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Utility Week 27th September 2013

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Finance & Investment Investor view Daniel Wong Graph 1: Time series of CPI Index for gas, electricity and all items 200 190 180 170 160 150 140 130 120 110 100 Jan 2008 CPI Index all items CPI Index Electricity CPI Index Gas Jan 2009 Jan 2010 Jan 2011 Jan 2012 Jan 2013 T Graph 2: Time series of UK Natural Gas Index (NBPI) 140 120 100 80 60 UK Natural Gas Index (NBPI) 40 20 Jan 2008 Jan 2009 Jan 2010 Jan 2011 clear that this is possible, because it is predominantly factors affecting the wholesale element rather than margin building by suppliers that have been the driving price hikes. Perversely, a more prescribed retail sector could lead to worse outcomes for consumers in the long run, in particular through reduced investment in energy infrastructure – without which prices will be noticeably less "fair" in the future. Despite such high stakes, the reforms resemble less an informed attempt to improve future outcomes to consumers than a reactive set of measures to appease restless lobby groups. Utility retailers are currently faced with volatile wholesale energy prices, higher costs associated with using the transmission and distribution networks and higher costs of complying with mandatory environmental and social obligations, and under these circumstances further price rises are not inconceivable. Integrated energy retailers must offer a reasonable return for investors to guarantee investment into the energy infrastructure of tomorrow. Without this they are unlikely to be well placed to deliver cleaner energy in the future and at "fair" prices. The prescriptive measures around energy retail ought to be seen as a smokescreen to deflect attention about higher prices towards the suppliers. It is up to the energy companies to communicate to the customers what really is driving household bills higher and to fight perceptions of profiteering. Thomas Haller, managing partner; Richard Greenwood, director; and Christopher Peacock, consultant; at Simon-Kucher & Partners Jan 2012 "Will global capital continue to be attracted to the UK water sector and help fund the large capex programmes?" Jan 2013 he UK water sector has long been a barometer for inward investment into the UK. The who's who of global investors has already invested in the sector. The original entrants were the global infrastructure funds, swiftly followed by the Canadian and Australian pension funds and more recently many sovereign wealth funds have also made significant equity investments in the sector. But will global capital continue to be attracted to the sector and help fund the large capex programmes? There are many factors that impact the appetite of financial investors for investing in the sector, from macro issues such as low returns in the sovereign debt and corporate bond markets causing the more attractive risk/return profile of the infrastructure asset class to receive large allocations from investors, to sectorspecific topics such as the upcoming PR14 regulatory review and the desire of Ofwat to make significant changes to the fundamental risk profile of the sector, as per the initial proposed licence changes. Despite there always being a degree of flux, history tells us that the sector has provided predictable and stable cashflows "To attract to shareholders. And for the time global appears investors to being it is well that all the water with the sector, sector, with a large queue of financial invesstability tors lining up. is key" The most recent of these was the LongRiver consortium – comprising Borealis, Kuwait Investment Authority and the Universities Superannuation Scheme (USS) – with its attempted public takeover of Severn Trent. We have also seen the emergence of a new type of investor, the Japanese and Chinese strategic investors, with names such as Marubeni and Beijing Water, widely rumoured to have looked to acquire water companies in the past 12 months, and the successful acquisition of Sutton and East Surrey Water by the Japanese trading house, Sumitomo. If the UK water sector is going to continue to attract global investors, both financial and strategic, then stability of the sector is key. As PR14 starts gaining real momentum, Ofwat will have to carefully balance customer requirements and ensuring that the sector remains an attractive place for investors. Daniel Wong, head of infrastructure advisory, Macquarie Capital Europe UTILITY WEEK | 27TH SEPTEMBER - 3rd OCTOBER 2013 | 23

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