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Contents

• Directors, Registered Office and Auditors
• Report of the Directors
  • Chief Executive's Overview
  • Financial Highlights
  • Main Trends
  • Business and Strategy
  • Regulatory and Competitive Environment
  • Customers, Community and Employees
  • Principal Risks and Uncertainties
  • Financial Performance
  • Other Statutory Information
• Independent Auditors' Report
• Financial Statements
  • Consolidated Income Statement
  • Statements of Comprehensive Income
  • Balance Sheets
  • Statements of Changes in Equity
  • Cash Flow Statements
  • Notes to the Financial Statements
    • 1. General information
    • 2. Principal accounting policies
    • 3. Financial risk management
    • 4. Critical accounting judgements and estimates
    • 5. Retrospective application of IFRIC
    • 6. Operating costs
    • 7. Fees payable to the group's Auditors
    • 8. Net finance costs
    • 9. Taxation
    • 10. Profit of holding company
    • 11. Dividends
    • 12. Employment costs
    • 13. Directors' emoluments
    • 14. Goodwill
    • 15. Other intangible assets
    • 16. Property plant and equipment
    • 17. Financial instruments by category
    • 18. Other non-current assets
    • 19. Investments
    • 20. Inventories
    • 21. Trade and other receivables - current
    • 22. Cash and cash deposits
    • 23. Trade and other payables - current
    • 24. Current tax liabilities
    • 25. Borrowings
    • 26. Other non current liabilities
    • 27. Retirement benefit obligations
    • 28. Deferred tax
    • 29. Provisions
    • 30. Share capital
    • 31. Share premium account
    • 32. Retained earnings
    • 33. Minority interests
    • 34. Cash flow from operating activities
    • 35. Net borrowings
    • 36. Acquisitions
    • 37. Principal subsidiary and joint venture undertakings
    • 38. Operating lease commitments
    • 39. Contingent liabilities
    • 40. Capital commitments
    • 41. Related party transactions
    • 42. Post balance sheet events
    • 43. Parent company
• Glossary

Financial statements

NOTES TO THE FINANCIAL STATEMENTS

30. Share capital

Employee share schemes

Pennon Group Plc operates a number of equity-settled share plans for the benefit of employees. Details of each plan are:

i) Sharesave Scheme

An all-employee savings related plan is operated that enables employees, including executive directors, to invest up to a maximum of £250 per month for three or five years. These savings can then be used to buy the ordinary shares of Pennon Group Plc at a price set at a 20% discount to the market value at the start of the savings period at the third, fifth or seventh anniversary of the option being granted. Options expire six months following the exercise date and, except for certain specific circumstances such as redundancy, lapse if the employee leaves the Pennon Group before the option exercise period commences.

Outstanding options to subscribe for shares of 40.7p each under the Pennon Group Plc share option schemes are:

At 31 March 2010 there were 1,023 participants from the Group in the Sharesave Scheme (2009 785).

The number and weighted average exercise price of Sharesave options are:

The weighted average price of Pennon Group Plc shares at the date of exercise of Sharesave options during the year was 468p (2009 594p). The options outstanding at 31 March 2010 had a weighted average exercise price of 409p (2009 409p) and a weighted average remaining contractual life of 3.1 years (2009 2.2 years).

The aggregate fair value of sharesave options granted during the year was £0.6m (2009 £0.3m), determined using the Black-Scholes valuation model. The significant inputs into the valuation model at the date of issue of the options were:

Expected volatility was determined by calculating the historical volatility of the parent company's share price over the previous two years.

ii) Restricted share plan

Under this plan Directors and senior management of the Group receive a conditional award of shares in the Parent. The eventual number of shares, if any, which vest is dependent upon the achievement of the performance condition of the plan over the restricted period, being not less than three years.

The number and weighted average price of shares in the Restricted Share Plan are:

The plan was succeeded in 2007 by the Performance and Co-investment Plan.

iii) Performance and Co-investment Plan

Executive Directors of the Group receive a conditional award of ordinary shares in Pennon Group Plc and are also required to hold a substantial personal shareholding in that company. The eventual number of shares, if any, which vest is dependent upon the achievement of conditions of the plan over the restricted period, being not less than three years.

The number and price of shares in the Performance and Co-investment Plan are:

The awards outstanding at 31 March 2010 had a weighted exercise price of 549p (2009 598p) and a weighted average remaining contractual life of 1.4 years (2009 1.9 years).

The aggregate fair value of awards granted during the year was £0.9m (2009 £0.5 m), determined using a Monte-Carlo simulation model.

The significant inputs into the valuation model at the date of the share awards were:

Expected volatility was determined by calculating the historical volatility of the Pennon Group Plc share price over the previous two years.

iv) Annual Incentive Bonus Plan - Deferred Shares

Awards under the plan to Executive Directors and senior management involve the release of ordinary shares in the Parent to participants. There is no performance condition since vesting is conditional upon conditional service within the Parent for a period.

The number and weighted average price of shares in the Incentive Bonus Plan are:

The awards outstanding at 31 March 2010 had a weighted average price of 560p (2009 575p) and a weighted average remaining contractual life of 1.8 years (2009 1.4 years). The Pennon Group Plc share price at the date of the awards ranged from 473p to 620p.

The aggregate fair value of awards granted during the year was £0.1m (2009 £0.3m), determined from market value. No option pricing methodology is applied since dividends declared on the shares are receivable by the participants in the scheme.

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