Pennon Group Plc · LSE:PNN
Pennon — Non-Deal Roadshow (March 2018)
75 slides from Pennon's roadshow presentation, March 2018
Slide 1: London Roadshow – Private Client Investment Managers
London Roadshow – Private Client Investment Managers (PCIMs) March 2018 Environmental | Sustainable | Profitable © Pennon Group plc 2018 2017
Slide 2: Disclaimer
Disclaimer For the purposes of the following disclaimers, references to this “document” risks, maintaining finance and funding to meet ongoing commitments, tax shall mean this presentation pack and shall be deemed to include references compliance and contributions and difficulty in recruitment, rete
Slide 3: Pennon Team
Pennon Team Susan Davy Chief Financial Officer Sarah Heald Director of Corporate Affairs & Investor Relations 3 ©© Pennon Pennon Group Group plcplc 2017 2018
Slide 4: About Pennon
About Pennon One of the largest environmental infrastructure groups in the UK • At the top end of the FTSE 250 index with a market capitalisation of £2.7bn • Group revenue of £1.35bn with Profit Before Tax (PBT) of £250m for 2016/17 (1) • Assets of £5.9bn and a workforce of around 5,000 people • Div
Slide 5: Unique combination of environmental infrastructure assets
About Pennon Unique combination of environmental infrastructure assets WATER & WASTEWATER WASTE MANAGEMENT Regulatory ring-fence A leading UK energy recovery, Water and wastewater services to B2B water retailer recycling and waste a population of c.2.2 m management company • Serves Cornwall, Devon,
Slide 6: A unique proposition in an attractive sector
About Pennon A unique proposition in an attractive sector ‘SECTOR-LEADING WATER BUSINESS, GROWING RECYCLING, ENERGY RECOVERY AND WASTE MANAGEMENT GROUP’ PREDICTABLE EFFICIENT/EFFECTIVE WELL-POSITIONED TO INDEX-LINKED EARNINGS BALANCE SHEET AND TAKE OPPORTUNITIES IN AND CASH FLOW SECTOR-LEADING A CHA
Slide 7: South West Water: Sector-leading UK water company
South West Water Sector-leading UK water company • 25-year rolling licence In our water and wastewater business we are • South West Water operating under an focused on providing services in the most efficient “enhanced” business plan for the period and sustainable way possible 2015 – 2020(1) • Deliv
Slide 8: Sector Leading RoRE Outperformance
South West Water Sector Leading RoRE Outperformance Cumulative K6 RoRE 12% Financing ODIs Totex 8% Base Returns 4% 0% -4% SWW Northumbrian SVT Wessex Anglian UU Southern Welsh Thames Yorkshire 8 Source: Company Annual Performance Reports ©© Pennon Pennon Group Group plcplc 2017 2018
Slide 9: South West Water Key themes for 2018
South West Water Key themes for 2018 Focus on customers and communities Meeting our PR14 ‘Enhanced’ Business Plan commitments Best in class RoRE outperformance, Strong in all measures, financing, ODIs and Totex PR19 methodology builds on challenges in PR14 Increased rewards & penalties, lower base r
Slide 10: Price Review Timetable
South West Water Price Review Timetable Well prepared for Business Plan submission in September 2018 2018 March/April Business plan customer consultation April Customer acceptability May Updated business plan submission May Performance commitment submission 3rd September Business plan submission 201
Slide 11: PR19 largely as expected: supportive of Ofwat's proposals
South West Water PR19 largely as expected South West Water: supportive of Ofwat’s proposals DEBT INDEXATION • Phased transition from RPI to CPI-H • CPI-H 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-
Slide 12: PR19 largely as expected: continued sharing of outperformance
South West Water PR19 largely as expected South West Water: continued sharing of outperformance with customers planned 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 all
Slide 13: PR19 impact on market sentiment in-line with past reviews
South West Water PR19 impact on market sentiment in-line with past reviews Trading of water stocks through previous price reviews PR04 WACC PR09 WACC PR14 WACC PR19 WACC Announcement Announcement Announcement Announcement 1000 40% 30% Pennon Share Price (GBp) 800 Premium to RCV (%) 20% 600 10% 400 0
Slide 14: Viridor: At the forefront of the UK resource sector
Viridor At the forefront of the UK resource sector • Portfolio of twelve Energy Recovery Facilities • 380,000 equivalent homes powered by energy produced by our portfolio • 650 150 local authority and major corporate clients Waste collection 12 vehicles ERFs • 32,000 customers across the UK • 300+ r
Slide 15: Viridor Key themes for 2018
Viridor Key themes for 2018 A market leader well-positioned today and for the future Viridor growth to 2020 and beyond - Differentiated from water peers ERF ‘growth kicker’, earnings enhancing Commitment to quality products Delivering for customers, employees and shareholders 15 ©© Pennon Pennon Gro
Slide 16: Viridor Continued opportunities
Viridor Continued opportunities 2018 Resources & Developing new Waste Strategy markets for recyclate (DEFRA) (UK & export) Landfill - ongoing UK residual waste market feature of UK waste dynamics favourable market, retaining - ERF demand exceeding dynamic approach capacity into long-term 16 ©© Penno
Slide 17: Recycling market activity
Viridor Recycling market activity Rest of World Paper Glass China Commodity Active volumes markets Europe UK Plastics & Metal & Polymers WEEE All Viridor metals and glass stay in the UK - no plastics have been exported to China as of March 2017 17 ©© Pennon Pennon Group Group plcplc 2017 2018
Slide 18: A challenging recycling environment, 'self-help' in place
Viridor A challenging recycling environment, ‘self-help’ in place, market developing Market dynamics Viridor ‘self-help’ activities • Public pressure is growing - ‘Blue Planet’ effect • Optimisation of contracts and asset base • Recycling rates have stalled in the UK o c.65% of contracted volumes ha
Slide 19: Delivering the next ERF growth stage
Viridor Delivering the next ERF growth stage Glasgow – final commissioning Beddington – final commissioning Dunbar – early stage commissioning Avonmouth – progressing well 19 ©© Pennon Pennon Group Group plcplc 2017 2018
Slide 20: ERF significant earnings step up
Viridor ERF significant earnings step up Avonmouth Dunbar South London Glasgow (IFRIC 12) IFRIC 12 Interest Receivable Adjusted Share of EBITDA JV EBITDA EBITDA £107m 2016/17 2020/21 20 ©© Pennon Pennon Group Group plcplc 2017 2018
Slide 21: Dividend Growth
Dividend Growth Established 10 year sector leading policy Policy of 4%+RPI leading to an expected doubling of dividend over 10 years (2010 to 2020)(1) • Interim dividend of 11.97p, up 7.9%(2) • SCRIP dividend alternative ceased • Dividend reinvestment plan (DRIP) offered for 2017/18 +7.1% +5.6% +4.9
Slide 22: Appendix
Appendix © Pennon Group plc 2018 2017
Slide 23: Sustainability
Sustainability © Pennon Group plc 2018 2017
Slide 24: Sustainability Integral to our businesses
Sustainability Integral to our businesses Sustainability objectives drive targets set by South West Water and Viridor • Focus on improvements in resource efficiency, increased levels of recycling and renewable energy generation – all helps to generate shareholder value • Underpins the successful del
Slide 25: Sustainability Integral to our businesses
Sustainability Integral to our businesses Customers Communities • Overall SWW customer satisfaction at 89% • 20th consecutive year without water restrictions o Value for money satisfaction at an all time high – 61% of • High drinking water quality score maintained – SWW 99.96% customers satisfied (u
Slide 26: Upstream Thinking - looking after the land to protect our rivers
Sustainability Upstream Thinking - looking after the land to protect our rivers What is Upstream Thinking? • Upstream Thinking is a partnership working across the South West • Purpose: to improve the raw water quality reaching South West Water’s treatment plants in order to improve tap water quality
Slide 27: Pennon's credentials
Sustainability Pennon’s credentials Score of B (Management) for Climate Change and Water (formerly called the Carbon Disclosure Project) We are making continuous steps to reduce our impacts Three-star rating 2017 (90% score) Business in the Community Corporate Responsibility Index Long-standing memb
Slide 28: HY Results 2017/18
HY Results 2017/18 © Pennon Group plc 2018 2017
Slide 29: Delivering for customers, communities and investors
Delivering for customers, communities and investors Delivering for customers and communities - On track to deliver against business plan commitments including all ODI(1) commitments by 2020 - Sharing financial benefits with customers through WaterShare - Customer bills lower than they were 8 years a
Slide 30: Financial Highlights
Financial Highlights Robust Group financial performance H1 2017/18 H1 2016/17 A Adjusted EBITDA in line Underlying(1) £m £m Change with expectations Revenue 723.9 685.5 +5.6% - Higher SWW revenue and continued efficiency EBITDA 253.5 245.4 +3.3% - Strong ERF performance Adjusted EBITDA(2) A 285.8 27
Slide 31: Capital Investment
Capital Investment Investing for growth What we have been investing in... Group Capital - Energy Recovery Facilities - Further improvements to South West Bathing and Shellfish waters Investment - New landfill cells driven by demand - Further innovation to improve drinking profile - Cutting edge Mayf
Slide 32: Net Debt Movements
Net Debt Movements Strong cash inflow from operations, continuing investment Strong cash Re-financing Peak years inflow from of perpetual of capital operations capital investment in (2,790.9) securities 2016/17 and £m 2017/18 (2,664.9) (235.3) (82.1) (48.6) (31.3) 308.9 (10.4) (25.7) (6.3) (7.0) (8.
Slide 33: Balance Sheet: £1,246m cash & committed facilities
Balance Sheet Strong funding position underpinning investment Group at 30 September 2017 £1,246m cash & committed facilities Net Debt £2,790.9m (31 March 2017 £1,383m) Profile Index- Linked £552m 20% Development of portfolio Fixed £1,812m Floating - £450m of new or renewed - Following EIB/Government
Slide 34: Stable gearing – increased headroom for investment
Balance Sheet Stable gearing – increased headroom for investment 64.8% Group Net Gearing(1) 65.2% at 30 September 2016 62.1% Water business Net Debt / RCV(2) 62.2% at 30 September 2016 Stable gearing - Reflects refinancing of perpetual capital securities (hybrid) in the Group’s capital structure, ne
Slide 35: Group financing
Group financing Sector-leading effective interest rate K4 K5 K6 3.7% Group average 7.0% (2005-10) (2010-15) (2015-20) interest rate 6.5% 3.3% 6.0% H1 2016/17 5.5% 5.0% 4.5% Pennon 3.5% SWW average 4.0% SWW 3.5% interest rate Water Sector 3.0% 3.2% H1 2016/17 Sector leading effective interest rates £
Slide 36: Dividend Growth
Dividend Growth Established 10 year sector leading policy Policy of 4%+RPI leading to an expected doubling of dividend over 10 years (2010 to 2020)(1) - Interim dividend of 11.97p, up 7.9%(2) - SCRIP dividend alternative ceased - Dividend reinvestment plan (DRIP) offered for 2017/18 +7.1% +5.6% +4.9
Slide 37: Water: Delivering for customers and communities
Water: Delivering for customers and communities On track to deliver against all water business plan commitments by 2020 Customers at the heart of our delivery - £7bn investment to improve services to customers since privatisation - Best ever customer service score (SIM) - Written complaints reduced
Slide 38: Water: Strong operational and financial performance
Water: Strong operational and financial performance Consistent sector-leading RORE WaterShare RORE (1) performance Cumulative K6 TOTEX outperformance - £159m - Delivering continued efficiency performance Cumulative 11.8%(1) FY 15/16 FY 16/17 H1 17/18 Operational performance ahead of 11.7% 12.6% 11.1
Slide 39: ODI performance levels – cumulative net reward position
Water: Strong operational and financial performance ODI performance levels – cumulative net reward position GOOD Water quality standard Odour contacts PERFORMANCE(1) Taste, smell and colour contacts Bathing water quality Operational contacts resolved 1st time Water & waste asset reliability Water re
Slide 40: Water: Preparing for next growth phase
Water: Preparing for next growth phase Investment anticipated at least comparable to historic levels £6bn - £9bn investment anticipated to 2050 - Informed by Defra’s guidance to Ofwat - Direct engagement with Ofwat - Customer / stakeholder research and engagement Key investment drivers continue to b
Slide 41: Viridor: Robust operational and financial performance
Viridor: Robust operational and financial performance ERFs performing well Focus on optimising performance - Delivered £52m of EBITDA in H1 2017/18 – expect H2 weighting Operational - High availability across fleet – Average >90%(1) - Maintenance regimes working well. Current run rate of 2.0% p.a. o
Slide 42: Viridor: Recycling EBITDA margin consistent
Viridor: Robust operational and financial performance Recycling EBITDA margin consistent VOLUMES 120kT Self-help measures underpinning performance – H1 2017/18: 740kT further opportunities available (H1 2016/17: 860kT) REVENUES - Reduced volumes - optimisation of contracts and asset base £10/T - Bet
Slide 43: Greater Manchester contract 'reset'
Viridor: Delivering for customers and communities Greater Manchester contract ‘reset’ Long-term partnership continues – mutually satisfactory outcome - Energy Recovery Facility – Runcorn I - Long-term contract remains - Residual waste will continue to be treated, no significant operational changes -
Slide 44: Viridor: Preparing for the next growth phase
Viridor: Preparing for the next growth phase Significant growth to come from residual waste Confidence in the waste sector - Strong fundamentals in UK waste market - Investment in further UK waste treatment capacity as essential to service longer term demand Source: Defra, SEPA, NRW and Viridor anal
Slide 45: ERF assets will deliver earnings step up
Viridor: Preparing for the next growth phase ERF assets will deliver earnings step up Avonmouth Glasgow South Dunbar In construction or stage of commissioning London Glasgow - First generated electricity – February 2017 IFRIC 12 (IFRIC 12) Interest - MRF(1) and AD(2) plants operating Receivable Shar
Slide 46: Pennon
Pennon © Pennon Group plc 2018 2017
Slide 47: Adjusted group EBITDA
Pennon Adjusted group EBITDA £m 0.5 1.2 2.1 4.0 (0.4) (0.4) (2.2) 285.8 7.4 (3.6) 277.2 H1 2016/17 SWW tariff Contracts, Viridor ERFs Share of JV Plc, PWS and Recycling SWW other Landfill and H1 2017/18 increase and collections and overheads EBITDA & IFRIC other revenue and cost landfill gas (1) cus
Slide 48: Robust operational and financial performance
Pennon: Robust operational and financial performance Underpinned by efficiency across the Group Sector leading water Totex outperformance SWW Totex £159m savings • £159m cumulative Totex efficiencies K6 to date Bournemouth Water synergies on track SWW/BW • Final integration phase complete c. £27m Sy
Slide 49: Pennon Water Services Financial Highlights
Pennon Water Services Financial Highlights Growing in the new competitive market H1 2017/18(1) £m >160,000 c.5,100(2) Revenue A 83.5 Customers New accounts accounts won since EBITDA B 0.5 market opening Depreciation (0.3) Operating Profit 0.2 Net Interest (0.7) Dedicated PWS Loss Before Tax (0.5) ma
Slide 50: Non-underlying Items
Non-underlying Items H1 H1 A Greater Manchester Contract ‘Reset’ £m 2017/18 2016/17 - TPSCo contract reset and settlement of outstanding Greater Manchester A 6.5 - Viridor Waste claims, net of write down of Viridor B Laing shareholder loans Derivatives(1) (7.8) (15.0) Other non-underlying costs(2) -
Slide 51: Corporation tax
Corporation tax Effective rate reflects capital allowances for investment H1 H1 A Current tax £m 2017/18 2016/17 - Increase in capital allowances reflecting increased Current Year Viridor capital expenditure - Current year current tax effective rate of 10.9% Current Tax A 14.3 23.1 (2016/17 H1 18.1%
Slide 52: Successful refinancing of £300m perpetual capital securities
Balance Sheet Successful refinancing of £300m perpetual capital securities (hybrid) - Tender offer at 103% of par value plus accrued periodic returns – together broadly 2013 £300m 6.750% - first equating to the periodic return which would have been due in March 2018 call date - 95% take-up of tender
Slide 53: Diversified funding sources
Pennon Diversified funding sources As at 30 September 2017 £m Finance Leasing(1) 1,474 Bank Bilaterals – Term Loans 380 European Investment Bank Loans 339 Index-Linked Bond 416 Fixed Rate Bond 134 Private Placements(2) 619 Total Gross Debt 3,362 Less: Cash/liquid investments (571) Net Borrowings 2,7
Slide 54: Fair value of non-current debt
Pennon Fair value of non-current debt As at 30 September 2017 As at 31 March 2017 Book Fair Book Fair £m Value Value Difference Value Value Difference Finance Leases 1,446 1,287 159 1,354 1,218 136 Bank and Other Loans 380 383 (3) 329 336 (7) European Investment Bank Loans 307 265 42 323 282 41 Inde
Slide 55: Net interest analysis
Pennon Net interest analysis(1) £m H1 2017/18 H1 2016/17 Net interest payable (36.6) (28.6) Efficient effective interest rate Add: capitalised interest (7.8) (6.1) Less: notional interest payable(2) 5.7 5.7 GROUP SOUTH WEST WATER Add: interest receivable on service concession contracts (6.9) (8.8) 3
Slide 56: Pensions
Pennon Pensions The aggregate pension schemes’ 30 September 31 March £m 2017 2017 deficit has reduced in the six months to 30 September 2017 by Pension schemes’ assets £891m £903m £12m from £68m to £56m Pension schemes’ £947m £971m This represents a net deficit of liabilities c. 1% of Group’s market
Slide 57: Significant energy generation
Pennon Significant energy generation Group energy generation - Total energy generation of c.0.9TWh in H1 2017/18 − 8 ERFs(1) – 661GWh − Landfill gas – 217GWh − 25 Hydro turbines – 4.3GWh generation − 53 solar PV installations – 5.4GWh(2) − Anaerobic digestion – 0.3GWh − CHP – 3.2GWh − 1 wind turbine
Slide 58: South West Water
South West Water © Pennon Group plc 2018 2017
Slide 59: South West Water Financial Highlights
South West Water Financial Highlights Continuing to drive outperformance of regulatory contract H1 2017/18 H1 2016/17(1) A Revenue Underlying(2) £m £m Change - Tariff increase 2.5% Revenue A 292.2 284.9 +2.6% - Higher demand 1.1% on metered volumes net of impact of meter Operating Costs (105.1) (103
Slide 60: South West Water Revenue
South West Water Revenue £m 12.0 0.7 (1.7) 1.9 292.2 (5.6) 284.9 H1 2016/17 Tariff increase WRFIM(1) New connections Increased customer Meter optants H1 2017/18 demand (net of leak allowances) (1) Wholesale Revenue Forecast Incentive Mechanism 60 ©© Pennon Pennon Group Group plcplc 2017 2018
Slide 61: South West Water EBITDA
South West Water EBITDA £m 1.4 7.4 187.1 (2.6) (0.5) (0.5) 181.9 H1 2016/17 Revenue growth Efficiencies and other Cost increases including Pension Capital charges H1 2017/18 cost savings inflation 61 ©© Pennon Pennon Group Group plcplc 2017 2018
Slide 62: Sector leading RORE outperformance
South West Water Sector leading RORE outperformance Highest potential returns in the industry SWW delivering outperformance across all areas OFWAT INDUSTRY RORE(1) CUMULATIVE TO 2016/17 (1) Source: Ofwat’s Monitoring Financial Resilience report published November 2017 62 ©© Pennon Pennon Group Group
Slide 63: Water: Delivering for customers and communities
Water: Delivering for customers and communities On track to deliver against all water business plan commitments by 2020 Water sector leakage performance Sector-leading leakage performance GOOD PERFORMANCE Best ever numeric and descriptive wastewater compliance - Wastewater serious and significant po
Slide 64: Viridor
Viridor © Pennon Group plc 2018 2017
Slide 65: Viridor Financial Highlights
Viridor Financial Highlights Strong performance, underpinned by cost base efficiency H1 2017/18 H1 2016/17 Change Underlying(1) £m £m A ERFs Revenue(2) 407.0 397.9 +2.3% - ERF availability >90%(5) for H1 2017/18 - Expect H2 weighting EBITDA 66.6 63.3 +5.2% ERFs A 51.7 50.5 +2.4% B Optimising landfil
Slide 66: Viridor Revenue
Viridor Revenue 1.3 5.1 £m 8.5 (8.0) 12.6 407.0 (10.4) 397.9 H1 2016/17 ERF construction Contracts, ERF operational Recycling Landfill and landfill Landfill tax H1 2017/18 revenue collections and other revenue gas 66 ©© Pennon Pennon Group Group plcplc 2017 2018
Slide 67: Viridor Adjusted EBITDA
Viridor Adjusted EBITDA £m 1.2 2.1 (0.4) 2.4 (1.9) 4.0 98.9 (3.6) 95.1 H1 2016/17 Contracts, Share of JV EBITDA Indirect costs ERFs Recycling IFRIC 12 interest Landfill and landfill H1 2017/18 collections and receivable gas other 67 ©© Pennon Pennon Group Group plcplc 2017 2018
Slide 68: Landfill and landfill gas
Viridor: Robust operational and financial performance Landfill and landfill gas Delivering cash flow from landfill – optimising capacity Landfill - Extracting value from sites – maximising opportunities for external grid connections 11 - Landfill volumes increased from H2 2016/17 – pricing holding u
Slide 69: Greater Manchester Waste Disposal Authority Contract 'reset'
Viridor Greater Manchester Waste Disposal Authority (GMWDA) Contract ‘reset’ Before 50% Joint 37.5% Joint 100% Viridor GMWDA venture Residual venture Operating subsidiary waste (ERF contract for contract) Runcorn I ERF VL TPSCo VLGM Principal contract Operating contract for recycling assets After B
Slide 70: Greater Manchester Contract 'reset' financial impacts
Viridor Greater Manchester Waste Disposal Authority (GMWDA) Contract ‘reset’ Financial Impacts H1 2017/18 reset Share of Shareholder VWGM JV PAT Loans EBITDA Viridor Laing – reduction in Disposal of Viridor Laing shareholder loan interest of Write down of shareholder loans - (£19.2m) - c.£5m p.a. Re
Slide 71: Viridor Joint Venture Performance
Viridor Joint Venture Performance Greater Manchester Viridor £m TPSCo Laing VWGM(1) Lakeside Total H1 2017/18 Share of JV PAT 1.0 0.1 - 4.2 5.3 Interest on shareholder loans 2.3 2.6 - 0.6 5.5 EBITDA VWGM(1) - - (0.3) - (0.3) Shareholder loans 40.1 - - 8.4 48.5 Share of non-recourse net debt/(cash) (
Slide 72: Viridor ERF accounting
Viridor ERF accounting An illustrative, large ERF (c.300kt) will contribute c.£28m to Viridor EBITDA Illustrative ERF(1) IAS 16(2) IFRIC 12(2) JVs IAS 16 IFRIC 12 JVs • Oxford (Ardley) • Exeter • Lakeside • Cardiff • Peterborough(3) • Runcorn I EBITDA £28m £12m -- (Trident Park) • Glasgow IFRIC 12 I
Slide 73: ERF CAPEX – Efficient investment to deliver growth
Viridor ERF CAPEX(1) – Efficient investment to deliver growth Cumulative Capital Cumulative Remaining Amounts Total Original spend at investment spend to spend to subject to project planned £m 1 April 2017 in H1 2017/18 30 September 2017 completion recovery(3) spend project spend ERF projects in ope
Slide 74: ERFs (including Joint Ventures): ERF portfolio build-out
Viridor ERFs (including Joint Ventures) Base load Capital municipal Actual/expected Progress on ERF pipeline Site Cost (1) Gross capacity Status contract commissioning Tonnes Electricity £m (000) MWe Lakeside(2) 150 410 38 Fully operational Merchant Commissioned ERF portfolio build-out Bolton N/A 12
Slide 75: London Roadshow – Private Client Investment Managers
London Roadshow – Private Client Investment Managers (PCIMs) March 2018 Environmental | Sustainable | Profitable © Pennon Group plc 2018 2017