Viridor
Viridor profits grew strongly in 2009/10 as it continued to expand its resource management activities
Colin Drummond
Chief Executive
Viridor Limited
CHIEF EXECUTIVE'S OVERVIEW
Viridor is one of the UK's leading waste management, recycling and renewable energy companies. Over the past 10 years we have evolved from waste collection and disposal into a more broadly based resource recovery business with major activities in recycling and waste-based renewable energy generation. At the same time we have increased our profits at an average rate of over 20% (PBITA plus joint ventures) per annum since 2001. Over 40% of our profit contribution now comes from recovering value from waste.
We have core competencies in landfill disposal, recycling and waste-based renewable energy generation. The company operates materials recycling facilities (MRFs), waste transfer stations, treatment plants, household waste recycling sites (HWRS), composting facilities, landfills and renewable energy generation facilities in most regions of the UK and has a collection fleet focussed on the industrial and commercial market.
Continuing developments in the UK's waste management and renewable energy policies, driven by climate change and environmental awareness, create major opportunities for Viridor.
In 2009/10 Viridor delivered another year of very strong profit growth despite the difficult economic conditions in the UK and worldwide. At the same time we progressed various major strategic initiatives, including in particular the Greater Manchester waste and renewable energy project (the largest of its kind in the UK) and the Lakeside Energy from Waste (EfW) plant, both of which commenced profitable operations. We also completed the acquisition of two further recycling companies. These and other initiatives are expected to enhance our business significantly in future years.
This reflects our focussed strategy of:
- capitalising on our strong position in landfill waste disposal
- proactively developing new recycling operations to meet ambitious EU/UK targets
- successfully exploiting the huge potential in waste-based renewable energy generation.
Further detail on the climate change and environmental drivers behind governments' policies and Viridor's strategy is given in the sections on main trends and business and strategy on pages 14 and 15.
FINANCIAL HIGHLIGHTS
Viridor traded very strongly in 2009/10, building further on the growth achieved over the past eight years. Revenue was up 18.7% (£98.5 million) to £626.5 million, of which acquisitions accounted for £89.7 million and existing business £8.8 million (including landfill tax of £6.3 million).
Viridor's earnings before interest, tax, depreciation and amortisation of intangibles (EBITDA) rose 9.1% from £105.2 million to £114.8 million. Profit before interest, tax and amortisation of intangibles (PBITA) for the year increased by 15.1% (£9.6 million) to £73.1 million, compared with £63.5 million in 2008/09.
With the commencement of the Greater Manchester and Lakeside projects, joint ventures now account for a significant part of Viridor's profits (£4.2 million in 2009/10) and we now focus on PBITA plus joint ventures as a key performance indicator. We profit from our joint ventures both via interest on shareholder loans and via share of the joint ventures' profit after tax (PAT). PBITA plus joint ventures grew by 19% in 2009/10 and has grown by a compound rate of 22% since 2001.
Profit before tax (PBT) at £55.4 million was up 34.8% on the previous year and has grown at a compound rate of 19% since 2001. Capital expenditure for the year was £46.6 million (2008/09 £84.0 million) and we invested £30.8 million in our Greater Manchester, Runcorn Combined Heat and Power (CHP) and Lakeside joint ventures.
PBITA PLUS JOINT VENTURES, PBT AND RETURN ON EQUITY
PBITA plus joint ventures (which contributed from 2008) and PBT are key overall measures of Viridor's performance and are set out in the table below for the ten-year period 2001 to 2010. The table also sets out the Compound Annual Growth Rate (CAGR) for these measures, being the rate of growth between 2001 and 2010 expressed as a single annual average figure over the period. Return on equity is also a key measure of Viridor's performance and is calculated as PBT expressed as a percentage of Pennon Group's equity investment in Viridor (£252 million at 31 March 2010).
VIRIDOR PROFIT CONTRIBUTION BY SEGMENT
The pie charts below provide a breakdown of Viridor's profit contribution by segment (before amortisation of intangibles and central overhead costs including pensions). In 2009/10 landfill accounted for 31% and landfill gas power generation 28% of Viridor's profit contribution, compared with the previous year's 45% and 25% respectively. Recycling accounted for 16% (last year 16%) and contracts grew to 15% from 3% in the previous year whilst joint ventures accounted for 4% (last year 2%). In total 44% of Viridor's profits come from recovering value in waste either by power generation or recycling.
Landfill
Total landfill disposal volumes decreased by 0.7 million tonnes (15%) to 3.9 million tonnes in the year. Approximately 0.2 million tonnes of this was due to landfill closures, as reported last year. The bulk of the remaining reduction was in third party industrial and commercial volumes which were heavily impacted by the general weakness in the UK economy. Average revenue per tonne increased by 1.1% to approaching £22 per tonne (3.1% like for like excluding site closures). Consented landfill void reduced from 81 million cubic metres at 31 March 2009 to 77 million cubic metres at 31 March 2010, reflecting 1.2 million cubic metres planning gains and usage during the period of 4.8 million cubic metres.
Landfill Gas
Viridor's landfill gas power generation output increased by a further 10% to 555 Gigawatt hours (GWh) during the year particularly reflecting capacity brought on in late 2008/09. All of the output increase was accredited for full ROCs in advance of the banding change. Viridor's average revenues per Megawatt hour (MWh) grew by 21% to approaching £90 reflecting the growth in the proportion of output eligible for Renewables Obligation Certificates (ROCs). Taking advantage of favourable market conditions in May 2008, Viridor sold forward the brown element of its 'ROC-able' electricity to March 2010 at May 2008 prices. Current power generation prices are significantly (circa £30 per MWh) lower. This will materially affect power generation segment performance for 2010/11.
At 31 March 2010 Viridor's landfill gas power generation capacity was 100 Megawatts (MW) including a small amount of sub-contract capacity. At 31 March 2010 63% of Viridor's power generating capacity was eligible for ROCs and 37% for the Non Fossil Fuel Obligation (NFFO).
RECYCLING
The UK is required under the EU Landfill Directive to reduce the amount of biodegradable municipal waste going to landfill sites. To meet the requirements of the Landfill Directive the UK Government uses landfill tax as a price mechanism. At the same time the Government has set clear targets for the recycling of household waste, and local authorities must also implement strategies for the diversion of biodegradable municipal waste away from landfill. The former Chancellor's Budget announcement on 24 March 2010, continuing the increase in landfill tax of £8 a year from £48 per tonne currently to £80 per tonne in 2014/15, will further enhance the long-term economics of recycling. In general, recyclate costs are typically significantly lower than the cost of using virgin materials for manufacturers.
As reported last year recyclate prices were high in the first half of 2008/09 and low in the second half, reflecting the prevailing general world economic conditions. Since then recyclate prices have recovered, ending the year at around the peak levels seen in early 2008/09. Viridor's recycling traded volumes grew 3.5% to a little over 1.4 million tonnes, with an improved recyclate mix. Recyclate prices have continued to strengthen since the year-end but are expected to ease back later in the year.
In June 2009 Viridor acquired London Recycling Limited for a cash consideration of £10.6 million, plus debt acquired of £1.5 million. With its headquarters in East London, the business comprises a full range of recycling operations including a fleet of collection vehicles, a 'WEEE' facility, paper processing, confidential material destruction, a MRF and a waste auditing facility. It handles approximately 50,000 tonnes of material per annum. London Recycling has had a good track record over recent years in providing essential recycling services to businesses in the capital and has an excellent geographic and business fit with Viridor's operations in the South East of England.
Plastics in particular are a significant and growing part of Viridor's recycling business and in July 2009 Viridor acquired Intercontinental Recycling Limited for a cash consideration of £4.2 million, plus debt acquired of £3.9 million. Based in Skelmersdale, Lancashire, the company processes High Density Polyethylene (HDPE) and Polyethylene Terephthalate (PET) plastic bottles, such as are recovered by Viridor's MRFs. It converts the bottles to pellet or flake for sale to plastic product manufacturers, mostly within the UK. The plant has the capacity to treat 40,000 tonnes of plastics waste per annum. Intercontinental Recycling also has a good geographic and business fit with Viridor's existing operations and is particularly well-placed to receive volumes from the Greater Manchester Waste PFI.
CONTRACTS
Contracts profits were well ahead with continued good performance from the West Sussex PFI and 10 other municipal contracts. The sludge contracts business which performed poorly in the second half of 2008/09 was back in profit. There was also a significant contribution from the Greater Manchester Waste PFI sub-contract.
PUBLIC PRIVATE PARTNERSHIPS AND PRIVATE FINANCE INITIATIVES
Public Private Partnership (PPP) and Private Finance Initiative (PFI) contracts are a key part of Viridor's strategy.
Financial close on the Greater Manchester Waste PFI 25-year contract was achieved on 8 April 2009. It is the UK's largest ever combined waste and renewable energy project, managing 1.3 million tonnes of waste per year. The total potential energy generation will be approaching 140 MW from Phases I and II of the Runcorn plant, the four anaerobic digesters (ADs) and the existing Bolton Energy from Waste (EfW) plant.
The PFI is a joint venture between Viridor and John Laing Infrastructure. Operation of the associated facilities is being carried out on a sub-contract basis by Viridor. In October 2009 it was confirmed that all required facilities planned for development had received planning permission. At 31 March 2010 of these 42 facilities 22 had been completed and handed over to Viridor to operate.
Associated with the Greater Manchester PFI is an EfW CHP facility (Runcorn Phase I) which is a three-way joint venture between Ineos Chlor, Viridor and John Laing Infrastructure. Planning permission was achieved by Ineos Chlor for both phases of the EfW CHP plant at Runcorn in September 2008 and construction of the first phase has commenced. Total capital expenditure for the Greater Manchester PFI is projected to be £405 million with an additional £235 million for the associated EfW CHP plant (Runcorn Phase I). Viridor's funding contribution will be £85 million. In addition we have secured all of the rights to Phase II of the planned EfW CHP facility at Runcorn. This will be targeted at the North West market more generally and is a significant upside to the initial project given rising landfill tax and the shortage of competing capacity in the North West.
In addition to the above contracts we continue to bid selectively for other projects. We are the preferred bidder for the Oxfordshire PPP and one of the last two for the Cheshire PFI and the South West Devon Waste Partnership. We are one of the last three for the Peterborough EfW and MRF contracts and one of four still in the bidding for the Gloucestershire PFI and South London Waste Partnership contracts. Most of these projects include renewable energy.
MAIN TRENDS AND FACTORS LIKELY TO AFFECT THE FUTURE DEVELOPMENT, PERFORMANCE AND POSITION OF THE COMPANY'S BUSINESS
The waste management and renewable energy business is heavily influenced by environmental and climate change considerations and associated Government policies. Viridor's strategy reflects this. Our belief is that being green is good for business, as is demonstrated by the company's financial performance.
Government policies are designed in the first instance to minimise the amount of waste generated, then to maximise reuse and recycling, followed by treatment and energy recovery via EfW facilities and other technologies. This is underpinned by final safe disposal in landfills. The Government is implementing the EU Landfill Directive and reducing the amount of waste to go to landfill. This Directive was a response in part to methane emissions from landfills, although in fact the bulk of this in the UK is now captured for renewable energy generation.
Government targets of diverting municipal waste away from landfill up to 2020 are leading to a decline in the landfill market. However, with only around six or seven years' consented capacity in the UK as a whole (according to Environment Agency estimates) and with new consents difficult to achieve, Viridor's 77 million cubic metres is regarded as a very valuable resource, with 15 years' average capacity available at current rates of fill.
At the same time it is increasingly recognised that waste is a major renewable energy source, accounting for approximately 25% of the current UK's renewable energy or roughly 1.5% of the total UK's electricity production. 1.2% of this comes from landfill gas utilisation, which has grown by 600% over the past 10 years, and 0.3% from energy from waste combustion. As the energy produced from waste is a product of waste treatment, it is effectively low cost. Unlike certain other renewables it provides baseload power which is distributed around the grid typically close to where energy is required.
There is scope for a major increase in the amount of energy recovered from waste in the UK particularly in EfW facilities (especially with CHP) as well as in developing technologies such as Anaerobic Digestion (AD). Viridor estimates that waste could account for 6% of UK electricity production by 2015 if planning barriers could be addressed, and has called upon the UK Government to set this as a target.
The need for councils to avoid steeply increasing landfill tax and to achieve their landfill diversion targets creates attractive opportunities for PFI/PPP and other contracts. Examples include Viridor's contracts with West Sussex, Somerset, Greater Manchester and the South London Waste Partnership, facilities such as the Lakeside EfW plant and the Runcorn EfW CHP plants, recycling operations such as those of Viridor Resource Management and our electrical goods and glass recycling services.
Whilst the long-term trends in favour of Viridor's business are very positive, the weakness of the UK economy is having a significant effect on waste volumes and power generation prices. It is certain that public expenditure will be reduced in the face of the UK's massive budget deficit.
This is likely to put particular pressure on local councils' budgets and may result in their delaying new major waste PPPs/PFIs or in seeking other ways to reduce their waste management costs.
BUSINESS AND STRATEGY
Our strategy is to deliver strong growth and add value by:
- capitalising on our strong position in landfill waste disposal
- proactively developing new recycling operations to meet ambitious EU/UK targets
- successfully exploiting the huge potential in waste-based renewable energy generation.
Viridor's landfill market consists of municipal, commercial and industrial wastes, along with certain other special types of waste. Landfill is currently the major final disposal route for these wastes.
Viridor is a major landfill site operator within the UK with a total consented landfill capacity of approximately 77 million cubic metres as at 31 March 2010. Viridor is at present filling this at a rate of around five million cubic metres per annum, which results in an average remaining life of 15 years at current rates of fill, which is significantly longer than for the industry as a whole.
Gas produced from decomposing waste on landfill sites is increasingly used to generate electricity. It is a form of renewable energy and now represents 1.2% of the UK's total electricity generation. EfW represents a further 0.3% according to Defra. The Government's stated strategy is to increase the percentage of electricity generated from all renewable sources from the current figure of around 5% to a target of 10% in 2010 and 15% in 2015. Viridor has called on the Government to set a target of 6% of electricity to be generated from waste sources by 2015. The UK has an EU target of generating 15% of total energy from renewable sources by 2020, which is likely to require over 30% of electricity to be generated from renewable sources. Historically, renewable energy projects were supported by the Government through the NFFO scheme. Under this fixed price, Retail Prices Index (RPI) contracts with terms of up to 15 years were awarded to the most competitive renewable projects in five tranches of bidding. In April 2002 the NFFO regime was replaced by the Renewables Obligation (RO) regime. Under the RO, eligible generators receive the brown energy price plus the value of the associated Renewables Obligation Certificate as described on the Viridor; Regulatory and competitive environment page.
The overall price for electricity supplied under the RO regime is currently substantially higher than that achieved under the most recent NFFO scheme. This has facilitated the increase of Viridor's total landfill gas power generation capacity to 100 MW at 31 March 2010, compared with 27 MW in March 2002. Of this power generation capacity, 63% is under the RO regime and 37% is under NFFO. Viridor's existing NFFO contracts end in tranches over the next six years after which the capacity can transfer to ROCs.
To take advantage of opportunities presented by the Government's developing waste strategy, Viridor is pursuing EfW schemes detailed below (including, where feasible, CHP) and a range of recycling or related treatment opportunities, including materials recycling facilities, mechanical-biological treatment, anaerobic digestion, composting and household waste recycling sites. These facilities may be combined in integrated waste management contracts.
Viridor is pursuing possible long-term EfW opportunities, including proposals in Cardiff (which received planning permission in June 2010), Avonmouth, Dunbar and Oxfordshire (which have had planning permission turned down locally and are being appealed), and near Plymouth. Construction of the consented Exeter EFW plant is expected to start during 2010/11.
In pursuing its strategy, Viridor seeks to grow its recycling, renewable energy and waste management business, both organically and through acquisition. It has continued to be an active participant in the consolidation of the UK waste market to date and, between October 2001 and March 2010, has made 17 acquisitions in the waste sector for an aggregate consideration of over £310 million. These businesses have now been integrated into the Viridor group.
