Pennon Group Plc · LSE:PNN

Pennon — Non-Deal Roadshow (November 2018)

66 slides from Pennon's roadshow presentation, November 2018

  1. Slide 1: Half Year Results 2018/19 Roadshow

    Half Year Results 2018/19 Roadshow November / December 2018 © Pennon Group plc 2018

  2. 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

  3. Slide 3: About Pennon

    About Pennon 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 transfo

  4. Slide 4: Financial Highlights

    Financial Highlights Strong, consistent financial performance Revenue (£m) Capital investment (£m) 1,321.2 1,357.2 1,352.3 1,353.1 1,352.1 439.2 434.1 407.3 398.2 1,201.1 384.7 316.9 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 EBITDA (£m) Gross ass

  5. Slide 5: 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

  6. Slide 6: 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

  7. Slide 7: Pennon Group: 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

  8. Slide 8: 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

  9. Slide 9: Balance Sheet

    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

  10. Slide 10: Balance Sheet: 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

  11. Slide 11: South West Water: 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

  12. Slide 12: 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

  13. Slide 13: 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

  14. Slide 14: Viridor

    Viridor © Pennon Group plc 2018

  15. Slide 15: 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

  16. Slide 16: 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

  17. Slide 17: 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

  18. Slide 18: 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

  19. Slide 19: Pennon Appendix

    Pennon Appendix © Pennon Group plc 2018

  20. Slide 20: Pennon 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

  21. Slide 21: 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

  22. Slide 22: 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

  23. Slide 23: 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

  24. Slide 24: 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

  25. Slide 25: 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

  26. Slide 26: 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) (

  27. Slide 27: Balance Sheet: 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

  28. Slide 28: 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

  29. Slide 29: 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

  30. Slide 30: 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-

  31. Slide 31: 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

  32. Slide 32: 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

  33. Slide 33: 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

  34. Slide 34: South West Water Appendix

    South West Water Appendix © Pennon Group plc 2018

  35. Slide 35: Outperformance momentum continues in current regulatory period

    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

  36. Slide 36: 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 36 Pennon Half Year Results 2018/19 © Pen

  37. Slide 37: 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 37 Pennon Half Year Results 2018/19 © Pennon Group plc 2018

  38. Slide 38: 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

  39. Slide 39: 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

  40. Slide 40: 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.

  41. Slide 41: 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

  42. Slide 42: South West Water PR19

    South West Water PR19 © Pennon Group plc 2018

  43. Slide 43: Lower bills, extra investment, 'shares' for customers in radical 'New Deal'

    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

  44. Slide 44: Lower bills, extra investment, 'shares' for customers in radical 'New Deal'

    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 to 2025 (£850m to 2020) − Two leading edge water treatment works in Bournemouth building on innovation

  45. Slide 45: Lower bills, extra investment, 'shares' for customers in radical 'New Deal'

    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

  46. Slide 46: Timetable and process

    South West Water - Business Plan 2020-2025 Lower bills, extra investment, ‘shares’ for customers in radical ‘New Deal’ Timetable and process 46 Pennon Half Year Results 2018/19 © Pennon Group plc 2018

  47. Slide 47: Viridor Appendix

    Viridor Appendix © Pennon Group plc 2018

  48. Slide 48: 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

  49. Slide 49: 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 49 Pennon Half Year Results 2018/19 © Pennon Group plc 2018

  50. Slide 50: 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 50 Pennon Half Year Results 2018/19 © Pennon Group plc 2018

  51. Slide 51: 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

  52. Slide 52: 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

  53. Slide 53: Greater Manchester Waste Disposal Authority (GMWDA) 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

  54. Slide 54: Greater Manchester Waste Disposal Authority (GMWDA) Contract 'reset'

    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

  55. Slide 55: ERF Background

    Viridor ERF Background © Pennon Group plc 2018

  56. Slide 56: 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

  57. Slide 57: 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 57 Pennon Half Year Results 2018/19 © Pennon Group plc 2018

  58. Slide 58: Growing ERF Portfolio

    Viridor Growing ERF Portfolio Glasgow Dunbar Avonmouth Beddington ERFs under construction ERFs in operational ramp up ERFs operational 58 Pennon Half Year Results 2018/19 © Pennon Group plc 2018

  59. Slide 59: 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

  60. Slide 60: 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

  61. Slide 61: 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

  62. Slide 62: 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 (

  63. Slide 63: 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 63 Pennon Half Year Results 2018/19 © Pe

  64. Slide 64: 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

  65. Slide 65: 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

  66. Slide 66: Half Year Results 2018/19 Roadshow

    Half Year Results 2018/19 Roadshow November / December 2018 © Pennon Group plc 2018

Pennon Group — Non-Deal Roadshow (November 2018) on 6ix