Pennon Group Plc · LSE:PNN
Pennon — FY2017/18 Earnings Presentation
62 slides from Pennon's earnings presentation, September 2018
Slide 1: Results 2017/18 & South West Water Business Plan
Results 2017/18 & South West Water Business Plan September 2018 © Pennon Group plc 2018
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: About Pennon
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 4: Pennon Bringing Resources to Life
Pennon Bringing Resources to Life • Our core values are embedded in our way of operating − Working in long-term partnerships − Delivering outstanding service to customers and communities − Supporting value creation for shareholders − Significant investment in UK water and waste – c.£1.7bn 2015-2020
Slide 5: Delivering for customers, communities and shareholders
Pennon Delivering for customers, communities and shareholders Delivering sustainable financial performance across the Group • South West Water RORE(1) 11.8% cumulatively for K6 – maintaining momentum • Efficiency underpinning delivery across the Group − Sector leading water Totex outperformance £177
Slide 6: South West Water Business Plan 2020-2025
South West Water - Business Plan 2020-2025 Lower bills, extra investment, ‘shares’ for customers in radical ‘New Deal’ Strong foundation for business plan - a solid base for continued performance • On track to meet all of our stretching PR14 commitments to 2020 • Forecast to deliver c. £300m totex o
Slide 7: South West Water Business Plan 2020-2025: co-created plan
South West Water - Business Plan 2020-2025 Lower bills, extra investment, ‘shares’ for customers in radical ‘New Deal’ Co-created our plan with customers • Support for increased investment £1,056m(1) to 2025 (£850m(1) to 2020) − Two leading edge water treatment works in Bournemouth building on innov
Slide 8: South West Water Business Plan 2020-2025: fair returns
South West Water - Business Plan 2020-2025 Lower bills, extra investment, ‘shares’ for customers in radical ‘New Deal’ Fair returns for excellent performance • RORE range upside 8.8% (doubling allowed base returns of 4.6%) • RCV growth of 11% • Proposal for a more ‘balanced’ Outcome Delivery Incenti
Slide 9: Business Plan timetable and process
South West Water - Business Plan 2020-2025 Lower bills, extra investment, ‘shares’ for customers in radical ‘New Deal’ Timetable and process 9 Pennon Full Year Results 2017/18 © Pennon Group plc 2018
Slide 10: Pennon Group Financial performance 2017/18
Pennon Group Financial performance 2017/18 2017/18 2016/17 A EBITDA in line with expectations Underlying(1) Change £m £m • Strong operational performance across Revenue 1,393.0 1,353.1 +2.9% the Group EBITDA A 509.6 486.0 +4.9% • Focus on efficiencies Adjusted EBITDA(2) 562.3 546.2 +2.9% Depreciatio
Slide 11: South West Water: Continuing to drive outperformance
South West Water Continuing to drive outperformance in current regulatory period 2017/18 2016/17(2) Underlying(1) Change Fair bills £m £m • Net tariff increase 2.5%(5) Revenue 571.3 555.3 +2.9% • Small increase 0.2% in metered Operational Costs (210.4) (207.7) (1.3%) volumes net of impact of meter E
Slide 12: Viridor Delivering Growth
Viridor Delivering Growth 2017/18 2016/17 Underlying(1) £m £m Change Strong earnings from ERFs • +9% like-for-like with 2016/17 - higher Revenue(2) 785.7 793.5 (1.0%) availability and energy generation EBITDA 150.2 138.3 +8.6% • Dunbar contribution in H2 2017/18 ERFs 123.7 106.9 +15.7% • Underlying
Slide 13: Capital Investment: peak year of capital investment
Capital Investment Investing for Growth - peak year of capital investment 500 2017/18 2016/17 £m £m 400 Total Water 184 191 Group Total Viridor(1) 213 194 300 Capex £m Total PWS/Other 1 0 200 Total 398 385 100 Total ERF portfolio expenditure c. £1.5bn(2) 0 - £1,356m expenditure to 2017/18, including
Slide 14: Net Debt Movements
Net Debt Movements Growing cash inflow from operations, continuing significant investment £m Strong cash Re-financing Peak year inflow from of perpetual of capital (2,801.5) (2,664.9) operations capital investment in securities 2017/18 (381.8) (129.0) (107.8) (82.1) (22.9) (61.3) 672.4 (17.0) (21.7)
Slide 15: Balance Sheet: Strong funding position underpinning investment
Balance Sheet Strong funding position underpinning investment Group at 31 March 2018 £1,171m cash & committed facilities Net Debt £2,802m (31 March 2017 £1,383m) Profile Index- linked £560m 20% Fixed Development of portfolio £1,740m Floating 62% £502m • £500m of funding signed • £240m signed since y
Slide 16: Balance Sheet: Sustainable gearing and effective interest rate
Balance Sheet Sustainable gearing and an effective interest rate 63.1% Group Net Gearing(1) 3.7% Group average 63.8% March 2017 3.4% 2016/17 interest rate Water business Net SWW average 60.3% 3.5% 61.8% March 2017 Debt / RCV(2) 3.2% 2016/17 interest rate Group net • Reflects refinancing of perpetual
Slide 17: Expansion to Isles of Scilly
South West Water Delivering for customers, communities and shareholders Expansion to Isles of Scilly – investing to improve vital services • Licence expansion for Isles of Scilly (IoS) requested by DEFRA with Ofwat support − Water quality, public health and security of supply to be improved − Target
Slide 18: Delivering and outperforming our plan to 2020: Totex efficiency
South West Water Delivering and outperforming our plan to 2020 Cumulative K6 RORE(1) (2016/17) 12% Financing ODIs 8% Totex Base Returns 4% 0% -4% SWW Northumbrian SVT Wessex Anglian UU Southern Welsh Thames Yorkshire Totex efficiency – drives greatest customer benefit through lower bills (1) Based o
Slide 19: Cumulative Totex outperformance and WaterShare RORE
South West Water Delivering and outperforming our plan to 2020 Cumulative K6 TOTEX outperformance - £177m WaterShare RORE (1) • Delivering continued efficiency performance Cumulative 17/18 11.8%(1) 11.1% Operational performance ahead of our commitments to customers • Cumulative net reward of £8.1m •
Slide 20: Cumulative ODI Outperformance net reward
South West Water Delivering and outperforming our plan to 2020 Cumulative ODI Outperformance net reward: £8.1m(1) Exceeding our commitments Net penalty Net reward • 21st consecutive year without water restrictions Water restrictions • Leakage ODI target beaten at 83 Ml/day – sector leading Leakage p
Slide 21: Customers at the heart of our delivery: SIM score
South West Water Delivering and outperforming our plan to 2020 Customers at the heart of our delivery Customer Service Improvements • Written complaints down 12% SWW, 39% BW – momentum continuing • Achieved accreditation of Institute of Customer Service ‘Service Mark’ in April 2018 • Largest qualita
Slide 22: Viridor Delivering for customers, communities and shareholders
Viridor Delivering for customers, communities and shareholders Confidence in UK waste sector, strong drivers • Government’s Resources & Waste Strategy expected to confirm fundamentals and provide stimulus to recycling • “Blue Planet” effect driving Government actions Delivering sustainable long-term
Slide 23: UK Combustible Residual Waste Market
Viridor Confidence in waste sector, strong drivers Favourable waste market dynamics confirmed • Further UK waste treatment capacity is essential to service longer term demand • Conservative assumptions taking into account higher recycling over time and further ERF build-out • Household waste arising
Slide 24: Confidence in waste sector, strong drivers
Viridor Confidence in waste sector, strong drivers • Resources & Waste Strategy expected Autumn 2018 − Supporting 25-year Environment Plan and aligned with Industrial Strategy & Clean Growth Strategy − Shaping policy around Brexit and beyond Issue Positive changes to UK waste policy expected Stagnan
Slide 25: Navigating short term recycling challenges
Viridor Delivering sustainable long-term returns Navigating short term recycling challenges • Local authority cost savings – impacting operational input quality and cost – margins reduced for 2017/18 by £3/t • Investing in facilities to improve output quality • Chinese import policy impacting paper
Slide 26: Strong ERF performance
Viridor Delivering sustainable long-term returns Strong ERF performance Outperforming base case expectation • Portfolio delivering in excess of base case expectations • High availability across fleet – Average c.92%(1) • Capacity expansion: Outperformance Outperformance − Cardiff – agreed expansion
Slide 27: ERF EBITDA build: 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 2017/18 2020/21 ERFs under construction ERFs in commissioning ERFs operational 27 Pennon Full Year Results 2017/18 © Pennon G
Slide 28: ERF sites: Glasgow, Beddington, Dunbar, Avonmouth
Viridor Delivering sustainable long-term returns Glasgow Beddington Dunbar Avonmouth 28 Pennon Full Year Results 2017/18 © Pennon Group plc 2018
Slide 29: Appendix
Pennon Appendix © Pennon Group plc 2018
Slide 30: Adjusted group EBITDA
Pennon Adjusted group EBITDA £m 2.8 5.2 9.3 (1.6) (2.7) (5.2) 16.0 562.3 (7.7) 546.2 2016/17 SWW tariff ERFs including Contracts, Viridor overheads Plc, PWS and SWW cost Landfill and Recycling 2017/18 increase, share of JV collections and other impacts landfill gas (2) customer demand EBITDA & IFRIC
Slide 31: Financial performance underpinned by efficiency
Pennon Group Financial performance underpinned by efficiency Sector leading water Totex outperformance SWW Totex savings • £177m cumulative Totex efficiencies £177m K6 to date Bournemouth Water synergies on track SWW/BW • Final integration phase complete c. £27m Synergies • c.£16m delivered since me
Slide 32: Pennon Water Services
Pennon Water Services Growing in the new competitive market 2017/18(1) £m >160,000 c.7,000(2) Revenue 165.9 Customers New accounts accounts won since market EBITDA 1.0 opening Depreciation (0.6) Operating Profit 0.4 Net Interest (1.5) Competitive market – PWS growing Loss Before Tax (1.1) • Achieved
Slide 33: Non-underlying Items
Non-underlying Items 2017/18 2016/17 £m £m Greater Manchester Contract ‘Reset’ Greater Manchester 6.5 - • TPSCo contract reset and Derivatives(1) (2.4) (28.8) settlement of outstanding Viridor Waste claims, net of write down of Other non-underlying costs(2) - (10.7) Viridor Laing shareholder loans P
Slide 34: Corporation Tax
Corporation Tax A responsible approach to tax 2017/18 2016/17 Group tax strategy published – March 2018 £m £m • Extensive customer and stakeholder research Current Year undertaken Current Tax 29.7 41.3 • Responsible and transparent tax strategy Deferred Tax 20.7 17.8 • Fair contribution to UK tax •
Slide 35: Pioneering a new sustainable financing framework
Balance Sheet Pioneering a new sustainable financing framework At the vanguard - integrating sustainability performance into debt financing • Framework allows Pennon to access future funding opportunities aligned with the green loan principles, green bond principles and social bond principles • Fram
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) • Recommend final dividend of 26.62p, up 7.0% • Full Year dividend of 38.59p, up 7.3%(2) • SCRIP dividend alternative ceased • Dividend reinvestment
Slide 37: Capital Investment, Investing For Growth
Capital Investment, Investing For Growth Group capital expenditure 2017/18 2016/17 £m £m ERFs(1) 178 158 Recycling 3 3 Landfill energy 15 12 Contracts and Collections 6 13 Other 11 8 Viridor 213 194 Clean Water 95 91 Waste Water 89 100 South West Water 184 191 Pennon Group/Pennon Water Services 1 -
Slide 38: 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 equating to the periodic return which would have been due in March 2018 6.750% - first • 95% take-up of tender – remaini
Slide 39: Diversified funding sources
Pennon Diversified funding sources As at 31 March 2018 £m Finance Leasing(1) 1,505 Bank Bilaterals – Term Loans 379 European Investment Bank Loans 323 Index-Linked Bonds 427 Fixed Rate Bond 134 Private Placements(2) 619 Total Gross Debt 3,387 Less: Cash/liquid investments (585) Net Borrowings 2,802
Slide 40: Fair value of non-current debt
Pennon Fair value of non-current debt As at 31 March 2018 As at 31 March 2017 Book Fair Book Fair £m Value Value Difference Value Value Difference Finance Leases 1,477 1,350 127 1,354 1,218 136 Bank and Other Loans 229 233 (4) 329 336 (7) European Investment Bank Loans 291 252 39 323 282 41 Index-Li
Slide 41: Net interest analysis
Pennon Net interest analysis(1) 2017/18 2016/17 £m £m Net interest payable (74.5) (58.8) Efficient effective interest rate Add: capitalised interest (17.0) (12.9) SOUTH WEST Less: notional interest payable(2) 11.8 10.3 GROUP WATER Add: interest receivable on service concession contracts (13.8) (16.1
Slide 42: Pensions
Pennon Pensions The aggregate pension schemes’ deficit has 31 March 31 March reduced in the year to 31 March 2018 by £18m 2018 2017 from £68m to £50m £m £m Pension schemes’ assets £898m £903m This represents a net deficit of c.2%of Group’s market capitalisation at 31 Pension schemes’ March 2018 £948
Slide 43: Significant energy generation
Pennon Significant energy generation Group energy generation • Total energy generation of c.1.6TWh in 2017/18 − 8 ERFs(1) – 1.1TWh − Landfill gas – 439.4GWh − 25 Hydro turbines – 12.6GWh generation − 53 solar PV installations – 10.0GWh(2) − Anaerobic digestion – 2.0GWh − 6 CHP – 6.1GWh − 1 wind turb
Slide 44: South West Water Appendix
South West Water Appendix © Pennon Group plc 2018
Slide 45: South West Water Revenue
South West Water Revenue £m 23.7 3.3 0.4 3.7 571.3 555.3 (4.2) (10.9) 2016/17 Tariff increases WRFIM (1) New connections Other Revenue Increased customer Meter optants 2017/18 demand (net of leak allowance) (1) Wholesale Revenue Forecast Incentive Mechanism 45 Pennon Full Year Results 2017/18 © Penn
Slide 46: South West Water EBITDA
South West Water EBITDA £m 4.7 16.0 360.9 (5.3) (1.1) (1.0) 347.6 2016/17 Revenue growth Efficiencies and Cost increases Pension costs Capital charges 2017/18 other cost savings including inflation 46 Pennon Full Year Results 2017/18 © Pennon Group plc 2018
Slide 47: 2017/18 ODI performance levels
South West Water 2017/18 ODI performance levels – cumulative net reward position Water quality standard Odour contacts GOOD Taste, smell and colour contacts Bathing water quality PERFORMANCE(1) Operational contacts resolved 1st time Water & waste asset reliability Water restrictions Sustainable abst
Slide 48: 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 Strong numeric and descriptive wastewater compliance - Wastewater serious and significant pollu
Slide 49: Sharing outperformance with customers
South West Water Sharing outperformance with customers Strong focus on sharing financial benefits with customers acting responsibly • Unique mechanism to share transparently outperformance in period • Significant benefits identified for customers to date • Reinvestment in services and future lower b
Slide 50: Delivering operational outperformance
South West Water Delivering operational outperformance Cumulative operational RORE £177m of Totex savings delivered • Totex largest element of potential operational TOTEX +2.6%(1) outperformance +1.5% • 2/3 capex, 1/3 opex £177m ODIs +0.3% Delivering net ODI rewards +1.8% £8.1m(2) • £8.1m(2) cumulat
Slide 51: Reconciliation of RORE to financials
South West Water Reconciliation of RORE to financials Cumulative Strong Totex(1) outperformance - £177m Totex (£m) 2017/18 2016/17 2015/16 ODI outperformance(2) • Total net reward £2.6m. £2.9m reward will be recognised at the Operating costs 210 212 212 end of the regulatory period, £0.3m penalty wh
Slide 52: Viridor Appendix
Viridor Appendix © Pennon Group plc 2018
Slide 53: Viridor Revenue
Viridor Revenue £m 2.8 13.0 (2.9) 14.3 (16.3) 793.5 785.7 (18.7) 2016/17 Contracts, ERF operational ERF construction Landfill Gas Recycling Landfill 2017/18 collections revenue and other 53 Pennon Full Year Results 2017/18 © Pennon Group plc 2018
Slide 54: Viridor Adjusted EBITDA
Viridor Adjusted EBITDA £m 2.8 5.2 (0.9) 9.3 (4.3) 202.9 198.5 (7.7) 2016/17 ERFs including Contracts, collections Indirect costs Landfill Landfill Gas Recycling 2017/18 Share of JV EBITDA, and other IFRIC 12 interest receivable 54 Pennon Full Year Results 2017/18 © Pennon Group plc 2018
Slide 55: Profit contribution by activity
Viridor Profit contribution by activity(1) 2017/18 2016/17 Change £m £m ERFs 99.1 82.3 +20.4% Landfill (17.4) (9.5) (83.2%) Landfill Gas 20.2 23.1 (12.6%) Recycling 6.9 14.1 (51.1%) Contracts, Collections and Other 30.8 24.0 +28.3% Joint Ventures 17.3 14.4 +20.1% Total contribution 156.9 148.4 +5.7%
Slide 56: ERF CAPEX: Efficient investment to deliver growth
Viridor ERF CAPEX(1) – Efficient investment to deliver growth Cumulative Capital Cumulative Remaining Amounts Total Original £m spend at investment spend to spend to subject to project planned 1 April 2017 in 2017/18 31 March 2018 completion recovery spend project spend ERF projects in operation Exe
Slide 57: 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 58: 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 VWGM Principal contract Operating contract for recycling assets After B
Slide 59: Greater Manchester contract reset: financial impacts
Viridor Greater Manchester Waste Disposal Authority (GMWDA) Contract ‘reset’ Financial Impacts 2017/18 reset Share of Shareholder VWGM JV PAT Loans EBITDA Viridor Laing – reduction in Disposal of Viridor Laing shareholder loan interest Write down of shareholder loans - (£19.2m) - of c.£5m p.a. Resid
Slide 60: Joint Venture Performance
Viridor Joint Venture Performance Viridor £m TPSCo Laing Lakeside Total 2017/18 Share of JV PAT 2.2 (0.1) 7.3 9.4 Interest on shareholder loans 4.1 2.6 1.2 7.9 Shareholder loans 32.5 0.0 8.2 40.7 Share of non-recourse debt 0.0 0.0 31.6 31.6 Share of adjusted EBITDA 14.5 7.5 16.9 38.9 2016/17 Share o
Slide 61: Closed loop solutions – Proctor & Gamble Plastics example
Recycling Closed loop solutions – Proctor & Gamble Plastics example Viridor’s Circular Economy Developments • Manufacturer interest in securing longer- term supplies Households Kerbside Collection • Innovation has facilitated consistent, odour-free, high quality product needed for premium consumer p
Slide 62: Full Year Results 2017/18
Full Year Results 2017/18 25 May 2018 © Pennon Group plc 2018