London Roadshow Private Client Investment Managers (PCIMs)

Transcription

1 London Roadshow Private Client Investment Managers (PCIMs) March 2018 Environmental Sustainable Profitable Pennon Group plc

2 Disclaimer 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 relation thereto and any other related verbal or written communications. This document contains certain forward-looking statements with respect to Pennon Group s financial condition, results of operations and business and certain of Pennon Group's plans and objectives with respect to these matters which may constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 (the PSLRA ). Forward-looking statements are sometimes, but not always, identified by their use of a date in the future or such words as anticipate, aim, believe, continue, could, due, "estimate, expect, forecast, goal, intend, "may", plan", project, seek, should, target, will and related and similar expressions, as well as statements in the future tense. By their very nature forward-looking statements are inherently unpredictable, speculative and involve risk and uncertainty because they relate to events and depend on circumstances that will or will not occur in the future. Various known and unknown risks, uncertainties and other factors could lead to substantial differences between the actual future results, financial situation development or performance of the Group and the estimates and historical results given herein. Undue reliance should not be placed on forward-looking statements which are made only as of the date of this document. Important risks, uncertainties and other factors that could cause actual results, performance or achievements of Pennon Group to differ materially from any outcomes or results expressed or implied by such forward-looking statements are changes in law, regulation or decisions by governmental bodies or regulators, non-recovery of customer debt, poor operating performance due to extreme weather and climate change, poor service provided to customers or increased competition leading to loss of customer base, global economic downturn pressuring volumes and margins, downward pressure on UK wholesale power prices, business interruption or significant operational failures/ incidents, non-compliance or occurrence of avoidable health and safety incidents, failure or increased cost of capital projects, exposure to contractor failure to deliver construction progress, failure of information technology systems management and protection including higher risks, maintaining finance and funding to meet ongoing commitments, tax compliance and contributions and difficulty in recruitment, retention and development of appropriate skills which are required to deliver the Group s strategy. Forward looking statements should therefore be construed in light of such risks, uncertainties and other factors and undue reliance should not be placed on them. Nothing in this document should be construed as a profit forecast. All written or verbal forward-looking statements, made in this document or made subsequently, which are attributable to Pennon Group or any other member of the Pennon Group or persons acting on their behalf are expressly qualified in their entirety by the factors referred to above. Pennon Group may or may not update these forward-looking statements. This document is not an offer to sell, exchange or transfer any securities of Pennon Group or any of its subsidiaries and is not soliciting an offer to purchase, exchange or transfer such securities in any jurisdiction. Without prejudice to the above, whilst Pennon Group accepts liability to the extent required by the Listing Rules, the Disclosure Rules and the Transparency Rules of the UK Listing Authority for any information contained within this document which the Company makes publicly available as required by such Rules: a) neither Pennon Group nor any other member of Pennon Group or persons acting on their behalf shall otherwise have any liability whatsoever for loss howsoever arising, directly or indirectly, from use of the information contained within this document; b) neither Pennon Group nor any other member of Pennon Group or persons acting on their behalf makes any representation or warranty, express or implied, as to the accuracy or completeness of the information contained within this document; and c) no reliance may be placed upon the information contained within this document to the extent that such information is subsequently updated by or on behalf of Pennon Group. Past performance of securities of Pennon Group cannot be relied upon as a guide to the future performance of any securities of Pennon Group. Pennon Group plc Pennon Group plc 2018

3 Pennon Team Susan Davy Chief Financial Officer Sarah Heald Director of Corporate Affairs & Investor Relations Pennon Group plc Pennon Group plc 2018

4 About Pennon One of the largest environmental infrastructure groups in the UK At the top end of the FTSE 250 index with a market capitalisation of 2.7bn Group revenue of 1.35bn with Profit Before Tax (PBT) of 250m for 2016/17 (1) Assets of 5.9bn and a workforce of around 5,000 people Dividend policy of +4% annual growth above Retail Price Index inflation to 2020 Peers include: United Utilities, Severn Trent, Veolia, Suez Strategic priorities FOCUSED ON DELIVERING MARKET-LEADING PERFORMANCE ACROSS OUR BUSINESSES LEADERSHIP IN UK WATER AND WASTE LEADERSHIP IN COST BASE EFFICIENCY DRIVING SUSTAINABLE GROWTH Water & Wastewater Our businesses Waste Management (1) Before non-underlying items Pennon Group plc Pennon Group plc 2018

5 About Pennon Unique combination of environmental infrastructure assets WATER & WASTEWATER WASTE MANAGEMENT Regulatory ring-fence Water and wastewater services to a population of c.2.2 m B2B water retailer A leading UK energy recovery, recycling and waste management company Serves Cornwall, Devon, parts of Dorset, Somerset, Hampshire and Wiltshire Award enhanced status for its Business Plan, and has highest potential returns in the sector PWS is our growing B2B water retailer currently serving >160,000 customers nationwide C.5,100 new accounts won since market opening Serves more than 150 local authorities and major corporate clients as well as over 32,000 customers across the UK Network of 300+ recycling, energy recovery and waste management facilities Including 12 Energy Recovery Facilities (ERFs) Pennon Group plc Pennon Group plc 2018

6 About Pennon A unique proposition in an attractive sector SECTOR-LEADING WATER BUSINESS, GROWING RECYCLING, ENERGY RECOVERY AND WASTE MANAGEMENT GROUP PREDICTABLE INDEX-LINKED EARNINGS AND CASH FLOW GROWTH EFFICIENT/EFFECTIVE BALANCE SHEET AND SECTOR-LEADING FINANCE COSTS WELL-POSITIONED TO TAKE OPPORTUNITIES IN A CHANGING REGULATORY ENVIRONMENT STRONG OPERATIONAL PERFORMANCE, DELIVERING FINANCIAL BENEFITS INVESTING FOR FURTHER INDEX-LINKED GROWTH, TRACK RECORD OF DELIVERING VALUE FROM M&A SECTOR-LEADING DIVIDEND OF +4% ABOVE RETAIL PRICE INDEX (RPI) INFLATION TO 2020 Pennon Group plc Pennon Group plc 2018

7 South West Water Sector-leading UK water company 25-year rolling licence South West Water operating under an enhanced business plan for the period (1) Delivery measured by Return on Regulated Equity (RoRE) Overall returns include outperformance on: o o o o (1) Including Bournemouth since 2015 Total expenditure (Totex) Outcome Delivery Incentives (ODIs) Service Incentive Mechanism (SIM) Financing costs 1,200 wastewater pumping stations In our water and wastewater business we are focused on providing services in the most efficient and sustainable way possible 2.2m population served 15,600km wastewater mains network 689 treatment works with 70 UV treatment facilities 23 raw water reservoirs Including private pumping stations which transferred over in October m Water & Waste Water Customers 24 shellfish waters 144 designated bathing waters 18,100km of drinking water mains network 0.2m Water-only customers Pennon Group plc Pennon Group plc 2018

8 South West Water Sector Leading RoRE Outperformance Cumulative K6 RoRE 12% 8% Financing ODIs Totex Base Returns 4% 0% -4% SWW Northumbrian SVT Wessex Anglian UU Southern Welsh Thames Yorkshire 8 Source: Company Annual Performance Reports Pennon Pennon Group Group plc plc

9 South West Water Key themes for 2018 Focus on customers and communities Meeting our PR14 Enhanced Business Plan commitments Best in class RoRE outperformance, Strong in all measures, financing, ODIs and Totex PR19 methodology builds on challenges in PR14 Increased rewards & penalties, lower base return SWW well prepared to build on its success Incentives for top performing companies 9 Source: Company Annual Performance Reports Pennon Pennon Group Group plc plc

10 South West Water Price Review Timetable Well prepared for Business Plan submission in September 2018 March/April Business plan customer consultation April Customer acceptability May Updated business plan submission May Performance commitment submission 3 rd September Business plan submission January Initial assessment of business plans published March/April Draft determinations (exceptional and fast track plans) April Companies submit revisions to business plans (significant scrutiny and slow track) July Draft determinations (Slow track and significant scrutiny) December: Final determinations published Pennon Group plc Pennon Group plc 2018

11 South West Water PR19 largely as expected South West Water: supportive of Ofwat s proposals DEBT INDEXATION Phased transition from RPI to CPI-H CPI-H will apply for 100% of revenues 50% applied to wholesale RCV in ; further transition at PR24 and beyond South West Water: lowest index-linked debt in the industry WATER AND SLUDGE RESOURCES Separate total revenue control to incentivise competition in water trading Separate average revenue control in sludge ( Bio-resources ) and no explicit RCV protection mechanism, though alternative implied RCV protections South West Water: lowest exposure in the industry at 4% for water resources and 2% sludge DIRECT PROCUREMENT Encouraged for discrete projects with a while life totex > 100m South West Water: well-positioned to take market share LICENCE CHANGES Ofwat engaging with companies ahead of a formal process South West Water: supportive of proposals Pennon Group plc Pennon Group plc 2018

12 South West Water PR19 largely as expected South West Water: continued sharing of outperformance with customers planned COST OF DEBT Proposed to continue to be set on the basis of an efficient notional company Indexation will be applied to new cost of debt only Ofwat will continue the fixed allowance approach for embedded debt End of period adjustment proposed for the inflation element of new debt only South West Water: comparable with Ofwat s notional company structure COST OF EQUITY South West Water: Ability to outperform base returns through delivering better performance Outcomes Totex Financing COMPANY-SPECIFIC SHARING MECHANISMS Ofwat does not propose to mandate risk sharing Companies are encouraged to consider pain-gain sharing around the cost of debt where it is in the interests of customers South West Water: leading company adopting pain-gain sharing at PR14 Pennon Group plc Pennon Group plc 2018

13 Pennon Share Price (GBp) South West Water PR19 impact on market sentiment in-line with past reviews Trading of water stocks through previous price reviews 1000 PR04 WACC Announcement PR09 WACC Announcement PR14 WACC Announcement PR19 WACC Announcement 40% % 20% 10% 0% Premium to RCV (%) 200 Sep-04 Sep-06 Sep-08 Sep-10 Sep-12 Sep-14 Sep-16 Mar-18 (10%) 29/11/2004 PNN /11/2009 PNN /01/2014 PNN /12/2017 PNN 7.78 Pennon Share Price Premium to RCV 13 Pennon Pennon Group Group plc plc

14 Viridor At the forefront of the UK resource sector Portfolio of twelve Energy Recovery Facilities 380,000 equivalent homes powered by energy produced by our portfolio 150 local authority and major corporate clients 32,000 customers across the UK 300+ recycling, energy recovery and waste management facilities 650 waste collection vehicles securing materials for our network of assets 1.6 million tonnes of recyclate traded 32,000 UK customers 650 Waste collection vehicles 12 ERFs 380,000 equivalent homes powered by energy produced by our portfolio 1.6 Million tonnes of recyclate traded Network of 300+ recycling facilities Pennon Group plc Pennon Group plc 2018

15 Viridor Key themes for 2018 A market leader well-positioned today and for the future Viridor growth to 2020 and beyond - Differentiated from water peers ERF growth kicker, earnings enhancing Commitment to quality products Delivering for customers, employees and shareholders Pennon Group plc Pennon Group plc 2018

16 Viridor Continued opportunities 2018 Resources & Waste Strategy (DEFRA) Developing new markets for recyclate (UK & export) Landfill - ongoing feature of UK waste market, retaining dynamic approach UK residual waste market dynamics favourable - ERF demand exceeding capacity into long-term Pennon Group plc Pennon Group plc 2018

17 Viridor Recycling market activity Rest of World Paper Glass China Commodity volumes Active markets Europe UK Plastics & Polymers Metal & WEEE All Viridor metals and glass stay in the UK - no plastics have been exported to China as of March 2017 Pennon Group plc Pennon Group plc 2018

18 Viridor A challenging recycling environment, self-help in place, market developing Market dynamics Public pressure is growing - Blue Planet effect Recycling rates have stalled in the UK Model needs improvement, Government recognition - Viridor engaging Brexit represents an opportunity for a new framework Quality improvements (input and output) required Viridor self-help activities Optimisation of contracts and asset base o c.65% of contracted volumes have now been renegotiated to pain/gain sharing mechanisms o Ongoing rollout of lean RCM (1) o Rationalisation of assets o Increased quality sampling regimes Managing pressure on costs China/shipping Developing new markets c.65% of contracted volumes have now been renegotiated (1) Reliability Centred Maintenance 18 Pennon Pennon Group Group plc plc

19 Viridor Delivering the next ERF growth stage Glasgow final commissioning Beddington final commissioning Dunbar early stage commissioning Avonmouth progressing well Pennon Group plc Pennon Group plc 2018

20 Viridor ERF significant earnings step up Avonmouth Dunbar South London Glasgow (IFRIC 12) IFRIC 12 Interest Receivable Share of JV EBITDA Adjusted EBITDA EBITDA 107m 2016/ /21 Pennon Group plc Pennon Group plc 2018

21 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) Interim dividend of 11.97p, up 7.9% (2) SCRIP dividend alternative ceased Dividend reinvestment plan (DRIP) offered for 2017/ % % % % % % % % H / / / / / / / / / / /20 Note: Full Year and Interim dividend in pence per share (1) Future dividends growth based on policy of 4% + RPI forecast to 2020 (2) 2017/18 Interim dividend based on September 2017 RPI of 3.9% Pennon Group plc Pennon Group plc 2018

22 Appendix Pennon Group plc

23 Sustainability Pennon Group plc

24 Sustainability Integral to our businesses Sustainability objectives drive targets set by South West Water and Viridor Focus on improvements in resource efficiency, increased levels of recycling and renewable energy generation all helps to generate shareholder value Underpins the successful delivery of our strategy PENNON SUSTAINABILITY OBJECTIVES Manage Pennon Group as a sustainable and successful business for the benefit of our customers, shareholders and other stakeholders Engage and foster good relationships with our customers and other stakeholders Aim to ensure that all our business activities have a positive economic, social and environmental impact on the communities in which we operate Strive for the highest standards of health and safety in the workplace, to minimise accidents, incidents and lost time Aspire to leadership in minimising emissions that contribute to climate change. Develop climate change adaption strategies Develop and motivate our employees, treat them fairly and ensure they are fully engaged in all aspects of Pennon Group s objectives and follow the highest standards of business conduct Aspire to leadership in all aspects of waste prevention and resource efficiency by delivering solutions for society to address the environmental challenge of depleting natural resources Pennon Group plc Pennon Group plc 2018

25 Sustainability Integral to our businesses Customers Overall SWW customer satisfaction at 89% o Value for money satisfaction at an all time high 61% of customers satisfied (up 2%) o Best ever customer service score for SWW 81.6 Service Incentive Mechanism ( SIM ) score o Written complaints reduced by c.30% First Viridor customer service survey completed 76% satisfied with overall service Communities 20 th consecutive year without water restrictions High drinking water quality score maintained SWW 99.96% BW 99.98% Record bathing water quality results 98.6% classified as sufficient under new stringent EU standards, 81.1% classified as excellent Market leader in Recycling Viridor 18% market share in co-mingled recyclate ERF state of the art visitor centres 3,483 visitors to Ardley ERF 16/17 People Introduction of new HomeSafe Health and Safety programme Reduction in RIDDOR (1) incidents to 35 in 2016 (2015, 42) Pennon Code of Conduct encouraging highest standards 130 apprentices trained within the Group since 2011 Commitment to improving diversity: 36% of Pennon Executive Team are female, 20% across the Group as a whole better than industry benchmarks Environmental Increase in renewable energy generation 16/17 1,549 GWh generated 3.9% increase YoY Reduction in landfill volumes as more waste is recycled or used to generate energy Landfill waste inputs 1.7m tonnes 2016/17 (2.0m tonnes 2015/16) A further 0.1m tonnes of waste diverted from landfill to ERF s Restoration of closed landfill sites in accordance with biodiversity plans 4 Operational Climate Adaption plans in place at key Viridor sites Best ever wastewater compliance score (numeric compliance 98.4%) Significant wastewater pollutions reduced from 7 to 4 (1) RIDDOR - Reporting of Injuries, Diseases and Dangerous Occurrences Regulations Pennon Group plc Pennon Group plc 2018

26 Sustainability Upstream Thinking - looking after the land to protect our rivers What is Upstream Thinking? Upstream Thinking is a partnership working across the South West Purpose: to improve the raw water quality reaching South West Water s treatment plants in order to improve tap water quality, reduce treatment cost and provide benefits to the environment Ofwat recognises that there is a need to ensure that the natural capital is preserved for future generations, and Upstream Thinking contributes to this process How does it work? South West Water carries out assessments on farms resulting in a water management plan which identifies areas of improvement. These can include upgrading slurry storage, fencing to keep livestock out of rivers, planting buffer strips, constructing ponds and better pesticide management Sustainable Partnership Approach? Working together with farmers keeps down costs for South West Water customers and reduces the impact of water treatment on the environment The target for the programme is 750 farms and 1,300ha of moorland under revised management by 2020; benefitting 15 water treatment works (which supply 72% of our customers water) through providing cleaner raw water prior to the treatment process Pennon Group plc Pennon Group plc 2018

27 Sustainability Pennon s credentials Score of B (Management) for Climate Change and Water (formerly called the Carbon Disclosure Project) We are making continuous steps to reduce our impacts Three-star rating 2017 (90% score) Business in the Community Corporate Responsibility Index Long-standing member of the FTSE4Good Index Pennon Group plc Pennon Group plc 2018

28 HY Results 2017/18 Pennon Group plc

29 Delivering for customers, communities and investors Delivering for customers and communities - On track to deliver against business plan commitments including all ODI (1) commitments by Sharing financial benefits with customers through WaterShare - Customer bills lower than they were 8 years ago - Long-term partnership working with customers and communities across the Group - Viridor s Greater Manchester contract mutually satisfactory outcome Robust operational & financial performance - Sector-leading in water, RORE (1) consistently over 11% - Bournemouth acquisition sustainable way to deliver greater efficiency and lower bills - ERF (1) portfolio performing well - Group efficiency initiatives on track, 11m p.a. delivered to date Preparing for the next growth phase, Viridor earnings step-up from Strong fundamentals in UK waste market, Viridor s investment in ERF s servicing demand - South West Water innovating for PR19, long-term vision for water to 2050 published - Well established long-term dividend policy of RPI + 4% to 2020 (1) ODI Outcome Delivery Incentive, RORE Return on Regulated Equity, ERF Energy Recovery Facility 29 Pennon Pennon Group Group plc plc

30 Financial Highlights Robust Group financial performance Underlying (1) H1 2017/18 m H1 2016/17 m Change Revenue % EBITDA % Adjusted EBITDA (2) A % Depreciation and amortisation (91.1) (91.5) +0.4% Operating Profit % Net Interest (36.6) (28.6) (28.0%) Share of JV Profit After Tax % Profit Before Tax B % Non-underlying Items Before Tax (1.3) (25.7) - C Statutory Profit Before Tax % Tax (17.5) (13.3) (31.6%) Statutory Profit After Tax % A B C Adjusted EBITDA in line with expectations - Higher SWW revenue and continued efficiency - Strong ERF performance Growth in Profit Before Tax - SWW in line with expectations - Strong Viridor contribution - Efficient finance costs effective rate 3.7% Non-underlying Items - Greater Manchester contract reset - Derivatives associated with SWW 2040 bond Earnings per share (3) (p) % D Statutory Earnings per share (p) D % Dividend per share (4) (p) % EPS ahead of H1 2016/17 - On both an adjusted and statutory basis (1) Before non-underlying items, see slide 35 (2) Underlying EBITDA plus share of Joint Venture EBITDA and IFRIC 12 interest receivable (3) Adjusted EPS: before deferred tax and non-underlying items and proportionately adjusted for the first return due on the 2017 perpetual capital securities in H1 2017/18 and the periodic return due March 2017 in the prior period (4) The RPI rate used is 3.9% as of September Pennon Pennon Group Group plc plc D

31 Capital Investment Investing for growth Group Capital Investment profile What we have been investing in... - Energy Recovery Facilities - New landfill cells driven by demand - Cutting edge Mayflower Water Treatment Works - Further improvements to South West Bathing and Shellfish waters - Further innovation to improve drinking water quality 500 m 400 m 300 m Group Capex m H1 2017/18 H1 2016/17 Total Water Total Waste (1) Total m 100 m 0 m 2015/ /17 H1 2017/18 H2 2017/ / /20 Total ERF portfolio expenditure c. 1.5bn (2) - 1,261m expenditure to H1 2017/18, including Avonmouth - 268m remaining spend to completion SWW Viridor (1) Including construction spend related to service concession arrangements, capitalised interest ( 6.7m in H1 2017/18) and ERF maintenance capital expenditure (2) Excluding capitalised interest, net of amounts subject to legal contractual process - 45m to H1 2017/18, estimated 77m at completion 31 Pennon Pennon Group Group plc plc

32 Net Debt Movements Strong cash inflow from operations, continuing investment m (2,664.9) Strong cash inflow from operations Re-financing of perpetual capital securities Peak years of capital investment in 2016/17 and 2017/18 (2,790.9) (235.3) (4.8) (6.3) (7.0) (8.1) (10.4) (25.7) (31.3) (48.6) (82.1) Net Debt 1-Apr-17 Cash inflow from operations VLGM loan repayment Lakeside dividends and loan repayments Pension contributions (1) Capital securities (2) Corporation tax Interim dividend (3) issuance 2016/17 Other movements Acquisition of South Staffs Nonhousehold retail customer book Net interest paid Other taxes Final dividend 2016/17 Capital (4) payments Net Debt 30-Sep-17 (1) Includes 2.6m non-cash movement in Euro loan due to exchange rates (2) Includes hybrid periodic return payment of 19.0m offset by net hybrid receipt on refinancing of 10.9m (remaining 14.2m of 2013 hybrid purchased in October 2017) (3) Other taxes include business rates, employers national insurance, fuel excise duty, carbon reduction commitment, environmental payments, climate change levy and external landfill tax (4) Including construction spend on service concession arrangements net of proceeds from sale of property, plant and equipment 32 Pennon Pennon Group Group plc plc

33 Balance Sheet Strong funding position underpinning investment Group Net Debt Profile Fixed 1,812m 65% at 30 September ,790.9m - Diversified funding mix, underpinned by finance leases with long maturities - Average maturity of debt 20 years matching asset base South West Water funding Index- Linked 552m 20% Floating 427m 15% 1,246m cash & committed facilities (31 March ,383m) Development of portfolio - 450m of new or renewed funding signed since March Including 300m Pennon hybrid refinanced: - Rate of 2.875% lowest ever for sterling issue - Order book 4 times oversubscribed - Following EIB/Government discussions previous EIB approved transaction being progressed alongside other options to support final year of K6 and K7 pre-funding - 25% index-linked, below Ofwat notional of 33%, headroom for RPI/CPI transition Pennon Group plc Pennon Group plc 2018

34 Balance Sheet Stable gearing increased headroom for investment 64.8% 65.2% Group Net Gearing (1) at 30 September % 62.2% Water business Net Debt / RCV (2) at 30 September 2016 Stable gearing Increased headroom for investment - Reflects refinancing of perpetual capital securities (hybrid) in the Group s capital structure, net of continuing investment - Gearing at plc is expected to reduce by year end, following the same profile as 2016/17 - SWW aligned with Ofwat notional efficient level - Hybrid supports increase in investible capacity c. 800m - Strength of balance sheet (1) Net borrowings/(equity + net borrowings) (2) Based on Regulatory Capital Value (RCV) at March Pennon Pennon Group Group plc plc

35 Group financing Sector-leading effective interest rate 3.7% Group average interest rate 7.0% 6.5% K4 ( ) K5 ( ) K6 ( ) 3.3% H1 2016/17 6.0% 5.5% 5.0% 3.5% 3.2% H1 2016/17 SWW average interest rate 4.5% 4.0% 3.5% 3.0% Pennon SWW Water Sector 36.6m 28.6m H1 2016/17 Group net finance costs (1) Sector leading effective interest rates Consistently low effective rate, feature of financing mix Group net finance costs impacted by unwind of PMB derivative in February 2017 (1) Before non-underlying items (2) As at 30 September Pennon Pennon Group Group plc plc

36 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) - Interim dividend of 11.97p, up 7.9% (2) - SCRIP dividend alternative ceased - Dividend reinvestment plan (DRIP) offered for 2017/ % % % % % % % % H / / / / / / / / / / /20 Note: Full Year and Interim dividend in pence per share (1) Future dividends growth based on policy of 4% + RPI forecast to 2020 (2) 2017/18 Interim dividend based on September 2017 RPI of 3.9% 36 Pennon Pennon Group Group plc plc

37 Water: Delivering for customers and communities On track to deliver against all water business plan commitments by 2020 Customers at the heart of our delivery - 7bn investment to improve services to customers since privatisation - Best ever customer service score (SIM) - Written complaints reduced by c.30% - halved since Customer bills lower than they were 8 years ago SWW strong focus on affordability - Tailored support for customers in vulnerable circumstances using a range of approaches- c.51,000 customers supported through our existing schemes Delivering 33 of 36 financial ODIs (1) - 21st consecutive year without water restrictions - Outperforming leakage target halved since privatisation - Maintaining high water quality standards Bathing water quality - Continued good performance 98% achieving sufficient quality - Further investments in bathing and shellfish waters underway Wastewater compliance - Best ever compliance performance 98.4% - Significant (2) pollutions reduced (1) SWW 26 ODIs and BW 10 ODIs including SIM. 33 meeting target or within appropriate tolerances (2) Category 1 and 2 pollution incidents 37 Pennon Pennon Group Group plc plc

38 Water: Strong operational and financial performance Consistent sector-leading RORE WaterShare RORE (1) performance Cumulative K6 TOTEX outperformance - 159m FY 15/ % FY 16/ % H1 17/ % Cumulative 11.8% (1) - Delivering continued efficiency performance Operational performance ahead of our commitments to customers - Cumulative net reward of 7.0m - End of period rewards of 9.1m - In period net penalties of 2.1m - Targeting further improvements on wastewater pollutions 6.0% Continued delivery of financing outperformance - 83m cumulative financing outperformance - Sharing the benefits of reduction in interest rates with customers Financing ODIs Totex Base returns (1) RORE outperformance: Totex outperformance calculated after sharing rate and the impact of tax, impact of net ODI rewards in 2016/17 and financing outperformance calculated using long term forecast K6 inflation of 2.8% (see slide for further detail) 38 Pennon Pennon Group Group plc plc

39 Water: Strong operational and financial performance ODI performance levels cumulative net reward position GOOD PERFORMANCE (1) Water quality standard Taste, smell and colour contacts Operational contacts resolved 1st time Water restrictions Supplies interrupted due to flooding Supply interruptions Odour contacts Bathing water quality Water & waste asset reliability Sustainable abstractions Leakage level Descriptive compliance IMPROVING PERFORMANCE Customers paying a metered bill Internal and External sewer flooding Wastewater numeric compliance (2) Service Incentive Mechanism (SIM) (2) AREAS OF FOCUS Pollution incidents Cumulative ODI Outperformance net reward: 7.0m (3) (1) Good performance in line with committed performance (or within appropriate tolerances) (2) End of AMP measure only, on track to deliver with no penalty assumed (3) ODI performance in H1 2017/18 of 1.5m is split 1.6m net reward which will be recognised at the end of the regulatory period and 0.1m net penalty which may be reflected during the regulatory period. Of the cumulative net reward of 7.0m 9.1m will be recognised at the end of the regulatory period and 2.1m net penalty which may be reflected during the regulatory period. 39 Pennon Pennon Group Group plc plc

40 Water: Preparing for next growth phase Investment anticipated at least comparable to historic levels 6bn - 9bn investment anticipated to Informed by Defra s guidance to Ofwat - Direct engagement with Ofwat - Customer / stakeholder research and engagement Key investment drivers continue to be - Resilience - Environmental protection and enhancement - Security of supply - Flood protection - Transformational improvement to customer service Choices over phases of spend - Tested with customers, stakeholders and regulators - Engagement will inform 5 year plan Pennon Group plc Pennon Group plc 2018

41 Operational Viridor: Robust operational and financial performance ERFs performing well Focus on optimising performance - Delivered 52m of EBITDA in H1 2017/18 expect H2 weighting - High availability across fleet Average >90% (1) - Maintenance regimes working well. Current run rate of 2.0% p.a. of capital cost, with 3.5% p.a. long term average cost - Investments delivering in excess of base case expectations - 80% long-term contracted volumes (and associated price) across the portfolio (2) H1 Adjusted EBITDA 2017/18 ERF Availability H1 2017/18 (1) Outperformance Pennon base case performance Fleet outperformance P'borough Runcorn II Runcorn I Cardiff Ardley Exeter Lakeside (1) Includes 100% of joint venture availability, excludes Bolton ERF due to fire (2) Excluding Avonmouth 41 Pennon Pennon Group Group plc plc % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Runcorn II Cardiff Ardley P'borough Exeter Lakeside Runcorn I

42 Viridor: Robust operational and financial performance Recycling EBITDA margin consistent VOLUMES 120kT H1 2017/18: 740kT (H1 2016/17: 860kT) REVENUES 10/T H1 2017/18: 97/T (H1 2016/17: 87/T) OPERATIONAL COST 6/T H1 2017/18: 78/T (H1 2016/17: 72/T) Self-help measures underpinning performance further opportunities available - Reduced volumes - optimisation of contracts and asset base - Better pricing reflected in revenues - Pressure on costs higher quality output requirements in China - Higher shipping costs due to under-capacity - EBITDA steady thanks to self-help and contract pass-through - Developing new Asian markets to offset Chinese impacts SHIPPING COST 3/T H1 2017/18: 5/T (H1 2016/17: 2/T) EBITDA MARGIN 1/T H1 2017/18: 14/T (H1 2017/18: 13/T) Pennon Group plc Pennon Group plc 2018

43 Viridor: Delivering for customers and communities Greater Manchester contract reset Long-term partnership continues mutually satisfactory outcome - Energy Recovery Facility Runcorn I - Long-term contract remains - Residual waste will continue to be treated, no significant operational changes - Recycling and reprocessing - Contract on run-off basis for a minimum of 18 months - Subsequent contracts, subject to re-procurement process - Viridor will be eligible to bid for the new contracts with new contractual terms Pennon Group plc Pennon Group plc 2018

44 Viridor: Preparing for the next growth phase Significant growth to come from residual waste Confidence in the waste sector - Strong fundamentals in UK waste market - Investment in further UK waste treatment capacity as essential to service longer term demand Source: Defra, SEPA, NRW and Viridor analysis Pennon Group plc Pennon Group plc 2018

45 In construction or stage of commissioning Viridor: Preparing for the next growth phase ERF assets will deliver earnings step up Glasgow - First generated electricity February MRF (1) and AD (2) plants operating - ERF in final commissioning Beddington (South London) - In final commissioning IFRIC 12 Interest Receivable Share of JV EBITDA EBITDA South London Glasgow (IFRIC 12) 107m Dunbar Avonmouth Adjusted EBITDA 2016/ /21 Dunbar - Early stage of commissioning Avonmouth - Construction underway and progressing well - Project is proceeding to plan with piling activities on-going (1) Materials Recycling Facility (2) Anaerobic Digestion 45 Pennon Pennon Group Group plc plc

46 Pennon Pennon Group plc

47 Pennon Adjusted group EBITDA m (0.4) (0.4) (2.2) (3.6) H1 2016/17 SWW tariff increase and customer demand Contracts, collections and other Viridor overheads ERFs Share of JV EBITDA & IFRIC 12 interest receivable Plc, PWS and other Recycling SWW other revenue and cost (1) impacts Landfill and landfill gas H1 2017/18 (1) Includes impact of meter switchers and new connections 47 Pennon Pennon Group Group plc plc

48 Pennon: Robust operational and financial performance Underpinned by efficiency across the Group 159m c. 27m c. 17m p.a. SWW Totex savings K6 to date SWW/BW Synergies K6 in total Group efficiencies From 2019 Sector leading water Totex outperformance 159m cumulative Totex efficiencies Bournemouth Water synergies on track Final integration phase complete 12m delivered since merger with SWW Group wide efficiencies c. 11m p.a. secured to date Group wide IS platform integration on track Pennon Group plc Pennon Group plc 2018

49 Pennon Water Services Financial Highlights Growing in the new competitive market H1 2017/18 (1) m Revenue A 83.5 EBITDA B 0.5 Depreciation (0.3) Operating Profit 0.2 >160,000 Customers accounts c.5,100 (2) New accounts won since market opening Net Interest (0.7) Loss Before Tax (0.5) Dedicated PWS management team A Competitive market PWS growing - One of only four associated retailers to have achieved net growth - Focused on value enhancing contracts B Set-up established - PWS has regularly achieved industry leading standards showing strong compliance with required market performance as measured by MOSL, with average performance of c.99% - Set-up costs reflected in 2017/18 (1) 80:20 venture with South Staffordshire Group (2) As at 20 November 2017 c.5,100 new accounts, net growth c.1, Pennon Pennon Group Group plc plc

50 Non-underlying Items m H1 2017/18 H1 2016/17 Greater Manchester A Derivatives (1) B (7.8) (15.0) Other non-underlying costs (2) - (10.7) Profit Before Tax impact (1.3) (25.7) Deferred tax change of rate (3) Tax credit/(charge) on non-underlying items 4.3 (2.7) Net credit/(charge) for the period 3.0 (8.3) A B Greater Manchester Contract Reset - TPSCo contract reset and settlement of outstanding Viridor Waste claims, net of write down of Viridor Laing shareholder loans Derivatives - Movement in fair value of long-dated derivatives associated with the 2040 bond (1) In the first half of 2016/17 net derivatives charge of ( 15.0m) includes the fair value of 2040 bond long-dated derivatives and a change in legislation impacting the 2011 PMB derivative, terminated in February 2017 (2) H1 2016/17 reflects charges for restructuring costs of 10.7m (3) Deferred tax credit of 20.1m in the first half of 2016/17 relating to the enacted reduction in the UK rate of corporation tax from 18% to 17% in Pennon Pennon Group Group plc plc

51 Corporation tax Effective rate reflects capital allowances for investment m Current Year H1 2017/18 H1 2016/17 Current Tax A Deferred Tax Prior Year Current Tax (4.3) (0.3) Deferred Tax 1.6 (1.6) (2.7) (1.9) Total Underlying Tax Charge Deferred Tax change of rate - (20.1) Non-underlying Items (1) B (4.3) A B Current tax - Increase in capital allowances reflecting increased Viridor capital expenditure - Current year current tax effective rate of 10.9% (2016/17 H1 18.1%) - H1 2016/17 included charges related to the Peninsula MB Ltd derivative Non-underlying items - Reflects the tax on write down of shareholder loans and settlement of outstanding claims as well as derivative movements (1) 1.3m deferred tax credit and 3.0m current tax credit 51 Pennon Pennon Group Group plc plc

52 Balance Sheet Successful refinancing of 300m perpetual capital securities (hybrid) m 6.750% - first call date March Tender offer at 103% of par value plus accrued periodic returns together broadly equating to the periodic return which would have been due in March % take-up of tender remaining 5% called at par ( 15m), settled October Associated periodic returns qualify for tax relief m 2.875% - first call date May Achieved a rate of 2.875%, the lowest ever for a sterling perpetual capital securities - Associated periodic returns do not qualify for tax relief H1 2017/18 financial impacts on EPS 2013 hybrid 2017 hybrid Total - Costs associated with the 2013 hybrid of 5.2m have been reclassified from the Statutory basis Underlying basis 15.7m 3.8p 15.7m 3.8p 5.8m 1.4p 0.2m 0.0p 21.5m 5.2p 15.9m 3.8p perpetual capital reserve to retained earnings - Costs associated with the 2017 hybrid of 3.3m have been recognised directly in the perpetual capital reserve Pennon Group plc Pennon Group plc 2018

53 Pennon Diversified funding sources As at 30 September 2017 m Finance Leasing (1) 1,474 Bank Bilaterals Term Loans 380 European Investment Bank Loans 339 Index-Linked Bond 416 Fixed Rate Bond 134 Private Placements (2) 619 Total Gross Debt 3,362 Less: Cash/liquid investments (571) Net Borrowings 2,791 Finance leasing provides a key role in long-dated funding (1) Includes 134m of index-linked finance leasing (2) Includes other borrowings of 6m related to PWS 53 Pennon Pennon Group Group plc plc

54 Pennon Fair value of non-current debt m As at 30 September 2017 As at 31 March 2017 Book Value Fair Value Difference Book Value Fair Value Difference Finance Leases 1,446 1, ,354 1, Bank and Other Loans (3) (7) European Investment Bank Loans Index-Linked Bond (88) (80) Fixed Rate Bond (61) (66) Private Placements (1) (37) (52) Total 3,302 3, ,117 3,145 (28) (1) Includes other borrowings of 6m related to PWS 54 Pennon Pennon Group Group plc plc

55 Pennon Net interest analysis (1) m H1 2017/18 H1 2016/17 Net interest payable (36.6) (28.6) Add: capitalised interest (7.8) (6.1) Less: notional interest payable (2) Add: interest receivable on service concession contracts Add: interest receivable on shareholder loans to JVs Net interest for average rate calculation Split between: (6.9) (8.8) (5.5) (5.0) (51.1) (42.8) Interest payable A (44.4) (42.6) Capitalised interest payable (7.8) (6.1) Other finance income B Net interest payable (51.1) (42.8) Average rate of interest 3.7% 3.3% Efficient effective interest rate GROUP 3.7% A B SOUTH WEST WATER 3.5% Reflects higher RPI Impacted by the unwind of the PMB derivative in February 2017 Net interest cover 4.3x 4.9x (1) Before non-underlying items as set out in slide 35 (2) Includes pensions net interest and discount unwind on provisions 55 Pennon Pennon Group Group plc plc

56 Pennon Pensions m 30 September March 2017 Pension schemes assets 891m 903m Pension schemes liabilities 947m 971m 56m = 46m net of tax - Liabilities have reduced by 24m reflecting higher corporate bond yields 68m = 56m net of tax - Asset values have reduced by 12m, due primarily to assets matched to liabilities The aggregate pension schemes deficit has reduced in the six months to 30 September 2017 by 12m from 68m to 56m This represents a net deficit of c. 1% of Group s market capitalisation Following 2016 actuarial valuation contributions remain in line with 2014 Final Determination allowances Pennon Group plc Pennon Group plc 2018

57 Pennon Significant energy generation Group energy generation - Total energy generation of c.0.9twh in H1 2017/18 8 ERFs (1) 661GWh Landfill gas 217GWh 25 Hydro turbines 4.3GWh generation 53 solar PV installations 5.4GWh (2) Anaerobic digestion 0.3GWh CHP 3.2GWh 1 wind turbine 0.1GWh generation Utilising existing grid connections at landfill sites - Continuing to identify opportunities to maximise the value from our grid connections Portfolio management strategy - The Portfolio management team continues to actively manage the Group net energy generation position in liquid markets - The natural hedge within the Group is maintained at around a third of generation - Forward hedges have been put in place in the liquid market to March The Group is fully hedged for the remainder of the financial year and c. 66% hedged for the three years to 2020 Pennon hedging activity Pennon hedging Internal and external hedges have been traded over the period to September 2017 maintaining the Group s net hedged position (1) Includes 100% capacity on joint ventures at Lakeside and Runcorn and excludes Bolton due to fire. (2) This includes 3.4GWh of output from two private wire schemes Polmaugan (Restormel) and Wadebridge Renewable energy network (Nanstallon) 57 Pennon Pennon Group Group plc plc

58 South West Water Pennon Group plc

59 South West Water Financial Highlights Continuing to drive outperformance of regulatory contract Underlying (2) H1 2017/18 m H1 2016/17 (1) m Change Revenue A % Operating Costs (105.1) (103.0) (2.0%) EBITDA B % Depreciation and amortisation (56.4) (55.8) (1.1%) Operating Profit % Net Interest (34.5) (30.2) (14.2%) Profit Before Tax % Capital Expenditure % Return on Regulated Equity C WaterShare RORE (3) 11.1% 11.7% (0.6%) OFWAT RORE (4) 12.4% 11.0% +1.4% A B C Revenue - Tariff increase 2.5% - Higher demand 1.1% on metered volumes net of impact of meter switchers EBITDA - Cost increases below inflation as a result of efficiencies - Good progress on debt collections - Bad debt fallen to c. 0.9% of revenue - Cumulative Totex efficiency of 159m delivered to date RORE - Outperforming regulatory contract - Maintaining momentum, consistently >11% p.a. - Cumulative K6 performance of 11.8% (1) Excludes South West Water s non-household retail performance now reported in Pennon Water Services (PWS) (2) Before non-underlying items, see slide 35 (3) Financing outperformance based on average forecast RPI for K6 of 2.8% (4) Based on Ofwat s definition of financing outperformance calculated based on average RPI of 1.1% for 2015/16, 2.1% for 2016/17 and 3.7% forecast for 2017/18 59 Pennon Pennon Group Group plc plc

60 South West Water Revenue m (1.7) (5.6) H1 2016/17 Tariff increase (1) WRFIM New connections Increased customer demand (net of leak allowances) Meter optants H1 2017/18 (1) Wholesale Revenue Forecast Incentive Mechanism 60 Pennon Pennon Group Group plc plc

61 South West Water EBITDA m (2.6) (0.5) (0.5) H1 2016/17 Revenue growth Efficiencies and other cost savings Cost increases including inflation Pension Capital charges H1 2017/18 Pennon Group plc Pennon Group plc 2018

62 South West Water Sector leading RORE outperformance Highest potential returns in the industry SWW delivering outperformance across all areas OFWAT INDUSTRY RORE (1) CUMULATIVE TO 2016/17 (1) Source: Ofwat s Monitoring Financial Resilience report published November Pennon Pennon Group Group plc plc

63 Severn Trent Water Wessex Water Anglian Water Southern Water South West Water Thames Water SWW Northumbrian Water United Utilities Yorkshire Water Thames Water Severn Trent Water Anglian Water Southern Water South West Water Yorkshire Water United Utilities Northumbrian Water Wessex Water Thames Water Severn Trent Water Anglian Water Yorkshire Water South West Water United Utilities Southern Water Northumbrian Water Wessex Water Water: Delivering for customers and communities On track to deliver against all water business plan commitments by 2020 Sector-leading leakage performance GOOD PERFORMANCE Best ever numeric and descriptive wastewater compliance - Wastewater serious and significant pollutions upper quartile performance - Minor pollutions, area of focus Water sector leakage performance Source: Discover Water Discharge permit compliance Numeric compliance Pollution Incidents (Cat 1-3) Source: Environment Agency data Source: Calculated from Environment Agency Environmental Performance Assessment data 63 Pennon Pennon Group Group plc plc

64 Viridor Pennon Group plc

65 Viridor Financial Highlights Strong performance, underpinned by cost base efficiency Underlying (1) H1 2017/18 m H1 2016/17 m Change Revenue (2) % EBITDA % ERFs A % Landfill B % Landfill Gas B (28.7%) Recycling C (3.6%) Contracts, Collections & Other (3) % Indirect Costs D (28.2) (30.3) +6.9% Share of JV EBITDA % IFRIC 12 Interest Receivable (21.6%) Adjusted EBITDA % Depreciation and amortisation (34.2) (35.6) +3.9% Profit Before Tax % Capital Investment (4) % A B C D ERFs - ERF availability >90% (5) for H1 2017/18 - Expect H2 weighting Optimising landfill - Landfill volumes increased since H2 2016/17 pricing holding up - Gas yields impacted by maintenance Recycling - Volumes reduced, optimising contracts and asset base - EBITDA margin/tonne increased Focus on cost base - Driving efficiency through shared services (1) Before non-underlying items, see slide 35 (2) Including landfill tax and construction spend on service concession arrangements (3) H1 2017/18 benefiting from contract rationalisation (4) Including construction spend related to service concession arrangements (5) Includes 100% of joint ventures, excluding Bolton ERF availability due to fire 65 Pennon Pennon Group Group plc plc

66 Viridor Revenue m (8.0) (10.4) H1 2016/17 ERF construction revenue Contracts, collections and other ERF operational revenue Recycling Landfill and landfill gas Landfill tax H1 2017/18 Pennon Group plc Pennon Group plc 2018

67 Viridor Adjusted EBITDA m (0.4) (1.9) (3.6) 95.1 H1 2016/17 Contracts, collections and other Share of JV EBITDA Indirect costs ERFs Recycling IFRIC 12 interest receivable Landfill and landfill gas H1 2017/18 Pennon Group plc Pennon Group plc 2018

68 Viridor: Robust operational and financial performance Landfill and landfill gas Landfill 11 Open sites (2016/17: 11 open sites) Delivering cash flow from landfill optimising capacity - Extracting value from sites maximising opportunities for external grid connections - Landfill volumes increased from H2 2016/17 pricing holding up - Retaining flexibility, keeping sites open for longer and investing in new cells where commercially attractive - Gas yields for H1 2017/18 impacted by maintenance carried out to improve engine reliability and availability Landfill gas 96 MW Yields typically reducing by 5-7% y-o-y (1) (1) Volume reduction H1 2017/18 impacted by 17.7% due to engine maintenance and replacement programme 68 Pennon Pennon Group Group plc plc

69 Viridor Greater Manchester Waste Disposal Authority (GMWDA) Contract reset Before GMWDA Principal contract 50% Joint venture Residual waste (ERF contract) 37.5% Joint venture 100% Viridor subsidiary VL TPSCo VLGM Operating contract for recycling assets Operating contract for Runcorn I ERF After A GMWDA B Residual waste (ERF contract) 37.5% Joint venture Operating contract for Runcorn I ERF 100% Viridor subsidiary VL TPSCo VLGM A GMWDA acquires Viridor Laing B Operating contract for recycling assets B Contracts reset Pennon Group plc Pennon Group plc 2018

70 Viridor Greater Manchester Waste Disposal Authority (GMWDA) Contract reset Financial Impacts Disposal of Viridor Laing Share of JV PAT H1 2017/18 reset Shareholder Loans VWGM EBITDA Write down of shareholder loans - ( 19.2m) - Viridor Laing reduction in shareholder loan interest of c. 5m p.a. Residual waste (ERF contract) reset Gain on fair value of re-profiled 22.5m - - cash flows Non material ongoing impact on TPSCo Operating contract for recycling assets Construction contract settlements m Subtotal 22.5m ( 19.2m) 3.2m Total 6.5m Anticipated annual EBITDA improvement from the 18 month run off contract. Ability to re-tender Pennon Group plc Pennon Group plc 2018

71 Viridor Joint Venture Performance m TPSCo H1 2017/18 Greater Manchester Viridor Laing VWGM (1) Lakeside Total Share of JV PAT Interest on shareholder loans EBITDA VWGM (1) - - (0.3) - (0.3) Shareholder loans Share of non-recourse net debt/(cash) (20.2) Share of adjusted EBITDA H1 2016/17 Share of JV PAT Interest on shareholder loans EBITDA VWGM (1) - - (0.2) - (0.2) Shareholder loans Share of non-recourse net debt Share of adjusted EBITDA (1) Viridor Waste Greater Manchester is not a Joint Venture arrangement and therefore performance is shown in Contracts, Collections and Other. Excluding overheads 71 Pennon Pennon Group Group plc plc

72 Viridor ERF accounting 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%) m Adjusted EBITDA 28m 28m 14m IAS 16 (2) IFRIC 12 (2) JVs Oxford (Ardley) Cardiff (Trident Park) Runcorn II Bolton Dunbar South London (Beddington) Avonmouth Exeter Peterborough (3) Glasgow Lakeside Runcorn I (1) From first full year of operation (2) ERFs under construction identified in green (3) Local authority funding, interest income will be negligible 72 Pennon Pennon Group Group plc plc