Pennon Group Plc · LSE:PNN
Pennon — H1 2018/19 Earnings Presentation
65 slides from Pennon's earnings presentation, Nov 27, 2018
Slide 1: Half Year Results 2018/19
Half Year Results 2018/19 27 November 2018 © Pennon Group plc 2018
Slide 2: Disclaimer
Disclaimer For the purposes of the following disclaimers, references to this “document” difficulty in recruitment, retention and development of skills; failure or increased shall mean this presentation pack and shall be deemed to include references cost of capital projects/exposure to contract failu
Slide 3: Chris Loughlin, Group Chief Executive
Chris Loughlin Group Chief Executive Living our core values: Trusted, Collaborative, Responsible, Progressive © Pennon Group plc 2018
Slide 4: Pennon: Bringing resources to life
Pennon Bringing resources to life Delivering our promises to customers and communities • SWW on track to meet all commitments to 2020 – WaterShare delivering c.£100m for customers to date – Demonstrating resilience to extreme climatic conditions – Best ever customer service (SIM) score in H1 2018/19
Slide 5: Susan Davy, Chief Financial Officer
Susan Davy Chief Financial Officer © Pennon Group plc 2018
Slide 6: H1 2018/19 Financial Highlights
H1 2018/19 Financial Highlights Strong Group Performance – management expectations on track for full year 2018/19 Underlying EBITDA Earnings Per Share +8.1% (1) +18.6% +17.4% (2) Underlying Statutory Strong Balance Sheet Dividend Per Share Effective Interest Rate 3.6% +7.3% (3) (1) Before non-underl
Slide 7: Strong financial performance H1 2018/19
Pennon Group Strong financial performance H1 2018/19 H1 2018/19 H1 2017/18 A EBITDA in line with expectations Underlying(1) Change £m £m (H1 weighting) Revenue 746.7 723.9 +3.1% • ERF build-out supporting growth EBITDA A 274.0 253.5 +8.1% • Higher revenue in South West Water - Adjusted EBITDA(2) 294
Slide 8: South West Water: Outperformance momentum continues
South West Water Outperformance momentum continues in current regulatory period H1 H1 A Fair charging Underlying(1) 2018/19 2017/18 Change £m £m • Net tariff increase of 1.0%(5) Revenue(2) A 301.5 292.2 +3.2% • Increase in meter volumes 2.7% as a result of dry weather Operational Costs B (106.8) (10
Slide 9: Viridor: Growth supported by ERF portfolio development
Viridor Growth supported by ERF portfolio development H1 H1 Underlying(1) 2018/19 2017/18 Change A Strong earnings from ERFs £m £m • ERF build out supporting growth(4) Revenue(2) 422.3 407.0 +3.8% • On track for full year ERF availability EBITDA 78.4 66.6 +17.7% >90%(5) with planned maintenance weig
Slide 10: Financial performance underpinned by efficiency initiatives
Pennon Group Financial performance underpinned by efficiency initiatives delivering across the group Sector leading Totex outperformance for SWW Totex savings South West Water £209m • £209m cumulative Totex efficiencies – on track to deliver c.£300m over K6 K6 to date Bournemouth Water synergies on
Slide 11: A responsible approach to tax
Corporation Tax A responsible approach to tax – managing tax efficiently for the benefit of customers and shareholders H1 H1 2018/19 2017/18 Tax charge reflects investment profiles £m £m Current Year • Current year current tax effective rate of Current Tax 15.6 14.3 10.9% (H1 2017/18 10.9%) Deferred
Slide 12: Capital Investment
Capital Investment Investing for growth, more ERFs moving into operation 400 H1 2018/19 H1 2017/18 £m £m 300 Group Total Water 69 98 Capex Total Viridor(1) 132 124 £m 200 Total(1) 201 222 100 Overall Group H1 weighting of capital expenditure 0 • South West Water profile reflects K6 business plan 201
Slide 13: Net Debt Movements
Net Debt Movements Robust cash inflow from operations, H1 weighted capital investment Robust cash H1 weighted outflows: Past peak of inflow from • Capital investment ERF capital operations • Full Year 2017/18 dividend investment • Hybrid coupon payment (3,041.9) £m (2,801.5) (181.4) (162.0) (51.2) (
Slide 14: Balance Sheet: Sustainable funding position
Balance Sheet Sustainable funding position underpinning investment Group at 30 September 2018 Stable gearing Net Debt £3,042m Profile Index- linked 65.5% 62.1% £563m 64.8% at 62.1% at 19% 30 September 2017 30 September 2017 Fixed £1,771m Floating 58% £708m Group Net Gearing(1) Water Business 23% • R
Slide 15: Sustainable financing delivering efficient financing costs
Balance Sheet Sustainable financing delivering efficient financing costs Financing secured in H1 2018/19 of £480m Sustainability linked financing £350m Other financing agreements £130m • £110m Plc EIB(1) 19 year loan Supporting capital investments in • £50m RCF our environmentally sustainable projec
Slide 16: Sustainable financing delivering efficient financing costs
Balance Sheet Sustainable financing delivering efficient financing costs K4 K5 K6 £40.8m Group net finance (2005-10) (2010-15) (2015-20) £36.6m H1 2017/18 costs(1) 7.0% 6.5% 6.0% 5.5% 3.6% Group average 5.0% 4.5% 3.7% H1 2017/18 interest rate Pennon 4.0% SWW 3.5% Water Sector 3.0% 3.5% SWW average 3
Slide 17: Dividend Growth
Dividend Growth Established 10 year sector leading policy Policy of RPI +4% leading to an expected doubling of dividend over 10 years (2010 to 2020)(1) • Interim dividend of 12.84p, up +7.3%(2) • Viridor earnings supporting growth in dividends • Dividend reinvestment plan (DRIP) available +7.3% +7.1
Slide 18: Chris Loughlin, Group Chief Executive
Chris Loughlin Group Chief Executive © Pennon Group plc 2018
Slide 19: South West Water
South West Water © Pennon Group plc 2018
Slide 20: Delivering a resilient service for customers
South West Water Delivering a resilient service for customers Excellent management of operational challenges • H1 2018/19 impacted by ‘freeze and thaw’ − Extreme cold weather in March – first red weather warning for snow in the South West − Proactive planning and management • Hot, dry summer – maint
Slide 21: Maintaining momentum – outperformance for every component
South West Water Maintaining momentum – outperformance for every component WaterShare RORE (1) Sector leading RORE(1) – cumulative delivery of 11.8% Cumulative Cumulative K6 Totex outperformance – £209m 11.8%(1) H1 • Continued sector leading efficiency 2018/19 11.6% − c.£300m Totex savings targeted
Slide 22: New Deal 2020-2025 – delivery preparation underway
South West Water New Deal 2020-2025 – delivery preparation underway Empowering customers through a New Deal • Sharing our success – putting customers in control • Customers hold us directly to account – Customer AGM • Shareholding – tangible stake in business supported by outperformance • Set new be
Slide 23: Viridor
Viridor © Pennon Group plc 2018
Slide 24: Confident outlook for Viridor in the waste sector
Viridor Confident outlook for Viridor in the waste sector Focus on UK recycling and residual waste processing/transformation • Continued favourable waste market dynamics in both recycling and residual waste • Government’s Resources & Waste Strategy expected to confirm fundamentals and provide stimul
Slide 25: Strong operational focus – Recycling
Viridor Strong operational focus – Recycling Significant improvement since H2 2017/18 • EBITDA improvement from £4.4m in H2 last year to £7.4m in H1 this year • Margin improvement of £5/T since H2 2017/18 • Chinese recycling restrictions on imports impacted the global recycling market in H2 last yea
Slide 26: Strong operational focus – ERFs
Viridor Strong operational focus – ERFs ERFs supporting strong growth Outperforming base case • Continued outperformance of base case assumption expectations (3) • On track to deliver full year availability > 90%(1) Outperformance • Planned maintenance H1 weighted • Glasgow, Beddington and Dunbar ER
Slide 27: Strong operational focus – ERF portfolio progressing well
Viridor Strong operational focus – ERF portfolio progressing well Glasgow Beddington Dunbar Avonmouth 27 Pennon Half Year Results 2018/19 © Pennon Group plc 2018
Slide 28: Strong operational focus – landfill & landfill gas
Viridor Strong operational focus – landfill & landfill gas Responsible landfill operator • Demand for landfill solution remains strong into the medium term • 10(1) sites open – volumes and gate fees holding up well • Well managed sites – restoring and repurposing for alternative uses – 3 closed site
Slide 29: Pennon: Bringing resources to life
Pennon Bringing resources to life Delivering our promises to customers and communities • SWW on track to meet all commitments to 2020 • ERF expansion nearing completion in Viridor • Invested c.£1.3bn since 2015 Strong sustainable financial performance • SWW RORE(1) 11.8% cumulatively for K6 – moment
Slide 30: Questions
Pennon Questions © Pennon Group plc 2018
Slide 31: Appendix
Pennon Appendix © Pennon Group plc 2018
Slide 32: Group EBITDA
Pennon Group EBITDA £m 1.1 0.4 0.3 9.3 274.0 14.9 (0.6) (1.7) (3.2) 253.5 H1 2017/18 ERFs SWW tariff Plc, PWS and Viridor overheads Contracts, Landfill and SWW cost Recycling H1 2018/19 increase, other collections and landfill gas impacts customer demand other and other sales (1) (1) Includes impact
Slide 33: Pennon Water Services
Pennon Water Services(1) Net growth in retail services, focus on delivering future cost base efficiencies H1 2018/19 H1 2017/18 Customer growth Change £m £m • Customer satisfaction scores increasing • Continued success with ‘Dual Service’ Revenue 84.1 83.5 +0.7% proposition EBITDA 0.9 0.5 +80.0% Dep
Slide 34: Non-underlying Items
Non-underlying Items H1 2018/19 H1 2017/18 Derivatives £m £m • Movement in fair value of long-dated Greater Manchester - 6.5 derivatives associated with the South West Water 2040 bond Derivatives (8.9) (7.8) Profit Before Tax (8.9) (1.3) Tax credit on 1.7 4.3 non-underlying items Net (charge)/credit
Slide 35: Adjusted EPS Reconciliation
Pennon Adjusted EPS Reconciliation H1 2018/19 H1 2017/18 H1 2018/19 H1 2017/18 Adjusted EPS Calculation £m £m Statutory EPS Calculation £m £m Statutory profit before tax 133.6 129.8 Statutory profit before tax 133.6 129.8 Adjusted for: Non-underlying items (pre-tax) 8.9 1.3 Adjusted for: Current Tax
Slide 36: Group capital expenditure reconciliations
Pennon Group capital expenditure reconciliations Group Capital Investment H1 2018/19 H1 2017/18 Group Capital Payments H1 2018/19 H1 2017/18 (Slide 12) £m £m (Net debt movements slide 13) £m £m Viridor 123.9 102.8 Viridor 123.9 102.8 ERFs 103.2 87.3 South West Water 68.6 97.6 Recycling 3.5 1.4 Other
Slide 37: Diversified funding sources
Pennon Diversified funding sources As at 30 September 2018 £m Finance Leasing(1) 1,532 Bank Bilaterals – Term Loans 378 European Investment Bank Loans 307 Index-Linked Bonds 426 Fixed Rate (SWW 2040) Bond 134 Private Placements 671 Total Gross Debt 3,448 Less: Cash/liquid investments (406) Net Borro
Slide 38: Fair value of non-current debt
Pennon Fair value of non-current debt As at 30 September 2018 As at 31 March 2018 Book Fair Book Fair £m Value Value Difference Value Value Difference Finance Leases 1,504 1,364 140 1477 1350 127 Bank and Other Loans 378 382 (4) 229 233 (4) European Investment Bank Loans 278 240 38 291 252 39 Index-
Slide 39: Net interest analysis
Pennon Net interest analysis(1) H1 2018/19 H1 2017/18 £m £m Net interest payable 1 (40.8) (36.6) Efficient effective interest rate Add: capitalised interest (8.3) (7.8) SOUTH WEST Less: notional interest payable(2) 6.3 5.7 GROUP WATER Add: interest receivable on service concession contracts (7.3) (6
Slide 40: Pensions
Pennon Pensions The aggregate pension schemes’ deficit has 30 September 31 March reduced in the six months to 30 September 2018 2018 2018 by £5m from £50m to £45m £m £m Pension schemes’ assets £899m £898m This represents a net deficit of c.1%of Group’s market capitalisation at 30 Pension schemes’ Se
Slide 41: Significant energy generation
Pennon Significant energy generation Group energy generation UK Power Forward Seasons 80 • Total energy generation of c. 0.7TWh in H1 2018/19 W18 S19 − 8 ERFs(1) – 0.5TWh 70 W19 S20 − Landfill gas – 208.0GWh 60 £/MWh − 25 Hydro turbines – 4.0GWh generation − 52 solar PV installations – 6.8GWh(2) 50
Slide 42: South West Water Appendix
South West Water Appendix © Pennon Group plc 2018
Slide 43: South West Water Revenue
South West Water Revenue £m 5.7 301.5 8.6 (1.7) 0.8 2.0 292.2 (6.1) H1 2017/18 Tariff increases WRFIM¹ New connections Other Revenue Increased customer Meter optants H1 2018/19 demand (net of leak allowance) (1) Wholesale Revenue Forecast Incentive Mechanism 43 Pennon Half Year Results 2018/19 © Pen
Slide 44: South West Water EBITDA
South West Water EBITDA £m 3.5 9.3 0.8 194.7 (3.1) (2.9) 187.1 H1 2017/18 Revenue growth Efficiencies & other Cost increase Adverse weather Bad debt charge H1 2018/19 cost savings incl inflation 44 Pennon Half Year Results 2018/19 © Pennon Group plc 2018
Slide 45: 2018/19 H1 ODI performance levels
South West Water 2018/19 H1 ODI performance levels – cumulative net reward position Water quality standard Bathing water quality GOOD Taste, smell and colour contacts Water & waste asset reliability PERFORMANCE(1) Water Operational contacts resolved 1st time Sustainable abstractions Water restrictio
Slide 46: Sharing outperformance with customers
South West Water Sharing outperformance with customers Strong focus on sharing financial benefits with customers • Unique mechanism to share transparently outperformance in period • Significant benefits identified for customers to date • Reinvestment in services and future lower bills • WaterShare p
Slide 47: Delivering operational outperformance
South West Water Delivering operational outperformance Cumulative operational RORE £209m of Totex savings delivered • Totex largest element of potential operational TOTEX +2.6%(1) outperformance +1.5% • Two thirds capex, one third opex £209m ODIs +0.3% Delivering net ODI rewards +1.8% £9.3m(2) • £9.
Slide 48: Reconciliation of RORE to financials
South West Water Reconciliation of RORE to financials Cumulative Strong Totex(1) outperformance - £209m ODI outperformance(2) H1 Totex (£m) 2018/19 2017/18 2016/17 2015/16 • Total net reward £1.2m will be recognised at the end of the regulatory period Operating 106 210 212 212 costs • Rewards: bathi
Slide 49: Viridor Appendix
Viridor Appendix © Pennon Group plc 2018
Slide 50: Viridor Revenue
Viridor Revenue £m 2.8 0.5 32.2 (2.2) (3.6) 422.3 (14.4) 407.0 H1 2017/18 ERFs Landfill Landfill gas Contracts, collections Recycling ERF construction H1 2018/19 & other 50 Pennon Half Year Results 2018/19 © Pennon Group plc 2018
Slide 51: Viridor Adjusted EBITDA
Viridor Adjusted EBITDA £m 0.5 0.4 0.4 0.3 (1.1) 98.9 (3.2) 99.1 14.9 (12.0) H1 2017/18 ERFs Landfill Indirect costs IFRIC 12 interest Contracts, Landfill gas Recycling Share of JV H1 2018/19 receivable collections & EBITDA other 51 Pennon Half Year Results 2018/19 © Pennon Group plc 2018
Slide 52: Profit contribution by activity
Viridor Profit contribution by activity Underlying (£m) H1 2018/19 H1 2017/18 Change ERFs 52.8 39.5 +33.7% Landfill (6.2) (6.7) +7.5% Landfill Gas 6.5 7.6 (14.5%) Recycling 3.8 6.4 (40.6%) Contracts, Collections and Other 15.2 15.7 (3.2%) Joint Ventures 7.3 10.8 (32.4%) Total contribution 79.4 73.3
Slide 53: Joint Venture Performance
Viridor Joint Venture Performance Viridor £m TPSCo Laing Lakeside Total H1 2018/19 Viridor’s share of TPSCo increased to 75% of the economic interest and Share of JV PAT 1.2 - 3.6 4.8 40% of the voting rights following Interest on shareholder loans 1.9 - 0.6 2.5 acquisition of additional holding in
Slide 54: ERF Background
Viridor ERF Background © Pennon Group plc 2018
Slide 55: UK Combustible Residual Waste Market
Viridor Confidence in waste sector – strong drivers ERF market fundamentals remain strong • Conservative assumptions taking into account higher recycling over time and further ERF build-out • Further UK waste treatment capacity is essential to service longer term demand 30 ERF Capacity Viridor ERF C
Slide 56: ERF Adjusted EBITDA – Driving Viridor growth
Viridor ERF Adjusted EBITDA – Driving Viridor growth EBITDA H1 2018/19 EBITDA H1 2013/14 £78.4m £41.4m ERFs Landfill Landfill Gas Recycling Contracts, Collections & Other Almost two thirds of Only 2% of EBITDA EBITDA from ERFs from ERFs 56 Pennon Half Year Results 2018/19 © Pennon Group plc 2018
Slide 57: Growing ERF Portfolio
Viridor Growing ERF Portfolio Glasgow Dunbar Avonmouth Beddington ERFs under construction ERFs in operational ramp up ERFs operational 57 Pennon Half Year Results 2018/19 © Pennon Group plc 2018
Slide 58: ERF Financials: Total ERF Revenue – De-risked position
Viridor ERF Financials 100% Total ERF Revenue – De-risked position 5% RECOVERED METALS 25% POWER OUTPUT 25%25% POWER OUTPUT POWER OUTPUT • Pennon - natural hedge (one third) Viridor capacity(1) 70% Balance of short and medium-term contracts (Municipal and Commercial & Industrial) 70% WASTE FUEL WAST
Slide 59: ERF Financials: Outperforming base case
Viridor ERF Financials Outperforming base case ERFs delivering strong growth expectations (1) • Ongoing capital and operational maintenance: – Current run rate – 2.1% of capital spend Outperformance – Underlying future average rate – 3.5% of capital spend Outperformance P'borough • Initial base case
Slide 60: ERFs portfolio driving Viridor growth
Viridor ERFs portfolio driving Viridor growth 3500 Input Capacity(2) ERF waste input and electricity 3000 generation capacity increasing 2500 • Reflects profile of build out - £1.5bn investment on 2000 total ERFs 1500 • Availability on track for >90%(1) for 2018/19 1000 500 0 2013/14 2014/15 2015/16
Slide 61: ERF Financials: illustrative large ERF
Viridor ERF Financials 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 Receivable -- £16m -- Share of JV EBITDA (50%) -- -- £14m IAS 16 IFRIC 12 JVs Underlying EBITDA £28m £28m £14m • Oxford (
Slide 62: Delivering sustainable long-term returns
Viridor Delivering sustainable long-term returns Avonmouth Dunbar South London Glasgow (IFRIC 12) IFRIC 12 Interest Receivable Share of JV EBITDA Adjusted EBITDA £167m EBITDA ERFs under construction 2017/18 2020/21 ERFs in operational ramp up ERFs operational 62 Pennon Half Year Results 2018/19 © Pe
Slide 63: ERF CAPEX – Efficient investment to deliver growth
Viridor ERF CAPEX(1) – Efficient investment to deliver growth Cumulative Cumulative Capital Remaining Amounts Total Original spend to £m spend at investment spend to subject to project planned 30 September 1 April 2018 in 2018/19 completion recovery spend project spend 2018 ERF projects in operation
Slide 64: ERF portfolio build-out nearing completion
Viridor ERFs (including Joint Ventures) Site Capital Cost (1) Gross capacity Status Base load municipal contract Actual/expected commissioning • Progress on £m Tonnes Electricity ERF pipeline (000) MWe Lakeside(2) 150 410 38 Fully operational Merchant Commissioned Greater Bolton(3) N/A 120 9 Fully o
Slide 65: Half Year Results 2018/19
Half Year Results 2018/19 27 November 2018 © Pennon Group plc 2018