Contents

OTHER STATUTORY INFORMATION

PRINCIPAL ACTIVITIES AND BUSINESS REVIEW

The principal activities of the Company and its subsidiaries ('the Group') are the provision of water and sewerage services, waste management, recycling 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 on the following pages: South West Water; Principal risks and uncertainties, Viridor; Principal risks and uncertainties & Pennon Group; Principal risks and uncertainties . Further information on ESG aspects of the Group's business are included in the Corporate Responsibility Report . The principal subsidiaries of the Company are listed in Note 39 to the financial statements .

Corporate governance statements

The following disclosures are made pursuant to Part 6 of Schedule 7 of the Large and Medium-sized Companies and Groups (Accounts & Reports) Regulations 2008 and Rule 7.2.3.R of the UK Listing Authority's Disclosure and Transparency Rules (DTR). The further information required by DTR 7.2 is set out in the Company's Corporate Governance and Internal Control Report page within this Directors' Report.

As at 31 March 2010:

  1. details of the Company's issued share capital, which consists of ordinary shares of nominal value 40.7 pence each, are set out in Note 32 to the financial statements . All of the Company's issued shares are fully paid up, rank equally in all respects and are listed on the Official List and traded on the London Stock Exchange. The rights and obligations attaching to the Company's shares, in addition to those conferred on their holders by law, are set out in the Company's Articles of Association (“Articles”), copies of which can be obtained from Companies House in the UK or by writing to the Company Secretary at the Company's registered office.
  2. The holders of the Company's shares are entitled to receive the Company's reports and accounts and in relation to general meetings of the Company they have the right to attend and speak, exercise voting rights and appoint proxies;
  3. there are no restrictions on the transfer of issued shares of the Company or on the exercise of voting rights attached to them, except where the Company has exercised its right to suspend their voting rights or to prohibit their transfer following the omission of their holder or any person interested in them to provide the Company with information requested by it in accordance with Part 22 of the Companies Act 2006 or where their holder is precluded from exercising voting rights by the Financial Services Authority's Listing Rules or the City Code on Takeovers and Mergers;
  4. details of significant direct or indirect holdings of securities of the Company are set out in the shareholder analysis;
  5. the Company's rules about the appointment and replacement of Directors are contained in the Articles and accord with usual English company law provisions. The powers of Directors are determined by UK legislation and the Articles in force from time to time. Changes to the Articles must be approved by the Company's shareholders by passing a special resolution;
  6. the Directors have the power to make purchases of the Company's own shares in issue as set out in the section below; 'Purchase of Own Ordinary Shares'. No such purchases have been made during the year. The Directors also have the authority to allot shares up to an aggregate nominal value of £30,448,075 which was approved by shareholders at the 2009 Annual General Meeting (AGM). In addition, shareholders approved a resolution giving the Directors a limited authority to allot shares for cash other than pro rata to existing shareholders. These resolutions remain valid until the conclusion of this year's AGM. Similar resolutions will be proposed at this year's AGM. The Directors have no present intention to issue ordinary shares other than persuant to the Company's Scrip Dividend Alternative; and
  7. there are a number of agreements which take effect, alter or terminate upon a change of control of the Company following a takeover bid, such as bank loan agreements, Eurobond documentation, private placement debt and employees' share plans. None of these is considered to be significant in terms of their potential impact on the business of the Group as a whole.

FINANCIAL RESULTS AND DIVIDEND

Statutory Group profit on ordinary activities after taxation was £139.5 million. The Directors recommend a final dividend of 15.60p per ordinary share to be paid to shareholders on the register on 13 August 2010, making a total dividend for the year of 22.55p, the cost of which will be £79.6 million, leaving a credit to reserves of £59.9 million. The Business Review on the following pages; Pennon Group; Financial performance and Pennon Group; Other financial information analyses the Group's financial results in more detail and sets out other financial information, including the Directors' opinion on asset values .

DIRECTORS

Gerard Connell and Chris Loughlin are due to retire at the AGM on 29 July 2010 and offer themselves up for re-election. In addition, in accordance with best practice as set out in the Combined Code, Ken Harvey continues to offer himself up for re-election annually as he has been a Director for over nine years. The Board continues to believe that Gerard Connell, as a Non-executive Director standing for re-election is independent, and that he makes an effective and valuable contribution to the Board, demonstrating continued commitment to the role. Ken Harvey and Gerard Connell do not have service contracts. Ken Harvey does have a contract for services which is terminable upon 12 months' notice. Chris Loughlin has a service contract which is due to expire in three years' time, being upon his normal retirement date. Resolutions for the above Directors' re-election will be proposed at the AGM. The Directors' biographies are set out on Board of Directors page.

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 within the Directors’ Renumeration 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 given in the Directors’ Renumeration 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 was 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.

RESPONSIBILITY STATEMENTS

Each of the Directors, whose names and functions are listed on the Board of Directors page, confirms that, to the best of each person's knowledge and belief:

a) the financial statements, prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group and of the Company; and

b) this Directors' Report includes a fair review of the development and performance of the business and position of the Company and the Group, together with a description of the principal risks and uncertainties they face.

The Directors are responsible for the maintenance and integrity of the Company's website pennon-group.co.uk Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

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 on the Pennon Group; Principal risks and uncertainties page.

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 on the following pagess of the Business Review: South West Water; Customers community and employees, Viridor; Customers community and employees & Pennon Group; Our corporate responsibility

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 2010 around 36% 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 (2008/09 £0.2 million).

PENNON GROUP DONATIONS

During the year donations amounting to £63,609 (2008/09 £74,781) were made. Further details are included in the Pennon Group; Our corporate responsibility pages of the Business Review. No political donations were made (2008/09 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 2011 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 2009/10 and the amount owed to its trade creditors at 31 March 2010, was 34 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 AGM in 2009) which was valid as at 31 March 2010 and remains currently valid. Of the 5,724,131 shares held in Treasury at 31 March 2009, 631,557 were subsequently re-issued under the Company's Sharesave Scheme for proceeds of £1.9 million.

AUDITORS

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

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 will be available from 15 July 2010 upon application to the Company Secretary at Peninsula House, Rydon Lane, Exeter EX2 7HR or on the website southwestwater.co.uk

ANNUAL GENERAL MEETING

The twenty-first Annual General Meeting of the Company will be held at the Sandy Park Conference Centre, Sandy Park Way, Exeter, Devon EX2 7NN on 29 July 2010 at 11.00am. In addition to routine business, resolutions will be proposed at the Annual General Meeting to:

  • renew the existing authorities to issue a limited number of shares (with updating to accord with the latest institutional guidelines and the Companies Act 2006) and to purchase up to 10% of the issued share capital of the Company
  • seek authority to make political donations under the Political Parties, Elections and Referendums Act 2000, as amended. (It is not the Group's policy to make political donations. This is a precautionary measure which is followed by many companies to ensure that there is no inadvertent breach of the law)
  • re-elect Mr K G Harvey, Mr G D Connell and Mr C Loughlin as Directors of the Company
  • adopt new Articles of Association. This is proposed principally to bring the Articles up to date in accordance with the provisions of the Companies Act 2006 which are all now in force and include changes to the limits set out in the existing Articles relating to Directors' fees
  • increase the Company's borrowing power from 21/2 to 3 times capital and reserves (and amend the definition of capital and reserves to exclude therefrom the impact of market price movements on the accounting treatment of financial derivatives to which the Company is a party) as set out in the Company's Articles
  • seek authority to continue to call general meetings other than an annual general meeting on not less than 14 clear days' notice (pursuant to the EU Shareholder Rights Directive (effective in August 2009), shareholder authority is required to continue to call meetings on at least 14 clear days' notice).

Details of the resolutions are 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

24 June 2010