Waste disposal termination could mean no loss for Pennon

Pennon has announced that the Greater Manchester Waste Disposal Authority is seeking to terminate its PFI contract with a 50:50 joints venture between Pennon waste arm, Viridor and construction firm, Laing.

The PFI is in the ninth year of a 25-year contract to divert waste from landfill to recycling and to energy from waste disposal. In a note, Utilities Analyst at Agency Parterns, Lakis Athanasiou, said with compensation for the cancellation its impact on Pennon’s share price could be zero.

“ Our valuation [to Pennon] of the Greater Manchester PFI is £107m, or 25p.The maximum direct loss from cancelling the PFI is 25p up to 43p if shareholder loans cannot be recovered. This however assumes that compensation will be insufficient to remunerate equity, and the outcome could easily be better, up to zero loss versus our valuation.” Lakes said provisions in the contract “appear allow at the very least, for compensation of senior debt.”

The contract includes the disposal of residual waste at Ineos Runcorn’s Runcorn I energy recovery facility in which Viridor has a 37.5% stake said Lakis.

The joint venture structure minimised dividends from the venture, with value coming from high-interest rates on “quasi equity” shareholder loans. Pennon hold £72m in such loans.