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Our Business Model and Investment Case Our business model and investment case December 2018 Our business model and investment case As one of the largest FTSE 250 environmental infrastructure groups in the UK, Pennon has assets of around £6.2 billion and a workforce ofPENNON around BRAND IDENTITY GUIDELINES5,000 people. 3 Our group of companies As one of the largest environmental infrastructure groups in the UK, Pennon brings together Viridor, South West Water, Bournemouth Water Our vision and a number of business water brands. Our brands are one of our most valuable assets. We should never Bringing resources undervalueto life our design identity in terms of the huge contribution it can make to our organisation’s standing – it is often the first impression people get and can create a lasting image. Our values To ensure we consistently build and protect our brand profile, Trusted always followResponsible these brand identity design guidelines. Collaborative Progressive We do the right thing for our We keep our promises to our We forge strong relationships, We are always looking for customers and stakeholders customers, communities and working together to make a new ways to improve and each other positive impact make life better Our businesses Water & Wastewater B2B Water Retailer Waste Management Pennon business water brands. Separate identity guidelines for these brands are available from [email protected] Viridor Identity MASTER 06.07.16 BW Identity WIP 25.07.16 Based on Calibre Bold Pantone 347 (93C 100Y) Calibre Semi Bold and Regular Pantone 2145 (98C 62M 14K) Pantone: 347 Pantone: 2145 Water and wastewater services to a Delivering retail services to business and A leading UK recycling and residual waste population of c. 2.2m commercial customers processing and transformation company • Serves Cornwall, Devon, parts of Dorset, • PWS is our growing B2B water retailer currently • Serves more than 150 local authorities and © PENNON GROUP 2016 VERSION 1.0 – 18 NOVEMBER 2016 Somerset, Hampshire and Wiltshire serving > 160,000 customers nationwide major corporate clients as well as over 32,000 • Awarded enhanced status for its 2015-2020 • c. 10,000 new accounts won since customers across the UK Business Plan, and has the highest potential market opening. • Network of 300+ recycling, energy recovery returns in the sector. and waste management facilities, including 12 Energy Recovery Facilities (ERFs) (8 in operation, 3 in operational ramp up and 1 in construction). Financial Revenue (£m) Capital investment (£m) 439.2 highlights 434.1 1,357.2 1,352.3 1,353.1 1,352.1 1,321.2 407.3 398.2 384.7 1,201.1 316.9 Water Waste Statutory Underlying Adjusted 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 EBITDA (£m) Gross assets at 31st March (£bn) 562.3 546.2 6.2 514.3 511.1 5.9 508.4 486.0 5.7 475.3 5.4 465.9 456.9 448.4 438.2 5.0 433.0 421.6 411.0 407.3 4.8 401.6 394.8 289.9 02 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2013 2014 2015 2016 2017 2018 Dividend policy +7.3% Pennon has a sector-leading dividend policy of 4% year-on-year +7.1% +5.6% 38.59 growth above RPI inflation to 2020. +4.9% 35.96 +6.5% 33.58 +7.3% 31.80 This is underpinned by the highest potential Return on Regulated +7.6% 30.31 +9.3% 28.46 Equity in the water sector over K6 (2015-2020) and the growth in 26.52 24.65 earnings being delivered by Viridor’s portfolio of Energy Recovery 22.5p Facilities (ERFs). Note: Full Year dividend in pence per share 09/10 10/11 11/12 12/13 13/14 14/15 15/16 16/17 17/18 18/19 19/20 Future dividends purely indicative REVENUE PROFILE GROWING ASSET BASE FINANCIAL OUTLOOK • Two thirds of revenues index-linked and • Water RCV growth of 21% over K6 • Water business outperforming the 2015-2020 long-term contracted • ERFs – portfolio on-stream by 2020/21, Final Determination. 2020-2025 Business Plan • c. 80% of ERF portfolio volumes (and 8 operational submitted and preparations underway for the (1) new regulatory period associated price) contracted long-term • 3 new ERFs in 2018 – Glasgow, Beddington • 25-year rolling licence for water (South London) and Dunbar all processing • ERF portfolio continues to deliver significant growth in EBITDA • Remaining one third of revenues ensuring waste viable long-term market, seeking appropriate • Avonmouth construction on track for • Moving towards a more consistent risk profile risk/reward balance. completion 2020/21 across the Group • Increased holding in Runcorn 1 ERF • Driving value through efficiency – cost (November 2018). reduction plans, shared services and Bournemouth Water synergies. STRONG LIQUIDITY EFFICIENT FINANCING KEY DRIVERS OF PERFORMANCE • Cash / committed in facilities of £1,171m at • Diversified funding mix • Average availability of 92% in operational ERFs 31 March 2018 • Significant finance leasing with long maturity in 2017/18 • Pioneering a new sustainable financing and secured margins • Return on Regulated Equity (RoRE) – framework – linked to ESG measures • Average debt maturity 20 years. cumulative 11.8% to 2017/18 • Group fully funded for ERF buildout and into • Optimising landfill gas output and site closures the next regulatory period. • Recycling EBITDA margin improving through self-help measures. Capital investment Revenue profile(4) 5.5 Water Competition(5) Recyclate ERF power 4.5 and landfill gas Recycling, Long-term 3.5 landfill, contracted collections and contracts 2.5 ERF – gate fees 1.5 Contracts ERF – Water 10/11 11/12 12/13 13/14 14/15 15/16 16/17 17/18 18/19 19/20 gate fees (2) (3) Viridor asset base Water RCV (1) Excluding Avonmouth (2) Includes NBV of PPE assets, JV Shareholder Loans and IFRIC 12 financial assets (3) South West Water RCV, plus Bournemouth Water RCV from 2015/16 onwards (4) Adjusted to include share of JV revenue and excluding landfill tax, IFRIC 12 construction revenue and revenue subject to natural offset within the Group (i.e. power and recyclate purchase costs) (5) Non-Regulated and Non-Household Retail Revenue (excluding wholesale charges) © Pennon Group plc 2018 03 Our business model and investment case Pioneering a new sustainable financing framework Sustainability linked financing £350m – in 2018 • Framework allows Pennon to access future funding opportunities aligned with the At the vanguard – green loan principles, green bond principles and social bond principles integrating sustainability performance into • Framework certified by DNV GL – a leading sustainability verifier • Commitment to continuous annual improvements in sustainability ratings and KPIs debt financing – Linked to Pennon Group’s annual ESG performance – Linked to South West Water sustainability KPIs • Can lead to improved Interest rate margins • Supporting capital investments in our environmentally sustainable projects. Sector-leading SWW 2017/18 3.5% finance costs Pennon 3.7% Sustainable and efficient financing Water industry 2017/18 average interest rate on net debt Source: Pennon calculation based on company Annual Reports – 2017/18 published July 2018 Average Basis: Net interest payable (excluding 4.9% pensions net interest) / average net debt Pennon outperforming the market since privatisation* 5,5,000 000 Pennon Severn Trent 4, 500 United Utilities FTSE 100 4,4,000 000 FTSE 250 3, 500 *Share price data as at 2 June 2017 3,3,000 000 2, 500 2,2,000 000 1, 500 1,1,000 000 500 0 1989198919901990199119911992199219931993199419941995199519961996199719971998199819991999200020002001200120022002200320032004200420052005200620062007200720082008200920092010201020112011201220122013201320142014201520152016201620172017 Pennon Severn Trent United Utilities FTSE 100 FTSE 250 04 Water & Wastewater Strategy Key facts South West Water South West Water is focused on providing • 2.2 million total population served (of which services in the most efficient and sustainable 0.5 million are water-only) way possible. Innovation, new technologies • 1.0m customers and the pioneering of an holistic approach • 23 raw water reservoirs underpins our commitment to delivering service improvements and long-term value. • 18,233km of drinking water mains network • 685 treatment works with 70 ultraviolet (UV) We provide water services to a population of treatment facilities c. 2.2 million in Cornwall, Devon and parts of Dorset, Somerset, Hampshire and Wiltshire, • 17,439km wastewater mains network* Bournemouth Water as well as wastewater services to c. 1.7 million • 1,200 wastewater pumping stations* (in Cornwall, Devon and parts of Somerset • 144 designated bathing waters and 24 and Dorset). shellfish waters* * South West Water region only Longham Lakes Price Review 2019 Key messages Financial highlights Delivering what we promise – a solid base for performance Targeting sector leading services • c. £300m of totex outperformance forecast £1 billion(1) K7 capital investment programme • 13% reduction in retail costs Two new water treatment works in Bournemouth • On track to deliver our business plan commitments by 2020 Expansion to the Isles of Scilly A balanced and well evidenced plan – supported by 88% (2) of customers RCV growth of 11% to 2025 (2) Ambitious customer service and environmental commitments South West Water bills in 2025 lower than they were 15 years ago Empowering our customers Fair returns for excellent performance – potential for doubling • Giving customers a stake and a say base RoRE • Receive additional powers through customer AGM Evolutionary WaterShare+ sharing mechanism proposal • Unique customer share ownership scheme – funded by 2015-2020 outperformance • Continued
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