Utility Week

Utility Week 21st February 2014

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UTILITY WEEK | 21sT - 27Th FEbrUarY 2014 | 19 Finance & Investment This week Ofgem cuts returns to investors in networks regulator to assume returns of 6 per cent for equity investors in distribution network operators Electricity network companies will be expected to get by with less aer Ofgem confirmed a cut to the cost of equity allowance on Monday. The regulator is to assume returns of 6 per cent for equity investors in distribution network operators (DNOs) over the next eight-year investment period. That is a material cut from the 6.7 or 6.8 per cent DNOs assumed in their business plans. Western Power Distribution, the only DNO chosen for fast-tracking through the RIIO-ED1 price review process, has accepted a more lenient figure of 6.4 per cent to avoid re-entering the slow track. The change will shave an estimated 54p off the bill for customers in WPD's area. Ofgem said WPD was still "the most efficient" DNO as its "challenging cost package" outweighed the higher equity allowance. The five slow-tracked DNOs must resubmit their busi- ness plans for 2015 to 2023 in March, taking into account issues flagged up by the regulator. They still have a chance to make a case for a higher cost of equity before Ofgem delivers its final determination in December. The change in guidance follows a dra determination by the Competition Commission on the price control for NI Electricity that takes a hard line on equity costs. It signals that transmission and gas distribution networks could also face tighter financial controls at the next price review. Deutsche Bank said the decision was a "slight nega- tive" for SSE and Iberdrola, which own distribution networks. MD EnErgY Investment case for gas is improving Ambivalence in government sup- port for renewables is making gas more attractive to potential investors, according to a report by consultancy PA Consulting. PA's "Energy Investment Map" compared prospective returns and risks of energy technologies in 31 countries worldwide. Its findings form the basis of an improving case for investment in gas. Energy analyst Mark Living- stone said: "The results from PA's map indicate that gas could be the one to watch over the coming years." The map showed that renewa- bles remain attractive as invest- ments, but said they were being compromised as investment prospects by industrial consumer pressure in the UK to freeze the carbon price support and the need for EU approval under state aid regulations. The UK ranked sixth in the map's renewable energy index and tenth in its conventional energy index. WaTEr Ofwat guidance may hit shareholders Water companies could find it dif- ficult to attract investment aer Ofwat's guidance suggested a "significant" reduction in allowed returns, according to Moody's. In a report on the sector pub- lished last Thursday, the ratings agency said: "Shareholders may not wish to write a large cheque if they are unlikely to receive a good return in future." Recent guidance published by Ofwat suggested the return companies will be allowed to earn on their assets will fall to 3.85 per cent, exposing highly leveraged companies. Those particularly at risk are Anglian Water, Thames Water, Yorkshire Water and Southern Water. Moody's analyst Stefanie Voelz told Utility Week these companies are likely to adjust their dividends policies, with shareholders likely to lose out. EnErgY EDF operating profit totals £863 million EDF Energy made an operating profit of £863 million in 2013 and invested over £1.1 billion, according to annual results published last Thursday. Underlying profitability was down 12.9 per cent on 2012, with adjustments to the value of gas generation assets outweighing an increase in nuclear output. However, earnings before interest, tax, depreciation and amortisation (Ebitda) rose 1.4 per cent to £1.69 billion. The company's eight nuclear power stations generated 60.5TWh of electricity, the high- est output in eight years. Hard line: Competition Commission determination Drax shares dipped to 758.50p on 13 February after a report in the FT raised fears Europe could block subsidies for the next phase of its biomass conversion. but rumours that the Treasury plans to freeze the carbon floor price are positive for the generator. Its shares bounced back to peak at 821p on Tuesday, when Drax revealed Ebitda for 2013 of £230 million – 23 per cent down on 2012, due to rising carbon costs, but 4 per cent ahead of analysts' forecasts. 806 802 798 794 790 786 782 800 700 600 500 400 Stock watch Drax share price, 11-17 february 2014 Drax share price, 1 January 2009 - 17 february 2014 2009 11 Feb 12 13 14 15 17 2011 2010 2012 2013 2014

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