Pennon Group Plc · LSE:PNN
Pennon — FY2014/15 Earnings Presentation
57 slides from Pennon's earnings presentation, May 20, 2015
Slide 1: Preliminary Results 2014/15
Preliminary Results 2014/15 20 May 2015 1
Slide 2: Pennon Group Plc Disclaimer
Pennon Group Plc (“Pennon Group”) Disclaimer For the purposes of the following disclaimers, references to this "document" shall mean this presentation pack and shall be deemed to include references to the related speeches made by or to be made by the presenters, any questions and answers in relation
Slide 3: SWW building on a strong base for K6 outperformance
SWW building on a strong base for K6 outperformance Well-prepared for market and regulatory reform Viridor has moved from investment to delivery Pennon delivering sustainable profit and dividend growth Ken Harvey Chairman 3
Slide 4: Financial Overview
Financial Overview Susan Davy Group Director of Finance 4
Slide 5: Financial Highlights
Financial Highlights Resilient financial performance Solid results In line with management expectations and previous guidance - Revenue up +2.7% to £1,357.2m - Profit Before Tax(1) up +1.6% to £210.7m - Dividend up +4.9% to 31.80p South West Water EBITDA(2) higher than last year despite tariff freez
Slide 6: Summary Financial Results
Summary Financial Results Strong performance (£m) 2014/15 2013/14 Change Group Revenue 1,357.2 1,321.2 +2.7% Group EBITDA(1) 411.0 407.3 +0.9% - SWW 331.3 330.9 +0.1% - Viridor EBITDA 80.4 76.3 +5.4% - Share of joint venture EBITDA(2) 41.4 41.1 +0.7% Group EBITDA (1) - IFRIC 12 interest 13.5 8.5 +58
Slide 7: Net Debt
Net Debt Strong cash inflow from operations (£m) (1) Including construction spend on service concession arrangements (excluding projects financed by local authorities) 7 Effective debt management
Slide 8: Group Capital Investment
Group Capital Investment Reflects regulatory expenditure and ERF build out 2014/15 2013/14 Recycling £22m Recycling £12m Landfill £13m Landfill £15m Viridor Other £23m Other £19m SWW ERFs ERFs Water £204m £246m Water £57m £407m(1) £434m(1) £61m Wastewater Wastewater £88m £81m South West Water • Effi
Slide 9: Group Financing
Group Financing Efficient financing a key feature of the Group 2014/15 2013/14 Regulatory Capital Value £m 3,800 K5 K6 Net borrowings £2,197.1m £2,194.0m 3,600 (£m) 3,400 3,200 Net Gearing(1) 61.9% 64.7% 3,000 (%) 2,800 RCV growth of c.24% over K6(2) • 19% South West Water 2,600 • 5% uplift for Bour
Slide 10: Group Financing: Efficient long-term financing
Group Financing Efficient long-term financing Group Net Finance Costs £40.8m (2013/14 £53.9m) Average rate of 3.4% (2013/14 3.8%) Average debt maturity 23 years Diversified funding mix Significant finance-leasing with long maturity and secured margins Facilities renewed in-line with expectations 10
Slide 11: Group Financing: Strong liquidity
Group Financing Strong liquidity Cash/committed facilities £1,741m Cash balances £771m (including £196m deposits with Letters of Credit providers and Lessors) Undrawn committed facilities £970m Committed funding in place for South West Water to March 2017 Fully funded for build-out of committed ERF
Slide 12: Taxation
Taxation(1) Tax rate reduced Tax Rate 21.2% (2013/14 25.0%) Current tax current year charge of £44.7m, lower than 2013/14 of £51.8m • Reflecting lower mainstream rates Deferred tax charge of £18.2m; 2013/14 £25.8m credit • Prior year reflected expected reductions in corporate tax rate (1) Current ta
Slide 13: Dividend Policy
Dividend Policy Consistent, sustainable cash returns 2014/15 dividends per share +4.9% to 31.80p +4% +4.9% annual increase Scrip dividend alternative +6.5% above RPI policy to 31.80 +7.3% 30.31 2020 +7.6% 28.46 26.52 24.65 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/
Slide 14: South West Water
South West Water Chris Loughlin Chief Executive
Slide 15: South West Water Overview
South West Water Overview Successful K5 delivery • Significant financial and efficiency outperformance • Strengthening operational performance Strong foundation for K6 outperformance • Highest RoRE potential in the sector • Delivery plans underway Prepared for industry reforms • Business re-organise
Slide 16: South West Water Financial Performance
South West Water Financial Performance Successful completion of K5 2014/15 2013/14 Change (£m) (£m) Revenue 522.2 520.0 +0.4% • Mitigated impact of price freeze: − NPV neutral − growth in revenue - higher EBITDA(1) 331.3 330.9 +0.1% demand − Strong cost control Operating Profit(1) 225.4 227.0 (0.7%)
Slide 17: Operating cost efficiency outperformed for K5
South West Water Financial Performance Operating cost efficiency outperformed for K5 K5 cumulative operating cost efficiencies Cumulative K5 cost increases lower than RPI Admin & Energy support services procurement £2.6m K5 efficiency programme delivered and usage £3.6m Cumulative K5 efficiency of £
Slide 18: Capital delivery outperformed for K5
South West Water Financial Performance Capital delivery outperformed for K5 K5 cumulative capital Expenditure £145.1m (2013/14 £141.6m) expenditure • Focus on wastewater compliance and reliability • Safeguarding high quality drinking water supply Enhanced Service Levels • Reducing number of customer
Slide 19: South West Water Operational Performance
South West Water Operational Performance Improvements for customers and environment Strong platform for K6 ODI(1) targets • Leakage target met every year • 18th consecutive year without water restrictions • Robust bathing water compliance • Asset reliability – stable serviceability Improving custome
Slide 20: South West Water Final Determination
South West Water Final Determination Benefits of draft position retained Water and sewerage companies’ Consistent with Draft Determination Return on Regulated Equity (RoRE) 2015-20(2) • Potential equity returns in excess of 10% • Appointee vanilla WACC 3.85% (Wholesale WACC 3.7%) Benefits of ‘enhanc
Slide 21: K6 Preparation
South West Water K6 Preparation Strong foundation for K6 outperformance K6 early start programme – focused on outcomes and ODI delivery • Advanced bathing water investments • Innovative new Plymouth water treatment works Refreshed and re-aligned strategic contracts Focus on customer service • Shifti
Slide 22: K6 Preparation: Re-organised and refocused business
South West Water K6 Preparation Re-organised and refocused business Targeting TOTEX, ODI and financing outperformance Developed wholesale and retail strategies • K6 shadow reporting already established Preparing for market liberalisation in 2017 • SWW’s internal programme well established • Source f
Slide 23: Acquisition of Bournemouth Water
Acquisition of Bournemouth Water Logical, accretive acquisition(1) Bournemouth South West Water Water Household 185,000 722,000 Bournemouth Water Customers • High performing water-only company Non-household 16,000 73,000 Customers • Outstanding customer service - leading SIM performance Population s
Slide 24: South West Water Summary
South West Water Summary Successful K5 delivery Successful K5 delivery • Provides strong foundation for 2015-20 Highest potential RoRE in sector • With delivery underway Engaged and planning for future regulatory reform • Prepared for market liberalisation in 2017 • Supporting development of Upstrea
Slide 25: Viridor
Viridor Ian McAulay Chief Executive
Slide 26: Viridor Overview
Viridor Overview Passed strategic point of inflexion • Strategic orientation of the business around ‘Energy’ and ‘Recycling & Resources’ divisions delivering results • Viridor’s ERF business now operational. 5 new ERFs delivered, adding to the existing Lakeside and Bolton operational ERF assets. On
Slide 27: Viridor Strategy
Viridor Strategy Unrivalled expertise delivering the right strategy for each business Landfill Landfill Recycling Collection & ERF Gas Contracts Short-term Headwinds in commodity outlook pricing currently creating challenging environment Long-term In prescriptive decline fundamentals due to EU and U
Slide 28: Viridor Financial Performance
Viridor Financial Performance Full year EBITDA exceeded 2013/14 as expected (£m) 2014/15 2013/14 Change Revenue(1)(2) 835.9 802.0 +4.2% EBITDA(3) 80.4 76.3 +5.4% Underlying EBITDA(3)(4) 135.3 125.9 +7.5% PBIT + Joint Ventures(3)(5) 37.9 43.6 (13.1%) PBT(3) 27.7 27.6 +0.4% Exceptional items post tax
Slide 29: ERFs making substantial EBITDA contribution
Viridor Financial Performance ERFs making substantial EBITDA contribution 2014/15 2013/14 IFRIC 12 interest (1) Collection IFRIC 12 interest (1) Collection Share of Contracts Share of JVs (2) Contracts JVs (2) Underlying Recycling Underlying EBITDA(3) EBITDA(3) Recycling Landfill ERFs ERFs Landfill
Slide 30: Residual Waste Market Overview
Viridor Residual Waste Market Overview Consistent and confident in our market projections UK Residual Waste Market (Tonnes m) 30 Other ERF Capacity Viridor ERF Capacity Residual UK ERFwaste arisings suitable for ERF fuel Under-capacity 25 20 15 10 5 0 2014 2015 2016 2017 2018 2019 2020 2021 2022 202
Slide 31: Landfill Energy
Viridor Landfill Energy Landfill Energy remains important cash contributor • Landfill and Landfill gas generation contributed £51.2m EBITDA in 2014/15 • From 21 sites in 2014/15, c.3 active landfills being closed per year to leave 3 strategic sites by 2020 - Closed landfill sites continue to produce
Slide 32: Alternative landfill site uses being explored
Viridor Landfill Energy Alternative landfill site uses being explored • Westbury solar array operational and further projects in planning - Utilising existing grid connections • Pilsworth cryogenic energy storage £8m trial underway, funded by Department of Energy & Climate Change (DECC) • Single and
Slide 33: Contracts and Collections
Viridor Contracts and Collections Well positioned for growth in a consolidating sector Collections • Viridor’s collection fleet has an increasing role in securing material for its recycling plants and ERFs • Profits increased through focus on route optimisation and infill of rounds using proprietary
Slide 34: Recycling
Viridor Recycling Relentless focus on recycling margin improvements through ITOO • Strong and growing drivers and demand for recycling - EU expected to announce 70% recycling target in 2014/15 2013/14 2015 Volumes 1.7mt 1.8mt • ITOO (Input, Throughput and Output Optimisation) Revenues £86/t £93/t pr
Slide 35: ERFs and Joint Ventures
Viridor ERFs and Joint Ventures ERF business now successfully operational EBITDA c.100 (£m) 3.1 2013 2013/14 2016/17 By November 2014 Since November Operational ERF 2014 2015-2018 Consented facility 35 Strong, growing profitability
Slide 36: ERF Profitability
Viridor ERF Profitability ERFs established and growing business • Five ERFs taken over since July 2014, adding to the existing Lakeside and Bolton operational ERF assets. Two thirds of the portfolio capacity now in operation • £839m spent with £460m capital budget remaining • Peterborough – progress
Slide 37: Energy Recovery Facilities
Viridor Energy Recovery Facilities Appropriate mix of fuel (waste) secured • Recently taken over plants operating in line or ahead of expectations • Wholly owned plants processed 209k tonnes and generated 121 GWh in 2014/15(1) • All operational facilities full at opening. • 80% of committed portfoli
Slide 38: Joint Venture Profitability
Viridor Joint Venture Profitability Consistent performance from Joint Ventures (£m) 2014/15 2013/14 Lakeside Share of EBITDA 18.1 15.2 • Continues to outperform initial expectations • Scheduled outage deferred to 2015/16 VLGM Share of EBITDA 3.0 2.5 Share of IFRIC 12 interest 12.1 12.5 • All 43 faci
Slide 39: Viridor Summary
Viridor Summary Passed strategic point of inflexion • Strategic orientation of the business around ‘Energy’ and ‘Recycling & Resources’ divisions delivering results • Viridor’s ERF business now operational. 5 new ERFs delivered, adding to the existing Lakeside and Bolton operational ERF assets, on t
Slide 40: SWW building on a strong base for K6 outperformance
SWW building on a strong base for K6 outperformance Well-prepared for market and regulatory reform Viridor has moved from investment to delivery Pennon delivering sustainable profit and dividend growth Ken Harvey Chairman 40
Slide 41: Appendix: Group Financials
Appendix Group Financials 41
Slide 42: Pennon Group Exceptional Items
Pennon Group Exceptional Items No immediate cash impact (£m) 2014/15 2013/14 Operating credits / (costs) • Pension scheme benefit changes 14.9 - • Environmental and landfill restoration provisions 6.7 (5.7) • Underperforming contracts (11.0) - • Net impairment of property, plant and equipment (24.3)
Slide 43: Net Borrowings Analysis
Pennon Group Net Borrowings Analysis Diversified funding sources As at 31 March 2015 £m Finance leasing 1,336 Bank bilaterals - term loans 388 EIB 304 Index-linked bond 2057 259 Bond 2040 133 Private placements 547 Unsecured loan notes 1 Total gross debt 2,968 Less: Cash/liquid investments (771) Net
Slide 44: Fair Value Non-current Borrowings
Pennon Group Fair Value Non-current Borrowings Fair value of debt £74m less than book value(1) As at 31 March 2015 As at 31 March 2014 Book Fair Book Fair Value Value Diff Value Value Diff £m £m £m £m £m £m Finance Leases 1,304 1,182 122 1,151 979 172 Bank and other loans 338 338 - 469 469 - Private
Slide 45: Net Interest Analysis
Pennon Group Net Interest Analysis(1) 2014/15 2013/14 £m £m Interest payable (66.0) (73.2) Capitalised interest payable (22.5) (21.8) Other finance income 13.5 14.3 Net interest payable (75.0) (80.7) Average rate of interest 3.4% 3.8% Net interest cover 6.0x 5.2x • Net interest payable down, includi
Slide 46: Taxation
Pennon Group Taxation 2014/15 2013/14 £m £m Current tax - current year 44.7 51.8 - prior year (5.5) (16.5) 39.2 35.3 Deferred tax - current year 8.5 2.2 - prior year 9.7 12.1 18.2 14.3 Deferred tax reduction on change of - (40.1) corporation tax rate Tax on exceptional items (2.7) (8.9) 54.7 0.6 Cur
Slide 47: Pensions
Pennon Group Pensions • Gross pension deficit of £60m (March 2014 - £79m) – £48m net of tax (March 2014 - £63m) 2015 2014 • Pension schemes’ assets £692m £608m Pension schemes’ liabilities £752m £687m £60m = £48m net of tax £79m = £63m net of tax • Increase in asset value, partly offset by higher li
Slide 48: Appendix: South West Water
PENNON GROUP PLC Appendix South West Water
Slide 49: South West Water Revenue
South West Water Revenue Customer demand increased 3.2 (4.8) 530 2.8 1.0 0.0 522.2 520.0 520 510 £m 500 490 480 • Tariff freeze impact of c.£22m – recovered on an NPV neutral basis over K6 • Drier summer and higher commercial demand • New connections and other sales reflecting higher developer activ
Slide 50: South West Water Operating Costs
South West Water Operating Costs(1) Cumulative K5 cost increases continue to be lower than RPI 310 ( ) 300 290 £m 280 270 260 • Doubtful debt costs reducing as % of revenue – reflecting positive performance of targeted debt initiatives • Higher depreciation reflecting the growth in the asset base an
Slide 51: Appendix: Viridor
PENNON GROUP PLC Appendix Viridor
Slide 52: EBITDA by Activity
Viridor Financial Performance EBITDA by Activity(1) (£m) 2014/15 2013/14 Change ERF 33.7 3.1 +987.1% Landfill 15.4 25.3 (39.1%) Recycling 11.5 23.2 (50.4%) Collections 10.3 11.4 (9.6%) Contracts and other 27.2 28.0 (2.9%) Landfill gas power generation 35.8 37.3 (4.0%) Indirect costs (2) (53.5) (52.0
Slide 53: Profit Contribution by Activity
Viridor Financial Performance Profit Contribution by Activity(1) (£m) 2014/15 2013/14 Change ERF 28.1 3.1 +806.5% Landfill (13.8) 3.2 (531.3%) Recycling 6.0 18.8 (68.1%) Collections 6.6 6.8 (2.9%) Contracts and other 22.9 23.8 (3.8%) Landfill gas power generation 28.9 30.1 (4.0%) Joint ventures 16.3
Slide 54: Landfill Energy KPIs
Viridor Landfill Energy KPIs 2014/15 2013/14 Landfill ‒ Consented void 51.7mcm(1) 57.7mcm ‒ Volumes 2.5mt 2.7mt ‒ Revenues £19.92/t £23.06/t ‒ Costs(2) £15.24/t £14.70/t Landfill gas generation ‒ Operational 104MW 104MW capacity(3) ‒ Volumes 602GWh 606GWh ‒ Revenues £92.72/MWh £89.74/MWh ‒ Costs(4)
Slide 55: ERFs (Including Joint Ventures)
Viridor ERFs (Including Joint Ventures) Progress on ERF pipeline Site Capital Gross Capacity Status Base Load Municipal Actual/Expected Operations Cost (1) Contract Commissioning End (2) Tonnes Electricity (000) MWe Lakeside(3) 150 410 38 Operational Merchant Commissioned 2033 Bolton N/A 120 9 Opera
Slide 56: Viridor ERF Capex Impact on Net Debt
Viridor Viridor ERF Capex(1) Impact on Net Debt Substantial ongoing ERF capex Cumulative spend to Remaining spend to completion Total project spend 31 March 2015 ERF projects in operation £m £m £m Exeter 47 - 47 Oxford (Ardley) 194 16 210 Cardiff (Trident Park) 205 18 223 Runcorn II 208 8 216 Total
Slide 57: Preliminary Results 2014/15
Preliminary Results 2014/15 20 May 2015 57