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Annual Report & Accounts 2010 PENNON GROUP PLC | ANNUAL ANNUAL REPORT & ACCOUNTS 2010 REPORT & ACCOUNTS | 2010 This document is printed on 100% recycled paper When you have finished with this document please recycle it Pennon Group Plc Registered Office: Peninsula House, Rydon Lane, Exeter, Devon, England EX2 7HR pennon-group.co.uk Registered in England No. 2366640 CONTENTS Financial highlights and Group strategy ..............1 Directors’ Report continued Directors’ Report continued About our businesses: Pennon Group: Directors’ Report South West Water: Other financial information ......................... 28 Business Review: Regulatory and competitive environment ...16 Key relationships ............................................. 30 Chairman’s statement .......................................2 Customers, community and employees ......18 Principal risks and uncertainties ................ 30 Pennon Group: Key relationships ............................................. 20 Our corporate responsibility ...................... 32 Financial performance ......................................4 Principal risks and uncertainties ................ 21 Interpretation ................................................... 37 Funding position .................................................7 Viridor: Other statutory information ........................... 38 Chief Executives’ overviews: Regulatory and competitive environment .. 22 Board of Directors .................................................. 40 South West Water ............................................8 Customers, community and employees.. 24 Directors’ Remuneration Report ...................... 41 Viridor ................................................................. 12 Key relationships ............................................. 25 Corporate Governance and Principal risks and uncertainties ................ 26 Internal Control ....................................................... 49 Independent Auditors’ Report ............................ 53 Financial statements ................................................ 54 Five-year financial summary ...............................109 Shareholder information ..................................... 110 The Group’s key performance indicators are shown throughout the Business Review by: KPI Designed by AB Design Group, ab-uk.com Printed on 100% recycled material by Burlington Press, Cambridge. Pennon Group Annual Report and Accounts | 2010 Underlying earnings Revenue up per share up 11.6% to 9.2% to million £1,069 41.6 p Underlying profit Dividend per share up before tax up to 14.2% to 7.4% p £189million 22.55 PENNON GROUP OPERATES AND INVESTS IN WATER AND Statutory results are: SEWERAGE SERVICES, WASTE • Profit before tax £184 million MANAGEMENT, RECYCLING AND (2008/09 £159 million) RENEWABLE ENERGY. IT HAS • Earnings per share 39.9p (2008/09 25.8p) ASSETS OF AROUND £3.9 BILLION A reconciliation to underlying measures of performance AND A WORKFORCE OF OVER is given on page 5. 4,100 PEOPLE. PENNON GROUP BOARD’S STRATEGY is to promote the success of the Group for the benefit of its shareholders through its focus on water and sewerage services, waste management, recycling and renewable energy. In pursuit of its strategy the Group aims to be a pre-eminent provider of customer services to high standards of quality, efficiency and reliability whilst having regard to a wide range of matters including: • the impact of its operations and activities on the community and the environment • the maintenance of high standards of business conduct • the need to foster business relationships with suppliers, customers and other key persons important to the success of the Group • the likely long-term consequences of any decisions • the interests of its employees. Pennon Group’s business is operated through two subsidiaries: • South West Water Limited – holds the water and sewerage appointments for Devon, Cornwall and parts of Dorset and Somerset • Viridor Limited – one of the leading waste management, recycling and renewable energy businesses in the United Kingdom. Pennon Group Annual Report and Accounts | 2010 | P.1 W IE CHAIRMAN’S STATEMENT V RE Another excellent year with significant achievements SINESS despite difficult economic conditions BU | RT PO RE ’ RS O T C IRE D DIVIDEND Ken Harvey The Board is recommending to shareholders a final dividend per share ChairMAN of 15.60p, a 9.5% increase on last year’s final dividend. This represents Pennon Group PLC a full year dividend of 22.55p which is an increase of 7.4% compared with 2008/09 reflecting RPI of 4.4% to March 2010. We have therefore delivered the policy to increase dividends from 2005/06 by 3% per annum above inflation. Following the setting of price limits for South West Water by Ofwat for BUSINESS OVERVIEW delivery of the K5 (2010-2015) regulatory contract and the expectation am pleased to say that it has been another excellent year for Pennon that Viridor will continue to deliver strong long-term growth, the Group with significant achievements by both businesses, despite Board has reviewed its dividend policy and is pleased to announce that Idifficult economic conditions. it intends to enhance its progressive dividend policy to 4% per annum real increases from 2010/11 to at least until the end of 2014/15. South West Water has delivered strong operational results and has outperformed the operating cost efficiency and financing targets set by Dividends have increased over the last five years as follows: Ofwat for the K4 period (2005-2010). Viridor has once again delivered a very strong financial performance. The Greater Manchester Waste PFI contract, the Lakeside Energy from Waste (EfW) project and the latest acquisitions are further major steps DIVIDENDS PER ORDINARY SHARE forward in the successful evolution of Viridor. The continuing prudent approach to financing in the Group, combined with a dedicated Board, management and staff, has also significantly 24 contributed to our success. KPI 22 FINANCIAL OVERVIEW 20 22.55 21.00 Group revenue increased by 11.6% to £1,068.9 million, exceeding 18 £1 billion for the first time. Underlying* profit before tax increased by 19.81 14.2% to £189.1 million and underlying* earnings per share increased by 16 18.55 17.20 9.2% to 41.6p. The Group also has a strong liquidity and funding position. 14 South West Water’s Regulatory Capital Value (RCV) grew by 31% 12 over the K4 (2005-2010) period to £2.6 billion by March 2010, the 10 highest percentage increase for any quoted UK water company. Viridor’s underlying* profit before tax was up by 34.8%, building on the growth Pence achieved by the company over the last eight years. Financial year * Underlying measures are defined in the Pennon Group financial performance section on page 5 2009/10 2005/06 2006/07 2007/08 2008/09 P.2 | Pennon Group Annual Report and Accounts | 2010 BUSINESS PERFORMANCE HEALTH & SAFETY OUR PEOPLE South West Water increased its revenue in Ensuring the health and safety of all our We fully recognise that the Group’s success the year by 2.9% and profit before tax was employees continues to be central to our is due to the quality of the staff and their up by 8.7%. The operating cost efficiency ethos as a responsible Group. The Corporate support and commitment. target set by Ofwat for K4 was achieved in Responsibility Committee and the Board 2008/09, ahead of schedule. The company pay particular attention to ensuring that we I once again express my personal thanks to all has accepted Ofwat’s Final Determination for continually strive to improve occupational members of staff for their continuing dedication the setting of price limits for the K5 period. health and safety performance. We are and commitment particularly as we continue to Notwithstanding the lower returns envisaged therefore very disappointed to report that implement further efficiences and develop new by Ofwat’s Final Determination and the last year our recorded number of incidents in systems and processes to strengthen further impact of current economic conditions which Viridor increased. Where incidents do occur governance across the Group. represent a very tough challenge for South they are fully investigated and every effort is West Water, the company is determined to made to ensure that they cannot be repeated In addition I am extremely grateful to achieve additional efficiencies despite having through, in particular, raising the level of my Board colleagues for their support already delivered substantial efficiencies over training and support available to staff and and significant contributions to another the last two decades. reinforcing strong positive attitudes to health successful year. and safety at all levels in the Group. Viridor has yet again delivered a strong OUTLOOK financial performance in difficult market GOVERNANCE Notwithstanding the lower returns envisaged conditions with revenue up by 18.7% and We operate businesses which can and do by Ofwat’s Final Determination and the profit before tax up by 34.8%. The company have a material impact on the environment. impact of current economic conditions, the expects to continue to deliver long-term We believe that a responsible approach to Group remains well positioned to continue growth through successfully leading the way environmental, social and governance (ESG) to deliver shareholder value and meet future in exploiting opportunities arising from the matters and our sustainable practices not challenges. South West Water is well placed Government’s targets for recycling, landfill only
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