London Investor Roadshow February 2017

Transcription

1 London Investor Roadshow February 2017

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, uncertainty arising from open tax computations where liabilities remain to be agreed 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. 2

3 About Pennon Group Unique combination of environmental infrastructure assets Pennon At the top end of the FTSE 250 index with a market capitalisation of 3.6 billion Assets of 5.8 billion and a workforce of over 5,000 people Dividend policy of +4% annual growth above Retail Price Index inflation to 2020 Peers include: United Utilities, Severn Trent, Veolia and Suez Pennon operates in the most efficient and sustainable way possible. Innovation, new technologies, and the pioneering of a holistic approach deliver service improvements and long-term value Viridor A leading UK recycling, energy recovery and waste management company Providing services to more than 150 local authorities and major corporate clients as well as over 32,000 customers across the UK South West Water Provides water and wastewater services to a population of c.2.2 million Serves Cornwall, Devon, parts of Dorset, Somerset, Hampshire and Wiltshire Awarded enhanced status for its Business Plan, highest potential returns in the water sector South West Water acquired Bournemouth Water in April

4 Pennon Group Strategy One of the largest environmental infrastructure groups in the UK Strategic priorities Focused on moving towards a more consistent risk profile DELIVER FOR CUSTOMERS, DELIVER FOR COMMUNITIES, CUSTOMERS, ENVIRONMENT, COMMUNITIES, SHAREHOLDERS ENVIRONMENT & SHAREHOLDERS LEADERSHIP IN EFFICIENT LEADERSHIP COST IN EFFICIENT BASE AND COST FINANCING BASE & FINANCING CAPITALISE ON CAPITALISE GROUP-WIDE ON STRENGTHS, GROUP-WIDE BEST STRENGTHS, PRACTICE, BEST SYNERGIES PRACTICE & SYNERGIES INVESTING FOR GROWTH Strategic objective LONG-TERM, PREDICTABLE, ASSET-BACKED, INDEX-LINKED RETURNS Water & Wastewater Waste Recycling & Recovery 4

5 Pennon Group Investment case 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

6 Financial Overview

7 Half Year 2016/17 Financial Highlights (1) Results on track to meet management s expectations DIVIDEND PER SHARE +6.0% to 11.09p ADJUSTED EBITDA (2) 277.2m +6.0% OPERATING PROFIT 153.9m +13.7% NET FINANCE COST 28.6m Effective rate of 3.3% (SWW 3.2%) EARNINGS PER SHARE (3) 23.6p +1.7% 7 (1) Before non-underlying items as set out on slide 10 (2) Statutory EBITDA plus share of Joint Venture EBITDA and IFRIC 12 interest receivable (3) Before deferred tax and adjusted proportionately to reflect the half year impact of the annual hybrid periodic return. Basic earnings per share (statutory basis) 17.7p

8 Half Year 2016/17 Financial Highlights Pennon robust results m Underlying (1) H1 2016/17 H1 2015/16 CHANGE Revenue (0.5%) EBITDA % South West Water % Viridor % Adjusted EBITDA (2) A % Operating Profit % Profit Before Tax B % Tax (30.7) (21.9) +40.2% Earnings per share (3) (p) C % Dividend per share (4) (p) % A B C Adjusted EBITDA ahead Higher SWW revenue and opex efficiencies Strong ERF performance Recycling self-help measures Profit before tax growth SWW in line with expectations Significant Viridor contribution Efficient ongoing finance costs EPS ahead of H1 2015/16 Underlying profits ahead YOY impact from last year s prior year corporation tax credit 8 (1) Before non-underlying items (2) Statutory EBITDA plus share of Joint Venture EBITDA and IFRIC 12 interest receivable (3) Before deferred tax and adjusted proportionately to reflect the half year impact of the annual hybrid periodic return. Basic earnings per share (statutory basis) 17.7p (4) The RPI rate used is 2.0% as of September 2016

9 Half Year 2016/17 Financial Highlights South West Water continued outperformance of regulatory contract % RORE m H1 2016/17 H1 2015/16 CHANGE Revenue A % Operating Costs (1) (104.9) (105.7) (0.8%) EBITDA (1) B % Depreciation (55.8) (55.9) (0.2%) Operating Profit (1) % Interest (30.2) (30.7) (1.6%) Profit Before Tax (1) % Capital Expenditure % RORE C 11.7% 11.5% +0.2% A B C Revenue Tariff increase 1.4% (1.1% RPI) Higher demand up 1.3% Increase in new connections EBITDA Operating costs down lower bad debt at 1.1% of revenue and efficiency savings Contributing to Totex outperformance of 24m H1 2016/17-80m cumulative to date RORE Outperforming regulatory contract Maintaining momentum from year 1 (1) Before non-underlying items 9

10 Half Year 2016/17 Financial Highlights Viridor growth driven by ERFs and recycling self-help m H1 2016/17 H1 2015/16 CHANGE Revenue (1) (3.0%) EBITDA (2) % ERFs A % Landfill B (28.9%) Landfill Gas B (19.4%) Recycling C % Contracts, Collections & Other D (20.4%) Indirect Costs (30.3) (30.6) (1.0%) Share of JV EBITDA % IFRIC 12 Interest Receivable % Adjusted EBITDA (2) % Profit Before Tax (2) % Capital Investment (3) (4.0%) A B C D Growth in ERF EBITDA Increase vs H1 2015/16 as plants ramp-up Expected to contribute c. 100m of EBITDA by the end of the year Optimising landfill Now at 13 sites, reducing to a handful of strategic sites by the end of 2020 Maximising gas yields but decreasing as expected Recycling self-help Significant progress made in reducing costs Improvements in asset utilisation Contracts, collections & other Higher asset sales in H1 2015/16 10 (1) Including landfill tax and construction spend on service concession arrangements (2) Before non-underlying items (3) Including construction spend on service concession arrangements

11 Half Year 2016/17 Non-underlying Items m H1 2016/17H1 2015/16 (1) Operating costs Shared services restructuring costs A (10.7) - Net operating costs (10.7) - Movement in derivatives B (15.0) - Deferred tax change of rate C Tax charge on non-underlying items (2.7) - Net charge for the period (8.3) - A B C Restructuring Shared Services Review delivering additional c. 6m per annum of efficiencies from 2019 Migration to a Group platform noncash asset de-recognition of 9.5m plus restructuring costs of 1.2m Derivatives Movements in fair value shown separately within the income statement to make clearer. Reflects changes in expected future cash flows of derivatives driven by market conditions and legislative changes Change in rate Change in the headline tax rate to 17% in 2020 has resulted in a deferred tax credit (1) No non-underlying items in H1 2015/16 11

12 Half Year 2016/17 Taxation m Current Year H1 2016/17 H1 2015/16 Current tax A Deferred tax Prior Year Current tax (0.3) (14.7) Deferred tax (1.6) 11.7 (1.9) (3.0) Total Underlying Tax Charge Deferred tax change of rate B (20.1) - Tax charge on non-underlying items (1) B A B Current tax Current year current tax effective rate of 18.0% (H1 2015/ %) reflecting capital allowances (including ERFs) Non-underlying items Reflect the change in headline rate of future current tax and tax on other non-underlying items (1) 4.0m deferred tax charge net of 1.3m current tax credit 12

13 Half Year 2016/17 Capital Investment Investing For Growth m H1 2016/17 H1 2015/16 Viridor ERFs (1) Recycling 2 3 Landfill Energy 5 6 Contracts and Collections 4 5 Other 7 7 Viridor Total South West Water Clean Water Waste Water South West Water Total Total Pennon Capital Investment (1)(2) m ERF CAPITAL INVESTMENT (3) 139m 86m c. 80m c. 180m c. 140m c. 60m 2014/ /16 H1 2016/17 H2 2016/ / / /20 Exeter Glasgow (4) Cardiff (Trident Park) Dunbar Runcorn II South London (Beddington) Oxford (Ardley) Avonmouth Peterborough Total ERF portfolio - 1,529m (including 252m for Avonmouth) Remaining investment c. 460m. 13 (1) Including construction spend on service concession arrangements (2) Includes 6.1m of capitalised interest in H1 2016/17 (3) Future periods exclude capitalised interest and capital expenditure during operation (4) Contractual remedies in place to mitigate incremental costs on Glasgow.

14 Half Year 2016/17 Net debt movements Strong cash inflow from operations, continuing investment m (163.0) (2,566.1) (2,484.4) (131.6) (6.2) (9.1) (33.3) Net Debt 1-Apr-16 Cash inflow from Operations JV Loan Repayments Pension Contributions Other Net Interest Dividends Capital (1) (2) (3) movements Paid Paid Payments Net Debt 30-Sept-16 (1) Includes 7.2m non-cash movement in Euro loan due to exchange rates (2) Includes 2015/16 interim and final dividend due to advancement of final results reporting and AGM date (3) Including construction spend on service concession arrangements and proceeds from sale of property, plant and equipment 14

15 Half Year 2016/17 Balance Sheet Strong funding position underpinning capital investment GROUP NET BORROWINGS 2,566m (31 March ,484m) CASH / COMMITTED FACILITIES (2) 1,603m (31 March ,707m) GROUP NET GEARING (1) 65.3% (31 March %) Net borrowings increased with capital investment Gearing Pennon reflects continuing investment, timing of dividend and pension accounting deficit increase SWW aligned with Ofwat efficient level 15 WATER BUSINESS NET DEBT/RCV 62.2% (3) (31 March %) (1) Net borrowings/(equity + net borrowings) (2) Including 219m deposits with Letters of Credit providers and Lessors (3) Based on RCV at March 2017, assuming RPI of 2.5% Committed funding in place SWW EIB drawn September 2016: 130m Group fully funded to March 2019, including the three ERFs currently under construction Development of portfolio Avonmouth will be corporately financed options, including new hybrid, being considered EIB funding for Pennon agreed - 110m new Pennon facility to support ERF programme

16 Half Year 2016/17 Balance Sheet Strong funding position underpinning capital investment GROUP NET FINANCE COSTS (1) 28.6m (H1 2015/ m) GROUP AVERAGE INTEREST RATE 3.3% (H1 2015/16 3.4%) SOUTH WEST WATER AVERAGE INTEREST RATE 3.2% (H1 2015/16 3.2%) Sustainable funding Diversified funding mix of fixed, floating and index-linked borrowings Weighted average debt maturity of 21 years matching the asset base South West Water funding: - Predominantly hedged for K6 policy to have hedging in place before the start of a regulatory period - 2/3 of funding from finance leases - Long maturity and secured margins of finance leases - 25% of funding from RPI-linked debt (1) Before non-underlying items 16

17 Dividend Growth Sector leading policy % % % % % % % Policy of 4% + RPI leading to a doubling of dividend over 10 years (2010 to 2020) (1) Scrip dividend alternative available as an option to shareholders H / / / / / / / / / / /20 Note: Full Year dividend in pence per share 17 (1) Future dividends growth based on policy of 4% + RPI forecast to /17 interim dividend based on September 2016 RPI of 2%

18 Operational Overview

19 Operational Highlights Half Year 2016/17 Building Momentum, Driving Growth Good operational and financial performance Consistent outperformance in Water RORE of 11.7% ERF portfolio on track to deliver c. 100m EBITDA 2016/17 Recycling self-help measures delivering improved margins Continued focus on cost efficiency Cumulative Water Totex outperformance 80m Shared Services Review extra efficiency of c. 6.0m (1) p.a. in addition to c. 11m p.a. Efficient, effective consolidation of Bournemouth Water c. 27m target for K6 on track Supporting RPI +4% dividend policy to 2020 Securing further growth Avonmouth ERF committed Non-household retail venture with South Staffs/Cambridge Water based in Bournemouth Well prepared for regulatory and market developments Engaged in Water 2020 Ready for water retail market opening 19 (1) Expected annual efficiency from 2019

20 Water: Good operational and financial performance Sector leading RORE outperformance Cumulative RORE (1) performance to H1 2016/17 OFWAT INDUSTRY RORE (2) COMPARISON 2015/ % Totex ODIs Financing 2.3% 0.3% 3.1% Base returns 6.0% (1) Cumulative annual equivalent outperformance to H1 2016/17 (2) Source: Ofwat s Monitoring financial resilience report published November

21 Water: Good operational and financial performance Building momentum from strong early outperformance K6 Totex outperformance Confidence in delivering cumulative K6 Totex outperformance Continuing advantage from strategic alliances - New water distribution alliance framework 80m 56m 6.0% 2015/ / / / / /20 FY H1 FY FY FY FY - H 5 0 capital delivery alliance in place since aligned incentives - Using off-site build techniques Changing ways of working iops K6 Financing outperformance Confidence in our ability to deliver cumulative K6 financing outperformance 33m 48m Maintaining efficient gearing levels Good balance of fixed and floating debt Continued finance leasing - cost efficient debt 2015/ / / / / /20 FY H1 FY FY FY FY 21

22 Water: Good operational and financial performance Cumulative 2016/17 performance levels Water quality standard Taste, smell and colour contacts Operational contacts resolved 1 st time Water restrictions Supplies interrupted due to flooding Duration of supply interruptions Odour contacts Bathing water quality Water & waste asset reliability Sustainable abstractions Internal sewer flooding Leakage level Descriptive compliance Pollution incidents (Cat 3&4) Customers paying a metered bill Wastewater numeric compliance (1) Service Incentive Mechanism (SIM) (1) Wastewater pollution incidents (Cat 1&2) External sewer flooding ODI Outperformance net reward 3.8m (2) (cumulative) 5.7m reward : 1.9m penalty (1) End of AMP measure only, on track to deliver with no penalty assumed (2) Cumulative ODI performance to H1 2016/17 based on performance to 30 September m net reward will be recognised at the end of the regulatory period and 1.9m net penalty which can be reflected during the regulatory period. 22

23 Water: Delivering ODI performance Focus on delivery and improvements Water restrictions & quality 20 th consecutive year without water restrictions Leakage target met every year since inception driving further improvements Maintaining top quartile water quality performance Bathing water quality 98.6% of bathing waters achieving more stringent bathing water standards Innovative solutions for Plymouth bathing waters investment Customer service (SIM) our best ever score Written complaints reduced by 28% in South West and 20% in Bournemouth region Value for money satisfaction at an all time high Wastewater compliance and significant pollutions Significant pollutions reduced Year on year compliance improvements c.98% vs 95.8% Outperformance shared through established WaterShare mechanism (1) Category 1 & 2 pollution incidents 23

24 Water: Prepared for regulatory and market developments Engaged in Water 2020 Debt consultation SWW leading company adopting pain/gain sharing at PR14 consistent with our WaterShare approach Structure close to the notional company structure and gearing levels Market Reform Lowest exposure in the industry at c.4% for water resources and c.2% bio-resources (sludge) Direct procurement Potential opportunity for innovative planning, scoping and delivery Licence changes Supportive of Ofwat s proposals and fully engaged in process for change Household retail competition Engaging in response and development of reform 24

25 Viridor: Good operational and financial performance ERF and landfill portfolios delivering H1 2016/17 ERFs 8 operational 3 in construction OPERATIONAL CAPACITY (1) 2.1 mt 178 MW LANDFILL 13 Operational sites 99 MW Focus on reliability and optimising performance On track to deliver c. 100m of EBITDA in 2016/17 Expected availability of c.90% in 2016/17 Continued progress on 3 ERFs in construction Dunbar and South London progressing well Glasgow commissioning commenced proactive intervention to complete MRF in commissioning AD plant construction completed ready for commissioning ACF (2) c.85% of construction completed Contracted position secure c.80% long-term contracted volumes (and associated price) across existing ERF portfolio Delivering cash flow from landfill Dynamic reviews of local market conditions to optimise value Optimising landfill gas output (1) Includes 100% capacity of joint ventures (2) Advanced combustion facility (ACF) 25

26 Viridor: Good operational and financial performance Recycling self-help increasing EBITDA VOLUMES 0% H1 2016/17: 0.9mT (H1 2015/16: 0.9mT) REVENUES -/T H1 2016/17: 87/T (H1 2015/16: 87/T) Self-help measures driving improved margin Cost and overhead reduction Further opportunities to improve returns from portfolio rationalisation and improved asset utilisation COSTS 5/T H1 2016/17: 74/T (H1 2015/16: 79/T) EBITDA MARGIN 5/T H1 2016/17: 13/T (H1 2015/16: 8/T) Market shift to sharing commodity risk/opportunity with clients Good progress on contract renegotiations made to date Further opportunities with over half still to review on renewal 26

27 Viridor: Significant growth to come from ERFs Long-term revenue streams secured Portfolio of ERFs continue to deliver significant growth in EBITDA ERF REVENUE MIX South London Avonmouth 5% RECOVERED METALS Glasgow (IFRIC 12) Dunbar 25% POWER OUTPUT (Pennon natural hedge) IFRIC 12 Interest Receivable Share of JV EBITDA Adjusted EBITDA EBITDA - 100m 70% WASTE FUEL INPUT (GATE FEES) 2016/ /21 Waste inputs secured at plant opening c.80% of volumes (and associated price) secured across the ERF portfolio under long-term contracts (1) The remaining c.20% is under short and medium-term contracts ERFs under construction ERFs operational ERF committed Index-linked contracts and risk-mitigation built-in with customer passthrough (e.g. new legislation) Track record of converting merchant capacity to contracted revenues 27 (1) Excluding Avonmouth, which has 35% long term contracted at commitment date of November 2016

28 Pennon Continued focus and momentum on cost efficiency SWW Totex savings 80m K6 to date SWW/BW SYNERGIES 27m (K6) SWW/VIRIDOR EFFICIENCIES 11m p.a. By 2017/18 GROUP SHARED SERVICES c. 6m p.a. From 2019 Delivering cumulative totex savings Bournemouth Water synergies on track 2015/16 announced cost savings being delivered Group shared services Group wide review centralised shared services - reducing central overheads - sharing best practice, delivering synergies 28

29 Pennon Securing further growth opportunities Avonmouth ERF Key Facts 252m investment 320,000 tonnes inputs with c.33mw / c.260,000mwh electricity output Operational /21 Clear market opportunity with already c. 50% early contract commitments Non-household Retail Joint Venture Key Facts 80:20 JV with South Staffs/Cambridge Water 4 th largest Non-household retailer, achieving lower cost to serve Grows our national footprint Combined revenue of c. 170m c. 8% of the new market 29

30 Pennon Optimising the risk/reward profile Growing asset base Water RCV growth of 21% over K6 ERFs - 11 plants, including 3 under construction on-stream by H1 2018/19. Glasgow commissioning expected to commence in 2017 Dunbar and Beddington (South London) - construction in progress Newly committed 12 th ERF at Avonmouth due to commence operations in 2020/21 Two thirds of revenues index-linked and long-term contracted c.80% of ERF portfolio volumes (and associated price) contracted long-term (1) 25-year rolling licence for water Remaining one third of revenues Ensuring viable long-term market Seeking appropriate risk/reward balance 30 (1) Excluding Avonmouth

31 Outlook Well prepared for the future Good operational and financial performance in water and waste Continued focus on cost efficiency Securing further growth Well prepared for regulatory and market developments 31 (1) Expected annual efficiency from 2019

32 Questions

33 Appendix

34 Pennon Half Year 2016/17 Adjusted group EBITDA m (1.3) (3.1) (4.1) H1 2015/16 SWW Tariff Increase and Customer Demand (1) ERFs Recycling Plc/Other Share of JV EBITDA + IFRIC 12 Interest Receivable SWW Other Revenue (2) Impacts SWW Net Cost Savings and Efficiencies (3) Viridor Overheads Landfill Landfill Gas Contracts & Collections H1 2016/17 (1) Last year included Bournemouth Water acquisition related costs (2) Includes impact of meter switchers and new connections (3) Includes cost increases due to inflation 34

35 Pennon Half Year 2016/17 Diversified funding sources m (As at 30 September 2016) Finance Leasing (1) 1,334 Bank Bilaterals - Term Loans 403 European Investment Bank Loans 380 Index-Linked Bond 413 Fixed Rate Bond 133 Private Placements 561 Total Gross Debt 3,224 Less: Cash/liquid investments (658) Finance leasing provides key role in long-dated funding Net Borrowings 2, (1) Includes 134m of index-linked finance leasing

36 Pennon Half Year 2016/17 Fair value of non-current debt m Book value As at 30 September 2016 As at 31 March 2016 Fair value Difference Book value Fair value Difference Finance Leases 1,307 1, ,315 1, Bank and Other Loans (10) European Investment Bank Loans Index-Linked Bonds (63) Fixed Rate Bond (72) (65) Private Placements (65) (46) Total 3,131 3,183 (52) 3,052 2,

37 Pennon Half Year 2016/17 Net interest analysis (1) m H1 2016/17 H1 2015/16 Net interest payable (28.6) (29.5) Add: capitalised interest (6.1) (4.0) Less: notional interest payable (2) Add: interest receivable on service concession contracts Add: interest receivable on shareholder loans to JVs (8.8) (8.3) (5.0) (5.6) Net interest for average rate calculation (42.8) (40.4) Efficient effective interest rate Net interest payable higher than last year, reflecting higher net debt 37 Split between: Interest payable (42.6) (44.7) Capitalised interest payable (6.1) (4.0) Other finance income Net interest payable (42.8) (40.4) Average rate of interest 3.3% 3.4% Net interest cover 4.9x 4.4x (1) Before non-underlying items as set out in slide 10 (2) Includes pensions net interest and discount unwind on provisions GROUP 3.3% SOUTH WEST WATER 3.2%

38 Pennon Half Year 2016/17 Pensions m 30 September March 2016 Pension schemes assets 893m 793m Deficit has increased due to the post-brexit fall in bond yields, increasing the valuation of liabilities Pension schemes liabilities 1,009m 834m 116m = 93m net of tax 2016 actuarial valuation underway 41m = 33m net of tax Over half of the increase in the valuation of liabilities has been offset by increases in asset values Net deficit c.3% of Group s market capitalisation outcome not expected to be materially different from position anticipated in 2013 valuation contributions are currently in line with FD allowances 38

39 Pennon Half Year 2016/17 Significant energy generation Group energy generation Total renewable energy generation of c.0.9twh in the first half of 2016/17 8 ERFs 632GWh Landfill gas 263GWh 25 Hydro turbines 3.7GWh generation 53 solar PV installations 7.6GWh (1) Anaerobic digestion 0.4GWh 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 Portfolio management team continues to actively manage the Group net energy generation position Net Group hedge in place for 2016/17 Natural hedge within the Group, a third of generation Over 90% hedged for 2016/17, and c.60% hedged out to 2019/2020 UK forward power prices Pennon hedging activity Pennon hedging Further trading along the curve continued from hedges in H2 2015/16 and in early H1 2016/17 (1) This includes 5.1GWh of output from two private wire schemes Polmaugan (Restormel) and Wadebridge Renewable energy network (Nanstallon) 39

40 South West Water

41 South West Water Half Year 2016/17 Revenue breakdown m (1.8) NHH Retail (1) H1 2015/16 Tariff increase Increased customer demand Other sales New connections Meter optants H1 2016/17 (1) Non-Household retail revenues reflect the total revenue from Non-Household customers (both wholesale and retail charges) as well as value added services 41

42 South West Water Half Year 2016/17 Operating cost breakdown m (0.9) (3.7) H1 2015/16 Cost increases incl. inflation Bournemouth Water full period impact Bad debt reduction Efficiency savings and other cost reductions H1 2016/17 42

43 South West Water Half Year 2016/17 Delivering operational outperformance TOTEX ODIs 2016/17 Cumulative Operational RORE +0.3% +2.3% +1.5% 38.5m (1) Highest potential returns in the industry 80m of Totex savings delivered Totex largest element of potential operational outperformance Opex lower than last year delivering operational savings and Bournemouth Water synergies K6 Business Plan Commitment (Base Return) 3.8m (2) +1.8% Delivering net ODI rewards 3.8m (2) cumulative rewards for H1 2016/17 ODIs for 2020 delivery on track Performance above Final Determination RORE range (1) Cumulative Totex RORE outperformance to 30 September 2016 calculated after sharing rate and the impact of tax. Phasing of actual expenditure compared to the planned programme is reflected prior to calculating Totex savings. Outperformance includes a reduction in the RCV run-off for the RCV element of Totex outperformance calculated based on the Final Determination PAYG. Tax impacts reflect actual effective tax rates. (2) Cumulative ODI rewards to H1 2016/17. 43

44 South West Water Reconciliation of RORE to financials Combined Totex outperformance Operating costs 105m + Capital Expenditure 80m = 185m Totex allowance (1) assumed for H1 2016/17 = 209m 24m Totex saving equates to 11m of RORE benefit after applying company sharing rate and tax impact (cumulatively Totex savings of 80m equates to 38.5m of RORE benefit) ODI outperformance Total net reward 3.8m (2). 5.7m reward will be recognised at the end of the regulatory period, 1.9m penalty which could be adjusted during the regulatory period Rewards: bathing water quality, odour complaints, water restrictions and leakage Penalties: pollution incidents and external flooding SIM outperformance Currently on track to deliver business plan targets in both businesses Regulated equity Based on notional gearing levels of 62.5% 2016/17 average RCV (3) of 2,970m (1) Totex RORE outperformance calculated after sharing rate and the impact of tax. Phasing of actual expenditure compared to the planned programme is reflected prior to calculating totex savings. Outperformance includes a reduction in the RCV run-off for the RCV element of Totex outperformance calculated based on the Final Determination PAYG. Tax impacts reflect actual effective tax rates. (2) Cumulative ODI rewards to H1 2016/17. (3) 2012/13 prices 44

45 South West Water Performance & WaterShare 2015/16 (1) Shareholder ( m) Customer ( m) Net Totex savings (2) ODIs 1.8 Shareholder value 1.8 Investment in enhancing services Other items (3) Total Value Benefit Shared through: Dividends Shared through: Re-investment options Future bill reductions Service improvements exceeding planned targets (1) WaterShare relates to South West Water performance and customers only (2) Gross Totex savings of 52m (inclusive of retail), net of tax for sharing and performance purposes. Enhanced sharing ratio of 56.7% for water and 55.1% wastewater (3) Other items including market movements on new financing returned to customers and the impact of new legislation 45

46 Viridor

47 Viridor Half Year 2016/17 Revenue breakdown m (4.2) (9.9) (12.0) H1 2015/16 Contracts, Collections & Other ERFs - operational revenue Recycling Landfill gas Landfill ERFs - IFRIC 12 construction revenue H1 2016/17 47

48 Viridor Half Year 2016/17 Adjusted EBITDA breakdown m (1.3) (3.1) (4.1) 95.1 H1 2015/16 ERFs Recycling Share of JV EBITDA & IFRIC 12 Interest Receivable Viridor Overheads Landfill Landfill Gas Contracts, Collections & Other (1) H1 2016/17 (1) H1 2015/16 included higher asset sales 48

49 Viridor Half Year 2016/17 Profit contribution by activity (1) m H1 2016/17 H1 2015/16 CHANGE ERFs % Landfill (7.4) (9.4) (21.3%) Landfill Gas (10.7%) Recycling % Contracts, collections and other (30.7%) Joint Ventures % Total contribution % Indirect costs (32.0) (32.2) (0.6%) PBIT + JVs % (1) Before non-underlying items 49

50 Viridor Half Year 2016/17 Joint Venture profitability m H1 2016/17 TPSCo H1 2015/16 CHANGE Share of EBITDA % Share of PAT - (1.4) - Viridor Laing Greater Manchester Share of EBITDA % Share of IFRIC 12 interest receivable (1.8%) Share of PAT 0.1 (0.3) % Lakeside Share of EBITDA (2.6%) Share of PAT Total share of JV EBITDA % Total share of JV PAT % Improved performance at TPSCo 50

51 UK combustible residual waste market (mt) Viridor: Securing further growth opportunities ERF waste market changes ERF under capacity (1) continues to 2030 and beyond ERF capacity Viridor ERF capacity Under capacity Previous view of under capacity Source: Defra, SEPA, NRW and Viridor analysis Waste arisings Brexit potential for increased residual waste availability Consistently forecasting under capacity in residual waste market 51 (1) Supported by independent third party analysis

52 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 Share of JV EBITDA (50%) m m Underlying EBITDA 28m 28m 14m (1) From first full year of operation (2) ERFs under construction identified in green, ERF committed identified in blue (3) Local authority funding, interest income will be negligible 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

53 Viridor ERF CAPEX (1) Efficient investment to deliver growth m Cumulative spend at 1 April 2016 Capital investment H1 2016/17 Cumulative spend to 30 Sept 2016 Remaining spend to completion Efficient delivery on projects in operation of 22m, managing projects under construction closely Debt includes 991m (1) for Runcorn II / Exeter / Oxford / Cardiff / Glasgow / Dunbar/ South London Total project spend Original planned project spend ERF projects in operation Exeter Oxford (Ardley) Cardiff (Trident Park) Peterborough Runcorn II Total ERF projects under construction Glasgow Dunbar South London (Beddington) Total ERF projects committed Avonmouth Total , ,529 1,551 Peterborough financed by local authority (72) - (72) - (72) (72) Total impact on net debt ,457 1,479 (1) Excluding capitalised interest, 4.8m in H1 2016/17 and 66m cumulatively 53

54 Viridor ERFs (including Joint Ventures) Progress on ERF pipeline ERF build-out nearing completion (1) Capital cost excludes capitalised interest and for projects for which the Engineering Procurement Construction (EPC) contract has not yet been executed, capital cost may vary in accordance with the Euro exchange rate (2) Joint ventures economic interest (Lakeside 50%; Runcorn I 37.5%) (3) Project committed November 2016 (4) Plus heat 51MWth (5) Plus heat 17MWth Site Capital Cost (1) Gross capacity Status m Tonnes (000) Electricity MWe Lakeside (2) Bolton N/A Exeter Oxford (Ardley) Cardiff (Trident Park) Fully operational Fully operational Fully operational Fully operational Fully operational Runcorn I (2) (4) Fully operational Runcorn II Peterborough Glasgow Fully operational Operational ramp-up Parts of plant in commissioning Dunbar (5) Construction in progress South London (Beddington) Sub Total 2, Avonmouth (3) Grand Total 3, Construction in progress Construction to begin 2017/18 Base load municipal contract Merchant Greater Manchester Exeter Oxfordshire Gwyrdd (SE Wales) Greater Manchester Merchant Peterborough Actual/expected commissioning Commissioned Commissioned Commissioned Commissioned Commissioned Commissioned Commissioned Commissioned Glasgow 2017 Merchant (Clyde Valley) H2 2017/18 S London H1 2018/19 Somerset 2020/21 54

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