Final Results

Pennon Group PLC 30 May 2002 PENNON GROUP PLC PRELIMINARY RESULTS FOR THE YEAR ENDED 31 MARCH 2002 Pennon Group announces its unaudited results for the year ended 31 March 2002. FINANCIAL HIGHLIGHTS - Profit before tax up 4% to Â£77.4m - Earnings per share up 31% to 54.3p - Dividend - recommended final dividend up 4% to 25.4p - full year dividend up 4% to 37.5p - Sale of Viridor Instrumentation for Â£105.5m - Return of value from the disposal of Viridor Instrumentation - special interim dividend of 70p coupled with consolidation of share capital OPERATIONAL HIGHLIGHTS South West Water - Remains confident of outperforming the regulatory contract to 2005 - Continues to improve efficiency - Delivers highest ever levels of drinking water and bathing water compliance - Completed Interim Determination Viridor Waste - 16% growth of operating profit before goodwill amortisation - Two acquisitions completed with a third shortly after the year end STRATEGIC INITIATIVES - Securitisation no longer under consideration - Strategy is for South West Water to outperform the regulatory contract and to continue to grow Viridor Waste - Profitable sale of Viridor Instrumentation. Special interim dividend to be paid from the sale proceeds - Corporate re-organisation completed Chairman, Ken Harvey, said: 'The Board, together with its advisers, has conducted an extensive review of financial restructuring options including that of a whole business securitisation of South West Water. The technical feasibility of securitising was established. However, the Board has concluded that securitisation for Pennon Group is unlikely to create sufficient incremental shareholder value to outweigh the significant implementation and other costs and identifiable risks. The Board has decided, therefore, not to pursue this option for the foreseeable future. 'The Board will continue to focus on adding value for shareholders by pursuing the policy of outperforming the regulatory contract in South West Water and of continuing to grow Viridor Waste. A special interim dividend will be paid from the proceeds of the sale of Viridor Instrumentation. ' For further information on 30 May 2002, please contact: Ken Harvey Chairman ) David Dupont Group Director of Finance ) 020 7831 3113 Richard Hughes Strategic Planning Manager ) Andrew Dowler Financial Dynamics ) Stephen Swain Communications Manager 01392 443022 GROUP OVERVIEW Turnover from continuing operations rose Â£27.8m to Â£381.0m. Turnover in South West Water increased by Â£9.0m to Â£260.4m and turnover in Viridor Waste increased by Â£19.2m to Â£125.3m. Overall group turnover reduced by Â£11.2m to Â£423.9m principally as a consequence of the disposals of Viridor Instrumentation and T J Brent. Operating profit from continuing operations reduced by Â£1.3m to Â£119.1m. South West Water's operating profit remained broadly unchanged on last year (Â£107.0m for 2001/02 vs Â£107.3m for 2000/01) and Viridor Waste's increased from Â£13.1m to Â£14.9m. After disposals and restructuring, including Â£2.1m costs relating to testing the feasibility of balance sheet restructuring, overall Group operating profit fell Â£6.3m to Â£121.8m. Profit before tax was up 4% to Â£77.4m. Profit before tax in continuing operations was up Â£0.8m to Â£69.3m. The disposal of Viridor Instrumentation produced an exceptional profit of Â£5.1m in 2001/02. Earnings per share before exceptional items rose by 17% to 50.6p and after exceptional items increased 31% to 54.3p. Capital expenditure for the Group rose Â£19.9m to Â£186.4m, comprising Â£167.6m for South West Water and Â£18.8m for Viridor Waste and other Group activities (2000/01 Â£154.4m and Â£12.1m respectively.) Two waste management businesses, The Suffolk Waste Disposal Company Limited and Lavelle & Sons Limited, were acquired during the year for a total cash consideration of Â£12.1m. A further acquisition, Richardson Limited, was made shortly after the year end for a cash consideration of Â£11.9m. Viridor Instrumentation was sold in February 2002 for Â£105.5m which included Â£9.5m in respect of the cash transferred with the business. With the adoption of Financial Reporting Standard 18 'Accounting Policies' (FRS 18), the Directors have reviewed the accounting policies of the Group and decided that, in the current reporting environment which encourages increased clarity and transparency in accounting transactions, it is appropriate to present the Group's defeased lease arrangements in a manner that improves their understandability and comparability with other utilities. Accordingly, the rental obligations and cash deposits associated with these leases have now been recognised on the balance sheet separately. Net debt for the Group at 31 March 2002 was Â£751.3m, including the proceeds from the sale of Viridor Instrumentation, virtually unchanged on that at 31 March 2001, as restated. Gearing, being net borrowings to shareholders funds, was 77% at 31 March 2002 (83% at 31 March 2001, as restated). Interest cover, before exceptional items, was maintained at 2.5 times. On a pro forma basis, assuming payment of the special interim dividend, gearing was 96%. The Board has recommended a final dividend of 25.4p up 4.1%, subject to shareholder approval. Together with the interim dividend of 12.1p, this will result in a total dividend for the year of 37.5p, representing an increase of 4.2% on the total dividend for 2001. In the absence of unforeseen circumstances, the Board intends to continue to pursue a progressive dividend policy. The total cost of the dividend for 2001/02 is Â£51.4m. Following the sale of Viridor Instrumentation, a special interim dividend for 2002/03 of 70p per share has been declared, at an estimated cost of Â£96m, being the net sale proceeds. The final dividend, along with the special interim dividend, will be paid on 1 October 2002 to shareholders on the register on 30 August 2002. As in previous years, shareholders will be given the opportunity to participate in a Dividend Reinvestment Plan, details of which will be circulated with the Annual Report. Reflecting the return of capital by way of special interim dividend from the sale of Viridor Instrumentation, a resolution will be proposed at the Annual General Meeting to consolidate the share capital of the Company in order to maintain comparability of the share price before and after the payment of the special interim dividend. The consolidation ratio will be based on the closing price of the Company's shares on 29 May 2002 (ie the price immediately before this announcement). Further details will be provided in a circular to be issued to shareholders on 27 June 2002. SOUTH WEST WATER South West Water increased its turnover by Â£9.0m during the year. Approved tariff increases, including headroom arising from meter switching, amounted to Â£8.3m. Measured demand from existing customers contributed a turnover increase of Â£1.6m. Customers switching from unmeasured to metered charging caused a reduction of Â£4.3m in turnover. Other factors, including new customer connections (5,800), contributed Â£3.4m. The company submitted an application for an Interim Determination of 'K' in September 2001. In December 2001 Ofwat confirmed revised price increases of 4.4% above inflation for each of the three years 2002/03 to 2004/05. South West Water's operating profit was virtually unchanged at Â£107.0m (2000/01 Â£107.3m). Operating costs, including depreciation, increased by Â£9.3m to Â£153.4m, including Â£7.2m in respect of new capital schemes. Â£4.0m of cost efficiencies were made in the year and the company remains on track to deliver further efficiency savings to outperform the regulatory contract to 2005. Capital expenditure rose Â£13.2m to Â£167.6m. With the commissioning of major waste water treatment schemes at Camborne and the first phase of Torbay, the company's 'Clean Sweep' coastal sewage treatment improvement programme is now virtually complete. In addition, reflecting the changing emphasis of the capital programme, over 90 smaller schemes were delivered in the year to meet the National Environmental Programme coupled with an extension of water mains rehabilitation activity. Drinking water quality attained a new all time high. In November 2001, the Department for Environment, Food and Rural Affairs and the Environment Agency announced the best ever bathing water quality results (98% compliance with mandatory standards) for beaches and bathing waters along the South West coastline. In addition, 100 bathing waters (71% of the region's total) met the more stringent guideline standards, the best performance of any region in the UK. Reported river water quality remains the best in England. The company is one of the industry leaders in managing water leakage and continues to deliver results in line with Ofwat's mandatory leakage target. Market research carried out amongst South West Water's customers continues to confirm high levels of satisfaction with the overall service provided by the company. There has been continued high performance against Ofwat's Levels of Service Indicators. VIRIDOR WASTE Viridor Waste turnover rose by 18% from Â£106.1m in 2000/01 to Â£125.3m in 2001/02. Â£5.0m of this increase came from the rise in landfill tax, Â£6.2m from acquisitions (including Â£1.0m of landfill tax) and Â£8.0m from existing trade. Operating profit rose 16% from Â£13.1m to Â£15.2m, before goodwill amortisation of Â£0.3m with an operating margin, excluding landfill tax, of 17%. The first half year performance was particularly strong, reflecting the benefit of certain temporary contracts. Earnings before interest, tax, depreciation and amortisation amounted to Â£32.1m. The increased profitability arose from volume and price increases in landfill and volume increases and cost savings in the collection business. The Viridor Waste strategy has two key elements. The first element is to exploit fully the company's landfill assets. The UK is likely to face an increasing shortage of landfill disposal capacity due to planning constraints and, with 73m cubic metres of consented landfill capacity, Viridor Waste is well-positioned for the future. The second element of the strategy is the pursuit of profitable opportunities to help deliver the targets of the Government's new waste and renewable energy strategies. Two acquisitions were announced on 18 October 2001 with a further announced on 9 April 2002, shortly after the year end. All three acquisitions reinforce the waste strategy outlined above either by adding to Viridor's landfill capacity in key parts of the UK or by enhancing the company's materials transfer and recycling capability. Capital expenditure for the year was Â£18.3m which was primarily invested by Viridor Waste in its continuing landfill operations. VIRIDOR INSTRUMENTATION The sale of Viridor Instrumentation was completed on 4 February 2002. Profit on disposal was Â£5.1m which is included in the Preliminary Results as an exceptional item. During the period to disposal, a profit before tax of Â£2.7m was made, compared to a profit of Â£4.9m in the previous full year. TAXATION The Group's taxation strategy continues to be beneficial. Excluding deferred tax, there was no tax charge for the year ended 31 March 2002 (2000/01 nil). A new Financial Reporting Standard (FRS 19) relating to deferred tax is operative for 2001/02. This requires the Group to make full provision for deferred tax liabilities, which are discounted. The consequent change of policy necessitated a prior year adjustment. The deferred tax charge for the year to 31 March 2002 was Â£3.3m. The equivalent figure for the year to 31 March 2001 was Â£17.6m. BOARD MATTERS Mr David Dupont was appointed interim Group Director of Finance on 2 March 2002 immediately following the retirement of Mr Ken Hill from that role. The Board has now confirmed Mr Dupont in the role of Group Director of Finance and also takes this opportunity to express its gratitude to Ken Hill for his significant contribution to the development of the Group since privatisation and wish him well in his retirement. STRATEGY AND PROSPECTS The Board will continue to focus on adding value for shareholders by pursuing the policy of outperforming the regulatory contract in South West Water and of continuing to grow Viridor Waste. The successful disposal of Viridor Instrumentation and the corporate re-organisation have confirmed the focused strategy outlined by the Board in May 2001. The satisfactory performances this year of the water, sewerage and waste management activities provide a strong foundation for the business going forward. Ken Harvey Chairman 30 May 2002 PENNON GROUP PLC GROUP PROFIT AND LOSS ACCOUNT for the year ended 31 March 2002 Note 2002 2001 (unaudited) restated (notes 2 & Â£m 3) Â£m Turnover Continuing operations 374.8 353.2 Acquisitions 6.2 - _______ _______ 381.0 353.2 Discontinued operations 2 42.9 81.9 _______ _______ Total turnover 423.9 435.1 Operating costs (302.1) (307.0) _______ _______ Group operating profit Continuing operations 119.2 120.4 Acquisitions (0.1) - _______ _______ 119.1 120.4 Discontinued operations 2 2.7 7.7 _______ _______ Total Group operating profit 121.8 128.1 Share of operating loss in Joint venture (0.1) - Associate (0.4) (0.4) _______ _______ Total operating profit 121.3 127.7 Profit/(loss) on disposal of discontinued operations 2 5.1 (2.1) Net interest payable (49.0) (51.4) _______ _______ Profit on ordinary activities before taxation 77.4 74.2 Tax on profit on ordinary activities 4 (3.3) (17.6) _______ _______ Profit on ordinary activities after taxation 74.1 56.6 Dividends 5 (51.4) (49.4) _______ _______ Retained profit transferred to reserves 22.7 7.2 ====== ====== Basic earnings per share 6 Before exceptional item 50.6p 43.1p After exceptional item 54.3p 41.5p Dividend per share 37.5p 36.0p STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES for the year ended 31 March 2002 2002 2001 (unaudited) restated Â£m Â£m Profit on ordinary activities after taxation 74.1 56.6 Currency retranslation differences on foreign currency net 0.6 0.2 investments _______ _______ Total gains and losses recognised for the year 74.7 56.8 Prior year adjustments 3 - (50.9) _______ _______ Total gains and losses recognised since last Annual Report 74.7 5.9 ======= ======= PENNON GROUP PLC SUMMARISED GROUP BALANCE SHEET as at 31 March 2002 2002 2001 (unaudited) restated Â£m Â£m Fixed assets Intangible assets 11.7 24.7 Tangible assets 1,907.7 1,798.5 Investments 3.3 3.1 _______ _______ 1,922.7 1,826.3 Current assets Stocks 3.2 13.9 Debtors 81.6 89.3 Investments and cash 292.0 219.7 _______ _______ 376.8 322.9 Creditors: amounts falling due within one year (276.0) (221.4) _______ _______ Net current assets 100.8 101.5 Total assets less current liabilities 2,023.5 1,927.8 Creditors: amounts falling due after more than one year (932.3) (911.7) Provisions for liabilities and charges (74.4) (65.9) Deferred income (40.6) (41.1) _______ _______ Net assets 976.2 909.1 ====== ====== Capital and reserves Called-up share capital 137.0 136.9 Share premium account 151.6 151.3 Profit and loss account 687.6 620.9 _______ _______ Shareholders' funds 976.2 909.1 ====== ====== PENNON GROUP PLC GROUP CASH FLOW STATEMENT for the year ended 31 March 2002 Note 2002 2001 (unaudited) restated Â£m Â£m Cash inflow from operating activities 7 196.2 205.0 Returns on investments and servicing of finance (44.3) (39.9) Taxation 0.4 (0.3) Capital expenditure and financial investment (182.3) (153.2) Acquisitions and disposals 85.0 12.0 Equity dividends paid (49.4) (65.3) _______ _______ Cash inflow/(outflow) before use of liquid resources and financing 5.6 (41.7) Management of liquid resources (27.0) (24.2) Financing 38.2 64.6 _______ _______ Increase/(decrease) in cash in year 8 16.8 (1.3) ====== ====== PENNON GROUP PLC SEGMENTAL ANALYSIS BY CLASS OF BUSINESS for the year ended 31 March 2002 Turnover Group operating profit Profit before tax 2002 2001 2002 2001 2002 2001 (unaudited) (unaudited) (unaudited) Â£m Â£m Â£m Â£m Â£m Â£m Continuing operations Water and sewerage 260.4 251.4 107.0 107.3 66.8 67.0 Waste management 125.3 106.1 14.9 13.1 13.5 11.7 Other 6.6 6.1 (2.8) - (11.0)* (10.2)* Less intra-group trading (11.3) (10.4) - - - - _______ _____ _______ _____ _______ _______ Total continuing 381.0 353.2 119.1 120.4 69.3 68.5 operations ====== ==== ====== ==== ====== ====== Discontinued operations Instrumentation 43.0 54.9 2.6 4.8 2.7 4.9 Construction services - 37.1 - 0.5 - 0.4 Property 1.4 5.7 0.1 2.4 0.3 2.5 Less intra-group trading (1.5) (15.8) - - - - _______ _____ _______ _____ _______ _______ Total discontinued 42.9 81.9 2.7 7.7 3.0 7.8 operations ====== ==== ====== ==== ====== ====== Exceptional item Discontinued operations - - - - 5.1 (2.1) disposal profit/(loss) _______ _____ _______ _____ _______ _______ Group totals 423.9 435.1 121.8 128.1 77.4 74.2 ====== ==== ====== ==== ====== ====== * includes parent company financing of business acquisitions. PENNON GROUP PLC NOTES 1 The financial information for the years ended 31 March 2001 and 31 March 2002 does not constitute full financial statements within the meaning of section 240 of the Companies Act 1985. The full financial statements for the year ended 31 March 2001 have been delivered to the Registrar of Companies. The auditors' report on those financial statements was unqualified and did not contain a statement under section 237 (2) or (3) of the Companies Act 1985. 2 On 4 February 2002 the Group disposed of its interest in the ordinary share capital of Viridor Instrumentation Limited. The results of Viridor Instrumentation Limited up to the disposal date and the comparatives for the year ended 31 March 2001 are included under discontinued operations. The profit on disposal of discontinued operations in the year ended 31 March 2002 relates to the disposal of that business and is after charging Â£43.5million of goodwill previously written off to reserves on acquisition. The comparatives for the year ended 31 March 2001 for discontinued operations also include the results of T J Brent Limited which was disposed of in December 2000. 3 The Group's accounting policy on deferred taxation has changed following adoption of Financial Reporting Standard 19 'Deferred Tax' (FRS 19). The FRS requires full provision to be made for deferred taxation arising from timing differences between recognition of gains and losses in the financial statements and their recognition in a tax computation. The Group has adopted a policy of discounting deferred tax assets and liabilities to reflect the time value of money, as permitted by FRS 19. Previously, the Group's accounting policy was to provide for deferred taxation to the extent that it was likely to crystallise in the foreseeable future. The application of the previous accounting policy resulted in no provision for deferred taxation being recognised at 31 March 2001. With the adoption of Financial Reporting Standard 18 'Accounting Policies' (FRS 18), the Directors have reviewed the accounting policies of the Group and have decided that, in the current reporting environment which encourages increased clarity and transparency in accounting transactions, it is appropriate to present the Group's defeased lease arrangements in a manner that improves their under-standability and comparability with other utilities. Accordingly, the rental obligations and cash deposits associated with these leases have now been recognised on the balance sheet separately and the net interest receivable arising from these transactions will now be recognised over the life of the leases. As a result of these changes in accounting policy the comparatives have been restated as follows: Group balance sheet: Provisions As at 31 March 2001 for liabilities Deferred Profit and and charges income loss reserve Â£m Â£m Â£m Previously reported (22.8) (49.0) (689.4) Deferred taxation (FRS 19) (43.1) - 43.1 Defeased leases (FRS 18) - 7.9 25.4 _______ _______ _______ Restated now reported (65.9) (41.1) (620.9) ====== ====== ====== Creditors: Investments Creditors: amounts and cash amounts falling due falling due after more within one than one year year Â£m Â£m Â£m Previously reported (217.3) (727.9) 65.1 Deferred taxation (FRS 19) - - - Defeased leases (FRS 18) (4.1) (183.8) 154.6 _______ _______ _______ Restated now reported (221.4) (911.7) 219.7 ====== ====== ====== The restatement of the profit and loss reserve for March 2001 comprises a prior period adjustment at 1 April 2000 of Â£50.9million (Â£25.5million FRS 19 and Â£25.4million FRS 18) and a Â£17.6million charge for the year ended 31 March 2001 (FRS 19). Group profit and loss account: Net interest Tax on Basic Year ended 31 March 2001 payable profit on earnings ordinary per share activities Â£m Â£m p Previously reported (51.4) - 56.0 Deferred taxation (FRS 19) - (18.0) (13.2) Defeased leases (FRS 18) - 0.4 0.3 _______ _______ ______ Restated now reported (51.4) (17.6) 43.1 ====== ====== ====== The changes arising within net interest payable from the application of FRS 18 relate to the recognition of Â£9.2million interest receivable on investments and Â£8.6million interest payable on finance leases, offset by the elimination of a previously reported gain on defeasance of finance leases of Â£0.6million. Group cash flow statement: Management Financing Year ended 31 March 2001 of liquid resources Â£m Â£m Previously reported (25.2) 65.6 Defeased leases (FRS 18) 1.0 (1.0) _______ _______ Restated now reported (24.2) 64.6 ====== ====== 4 The taxation charge comprises: Year ended 31 March 2002 2001 (unaudited) restated Â£m Â£m United Kingdom taxation Corporation tax at 30% 0.5 - Overseas taxation (0.5) - Deferred tax 3.3 17.6 _______ _______ 3.3 17.6 ====== ====== 5 If approved at the Annual General Meeting on 25 July 2002 the final dividend of 25.4p per share will be paid on 1 October 2002 to shareholders on the register at 30 August 2002. 6 The calculation of basic earnings per share is based on the profit on ordinary activities after taxation divided by the weighted average number of ordinary shares in issue during the year of 136.5 million (2001 136.3 million) as follows: Profit after tax Basic earnings per share Year ended 31 March 2002 2001 2002 2001 (unaudited) restated (unaudited) restated Â£m Â£m p p Before exceptional item 69.0 58.7 50.6 43.1 Exceptional item 5.1 (2.1) 3.7 (1.6) _______ _______ _______ ______ After exceptional item 74.1 56.6 54.3 41.5 ====== ====== ====== ===== The exceptional item in 2002 comprises the profit on disposal of Viridor Instrumentation Limited and that for 2001 is the loss on disposal of T J Brent Limited. Earnings per share on a diluted basis are 50.5p (2001 43.0p), and after the exceptional item 54.2p (2001 41.4p). 7 Reconciliation of Group operating profit to net cash inflow from operating activities for the year ended 31 March 2002: 2002 2001 (unaudited) Â£m Â£m Group operating profit 121.8 128.1 Depreciation charge 75.5 70.4 Amortisation of intangible assets 1.6 1.4 Fixed asset impairment 0.3 0.1 Deferred income released to profits (1.2) (1.2) Increase/(decrease) in provisions for liabilities and charges 1.0 (2.1) Increase in stocks (0.6) (0.3) (Increase)/decrease in debtors (amounts falling due within and over one year) (4.0) 8.7 Increase in creditors (amounts falling due within and over one year) 2.9 0.6 Profit on disposal of tangible fixed assets (1.1) (0.7) _______ _______ Net cash inflow from operating activities 196.2 205.0 ====== ====== 8 Analysis of net debt At Cash Acquisitions Non-cash At 1 April 2001 flow (excl cash) movements 31 March 2002 (unaudited) Â£m Â£m Â£m Â£m Â£m Cash at bank and in hand 3.7 (2.7) - - 1.0 Current asset investments: Overnight deposits 0.6 44.7 - - 45.3 Bank overdrafts (3.9) (25.2) (29.1) _______ _______ _______ _______ _______ 0.4 16.8 - - 17.2 _______ _______ _______ _______ _______ Debt due within one year (other (38.5) 13.5 (0.2) (37.7) (62.9) than bank overdrafts) Debt due after more than one year (322.1) (14.8) - 37.7 (299.2) Finance lease obligations* (607.0) (36.6) (2.8) (5.7) (652.1) _______ _______ _______ _______ _______ (967.6) (37.9) (3.0) (5.7) (1,014.2) _______ _______ _______ _______ _______ Current asset investments: 215.4 27.0 - 3.3 245.7 Other than overnight deposits* _______ _______ _______ _______ _______ Net debt (751.8) 5.9 (3.0) (2.4) (751.3) ====== ====== ====== ====== ====== * Finance lease obligations and current asset investments other than overnight deposits have been restated as described in note 3. Non-cash movements include transfers between categories for debt changing maturities, increased accrued finance charges within finance lease obligations and increased accrued interest on cash deposits placed to secure rental obligations. 9 The Annual Report for 2001/02 will be issued to shareholders on 27 June 2002. Pennon Group Plc Registered Office Peninsula House Rydon Lane EXETER Devon EX2 7HR Registered in England No 2366640 This information is provided by RNS The company news service from the London Stock Exchange

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