Pennon Group Plc · LSE:PNN
Pennon — Non-Deal Roadshow (September 2016)
62 slides from Pennon's roadshow presentation, September 2016
Slide 1: North America Roadshow
NORTH AMERICA ROADSHOW DELIVERING FOR CUSTOMERS AND SHAREHOLDERS SEPTEMBER 2016
Slide 2: Disclaimer
DISCLAIMER For the purposes of the following disclaimers, references to this “document” shall mean meet ongoing commitments, uncertainty arising from open tax computations where this presentation pack and shall be deemed to include references to the related liabilities remain to be agreed and diffic
Slide 3: About Pennon
PENNON GROUP PLC ABOUT PENNON
Slide 4: The Pennon Team
THE PENNON TEAM Chris Loughlin Susan Davy Sarah Heald Chief Executive Officer Chief Financial Officer Director of Corporate Affairs & Investor Relations 4
Slide 5: About Pennon
ABOUT PENNON UNIQUE COMBINATION OF ENVIRONMENTAL INFRASTRUCTURE ASSETS PENNON • At the top end of the FTSE 250 index with a market capitalisation of £3.7 billion • Assets of £5.7 billion and a workforce of over 4,800 people • Dividend policy of +4% annual growth above Retail Price Index inflation to
Slide 6: Water and Wastewater
WATER AND WASTEWATER SOUTH WEST WATER AND BOURNEMOUTH WATER We are focused on providing water and wastewater services in the most efficient and sustainable way possible. Innovation, new technologies, and the pioneering of a holistic approach to water and wastewater management are playing a key role
Slide 7: Recycling, Energy Recovery and Waste Management
RECYCLING, ENERGY RECOVERY AND WASTE MANAGEMENT VIRIDOR We remain at the forefront of the resource sector in the UK, transforming waste into energy, high quality recyclates and raw materials. 8 energy recovery facilities (ERFs) in operation and 3 more under construction Produces enough energy to pow
Slide 8: Why Invest in Pennon?
PENNON GROUP PLC WHY INVEST IN PENNON? eee
Slide 9: Investment Case
INVESTMENT CASE A UNIQUE PROPOSITION IN AN ATTRACTIVE SECTOR ‘SECTOR-LEADING WATER BUSINESS, GROWING RECYCLING, ENERGY RECOVERY AND WASTE MANAGEMENT GROUP’ PREDICTABLE WELL-POSITIONED TO EFFICIENT/EFFECTIVE TAKE OPPORTUNITIES INDEX-LINKED BALANCE SHEET AND EARNINGS AND IN A CHANGING SECTOR-LEADING R
Slide 10: Strategy
STRATEGY STRONG PLATFORM, EVOLVING FOR FUTURE LEADING UK-LISTED ENVIRONMENTAL INFRASTRUCTURE GROUP Strategic priorities FOCUSED ON MOVING TOWARDS A MORE CONSISTENT RISK PROFILE DELIVER FOR LEADERSHIP IN CAPITALISE ON INVESTING FOR CUSTOMERS, EFFICIENT COST GROUP-WIDE GROWTH COMMUNITIES, BASE AND STR
Slide 11: Total Shareholder Return
TOTAL SHAREHOLDER RETURN CONSISTENTLY OUTPERFORMING THE MARKET SINCE PRIVATISATION 5,000 4,500 4,000 TSR, Indexed to 100 3,500 3,000 2,500 2,000 1,500 1,000 500 0 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Pe
Slide 12: Dividend Policy
DIVIDEND POLICY SECTOR-LEADING, PROGRESSIVE DIVIDENDS +4% +5.6% annual increase +4.9% +6.5% 33.58 above RPI policy to 31.80 +7.3% 30.31 2020 +7.6% 28.46 26.52 • Recommended 24.65 final dividend up 6.0% to 23.12p • Full year dividend up 5.6% to 33.58p, reflecting RPI of 1.6% at March 2016 Scrip divid
Slide 13: Outlook
OUTLOOK WELL-PREPARED FOR THE FUTURE STRONG WATER BUSINESS • Outperforming and well-prepared to take opportunities in a changing regulatory environment ERFs DELIVERING GROWTH • On track to contribute c.£100m to EBITDA in 2016/17 • Decision on additional ERF at Avonmouth near Bristol to be taken this
Slide 14: Regulatory Environment
PENNON GROUP PLC REGULATORY ENVIRONMENT eee
Slide 15: UK Water Sector
UK WATER SECTOR INDUSTRY REGULATION Ofwat Natural Environment England Agency Drinking Consumer Council for Water Water Inspectorate 15
Slide 16: Economic Regulation
ECONOMIC REGULATION OFWAT LEGAL OBLIGATIONS • Ensure companies properly carry out their functions • Ensure companies can finance their functions • Protect the interests of consumers, wherever appropriate, by promoting effective competition • Secure the long-term resilience of water and sewerage syst
Slide 17: South West Water Final Determination 2015-20
SOUTH WEST WATER FINAL DETERMINATION 2015-20, ENHANCED STATUS AWARDED OFWAT’S FINAL DETERMINATION – KEY HIGHLIGHTS WHOLESALE TOTEX K6(2) • Highest potential RORE in the sector SWW Final Determination allowed £1,584m Totex • Relative benefits of enhanced assessment increased by a further c. £14m BW F
Slide 18: South West Water 2015/16 RoRE Performance
SOUTH WEST WATER 2015/16 RORE PERFORMANCE, ANTICIPATED TO CONTINUE IN 2016/17 SOUTH WEST WATER - HIGHEST POTENTIAL RETURNS IN THE INDUSTRY RETURN OF REGULATED EQUITY 1) (1) RoRE reflects the Ofwat regulatory guidance of Base RoRE + Outperformance. It is calculated using actual results (before non-un
Slide 19: Non-Household Retail Market Opening
NON-HOUSEHOLD RETAIL MARKET OPENING PENNON WATER SERVICES - A STRATEGY TO RETAIN AND GROW WELL-PREPARED FOR SHADOW OPENING ON 1 OCTOBER FULL MARKET OPENING IN APRIL 2017 MERGER OF SOUTH WEST WATER AND BOURNEMOUTH WATER DELIVERING OPERATING SYNERGIES OF C.10% RETAIN EXISTING CUSTOMERS, GROW THROUGH C
Slide 20: Water 2020
WATER 2020 LARGELY AS EXPECTED DEBT INDEXATION • Phased transition from RPI to CPI • CPI will apply for 100% of revenues • 50% applied to wholesale RCV in 2020-25; further transition at PR24 and beyond • South West Water: lowest index-linked debt in the industry WATER AND SLUDGE RESOURCES • Separate
Slide 21: Water 2020: Ofwat Timetable
WATER 2020 OFWAT TIMETABLE 21 Source: Ofwat
Slide 22: Cost of Debt Consultation
COST OF DEBT CONSULTATION AS EXPECTED COST OF DEBT • Proposed to continue to be set on the basis of an efficient notional company • Indexation will be applied to new cost of debt only • Ofwat will continue the fixed allowance approach for embedded debt • End of period adjustment proposed for the inf
Slide 23: Household Retail Market Opening
HOUSEHOLD RETAIL MARKET OPENING UNDER REVIEW BY UK GOVERNMENT POLICY REVIEW • UK Government requested an assessment of costs and benefits of introducing competition to residential retail customers in England. (Pre-Brexit government) • Ofwat published findings on 19 September 2016 using 4 scenarios.
Slide 24: Financial Performance
PENNON GROUP PLC FINANCIAL PERFORMANCE eee
Slide 25: Financial Highlights 2015/16
FINANCIAL HIGHLIGHTS 2015/16 STRONG RESULTS £M A Underlying(1) 2015/16 2014/15 CHANGE PBT IN-LINE WITH 2014/15 • Net £13.5m(3) impact of revenue reset Group Revenue 1,352.3 1,357.2 (0.4%) mitigated by ERF profit growth Group EBITDA 448.4 411.0 +9.1% • Contribution from Bournemouth Water Group Adjust
Slide 26: Financial Highlights 2015/16
FINANCIAL HIGHLIGHTS 2015/16 GROWTH DRIVEN BY ERFs AND BOURNEMOUTH WATER VIRIDOR WATER GROWTH IN ERF EBITDA REVENUE • Increasing as plants ramp-up, 8 plants • SWW revenue reset impact now on-stream • Bournemouth Water contribution • Expected to contribute c.£100m of EBITDA in 2016/17 OPTIMISING LAND
Slide 27: Driving Value Through Efficiency
DRIVING VALUE THROUGH EFFICIENCY COST REDUCTION PLANS – EXISTING AND NEW STRONG TOTEX OUTPERFORMANCE IN 2015/16 TOTEX OUTPERFORMANCE(1) • Opex lower than last year £56m • H5O alliance continuing to deliver capital efficiency(2) 2015/16 INTEGRATION OF BOURNEMOUTH INTO SOUTH WEST WATER • Back offices
Slide 28: Growing and Maintaining Our Asset Base
GROWING AND MAINTAINING OUR ASSET BASE OPTIMISING THE RISK/REWARD PROFILE GROWING ASSET BASE £BN CAPITAL INVESTMENT 6 • Water RCV growth of 21% over K6 5 4 • ERFs - all 11 plants on-stream by H1 2018/19 3 - Glasgow – commissioning expected to commence in H1 2 2016/17 1 - Dunbar and Beddington (South
Slide 29: Efficient, Effective Balance Sheet
EFFICIENT, EFFECTIVE BALANCE SHEET UNDERPINNING CAPITAL INVESTMENT GROUP NET CASH/COMMITTED BORROWINGS FACILITIES(2) £2,484m £1,707m (31 March 2015 £2,197m) GROUP NET SUSTAINABLE AND EFFICIENT FINANCING – BALANCING GEARING(1) RISK AND REWARD 62.5% • Floating rate debt fixed to protect against rate r
Slide 30: Efficient, Effective Balance Sheet
EFFICIENT, EFFECTIVE BALANCE SHEET DELIVERING SECTOR-LEADING FINANCE COSTS PENNON EFFECTIVE INTEREST RATES K4 K5 K6 7.0% (2005-10) (2010-15) (2015-20) 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2005/6 2006/7 2007/8 2008/9 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 Pennon Water Sector South
Slide 31: Strong Operational Performance
STRONG OPERATIONAL PERFORMANCE DELIVERING SUBSTANTIAL FINANCIAL BENEFITS GROUP EBITDA(1) £M GROUP CASH GENERATED FROM OPERATIONS 700 ERFs contributing 600 significantly post - ERFs expected to contribute build out 500 c.£100m to 448.4 400 300 EBITDA in 2016/17 200 100 0 411.0 407.3 394.8 SWW RETURN
Slide 32: Appendix
PENNON GROUP PLC APPENDIX
Slide 33: Pennon
PENNON GROUP PLC PENNON
Slide 34: Pennon Capital Investment
PENNON CAPITAL INVESTMENT UNDERPINNING GROWTH £M 2015/16 2014/15 ERF CAPITAL INVESTMENT(4)(5) Viridor REMAINING ERF ERFs 139 204 CAPITAL INVESTMENT Recycling 7 22 Landfill Energy 12 16 c.£295M Contracts and Collections 11 5 £204m c.£185m Other(1) 14 15 Viridor Total 183 262 £139m South West Water c.
Slide 35: Pennon Energy
PENNON ENERGY SIGNIFICANT GENERATION GROUP ENERGY GENERATION UK FORWARD POWER PRICES • Total renewable energy generation of c.1.5TWh in 2015/16 £60 - 8 ERFs - 903GWh £55 - Landfill gas – 562GWh £50 £/MWh - 25 Hydro turbines – 12.8GWh generation £45 £40 - 52 solar PV installations – 10.4GWh(1) £35 -
Slide 36: Pennon Funding
PENNON FUNDING DIVERSIFIED SOURCES £M (As at 31 March 2016) Finance Leasing 1,341 Bank Bilaterals - Term Loans 403 European Investment Bank Loans 273 Index-Linked Bond 412 Fixed Rate Bond 133 Private Placements 554 Total Gross Debt 3,116 Less: Cash/liquid Investments (632) Net Borrowings 2,484 KEY R
Slide 37: Pennon Funding: Fair Value of Non-Current Debt
PENNON FUNDING FAIR VALUE OF NON-CURRENT DEBT AS AT 31 MARCH 2016 AS AT 31 MARCH 2015 £M BOOK FAIR DIFF BOOK FAIR DIFF VALUE VALUE VALUE VALUE Finance Leases 1,315 1,163 152 1,304 1,182 122 Bank and Other Loans 403 403 - 338 338 - Private Placements 554 600 (46) 548 607 (59) Fixed Rate Bond 133 198
Slide 38: Pennon Net Interest
PENNON NET INTEREST ANALYSIS £M 2015/16 2014/15 • Net interest payable broadly unchanged, reflecting lower Interest payable (85.0) (66.0) rates, offsetting higher net Capitalised interest payable (9.4) (22.5) debt Other finance income 14.7 13.5 • Effective management of interest rates Net interest p
Slide 39: Pennon Pensions
PENNON PENSIONS NET DEFICIT C.1% OF GROUP’S MARKET CAPITALISATION £M 31 MARCH 2016 31 MARCH 2015 • Bournemouth Water pension Pension schemes’ scheme has assets of around assets £793m £692m £87m resulting in a small surplus Pension schemes’ • Excluding the addition of liabilities £834m £752m Bournemo
Slide 40: Viridor
PENNON GROUP PLC VIRIDOR
Slide 41: Viridor Financial Highlights 2015/16
VIRIDOR FINANCIAL HIGHLIGHTS 2015/16 GROWTH DRIVEN BY ERFs £M 2015/16 2014/15 CHANGE A GROWTH IN ERF EBITDA Revenue(1) 806.2 835.9 (3.6%) • Increasing as plants ramp-up, 8 plants EBITDA(2) 116.5 80.4 +44.9% now on-stream ERFs A 89.7 33.7 +166.2% • Expected to contribute c.£100m of EBITDA in 2016/17
Slide 42: Viridor: ERFs Delivering Growth
VIRIDOR ERFS DELIVERING GROWTH SECURED REVENUE STREAMS FOR ERFs ERF PORTFOLIO • Ramp-up progressing well at the 5 ERFs brought on-stream in 2014/15 • Peterborough added H2 2015/16 8 operational • c.80% long-term contracted volumes (and associated price) across the ERF portfolio 3 under construction
Slide 43: Viridor: Areas of Focus - Recycling
VIRIDOR AREAS OF FOCUS - RECYCLING VOLUMES RECYCLING ‘SELF-HELP’ TO DRIVE MARGIN IMPROVEMENT +7.3% • Short term outlook for recyclate prices relatively stable 1.8MT (2014/15 1.7MT) • Not relying on a near term recyclate price recovery REVENUES • Further ‘self-help’ measures to drive margin improveme
Slide 44: Viridor: ERF Accounting
VIRIDOR ERF ACCOUNTING AN ILLUSTRATIVE, LARGE ERF (C.300KT) WILL CONTRIBUTE C.£28M TO VIRIDOR EBITDA ILLUSTRATIVE ERF(1) IAS 16 IFRIC 12 JVs EBITDA £28m £12m -- IFRIC 12 Interest -- £16m -- Receivable IAS 16 IFRIC 12 JVs Share of JV EBITDA (50%) -- -- £14m • Oxford (Ardley) • Exeter • Lakeside Under
Slide 45: Viridor: Long-Term Revenue Streams for ERFs Secured
VIRIDOR LONG-TERM REVENUE STREAMS FOR ERFs SECURED WASTE INPUTS SECURED AT PLANT OPENING • c.80% of volumes (and associated price) secured 5% RECOVERED 25% METALS across the total ERF portfolio under long-term POWER OUTPUT contracts 25% POWER 25% OUTPUT • The remaining c.20% is under short and mediu
Slide 46: Viridor: Long Term Contract Base
VIRIDOR LONG TERM CONTRACT BASE, WHICH COVERS C.80% OF CAPACITY VIRIDOR ERF CAPACITY Viridor capacity (operational & in construction) Balance of short and medium-term contracts (Municipal and Commercial & Industrial) De-risking - long-term contracts secured Long-term contracts at the start of the ER
Slide 47: ERF Under-Capacity Continues to 2030 and Beyond
VIRIDOR ERF UNDER-CAPACITY CONTINUES TO 2030 AND BEYOND UK COMBUSTIBLE RESIDUAL WASTE MARKET (MT) 30 Other ERF Capacity Viridor ERF Capacity UK ERF Under-capacity 25 20 15 10 5 0 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Source: DEFRA, SEPA, NRW and Viridor
Slide 48: Minimising Risk – Merchant Becomes Long Term Contracted
VIRIDOR MINIMISING RISK – MERCHANT BECOMES LONG TERM CONTRACTED Planning & Permitting Plant Plant Contracted % Achieved Commissioning Operational Merchant % 100% 80% Fuel Load TRIDENT 60% PARK ERF 40% 20% 0% Project Gwyrdd Project Gwyrdd in Trident Contracting Project Gwyrdd Outline Bid Contract sig
Slide 49: Delivering the ERF Programme
VIRIDOR DELIVERING THE ERF PROGRAMME OPERATIONAL RAMP-UP AT NEW PLANTS LAKESIDE RAMP-UP Waste Inputs (tonnes) • Eight operational facilities 500,000 • Managed operational ramp-up of new ERFs, the same 400,000 process performed at Lakeside 300,000 • Transition from commissioning to full operational 2
Slide 50: ERF Build-Out Nearing Completion
VIRIDOR ERFs (INCLUDING JOINT VENTURES) PROGRESS ON ERF PIPELINE BASE LOAD CAPITAL MUNICIPAL ACTUAL/EXPECTED SITE COST (1) GROSS CAPACITY STATUS CONTRACT COMMISSIONING Tonnes Electricity MWe ERF BUILD-OUT (000) Lakeside(2) 150 410 38 Fully operational Merchant Commissioned NEARING Bolton N/A 120 9 F
Slide 51: ERF Capex – Efficient Investment to Deliver Growth
VIRIDOR ERF CAPEX(1) – EFFICIENT INVESTMENT TO DELIVER GROWTH CUMULATIVE CAPITAL CUMULATIVE REMAINING TOTAL ORIGINAL SPEND AT INVESTMENT SPEND TO SPEND TO PROJECT PLANNED £M 1 APRIL 2015(2) 2015/16 31 MAR 2016 COMPLETION SPEND PROJECT SPEND ERF projects in operation Exeter 47 - 47 - 47 47 Oxford (Ar
Slide 52: An Energy Recovery Facility
AN ENERGY RECOVERY FACILITY ARDLEY - OXFORDSHIRE, UK
Slide 53: Ardley ERF
ARDLEY ERF TRANSFORMING RESIDUAL WASTE INTO VITAL BASELOAD ENERGY Weighbridge Flue gas Bunker and treatment Steam Waste cranes turbine IBA Processing Tipping hall Hall Boiler Hall hall Air cooled condenser 53
Slide 54: South West Water
PENNON GROUP PLC SOUTH WEST WATER eee
Slide 55: Water Business Financial Highlights 2015/16
WATER BUSINESS FINANCIAL HIGHLIGHTS 2015/16 OUTPERFORMING THE REGULATORY CONTRACT – 11.7% RORE £M 2015/16 2014/15 CHANGE A Revenue A 547.0 522.2 +4.7% REVENUE South West Water 505.1 522.2 (3.3%) • SWW revenue reset impact Bournemouth Water 41.9 N/A N/A • Bournemouth Water contribution EBITDA(1) B 33
Slide 56: Delivering Net ODI Reward for 2015/16
SOUTH WEST WATER DELIVERING NET ODI REWARD FOR 2015/16 NO WATER STRONG PROGRESS ON ODIs, K6 DELIVERY ON TRACK RESTRICTIONS • Asset reliability - stable serviceability across all areas SWW 19 YEARS • Leakage targets met every year BW SINCE PRIVATISATION • No water restrictions for customers DRINKING
Slide 57: Areas of Focus – SIM and Wastewater
SOUTH WEST WATER AREAS OF FOCUS – SIM AND WASTEWATER SIM IMPROVEMENTS • Sharing best practice between South West Water and Bournemouth Water • Bournemouth Water at SIM performance frontier • Year-on-year improvements in South West Water SIM WASTEWATER IMPROVEMENTS • Continuing our improving trend on
Slide 58: Reconciliation of RoRE to Financials
SOUTH WEST WATER RECONCILIATION OF RORE TO FINANCIALS COMBINED TOTEX OUTPERFORMANCE • Operating costs £211.8m + Capital Expenditure £134.1m = £345.9m • Totex allowance(1) assumed for 2015/16 = £401.1m • £55.2m Totex saving equates to £27.7m of RoRE benefit after applying company sharing rate and tax
Slide 59: Delivering Operational Outperformance
SOUTH WEST WATER DELIVERING OPERATIONAL OUTPERFORMANCE HIGHEST POTENTIAL RETURNS IN THE INDUSTRY 2015/16 OPERATIONAL RORE(2) £56M(1) OF TOTEX SAVINGS DELIVERED TOTEX +2.5% • Totex largest element of potential operational -1.5% +2.3% outperformance £27.7m FRONT-END LOADING OF EFFICIENCIES • Opex lowe
Slide 60: Performance & WaterShare
SOUTH WEST WATER PERFORMANCE & WATERSHARE(1) Shareholder (£m) Customer (£m) Net Totex savings(2) 25.5 21.0 1.8 1.8 ODIs Shareholder Investment in value enhancing services Other items(3) - 3.1 Total Value Benefit 27.3 25.9 Shared through: Shared through: • Dividends • Re-investment options • Future b
Slide 61: Reconciliation of WaterShare
SOUTH WEST WATER RECONCILIATION OF WATERSHARE DRIVING COST BASE EFFICIENCY • Totex efficiencies delivered despite cost pressures DELIVERING OUTCOMES • ODI net rewards delivered of £1.8m OTHER FACTORS • Market movements on new financing returned to customers • Changes in legislation • Costs associate
Slide 62: North America Roadshow
NORTH AMERICA ROADSHOW DELIVERING FOR CUSTOMERS AND SHAREHOLDERS SEPTEMBER 2016