19th Sep 2005 06:00
19 September 2005SEVERN TRENT PLCInternational Financial Reporting StandardsSevern Trent Plc ("Severn Trent" or the "group") is required to report itsgroup consolidated financial results under IFRS from 1 April 2005. Thereforethe first published results under IFRS will be the interim results for the sixmonths ending 30 September 2005 due on 6 December 2005.Severn Trent is holding a presentation on 19 September 2005 at 4.00pm on itsimplementation of International Financial Reporting Standards ("IFRS"). Thepresentation will outline the impact of IFRS on Severn Trent's 2004/05 interimand full year group profit and loss accounts and balance sheet. Thepresentation, together with the presentation slides, will be available as asimultaneous webcast on the Severn Trent website (www.severntrent.com) andwill remain on the website for subsequent viewing.As previously announced on 7 June 2005, the adoption of IFRS will impact onSevern Trent's future reported financial results and is expected to lead to areduction in reported net assets and increased volatility in reported profitsand earnings per share. It is important to note that the adoption of IFRSrepresents an accounting change and does not change the group's businessstrategy, commercial operations, dividend policy, debt covenants or regulatedcapital value and has only a minor impact on cash flows.This statement presents and explains the unaudited reconciliations of thegroup balance sheet as at 31 March 2005 under UK GAAP to IFRS and theunaudited reconciliation of the group profit and loss account under UK GAAP tothe group income statement under IFRS for the year ended 31 March 2005. Inaddition, the unaudited reconciliations of the group balance sheets as at 1April and 30 September 2004 under UK GAAP to IFRS and the unauditedreconciliations of the group profit and loss account under UK GAAP to thegroup income statement under IFRS for the six months ended 30 September 2004are presented in the Appendix.OverviewThis statement explains how Severn Trent's reported performance and financialposition are affected by the change from UK GAAP to IFRS and provides detailsof that change prior to the publication of our interim results for the sixmonths ending 30 September 2005.The impact on the group's reported results, excluding exceptionals*, andfinancial position of moving to IFRS was:- Profit before tax and goodwill amortisation for the year ended 31 March 2005decreased by ‚£27.6 million.- Adjusted basic earnings per share increased by 1.0p per share to 56.6p.- PBITDA interest cover decreased from 4.3 to 4.0 times.- The effective tax rate decreased from 17.2% to 16.6%.- Net assets as at 31 March 2005 reduced by ‚£316 million.- Net debt as at 31 March 2005 increased by ‚£4.6 million but underlying cashflows are unaffected.- Gearing increased by 4 percentage points to 61%.* Exceptional means material restructuring, termination and disposal items.The major movements affecting net assets are reductions arising from theremoval of the discount on deferred tax ‚£397 million and from recognition ofthe pension liability on the balance sheet ‚£312 million, partly offset byincreases in net assets from fair valuing infrastructure assets ‚£275 millionand timing of recognition of dividends ‚£105 million.The group has taken advantage of the exemption in IFRS 1 from the requirementto restate comparative information for IAS 32 and 39. These standards will beapplied with effect from 1 April 2005. The most significant impact of adoptingthese standards will be a further reduction in net assets of ‚£67.9 million dueto the mark to market of hedges and increased volatility in the profit andloss account. During the current financial year up to 31 August, the fairvalue of these liabilities had increased by ‚£38 million resulting in a chargeto finance costs and a further reduction in net assets as a consequence of themovement in the forward yield curve. Further details of the impact of applyingthese standards as at 1 April 2005 are set out below.In addition to the changes in measurement described above, IFRS also requiresa number of changes in presentation which have no impact on reported resultsor net assets.The main accounting changes for the year ended 31 March 2005, which areexplained in more detail below, arise from the following IAS and IFRS:- IAS 10 (Events after the Balance Sheet Date)- IAS 12 (Income Taxes)- IAS 16 (Property Plant and Equipment)- IAS 17 (Leases)- IAS 19 (Employee Benefits)- IFRS 2 (Share Based Payments)- IFRS 3 (Business Combinations)Enquiries:Julian Wais 0121 722 4523 (on the day)Head of Investor Relations 0121 722 4295Basis of preparationThe financial statements presented have been prepared in accordance with IFRS,as endorsed by the EU or where there is a reasonable expectation ofendorsement by the EU before the group prepares its first annual Accounts inaccordance with IFRS for the year ending 31 March 2006, and interpretationsissued by the International Financial Reporting Interpretations Committee(IFRIC) or its predecessor body. The group's IFRS accounting policies are setout on pages 12 to 22.The group has taken advantage of the exemption in IFRS 1 from the requirementto restate comparative information for IAS 32 and 39. These Standards will beapplied with effect from 1 April 2005.First time adoptionIFRS 1 (First-time Adoption of International Financial Reporting Standards)requires that IFRS be applied retrospectively unless a specific exemption isapplied. In preparing these financial statements the group has adopted thefollowing exemptions:- Not to apply IFRS 3 (Business Combinations) retrospectively to past businesscombinations;- To establish a deemed cost for the opening balance sheet carrying value ofthe water and wastewater infrastructure fixed assets by reference to the fairvalue of these assets at the date of transition to IFRS, 1 April 2004.- To recognise all cumulative actuarial gains and losses relating to definedbenefit pension schemes at the date of transition;- To deem cumulative translation differences for all foreign operations to bezero at the date of transition;- Not to apply the requirements of IFRS 2 (Share Based Payments) to optionsgranted under the group's SAYE schemes prior to 7 November 2002. Therequirements of IFRS 2 have been applied to shares conditionally awarded underthe group's LTIP schemes before 7 November 2002 but not vested or lapsedbefore 1 April 2004 since the fair values of these awards has been publiclydisclosed previously.Summary of significant differences between IFRS and UK GAAP that affect theGroupThis section sets out the significant differences between UK GAAP and IFRSthat affect the group and quantifies the impact on the group's reportedresults and financial position.This should be read in conjunction with the reconciliations of the groupbalance sheets and income statement that are set out below.Property plant and equipmentUnder UK GAAP, the water and wastewater infrastructure assets within SevernTrent Water were accounted for in accordance with the renewals accountingprovisions of FRS 15 (Tangible Fixed Assets). Such provisions are not presentwithin IAS 16 and it is therefore necessary to change the accounting policiesfor these assets on transition to IFRS. The accounting policies applied underUK GAAP in respect of all other fixed assets are compliant with IFRS andremain appropriate.Under renewals accounting the water and wastewater infrastructure networks areassumed to be single assets. Expenditure on infrastructure assets relating toincreases in capacity or enhancements to the networks and on maintaining theoperating capability of the networks in accordance with defined standards ofservice are capitalised. The depreciation charged is the estimated anticipatedlevel of annual expenditure required to maintain the operating capability ofthe networks.Under IAS 16 this treatment may not be applied. Therefore, the significantparts within the infrastructure networks have been identified and useful livesand residual values determined so that each significant part may bedepreciated individually.As the UK GAAP net book value of the infrastructure networks was determinedusing an accounting policy not compliant with IFRS a deemed cost has beenestablished for the opening balance sheet carrying value of the infrastructurenetworks by reference to the fair value at the date of transition, 1 April2004 (as permitted by IFRS 1).The election to record the carrying value of the water and wastewaterinfrastructure networks at fair value, and to use that fair value as thedeemed cost in the opening IFRS balance sheet, increases net assets by ‚£275.5million as at 31 March 2005 compared with UK GAAP.The segments recognised within the water and wastewater networks have beenbased upon asset class since no single pipe or section of sewer is significantcompared with the total value of the networks. This has led to theidentification of 6 segments (impounding reservoirs, raw water aqueducts,large water mains, other water mains and pipes, strategic sewers and othersewers) which have been assigned zero residual values at the end of theiruseful lives. The lives allocated to these segments range from 80 - 250 years.The depreciation on these assets results in an additional charge of ‚£19.8million in the 2005 IFRS income statement compared with UK GAAP.Since the classification of expenditure incurred in maintaining the networksbetween operating expenditure and capital expenditure has not changed there isno change to the repairs and maintenance expenditure charged to the incomestatement over the long term. However, under UK GAAP such expenditure wasincluded in the calculation of the infrastructure renewals charge and wastherefore smoothed over an Asset Management Period ("AMP"). Under IAS 16,repairs and maintenance expenditure will be charged to the income statement inthe period in which it is incurred. This will introduce an element ofvolatility into the income statement since the level of such expenditure canfluctuate significantly from one reporting period to the next, within a singleAMP.Retirement benefitsThe group prepared its 2005 UK GAAP results in accordance with SSAP 24(Accounting for Pension Costs). Under SSAP 24, any pension scheme surplus ordeficit identified at the most recent actuarial valuation is recognisedthrough the profit and loss account over the average expected remainingservice lives of current employees. The net pension cost under SSAP 24therefore includes both the cost of providing an additional year of pensionbenefits to employees (regular cost) and an element of the surplus/deficitrelating to previous years (variation). The difference between employer'scontributions paid and the SSAP 24 net pension cost is recognised as aprepayment or accrual, which does not necessarily reflect the actuarialposition. Interest is calculated on this balance sheet entry and is includedin the net pension cost.Under IAS 19, defined benefit scheme assets and liabilities have been valuedat each balance sheet date and the resulting asset or liability is immediatelyrecognised on the balance sheet. At the start of each year, assumptions aremade to enable the current service cost, the expected return on assets and theinterest cost to be calculated. These amounts are charged to the incomestatement for the year. Where actual experience differs from the assumptionsmade at the start of a financial year, actuarial gains and losses arerecognised through the statement of recognised income and expense.The expected return on assets and the interest on the liabilities arerecognised within finance costs under IAS 19. Under SSAP 24 all pension costsare recognised within operating profits.The adoption of IAS 19 increases the 2005 profit before tax by ‚£18.1 millioncompared with UK GAAP, representing increased operating profits of ‚£19.4million and increased finance costs of ‚£1.3 million. Actuarial gains amountingto ‚£43.2 million have been recognised in reserves.At 31 March 2005, the derecognition of the UK GAAP SSAP 24 liability increasesnet assets by ‚£5.6 million. Net assets are then reduced by the recognition ofthe IAS 19 deficit of ‚£317.5 million.GoodwillGoodwill is not amortised under IFRS, but is subject to annual impairmentreviews. The reviews carried out at the transition date and 31 March 2005indicated that no impairment had arisen.Since goodwill is no longer being amortised, the 2005 amortisation charge of‚£30.1 million is eliminated.Restructuring costs and termination of operations for 2005 are reduced by ‚£9.9million. IFRS does not allow the UK GAAP requirement to charge goodwillpreviously written off directly to reserves as part of the loss ontermination.Deferred taxThe most significant impact of IAS 12 for the group is that IAS 12 does notpermit deferred tax balances to be discounted whereas FRS 19 (Deferred Tax)permits, but does not require, discounting of deferred tax assets andliabilities.The group's policy has been to apply discounting to its deferred taxliability. This is of particular significance to a utility business where anyreversal of timing differences is likely to be deferred long into the futuredue to the long asset lives of network assets.The impact of eliminating discounting from the accounting for deferred tax isto increase the deferred tax charge in the year ended 31 March 2005 by ‚£0.8million and to increase the deferred tax liability at that date by ‚£396.6million.IAS 12 takes a different conceptual approach to deferred tax than that appliedby FRS 19. Under IAS 12 deferred tax must be provided for on all temporarydifferences between the carrying amount of an asset or liability in thebalance sheet and its tax base whereas UK GAAP requires deferred tax to beprovided for on timing differences between the treatment of items in the taxcomputation and the income statement. This change in approach results indeferred tax provisions under IFRS for items which under UK GAAP would bepermanent differences and hence would not be provided for. The impact on thegroup's IFRS financial statements is to decrease the deferred tax charge inthe year ended 31 March 2005 by ‚£0.2 million and to increase the deferred taxliability at that date by ‚£20.4 million.The other IFRS adjustments result in a deferred tax credit of ‚£3.1 million inthe year ended 31 March 2005 and a decrease in the deferred tax liability atthat date of ‚£14.2 million.Dividends payableUnder IAS 10 dividends payable are not recognised as liabilities until theyhave been appropriately authorised and are unconditional obligations of thegroup. Historically, under UK GAAP dividends declared for a particular periodhave been recognised in that period's financial statements, irrespective ofthe date that they are declared or approved by shareholders.In practice this means that interim dividends will now be recognised in thesecond half of the financial year and final dividends will be recognised inthe first half of the following year.The impact on the group's IFRS financial statements is to reduce the amount ofdividends appropriated in the year ended 31 March 2005 by ‚£3.7 million and toincrease net assets at 31 March 2005 by ‚£104.6 million.Other differencesAll other differences between IFRS and UK GAAP are included within the othercolumn. The main adjustments are:- The impact of fair valuing shares awarded under LTIP schemes that had notvested before 1 April 2004 and share options granted under the group's SAYEschemes after 7 November 2002 in accordance with IFRS 2; and- A change in the classification of the buildings element of certain propertyleases from operating to finance leases arising from the requirement in IAS 17to consider the land and buildings elements of such leases separately;The impact of these adjustments on profit before tax and net assets, bothindividually and in aggregate, is not considered to be material although theimpact of IFRS 2 will increase going forward as more SAYE options fall withinits scope.Financial instrumentsIFRS 1 permits the group to continue to apply UK GAAP in respect of financialinstruments for the year ended 31 March 2005 and to apply IAS 32 and 39 witheffect from 1 April 2005. The comparative information for 2004/05 within the31 March 2006 IFRS financial statements will therefore reflect financialinstruments accounted for under the group's existing UK GAAP accountingpolicies.However, for information purposes, the significant transition adjustmentsexpected to be required to implement IAS 32 and 39 on 1 April 2005 aredescribed below. The most significant impact of IAS 39 will be in relation tofinancial instruments, principally interest rate swaps and cross currencyswaps, that are held to hedge the group's exposure to changes in interestrates and exchange rates.Under UK GAAP, debt is initially recorded at the net proceeds of issue. Insubsequent periods this is adjusted for accrued finance costs and paymentsmade. The fair values of derivatives are not recognised in the balance sheethence the balance sheet values and charges in the profit and loss account arerelatively stable.Under IAS 39, the default treatment is for debt to be carried at amortisedcost, whilst derivatives are recognised separately on the balance sheet atfair value with movements in those fair values reflected through the incomestatement. This has the potential to introduce considerable volatility both tothe income statement and to the balance sheet. Therefore, for fair valuehedges, IAS 39 allows changes in the recognised value of hedged debt that areattributable to the hedged risk to be adjusted through the income statement.In the case of cash flow hedges, movements in the fair value of derivativesare deferred within reserves until they can be recycled through the incomestatement to offset the future income statement effect of changes in thehedged risk.However, in order to apply this treatment, it must be demonstrated that thederivative has been, and will continue to be, an effective hedge of the hedgedrisk in the underlying debt within the strict criteria set out in IAS 39. Anyhedge ineffectiveness, provided it is within the range deemed acceptable byIAS 39, is recognised immediately within the income statement. At 1 April2005, the group held interest rate swaps as hedges against its exposure tointerest rate fluctuations for periods up to 2030. The swap portfolio isdesigned to hedge the debt portfolio and provide an overall effective economichedge. However, these swaps are not individually designated to particularliabilities and so do not meet the criteria for hedge accounting under IAS 39.As a result of applying IAS 39 at 1 April 2005 net assets will be reduced by‚£67.9 million as a result of the swaps that do not meet the hedge accountingcriteria.During the current financial year up to 31 August, the fair value of theseliabilities had increased by ‚£37.8 million resulting in a charge to financecosts and a further reduction in net assets as a consequence of the movementin the forward yield curve.Other mattersVolatility in future earningsUnder IFRS infrastructure renewals expenditure will be charged to the incomestatement in the year in which it is incurred whereas under UK GAAP it is"smoothed" over the AMP period. Under IFRS, fluctuations in actual expenditurewill result in volatility in earnings.Severn Trent Water infrastructure renewals expenditure for the 5 years of theAMP4 programme is not expected to be incurred smoothly at 20% average perannum. It is instead presently expected to be incurred at a rate higher thanthat average over the period of 1 October 2005 to 31 March 2007 and at a ratelower than that average in the three years 1 April 1007 to 31 March 2010.Under IAS 19, pension costs are sensitive to changes in actuarial assumptions,in particular those for interest rates and mortality. A 1% shift in corporatebond yields would result in a change in the annual pension cost of ‚£10 - 12million.IAS 39 will give rise to earnings volatility due to the requirement to fairvalue swaps. However, this volatility is not a cash item, has no economiceffect, and will reverse over the lives of the swaps.Subsidiary statutory accountsThe group's current intention is that all of its subsidiary companies willcontinue to prepare their individual statutory accounts under UK GAAP (orlocal GAAP for overseas subsidiaries). The costs and benefits of this approachwill be regularly reviewed, and IFRS may be implemented in subsidiarystatutory accounts in the future if found appropriate.Corporation taxSince the individual subsidiary companies will continue to apply UK GAAP intheir statutory accounts there will be no impact on their corporation taxliabilities. The impact of adopting IFRS in the parent company financialstatements on its corporation tax position is not considered to besignificant.Distributable reserves and dividend policyDividends are paid from individual company reserves. As the group's subsidiarycompanies are not adopting IFRS at this time, their distributable reserveswill be unaffected by the group's implementation of IFRS. Of the significantadjustments impacting the group at 31 March 2005, only the recognition of thepension scheme deficit on the balance sheet is considered to have a materialimpact on the parent company's distributable reserves. However, it should benoted that the group's UK subsidiaries will be required to implement FRS 17(Retirement Benefits) with effect from 1 April 2005. The combined impact ofimplementing IAS 19 in the parent company and FRS 17 in the UK subsidiarieswill be to reduce distributable reserves by approximately ‚£220 million at 31March 2005.The implementation of IAS 39 in the parent company on 1 April 2005 will reducedistributable reserves by ‚£29.1 million.At 31 March 2005 the parent company had distributable reserves in the order of‚£1.2 billion. The group anticipates that the implementation of IFRS will haveno impact on its current stated dividend policy.Debt covenantsAll of the financial covenants relating to the group's debt are calculated inaccordance with UK GAAP at the time that the covenant was set. Therefore theimplementation of IFRS will have no impact on the group's compliance with itsdebt covenants.Reconciliation of the group Profit and Loss Account under UK GAAP to the groupIncome Statement under IFRS for the year ended 31 March 2005 UK GAAP IFRS Property Retirement Goodwill Deferred Other IFRS reclassification Plant & Benefits tax Equipment IAS 16 IAS 19 IFRS 3 IAS 12 ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m------------------------------------------------------------------------------------------------------------------------Revenue 2,081.2 - - - - - (0.1) 2,081.1------------------------------------------------------------------------------------------------------------------------ Operating costs before goodwill (1,654.3) - (38.7) 16.8 - - (2.8) (1,679.0)amortisation and material itemsGoodwill amortisation (30.1) - - - 30.1 - - -Restructuring costs and (13.0) (13.7) - 2.6 - - 9.9 (14.2)termination of operationsProfit on disposal of property - 11.9 - - - - - 11.9and investments------------------------------------------------------------------------------------------------------------------------Total operating costs (1,697.4) (1.8) (38.7) 19.4 30.1 - 7.1 (1,681.3)Group operating profit 383.8 (1.8) (38.7) 19.4 30.1 - 7.0 399.8Share of operating profit of 11.7 (11.7) - - - - - -joint ventures and associatesExceptional loss on sale and (9.4) 9.4 - - - - - -termination of operationsExceptional profit on disposal 7.6 (7.6) - - - - - -of fixed assets------------------------------------------------------------------------------------------------------------------------Profit before finance costs 393.7 (11.7) (38.7) 19.4 30.1 - 7.0 399.8Net finance costs (176.4) 8.7 - (1.3) - - (0.3) (169.3)Share of profit of associates - 1.8 - - - - - 1.8and joint ventures------------------------------------------------------------------------------------------------------------------------Profit on ordinary activities 217.3 ( 1.2) (38.7) 18.1 30.1 - 6.7 232.3before taxationIncome tax expenseCurrent tax (40.9) 1.2 - - - - - (39.7)Deferred tax (36.9) - - - 2.5 - (34.4)Total income tax expense (77.8) 1.2 - - - 2.5 - (74.1)------------------------------------------------------------------------------------------------------------------------Profit for the period 139.5 - (38.7) 18.1 30.1 2.5 6.7 158.2------------------------------------------------------------------------------------------------------------------------ Attributable to:Equity holders of the parent 138.8 - (38.7) 18.1 30.1 2.5 6.7 157.5Minority interests 0.7 - - - - - - 0.7------------------------------------------------------------------------------------------------------------------------ 139.5 - (38.7) 18.1 30.1 2.5 6.7 158.2------------------------------------------------------------------------------------------------------------------------Earnings per share (pence)Basic 40.3 - (11.2) 5.3 8.7 0.7 1.9 45.7Diluted 40.0 - (11.1) 5.2 8.6 0.7 1.9 45.3Adjusted basic before 55.6 - (11.2) 4.5 8.7 - (1.0) 56.6exceptional items* and deferredtaxAdjusted diluted before 55.2 - (11.1) 4.4 8.6 - (0.9) 56.2exceptional items* and deferredtax*Exceptional items means material restructuring, termination and disposal items.Reconciliation of the Group Balance sheet under UK GAAP to IFRS as at 31 March 2005 UK GAAP IFRS Property Retirement Goodwill Deferred Dividends Other IFRS reclassification Plant & Benefits Tax Equipment IAS 16 IAS 19 IFRS 3 IAS 12 IAS 10 ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m------------------------------------------------------------------------------------------------------------------------Non-current assetsProperty plant and 5,440.6 (107.5) 306.5 (2.0) - - - 1.8 5,639.4equipmentIntangible assetsGoodwill 469.5 - - - 30.1 - - (0.5) 499.1Other intangible assets 14.2 107.5 - - - - - 4.1 125.8Investments in joint 9.5 - - - - - - - 9.5venturesInvestments in associates 16.3 - - - - - - - 16.3Available for sale 0.7 - - - - - - 0.7financial assets------------------------------------------------------------------------------------------------------------------------Non-current assets 5,950.8 - 306.5 (2.0) 30.1 - - 5.4 6,290.8------------------------------------------------------------------------------------------------------------------------Current assetsInventories 66.0 - - - - - - - 66.0Trade and other 499.4 - - (7.4) - - - 0.5 492.5receivablesDerivative financial - - - - - - - - -instrumentsCash and cash equivalents 90.8 - - - - - - - 90.8------------------------------------------------------------------------------------------------------------------------Current assets 656.2 - - (7.4) - - 0.5 649.3------------------------------------------------------------------------------------------------------------------------Total assets 6,607.0 - 306.5 (9.4) 30.1 - - 5.9 6,940.1------------------------------------------------------------------------------------------------------------------------Current liabilitiesTrade and other payables (669.4) - (31.0) - - - 104.6 (13.2) (609.0)Borrowings (486.5) - - - - - - - (486.5)Derivative financial - - - - - - - - -instrumentsCurrent income tax (69.6) - - - - - - - (69.6)liabilitiesShort-term provisions - - - - - - - - -------------------------------------------------------------------------------------------------------------------------Current liabilities (1,225.5) - (31.0) - - - 104.6 (13.2) (1,165.1)------------------------------------------------------------------------------------------------------------------------Non-current liabilitiesTrade and other payables (17.9) - - 13.4 - - - - (4.5)Borrowings (2,494.3) - - - - - - (4.6) (2,498.9)Derivative financial - - - - - - - - -instrumentsDeferred tax liabilities (499.8) - - - - (402.8) - - (902.6)Retirement benefit - - - (317.5) - - - - (317.5)obligationsLong-term provisions (124.4) - - 1.6 - - - - (122.8)Deferred income (45.1) - - - - - - - (45.1)------------------------------------------------------------------------------------------------------------------------Non-current liabilities (3,181.5) - - (302.5) - (402.8) (4.6) (3,891.4)------------------------------------------------------------------------------------------------------------------------Total liabilities (4,407.0) - (31.0) (302.5) - (402.8) 104.6 (17.8) (5,065.5)------------------------------------------------------------------------------------------------------------------------Net assets 2,200.0 - 275.5 (311.9) 30.1 (402.8) 104.6 (11.9) 1,883.6------------------------------------------------------------------------------------------------------------------------EquityShare capital 264.2 - - - - - - - 264.2Other reserves 156.1 - 314.2 - - - - - 470.3Retained earnings 1,777.8 - (38.7) (311.9) 30.1 (402.8) 104.6 (11.9) 1,147.2------------------------------------------------------------------------------------------------------------------------ 2,198.1 - 275.5 (311.9) 30.1 (402.8) 104.6 (11.9) 1,881.7Minority interests 1.9 - - - - - - - 1.9------------------------------------------------------------------------------------------------------------------------Total equity 2,200.0 - 275.5 (311.9) 30.1 (402.8) 104.6 (11.9) 1,883.6------------------------------------------------------------------------------------------------------------------------IFRS Accounting Policies for the year ended 31 March 2005a) Basis of preparationThe financial statements have been prepared in accordance with InternationalFinancial Reporting Standards (IFRS), International Accounting Standards (IAS)and IFRIC interpretations issued and effective or issued and early adopted asat 31 March 2005. These standards are subject to on going review andendorsement by the European Union or possible amendment by interpretiveguidance from the International Accounting Standard Board (IASB) and theInternational Financial Reporting Interpretations Committee (IFRIC) and aretherefore still subject to change.The financial statements have been prepared under the historical costconvention as modified by the revaluation of financial assets and liabilities(including derivative instruments) at fair value through profit and loss.The preparation of financial statements in conformity with IFRS requires theuse of estimates and assumptions that affect the reported amounts of assetsand liabilities at the date of the financial statements and the reportedamount of revenues and expenses for the reporting period. Although theseestimates are based on management's best knowledge of the amount, event oractions, actual results may ultimately differ from those estimates.b) First time adoption of IFRSThe group's date of transition to IFRS is 1 April 2004 and all comparativeinformation in the financial statements has been restated to reflect thegroup's adoption of IFRS, except where otherwise required or permitted byInternational Financial Reporting Standard 1 - `First Time Adoption ofInternational Financial Reporting Standards' (IFRS1).IFRS1 requires an entity to comply with each IFRS effective at the reportingdate for its first IFRS financial statements. As a general principle, IFRS1requires the standards effective at the reporting date to be appliedretrospectively, however, retrospective application is prohibited in someareas. In addition, there are a number of optional exemptions from fullretrospective application of IFRSs within IFRS1.Group policy on optional IFRS1 exemptions is as follows:- Not to apply IFRS 3 (Business Combinations)' retrospectively to pastbusiness combinations;- To establish a deemed cost for the opening balance sheet carrying value ofthe water and wastewater infrastructure fixed assets by reference to the fairvalue of these assets at the date of transition to IFRS, 1 April 2004.- To recognise all cumulative actuarial gains and losses relating to definedbenefit pension schemes at the date of transition;- To deem cumulative translation differences for all foreign operations to bezero at the date of transition;- Not to apply the requirements of IFRS 2 (Share Based Payments) to optionsgranted under the group's SAYE schemes prior to 7 November 2002. Therequirements of IFRS 2 have been applied to shares conditionally awarded underthe group's LTIP schemes before 7 November 2002 but not vested or lapsedbefore 1 April 2004 since the fair values of these awards has been publiclydisclosed previously.c) Basis of consolidationThe financial statements include the results of Severn Trent Plc and itssubsidiary, joint ventures and associated undertakings.The results of subsidiaries, joint ventures and associated undertakings areincluded from the date of acquisition or incorporation, and excluded from thedate of disposal. The results of subsidiaries are consolidated where the grouphas the power to control a subsidiary. The results of joint ventureundertakings are accounted for on an equity basis where the company exercisedjoint control under a contractual arrangement. The results of associates areaccounted for on an equity basis where the company holding is 20% or more andthe company has the power to exercise significant influence.d) Revenue recognitionRevenue represents the fair value of consideration receivable, excluding valueadded tax, trade discounts and intercompany sales, in the ordinary course ofbusiness for goods and services provided.Revenue is not recognised until the service has been provided to the customer,or the goods which the sale relates to have either been despatched to thecustomer or, where they are held on the customer's behalf, title has passed tothe customer.In respect of long term contracts, revenue is recognised based on the value ofwork carried out during the year with reference to the total sales value andthe stage of completion of these contracts.Income includes an estimation of the amount of mains water and wastewatercharges unbilled at the year end. The accrual is estimated using a definedmethodology based upon a measure of unbilled water consumed by tariff, whichis calculated from historical billing information.Revenue is recognised for software licence agreements for general releasesoftware as at the time of client acceptance of the software. Where softwaremodifications are integral to the overall contract, software licence revenueis recognised over the life of the modifications.Software support and maintenance revenue is recognised over the period itrelates to.e) Segmental reportingEach of the group's business and geographical segments provide services thatare subject to risks and returns that are different from those of the otherbusiness segments.f) Property plant and equipmentProperty, plant and equipment comprises:i) Infrastructure assetsInfrastructure assets are included at cost less accumulated depreciation. Thecosts of day to day servicing of infrastructure components are recognised inthe profit and loss account as they arise. Where it is probable that the moneyspent will cause future economic benefits to flow to the entity, then costsare capitalised.Infrastructure assets are depreciated over their useful economic lives, whichare principally as follows: YearsImpounding reservoirs 250Raw water aqueducts 250Mains 80 - 150Sewers 150 - 200Assets in the course of construction are not depreciated until commissioned.ii) Landfill sitesLandfill sites are included within Land and Buildings at cost less accumulateddepreciation.The cost of landfill sites includes the cost of acquiring, developing andengineering sites, but does not include interest. The cost of the asset isdepreciated over the estimated life of the site on the basis of the usage ofvoid space.iii) Other assetsOther assets are included at cost less accumulated depreciation. Freehold landis not depreciated. Other assets are depreciated over their estimated economiclives to their residual value, which are principally as follows: YearsBuildings 30 - 60Operational structures 40 - 80Fixed plant 20 - 40Vehicles, mobile plant and 2 - 15computersAssets in the course of construction are not depreciated until commissioned.Interest costs of debt raised to finance new property, plant and equipment arenot included within the cost of those fixed assets, but are expensed to theincome statement as they arise.g) Leased assetsWhere assets are financed by leasing arrangements which transfer substantiallyall the risks and rewards of ownership of an asset to the lessee (financeleases), the lower of the fair value of the leased asset or the present valueof the minimum lease payments is capitalised as an asset with a correspondingliability representing the obligation to the lessor. Lease payments aretreated as consisting of a capital element and a finance charge, the capitalelement reducing the obligation to the lessor and the finance charge beingwritten off to the income statement over the period of the lease in proportionto the capital amount outstanding. Depreciation is charged over the shorter ofthe estimated useful life and the lease period.Where assets are financed by leasing arrangements where substantially all therisks and rewards of ownership remain with the lessor, these are classified asoperating leases. Rental costs arising under operating leases are expensed inthe year in which they are incurred. Leases of land are always treated asoperating leases, unless ownership is transferred at the end of the lease.IAS17 `Leases' states that where land and buildings are leased, the landelement is almost always regarded as an operating lease, whilst the buildingelement is separately reviewed to ascertain whether it is an operating orfinance lease. This is different to the treatment under UKGAAP as defined inSSAP21 `Accounting for leases and hire purchase contracts' where the land andbuildings are viewed as a single item when assessing whether the lease is anoperating lease or a finance lease.h) Grants and contributionsGrants and contributions received in respect of non-current assets are treatedas deferred income and released to the income statement over the usefuleconomic life of those assets.Where grants and contributions are given for the purpose of compensation forexpenses incurred with no future related costs, then these are recognised inthe income statement in the period that they become receivable.i) Impairment of non-current assetsImpairments of property, plant and equipment, goodwill and all othernon-current assets are calculated as the difference between the carrying valueof the asset and its recoverable amount. Where the asset does not generatecash flows that are independent from other assets, the group estimates therecoverable amount of the cash generating unit to which the asset belongs.Recoverable amount is defined as the higher of fair value less costs to sellor estimated value in use at the date the impairment review is undertaken.Fair value less costs to sell represents the amount obtainable from the saleof the assets in an arm's length transaction between knowledgeable and willingthird parties, less costs of disposal. Value in use represents the presentvalue of expected future cash flows expected to be derived from a cashgenerating unit, discounted using a pre-tax discount rate that reflectscurrent market assessments of the cost of capital of the cash generating unit.The discount rate used is based on the group's cost of capital adjusted forthe risk profiles of individual businesses.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.j) InvestmentsThe group followed the transitional provisions of IRFS1 and adopted IAS32 andIAS 39 from 1 April 2005.After initial recognition at cost (being the fair value of the considerationpaid), investments which are classified as held for trading or available forsale are measured at fair value, with gains or losses recognised in income orequity respectively. When an available for sale investment is disposed of, orimpaired, the gain or loss previously recognised in equity is taken to theincome statement.Other investments are classified as held to maturity when the group has thepositive intention and ability to hold to maturity. Investments held for anundefined period are excluded from this classification. Such investments (andthose held to maturity) are subsequently measured at amortised cost using theeffective interest method, with any gains or losses being recognised in theincome statement.Prior to 1 April 2005, the group held investments at historical cost less anyprovision for impairment.k) InventoryInventory and work in progress is stated at the lower of cost and netrealisable value. Cost includes labour, materials, transport and attributableoverheads.Development land and properties are included at the lower of cost and netrealisable value. Cost includes the cost of acquiring and developing thesites. The net realisable value of development land is based upon its value asa serviced site, after taking account of the cost of providing infrastructureservices. Income and attributable profits on properties under development aredetermined by reference to valuation of work carried out to date.l) ProvisionsProvisions are made where there is a present obligation as a result of a pastevent and it is probable that there will be an outflow of economic benefits tosettle this obligation and a reliable estimate of this amount can be made. Thegroup's policy on provisions for specific areas is as follows:- Landfill restoration costs: Provision for the cost of restoring landfillsites is made over the operational life of each landfill site and charged tothe income statement on the basis of the usage of void space.- Environmental control and aftercare costs: Environmental control andaftercare costs are incurred over the operational life of each landfill siteand may be incurred for a considerable period thereafter. Provision for allsuch costs is made over the operational life of the site and charged to theprofit and loss account on the basis of the usage of void space. Materialenvironmental control and aftercare costs are discounted by applying anappropriate discount rate.- Insurance: Provision is made for claims notified and for claims incurred butwhich have not yet been notified, based on advice from the group's independentinsurance advisers.m) Pension costsThe group operates both defined benefit and defined contribution pensionschemes.Defined benefit pension scheme assets are measured using bid rate. Definedbenefit pension scheme liabilities are measured by an independent actuaryusing the projected unit method and discounted at the current rate of returnon high quality corporate bonds of equivalent term and currency to theliability. The increase in the present value of the liabilities of the group'sdefined benefit pension schemes expected to arise from employee service in theperiod is charged to operating profit. The expected return on the scheme'sassets and the increase during the period in the present value of the scheme'sliabilities, arising from the passage of time, are included in other financeincome or cost.Actuarial gains and losses arising from experience adjustments, changes inactuarial assumptions and amendments to pension plans are charged or creditedto equity and recorded in the statement of recognised income and expense.Costs of defined contribution pension schemes are charged to the incomestatement in the period in which they fall due.n) Foreign currencyThe results of overseas subsidiary and associated undertakings are translatedinto the presentational currency of the group, sterling, using average ratesof exchange ruling during the year.The net investments in overseas subsidiary and associated undertakings aretranslated into sterling at the rates of exchange ruling at the year-end.Exchange differences thus arising are treated as movements in equity. Ondisposal of a foreign currency denominated subsidiary, the deferred cumulativeamount recognised in equity (since 1 April 2004 under the transitional rule ofIFRS1 - see note b) relating to that entity are recognised in the incomestatementExchange differences arising in respect of foreign exchange instruments takenout as hedges of overseas investments are also treated as movements in equity(see note s).All other foreign currency denominated assets and liabilities of the companyand its United Kingdom subsidiary undertakings are translated into sterling atthe rates of exchange ruling at the year-end. Any exchange differences soarising are dealt with through the income statement. Foreign currencytransactions arising during the year are translated into sterling at the rateof exchange ruling on the date of the transaction. All profits and losses onexchange arising during the year are dealt with through the income statement.o) Research and developmentResearch expenditure is expensed when it is incurred. Development expenditureis capitalised and written off over its expected useful economic life wherecertain criteria are met and inflows of economic benefits are expected.Expenditure on property, plant and equipment relating to research anddevelopment projects is capitalised and written off over the expected usefullife of those assets.p) Deferred taxationDeferred taxation is provided in full, using the liability method, ontemporary differences between the tax basis of assets and liabilities andtheir carrying amounts in the financial statements. A deferred tax asset isonly recognised to the extent it is probable that sufficient taxable profitswill be available in the future to utilise it. Deferred taxation is measuredon a non-discounted basis using the tax rates and laws that have then beenenacted or substantially enacted by the balance sheet date and are expected toapply when the related deferred income tax asset is realised or the deferredtax liability is settled.q) GoodwillGoodwill represents the excess of the fair value of purchase considerationover the fair value of the net assets acquired. Goodwill arising onacquisition of subsidiaries is included in intangible assets, whilst goodwillarising on acquisition of associates is included in investments in associates.If an acquisition gives rise to negative goodwill this is credited directly tothe income statement.Goodwill arising on all acquisitions prior to 1 April 1998 remains eliminatedagainst reserves. Purchased goodwill arising on acquisitions after 31 March1998 is treated as an intangible fixed asset.Goodwill is tested annually for impairment and carried at cost lessaccumulated impairment losses. Goodwill is allocated to the cash generatingunit that derives benefit from the goodwill for impairment testing purposes.Fair value accounting adjustments are made in respect of acquisitions. Fairvalue adjustments based on provisional estimates are amended within one yearof the acquisition, if required with a corresponding adjustment to goodwill.Where goodwill forms part of a cash-generating unit and all or part of thatunit is disposed of, the associated goodwill is included in the carryingamount of that operation when determining the gain or loss on disposal of theoperation.r) Intangible non-current assetsIntangible assets acquired separately are capitalised at cost and whenacquired in a business combination are capitalised at fair value at the dateof acquisition. Following initial recognition, the historical cost model isapplied to intangible assets. Where amortisation is charged on finite assets,this expense is taken to the income statement through operating expenses.Finite life intangible assets are amortised on a straight line basis overtheir estimated useful economic lives as follows: YearsSoftware 3 - 10Intangible assets are reviewed for impairment where indicators of impairmentexist.s) Derivatives and other financial instrumentsThe group has taken advantage of the IFRS1 exemption from application of IAS32 - Financial Instruments: `Disclosure and Presentation' and IAS 39 -`Financial Instruments: Recognition and Measurement' and has applied thesestandards from 1 April 2005.The accounting policy after 1 April 2005 is as follows:Debt instrumentsAll loans and borrowings are initially recognised at cost, being the net fairvalue of the consideration received. After initial recognition,interest-bearing loans and borrowings are subsequently measured at amortisedcost using the effective interest method. Where a loan or borrowing is in afair value hedging relationship it is remeasured for changes in fair value ofthe hedged risk at the balance sheet date with gains or losses beingrecognised in the income statement (see below).Gains and losses are recognised in the income statement when the liabilitiesare derecognised or impaired, as well as through the amortisation process.Derivative financial instrumentsThe group uses derivative financial instruments such as cross currency swaps,forward currency contracts and interest rate swaps to hedge its risksassociated with foreign currency and interest rate fluctuations. Suchderivative instruments are initially recorded at cost and subsequentlyremeasured at fair value for the reported balance sheet. The fair value ofcross currency swaps, interest rate swaps and forward currency contracts iscalculated by reference to market exchange rates and interest rates at theperiod end.In relation to fair value hedges which meet the conditions for hedgeaccounting, the gain or loss on the hedging instrument is taken to the incomestatement where the effective portion of the hedge will offset the gain orloss on the hedged item (see above).In relation to cash flow hedges which meet the conditions for hedgeaccounting. The portion of the gain or loss on the hedging instrument that isdetermined to be an effective hedge is recognised directly in equity, and theineffective portion in the income statement. The gains or losses deferred inequity in this way are recycled through the income statement in the sameperiod in which the hedged underlying transaction or firm commitment isrecognised in the income statement.Forward currency contracts and foreign currency borrowings are used to hedgenet investments in foreign currency denominated operations and to the extentthat they are designated and effective as net investment hedges are matched inequity against changes in value of the related assets. Any ineffectiveness istaken to the income statement.For derivatives that do not qualify for hedge accounting, gains or losses aretaken directly to the income statement in the period.Hedge accounting is discontinued when the hedging instrument expires, is sold,terminated or exercised, or no longer qualifies for hedge accounting. At thatdate any cumulative gain or loss on the hedging instrument recognised inequity is kept in equity until the forecast transaction occurs, or transferredto the income statement if the forecast transaction is no longer expected tooccur.The accounting policy prior to 1 April 2005 is as disclosed in the AnnualReport and Accounts 2005.t) Share based paymentsThe group operates a number of equity settled, share-based compensation plansfor employees. The fair value of the employee services received in exchangefor the grant is recognised as an expense over the vesting period of thegrant.The fair value of employee services is determined by reference to the fairvalue of the awards granted calculated using an appropriate pricing model,excluding the impact of any non market vesting conditions. Non-market basedvesting conditions are adjusted for in assumptions as to the number of awardsthat are expected to vest.u) Pre-contract costsPre-contract costs are expensed as incurred, except where it is virtuallycertain that the contract will be awarded, in which case they are recognisedas an asset which is written off to the income statement over the life of thecontract.v) Discontinued operations and assets held for saleWhere an asset or group of assets (a disposal group) is available forimmediate sale and the sale is highly probable and expected to occur withinone year, then the disposal group is deemed as held for sale. The disposalgroup is measured at the lower of the carrying amount and fair value lesscosts to sell.w) Purchase of own sharesThe group balance sheet incorporates the shares held by the Severn TrentEmployee Share Ownership Trust (the Trust) and which have not vestedunconditionally by the balance sheet date. These are shown as a deduction fromshareholders funds until such time as they vest.DisclaimerThe group's IFRS accounting policies as they are applied for the year ended 31March 2005 have been adopted on the basis of all IFRS issued by theInternational Accounting Standards Board ("IASB") as at the date of thisreport and which have either been endorsed by the European Union ("EU") orwhere there is a reasonable expectation of endorsement by the EU before thegroup prepares its first annual Accounts in accordance with IFRS for the yearending 31 March 2006. In particular this assumes that the EU will adoptrevised IAS 19 (2004) "Employee Benefits" issued by the IASB in December 2004.Whilst most of the issues regarding the adoption of IFRS for use in the EUhave been resolved, there are still some areas to be concluded upon. Any newstandards or interpretations issued by the IASB will be assessed andconsidered by the group on an individual basis and might result in adjustmentsto the 2005 IFRS financial statements before they are considered final. IFRSis currently being applied simultaneously in the United Kingdom and a numberof other countries for the first time. Furthermore, due to a number of new orrevised IFRS having been issued in the past 18 months there is not yetsignificant established practice upon which to draw when forming decisionsregarding interpretation and application. Accordingly, practice is continuingto evolve. At this preliminary stage therefore, the full financial effect ofreporting under IFRS as it will be applied and reported on in the group'sfirst IFRS financial statements for the year ended 31 March 2005 may besubject to change.The financial information set out in this statement relating to the year ended31 March 2005 does not constitute statutory accounts for that period. Full auditedaccounts of Severn Trent Plc in respect of that financial period in accordance with UKGAAP (which received an unqualified audit opinion and did not contain a statementunder either section 237(2) or (3) of the Companies Act 1985) have been delivered tothe Registrar of Companies.Forward-Looking StatementsThis document contains certain "forward-looking statements" with respect toSevern Trent's financial condition, results of operations and business andcertain of Severn Trent's plans and objectives with respect to these items.Forward-looking statements are sometimes, but not always, identified by theiruse of a date in the future or such words as "anticipates", "aims", "due","could", "may", "should", "expects", "believes", "intends", "plans","targets", "goal" or "estimates". By their very nature forward-lookingstatements are inherently unpredictable, speculative and involve risk anduncertainty because they relate to events and depend on circumstances thatwill occur in the future.There are a number of factors that could cause actual results and developmentsto differ materially from those expressed or implied by these forward-lookingstatements. These factors include, but are not limited to, changes in theeconomies and markets in which the Group operates; changes in the regulatoryand competition frameworks in which the Group operates; the impact of legal orother proceedings against or which affect the Group; and changes in interestand exchange rates.All written or verbal forward-looking statements, made in this document ormade subsequently, which are attributable to Severn Trent or any other memberof the Group or persons acting on their behalf are expressly qualified intheir entirety by the factors referred to above. Severn Trent does not intendto update these forward-looking statements.This document is not an offer to sell, exchange or transfer any securities ofSevern Trent Plc or any of its subsidiaries and is not soliciting an offer topurchase, exchange or transfer such securities in any jurisdiction. Securitiesmay not be offered, sold or transferred in the United States absentregistration or an applicable exemption from the registration requirements ofthe US Securities Act of 1933 (as amended). AppendixReconciliation of the Group Balance sheet under UK GAAP to IFRS as at 1 April 2004 UK GAAP IFRS Property Retirement Deferred Dividends Other IFRS reclassification Plant & Benefits Tax Equipment IAS 16 IAS 19 IAS 12 IAS 10 ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m------------------------------------------------------------------------------------------------------------------------Non-current assetsProperty plant and equipment 5,278.0 (110.6) 314.2 - - - 3.5 5,485.1Intangible assetsGoodwill 497.6 - - - - - - 497.6Other intangible assets - 110.6 - - - - 2.0 112.6Investments in joint 9.6 - - - - - - 9.6venturesInvestments in associates 17.7 - - - - - - 17.7Available for sale financial 1.0 - - - - - - 1.0assets------------------------------------------------------------------------------------------------------------------------Non-current assets 5,803.9 - 314.2 - - - 5.5 6,123.6------------------------------------------------------------------------------------------------------------------------Current assetsInventories 80.4 - - - - - - 80.4Trade and other receivables 452.8 - - (7.8) - - - 445.0Derivative financial - - - - - - - -instrumentsCash and cash equivalents 115.3 - - - - - - 115.3------------------------------------------------------------------------------------------------------------------------Current assets 648.5 - - (7.8) - - - 640.7------------------------------------------------------------------------------------------------------------------------Total assets 6,452.4 - 314.2 (7.8) - - 5.5 6,764.3------------------------------------------------------------------------------------------------------------------------Current liabilitiesTrade and other payables (671.0) - - - - 100.9 (8.8) (578.9)Borrowings (486.9) - - - - - (4.0) (490.9)Derivative financial - - - - - - - -instrumentsCurrent income tax (65.8) - - - - - - (65.8)liabilitiesShort-term provisions - - - - - - - -------------------------------------------------------------------------------------------------------------------------Current liabilities (1,223.7) - - - - 100.9 (12.8) (1,135.6)Non-current liabilitiesTrade and other payables (17.4) - - 11.1 - - - (6.3)Borrowings (2,377.5) - - - - - (0.4) (2,377.9)Derivative financial - - - - - - - -instrumentsDeferred tax liabilities (462.9) - - - (392.3) - - (855.2)Retirement benefit - - - (376.5) - - - (376.5)obligationsLong-term provisions (109.1) - - - - - - (109.1)Deferred income (45.7) - - - - - - (45.7)------------------------------------------------------------------------------------------------------------------------Non-current liabilities (3,012.6) - - (365.4) (392.3) - (0.4) (3,770.7)------------------------------------------------------------------------------------------------------------------------Total liabilities (4,236.3) - - (365.4) (392.3) 100.9 (13.2) (4,906.3)------------------------------------------------------------------------------------------------------------------------Net assets 2,216.1 - 314.2 (373.2) (392.3) 100.9 (7.7) 1,858.0------------------------------------------------------------------------------------------------------------------------EquityShare capital 258.7 - - - - - - 258.7Other reserves 156.1 - 314.2 - - - - 470.3Retained earnings 1,798.9 - - (373.2) (392.3) 100.9 (7.7) 1,126.6------------------------------------------------------------------------------------------------------------------------ 2,213.7 - 314.2 (373.2) (392.3) 100.9 (7.7) 1,855.6Minority interests 2.4 - - - - - - 2.4------------------------------------------------------------------------------------------------------------------------Total equity 2,216.1 - 314.2 (373.2) (392.3) 100.9 (7.7) 1,858.0------------------------------------------------------------------------------------------------------------------------Reconciliation of the Group Profit and Loss Account under UK GAAP to the GroupIncome Statement under IFRS for the six months ended 30 September 2004 UK GAAP IFRS Property Retirement Goodwill Deferred Other IFRS reclassification Plant & Benefits tax Equipment IAS 16 IAS 19 IFRS 3 IAS 12 ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m------------------------------------------------------------------------------------------------------------------------Revenue 1,038.9 - - - - - - 1,038.9 ------------------------------------------------------------------------------------------------------------------------Operating costs before goodwill (815.4) - (12.2) 11.3 - - (0.2) (816.5)amortisationGoodwill amortisation (15.1) - - - 15.1 - - -------------------------------------------------------------------------------------------------------------------------Total operating costs (830.5) - (12.2) 11.3 15.1 - (0.2) (816.5)Group operating profit 208.4 - (12.2) 11.3 15.1 - (0.2) 222.4Share of operating profit of joint 5.8 (5.8) - - - - - -ventures and associates------------------------------------------------------------------------------------------------------------------------Profit before finance costs 214.2 (5.8) (12.2) 11.3 15.1 - (0.2) 222.4Net finance costs (88.0) 4.1 - (0.6) - - (0.1) (84.6)Share of profit of associates and - 1.1 - - - - - 1.1joint ventures------------------------------------------------------------------------------------------------------------------------Profit on ordinary activities 126.2 (0.6) (12.2) 10.7 15.1 - (0.3) 138.9before taxationIncome tax expenseCurrent tax (26.0) 0.6 - - - - - (25.4)Deferred tax (21.7) - - - - (5.0) - (26.7)Total income tax expense (47.7) 0.6 - - - (5.0) - (52.1)------------------------------------------------------------------------------------------------------------------------Profit for the period 78.5 - (12.2) 10.7 15.1 (5.0) (0.3) 86.8------------------------------------------------------------------------------------------------------------------------Attributable to:Equity holders of the parent 78.1 - (12.2) 10.7 15.1 (5.0) (0.3) 86.4Minority interests 0.4 - - - - - - 0.4------------------------------------------------------------------------------------------------------------------------ 78.5 - (12.2) 10.7 15.1 (5.0) (0.3) 86.8------------------------------------------------------------------------------------------------------------------------Earnings per share (pence)Basic 22.7 - (3.6) 3.1 4.3 (1.5) - 25.0Diluted 22.5 - (3.6) 3.1 4.3 (1.4) - 24.9Adjusted basic before deferred tax 29.0 - (3.6) 3.2 4.3 - - 32.9Adjusted diluted before deferred 28.8 - (3.6) 3.2 4.3 - - 32.7taxReconciliation of the Group Balance sheet under UK GAAP to IFRS as at 30 September 2004 Property Plant & Retirement Deferred Equipment Benefits Goodwill Tax Dividends Other IFRS IFRS UK GAAP reclassification IAS 16 IAS 19 IFRS 3 IAS 12 IAS 10 ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m------------------------------------------------------------------------------------------------------------------------Non-current assetsProperty plant and 5,332.4 (84.2) 302.0 (1.1) - - - (15.4) 5,533.7equipmentIntangible assetsGoodwill 486.8 - - - 15.1 - - - 501.9Other intangible assets - 84.2 - - - - - 20.7 104.9Investments in joint 10.3 - - - - - - - 10.3venturesInvestments in 17.4 - - - - - - - 17.4associatesAvailable for sale 0.7 - - - - - - - 0.7financial assets------------------------------------------------------------------------------------------------------------------------Non-current assets 5,847.6 - 302.0 (1.1) 15.1 - - 5.3 6,168.9------------------------------------------------------------------------------------------------------------------------Current assetsInventories 88.8 - - - - - - - 88.8Trade and other 479.6 - - (7.8) - - - - 471.8receivablesDerivative financial - - - - - - - - -instrumentsCash and cash 74.9 - - - - - - - 74.9equivalents------------------------------------------------------------------------------------------------------------------------Current assets 643.3 - - (7.8) - - - - 635.5------------------------------------------------------------------------------------------------------------------------Total assets 6,490.9 - 302.0 (8.9) 15.1 - - 5.3 6,804.4------------------------------------------------------------------------------------------------------------------------Current liabilitiesTrade and other payables (706.5) - - - - - 62.8 (9.0) (652.7)Borrowings (403.6) - - - - - - - (403.6)Derivative financial - - - - - - - - -instrumentsCurrent income tax (77.3) - - - - - - - (77.3)liabilitiesShort-term provisions - - - - - - - - -------------------------------------------------------------------------------------------------------------------------Current liabilities (1,187.4) - - - - - 62.8 (9.0) (1,133.6)------------------------------------------------------------------------------------------------------------------------Non-current liabilitiesTrade and other payables (61.6) - - 25.5 - - - - (36.1)Borrowings (2,406.6) - - - - - - (4.3) (2,410.9)Derivative financial - - - - - - - - -instrumentsDeferred tax liabilities (484.4) - - - - (398.2) - - (882.6)Retirement benefit - - - (373.2) - - - - (373.2)obligationsLong-term provisions (109.3) - - - - - - - (109.3)Deferred income - - - - - - - - -------------------------------------------------------------------------------------------------------------------------Non-current liabilities (3,061.9) - - (347.7) - (398.2) - (4.3) (3,812.1)------------------------------------------------------------------------------------------------------------------------Total liabilities (4,249.3) - - (347.7) - (398.2) 62.8 (13.3) (4,945.7)------------------------------------------------------------------------------------------------------------------------Net assets 2,241.6 - 302.0 (356.6) 15.1 (398.2) 62.8 (8.0) 1,858.7------------------------------------------------------------------------------------------------------------------------EquityShare capital 262.8 - - - - - - - 262.8Other reserves 156.1 - 314.2 - - - - - 470.3Retained earnings 1,820.3 - (12.2) (356.6) 15.1 (398.2) 62.8 (8.0) 1,123.2------------------------------------------------------------------------------------------------------------------------ 2,239.2 - 302.0 (356.6) 15.1 (398.2) 62.8 (8.0) 1,856.3Minority interests 2.4 - - - - - - - 2.4------------------------------------------------------------------------------------------------------------------------Total equity 2,241.6 - 302.0 (356.6) 15.1 (398.2) 62.8 (8.0) 1,858.7------------------------------------------------------------------------------------------------------------------------The segmental analysis of the adjustments to group profit before interest andexceptional items, group profit before interest and net operating assets isset out below.March 2005 UK GAAP IFRS Property Retirement Goodwill Other IFRS reclassification Plant & Benefits Equipment IAS 16 IAS 19 IFRS 3 ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m------------------------------------------------------------------------------------------------------------------------Group profit before interest, goodwillamortisation and exceptional* itemsWater and sewerage 339.9 - (38.7) 9.1 - (2.8) 307.5Waste management 83.4 (1.3) - 2.0 - (1.9) 82.2Laboratories 15.0 - - 0.2 - - 15.2Water purification and operating services 19.8 (11.1) - 0.1 - 0.1 8.9Other businesses 4.8 0.7 - 0.8 - 0.7 7.0Unrealised profit on inter-segment trading (0.9) - - - - - (0.9)Corporate overheads (23.4) - - 4.6 - 1.0 (17.8)------------------------------------------------------------------------------------------------------------------------ 438.6 (11.7) (38.7) 16.8 - (2.9) 402.1------------------------------------------------------------------------------------------------------------------------ Group profit before interest andexceptional* itemsWater and sewerage 339.9 - (38.7) 9.1 - (2.8) 307.5Waste management 60.5 (1.3) - 2.0 22.9 (1.9) 82.2Laboratories 10.9 - - 0.2 4.1 - 15.2Water purification and operating services 16.7 (11.1) - 0.1 3.1 0.1 8.9Other businesses 4.8 0.7 - 0.8 - 0.7 7.0Unrealised profit on inter-segment trading (0.9) - - - - - (0.9)Corporate overheads (23.4) - - 4.6 - 1.0 (17.8)------------------------------------------------------------------------------------------------------------------------ 408.5 (11.7) (38.7) 16.8 30.1 (2.9) 402.1------------------------------------------------------------------------------------------------------------------------ Group profit before interestWater and sewerage 334.5 - (38.7) 11.7 - (2.8) 304.7Waste management 60.5 (1.3) - 2.0 22.9 (1.9) 82.2Laboratories 10.9 - - 0.2 4.1 - 15.2Water purification and operating services 21.0 (11.1) - 0.1 3.1 0.1 13.2Other businesses (8.9) 0.7 - 0.8 - 10.6 3.2Unrealised profit on inter-segment trading (0.9) - - - - - (0.9)Corporate overheads (23.4) - - 4.6 - 1.0 (17.8)------------------------------------------------------------------------------------------------------------------------ 393.7 (11.7) (38.7) 19.4 30.1 7.0 399.8------------------------------------------------------------------------------------------------------------------------ Net operating assets as at 31 March 2005Water and sewerage 4,866.5 - 275.5 (233.5) - (3.0) 4,905.5Waste management 288.4 - - (41.0) - 0.5 247.9Laboratories 65.9 - - (2.9) - (1.8) 61.2Water purification and operating services 92.1 - - (8.5) - (0.8) 82.8Other businesses and Corporate 44.1 - - (26.0) - (1.2) 16.9------------------------------------------------------------------------------------------------------------------------ 5,357.0 - 275.5 (311.9) - (6.3) 5,314.3------------------------------------------------------------------------------------------------------------------------* Exceptional means material restructuring, termination and disposal items.September 2004 Property Plant & Retirement IFRS Equipment Benefits Goodwill Other IFRS UK GAAP reclassification IAS 16 IAS 19 IFRS 3 ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m------------------------------------------------------------------------------------------------------------------------Group profit before interest, goodwillamortisation and exceptional* itemsWater and sewerage 181.2 - (12.2) 7.6 - (0.2) 176.4Waste management 43.8 (0.7) - 1.5 - (0.7) 43.9Laboratories 9.8 - - 0.2 - - 10.0Water purification and operating services 8.9 (5.2) - 0.2 - (0.5) 3.4Other businesses (2.0) 0.1 - 0.8 - 0.2 (0.9)Unrealised profit on inter-segment trading 0.2 - - - - - 0.2Corporate overheads (12.6) - - 1.0 - 1.0 (10.6)------------------------------------------------------------------------------------------------------------------------ 229.3 (5.8) (12.2) 11.3 - (0.2) 222.4------------------------------------------------------------------------------------------------------------------------ Group profit before interest andexceptional* itemsWater and sewerage 181.2 - (12.2) 7.6 - (0.2) 176.4Waste management 32.4 (0.7) - 1.5 11.4 (0.7) 43.9Laboratories 7.7 - - 0.2 2.1 - 10.0Water purification and operating services 7.3 (5.2) - 0.2 1.6 (0.5) 3.4Other businesses (2.0) 0.1 - 0.8 - 0.2 (0.9)Unrealised profit on inter-segment trading 0.2 - - - - - 0.2Corporate overheads (12.6) - - 1.0 - 1.0 (10.6)------------------------------------------------------------------------------------------------------------------------ 214.2 (5.8) (12.2) 11.3 15.1 (0.2) 222.4------------------------------------------------------------------------------------------------------------------------ Group profit before interestWater and sewerage 181.2 - (12.2) 9.5 - (0.2) 178.3Waste management 32.4 (0.7) - 0.8 11.4 (0.7) 43.2Laboratories 7.7 - - 0.2 2.1 - 10.0Water purification and operating services 7.3 (5.2) - 0.2 1.6 (0.5) 3.4Other businesses (2.0) 0.1 - 0.8 - 0.2 (0.9)Unrealised profit on inter-segment trading 0.2 - - - - - 0.2Corporate overheads (12.6) - - - - 1.0 (11.6)------------------------------------------------------------------------------------------------------------------------ 214.2 (5.8) (12.2) 11.5 15.1 (0.2) 222.6------------------------------------------------------------------------------------------------------------------------* Exceptional means material restructuring, termination and disposal items.ENDSEVERN TRENT PLCRelated Shares:
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