VIRIDOR

Viridor's strategy remains focused on transforming waste, adding substantial value through renewable energy generation and recycling. The half year results come at a point of inflexion for the company as it continues its strong progress on the construction and delivery of its growing PPP/ERF asset base. ERFs are central to the UK's waste and renewable energy strategies as the long term low cost alternative to landfill for treatment of residual waste, aligned with higher levels of recycling. Viridor expects to have at least 15% ERF market share by 2020 with a network of strategic ERFs which will underpin the company's long term profit growth.

Given this inflexion, Viridor has implemented a strategic re-orientation of its business around its 'Energy' and 'Recycling & Resources' divisions and has strengthened its Board with new hires.

The strong progress in the construction and operational delivery of Viridor's ERF asset base, and in the development of the Energy division, is underlined by the fact that all plants⁽¹⁾ are full at the time of opening. ERF asset and feedstock markets are now maturing, with a few major players emerging. In addition, the majority of long term municipal contracts have now been let.

The focus for Viridor's Recycling division is on margin enhancement via quality optimisation, investment in technology and efficiency improvements, thereby reducing exposure to recyclate price movements.

Landfill gas generation remains very profitable, albeit generation is slowly declining.  Landfill continues to provide good cash generation whilst alternative uses for sites are being explored as they accelerate into closure.

Financial Highlights

As previously flagged, Viridor's financial performance was materially lower in the first half of 2014/15. This reflects the point of inflexion in the company's strategy, with full year 2014/15 EBITDA expected to exceed that of 2013/14.

Revenues in the first half of 2014/15 were up 6.6% to £424.4m.  Landfill tax collected increased by 10.4% to £106.8m driven by the increase in landfill tax to £80 per tonne from 1 April 2014. Construction revenue was also up reflecting growth in assets under construction. 

Viridor's EBITDA⁽¹⁾ for the half year decreased by £13.3m (32.1%) to £28.1m. PBIT fell £17.8m (98.9%) to £0.2m, but joint ventures were up £2.6m (48.1%) to £8.0m, resulting in PBIT plus joint ventures decreasing by £15.2m (65.0%) to £8.2m. Viridor underlying EBITDA was down £9.7m (14.9%) to £55.3m.

Viridor underlying EBITDA is a new non-statutory earnings measure that aggregates all of Viridor's earnings into a single figure, consisting of EBITDA £28.1m (H1 2013/14 £41.4m) plus IFRIC 12 finance income £5.8m (H1 2013/14 £4.2m) and share of joint venture EBITDA £21.4m (H1 2013/14 £19.4m). Viridor's share of non-recourse debt in its joint ventures was £303m. The introduction of this measure is timed to coincide with the significant progress made in the build out of Viridor's ERF business and will ensure earnings from ERFs contracted and accounted for in differing ways are captured in a single measure.

Profit before tax decreased £10.6m (69.3%) to £4.7m reflecting lower PBIT plus joint ventures partly offset by the benefit of reduced interest from intra group funding.

Capital expenditure for the half year was £127.3m (H1 2013/14 £146.6m) of which circa £116m was for Viridor growth projects (largely ERFs, but including recycling technology investment).

Following an extensive strategy planning exercise, Viridor is now actively implementing a major transformation of its business processes and procedures, including installation of a new enterprise IT platform. The first elements have recently been successfully delivered. As a result, over the next five years ongoing benefits in excess of the c. £30m capital investment are expected to be realised.

^{(1)  All figures before exceptional credit}

Operational Highlights

UK context

The UK is required under the EU Waste Framework and Landfill Directives to increase recycling, to achieve greater resource efficiency and to reduce the amount of biodegradable municipal waste going to landfill sites. This is being achieved by incentivising a major increase in recycling levels with residual waste increasingly being used for energy recovery. 

The Government's main mechanism for diverting waste from landfill, and incentivising recycling and ERFs remains landfill tax. The Government has implemented its landfill tax escalator to reach £80 per tonne from 1 April 2014 and has confirmed a further inflationary rise next year. This ongoing increase continues to enhance the long term economics of both recycling and UK energy recovery.  In addition, recyclate costs are typically significantly lower than the cost of using virgin materials for manufacturers. The EU and the UK Government have also introduced policy and regulation to deliver greater quality in recycled materials.

Viridor is clearly focused on recycling and renewable energy using waste as fuel. Investment in technology and operational practices continues to be made successfully to enhance recyclate quality to differentiate Viridor from its competitors. Significant progress has also been made in the development and delivery of the ERF business, with a substantial asset base being constructed and now becoming operational. This is being delivered in conjunction with the development of the associated business capability process across the whole "source to supply" ERF and recycling value chains.

Recycling

During the half year recycling volumes remained relatively stable at 0.9m tonnes. Recyclate prices have stabilised to some degree for most commodities but remain under pressure, reflecting global economic conditions and competitive markets. Overall average revenues per tonne from recyclate sales and gate fees for the half year fell to £86, 7.5% lower than  for the same period last year. Viridor remains cautious about future recyclate price growth and shipping costs.

Recycling EBITDA in the first half of 2014/15 was £10.0m (H1 2013/14 £13.1m). Viridor is implementing a two year Input, Throughput, Output Optimisation programme (ITOO) to provide an enhanced focus on increasing margins by taking actions across the value chain. The company is targeting a substantial enhancement in EBITDA margin through improvements in asset productivity. Future actions are focused on the three key parts of the value chain:

Two underperforming Materials Recycling Facilities (MRFs) were closed in the first half of 2014/15 to reduce the cost base and improve portfolio efficiency.

Viridor continues to operate the most extensive MRF capacity in the UK with accreditations for export to China, and is established as a quality brand in the UK and other far eastern markets.

Contracts and collection

Viridor's contract base and collection operations remain a key element of Viridor's integrated offering. Collections play an increasing role in securing in-house recycling materials and fuel for ERFs. EBITDA for collections reduced slightly to £5.4m (H1 2013/14 £6.1m).  

As previously flagged, in the first half of 2014/15 contracts (comprising 15 local authority contracts plus Thames Water and ERFs) profits were slightly lower due to contract expiry but the profit reduction was lower than expected given asset disposals and contract wins including:

Joint Ventures

Total share of joint ventures' EBITDA (comprising VLGM (including IFRIC 12 interest), TPSCo and Lakeside) was up 10.3% to £21.4m (H1 2013/14 £19.4m). Total share of joint ventures' profit after tax was £2.4m, up £1.6m from H1 2013/14.

The 25 year Greater Manchester Waste PFI contract (being delivered through VLGM) is the UK's largest ever combined waste and renewable energy project. The company is a joint venture between Viridor and John Laing Infrastructure. Operation of the associated facilities (both existing facilities and those which are to be developed) is being carried out on a sub- contract basis by Viridor.

As reported previously, solid recovered fuel produced from the waste will be used to generate heat and power at a plant being built at Runcorn.  Phase I is being built primarily for the Greater Manchester Waste PFI contract and Phase II will be available for the market generally, as high landfill tax drives residual waste away from landfill towards recycling and ERFs.

As part of the VLGM contract, a separate contractor was mandated to construct 43 facilities. As at 30 September 2014, 42 of these facilities had been formally taken over by Viridor. The final plant is nearing completion of its commissioning tests.

Viridor's share of VLGM's EBITDA was £1.5m (H1 2013/14 £1.2m). Viridor's share of IFRIC 12 interest was £6.0m (H1 2013/14 £6.2m).   

Viridor's share of TPSCo's EBITDA was £4.5m (H1 2013/14 £5.5m).

The Runcorn ERF Phase I project is about to move into final takeover tests (after first waste burn in March 2014), moving towards scheduled takeover in early 2015. Phase II has been only slightly affected by the Phase I delays, is on budget and first waste burn is imminent.

Lakeside, the first of Viridor's ERF projects, continues to outperform its financial close assumed power generation and waste processing targets. Viridor's share of Lakeside's EBITDA was £9.4m (H1 2013/14 £6.4m).

Results in the first half of 2014/15 benefitted from different scheduled outage timing (H1 2013/14 vs H2 2014/15) and continued good performance.

Renewable Energy

Energy recovery from waste (both biodegradable and non-biodegradable) accounted for 8% of total UK renewable energy generated in 2012.  Viridor believes that by 2020 UK energy recovery from waste could produce 15,000 GWh of the total forecasted UK renewable energy generation (120,000 GWh) accounting for circa 13%. This is particularly significant given predicted capacity shortages in the energy sector.

Viridor continues to make excellent progress on the construction and delivery of its PPP/ERFs asset base. In 2014/15, two plants (Exeter and Oxford) have become operational to date - in addition to the already operating Lakeside and Bolton plants - with three further plants (Cardiff, and Runcorn I and II) expected to be operational by year end.

With regards to securing fuel, of the new and developing facilities, five are full.  All plants (excluding Dunbar) are full at opening with more than 60% of feedstock coming from long term contracts and the balance from shorter term Industrial and Commercial (IC) contracts.  Average gate fees are at modelled rates. The proportion of long-term local authority contracted material (circa 60%) versus commercial inputs providing well-balanced risk.

Progress on delivery of the ERF asset base can be summarised as:

The Pennon Board has given its approval to proceed with the £177m Dunbar ERF at its existing Oxwellmains waste treatment hub in East Lothian, Scotland. This follows an extensive assessment of market conditions and an appraisal of current competitive advantages.

The facility is integral to the Scottish Government's ambitions to deliver a zero waste, circular economy which encourages landfill diversion and maintains price regulation. There is good support for the project as evidenced by all necessary planning, environmental and operational consents having been secured. Following a competitive procurement process, an EPC contract is also already in place with trusted suppliers. The project is therefore "shovel ready" and construction is expected to commence in Q1 2015. 

The plant will treat 300,000 tonnes per annum (tpa) of waste and is supported by a potential feedstock market of 1.25m tpa in the direct catchment area.  The market comprises 570,000tpa Municipal Solid Waste (MSW) and 680,000tpa Commercial and Industrial (C&I) arisings.  Viridor already has long term tonnages readily available to feed the plant as it currently services 110,000tpa of C&I waste in the central belt of Scotland.  The company is well placed for the active MSW procurements and has qualified for three currently in progress: Clyde Valley (minimum 98,000tpa, likely 180,000tpa); Edinburgh and Midlothian (75,000tpa, likely 120,000 tpa) and South Lanarkshire (60,000tpa, likely 85,000tpa).  The Dunbar facility is not reliant, however, on MSW procurement to achieve successful commercial returns.  Being the first to commit to building an ERF in the Dunbar area provides Viridor with a significant first mover advantage over any potential competitors and there are no competitor facilities currently in progress.

At 30 September 2014, Viridor had 34MW of renewable energy capacity across its share of Lakeside ERF, Bolton and Exeter ERF and its Anaerobic Digestion (AD) operations, in addition to its 105 MW of landfill gas capacity. Since the end of the period, a further 24MW has been added with the takeover of Oxford ERF. The ERF asset base coming on stream in 2014/15 and in development will raise cumulative electricity generation capacity to over
300MW and cumulative ERF waste treatment capacity to around 2.8m tonnes.

ERF contracts and projects already contribute to the bottom line and reflect the realisation of a strategy which is expected to add circa £100m to Viridor's EBITDA in 2016/17.

Viridor's landfill energy business is being managed to maximise the value of landfill gas power generation, whilst exploring photovoltaic (PV) and cryogenic energy generating developments as alternative uses for landfill sites with existing grid connections.

Gas volumes reached peak production in 2012/13 and are expected to gradually reduce over the coming years. In the first half of 2014/15 the landfill gas power generation output was marginally down to 297 Gigawatt hours (GWh) (H1 2013/14 303 GWh), reflecting a successful output optimisation programme. Landfill gas power generation EBITDA was £15.4m (H1 2013/14 £18.1m).

Average revenue per Megawatt hour (MWh) was flat, while average costs increased to £36.51 per MWh due to maintenance costs to improve gas capture. The switch from legacy Non Fossil Fuel Obligation (NFFO) contracts to Renewables Obligation Certificates (ROCs) continues with 94% of energy now sold under the higher value ROCs.  The remaining 6% NFFO component will migrate to ROCs by 2016/17. Total landfill gas power generation operational capacity reduced to 105MW (excluding 3MW capacity at sub-contract sites in Suffolk), from 107MW last half year.

Future alternative uses for landfill sites are now being assessed as most of our landfill operations accelerate into closure. A 2.75MW PV installation at Westbury landfill was completed during the first half of 2014/15.  Other alternative uses are also being explored, including an £8m cryogenic energy storage pilot project at Pilsworth landfill, funded by the Department of Energy and Climate Change.

Landfill

The business plan now being implemented for the landfill business is seeing operations reduced to a few strategic landfill sites, reflecting the fact that there will still be demand for landfilling of certain materials for the foreseeable future. Other sites are being run to closure with an emphasis on maximising the value of electricity generation from landfill gas and reducing costs. Non-strategic sites and closed sites are being assessed for alternative uses - both for energy and for development potential. Three sites are being closed in 2014/15 and a similar closure rate is forecast for the next five years.

The business continues to be cash generative and contributed £9.3m to EBITDA in the first half of the year. Volumes were stable at 1.4m tonnes.

Average gate fees decreased by 15.2% to £19.73 per tonne. Consented landfill capacity reduced from 58.0 million cubic metres (mcm) at 31 March 2014 to 56.1 mcm at 30 September 2014, reflecting usage during the period. As previously stated, and provided for, 39 mcm is not expected to be used.

Landfill tax has increased to its maximum level under the Landfill Tax Escalator of £80 per tonne. The Government has confirmed that it will rise next year by the rate of inflation.

Outlook for Viridor

Viridor has reached its expected point of inflexion in its ongoing transformation from being predominantly a landfill business to becoming a leading recycling and renewable energy provider.

As forecast and previously flagged, EBITDA in the first half of 2014/15 is materially lower than in the same period last year. The new ERFs will boost results in the second half of 2014/15 significantly such that full year 2014/15 EBITDA is expected to exceed full year 2013/14.

Viridor's full year performance is predicated on the continued successful delivery of the ERF business. Two ERFs have already been handed over in 2014/15, with a further three ERFs set to become operational this financial year.

Importantly, all plants⁽¹⁾ are full at opening with more than 60% of feedstock coming from long term contracts and the balance from shorter term Industrial and Commercial (IC) contracts.  Average gate fees are at modelled rates. The committed ERF projects are expected to contribute £100m to Viridor's EBITDA in 2016/17.

A two year asset optimisation programme in recycling has commenced.  The focus for the recycling division is on margin enhancement driven via quality, investment in technology and managing the cost base.

Viridor's transformational strategy is now being realised. Its asset base of ERFs will drive long term profitability together with a complementary quality focus in recycling.

⁽¹⁾ excluding Dunbar

During the year the Group reviewed the long term sustainability of its main defined pension benefit scheme and agreed to changes in benefits with the scheme trustee following extensive employee engagement.  An exceptional credit of circa £15m (£12m net of tax) relating to past service cost has been recognised in operating profit following changes in scheme design, in particular the introduction of a cap on increases in pensionable pay.