Colin Drummond - Chief Executive, Viridor

Colin Drummond, Chief Executive, Viridor

CHIEF EXECUTIVE OVERVIEW

Viridor aims to be a sustainable business in environmental, social and economic terms. Climate change, excessive resource use and environmental degradation/loss of biodiversity are the key environmental issues facing the UK and the world. As reported last year, Viridor's business as one of the UK's leading recycling, waste management and renewable energy companies, is founded on addressing these fundamental environmental issues.

There is an on-going risk that difficult world economic conditions might lead to a reduction in focus on these key issues. This has been one of the issues we have had to address in the current year as I highlight below.

Climate change is now rightly a mainstream issue for policy makers in the UK and worldwide. We must not however think that everything can be reduced to CO2 equivalents. There are other critical environmental issues, most notably that the world is using resource at an unsustainable rate. Food security is just one example. Over the past hundred years the world has lost one third of its topsoil, at the same time as its population has trebled. Topsoil is vital for agricultural production and our ability even to feed ourselves. Similarly energy security is a key issue particularly for the UK with North Sea gas and oil reserves declining, nuclear power plants due to close and coal facing major issues relating to carbon capture and storage. For these reasons improved resource efficiency from waste by recycling and energy generation is critically important.

Economic Sustainability

I am pleased to report that despite difficult trading conditions and difficult debt markets, Viridor's business model is proving economically sustainable. Profit Before Tax (PBT) in fact grew by 34.8%, from £40.8m to £55.4m, which is very creditable in the circumstances. More importantly we have continued our investment in new facilities undertaking total capital expenditure of £46.6m (of which £15.2m was in recycling and £3.9m in renewable energy) and acquisitions of £14.8m (in recycling). In addition, we invested £30.8m in our Lakeside and Manchester ventures. We deliberately decided not to be diverted from our long term strategy in the face of a weakened economy even at the risk of reduced short term returns. Indeed Pennon Group Plc, our parent company, undertook a £125m convertible bond issue specifically to permit ongoing investment in Viridor.

Environmental Sustainability

Viridor's business is founded on addressing fundamental environmental issuesDuring the year we met our key target highlighted last year of establishing accurate recording of all our greenhouse gas emissions. Nearly 90% of these (in CO2 equivalent terms) come from methane from landfills. For a number of years we have been working to capture and utilise this and at the same time generate more renewable energy, thereby earning good returns for our shareholders. With 84% of the methane from our landfills now recovered the scope for further improvement in this specific area is limited. This is one of the factors driving our business into other areas of resource efficiency and carbon benefit, including diverting waste from landfill via recycling, composting and energy recovery. These activities also assist climate change abatement.

In terms of resource recovery, during the year we have seen our proportion of waste recovered for recycling increase by 8%, to a total of 1.9 million tonnes, and our landfill gas energy generation increase by 10% to 555 Gigawatt hours (GWh). Recyclate prices, especially for paper, card, plastics and metals, generally recovered well to around long term trend levels upon which we base our investment decisions.

Lakeside energy from waste facilityOur energy prices in 2009/10 were lockedin based on the high levels pertaining in May 2008 when we sold our energy forward. However, for next year energy prices are likely to be lower due to current economic conditions. Our view remains that in the long term the price of energy, and the premium received for renewables under the Renewables Obligation and similar mechanisms, will trend upwards. The UK is increasingly short of any form of energy and particularly of renewables. Waste is a low cost, base load, distributed form of renewable energy. As highlighted last year waste already accounts for 1.5% of UK electricity generation and accounts for 25% of the UK's renewable energy. Respected commentators such as the Institutions of Civil Engineers and of Mechanical Engineers indicate that waste could account for 15% - 20% of UK electricity production. Our view is that environmental and economic realities will ensure that policy makers reflect this in practice, and Viridor has called upon the UK Government to set a target of 6% of UK electricity production to come from waste-based energy sources by 2015.

We have reflected on these factors in our planning and have concluded that continued investment in recycling and renewable energy is in the long term best interests of the company. In addition resource productivity forms a key part of our corporate responsibility targets for next year.

Social Sustainability

Reliance Street anaerobic digestion facility, ManchesterOur donations under the Landfill Communities Fund and via direct sponsorship continue to increase. Our aim is always to be a good neighbour as outlined in more detail later in this report. Continued positive community engagement, and support for community projects, within our operational areas remains important to us.

With regard to our responsibility towards our own employees, our RIDDOR accident statistics are too high. The company is very disappointed that our reportable accident and incident rate per 100,000 employees rose to 2445 in 2009 (from 1505 in 2008). This was primarily due to manual handling type injuries and slips, trips and falls. We are redoubling our efforts in this area focussing particularly on the underlying cause of accidents and effective promotion of safety and good practice in the workplace. Health and safety forms a key part of our targets for next year.