Pennon Group Plc · LSE:PNN
Pennon — FY2006/07 Earnings Presentation
44 slides from Pennon's earnings presentation, May 31, 2007
Slide 1: Preliminary Results 2006/07
Preliminary Results 2006/07 31 May 2007 1
Slide 2: Disclaimers
Pennon Group Plc (“Pennon Group”) Disclaimers 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 relatio
Slide 3: 2006/07 Financial Highlights
Pennon Group Plc 2006/07 Financial Highlights • Operating profit (1) up 14.2% to £201.8m - South West Water up 10.8% to £156.8m - Viridor up 30.4% to £46.8m • Profit before tax(2) up 18.2% to £131.1m • Earnings per share up 20.2% to 30.3p (3) • Dividend − Recommended final dividend per share up 8.5%
Slide 4: 2006/07 Operational Highlights (South West Water)
Pennon Group Plc 2006/07 Operational Highlights South West Water: • On target to deliver 2005 – 2010 Regulatory Contract • Profit increase reflecting strong growth in RCV which is forecast to reach £2.6bn by end of K4 • South West bathing waters 100% compliant with mandatory standards (all 144 beach
Slide 5: 2006/07 Operational Highlights (Viridor)
Pennon Group Plc 2006/07 Operational Highlights Viridor: • Particularly strong growth in operating profits • Preferred bidder (consortium with John Laing) status achieved for Greater Manchester Waste PFI • Wyvern Waste acquisition fully integrated and earnings enhancing in first 10 months − long-ter
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Slide 7: Summary Financial Results
Pennon Group Plc Summary Financial Results 2006/07 2005/06 Change £m £m % Group revenue 748.3 645.7 15.9 Group operating profit (1) (2) 201.8 176.7 14.2 Group profit before tax (2) 131.1 110.9 18.2 Earnings per share (2) (3) (4) 30.3p 25.2p 20.2 Dividends per share (4) 18.55p 17.2p 7.8 (1) Before am
Slide 8: Cash Flow
Pennon Group Plc Cash Flow 2006/07 2005/06 £m £m Cash inflow from operations 313.7 276.3(1) Net interest paid (51.4) (106.4) Dividends and tax paid (73.0) (36.3) Capital expenditure (246.4) (213.8) Acquisitions/disposals (36.3) (40.8) Pensions prepayment (8.6) (44.2) Net cash outflow (102.0) (165.2)
Slide 9: Net Borrowings
Pennon Group Plc Net Borrowings As at 31 March 2007 2006 £m £m Loans and finance leases - over one year 1,599 1,472 - under one year 86 54 1685 1,526 Less: investment and cash (128) (99) Net debt 1,557 1,427 Net gearing (1) 71% 71% SWW debt/RCV 62% 62% • Gearing stable (1) Debt to equity + debt 9
Slide 10: Net Debt Analysis as at March 2007
Pennon Group Plc Net Debt Analysis as at 31 March 2007 £m Finance leasing 1,082 Bank bilaterals - RCFs/term loans 258 EIB 232 Private placement 100 Other 13 Total gross debt 1,685 Less: Cash/liquid investments (128) Total net debt 1,557 • Key role of finance leasing 10
Slide 11: Net Interest Payable
Pennon Group Plc Net Interest Payable 2006/07 2005/06 (1) £m £m Interest payable (98.3) (96.8) Interest receivable 29.1 32.5 Net interest payable (69.2) (64.3) Average rate of interest 4.6% 5.1% Net interest cover 2.9x 2.7x • Effective management of interest rates – SWW: 4.3% (1) Before exceptional
Slide 12: Efficient Financing Strategy
Pennon Group Plc Efficient Financing Strategy • Funding strategy uses mix of fixed, floating and index-linked rate borrowings − Locks in benefit of low interest rates compared to Ofwat assumptions − Circa 60% of SWW projected debt fixed to March 2010 − Circa 10% SWW current debt index-linked to 2041
Slide 13: Fair Value of non-current borrowing
Pennon Group Plc Fair Value of non-current borrowing YE 31/03/07 YE 31/03/06 Book Value Fair Value Book Value Fair Value £m £m £m £m Finance Leases 1,033 921 927 884 Private Placement 100 100 - - EIB 216 211 232 227 Bank Loans 250 250 313 313 1,599 1,482 1,472 1,424 117 48 • Benefit of Fair Value ov
Slide 14: Taxation
Pennon Group Plc Taxation 2006/07 2005/06 £m £m UK corporation tax 23.9 14.8(1) Deferred tax 13.3 20.2 37.2 35.0 • Mainstream tax charge 18% (2006 – 13%) (1) Before net tax relief of £18.7m relating to exceptional items 14
Slide 15: Pensions
Pennon Group Plc Pensions • Pension deficit of £41m at 31 March 2007 (2006 - £42m) − updated longevity assumption (additional £16m liability) offset by higher market discount rate and further contribution prepayment £9m • Net deficit represents just over 1% of market capitalisation • Pension fund as
Slide 16: Dividends
Pennon Group Plc Dividends • Progressive dividend policy: 3% real until 2009/10 • Recommended final dividend up 8.5% to 12.7p • Full year dividend up 7.8% to 18.55p • DRIP alternative • Dividend cover maintained at 1.6x (before deferred tax, and exceptional items in 2005/06) 16
Slide 17: South West Water
SOUTH WEST WATER eo Pennon Group Plc
Slide 18: Financial Performance Summary
South West Water Financial Performance Summary 2006/07 2005/06 £m £m Revenue 381.5 348.5 Operating profit 156.8 141.5(1) • Revenue up by 9.5% • Operating profit up by 10.8% (1) Before exceptional costs of £14.5m 18
Slide 19: Revenue
South West Water Revenue • Increase of £33.0m (9.5%) in year. Reflects impact of £m - tariff increase 43.0 - meter option switchers (8.0) - new connections 3.1 - demand (5.1) 33.0 • Number of meter switchers 26,500 • Number of new customers 7,100 • Over 57% of domestic customers now metered • Existi
Slide 20: Operating Costs
South West Water Operating Costs 2006/07 2005/06 (1) £m £m Total operating costs 224.7 207.0 Less depreciation charges (77.7) (71.9) Operating costs before depreciation charges 147.0 135.1 Cash costs: - inflation (including power costs (£5.5m) and 10.2 chemicals) - new capital schemes 2.7 - other (i
Slide 21: K4 Efficiency Achievement versus Target
South West Water K4 Efficiency Achievement versus Target 14.0 12.0 10.0 8.0 Cumulative Actual £m 6.0 4.0 Cumulative Original Target profile 2.0 0.0 2005/06 H1 2005/06 H2 2006/07 H1 2006/07 H2 2007/08 H1 2007/08 H2 2008/09 H1 2008/09 H2 2009/10 H1 2009/10 H2 • K4: £7m efficiency savings to date 21
Slide 22: Capital Programme
South West Water Capital Programme • Capital expenditure 2006/07 – £184m (2005/06 – £191m) − 638km water mains replaced/refurbished (2005/06 – 695km) reflecting switch to urban areas • K4 capital programme on track − investment to date £375m (outturn prices) − all major projects delivered in line
Slide 23: Regulatory Capital Value
South West Water Regulatory Capital Value Year End 2005 2006 2007 2008 2009 2010 £m £m £m £m £m £m At 2002/03 prices (1) 1847 1929 1994 2042 2095 2136 Actual/expected outturn prices (2) 1956 2091 2265 2379 2501 2614 • 34% growth in RCV 2005-10 – highest percentage increase of any quoted water compan
Slide 24: Delivering K4: Operational Performance – on track
South West Water Delivering K4: Operational Performance – on track • No hosepipe bans or drought orders – 10th consecutive year • Ofwat leakage target met every year − lowest ever leakage level achieved in 2006/07 • Drinking water quality – high quality sustained • Waste water quality – all time hig
Slide 25: Delivering K4: Operational Performance – on track (cont)
South West Water Delivering K4: Operational Performance – on track (cont) • “Service+” successfully launched • New call centre telephony platform now operating • New debt recovery system under development • Stakeholder engagement plan making impact • “WaterCare” successfully launched • Organisationa
Slide 26: Looking to the future
South West Water Looking to the future • Customer contact/billing contract re-tendering is underway • “Service+” phase 2 under development • Examining tariff structures to address affordability and sustainability • “Puros” launched - service excellence/operational efficiency from more centralised op
Slide 27: PR09 - Timetable
South West Water PR09 - Timetable • Customer and stakeholder engagement well underway • Ofwat methodology consultation paper – October 2007 • Strategic Direction Statement – October 2007 • Draft Business Plan – late summer 2008 • Final Business Plan – spring 2009 • Final Determination – November 200
Slide 28: PR09 – Likely Investment Drivers
South West Water PR09 – Likely Investment Drivers • Quality – revised bathing water and water framework directives • Adoption of private sewers • Supply/demand focus and climate change impacts • Enhanced focus on sustainability and energy efficiency • Capital maintenance – reinvestment in 1990s asse
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Slide 30: Continuing to Deliver Strong Financial Performance
Viridor Continuing to Deliver Strong Financial Performance EBITDA PBITA 90 50 82.8 46.8 80 45 66.7 40 70 % 9% 4 35.9 :1 R :2 G R 35 G CA CA 60 56.4 30.0 30 50 43.2 25 22.7 38.2 40 19.1 32.1 20 28.8 15.2 30 15 13.1 20 10 10 5 0 0 2001 2002 2003 2004 2005 2006 2007 2001 2002 2003 2004 2005 2006 2007 3
Slide 31: 2006/07 Financial Highlights: particularly strong growth
Viridor 2006/07 Financial Highlights: particularly strong growth • At beginning of year projected continued moderate growth in PBITA • Revenue increased by £68.8m (23%) to £367.7m − acquisitions (Brett full year, Wyvern and Skipaway) accounted for £39.6m and underlying business £29.2m − includes inc
Slide 32: Profit Contribution by Segment
Viridor Profit Contribution by Segment (1) Year Ended 31 March 2007 Y ear Ended 31 March 2006 Recycling & Recycling & Transfer Transfer (2) 5% C ontracts 2% Contracts (2) 10% 11% C ollection 8% Collection 8% Landfill 58% Landfill Power Generation 54% 22% Power Generation 22% (1) Contribution before
Slide 33: Operational and Business Highlights – Landfill
Viridor Operational and Business Highlights – Landfill • Total volumes increased by 9% to 4.7m tonnes − excluding acquisitions held constant at 4.3m tonnes • Average gate fees increased by 7% (to £19 per tonne) • Margin per tonne increased by 50p (now exceeds £6) • Consented landfill capacity grew f
Slide 34: Operational and Business Highlights – Power Generation
Viridor Operational and Business Highlights – Power Generation • Total landfill gas power generation increased by 15% to 423GWH • Average price increased 4.3% to £62 per MWH − reflecting strong brown energy prices and ROCs premium − timing of open market sales for 2006/07 particularly favourable; 20
Slide 35: Wyvern Waste Acquisition/Somerset PPP
Viridor Wyvern Waste Acquisition/Somerset PPP • In May 2006 completed acquisition of Wyvern Waste for £25m (including £3m cash on balance sheet) and entered into 25 year Public Private Partnership agreement with Somerset County Council • Integration complete and the business is significantly earning
Slide 36: Greater Manchester Waste PFI Contract
Viridor Greater Manchester Waste PFI Contract • Viridor/Laing consortium announced as preferred bidder in January 2007 − expect to sign and commence operations in the current financial year • 1.4m tonnes per annum with total capex of around £300m • In addition, Viridor one of the nominated landfill
Slide 37: Lakeside Energy from Waste Plant
Viridor Lakeside Energy from Waste Plant • Joint venture with Grundon Waste Management − 400kt and up to 37MW energy from waste plant at Colnbrook near Heathrow − £160m capex, 86% non-recourse debt with balance split equally between equity providers − under construction and on schedule to open secon
Slide 38: Lakeside Energy from Waste Plant – under construction
Viridor Lakeside Energy from Waste Plant – under construction 38
Slide 39: Lakeside Energy from Waste Plant – artist’s impression
Viridor Lakeside Energy from Waste Plant – artist’s impression 39
Slide 40: Other Significant New Developments
Viridor Other Significant New Developments • Poole recycling and disposal contract 70kt pa extension to 2027 • Plymouth landfill contract 120kt pa for 7 years starting in April 2008 • South Lanarkshire 5 year landfill and 7 year recycling contracts totalling £20m • Preferred bidder for medium term d
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Slide 42: Summary
Pennon Group Plc Summary • An excellent year • Strategy clearly focused on water, sewerage and waste management • South West Water − delivery of K4 contract well under way − strong growth in K4 RCV reaching £2.6bn by March 2010 − preparing for PR09 • Viridor delivering strong growth by − capitalisin
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Slide 44: Appendix A: Water Industry Average Interest Rate
Appendix A Wate r Industry 2005/06 Ave rage Inte re st Rate (Pre Exce ptional Ite ms) 8% 7% Average Interest Rate 6% 5% 4% 3% * x W S ire es rn es n t se W en ia ru he SW am iti sh es A br Tr ym til ut k W Th um or So U n rC er Y th ted v w or Se D ni N U Source: Pennon calculation based on Annual R