our business model and investment case - pennon group

Our business model and investment caseDecember 2018

02

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 of around 5,000 people.

Our vision

Our values

Bringing resources to life

Financial highlights

We do the right thing for our customers and stakeholders

We keep our promises to our customers, communities and each other

We forge strong relationships, working together to make a positive impact

We are always looking for new ways to improve and make life better

Trusted Responsible Collaborative Progressive

B2B Water Retailer

Delivering retail services to business and commercial customers• PWS is our growing B2B water retailer currently

serving > 160,000 customers nationwide• c. 10,000 new accounts won since

market opening.

Our businessesWater & Wastewater

Water and wastewater services to a population of c. 2.2m• Serves Cornwall, Devon, parts of Dorset,

Somerset, Hampshire and Wiltshire• Awarded enhanced status for its 2015-2020

Business Plan, and has the highest potential returns in the sector.

Waste Management

A leading UK recycling and residual waste processing and transformation company• 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) (8 in operation, 3 in operational ramp up and 1 in construction).

BW Identity WIP 25.07.16Calibre Semi Bold and RegularPantone: 2145

Pantone 2145 (98C 62M 14K)

Viridor Identity MASTER 06.07.16Based on Calibre BoldPantone: 347

Pantone 347 (93C 100Y)

PENNON BRAND IDENTITY GUIDELINES 3

© PENNON GROUP 2016 VERSION 1.0 – 18 NOVEMBER 2016

Our group of companiesAs one of the largest environmental infrastructure groups in the UK, Pennon brings together Viridor, South West Water, Bournemouth Water and a number of business water brands.

Our brands are one of our most valuable assets. We should never undervalue 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.

To ensure we consistently build and protect our brand profile, always follow these brand identity design guidelines.

Pennon business water brands. Separate identity guidelines for these brands are available from [email protected]

2012/13 2013/14 2014/15 2015/16 2016/17 2017/18

2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18

2013 2014 2015 2016 2017 2018

Water

Waste

Statutory

Underlying

Adjusted

1,201

.128

9.9 39

4.8

433.

0

401.6

407.

345

6.9

421.6

411.0 46

5.9

438.

244

8.4 50

8.4

439.

24.

8

1,321

.2

434.

15.

0

1,357

.2

407.

35.

4

1,352

.3

316.

95.

7

1,35

2.1

1,353

.1

398.

2

384.

7

6.2

5.9

Gross assets at 31st March (£bn)EBITDA (£m)

Revenue (£m) Capital investment (£m)

475.

3

514.

3

486.

0

511.154

6.2

562.

3

03© Pennon Group plc 2018

Pennon has a sector-leading dividend policy of 4% year-on-year growth above RPI inflation to 2020.

This is underpinned by the highest potential Return on Regulated Equity in the water sector over K6 (2015-2020) and the growth in earnings being delivered by Viridor’s portfolio of Energy Recovery Facilities (ERFs).

Note: Full Year dividend in pence per shareFuture dividends purely indicative

Dividend policy

24.6526.52

+7.6%+7.3%

+6.5%+4.9%

+5.6%+7.1%

+7.3%

28.4630.31

31.8033.58

35.9638.59

+9.3%

22.5p

10/11 11/12 12/13 13/14 14/15 15/16 16/17 18/1917/18 19/2009/10

REVENUE PROFILE GROWING ASSET BASE FINANCIAL OUTLOOK

• 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.

• Water RCV growth of 21% over K6

• ERFs – portfolio on-stream by 2020/21, 8 operational

• 3 new ERFs in 2018 – Glasgow, Beddington (South London) and Dunbar all processing waste

• Avonmouth construction on track for completion 2020/21

• Increased holding in Runcorn 1 ERF (November 2018).

• Water business outperforming the 2015-2020 Final Determination. 2020-2025 Business Plan submitted and preparations underway for the new regulatory period

• ERF portfolio continues to deliver significant growth in EBITDA

• Moving towards a more consistent risk profile across the Group

• Driving value through efficiency – cost reduction plans, shared services and Bournemouth Water synergies.

STRONG LIQUIDITY EFFICIENT FINANCING KEY DRIVERS OF PERFORMANCE

• Cash / committed in facilities of £1,171m at 31 March 2018

• Pioneering a new sustainable financing framework – linked to ESG measures

• Group fully funded for ERF buildout and into the next regulatory period.

• Diversified funding mix

• Significant finance leasing with long maturity and secured margins

• Average debt maturity 20 years.

• Average availability of 92% in operational ERFs in 2017/18

• Return on Regulated Equity (RoRE) – cumulative 11.8% to 2017/18

• Optimising landfill gas output and site closures

• Recycling EBITDA margin improving through self-help measures.

10/11 11/12 12/13 13/14 14/15 15/16 16/17 18/1917/18 19/20ERF – gate fees

Contracts

Recycling, landfill,

collections and contracts

ERF – gate fees

Long-term contracted

Water Competition(5)

Recyclate

ERF power and landfill gas

Capital investment Revenue profile(4)

5.5

4.5

3.5

2.5

1.5 Water

Viridor asset base (2) Water RCV (3)

(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)

04


Pennon outperforming the market since privatisation*

*Share price data as at 2 June 2017

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Pennon Severn Trent United Utilities FTSE 100 FTSE 250

Pennon

Severn Trent

United Utilities

FTSE 100

FTSE 250

5,000

4,000

3,000

2,000

1,000

0

• Framework allows Pennon to access future funding opportunities aligned with the green loan principles, green bond principles and social bond principles

• Framework certified by DNV GL – a leading sustainability verifier

• Commitment to continuous annual improvements in sustainability ratings and KPIs – 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.

Pioneering a new sustainable financing frameworkSustainability linked financing £350m – in 2018

At the vanguard – integrating sustainability performance into debt financing

Pennon 3.7%

Sector-leading finance costsSustainable 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 2018Basis: Net interest payable (excluding pensions net interest) / average net debt

SWW 2017/18 3.5%

Average 4.9%

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017


StrategySouth West Water is focused on providing services in the most efficient and sustainable way possible. Innovation, new technologies and the pioneering of an holistic approach underpins our commitment to delivering service improvements and long-term value.

We provide water services to a population of c. 2.2 million in Cornwall, Devon and parts of Dorset, Somerset, Hampshire and Wiltshire, as well as wastewater services to c. 1.7 million (in Cornwall, Devon and parts of Somerset and Dorset).

* South West Water region only

Key facts• 2.2 million total population served (of which

0.5 million are water-only)

• 1.0m customers

• 23 raw water reservoirs

• 18,233km of drinking water mains network

• 685 treatment works with 70 ultraviolet (UV) treatment facilities

• 17,439km wastewater mains network*

• 1,200 wastewater pumping stations*

• 144 designated bathing waters and 24 shellfish waters*

Longham Lakes

Financial highlightsKey messages

Delivering what we promise – a solid base for performance

• c. £300m of totex outperformance forecast

• 13% reduction in retail costs

• On track to deliver our business plan commitments by 2020

A balanced and well evidenced plan – supported by 88% of customers

Ambitious customer service and environmental commitments

Empowering our customers

• Giving customers a stake and a say

• Receive additional powers through customer AGM

Targeting sector leading services

£1 billion(1) K7 capital investment programme

Two new water treatment works in Bournemouth

Expansion to the Isles of Scilly

RCV growth of 11% to 2025(2)

South West Water bills in 2025(2) lower than they were 15 years ago

Fair returns for excellent performance – potential for doubling base RoRE

Evolutionary WaterShare+ sharing mechanism proposal

• Unique customer share ownership scheme – funded by 2015-2020 outperformance

• Continued sharing of outperformance with customers to 2025

Price Review 2019

31 Jan 2019Ofwat publish assessment of business plans

Ofwat initial assessment of plan 1 Sept – 31 Dec 2019Final determinations published

3 Sept 2018WaterFuture Customer Panel report submitted

South West Water business plan submitted

1 March – 31 July 2019Draft determinations published

Water & Wastewater

(1) 2017/18 prices (2) Nominal prices

South West Water

Bournemouth Water

http://www.southwestwater.co.uk

http://www.bournemouthwater.co.uk

06


Customer Shareholder

Cumulative to 2017/18£m

Cumulative to 2017/18£m

58 Net totex savings (3) 74

8 ODIs 8

13 Other items (4) –

79 Total Value Benefit 82

-4%

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4%

8%

12%

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MB

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Financing

ODIs

Totex

Base return

South West Water RoRE performance

Outperforming in every area – highest returns across the industry

Cumulative industry RoRE performance to 2017/18

(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) WaterShare relates to South West Water region performance(3) Gross Totex savings (inclusive of retail), net of tax for sharing and performance purposes(4) Other items including market movements on new financing returned to customers and the impact of new legislation

Unique WaterShare(2) mechanism in place

11.8%11.1%

2017/18CUMULATIVE

2017/18 IN YEAR

2.8%Financing

ODIs

Totex(1)

Base returns

0.3%

2.0%

6.0%

2.6%

6.0%

0.3%

2.9%

£177m OF CUMULATIVE K6 TOTEX SAVINGS DELIVERING NET ODI REWARDS

• Totex largest element of potential operational outperformance

• Focus on efficiency benefits customers by lowering bills

• £8.1m cumulative rewards for 2017/18

• On track to deliver all our business plan commitments by 2020

• Unique mechanism to share transparently outperformance in the regulatory period

• Significant benefits identified for customers to date

• Reinvestment in services and future lower bills

• Independent WaterShare panel guiding priority area investments.


LANDFILL & LANDFILL ENERGY RECYCLING ERF

• Maximising value from landfill with continued demand forecast – 5 sites with capacity 2030+

• Extracting value from sites – maximising opportunities for existing grid connections

• Optimising landfill gas output

• 96MW of landfill gas capacity.

• Continued under capacity in the waste market in the UK

• Favourable market dynamics – public perception driving Government support for recycling

• Investing to improve output quality and focus on cost efficiency

• Contracts renegotiated to share risk /opportunity with clients.

• 8 operational ERFs performing well with >90%(1) average availability in 2017/18

• Glasgow, Beddington (South London) and Dunbar are processing waste

• Avonmouth construction on track for 2020/21

• c. 80% of ERF portfolio volumes (and associated price) contracted long-term(2)

• Outperforming the original business case.

StrategyViridor remains at the forefront of the resource sector focused on UK recycling and residual waste processing and transformation, raw materials, providing services to more than 150 local authorities and major corporate clients as well as over 32,000 customers across the UK.

Key facts• Eight energy recovery facilities in operation, three processing waste

and one under construction across the UK

• Viridor’s ERFs produce enough energy to power over 330,000 homes

• Over 150 local authority and major corporate clients, as well as over 32,000 customers across the UK

• Network of 300+ recycling, energy recovery and waste management facilities

• 7.0 million tonnes of waste material inputs each year and 1.4 million tonnes of recyclate traded

• 600 waste collection vehicles securing materials for our network of assets.

All businesses well-positioned

Viridor Identity MASTER 06.07.16Based on Calibre BoldPantone: 347

Pantone 347 (93C 100Y)

ERFs

Landfill

Landfill Gas

Recycling

Contracts, Collections and other

EBITDA profile 2013/14

EBITDA £76.3m

Only 2% of EBITDA from ERFs

2017/18 EBITDA £150.2m

Almost two thirds of EBITDA from ERFs

Waste recycling & Energy Recovery Facilities (ERF)

Operational facilities

(1) Forecast average ERF availability is weighed by site capacity, includes 100% and joint venture, excludes Bolton (2) Excluding Avonmouth

08


IFRIC 12 Interest

receivable

ERF portfolio delivery

Outperforming base case expectations(1)

Delivering sustainable long-term returns

ERFs under construction

ERFs in operational ramp up

ERFs operational

Glasgow (IFRIC12)

Avonmouth

Beddington

Dunbar

Long-term contract base, covering c.80% of capacity*

Balance of short and medium-term contracts (Municipal and Commercial & Industrial)

De-risking – long-term contracts secured

Long-term contracts at the start of the ERF programme

100%

5%Recovered metals

25% Power output Pennon – natural hedge (one third)

70% Waste fuel input (gate fees)

* Excluding Avonmouth ERF

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

ERF capacity

Viridor ERF capacity

Under capacity

30

25

20

15

10

5

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 -

5

10

15

20

25

30

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

UK

Com

bust

ible

Res

idua

l Was

te M

arke

t(m

T)

ERF Capacity Viridor ERF Capacity Undercapacity

UK ERF capacity gap continues to 2030 and beyond UK Combustible Residual Waste Market (mT)

2017/18 Outperformance

Pennon initial base case performance

Peterborough

Runcorn II

Runcorn I

Trident Park

Ardley

Exeter

Lakeside

Source: Tolvik, Defra, SEPA, NRW, MSW and Viridor analysis

(1) Adjusted EBITDA on operational sites normalised for the profile of maintenance on operational assets, adjusted for impact of the residual value contract (RVC) on TPSCo, includes share of joint ventures

2017/18 2020/21

£167m

Adjusted EBITDA

Avonmouth

Dunbar

BeddingtonGlasgow (IFRIC12)

Share of JV EBITDA

EBITDA


ERFs under construction

ERFs in operational ramp up

ERFs operational

Principal risks and uncertaintiesThe Pennon Group plc principal risks and uncertainties are reported on pages 55 to 60 of the Annual Report and Accounts 2018. A summary of Pennon Group’s principal risks is detailed below. These principal risks have been reconsidered against a continued back drop of broader macro political and economic uncertainties; including the potential renationalisation of the water industry in the event of a change in Government and ongoing negotiations between the UK and the EU on any withdrawal agreement.

Specifically, the Board has considered the potential implications of a ‘no deal’ scenario between the UK and the EU on the Group’s principal risks, which was informed by guidance documentation issued by the UK Government. Appropriate mitigation strategies have been developed in order to minimise any potential impact on the Group.

LAW, REGULATION AND FINANCE

Changes in government policy may fundamentally impact our ability to deliver the Group’s strategic priorities, impacting shareholder value.

Reform of the regulatory framework may result in changes to the Group’s priorities and the service we provide to our customers. It may have a significant impact on our performance which can impact shareholder value.

The Pennon Group is required to comply with an ever increasing range of regulated and non-regulated laws and regulation across our water and waste businesses. Non-compliance with one or a number of these may result in financial penalties, a negative impact on our ability to operate effectively and reputational damage which could affect shareholder value.

Failure to maintain sufficient funding requirements could lead to additional finance costs and put our growth agenda at risk. Breach of covenants could result in the requirement to repay certain debt.

A breach of health and safety law could lead to financial penalties, significant legal costs and damage to the Group’s reputation.

Non-compliance may result in financial penalties, legal costs and reputational damage. Furthermore, the perception that Pennon’s overall tax contribution is inadequate could have a detrimental impact on the reputation of the Group.

The Group could be called upon to increase funding to reduce the pension deficit, impacting our cost base.

MARKET AND ECONOMIC CONDITIONS

Potential impact on revenue as a result of reduced customer debt collection, particularly with regards to vulnerable customers and affordability.

Challenges such as continued local authority austerity, reduced global demand for our recycled commodities and decreases in power prices have a direct impact on the revenues generated by our recycling business.

OPERATING PERFORMANCE

Failure of our assets to cope with extreme weather conditions may lead to an inability to meet our customers’ needs, environmental damage, additional costs being incurred and reputational damage.

Poor customer service has a direct impact on South West Water’s delivery of the PR14 business plan and the ability of both Viridor and PWS to retain and grow market share.

Operational failure in our Water business could mean that we are not able to supply clean water to our customers or provide safe wastewater services. This has a direct impact on the successful delivery of the PR14 business plan.

Additionally, business interruption caused by defects, outage or fire could impact the availability and optimisation of our ERFs and recycling facilities.

Failure to have a workforce of skilled and motivated individuals will detrimentally impact all of our strategic priorities. We need the right people in the right places to share best practice, deliver synergies and move the Group forward in the new ‘shared services’ structure.

BUSINESS SYSTEMS AND CAPITAL INVESTMENT

Inability to successfully deliver our capital programme may result in increased costs and delays and detrimentally impacts our ability to provide top class customer service and achieve our growth agenda.

Failure of our information technology systems, due to inadequate internal processes or external cyber threats could result in the business being unable to operate effectively and the corruption or loss of data. This would have a detrimental impact on our customers and result in financial penalties and reputational damage for the Group.

Disclaimer

This document contains certain “forward-looking statements” with respect to Pennon Group’s financial condition, operations, performance and plans and objectives for the future. By their very nature forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will or will not occur in the future. Important risks, uncertainties and other factors that could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements include, among other things, the principal risks set out in this document. The forward-looking statements made reflect knowledge and information available at the date of preparation of this document. The forward-looking statements made reflect the knowledge and information available at the date of preparation of this document and no representation, assurance, guarantee or warranty is given in relation to them including as to their accuracy, completeness, or the basis on which they are made. They are not to be considered as profit forecasts. 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.

For further information:Sarah Heald Director of Corporate Affairs & Investor Relations + 44 (0)1392 443401 [email protected]

Jennifer Cooke Investor Relations Officer + 44 (0)1392 443168 [email protected]

Visit www.pennon-group.co.uk for:• Email alert sign-up• Additional documents• Presentations

Twitter: @PennonGroup

Pennon Group plc Registered in England No 2366640

Registered Office: Peninsula House, Rydon Lane, Exeter, EX2 7HR

our business model and investment case - pennon group

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