Principal activities and business review

The principal activities of the Company and its subsidiaries (‘the Group’) are the provision of water and sewerage services, recycling, waste management and renewable energy. Information regarding the Group, including events and its progress during the year, events since the year-end and likely future developments is contained in the Business review set out in this Directors’ report.

In addition the Business review contains a fair and balanced review of the business of the Group, including its position and prospects, Key Performance Indicators and a description of the principal risks and uncertainties facing the Group in accordance with the requirements of the Combined Code and Section 417 of the Companies Act 2006. In addition in accordance with the ABI Corporate Social Responsibility Guidelines, statements are included on any significant environmental, social and governance (ESG) risks and the actions taken in mitigating these risks within the Business review section. Further information on ESG aspects of the Group’s business are included in the Group Corporate responsibility section. The principal subsidiaries of the Company are listed in note 39 to the financial statements.

Corporate governance and Directors’ responsibilities statements

The Directors’ responsibilities statements and the disclosures required by Part 6 of Schedule 7 of the Large and Medium-sized Companies and Groups (Accounts & Reports) Regulations 2008 and Rule DTR 7.2 are set out in the Corporate governance and internal control section of this Annual Report which are hereby included within this Directors’ report by reference.

Financial results and dividend

Group profit on ordinary activities after taxation was £171.6 million. The Directors recommend a final dividend of 17.15p per ordinary share to be paid on 7 October 2011 to shareholders on the register on 12 August 2011, making a total dividend for the year of 24.65p, the cost of which will be £88.2 million, leaving a credit to reserves of £83.4 million. The Business review on pages 20 to 23 analyses the Group’s financial results in more detail and sets out other financial information, including the Directors’ opinion on asset values.

Directors

Following the inclusion in the UK Corporate Governance Code (the Code) of a provision that all directors of FTSE companies should be subject to annual election by shareholders, all Directors are offering themselves up for re-election at this year’s Annual General Meeting. The Board

continues to believe that each Director makes an effective and valuable contribution to the Board, demonstrating continued commitment to his or her role. The Non-executive Directors, Gerard Connell, Dinah Nichols and Martin Angle, are all considered to be independent in accordance with the provisions of the Code. They do not have service contracts. The Chairman, Ken Harvey, does have a contract for services which is terminable upon 12 months’ notice. All of the Executive Directors, Colin Drummond, David Dupont and Chris Loughlin, have service contracts which are due to expire when they reach age 60 (unexpired term for David Dupont and Chris Loughlin is until 10 June 2014 and 20 August 2012 respectively) with the exception of that of Colin Drummond who has reached age 60. His contract now continues subject to 12 months’ notice and the other Executive Directors’ contracts may also continue after they reach age 60. Formal resolutions for the above Directors’ re-election will be proposed at the Annual General Meeting. The Directors’ biographies are set out on pages 36 and 37.

No Director has, or has had, a material interest, directly or indirectly, at any time during the year under review in any contract significant to the Company’s business. A list of all the Directors during the year is set out in the emoluments table in the Directors' remuneration report. Further details relating to the Directors and their service agreements or contracts for services and details of the Directors’ interests in shares of the Company are also given in the Directors' remuneration report.

Directors’ insurance and indemnities

The Directors have the benefit of the indemnity provisions contained in the Company’s Articles and the Company has maintained throughout the year Directors’ and Officers’ liability insurance for the benefit of the Company, the Directors and its Officers. The Company has entered into qualifying third party indemnity arrangements for the benefit of all its Directors in a form and scope which comply with the requirements of the Companies Act 2006 and which were in force throughout the year and remains in force.

Statement as to disclosure of information to auditors

a) so far as each of the Directors in office at the date of the signing of the report is aware, there is no relevant audit information of which the Company’s auditors are unaware; and

b) each of the Directors has taken all the steps each Director ought to have taken individually as a director in order to make themselves aware of any relevant audit information and to establish that the Company’s auditors are aware of that information.

Financial instruments

Details of the financial risk management objectives and policies of the Group and the exposure of the Group to price, credit, liquidity and cash flow risks are set out in the Business review in the Group financial review and Group risk review sections.

Employment policies and employee involvement

The Group has a culture of continuous improvement through investment in people at all levels within the Group. The Group is committed to pursuing equality and diversity in all its employment activities including recruitment, training, career development and promotion and ensuring there is no bias or discrimination in the treatment of people. In particular, applications for employment are welcomed from persons with disabilities and special arrangements and adjustments as necessary are made to ensure that applicants are treated fairly when attending for interview or for pre-employment aptitude tests. Wherever possible the opportunity is taken to retrain people who become disabled during their employment in order to maintain their employment within the Group.

Employees are consulted regularly about changes which may affect them either through their trade union appointed representatives or by means of the elected Staff Council which operates in South West Water for staff employees.

These forums, together with regular meetings with particular groups of employees, are used to ensure that employees are kept up to date with the operating and financial performance of their employer.

The Group also uses a monthly information cascade process to provide employees with important and up to date information about key events and to receive feedback from employees.

Further information about employment matters relating to the Group are set out in the South West Water, Viridor and Group sections of the Business review.

The Group encourages share ownership amongst its employees by operating an HM Revenue & Customs (HMRC) approved Sharesave Scheme and Share Incentive Plan. At 31 March 2011 around 35% of the Group’s employees participated in these plans.

Research and development

Research and development activities within the Group involving water and waste treatment processes amounted to £0.2 million during the year (2009/10 £0.2 million).

Pennon Group donations

During the year donations amounting to £78,678 (2009/10 £63,609) were made. Further details are included in the Group Corporate responsibility report. No political donations were made (2009/10 Nil).

Tax status

The Company is not a close company within the meaning of the Income and Corporation Taxes Act 1988.

Payments to suppliers

It is the Group’s payment policy for the year ending 31 March 2012 to follow the Code of The Better Payment Practice Group on supplier payments. Information about the Code can be obtained from the website payontime.co.uk The Company will agree payment terms with individual suppliers in advance and abide by such terms. The ratio, expressed in days, between the amount invoiced to the Company by its suppliers during 2010/11 and the amount owed to its trade creditors at 31 March 2011, was 14 days.

Purchase of own ordinary shares

The Company has authority from shareholders to purchase up to 10% of its own ordinary shares (as renewed at the Annual General Meeting in 2010) which was valid as at 31 March 2011 and remains currently valid. Of the 5,092,574 shares held in Treasury at 31 March 2010, 783,007 were subsequently re-issued under the Company’s employee share schemes for proceeds of £1.6 million.

Independent auditors

PricewaterhouseCoopers LLP were appointed auditors until the conclusion of the twenty-second Annual General Meeting. A resolution for their re-appointment upon the recommendation of the Audit Committee of the Board will be proposed at the Annual General Meeting.

Appointed business

South West Water Limited is required to publish additional financial information relating to the ‘appointed business’ as water and sewerage undertaker in accordance with the Instrument of Appointment from the Secretary of State for the Environment. A copy of this information is available on the website southwestwater.co.uk or upon application to the Group Company Secretary at Peninsula House, Rydon Lane, Exeter EX2 7HR.

Annual General Meeting

The twenty-second Annual General Meeting of the Company will be held at the Sandy Park Conference Centre, Sandy Park Way, Exeter, Devon EX2 7NN on 28 July 2011 at 11.00am. Details of the resolutions are summarised below and set out in the separate Notice of Annual General Meeting which is circulated to shareholders with this Annual Report or provided by electronic communication via the Company’s website pennon-group.co.uk

Information required by Section 311A of the Companies Act 2006 is also on the Company’s website.

By Order of the Board

Ken Woodier
Group General Counsel & Company Secretary
22 June 2011