Pennon Group Plc · LSE:PNN
Pennon — FY2019/20 Earnings Presentation
59 slides from Pennon's earnings presentation, June 2020
Slide 1: Full Year Results 2019/20 North America Roadshow
Full Year Results 2019/20 North America Roadshow June 2020
Slide 2: Disclaimer
Disclaimer For the purposes of the following disclaimers, references to this “document” recruitment, retention and development of skills; non-delivery of regulatory shall mean this presentation pack and shall be deemed to include outcomes and performance commitments; failure or increased cost of ref
Slide 3: Pennon: A unique combination of environmental infrastructure assets
Pennon A unique combination of environmental infrastructure assets Pennon has been driven by its strategic vision to become a leader in UK infrastructure, delivering for the benefit of customers, communities and the environment. 2019/20 has been a landmark year for Pennon, culminating in the announc
Slide 4: UK Water Industry Regulation
UK Water Industry Regulation Market Regulation – overview • As a provider of water and wastewater services, South West Water operates within a framework which contains a variety of regulators • Regulation on price and performance by economic, quality and environmental factors - this regulatory frame
Slide 5: Ofwat's Final Determination for South West Water
2020-25 Business Plan Ofwat’s Final Determination for South West Water Key Features • Minimal changes to our Business Plan to 2025 • Totex allowance of c.£2 billion – in line with South West Water’s fast track Draft Determination • An innovative sharing mechanism – WaterShare+ • A K7 capital investm
Slide 6: Pennon – Significant Strategic Delivery
Pennon – Significant Strategic Delivery Bringing resources to life COVID 19 – Resilient delivery of critical services across Group • Prioritised the health and safety of employees and customers – key worker status across Group • Adapted quickly to unprecedented conditions, vast majority of operation
Slide 7: Financial Highlights
Financial Highlights Strong, consistent financial performance 7
Slide 8: Total Shareholder Return
Total Shareholder Return Consistently outperforming the market since privatisation 7,500 7,000 Pennon Severn Trent United Utilities FTSE 100 FTSE 250 6,500 6,000 5,500 5,000 4,500 Total indexed to 100 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1
Slide 9: 2019/20 Financial Highlights
2019/20 Financial Highlights Solid financial performance, resilient outlook Managing COVID-19 impacts Responsible delivery of 2019/20 results for all stakeholders Strong liquidity and funding position Sale of Viridor on track Sector leading new dividend policy for 2020-25 9
Slide 10: COVID-19: Managing financial impacts
COVID-19 Managing financial impacts of COVID-19 Limited impact on 2019/20 results • No significant additional Totex impact as a result of the pandemic to date • COVID-19 expected credit losses provision – non-underlying charge £9.0m across Group – largest impact for PWS £5.0m • Cash collections rema
Slide 11: Pennon financial performance in line with expectations
Pennon Financial performance in line with expectations for 2019/20 Continuing Group Continuing Group and Viridor Continuing Group represents South West Water, Pennon Water Underlying(1) 2019/20 (£m) 2019/20 (£m) 2018/19 (£m) Change(2) Services and Pennon (the Revenue 636.7 1,389.9 1,478.2 (6.0%) com
Slide 12: South West Water: continued outperformance
South West Water Continued outperformance – delivered highest sector returns in K6 Wet weather impacting revenue • Overall revenue reduced by 1.8% Underlying(1) 2019/20 (£m) 2018/19 (£m) Change – Lower revenue from wet weather impact Revenue(2) 570.3 581.0 (1.8%) (c.84% metered customer base) – Net
Slide 13: Pennon Water Services
Pennon Water Services(1) Focused cost efficiencies in a competitive market Sustained position in a competitive Underlying(2) 2019/20 (£m) 2018/19 (£m) market Revenue 173.5 173.7 • Financial performance driven through SWW wholesale elimination (106.4) cross selling to national customers (119.3) and w
Slide 14: Viridor: Solid performance, delivering value
Viridor Solid performance, delivering value Underlying(1) 2019/20 (£m) 2018/19 (£m) Change Revenue Revenue(2) 757.8 852.7 (11.1%) • Lower revenue with limited EBITDA impact from landfill tax and Greater EBITDA 198.1 178.9 +10.7% Manchester recycling operating contract ERFs 165.6 154.8 +7.0% ERFs Lan
Slide 15: Non-underlying items
Pennon Non-underlying items 2019/20 2018/19 Expected credit loss COVID-19 impacts Total Group (incl. Viridor) £m £m • Pennon Water Services – c.£5m COVID-19 – Expected credit loss from (9.0) - • South West Water – c.£3m customers • Viridor – c.£1m Derivatives 18.0 5.8 Derivatives Pension past servic
Slide 16: Corporation Tax
Corporation Tax A responsible approach to tax 2019/20 2018/19 Continuing Group (incl. Viridor) £m £m • First water and waste infrastructure business to Current Year secure accreditation Current Tax 28.0 32.4 • Demonstrates transparency and best practice across the Group Deferred Tax 26.7 23.2 • Tota
Slide 17: Net Debt Movements
Net Debt Movements Strong cash inflow from operations Non-cash impact of Substantial operating cash flows supporting: IFRS 16 has no debt • Continued capital investment covenant impact (137.5) (3,264.0) £m • Accelerated pension contributions • Responsible tax contributions (339.9) (3,126.5) (3,079.5
Slide 18: Balance Sheet: Robust financing position
Balance Sheet Robust financing position Group Net Debt(1) £3,264m net debt at 31 March 2020 £3,080m at 31 March 2019 Implied Pennon Company £822m South West Water £2,227m Viridor £215m £809m at 31 March 2019 £2,057m at 31 March 2019 £214m at 31 March 2019 Strong Balance sheet Group Net Gearing(2) Fl
Slide 19: Finance Costs
Finance Costs Efficient financing – mitigating risk 2019/20 net finance costs(1) 2019/20 Group interest rate 2019/20 SWW interest rate £88.7m 3.5% 3.4% £83.2m 2018/19 3.6% 2018/19 3.5% 2018/19 Interest rate hedging for K7 1.90% Hedging • Aligned to Ofwat’s PR19 1.70% activity Hedging methodology act
Slide 20: Crystallising Value from Sale of Viridor
Crystallising Value from Sale of Viridor Strategic review – delivering for shareholders • Recognises strategic value in Viridor - £4.2 billion enterprise value • Represents an EV / EBITDA multiple of 18.5x(1) • Pennon shareholder approval and European Commission merger clearance received • Now final
Slide 21: Dividend
Dividend Track record of sustained growth – sector leading policy for Continuing Group 10 year sector leading dividend policy delivered to 2020 • Full year dividend for 2019/20 of 43.77p per share, up +6.6% – Interim dividend paid 13.66p per share – Recommended final dividend of 30.11p per share • D
Slide 22: South West Water
South West Water Pennon
Slide 23: South West Water: Delivering for customers and communities
South West Water Delivering for customers and communities in the right way COVID-19 – Resilient delivery of critical services • Delivering robust service safely – responded rapidly to emerging impacts • Supporting customers in vulnerable circumstances – building on well established support • Managin
Slide 24: COVID-19 – Resilient delivery of critical services
South West Water COVID-19 – Resilient delivery of critical services Focus on safety and supporting our employees and customers • Prioritised mental, physical and financial wellbeing • Commitment to full pay without Government support • Swift response to ensuring safety – continuing supply of PPE • T
Slide 25: COVID-19 – Supporting customers and communities
South West Water COVID-19 – Resilient delivery of critical services Supporting customers and our communities • Building on our well established support for customers • Launched COVID-19 Priority Services Register – 21,000 registered (an industry first) • Social tariff and affordability schemes provi
Slide 26: Strong delivery throughout K6: customer service
South West Water Strong delivery and performance throughout K6 regulatory period Customer service improvements over K6 • Step change in SIM performance – biggest increase across the industry • Written complaints more than halved since 2015 • Customer waiting times down to less than a minute • Unwant
Slide 27: Strong delivery throughout K6: operational performance
South West Water Strong delivery and performance throughout K6 regulatory period Excelled and transformed performance in key operational areas • Bathing water quality achieving c.99% • Leakage targets met every year • Maintained asset reliability throughout K6 • Supply interruptions more than halved
Slide 28: Strong delivery throughout K6: RORE and outperformance
South West Water Strong delivery and performance throughout K6 regulatory period Consistently delivered highest RORE(1) in every year • 11.8% over K6 • Delivering outperformance in every area, every year Totex outperformance delivered across 5 years • c.£300m savings delivered – reducing future bill
Slide 29: Looking forward – delivering fast-track K7 plan
South West Water Looking forward – delivering fast-track K7 plan RORE impacted by industry wide changes in returns and approach in PR19 • Lower base returns – 3.9% (from 6.0% K6) • Gearing reduced to 60% • Totex sharing rates reduced to 50% • Nominal cost of debt reduced to 4.2% (from 5.5% K6) South
Slide 30: Looking forward – delivering fast-track K7 plan
South West Water Looking forward – delivering fast-track K7 plan Strong track record of improvements Isles of Scilly expansion completed on 1 April 2020 • First for industry – collaboration with all regulators and stakeholders • Teams fully operational and assets transferred • Delivering significant
Slide 31: Pennon Water Services
Pennon Water Services Pennon
Slide 32: Pennon Water Services: High quality business services
Pennon Water Services High quality business services delivering value High quality customer service in competitive market • Customer centric approach underpinning excellent service – Trustpilot score of 9.1/10 • 41% reduction in written complaints from prior year – top 3 position within market perfo
Slide 33: Pennon – Significant Strategic Delivery
Pennon – Significant Strategic Delivery Bringing resources to life COVID 19 – Resilient delivery of critical services across Group • Prioritised the health and safety of employees and customers – key worker status across Group • Adapted quickly to unprecedented conditions, vast majority of operation
Slide 34: Appendix
Pennon —=S Appendix Pennon
Slide 35: 2020/21 Technical Guidance – Continuing Group
Pennon 2020/21 Technical Guidance – Continuing Group Pennon Group 2019/20 Change Revenue • Impact of lower tariffs based on K7 Final Determination (c.£20m) £636.7m(1) • Reduced non household demand (c.£15m including impact from customers outside of the South West Water region) partially offset by in
Slide 36: Pennon Group EBITDA
Pennon Group EBITDA £m 10.8 563.4 6.6 546.2 7.8 2.5 0.9 (10.7) (0.7) 2018/19 SWW revenue Recycling Pennon Water Viridor contracts, SWW cost Landfill and ERFs 2019/20 Services collections & savings landfill gas other, and indirect costs 36 36
Slide 37: Adjusted EPS reconciliation
Pennon Adjusted EPS reconciliation Continuing Continuing Group and Continuing Continuing Group Group Viridor Group and Viridor 2019/20 2019/20 2018/19 2019/20 2019/20 2018/19 Adjusted EPS Calculation Statutory EPS Calculation £m £m £m £m £m £m Profit Before Tax 193.1 301.5 260.3 Statutory Profit Bef
Slide 38: Capital Investment
Capital Investment Continued investment across the Group 500 2019/20 2018/19 £m £m 400 Group Total Water 161 154 Capex Total Viridor 178 242 300 £m Total(1) 339 396 200 100 Key elements of Group expenditure in 2019/20 • Early investments for SWW for K7 – focused on ODI delivery 0 • Water quality inv
Slide 39: Group capital expenditure reconciliations
Pennon Group capital expenditure reconciliations Group Capital Investment 2019/20 2018/19 Group Capital Payments 2019/20 2018/19 (Slide 35) £m £m (Net debt movements slide 14) £m £m Viridor 160.5 210.2 Viridor 160.5 210.2 ERFs 84.5 176.2 South West Water 161.0 154.0 Recycling 48.2 8.9 Other Group 0.
Slide 40: Sustainable, diversified funding sources
Pennon Sustainable, diversified funding sources Pennon Group as at 31 March 2020 £m SWW as at 31 March 2020 £m Finance Leasing(1) 1,549 Finance Leasing(1) 1,402 Bank Bilaterals 660 Bank Bilaterals 139 European Investment Bank Loans 374 European Investment Bank Loans 264 Index-Linked Bonds 490 Index-
Slide 41: Fair value of non-current debt
Pennon Fair value of non-current debt Continuing Group and Viridor Pennon Plc Book Fair As at 31 March 2020 (£m) Difference Book Value Fair Value Difference Value Value Bank Bilaterals 702 710 (8) 520 528 (8) European Investment Bank Loans 341 324 17 103 103 - Index-Linked Bonds 440 536 (96) - - - F
Slide 42: Pensions
Pennon Pensions 31 March 31 March 2020 2019 2019 Actuarial technical provision basis £m £m • Principal scheme (82% SWW, 12% Viridor, 6% Pension schemes’ assets 934 934 Plc) deficit of c.£53m, agreed through triennial valuation – outcome broadly in line with the Pension schemes’ liabilities 943 995 p
Slide 43: Net interest analysis
Pennon Net interest analysis(1) 2019/20 2018/19 K4 K5 K6 £m £m (2005-10) (2010-15) (2015-20) 7.0% 6.5% Pennon Net interest charge: (88.7) (83.2) 6.0% 5.5% Add: capitalised interest A (11.0) (15.2) 5.0% SWW Less: notional interest payable(2) 9.0 12.5 4.5% 4.0% Water Add: interest receivable on servic
Slide 44: Significant energy generation
Pennon Significant energy generation Total Continuing Group energy generation of UK Power Forward Seasons 20.6 GWh in 2019/20 65 60 • 25 hydro turbines – 12.5 GWh 55 • 44 Solar PV installations(1) – 7.2 GWh 50 £/MWh 45 • 6 CHP – 5.8 GWh 40 • 1 wind turbine – 0.3 GWh 35 S 20 W 20 30 Portfolio managem
Slide 45: South West Water Appendix
South West Water Appendix
Slide 46: South West Water Revenue
South West Water Revenue £m 21.4 4.3 581.0 (3.4) (17.5) (3.0) 570.3 (12.5) (1) 2018/19 Tariff increases WRFIM New connections Customer leak Meter optants Other revenue (incl. 2019/20 allowances customer demand) 46 (1) WRIFM - Wholesale Revenue Forecast Incentive Mechanism 46
Slide 47: South West Water EBITDA
South West Water EBITDA £m 367.1 1.8 364.2 4.7 362.4 7.6 (10.6) (6.4) 2018/19 Reduction in Cost increases incl. Efficiencies & other Prior year one- 2019/20 (pre-IFRS) IFRS 16 2019/20 revenue inflation cost savings off/atypical costs 47 47
Slide 48: 2019/20 Performance Measures
South West Water 2019/20 Performance Measures Water quality standard Bathing water quality Taste, smell and colour contacts Water & waste asset reliability Water contacts resolved 1st time Sustainable abstractions Water restrictions Leakage level Exceeded or met Supplies interrupted due to flooding
Slide 49: Sharing outperformance with customers
South West Water Sharing outperformance with customers Strong focus on sharing financial benefits with customers • Unique mechanism to share outperformance transparently • Significant benefits identified for customers to date • Reinvestment in services, future lower bills • Future sharing scheme for
Slide 50: Reconciliation of RORE to financials
South West Water Reconciliation of RORE to financials Cumulative Totex(1) outperformance of £297m Totex £m K6 2019/20 Total ODI Outperformance(2) Operating Costs 1,054 206 824 161 • 2019/20 net reward £2.0m Capital Expenditure Totex 1,878 367 • Rewards: water restrictions, flooding incidents Totex a
Slide 51: Viridor Appendix
Viridor Pennon Appendix
Slide 52: Viridor: Successful delivery of key priorities for 2019/20
Viridor Successful delivery of key priorities for 2019/20 Growth in earnings delivery from a complementary portfolio of assets • Increasing contribution from contract backed infrastructure assets • Successful transition out of Greater Manchester contract in May 2019 – limited business impact Strong
Slide 53: COVID-19 – Resilient operations in unprecedented times
Viridor COVID-19 – Resilient operations in unprecedented times Well positioned to manage impact of COVID-19 • Strong local authority contracted position • Strong ERF performance mitigating volume impact from Commercial & Industrial customers in Collections, Landfill and Recycling • Household Waste R
Slide 54: Strong growth from ERF portfolio
Viridor Strong growth from ERF portfolio Avonmouth ERF in commissioning – on track for operational ramp up in 2020/21 • First financial contribution(1) in 2019/20 Optimisation ongoing at Glasgow, Beddington and Dunbar • Full year availability 90%(2) Ford ERF JV with Grundon Waste Management announce
Slide 55: Viridor – Landfill and Landfill Gas
Viridor – Landfill and Landfill Gas Efficiently managed with demand into the long term Responsible operator • Highly engineered and controlled operations • Norlands site sold for alternative use in H1 2019/20 Improved gas collection and availability • Strong engine availability and gas collection ef
Slide 56: Viridor – Recycling
Viridor - Recycling Long term recycling fundamentals remain strong Avonmouth Plastics Recycling Facility • £65m construction progressing Continuing to progress facilities co-located at Ardley and Dunbar ERFs • UK regional events held to engage stakeholders ahead of formal planning applications Focus
Slide 57: Viridor Revenue
Viridor Revenue £m 3.1 37.0 3.3 852.7 (22.9) (28.2) 757.8 (87.2) 2018/19 ERFs Contracts Landfill Gas Recycling Landfill Greater 2019/20 Manchester contract 57
Slide 58: Viridor Adjusted EBITDA
Viridor Adjusted EBITDA £m 6.2 2.5 0.4 254.5 9.9 10.8 (0.7) 225.4 2018/19 ERFs Share of JV Landfill Gas Contract, Landfill Recycling 2019/20 EBITDA and Collections & IFRIC 12 Interest Other (inc. indirect Receivable overheads) 58
Slide 59: Full Year Results 2019/20
Full Year Results 2019/20