Pennon Group Plc

The Board is committed to the highest standards of corporate governance in the best interests of its shareholders and other stakeholders.

The Annual Report remains the principal means of reporting to our shareholders on the Board's governance policies. This Corporate Governance Report 2012, as set out in our Annual Report and Accounts 2012, sets out how the main and supporting principles of good  corporate governance set out in the UK Corporate Governance Code (June 2010) have been applied in practice. The Code is publicly available on the Financial Reporting Council (FRC) website frcpublications.com.

Chairman's introduction to governance

My primary role as Chairman is to provide leadership to the Board and to provide the right environment to enable the Directors and the Board as a whole to perform effectively to promote the success of the Company for the benefit of its shareholders. In doing so we take account of the interests of our customers, employees, suppliers, communities in which we operate and other interested stakeholders.

I firmly believe that we have good governance in place and that we operate effectively as a Board. However there is always room for improvement and each year we carry out a detailed performance evaluation of the Board and each of the Committees as well as of the Directors and the Group General Counsel & Company Secretary. Further details of the review, which was facilitated by an external governance consultancy for the first time, are set out later in this report. I remain mindful of the need to ensure that the Non-executive Directors continue to have appropriate up to date knowledge and understanding of both South West Water and Viridor as they develop and pursue new initiatives. During 2010/11 

the Board had a number of visits to key sites within both South West Water and Viridor and met and discussed the then current  issues with managers and employees across the Group. In 2011/12 the Board has concentrated on receiving presentations from senior management on material developments in the businesses including our energy from waste plant projects; landfill gas management; energy production from landfill; and regulatory and legislative changes proposed by Ofwat and Government.

Role of the Board and its effectiveness

My primary role as Chairman is to provide leadership to the Board and to provide the right environment to enable the Directors and the Board as a whole to perform effectively to promote the success of the Company for the benefit of its shareholders. In doing so we take account of the interests of our customers, employees, suppliers, communities in which we operate and other interested stakeholders.

I firmly believe that we have good governance in place and that we operate effectively as a Board. However there is always room for improvement and each year we carry out a detailed performance evaluation of the Board and each of the Committees as well as of the Directors and the Group General Counsel & Company Secretary. Further details of the review, which was facilitated by an external governance consultancy for the first time, are set out later in this report. I remain mindful of the need to ensure that the Non-executive Directors continue to have appropriate up to date knowledge and understanding of both South West Water and Viridor as they develop and pursue new initiatives. Last year the Board had a number of visits to key sites within both South West Water and Viridor and met and discussed the then current issues with managers and employees across the Group. This year the Board has concentrated on receiving presentations from senior management on material developments in the businesses including our energy from waste plant projects; landfill gas management; energy production from landfill; and regulatory and legislative changes proposed by Ofwat and Government.

Remuneration

The Board and the Remuneration Committee remain mindful of shareholder and the Government's concerns regarding some companies' remuneration practices.

We have always pursued a remuneration policy of setting pay at a level which is just sufficient to attract and retain high calibre management and providing incentives which are fully aligned with creating shareholder value. We have reviewed our pay and benefits practice again this year and are satisfied no changes are necessary to maintain this policy.

Shareholder engagement

The Directors and I recognise the importance and value of regular communications with our shareholders. This ensures that we understand their needs and wishes and hopefully that we provide them with confidence that we have the right governance structures, processes and systems in place to assist us in achieving our stated objectives.

A regular dialogue with the Company's institutional shareholders is maintained through a comprehensive investor relations programme. During the year some 60 meetings with institutional shareholders (including with prospective shareholders) were held and attended by the Group Director of Finance and the Company's Investor Relations Manager. The Chief Executive of South West Water, the Chief Executive of Viridor and I also participated when appropriate. The Group Director of Finance reports to the Board regularly on major shareholders' views about the Group and every six months the Company's Brokers give a presentation to the Board on equity market developments and shareholder perceptions.

I also actively encourage the participation of shareholders at our Annual General Meeting.

Compliance with UK Corporate Governance Code and other requirements

I am pleased to report that throughout 2011/12 the Company complied with the provisions and applied the main principles set out in the UK Corporate Governance Code with no exceptions to report.

My introduction to this Corporate Governance Report and the following sections are made in compliance with the UK Corporate Governance Code, FSA Listing Rule 9.8.6 and FSA Disclosure and Transparency Rules 7.1 and 7.2 and cover the work of our Board and its Committees; our internal control systems and procedures including risk management; our corporate governance statements relating to share capital and control; and our Going concern and Directors' responsibilities statements.

Ken Harvey
Chairman
18 June 2012

The Board and its Committees

The Board

The Directors, independence and responsibilities

The Board of Directors at the end of the year comprised the Chairman, three Executive Directors and three Non-executive Directors. The Non-executive Directors were considered by the Board to be independent throughout the year. None of the relationships or circumstances set out in provision B.1.1 of the UK Corporate Governance Code (the Code) applied to them. Following this year's Annual General Meeting and subject to re-election, Dinah Nichols will have served on the Board for more than nine years since her first election. However Dinah has been determined by the Board to be independent. The Board is satisfied that she does and will continue to demonstrate independence of character and judgement in the performance of her role on the Board. All of the Non-executive Directors are considered to have the appropriate skills, experience in their respective disciplines and personality to bring independent and objective judgement to the Board's deliberations. Their biographies on pages 44 and 45 of the 2012 Pennon Group Annual Report demonstrate a broad range of business and financial experience. Gerard Connell is the Senior Independent Non-executive Director. His duties include leading the annual evaluation of the performance of the Chairman by the Non-executive Directors and being available as an additional point of contact on the Board for shareholders. Gerard is also chairman of the Audit Committee and in accordance with the Code's principles relating to audit committee membership he has recent and relevant financial experience (as set out in his biography on page 44 of the 2012 Pennon Group Annual Report). Martin Angle is also a member of the Audit Committee and he has relevant financial experience as set out in his biography on page 44 of the 2012 Pennon Group Annual Report. There is a clear division of responsibilities between the roles of Chairman and the Chief Executives of South West Water and Viridor as recorded in the descriptions of the roles approved by the Board. All Directors are now subject to re-election each year in accordance with provision B.7.1 of the Code.

The search for an additional non-executive director is well under way. The intention is to appoint a director who is considered to be independent and who will be a member of the Remuneration, Audit, Nomination and Sustainability committees.

All Directors are equally accountable for the proper stewardship of the Group's affairs, with the Non-executive Directors having a particular responsibility for ensuring that strategies proposed for the development of the business are critically reviewed. The Non-executive Directors also critically examine the operational and financial performance of the Group and fulfil a key role in corporate accountability through their membership of the Committees of the Board. In addition the Chairman holds meetings with the Non-executive Directors, without the Executive Directors present, to discuss performance and strategic issues.

How the Board operates

In accordance with Group policies the Board has a schedule of matters reserved for its decision and delegates more detailed consideration of certain matters to Board Committees; to the subsidiary boards of South West Water and Viridor; to the Executive Directors; and to the Group General Counsel & Company Secretary, as appropriate. The matters reserved to the Board include the approval of financial statements; acquisitions and disposals; major items of capital expenditure; authority levels for other expenditure; risk management; and approval of the strategic plan and annual operating budgets.

The Board operates by receiving written reports circulated in advance of its meetings from the Executive Directors and the Group General Counsel & Company Secretary on matters within their respective business areas in the Group. Under the guidance of the Chairman, all matters before the Board are discussed openly and presentations and advice are received frequently from other senior executives within the Group or from external advisers.

Directors have access to the advice and services of the Group General Counsel & Company Secretary and the Board has established a procedure whereby Directors, in order to fulfil their duties, may seek independent professional advice at the Company's expense.

The training needs of Directors are reviewed as part of the performance evaluation process.

Performance evaluation

The Board has well developed internal procedures to evaluate the performance of the whole Board, each Committee, the Chairman, each individual Director and the Group General Counsel & Company Secretary. The evaluation procedure relating to the Board and its Committees was administered this year by an external governance consultancy, Lintstock. All participants' views were sought via an online questionnaire on a range of questions which were specifically designed by the Chairman and the Group General Counsel and Company Secretary in conjunction with Lintstock to ensure objective evaluation of performance. Responses were then summarised and evaluated by Lintstock for the Board and each Committee to consider and determine whether any changes should be made to be more effective. A meeting between the Chairman, the Group General Counsel & Company Secretary and Lintstock was then held to discuss the high level findings of the evaluation and to consider them in the context of governance developments generally. While performance was again considered to be satisfactory, there were a number of suggestions made to refine the overall effectiveness of the Board which the Board agreed should be introduced over the following months when appropriate. For example it was agreed that performance could be improved further through a number of minor changes to Board reports and discussions at the beginning of each meeting on topical issues.

The Chairman's performance was evaluated separately by the Non-executive Directors, led by the Senior Independent Non-executive Director. The Chairman's other significant commitments outside the Group have not changed during the year and the Board is satisfied that such commitments do not prejudice the Chairman's performance in relation to his Group role.

Dealing with Directors' conflicts of interest

The Board has in place a procedure for the consideration and authorisation of Directors' conflicts or possible conflicts with the Company's interests. This is in accordance with the Directors' interests provisions of the Companies Act 2006 and the Company's Articles of Association which grants to Directors authority to approve such conflicts subject to appropriate conditions.

Board committees

Group policies allocate the tasks of giving detailed consideration to specified matters, to monitoring executive actions and to assessing reward, to the Board Committees as set out in the remaining sections of this Governance Report and the Directors' Remuneration Report on pages 52 and 53 of the 2012 Pennon Group Annual Report.

Board committees' terms of reference

The Terms of Reference of the Audit, Remuneration, Nomination and Sustainability Committees are available upon request to the Group General Counsel & Company Secretary and are also set out on the Company's website pennon-group.co.uk.

The Audit Committee

Our activities during the year

A continuing focus this year has been reviewing the systems and controls in place in Viridor to manage its increasingly complex and regionalised businesses across the UK. It is important to ensure that Viridor continues to have appropriate processes and controls in place to manage the strong growth expected from its energy from waste plants, its developing recycling businesses and the major contracts with waste authorities. The Committee was pleased to note that plans are also being developed to deliver significant enhancements and upgrading of IT systems and that regular internal audits at local sites are demonstrating that new controls and systems put in place have been working satisfactorily.

In South West Water the emphasis has been on continuing to manage systems in place as efficiently as possible whilst ensuring that risks are being appropriately assessed and controls in place are operating satisfactorily. The Committee was pleased to note that South West Water's risk assessment and internal control processes remain robust.

We decided to review our risk review process this year bearing in mind that it is 12 years since the Group introduced detailed risk management policies and procedures in accordance with the Turnbull Recommendations. We appointed Deloitte to undertake a full review; to date we have received a valuable interim report which is to be followed up shortly by a presentation to the Committee and the Board to enable us to consider any changes which may be appropriate to existing processes.

As part of the Group's risk review process this year we have once again assessed the key areas of sensitivity to the Group and these are set out on pages 28 to 33 of the 2012 Pennon Group Annual Report. We have concentrated on the high level key risks to the Group and have provided an indication of how the level of risk has changed over the past year.

As reported in previous Annual Reports we continue to monitor carefully the effectiveness of our external auditors as well as their independence, bearing in mind that it is recognised there is a need to use our auditors' firm for non-audit services from time to time. We have full regard to the Auditing Practices Board's Ethical Standards and ensure that our procedures and safeguards meet these standards.

Periodically a detailed review of the provision of external auditors is undertaken in accordance with best practice. The last such review was undertaken in 2006 when the current auditors were appointed following a comprehensive competitive tender process. In addition the auditors' appointment is reviewed annually by the Committee. As part of this annual review the Committee considers the tenure, quality and fees of the auditors.

Our policy for the engagement of the auditors' firm for non-audit work involves the Group Director of Finance setting out in a report to the Committee the reasons for appointing the auditors' firm for any material work and obtaining the approval of the Committee. We carefully review whether it is necessary for the auditors' firm to carry out such work and we will only grant approval for their appointment if we are satisfied that the auditors' independence and objectivity are fully safeguarded.

The Company's auditors assist in this process by ensuring that the senior partner responsible for the external audit of the Group remains responsible for such audit for no more than five years and that there is a Quality Review Partner who is involved in planning the audit and in the reviewing of the final accounts of the Company including assessing any critical matters which may be identified in the audit. The auditors have also confirmed to the Committee that they have complied with all relevant guidance issued by the Auditing Practices Board and have implemented appropriate safeguards including:

• all non-audit related services, where necessary, being performed by personnel independent of the audit engagement team
• no work being undertaken that would require the auditors to act in a capacity as an advocate
  no aspect of the auditing engagement partner's performance being assessed on the level of non-audit fees charged to the
• Company
• the Committee Chairman meeting with the auditors' Quality Review Partner periodically to discuss the scope and performance of their work.

Set out on page 80 of the 2012 Pennon Group Annual Report is the level of fees paid to the Company's auditors' firm for audit services, or audit-related services and non-audit services following the guidance proposed by the Auditing Practices Board's Ethical Standards Guidance for Auditors. It is recognised that the level of non-audit fees payable to the Company's auditors' firm in the past year was in excess of the audit fee paid. This was primarily due to fees paid to the corporate finance arm of the auditors' firm in relation to the major new PPP/PFI contract gains by Viridor. We considered carefully the reasons for the engagement of the auditors' firm in accordance with the process described above. Of paramount importance was the continuing independence of the auditors which the Committee was satisfied was maintained due to the safeguards followed by the auditors' firm as described above. We were also satisfied that it was appropriate to appoint the auditors' firm to undertake such work because of the auditors' firm's specialist knowledge and the limited number of consultants with the expertise to undertake such engagements. These PPP/PFI contracts are of vital importance to the long-term strategic development of Viridor and it is critical that Viridor should be able to benefit from the best advice available in the market. The number of PPP/PFI contract opportunities is expected to decline from 2012/13 onwards leading to a corresponding decline in corporate finance fees payable.

The Committee also acknowledged that the absolute level of non-audit fees payable to the Company's auditors is consistent with the level of non-audit fees incurred by many companies within the FTSE 100.

Another area of particular importance to the Committee is the internal audit activities of the Group. The Group has a longstanding and effective centralised internal audit function together with separate reviews undertaken within both South West Water and Viridor. A Group Internal Audit Plan is approved in September each year. It takes account of the activities to be undertaken by the external auditor and also the Group's annual and regular interim risk management reviews. This approach seeks to ensure that there is an ongoing programme of internal and external audit reviews focused on key risk areas throughout the Group. The Group Audit Manager reports quarterly to the Committee on audit reviews undertaken and their findings.

The areas of the business of the Group which received audit attention over the past year included Group treasury processes; business continuity management; information security and IT risks; Viridor site practices; credit management and debt collection; and core systems and processes.

We have also considered a range of matters during the year in accordance with our established calendar of business and Terms of Reference including in particular:

• reviewing the accounting policies and reporting judgements adopted by the Group in preparing its financial statements. We were satisfied that they were appropriate to provide a fair assessment of the financial performance of the Group
• agreeing the external auditors' strategy for carrying out the audit during the past financial year
• carrying out a review of the Half Yearly Report with the external auditors
• considering a report from the external auditors on the review of the financial year-end and meeting them in the absence of management to discuss their remit and any issues arising from the audit, including management's treatment of significant judgements which the auditors had confirmed (following discussion with management) were considered to be satisfactory
• considering an internal control report from the external auditors which reviewed the co-ordination of activities with the Group's internal audit function
• keeping under review the effectiveness of the Group's internal controls, including all material financial, operational and compliance controls and risk management systems
• monitoring and reviewing the effectiveness of the Group's internal audit function and approving the annual internal audit plan
• reviewing the findings of the internal audit function and reviewing and monitoring management's responsiveness to such findings
• overseeing the relationship with the external auditors including their appointment, remuneration, re-appointment and the monitoring of their independence and objectivity particularly having regard to the supply of any non-audit services by the auditors' firm
• reviewing the level of audit and non-audit fees paid
• an updated fraud, anti-bribery and other irregularities policy and procedure to take account of the provisions of the new Bribery Act, which was subsequently approved by the Board.

After consideration of the reports provided by the external auditors, and our assessment of the performance and independence of the auditors during the year in conjunction with the Group Director of Finance, we consider that it is appropriate that the external auditors be re-appointed and will make an appropriate recommendation to shareholders at the Annual General Meeting.

It is our practice as an additional assurance, at the end of meetings of the Committee, to hold separate meetings with the external auditors and the internal Group Audit Manager without management present to discuss their respective areas of activity during the previous period and any issues arising from their audits.

Sustainability Committee¹

The Sustainability Committee's duties, in the context of the requirement for companies to conduct their business in a responsible manner (in relation to environmental, social and governance (ESG) matters), are to review the strategies, policies, management, initiatives, targets and performance of the Pennon Group of companies in the areas of occupational health and safety and security; environment; workplace policies; non-financial regulatory compliance and the role of the Group in society.

During the year the Committee considered a wide range of matters in accordance with its Terms of Reference including:

• the 2011/12 Group Sustainability Report and the associated Verifier's Report
• the South West Water and Viridor Sustainability Reports
• the Group's health and safety performance and plans
• the Verifier's recommendations for the next Sustainability Reports
• progress against the Sustainability targets for 2011/12
• Sustainability targets for 2012/13
• the annual review of Group policies
• a new community relations and investment policy
• developments and progress in carbon reduction driving sustainability within the Group supply chains.

In reporting on sustainability, the Company has sought to comply with the Association of British Insurers' Guidelines on Responsible Investment Disclosure. The Business review on pages 34 to 39 of the 2012 Pennon Group Annual Report contains the Group's 2012 Annual Sustainability Report.

¹ (formerly Corporate Responsibility Committee).

The Nomination Committee

The Nomination Committee meets as and when required to select and recommend to the Board suitable candidates for appointment as Executive and Non-executive Directors to the Board and as executive directors to the Viridor and South West Water boards, determine the nomination process and review succession plans. It is the practice of the Committee, led by the Chairman, to appoint an external search consultancy to assist in any Board appointments.

During the year the Committee considered the annual performance evaluation results for the Committee; considered and approved the appointments of an executive director and a non-executive director to the Viridor board; reviewed equality and diversity arrangements throughout the Group; and commenced the process, with the assistance of external search consultants, for the appointment of a further Non-executive Director to the Board taking account of the recommendations of the Lord Davies Review, 'Women on Boards'.

Gender Diversity – The Board's policy In accordance with the Lord Davies Review recommendations and the expected changes to the UK Corporate Governance Code (the Code) the Committee is pleased to report that the Board has adopted a Boardroom Diversity Policy which confirms that the Board is committed to:

• the search for Board candidates being conducted, and appointments made, on merit, against objective criteria and with due regard for the benefits of diversity on the Board, including gender
• satisfying itself that plans are in place for orderly succession of appointments to the Board and to senior management to maintain an appropriate balance of skills and experience within the Group and on the Board and to ensure progressive refreshing of the Board.

In addition, within the spirit of Principle B.2 of the Code, the Board will endeavour to achieve and subsequently maintain:

• a minimum of 25% female representation on the Board by 2015 (and maintain the current 14% representation until the higher percentage is achieved)
• a minimum of 25% female representation on the Group's senior management team by 2015.

Currently the Group has 14% female representation at Board level and in a workforce of circa 4,500 some 16% are women. In senior/middle management executive positions the female representation is circa 18%.

As well as its Boardroom Diversity Policy the Group has a number of policies embracing workplace matters, including non-discrimination and equal opportunities policies.

The Committee is required by the Board to review and monitor compliance with the Boardroom Diversity Policy and report on the targets, achievement against those targets and overall compliance in the Annual Report each year.

Internal control

Wider aspects of internal control

The Board is responsible for maintaining the Group's system of internal control to safeguard shareholders' investment and the Group's assets and for reviewing its effectiveness. The system is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss. There is an ongoing process for identifying, evaluating and managing the significant risks faced by the Group that has been in place throughout the financial year 2011/12 and up to the date of the approval of this Annual Report and Accounts.

The Board confirms that it continues to apply procedures in accordance with the UK Corporate Governance Code and the 'Guidance on Internal Control' (The Turnbull Guidance) which suggests means of applying the internal control part of the Code. As part of these procedures the Board has a Group Risk Management Policy (GRMP) which provides for the identification of key risks in relation to the achievement of the business objectives of the Group, monitoring of such risks and annual evaluation of the overall process, as described in more detail below. The GRMP is applied by all business units within the Group in accordance with an annual timetable.

Risk identification

A full risk and control assessment is undertaken annually by the management of each business to identify financial and non-financial risks which are then regularly updated. Each business compiles (as part of regular management reports) an enhanced and focused assessment of key risks against corporate objectives. At each meeting the Board receives from the Executive Directors details of any new high-level risks identified and how they are to be managed, together with details of any changes to existing risks and their management. The subsidiary boards of South West Water and Viridor also receive at each meeting similar reports in respect of their own areas of responsibility. All Executive Directors and senior managers are required to certify on an annual basis that they have effective controls in place to manage risks and to operate in compliance with legislation and Group procedures.

We also have a Whistleblowing policy and we thoroughly investigate any allegations of misconduct and irregularity and consider the implications for our control environment. In the normal course of business investigations into irregularities may be ongoing as of the date of the approval of the financial statements.

All of these processes serve to ensure that a culture of effective control and risk management is embedded within the organisation and that the Group is in a position to react appropriately to new risks as they arise. Details of key risks affecting the Group are set out in the Business review on pages 28 to 33 of the 2012 Pennon Group Annual Report.

Internal control framework

The Group also has a well established internal control framework which is operated and which applies in relation to the process for preparing the Group's consolidated accounts.

This framework comprises:

• a clearly defined structure which delegates an appropriate level of authority, responsibility and accountability, including responsibility for internal financial control, to management of operating units
• a comprehensive budgeting and reporting function with an annual budget approved by the Board of Directors, which also monitors the financial reporting process, monthly results and updated forecasts for the year against budget
• documented financial control procedures. Managers of operating units are required to confirm annually that they have adequate financial controls in operation and to report all material areas of financial risk. Compliance with procedures is reviewed and tested by the Company's internal audit function
• an investment appraisal process for evaluating proposals for all major capital expenditure and acquisitions, with defined levels of approval and a system for monitoring the progress of capital projects
• a post-investment evaluation process for major capital expenditure and acquisitions to assess the success of the project and learn any lessons to be applied to future projects.

Internal control review

An evaluation of the effectiveness of overall internal control compliance by the Group is undertaken in respect of each financial year (and subsequently up to the date of this report) to assist the Audit Committee in considering the Group internal audit plan for the forthcoming financial year and also the Business review for the Annual Report. The Group General Counsel & Company Secretary initially carries out the evaluation with Directors and senior management for consideration by the Audit Committee and subsequently for final evaluation by the Board.

In addition the Audit Committee regularly reviews the operation and effectiveness of the internal control framework and annually reviews the scope of work, authority and resources of the Company's internal audit function. The Committee reports and makes recommendations to the Board on such reviews. For 2011/12 and up to the date of the approval of the Annual Report and Accounts, both the Audit Committee and the Board were satisfied with the effectiveness of the GRMP and the internal control framework and their operation within the Group.

Further information on the internal control review is set out on page 47 of the 2012 Pennon Group Annual Report in relation to the Audit Committee.

Going concern

The Directors consider, after making appropriate enquiries, that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the financial statements.

Directors' responsibilities statements

The Directors are responsible for preparing the Annual Report, the Directors' Remuneration Report and the financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the Group and Company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group for the year.

In preparing these financial statements the Directors are required to:

• select suitable accounting policies and then apply them consistently
• make judgements and accounting estimates which are reasonable and prudent
• state whether applicable IFRSs as adopted by the European Union have been followed, subject to any material departures disclosed and explained in the financial statements.

The Directors confirm that they have complied with the above requirements in preparing the financial statements.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Group and the Company and enable them to ensure that the financial statements and the Directors' remuneration report comply with the Companies Act 2006 and, as regards the Group financial statements, article 4 of the International Accounting Standards (IAS) Regulation. They are also responsible for safeguarding the assets of the Group and the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

Each of the Directors, whose names and functions are listed on pages 44 and 45 of the 2012 Pennon Group Annual Report, confirms that, to the best of their knowledge:

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

the Directors' report contained on pages 2 to 41 of the 2012 Pennon Group Annual Report includes a fair review of the development and performance of the business and position of the Company and the Group, together with a description of the principal risks and uncertainties they face.

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

The Remuneration Committee

The Committee's Terms of Reference include:

• advising the Board on the framework of executive remuneration for the Group
• determining the remuneration and terms of engagement of the Chairman, the Executive Directors and Senior Management of the Group.

No Director or any other attendee participates in any discussion on, or determination of, his or her own remuneration.

During the year the Committee received advice or services which materially assisted the Committee in the consideration of remuneration matters from Ken Harvey, Chairman of the Company, and from the following advisors who were appointed directly by the Committee:

• Ken Woodier, Group General Counsel & Company Secretary, on remuneration and share scheme matters. He also provides legal advice and company secretarial services to the Company
• Deloitte LLP, auditing and remuneration consultants, on calculating the Company's total shareholder return compared with two comparator groups for the Company's Performance and Co-investment Plan. Deloitte also provide financial, tax and risk management review advice to the Company
• Aon Hewitt Limited, pensions and remuneration consultants, on providing advice on pension benefits. Aon Hewitt also provided actuarial and investment advice to the Company and to the Trustees of the Group's pension schemes
• Towers Watson UK Limited, remuneration consultants, on the Company's Director and senior management annual incentive benefits framework.