About our businesses - Viridor

RISKS ASSOCIATED WITH CURRENT UK AND WORLD ECONOMIC CONDITIONS

Current UK and world economic conditions are highly uncertain. Though less affected than many companies, Viridor is by no means immune to general economic conditions. A full assessment of the key risks to Viridor's business arising from current economic uncertainties has been conducted, including the following:

Landfill volumes may decline due to contraction in economy

The majority of inputs are from long-term local authority contracts or Viridor's own collection fleet. This risk is most pertinent to the 40% of Viridor's volumes which are not from these inputs. Local authority and Viridor volumes have been less affected to date.

Landfill prices

To date, landfill prices in general have proved robust. In a prolonged recession such prices may be impacted by increased price competition.

Recyclate prices

Recyclate prices are, like any commodity, volatile and are directly impacted by world economic conditions. The effect is most significant on the 40% of Viridor's recycling volumes of internationally traded commodities such as paper, card, plastics and metals. However
recyclate is typically cheaper than virgin materials which limits the impact on prices for good quality recyclate. Recyclate prices have recovered to the levels pertaining before the global financial crisis.

Collection volumes (particularly industrial customers) are subject to economic conditions

Currently margins are holding up. However volumes have fallen significantly.

Bad debt collection more challenging in an economic downturn

Viridor's record of bad debts has been, and remains, good based on tight management controls and the ability to put customers 'on stop' and, for example, refusing to accept waste at its landfills if debts are not being paid.

Government funding cutbacks may lead to the delay or abandonment of major waste projects.

Viridor's existing business with local authorities is covered by contracts on a variety of terms up to 25 years.

INCREASES IN LANDFILL COSTS MAY NOT BE RECOVERED THROUGH PRICE INCREASES

The raising of environmental standards is leading to a gradual increase in landfill costs in general, including engineering (resulting in increased depreciation) and restoration and aftercare costs. Viridor, with landfills engineered to modern standards with good environmental control systems, should incur lower than average increases in costs.

Recovery of costs of legislative change

Municipal contracts typically last for up to seven years. They usually have provision for price increases under set formulae related to inflation and some include legislative or technical changes. Prices for other types of waste depend more on local markets and competitive conditions. Prices, as a long-term trend, have risen fast enough at least to cover cost increases.

Aftercare costs levels

Costs which are assessed over 30 years are best estimates based on Viridor's own experience and are updated at each stage of the capital expenditure programme.

Residual contamination

Viridor's landfill aftercare management includes restoration, maintenance, supervision, monitoring and management of gas and leachate levels after the landfilling activities have ceased. Provision is also made for estimated costs of remediation if required. The EA or SEPA will only grant a full or partial surrender of the permit once it is satisfied that the landfill no longer poses any environmental risk.

Estimated compaction rates
(tonnes per cubic metre)

These are best estimates, based on current information, which are reviewed every year based on actual compaction rates assessed by external consultants.

THE UK GOVERNMENT'S WASTE STRATEGY, STEMMING FROM THE LANDFILL DIRECTIVE, WILL LEAD TO A REDUCTION IN VOLUMES OF WASTE BEING DISPOSED TO LANDFILL.

Government initiatives are having an impact and the amount of municipal waste being disposed of to landfill is declining. Assuming Landfill Directive targets are met, the total amount of municipal solid waste which will be landfilled in 2020 will be five to 10 million tonnes. The Government is now seeking to reduce the amount of industrial and commercial waste to be landfilled. However it is believed there will still be a significant total landfill market in 2020 and beyond.

Scarcity of landfill will ensure available voidspace remains a valuable asset. With the exception of the most recent year, Viridor has seen its underlying landfill volumes holding steady probably reflecting a greater share of the landfill market.

PRICING AND OTHER RISKS RELATING TO RENEWABLE ENERGY:

Fluctuating 'brown energy' prices

Viridor's 'brown energy' prices were fixed at high levels through to the end of March 2010. Brown energy prices will continue to be determined by the world and UK energy market and may go down as well as up. Current prices are around £30 per MWh lower than achieved in 2009/10 which will affect the company's 2010/11 power generation comparative performance in 2010/11.

Changes in ROC pricing mechanism

The Government has made a strong commitment to renewables which are key to meeting the UK's long-term carbon reduction strategy. To date the major political parties have stressed their commitment to 'grandfather' rights under current ROC schemes, which are not subject to retrospective changes. Renewables are also important in minimising the UK's increasing reliance on imported energy.

UK renewable energy generating capacity & licensed electricity suppliers

The value of ROCs is increased by the sharing of the buy-out price monies among holders of ROCs. The value of a ROC depends on the supply of renewable electricity relative to the UK's annual increasing targets. It is also dependent on the financial strength of those suppliers who opt to pay the buy-out price. The insolvency of a licensed electricity supplier could lead to a drop in the value of the ROCs which Viridor sells.

Volume of gas generated

Current and future waste composition (including Biodegradable Municipal Waste (BMW) diversion due to Landfill Directive and calorific value) is assessed against costs on each landfill gas project.

THE CURRENT PLANNING REGIME MAY RESTRICT THE AVAILABILITY OF FUTURE WASTE TREATMENT FACILITIES

Achievement of the Government's targets for waste management is critically dependent on the planning system delivering sufficient waste treatment facilities. Viridor employs best practice throughout the planning process.

RISKS ASSOCIATED WITH LONG-TERM INTEGRATED CONTRACTS (RISK TRANSFER IS A KEY PART OF GOVERNMENT PFI PROCUREMENT GUIDELINES)

Risks include waste volumes and mix, planning, technology, input costs and recyclate prices.
A careful assessment of the risks and apportionment of them between client, main contractor, technology and equipment suppliers, and sub-contractors is a key part of the process of bidding and finalising a contract. Extensive due diligence is conducted so that risks are correctly identified. Viridor then seeks to protect itself through contractual documentation with its client, sub-contractors and sub-suppliers.

Viridor takes a robust approach to this issue. If it cannot mitigate the risks satisfactorily or cannot get a reasonable commercial return for taking such risks, its policy is to accept the loss of such a contract rather than win it on unsatisfactory terms.