Final Results

Thames Water PLC 23 May 2000 THAMES WATER ANNOUNCES PRELIMINARY RESULTS FOR YEAR ENDED 31 MARCH 2000 'Thames established as the UK leader in international water markets' The Board of Thames Water Plc today announced unaudited results for the year ended 31 March 2000. Table of key figures £m 1999/2000 1998/1999 % increase Turnover 1,484 1,403 6 Operating Profit 559 521 7 - Non-regulated 85 58 47 - UK Utility 488 474 3 Profit before tax and 420 412 2 exceptional items Financial highlights: * Base dividend up 9% to 46.5p * Non-regulated operating profit up 47% * International operating profit more than doubled * UK Utility continues to increase operating profit through efficiency improvements * US$948m E'town acquisition to strengthen international portfolio Operational highlights: * All customer service and quality targets achieved * Since privatisation £4bn capital investment (£1,150 per household) to improve customer service * Maintained lowest average household bills for combined water and wastewater services in England and Wales * Over 24 million customers worldwide Roger Carr, Chairman said: 'We are developing our position as a leading competitive force internationally in water-related services and products. We believe this strategy will provide a balanced spread of investments generating earnings and dividend growth for our shareholders.' Bill Alexander, Chief Executive said: 'We are a strong and increasingly well balanced Group and have the resources to win new business in markets that are growing around the world. 'Although the 1999 regulatory Price Review will result in a reduction in the earnings from the UK Utility this year, I am confident that we can continue to provide high quality earnings growth from our new baseline and deliver increasing value to our shareholders underpinned by the considerable long-term strengths of the business.' Information The preliminary results presentation will be available on the Thames Water web site from 11am on Tuesday 23 May. Our website address is www.thames-water.com and the presentation will be found in the Shareholder Information section under Presentations. There will be a telephone conference call for investors and brokers analysts at 4pm (UK time) on Tuesday 23 May. Please call Majella Brennan of Bell Pottinger on 0207 353 9203 for details. For further information please contact: Thames Water Plc Chris Bunker, Finance Director 020 7833 6161 Liz Christie, Head of Investor Relations 020 7833 6125 Bell Pottinger David Beck, Bell Pottinger 020 7353 9203 Chairman's Statement (extract) Overview At the centre of our strategy for value creation is our expertise in water-related services and products. We are developing our position as a leading competitive force internationally and taking every opportunity to realise the full potential of both our people and assets around the world. We believe this strategy will provide a balanced spread of investments generating earnings and dividend growth for our shareholders. The financial results for 1999/00 are evidence of the progress we are making. Operating profits increased by 7% to £559m. The non- regulated businesses contributed £85m, an increase of 47% in the year. It is also pleasing to report that profit before tax and exceptional items, at £420m, was increased by some 2%. The final regulatory price determination in November 1999 proved to be particularly challenging and will result in a reduction in UK Utility earnings in 2000 and the prospect of lower returns on the substantial capital employed in this business. However, we remain determined to improve upon the new regulatory targets as we have done successfully for the last ten years. The International business had another excellent year and has quickly established itself as a major force in the growing global water markets. The Products, Services and Property businesses also increased their overall contribution to operating profits and, as a result, 15% of the total operating profit in 1999/00 was delivered by businesses outside the UK Utility, up from 11% in the previous year. Dividend Despite the regulatory challenge to the UK Utility, the Board remains committed to a policy of real dividend growth. Accordingly, the Board has recommended a final base dividend per ordinary share of 31.2p, making a total dividend of 46.5p for the year - an increase of 9%. Shareholders will be aware that there have been changes to Advance Corporation Tax (ACT) in recent years. The Group's historically high levels of capital expenditure and the reduction in Utility profits from the beginning of the new regulatory period, have meant that the Board has been considering ways to mitigate the effect of these tax changes. After careful consideration, the Board has decided to propose to shareholders for their approval at the Annual General Meeting a resolution deferring the payment of the final dividend until 2 April 2001. Shareholders will be compensated for the effects of the delay by receiving, in addition to the base final dividend of 31.2p, a further one-off enhancement of 1.5p per ordinary share making a total of 32.7p payable to shareholders on the register at 26 January 2001. The 1.5p enhancement represents an attractive annualised interest rate of 8% on the base dividend of 31.2p over the period of deferment. It is proposed to follow a similar approach in respect of the payment of the 2001 interim dividend which will be deferred from February 2001 to 2 April 2001. Further details of the Board's dividend proposals are contained in the Chief Executive's report. In conclusion, I would like to extend my thanks for the enthusiastic and loyal support of all our employees. We have some exciting and challenging times ahead. We are committed to delivering high standards of customer service in all our businesses and to the creation of real value for our shareholders. Roger Carr 23 May 2000 Chief Executive's Report (extract) With the rapidly increasing global demand for improved water supplies and services, I believe that shareholder value will be maximised by a positive strategy of international business development and growth. We are actively creating a balanced portfolio of high quality, internationally competitive businesses, dedicated to the continuous improvement of customer service and value for money through a focused programme of innovation and investment. Turnover of £1,484m was 6% higher than last year, whilst operating profit was increased by 7% to £559m, reflecting further improvement in the Group's operating margin from 37.2% to 37.7%. Profit before tax of £420m was 2% higher after increased interest costs resulting from greater balance sheet efficiency, windfall tax payment and our overseas investment programme. Adjusted earnings per ordinary share were 97.6p (1998/99 104.4p) reflecting the increased effective tax rate in the year. In line with our business development strategy, the Group made investments in the year totalling £540m including; £435m capital expenditure in the UK Utility, equity in joint venture companies of £7m and acquisitions in the International Division of £57m. UK Utility Operating profit in the UK Utility was increased by 3% to £488m (1998/99 £474m) on turnover of £1,126m (1998/99 £1,092m). £435m of capital investment was made during the year bringing the total to £4bn since privatisation. This represents a total of £1,150 for each of the households we serve. Against a background of continuing real growth in activity, operating costs, at £454m (1998/99 £458m), were again reduced in the year. The substantial capital investment programme is reflected in the increased depreciation charge of £186m (1998/99 £169m). We remain committed to further improving efficiency and the provision of excellent customer service whilst, at the same time, taking advantage of opportunities to create value provided by competition in the UK. The latest five-year review of prices was completed in 1999 and, although Thames had met or exceeded all relevant operational targets, the Regulator elected to reduce prices by some 10%. This will produce a reduction in earnings from the UK Utility in 2000/01, which we will seek to offset progressively through continuous productivity improvement. The UK Utility business remains the largest such water company in the United Kingdom, serving London and the South East. We expect to continue to deliver real growth in its earnings from the new baseline set by the Regulator, and to maximise the value obtained from its unrivalled customer and asset base. International The growth of our International business was accelerated in 1999/00 with operating profit up £26m to £44m, on turnover of £151m (1998/99 £129m). Good progress has been made on all our projects and significant new contracts were secured in Australia, Chile, Malaysia, Scotland and Thailand. During the year a number of large projects, having completed their construction phase, were transferred to joint venture companies for long-term operation. This year we entered the Latin American market with the US$136m acquisition of ESSEL in Chile through a joint venture with the Portugese electricity company Electricidade de Portugal (EDP). ESSEL, a water company serving 600,000 customers, is situated in an excellent region for growth to the south of the capital city, Santiago. In November 1999 we announced a recommended offer to acquire the New Jersey-based water company E'town for US$948m. It is one of the largest investor-owned water utilities in the United States and provides an excellent growth opportunity in the rapidly expanding North American market place. Subject to the necessary regulatory approvals, we expect the acquisition to be completed this Autumn. The international market for water supply and services is growing strongly through a wide variety of contract types as both political and consumer expectations increase. Business performance in 1999/00 was encouraging and I am confident that, with the substantial opportunities that exist in both developed and developing markets, we have the skills and resources to continue the focused development of the International business to provide reliable long-term earnings growth. Products The Products business increased operating profit by 37% to £5.6m (1998/99 £4.1m) on turnover up 16% to £97m (1998/99 £83m). Operating margins were also increased to 5.8% (1998/99 4.9%). As with our water operations, the Products division has demonstrated success both at home and abroad. Services The Services business improved operating profit by 30% to £8.2m (1998/99 £6.3m) on turnover of £211m (1998/99 £189m). Operating margins were also increased to 3.9% (1998/99 3.3%). The business continued to make strong progress as a service provider in its three key market sectors - Utility Network Services, Management Contracts and Waste Management. Property and Insurance The Property business increased operating profit by 16% to £21m (1998/99 £18m) on £52m turnover (1998/99 £49m). This reflects the growing strength of St James Homes, the important joint venture with Berkeley Group, and the continuing successful development of the commercial portfolio through Kennet Properties, our wholly owned property subsidiary. Our insurance company (Isis) produced an operating profit of £6.5m, down from £11.9m last year, as a result of reduced investment returns and increased claims experience in the year. Taxation and Dividends At 31 March 2000 Thames has written off ACT of £159m, derived from dividend payments and share buybacks. The Government announced the abolition of ACT as from 6 April 1999 and the Board is determined to realise value from this asset at the earliest possible opportunity. Under the current legislation the extent to which Thames can utilise this asset is limited by Shadow ACT which is generated whenever a dividend is paid. In order to minimise the generation of Shadow ACT, the Board is therefore proposing that the payment of the final cash dividend for the year ended 2000 and the interim dividend for 2001 is delayed until 2 April 2001. If the final dividend were to be paid as usual in September 2000 the Board would be proposing a payment of 31.2p per share to give a total dividend for the year ended 2000 of 46.5p per share, an increase of 9% over the 1999 dividend. To compensate shareholders for the delay in payment of the final dividend it is now proposed that the final cash dividend for 2000 should be 32.7p; the additional 1.5p per share equates to interest at approximately 8% per annum for the seven month deferral period. It is proposed that a similar approach will be followed in respect of the payment of the 2001 interim dividend which will be deferred from February 2001 to April 2001. This action will avoid the creation of Shadow ACT of approximately £41m in 2001. The Company is actively considering options to realise the balance of the ACT asset in the current financial year. The Way Forward We are a strong and increasingly well-balanced Group and have the resources to win new business in markets that are growing around the world. We will continue to maximise the generation of value from our assets and strong market positions and are creating a platform for sustainable growth through our existing and planned investments in both developed and developing markets. Although the 1999 regulatory Price Review will result in a substantial reduction in the earnings from the UK Utility this year, I am confident that we can continue to provide high quality earnings growth from our new baseline and deliver increasing value to our shareholders underpinned by the considerable long term strengths of our business. Bill Alexander 23 May 2000 Consolidated Profit and Loss Account Year ending 31 March 2000 2000 1999 1999 Notes Total Total Total Total £m £m £m £m ----- ----- ----- ----- Turnover - Group and share of joint ventures 1,483.7 1,402.8 - Share of joint ventures (115.9) (77.3) ----- ----- - Group 1,367.8 1,325.5 Operating costs (860.1) (825.6) Other operating income 2 7.9 12.7 Utilisation of provision - 1.4 ----- ----- Group operating profit 515.6 514.0 Share of operating profit in: - Joint ventures 43.4 8.1 - Associates 0.4 43.8 (0.8) 7.3 ----- ----- ----- ----- Operating profit 559.4 521.3 Exceptional item - 7.0 ----- ----- Profit on ordinary activities before interest and taxation 559.4 528.3 Net interest expense: - Group (121.5) (106.0) - Share of joint ventures (16.3) (2.9) - Share of associates (2.0) (139.8) (0.8) (109.7) ----- ----- ----- ----- Profit on ordinary activities before taxation 419.6 418.6 Taxation on profit on ordinary activities 3 (76.4) (34.2) ----- ----- 343.2 384.4 Non-equity dividend (1.0) (0.9) ----- ----- Profit for the financial year 342.2 383.5 Ordinary dividends 4 (168.4) (148.8) ----- ----- Retained profit transferred to reserves 173.8 234.7 ===== ===== Earnings per ordinary share - Adjusted EPS 5 97.6p 104.4p - Diluted 97.2p - 105.5p - - Exceptional item - 1.9p ----- ----- Basic earnings per ordinary share 97.6p 106.3p ===== ===== Summarised Consolidated Balance Sheet Restated (Note 6) Year ending 31 March Notes 2000 1999 £m £m Fixed assets - Intangible assets 27 27 - Tangible fixed assets 6 4,297 4,023 - Fixed asset investments 7 129 55 ----- ----- 4,453 4,105 Current assets - Stocks and work in progress 39 32 - Debtors and prepayments 363 316 - Cash and short-term investments 156 181 ----- ----- 558 529 Creditors: amounts falling due within one year (939) (1,029) ----- ----- Net current liabilities (381) (500) ----- ----- Total assets less current liabilities 4,072 3,605 ----- ----- Creditors: amounts falling due after more than one year (1,730) (1,449) Provisions for liabilities and charges (60) (52) ----- ----- Net assets 2,282 2,104 ===== ===== Capital and reserves - Share capital 103 105 - Share premium 70 56 - Capital redemption reserve 320 317 - Profit and loss account 1,789 1,626 ----- ----- 2,282 2,104 ===== ===== Shareholder's funds - Equity shareholder's funds 2,260 2,079 - Non equity shareholder's funds 22 25 ----- ----- 2,282 2,104 ===== ===== Memorandum item: Net debt 8 (1,810) (1,592) Gearing 79% 76% Summarised Cash Flow Statement Restated (Note 6) Notes Year ending 31 March 2000 1999 £m £m Net cash flow from operating activities 673 647 Servicing of finance less returns on investment (115) (96) Taxation (50) (172) Capital expenditure - Capital investment (470) (488) - Capital contributions and sale of fixed assets 43 52 - Infrastructure renewals expenditure (47) (45) Acquisitions, disposals and equity investments 7 (51) (29) Equity dividends paid (204) (98) Management of liquid resources 13 15 Financing - Issue of shares 15 7 - Share capital related costs - (5) - Payments under qualifying employee share trust (8) (2) - Repurchase of shares (2) (276) - Cashflow from increase in debt & lease financing 226 501 ----- ----- Increase in cash during the period 23 11 Change in debt resulting from cash flows - Management of liquid resources (13) (15) - Cashflow from increase in debt & lease financing (226) (501) Other non cash movements (2) (2) ----- ----- Increase in net debt (218) (507) ===== ===== Reconciliation of operating profit to operating cash flow 2000 1999 £m £m Operating profit 559 528 Depreciation 6 197 179 Working capital (54) (60) Increase/(decrease) in long term provisions 9 (7) Other adjustments (38) 7 ----- ----- Net cash flow from operating activities 673 647 ===== ===== Segmental Analysis by Class of Business Year ending 31 March TURNOVER 2000 1999 £m £m UK Utility 1,125.9 1,092.1 International 150.6 129.4 Products 96.6 83.1 Services 210.6 188.7 Property 52.4 48.6 Insurance 13.0 13.4 Inter-segment trading (165.4) (152.5) ----- ----- 1,483.7 1,402.8 Share of joint ventures (115.9) (77.3) ----- ----- 1,367.8 1,325.5 OPERATING PROFIT 2000 1999 £m £m UK Utility 487.7 473.7 International 43.7 17.6 Products 5.6 4.1 Services 8.2 6.3 Property 20.9 18.0 Insurance 6.5 11.9 Other activities (11.6) (7.7) Inter-segment trading (1.6) (2.6) ----- ----- 559.4 521.3 Share of joint ventures / associates (43.8) (7.3) ----- ----- 515.6 514.0 Exceptional item - 7.0 ----- ----- 515.6 521.0 ----- ----- PROFIT BEFORE TAX 2000 1999 £m £m UK Utility 364.5 395.9 International 24.5 16.1 Products 5.1 4.3 Services 7.1 4.7 Property 18.5 16.2 Insurance 6.5 11.9 Other activities (5.0) (34.9) Inter-segment trading (1.6) (2.6) ----- ----- 419.6 411.6 Exceptional item - 7.0 ----- ----- 419.6 418.6 ----- ----- Notes to the preliminary announcement 1 Results The auditor's report on the statutory accounts for the year ended 31 March 1999 was unqualified, and has been filed at Companies House. The Group's full statutory accounts for the year ended March 2000 have not yet been reported on by the auditors. 2 Other operating income 1999/00 1998/99 £m £m Gains on short term investments 1.3 4.1 Other investment income 3.4 4.6 Miscellaneous 3.2 4.0 ----- ----- 7.9 12.7 ===== ===== 3 Taxation on profit on ordinary activities 1999/00 1999/00 1998/99 1998/99 £m £m £m £m UK Corporation tax at 30% (1998/99 31%) - Current year 76.4 93.9 - Prior year (29.7) (11.1) ----- ----- 46.7 82.8 Overseas taxation 1.9 3.3 Advance corporation tax (relieved/written off) - Current year (0.4) (60.7) - Prior year 20.1 7.5 ----- ----- 19.7 (53.2) Share of associates/joint venture tax 8.1 1.3 ----- ----- 76.4 34.2 ===== ===== 4 Dividends An interim dividend of 15.3p per ordinary share (1998/99 14.0p) was paid on 3 February 2000. The Directors propose the final dividend payment be deferred to 2 April 2001 and paid to those shareholders on the register on 26 January 2001. The proposed final dividend of 32.7p per ordinary share comprises 31.2p base dividend (1998/99 28.6p) and 1.5p to compensate for the delayed payment. 5 Earnings per ordinary share Basic earnings per ordinary share of 97.6p (1998/99 106.3p) has been calculated by dividing the profit for the financial year of £342.2m (1998/99 £383.5m) by the weighted average number of ordinary shares in issue during the year of 350.5m (1998/99 360.6m). 1999/00 1998/99 Profit for the financial year £342.2m £383.5m ----- ----- Weighted average - ordinary shares in issue 350.5m 360.6m ----- ----- Adjusted earnings per ordinary share 97.6p 104.4p Adjustments for exceptional item - 1.9p ----- ----- Earnings per ordinary share - basic 97.6p 106.3p ===== ===== Weighted average ordinary shares including effect of dilutive ordinary shares 352.0m 363.5m ----- ----- Earnings per ordinary share - diluted 97.2p 105.5p ===== ===== 6 Tangible fixed assets The Group's accounting policy for infrastructure assets has been amended following the publication of Financial Reporting Standard 15 (FRS 15) from 1 April 1999 as a result of which expenditure on infrastructure assets is capitalised. Expenditure incurred in maintaining the operating capacity of infrastructure assets in accordance with defined service standards is expensed as depreciation. Tangible fixed assets for the full year to 31 March 1999 have been adjusted by £9.5m following the adoption of FRS 15, to include expenditure previously classified as prepayments. Depreciation is restated to include infrastructure renewals in the cash flow statement. Further references to depreciation include infrastructure renewals expenditure. There is no profit impact resulting from this change. 7 Acquisitions and disposals In April 1999, Kelantan Water Sdn.Bhd, a Malaysian subsidiary, was sold for £13.3m giving rise to a profit on disposal of £1.2m. On 1 August 1999, the Group increased its investment in Izmit Su by 11.9% for a consideration of £13.1m, including goodwill of £1.1m. Izmit Su remains a joint venture undertaking for accounting purposes. On 24 March 2000, the Group acquired an effective 25.5% of the voting stock of ESSEL SA in Chile through its joint venture company Inversiones Andes Sur for a consideration of £44.6m. Goodwill is estimated to be £13.9m. 8 Net debt An analysis of the movement in net debt is shown below. at 31 Cash Other Exchange at 31 March Flow Non-cash movements March 1999 movements 2000 Analysis of net debt £m £m £m £m £m ----- ----- ----- ----- ----- Cash in hand 95.5 (11.9) 83.6 Bank overdraft (81.7) 35.1 (46.6) ----- ----- ----- ----- ----- Net cash 13.8 23.2 37.0 Loans due within one year (304.5) 51.4 (253.1) Loans due after more than one year (1,119.6) (281.6) 1.6 (1,399.6) Finance leases (267.4) 4.5 (3.9) (266.8) Liquid resources 85.5 (13.4) 72.1 ----- ----- ----- ----- ----- (1,592.2) (215.9) (3.9) 1.6 (1,810.4) ===== ===== ===== ===== ===== 9 Report and Accounts The Company's Report and Accounts will be posted to shareholders by 26 June 2000. From that date copies will be available from the registered office, Thames Water Plc, 14 Cavendish Place, London W1M 0NU.

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