Interim Results - 6 Months to 30 September 1999
Pennon Group PLC
9 December 1999
INTERIM RESULTS FOR THE HALF YEAR ENDED 30 SEPTEMBER 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.
FINANCIAL HIGHLIGHTS
- 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 OVERVIEW
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
12%.
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.
UTILITY OPERATIONS - SOUTH WEST WATER LTD (SWW)
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.
VIRIDOR LTD
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
growth.
PERIODIC REVIEW - PRICE DETERMINATION
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.
PROSPECTS
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.
PENNON GROUP PLC
GROUP PROFIT AND LOSS ACCOUNT
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
(unaudited)
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)
associate
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)
activities
Profit on ordinary
activities after 55.3 66.3 109.1
taxation
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.
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
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
(unaudited)
Notes £m £m £m
Profit on ordinary
activities after 55.3 66.3 109.1
taxation
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
period
Prior year adjustment (3) - 2.4 2.4
Total gains and losses
since last Annual Report 54.7 68.7 110.6
PENNON GROUP PLC
SUMMARISED GROUP BALANCE SHEET
at 30 September 1999
30 Septem- 30 Septem- 31 March
ber 1999 ber 1998 1999
(unaudited) restated
(unaudited)
£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
liabilities
Creditors: amounts falling
due after more than one (661.8) (542.6) (675.9)
year
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
PENNON GROUP PLC
GROUP CASH FLOW STATEMENT
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
(unaudited)
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)
disposals
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
resources
Financing (19.8) (28.3) 64.6
(Reduction)/increase in (1.9) 3.0 1.1
cash in period
PENNON GROUP PLC
SEGMENTAL ANALYSIS BY CLASS OF BUSINESS
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
(unaudited)
£m £m £m
Turnover
Water and sewerage 141.1 137.2 270.1
business
Less: intra-group (0.7) (0.5) (1.5)
trading
140.4 136.7 268.6
Non-regulated
businesses:
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
businesses
Less: intra-group (11.8) (15.0) (27.1)
trading
93.2 83.7 168.5
233.6 220.4 437.1
Operating profit
Water and sewerage 73.3 73.3 138.7
business
Non-regulated
businesses:
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
businesses
10.0 12.9 24.0
Exceptional item:
Non-regulated - 5.0 5.0
businesses
83.3 91.2 167.7
Profit on ordinary
activities before
taxation
Water and sewerage 54.3 58.2 106.2
business
Non-regulated
businesses:
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)
businesses*
6.7 8.3 15.4
Exceptional item:
Non-regulated - 5.0 5.0
businesses
61.0 71.5 126.6
* includes interest arising on parent company financing of acquisitions
+ after charging £0.7m goodwill amortisation for Orbisphere
PENNON GROUP PLC
NOTES
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
assets.
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
liabilities
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
account
Turnover Operating Net
profit interest
payable
£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
financial
investment
£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)
utilisation
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
activities:
Half year Half year Year
ended ended ended
30 Septem- 30 Septem- 31 March
ber 1999 ber 1998 1999
(unaudited) restated
(unaudited)
£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)
to
profit
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
(amounts
falling due within and (9.9) (12.9) (9.7)
over
one year)
Increase/(decrease) in
creditors (amounts 2.7 (8.5) (20.4)
falling
due within and over one
year)
Profit on disposal of (0.2) (0.2) (1.0)
tangible
fixed assets
Net cash inflow from 105.2 100.8 193.6
operating
activities
10. Analysis of net debt:
At Cash Currency Non- At
1 April flow move- cash 30 Septem-
1999 ments move- ber 1999
ments
£m £m £m £m £m
Cash at bank 7.3 (2.4) (0.1) - 4.8
and in hand
Current asset
investments:
Overnight 0.2 4.5 - - 4.7
deposits
Bank overdrafts (0.7) (4.0) - - (4.7)
6.8 (1.9) (0.1) - 4.8
Debt due within
one year (other
than
bank (34.8) 8.8 - (5.6) (31.6)
overdrafts)
Debt due after
more
than one year (365.5) 10.0 0.7 5.6 (349.2)
Finance lease (317.8) 2.1 - (3.8) (319.5)
obligations
(718.1) 20.9 0.7 (3.8) (700.3)
Current asset
investments:
Other than overnight 56.2 13.5 - - 69.7
deposits
(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
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