Our operations Waste management

Viridor is at the forefront of the resource sector in the UK, transforming waste into energy, high quality recyclates and raw materials.

www.pennon-group.co.uk/waste

Phil PiddingtonManaging Director, ViridorViridor has delivered a strong performance across its recycling and energy asset base. Our ERF portfolio is performing well and we have started construction of a new facility in Avonmouth, for which we have already secured half of the inputs. Our focus on self-help measures has reduced the risks in the recycling business and delivered significant financial benefit.

8energy recovery facilities in operation and four more due to be operational by 2020

380,000 potential homes powered by energy produced by our portfolio

150local authority and major corporate clients

32,000 customers across the UK

300recycling, energy recovery and waste management facilities

650waste collection vehicles securing materials for our network of assets

7.6million tonnes of waste materials input each year

1.6 million tonnes of recyclate traded

Key facts

32

Pennon Group plc Annual Report 2017

Material recycling facility

Energy recovery facility

33

Stra

tegi

c re

port

Our operations Waste management continued

Strong momentum Our energy recovery and waste recycling business enjoyed strong momentum in 2016/17. Through our energy recovery facility (ERF) portfolio we are delivering on the Group’s strategy to invest for growth. Our announcement of a new ERF at Avonmouth near Bristol takes our total portfolio to 12 plants. Of the three other ERFs currently under construction, Dunbar and South London ERFs are progressing well. Following the termination in the year of Interserve as our main contractor for Glasgow ERF, the project is now progressing to our revised plan with commissioning expected in 2017.

To date, the Group has invested more than £1 billion into its ERF asset base. This significant investment in environmental infrastructure is helping us to transform our business model with an increasing focus on ERFs and recycling.

In coming years, we expect our growing ERF business to be the largest contributor to Viridor, followed by recycling, with these operations together already successfully delivering new revenues that can replace our legacy landfill business.

‘Self-help’ measures during the year improved efficiency in our recycling operations while there was continued progress in commodity risk sharing with our customers.

We took further steps to evolve our approach to health and safety. The Group’s new director of Safety, Health, Quality and Sustainability (SHQS) will work closely with Viridor to deliver a major transformation in our health and safety outlook that will benefit personal wellbeing and enhance business performance.

Viridor’s total energy capacity has continued to grow and with our joint venture partners, we are already one of the largest independent power generators from waste in the UK. We had 280MW of operating capacity from ERFs, anaerobic digestion (AD), solar and landfill gas (including joint ventures) at 31 March 2017 and exported 1.5 terawatt hours (TWh) of power during the year.

Customer experienceDuring the year, we completed our first customer service survey to seek the views of over 1,000 clients. Viridor will use the findings to strengthen customer relationships and support the Group’s wider growth strategy. By improving the quality of our products and services we enhance the customer experience, and this in turn supports customer retention and creates long-term business partnerships.

76% of Viridor customers said they were satisfied or very satisfied with the service

The key requirement from the perspective of our customers is for a seamless service providing safe, reliable collection. We continue to develop a fully integrated service of waste management, recycling and recovery recognising that customers are keen to avoid landfill. Our aim is to maximise the amount of waste that goes into recycling and to divert the balance to our ERFs or landfill as appropriate. By doing this, we are supporting development of a circular economy with greater resource productivity leading to reduced waste and pollution.

Energy recovery facilitiesViridor reported a good operational and financial performance for 2016/17.

Our ERF portfolio is a significant asset base comprising eight plants in operation with four under construction, including Avonmouth. This is the UK’s largest network of modern low-carbon energy recovery facilities and produces much-needed energy. At year end, our ERFs provided 178MW of generating capacity. Once the total committed ERF portfolio is completed in 2020/21 our ERFs alone will provide 276MW of energy generation capacity.

Long-term waste contracts provide a secure fuel source for the ERFs and strategically agreed energy offtake contracts provide assured earnings from the energy generated.

£1.1bninvested to date in our ERF portfolio

1.5TWhpower exported in 2016/17

Bringing new solutions to plastics recycling

Viridor is continually working on solutions to align next-generation recycling resources with the needs of UK industry. Our £12.5m advanced plastics recycling facility at Rochester is capable of processing 75,000 tonnes of mixed plastics each year. The Rochester team has partnered with packaging specialists (Nextek, funded by WRAP) to help find a solution to the 1.3 billion black plastic ready-meal trays sold by UK supermarkets that are not currently recyclable.

34

Pennon Group plc Annual Report 2017

Plant optimisationWe are maintaining a high level of performance in these facilities and demonstrating we can deliver long-term stable earnings. This helped us exceed our target contribution of some £100 million of EBITDA from our ERF portfolio for 2016/17.

For the operational plants, our focus was on optimisation and during 2016/17 we achieved average availability in excess of 90%. Our operational ERFs have a design capacity of 2.1 million tonnes of waste inputs, including joint ventures. Our forecasts are for this to increase to 3.2 million tonnes of waste by 2020.

ERF growthTwo of our ERFs under construction, at Dunbar and Beddington, are progressing well and to budget. Delays at Glasgow’s Recycling and Renewable Energy Centre led Viridor to terminate the construction contract with Interserve. The project will be finished by an experienced team assembled by Viridor while contractual remedies will also support completion. The client (Glasgow City Council) is supportive and commissioning of the plant is now expected in 2017.

We are building a strong operational team using power industry best practice. We have demonstrated that we can build these facilities safely, on time and to budget and during the year we achieved upper quartile availability and reliability. Maintaining this high level of performance in our ERFs contributed to fulfilling our commitment to achieve c.£100 million EBITDA during the year.

The £252 million Avonmouth ERF near Bristol is scheduled for completion in 2020/21. The plant will have a capacity of 320,000 tonnes per annum and will deliver 34MW of electricity. Viridor expects to fill the plant’s capacity on opening and by year end 50% of the fuel had already been agreed. This includes some 35% of total capacity secured through a long-term contract with Somerset Waste Partnership. This aligns with our strategy to achieve a balanced risk-reward profile across the Group. We are implementing that strategy by increasing long-term contracted revenue to match the life cycle of our assets. There are further contracts for Avonmouth ERF in the pipeline.

Impact on carbon emissions41% of the Group’s 2016/17 emissions were attributable to our ERFs. This part of the business will continue to contribute a significant proportion of our carbon footprint as more plants come on stream however there are clear environmental benefits due to the reduction of waste going to landfill. Viridor is in the process of establishing energy efficiency projects at key sites although, in the long term, we believe our energy recovery activities and their related combined heat and power schemes will help to deliver a distinct improvement over landfill. In addition, the displacement of virgin materials in manufacturing with recycled material contributes to significant reductions in embodied carbon across product life cycles. However, this offset falls outside current greenhouse gas reporting scopes.

Innovative use of by-productsViridor’s ERFs are moving closer to becoming a fully ‘zero waste to landfill’ solution using innovative technology to treat the by-products of the energy recovery process. Incinerator Bottom Ash (IBA), the ash left behind after burning the waste and Air Pollution Control Residue (APCr), the by-product of the filtering process to clean exhaust gases before they exit the facility, are now being transformed into valuable construction products. Our IBA is recovered for processing from all ERF sites and after the removal of metals, is recycled into an aggregate that is used as capping layers, sub-bases, trenches and binding concrete to structures. The aggregate is now widely recognised and used in nationally important construction projects such as the M25 widening. Contracts are also in place for recycling APCr that includes an innovative technology that transforms the APCr into a carbon negative aggregate. The Environment Agency considers the aggregate to be a product in its own right, having been assessed as an ‘end of waste’ material that can be used in exactly the same way as virgin aggregates and with no worse environmental impact than virgin aggregate.

Viridor plays a vital part in the displacement of virgin materials in manufacturing supply chains, with recycled material that significantly reduces embodied carbon across product lifecycles.

Ardley ERF achieves best-in-class delivery

Viridor’s ERF at Ardley, north of Oxford, delivered world-class safety performance in construction and was built on-time and on-budget. It completed its first year of operations in 2016/17 and achieved upper quartile availability (between 90% and 96%). This high level of performance is normally associated with a mature asset and it would be reasonable to expect a lower level of 80%-90% availability from a new plant. The achievement at Ardley of upper quartile performance in the first year with a completely new team is the result of Viridor’s record of investing in quality people, training and development and its commitment to effective operational processes and procedures.

35

Stra

tegi

c re

port

Our operations Energy recovery and waste recycling continued

RecyclingOur recycling operations had a satisfactory year with Viridor retaining its position as one of the largest recycling businesses in the UK. Recycling volumes traded in 2016/17 were slightly lower than previous years at 1.6 million tonnes. We were active in many areas, including mixed material recycling, glass and plastics recycling, paper recycling, transforming food waste into organic and energy resources. As one of the UK’s largest glass-recycling companies, our recycling plants in Sheffield and Glasgow processed over 245,000 tonnes of glass in 2016/17.

Self-help measuresRecyclate prices were mainly flat but under pressure, with fluctuations across different commodities. While the outlook for recyclate prices is relatively stable over the short term, we are not relying on a near-term recovery. In addition, local authority austerity in the face of central government cuts has made the market environment more difficult. We therefore focused in 2016/17 on ‘self-help’ optimisation measures. These initiatives drove improved margins with EBITDA increasing by £6 per tonne, from £8 per tonne in 2015/16 to £14 per tonne in 2016/17.

As part of the ‘self-help’ initiative, Viridor intensified its optimisation programme and, combined with other ongoing efficiency initiatives, this saw costs reduced by £1 per tonne for the year despite an increase in shipping costs.

Sharing commodity risk and opportunityIn line with the Group’s strategy of achieving a balanced risk profile, we continue to work with stakeholders where we can share commodity risk and opportunity. There are further opportunities for risk sharing arrangements as contracts expire and are renegotiated.

Local authority contractsPerformance in 2016/17 across our key local authority contracts, including Greater Manchester, Glasgow, Lancashire, Somerset and West Sussex, as well as the Thames Water contract, remains broadly in line with 2015/16. We began operating our 25-year contracted service for Tomorrow’s Valley in Wales (where four local authorities are collaborating in a £190 million residual waste contract) that is securing fuel for Trident Park ERF. In May 2016, we announced a significant multi-authority recycling project in Scotland’s Clyde Valley. This is expected to be worth around £700 million over the 25-year contract period and will secure fuel for the Dunbar ERF.

Joint venturesThe Lakeside ERF (a 50/50 joint venture with Grundon Waste Management) continued to operate efficiently while Viridor Laing Greater Manchester (a joint venture between Viridor and John Laing Infrastructure) is delivering the 25-year Greater Manchester Waste private finance initiative (PFI) contract, which was the UK’s largest waste and energy project entered into in 2009. Solid recovered fuel produced from Greater Manchester’s residual waste is used to generate heat and power at Runcorn 1 ERF (TPSCo, a joint venture between Viridor, John Laing Infrastructure and Inovyn).

The Greater Manchester Waste Disposal Authority (GMWDA) continues to face financial challenges and in April 2017 confirmed it is seeking an exit and re-negotiation of the PFI contract. Diversion of waste from landfill remains ahead of contractual commitments and Viridor and its partners are keen to ensure this progress is able to continue. Viridor and John Laing have been actively engaging with GMWDA as they consider their options.

There are provisions in the PFI Contract for compensation to be paid to Viridor and John Laing on termination.

Investment in dust control

A key facet of our operations is managing the dust caused by our activities, to minimise the impact on our staff as well as on the external environment. The primary focus for dust control is elimination at source, through localised extraction and dust filtration systems at key locations within the process. Water suppression (the dampening down of yard areas or haul roads) is also used and we have invested in vacuum suction systems at a number of plants for use in cleaning and maintenance activities. These measures, as well as general standards of good housekeeping within our plants, help us to keep dust levels under control.

Crayford MRF underlines benefits of ‘self-help’ asset optimisation

Viridor has one of Europe’s largest mixed-waste recycling facilities at Crayford in Kent. Crayford MRF applies advanced technology to sort and recover co-mingled recyclable materials from local councils and businesses outside London.

This plant serves as a good example of our boosting productivity through asset optimisation and self-help measures that saw inputs into Crayford reduce marginally from the previous year, but delivered a significantly increased EBITDA.

36

Pennon Group plc Annual Report 2017

Along with our JV partners, Viridor is already one of the largest independent power generators from waste in the UK.

LandfillIn 2016/17 we continued to manage our landfill energy business to maximise the value of landfill gas power generation, optimise opportunities for waste disposal where it is not suitable for recycling or sending to ERFs, whilst exploring alternative commercial development opportunities and other energy uses.

We operate a network of landfill gas power generation sites that contributed 99MW of capacity in 2016/17. We are continuing our strategy of delivering cash flow from landfill sites and anticipate continued reduction of capacity. However, we believe there will be an ongoing requirement for some landfill capacity in the UK as some waste is not suitable for recycling nor for sending to ERFs. Careful consideration will be given to selecting suitable sites for this opportunity, our intention being to retain only a small number of strategic sites by 2020. Viridor closed four sites during the year, bringing the total number of operational sites to 11.

Landfill restoration and biodiversityViridor continues to manage 31 closed landfill sites across the UK in accordance with biodiversity plans and using our experience in restoration. Sites have been restored to heathland, grassland, woodland, agriculture, amenity parkland or a combination of these. Viridor currently has eight sites that have

achieved The Wildlife Trust’s Biodiversity Benchmark, which includes two heathland restorations (Tatchells and Warmwell in Dorset) and a grassland restoration that has national significance for birdlife (Beddingham in Sussex).

Community engagementInvesting in educational programmes and supporting initiatives local to our operational facilities is a key element of our community engagement. Our 11 educational facilities have received 19,327 visitors over the year and helped deliver 122 outreach events to 6,848 people.

The education facility at Ardley ERF has been shortlisted for the UBS Award for Education, as part of Business in the Community’s Responsible Business Awards 2017 which recognised our Business Class Partnership with The Bicester School, Industrial Cadet Programme, Go4Set and Engineering Trust projects.

During 2016/17 Viridor has provided £8.0 million in community support, sponsorship and charitable donations, of which £7.7 million was paid to Viridor Credits for distribution via the Landfill Communities Fund.(1)

We operate active community liaison groups to ensure effective dialogue with the local community and as part of our major construction projects we work hard to ensure maximum benefit is achieved for local communities in the surrounding area.

Energy efficiency programmes and reorganised operations have made our recycling facilities more efficient and productive.

Household Waste Recycling Centres

Viridor manages a network of Household Waste Recycling Centres (HWRCs) in partnership with local authorities across the UK. HWRCs complement kerbside collections by giving residents access to safe and modern facilities where they can bring along items that are not routinely collected from their home to maximise recycling.

Our HWRCs have won awards for site design and excellent customer services. In areas serviced by our HWRCs recycling rates significantly exceed national averages, often achieving recycling rates of more than 75%.

Investment in Leachate Management

A number of operational projects have been launched aimed at reducing leachate generation including accelerated capping and restoration initiatives. A dedicated leachate management team has been created to focus on driving down long-term management and disposal costs, improving treatment plants and achieving the best environmental outcome.

(1) Viridor Credits is an independent, not-for-profit organisation that administers Viridor’s contributions to the Landfill Communities Fund.

37

Stra

tegi

c re

port