Half Year Interim Results - Turnover Up 4%

Thames Water PLC 2 November 1999 INTERIM RESULTS FOR THE HALF YEAR ENDED 30 SEPTEMBER 1999 The Board of Thames Water Plc today announced unaudited results for the half year ended 30 September 1999. * Group turnover up 4% to £680m * Operating profit up 8% to £273m * Non-regulated profit up 22% to £29m * Interim dividend per share up 9% to 15.3p * Profit before tax and exceptional items down 2% to £204m, reflecting balance sheet restructuring. * Further improvements in quality and service standards * £3.8bn invested since privatisation in 1989 * Good progress on leakage reduction * Lowest average bill for combined water and wastewater services in England and Wales maintained * International portfolio growing successfully Roger Carr, Chairman, said: 'Thames Water has continued to make good progress during the first half of the year. All parts of our businesses are performing well. In the six months ended 30 September 1999 operating profit increased to £273m. 'Our Utility business has continued to outperform the regulatory targets and improve efficiency. Our investment programme, amounting to more than £3.8bn since privatisation, has led to the highest ever quality and service standards for our customers who continue to enjoy the lowest average combined bill in England and Wales. 'On 27 July 1999, Ofwat issued its draft determination for prices in the next five years. We have responded to the proposals and continue to press for an appropriate balance between levels of service, investment and pricing. Ofwat's final determination is due on 25 November 1999. 'Our portfolio of non-regulated businesses has continued its strong performance, with profits of £29m ahead of last year by 22%. Of this, the contribution from international projects increased from £6m to £11m. We have also invested £4m during this period in developing new non-regulated opportunities'. GROUP OVERVIEW Group turnover of £680m was 4% higher than last year and operating profit increased by 8% from £252m to £273m. There was a small reduction in profit before tax to £204m (£207m) because of higher interest charges of £69m (£45m), largely reflecting last year's balance sheet restructuring and the payment of the final windfall tax instalment. The tax rate for 1999/2000 is currently estimated to be 21% (8%). The tax charge for the half year at 21% was £42m (£17m) with a consequential fall in earnings per share to 46.2p (51.1p pre-exceptional). The 1999/2000 tax charge reflects the Group's decision to defer last year's interim dividend payment to 6 April 1999, because of changes to the advance corporation tax regime. DIVIDENDS The Group has delivered another strong operating and financial performance, particularly in the non-regulated businesses, and has a sound overall financial position. Accordingly the Board has decided to increase the interim dividend per share by 9%. This is consistent with the Board's policy for the five year period to 2000 to increase dividends materially in real terms whilst allowing dividend cover to move towards two times by March 2000. An interim dividend of 15.3p (14.0p) will be paid on 3 February 2000 to those ordinary shareholders on the register on 17 December 1999. UTILITY OPERATIONS The Utility increased turnover by 5% to £556m. Profit before tax declined from £201m to £178m, because of the higher interest cost from the reorganisation of the Utility's capital structure. The Utility's capital structure was changed in August 1998 to bring it closer to the optimum level being assumed by Ofwat as part of the price review. The change was effected by a special dividend payment of £750m in 1998/99 to Thames Water Plc. A normal interim dividend for 1999/2000 of £39m (£49m) to Thames Water Plc has been provided. Running costs showed an increase of only 2% which has been achieved while absorbing the costs incurred in operating new facilities. These additional costs were covered by continuing efficiency improvements. Good progress is being made on leakage reduction and, provided we have normal winter weather conditions, the company is on track to meet Ofwat's 1999/2000 target of 665 million litres per day. We continue to find and fix leaks at a current rate of 2000 every week. Our readiness to maintain water supplies and wastewater services over the millennium period has been externally validated. The Utility's capital investment programme, £191m for the half year, continues to meet all regulatory and internal targets, including discretionary investment for improvements in customer service. All obligations under the current regulatory five- year period have or will be met by the end of this financial year. NON-REGULATED ACTIVITIES The International division, with a portfolio of long term contracts to supply water around the world, continues to progress. Turnover, including that arising in joint ventures, increased to £64m from £52m. Profit before tax and development costs increased to £11m from £6m. We announced in June 1999 a US$25m five year contract with the Provincial Water Authority of Thailand to manage water distribution in the area immediately north of Bangkok. A new operating contract also commenced in June 1999 providing water services in the state of Johor (Malaysia). We have been providing essential support to the local communities in and around Izmit in Turkey following the earthquake in August 1999. There has been no material adverse financial impact to our operations. A disaster relief fund has been established to support re-housing of local families and employees. The Products division produced an increased profit before tax of £1.8m (£0.4m) on turnover of £44m (£38m). The acquisitions made in 1998/99 have been fully integrated into the division. We have also received the first order for our new advanced sludge pasteurisation process. The Services division's profit before tax grew to £2.1m (£0.6m) on turnover of £106m (£92m). We expect the full year results also to be ahead of last year. Early in October, the Metronet consortium, in which Thames Water has a 20% share, prequalified to bid for two London Underground infrastructure projects. The Property and Insurance companies have contributed profit before tax of £8.5m (£9.2m) and £5.4m (£8.1m) respectively. This year's Insurance contribution is within a more normal range following the strong investment gains in the first half of last year. LOOKING AHEAD Bill Alexander, Chief Executive, said: 'We will continue to focus on our core strengths in water and wastewater where we are increasingly recognised as an industry leader. The Utility remains the cornerstone of the Group, enhancing service standards whilst maintaining the lowest bills in England and Wales. We continue to press for a balanced outcome from the water industry price review. 'The non-regulated businesses have again delivered an excellent increase in profits and now contribute 15% of our group results. We are pursuing a number of new opportunities and expect our non-regulated businesses to make a growing contribution in the future'. For further information contact: Thames Water Plc David Luffrum Finance and Planning Director Tel: 0171 636 8686 Jonathan Russell Director of Corporate Affairs Tel: 0171 636 8686 David Beck Bell Pottinger Tel: 0171 353 9203 THAMES WATER PLC INTERIM RESULTS CONSOLIDATED PROFIT AND LOSS ACCOUNT Notes Half Half Full Year Year Year 30/09/99 30/09/98 31/03/99 £m £m £m Turnover Group and share of joint ventures 723.1 689.0 1,402.8 Share of joint ventures turnover (42.7) (35.4) (77.3) ------- ------- ------- Group 680.4 653.6 1,325.5 Operating costs (426.1) (415.5) (825.6) Other operating income 2 3.1 13.1 12.7 Utilisation of discontinued business provision - 0.6 1.4 ------- ------- ------- Group operating profit 257.4 251.8 514.0 Share of operating profit in joint ventures 15.7 0.6 8.1 Share of operating loss in associates (0.4) - (0.8) ------- ------- ------- Operating profit 272.7 252.4 521.3 Other non-operating exceptional items Release of discontinued business provision - 7.0 7.0 ------- ------- ------- Profit on ordinary activities before interest and taxation 272.7 259.4 528.3 Net interest expense 3 (59.4) (45.2) (106.0) Share of net interest in joint ventures and associates (9.7) - (3.7) ------- ------- ------- Profit on ordinary activities before taxation 203.6 214.2 418.6 Taxation on profit on ordinary activities 4 (41.9) (17.3) (34.2) ------- ------- ------- Profit for the half year 161.7 196.9 384.4 Non-equity dividend - - (0.9) Ordinary dividend (53.5) (48.8) (148.8) ------- ------- ------- Retained profit 108.2 148.1 234.7 ======= ======= ======= Earnings per ordinary share - basic 5 46.2p 53.0p 106.3p Adjusted earnings per ordinary share 5 46.2p 51.1p 104.4p Earnings per ordinary share - diluted 5 45.9p 52.5p 105.5p Dividend per share 15.3p 14.0p 42.6p The above results relate to continuing operations. THAMES WATER PLC CONSOLIDATED BALANCE SHEET Restated Restated (note 8) (note 8) As at Notes 30/09/99 30/09/98 31/03/99 £m £m £m Fixed assets Goodwill 6 16 10 16 Other intangible assets 7 11 - 11 Tangible fixed assets 8 4,123 3,866 4,023 Fixed asset investments 75 48 55 --------- -------- --------- 4,225 3,924 4,105 Current assets Stocks and work in progress 31 32 32 Debtors and prepayments 658 579 316 Cash and short-term investments 169 106 181 --------- -------- --------- 858 717 529 Creditors: amounts falling due within one year (1,276) (1,417) (1,029) --------- -------- --------- Net current liabilities (418) (700) (500) --------- -------- --------- Total assets less current liabilities 3,807 3,224 3,605 --------- -------- --------- Creditors: amounts falling due after more than one year (1,535) (1,130) (1,449) Provisions for liabilities and charges (58) (56) (52) --------- -------- --------- Net assets 2,214 2,038 2,104 --------- -------- --------- Capital and reserves Share capital 104 115 105 Share premium 57 53 56 Capital redemption reserve 319 308 317 Profit and loss account 1,734 1,562 1,626 --------- -------- --------- Shareholders' funds 2,214 2,038 2,104 --------- -------- --------- of which - equity shareholders' funds 2,191 2,004 2,079 - non - equity shareholders' funds 23 34 25 --------- -------- --------- 2,214 2,038 2,104 --------- -------- --------- Net debt 9 (1,704) (1,415) (1,592) Gearing 77% 69% 76% THAMES WATER PLC CONSOLIDATED CASH FLOW STATEMENT Half Half Full Year Year Year 30/09/99 30/09/98 31/03/99 £m £m £m Net cash flow from operating activities 281 306 602 Servicing of finance less returns on investment (38) (23) (96) Taxation (1) (17) (172) Capital expenditure - capital investment (218) (240) (488) - capital contributions and sale of fixed assets 18 28 52 Acquisitions, disposals and equity investments (3) (17) (29) Equity dividends paid (150) (98) (98) Management of liquid resources 17 1 15 Financing - repurchase of shares (2) (269) (276) - issue of shares - 2 7 - share capital related costs - - (7) - cashflow from increase in debt & lease financing 101 385 501 -------- -------- -------- Increase in cash during the period 5 58 11 Change in debt resulting from cash flows - management of liquid resources (17) (1) (15) - cashflow from increase in debt & lease financing (101) (385) (501) Other non-cash movements 1 (2) (2) -------- -------- -------- Increase in net debt (112) (330) (507) -------- -------- -------- Reconciliation of operating profit to operating cash flow Operating profit 273 259 528 Depreciation * 99 87 179 Working capital (56) (18) (64) Increase/(decrease) in long-term provisions 2 (2) (7) Other adjustments * (37) (20) (34) -------- -------- -------- Net cash flow from operating activities 281 306 602 ======== ======== ======== * Depreciation includes infrastructure renewals charge in accordance with Financial Reporting Standard 15 (FRS 15). Cash outflows for infrastructure renewals are included within Capital Expenditure therefore an adjustment is required in reconciling operating profits to operating cashflows. Other adjustments also include balances eliminating the Group's share of joint ventures/associated undertakings' operating profit as per FRS 9. SEGMENTAL ANALYSIS BY CLASS OF BUSINESS Half Half Full Year Year Year 30/09/99 30/09/98 31/03/99 £m £m £m TURNOVER Utilities 555.7 531.4 1,092.1 International Operations 63.6 52.2 129.4 Products 43.9 37.9 83.1 Services 106.3 91.5 188.7 Property 20.6 30.4 48.6 Insurance 6.5 6.3 13.4 -------- -------- -------- Group & share of joint ventures 796.6 749.7 1,555.3 Intercompany eliminations (73.5) (60.7) (152.5) Share of joint ventures (42.7) (35.4) (77.3) -------- -------- -------- Group 680.4 653.6 1,325.5 ======== ======== ======== Half Half Full Year Year Year 30/09/99 30/09/98 31/03/99 £m £m £m PROFIT BEFORE INTEREST AND TAX Utilities 239.2 234.1 473.7 International Operations 20.5 4.1 17.6 Products 2.1 0.5 4.1 Services 2.6 1.3 6.3 Property 9.5 10.1 18.0 Insurance 5.4 8.1 11.9 Other activities (5.4) (3.1) (7.7) Intercompany eliminations (1.2) (2.7) (2.6) -------- -------- -------- 272.7 252.4 521.3 Other non-operating exceptional items: International operations - 7.0 7.0 -------- -------- -------- 272.7 259.4 528.3 ======== ======== ======== Half Half Full Year Year Year 30/09/99 30/09/98 31/03/99 £m £m £m PROFIT BEFORE TAX Utilities 178.2 200.6 395.9 International Operations 11.1 5.4 16.1 Products 1.8 0.4 4.3 Services 2.1 0.6 4.7 Property 8.5 9.2 16.2 Insurance 5.4 8.1 11.9 Other activities (2.3) (14.4) (34.9) Intercompany eliminations (1.2) (2.7) (2.6) -------- -------- -------- 203.6 207.2 411.6 Other non-operating exceptional items: International operations - 7.0 7.0 -------- -------- -------- 203.6 214.2 418.6 ======== ======== ======== NOTES 1 Basis of preparation The interim profit and loss account and cash flow statement for the half year ended 30 September 1999 and the Balance Sheet as at 30 September 1999 have, except as set out in note 8 below, been prepared on the basis of the accounting policies adopted by the Company for the year ended 31 March 1999 as set out in the Thames Water Plc Annual Report and Accounts. The accounts for the year ended 31 March 1999 (on which the auditors made an unqualified report) have been delivered to the Registrar of Companies. 2 Other income Half Half Full Year Year Year 30/09/99 30/09/98 31/03/99 £m £m £m Gains (losses) on short term investments (1.7) 3.0 4.1 Insurance investment income 1.7 2.4 4.6 Other financial income 3.1 7.7 4.0 -------- -------- -------- 3.1 13.1 12.7 -------- -------- -------- 3 Interest The increase in net interest expense to £59.4m (£45.2) for the half year ended 30 September 1999 reflects:- * the half year effect of the second instalment of the windfall tax which was paid on 1 December 1998; * the part year effect of the repurchase of 'B' shares following the reorganisation of the Company's share capital undertaken in 1998; * borrowing in the Utility business to finance the on- going capital investment programme; 4 Taxation Half Half Full Year Year Year 30/09/99 30/09/98 31/03/99 £m £m £m Corporation tax on income at 31% 41.7 42.0 82.8 Overseas taxation 1.8 1.7 3.3 Prior years advance corporation tax relieved (3.3) (26.6) (53.2) Share of tax for joint ventures and associates 1.7 0.2 1.3 ------- ------- ------- 41.9 17.3 34.2 ------- ------- ------- The interim taxation charge of £41.9m reflects the anticipated effective rate for the year to 31 March 2000, compared to £17.3m for the same period to 30 September 1998. Changes in advance corporation tax resulted in a non-recurring reduction in the tax charge for the period to 30 September 1998. 5 Earnings per share Earnings per ordinary share have been calculated by dividing the profit for the half year by the weighted average ordinary shares in issue during the period. Half Half Full Year Year Year 30/09/99 30/09/98 31/03/99 Profit for the half year £161.7m £196.9m £383.5m -------- -------- -------- Weighted average - ordinary shares in issue 349.9m 371.5m 360.6m -------- -------- -------- Earnings per ordinary share - basic 46.2p 53.0p 106.3p Adjustments for: - non-operating exceptional items - (1.9p) (2.9p) -------- -------- -------- Adjusted earnings per ordinary share 46.2p 51.1p 104.4p ======== ======== ======== Weighted average ordinary shares including effect of dilutive ordinary shares 352.3m 374.9m 363.5m -------- -------- -------- Earnings per ordinary share - diluted 45.9p 52.5p 105.5p ======== ======== ======== 6 Acquisitions The Group acquired Ham Baker, Underpressure Engineering plc, Memtech (UK) Ltd and the minority interest in it's subsidiary PT Kekar Thames Arindo during the year ended 31 March 1999. Goodwill arising, being the difference between the fair value of net assets acquired and the purchase price, was capitalised as follows:- Consideration Fair Goodwill £m Value £m £m Ham Baker Limited 6.1 1.8 4.3 Underpressure Engineering 8.4 2.4 6.0 -------------- ----- -------- at 30 September 1998 14.5 4.2 10.3 Memtech (UK) Ltd 4.8 0.1 4.7 PT Kekar Thames Arindo 2.3 0.3 2.0 -------------- ----- -------- at 31 March 1999 21.6 4.6 17.0 -------------- ----- -------- At 30 September 1999, cumulative goodwill of £1.1m (£0.5m) for the full year to March 1999) has been amortised to the profit and loss account in respect of the above acquisitions. 7 Other intangible assets Other intangible assets relate to initial expenditure on concession contracts. Development expenditure for the period to 30 September 1999 has been charged to the profit and loss account. 8 Tangible fixed assets The Group's accounting policy on infrastructure assets has been amended following the publication of Financial Reporting Standard 15 (FRS 15). From 1 April 1999, all expenditure on infrastructure assets is now capitalised, whilst the element incurred in maintaining the operating capability of the infrastructure assets network in accordance with defined service standards is expensed as depreciation. Tangible fixed assets for the half year to 30 September 1998 and the full year to 31 March 1999 have been adjusted by £4.3m and £9.5m respectively following implementation of FRS 15, to include expenditure on infrastructure assets which was previously classified within prepayments. 9 Net debt Net debt is the aggregation of cash and short term investments, short term loans and finance leases which are included in creditors: amounts falling due within one year and long term loans and finance leases which are included in creditors: amounts falling due after more than one year. Movement of £112m for the period is analysed as the cashflow statement. INDEPENDENT REVIEW REPORT TO THAMES WATER PLC Introduction We have been instructed by the Company to review the financial information set out on pages 6 to 12 and we have read the other information contained in the interim report for any apparent misstatements or material inconsistencies with the financial information. Directors' responsibilities The interim report, including the financial information contained herein, is the responsibility of, and has been approved by the directors. The Listing Rules of the London Stock Exchange require that the accounting policies and presentation applied to the interim figures should be consistent with those applied in preparing the preceding annual accounts except where any changes, and the reasons for them, are disclosed. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4 issued by the Auditing Practices Board. A review consists principally of making enquiries of group management and applying analytical procedures to the financial information and underlying financial data, and based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit performed in accordance with Auditing Standards and therefore provides a lower level of assurance than an audit. Accordingly, we do not express an audit opinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the six months ended 30 September 1999. PricewaterhouseCoopers Chartered Accountants London 1 November 1999

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