Pennon drops as Manchester wants out of waste management contract

Utility infrastructure company Pennon was under pressure on Wednesday after the Greater Manchester Waste Disposal Authority confirmed that it was looking to exit its recycling and waste management contract with Viridor Laing.

In a statement on its website on Tuesday, Pennon - the parent company of Viridor - noted the fact that GMWDA "continues to face financial challenges due to prolonged austerity" and said Viridor and its joint venture partner John Laing had been actively engaging with GMWDA as they have worked to consider their options.

"Discussions and negotiations are now expected to progress over the coming weeks as we work with GMWDA to ascertain the implications. There are provisions in the private finance initiative contract for compensation to be paid to Viridor and John Laing on termination," Pennon said.

The book value of Viridor's investment in the Greater Manchester project as at 31 March 2016 is £72.3m, of which Viridor Laing represents £36.8m and Ineos Runcorn represents £35.5m.

Pennon said it still expects to report a strong financial performance for the group at its full year results for 2016/17 on 24 May.

Citigroup said that while a contract renegotiation was well flagged, it had expected renegotiated terms, i.e. a reduced price, not a full exit.

"It also brings into question if we should expect to see other local authorities to follow suit and/or renegotiate terms of their PFI waste contract," the bank said.

"Currently, we do not have details of the compensation terms in an event of early exit of the contract. In the best case scenario, Viridor would be made whole for the loss of earnings from the remaining terms of this 25-year contract – we are currently in year eight.

"There is no reason to believe this would be a likely outcome as this would deter GMWDA to vote for an early exit. In the worst case scenario, we could see the full £72.3m (2% of market cap) investment made by Viridor written off. Although we believe it is possible to see Viridor keeping parts of the existing operational contract, at least on an interim basis."

Deutsche Bank noted that Pennon doesn't disclose fully the profits it makes under the contract, but the bank reckoned the PFI contract was around 5% of the profits for Pennon Group.

At 1445 BST, Pennon shares were down 3% to 839.50p.