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UTILITY WEEK | 27Th March - 2nd aprIL 2015 | 17 Finance & Investment I n a sector where M&A is oen a highlight in investor discussions, we thought we would revisit the invest- ment case for Pennon. In our view, whether there is M&A or not, Pennon offers the best investment value and balance among its publicly-listed UK water peers. Pennon offers the most dynamic dividend policy. Pennon published its pre-close trading statement on 23 March, which headlined the continuation of its dividend policy of RPI+4 per cent till the end of FY20. This is superior to UU and SVT's offerings that are "at least in line with RPI". Pennon's can afford this because of strong underlying financial fundamentals. These include its stable 3 per cent RAB CAGR in its water busi- ness South West Water (SWW), and growth in its waste management business Viridor. Viridor reconfirmed its guidance that FY15 EBITDA will exceed FY14, and that the Energy Recovery Facilities (ERF) will add around £100 million of EBITDA by FY17 (compared with FY12). M&A expectations rises with the retirement of Ken Harvey. Harvey has announced that he will retire and be replaced as chairman by Sir John Parker, a utilities industry heavyweight. Importantly, Harvey's retirement could reignite discus- sions about the future of Pennon. Harvey has been viewed as the chairman who has kept SWW and Viridor together over recent years. Indeed, Viridor has benefitted from being able to access low-cost funding at the backs of the stable SWW assets. However, as Viridor completes its build-out of the ERFs, we see little to justify keeping SWW and Viri- dor together. With Ofwat now appearing to be more open up on consolidation, we believe Harvey's retirement is likely to raise M&A expectations. Pennon's underperformance YTD suggests good entry point. Pennon has underperformed YTD, with share prices (on a euro basis, as of 20 March) down two per cent, versus its closest peers UU and SVT at 11 per cent, and the broader European Utilities SX6P at 6 per cent. Most of this weakness is due to concerns surround- ing its recycling business and what a low power price environment could mean for Viridor's ERF achieved IRRs. We believe the reconfirmation of financial guid- ance in the pre-close trading update will help lay to rest some of these concerns. Overall, whether there is M&A or not, we believe PNN looks attractive. Maurice Choy, equity research analyst at RBC Capital Markets "Whether there is M&A or not, Pennon offers the best investment value and balance among its publicly-listed UK water peers" Investor view Maurice Choy "We believe Ken Harvey's retirement is likely to raise M&A expectations" Bioenergy Strategy in 2012, it is important to understand fully the end-to-end elements across the bioenergy value chain: from crops and land use to the conversion of biomass to useful energy vectors and finally the man- ner in which it is integrated into the rest of the UK energy system in transport, heat or electricity. To understand these challenges, ETI commissioned and funded the creation of a bioenergy value chain model (BVCM). This model, together with the the company's internationally peer reviewed energy system modelling environment (ESME) – a national energy system design and planning capabil- ity – means we are uniquely placed to assess the nature and potential scale of the contri- bution that bioenergy can make to the future low-carbon UK energy system. The analysis has provided insights into the future UK bioenergy sector – what bio- mass feedstocks would be best to produce, where, and which technologies are best deployed to convert them to different energy vectors (see box). Geraldine Newton-Cross, bioenergy strategy manager, ETI ETI research findings • When biomass resources are limited, and when the need to hit our greenhouse gas targets becomes imperative, ETI believes the conversion of biomass to power and hydrogen with CCS will be the preferred utilisation pathways, since they deliver the maximum amount of carbon savings. • Biomass to heat also offers good carbon savings relative to fossil fuels, and should be pursued where there is demand, especially for off-grid buildings. Biomass to heat schemes are particularly enabling for the longer-term development of the UK bioenergy sector, by providing an early market stimulus to increase the production of sustainable biomass in the UK. A ramp-up in domestic production is crucial if the country is ever to realise the full potential of bioenergy and maximise the UK's green growth opportunities. • The bioenergy sector is complex, yet immature, and the success of bioen- ergy's utilisation and growth will depend heavily on the route to deployment. • UK land is finite and valuable. With the right prioritisation, taking in to account other key uses such as food and feed production, conservation and wider ecosystem services, we believe it could deliver sufficient sustainably-produced bio- mass feedstock in later decades to make a hugely important contribution to the deliv- ery of the UK's overall greenhouse gas emissions reduction targets, without the need for potentially unacceptable levels of land-use change having to be implemented. • Locational preferences for resource production and utilisation are appar- ent: with short rotation coppice willow in the west and northwest of the UK, and Miscanthus in the south and east of the UK. Short rotation forestry when grown is preferred in the south and east of the country, along with the collection of waste for making refuse derived f uel. • Hubs of bioenergy production with CCS appear to be efficient value chain options: with gasification to hydrogen with CCS in the west of England (at Barrow) and combined cycle gas turbines running on syngas with CCS in the east of England (at Thames and Easington), based on key "resource-conversion-CCS" pathway opti- misation. For for the full research paper and overview of the BVCM toolkit, visit: www.eti.co.uk 10% of the UK's energy needs could be met by bioen- ergy by 2050, according to ETI's analysis