Salesforce Briefing Building on a Strong Platform March 2016
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SALESFORCE BRIEFING BUILDING ON A STRONG PLATFORM MARCH 2016 DISCLAIMER For the purposes of the following disclaimers, references to this “document” shall mean higher cost for future service and growing deficit in relation to past service in the Defined this presentation pack and shall be deemed to include references to the related Benefit Schemes. 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. 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. This document contains certain “forward-looking statements” with respect to Pennon Nothing in this document should be construed as a profit forecast. Group’s financial condition, results of operations and business and certain of Pennon Group's plans and objectives with respect to these matters. 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 Forward-looking statements are sometimes, but not always, identified by their use of a Pennon Group or persons acting on their behalf are expressly qualified in their entirety date in the future or such words as “anticipate”, “aim”, “believe”, “continue”, “could”, by the factors referred to above. Pennon Group may or may not update these forward- “due”, "estimate“, “expect”, “forecast”, “goal”, “intend”, "may", “plan", “project”, “seek”, looking statements. “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 This document is not an offer to sell, exchange or transfer any securities of Pennon unpredictable, speculative and involve risk and uncertainty because they relate to events Group or any of its subsidiaries and is not soliciting an offer to purchase, exchange or and depend on circumstances that will or will not occur in the future. transfer such securities in any jurisdiction. Various known and unknown risks, uncertainties and other factors could lead to Without prejudice to the above, whilst Pennon Group accepts liability to the extent substantial differences between the actual future results, financial situation development required by the Listing Rules, the Disclosure Rules and the Transparency Rules of the or performance of the Group and the estimates and historical results given herein. Undue UK Listing Authority for any information contained within this document which the reliance should not be placed on forward-looking statements which are made only as of Company makes publicly available as required by such Rules: the date of this document. Important risks, uncertainties and other factors that could a) neither Pennon Group nor any other member of Pennon Group or persons acting on cause actual results, performance or achievements of Pennon Group to differ materially their behalf shall otherwise have any liability whatsoever for loss howsoever arising, from any outcomes or results expressed or implied by such forward-looking statements directly or indirectly, from use of the information contained within this document; 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 b) neither Pennon Group nor any other member of Pennon Group or persons acting on climate change; poor service provided to customers; global economic downturn their behalf makes any representation or warranty, express or implied, as to the pressuring volumes and margins; downward pressure on UK wholesale power prices; accuracy or completeness of the information contained within this document; and business interruption or significant operational failures/ incidents; non-compliance or c) no reliance may be placed upon the information contained within this document to the occurrence of avoidable health and safety incidents; failure or increased cost of capital extent that such information is subsequently updated by or on behalf of Pennon projects and/or Joint Ventures not achieving predicted revenues or performance; Group. exposure to contractor failure to deliver construction progress, increasing costs and potentially requiring lengthy legal action or other redress; reduced customer base, Past performance of securities of Pennon Group cannot be relied upon as a guide to the increased competition affecting prices or reduced demand for services; information future performance of any securities of Pennon Group. technology systems requiring replacement, development or upgrading to meet growing requirements of the business; an inability to raise sufficient funds to finance its activities or such funds only being available at higher cost; uncertainty arising from open tax computations where liabilities remain to be agreed and pension costs increasing due to 2 PENNON STRATEGY STRONG PLATFORM, EVOLVING FOR FUTURE LEADING UK-LISTED ENVIRONMENTAL INFRASTRUCTURE GROUP Strategic priorities FOCUSED ON MOVING TOWARDS A MORE CONSISTENT RISK PROFILE DELIVER FOR LEADERSHIP IN CAPITALISE ON INVESTING FOR CUSTOMERS, EFFICIENT COST GROUP-WIDE GROWTH COMMUNITIES, BASE AND STRENGTHS, ENVIRONMENT, FINANCING BEST PRACTICE, SHAREHOLDERS SYNERGIES Strategic objective LONG-TERM, PREDICTABLE, ASSET-BACKED, INDEX-LINKED RETURNS 3 PENNON’S BUSINESS SIGNIFICANT AND GROWING ASSET BASE (3) £BN EFFICIENT, EFFECTIVE ASSET BASE REVENUE PROFILE Recyclate Water – 9 NHH Retail 5% 0% (4) 6 7 ERF power & Landfill 1%Competition Gas Recyclate 6% 5 ERF power and landfill gas 4 3 5 Recycling, landfill, Water Recycling,collections & contracts landfill, Wholesale collections17% and and 2 contracts HH Retail 1 Water 47% 1 ERF4 ERF -– not gate lt fees 3% 0 3 ContractsOther contracts - lt 9% ERF2 ERF -gate lt fees 12% Water RCV (1) Viridor Asset Base (2) (1) 12% Long-term contracted Managed commodity exposure Varied contract lengths NHH Market Opening 2017 (1) South West Water RCV, plus Bournemouth Water RCV from 2015-16 onwards (2) Includes NBV of PPE assets, JV Shareholder Loans and IFRIC 12 Financial Assets UNDERPINNED BY LONG- (3) Revenue based on H1 2015-16, 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. TERM INDEX-LINKED power and recyclate purchase costs) (4) Non-Regulated and Non-Household Retail Revenue (excluding wholesale charges) CONTRACTS 4 DELIVERING SHAREHOLDER RETURNS COMMITTED TO SECTOR-LEADING, SUSTAINABLE DIVIDENDS +4% +4.9% annual increase +6.5% above RPI policy to 31.80 +7.3% 30.31 2020 +7.6% 28.46 26.52 Scrip dividend alternative 24.65 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 Note: Full Year dividend in pence per share 5 WHOLESALE WATER ON TRACK FOR OUTPERFORMANCE • Enhanced business plan at PR14 Ofwat Water and sewerage companies’ Return on Regulated Equity (RoRE) 2015-20 • Highest RoRE potential in the sector • Track record of delivering efficiency • RoRE at 11.5%(1) Base returns in SWW Business Plan • Bournemouth Water integration on track (1)As at H1 2015/16 6 WHOLESALE WATER ON TRACK FOR OUTPERFORMANCE • Maintain cost leadership/ frontier H1 2015/16 Operational RoRE efficiency at PR19 TOTEX +2.2% -1.5% +2.3% £12.5m • Building customer operational SIM 0.0% quality -0.3% +0.2% £0.1m ODIs +0.3% • Focus on environmental -1.8% +1.5% performance and customer service £1.8m K6 Business Plan Commitment • Strengthen/grow wholesale business Note: Operational RoRE calculated from outperformance on Total Expenditure (TOTEX) compared to 2014 Final Determination allowances and performance on Outcome Delivery Incentives (ODI). Regulatory reporting requirements still to be confirmed by Ofwat for 2015/16 and therefore approach to calculating returns may be amended when further guidance is published 7 ENERGY RECOVERY FACILITIES (ERFS) PORTFOLIO OF ASSETS SERVING RESIDUAL WASTE MARKET • Build out risk diminishing Operational ERF 2016-18 Consented facility • 8 operational ERFs delivered • Construction of 3 further ERFs progressing well • On track to deliver c.£100m ERF EBITDA 16/17 • Supplies residual waste market 8 ENERGY RECOVERY FACILITIES (ERFS) LONG-TERM, PREDICTABLE, ASSET-BACKED, INDEX-LINKED RETURNS ERF REVENUE 5% RECOVERED METALS 25% POWER OUTPUT Pennon - natural hedge SWW/Viridor (c.25%) SHORT TERM MEDIUM TERM CONTRACTED WASTE FUEL 70% LONG TERM INPUT WASTE FUEL INPUT CONTRACTED (GATE FEES) (GATE FEES) (C.80%) VIRIDOR HAS OVER 80% OF ERF REVENUES HEDGED OR CONTRACTED 9 LANDFILL AND LANDFILL GAS A SOLID EARNINGS STREAM FROM GAS, CAPITALISE ON VALUE OF SITES CASH GENERATING BUSINESS • Simple, well-proven technology • Predictable gas volumes, steady decline, effective management of sales price risk LANDFILL SITES BEING CLOSED TO WASTE INPUTS • Reducing from 17 sites to 3 strategic sites by 2020 CAPITALISE ON VALUE OPPORTUNITIES • Industrial area/grid connections/decentralised energy - £8m Pilsworth cryogenic storage project, funded by Department of Energy & Climate Change (DECC) - Solar power opportunities, Westbury solar array operational 10 RECYCLING DRIVING TOWARDS MORE PROFITABLE RECYCLING SECTOR CONTINUES TO FACE HEADWINDS • Current focus on comingled waste, but quality of waste input vital SEEKING OPPORTUNITIES TO DE-RISK AND RATIONALISE ASSETS • ITOO change programme – essential response • Contract