Pennon Group Plc

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Pennon Group Plc

Peninsula House
Rydon Lane, Exeter
Devon EX2 7HR
United Kingdom
Telephone: ( + 44) 1392-446-677
Fax: ( + 44) 1392-434-966
Web site: http://www.pennon-group.co.uk

Public Company
Incorporated: 1989 as South West Water Pic
Employees: 2,700
Sales: £435.1 million ($616.2 million) (2001)
Stock Exchanges: London
Ticker Symbol: PNN
NAIC: 221310 Water Supply and Irrigation Systems; 562998 All Other Miscellaneous Waste Management Services; 562111 Solid Waste Collection; 562112 Hazardous Waste Collection; 562119 Other Waste Collection; 562211 Hazardous Waste Treatment and Disposal; 562212 Solid Waste Landfill; 562213 Solid Waste Combustors and Incinerators; 562219 Other Nonhazardous Waste Treatment and Disposal

Pennon Group Plc is a holding company for two primary subsidiaries: South West Water Limited, which provides water utility and wastewater treatment services to Devon, Cornwall, and parts of Dorset and Somerset in southwest England; and Viridor Limited, which operates waste management services—including the United Kingdom’s largest landfill operation—through subsidiary Viridor Waste, and environmental instrumentation through Viridor Instrumentation. The company has been striving to reduce its reliance on its regulated water subsidiary by stepping up investment in the non-regulated operations of Viridor. By 2001, South West Water represented just 54 percent of the company’s £435.1 million in sales, while waste management had risen to 23 percent of sales. Viridor Instrumentation, which operates internationally with subsidiaries in the United States, Switzerland, Canada, Germany, France, South Africa, and elsewhere, and under the Viridor and ELE Instrumentation and other names, provided 12 percent of the company’s sales in 2001. However, due to an extensive capital investment program agreed to with the British government’s Office of Water Services (Ofwat), Pennon has been forced to put parts of its Viridor business up for sale. In 2000 the company sold off its construction business, and in 2001 announced its intention of disposing of Viridor Instrumentation. One of the smallest of the United Kingdom’s privatized water companies, South West Water was protected from a takeover bid in the mid-1990s when the British government blocked consolidation efforts among water companies. Mounting pressure is expected to persuade the government to allow mergers and acquisitions within the industry. Pennon Group is led by Chairman Kenneth G. Harvey (the company has functioned without a chief executive since the late 1990s), and seconded by South West Water CEO Robert Baty and Viridor CEO Colin Drummond.

Privatization Act in the 1980s

England’s water supply had been shared between private companies and local towns and cities from the 18th century into the 19th century. Many early piping systems were constructed from stone and wood. The growth of larger cities and the reorganization of municipal control into more modern-styled governments led these municipalities increasingly to take control of their own water supply and facilities. By the middle of the 19th century, the various governments had taken full control of constructing the water piping infrastructure—by then being laid with iron pipes—and, in a series of Water Acts promulgated in the 1870s, the nation’s water supply was placed fully in government control. Nonetheless, the water utility industry continued to operate on a largely local basis.

This situation led to a large number of water utility operations throughout the United Kingdom. At the beginning of the 1970s, the country counted 29 “river” authorities in England and Wales alone, which in turn oversaw 160 water suppliers. In addition, there were more than 1,300 sewage treatment authorities. The small size of the vast majority of these operations caused them to be inefficient and unable to invest in modernized equipment and facilities.

A first step toward consolidating and modernizing the increasingly antiquated British water supply and treatment system was taken with the passage of the Water Act of 1973. That act provided for the amalgamation of the United Kingdom’s water utilities into ten regional water authorities. Each water authority was given the responsibility over the water supply, treatment, sewage treatment and disposal, and river and coastline protection in its region. The authorities remained government bodies, however, reporting both to local and national governments.

The rise of environmental awareness and health issues, which included stricter drinking standards and sewage disposal standards from the European Community as well as the dilapidated state of much of the country’s water supply system, came to plague the new water authorities in the 1970s and 1980s. The rise to power of the conservative government led by Margaret Thatcher had prompted the privatization of a number of industries and sectors that had previously been brought under government control. With the British government unable and unwilling to foot the enormous bills required to bring the country’s water system up to date, the decision was made to privatize the industry at the end of the 1980s.

The Water Act of 1989 returned the country’s water supply and sewage treatment needs to the private sector. Under the act, the ten water authorities were converted into public liability companies and listed on the London stock exchange. The act also set up the Office of Water Services (Ofwat) to act as a regulatory body and to set pricing and capital investment levels. The new publicly listed companies were then able to raise capital to begin a series of obligatory infrastructure and environmental investments.

Birth and Development of South West Water: 1989-90s

One of the smaller of the new water utility companies was South West Water Pic, which took over the Westcountry region around Devon and Cornwall, with pockets extending into Dorset and Somerset, in a region of some 4,300 square miles, with more than 10,000 miles of supply pipes and 5,000 miles of public sewers overseen by nearly 90 locally operating water and treatment facilities. Much of the region was farmland—the company itself was to become one of the largest and few major public limited companies in the region—with an extensive, and long neglected, coastline. Responsibility for the coastline was to cause the company headaches, and force it to dig deep into its pockets. The company promptly began a ten-year, £1.6 billion investment program, some two-thirds of which was earmarked toward cleaning up the beaches under the company’s authority.

Led by Bill Fraser, who joined as chief executive in 1990, South West Water soon succeeded in making itself unloved by its customers. While all of the United Kingdom faced price increases as water utilities sought to recoup their large capital improvement investments, South West Water’s customers came to feel singled out. Reviews in the early 1990s revealed that South West Water was the most expensive of all of the United Kingdom’s water companies. As the company’s rates rose, so did its profits: by 1994, the company was posting operating profits of more than £100 million on turnover of £252 million. The company compounded its poor reputation with a number of missteps, including a series of contaminated water scares—in one scare in 1995, more than 600 people had become ill from water tainted by the Cryptosporidium parasite.

Another public relations disaster occurred during the long summer drought of 1995, when it was revealed that leaks in the company’s reservoirs had “wasted” some one billion gallons of water at a time when its customers were faced with restrictions on their water usage—the company countered that the water was simply returned back to nature, where it was needed as well. Meanwhile, South West Water faced new rounds of criticism when it raised CEO Fraser’ s pay and pensions packet from £150,000 to £217,000. Fraser stepped down in February 1996, replaced by Robert Baty.

Baty was immediately faced with a new crisis when Wessex Water, which had taken over the former water authority for the neighboring region, launched a hostile takeover of South West Water in March 1996. That bid was quickly countered by a rival bid from another water utility, Severn Trent, sparking hopes—from investors at least—of a bidding war. But the deal was quashed in October of that year when the government’s Monopolies and Mergers Commission blocked the bid on the grounds that mergers among the country’s water companies would be against the public interest.

If South West Water had succeeded in making a bad name for itself among its water customers in its first half decade as a public company, it had also been successful in expanding into new areas. In the early 1990s the company targeted environmental services as a fitting extension of its water business—given the company’s growing expertise in wastewater and sewage treatment and its massive investment in cleaning up the southwest’s beaches. In 1993 the company acquired Haul Waste Limited, adding waste transportation and disposal services, as well as landfill operations. At the same time, the company branched out into environmental instrumentation, acquiring ELE International Ltd. A third component was added with the acquisition of J Brent, a construction company.

Company Perspectives:

Mission Statement: To be a pre-eminent operator in business areas of water and sewerage services, waste management and instrumentation. In these main business areas, and for all future business developments, to ensure the hallmark of quality, efficiency and reliability which will help to meet the three key goals of: satisfying customers; enhancing the environment; adding value for shareholders, employees and the regional community.

ELE grew steadily through acquisitions during the 1990s. In 1994 the subsidiary was merged with pHOX Systems Ltd. The following year ELE moved into the United States with the acquisition of Great Lakes Instruments Inc., based in Milwaukee. In 1997, the subsidiary added operations in Austin, Texas, when it acquired Hydrolab Corporation. Back at home, ELE grew with the purchases of Warren Jones Engineering Ltd. in 1995 and then Didcot Instruments in 1996. ELE was already the most international of South West Water’s operations when it acquired Orbishpere, based in Geneva, Switzerland, in 1998.

Yet the company’s brightest growth prospects came from its waste management side. That division, still trading under the Haul Waste Group name, was strengthened when it acquired Greenhill Enterprises from Scottish Power for £10.6 million in November 1997. The acquisition gave the company both landfill and quarrying operations. One month later, South West Water took a major step forward when it agreed to pay a total of £105 million for the acquisition of landfill and waste disposal specialist Terry Adams. That purchase transformed South West Water into the United Kingdom’s largest landfill operator. These moves were in keeping with the company’s plan to reduce its reliance on its water supply operations to just 50 percent of turnover by 2001.

New Name, New Emphasis: Pennon in the Late 1990s and Early 2000s

In May 1998, the company moved to underline its transformation from water company to diversified environmental services group when it changed its name to Pennon Group—using an old English term for flag. At the same time, Pennon renamed its environmental services wing as Viridor, based on the Latin verb for “to become green.” Meanwhile, the company maintained the South West Water name for its water company operations. The new holding company, chaired by Kenneth Harvey, found itself unable to attract a new CEO (in part because the company was eager to avoid being accused of paying a new “fat cat” salary). With Robert Baty acting as CEO of South West Water and Colin Drummond named CEO of Viridor, the company opted to continue without a group-level chief executive.

If the government blocked competition through mergers, the company found another way to cross its regional borders. In 1997, the company acquired a 50 percent stake in London-based consultancy En viro-Logic. That company had developed a series of projects that promised to cut water prices by as much as 30 percent, through such schemes as bulk buying and water recycling, including a two-pipe home system that would provide drinking water through one set of pipes and recycled water for use in toilets and gardening through a second set of pipes. Pennon expected to be able to leverage its position in Enviro-logic to begin offering water supply services on its competitors’ turf. In 1999, Enviro-Logic, which later became a fully owned subsidiary of Pennon, launched Albion Water, the first new privately owned water supply company in the United Kingdom.

At the turn of the century, Pennon Group was hurt by the combination of rate cuts demanded by Ofwat and a newly negotiated capital investment commitment. Pennon, like many of the United Kingdom’s water companies, announced that it was conducting a strategic review with an eye toward restructuring its water utility operations. Yet after a year-long review, the company acknowledged that it had found no alternatives to its current structure. Instead, the group decided to dismantle parts of its diversified operations. In 2000, the company sold off its construction division.

Pennon felt the brunt of the new rate cuts at the end of its 2001 year, seeing its turnover dip to £435 million from £467 million the previous year. By 2001, Pennon’s capital investment commitments with Ofwat left it unable to provide the necessary financing for its instrumentation division. That year, the company announced that it was seeking to sell off its Viridor Instrumentation subsidiary as well. The company now regrouped around a new core of waste management services and water supply and treatment. In the future, Pennon was able to count on two things: that people would always get thirsty, and they would always need to dispose of their trash.

Principal Subsidiaries

South West Water Limited; Viridor Waste Limited; Viridor Waste Disposal Limited; Albion Water Limited; Enviro-Logic Limited; VWM Limited; Viridor Waste Exeter Limited; Dragon Waste Limited; Viridor Waste Wootton Limited; Viridor Waste Hampshire Limited; Viridor Waste Management Limited; Viridor Instrumentation Limited; ELE International Limited; Exe International Inc (U.S.A.); ELE International Inc (U.S.A.); GLI International Inc (U.S.A.); Hydrolab Corporation (U.S.A.); Orbisphere Laboratories Japan Inc (U.S.A.); Orbisphere Laboratories Overseas Corporation (U.S.A.); Orbisphere Management Holding SA (Switzerland); Orbisphere Laboratories Neuchâtel SA (Switzerland); Orbisphere (Canada) Ine; Orbisphere (France) Sari; Orbisphere GmbH (Germany); Orbisphere Laboratories Geneve SA (Switzerland); Orbisphere South Africa (Pty) Limited; Orbisphere UK Limited; Viridor Properties Limited; Peninsula Insurance Limited (Guernsey); Viridor Limited; Exe Continental Limited.

Key Dates:

1973:: Water Act creates ten regional water authorities to govern water supply and wastewater treatment for the United Kingdom.
1989:: New Water Act privatizes water authorities and creates ten publicly listed companies, including South West Water Pic.
1993:: South West Water acquires Haul Waste Group to enter waste management services and ELE International, expanding into environmental instrumentation.
1997:: Haul Waste acquires Greenhill Enterprises and Terry Adams, making it the United Kingdom’s largest landfill operator; South West Water acquires 50 percent of En viro-Logic.
1998:: Company changes name to Pennon Group Pic, which becomes the holding company for South West Water and the renamed environmental division, Viridor.
1999:: En viro-Logic creates Albion Water, the United Kingdom’s first new private water company.
2001:: Company announces intention to sell off its Viridor Instrumentation subsidiary and regroup around a core of South West Water and Viridor Waste.

Principal Competitors

Cory Environmentais (Exel pic); Waste Recycling Group (Kelda Group pic); Severn Trent Pic; Shanks Pic; Société Industrielle de Transports Automobiles (SITA); Suez; Waste Management, Inc.; Vivendi Environnement SA; Waste Recycling Group PLC.