Pennon Group Plc · LSE:PNN
Pennon — H1 2019/20 Earnings Presentation
65 slides from Pennon's earnings presentation, November 2019
Slide 1: Half Year Results 2019/20 Roadshow
Half Year Results 2019/20 Roadshow November / December 2019 1
Slide 2: Disclaimer
Disclaimer For the purposes of the following disclaimers, references to this “document” outcomes and performance commitments; failure or increased cost of capital shall mean this presentation pack and shall be deemed to include references projects/exposure to contract failures; failure of informatio
Slide 3: A unique combination of environmental infrastructure assets
Pennon A unique combination of environmental infrastructure assets Water & Wastewater Waste Management Regulatory ring-fence Water and wastewater services to B2B water retailer A leading UK recycling and a population of c.2.2 m residual waste processing and • PWS is our growing B2B water transformat
Slide 4: Financial Highlights
Financial Highlights Strong, consistent financial performance 4 Half Year Results 2019/20
Slide 5: Dividend Growth
Dividend Growth Track record driving sustained dividend growth Delivering on 10 year sector leading policy of RPI +4% to 2020 • Interim dividend of 13.66p, up +6.4%(1) Final dividend Interim dividend • Viridor earnings and sustained outperformance in the water business supporting growth in dividends
Slide 6: Good results, momentum maintained – delivered in the right way
Pennon Bringing resources to life Good results, momentum maintained – delivered in the right way • Our core values are embedded in delivering outstanding service to customers and communities Viridor • Focus on infrastructure model, de-risked through index-linked long-term contracts • Portfolio of op
Slide 7: H1 2019/20 Financial Highlights
H1 2019/20 Financial Highlights Robust financial performance Robust financial performance Responsible delivery of results for all stakeholders Adjusted EBITDA(1)(2) • Founder of the Sustainable Financing Framework - at the +3.3% forefront of sustainable financing • First water and waste company to r
Slide 8: Financial performance in line with expectations for 2019/20
Pennon Financial performance in line with expectations for 2019/20 £m H1 2019/20 H1 Change(1) (excluding (excluding Underlying(1) H1 2019/20 IFRS 16 impact) 2018/19 IFRS 16 impact) Robust Group financial performance Revenue 712.4 712.4 746.7 (4.6%) • Expected revenue reduction reflecting: EBITDA 283
Slide 9: Viridor: Delivering growth underpinned by index-linked long-term contracts
Viridor Delivering growth underpinned by index-linked long-term contracts £m H1 2019/20 H1 Change (1) (excluding (excluding Revenue Underlying(1) H1 2019/20 IFRS 16 impact) 2018/19 IFRS 16 impact) • Expected revenue reduction from planned Revenue(2) 388.1 388.1 422.3 (8.1%) Greater Manchester recycl
Slide 10: South West Water: Continued outperformance
South West Water Continued outperformance – on track for highest sector returns in K6 £m Change(1) Weather related revenue impacts H1 H1 2019/20 H1 Underlying(1) (excluding 2019/20 IFRS 16 impact) 2018/19 (excluding IFRS 16 impact) • Overall revenue reduced by 2.9% Revenue(2) 292.9 292.9 301.5 (2.9%
Slide 11: Capital investment
Capital investment Continued investment for growth across the Group 500 H1 2019/20 H1 2018/19 £m £m 400 Total Water 78 69 Group Total Viridor 94 132 300 Capex £m Total(1) 172 201 200 100 Key elements of Group expenditure in H1 2019/20 0 • Early investments for K7 – focused on ODI delivery 2015/16 20
Slide 12: Balance Sheet
Balance Sheet Sustainable funding position underpinning investment Group Net Debt Profile(1) Optimised financing • £3,178m net debt at 30 September 2019 Group Net Gearing(2) Index-Linked 66.3% • H1 weighted - reflecting timing of £570m 65.5% at dividend payments – gearing 18% 30 September 2018 antic
Slide 13: Sustainable Financing Framework delivering efficient financing costs
Balance Sheet Sustainable Financing Framework delivering efficient financing costs Sustainably linked financing - £845m raised to date Progressive approach to financing Balanced portfolio of sustainable financing • Good availability of financing • £230m against Pennon Group’s ESG performance • Speed
Slide 14: Viridor
Viridor Half Year Results 2019/20
Slide 15: Leading UK waste management core infrastructure business
Viridor Leading UK waste management core infrastructure business • Strong delivery in H1 2019/20 – Continued momentum for outperformance – Resilient financial performance underpinned by de-risked business model • Providing a unique platform for growth – Track record of significant growth from a comp
Slide 16: Residual waste: Strong delivery in H1 2019/20
Viridor Residual waste: Strong delivery in H1 2019/20 – continued momentum • Strong operational performance in ERFs – Portfolio of ten operating ERFs is performing well Outperformance in excess of £35m since 2017 – Glasgow, Beddington and Dunbar ERFs progressing through operational ramp-up – ROCs(1)
Slide 17: Residual waste: Strong delivery in H1 2019/20
Viridor Residual waste: Strong delivery in H1 2019/20 – continued momentum • Continuing to develop options for new ERFs – Heads of Terms with Grundon for a new 40 year JV in Ford, West Sussex – Site with outline planning permission – De-risked inputs through shared commitments – Energy Park potentia
Slide 18: Recycling: Delivering continued progress in recycling
Viridor Recycling: Delivering continued progress in recycling in H1 2019/20 • Avonmouth plastics recycling facility construction underway – On track to contribute to earnings in 2020/21 – c.85% of inputs and c.75% of offtake contracts secured • Policy and regulatory measures driving market opportuni
Slide 19: Energy Parks: Leveraging value from Viridor asset base
Viridor Energy Parks: Leveraging value from Viridor asset base Dunbar – Landfill gas private wire to Tarmac cement works – Exploring potential Plastics Recycling Facility Runcorn – Heat and power off-take to Inovyn ERF with existing/ immediate Energy Park development Beddington – ERF and landfill ga
Slide 20: Forecast growth in plastics available for recycling
Viridor – Recycling Forecast growth in plastics available for recycling • UK capacity unable to fulfil consumer demand – driving confidence in recycling investment – Only 46% of all UK plastic material with recycling potential currently collected – Government target of 75% by 2030 with current expec
Slide 21: Viridor – confident outlook for growth
Viridor – confident outlook for growth Visible pipeline of growth projects at various stages of development Expected Growth in Viridor Adjusted EBITDA (1) EBITDA plus share of joint venture EBITDA and IFRIC 12 interest receivable 21 Half Year Results 2019/20
Slide 22: South West Water
South West Water 22
Slide 23: Strong foundations for continued outperformance
South West Water Strong foundations for continued outperformance • Delivering for our customers • Bills lower today than they were ten years ago – driven by efficiency • Strong performance in K6 – delivered cumulative RORE of 11.8% • Continuing momentum into K7 • Innovation driving performance • Wor
Slide 24: Strong operational performance – delivering for our customers
South West Water Strong operational performance – delivering for our customers • SWW Upper Quartile in Ofwat’s Service Delivery Ofwat Service Delivery Report 2018/19 report for 2018/19 – Strong performance in key common measures: o Leakage – target met every year o Supply interruptions – 58% reducti
Slide 25: Supporting our customers
South West Water Supporting our customers • Bills lower today than in 2010 – driven by efficiency Supporting customers – making bills affordable • Industry leading support for customers in vulnerable circumstances – Supporting c.59,500 customers through our range of support programmes – WaterCare+ p
Slide 26: Strong performance in K6 - Sector leading outperformance
South West Water Strong performance in K6 - Sector leading outperformance • Consistently delivered the highest RORE • Outperformance delivered in every area in every year • Sharing outperformance benefits with customers – Delivering around £120m of benefits over K6 – reducing future bills, reinvestm
Slide 27: Continued momentum into K7
South West Water Continued momentum into K7 • Highest potential outperformance for 2020-25 – July DDs confirm strong position on outperformance – Confident in delivering across all areas • Strong position for ODI delivery – Bespoke ODIs – up to £68m reward available – Common ODIs – well placed for K
Slide 28: Innovation driving performance into K7
South West Water Innovation driving performance into K7 • Establishing a UK water industry innovation centre – New partnership with the University of Exeter – State of the art specialist lab facilities, focused on developing innovative new solutions for the environment, industry and economy – £10m o
Slide 29: Working in the public interest
South West Water Working in the public interest • Commitment to drive sustainable outcomes – Building on our track record and reducing leakage by a further 15% by 2025 – Targeting net zero carbon emissions by 2030 • Targeting to eliminate water poverty in K7 (2020-25) – Expanding our existing progra
Slide 30: Pennon Appendix
Pennon Appendix Half Year Results 2019/20
Slide 31: Group EBITDA
Pennon Group EBITDA £m 283.9 7.1 276.8 4.4 274.0 3.6 3.6 0.2 (8.6) (0.4) H1 2018/19 SWW revenue Viridor contracts, Recycling SWW cost Landfill and ERFs H1 2019/20 (pre- IRFS 16 impact H1 2019/20 collections & savings landfill gas IFRS) other, and indirect costs 31 Half Year Results 2019/20
Slide 32: Non-underlying items
Pennon Non-underlying items A Derivatives H1 2019/20 H1 2018/19 £m £m • Fair value movement of South West Water 2040 bond swaps to settlement in Derivatives A 18.0 (8.9) September 2019. Locking in benefit of low yield environment Pension past service credit B 2.2 - • Cash benefit of £87.2m Profit Be
Slide 33: A responsible approach to tax
Corporation Tax A responsible approach to tax – managing tax efficiently for the benefit of customers and shareholders H1 2019/20 H1 2018/19 £m £m Current Year Current Tax 13.7 15.6 • First water and waste infrastructure business to secure accreditation Deferred Tax 13.1 12.2 • Demonstrates transpar
Slide 34: Adjusted EPS reconciliation
Pennon Adjusted EPS reconciliation H1 2019/20 H1 2018/19 H1 2019/20 H1 2018/19 Adjusted EPS Calculation Statutory EPS Calculation £m £m £m £m Profit Before Tax (pre-IFRS 16) 163.9 133.6 Profit Before Tax (pre-IFRS 16) 163.9 133.6 IFRS 16 PBT impact (0.8) - IFRS 16 PBT impact (0.8) - Profit Before Ta
Slide 35: Net Debt Movements
Net Debt Movements Strong cash inflow from operations Substantial operating cash flows supporting: Non-cash impact of £m • Continued capital investment IFRS 16 has no debt (118.3) (3,296.0) • Accelerated pensions contributions covenant impact • Responsible tax contributions (192.9) (3,177.7) • 2018/
Slide 36: Finance Costs
Finance Costs Efficient financing – mitigating risk H1 2019/20 net finance costs(1) H1 2019/20 Group interest rate H1 2019/20 SWW interest rate £43.1m 3.5% 3.4% £40.8m H1 2018/19 3.6% H1 2018/19 3.5% H1 2018/19 Interest rate hedging for K7 1.90% Hedging • Aligned to Ofwat’s PR19 1.70% Hedging activi
Slide 37: Group capital expenditure reconciliations
Pennon Group capital expenditure reconciliations Group Capital Investment H1 2019/20 H1 2018/19 Group Capital Payments H1 2019/20 H1 2018/19 (Slide 11) £m £m (Net debt movements slide 35) £m £m Viridor 85.6 123.9 Viridor 85.6 123.9 ERFs 50.6 103.2 South West Water 77.6 68.6 Recycling 25.2 3.5 Other
Slide 38: Sustainable, diversified funding sources
Pennon Sustainable, diversified funding sources Pennon Group as at 30 September 2019 £m SWW as at 30 September 2019 £m Finance Leasing(1) 1,637 Finance Leasing(1) 1,491 Bank Bilaterals 496 Bank Bilaterals 76 European Investment Bank Loans 387 European Investment Bank Loans 278 Index-Linked Bonds 434
Slide 39: Net interest analysis
Pennon Net interest analysis(1) H1 2019/20 H1 2018/19 £m £m K4 K6 7.0% K5 (2005-10) (2010-15) (2015-20) 6.5% Pennon Net interest charge: (43.1) (40.8) 6.0% 5.5% Add: capitalised interest (6.1) (8.3) SWW 5.0% Less: notional interest payable(2) 5.8 6.3 4.5% 4.0% Water Add: interest receivable on servi
Slide 40: Pensions
Pennon Pensions • The aggregate pension schemes’ net deficit has decreased in the period to 30 September 2019 by £22m from £61m to £39m, reflecting: 30 September 31 March 2019(1) 2019 • a lower discount rate, net of; £m £m • the responsible acceleration of £17.2m of deficit contributions Pension sch
Slide 41: Significant energy generation
Pennon Significant energy generation • Total Group energy generation of 0.9TWh in 2019/20 – 10 ERFs(1) – 0.7 TWh – 25 Hydro Turbines – 2.7 GWh – 52 Solar PV installations(2) – 7.4 GWh – 6 CHP – 3.4 GWh – 1 wind turbine – 0.1 GWh – Anaerobic digestion – 1.4 GWh – Landfill gas – 199.3 GWh • Utilising
Slide 42: Viridor energy park power supply
Pennon Viridor energy park power supply Dunbar – Private wire to Tarmac cement works Westbury & Landfill Gas Broadpath – Solar array at landfill sites c.2% Beddington – Heat off-take into community heating Exeter – Private wire power supply to SWW – Heat off-take community heating Beddington Energy
Slide 43: Pennon Water Services financial highlights
Pennon Pennon Water Services(1) financial highlights H1 2019/20 H1 2018/19 Change Robust performance in a competitive market £m £m Revenue 86.6 84.1 +3.0% • Continuing to sign multi-year contracts with national accounts within targeted sectors EBITDA 0.9 0.9 - Operational focus on delivering future
Slide 44: 2019/20 technical guidance
Pennon 2019/20 technical guidance Pennon Group 2018/19 Change Capex Passed peak of committed ERF capex. Growth capex in near term principally reflects completion £396m of Avonmouth and investment in recycling Dividend Reflecting policy of RPI + 4% annual increase in dividend 41.06p per share Tax rat
Slide 45: Viridor Appendix
Viridor Appendix Half Year Results 2019/20
Slide 46: Viridor Revenue
Viridor Revenue £m 3.3 1.5 26.6 (4.3) 422.3 (36.1) 388.1 (25.2) H1 2018/19 ERFs Landfill Gas Other Recycling Contracts (1) Landfill (2) H1 2019/20 1) Contracts includes anticipated reduction following the cessation of the Greater Manchester recycling operating contract 2) Landfill includes Landfill
Slide 47: Viridor Adjusted EBITDA
Viridor Adjusted EBITDA £m 6.2 120.0 0.6 0.2 113.8 3.0 4.4 (0.4) 6.9 99.1 H1 2018/19 Share of JV ERFs Landfill Gas Landfill Recycling Contract, H1 2019/20 (pre- IFRS 16 H1 2019/20 EBITDA and Collections & IFRS 16) IFRIC 12 Interest Other Receivable 47 Half Year Results 2019/20
Slide 48: Joint venture performance
Viridor Joint venture performance Runcorn I Runcorn I Runcorn I £m Tranche 1(1) Tranche 2(2) Total Lakeside Total H1 2019/20 Share of JV PAT 2.3 0.9 3.2 4.1 7.3 Interest on shareholder loans 1.7 1.1 2.8 0.6 3.4 Shareholder loans 30.6 33.8 64.4 7.4 71.8 Share of non-recourse net debt/(cash) (13.6) (1
Slide 49: Core Environmental Infrastructure Business Model
Viridor Core Environmental Infrastructure Business Model 100% 5% Recovered Metals 25% Balance of Short and Medium-Term Power Output Contracts (Less Than 10 Years) (Municipal and Commercial & Industrial) • De-risked business model from contracted ERFs ERF Business 70% ― c.80% of total ERF capacity an
Slide 50: ERF Background
Viridor ERF Background Half Year Results 2019/20
Slide 51: Total ERF Revenue – De-risked position
ERF Revenue breakdown 100% Total ERF Revenue – De-risked position 5% RECOVERED METALS 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 WASTE70%FUELINPUT (GAT
Slide 52: Market growth for residual waste – unique platform
Viridor Market growth for residual waste – unique platform • Imbalance between supply and demand for ERFs is expected to persist – Capacity gap forecast to remain c.7mT by 2035(1) – To fill estimated capacity gap by 2035 would require the equivalent of c.23 large ERFs – In addition to this, a furthe
Slide 53: Focus on De-risked Infrastructure Model
Focus on De-risked Infrastructure Model Successful execution in residual waste transformation 53 Half Year Results 2019/20
Slide 54: Excellent Viridor Track Record
Excellent Viridor Track Record Leading the way in UK waste ERF Financial c.£28m c.60% > 8% Performance EBITDA/plant(1) EBITDA Margin IRR(2) ERF Operational 2.8mt 240MW > 90% Base Base Performance Tonnage(3) Energy(3) Availability ERF current outperformance of 10%(4) (1) Based on a typical large, 300
Slide 55: Viridor ERF Financials
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 56: ERF capital expenditure – Efficient investment to deliver growth
Viridor ERF capital expenditure(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 2019 in 2019/20 completion recovery spend project spend 2019 ERF project
Slide 57: Viridor ERFs (including Joint Ventures)
Viridor ERFs (including Joint Ventures) Capital Base load H1 2019/20 Site Gross capacity Status Cost (1) municipal contract Availability Tonnes Electricity £m (000) MWe Lakeside(2) 150 410 38 Fully operational Merchant 90.0% Exeter 47 60 3 Fully operational Exeter 83.5% Oxford (Ardley)(3) 204 300 24
Slide 58: South West Water Appendix
South West Water Appendix Half Year Results 2019/20
Slide 59: South West Water Revenue
South West Water Revenue £m 10.7 2.1 301.5 (9.0) (2.7) (1.7) 292.9 (8.0) (1) H1 2018/19 Tariff increases WRFIM New connections Customer leak Meter optants Other revenue (incl. H1 2019/20 allowances customer demand) (1) WRIFM - Wholesale Revenue Forecast Incentive Mechanism 59 Half Year Results 2019/
Slide 60: South West Water EBITDA
South West Water EBITDA £m 194.7 0.9 190.6 3.7 2.9 189.7 (3.0) (8.6) H1 2018/19 Reduction in revenue Efficiencies & other Cost increases incl. Prior year one- H1 2019/20 (pre- IFRS 16 H1 2019/20 cost savings inflation off/atypical costs IFRS) 60 Half Year Results 2019/20
Slide 61: H1 2019/20 ODI performance levels
South West Water H1 2019/20 ODI performance levels – cumulative net reward position for K6 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 res
Slide 62: 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 63: Reconciliation of RORE to financials
South West Water Reconciliation of RORE to financials Cumulative Totex(1) outperformance of £268m Totex £m H1 2018/19 2017/18 2016/17 2015/16 2019/20 ODI Outperformance(2) Operating Costs 102 214 210 212 212 • Total net reward £1.7m will be recognised at the Capital Expenditure 78 154 184 191 134 en
Slide 64: K7 Draft Determination – ODI outperformance potential for K7
South West Water K7 Draft Determination – ODI outperformance potential for K7 Strong platform for ODI performance in K7 BESPOKE ODIs Taste, smell and colour contacts Compliance with sludge standards Unique rewards Water & wastewater operational contacts Resilience (water & wastewater) for SWW resolv
Slide 65: Half Year Results 2019/20 Roadshow
Half Year Results 2019/20 Roadshow November / December 2019 65 Half Year Results 2019/20