Pennon Group Plc · LSE:PNN
Pennon — Investor Presentation (December 2008)
40 slides from Pennon's investor presentation, Dec 3, 2008
Slide 1: Waste PPPs/PFIs
Waste PPPs/PFIs London, 3 December 2008 www.pennon-group.co.uk 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: Colin Drummond, Chief Executive, Viridor Waste
Colin Drummond Executive Director, Pennon Group Plc Chief Executive, Viridor Waste 3
Slide 4: The Challenges for UK Municipalities – Drivers of PPPs/PFIs
The Challenges for UK Municipalities – Drivers of PPPs(1)/PFIs(2) • Targets - 50% recycling by 2020 - 65% reduction from 1995 levels in biodegradable municipal waste to landfill by 2020 • If they fail to meet targets - face steeply increasing landfill tax - potential Landfill Allowance Trading Schem
Slide 5: Services Required by Municipalities
Services Required by Municipalities • Services required may include - Household Waste Recovery Centres (HWRCs) - Transfer Stations and Bulk Transport - Materials Reclamation Facilities (MRFs) - Composting - Mechanical Biological Treatment (MBT) - Anaerobic Digestion (AD) - Energy from Waste (EfW) es
Slide 6: Waste and Renewable Energy Opportunity
Waste and Renewable Energy Opportunity • UK targets to generate 15% of total electricity from renewables by 2015 and 15% of total energy (30% to 40% of electricity) by 2020 - compared to 4% of total UK electricity at present • Waste currently accounts for largest portion of UK renewables (30%) and h
Slide 7: Renewable Obligation (RO)
Renewable Obligation (RO) • Under RO, generators of renewable energy are paid − basic wholesale/brown energy price − value of renewable obligation certificate ROC − (climate change) levy exemption certificate • Brown energy price set by world supply/demand • ROC value depends on actual renewable pro
Slide 8: Types of Contract
Types of Contract • In order to meet the above challenge UK municipalities are letting a large variety of contracts including - short to medium term contracts (up to 10 years) which typically have limited infrastructure provision versus medium to long term contracts (10 to 25+ years) with a signific
Slide 9: Types of Contract Finance
Types of Contract Finance • Contracts can be financed in a number of ways - with or without PFI credits (from council funding viewpoint) - corporately financed on waste contractor’s balance sheet - project financed through Special Purpose Vehicle (SPV) with or without a recourse element • Viridor se
Slide 10: Public Private Partnerships
Public Private Partnerships • Historically waste services have been delivered through a number of conventional contracts covering - collection - civic amenity/household waste recycling centre management - landfill • Over the last 10 years, the PPP approach has increasingly been applied to waste to h
Slide 11: Private Finance Initiatives
Private Finance Initiatives • PFIs are a sub category of PPPs • In PFI, Councils bid to Government for PFI funding − allocated in series of tranches − if successful, a council will received additional funding (PFI credits) from central government to reduce the cost (to the council) of its project −
Slide 12: Strategic Partnerships
Strategic Partnerships Strategic Partnerships are another sub category of PPPs • In these, council works in direct partnership with the contractor - council and contractor jointly investigate and decide on infrastructure to be built - contractor procures infrastructure through third party - contract
Slide 13: Procurement Rules
Procurement Rules • Government has developed suite of standard procurement rules for PPPs - rules are evolving over time (current version SoPC4) - projects with PFI credits must seek DEFRA/PUK*/Treasury approval for any derogation from these rules - projects without PFI credits have more flexibility
Slide 14: Viridor PPP/PFI/Similar Contracts - I
Viridor PPP/PFI/Similar Contracts - I • West Sussex PFI (April 2005) - 25 years - HWRCs, MRF, transfer stations and transport - on balance sheet • Somerset PPP (May 2006) - 25 years - running existing HWRC centres - building and operating proposed Anaerobic Digestion plant under Strategic Partnershi
Slide 15: Viridor PPP/PFI/Similar Contracts - II
Viridor PPP/PFI/Similar Contracts - II • Poole PPP (September 2006) - 20 year extension to original 3 year contract - transfer and disposal (initially to landfill and thereafter landfill and Lakeside) - recycling (initially Crayford with potential development of dedicated MRF in Poole in co-operatio
Slide 16: Uncertainties and Risks
Uncertainties and Risks • Various uncertainties and risks in PPPs/PFIs - waste volumes and mix - technology - capacity of technology suppliers - planning - input costs (including fuel/energy) - recyclate prices - legislation/regulation - etc • Typically handled by - due diligence - contractual terms
Slide 17: Other Viridor Municipal Contracts
Other Viridor Municipal Contracts • In addition to the above PPP/PFI/similar contracts Viridor has a large number of conventional municipal contracts - 24 landfill - 51 recycling / HWRCs 17
Slide 18: David Robertson, Finance Director, Viridor Waste
David Robertson Finance Director, Viridor Waste 18
Slide 19: Accounting for Contracts
Accounting for Contacts Current Rules • International Financial Reporting Standards (FRS 5) • Profit and loss account − revenue taken as paid by council − operating costs, including depreciation of asset, deducted − operating profit − interest on borrowings − PBT • Balance sheet − operator owns the
Slide 20: Accounting for Contracts
Accounting for Contracts • If contract is in a wholly owned SPV - all lines consolidated into Group Accounts (P&L and balance sheet) - sub contract profit • If contract is in a majority owned SPV - as above, except that there will be a minority interest in P&L and reserves • If contract is in a join
Slide 21: Accounting for Contracts: Potential New Rules
Accounting for Contracts Potential New Rules NB: not yet adopted by EU Accounting Regulatory Committee (ARC) • Pennon not currently planning to apply them in 2008/09 • International Financial Reporting Interpretations Committee (IFRIC) 12 • Service Concession Arrangement - operator undertakes the co
Slide 22: Accounting for Contracts: Potential New Rules
Accounting for Contracts Potential New Rules • Revenue from council split into three elements: − construction revenue (taken as facilities are built) − funding revenue (to fund operator’s borrowing) − operating revenue (to cover operating costs) • The quantum of the split will be decided by assumpti
Slide 23: Accounting for Contracts: Potential New Rules
Accounting for Contracts Potential New Rules • Profit and loss account − construction revenue (early years as facilities are built) less construction costs − operating revenue less operating costs (Note: no depreciation as facilities not owned by operator) − funding revenue less borrowing costs (Not
Slide 24: Accounting for Contracts: EBITDA Comparison
£ 000 0 2000 4000 6000 8000 10000 12000 14000 Year 1 Year 2 Year 3 Year 4 Year 5 EBITDA Comparison Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 Accounting for Contracts Year 13 Effect best seen in graphical form: Year 14 Year 15 Year 16 Year 17 Year 18 Year 19 Year 20 Year 21 Year 22 Year 23
Slide 25: Accounting for Contracts: Operating Profit Comparison
£ 000 0 2000 4000 6000 8000 10000 12000 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 Year 13 Accounting for Contracts Year 14 Year 15 Year 16 Operating Profit (EBIT) Comparison Year 17 Year 18 Year 19 Year 20 Year 21 Year 22 Year 23 Year 24 Year 25 Year 26 Y
Slide 26: Accounting for Contracts: PBT Comparison
£ 000 -2000 0 2000 4000 6000 8000 10000 12000 Year 1 Year 2 PBT Comparison Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Accounting for Contracts Year 12 Year 13 Year 14 Year 15 Year 16 Year 17 Year 18 Year 19 Year 20 Year 21 Year 22 Year 23 Year 24 Year 25 Year 26 Year 27 Year 28
Slide 27: Accounting for Contracts
Accounting for Contracts Please note that: • Over the life of the contract PBT will be the same under both sets of rules • IFRIC 12 does not affect the cash flow of a contract in any way It is an accounting construct only 27
Slide 28: Valuing PPPs/PFIs
Valuing PPPs/PFIs • Valuation can be complicated − profit streams show up in different parts of Viridor or in SPVs/JVs − project may have value even before earnings come through eg Lakeside • Simplest approach for on-balance sheet projects is usual metric of EBITDA or other multiples − however will
Slide 29: Possible Lakeside Valuation Methodology - I
Possible Lakeside Valuation Methodology - I • £160m capex undertaken on basis of 10% real after tax project IRR over 25 years − implied average cashflow of £20m per annum after tax • 86% non-recourse debt at 6.25% gives average annual debt service cost (interest and capital repayment) of £9m after t
Slide 30: Possible Lakeside Valuation Methodology - II
Possible Lakeside Valuation Methodology - II • In reality gate fees are c£20 per tonne higher than the model and electricity prices c£10 per MWh higher − total upside c£8m per annum post tax • NPV of Viridor’s 50% share of the upside is £42m at 8% real after tax and £50m at 6% real after tax • Total
Slide 31: Greater Manchester PFI - I
Greater Manchester PFI - I • Preferred bidder with John Laing • Largest waste PFI in UK • Commercial terms agreed and preliminary works under way • Key planning permissions secured (including strategic waste CHP plant in September 2008) • Signing delayed by impact of current debt markets but substan
Slide 32: Greater Manchester PFI - II
Greater Manchester PFI - II • The Energy from Waste/CHP facility is the first line (of two) due to be built on the Runcorn site − total capacity due to be 750kt pa, 70MW electricity plus heat • Profit streams to Viridor − subcontract − interest on shareholder loans to SPVs − share of PAT in recyclin
Slide 33: Colin Drummond, Chief Executive, Viridor Waste
Colin Drummond Executive Director, Pennon Group Plc Chief Executive, Viridor Waste 33
Slide 34: UK Local Authority PFI Contracts
UK Local Authority PFI Contracts • 15 operational totalling 4.9m tonnes pa • 3 under construction totalling 0.5m tonnes pa 34
Slide 35: UK Local Authority PFI Tenders
UK Local Authority PFI Tenders Approximate Tonnes m per pa Approved 2006/2007 Future Pipeline Wakefield 0.2 Norfolk 0.2 Greater Manchester 1.4 Milton Keynes/Northampton n/a Cheshire 0.4 Essex n/a Merseyside 0.8 Bedfordshire 0.2 North Yorkshire/York 0.5 Derbyshire n/a Sub Total: 3.3 Dorset 0.2 Approv
Slide 36: Prospects for PFIs - I
Prospects for PFIs - I • PFIs have been preferred route for government to fund major infrastructure projects - increasing allocations of PFI credits to waste projects - private finance minimises impact on government borrowing • Questions have sometimes been raised about value for money particularly
Slide 37: The Scottish Futures Trust
The Scottish Futures Trust • Because it believes that PFIs have not delivered value for money, the Scottish Government announced (September 2008) the formation of the Scottish Futures Trust (SFT) • SFT is a non profit distributing limited company which is due to be financed through public bonds • Ro
Slide 38: Prospects for PFIs - II
Prospects for PFIs - II • Current debt market issues raise significant concerns about future of large PPPs/PFIs financed through SPVs - a major issue for UK public finances and the economy as a whole • Somehow or other however the UK has to fund its waste management strategy • PPPs/PFIs deliver effe
Slide 39: PPPs/PFIs Summary
PPPs/PFIs Summary • Fundamental opportunity driven by Government recycling and landfill diversion targets − £15bn - £30bn capex • Possible upsides of energy sales • Contractual framework is secondary to the above basic opportunities − see PPPs/PFIs in light of above • Viridor sees huge commercial op
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