Pennon Group Plc (PNN) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the Pennon General Meeting hosted by Susan Davy. My name is Leslie, and I'm the event manager. [Operator Instructions] I'd like to advise all parties that the conference is being recorded for training purposes. And now I'd like to hand you over to Susan. Please go ahead.

Good morning, and thank you to those of you who have dialed in to listen to Pennon's General Meeting regarding the Proposed Disposal of Viridor. My name is Susan Davy, Group Chief Financial Officer and the shareholder. In the absence of Sir John Parker and the other Board members who could not be here in person today due to public health guidelines, I will be chairing the general meeting today. However, Sir John Parker and the other Board members have dialed in and are listening to this broadcast along with you. Due to the ongoing restrictions in place because of the COVID-19 pandemic, in particular the provision on public gatherings, we've had to take the step of not meeting with you face-to-face today. The health and safety of all our stakeholders is a paramount importance to us. As a result, this is one of several changes we have to make to the format of this general meeting in order to comply with public health guidelines. We are closely monitoring developments around the COVID-19 pandemic. And as the situation becomes clearer in the coming months, we will explore ways in which we can offer you an opportunity to engage in person with your Board. However, I do hope that you will see that we have endeavored to do what we can to give you, our shareholders, an opportunity to engage with us in relation to today's general meeting in what are exceptionally challenging times. Traditionally, at this point, I would introduce you to your Board, but for obvious reasons, they're not physically with me today. However, I am joined here by my colleague, Simon Pugsley, General Counsel and Company Secretary; and the shareholder obviously at the required 2-meters distance. He is here to assist me in talking about the Proposed Disposal of Viridor. Simon and I formed a quorum for the purposes of the formal meeting -- as the formal business of the meeting, which I will come on to later. As part of this broadcast, you have been provided with access to a series of slides, which I'll walk you through during this general meeting. For those of you dialing in, the slides are also available to the shareholders online in the Investor Information section of the Pennon website. These slides summarize the need for this expansion circular dated the 7th of May 2020, along with accompanying documents, including the proxy form for this meeting, all of which were provided to shareholders earlier this month. Secondly, the slide summarizes the requirement for this general meeting; and thirdly, based on rise of the sale price of the Proposed Disposal of Viridor and the conditions which must be met before the proposed disposal can proceed. And finally, we expect a number of questions, which have been raised by shareholders in advance of the general meeting. I will now take you to the slides in turn. However, I should point out that neither the presentation slides nor my summary of them are intended to be a -- to read in the circular and accompanying documents. These documents contain detailed information on the Proposed Disposal of Viridor. Instead, I will take the circular and document as having being read, and the presentation slides and my summary of them are intended to provide key points we feel should be highlighted to you for the purpose of this general meeting. I will now take each of the slides in turn, starting with Slide 1. On the 18th of March 2020, Pennon Group Plc signed a conditional sale agreement for the entire -- the sale of the entire Viridor business with Planets UK Bidco Limited for an enterprise value of GBP 4.2 billion. Planets UK Bidco Limited is a new company established by funds advised by KKR. And KKR is a leading global investment firm that manages multiple alternative asset classes, including energy and infrastructure. KKR aims to generate attractive investment and care for these investors by following a disciplined investment approach, driving growth and value creation within the KKR portfolio of companies. The disposal of Viridor constitute the Class 1 transaction under the U.K. listing rules. A Class 1 transaction requires the approval of Pennon Group Plc shareholders. That is the reason, therefore, for the placation of the circular and the calling of this general meeting. As mentioned earlier and due to the COVID-19 pandemic, the format of the general meeting is different from previous general meetings. We have taken all reasonable steps to ensure shareholder engagement, which is a key priority of ours in relation to this general meeting and making sure that, that is maintained but also adhering to stay-at-home measures and ensuring the safety of our stakeholders. Moving on to Slide 2. Slide 2 sets us in a brief summary the principal terms and conditions of the disposal. The Viridor business will be sold for an enterprise value of GBP 4.2 billion and a cash-free debt basis with net cash proceeds accepted to be approximately GBP 3.7 billion, which will be payable to Pennon Group Plc in cash on completion of the disposal. The disposal requires abstraction of a number of conditions, meaning disposal cannot proceed until these conditions have been met or, where relevant, waived. These conditions are approved with the disposal by the company's shareholders in this general meeting, which, as I just explained, is the purpose of the current general meeting. Secondly, merger control clearance being obtained from the European Commission for European competition for reasons this clearance was obtained on the 8th of May 2020. The final condition, which has 2 parts, the first being the release of the company through its obligations under existing bonding commitments related to the Viridor landfill business or the putting in place of cash collateral or letter of credit support for those obligations if the company is not released from them. And the second part of the final condition being the release of the company through its obligations under the parent company guarantees given in favor of Viridor entities for the purpose of existing financing arrangements. If the resolution is passed at this general meeting, the only condition remaining will be the third one, which is the one relating to the release from bonding commitments and parent company guarantees. All of the conditions must be satisfied by the 13th of August 2020. This date is referred to as the long stop date in the sale agreement and is to date 5 months after the sale agreement is signed. However, it is important to note that the company has the ability to waive the third condition, which as I explained is the condition relating to the release from the bonding commitments from parent company guarantees. The company and the purchaser have both agreed to enter into a transitional service agreement on completion of disposal. Under this agreement, the company will provide certain transitional services to Viridor for a period of up to 18 months. Pending this transition by Viridor will be staying standard on operations. Completion of the disposal is expected to occur in early summer 2020. For any further details on terms and conditions of the disposal, please refer to the circular and the accompanying documents. So that concludes my summary of the key terms of the disposal, and we will now move to answering the questions submitted by shareholders prior to this meeting. In the notice of the meeting, we ask you to submit any questions you have. I would like to thank [ Leslie ] who has taking the time to do that. A number of questions may have been covered by my summary of the terms and conditions in disposal. However, we would like to address specific questions submitted prior to the meeting. These questions are set out on Slides 4 and 5 of the presentation. Copies of the questions and answers will be made available to shareholders online following the general meeting. You can find the questions and answers and relevant details on the Investor Relations web page of our website. I will now provide answers to the various questions, starting with question 1 on Slide 4. I will hand over to Simon, who will now take you through those questions.

Thank you, Susan. Questions 1 to 5 asked by our shareholders related to the disposal itself. Here is the first question. Are you able to reassure retired personnel that their pensions will continue in the event of Viridor being sold and that the pension fund will be maintained into the future?

As a responsible employer, Pennon will continue to support its pension obligations into the future. All defined benefit pensions in payment will continue to be paid in the Pennon Group Pension Scheme, the Citrus pension plan and the Devon pension fund. As part of the disposal, Pennon has agreed to assume responsibility for funding the pensions payable from the Citrus pension plan and the Pennon Group Pension Scheme in respect of a large number of current and former Viridor personnel. Viridor will only retain responsibility in a very small number of active members in Citrus pension plan and all of the Viridor members in the Devon pension fund.

The second question. The company is proposing to reduce the pension deficit on completion of the Viridor disposal. Pension funds have been badly affected by market weakness caused by COVID-19. And will more of the proceeds than originally planned be used to reduce the deficit?

The circular sets out intended use of proceeds, which is subject to developments and Board consideration of opportunities. At this stage, the amount of proceeds to be directed towards a particular use has not been determined.

The second part of this question asks who takes responsibility for the pension fund of the Viridor employees.

As part of the disposal, Pennon has agreed to assume responsibility for funding the pensions payable from the Citrus pension plan and the Pennon Group Pension Scheme in respect to a large number of current and former Viridor personnel. And Viridor will only retain responsibility for a small number of active members in Citrus pension plan and for all of the Viridor members in the Devon pension funds.

The third part of this question is will they have deferred benefits in the Pennon Pension Scheme or will some other arrangements apply?

The status of Viridor members within its design benefit schemes, i.e., pension deferred or active, does not change as a direct result of the sales transaction. The company is, however, in the process of concluding a comprehensive consultation of pension provision with all Pennon employees on a proposed closure of the Pennon Group Pension Scheme, which would, depending on the outcome, resulting in currently active Pennon Group Pension Scheme Viridor members becoming deferred.

The third question on this slide is how does Pennon intend to deal with the proceeds generated from the disposal of Viridor? Will shareholders benefit?

As outlined in the circular, Pennon intends to reduce a significant proportion of its net borrowings, which will ensure that following disposal the group can optimize its cost of debt. Pennon also intends to use a portion of the cash proceeds from the disposal to reduce the company's current pension fund deficits. And Pennon also inherent to intend a portion of cash proceeds to shareholders, with a view to retain some funds for future investment opportunities, which may arise.

Question 4. Given the stable nature of the remaining business and the current very low-cost of debt, what is the Board's intention for the longer-term gearing up of the business?

The Board intends to consider an appropriate capital structure for this group going forward in light of any of the value-creating investment opportunities pursued and in conjunction with the broader use of proceeds. As outlined already, a proportion of the company's net borrowings will be repaid, which will be done in a manner that results in a sustainable gearing level for the continuing group.

Fifth question, with the intent to return funds to investors, will the Board take into account the interests of private investors regarding the form of return of capital?

The Board is aware that there are a number of options available to it when considering making a return to shareholders, and Pennon does intend to speak to major shareholders and provides reasonably practical regarding their views at the appropriate time.

In addition to those questions, specifically relating to the disposal, we have also received questions about the format of this meeting and shareholder engagement. Although there was an explanation for this in the circular, one of our key priorities is shareholder engagement. And in light of the current situation, we felt it appropriate that we also address this point during the meeting. The relevant questions are question 6 to 10 inclusive and set out on Slide 5 of the presentation slides. So question 6, shown at the top of Slide 5, is the sale of Viridor would lead to a reduction of the Pennon Group's operating profit. What is the rationale for proceeding with the disposal especially in light of the current adverse market conditions resulting from the COVID-19 outbreak?

The Pennon Board has conducted a review of the group's strategic focus, future options and capital allocation. It was decided that the sale of Viridor would achieve an attractive value for the business with an enterprise value of GBP 4.2 billion and would accelerate the realization of value in cash for Pennon, reflecting its long-term investment in and development of the Viridor business. While the Viridor business will no longer contribute to the Pennon Group's trading profit following the disposal, Pennon intends to invest in the continued growth of its retained operations. And in additional value-creating growth opportunities, which may arise. Pennon continues to closely monitor the impact of the COVID-19 pandemic. However, with the strong funding and liquidity, the group is well positioned to weather the current uncertainty. Pennon secured a rather new -- renewed financing, much of which has been secured through the group's sustainable financing framework to South West Water, ensuring that the group achieved long-term growth in a sustainable way.

Question 7 is how will the disposal impact Pennon's commitment to delivering South West Water's business plan for the K7 regulatory period?

Pennon's water and residual waste and recycling businesses have always been operated entirely independent upon another. With South West Water, Bournemouth Water afforded additional protections due to its regulated status. The disposal of Viridor would allow Pennon to focus on delivering the strategic priorities of its retained water and wastewater businesses, including leadership, cost efficiency and sustainable growth in the U.K. water industry. South West Water is approved in this fund for the new regulatory period, K7 is key to achieving those priorities. And with a renewed focus on operational performance and customer service, Pennon ensures delivery commitments under that business plan.

Question 8, the company has arranged for the meeting to be held with the minimum number of attendees to satisfy the requirements for a quorate meeting. What is such a quorum? And is the general meeting still valid if shareholders cannot attend in person?

In according to Article 31 of the company's Articles of Association, no business may be conducted at a general meeting unless the quorum is present. Two qualifying persons entitled to vote at the general meeting will constitute a quorum. Article 31(c) defines a qualifying person as being an individual who is a shareholder of the company, a person authorized to act as a representative of the corporation in relation to the general meeting, or a person appointed as a proxy of the shareholder in relation to the general meeting. As mentioned earlier, I am attending the meeting, both in my capacity as a shareholder and Chief Financial Officer. As the chair of the meeting, I am the proxy for shareholders who have appointed to chair as such in accordance with the instructions in the notice of the general meeting included in the explanatory circular dated the 7th of May 2020, and proxy cards applied. My colleague, Simon Pugsley, is also attending the meeting in his capacity as a shareholder of the company. Together, we form the required quorum.

Question 9, on what legal basis have shareholders been prevented from attending the general meeting in person?

On the 23rd of March 2020, the U.K. government published compulsory measures prohibiting public gatherings of more than 2 people. These measures were passed into on the 25th of March 2020, in England and well with immediate effect by where the health protection regulations, they're pursuant to the Public Health Act 1984, i.e., the stay-at-home measures. Despite changes made to the stay-at-home measures by the U.K. government with effect on the 11th of May 2020, which is also the modest changes to the current restrictions, the stay-at-home measures still prohibit public gatherings of more than 2 people. The early exception to this provision are situations in which the gathering is essential for work purposes, or if a gathering consists of people from the same household or people from the same household and 1 person from another household. Attendance at a general meeting by a shareholder other than they are specifically required to form the quorum of that meeting is not essential for work purposes, so that's for being contravention of the restricted measures. The Chair of the general meeting also has broad legal powers to preserve order at the meeting, ensuring the safety of attendees and allow the business estimation to be conducted. Given the attendance of more than 2 people at the general meeting is not permitted on the restricted measures. As the Chair of the general meeting, I would have to provide these prior to exclude excess attendees. Obviously, the health and safety of Pennon's shareholders, workforce and offices is paramount here.

And question 10 asks what consideration was given to enabling shareholder engagement in the general meeting by electronic means or otherwise?

The company is committed to maintaining shareholder engagement and a range of alternatives on how to hold the upcoming general meeting were considered, particularly in light of COVID-19 and the stay-at-home measures. Pennon is a Fortune 100 listed company with approximately 18,000 shareholders as at the 31st of March 2020. It is difficult to find appropriate technology which allows participation by all shareholders at the same time, enables shareholders to vote as for those votes to be properly counted, which ensures the chairperson can run an effective meeting. In light of these factors, Zoom and a number of other video conferencing platforms were considered but none were deemed appropriate to hold the meeting of this scale and ensure the issues noted above could be effectively safeguarded. In particular, the company gave consideration to a situation where the technology failed, and shareholders are not able effectively to communicate or cast their vote. This may have resulted in the meeting being invalid and any resolutions part being subject to challenge. The holding of the general meeting in light of COVID-19 has been the subject of much debate. The ability to participate in meetings have been considered in deciding whether a meeting was validly held whilst a general meeting of a company can be held at more than one place under Article 37 of our Articles of Association, and meeting is deemed to be validly held at more than one place, only the Chair satisfies that facilities are available to -- enable those present at each place to participate in the business of the meeting. As I said earlier, given the uncertainties of technology to the meeting at this scale and the potential risks, which could have a wide range of consequence for both Pennon Group Plc and its shareholders, the company does not consider any technology suitable in the present case. Having said that, the company has thought to provide shareholders with a greater level of engagement for this general meeting while maintaining the integrity of the meeting and the health and safety both company employees and its shareholders, which is a paramount importance to us all. These steps include providing all shareholders with all material information about disposals in the form of the circular, which has been made available to every shareholder, as explained earlier in the general meeting; encouraging shareholders to vote by proxy; allowing questions to be submitted in advance of the general meeting, which I'm now answering -- which we are now answering at the general meeting; ensuring shareholders can listen to the proceedings of the meeting; and addressing any queries from shareholders by encouraging the submission of questions by shareholders. That concludes the presentation and the questions and answers, and we will now move to the formal business of the meeting. The notice of the meeting, convening with general meeting has been issued to all shareholders as part of the circular, and I'll treat the notice of the meeting as having been read. As noted in the circular, in particular the letter from the Chairman of the company, Sir John Parker, the company has made arrangements for the general meeting to be convened with the minimum number of attendees in order to satisfy the requirements to record a meeting. Given that Simon and I are the independent shareholders of the company and the quorum for a valid shareholder meeting is 2 qualifying persons entitled to vote, I am pleased to confirm that the quorum is present. Details on how to submit your proxy vote were provided in the notice of the general meeting and shareholders were urged to appoint the Chair of the meeting as their proxy to ensure their votes will be counted. Accordingly, the votes at today's general meeting will be cast in accordance with the proxies that were received by the proxy deadline date. Thank you to those shareholders who have submitted proxy votes. So moving on to Slide 6 and the disposal resolution. For ease of reference, the full tax of the disposal resolution is included in the notice of the general meeting and on Slide 6 of these slides. Before I propose the disposal resolution, I confirm that consistent with the Articles of Association and the approach we have taken at previous general meetings, the vote will be conducted on a show of hands. This is simply to facilitate the efficient running of the general meeting. We will ensure that the overall results of the vote reflects the proxy instructions received from shareholders by the proxy deadline. Details of the proxy instructions received are set out on Slide 7, and I can confirm that we will also publish this information by the regulatory news services and on the company's website following the conclusion of the meeting. Overall, proxy instructions received in respect of 300,608,157 shares. Of the proxy votes received, 300,163,886 shares were voted in favor of the disposal resolution, including those voted at the Chairman's discretion. 444,271 shares were voted against the disposal resolution. Votes in respect to 1,301,669 shares were withheld. As you may know, a shareholder who has abstained is deemed to have withheld their vote. A withheld vote is not a voting nor and is not counted by calculating a proportion of votes for and against a resolution. As a result, this means that 99.85% of proxy votes received were in favor of disposal revolution, including those voted at Chairman's discretion. With only 0.15% of proxy votes received against the disposal of resolution. Given that I am chairing the meeting, I am entitled to exercise the proxy votes received from all shareholders, who were appointed to the chair of the meeting as their proxy. Since proxy votes have been provided both in favor of and against the disposal, I will place a vote both for and against the disposal on the show of hands vote so that as required by law, I have voted in accordance with the proxy's instructions given to me. I would note that I'm personally in favor of the disposal, which, as you know, has been recommended by the Board. Simon is here in his capacity as the shareholder and will vote his share as he see fit, which has indicated will be in favor of the disposal. So I now propose the disposal resolution 2, approve the disposal of the Viridor business substantially on the terms and subject to the conditions of the share purchase agreement dated the 18th of March 2020 between the company and Planets UK Bidco Limited, and all of the agreements and ancillary documents contemplated by the sale agreement and authorized directors of the company to do or procure to be done all such acts and things on behalf of the company and any of its subsidiaries as they may consider necessary or desirable in connection with and to implement the disposal; and to agree such modifications, variations, revisions, wave of extensions or abundance of a nonmaterial nature as they may be -- as they may in their absolute discretion deemed necessarily or desirable in connection with the disposal. So moving on to Slide 7. On behalf of those proxies received in favor of the disposal, I voted in favor of the disposal. Both Simon and I in our personal capacity as shareholders also vote in favor to disposal. On behalf of those proxies received against the disposal, I also care to vote on this show of hands against the disposal. The disposal resolution is an ordinary resolution requiring a simple majority of votes to be in favor of the resolutions in order for it to be passed. I therefore declare the resolutions carried on a show of hands vote, which reflects the overwhelming will of the shareholders in accordance with the proxy voting instructions communicated earlier. Ladies and gentlemen, that concludes the formal business of the general meeting, and I declare the general meeting now closed. Thank you for joining us today.

Thank you, Susan, and thank you, everyone. That concludes your conference call for today. You may now disconnect. Thank you for joining.