in compliance with its covenants during the year.
Regulatory Capital Value
net borrowings
2010
£m
2,555.0
1,547.2
2009
£m
2,461.0
1,571.1
Net borrowings/Regulatory Capital Value
60.6%
63.8%
(c) Determination of fair values
Effective 1 April 2009. The Group adopted the amendment to IFRS 7 for financial instruments which are measured in the balance
sheet at fair value. This requires disclosure of fair value measurements by level of the following fair value measurement hierarchy:
• Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1).
•
Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is,
as prices) or indirectly (that is, derived from prices) (level 2).
Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3).
•
the disclosures are set out in note 23.
The fair value of financial instruments traded in active markets (such as trading and available-for-sale securities) is based on quoted
market prices at the balance sheet date. The quoted market price used for financial assets held by the Group is the current bid price.
The fair value of financial instruments not traded in an active market (for example over-the-counter derivatives) is determined by
using valuation techniques. A variety of methods and assumptions are used based on market conditions existing at each balance
sheet date. Quoted market prices or dealer quotes for similar instruments are used for long-term debt. Other techniques, such as
estimated discounted cash flows, are used to determine fair value for the remaining financial instruments. the fair value of interest
rate swaps is calculated as the present value of the estimated future cash flows.
The carrying values less impairment provision of trade receivables and payables are assumed to approximate to their fair values.
The fair value of financial liabilities is estimated by discounting the future contractual cash flows at the current market interest rate
available to the Group for similar financial instruments.
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4. CritiCal aCCountinG JuDGements anD estimates
The Group’s principal accounting policies are set out in note 2. Management is required to exercise significant judgement and make
use of estimates and assumptions in the application of these policies.
Areas which management believes require the most critical accounting judgements are:
underlying business performance
Underlying business performance is presented to provide a more useful comparison of business trends and performance. The
term underlying is not a defined term under IFRS, and may not be comparable with similarly-titled profit measurements reported
by other companies. Reconciliations between underlying and reported measures are included in the Directors’ Report on page 5
and in note 11 for earnings per share.
environmental and landfill restoration provisions
restoration and aftercare provisions are recognised in the financial statements at the net present value of the estimated future
expenditure required to settle the Group’s restoration and aftercare obligations. A discount is applied to recognise the time value of
money and is unwound over the life of the provision. This is included in the income statement as a financial item within finance costs.
As at 31 March 2010 the Group’s environmental and landfill restoration provisions were £96.4m.
Where a provision gives access to future economic benefits, an asset is recognised and depreciated in accordance with the Group’s
depreciation policy.
Capitalisation of borrowing costs
The Group capitalises material borrowing costs directly attributable to the construction of qualifying assets (assets necessarily
taking a substantial period of time to be prepared for their intended use). At the balance sheet date only the assets under
construction in the joint ventures for the construction of Energy from Waste plants meet the criteria for capitalisation of related
borrowing costs.
retirement benefit obligations
The Group operates defined benefit pension schemes for which actuarial valuations are carried out as determined by the trustees
at intervals of not more than three years.
The pension cost under IAS 19 is assessed in accordance with Directors’ best estimates using the advice of an independent
qualified actuary and assumptions in the latest actuarial valuation. The assumptions are based on information supplied to the
actuary, supplemented by discussions between the actuary and management. The principal assumptions used to measure schemes’
liabilities, sensitivities to changes in assumptions and future funding obligations are set out in note 29 of the financial statements.
Cash-generating units
For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable
cash flows (cash-generating units). the waste management segment is considered to be a single cash-generating unit as it is an
integrated business.
Areas which management believes require the most critical accounting estimations are:
service concession arrangements
consideration from public sector entities for the operation of waste management service concessions is treated as contract
receivables, split between profit on the construction of assets, operation of the service and provision of finance recognised as
interest receivable. Management’s allocation between these three elements is assessed according to prevailing external market
conditions according to the type of service provided.
site development costs
The development of waste management sites for additional landfill capacity and new projects (such as Energy from Waste plants)
are subject to obtaining planning permissions. Development costs are capitalised using management’s assessment of the likelihood
of a successful outcome for each project. To the extent that planning permission is not received any capitalised development costs
would be expensed.
landfill costs
the estimation of landfill reserves is of particular importance in assessing landfill costs, since the cost of a landfill site is
depreciated over its estimated operational life taking into account the usage of void space and gas production at the site post
closure. The estimates of landfill reserves are regularly reviewed and updated during the financial year for usage and other events
(for example site extensions). Estimates are also subject to physical review by external advisors.
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4. CritiCal aCCountinG JuDGements anD estimates continued
A number of factors impact on the depreciation of landfill reserves including the available landfill space, future capital expenditure
and operating costs. the assumptions are revised as these factors change.
the estimate of gas production at landfill sites post-closure reduces the depreciation of landfill reserves. An assessment is
undertaken for individual sites of the historic profile of gas production during landfilling activity and the projected generation
post-closure according to the type of waste contained in the landfill and expected profile of gas production over time.
Carrying value of property, plant and equipment
The Group’s accounting policy for property, plant and equipment assets is set out in note 2. The carrying value of property,
plant and equipment as at 31 March 2010 was £2,822.7m. In the year ended 31 March 2010 additions totalled £190.2m and the
depreciation charge was £136.5m. Estimated useful economic lives of property, plant and equipment are based on management’s
judgement and experience. When management identifies that actual useful lives differ materially from the estimates used to
calculate depreciation, that charge is adjusted prospectively. Due to the significance of capital investment to the Group, variations
between actual and estimated useful lives could impact operating results both positively and negatively. Asset lives and residual
values are reviewed annually and historically changes to remaining estimates of useful lives have not been material.
Defined benefit pension schemes
Directors’ best estimates are based upon an assessment, with advice from the schemes’ actuaries, of key financial and
demographic assumptions.
The rate used to discount schemes’ liabilities reflects the market rate for long-term corporate bonds, adjusted for the projected
duration of liabilities. Inflation is based upon the market rate observed at 31 March by reference to long-term index-linked bonds.
Mortality assumptions are set upon actuarial advice in accordance with published statistics using a “medium cohort” basis and
scheme-specific experience.
A schedule showing the impact upon the schemes’ liabilities of any change in the assumption made is included in note 29 to these
financial statements.
revenue recognition
The Group recognises revenue at the time of delivery of services. Payments received in advance of services delivered are recorded
as a liability.
South West Water raises bills and recognises revenue in accordance with its entitlement to receive revenue in line with the limits
established by the Periodic Review price-setting process. For water and waste water customers with water meters, revenue
recognised is dependent upon the volume supplied including an estimate of the sales value of units supplied between the date
of the last meter reading and the financial year-end. Estimated usage is based on historic data, judgement and assumptions; actual
results could differ from these estimates which would result in operating revenue being adjusted in the period in which the
revision of the estimates is determined.
Provision for doubtful debts
At each balance sheet date each subsidiary evaluates the collectability of trade receivables and records provisions for doubtful
debts based on experience including comparisons of the relative age of accounts and consideration of actual write-off history.
The actual level of debt collected may differ from the estimated levels of recovery and could impact future operating results
positively or negatively. As at 31 March 2010 the Group’s current trade receivables were £174.5m, against which £50.6m was
provided for impairment.
impairment of intangible assets
The Group records all assets and liabilities acquired in business acquisitions, including goodwill, at fair value. Intangible assets
which have an indefinite useful life, principally goodwill, are assessed at least annually for impairment.
The initial goodwill recorded and subsequent impairment analysis require management to make estimations of future cash flows,
terminal values and an assessment of the long-term pre-tax discount rate to be applied to those cash flows which reflects an
assessment of the cost of capital of the cash-generating unit.
taxation
The Group corporation tax provision of £83.6m reflects management’s estimation of the amount of tax payable for fiscal years
with open tax computations where liabilities remain to be agreed with Her Majesty’s Revenue and Customs.
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5. Prior year aDJustment
accounting policy for service concession arrangements
The application of IFRIC 12 “Service concession arrangements” has required a restatement of amounts for prior years. Where a contract for
the provision of public services meets the scope of IFRIC 12 the service concession is to be treated as a contract receivable, split between
the profit on the construction of assets, operation of the service and provision of finance through interest receivable. The Group’s existing
contract with West Sussex County Council for the provision of waste collection and disposal services falls within the scope of IFRIC 12.
As a result of the above change in accounting policy and other restatements required, comparative figures have been restated :
year ended 31 march 2009
Application of
IFRIC 12
£m
restated now
reported
£m
5.3
(8.0)
0.7
2.3
(0.6)
(1.4)
(1.7)
958.2
(402.2)
(131.3)
45.8
(31.3)
(38.3)
89.8
Previously
reported
£m
952.9
(394.2)
(132.0)
43.5
(30.7)
(36.9)
91.5
Previously reported
£m
Application of
IFRIC 12
£m
31 march 2009
restated now
reported
£m
Previously reported
£m
Application of
IFRIC 12
£m
31 march 2008
restated now
reported
£m
inCome statement
revenue
Other operating expenses
depreciation
Finance income
Taxation – current tax
Taxation – deferred tax
Profit for the year
BalanCe sHeet
Non-current assets
Property, plant and equipment
other non-current assets
2,774.2
10.6
(28.4)
35.6
2,745.8
46.2
2,665.8
10.4
(21.1)
28.0
2,644.7
38.4
Current liabilities
Current tax
Non-current liabilities
Deferred tax
shareholders’ equity
Retained earnings
Brought forward
Profit for the year
carried forward
CasH floW statement
Cash generated from operations
Profit for the year
depreciation charge
Finance income
Taxation
Increase in trade and other
receivables
Purchase of property, plant and
equipment
(43.2)
(1.6)
(44.8)
(43.1)
(1.0)
(44.1)
(326.3)
(2.1)
(328.4)
(306.7)
(0.7)
(307.4)
341.3
91.5
317.6
91.5
132.0
(43.5)
67.6
(15.4)
5.2
(1.7)
3.5
(1.7)
(0.7)
(2.3)
2.0
(5.3)
346.5
89.8
321.1
89.8
131.3
(45.8)
69.6
318.2
133.6
341.3
133.6
127.9
(42.0)
16.0
2.9
2.3
5.2
2.3
(0.7)
(1.8)
0.4
321.1
135.9
346.5
135.9
127.2
(43.8)
16.4
(20.7)
(29.9)
(4.4)
(34.3)
(245.9)
8.0
(237.9)
(219.2)
4.2
(215.0)
During the year the Group’s joint venture Viridor Laing (Greater Manchester) Limited was established; its operations also fall within the
scope of IFRIC 12.
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nOTES TO THE FInanCIaL STaTEmEnTS
6. oPeratinG seGments
Operating segments are reported in a manner consistent with internal reporting provided to the Chief Operating Decision-Maker,
which has been identified as the Pennon Group Plc Board.
The water and sewerage business comprises the regulated water and sewerage services undertaken by South West Water Limited.
The waste management business is the waste treatment, recycling and renewable energy services provided by Viridor Limited.
Other includes parent company financing of business acquisitions made before 1999. Segment assets include goodwill and other
intangible assets, property, plant and equipment, inventories, trade and other receivables and cash and cash deposits. Segment
liabilities comprise operating liabilities and exclude taxation. The other segment liabilities include the Company’s financing of
business acquisitions and Group taxation liabilities. Capital expenditure comprises additions to property, plant and equipment,
including additions resulting from acquisitions through business combinations.
2010
£m
2009
(Restated note 5)
£m
revenue
Water and sewerage
Waste management
other
less intra-segment trading*
segment result
underlying operating profit before depreciation and amortisation (eBitDa)
Water and sewerage
Waste management
other
underlying operating profit
Water and sewerage
Waste management
other
operating profit
Water and sewerage
Waste management
other
underlying profit before tax
Water and sewerage
Waste management
other
Profit before tax
Water and sewerage
Waste management
other
444.2
626.5
8.5
(10.3)
1,068.9
290.1
114.8
(0.2)
404.7
196.5
73.1
–
269.6
191.5
72.8
–
264.3
132.5
55.4
1.2
189.1
127.5
55.1
1.2
183.8
431.7
528.0
8.7
(10.2)
958.2
281.4
105.2
1.7
388.3
191.6
63.5
1.9
257.0
186.6
62.3
1.9
250.8
121.9
41.1
2.6
165.6
116.9
39.9
2.6
159.4
* Intra-segment trading between and to other segments by the water and sewerage and waste management segments is under normal commercial
terms and conditions that would also be available to unrelated third parties. Intra-segment revenue of the other segment is at cost.
Underlying measures exclude restructuring costs in South West Water and amortisation of intangibles in Viridor. A full reconciliation
between underlying and reported measures is included in the Directors’ report on page 5 and in note 11 for earnings per share.
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nOTES TO THE FInanCIaL STaTEmEnTS
6. oPeratinG seGments continued
Water and
sewerage
£m
Waste management
(Restated note 5)
£m
other
(Restated note 5)
£m
eliminations
£m
Group
(Restated note 5)
£m
Balance sheet
31 march 2010
Assets (excluding investments in joint ventures)
2,751.2
Investments in joint ventures
total assets
liabilities
net assets/(liabilities)
31 march 2009
–
2,751.2
(1,985.8)
765.4
Assets (excluding investments in joint ventures)
2,684.9
Investments in joint ventures
total assets
liabilities
net assets/(liabilities)
–
2,684.9
(1,959.7)
725.2
1,018.8
0.2
1,019.0
(777.2)
241.8
848.2
2.2
850.4
(710.2)
140.2
901.1
(789.3)
3,881.8
–
–
0.2
901.1
(789.3)
3,882.0
(1,247.4)
789.3
(3,221.1)
(346.3)
–
660.9
809.6
(771.2)
3,571.5
–
–
2.2
809.6
(771.2)
3,573.7
(1,074.4)
771.2
(2,973.1)
(264.8)
–
600.6
segment liabilities of the water and sewerage and waste management segments comprise operating liabilities. the other segment
liabilities include the Company’s financing of business acquisitions before 1999 and Group taxation liabilities.
other information
31 march 2010
Amortisation of other intangible assets (note 16)
Capital expenditure (including acquisitions)
depreciation
Finance income (note 8)
Finance costs (note 8)
31 march 2009
Amortisation of other intangible assets (note 16)
Capital expenditure (including acquisitions)
depreciation
Finance income (note 8)
Finance costs (note 8)
Water and
sewerage
£m
Waste management
(Restated note 5)
£m
other
£m
Group
(Restated note 5)
£m
–
143.3
93.6
18.1
82.2
–
147.8
89.8
29.8
99.5
0.3
55.9
41.7
12.2
31.0
1.2
87.4
41.7
7.2
30.4
–
0.3
(0.2)
4.1
2.8
–
–
(0.2)
8.8
8.1
0.3
199.5
135.1
34.4
116.0
1.2
235.2
131.3
45.8
138.0
Geographical segments
Separate disclosure by geographical segment is not shown since the operations of the Group are substantially located in the
united Kingdom.
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nOTES TO THE FInanCIaL STaTEmEnTS
7. oPeratinG Costs
Manpower costs (note 13)
raw materials and consumables
Other operating expenses include:
Profit on disposal of property, plant and equipment
Operating lease rentals payable:
– Plant and machinery
– Property
Research and development expenditure
trade receivables impairment
Depreciation of property, plant and equipment:
– owned assets
– under finance leases
Amortisation of other intangible assets (note 16)
Fees payable to the Group’s auditors in the year were:
Fees payable to the Company’s auditors for the audit of the Company’s accounts
Fees payable to the Company’s auditors for other services to the Group:
Audit of the Company’s subsidiaries pursuant to legislation
total audit fees
other services pursuant to legislation
Tax services
services relating to corporate finance transactions
All other services
Fees payable to the Company’s auditors in respect of Pennon Group pension schemes:
Audit
2010
£m
132.3
76.3
2009
(Restated note 5)
£m
108.6
59.1
(3.6)
(2.1)
7.7
6.3
0.2
7.9
98.8
36.3
0.3
2010
£000
47
360
407
103
199
1,346
31
2,086
24
6.9
5.2
0.2
6.7
97.1
34.2
1.2
2009
£000
47
316
363
130
135
570
37
1,235
24
Expenses reimbursed to the auditors in relation to the audit of the Group were £38,000 (2009 £31,000).
Corporate finance services in 2010 include fees of circa £1.2m relating to the conclusion of the Financial Close of the Greater
Manchester PFI contract.
A description of the work of the Audit Committee is set out in its report on page 50 which includes an explanation of how
auditor objectivity and independence are safeguarded when non-audit services are provided by the auditors.
8. net finanCe Costs
finance income
Interest receivable
Interest receivable on shareholder loans to joint ventures
Interest receivable on service concession arrangements
Expected return on defined benefit pension schemes’ assets (note 29)
P.74 | Pennon GrouP AnnuAl rePort And Accounts | 2010
2010
£m
6.1
3.1
2.7
22.5
34.4
2009
(Restated note 5)
£m
18.8
2.3
2.3
22.4
45.8
8. net finanCe Costs continued
finance costs
Bank borrowings and overdrafts
Interest element of finance lease rentals
other finance costs
Interest cost on retirement benefit obligations (note 29)
unwinding of discounts in provisions (note 31)
net gains/(losses) on derivative instruments:
Ineffectiveness on derivatives designated as cash flow hedges (note 23)
on derivatives deemed held for trading (note 23)
net finance costs
9. taxation
analysis of charge in year
UK corporation tax
Deferred tax – other
Deferred tax arising on abolition of industrial buildings allowances
Total deferred tax (note 30)
Tax charge for year
nOTES TO THE FInanCIaL STaTEmEnTS
2010
£m
2009
(Restated note 5)
£m
(41.6)
(45.7)
(2.2)
(24.8)
(3.8)
(118.1)
–
2.1
(116.0)
(81.6)
2010
£m
43.0
1.3
–
1.3
44.3
(48.9)
(54.6)
(1.5)
(24.0)
(4.5)
(133.5)
0.4
(4.9)
(138.0)
(92.2)
2009
(Restated note 5)
£m
31.3
13.4
24.9
38.3
69.6
UK corporation tax is calculated at 28% (2009 28%) of the estimated assessable profit for the year.
The deferred tax charge for the year ended 31 March 2009 was increased by a non-recurring charge of £24.9m arising from the
phasing out of industrial buildings allowances over the three years commencing 1 April 2008 as contained in the 2008 Finance Act.
The tax for the year differs from the theoretical amount which would arise using the standard rate of corporation tax in the UK (28%) from:
Profit before tax
Profit before tax multiplied by the standard rate of UK corporation tax of 28% (2009 28%)
effects of:
Expenses not deductible for tax purposes
other
Capital gains reduced by capital losses
Tax relief no longer available on industrial buildings
Adjustments to tax charge in respect of prior years
Tax charge for year
2010
£m
183.8
51.5
1.3
(3.5)
–
–
(5.0)
44.3
2009
(Restated note 5)
£m
159.4
44.6
2.1
(1.0)
(0.7)
24.9
(2.3)
69.6
The average applicable tax rate for the year was 24% (2009 44%).
In addition to the amount debited to the income statement, a deferred tax credit relating to actuarial losses on defined benefit
pension schemes of £12.4m (2009 credit of £18.7m on actuarial losses) and a deferred tax credit relating to gains/losses on cash
flow hedges of £5.0m (2009 nil), has been credited directly to equity. A deferred tax credit relating to share-based payments of
£0.2m (2009 charge £0.8m) has been taken directly to equity.
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10. Profit of Parent ComPany
Profit attributable to equity shareholders dealt with in the accounts of the parent company
2010
£m
81.6
2009
£m
140.1
As permitted by Section 408 of the Companies Act 2006 no income statement is presented for the Company.
11. earninGs Per sHare
Basic earnings per share are calculated by dividing the earnings attributable to ordinary shareholders by the weighted average
number of ordinary shares outstanding during the year, excluding those held in the employee share trust (note 35), which are
treated as cancelled.
For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to include all dilutive potential
ordinary shares. The Group has two types of dilutive potential ordinary shares – those share options granted to employees where
the exercise price is less than the average market price of the Company’s ordinary shares during the year; and the contingently
issuable shares under the Group’s Performance and co-investment Plan and the deferred shares element of the Incentive Bonus
Plan, to the extent that the performance criteria for vesting of the awards are expected to be met. The convertible bonds issued
in August 2009 did not have a dilutive effect on earnings per share during the year.
the weighted average number of shares and earnings used in the calculations were:
number of shares (millions)
for basic earnings per share
Effect of dilutive potential ordinary shares from share options
For diluted earnings per share
underlying basic and diluted earnings per share
2010
2009
350.0
1.5
351.5
348.1
1.7
349.8
Underlying earnings per share are presented to provide a more useful comparison on business trends and performance. The term
underlying is not a defined term under IFRS and may not be comparable with a similarly titled profit measure reported by other
companies. Underlying earnings have been calculated:
Statutory earnings per share
Restructuring costs (net of tax)
Amortisation of intangibles
Deferred tax
Underlying earnings per share
2010
2009 (Restated note 5)
Profit earnings per share
after tax Basic Diluted
£m p p
Profit earnings per share
after tax Basic Diluted
£m p p
139.5
4.4
0.3
1.3
145.5
39.9
1.2
0.1
0.4
41.6
39.7
1.2
0.1
0.4
41.4
89.8
3.3
1.2
38.3
132.6
25.8
0.9
0.3
11.1
38.1
25.7
0.9
0.3
11.0
37.9
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nOTES TO THE FInanCIaL STaTEmEnTS
12. DiviDenDs
Amounts recognised as distributions to equity holders in the year:
Interim dividend paid for the year ended 31 March 2009 : 6.75p (2008 6.25p) per share
Final dividend paid for the year ended 31 March 2009 : 14.25p (2008 13.56p) per share
Proposed dividends
Proposed interim dividend for the year ended 31 March 2010 : 6.95p (2009 6.75p) per share
Proposed final dividend for the year ended 31 March 2010 : 15.60p (2009 14.25p) per share
2010
£m
23.6
49.8
73.4
24.5
55.1
79.6
2009
£m
21.8
47.3
69.1
23.6
49.8
73.4
the proposed interim and final dividends have not been included as liabilities in these financial statements.
The proposed interim dividend for 2010 was paid on 1 April 2010 and the proposed final dividend is subject to approval by
shareholders at the Annual General Meeting.
13. emPloyment Costs
Wages and salaries
Social security costs
Pension costs
Share-based payments
Total employment costs
charged:
Manpower costs
capital schemes
restructuring costs
Total employment costs
2010
£m
117.4
10.7
15.9
2.7
146.7
132.3
10.0
4.4
146.7
2009
£m
95.9
9.2
13.2
2.7
121.0
108.6
10.3
2.1
121.0
Details of Directors’ emoluments are set out in note 14. There are no personnel, other than Directors, who as key management
exercise authority and responsibility for planning, directing and controlling the activities of the Group.
employees (average number)
The average monthly number of employees (including Executive Directors) was:
Water and sewerage
Waste management
other
Group totals
The total number of employees at 31 March 2010 was 4,089 (2009 3,417).
2010
2009
1,191
2,853
43
4,087
1,227
2,154
41
3,422
Pennon GrouP AnnuAl rePort And Accounts | 2010 | P.77
nOTES TO THE FInanCIaL STaTEmEnTS
14. DireCtors’ emoluments
Executive Directors:
Salary
Performance-related cash bonus paid or payable
Share-based payments
other emoluments
Payment in lieu of pension provision
Non-executive Directors
2010
£000
975
458
847
65
95
399
2009
£000
975
257
689
67
95
376
2,839
2,459
The cost of share-based payment represents the amount charged to the income statement, as described in note 32.
The aggregate gains on vesting of Directors’ share-based awards amounted to a total of £378,000 (2009 £569,000).
Total gains made by Directors on the exercise of share options were £3,000 (2009 nil).
Total emoluments include £1,301,000 (2009 £995,000) payable to Directors for services as directors of subsidiary undertakings.
At 31 March 2010 retirement benefits were accruing to two Directors under defined benefit pension schemes (2009 two). The accrued
pension entitlement at 31 March 2010 under defined benefit schemes of the highest paid Director was £146,000 (2009 £122,000).
No pension contributions were payable to defined contribution schemes but one Director received payments in lieu of pension provision.
More detailed information concerning directors’ emoluments (including pensions and the highest paid director) and share
interests is shown in the directors’ remuneration report.
15. GooDWill
cost:
At 1 April 2008
Recognised on acquisition of subsidiaries
At 31 March 2009
disposals
Recognised on acquisition of subsidiaries (note 38)
At 31 March 2010
Carrying amount:
At 31 March 2009
at 31 march 2010
£m
235.9
0.6
236.5
(0.6)
18.5
254.4
236.5
254.4
Goodwill acquired in a business combination is allocated at acquisition to the cash-generating unit (CGU) expected to benefit
from that business combination. All of the carrying amount of goodwill is allocated to the waste management segment which is
considered to be a single cGu, as it is an integrated business.
Goodwill is reviewed annually or when other events or changes in circumstance indicate that the carrying amount may not be fully
recoverable.
The recoverable amount of the waste management segment is determined from value in use calculations. The key assumptions in
those calculations relate to discount rates, cash flows, price increases and for landfill, the compaction rate. cash flow projections
are based on approved budgets and plans for the next five years based on growth rates and margins achieved historically and
expectations for market development. Beyond this period long-term growth rates for the waste sector are based on UK Gross
Domestic Product. The cash flows have been discounted using a pre-tax discount rate of 12.5% (2009 12.5%) which reflects the
overall business risks associated with the waste management segment activities.
P.78 | Pennon GrouP AnnuAl rePort And Accounts | 2010
nOTES TO THE FInanCIaL STaTEmEnTS
16. otHer intanGiBle assets
Customer contracts
£m
Patents
£m
Acquired intangible assets
cost:
At 1 April 2008
At 31 March 2009
At 31 March 2010
Amortisation:
At 1 April 2008
Charge for year
At 31 March 2009
Charge for year
At 31 March 2010
Carrying amount:
At 31 March 2009
at 31 march 2010
12.5
12.5
12.5
6.1
1.2
7.3
0.3
7.6
5.2
4.9
0.2
0.2
0.2
–
–
–
–
–
0.2
0.2
total
£m
12.7
12.7
12.7
6.1
1.2
7.3
0.3
7.6
5.4
5.1
Customer contracts are amortised over the useful economic life of each contract which at acquisition ranged between two
and 15 years. The average remaining life is three years.
Patents are amortised over their estimated useful economic lives which at acquisition was 13 years. The average remaining life is
seven years.
The carrying values of other intangible assets are reviewed annually or when events or changes in circumstance indicate that the
carrying amounts may not be fully recoverable.
Pennon GrouP AnnuAl rePort And Accounts | 2010 | P.79
nOTES TO THE FInanCIaL STaTEmEnTS
17. ProPerty, Plant anD equiPment
land and
buildings
£m
Infrastructure
assets
£m
operational
properties
£m
Fixed and mobile
plant, vehicles and
computers
(Restated note 5)
£m
landfill
restoration
£m
construction
in progress
£m
total
(Restated note 5)
£m
331.8
2.4
40.3
–
–
(0.3)
11.9
386.1
8.7
20.7
–
–
–
1.9
1,260.8
585.5
1,136.8
44.7
134.7
–
53.7
–
(1.9)
(0.7)
34.0
–
1.7
–
–
–
10.5
0.7
27.9
–
–
(6.6)
38.9
–
–
1.4
–
–
–
–
108.2
–
–
–
(95.3)
3,494.3
3.1
231.8
1.4
(1.9)
(7.6)
–
1,345.9
597.7
1,197.7
46.1
147.6
3,721.1
–
36.0
–
(0.4)
(0.7)
36.3
–
0.8
–
–
(0.2)
8.1
13.5
33.3
–
–
(19.8)
97.5
–
–
2.6
–
–
–
–
99.4
–
–
–
(143.8)
22.2
190.2
2.6
(0.4)
(20.7)
–
Group
cost:
At 1 April 2008
Arising on acquisitions
Additions
other
Grants and contributions
disposals
transfers/reclassifications
At 31 March 2009
Arising on acquisitions
Additions
other (note 31)
Grants and contributions
disposals
transfers/reclassifications
At 31 March 2010
417.4
1,417.1
606.4
1,322.2
48.7
103.2
3,915.0
depreciation:
At 1 April 2008
Charge for year
disposals
At 31 March 2009
Charge for year
disposals
At 31 March 2010
Net book value:
At 31 March 2009
137.3
19.5
(0.1)
156.7
15.8
–
172.5
55.4
18.7
(0.7)
73.4
20.5
(0.7)
93.2
142.3
10.8
–
153.1
10.9
(0.2)
163.8
505.0
80.8
(6.3)
579.5
86.9
(18.6)
647.8
9.6
3.0
–
12.6
2.4
–
15.0
–
–
–
–
–
–
–
849.6
132.8
(7.1)
975.3
136.5
(19.5)
1,092.3
229.4
1,272.5
444.6
618.2
33.5
147.6
2,745.8
at 31 march 2010
244.9
1,323.9
442.6
674.4
33.7
103.2
2,822.7
Of the total depreciation charge of £136.5m (2009 £132.8m), £1.4m (2009 £1.5m) has been charged to capital projects and
£135.1m (2009 £131.3m) against profits.
Asset lives and residual values are reviewed annually.
P.80 | Pennon GrouP AnnuAl rePort And Accounts | 2010
nOTES TO THE FInanCIaL STaTEmEnTS
17. ProPerty, Plant anD equiPment continued
Assets held under finance leases included above were:
land and
buildings
£m
Infrastructure
assets
£m
operational
properties
£m
Fixed and mobile
plant, vehicles and
computers
£m
landfill
restoration
£m
construction
in progress
£m
total
£m
–
–
–
–
–
–
350.1
444.9
355.0
459.9
335.3
322.8
15.4
73.8
172.0
20.6
81.4
165.3
334.7
371.1
163.3
334.4
378.5
157.5
–
–
–
–
–
–
14.8
1,145.1
8.1
1,145.8
–
–
261.2
267.3
14.8
883.9
8.1
878.5
Fixed and mobile plant, vehicles and computers
£m
cost:
At 31 March 2009
At 31 March 2010
depreciation:
At 31 March 2009
At 31 March 2010
Net book amount:
At 31 March 2009
at 31 march 2010
Company
cost
At 1 April 2008
At 31 March 2009
Additions
At 31 March 2010
depreciation:
At 1 April 2008
At 31 March 2009
Charge for year
At 31 March 2010
Net book value:
At 31 March 2009
at 31 march 2010
Asset lives and residual values are reviewed annually.
0.3
0.3
0.1
0.4
0.1
0.1
0.1
0.2
0.2
0.2
Pennon GrouP AnnuAl rePort And Accounts | 2010 | P.81
nOTES TO THE FInanCIaL STaTEmEnTS
18. finanCial instruments By CateGory
the accounting policies for financial instruments have been applied to the line items:
fair value
amortised cost
derivatives
used for
hedging
£m
note
derivatives deemed
held for trading
£m
loans and
receivables
£m
trade receivables
and trade payables
£m
total
£m
Group
31 march 2010
financial assets
trade and other receivables
derivative financial instruments
cash and cash deposits
total
financial liabilities
Borrowings
derivative financial instruments
Trade and other payables
total
31 march 2009
financial assets
Financial assets
trade and other receivables
derivative financial instruments
cash and cash deposits
total
financial liabilities
Borrowings
derivative financial instruments
Trade and other payables
total
Company
31 march 2010
financial assets
derivative financial instruments
cash and cash deposits
total
financial liabilities
Borrowings
Trade and other payables
total
31 march 2009
financial assets
cash and cash deposits
total
financial liabilities
Borrowings
derivative financial instruments
Trade and other payables
total
22
23
24
27
23
25
22
23
24
27
23
25
23
24
27
25
24
27
23
25
–
3.4
–
3.4
–
(17.6)
–
(17.6)
–
0.2
–
0.2
–
(17.9)
–
(17.9)
3.4
–
3.4
–
–
–
–
–
–
(1.4)
–
(1.4)
–
–
–
–
–
(0.1)
–
(0.1)
–
–
–
–
–
(2.2)
–
–
–
493.9
493.9
(2,389.2)
–
–
(2,389.2)
–
–
353.3
353.3
(2,245.3)
–
–
123.9
–
–
123.9
–
–
(82.1)
(82.1)
111.8
–
–
111.8
–
–
(77.2)
123.9
3.4
493.9
621.2
(2,389.2)
(17.7)
(82.1)
(2,489.0)
111.8
0.2
353.3
465.3
(2,245.3)
(20.1)
(77.2)
(2.2)
(2,245.3)
(77.2)
(2,342.6)
–
–
–
–
–
–
–
–
–
–
–
–
–
174.6
174.6
(814.0)
–
(814.0)
168.7
168.7
(675.5)
–
–
(675.5)
–
–
–
–
(0.2)
(0.2)
–
–
–
–
(0.1)
(0.1)
3.4
174.6
178.0
(814.0)
(0.2)
(814.2)
168.7
168.7
(675.5)
(1.4)
(0.1)
(677.0)
P.82 | Pennon GrouP AnnuAl rePort And Accounts | 2010
19. otHer non-Current assets
Amounts owed by subsidiary undertakings
Amounts owed by related parties (note 43)
other receivables
nOTES TO THE FInanCIaL STaTEmEnTS
Group
Company
2010
£m
–
45.9
55.1
101.0
2009
(Restated note 5)
£m
2010
£m
2009
£m
–
10.6
35.6
46.2
337.5
271.3
–
1.0
–
–
338.5
271.3
Other receivables include site development and pre-contract costs of £15.6m (2009 nil).
non-current assets were due:
Between 1 and 2 years
Between 2 and 5 years
Over 5 years
the fair values of other non-current assets were:
Amounts owed by subsidiary undertakings
Amounts owed by related parties
other receivables
Group
Company
2010
£m
16.6
6.2
78.2
101.0
2009
(Restated note 5)
£m
0.6
2.1
43.5
46.2
2010
£m
83.8
254.7
–
338.5
2009
£m
67.8
203.5
–
271.3
Group
Company
2010
£m
–
90.9
55.1
146.0
2009
(Restated note 5)
£m
2010
£m
2009
£m
–
17.3
35.6
52.9
336.9
271.3
–
1.0
–
–
337.9
271.3
The fair value of amounts owed by related parties is based on cash flows using a rate based on the borrowings rate of 2.5% (2009 5.7%).
The discount rate is equal to London Interbank Offered Rate plus an allowance to reflect an appropriate credit margin.
The effective interest rate on amounts owed by related parties was 11.3% (2009 15.0%).
20. investments
subsidiary undertakings
Company
At 1 April 2008
disposals
At 31 March 2009
Additions
at 31 march 2010
£m
1,044.8
(100.0)
944.8
87.2
1,032.0
Pennon GrouP AnnuAl rePort And Accounts | 2010 | P.83
nOTES TO THE FInanCIaL STaTEmEnTS
20. investments continued
Joint ventures
Group
At 1 April 2008
share of profit
At 31 March 2009
Additions
share of profit
share of other comprehensive loss
at 31 march 2010
shares
£m
1.4
0.8
2.2
0.1
1.1
(3.2)
0.2
Details of the Group’s principal subsidiary and joint venture undertakings are set out in note 39.
The Group’s share of the results, assets and liabilities in its joint ventures, which are equity accounted in these financial statements, are:
2010
Lakeside Energy from Waste
Holdings limited
Viridor Laing
(Greater Manchester) limited
2009
Lakeside Energy from Waste
Holdings limited
21. inventories
raw materials and consumables
Finished goods and goods for resale
Assets
liabilities
Income
non-current
£m
current
£m
non-current
£m
current
£m
revenues
£m
Profit
£m
other
comprehensive
income
£m
84.2
16.0
2.6
(0.3)
(86.3)
81.0
(7.0)
(90.0)
14.4
44.0
1.0
0.1
(3.1)
(0.1)
76.4
8.4
(5.8)
(75.2)
3.9
0.8
–
Group
Company
2010
£m
6.4
–
6.4
2009
£m
5.4
0.4
5.8
2010
£m
–
–
–
2009
£m
–
–
–
P.84 | Pennon GrouP AnnuAl rePort And Accounts | 2010
nOTES TO THE FInanCIaL STaTEmEnTS
22. traDe anD otHer reCeivaBles – Current
trade receivables
less: provision for impairment of receivables
trade receivables
Amounts owed by subsidiary undertakings
other receivables
Other prepayments and accrued income
Group
Company
2010
£m
174.5
(50.6)
123.9
–
8.1
62.9
194.9
2009
£m
154.9
(43.1)
111.8
–
23.3
43.2
178.3
2010
£m
–
–
–
84.2
0.3
–
84.5
2009
£m
–
–
–
68.9
1.3
–
70.2
The Directors consider that the carrying amount of trade and other receivables approximates to their fair value.
There is no concentration of credit risk in trade receivables. The Group has a large number of customers who are dispersed and there
is no significant loss on trade receivables expected that has not been provided for. The Group has created IAS 39 portfolio provisions,
but cannot practicably identify which receivables specifically are the ones impaired. It is Group policy to consider a receivable in a
portfolio to which an impairment has been allocated on a collective basis as not being impaired for the purposes of IFRS 7 disclosures
until the loss can be specifically identified with the receivable.
The ageing of trade receivables which are past due but not specifically impaired was:
Group
Past due 1 – 30 days
Past due 31 – 120 days
More than 120 days
2010
£m
27.4
10.3
71.7
2009
£m
25.2
10.2
61.7
The Group’s two principal operating businesses specifically review separate categories of debt to identify an appropriate provision for
impairment. South West Water Limited has a duty under legislation to continue to provide domestic customers with services regardless
of payment.
the movement in the allowance for impairment in respect of trade receivables was:
At 1 April
Provision for receivables impairment
Receivables written-off during the year as uncollectible
Cumulative amounts previously excluded from debt
Arising on acquisitions
At 31 March
2010
£m
43.1
7.9
(6.9)
6.5
–
50.6
2009
£m
36.2
6.7
(5.1)
4.9
0.4
43.1
Other receivables and prepayments include site development and pre-contract costs of £4.0m (2009 £18.0m).
Pennon GrouP AnnuAl rePort And Accounts | 2010 | P.85
nOTES TO THE FInanCIaL STaTEmEnTS
23. Derivative finanCial instruments
Derivatives used for hedging
non-current assets
current assets
current liabilities
non-current liabilities
Derivatives deemed held for trading
current liabilities
Group
Company
2010
£m
–
3.4
(3.5)
(14.1)
2009
£m
0.2
–
(1.4)
(16.5)
(0.1)
(2.2)
2010
£m
–
3.4
–
–
–
2009
£m
–
–
(1.4)
–
–
The fair value of hedging derivatives is split between current and non-current assets or liabilities based on the maturity of the cash flows.
The ineffective portion recognised in the income statement arising from cash flow hedges amounts to a gain of nil (2009 £0.4m).
Interest rate swaps and fixed rate borrowings are used to manage the mix of fixed and floating rates to ensure at least 50% of Group
net borrowings are at fixed rate. At 31 March 2010 65% of Group net borrowings were at fixed rate (2009 57%).
At 31 March 2010 the Group had interest rate swaps to swap from floating to fixed rate and hedge financial liabilities with a notional
value of £775.0m and a weighted average maturity of 4.4 years (2009 £760.0m, with 2.4 years). The weighted average interest rate of
the swaps for their nominal amount was 4.0% (2009 4.5%).
At 31 March 2010 the Company had cross-currency interest rate swaps to swap from floating to fixed rate and hedge financial liabilities,
relating to a borrowing in the year of 70m Australian Dollars, with a weighted average maturity of 3.0 years. The weighted average
interest rate of the swaps was 3.7%.
Derivatives held for trading relate to interest rate swaps which no longer qualify for hedge accounting.
The amounts above are the fair value of swaps based on the market value of equivalent instruments at the balance sheet date.
Valuation hierarchy
The amounts of financial instruments carried at fair value by valuation method were:
Assets
derivatives used for hedging
total assets
Liabilities
derivatives used for hedging
derivatives deemed held for trading
total liabilities
31 march 2010
31 March 2009
level 1
£m
level 2
£m
level 3
£m
total
£m
level 1
£m
level 2
£m
level 3
£m
total
£m
–
–
–
–
–
3.4
3.4
17.6
0.1
17.7
–
–
–
–
–
3.4
3.4
17.6
0.1
17.7
–
–
–
–
–
0.2
0.2
17.9
2.2
20.1
–
–
–
–
–
0.2
0.2
17.9
2.2
20.1
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 - Inputs (other than quoted prices included within level 1) that are observable for the asset or liability, either directly (that is,
Level 3 -
as prices) or indirectly (that is, derived from prices).
Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs).
P.86 | Pennon GrouP AnnuAl rePort And Accounts | 2010
24. CasH anD CasH DePosits
Cash at bank and in hand
Short-term bank deposits
other deposits
nOTES TO THE FInanCIaL STaTEmEnTS
Group
Company
2010
£m
9.2
232.8
251.9
493.9
2009
£m
10.2
144.6
198.5
353.3
2010
£m
11.8
151.4
11.4
174.6
2009
£m
77.0
80.8
10.9
168.7
The effective interest rate on Group short-term deposits was 0.7% (2009 1.4%) and these deposits have an average maturity of one day.
The effective interest rate on Group other deposits was 0.9% (2009 2.3%) and these deposits have an average maturity of 39 days.
Group other deposits include restricted funds of £33.5m (2009 £16.7m) to settle long-term lease liabilities (note 27) and £56.3m
(2009 nil) relating to letters of credit.
For the purposes of the cash flow statement cash and cash equivalents comprise:
cash and cash deposits as above
Bank overdrafts (note 27)
Less: deposits with a maturity of three months or more (restricted funds)
25. traDe anD otHer PayaBles – Current
Trade payables
Amounts owed to subsidiary undertakings
Amounts owed to joint venture (note 43)
Other tax and social security
other creditors
Accruals
Group
Company
2010
£m
493.9
(12.7)
481.2
(91.7)
2009
£m
353.3
(12.9)
340.4
(18.4)
2010
£m
174.6
–
174.6
(1.4)
2009
£m
168.7
–
168.7
(0.9)
389.5
322.0
173.2
167.8
Group
Company
2010
£m
82.1
–
5.0
49.3
17.2
42.2
2009
£m
77.2
–
–
39.4
7.7
42.5
2010
£m
0.2
7.6
5.0
0.2
3.9
0.4
195.8
166.8
17.3
2009
£m
0.1
2.4
–
0.3
4.4
0.4
7.6
The Directors consider that the carrying amount of trade and other payables approximates to their fair value.
26. Current tax liaBilities/(reCoveraBle)
UK corporation tax
83.6
44.8
(1.3)
(2.4)
Group
Company
2010
£m
2009
(Restated note 5)
£m
2010
£m
2009
£m
Pennon GrouP AnnuAl rePort And Accounts | 2010 | P.87
nOTES TO THE FInanCIaL STaTEmEnTS
27. BorroWinGs
Current
Bank overdrafts
short-term loans
European Investment Bank
Unsecured loan stock notes
Amounts owed to subsidiary undertakings
obligations under finance leases
total current borrowings
non-current
Bank and other loans
convertible bond
European Investment Bank
obligations under finance leases
Group
Company
2010
£m
2009
£m
2010
£m
2009
£m
12.7
170.0
14.1
–
–
196.8
32.2
229.0
568.9
112.6
273.6
955.1
1,205.1
12.9
205.0
14.1
0.8
–
232.8
30.1
262.9
507.5
–
287.7
795.2
1,187.2
–
70.0
–
–
281.2
351.2
–
351.2
350.2
112.6
–
462.8
–
–
205.0
–
0.8
280.2
486.0
–
486.0
189.5
–
–
189.5
–
189.5
675.5
total non-current borrowings (note 37)
2,160.2
1,982.4
462.8
total borrowings
2,389.2
2,245.3
814.0
The Company issued £125m 4.625% convertible bonds on 20 August 2009. The bonds mature five years from the issue date at their
nominal value of £125m or can be converted into shares at the holders option at the maturity date on the conversion price of 597.81
pence per ordinary share.
The values of the liability component and the equity conversion component were determined at issuance of the bond. The value of
the equity conversion component was determined to be £10m, using the Black-Scholes valuation model and has been recognised in
shareholders’ equity in retained earnings (note 35).
the fair values of non-current borrowings were:
Group
Bank and other loans
convertible bond
European Investment Bank
obligations under finance leases
Company
Bank and other loans
2010
2009
Book value
£m
fair value
£m
Book value
£m
Fair value
£m
568.9
112.6
273.6
955.1
1,205.1
533.3
127.6
235.5
896.4
967.7
507.5
445.0
–
–
287.7
245.6
795.2
1,187.2
690.6
1,070.2
2,160.2
1,864.1
1,982.4
1,760.8
462.8
471.1
189.5
194.7
Where market values are not available, fair values of borrowings have been calculated by discounting expected future cash flows at
prevailing interest rates.
P.88 | Pennon GrouP AnnuAl rePort And Accounts | 2010
nOTES TO THE FInanCIaL STaTEmEnTS
27. BorroWinGs continued
The maturity of non-current borrowings was:
Between 1 and 2 years
Between 2 and 5 years
Over 5 years
Group
Company
2010
£m
55.0
516.2
2009
£m
233.5
206.4
1,589.0
1,542.5
2,160.2
1,982.4
2010
£m
10.0
352.9
99.9
462.8
The weighted average maturity of non-current borrowings was 22 years (2009 23 years).
Finance lease liabilities – minimum lease payments:
Within one year
In the second to fifth years inclusive
After five years
less: future finance charges
Group
Company
2010
£m
47.9
242.6
2009
£m
62.0
319.7
2,323.2
1,970.2
2,613.7
2,351.9
(1,376.4)
(1,134.6)
1,237.3
1,217.3
2010
£m
–
–
–
–
–
–
2009
£m
80.0
10.0
99.5
189.5
2009
£m
–
–
–
–
–
–
Included above are accrued finance charges arising on obligations under finance leases totalling £135.3m (2009 £135.9m), of which
£11.9m (2009 £13.8m) is repayable within one year.
Within obligations under finance leases, South West Water Limited has utilised finance lease facilities of £180.0m for certain water
and sewerage business property, plant and equipment which are secured by bank letters of credit issued by United Kingdom financial
institutions. these letters of credit, covering the full period of the finance leases, are renewable between the financial institutions and
South West Water Limited at five-yearly intervals, the next being March 2011.
During 2007 the period for repayment of these leases was extended with an agreement to deposit with the lessor group amounts
equal to the difference between the original and revised payments due. The accumulated deposits, £24.1m at 31 March 2010 (2009
£16.7m), are being held to settle the lease liability over the period from the end of the original lease term. The deposits are subject to
a registered charge given as security to the lessor for the balance outstanding.
During 2010 the period for repayment of certain existing leases was extended with an agreement to deposit with the lessor group
amounts equal to the difference between the original and revised payments due. The deposit at 31 March 2010 of £9.4m (2009 nil) is
being held to settle the lease liability at the end of the lease term, subject to rights to release by negotiation with the lessor.
Pennon GrouP AnnuAl rePort And Accounts | 2010 | P.89
nOTES TO THE FInanCIaL STaTEmEnTS
27. BorroWinGs continued
The effective interest rates at the balance sheet date and the exposure to interest rate changes and the repricing dates were:
effective rate
%
6 months
or less
£m
6–12 months
1–5 years
Over 5 years
£m
£m
£m
Group
31 march 2010
Bank overdrafts
European Investment Bank
Bank and other loans
Finance leases
effect of swaps
31 march 2009
Bank overdrafts
European Investment Bank
Unsecured loan stock notes
Bank and other loans
Finance leases
effect of swaps
Company
31 march 2010
Bank and other loans
effect of swaps
31 march 2009
Unsecured loan stock notes
Bank and other loans
effect of swaps
1.5
1.0
3.9
2.9
4.0
1.5
2.1
1.4
3.8
4.6
4.5
2.3
3.7
1.4
3.4
4.5
12.6
287.7
381.7
246.4
928.4
(813.8)
114.6
12.9
301.8
0.8
295.0
461.5
1,072.0
(590.0)
482.0
281.7
(38.8)
242.9
0.8
295.0
295.8
(50.0)
245.8
–
–
218.7
700.9
919.6
255.0
1,174.6
–
–
–
218.0
540.2
758.2
90.0
848.2
–
–
–
–
–
–
50.0
50.0
–
–
251.0
198.9
449.9
508.8
958.7
–
–
–
199.5
124.4
323.9
325.0
648.9
251.0
38.8
289.9
–
99.5
99.5
–
99.5
total
£m
12.6
287.7
851.4
1,237.4
2,389.1
–
–
–
–
91.2
91.2
50.0
141.2
2,389.1
–
–
–
–
12.9
301.8
0.8
712.5
91.2
1,217.3
91.2
175.0
2,245.3
–
266.2
2,245.3
–
–
–
–
–
–
–
–
532.7
–
532.7
0.8
394.5
395.3
–
395.3
undrawn committed borrowing facilities:
Floating rate:
Expiring within one year
Expiring after one year
Group
Company
2010
£m
2009
£m
25.0
175.0
200.0
94.0
110.0
204.0
2010
£m
25.0
65.0
90.0
2009
£m
80.0
–
80.0
In addition the Group has short-term uncommitted bank facilities of £60.0m available to the Company or South West Water Limited.
P.90 | Pennon GrouP AnnuAl rePort And Accounts | 2010
28. otHer non-Current liaBilities
Amounts owed to subsidiary undertakings
other creditors
29. retirement Benefit oBliGations
nOTES TO THE FInanCIaL STaTEmEnTS
Group
Company
2010
£m
–
16.0
16.0
2009
£m
–
3.7
3.7
2010
£m
8.7
–
8.7
2009
£m
8.7
–
8.7
the Group operates a number of defined benefit pension schemes including a defined contribution section within the main scheme.
During the year the acquisition of Greater Manchester Waste Limited resulted in the Group participating in two further defined benefit
pension schemes. The amounts acquired are shown in the analysis of the fair value of the schemes’ assets and the present value of the
schemes’ defined benefit obligations below.
The assets of the Group’s pension schemes are held in separate trustee administered funds. The trustees of the funds are required
to act in the best interest of the funds’ beneficiaries. The appointment of schemes’ trustees is determined by the schemes’ trust
documentation. The Group has a policy for the main fund that one-half of all trustees, other than the Chairman, are nominated by
members of the schemes, including pensioners.
Defined contribution schemes
Pension costs for defined contribution schemes were £2.4m (2009 £1.9m).
Defined benefit schemes
assumptions
the principal actuarial assumptions at 31 March were:
Expected return on scheme assets
Rate of increase in pensionable pay
rate of increase for current and future pensions
rate used to discount schemes’ liabilities
Inflation
2010
%
7.3
4.1
3.6
5.5
3.6
2009
%
7.0
3.75
2.75
6.5
2.75
Mortality
Assumptions regarding future mortality experience are set based on actuarial advice in accordance with published statistics and
experience. The mortality assumption uses a scheme-specific ‘medium cohort’ basis.
The average life expectancy in years of a member having retired at age 62 on the balance sheet date is projected at:
Male
Female
2010
2009
22.0
25.4
21.9
25.4
The average life expectancy in years of a future pensioner retiring at age 62, 20 years after the balance sheet date is projected at:
Male
Female
2010
2009
23.4
26.6
23.4
26.5
Pennon GrouP AnnuAl rePort And Accounts | 2010 | P.91
nOTES TO THE FInanCIaL STaTEmEnTS
29. retirement Benefit oBliGations continued
the sensitivities regarding the principal assumptions used to measure the schemes’ liabilities are:
Rate of increase in pensionable pay
rate of increase in current and future pensions
rate used to discount schemes’ liabilities
Inflation
Life expectancy
the amounts recognised in the income statement were:
current service cost
Past service cost
Total included in employment costs
Expected return on pension schemes’ assets
Interest cost on retirement benefit obligations
total included within net finance costs
total charge
change in
assumption
+/– 0.5%
+/– 0.5%
+/– 0.5%
+/– 0.5%
+/– 1 year
Impact on
schemes’
liabilities
+/– 2.0%
+/– 5.7%
+/– 9.0%
+/– 8.3%
+/– 2.8%
Group
Company
2010
£m
(10.5)
(1.1)
(11.6)
22.5
(24.8)
(2.3)
(13.9)
2009
£m
(10.2)
(1.1)
(11.3)
22.4
(24.0)
(1.6)
(12.9)
2010
£m
(0.8)
–
(0.8)
2.2
(2.6)
(0.4)
(1.2)
2009
£m
(0.8)
–
(0.8)
2.3
(2.6)
(0.3)
(1.1)
The actual return on schemes’ assets was a profit of £98.5m (2009 loss of £79.2m).
the amounts recognised in the statement of comprehensive income were:
Actuarial losses recognised in the year
the amounts recognised in the balance sheet were:
Fair value of schemes’ assets
Present value of defined benefit obligations
Net liability recognised in the balance sheet
Group
Company
2010
£m
2009
£m
(44.4)
(66.8)
2010
£m
(4.3)
2009
£m
(8.0)
Group
Company
2010
£m
402.4
(510.3)
(107.9)
2009
£m
276.4
(342.4)
(66.0)
2010
£m
37.3
(49.0)
(11.7)
The schemes’ assets and the expected long-term rates of return at the year end were:
Equities
Property
Bonds
other
expected
return
%
8.5
9.0
5.0
4.5
2010
2009
value
£m
244.5
23.3
125.8
8.8
402.4
fund
%
61
6
31
2
100
Expected
return
%
8.75
7.9
5.2
8.75
Value
£m
128.2
21.2
96.1
30.9
276.4
Other assets principally represent cash contributions received from the Group towards the year-end which are invested during the
subsequent financial year.
P.92 | Pennon GrouP AnnuAl rePort And Accounts | 2010
2009
£m
29.6
(36.9)
(7.3)
Fund
%
46
8
35
11
100
nOTES TO THE FInanCIaL STaTEmEnTS
29. retirement Benefit oBliGations continued
The Company’s share of the schemes’ assets at the balance sheet date were:
Equities
Property
Bonds
other
2010
£m
22.9
2.3
11.8
0.3
37.3
2009
£m
13.6
2.3
10.2
3.5
29.6
The expected return on schemes’ assets is determined by considering the long-term returns and the balance between risk and reward
on the various categories of investment assets held. Expected returns on equity and property investments reflect long-term rates of
return experienced in the respective markets. Expected yields on fixed interest investments are based on gross redemption yields as at
the balance sheet date.
In conjunction with its investment advisers, the trustees have structured the schemes’ investments with the objective of balancing
investment returns and levels of risk. The asset allocation for the main scheme has three principal elements:
– holding of bonds which is expected to be less volatile than most other asset classes and reflects the schemes’ liabilities
– a proportion of equities, with fund managers having freedom in making investment decisions to maximise returns
– investment of a relatively small proportion of the schemes’ assets (circa 10%) in alternative asset classes which give the potential for
gaining higher returns (property and currency).
The liabilities of the defined benefit schemes are measured by using the projected unit credit method which is an accrued benefits
valuation method in which the scheme liabilities make allowance for projected earnings.
Movements in the net liability were:
At 1 April
Income statement
statement of comprehensive income
regular contributions
Other employer contributions
Group
Company
2010
£m
(66.0)
(13.9)
(44.4)
3.2
13.2
2009
£m
(26.3)
(12.9)
(66.8)
1.3
38.7
2010
£m
(7.3)
(1.2)
(4.3)
–
1.1
2009
£m
(2.9)
(1.1)
(8.0)
–
4.7
At 31 March
(107.9)
(66.0)
(11.7)
(7.3)
Movements in the fair value of schemes’ assets were:
At 1 April
Expected return on schemes’ assets
Actuarial gains/(losses)
Acquisition
Members’ contributions
Benefits paid
Group regular contributions
Other employer contributions
At 31 March
Group
Company
2010
£m
276.4
22.5
65.7
38.2
1.0
(17.8)
3.2
13.2
2009
£m
331.5
22.4
(101.6)
–
0.4
(16.3)
1.3
38.7
2010
£m
29.6
2.2
6.3
–
–
(1.9)
–
1.1
402.4
276.4
37.3
2009
£m
33.9
2.3
(9.6)
–
0.1
(1.8)
–
4.7
29.6
Pennon GrouP AnnuAl rePort And Accounts | 2010 | P.93
nOTES TO THE FInanCIaL STaTEmEnTS
29. retirement Benefit oBliGations continued
Movements in the present value of schemes’ defined benefit obligations were:
At 1 April
service cost
Interest cost
Actuarial (losses)/gains
Acquisition
Members’ contributions
Benefits paid
At 31 March
Group
Company
2010
£m
2009
£m
(342.4)
(357.8)
(11.6)
(24.8)
(110.1)
(38.2)
(1.0)
17.8
(11.3)
(24.0)
34.8
–
(0.4)
16.3
2010
£m
(36.9)
(0.8)
(2.6)
(10.6)
–
–
1.9
2009
£m
(36.8)
(0.8)
(2.6)
1.6
–
(0.1)
1.8
(510.3)
(342.4)
(49.0)
(36.9)
The future cash flows arising from the payment of the defined benefits are expected to be settled primarily in the period between
15 and 40 years from the balance sheet date.
The five-year history of experience adjustments is:
2010
£m
2009
£m
2008
£m
2007
£m
2006
£m
Group
Fair value of schemes’ assets
Present value of defined benefit obligations
402.4
(510.3)
276.4
(342.4)
331.5
(357.8)
347.6
(388.8)
Net liability recognised
(107.9)
(66.0)
(26.3)
(41.2)
317.5
(359.2)
(41.7)
Experience gains/(losses) on schemes’ assets
Amount (£m)
Percentage of schemes’ assets
Experience gains/(losses) on defined benefit obligations
65.7
16.3%
(101.6)
(36.7)%
(44.7)
(13.5)%
1.5
0.4%
34.2
10.8%
Amount (£m)
Percentage of defined benefit obligations
2.3
0.4%
34.8
10.2%
49.8
13.9%
(2.7)
(0.7)%
(37.0)
(10.3)%
The cumulative actuarial gains recognised in the Group statement of comprehensive income at 31 March 2010 were £19.4m (2009 gains of £63.8m).
2010
£m
2009
£m
2008
£m
2007
£m
Company
Fair value of schemes’ assets
Present value of defined benefit obligations
37.3
(49.0)
29.6
(36.9)
33.9
(36.8)
27.0
(30.4)
Net liability recognised
(11.7)
(7.3)
(2.9)
(3.4)
Experience gains/(losses) on schemes’ assets
Amount (£m)
Percentage of schemes’ assets
6.0
16.1%
(9.6)
(32.4)%
4.0
11.8%
0.1
–
Experience gains/(losses) on defined benefit obligations
Amount (£m)
Percentage of defined benefit obligations
0.4
0.8%
1.6
4.3%
(5.3)
(14.4)%
(0.4)
(1.3)%
2006
£m
25.4
(28.7)
(3.3)
3.9
15.3%
(0.3)
(1.0)%
The cumulative actuarial gains recognised in the Company statement of comprehensive income at 31 March 2010 were £1.9m (2009 gains of £6.2m).
In 2008 the Group completed the triennial actuarial valuation of its defined benefit schemes as at 1 April 2007 which resulted in higher future
service and deficit recovery contributions. The Group updated the valuation of the main scheme to 31 March 2009 and has made deficit
recovery contributions of £13.2m during the year (2009 £38.7m). The Group monitors funding levels on an annual basis and expects to pay
total contributions of £34.4m during the year ended 31 March 2011.
P.94 | Pennon GrouP AnnuAl rePort And Accounts | 2010
nOTES TO THE FInanCIaL STaTEmEnTS
30. DeferreD tax
Deferred tax is provided in full on temporary differences under the liability method using a tax rate of 28% (2009 28%).
Movements on deferred tax were:
Group
Company
liabilities/(assets) at 1 April
charged/(credited) to the income statement
Credited to equity
Arising on acquisitions
2010
£m
2009
(Restated note 5)
£m
328.4
1.3
(17.6)
(0.9)
307.4
38.3
(17.9)
0.6
liabilities/(assets) at 31 March
311.2
328.4
2010
£m
(2.6)
(1.5)
(0.9)
–
(5.0)
2009
£m
(1.6)
1.0
(2.0)
–
(2.6)
Deferred tax assets have been recognised in respect of all temporary differences giving rise to deferred tax assets because it is probable
that these assets will be recovered.
All deferred tax assets and liabilities within the same jurisdiction are offset.
The movements in deferred tax assets and liabilities were:
Group
Deferred tax liabilities
At 1 April 2008
credited/(charged) to the income statement
Arising on acquisitions
At 31 March 2009
charged/(credited) to the income statement
Arising on acquisitions
at 31 march 2010
Deferred tax assets
At 1 April 2008
charged to the income statement
(Credited)/charged to equity
At 31 March 2009
(credited)/charged to the income statement
Credited to equity
Arising on acquisition
at 31 march 2010
Net deferred tax liabilities:
At 31 March 2009
at 31 march 2010
Accelerated tax depreciation
owned assets
(Restated note 5)
leased assets
£m
289.6
26.8
0.1
316.5
5.1
2.2
£m
15.5
0.8
–
16.3
0.7
–
other
(restated
note 5)
£m
total
(restated
note 5)
£m
22.2
(0.6)
0.5
22.1
(1.9)
1.4
327.3
27.0
0.6
354.9
3.9
3.6
323.8
17.0
21.6
362.4
Provisions
£m
retirement
benefit
obligations
£m
(6.6)
1.5
–
(5.1)
(1.8)
–
(1.4)
(8.3)
other
£m
(5.9)
2.2
0.8
(2.9)
(1.5)
(5.2)
(3.1)
total
£m
(19.9)
11.3
(17.9)
(26.5)
(2.6)
(17.6)
(4.5)
(7.4)
7.6
(18.7)
(18.5)
0.7
(12.4)
–
(30.2)
(12.7)
(51.2)
328.4
311.2
Pennon GrouP AnnuAl rePort And Accounts | 2010 | P.95
nOTES TO THE FInanCIaL STaTEmEnTS
30. DeferreD tax continued
Company
Deferred tax assets
At 1 April 2008
charged to the income statement
(Credited)/charged to equity
At 31 March 2009
credited to the income statement
(Credited)/charged to equity
at 31 march 2010
Deferred tax credited to equity during the year was:
Actuarial losses on defined benefit schemes
net fair value losses/(gains) on cash flow hedges
Deferred tax on other comprehensive loss
Share-based payments (note 35)
31. Provisions
Group
At 1 April 2009
charged to the income statement
landfill restoration
Arising on acquisition (note 38)
Utilised during year
at 31 march 2010
retirement
benefit
obligations
£m
(0.8)
1.0
(2.2)
(2.0)
–
(1.2)
other
£m
(0.8)
–
0.2
(0.6)
(1.5)
0.3
total
£m
(1.6)
1.0
(2.0)
(2.6)
(1.5)
(0.9)
(3.2)
(1.8)
(5.0)
Group
Company
2010
£m
12.4
5.0
17.4
0.2
17.6
2009
£m
18.7
–
18.7
(0.8)
17.9
2010
£m
1.2
(0.3)
0.9
–
0.9
2009
£m
2.2
–
2.2
(0.2)
2.0
environmental and
landfill restoration
£m
restructuring
£m
other provisions
£m
total
£m
97.5
4.5
2.6
3.2
(11.4)
96.4
0.3
5.0
–
–
(2.2)
3.1
0.2
98.0
–
–
–
–
9.5
2.6
3.2
(13.6)
0.2
99.7
The amount charged to the income statement includes £3.8m (2009 £4.5m) charged to finance costs as the unwinding of discounts
in provisions.
The addition to landfill restoration provision of £2.6m recognised in the year has been matched with an addition to property, plant
and equipment.
The analysis of provisions between current and non-current is:
current
non-current
2010
£m
21.5
78.2
99.7
2009
£m
18.8
79.2
98.0
Environmental and landfill restoration provisions are expected to be substantially utilised over the period from 2011 to beyond 2051.
The provisions have been established assuming current waste management technology based upon estimated costs at future prices which
have been discounted to present value. The restructuring provision related principally to severance costs and will be utilised within one year.
P.96 | Pennon GrouP AnnuAl rePort And Accounts | 2010
32. sHare CaPital
authorised
429,975,270 ordinary shares of 40.7p each
allotted, called up and fully paid
nOTES TO THE FInanCIaL STaTEmEnTS
2010
£m
2009
£m
175.0
175.0
number of shares
Treasury
shares
Ordinary
shares
£m
At 1 April 2008
Ordinary shares of 40.7p each
6,411,406
348,752,868
For consideration of £1.6m, shares re-issued under the Company’s Sharesave Scheme
(687,275)
687,275
At 31 March 2009 ordinary shares of 40.7p each
shares issued under the scrip dividend alternative
For consideration of £1.9m, shares re-issued under the Company’s Sharesave Scheme
(631,557)
5,724,131
349,440,143
–
1,986,553
631,557
144.5
–
144.5
0.8
–
at 31 march 2010 ordinary shares of 40.7p each
5,092,574
352,058,253
145.3
Shares held as treasury shares may be sold or re-issued for any of the Company’s share schemes, or cancelled.
employee share schemes
The Group operates a number of equity-settled share plans for the benefit of employees. Details of each plan are:
i) Sharesave Scheme
An all-employee savings related plan is operated that enables employees, including executive directors, to invest up to a maximum of
£250 per month for three or five years. These savings can then be used to buy ordinary shares at a price set at a 20% discount to the
market value at the start of the savings period at the third, fifth or seventh year anniversary of the option being granted. Options expire
six months following the exercise date and, except for certain specific circumstances such as redundancy, lapse if the employee leaves
the Group before the option exercise period commences.
Outstanding options to subscribe for ordinary shares of 40.7p each under the Company’s share option schemes are:
date granted and
subscription price fully paid
189p
177p
200p
270p
358p
522p
517p
386p
9 July 2002
8 July 2003
6 July 2004
5 July 2005
4 July 2006
3 July 2007
8 July 2008
6 July 2009
Period when
options normally
exercisable
2005 – 2009
2006 – 2010
2007 – 2011
2008 – 2012
2009 – 2013
2010 – 2014
2011 – 2015
2012 – 2016
thousands of shares in respect of
which options outstanding at 31 March
2009
2010
–
59
70
244
165
307
306
1,321
2,472
37
63
278
270
559
472
464
–
2,143
At 31 March 2010 there were 1,492 participants in the Sharesave Scheme (2009 1,299).
Pennon GrouP AnnuAl rePort And Accounts | 2010 | P.97
nOTES TO THE FInanCIaL STaTEmEnTS
32. sHare CaPital continued
employee share schemes continued
i) Sharesave Scheme (continued)
The number and weighted average exercise price of Sharesave options are:
At 1 April
Granted
Forfeited
Exercised
Expired
At 31 March
2010
2009
number of
ordinary shares
(thousands)
Weighted
average exercise
price per share (p)
number of
ordinary shares
(thousands)
Weighted
average exercise
price per share (p)
2,143
1,351
(371)
(632)
(19)
389
386
2,519
495
493 (158)
295 (687)
370 (26)
2,472
396
2,143
322
517
431
228
377
389
The weighted average price of the Company’s shares at the date of exercise of Sharesave options during the year was 468p (2009
594p). The options outstanding at 31 March 2010 had a weighted average exercise price of 396p (2009 389p) and a weighted average
remaining contractual life of 3.0 years (2009 1.9 years).
The aggregate fair value of Sharesave options granted during the year was £1.5m (2009 £0.8m), determined using the Black-Scholes
valuation model. the significant inputs into the valuation model at the date of issue of the options were:
Weighted average share price
Weighted average exercise price
Expected volatility
Expected life
Risk-free rate
Expected dividend yield
2010
2009
482p
386p
29.0%
646p
517p
21.3%
3.8 years
3.8 years
2.5%
4.7%
4.9%
3.3%
Expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous two years.
ii) Restricted Share Plan
Under this plan Executive Directors and senior management receive a conditional award of ordinary shares in the Company.
The eventual number of shares, if any, which vest is dependent upon the achievement of the performance condition of the plan
over the restricted period, being not less than three years.
the number and weighted average price of shares in the restricted share Plan are:
At 1 April
Vested
lapsed
At 31 March
2010
2009
number of
ordinary shares
(thousands)
Weighted
average exercise
price per share (p)
number of
ordinary shares
(thousands)
Weighted
average exercise
price per share (p)
332
–
(332)
–
498
–
498
–
684
(233)
(119)
332
449
357
494
498
The plan was succeeded in 2007 by the Performance and Co-investment Plan.
P.98 | Pennon GrouP AnnuAl rePort And Accounts | 2010
NOTES TO THE FINANCIAL STATEMENTS
32. sHare CaPital continued
employee share schemes continued
iii) Performance and Co-investment Plan
Executive Directors and senior management receive a conditional award of ordinary shares in the Company and are also required
to hold a substantial personal shareholding in the Company. The eventual number of shares, if any, which vest is dependent upon the
achievement of conditions of the plan over the restricted period, being not less than three years.
the number and price of shares in the Performance and co-investment Plan are:
At 1 April
Granted
At 31 March
2010
2009
number of
ordinary shares
(thousands)
Weighted
average exercise
price per share (p)
number of
ordinary shares
(thousands)
Weighted
average exercise
price per share (p)
886
579
1,465
598
486
554
436
450
886
557
638
598
The awards outstanding at 31 March 2010 had a weighted exercise price of 554p (2009 598p) and a weighted average remaining
contractual life of 1.4 years (2009 1.9 years).
The aggregate fair value of awards granted during the year was £1.9m (2009 £1.8m) determined using a Monte-Carlo simulation model.
the significant inputs into the valuation model at the date of the share awards were:
Weighted average share price
Expected volatility
Risk-free rate
2010
2009
486p
29.0%
2.5%
638p
21.3%
4.9%
Expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous two years.
iv) Annual Incentive Bonus Plan – Deferred Shares
Awards under the plan to Executive Directors and senior management involve the release of ordinary shares in the Company to
participants. there is no performance condition since vesting is conditional upon continuous service with the Group for a period of
three years from the award. The number and weighted average price of shares in the Incentive Bonus Plan are:
At 1 April
Granted
Vested
At 31 March
2010
2009
number of
ordinary shares
(thousands)
Weighted
average exercise
price per share (p)
number of
ordinary shares
(thousands)
Weighted
average exercise
price per share (p)
358
146
(213)
291
575
475
545
547
368
153
(163)
358
465
630
368
575
The awards outstanding at 31 March 2010 had a weighted average exercise price of 547p (2009 575p) and a weighted average remaining
contractual life of 1.8 years (2009 1.4 years). The Company’s share price at the date of the awards ranged from 473p to 620p.
The aggregate fair value of awards granted during the year was £0.7m (2009 £0.9m), determined from market value. No option pricing
methodology is applied since dividends declared on the shares are receivable by the participants in the scheme.
Further details of the plans and options granted to Directors, included above, are shown in the Directors’ Remuneration Report.
Pennon GrouP AnnuAl rePort And Accounts | 2010 | P.99
nOTES TO THE FInanCIaL STaTEmEnTS
33. sHare Premium aCCount
At 1 April 2008
At 31 March 2009
Adjustment for shares issued under the scrip dividend alternative
at 31 march 2010
34. CaPital reDemPtion reserve
£m
11.7
11.7
(0.8)
10.9
the capital redemption reserve represents the redemption of B shares and cancellation of deferred shares arising from a capital return
to shareholders undertaken during 2006.
At 1 April 2008
At 31 March 2009
at 31 march 2010
35. retaineD earninGs anD otHer reserves
Group
At 1 April 2008
Profit for year
Other comprehensive loss for the year
Dividends paid relating to 2008
Credit to equity in respect of share-based payments
charge in respect of share options vesting
Deferred tax in respect of share-based payments
Proceeds from treasury shares re-issued
At 31 March 2009
Profit for year
Other comprehensive income/(loss) for the year
Dividends paid relating to 2009
Adjustment for shares issued under the scrip dividend alternative
Credit to equity in respect of share-based payments
charge in respect of share options vesting
Deferred tax in respect of share-based payments
Equity component of convertible bond issued
Proceeds from treasury shares re-issued
own
shares
£m
(4.5)
–
–
–
–
1.5
–
–
(3.0)
–
–
–
–
–
0.8
–
–
–
Hedging reserve
£m
retained earnings
(Restated note 5)
£m
3.1
–
(21.0)
–
–
–
–
–
(17.9)
–
5.0
–
–
–
–
–
–
–
346.5
89.8
(48.1)
(69.1)
2.7
(1.5)
(0.8)
1.6
321.1
139.5
(35.2)
(73.4)
9.6
2.7
(0.8)
0.2
10.0
1.9
£m
144.2
144.2
144.2
total
(restated
note 5)
£m
345.1
89.8
(69.1)
(69.1)
2.7
–
(0.8)
1.6
300.2
139.5
(30.2)
(73.4)
9.6
2.7
–
0.2
10.0
1.9
at 31 march 2010
(2.2)
(12.9)
375.6
360.5
The own shares reserve represents the cost of ordinary shares in Pennon Group Plc issued to or purchased in the market and held by
the Pennon Employee Share Trust to satisfy awards under the Group’s Restricted Share Plan and Incentive Bonus Plan.
The market value of the 596,000 ordinary shares (2009 810,000 ordinary shares) held by the trust at 31 March 2010 was £3.1m
(2009 £3.3m).
P.100 | Pennon GrouP AnnuAl rePort And Accounts | 2010
nOTES TO THE FInanCIaL STaTEmEnTS
35. retaineD earninGs anD otHer reserves continued
Company
At 1 April 2008
Profit for the year
Other comprehensive loss for the year
Dividends paid relating to 2008
Credit to equity in respect of share-based payments
Deferred tax in respect of share-based payments
Proceeds from treasury shares re-issued
At 31 March 2009
Profit for the year
Other comprehensive income/(loss) for the year
Dividends paid relating to 2009
Adjustment for shares issued under the scrip dividend alternative
Credit to equity in respect of share-based payments
Equity component of convertible bond issued
Proceeds from treasury shares re-issued
Hedging
reserve
£m
retained
earnings
£m
0.5
–
(1.9)
–
–
–
–
(1.4)
–
1.1
–
–
–
–
–
393.5
140.1
(5.8)
(69.1)
0.6
(0.2)
1.6
460.7
81.6
(3.4)
(73.4)
9.6
0.7
10.0
1.9
total
£m
394.0
140.1
(7.7)
(69.1)
0.6
(0.2)
1.6
459.3
81.6
(2.3)
(73.4)
9.6
0.7
10.0
1.9
at 31 march 2010
(0.3)
487.7
487.4
36. CasH floW from oPeratinG aCtivities
Reconciliation of profit for the year to cash generated from operations:
Cash generated from operations
Continuing operations
Profit for the year
Adjustments for:
Employee share schemes
Profit on disposal of property, plant and equipment
depreciation charge
Amortisation of intangible assets
Share of post-tax profit from joint ventures
Finance income
Finance costs
dividends receivable
Taxation charge/(credit)
Changes in working capital (excluding the effect of acquisition of subsidiaries):
decrease in inventories
Increase in trade and other receivables
Decrease/(increase) in trade and other payables
decrease in retirement benefit obligations from contributions
decrease in provisions
Group
Company
2010
£m
2009
(Restated note 5)
£m
2010
£m
2009
£m
139.5
89.8
81.6
140.1
2.8
(3.6)
135.1
0.3
(1.1)
(34.4)
116.0
–
44.3
0.3
(32.4)
9.3
(4.8)
(7.9)
2.7
(2.1)
131.3
1.2
(0.8)
(45.8)
138.0
–
69.6
0.8
(20.7)
(24.5)
(28.7)
(10.2)
0.7
–
0.1
–
–
(22.9)
21.8
(80.6)
(0.2)
–
(123.7)
9.7
(0.3)
–
0.6
–
–
–
–
(24.3)
31.8
(128.6)
(0.3)
–
(12.1)
(9.1)
(3.9)
–
cash generated/(outflow) from operations
363.4
300.6
(113.8)
(5.8)
Pennon GrouP AnnuAl rePort And Accounts | 2010 | P.101
nOTES TO THE FInanCIaL STaTEmEnTS
37. net BorroWinGs
cash and cash deposits
Borrowings – current
Bank overdrafts
other current borrowings
Finance lease obligations
Amounts owed to subsidiary undertakings
total current borrowings
Borrowings – non-current
Bank and other loans
other non-current borrowings
Finance lease obligations
total non-current borrowings
total net borrowings
Group
Company
2010
£m
2009
£m
2010
£m
2009
£m
493.9
353.3
174.6
168.7
(12.7)
(184.1)
(32.2)
–
(12.9)
(219.9)
(30.1)
–
–
–
(70.0)
(205.8)
–
–
(281.2)
(280.2)
(229.0)
(262.9)
(351.2)
(486.0)
(681.5)
(273.6)
(507.5)
(287.7)
(1,205.1)
(1,187.2)
(462.8)
(189.5)
–
–
–
–
(2,160.2)
(1,982.4)
(462.8)
(189.5)
(1,895.3)
(1,892.0)
(639.4)
(506.8)
Bank overdrafts at the balance sheet date arise from the timing of the payment of unpresented cheques.
P.102 | Pennon GrouP AnnuAl rePort And Accounts | 2010
nOTES TO THE FInanCIaL STaTEmEnTS
38. aCquisitions
On 8 April 2009 the entire issued share capital of Greater Manchester Waste Limited (now renamed Viridor Waste (Greater
Manchester) Limited) was purchased by Viridor Waste Management Limited for a nominal consideration. The acquisition has been
accounted for using the acquisition method.
Viridor Waste (Greater Manchester) Limited contributed revenues of £75.5m and a profit before tax of £6.5m for the period from
8 April 2009 to 31 March 2010. These amounts have been calculated after applying the Group’s accounting policies and adjusting the
results to reflect the fair value adjustments.
The residual excess over the net assets acquired has been recognised as goodwill. The goodwill is attributed to the profitability of the
acquired business.
other intangible assets
Property, plant and equipment
Inventories
receivables
Payables
retirement benefit obligations
Provisions – environmental
Taxation – current
Taxation – deferred
cash and cash deposits
net assets/(liabilities) acquired
Goodwill
total consideration
satisfied by:
cash
Directly attributable costs
net cash inflow arising on acquisition
cash consideration
Cash and cash deposits acquired
Book value
£m
1.1
26.5
0.4
6.3
(11.4)
(1.5)
–
0.7
(0.3)
6.3
28.1
Fair value
adjustment
£m
(1.1)
(10.6)
–
–
Fair value
£m
–
15.9
0.4
6.3
(19.7)
(31.1)
1.5
(3.2)
(0.2)
(0.6)
–
(33.9)
–
(3.2)
0.5
(0.9)
6.3
(5.8)
5.8
–
–
–
–
–
6.3
6.3
Pennon GrouP AnnuAl rePort And Accounts | 2010 | P.103
nOTES TO THE FInanCIaL STaTEmEnTS
38. aCquisitions continued
On 5 June 2009 the entire issued share capital of London Recycling Limited (now renamed Viridor London Recycling Limited) was
purchased by Viridor Waste Management Limited for a cash consideration of £11.1m, including costs of £0.5m. The acquisition has been
accounted for using the acquisition method.
Viridor London Recycling Limited contributed revenues of £7.3m and a loss before tax of £0.5m for the period from 5 June 2009 to
31 March 2010. If the acquisition had occured on 1 April 2009 Group revenues for the year would have been £1,070.3m and profit for
the year would have been £139.4m. These amounts have been calculated after applying the Group’s accounting policies and adjusting
the results to reflect the provisional fair value adjustments.
The residual excess over the net assets acquired has been recognised as goodwill. The provisional goodwill is attributed to the
profitability of the acquired business.
Book value
£m
Fair value
adjustment
£m
Fair value
£m
Property, plant and equipment
Inventories
receivables
Payables
loans
leases
net assets acquired
Goodwill
total consideration
satisfied by:
cash
Directly attributable costs
net cash outflow arising on acquisition
cash consideration
Cash and cash deposits acquired
3.2
0.1
1.6
(0.8)
(1.2)
(0.3)
2.6
–
–
–
–
–
–
–
3.2
0.1
1.6
(0.8)
(1.2)
(0.3)
2.6
8.5
11.1
10.6
0.5
11.1
11.1
–
11.1
P.104 | Pennon GrouP AnnuAl rePort And Accounts | 2010
nOTES TO THE FInanCIaL STaTEmEnTS
38. aCquisitions continued
On 31 July 2009 the entire issued share capital of Intercontinental Recycling Limited (now renamed Viridor Polymer Recycling Limited)
was purchased by Viridor Waste Management Limited for a cash consideration of £4.7m, including costs of £0.5m. The acquisition has
been accounted for using the acquisition method.
Viridor Polymer Recycling Limited contributed revenues of £6.9m and a loss before tax of £0.4m for the period from 31 July 2009 to
31 March 2010. If the acquisition had occured on 1 April 2009 Group revenues for the year would have been £1,071.5m and profit for
the year would have been £138.9m. These amounts have been calculated after applying the Group’s accounting policies and adjusting
the results to reflect the provisional fair value adjustments.
The residual excess over the net assets acquired has been recognised as goodwill. The provisional goodwill is attributed to the
profitability of the acquired business.
Book value
£m
Fair value
adjustment
£m
Fair value
£m
Property, plant and equipment
Inventories
receivables
Payables
Taxation – deferred
loans
cash and cash deposits
net assets acquired
Goodwill
total consideration
satisfied by:
cash
Directly attributable costs
net cash outflow arising on acquisition
cash consideration
Cash and cash deposits acquired
3.1
0.4
1.1
(2.3)
1.8
(3.8)
0.2
0.5
–
–
–
–
–
–
–
–
3.1
0.4
1.1
(2.3)
1.8
(3.8)
0.2
0.5
4.2
4.7
4.2
0.5
4.7
4.7
(0.2)
4.5
Pennon GrouP AnnuAl rePort And Accounts | 2010 | P.105
nOTES TO THE FInanCIaL STaTEmEnTS
39. PrinCiPal suBsiDiary anD Joint venture unDertaKinGs at 31 marCH 2010
Country of incorporation, registration and principal operations
Water and sewerage
South West Water Limited*
South West Water Finance Plc
Waste management
Viridor Limited*
Viridor Waste Limited
Viridor Waste Exeter Limited
Viridor Waste Management Limited
Viridor EnviroScot Limited
Viridor Glass Recycling Limited
Viridor Parkwood Holdings Limited
Parkwood Group Limited
Viridor Waste (Sheffield) Limited
Viridor Resource Management Limited
Viridor Waste Kent Limited
Viridor Waste (Landfill Restoration) Limited
Viridor Waste (Somerset) Limited
Viridor Waste (Thames) Limited
Viridor Waste (Greater Manchester) Limited
Viridor London Recycling Limited
Viridor Polymer Recycling Limited
Viridor Waste Suffolk Limited
Viridor Waste (West Sussex) Limited
other
Peninsula Insurance Limited*
* Indicates the shares are held directly by Pennon Group Plc, the Company.
† Operations are carried out in England.
England
England
England
England
England
England
Scotland
England
British Virgin Islands †
England
England
England
England
England
England
England
England
England
England
England
England
Guernsey
The subsidiary undertakings are wholly-owned and all shares in issue are ordinary shares. All companies above are consolidated in
the Group financial statements.
Joint ventures and associate
All joint ventures, the associate and the subsidiary undertakings of Lakeside Energy from Waste Holdings Limited, Viridor Laing
(Greater Manchester) Holdings limited and Ineos runcorn (tPs) Holdings limited are incorporated and registered in england
which is also their country of operation.
Lakeside Energy from Waste Holdings Limited
1,000,000 A ordinary shares
1,000,000 B ordinary shares
–
100%
Lakeside Energy from Waste Limited
Waste management
Shares in Lakeside Energy from Waste Holdings Limited are held by Viridor Waste Management Limited.
share capital in issue
Percentage held
activity
Viridor Laing (Greater Manchester) Holdings Limited
2 ordinary shares
50%
Viridor Laing (Greater Manchester) Limited
Waste management
Shares in Viridor Laing (Greater Manchester) Holdings Limited are held by Viridor Waste Management Limited.
Ineos runcorn (tPs) Holdings limited
1,000 A ordinary shares
186,750 B1 ordinary shares
62,250 B2 ordinary shares
20%
50%
–
Ineos runcorn (tPs) limited
Waste management
Shares in INEOS Runcorn (TPS) Holdings Limited are held by Viridor Waste Management Limited.
P.106 | Pennon GrouP AnnuAl rePort And Accounts | 2010
nOTES TO THE FInanCIaL STaTEmEnTS
40. oPeratinG lease Commitments
Group
Company
The future aggregate minimum lease payments under non-cancellable
operating leases are:
Within one year
Later than one year and less than five years
After five years
2010
£m
7.4
23.8
89.1
2009
£m
2010
£m
2009
£m
7.2
19.1
81.2
–
–
–
–
–
–
–
–
120.3
107.5
The Group leases various offices, depots and workshops under non-cancellable operating lease agreements. The leases have various
terms, escalation clauses and renewal rights. Property leases are negotiated for an average term of 25 years and rentals are reviewed on
average at five yearly intervals.
The Group also leases plant and machinery under non-cancellable operating lease agreements.
41. ContinGent liaBilities
Guarantees:
Borrowing facilities of subsidiary undertakings
contractors’ claims on capital schemes
Performance bonds
other
Group
Company
2010
£m
–
3.0
104.8
6.9
114.7
2009
£m
2010
£m
2009
£m
–
1.3
96.6
6.9
104.8
363.8
–
104.8
6.9
475.5
452.4
–
96.6
6.9
555.9
Guarantees in respect of performance bonds are entered into in the normal course of business. No liability is expected to arise in
respect of the guarantees.
Viridor Waste Management Limited has given a commitment to supply 200,000 tonnes of waste per annum (or pay market price based
compensation) to the energy from waste plant of the joint venture in Lakeside Energy from Waste Holdings Limited. The Directors
consider that the committed waste volume will be available in the ordinary course of business.
Other contingent liabilities relate to a possible obligation to pay further consideration in respect of a previously acquired business when
the outcome of planning applications is known.
42. CaPital Commitments
contracted but not provided
Share of commitment contracted but not provided by joint ventures
Group
Company
2010
£m
104.1
135.2
239.3
2009
£m
85.3
6.1
91.4
2010
£m
–
–
–
2009
£m
–
–
–
43. relateD Party transaCtions
During the year, Group companies entered into the following transactions with related parties who are not members of the Group:
Sales of goods and services
Lakeside Energy from Waste Limited
Viridor Laing (Greater Manchester) Limited
Purchase of goods and services
Lakeside Energy from Waste Limited
2010
£m
0.2
49.0
3.8
2009
£m
–
–
–
Pennon GrouP AnnuAl rePort And Accounts | 2010 | P.107
nOTES TO THE FInanCIaL STaTEmEnTS
43. relateD Party transaCtions continued
Year end balances
Receivables due from related parties
Viridor Laing (Greater Manchester) Limited
Lakeside Energy from Waste Limited
Ineos runcorn (tPs) limited
Payables due to related parties
Lakeside Energy for Waste Limited
2010
£m
20.7
19.5
5.7
45.9
2009
£m
–
10.6
–
10.6
5.0
–
The £5.0m payable relates to consortium relief due to Lakeside Energy from Waste Limited.
The £45.9m (2009 £10.6m) relates to loans to related parties included within receivables and due for repayment in instalments between
2011 and 2033. Interest is charged at an average of 11.3% (2009 15%).
Company
The following transactions with subsidiary undertakings occurred in the year:
sales of goods and services (management fees)
Purchase of goods and services (support services)
Interest receivable (loans)
Interest payable (short-term funding)
dividends received
2010
£m
7.1
0.5
19.4
0.1
80.6
2009
£m
7.3
0.5
17.6
1.7
128.6
Sales of goods and services to subsidiary undertakings are at cost. Purchases of goods and services from subsidiary undertakings are
under normal commercial terms and conditions which would also be available to unrelated third parties.
Year end balances
Receivables due from subsidiary undertakings
loans
trading balances
2010
£m
2009
£m
420.6
339.1
0.9
0.9
Interest on £104.8m of the loans has been charged at a fixed rate of 5.0% and on £104.3m at a fixed rate of 6.0% (2009 £76.2m, 6.0%).
Interest on the balance of the loans is charged at 12 month LIBOR + 1.5% (2009 Barclays Bank Plc base rate +1%). The loans are due
for repayment in instalments over the period 2011 to 2014. During the year there were no further provisions (2009 £0.1m) in respect of
loans to subsidiaries not expected to be repaid.
Payables due to subsidiary undertakings
loans
trading balances
Payables due to joint venture
trading balances
The loans from subsidiary undertakings are unsecured and interest-free without any terms for repayment.
P.108 | Pennon GrouP AnnuAl rePort And Accounts | 2010
2010
£m
2009
£m
281.2
280.2
16.3
11.1
5.0
–
FIVE-YEaR FInanCIaL SummaRY
2007*
2006*
£m
£m
2008
(restated
note 5)
£m
879.4
243.0
(85.6)
0.2
157.6
(5.3)
(16.4)
135.9
69.1
748.3
202.1
(69.2)
0.3
133.2
(2.1)
(37.2)
93.9
65.6
38.9p
1.3p
(2.6p)
37.6p
26.5p
0.6p
3.8p
30.9p
19.81p
18.55p
645.7
176.7
(64.3)
0.1
112.5
(58.4)
(16.3)
37.8
61.0
9.9p
10.4p
5.3p
25.6p
17.2p
2008
(restated
note 5)
£m
2007*
2006*
£m
£m
89.0
207.7
37.0
245.1
45.8
249.7
2010
£m
2009
(restated
note 5)
£m
1,068.9
269.6
(81.6)
1.1
189.1
(5.3)
(44.3)
139.5
79.6
39.9p
1.3p
0.4p
41.6p
22.55p
2010
£m
9.3
190.2
958.2
257.0
(92.2)
0.8
165.6
(6.2)
(69.6)
89.8
73.4
25.8p
1.2p
11.1p
38.1p
21.0p
2009
(restated
note 5)
£m
3.4
231.8
3,183.4
165.1
3,036.3
40.5
2,931.0
199.7
2,728.6
(56.7)
(2,687.6)
(2,476.2)
(2,485.2)
(2,044.7)
2,527.5
(61.2)
(1,885.1)
income statement
revenue
Underlying operating profit
net finance costs
share of profit in joint ventures
Underlying profit before tax and exceptional items
Non-underlying and exceptional items (before tax)
Taxation
Profit for the year
dividends proposed
Underlying earnings per share (basic):
From continuing operations
earnings per share
Non-underlying and exceptional items (net of tax)
Deferred tax
Underlying earnings per share
declared dividends per share
Capital expenditure
Acquisitions
Property, plant and equipment
Balance sheet
non-current assets
net current assets/(liabilities)
non-current liabilities
net assets
660.9
600.6
645.5
627.2
581.2
number of employees (average for year)
Water and sewerage business
Waste management
other businesses
1,191
2,853
43
4,087
1,227
2,154
41
3,422
1,276
2,059
42
3,377
1,301
1,686
38
3,025
1,299
1,388
35
2,722
* Prior to the application of IFRIC 12 “Service concession arrangements”.
Pennon GrouP AnnuAl rePort And Accounts | 2010 | P.109
SHaREHOLDER InFORmaTIOn
finanCial CalenDar
Financial year-end
Twenty-first Annual General Meeting
Ex-dividend date for 2010 Final dividend
Record date for 2010 Final dividend
2010 Final dividend payable
2010/11 Half yearly financial report announcement
2011 Interim dividend payable
2011 Preliminary results announcement
Twenty-second Annual General Meeting
2011 Final dividend payable
31 March
29 July 2010
11 August 2010*
13 August 2010*
8 October 2010*
november 2010
April 2011
May 2011
July 2011
october 2011
* the above dates are subject to obtaining shareholder approval at the 2010 Annual General Meeting to the payment of a final dividend for the year ended 31 March 2010.
sCriP DiviDenD alternative
subject to obtaining shareholder approval at the 2010 Annual General Meeting to the
payment of a final dividend for the year ended 31 March 2010, the timetable for offering the
scrip dividend Alternative will be as follows:
11 August 2010
13 August 2010
27 August 2010
Ordinary shares quoted ex dividend
record date for final cash dividend
Posting of scrip dividend offer
Pennon Group Plc is listed on the London Stock
Exchange and meets the requirements of a
Premium listing. this is a listing that meets the
more stringent UK ‘super-equivalent standards’
20 september 2010
Final date for receipt of Forms of Election/Mandate
compared with a ‘standard listing’ which meets
7 october 2010
Posting of dividend cheques and share certificates
eu minimum standards.
8 October 2010
8 October 2010
Final cash dividend payment date
First day of dealing in the new ordinary shares
sHareHolDers’ analysis at 31 marCH 2010
range
1 - 100
101 - 1,000
1,001 - 5,000
5,001 - 50,000
50,001 - 100,000
100,001 - HIGHest
Individuals
companies
trust companies (pension funds
etc)
Banks and nominees
number of
shareholders
Percentage of
total shareholders
Percentage of
ordinary shares
2,441
9,555
10,492
1,433
80
252
24,253
20,602
223
3
3,425
24,253
10.06
39.40
43.26
5.91
0.33
1.04
0.02
1.41
6.29
4.40
1.58
86.30
100.00
100.00
84.95
0.92
0.01
8.67
3.54
0.00
14.12
87.79
100.00
100.00
Further shareholder information may be found at pennon-group.co.uk
P.110 | Pennon GrouP AnnuAl rePort And Accounts | 2010
suBstantial sHareHolDinGs
At 14 June 2010 interests in the issued share
capital had been notified pursuant to the
Financial Service Authority’s Disclosure and
Transparency Rules:
Invesco ltd
Ameriprise Financial Inc
Pictet Asset Management sA
11.98%
9.98%
7.24%
AXA SA and its Group Companies
6.14%
Legal & General Group Plc
Prudential Plc
5.91%
5.39%
SHaREHOLDER InFORmaTIOn
‘Brokers’ Contacting shareholders –
Boiler room scams
A number of companies, including Pennon
Group Plc, continue to be aware that their
shareholders have received unsolicited
phone 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 sell them
what can turn out to be worthless or high risk
shares in US or UK investments. They can
be very persistent and extremely persuasive
and a 2006 survey by the Financial Services
Authority (FSA) has reported that the average
amount lost by investors is around £20,000.
It is not just the novice investor who has been
duped in this way; many of the victims had
been successfully investing for several years.
Shareholders are advised to be wary of any
unsolicited advice, offers to buy shares at a
discount or offers of free reports into the
Company. If you are contacted in this manner,
please make sure you obtain the correct name
of the person and organisation and where they
are based. You should also check that they are
properly authorised by the FSA before getting
involved and should call the organisation back
using their details in the FSA register to verify
their authorisation - you can check online
fsa.gov.uk/register/home.do If you deal
with an unauthorised firm, you would not
be eligible to receive any payment under the
Financial Services Compensation Scheme. The
FSA can be contacted by completing an online
form at fsa.gov.uk/pages/Doing/regulated/
law/alerts/overseas.shtml
Details of any share dealing facilities that
the Company endorses will be included in
Company mailings.
More detailed information on this or similar
activity can be found on the FSA website
moneymadeclear.fsa.gov.uk/consumer
sHareHolDer serviCes
online portfolio service
The online portfolio service provided by
capita registrars gives shareholders access to
more information on their investments. details
of the portfolio service are available online at
capitashareportal.com
electronic communications
The Company has passed a resolution which
allows it to communicate with its shareholders
by means of its website.
Shareholders currently receiving a printed
copy of the Annual Report who now wish
to sign up to receive all future shareholder
communications electronically, can do so by
registering with capita registrars’ share portal.
Go to capitashareportal.com to register,
select ‘Account Registration’ and then follow
the on-screen instructions by inputting your
surname, your Investor Code (which can
be found on your Form of Proxy) and your
postcode as well as entering an e-mail address
and selecting a password. some facilities will
require an activation code which will be sent
to you in the post following registration.
electronic Proxy voting
Shareholders also have the opportunity to
register the appointment of a proxy for any
general meeting of the Company once notice
of the meeting has been given and may do so
via capitashareportal.com shareholders
who register an ‘e-mail’ preference will not
receive a paper proxy form. Instead they
will receive an e-mail alert advising them of
general meetings of the Company, with links
to the notices of Meetings and annual and half
yearly accounts.
the Pennon website
Pennon’s website pennon-group.co.uk
provides news and details of the Company’s
activities plus links to its business websites.
the Investor Information section contains
up-to-date information for shareholders
including comprehensive share price
information; financial results; dividend
payment dates and amounts; and Stock
Exchange announcements. There is also a
comprehensive share services section on
the website which includes information
on buying, selling and transferring shares;
and on the action to be undertaken by
shareholders in the event of a change in
personal circumstances, for example, a change
of address.
share dealing service
the low-cost share dealing service offered
by Stocktrade enables shareholders to buy
and sell shares in the Company on a low-cost
basis and to make regular investments in the
Company. Telephone Stocktrade on 0845 601
0995 and quote: LOW CO107. Commission
is 0.5% (subject to a minimum charge of
£17.50) to £10,000, then 0.2% thereafter.
Change of registrar
On 10 May 2010 the Company changed its
registrar from Equiniti to Capita Registrars.
capita registrars can be contacted as follows:
capita registrars
northern House
Woodsome Park
Fenay Bridge
Huddersfield
HD8 0GA
Telephone: 0871 664 9234*
Overseas telephone: +44 800 141 2951
email: pennon@capitaregistrars.com
*(calls cost 10p per minute plus network extras)
Lines are open 8:30am - 5.30pm Mon - Fri
share gift service
Through Sharegift, an independent charity
share donation scheme, shareholders who
only have a small number of shares with a
value that makes it uneconomical to sell them,
can donate such shares to charity. Donations
can be made by completion of a simple share
transfer form which is available from the
Company’s registrars, Capita Registrars.
individual savings accounts
By holding their shares in the Company in an
Individual savings Account (IsA), shareholders
may gain tax advantages.
scrip Dividend alternative
The Company operates a Scrip Dividend
Alternative. the scrip dividend Alternative
provides shareholders with an opportunity
to invest the whole of, or part of, the cash
dividend they receive on their Pennon
Group Plc shares to buy further shares in
the Company without incurring stamp duty
or dealing expenses. Subject to obtaining
shareholder approval at the 2010 Annual
General Meeting to the payment of a final
dividend for the year ended 31 March 2010,
full details of the scrip dividend Alternative,
including how to join, will be sent out to
shareholders on 27 August 2010. the full
timetable for offering the scrip dividend
Alternative is given opposite on page 110.
Pennon Group Plc Registered Office: Peninsula House, Rydon Lane, Exeter EX2 7HR
registered in england no. 2366640
Pennon GrouP AnnuAl rePort And Accounts | 2010 | P.111
CONTENTS
Financial highlights and Group strategy ..............1
Directors’ Report continued
About our businesses:
South West Water:
Directors’ Report continued
Pennon Group:
Other financial information ......................... 28
Directors’ Report
Business Review:
Pennon Group:
Regulatory and competitive environment ...16
Key relationships ............................................. 30
Chairman’s statement .......................................2
Customers, community and employees ......18
Principal risks and uncertainties ................ 30
Key relationships ............................................. 20
Our corporate responsibility ...................... 32
Financial performance ......................................4
Principal risks and uncertainties ................ 21
Interpretation ................................................... 37
Funding position .................................................7
V iridor:
Other statutory information ........................... 38
Chief Executives’ overviews:
Regulatory and competitive environment ..22
Board of Directors .................................................. 40
South West Water ............................................8
Customers, community and employees.. 24
Directors’ Remuneration Report ...................... 41
V iridor ................................................................. 12
Key relationships ............................................. 25
Corporate Governance and
Principal risks and uncertainties ................ 26
Internal Control ....................................................... 49
Independent Auditors’ Report ............................ 53
Financial statements ................................................ 54
Five-year financial summary ...............................109
Shareholder information ..................................... 110
The Group’s key performance indicators are shown throughout the Business Review by:
KPI
PENNON GROUP ANNUAL REPORT AND ACCOUNTS | 2010
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Pennon Group Plc Registered Office: Peninsula House, Rydon Lane, Exeter, Devon, England EX2 7HR pennon-group.co.uk
Registered in England No. 2366640