Adoption of IFRS

Pennon Group PLC 08 December 2005 PENNON GROUP PLC Adoption of International Financial Reporting Standards (IFRS) Pennon Group is required to report its Group consolidated financial results under IFRS from 1 April 2005. The first published results under IFRS are the unaudited interim results for the six months ending 30 September 2005, published today. The indicative effects of the principal differences between UK Generally Accepted Accounting Principles (UK GAAP) and IFRS likely to impact the Group were detailed in the Group's 2005 Annual Report. The attached statements present and explain the unaudited reconciliations of the Group balance sheets as at 1 April 2004 and 31 March 2005 under UK GAAP to IFRS and the unaudited reconciliation of the Group profit and loss account under UK GAAP to the Group income statement under IFRS for the year ended 31 March 2005. The unaudited reconciliations of the Group balance sheet as at 30 September 2004 under UK GAAP to IFRS and the unaudited reconciliation of the Group profit and loss account under UK GAAP to the Group income statement under IFRS for the six months ended 30 September 2004 are also presented. Overview In line with the previous assessment contained in the 2005 Annual Report, shareholders' equity at 1 April 2004 of Â£900m under existing UK GAAP has been reduced to Â£668m on an IFRS basis, primarily resulting from changes to deferred taxation balances (largely through the non-discounting of the existing deferred tax provision) Â£224m, and the recognition of the net pension deficit, Â£58m. Reported profit before tax for the year ended 31 March 2005 has increased slightly to Â£84m, compared to the UK GAAP profit of Â£82.5m with adjusted earnings per share (before deferred tax) increasing to 64.3p, close to the 63.1p reported under UK GAAP. The non-discounting of the 2004/05 deferred tax charge reduces basic earnings per share by 6.5p, to 48.1p. The reduction in net worth does not affect compliance with debt covenants since these are subject to either 'frozen UK GAAP' or specific 'carve-out' clauses. The reduction in net worth from the adoption of IFRS affects Group consolidated reserves only and consequently will not impact upon Pennon Group Plc's (the Company's) existing distributable reserves. The Group has taken advantage of the exemption in IFRS 1 from the requirement to restate comparative information for IAS 32 and 39. These standards have been applied with effect from 1 April 2005. A reduction in net assets of only Â£1m arises from the Group's ongoing debt interest rate swaps since these are cash flow hedges and meet the effectiveness criteria under IAS 39. 8 December 2005 PENNON GROUP PLC Adoption of International Financial Reporting Standards (IFRS) Contents 1. Introduction 2. Summary of significant differences between IFRS and UK GAAP 3. Selected primary financial statements for the year ended 31 March 2005 adjusted for IFRS adoption 4. IFRS accounting policies 1. Introduction Basis of preparation The financial statements have been prepared in accordance with IFRS issued by the International Accounting Standards Board (IASB), and which have either been, or are reasonably expected to be, endorsed by the European Union for application to the financial year ending 31 March 2006. Due to the continuing work of the IASB further standards, amendments and interpretations could become applicable to the Group's accounts as practice and interpretation continues to evolve. Consequently the Group's accounting policies may change prior to the publication of financial statements for the year ending 31 March 2006. The Group's IFRS accounting policies are set out below in section 4. All accounting policies have been consistently applied except where the Group has taken advantage of the exemption in IFRS 1 from the requirement to restate comparative information for IAS 32 and 39. These Standards will be applied with effect from 1 April 2005. First time adoption IFRS 1 ('First-time Adoption of International Financial Reporting Standards') requires that IFRS be applied retrospectively unless a specific exemption is applied. In preparing these financial statements the Group has adopted the following exemptions: â€¢ Not to apply IFRS 3 ('Business Combinations') retrospectively to past business combinations; â€¢ To establish a deemed cost for the opening balance sheet carrying value of the water and wastewater infrastructure fixed assets by reference to the fair value of these assets at the date of transition to IFRS, 1 April 2004. All non-infrastructure assets have been be carried forward on transition using the depreciated historical cost UK GAAP balances as the deemed IFRS costs; â€¢ To recognise all cumulative actuarial gains and losses relating to defined benefit pension schemes at the date of transition; â€¢ Not to apply the requirements of IFRS 2 ('Share-Based Payments') to options granted under the Group's SAYE schemes prior to 7 November 2002. 2. Summary of significant differences between IFRS and UK GAAP This section sets out the significant differences between UK GAAP and IFRS that affect the Group and quantifies the impact on the Group's reported results and financial position. This should be read in conjunction with the reconciliations of the Group balance sheets and income statements set out below. Property plant and equipment UK GAAP (FRS 15) permitted the use of 'renewals accounting' as a method for estimating depreciation on infrastructure assets and was adopted by the UK water industry. The depreciation charge represented the level of annual expenditure required to maintain the operating capacity of the infrastructure network at a specified level of service potential by the continuing replacement and refurbishment of its components. South West Water used an independently certified Asset Management Plan to determine the level of annual expenditure required. IFRS does not permit the use of renewals accounting. Instead infrastructure assets are capitalised and depreciated over the estimated useful lives of major components. Infrastructure assets in the opening balance sheet under IFRS have consequently been restated from their existing UK GAAP net book value. In accordance with the first time adoption rules set out in IFRS1, fair value has been used as deemed cost of the infrastructure assets on restatement. This value is depreciated over the estimated remaining asset life. Shareholders' equity at 31 March 2004 has not been significantly affected since the opening fair value of infrastructure assets under IFRS in South West Water was close to the net book value under UK GAAP. Reported operating profit for the year ended 31 March 2005 has been reduced by Â£4m as a result of calculating specific depreciation compared to the previous normative long-term charge based upon the 1999 Periodic Review Asset Management Plan. However, the revised total infrastructure depreciation cost of Â£19m for 2004/05 is Â£2m lower than the level of infrastructure renewals charge assumed by Ofwat in the Final Determination for 2005/06. The Group has also reclassified all grants and contributions received for non-infrastructure assets to property, plant and equipment, totalling Â£19m. Retirement benefits Under UK GAAP (SSAP 24) the pensions charge was established by reference to the triennial valuation of the Group's pension schemes and was set at a level amount to recognise both the on-going service cost and the spreading of any actuarial surplus or deficit over the expected average employee remaining service lives. Under IFRS (IAS 19) only the on-going service cost is charged against operating profit. A net financing cost or credit to reflect expected interest on liabilities and asset investment return is included within interest payable or receivable. An annual update of the valuation of scheme assets and liabilities will take place, and any movements in the total actuarial gains or losses is to be recognised in the IFRS Statement Of Recognised Income and Expenditure (SORIE). The gross pension deficit, Â£80m at 31 March 2005, is shown as a balance sheet liability, with the related deferred tax asset, Â£24m, netted within the deferred tax liability. The recognition of the pension deficit (net of deferred tax) and other pension adjustments under IFRS, reduced shareholders' equity by Â£58m at 1 April 2004 and Â£52m at 31 March 2005. Reported profit before tax increased by Â£3m, principally due to the pension charge no longer containing an element of deficit recovery. Acquisition accounting, goodwill and intangibles Under UK GAAP, goodwill arising on acquisitions was amortised over its useful life, assessed by the Directors as being 20 years. No separately identifiable intangible assets were included in the fair values established for acquisitions. Under IFRS (IFRS 3) a wider range of potential intangible assets arising on acquisition is required to be considered, identified and amortised according to the useful lives of the individual components. In addition the amortisation of goodwill is not permitted, but all goodwill balances are subject to an annual test for impairment by comparing the carrying values of assets to their recoverable amounts, being the higher of value-in-use (discounted cash flows arising from future use of those assets for identifiable cash generating units) and fair value less costs of sale. Shareholders' equity at 1 April 2004 was not affected since the Group is bringing forward historic balances (as allowed under the IFRS1 exemption referred to above). The 2004/05 reported operating profit was increased by a net Â£2m, comprising the elimination of goodwill amortisation, Â£3m, partially offset by a charge of Â£1m for the amortisation of intangible assets acquired under the purchase of Thames Waste Management Limited. No impairment charge was required in 2004/05 in relation to the goodwill balances recorded. Deferred taxation Under UK GAAP the Group created a discounted provision for deferred taxation, as allowed under FRS 19, to reflect an assessment of the period over which timing differences are expected to reverse. Under IFRS a discounting methodology is not permitted and consequently the deferred tax provision increases, with a commensurate reduction to shareholders' equity, as indicated below: 31 31 March March 2004 2005 Â£m Â£m Discounted provision - UK GAAP 63 72 Undiscounted provision - IFRS 264 283 Increase in provision 201 211 Other significant deferred tax effects arise from the recognition under IFRS of deferred tax on property revalued at the time of acquisitions by Viridor Waste, Â£13m, and the recognition of the pension deficit in the balance sheet, as outlined above in the retirement benefits note. The amount of deferred tax charged against 2004/05 profits increased from Â£11m under UK GAAP to Â£16m under IFRS, primarily through the impact of not discounting liabilities. The significant on-going level of capital expenditure projected for the Group's operations means that actual payment of tax is expected to continue to be deferred through the creation of further timing differences. Dividends payable Under UK GAAP dividends payable were recognised in the profit and loss account for the period to which they related. Under IFRS (IAS 10) dividends are only recognised when there is a legal or constructive obligation for them to be paid. Dividends on equity instruments are therefore recognised under IFRS as follows: - Final dividends - when authorised by shareholders at the Annual General Meeting. - Interim dividends - when paid, as they are revocable and discretionary until such time. Shareholders' equity is consequently increased at the balance sheet date by Â£51m at 1 April 2004, and by Â£55m at 31 March 2005 as a result of adding-back, for each of the 2003/04 and 2004/05 financial years, the final dividend not authorised until after the year end and the interim dividend not paid until after the year end. Other differences All other differences between IFRS and UK GAAP are included within the 'Other' column, with the principal adjustment to profit before taxation being the impact of fair valuing shares awarded under employee share options granted under the Group's share schemes after 7 November 2002. The fair value cost of shares awarded is charged to the income statement over the vesting period, in accordance with IFRS 2. Financial instruments IFRS 1 permits the Group to continue to apply UK GAAP in respect of financial instruments for the year ended 31 March 2005 and to apply IAS 32 and 39 with effect from 1 April 2005. The comparative information for 2004/05 within the 31 March 2006 IFRS financial statements will therefore reflect financial instruments accounted for according to existing UK GAAP accounting policies. The Group uses financial instruments, principally interest rate swaps, to manage the mix of fixed and floating rate debt. Relatively low interest rates resulted in the Group fixing 70% of existing net debt at March 2005. Under UK GAAP, debt is initially recorded as the net proceeds of issue. In subsequent periods this is adjusted for accrued finance costs and payments made. The fair values of derivatives are not recognised in the balance sheet, but are disclosed in the notes to the financial statements. Under IAS 39 debt is carried at amortised cost, whilst derivatives are recognised separately on the balance sheet at fair value with movements in those fair values reflected through the income statement. In the case of cash flow hedges, movements in the fair value of derivatives are deferred within reserves until they can be recycled through the income statement to offset the future income statement effect of changes in the hedged risk. In order to apply this treatment it must be demonstrated that the derivative has been, and will continue to be, an effective hedge of the hedged risk in the underlying debt within the criteria set out in IAS 39. Any hedge ineffectiveness outside the range deemed acceptable by IAS 39 is recognised immediately within the income statement. At 1 April 2005, the Group held interest rate swaps as hedges against its exposure to interest rate fluctuations for periods up to 2010. The swap portfolio is designed to hedge the debt portfolio and provide an overall effective economic hedge. The swaps are individually designated to particular liabilities and therefore meet the criteria for hedge accounting under IAS 39. As a result of applying IAS 39 at 1 April 2005 net assets will be reduced by Â£1m for the Group's debt interest rate swaps and increased by Â£15m following release of deferred income which does not qualify as a hedge under IFRS. Disclaimer The Group's IFRS accounting policies as they are applied for the year ended 31 March 2005 have been adopted on the basis of all IFRS issued by the International Accounting Standards Board (IASB) as at the date of this report which have either been endorsed by the European Union (EU) or where there is a reasonable expectation of endorsement by the EU before the Group prepares its first annual accounts in accordance with IFRS for the year ending 31 March 2006. Any new standards or interpretations issued by the IASB or IFRIC will be assessed and considered by the Group on an individual basis and might result in adjustments to the 2005/6 IFRS financial statements before they are considered final. IFRS is currently being applied simultaneously in the United Kingdom and a number of other countries for the first time and for a number of recently issued new or revised IFRS there is not yet significant established practice upon which to draw when forming decisions regarding interpretation and application. Accordingly, practice is continuing to evolve. At this preliminary stage, therefore, the full financial effect of reporting under IFRS as it will be applied and reported on in the Group's first IFRS financial statements for the year ended 31 March 2006 may be subject to change. The financial information set out in this statement relating to the year ended 31 March 2005 does not constitute statutory accounts for that period. Full audited accounts of Pennon Group Plc in respect of that financial period in accordance with UK GAAP (which received an unqualified audit opinion and did not contain a statement under either section 237(2) or (3) of the Companies Act 1985) have been delivered to the Registrar of Companies. Results restated under International Financial Reporting Standards Consolidated balance sheet Reconciliation at 1 April 2004 ------------------------------------------------------------- Impact of IFRS ------------------------------------------------------------- Reported under IAS16 IFRS UK IAS10 IAS12 Infrastructure IAS19 Other (un- GAAP Dividend Tax renewals Pensions audited) Â£m Â£m Â£m Â£m Â£m Â£m Â£m Assets Non-current assets Goodwill 47.6 47.6 Property, plant and equipment 2,141.1 (1.6) (18.9) 2,120.6 Trade and other receivables 7.0 (3.9) 3.1 ---------- --------- --------- --------- ------------ ---------- ------- --------- 2,195.7 - - (1.6) (3.9) (18.9) 2,171.3 ---------- --------- --------- --------- ------------ ---------- ------- --------- Current assets Inventories 4.5 4.5 Trade and other receivables 92.3 (0.7) 91.6 Financial assets Available for sale investments 4.2 4.2 Cash and cash equivalents 264.1 264.1 ---------- --------- --------- --------- ------------ ---------- ------- --------- 365.1 - - - (0.7) - 364.4 ---------- --------- --------- --------- ------------ ---------- ------- --------- Liabilities Current liabilities Financial liabilities Borrowings (107.0) (107.0) Trade and other payables (170.9) 51.1 1.0 1.5 (117.3) Current tax liabilities (15.7) (15.7) Provisions for liabilities and charges (9.0) (9.0) ---------- --------- --------- --------- ------------ ---------- ------- --------- (302.6) 51.1 - - 1.0 1.5 (249.0) ---------- --------- --------- --------- ------------ ---------- ------- --------- Net current assets 62.5 51.1 - - 0.3 1.5 115.4 ---------- --------- --------- --------- ------------ ---------- ------- --------- Non-current liabilities Financial liabilities Borrowings (1,234.8) (1,234.8) Other non-current liabilities (38.8) 17.9 (20.9) Retirement benefit obligations - (77.5) (77.5) Deferred tax liabilities (63.3) (224.0) 23.3 0.1 (263.9) Provisions for liabilities and charges (21.7) (21.7) ---------- --------- --------- --------- ------------ ---------- ------- --------- (1,358.6) - (224.0) - (54.2) 18.0 (1,618.8) ---------- --------- --------- --------- ------------ ---------- ------- --------- Net assets 899.6 51.1 (224.0) (1.6) (57.8) 0.6 667.9 ========== ========= ========= ========= ============ ========== ======= ========= Shareholders' equity Share capital 137.9 137.9 Share premium account 154.2 154.2 Retained earnings and other reserves 607.5 51.1 (224.0) (1.6) (57.8) 0.6 375.8 ---------- --------- --------- --------- ------------ ---------- ------- --------- Total shareholders' equity 899.6 51.1 (224.0) (1.6) (57.8) 0.6 667.9 ========== ========= ========= ========= ============ ========== ======= ========= The UK GAAP balances have been restated in IFRS format. Results restated under International Financial Reporting Standards Consolidated income statement Reconciliation for the half year ended 30 September 2004 -------------------------------------------------------------- Impact of IFRS -------------------------------------------------------------- Reported under IAS16 IFRS UK IFRS3 IAS12 Infrastructure IAS19 Other (un- GAAP Goodwill Tax renewals Pensions audited) Â£m Â£m Â£m Â£m Â£m Â£m Â£m Continuing operations Revenue 282.2 (0.7) 281.5 Operating costs Manpower costs (37.2) 2.5 (34.7) Raw materials and consumables used (14.7) (14.7) Depreciation (47.6) 1.8 0.6 (45.2) Amortisation of intangibles (1.8) 1.0 (0.8) Other operating expenses (102.5) (2.1) 0.1 (104.5) Abortive acquisition costs (2.0) (2.0) ---------- ----------- ---------- ------- ------------- --------- ------- --------- Operating profit 76.4 1.0 - (0.3) 2.5 - 79.6 --------------------------- ---------- ----------- ---------- ------- ------------- --------- ------- --------- Operating profit before depreciation, amortisation and exceptional items 127.8 - - (2.1) 2.5 (0.6) 127.6 Operating profit before exceptional items 78.4 1.0 - (0.3) 2.5 - 81.6 Abortive acquisition costs (2.0) (2.0) ---------- ----------- ---------- ------- ------------- --------- ------- --------- Operating profit 76.4 1.0 - (0.3) 2.5 - 79.6 --------------------------- ---------- ----------- ---------- ------- ------------- --------- ------- --------- Interest payable and similar charges (37.1) (7.7) (44.8) Interest receivable 6.1 7.1 13.2 ---------- ----------- ---------- ------- ------------- --------- ------- --------- Profit before tax 45.4 1.0 - (0.3) 1.9 - 48.0 Tax on profit on ordinary activities (9.1) (5.6) 0.2 0.1 (14.4) ---------- ----------- ---------- ------- ------------- --------- ------- --------- Profit for the period from continuing operations 36.3 1.0 (5.6) (0.3) 2.1 0.1 33.6 ========== =========== ========== ======= ============= ========= ======= ========= Profit for the period 36.3 1.0 (5.6) (0.3) 2.1 0.1 33.6 ========== =========== ========== ======= ============= ========= ======= ========= Profit attributable to equity shareholders 36.3 1.0 (5.6) (0.3) 2.1 0.1 33.6 ========== =========== ========== ======= ============= ========= ======= ========= The UK GAAP balances have been restated in IFRS format. Results restated under International Financial Reporting Standards Consolidated balance sheet Reconciliation at 30 September 2004 ------------------------------------------------------------- Impact of IFRS ------------------------------------------------------------- Reported under IAS16 IFRS UK IFRS3 IAS10 IAS12 Infrastructure IAS19 Other (un- GAAP Goodwill Dividend Tax renewals Pensions audited) Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Assets Non-current assets Goodwill 62.5 (0.7) 61.8 Intangible assets - 6.4 6.4 Property, plant and equipment 2,190.6 (1.9) (21.0) 2,167.7 Trade and other receivables 3.0 3.0 ---------- --------- --------- --------- ------------ ---------- ------- --------- 2,256.1 5.7 - - (1.9) - (21.0) 2,238.9 ---------- --------- --------- --------- ------------ ---------- ------- --------- Current assets Inventories 4.9 4.9 Trade and other receivables 106.4 (1.7) 104.7 Cash and cash equivalents 296.9 296.9 ---------- --------- --------- --------- ------------ ---------- ------- --------- 408.2 - - - - (1.7) - 406.5 ---------- --------- --------- --------- ------------ ---------- ------- --------- Liabilities Current liabilities Financial liabilities Borrowings (107.2) (107.2) Trade and other payables (197.5) 17.7 1.0 4.0 (174.8) Current tax liabilities (19.9) (19.9) Provisions for liabilities and charges (6.8) (6.8) ---------- --------- --------- --------- ------------ ---------- ------- --------- (331.4) - 17.7 - - 1.0 4.0 (308.7) ---------- --------- --------- --------- ------------ ---------- ------- --------- Net current assets/(liabilities) 76.8 - 17.7 - - (0.7) 4.0 97.8 Non-current liabilities Financial liabilities Borrowings (1,278.1) (1,278.1) Other non-current liabilities (34.7) 17.3 (17.4) Retirement benefit obligations - (82.7) (82.7) Deferred tax liabilities (66.1) (4.7) (229.6) 24.8 0.4 (275.2) Provisions for liabilities and charges (28.2) (28.2) ---------- --------- --------- --------- ------------ ---------- ------- --------- (1,407.1) (4.7) - (229.6) - (57.9) 17.7 (1,681.6) ---------- --------- --------- --------- ------------ ---------- ------- --------- Net assets 925.8 1.0 17.7 (229.6) (1.9) (58.6) 0.7 655.1 ========== ========= ========= ========= ============ ========== ======= ========= Shareholders' equity Share capital 139.5 139.5 Share premium account 156.1 156.1 Retained earnings and other reserves 630.2 1.0 17.7 (229.6) (1.9) (58.6) 0.7 359.5 ---------- --------- --------- --------- ------------ ---------- ------- --------- Total shareholders' equity 925.8 1.0 17.7 (229.6) (1.9) (58.6) 0.7 655.1 ========== ========= ========= ========= ============ ========== ======= ========= The UK GAAP balances have been restated in IFRS format. Results restated under International Financial Reporting Standards Consolidated income statement Reconciliation for the year ended 31 March 2005 -------------------------------------------------------------- Impact of IFRS -------------------------------------------------------------- Reported under IAS16 IFRS UK IFRS3 IAS12 Infrastructure IAS19 Other (un- GAAP Goodwill Tax renewals Pensions audited) Â£m Â£m Â£m Â£m Â£m Â£m Â£m Continuing operations Revenue 554.2 (2.8) 551.4 Operating costs Manpower costs (73.1) 4.7 0.1 (68.3) Raw materials and consumables used (32.8) (32.8) Depreciation (95.1) 3.3 1.1 (90.7) Amortisation of intangibles (3.5) 2.1 (1.4) Other operating expenses (201.7) (7.3) 1.7 (207.3) Abortive acquisition costs (1.5) (1.5) Business restructuring costs (3.4) (3.4) ---------- ----------- ---------- ------- ------------- --------- ------- --------- Operating profit 143.1 2.1 - (4.0) 4.7 0.1 146.0 --------------------------- ---------- ----------- ---------- ------- ------------- --------- ------- --------- Operating profit before depreciation, amortisation and exceptional items 246.6 - - (7.3) 4.7 (1.0) 243.0 Operating profit before exceptional items 148.0 2.1 - (4.0) 4.7 0.1 150.9 Abortive acquisition costs (1.5) (1.5) Business restructuring costs (3.4) (3.4) ---------- ----------- ---------- ------- ------------- --------- ------- --------- Operating profit 143.1 2.1 - (4.0) 4.7 0.1 146.0 --------------------------- ---------- ----------- ---------- ------- ------------- --------- ------- --------- Interest payable and similar charges (74.0) (15.3) (89.3) Interest receivable 13.3 14.0 27.3 Share of post-tax profit from joint venture 0.1 0.1 ---------- ----------- ---------- ------- ------------- --------- ------- --------- Profit before tax 82.5 2.1 - (4.0) 3.4 0.1 84.1 Tax on profit on ordinary activities (18.7) (6.2) 1.2 0.2 (23.5) ---------- ----------- ---------- ------- ------------- --------- ------- --------- Profit for the period from continuing operations 63.8 2.1 (6.2) (4.0) 4.6 0.3 60.6 Discontinued operations Post-tax business disposal profit 5.0 5.0 ---------- ----------- ---------- ------- ------------- --------- ------- --------- Profit for the period 68.8 2.1 (6.2) (4.0) 4.6 0.3 65.6 ========== =========== ========== ======= ============= ========= ======= ========= Profit attributable to equity shareholders 68.8 2.1 (6.2) (4.0) 4.6 0.3 65.6 ========== =========== ========== ======= ============= ========= ======= ========= The UK GAAP balances have been restated in IFRS format. Results restated under International Financial Reporting Standards Consolidated balance sheet Reconciliation at 31 March 2005 ------------------------------------------------------------- Impact of IFRS ------------------------------------------------------------- Reported under IAS16 IFRS UK IFRS3 IAS10 IAS12 Infrastructure IAS19 Other (un- GAAP Goodwill Dividend Tax renewals Pensions audited) Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Assets Non-current assets Goodwill 63.0 1.0 0.4 64.4 Intangible assets 0.2 5.8 6.0 Property, plant and equipment 2,248.1 (5.6) (24.0) 2,218.5 Trade and other receivables 3.3 3.3 ---------- --------- --------- --------- ------------ ---------- ------- --------- 2,314.6 6.8 - - (5.6) - (23.6) 2,292.2 ---------- --------- --------- --------- ------------ ---------- ------- --------- Current assets Inventories 4.7 4.7 Trade and other receivables 99.6 99.6 Cash and cash equivalents 303.4 303.4 ---------- --------- --------- --------- ------------ ---------- ------- --------- 407.7 - - - - - - 407.7 ---------- --------- --------- --------- ------------ ---------- ------- --------- Liabilities Current liabilities Financial liabilities Borrowings (54.8) (54.8) Trade and other payables (192.5) 55.1 4.0 5.6 (127.8) Current tax liabilities (23.6) (23.6) Provisions for liabilities and charges (8.4) (8.4) ---------- --------- --------- --------- ------------ ---------- ------- --------- (279.3) - 55.1 - - 4.0 5.6 (214.6) ---------- --------- --------- --------- ------------ ---------- ------- --------- Net current assets 128.4 - 55.1 - - 4.0 5.6 193.1 ---------- --------- --------- --------- ------------ ---------- ------- --------- Non-current liabilities Financial liabilities Borrowings (1,366.8) (1,366.8) Other non-current liabilities (37.8) 18.7 (19.1) Retirement benefit obligations - (79.8) (79.8) Deferred tax liabilities (72.4) (4.7) (230.2) 23.9 0.6 (282.8) Provisions for liabilities and charges (27.9) (27.9) ---------- --------- --------- --------- ------------ ---------- ------- --------- (1,504.9) (4.7) - (230.2) - (55.9) 19.3 (1,776.4) ---------- --------- --------- --------- ------------ ---------- ------- --------- Net assets 938.1 2.1 55.1 (230.2) (5.6) (51.9) 1.3 708.9 ========== ========= ========= ========= ============ ========== ======= ========= Shareholders' equity Share capital 142.0 142.0 Share premium account 153.7 153.7 Retained earnings and other reserves 642.4 2.1 55.1 (230.2) (5.6) (51.9) 1.3 413.2 ---------- --------- --------- --------- ------------ ---------- ------- --------- Total shareholders' equity 938.1 2.1 55.1 (230.2) (5.6) (51.9) 1.3 708.9 ========== ========= ========= ========= ============ ========== ======= ========= The UK GAAP balances have been restated in IFRS format. IFRS Accounting Policies for the year ended 31 March 2005 a) Basis of preparation The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS), International Accounting Standards (IAS) and International Financial Reporting Interpretation Committee (IFRIC) interpretations issued and effective for the year ending 31 March 2006. These standards are subject to on-going review and endorsement by the European Union or possible amendment by interpretative guidance from the IASB and IFRIC and are therefore still subject to change. b) First time adoption of IFRS The Group's date of transition to IFRS is 1 April 2004 and all comparative information in the financial statements has been restated to reflect the Group's adoption of IFRS, except where otherwise required or permitted by IFRS1 - 'First Time Adoption of International Financial Reporting Standards'. All accounting policies have been consistently applied except where the Group has taken advantage of the exemption in IFRS 1 from the requirement to restate comparative information for IAS 32 and 39. These Standards will be applied with effect from 1 April 2005. IFRS1 requires an entity to comply with each IFRS effective at the reporting date for its first IFRS financial statements. As a general principle IFRS1 requires the standards effective at the reporting date to be applied retrospectively. There are, however, a number of optional exemptions from full retrospective application. The Group has elected to take advantage of certain exemptions under IFRS1 as follows: - Not to apply IFRS 3 ('Business Combinations') retrospectively to past business combinations; - To establish a deemed cost for the opening balance sheet carrying value of the water and wastewater infrastructure fixed assets by reference to the fair value of these assets at the date of transition to IFRS, 1 April 2004. All non infrastructure assets have been carried forward using the depreciated historical cost UK GAAP balances as the deemed IFRS cost; - To recognise all cumulative actuarial gains and losses relating to defined benefit pension schemes at the date of transition; - Not to apply the requirements of IFRS 2 ('Share-Based Payments') to options granted under the Group's share incentive schemes prior to 7 November 2002. c) Basis of consolidation The financial statements include the results of Pennon Group Plc and its subsidiary and joint venture undertakings. The results of subsidiaries and joint venture undertakings are included from the date of acquisition or incorporation, and excluded from the date of disposal. The results of subsidiaries are consolidated where the Group has the power to control a subsidiary. The results of joint venture undertakings are accounted for on an equity basis where the company exercised joint control under a contractual arrangement. d) Revenue recognition Revenue represents the fair value of consideration receivable, excluding value added tax, trade discounts and intercompany sales, in the ordinary course of business for goods and services provided. Revenue is not recognised until the service has been provided to the customer, or the goods which the sale relates to have been despatched to the customer. Income from main water and wastewater charges includes an estimation of the amount of unbilled charges at the period end based upon a defined methodology reflecting historical consumption and current tariffs. e) Segmental reporting Each of the Group's business and geographical segments provide services which are subject to risks and returns which are different from those of the other business segments. f) Property, plant and equipment i) Infrastructure assets (being mains and sewers, impounding and pumped raw water storage reservoirs, dams, pipelines and sea outfalls) Infrastructure assets are included at fair value on transition and subsequent additions at cost less accumulated depreciation. The costs of day to day servicing of infrastructure components are recognised in the profit and loss account as they arise. Where it is probable that the money spent will lead to incremental future economic benefits to flow to the entity and those costs can be reliably measured, then costs are capitalised. Infrastructure assets are depreciated over their useful economic lives, which are principally as follows: Years Dams and impounding reservoirs 200 Water mains 40 - 100 Sewers 40 - 100 Assets in the course of construction are not depreciated until commissioned. ii) Landfill sites Landfill sites are included within Land and Buildings at cost less accumulated depreciation. The cost of landfill sites includes acquisition and development expenses. The cost of the site is depreciated over its estimated operational life taking account of the usage of void space. iii) Other assets Other assets are included at cost less accumulated depreciation. Freehold land is not depreciated. Other assets are depreciated over their estimated economic lives to their residual value, which are principally as follows: Years Freehold buildings 30 - 60 Operational structures 40 - 80 Fixed plant 20 - 40 Vehicles, mobile plant and computers 3 - 10 Assets in the course of construction are not depreciated until commissioned. The cost of assets includes directly attributable labour and overhead costs which are incremental to the Group. Asset lives and residual values are reviewed annually. g) Leased assets Assets held under finance leases are included in the balance sheet as tangible fixed assets at their equivalent capital value and are depreciated over their estimated economic useful lives or the finance lease period, whichever is the shorter. The corresponding liability is recorded as a creditor. The interest element of the rental costs is charged against profits using the actuarial method, over the period of the lease. Rental costs arising under operating leases are charged against profits in the year they are incurred. h) Grants and contributions Grants and contributions receivable in respect of property, plant and equipment are deducted from cost of those assets. i) Impairment of assets Assets which have an indefinite useful life are not subject to amortisation and are tested annually for impairment, or whenever events or changes in circumstance indicate that the carrying amount may not be recoverable. Assets which are subject to amortisation are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Value in use represents the present value of projected future cash flows expected to be derived from a cash generating unit, discounted using a pre-tax discount rate which reflects an assessment of the cost of capital of the cash-generating unit. Impairments are charged to the income statement in the year in which they arise. j) Inventory Inventory and work in progress is stated at the lower of cost and net realisable value. Cost includes labour, materials and attributable overheads. k) Provisions Provisions are made where there is a present legal or constructive obligation as a result of a past event and it is probable that there will be an outflow of economic benefits to settle this obligation and a reliable estimate of this amount can be made. The Group's policy on provisions for specific areas is as follows: Landfill restoration costs: Provision for the cost of restoring landfill sites is made over the operational life of each landfill site and charged to the income statement taking account of the usage of void space. Environmental control and aftercare costs: Environmental control and aftercare costs are incurred over the operational life of each landfill site and may be incurred for a considerable period thereafter. Provision for all such costs is made over the operational life of the site and charged to the profit and loss account on the basis of the usage of void space. Material environmental control and aftercare costs are discounted by applying an appropriate discount rate. l) Employee benefits i) Pension obligations The Group operates defined benefit and defined contribution pension schemes. Defined benefit scheme Defined benefit pension scheme assets are measured using bid price. Defined benefit pension scheme liabilities are measured by an independent actuary using the projected unit method and discounted at the current rate of return on high quality corporate bonds of equivalent term to the liability. The increase in the present value of the liabilities of the Group's defined benefit pension schemes expected to arise from employee service in the period is charged to operating profit. The expected return on scheme assets and the increase during the period in the present value of scheme liabilities, arising from the passage of time, are included in other finance income or cost. Actuarial gains and losses arising from experience adjustments, changes in actuarial assumptions and amendments to pension plans are charged or credited to equity and recorded in the statement of recognised income and expense. Defined contribution scheme Costs of the defined contribution pension scheme are charged to the income statement in the period in which they arise. ii) Share-based payments The Group operates a number of equity settled, share-based compensation plans for employees. The fair value of the employee services received in exchange for the grant is recognised as an expense over the vesting period of the grant. Fair values are calculated using an appropriate pricing model. Non-market based vesting conditions are adjusted for in assumptions as to the number of awards which are expected to vest. m) Deferred tax Deferred taxation is provided in full, using the liability method, on temporary differences between the tax basis of assets and liabilities and their carrying amounts in the financial statements. A deferred tax asset is only recognised to the extent it is probable that sufficient taxable profits will be available in the future to utilise it. n) Intangible assets Intangible assets acquired in a business combination are capitalised at fair value at the date of acquisition. Following initial recognition, finite life intangible assets are amortised on a straight line basis over their estimated useful economic lives, with the expense taken to the income statement through operating expenses. o) Goodwill Goodwill represents the excess of the fair value of purchase consideration over the fair value of the net assets (including intangible assets) acquired. Goodwill arising on acquisition of subsidiaries is included in intangible assets. Goodwill arising on all acquisitions prior to 1 April 1998 remains eliminated against reserves. Purchased goodwill arising on acquisitions after 31 March 1998 is treated as an intangible asset. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. p) Derivatives and other financial instruments The Group has taken advantage of the IFRS1 exemption from application of IAS 32 ('Financial Instruments: 'Disclosure and Presentation') and IAS 39 ('Financial Instruments: Recognition and Measurement') and will apply these standards from 1 April 2005. The Group will classify its investments in the following categories from 1 April 2005. i) Loans and receivables All loans and borrowings are initially recognised at cost, being the net fair value of the consideration received. Following initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Gains and losses are recognised in the income statement when the liabilities are derecognised or impaired. Premiums, discounts and other costs and fees are recognised in the income statement through the amortisation process. ii) Derivative financial instruments The Group uses derivative financial instruments, principally interest rate swaps, to hedge its risks associated with interest rate fluctuations. Such derivative instruments are initially recorded at cost and subsequently re-measured at fair value for the reported balance sheet. For cash flow hedges which meet the conditions for hedge accounting, the portion of the gain or loss on the hedging instrument which is determined to be an effective hedge is recognised directly in equity, and the ineffective portion in the income statement. The gains or losses deferred in equity in this way are subsequently recognised in the income statement in the same period in which the hedged underlying transaction or firm commitment is recognised in the income statement. q) Pre-contract costs Pre-contract costs are expensed as incurred, except where it is virtually certain that the contract will be awarded, in which case they are recognised as an asset which is amortised to the income statement over the life of the contract. r) Purchase of own shares The Group balance sheet incorporates the shares held by the Pennon Employee Share Trust (the Trust) and which have not vested by the balance sheet date. These are shown as a deduction from shareholders funds until such time as they vest. Disclaimer The Group's IFRS accounting policies as they are applied for the year ended 31 March 2005 have been adopted on the basis of all IFRS issued by the International Accounting Standards Board (IASB) as at the date of this report which have either been endorsed by the European Union (EU) or where there is a reasonable expectation of endorsement by the EU before the Group prepares its first annual accounts in accordance with IFRS for the year ending 31 March 2006. Any new standards or interpretations issued by the IASB or IFRIC will be assessed and considered by the Group on an individual basis and might result in adjustments to the 2006 IFRS financial statements before they are considered final. IFRS is currently being applied simultaneously in the United Kingdom and a number of other countries for the first time and for a number of recently issued new or revised IFRS there is not yet significant established practice upon which to draw when forming decisions regarding interpretation and application. Accordingly practice is continuing to evolve. At this preliminary stage, therefore, the full financial effect of reporting under IFRS as it will be applied and reported on in the Group's first IFRS financial statements for the year ended 31 March 2006 may be subject to change. The financial information set out in this statement relating to the year ended 31 March 2005 does not constitute statutory accounts for that period. Full audited accounts of Pennon Group Plc in respect of that financial period in accordance with UK GAAP (which received an unqualified audit opinion and did not contain a statement under either section 237(2) or (3) of the Companies Act 1985) have been delivered to the Registrar of Companies. This information is provided by RNS The company news service from the London Stock Exchange

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