6th Dec 2006 07:01
Biffa Plc06 December 2006 6 December 2006 Interim results for the 26 weeks ended 29 September 2006 STRONG FIRST HALF PERFORMANCE WITH CONTINUING ORGANIC GROWTH Highlights • Continued profit growth across all divisions - Revenues up 5.8% to £376.5 million (2005/6: £356.0 million) - Operating profit up 8.7% to £48.9 million (2005/6: £45.0 million) - Profit before tax up 19.9% to £41.6 million (2005/6: £34.7million) - Proforma earnings per share * of 8.0 pence - Free cash flow ** at £27.2 million, increase of £8.2 million compared with £19.0 million last year - Maiden interim dividend 2.1 pence per share • Strong revenue growth in collection services to national account customers • Commenced 14 year contract with Metropolitan Borough of Wirral with expected value of £140 million • Continued strength of landfill operations, with new site opened in Northern Ireland in November 2006 • Special Waste benefiting from the impact of hazardous waste regulations • Expansion into recycling and treatment activities progressing well * Proforma earnings per share is based on the Biffa Ordinary Shares in issue immediately following the demerger ** Refer to consolidated cash flow statement for definition of 'free cash flow' Martin Bettington, Chief Executive Officer of Biffa Plc commented: "Biffa has delivered a strong set of maiden results, with all divisionsachieving organic growth in the first half of the year. Our strategy of operating across the whole waste management value chainpositions the business well to respond to changes in the industry driven bylegislation. We are also concentrating on the existing business and have broughtin skills from outside the industry to drive through change in our largestcustomer facing division, Collection. The listing of Biffa on the London StockExchange in October marked the start of an exciting new phase for Biffa and ourindependence has ensured that we now have a primary focus on driving organicgrowth in a sector that has significant development opportunities to delivervalue to our shareholders." For further information contact: Biffa Plc Tulchan CommunicationsMartin Bettington, Chief Executive Officer David TrenchardTim Lowth, Finance Director Stephen MalthouseTelephone 0207 353 4200 (all day) Telephone 0207 353 4200 A presentation for analysts will be held at 9.30am today at Farmers & FletchersHall, 3 Cloth Street, London EC1A 7LD. The presentation will also be availableat www.biffa.co.uk. A live audio broadcast of the presentation will also beavailable for analysts. The dial-in number is + 44 (0)20 7863 6116 and the pinnumber is 122608. Interim StatementFor the 26 weeks ended 29 September 2006======================================== I am pleased to report that, in our first set of results published since Biffa'sdemerger from Severn Trent, the Group has delivered a strong first halfperformance, with all divisions achieving organic growth. Highlights • Continued profit growth across all divisions - Revenues up 5.8% to £376.5 million (2005/6: £356.0 million) - Operating profit up 8.7% to £48.9 million (2005/6: £45.0 million) - Profit before tax up 19.9% to £41.6 million (2005/6: £34.7million) - Proforma earnings per share * of 8.0 pence - Free cash flow ** at £27.2 million, increase of £8.2 million compared with £19.0 million last year - Maiden interim dividend 2.1 pence per share • Strong revenue growth in collection services to national account customers • Commenced 14 year contract with Metropolitan Borough of Wirral with expected value of £140 million • Continued strength of landfill operations, with new site opened in Northern Ireland in November 2006 • Special Waste benefiting from the impact of hazardous waste regulations • Expansion into recycling and treatment activities progressing well * Proforma earnings per share is based on the Biffa Ordinary Shares in issue immediately following the demerger ** Refer to consolidated cash flow statement for definition of 'free cash flow' Significant Developments------------------------ The Group performed strongly whilst at the same time managing the demerger fromSevern Trent. The first half of the year has seen good progress in implementingour strategy and I am pleased to report revenues increased by 5.8% to £376.5million, compared with £356.0 million last year. Operating profit increased by8.7% to £48.9 million (2005/6: £45.0 million), with all divisions showinggrowth. Through good control and the phasing effects of working capital andcapital expenditure we generated free cash flow of £27.2 million (2005/6: £19.0million). Proforma earnings per share was 8.0 pence. The Board recognises that dividends represent an important part of totalshareholder return. As a result we have adopted a progressive dividend policywhich will take into account the profitability of the Group, the strength of itscash generation and investment requirements. The Board has therefore resolved topay a maiden interim dividend of 2.1 pence per ordinary share on 2 February 2007to shareholders on the register on 29 December 2006. This first half performance, traditionally a stronger period than the secondhalf, demonstrates the benefit of our strategic focus on organic growth,capitalising on the strengths of each of our separate divisions as well as ourintegrated approach to waste management. We have continued to strengthen ourmarket positions with the commencement of a substantial municipal contract inthe Wirral and we have gained a number of significant national contracts in ourCollection Division. In November, we opened our new landfill site Cottonmount in Northern Irelandadding 5 million cubic metres of void to our operating portfolio. Our strategyof void optimisation continues to bring benefits with the 14% growth in priceper tonne (before landfill tax) more than offsetting the 7% reduction in volume. Within our Resource Recovery and Landfill Division, the soil remediationactivity piloted at our Risley site in Cheshire has proved successful, and theconcept will be rolled out to other strategic locations. We have securedcontracts with three local authorities for recycling waste through a newin-vessel composting facility which is currently under construction at Etwall inDerbyshire. Operational Review------------------ i) Collection Gross revenue (including inter- and intra-segment revenue) increased to £226.1million from £212.6 million last year, a 6.3% increase. The division contributed£31.2 million to the Group's operating profits, compared with £30.4 million lastyear. In the largest sector of this business, the Industrial and Commercial collectionactivity, revenues increased by 6.7%, from £166.5 million to £177.7 million. Ourobjective of targeting growth from national accounts is proving successful andthese now account for nearly half of our industrial and commercial revenueswhilst maintaining our margins. In July, following a six month inter-regnum,Nick Gregg a new senior executive with substantial service sector experience wasappointed to head up the Collection Division. He brings a new, moresophisticated approach on customer service which will take the Industrial andCommercial collection activities to their next stage of development. Our scaleand coverage already provides us with significant competitive advantages inserving national account customers, and our new initiatives will capitalise onBiffa's strengths to distinguish our service offering in the local accountarena. As a part of our change management process we will, where appropriate, beinvesting further in account management and systems development in the short tomedium term in order to increase absolute levels of profit. We will alsocontinue to expand our recycling collection services both nationally and locallywith nearly half of our national account customers using our recycling servicesas well as a waste collection service. Our municipal collection contracts generated revenues of £42.3 million, 11.9%ahead of last year, aided by the expansion of services to include the collectionof recyclables from the household as well as waste. In August we commenced afourteen year contract for the Metropolitan Borough of Wirral, our largestcollection-only municipal contract, which is anticipated to generate annualrevenues of about £10 million. Overall margins in the Collection division declined from 14.3% to 13.8%. Thisreduction was caused by the disappointing performance of our integratedmunicipal contract with Leicester City Council. There are two major elements tothis contract; the collection service element of the contract continues toperform well. However the second element, the new mechanical-biologicaltreatment (MBT) facility, is not yet fully operating to its design specificationleading to higher than expected waste disposal costs. In October 2006, Biffaassumed control of the facility and we are currently introducing designmodifications which we anticipate will be implemented early in 2007. We expectthat these modifications will be successful and therefore we are confident thatthe issues will largely have been resolved by the middle of 2007. Our integratedmunicipal contract on the Isle of Wight continues to perform in line with ourexpectations. Excluding the Leicester contract, the operating margin for theCollection division was 14.6% compared to 14.5% in the prior year. ii) Special Waste Gross revenue for the division was £24.7 million (15.3% was inter- orintra-segment revenue) 4.2% up on last year's levels of £23.7 million. Operatingprofit was £1.4 million compared with £0.7m last year. The largest segment of this division, Recovery and Treatment, performed well,generating revenues of £10.5 million in the period, 8.2% up on last year. TheIndustrial and Environmental sector, the second largest revenue contributorwithin this division, also performed well with revenues of £5.6 million, 19.1%up compared with last year as it benefited from a number of one-off contracts.Overall we delivered an improvement in margins from 3.0% in 2005/6 to 5.7%, asthe division continued to benefit from the impact of hazardous wasteregulations. iii) Resource Recovery and Landfill This was another successful half year for the division. Gross revenues were 4.7%up on last year at £161.7 million (2005/6: £154.4 million) of which 24.2% wasinter- or intra-segment revenue (2005/6: 24.1%). Operating profits were £24.4million compared with £22.0 million in the previous year, a 10.9% increase. Our largest revenue segment of this division is recharged landfill tax, whichamounted to £67.8 million in the period, 11.0% up on last year. This revenuerepresents the passing on of a fiscal cost to our customers, it does notincrease profit. Landfill gate fees, the largest profit generating segment,accounted for revenues of £55.6 million compared with £52.3 million last year, a6.3% increase. As expected, landfill volumes across all sites were down 7% to 3.6 milliontonnes, reflecting the number of sites which have been filled. However, at sitesopen throughout the first half of both years volumes were up 1% and, at allsites, average unit revenues (excluding recharged Landfill Tax) at £15.37 pertonne were up 14% as we continue to optimise the value of our void. At the endof September our consented and operational void bank totalled 71 million cubicmetres, of which 10 million cubic metres is leased to another landfill operator.In addition we had 10 million cubic metres of consented but as yet notoperational void, of which 5 million cubic metres relates to our Cottonmountsite in Northern Ireland. The latter became operational on 1 November. At theend of the period we also continued to control 22 million cubic metres ofpotential void. The recycling and treatment activities in the division progressed well, withrecycling volumes increasing by 3%. The soil remediation activity piloted at ourRisley site has proved successful, and the concept will be rolled out to otherstrategic locations. Additionally we introduced our third new in-vesselcomposting facility at Etwall in Derbyshire, which will be supported by threelocal councils in the area. iv) Power Generation The Power Generation Division turned in a strong performance with gross revenuesat £10.1 million compared with £8.8 million last year. Operating profits were£3.9 million compared with £3.6 million last year. The decline in operatingmargins from 40.9% to 38.6% primarily reflected the impact of increasedregulatory and gas clean up costs. The division wholly owns 64.3 MW of installed capacity, of which 31% qualifiesfor Renewable Obligation Certificates. The Group also has interests in a further44.5 MW, primarily held through joint venture and royalty arrangements. Plans toinstall a further 4 MW of new capacity in the second half are progressing well. Financial Review---------------- i) Summary of Results The Group has adopted International Financial Reporting Standards (IFRS) with atransition date of 25 March 2005 and these financial statements, including thecomparatives, have been produced in accordance with these standards. Thefinancial statements as at 29 September 2006 do not include the impact of thecapital reorganisation, which took place on 6 October 2006 prior to thedemerger. The Directors consider that the basic earnings per share based on thecapital structure prior to the demerger to be of limited relevance and havetherefore disclosed a proforma earnings per share based on the number of sharesin issue immediately following demerger and the debt structures in place in thefirst half, details of which can be found in note 4. Revenue in the period increased by 5.8% to £376.5 million (2005/6: £356.0million) with operating profit growing by 8.7% to £48.9 million (2005/6: £45.0million). Profit before tax was up 19.9% to £41.6 million (2005/6: £34.7 million)after net finance charges of £7.7 million (2005/6: £10.8 million) and share ofresults of joint ventures of £0.4 million (2005/6: £0.5 million). Our headlinetax rate was 32.9% (2005/6: 33.1%). Proforma earnings per share increased by21.2% to 8.0 pence, as a result of the increase in operating profit and thereduction in the net finance charge due to the refinancing of our debtfacilities in August 2006. Free cash flow of £27.2 million was generated in the period compared to £19.0million last year largely reflecting good control and the phasing effects ofworking capital and capital expenditure. Capital expenditure in the period was£32.7 million compared with £35.0 million in the previous year, with proceedsfrom the disposal of assets amounting to £1.3 million (2005/6: £0.4 million).Net debt at 29 September 2006 was £352.4 million compared with £314.7 million at31 March 2006, this being in part due to the £65.3 million dividend paid toSevern Trent Plc in September 2006 countered by the strong free cash flow. Ourgearing level (net debt/net debt plus equity) at 29 September 2006 was 36%compared with 32% as at 31 March 2006. The interim statements for the 26 weeks ended 29 September 2006 have beenreviewed by Deloitte & Touche LLP with their unqualified review opinion set outat the end of this report. It should be noted that the interim statements forthe 26 weeks ended 29 September 2006 and 23 September 2005 are unaudited. ii) Other financing matters On an IAS 19 'Employee benefits' basis, the estimated net position of theGroup's defined benefit pension schemes as at 29 September 2006 was a deficit of£39.0 million. After deferred tax, the estimated net deficit was £27.3 million.In total the Group charged a service cost of £5.1 million against operatingprofits in the 26 weeks ended 29 September 2006 (2005/6: £4.6 million).Following demerger, it has been agreed that the liabilities arising from theSevern Trent pension scheme relating to current and former employees of theGroup, will be transferred into the UK Waste Pension Scheme. To facilitate thistransfer, the Group has committed to make one-off special contributions of about£21 million to the Severn Trent Schemes towards the end of this financial year,and £5 million in the UK Waste Pension Scheme for the current and next financialyears. On 30 August 2006, the Group successfully entered into a £460 million unsecureddual tranche credit facility (comprising a £310 million term loan facility and a£150 million revolving credit facility) over a term of five years. In September2006, £334.0 million of this facility was drawn and used to repay loans andother amounts due to Severn Trent Plc and, in part, fund the pre-demergerdividend of £65.3 million. iii) Previous half year on half year financial history In 2005/6, revenue was divided between the two halves broadly equally. However,the Company's reporting cycle runs in complete weeks, meaning that the secondhalf of 2005/6 had 27 weeks as opposed to the normal 26 weeks. Eliminating theimpact of this extra week shows that 51% of the full year's revenue was in thefirst half and 49% was in the second half. Similarly, adjusting for theadditional week, operating profit was split 53% in the first half to 47% in thesecond half. This broadly matches the ratios in the previous year, 2004/5, whererevenue was split 51% to 49% and operating profit was split 54% to 46%. Thistrend reflects the normal seasonal impact of the Christmas and New Year holidaysand poor weather on the business. Further details on these trends can be foundin Note 11. Outlook------- The completion of the demerger from Severn Trent marks the beginning of anexciting new phase in Biffa's development. During the first half, the managementteam has succeeded in delivering a strong performance from the business whilstat the same time dealing with the issues and substantial additional workloadarising from the demerger. With the completion of the demerger, management cannow fully concentrate on driving this business forward in this rapidlydeveloping sector. Looking forward into the second half, we anticipate continuation of the trendsexperienced in the first half. We intend to capitalise on our strengths innational and municipal collection as well as landfill whilst furtherconcentrating on our local account customer base in Collection. With ourprogressive dividend policy underpinned by the exciting opportunities availableto us in this industry, we are well placed to deliver value to our shareholders. Bob Davies Chairman 6 December 2006 CONSOLIDATED INCOME STATEMENT For the 26 weeks ended 29 September 2006 --------------------------------------- Notes 26 weeks to 26 weeks to 53 weeks to 29 September 23 September 31 March 2006 2005 2006 £m £m £m --------------------------------------- Revenue 1 376.5 356.0 712.3Cost of sales (311.6) (297.8) (600.9) ---------------------------------------Gross profit 64.9 58.2 111.4 Distribution costs (4.9) (4.9) (9.2)Administrative expenses (11.2) (8.6) (16.5)Other operating income 0.1 0.3 0.6 ---------------------------------------Operating profit 1 48.9 45.0 86.3 Share of post tax results ofjoint ventures 0.4 0.5 1.0Finance income 2.5 1.1 2.0Finance charges (10.2) (11.9) (23.8) ---------------------------------------Profit before taxation 41.6 34.7 65.5Taxation 2 (13.7) (11.5) 4.1 ---------------------------------------Profit for the period 27.9 23.2 69.6 =======================================Earnings per share expressed inpence per share- Basic and diluted 4 0.4p 0.5p 1.6p All the amounts above relate to continuing operations and are attributable toequity holders of Biffa Plc. STATEMENT OF RECOGNISED INCOME AND EXPENSE For the 26 weeks ended 29 September 2006 ---------------------------------------- Notes 26 weeks to 26 weeks to 53 weeks to 29 September 23 September 31 March 2006 2005 2006 £m £m £m --------------------------------------- Profit for the period 27.9 23.2 69.6 Actuarial losses on defined benefitpension scheme (3.1) (2.9) (4.5) Deferred tax arising on actuariallosses on defined benefit scheme 0.9 0.9 1.3 ---------------------------------------Total recognised income and expensesfor the period 25.7 21.2 66.4 ======================================= CONSOLIDATED BALANCE SHEET As at 29 September 2006 --------------------------------------- Notes As at As at As at 29 September 23 September 31 March 2006 2005 2006 £m £m £m ---------------------------------------AssetsNon-current assetsGoodwill 732.3 732.3 732.3Other intangible assets 1.4 1.2 1.3Property, plant and equipment 339.6 324.7 335.5Interest in joint venture 0.5 0.6 0.6Other receivables and investments 0.2 0.2 0.2Deferred tax assets - 2.7 - --------------------------------------- 1,074.0 1,061.7 1,069.9 --------------------------------------- Current assetsInventories 3.0 3.2 3.2Trade and other receivables 148.3 159.6 149.0Cash and cash equivalents 25.2 26.8 23.2 --------------------------------------- 176.5 189.6 175.4 --------------------------------------- Current liabilitiesFinancial liabilities - (13.4) (8.8) (205.8)borrowingsTrade and other payables (121.7) (141.6) (119.5)Current tax liabilities (21.5) (16.0) (9.1)Provisions 5 (15.4) (14.7) (16.7) --------------------------------------- (172.0) (181.1) (351.1) --------------------------------------- --------------------------------------- Net current assets / (liabilities) 4.5 8.5 (175.7) --------------------------------------- Non-current liabilitiesFinancial liabilities - (364.2) (616.2) (148.0)borrowingsNon-current provisions 5 (55.6) (59.1) (55.0)Deferred tax liabilities (2.5) - (1.0)Retirement benefit obligations (39.0) (44.2) (33.7) --------------------------------------- (461.3) (719.5) (237.7) --------------------------------------- ---------------------------------------Net assets 617.2 350.7 656.5 ======================================= Equity Called up share capital 711.3 443.8 711.3Retained deficit (note i) (94.1) (93.1) (54.8) ---------------------------------------Total shareholders' equity 617.2 350.7 656.5 ======================================= Net debt 7 & 8 352.4 582.3 314.7Gearing (note ii) 36% 62% 32% (i) As at 29 September 2006, the Company has sufficient distributable reserves to pay the 2006/7 interim dividend. (ii) Gearing has been calculated on the basis of Debt / (Debt + Equity). CONSOLIDATED CASH FLOW STATEMENT For the 26 weeks ended 29 September 2006 --------------------------------------- Notes 26 weeks to 26 weeks to 53 weeks to 29 September 23 September 31 March 2006 2005 2006 £m £m £m --------------------------------------- Cash flows from operatingactivities Cash generated fromoperations 6 70.1 59.3 121.7Interest received 1.8 0.7 1.9Interest paid (7.7) (5.1) (23.1)Tax paid (5.6) (1.3) (1.4) ---------------------------------------Net cash from operatingactivities 58.6 53.6 99.1 --------------------------------------- Cash flows from investingactivities Acquisition of subsidiaries(net of cash acquired) - - (0.2)Purchases of property, plantand equipment (32.7) (35.0) (75.5)Proceeds from the sale ofproperty, plant and equipment 1.3 0.4 1.5Dividend received 0.4 0.6 1.3 --------------------------------------- Net cash used in investingactivities (31.0) (34.0) (72.9) --------------------------------------- Cash flows from financingactivities Dividends paid (65.3) (6.5) (13.0)Finance lease principalpayments (0.8) (4.6) (8.5)Drawdown of borrowings 332.3 2.9 -Repayment of borrowings (307.7) - (264.4)Settlement of interest freeloan 15.9 - -Issue of shares - - 267.5 ---------------------------------------Net cash flow from financingactivities (25.6) (8.2) (18.4) --------------------------------------- Net increase in cash and cashequivalents 2.0 11.4 7.8 Cash and cash equivalents atbeginning of period 23.2 15.4 15.4 ---------------------------------------Cash and cash equivalents atend of period 25.2 26.8 23.2 ======================================= Free cash flow Net cash generated fromoperating activities 58.6 53.6 99.1Proceeds from the sale ofproperty, plant and equipment 1.3 0.4 1.5Purchase of property, plantand equipment (32.7) (35.0) (75.5)Special pension contributionpayments - - 9.0 --------------------------------------- 27.2 19.0 34.1 ======================================= NOTES TO THE INTERIM RESULTS============================ ACCOUNTING POLICIES a) Revenue Revenue represents the income receivable excluding value added tax, tradediscounts and intercompany sales, in the ordinary course of business for goodsand services provided. Revenue is recognised at the point when service has been performed. Within theCollection division this will be on completion of each container lift, or inaccordance with the contract bill of quantities with respect to Municipalcontracts. For both Special Waste and Resource Recovery and Landfill, revenuewill be recognised on receipt of waste, whilst for the Power Generation divisionit is recognised on the measured supply of power. Revenue is not recognised until the services have been provided to the customer. b) Exceptional items Items that are either material in size or non operating in nature are presentedas exceptional items in the income statement. The directors are of the opinionthat the separate recording of exceptional items provides helpful informationabout the group's underlying business performance. Example of events which maygive rise to the classification of items as exceptional include restructuring ofbusinesses, gains or losses on disposal of properties, impairment of goodwilland non-recurring income or expenditure. c) Segmental reporting The Group is managed by type of business. Segmental information is providedhaving regard to the nature of the services provided and the markets served. Thebusiness segments are: • Collection: Collection provides waste collection services to industrial, commercial and municipal waste producers. • Special Waste: Special Waste provides a range of specialised services for the collection, treatment and recycling, and disposal of solid and liquid hazardous waste for industrial, commercial and municipal customers. • Resource Recovery & Landfill: Landfill provides waste treatment, recycling and disposal services for industrial, commercial and municipal customers. • Power Generation: Power Generation utilises the methane produced by decomposing waste in Biffa's landfill sites to generate "green" power for export to the grid. All trading activity and operations are in the United Kingdom d) Basis of consolidation The consolidated financial information includes the results of Biffa Plc and itssubsidiaries and joint ventures. e) Property, plant, equipment and depreciation Landfill sites Landfill sites are included within property, plant and equipment at cost lessaccumulated depreciation. The cost of landfill sites includes the cost ofacquiring, developing and engineering sites, but does not include interest. Theanticipated total cost of the asset is depreciated over the estimated life ofthe site on the basis of the usage of void space. In some circumstances thetiming of engineering expenditure and the configuration of a site can lead todepreciation charges exceeding capital expenditure to date. In thesecircumstances the surplus depreciation is transferred to provisions. Other property, plant and equipment Other property, plant and equipment are included at cost less accumulateddepreciation. Freehold land is not depreciated. Other property, plant andequipment is depreciated on a straight-line basis over their expected lives,which are as follows: Short leasehold property and improvements..Length of lease up to 21 yearsLong leasehold property and improvements..Length of lease greater than 21 yearsMotor vehicles................................................ 4-8 yearsPlant......................................................... 5-8 yearsFixtures and office equipment................................. 5-10 years Assets in the course of construction are not depreciated until commissioned. f) Leased assets Where assets are financed by leasing arrangements which transfer substantiallyall the risks and rewards of ownership of an asset to the lessee (financeleases), the assets are accounted for as if they had been purchased and the fairvalue of the minimum payments are shown as an obligation to the lessor. Leasepayments are treated as consisting of a capital and a finance charge. Thecapital element reduces the obligation to the lessor with the finance chargebeing expensed to the income statement over the leases period so as to produce aconstant periodic rate of interest on the remaining balance of the liability foreach period. Depreciation is charged over the shorter of the estimated usefullife and the lease period. All other leases are accounted for as operating leases. Rental costs arisingunder operating leases are charged to the income statement on a straight-linebasis over the lease term. Where assets are leased to third parties and subsequently leased back underarrangements which transfer substantially all of the risks and rewards ofownership back to the Company, the assets are accounted for as if they are stillowned by the Company and the fair value of the minimum payments are shown as anobligation to the lessor. The cash inflow arising from the lease to the thirdparty is included within financing activities in the cash flow statement. g) Goodwill and intangibles Goodwill represents the excess of the fair value of the purchase considerationover the fair value of the identifiable intangible and tangible assets net offair value of the liabilities, including contingencies of business acquired, atthe date of acquisition. Intangible assets can be separately identified from goodwill on an acquisition,and a fair value attributed to that asset. Customer lists or contracts, thatwill generate future economic benefits represent such intangible assets that maybe acquired. Customer lists or contracts that are held in intangible assets aresubject to amortisation over a period of 5 years. Costs that are directly associated with the production and purchase ofidentifiable and unique software products controlled by the Group, and that willgenerate economic benefits beyond one year are recognised as intangible assets.These intangible assets are stated at cost less accumulated amortisation andimpairment losses. Software is amortised over 2-5 years. h) Impairment of non-current assets If the recoverable amount of goodwill, an item of property, plant and equipment,or any other non-current asset is estimated to be less than its carrying amount,the carrying amount of the asset is reduced to its recoverable amount. Where theasset does not generate cash flows that are independent from other assets, theGroup estimates the recoverable amount of the cash generating unit to which theasset belongs. Recoverable amount is defined as the higher of fair value lesscosts to sell or estimated value in use at the date the impairment review isundertaken. Net realisable value represents the present value of expected futurecash flows discounted on a pre-tax basis, using the estimated cost of capital ofthe cash generating unit. Goodwill is tested for impairment on an annual basis. Impairment reviews arealso carried out if there is some indication that an impairment may haveoccurred, or, where otherwise required, to ensure that non-current assets arenot carried above their estimated recoverable amounts. Impairments are recognised in the income statement, and where material aredisclosed as exceptional. Any impairments of goodwill cannot be subsequentlyreversed. i) Investments Investments held as fixed assets are held at cost less provision for impairment. j) Inventories Inventories are stated at the lower of cost and net realisable value and whereappropriate are stated net of provisions for slow moving and obsolete inventory. k) Landfill reinstatement costs Provision for the cost of reinstating landfill sites is made over theoperational life of each landfill site and charged to the income statement asthe obligation to reinstate the site arises. l) Environmental control and aftercare costs Environmental control and aftercare costs are incurred over the operational lifeof each landfill site and may be incurred for a considerable period thereafter.Provision for all such costs is made over the operational life of each landfillsite as the environmental and aftercare liability arises. Long term aftercareprovisions are calculated based on the NPV of estimated future costs by applyingan appropriate discount rate. The effects of inflation and unwinding of thediscount element on existing provisions are reflected in the financialinformation as a finance charge. m) Insurance Provision is made for claims notified and for claims incurred but which have notyet been notified, based on advice from the Group's external insurance advisers. n) Pension costs The Group contributes to the Severn Trent Pension Scheme ("STPS"), Severn TrentSenior Staff Pension Scheme ("STSSPS"), the Biffa Works Pension Scheme, and theUK Waste Pension Scheme ("UKWPS"). Pension costs are determined actuarially so as to spread the cost of providingpension benefits over the estimated period of employees' pensionable servicewith the Group. Costs of defined contribution pension schemes are charged to theincome statements in the period in which they fall Severn Trent Plc, operates two defined benefit schemes, the STPS and the STSSPS,of which some employees of the Group are members. The Group is able to identifyits share of underlying assets and liabilities of Severn Trent's definedbenefits schemes. The Group accounts for all defined benefit schemes throughfull recognition of the scheme's surpluses or deficits on the balance sheet atthe end of each year. Actuarial gains and losses are included in the statementof recognised income and expense. Current and past services costs curtailmentsand settlements are recognised within operating profit. Returns on scheme assetsand interest on obligations are recognised as a component of finance costs. o) Tax The tax currently payable is based on taxable profit for the year. Taxableprofit differs from net profit as reported in the income statement because itexcludes items of income and expenses that are taxable in other years and itfurther excludes items that are never taxable or deductible. The Group'sliability for current tax is calculated using rates that have been enacted orsubstantively enacted by the balance sheet date. Provision is made in full for deferred tax liabilities that arise from timingdifferences where transactions or events that result in an obligation to paymore tax in the future have occurred by the balance sheet date. Deferred taxassets are recognised to the extent that it is probable that they will berecoverable in the future. Deferred tax is measured at the average tax ratesthat are expected to apply in the periods in which the timing differences areexpected to reverse based on the rates and laws that have been enacted orsubstantively enacted by the balance sheet date. p) Pre-contract costs Pre-contract costs are expensed as incurred, except where it is virtuallycertain that the contract will be awarded, in which case they are recognised asan asset which is written off to the income statement over the life of thecontract. q) Financial instruments Borrowings Borrowings are recognised initially at fair value, net of transaction costsincurred. Borrowings are subsequently stated at amortised cost; any differencebetween the proceeds (net of transaction costs) and the redemption value isrecognised in the income statement over the period of the borrowings using theeffective interest rate. Borrowings are classified as current liabilities unless the Group has anunconditional right to defer settlement of the liability for at least 12 monthsafter the balance sheet date. Financial assets Loans and receivables are non-derivative financial assets with fixed ordeterminable payments that are not quoted in an active market. They are includedin current assets, except for those with maturities greater than 12 months afterthe balance sheet date, which are classified as non-current assets. Loans andreceivables are classified as "trade and other receivables" in the balancesheet. r) Share-based payments IFRS 2 "Share-based payment" requires that an expense for equity instrumentsgranted is recognised in the financial statements based on their fair value atthe date of grant. This expense, which is primarily in relation to employeeshare options and Executive LTIP schemes, is recognised over the vesting periodof the scheme. The fair value of employee services is determined by reference tothe fair value of the awarded granted calculated using an appropriate pricingmodel, excluding the impact of any non market vesting conditions. IFRS 2 allows the measurement of this expense to be calculated only on optionsgranted after 7 November 2002. At the balance sheet date, the Group revises itsestimates of the number of share incentives that are expected to vest. The impact of the revision of original estimates, if any, is recognised in theincome statement, with a corresponding adjustment to equity, over the remainingvesting period. The proceeds received net of any directly attributable transaction costs arecredited to share capital (nominal value) and share premium when the options areexercised. s) Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits at call with banks,other short-term highly liquid investments and bank overdrafts. t) Dividends Dividend distribution to the Company's shareholders is recognised as a liabilityin the Group's financial statements in the period in which the dividends areapproved by the Company's shareholders. 1 SEGMENTAL INFORMATION======================= The group is managed by type of business and as such is organised into fouroperating divisions. These divisions represent the business segments in whichthe group reports its primary segment information. Since all trading activityand operations are in the United Kingdom, there is no secondary reporting formatby geographical segment. The segment results for the period are as follows: ----------------------------------------------- 26 weeks to 26 weeks to 53 weeks to 29 September 23 September 31 March 2006 2005 2006 £m £m £m ----------------------------------------------- RevenueCollection 226.1 212.6 429.0Special Waste 24.7 23.7 49.2Resource Recovery & Landfill 161.7 154.4 302.8Power Generation 10.1 8.8 18.9Less inter and intra-segmentrevenue (46.1) (43.5) (87.6) -----------------------------------------------Total 376.5 356.0 712.3 =============================================== Operating profitCollection 31.2 30.4 60.1Special Waste 1.4 0.7 1.9Resource Recovery & Landfill 24.4 22.0 40.8Power Generation 3.9 3.6 7.5Shared service and corporatecosts (Note i) (12.0) (11.7) (24.0) ------------------------------------------------Operating profit 48.9 45.0 86.3Finance costs (10.2) (11.9) (23.8)Investment revenue 2.5 1.1 2.0Share of post tax results ofjoint venture 0.4 0.5 1.0 ------------------------------------------------Profit before tax 41.6 34.7 65.5 ================================================ (i) Shared service and corporate costs include a management charge payableto Severn Trent Plc amounting to £0.8 million (2005/6: £1.1 million). Corporatecosts arising as a result of the demerger totalled £0.3 million in the firsthalf. Other segment items are: ---------------------------------------------Capital expenditure 26 weeks to 26 weeks to 53 weeks to 29 Sep 06 23 Sep 05 31 Mar 06 £m £m £m ---------------------------------------------Collection 17.0 22.8 50.1Special Waste 0.3 0.7 1.0Resource Recovery & Landfill 13.3 9.7 19.7Power Generation 1.5 1.7 3.3Shared service and corporate 0.6 0.2 1.5 --------------------------------------------- 32.7 35.1 75.6 ============================================= Depreciation and amortisationCollection 17.2 15.4 32.5Special Waste 0.8 0.9 1.8Resource Recovery & Landfill 10.2 10.9 20.4Power Generation 1.3 1.2 2.5Shared service and corporate 0.7 0.5 1.3 --------------------------------------------- 30.2 28.9 58.5 ============================================= Capital expenditure comprises additions to property, plant and equipment andintangible assets, including additions resulting from acquisitions arisingthrough business acquisitions. Segment Assets-------------- ----------------------------------------- As at As at As at 29 Sep 06 23 Sep 05 31 Mar 06 £m £m £m -----------------------------------------GoodwillCollection 491.8 491.8 491.8Special Waste 34.9 34.9 34.9Resource Recovery & Landfill 180.2 180.2 180.2Power Generation 25.4 25.4 25.4Corporate - - - ----------------------------------------- 732.3 732.3 732.3 ========================================= Operating AssetsCollection 266.1 251.7 273.4Special Waste 20.2 21.0 19.7Resource Recovery & Landfill 173.5 165.4 152.0Power Generation 23.1 22.7 23.2Corporate 35.3 58.2 44.7 ------------------------------------------ 518.2 519.0 513.0 ==========================================TotalCollection 757.9 743.5 765.2Special Waste 55.1 55.9 54.6Resource Recovery & Landfill 353.7 345.6 332.2Power Generation 48.5 48.1 48.6Corporate 35.3 58.2 44.7 ----------------------------------------- 1,250.5 1,251.3 1,245.3 ========================================= Segment assets consist primarily of operating assets such as goodwill,intangible assets, property, plant and equipment, inventories and receivables.Assets such as deferred taxation, cash and loans to parent company areseparately identified as unallocated corporate assets. Segment Liabilities------------------- --------------------------------------------- As at As at As at 29 September 23 September 31 March 2006 2005 2006 £m £m £m ---------------------------------------------Collection 50.8 44.3 45.3Special Waste 7.5 5.5 6.2Landfill 95.7 93.7 90.0Power Generation 3.4 2.4 3.1Corporate 33.5 38.7 37.8 --------------------------------------------- 190.9 184.6 182.4Unallocated corporateliabilities 442.4 716.0 406.4 ---------------------------------------------Group total liabilities 633.3 900.6 588.8 ============================================= Segment liabilities comprise operating liabilities, but separately identifyretirement obligations, leasing obligations and corporate borrowing asunallocated corporate liabilities. 2 TAXATION=========== The income tax expense is based on an effective annual tax rate estimated andapplied to the pre-tax profit. The tax charge comprises as follows: ---------------------------------------------- 26 weeks to 26 weeks to 53 weeks to 29 September 23 September 31 March 2006 2005 2006 £m £m £m ---------------------------------------------- Current taxCorporation tax at 30%Current year 11.2 - -Prior year - - (2.9)Severn Trent Group relief at 30%Current year - 7.9 13.5Prior year - - (21.8) -------------------------------------------Total current tax 11.2 7.9 (11.2) Deferred taxCurrent year 2.5 3.6 6.9Prior year - - 0.2 -------------------------------------------Total deferred tax 2.5 3.6 7.1 -------------------------------------------Total tax charge / (credit) 13.7 11.5 (4.1) ========================================== 3 DIVIDENDS------------ ---------------------------------------------- 26 weeks to 26 weeks to 53 weeks to 29 September 23 September 31 March 2006 2005 2006 £m £m £m ---------------------------------------------- Interim paid : 1.46p per £1share - 6.5 6.5: 9.2p per £1 share 65.3 - -Second interim paid: 1.46p per£1 share - - 6.5 -------------------------------------------- 65.3 6.5 13.0 ============================================ The directors have declared an interim dividend of 2.1 pence per ordinary shareto be paid on 2 February 2007 to shareholders who are on the register at 29December 2006. The cost of the interim dividend will be £7.3 million. 4 EARNINGS PER ORDINARY SHARE------------------------------ Basic earnings per ordinary share is calculated by dividing earningsattributable to ordinary shareholders by the weighted average number of ordinaryshares in issue during the year. ----------------------------------------------- 26 weeks to 26 weeks to 53 weeks to 29 September 23 September 31 March 2006 2005 2006 ----------------------------------------------- Basic earnings per share denominator (m) 7,113.2 4,438.2 4,445.6Earnings attributable toordinary shareholders (£m) 27.9 23.2 69.6Basic and diluted earnings pershare (p) 0.4 0.5 1.6 ============================================== For the purpose of the consolidated interim statements, earnings per shareinformation for each period has been presented on an adjusted basis to reflectthe impact of the capital reorganisation. The weighted average number of shares reflects the actual number of BiffaOrdinary Shares that existed during each period adjusted for the sub division ofordinary shares of £1 into 10 ordinary shares of 10 pence that occurred on 12September 2006. Prior to demerger there was a reclassification of 349,531,239 Biffa OrdinaryShares into deferred shares so that the number of Biffa Ordinary Shares in issuematched the number of Severn Trent Ordinary Shares in issue. The deferred shareshave been repurchased for 1 penny in aggregate and cancelled. As a consequencethe Directors consider the earnings per share shown above to be of limitedrelevance. The following supplementary information shows the earnings per share based onthe Biffa Ordinary Shares in issue immediately following the demerger and thedebt structures in place in the first half. ----------------------------------------------- 26 weeks to 26 weeks to 53 weeks to 29 September 23 September 31 March 2006 2005 2006 ----------------------------------------------- Basic earnings per sharedenominator (m) 349.5 349.5 349.5Earnings attributable toordinary shareholders (£m) 27.9 23.2 69.6Basic and diluted earnings pershare (p) 8.0 6.6 19.9 ============================================ 5 PROVISIONS FOR LIABILITIES AND CHARGES========================================= ----------------------------------------------------------- Land Onerous Insurance Total reinstatement contracts and environmental £m £m £m £m -----------------------------------------------------------At 25 March 2005 67.9 3.2 4.3 75.4Utilised (10.6) (1.6) (3.0) (15.2)Charge to income 9.2 0.1 2.1 11.4Discount elimination 2.3 - - 2.3Transfers fromfixed assets /other assets (2.2) - - (2.2) -----------------------------------------------------------At 31 March 2006 66.6 1.7 3.4 71.7Utilised (4.5) (0.5) (1.3) (6.3)Charge to income 4.4 - 0.9 5.3Discount elimination 1.2 - - 1.2Transfers fromfixed assets (0.9) - - (0.9) ---------------------------------------------------------- At 29September 2006 66.8 1.2 3.0 71.0 ========================================================== Provisions have been analysed between current and non-current as follows: ------------------------------------------------------- As at As at As at 29 September 23 September 31 March 2006 2005 2006 £m £m £m -------------------------------------------------------Current 15.4 14.7 16.7Non-current 55.6 59.1 55.0 ------------------------------------------------------- 71.0 73.8 71.7 ======================================================= 6 CASH FLOWS FROM OPERATING ACTIVITIES--------------------------------------- ----------------------------------------------- 26 weeks to 26 weeks to 53 weeks to 29 September 23 September 31 March 2006 2005 2006 £m £m £m -----------------------------------------------Profit for the period 27.9 23.2 69.6Adjustments for:Finance income (2.5) (1.1) (2.0)Finance costs 10.2 11.9 23.8Share of results of jointventures before taxation (0.4) (0.5) (1.0)Taxation 13.7 11.5 (4.1) -----------------------------------------------Operating profit 48.9 45.0 86.3Amortisation of intangibles 0.3 - 0.5Depreciation of property, plantand equipment 29.9 28.9 58.0(Profit)/loss on disposal ofproperty, plant and equipment (0.3) (0.1) (0.5)Decrease/(increase) ininventories 0.2 (0.2) (0.2)Increase in debtors (16.8) (18.6) (9.6)Increase/(decrease) in creditors 8.8 6.2 (9.1)Decrease in provisions (0.9) (1.9) (3.7) ----------------------------------------------Total cash flow from operatingactivities 70.1 59.3 121.7 ============================================== 7 CONSOLIDATED MOVEMENT IN NET DEBT------------------------------------ -------------------------------------------- As at As at As at 29 September 23 September 31 March 2006 2005 2006 £m £m £m -------------------------------------------- Net increase in cash and cashequivalents 2.0 11.4 7.8(Increase) / repayment ofborrowings and finance leases (39.7) 1.7 272.9 -------------------------------------------- Movement in net debt in theperiod (37.7) 13.1 280.7Net debt at beginning of period (314.7) (595.4) (595.4) -------------------------------------------- Net debt at end of period (352.4) (582.3) (314.7) ============================================ 8 ANALYSIS OF NET DEBT----------------------- -------------------------------------------- As at As at As at 29 September 23 September 31 March 2006 £m 2005 2006 £m £m --------------------------------------------- Cash and cash equivalents 25.2 26.8 23.2Loans due from group companies - 15.9 15.9Convertible loan notes - (464.1) -Finance leases (45.3) (50.0) (46.1)Loans due to group companies - (110.9) (307.7)Bank loans (332.3) - - --------------------------------------------Total net debt (352.4) (582.3) (314.7) ============================================ 9 STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY----------------------------------------------- --------------------------------- Share capital Retained Total earnings £m £m £m --------------------------------- At 26 March 2005 443.8 (108.5) 335.3Profit for the financial year - 69.6 69.6Actuarial loss arising on post employmentobligations, including tax - (3.2) (3.2)Dividends - (13.0) (13.0)Issue of ordinary shares 267.5 - 267.5Value of employee services - 0.3 0.3 --------------------------------At 31 March 2006 711.3 (54.8) 656.5Profit for the period - 27.9 27.9Actuarial loss arising on post employmentobligations, including tax - (2.2) (2.2)Dividends paid in the period - (65.3) (65.3)Value of employee services - 0.3 0.3 ---------------------------------At 29 September 2006 711.3 (94.1) 617.2 ================================= 10 RECONCILIATION OF UK GAAP TO IFRS------------------------------------- The Group has historically prepared its financial statements in accordance withUK Generally Accepted Accounting Principles (UK GAAP). This is the first yearthat the group has presented its financial statements under IFRS. The earliestperiod for which full comparative information under IFRS will be presented isthe 53 weeks ended 31 March 2006 and the date of transition to IFRS wastherefore 26 March 2005. The group has adopted IFRS later than its parent,Severn Trent plc and has elected under IFRS 1(24a) 'First time adoption ofInternational Financial Reporting Standards' to measure its assets andliabilities at the carrying amounts that were included in Severn Trent plc'sconsolidated financial statements based on Severn Trent plc's date of transitionto IFRS of 1 April 2004. The tables that follow this narrative show areconciliation of net assets and profit as reported under UK GAAP as at 31 March2006, 26 March 2005 and 29 September 2005 to the revised net assets and profitunder IFRS as reported in these financial statements. a) Reconciliation of consolidated income statement for the 26 weeks ended 23September 2005 ---------------------------------------- UK GAAP Effect of IFRS transition to IFRS £m £m £m ---------------------------------------- Revenue 356.0 - 356.0Cost of sales (297.8) - (297.8) ----------------------------------------- Gross profit 58.2 - 58.2 Distribution costs (4.9) - (4.9)Administrative expenses (21.8) 13.2 (8.6)Other income 0.3 - 0.3 ----------------------------------------- Operating profit 31.8 13.2 45.0 Share of post tax results of jointventures 0.5 - 0.5Net finance charges (10.9) 0.1 (10.8) -----------------------------------------Profit before tax 21.4 13.3 34.7 Tax (10.8) (0.7) (11.5) ------------------------------------------Profit for the period 10.6 12.6 23.2 ========================================== b) Reconciliation of consolidated equity as at 23 September 2005 UK GAAP Effect of IFRS transition to IFRS £m £m £m -----------------------------------------AssetsNon-current assetsGoodwill 679.9 52.4 732.3Other intangible assets - 1.2 1.2Property, plant and equipment 323.2 1.5 324.7Interest in joint ventures 0.6 - 0.6Other receivables and investments 0.2 - 0.2Deferred tax assets 5.3 (2.6) 2.7 ------------------------------------------ 1,009.2 52.5 1,061.7 ----------------------------------------- Current assetsInventories 3.2 - 3.2Trade and other receivables 160.1 (0.5) 159.6Cash and cash equivalents 26.8 - 26.8 ------------------------------------------ 190.1 (0.5) 189.6 ------------------------------------------LiabilitiesCurrent liabilitiesBorrowings (8.8) - (8.8)Trade and other payables (142.2) 0.6 (141.6)Current tax liabilities (16.0) - (16.0)Provisions - (14.7) (14.7) ------------------------------------------ (167.0) (14.1) (181.1) ------------------------------------------ ------------------------------------------Net current assets 23.1 (14.6) 8.5 ------------------------------------------ Non-current liabilitiesBorrowings (612.4) (3.8) (616.2)Provisions (73.8) 14.7 (59.1)Retirement benefit obligations - (44.2) (44.2) ------------------------------------------ (686.2) (33.3) (719.5) ------------------------------------------ ------------------------------------------Net assets 346.1 4.6 350.7 ========================================== EquityShare capital 443.8 - 443.8Retained earnings (97.7) 4.6 (93.1) ------------------------------------------Total equity 346.1 4.6 350.7 ========================================== c) Reconciliation of consolidated income statement for the 53 weeks ended 31March 2006 ------------------------------------------ UK GAAP Effect of IFRS transition to IFRS £m £m £m ------------------------------------------Revenue 712.3 - 712.3Cost of sales (599.5) (1.4) (600.9) ------------------------------------------Gross profit 112.8 (1.4) 111.4 Distribution costs (9.2) - (9.2)Administrative expenses (59.2) 42.7 (16.5)Other income 0.6 - 0.6 ------------------------------------------Operating profit 45.0 41.3 86.3 Share of post tax results of jointventures 1.1 (0.1) 1.0Finance charges (21.5) (0.3) (21.8) ------------------------------------------Profit before tax 24.6 40.9 65.5 Tax 9.2 (5.1) 4.1 ------------------------------------------ Profit for the year 33.8 35.8 69.6 ========================================== d) Reconciliation of consolidated equity as at 31 March 2006 ------------------------------------------ UK GAAP Effect of IFRS transition to IFRS £m £m £m ------------------------------------------AssetsNon-current assetsGoodwill 650.2 82.1 732.3Other intangible assets - 1.3 1.3Property, plant and equipment 333.9 1.6 335.5Interest in joint ventures 0.6 - 0.6Other receivables and investments 0.2 - 0.2Deferred tax assets 10.3 (10.3) - ------------------------------------------ 995.2 74.7 1,069.9 ------------------------------------------Current assetsInventories 3.2 - 3.2Trade and other receivables 149.1 (0.1) 149.0Cash and cash equivalents 23.2 - 23.2 ------------------------------------------ 175.5 (0.1) 175.4 ------------------------------------------LiabilitiesCurrent liabilitiesBorrowings (211.5) 5.7 (205.8)Trade and other payables (109.9) (9.6) (119.5)Current tax liabilities (9.1) - (9.1)Provisions - (16.7) (16.7) ------------------------------------------ (330.5) (20.6) (351.1) ------------------------------------------ ------------------------------------------Net current liabilities (155.0) (20.7) (175.7) ------------------------------------------ Non-current liabilitiesBorrowings (144.2) (3.8) (148.0)Provisions (71.7) 16.7 (55.0)Deferred tax liability - (1.0) (1.0)Retirement benefit obligations (22.1) (11.6) (33.7) ------------------------------------------ (238.0) 0.3 (237.7) ------------------------------------------ ------------------------------------------Net assets 602.2 54.3 656.5 ========================================== EquityShare capital 711.3 - 711.3Retained earnings (109.1) 54.3 (54.8) ------------------------------------------Total equity 602.2 54.3 656.5 ========================================== e) Reconciliation of consolidated equity as at 26 March 2005 ---------------------------------------- UK GAAP Effect of IFRS transition to IFRS £m £m £m ----------------------------------------Assets Non-current assetsGoodwill 691.3 41.0 732.3Other intangible assets - 1.2 1.2Property, plant and equipment 319.2 1.6 320.8Interest in joint venture 0.8 0.1 0.9Other receivables and investments 0.2 - 0.2Deferred tax assets 8.2 (3.4) 4.8 ------------------------------------------ 1,019.7 40.5 1,060.2 ------------------------------------------Current assetsInventories 3.0 - 3.0Trade and other receivables 138.3 (0.6) 137.7Cash and cash equivalents 15.4 - 15.4 ------------------------------------------ 156.7 (0.6) 156.1 ------------------------------------------Liabilities Current liabilitiesBorrowings (8.6) (3.7) (12.3)Trade and other payables (121.7) 0.4 (121.3)Current tax liabilities (14.2) - (14.2)Provisions - (16.6) (16.6) ------------------------------------------ (144.5) (19.9) (164.4) ------------------------------------------ ------------------------------------------Net current assets / (liabilities) 12.2 (20.5) (8.3) ------------------------------------------ Non-current liabilitiesBorrowings (614.4) - (614.4)Provisions (75.4) 16.6 (58.8)Retirement benefit obligations - (43.4) (43.4) ------------------------------------------ (689.8) (26.8) (716.6) ------------------------------------------ ------------------------------------------Net assets 342.1 (6.8) 335.3 ========================================== EquityShare capital 443.8 - 443.8Retained earnings (101.7) (6.8) (108.5) ------------------------------------------Total equity 342.1 (6.8) 335.3 ========================================== Explanation of reconciling items between UK GAAP and IFRS The following note sets out significant accounting policy changes andadjustments arising from the transition to IFRS. i) IFRS 2 - Share-based payments The Group operates several share-based payment schemes under which options orshares may be granted to employees. Under UK GAAP, the Group has recognisedexpenses in its income statement in relation to shares awarded under itsExecutive Share Option Scheme and STLTIP and the share save scheme. Under IFRS2, the Group is required to record an expense for all share-based payments basedon the fair value of those payments as determined at the date of grant. IFRSalso permits an entity to recognise a deferred tax asset in relation to itsshare-based payment expense to the extent that it is able to obtain a taxdeduction upon exercise of the equity instruments granted. The effect ofapplying IFRS 2 is to increase operating expenses for 26 weeks ended 23September 2005 and 53 weeks ended 31 March 2006 by £0.1 million and £0.3 millionrespectively. ii) IFRS 3 - Business combinations Under UK GAAP goodwill on acquisitions was capitalised and amortised over itsestimated useful life up to a maximum of 20 years. IFRS 3 deals with accounting for businesses acquired and requires separatelyidentifiable intangible assets to be fair valued at the date of acquisition andamortised over an appropriate time period. Any residual goodwill is notamortised but is subject to an annual impairment review. The group has elected not to restate previous business combinations as permittedby IFRS 1. However since the group has adopted IFRS later than its parent,Severn Trent Plc, it has elected under IFRS 1(24a) to measure its assets andliabilities at the carrying amounts that would be included in Severn Trent plc'sconsolidated financial statements based on Severn Trent plc's date of transitionto IFRS of 1 April 2004. As a result, amortisation relating to goodwill on the balance sheet at the dateof transition has been reversed resulting in an increase in the carrying valueof goodwill for £41 million for the 52 weeks ended 26 March 2005. The impact ofthe reversal of amortisation of goodwill to the income statement for the 26weeks ended 23 September 2005 and 53 weeks ended 31 March 2006 was £11.4 millionand £41 million respectively, consequently increasing the net assets by anequivalent amount. iii) IAS 12 - Income taxes Under UK GAAP deferred tax was provided in accordance with Financial ReportingStandard 19 'Deferred Tax' (FRS 19) on timing differences between the accountingand taxable profits. IAS 12 takes a different conceptual approach to deferred tax than that appliedby FRS 19. Under IAS 12 deferred tax must be provided for all temporarydifferences between the carrying amount of an asset or liability in the balancesheet and its tax base whereas UK GAAP requires deferred tax to be provided foron timing differences between the treatment of items in the tax computation andthe income statement. This change in approach results in deferred tax provisionsunder IFRS for items which under UK GAAP would be permanent differences andhence would not be provided for. The impact of the adoption of IFRS on deferred taxes as at 26 March 2005, 23September 2005 and 31 March 2006 is to reduce net assets by £3.4 million, £2.6million and £10.3 million respectively. Since our prospectus was published,further clarification has become available on the deferred tax arising ongoodwill existing at the date of transition from UK GAAP to IFRS. By comparisonwith the prospectus, the impact of this has been to increase the tax charge andreduce profit after tax for the 53 weeks ended 31 March 2006 by £3.0 million,and to reduce shareholders' equity by £0.7 million at 26 March 2005, and £3.7million at 31 March 2006. iv) IAS 19 - Employee benefits As at the date of transition the group prepared its UK GAAP results inaccordance with Statement of Standard Accounting Practice 24 'Accounting forPension Costs' (SSAP 24), whilst as at 31 March 2006 the group adopted FinancialReporting Standards 17 'Retirement benefits' (FRS 17). Under SSAP 24, any pension scheme surplus or deficit identified at the mostrecent actuarial valuation is recognised through the profit and loss accountover the average expected remaining service lives of current employees. The netpension cost under SSAP 24 therefore includes both the cost of providing anadditional year of pension benefits to employees (regular cost) and an elementof the surplus or deficit relating to previous years (variation). The differencebetween employer's contributions paid and the SSAP 24 net pension cost isrecognised as a prepayment or accrual, which does not necessarily reflect theactuarial position. Interest is calculated on this balance sheet entry and isincluded in the net pension cost. Under International Accounting Standard 19 'Employee Benefits' (IAS 19), definedbenefit scheme assets and liabilities have been valued at each balance sheetdate and the resulting asset or liability is immediately recognised on thebalance sheet. At the start of each year, assumptions are made to enable thecurrent service cost, the expected return on assets and the interest cost iscalculated. These amounts are charged to the income statement for the year.Where actual experience differs from the assumptions made at the start of afinancial year, actuarial gains and losses are recognised through the statementof recognised income and expense. As at 26 March 2005 and 23 September 2005, the retirement obligation liability,in accordance with IAS 19, was £43.4 million and £44.2 million respectively.Consequently reducing the net assets by an equivalent amount. Since the group adopted FRS 17 as at 31 March 2006, a retirement obligationliability of £22.1 million was recorded net of a £9.5 million deferred taxasset. Under IAS 19, the retirement benefit obligation has been re-measuredresulting an increase to the liability of £2.1 million after thereclassification of the deferred tax asset which is disclosed separately. The group's pension charge, based on IAS 19, has been reduced by £1.1 millionfor the 26 weeks ended 23 September 2005 and £0.6 million for the 53 weeks ended31 March 2006. Similarly, finance costs arising from the interest cost on thescheme liabilities net of the expected return on plan assets have been reducedby £0.3 million for the 26 weeks ended 23 September 2005 and increased by £0.1million for the 53 weeks ended 31 March 2006. The recognition of previously unrecorded holiday pay liabilities resulted in areduction of net assets as at 23 September 2005 by £0.9 million, with a deferredtax asset arising of £0.5 million. The impact as at 31 March 2006 was areduction in net assets by £2.2 million, with a deferred tax asset arising of£0.7 million. v) IAS 38 - Intangible assets Under IAS 38, computer software assets have been reclassified from property,plant and equipment to other intangible assets. vi) IAS 17 - Leases In accordance with IFRS 1 and IAS 17, the group has reviewed the classificationof all of its leases. In reviewing leases of land and buildings in accordancewith IAS 17, the land and buildings elements of the lease need to be consideredseparately. On this basis a number of leases have been reclassified fromoperating leases to finance leases. This has resulted in an increase in fixedassets of £2.8 million and a finance lease creditor of £3.7 million as at 23September 2005 and 31 March 2006. vii) IAS 32 & 39 - Financial instruments IAS 32 and IAS 39 addresses the accounting and reporting of financialinstruments. Under UK GAAP, certain financial liabilities were derecognised atthe point when transfer of economic benefit was considered to be highlyunlikely. IAS39 requires derecognition at the point of extinguishment, resultingin the recognition of liabilities up to the point of legal expiration. This has resulted in an increase in trade and other payables as at 26 March2005, 23 September 2005 and 31 March 2006 of £1.5 million. viii) IAS 37 - Provisions Under IAS 37 the group has reclassified provisions that it expects to beutilised within one year to current liabilities. The amount reclassified at 23September 2005 and 31 March 2006 was £14.7 million and £16.7 millionrespectively. 11 PREVIOUS HALF YEAR ON HALF YEAR FINANCIAL HISTORY----------------------------------------------------- The following financial history has been prepared in accordance withInternational Financial Reporting Standards. ------------------------------------ 1st half 2nd half Full year 2004/05 2004/05 2004/5 £m £m £m ------------------------------------ RevenueCollection 186.4 187.4 373.8Special Waste 23.3 23.6 46.9Resource Recovery & Landfill 138.4 126.6 265.0Power Generation 6.6 7.7 14.3Less inter and intra-segment revenue (34.6) (35.7) (70.3) ------------------------------------ Total 320.1 309.6 629.7 ==================================== Operating profitCollection 28.0 23.6 51.6Special Waste 0.6 0.9 1.5Resource Recovery & Landfill 21.8 17.9 39.7Power Generation 2.4 2.7 5.1Shared service and corporate costs (11.3) (9.5) (20.8) ----------------------------------- Total 41.5 35.6 77.1 =================================== ------------------------------------------------ 1st half 2nd half Full year Full year 2005/06 2005/06 (1) 2005/06 (1) 2005/06 £m £m £m £m ------------------------------------------------ RevenueCollection 212.6 208.3 420.9 429.0Special Waste 23.7 24.6 48.3 49.2Resource Recovery & Landfill 154.4 142.7 297.1 302.8Power Generation 8.8 9.7 18.5 18.9Less inter and intra-segmentrevenue (43.5) (42.4) (85.9) (87.6) ------------------------------------------------ Total 356.0 342.9 698.9 712.3 ================================================ Operating profitCollection 30.4 28.6 59.0 60.1Special Waste 0.7 1.2 1.9 1.9Resource Recovery & Landfill 22.0 18.0 40.0 40.8Power Generation 3.6 3.8 7.4 7.5Shared service and corporatecosts (11.7) (11.8) (23.5) (24.0) ------------------------------------------------ Total 45.0 39.8 84.8 86.3 ================================================ (1) The financial information for 2005/6 full year and second half have beenrestated to reflect a 52 week period, the reported 53 week period is shown ascomparative and is also reported within the main financial statements. 12 BASIS OF PREPARATION OF FINANCIAL STATEMENTS AND STATUS OF FINANCIAL INFORMATION-------------------------------------------------------------------------- The financial information for the 26 weeks ended 29 September 2006 included inthis interim report (herewith referred to as the 'interim financialinformation') comprises the consolidated income statement, the consolidatedbalance sheet, the consolidated cash flow statement, the consolidated statementof recognised income and expense, the accounting policies and the related notes. This interim statement has been prepared in accordance with the Listing Rules ofthe Financial Services Authority. In preparing this interim financialinformation management has used the principle accounting policies set out onpages 9 to 13. The group has chosen not to adopt IAS 34 'Interim financial statements', inpreparing its 2006 interim statements and, therefore, this interim financialinformation is not in compliance with IFRS. The group has reviewed new standards and amendments to standards andinterpretations issued on or after 1 April 2006 and reports that they are eithernot relevant or have no material impact on their financial statements. The interim financial information is unaudited but has been reviewed by theauditors and their review opinion is included in this interim report. Thefinancial information set out in this report does not constitute statutoryaccounts as defined in Section 240 of the Companies Act 1985. Financialinformation for the 53 weeks ended 31 March 2006 included herein is derived fromthe statutory accounts for that year (prepared under UK GAAP), which have beendelivered to the Registrar of Companies. The auditors' report on those accountswas not qualified and did not contain statements under Section 237(2) or Section237(3) of the Companies Act 1985. The next annual financial statements of the group will be prepared in accordancewith International Financial Reporting Standards as adopted for use by theEuropean Union. 13 WEBSITE POLICY-------------------- The directors are responsible for the maintenance and integrity of the company'swebsite. Information published on the internet is accessible in many countrieswith different legal requirements. Legislation in the United Kingdom governingthe preparation and dissemination of financial statements may differ fromlegislation in other jurisdictions. REVIEW OPINION OF DELOITTE & TOUCHE LLP======================================= Introduction We have been instructed by the company to review the financial information forthe 26 weeks ended 29 September 2006 which comprise the consolidated incomestatement, the consolidated balance sheet, the consolidated cash flow statement,the consolidated statement of recognised income and expense, the accountingpolicies and related notes 1 to 13. We have read the other information containedin the interim report and considered whether it contains any apparentmisstatements or material inconsistencies with the financial information. This report is made solely to the company in accordance with Bulletin 1999/4issued by the Auditing Practices Board. Our work has been undertaken so that wemight state to the company those matters we are required to state to them in anindependent review report and for no other purpose. To the fullest extentpermitted by law, we do not accept or assume responsibility to anyone other thanthe company, for our review work, for this report, or for the conclusions wehave formed. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of, and has been approved by, the directors. The directorsare responsible for preparing the interim report in accordance with the ListingRules of the Financial Services Authority which require that the accountingpolicies and presentation applied to the interim figures are consistent withthose applied in preparing the preceding annual accounts except where anychanges, and the reasons for them, are disclosed. Adoption of International Financial Reporting Standards As disclosed in note 12, the next annual financial statements of the group willbe prepared in accordance with International Financial Reporting Standards asadopted for use in the EU. Accordingly, the interim report has been prepared inaccordance with the recognition and measurement criteria of IFRS and thedisclosure requirements of the Listing Rules. The accounting policies are consistent with those that the directors intend touse in the annual financial statements. There is, however, a possibility thatthe directors may determine that some changes to these policies are necessarywhen preparing the full annual financial statements for the first time inaccordance with IFRSs as adopted for use in the EU. Review work performed We conducted our review in accordance with the guidance contained in Bulletin1999/4 issued by the Auditing Practices Board for use in the United Kingdom. Areview consists principally of making enquiries of group management and applyinganalytical procedures to the financial information any underlying financial dataand, based thereon, assessing whether the accounting policies and presentationhave been consistently applied unless otherwise disclosed. A review excludesaudit procedures such as tests of controls and verification of assets,liabilities and transactions. It is substantially less in scope than an auditperformed in accordance with International Standards on Auditing (UK andIreland) and therefore provides a lower level of assurance than an audit.Accordingly, we do not express an audit opinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the 26 weeks ended29 September 2006. Deloitte & Touche LLPChartered AccountantsBirminghamUnited Kingdom5 December 2006 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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