Utility Week

UTILITY WEEK | 1sT - 7Th AUgUsT 2014 | 21 Finance & Investment Stock watch Risk Risk-RetuRn pRofile of eneRgy infRastRuctuRe and typical liquidity Pension funds/insurers Utilities Infrastructure funds Private equity Hedge funds Source: Baringa Partners investor hurdle rate LNG terminal Distribution networks Operational onshore wind Tolled thermal plant Operational offshore wind Construction onshore wind Construction offshore wind Biomass (dedicated) Gas storage Merchant new-build (with CM) Transmission networks Distributed generation Merchant interconnector DSR/STOR Merchant plant existing Merchant new-build (pre-CM) District heating The UK market is ready for investment, say investment advisers at Baringa Partners. The chart characterises recent investments by investor and asset types, along with the appetite for risk and the expectation of the rate of return. A low-risk investment option which is comparatively liquid is operational onshore wind, whereas construction of offshore wind is much higher in risk and comparatively illiquid. For more on the UK investment landscape, see the Investor View column on page 23 by Baringa Partners' Jayesh Parmar. This week Drax first half profits drop by 15 per cent Chief executive calls fall in profits a 'short-term' issue before plant's conversion to biomass Drax's earnings for the first half of 2014 fell further than analyst predictions as the UK govern- ment's carbon tax continues to erode profitability for the opera- tor of the UK's largest coal-fired power plant. Drax reported earnings before interest, taxes, depreciation, and amortisation (Ebitda) 15 per cent below last year's first-half result at £102 million, below analyst forecasts of a 13 per cent hit. But Drax chief executive Dorothy Thompson referred to the fall as a "short-term" issue before the generator converts to lower carbon biomass-fired power. The UK's carbon tax was implemented on 1 April 2013 and escalates each year, cutting earnings for the largely coal-fired power generator. The tax was originally set at a support level of £4.94 per metric tonne of carbon emitted, to be paid in addi- tion to carbon allowances through the EU's carbon market. But in April this year the tax rose to £9.55/mt CO2 and will rise again to £18.08/mt CO2 at the same time next year. But Thompson said the underlying business case for the company remains strong. "In 2016, half of Drax Power Station will be fuelled by sustainable biomass, delivering 4 per cent of the UK's electricity," Thompson said. The generator has invested £123 million in capital in the first half of 2014. This is in line with expectations and sets up Drax to meet its full-year capital investment guidance of around £200 million. JA EnErgY Investment steady at National Grid National Grid expects its investment in the UK's energy infrastructure to remain steady at £3.4 billion this year. In its interim management statement on Monday, the com- pany said its capital expenditure will be in line with the £3.4 billion seen during 2013/14. More details about the investment pro- gramme are expected a˜er the capacity market auction and the first round of subsidy contracts by the year's end. National Grid is due to administer an auction to secure capacity of 53.3GW for the winter of 2018, while the government is expected to award its first round of Contracts for Difference (CfD) by December. The completion of these steps will "provide additional infor- mation that will help define ele- ments of its future UK transmis- sion investment programme", National Grid said. WATEr UU ahead of targets on outperformance United Utilities is ahead of schedule in respect of the 2010- 2015 regulatory outperformance targets, and the company plans similar levels of regula- tory capital investment in the financial year ahead, accord- ing to its interim management statement. In addition, the company said its service incentive mecha- nism (SIM) scores for 2013/14 were above the industry average, representing "continued year-on- year improvement". "The group expects to deliver a good underlying financial performance for 2014/15. Our improved operational and capital delivery performance will provide further customer and environmental benefits," UU said. ELEcTrIcITY Scottish Power's green profits grow Profits from Scottish Power's renewable generation portfo- lio have increased, but parent company Iberdrola has seen its renewable revenue fall. Scottish Power reported earnings before interest, taxes, depreciation, and amortisation (Ebitda) of €123 million in the first half of 2014, up 11 per cent on the same period in the previ- ous year. Iberdrola's renewable generation Ebitda fell by 20.3 per cent to €712.8 million. Scottish Power saw its increase partly because the input from renewables increased by 11 per cent, to 1.61GWh, and wind capacity also increased by 27 per cent (com- pared with the first half of 2013) to 1.612GW. Carbon tax erodes profits at coal-fired plant Comparatively liquid Average liquidity Comparatively illiquid

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