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Pennon Group PLC (PNN)

  Print      Mail a friend       Annual reports

Thursday 09 December, 1999

Pennon Group PLC

Interim Results - 6 Months to 30 September 1999

Pennon Group PLC
9 December 1999


Pennon Group today announces its unaudited results for the half year ended 30
September 1999.  It also sets out the Group's reaction to the Periodic Review
Final Determination issued by the Director General of Water Services on 25
November 1999 and the implications this has on future dividend policy.


-   Turnover up 6% to £234m
-   Operating profit down 3% to £83m *
-   Profit before tax down 8% to £61m *
-   Earnings per share down 12% to 40.7p *
-   Interim dividend per share up 4.8% to 15.4p
-   Proposed dividend cut of 25% to be applied in 2000/01, with a progressive
    policy thereafter.

*  before exceptional credit of £5m in 1998

'The Periodic Review Determination by the Director General of Water Services
represents a very tough challenge for South West Water, one which we are
determined to meet' said Ken Harvey, Chairman. 'As a direct result of the
Review, South West Water propose to reduce manpower levels by around 200, of
which just under one half is expected to take place during 2000/01. 
Notwithstanding the efficiency initiatives, the reduction in South West Water
profitability which will ensue is at such a level that the lower base
profitability and reduced growth expectations from Viridor Ltd cannot counter
the shortfall.  The Board has, therefore, decided to announce a change in
dividend policy.  The interim dividend and recommended final dividend for
1999/2000 will to continue the progressive policy adopted since flotation in
1989.  It is intended to apply a dividend cut of 25% in 2000/01 and to pursue
thereafter a progressive dividend policy, albeit at a lower level than in
previous years.  That level will reflect an appropriate element from South
West Water, depending upon its performance relative to the Periodic Review
Determination, and an element from Viridor Ltd, which will recognise its
growth characteristics.  The Board does not intend to ask the Director General
to refer
the Price Determination to the Competition Commission.'

For further information, please contact:

Ken Harvey    - Chairman                           )
Ken Hill      - Group Director of Finance          )
Jo Rayner     - Investor Relations Manager         ) 0171 831 3113
Andrew Dowler - Financial Dynamics                 )
Stephen Swain - Press & Public Relations Manager     01392 443022


Group turnover rose by 6%, or £13.2m, to £233.6m.  £3.7m of the increase was
generated by South West Water Ltd and the balance by Viridor Ltd, principally
from waste management  and environmental instrumentation activities.

Group operating profit reduced by 3% , or £2.9m, to £83.3m, before the impact
of the exceptional credit of £5m received in 1998.  Profit before tax reduced by
8%, or £5.5m, to £61.0m, before the impact of the exceptional credit.  £3.9m
of this reduction emanated from South West Water Ltd and £1.6m from Viridor Ltd
and other Group companies.

Earnings per share, before the impact of the exceptional credit, reduced by

Capital expenditure for the Group was £53.3m, comprising £43.8m in South West
Water Ltd and £9.5m in Viridor Ltd and other Group companies.

There were no acquisitions completed during the half year.

Net debt was £625.8m at 30 September 1999, a reduction of £29.3m compared with
31 March 1999.  The gearing ratio, being net borrowings to shareholders funds,
was 68%.  Interest cover was 3.8 times.

The Group has taken all necessary steps to deal with the impact of the Year
2000.  The total expenditure incurred by the Group has been £4.3m, including
£2.2m treated as capital expenditure.


SWW increased its turnover by £3.7m, principally driven by tariff increases.
The negative impact of customers switching from unmeasured to measured tariffs
was £2.9m and the resultant reduction in demand amounted to £1.1m.

SWW operating profit was unchanged, incorporating a further £1.7m of
efficiency savings.

The water resources within the region are in a strong position and the company
continues its activities to meet the requisite leakage targets.


Turnover of Viridor Ltd for the half year to 30 September 1999 amounted to
£93.1m, an increase of £9.5m.  It represented 40% of Group turnover.

Operating profit for Viridor Ltd was £9.8m, after charging £0.7m for
acquisition goodwill, a reduction of £2.6m compared with 1998.

Operating profit grew by £0.5m before goodwill write off in Viridor
Instrumentation.  This was after charging integration costs of £0.3m on the
Orbisphere acquisition.  Viridor Contracting operating profit rose by £0.4m.
Viridor Waste operating profit fell by £1.9m, where accounting changes and the
ending of NFFO 1 and 2 contracts have more than offset underlying profit


The Director General of Water Services has issued his Final Determination in
respect of the period 2000-2005.  The key elements are:

(a)     a one-off price cut of 12.2%;

(b)     'K' price increases of 0, 2, 2, & 2 for 2001-2005;

(c)     a capital programme of £725m at May 1999 prices weighted towards the  
        earlier part of the K3 period;

(d)     operating cost efficiencies of 14% for water services and 17% for
        sewerage services to be achieved by 2004/05;

(e)     capital efficiencies of between 7% and 13% to be achieved by 2004/05;

(f)     an assumption of 15,000 customers per annum switching from an
        unmeasured to a measured basis of charging;

(g)     projected Regulatory Asset Base increasing from c.£1.4bn in 1999/00 to
        c.£1.8bn by 2004/05.

The Determination represents a very tough challenge for South West Water, one
which is being, and will be, tackled vigorously, by building on the
substantial efficiencies already introduced.  It is proposed to reduce
manpower levels by around 200, of which just under one half is expected to
take place during 2000/01.  It is not intended to request a reference to the
Competition Commission.


As anticipated, the Periodic Review has had, and will have, a major impact on
both South West Water and the Group.  The Group is determined to meet the
challenge which the Review poses.

Viridor continues to deliver underlying profit growth albeit at a lower rate
from a reduced base but is expected to increasingly contribute to earnings and
shareholder value.  Within the next financial year, more than 50% of Group
turnover should arise from these businesses.

for the half year ended 30 September 1999

                                  Half year    Half year    Year
                                  ended        ended        ended
                                  30 Septem-   30 Septem-   31 March
                                  ber 1999     ber 1998     1999
                                  (unaudited)  restated
                           Notes      £m            £m        £m
Turnover                            233.6         220.4     437.1
Operating profit           (4)       83.3          91.2     167.7
Share of operating loss in           (0.2)         (0.1)     (0.2)
Net interest payable       (5)      (22.1)        (19.6)    (40.9)
Profit on ordinary                                          
 activities before
 taxation                            61.0          71.5     126.6
Tax on profit on ordinary  (6)       (5.7)         (5.2)    (17.5)
Profit on ordinary                                          
 activities after                    55.3          66.3     109.1
Dividends                           (21.0)        (19.8)    (61.9)
Retained profit                      34.3          46.5      47.2
 transferred to reserves
Basic earnings per share-  (7)                              
 before exceptional item             40.7p         46.3p    77.9p
 after exceptional item              40.7p         50.0p    81.7p
Dividend per share         (8)       15.4p         14.7p    45.6p
All the activities are continuing operations.

for the half year ended 30 September 1999

                                 Half year     Half year   Year
                                 ended         ended       ended
                                 30 Septem-    30 Septem-  31 March
                                 ber 1999      ber 1998    1999
                                 (unaudited)   restated
                           Notes     £m            £m         £m
Profit on ordinary                                         
 activities after                   55.3          66.3      109.1
Currency retranslation                                     
 differences on foreign             (0.6)           -        (0.9)
 currency net investments
Total gains and losses                                     
 recognised for the                 54.7          66.3      108.2
Prior year adjustment      (3)        -            2.4        2.4
Total gains and losses                                     
 since last Annual Report           54.7          68.7      110.6

at 30 September 1999

                                 30 Septem-    30 Septem-  31 March
                                 ber 1999      ber 1998    1999
                                 (unaudited)   restated
                                     £m            £m          £m
Fixed assets                                               
  Intangible assets                 25.6           -          27.0
  Tangible assets                1,643.0       1,588.7     1,623.2
  Investments                        3.2           2.7         2.2
                                 1,671.8       1,591.4     1,652.4
Current assets                                             
  Stocks                            14.9          12.6        15.5
  Debtors                          110.1         101.5       101.5
  Investments and cash              79.2          68.1        63.7
                                   204.2         182.2       180.7
Creditors: amounts falling                                 
 due within one year              (230.4)       (291.9)     (206.9)
Net current liabilities            (26.2)       (109.7)      (26.2)
Total assets less current        1,645.6       1,481.7     1,626.2
Creditors: amounts falling                                 
 due after more than one          (661.8)       (542.6)     (675.9)
Provisions for liabilities         (24.9)        (28.8)      (26.5)
 and charges
Deferred income                    (32.4)        (31.7)      (32.1)
Net assets                         926.5         878.6       891.7
Capital and reserves                                       
  Called-up share capital          136.3         134.7       136.1
  Share premium account            148.4         148.1       147.0
  Profit and loss account          641.8         595.8       608.6
Shareholders' funds                926.5         878.6       891.7


for the half year ended 30 September 1999

                                 Half year     Half year   Year
                                 ended         ended       ended
                                 30 Septem-    30 Septem-  31 March
                                 ber 1999      ber 1998    1999
                                 (unaudited)   restated
                           Notes      £m           £m         £m
Cash inflow from           (9)      105.2        100.8      193.6
 operating activities
Returns on investments                                     
 and servicing of finance            (9.6)        (8.7)     (31.1)
Taxation                             (0.5)        (3.0)     (79.9)
Capital expenditure and                                    
 financial investment               (57.5)       (66.6)    (125.0)
Acquisitions and                      0.3          1.2      (29.7)
Equity dividends paid                (6.5)       (25.4)     (25.4)
Cash inflow/(outflow)                                      
 before use of liquid                31.4         (1.7)     (97.5)
 resources and financing
Management of liquid                (13.5)        33.0       34.0
Financing                           (19.8)       (28.3)      64.6
(Reduction)/increase in              (1.9)         3.0        1.1
 cash in period

for the half year ended 30 September 1999

                          Half year     Half year    Year ended
                          ended         ended        31 March
                          30 September  30 Septem-   1999
                          1999          ber 1998
                          (unaudited)   restated
                              £m            £m           £m
 Water and sewerage         141.1         137.2        270.1
 Less: intra-group           (0.7)         (0.5)        (1.5)
                            140.4         136.7        268.6
   Viridor businesses:                               
     Waste management        50.1          41.9         83.4
     Instrumentation         24.1          18.7         41.0
     Contracting             27.1          30.6         60.3
     Property and other       0.3           4.3          4.6
     Total Viridor          101.6          95.5        189.3
   Other non-regulated        3.4           3.2          6.3
   Less: intra-group        (11.8)        (15.0)       (27.1)
                             93.2          83.7        168.5
                            233.6         220.4        437.1
Operating profit                                     
 Water and sewerage          73.3          73.3        138.7
   Viridor businesses:                               
     Waste management         7.8           9.7         17.9
     Instrumentation          1.6 +         1.8          3.7
     Contracting              0.5           0.1          1.1
     Property and other      (0.1)          0.8          0.9
     Total Viridor            9.8          12.4         23.6
   Other non-regulated        0.2           0.5          0.4
                             10.0          12.9         24.0
Exceptional item:                                    
 Non-regulated                 -            5.0          5.0
                             83.3          91.2        167.7
Profit on ordinary                                   
 activities before
 Water and sewerage          54.3          58.2        106.2
   Viridor businesses:                               
     Waste management         7.4           9.2         17.3
     Instrumentation          1.5           1.6          3.6
     Contracting              0.4          (0.1)         0.7
     Property and other        -            0.9          1.1
     Total Viridor            9.3          11.6         22.7
   Other non-regulated       (2.6)         (3.3)        (7.3)
                              6.7           8.3         15.4
Exceptional item:                                    
  Non-regulated                -            5.0          5.0
                             61.0          71.5        126.6

* includes interest arising on parent company financing of acquisitions
+ after charging £0.7m goodwill amortisation for Orbisphere



1.   The results for the half year ended 30 September 1999 are unaudited as
were those for the half year ended 30 September 1998.  The same accounting
policies have been applied as those set out in the Pennon Group Plc Annual
Report and Accounts for the year ended 31 March 1999.

2.   The financial information for the year ended 31 March 1999 does not
constitute full financial statements within the meaning of section 240 of the
Companies Act 1985.  The full financial statements for that year 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.

3.   The Group's accounting policy on infrastructure assets, and environmental
and landfill restoration provisions, was amended in the results for the full
year ended 31 March 1999 following the publication of two new Financial
Reporting Standards

Financial Reporting Standard 12 'Provisions, Contingent Liabilities and
Contingent Assets' (FRS 12) necessitated an adjustment to certain provisions
made in prior years.  Financial Reporting Standard 15 'Tangible Fixed Assets'
(FRS 15), also required a changed method of accounting for infrastructure

As a result of these changes in accounting policy, the September 1998
comparatives have been restated as follows:

      Group balance sheet                         
                                  Provisions      Profit and
                                  for             loss reserve
                                  and charges
                                      £m               £m
      September 1998 reported       (31.2)          (593.4)
      Application of FRS 12           2.4             (2.4)
      September 1998 restated       (28.8)          (595.8)

      Group profit and loss                           
                                  Turnover  Operating Net
                                            profit    interest
                                     £m        £m        £m
      September 1998 reported      220.2      90.9     (19.3)
      Application of FRS 12           -        0.3      (0.3)
      Reclassification               0.2        -         -
      September 1998 restated      220.4      91.2     (19.6)

      Group cash flow statement                   
                                  Cash inflow     Capital
                                  from operating  expenditure
                                  activities      and
                                       £m             £m
      September 1998 reported         97.4          (63.2)
      Application of FRS 12&15         3.4           (3.4)
      September 1998 restated        100.8          (66.6)

4.   Operating profit is after crediting the following exceptional item:

                                   September   September    March
                                   1999        1998         1999
                                      £m          £m          £m
      Settlement of legal claim                             
       on Browning-Ferris             -           5.0         5.0
       Industries Inc.

5.   Net interest payable includes a profit of £0.4m arising on a £2.6m
drawdown under a finance lease facility backed by letters of credit,
counter-indemnified by cash deposits (1998 £1.9m profit on £15.1m drawdown). 
The profit is after allowing for appropriate deferred income and costs.

6.   Tax on profit on ordinary activities comprises:

                                   September    September   March
                                   1999         1998        1999
                                      £m           £m         £m
     United Kingdom taxation:                               
       Corporation tax at 30%        10.7          31.0      66.0
        (1998  31%)
       Advance corporation tax:                             
         Scrip dividend saving         -           (5.8)     (5.8)
         Previous year               (5.4)        (20.0)    (43.0)
       Overseas taxation              0.4            -        0.3
                                      5.7           5.2      17.5

The corporation tax charge is derived by applying the anticipated effective
annual tax rate to the first half year profit before tax.

7.   The calculation of 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 half year of 135.9 million (1998 132.5 million).

                               Profit after tax      Earnings per share
                               Septem-   Septem-     Septem-    Septem-
                               ber       ber         ber        ber
                               1999      1998        1999       1998
                                 £m        £m            p          p
     Before exceptional item    55.3      61.3        40.7       46.3
     Exceptional item             -        5.0          -         3.7
       (note 4)
     After exceptional item     55.3      66.3        40.7       50.0

Earnings per share on a diluted basis and after the exceptional item are 40.4p
(1998  49.7p).  This basis allows for the issue of share options.

8.   The interim dividend of 15.4p per share will be paid on 6 April 2000 to
shareholders on the register on 3 March 2000.

9.   Reconciliation of operating profit to net cash inflow from operating

                                Half year    Half year    Year
                                ended        ended        ended
                                30 Septem-   30 Septem-   31 March
                                ber 1999     ber 1998     1999
                                (unaudited)  restated     
                                    £m           £m          £m
     Operating profit              83.3         91.2       167.7
     Depreciation charge           30.2         28.5        57.3
     Amortisation of goodwill       0.7           -          0.5
     Provision for impairments      0.4          0.3         0.7
     Deferred income released      (0.5)        (0.6)       (1.3)
     Decrease in provisions                               
     for                           (1.9)        (0.7)       (3.3)
      liabilities and charges
     Decrease in stocks             0.4          3.7         3.1
     Increase in debtors                                  
      falling due within and       (9.9)       (12.9)       (9.7)
      one year)
     Increase/(decrease) in                               
      creditors (amounts            2.7         (8.5)      (20.4)
      due within and over one
     Profit on disposal of         (0.2)        (0.2)       (1.0)
      fixed assets
     Net cash inflow from         105.2        100.8       193.6

10.   Analysis of net debt:

                      At        Cash    Currency Non-     At
                      1 April   flow    move-    cash     30 Septem-
                      1999              ments    move-    ber 1999
                        £m       £m       £m       £m        £m
     Cash at bank       7.3     (2.4)    (0.1)     -         4.8
     and in hand
     Current asset                                        
     Overnight          0.2      4.5       -       -         4.7
     Bank overdrafts   (0.7)    (4.0)      -       -        (4.7)
                        6.8     (1.9)    (0.1)     -         4.8
     Debt due within                                      
     one year (other
     bank              (34.8)    8.8       -     (5.6)     (31.6)
     Debt due after                                       
     than one year    (365.5)   10.0      0.7     5.6     (349.2)
     Finance lease    (317.8)    2.1       -     (3.8)    (319.5)
                      (718.1)   20.9      0.7    (3.8)    (700.3)
     Current asset                                        
Other than overnight    56.2   13.5       -        -        69.7
                      (655.1)   32.5      0.6    (3.8)    (625.8)

Non-cash movements include transfers between categories for debt changing
maturities £5.6m, the in-substance settlement of finance lease obligations
£0.4m, and finance charge variations on finance leases £4.2m.

11.   The interim report will be posted to shareholders on 7 January 2000 and
will also be available from the Company's registered office at Peninsula
House, Rydon Lane, Exeter, EX2 7HR.

Pennon Group Plc
Registered Office:  Peninsula House,
Rydon Lane, Exeter, EX2 7HR.

Registered in England No.  2366640


a d v e r t i s e m e n t