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Pennon Group PLC (PNN)

  Print      Mail a friend       Annual reports

Thursday 29 May, 2003

Pennon Group PLC

Final Results

Pennon Group PLC
29 May 2003

                                                            Thursday 29 May 2003



Pennon Group announces its unaudited results for the year ended 31 March 2003.


             •        Profit before tax of £74.2m
             •        Underlying profit before tax growth of 7.1%
             •        Earnings per share (before deferred tax and exceptional item) up 3.8%
                      from 53.0p to 55.0p
             •        Dividend
                        •      Recommended final dividend per share up 4.3% to 26.5p
                        •      Full year dividend (excluding the special interim dividend)
                               up 4.3% to 39.1p


             •        South West Water
                        •      Operating profit up 4.2% to £111.5m
                        •      Profit before tax up 0.4% to £67.1m
                        •      Continuing to improve efficiency
                        •      Delivering record levels of drinking water and bathing water
                        •      'Clean Sweep' now virtually complete

             •        Viridor Waste
                        •      Operating profit before goodwill up 25.7% to £19.1m
                        •      Profit before tax up 5.2% to £14.2m
                        •      Consented landfill capacity up 7m cubic metres to 80m cubic
                        •      Landfill gas capacity up 30% to 37MW
                        •      This year's and last year's acquisitions performing ahead of

             •        Pennon Group continues to be well placed for the future
                        •      South West Water : strong growth in regulatory asset value
                               to 2005; remains confident of out-performing the regulatory
                               contract to 2005
                        •      Viridor Waste's focused strategy : capitalising on landfill
                               asset base; exploiting landfill gas power generation
                               opportunities; continuing to pursue profitable opportunities
                               in line with the Government's developing waste strategy

'These results demonstrate further profitable growth in the Group, affirming our
strategy of focusing on our two key businesses, South West Water and Viridor
Waste' said Ken Harvey, Chairman. 'South West Water has maintained its
improvement in customer service, delivered further efficiencies and remains
confident of out-performing the regulatory contract to 2005.  Viridor Waste
shows continued steady growth in profits and is well placed to capitalise on its
recent developments.  We are confident prospects for the Group remain

For further information on 29 May 2003, please contact :

David Dupont              Group Director of Finance        )
Jo Finely                 Investor Relations Manager       )      020 7831 3113
Andrew Dowler             Financial Dynamics               )
Stephen Swain             Communications Manager                  01392 443022


Group turnover from continuing operations, including acquisitions, rose £36.2m
to £417.2m.  Overall group turnover reduced by £6.7m as a consequence of the
disposal of Viridor Instrumentation, completed in February 2002.

Group operating profit from continuing operations rose by 6.6% to £127.0m.

Earnings per share before deferred tax and exceptional item rose by 3.8% to
55.0p.  Earnings per share after deferred tax and exceptional item fell by 18.4%
to 44.3p, as a result of lower discount rates increasing the deferred tax

Capital expenditure for the Group was £204.6m (2001/02 - £186.4m).

Three waste management acquisitions were made during the year for a total cash 
consideration of £41.4m.

Net debt for the Group was £988.6m, an increase of £237.3m since 31 March 2002. 
Gearing, being net borrowings to shareholders' funds, was 111% (2001/02 - 77%). 
(Allowing for the impact of the special interim dividend referred to below, pro
forma gearing at 31 March 2002 was 96%.)  Interest cover was 2.4 times (March
2002 - 2.5 times).

The Board has recommended a final dividend of 26.5p, up 4.3%, subject to
shareholder approval.  Together with the interim dividend of 12.6p, (but
excluding the special interim dividend referred to below), this will result in a
total dividend for the year of 39.1p, representing an increase of 4.3% on the
total dividend for 2001/02.  The Board intends to continue to pursue a
progressive dividend policy.  The total cost of the interim and final dividends
for 2002/03 is £48.4m.

Following the sale of Viridor Instrumentation in February 2002, a special
interim dividend for 2002/03 of 70p per share was paid on 1 October 2002 out of
the sale proceeds, at a cost of £95.9m.  A share consolidation took place on 2
September 2002 in order to maintain comparability of the share price both before
and after the payment of the special interim dividend.

This year the Board is proposing to re-introduce a scrip dividend alternative to
replace the  Dividend Reinvestment Plan which has been available to shareholders
in recent years.  The scrip alternative will enable shareholders to acquire new
shares issued by the Company and details will be circulated with the Annual


South West Water turnover rose by £9.8m to £270.2m.  Approved tariff increases,
including headroom arising from meter switching, amounted to £14.0m.  Customers
switching from unmeasured to metered charging caused a reduction of £5.0m in
turnover.  Other factors, including 7,300 new customer connections, offset by a
small fall in measured demand, contributed £0.8m.

South West Water's operating profit rose 4.2% to £111.5m.  Operating costs,
including depreciation, increased by £5.3m to £158.7m.  New capital schemes
added £7.4m and inflation £3.1m, offset by £4.5m of efficiency and £0.7m of
other savings made in the year.  The company remains ahead of Ofwat's 
efficiency target and is on track to deliver further efficiency savings to
achieve the regulatory contract to 2005.  In the drive to achieve further
efficiencies, the benefit of three new major management information systems is
being realised in the areas of asset management, human resources and customer
service management.

Capital expenditure rose £13.9m to £181.5m.  £67.0m was invested in water supply
improvements including water mains renovation, water treatment works enhancement
and leakage control.  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.  Over 400kms of water mains were laid, replaced or refurbished
during the year.  Drinking water quality and river water quality are at an all
time high and the region features more miles of high quality river than any
other region in England.

Waste water services investment expenditure was £114.5m of which £64.5m was
invested in the company's 'Clean Sweep' bathing water programme which is nearing
completion.  Over 98% of the region's 140 bathing waters along the South West
coastline complied with the European Union's mandatory standards.  In addition,
84% of the region's bathing waters met the more stringent EU guideline
standards, the best performance of any region in the UK (2001/02 - 71%).

Independent market research carried out amongst South West Water's customers
confirmed continued high levels of satisfaction with the overall service
provided by the company.

South West Water is formulating its business plan submission for the next 
regulatory period (2005 - 2010).


Viridor Waste turnover rose by 21.5% from £125.3m in 2001/02 to £152.3m in
2002/03.  Acquisitions accounted for £12.9m, increased existing business £9.3m
and increased landfill tax £4.8m.

Viridor Waste operating profit before goodwill rose by 25.7% to £19.1m (£17.6m
after goodwill) compared to £15.2m in 2001/02.  This year's and last year's
acquisitions offset the impact of one off gains in 2001/02.  Existing business
grew strongly, assisted by a step change in profits arising from the impact of
the new renewables pricing regime on Viridor Waste's existing power generation
business.  Excluding this step change, underlying profit growth was around 10%. 
This financial performance was achieved despite generally tough market
conditions.  Operating margin, before goodwill and excluding landfill tax, was
17.4%.  Earnings before interest, tax, depreciation and amortisation (EBITDA)
grew from £32.1m to £38.2m.  Capital expenditure for the year was £23.0m
(2001/02 - £18.3m).

Three acquisitions were made during the year reinforcing Viridor Waste's stated
strategy of capitalising on its strong position in landfill disposal, exploiting
opportunities in renewable energy in line with the Government's targets and
pursuing profitable opportunities arising from the Government's developing waste
management strategy.  The three acquisitions were in total already earnings
enhancing before goodwill in 2002/03, at least a year earlier than expected. 
Last year's acquisitions were earnings enhancing not only before goodwill, as
expected, but also after goodwill.

Total landfill disposal volumes increased by 8.6% to 3.5m tonnes.  Excluding the
effect of last year's non recurring items and both last year's and this year's
acquisitions, volumes increased by 3.3%.  Underlying gate fees rose by 4.7%.
Consented landfill increased from 73m m3 to 80m m3 from a combination of
acquisitions and planning gains, less usage during the year.  Viridor Waste's
total power generation capacity increased by 30% to 37MW.


The terms of the agreement with the other shareholders of Enviro-Logic provided
for Pennon Group Plc to acquire full ownership of the company after 5 years. 
Pennon took up this option on 6 May 2003.  The Company is currently reviewing
the strategic development of Enviro-Logic and the integration of its activities
with the ongoing commercial activities within South West Water.


Pennon operates a defined benefit pension scheme for existing staff and new
entrants to Pennon and South West Water and for existing employees in Viridor
Waste.  The last actuarial valuation in April 2001 indicated a scheme surplus,
enabling a continuation of the employer contribution 'holiday' in 2001/02. 
However, in response to deteriorating stock market conditions, the company
resumed employer contributions of 4.8% of pensionable pay in 2002/03, in line
with the recommendation from the scheme actuary.

Under FRS 17 reporting requirements the Group pension schemes had a net deficit
at 31 March 2003 of £59.4m.  This represents circa 7% of total market
capitalisation.  From 1 April 2003, employer contributions have been increased
to 11.5%.  The pension fund position is being kept under review and the next
triennial actuarial review is due in April 2004.

Having reviewed practices in the waste industry, Pennon is putting in place a
defined contribution scheme for employees from recently acquired waste companies
and new entrants to Viridor Waste.  In many instances this will be an
enhancement of their current position.  At the same time the policy is that the
Pennon defined benefit scheme will no longer be available to new entrants to
Viridor Waste as of 1 July 2003.   Whilst the introduction of the defined
contribution scheme and increased funding costs for the defined benefit pension
scheme will impact profit growth in 2003/04, this change will reduce Viridor
Waste's exposure to any further adverse movements in the defined benefit scheme
funding position.


The mainstream corporation tax charge for the year was £3.4m (2001/02 - nil).

The deferred tax charge for the year to 31 March 2003 was £13.7m, up from £3.3m 
in 2001/02 as a result of lower discount factors.


The Group funding strategy utilises a mix of fixed and floating rate borrowings.
 To take advantage of current historically low interest rates and reduce the
risk of adverse movements over the next few years, South West Water has entered
into swap arrangements to fix the interest rate on the majority of its debt for
the period up to the next Periodic Review. In addition, it has entered into a
new £95m finance lease facility which provides sub-LIBOR funding at very
attractive rates for the next 20 years and also provides a substantial element
of the remaining K3 funding requirements.


The Board will continue to focus on adding value for shareholders.  This will be
achieved by South West Water growing its regulatory asset value and
outperforming the regulatory contract up to 2005, and  Viridor Waste
capitalising on the opportunities arising from its successful focused strategy.

The pension fund contribution increases will have some impact on the Group
2003/04 results.  The Board is confident, however, that the satisfactory
performance this year of both businesses provides a strong foundation for the
Group going forward.

Ken Harvey
29 May 2003

for the year ended 31 March 2003
                                                                          2003                2002
                                                    Note                    £m                  £m
                                                                  ____________       _____________
Continuing operations                                                   403.0               381.0
     Acquisitions                                                        14.2                   -
                                                                  ____________       _____________
                                                                        417.2               381.0
Discontinued operations                               2                     -                42.9
                                                                  ____________       _____________
Total turnover                                                          417.2               423.9
Operating costs                                                        (290.2)             (302.1)
                                                                  ____________       _____________
Group operating profit
Continuing operations                                                   126.0               119.1
     Acquisitions                                                         1.0                   -
                                                                  ____________       _____________
                                                                        127.0               119.1
Discontinued operations                               2                     -                 2.7
                                                                  ____________       _____________
Total Group operating profit                                            127.0               121.8
Share of operating loss in
     Joint venture                                                       (0.1)               (0.1)
     Associate                                                           (0.6)               (0.4)
                                                                  ____________       _____________
Total operating profit                                                  126.3               121.3
Profit on disposal of discontinued operation          2                     -                 5.1
Net interest payable                                                    (52.1)              (49.0)
                                                                  ____________       _____________
Profit on ordinary activities before taxation                            74.2                77.4
Tax on profit on ordinary activities                  3                 (17.1)               (3.3)
                                                                  ____________       _____________
Profit on ordinary activities after taxation                             57.1                74.1
Dividends                                             4                (144.3)              (51.4)
                                                                  ____________       _____________
Retained (deficit)/surplus transferred (from)/to                        (87.2)               22.7
                                                                  ____________       _____________
Earnings per share                                    5
     Adjusted basic                                                      55.0p               53.0p
     Adjusted diluted                                                    54.8p               52.9p
     Basic                                                               44.3p               54.3p
     Diluted                                                             44.2p               54.2p

                                                                  ____________       _____________
Dividend per share                                    4                 109.1p               37.5p
                                                                  ____________       _____________

for the year ended 31 March 2003
                                                                          2003                2002
                                                                            £m                  £m
                                                                  ____________       _____________
Profit on ordinary activities after taxation                             57.1                74.1
Currency retranslation differences on foreign
currency net investments
                                                                            -                 0.6
                                                                  ____________       _____________
Total gains and losses recognised for the year                           57.1                74.7
Prior year adjustments                                                      -               (50.9)
                                                                  ____________       _____________
Total gains and losses recognised since last
Annual Report                                                            57.1                23.8
                                                                  ____________       _____________

for the year ended 31 March 2003

                                                              2003 (unaudited)                2002
                                                                            £m                  £m
                                                                  ____________       _____________

Fixed assets
Intangible assets                                                        37.6                11.7
Tangible assets                                                       2,046.4             1,907.7
Investments                                                               1.9                 3.3
                                                                  ____________       _____________
                                                                      2,085.9             1,922.7
Current assets
Stocks                                                                    4.0                 3.2
Debtors                                                                  87.6                81.6
Investments and cash                                                    191.0               292.0
                                                                  ____________       _____________
                                                                        282.6               376.8
Creditors: amounts falling due within one year                         (265.1)             (276.0)
                                                                  ____________       _____________
Net current assets                                                       17.5               100.8
                                                                  ____________       _____________
Total assets less current liabilities                                 2,103.4             2,023.5
Creditors: amounts falling due after more than one year              (1,083.3)             (932.3)
Provisions for liabilities and charges                                  (90.6)              (74.4)
Deferred income                                                         (39.4)              (40.6)
                                                                  ____________       _____________
Net assets                                                              890.1               976.2
                                                                  ____________       _____________

Capital and reserves
Called-up share capital                                                 137.2               137.0
Share premium account                                                   152.8               151.6
Profit and loss account                                                 600.1               687.6
                                                                  ____________       _____________
Shareholders' funds                                                     890.1               976.2
                                                                  ____________       _____________

for the year ended 31 March 2003
                                                                          2003                2002
                                                       Note                 £m                  £m
                                                                  ____________       _____________
Net cash inflow from operating activities               6               198.9              196.2
Returns on investments and servicing of finance                         (42.9)             (44.3)
Taxation                                                                    -                0.4
Capital expenditure and financial investment                           (198.2)            (182.3)
Acquisitions and disposals                                              (37.2)              85.0
Equity dividends paid                                                  (147.3)             (49.4)
                                                                  ____________       _____________
Net cash (outflow)/inflow before use of liquid resources
and financing                                                          (226.7)               5.6
Management of liquid resources                                           67.6              (27.0)
Financing                                                               140.7               38.2
                                                                  ____________       _____________
(Decrease)/increase in cash in year                                     (18.4)              16.8
                                                                  ____________       _____________

for the year ended 31 March 2003
                                                               2003 (unaudited)                2002
                                                                            £m                   £m
                                                                   ____________       _____________
Continuing operations
Water and sewerage                                                       270.2               260.4
Waste management                                                         152.3               125.3
Other                                                                      5.2                 6.6
Less intra-group trading                                                 (10.5)              (11.3)
                                                                   ____________       _____________
Total continuing operations                                              417.2               381.0
                                                                   ____________       _____________

Discontinued operations
Instrumentation                                                              -                43.0
Property                                                                     -                 1.4
Less intra-group trading                                                     -                (1.5)
                                                                   ____________       _____________
Total discontinued operations                                                -                42.9
Group totals                                                             417.2               423.9
                                                                   ____________       _____________

Group operating profit
Continuing operations before goodwill amortisation
Water and sewerage                                                       111.5               107.0
Waste management                                                          19.1                15.2
Other                                                                     (2.1)               (2.8)
                                                                   ____________       _____________
Total continuing operations                                              128.5               119.4
                                                                   ____________       _____________

Discontinued operations before goodwill amortisation
Instrumentation                                                              -                 3.9
Property                                                                     -                 0.1
                                                                   ____________       _____________
Total discontinued operations                                                -                 4.0
                                                                   ____________       _____________

Goodwill amortisation
Continuing operations :
     Waste management                                                     (1.5)               (0.3)
Discontinued operations :
     Instrumentation                                                          -               (1.3)
                                                                   ____________       _____________
Total goodwill amortisation                                               (1.5)               (1.6)
                                                                   ____________       _____________

Group totals                                                             127.0               121.8
                                                                   ____________       _____________

for the year ended 31 March 2003 (continued)

                                                                 2003 (unaudited)               2002
                                                                               £m                 £m
                                                                     ____________      _____________

Profit on ordinary activities before taxation

Continuing operations
Water and sewerage                                                          67.1               66.8
Waste management                                                            14.2               13.5
Other *                                                                     (7.1)             (11.0)
                                                                     ____________      _____________
Total continuing operations                                                 74.2               69.3
                                                                     ____________      _____________

Discontinued operations
Instrumentation                                                                -                2.7
Property                                                                       -                0.3
                                                                     ____________      _____________
Total discontinued operations                                                  -                3.0
                                                                     ____________      _____________

Exceptional item
Discontinued operations disposal profit                                        -                5.1
                                                                     ____________      _____________

Group totals                                                                74.2               77.4
                                                                     ____________      _____________

* includes interest arising on parent company financing of acquisitions


1    The financial information for the years ended 31 March 2003 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 2002 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    The comparatives for the year ended 31 March 2002 for discontinued 
     operations include the results of Viridor Instrumentation Limited which was 
     disposed of in February 2002.

3    Tax on profit on ordinary activities for the year comprises :

                                                          2003                        2002
                                                            £m                          £m

     United Kingdom corporation tax at 30%                 3.4                         0.5

     Overseas taxation                                       -                        (0.5)
     Deferred taxation                                    13.7                         3.3
                                                   ___________                 ___________
                                                          17.1                         3.3
                                                   ___________                 ___________

4    Dividends                                            2003                        2002
                                                            £m                          £m
     Special interim dividend of 70.0p
     per share                                             95.9                          -
     Interim dividend of 12.6p
          (2002 12.1p) per share                           15.6                        16.6
     Final dividend 26.5p
          (2002 25.4p) per share                           32.8                        34.8
                                                    ___________                 ___________
                                                          144.3                        51.4
                                                    ___________                 ___________

     On 2 September 2002 the Share Capital of the Company was reduced by a share 
     capital consolidation whereby every 111 Ordinary shares of £1 each were 
     replaced by 100 new Ordinary shares of £1.11 each.  The consolidation was 
     accompanied by the declaration of a special interim dividend for the year 
     ending 31 March 2003 of  70.0 pence per existing Ordinary share.  The 
     special interim dividend was paid on 1 October 2002 together with the final 
     dividend for the year ended 31 March 2002.

     If approved at the Annual General Meeting on 31 July 2003 the final 
     dividend of 26.5p per share will be paid on 1 October 2003 to shareholders 
     on the register at 11 July 2003.

5    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 year of 128.8 million (2002 136.5 

     All share options with an exercise price lower than the average market 
     price of the Company's shares during the year have been included in the 
     calculation of diluted earnings per share.  The weighted average number of 
     shares in issue during the year, taking account of the dilutive effect of 
     share options, was 129.3 million (2002 136.8 million).

     Adjusted basic and diluted earnings per share

     Adjusted earnings per share have been calculated to exclude the impact of 
     exceptional items and deferred tax on the results, as such items can have a 
     distorting  effect on earnings from year to year and therefore warrant 
     separate consideration.  Adjusted earnings have been calculated as follows:

                                                            2003                         2002
                                                              £m                           £m
     Profit on ordinary activities
          after taxation                                    57.1                         74.1
     Exceptional item -
          profit on business disposal                          -                         (5.1)
                                                     ___________                  ___________
     Profit after tax before exceptional item               57.1                         69.0
     Deferred tax                                           13.7                          3.3
                                                     ___________                  ___________
     Adjusted earnings                                      70.8                         72.3
                                                     ___________                  ___________

     The exceptional item in 2002 comprises the profit on disposal of Viridor 
     Instrumentation Limited.

6    Reconciliation of Group operating profit to net cash inflow from operating activities:

                                                                  2003                  2002
                                                                    £m                    £m
     Group operating profit                                      127.0                 121.8
     Depreciation charge                                          79.8                  75.5
     Amortisation of intangible fixed assets                       1.5                   1.6
     Provision for impairment of fixed asset
     Investments                                                   1.4                   0.3
     Deferred income released to profits                          (1.2)                 (1.2)
     (Decrease)/increase in provisions for liabilities
     and charges                                                  (2.0)                  1.0
     Increase in stocks                                           (0.8)                 (0.6)
     Decrease/(increase) in debtors (amounts falling
     due within and over one year)                                 1.1                  (4.0)
     (Decrease)/increase in creditors (amounts falling
     due within and over one year)                                (7.1)                  2.9
     Profit on disposal of tangible fixed assets                  (0.8)                 (1.1)
                                                           ___________           ___________
     Net cash inflow from operating activities                   198.9                 196.2
                                                           ___________           ___________

7    Analysis of net debt
                                         At         Cash   Acquisitions     Non-cash            At
                                    1 April         flow     (excluding    movements      31 March
                                       2002                 cash items)                       2003
                                        £m           £m             £m           £m            £m
     Cash at bank and in
     hand                              1.0          7.6              -            -           8.6
     Current asset
     Overnight deposits              45.3        (41.0)             -            -           4.3
     Bank overdrafts                 (29.1)        15.0              -            -         (14.1)
                                   ________      _______       ________     ________      ________
                                      17.2        (18.4)             -            -          (1.2)
                                   ________      _______       ________     ________      ________
     Debt due within one
     year (other than
     bank overdrafts)                (62.9)        19.7               -       (14.8)        (58.0)
     Debt due after more
     than one year                  (299.2)      (100.0)             -         13.6        (385.6)
     Finance lease
     obligations                    (652.1)       (59.3)          (0.3)       (10.2)       (721.9)
                                   ________      _______       ________     ________      ________
                                  (1,014.2)      (139.6)          (0.3)       (11.4)     (1,165.5)
                                   ________      _______       ________     ________      ________
     Current asset
     Other than overnight
     deposits                        245.7        (67.6)             -            -         178.1
                                   ________      _______       ________     ________      ________
                                    (751.3)      (225.6)          (0.3)       (11.4)       (988.6)
                                   ________      _______       ________     ________      ________

     Non-cash movements include transfers between categories of debt for 
     changing maturities, increased accrued finance charges within finance lease 
     obligations, and loan notes issued in settlement of accrued consideration 
     in respect of a previously acquired business.

8    The Annual Report for 2002/03 will be issued to shareholders on 30 June 

Pennon Group Plc
Registered Office :
Peninsula House
Rydon Lane
Devon  EX2  7HR

Registered in England No 2366640

                      This information is provided by RNS
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