Utility Week - authoritative, impartial and essential reading for senior people within utilities, regulators and government
Issue link: https://fhpublishing.uberflip.com/i/370624
UTILITY WEEK | 29Th AUgUsT - 4Th sEpTEmbEr 2014 | 21 Finance & Investment M any utility finance officers and treasurers are re- thinking the way they fund ongoing operations and network upgrades. Today, larger businesses tend to source funds pre- dominately in the bond markets, and smaller companies complement bonds with bank financing. Most power and energy corporates have substantial inflation-linked needs, and have satisfied these by borrowing on a nominal basis while entering into a swap with a bank to convert the debt into inflation- linked pay- ments. Changes in the bank- ing industry are making long-term swap arrangements more costly than in the past, so the increasing opportunity to tap private debt markets for inflation-linked borrowing is generating interest. Investor demand is there. UK institutions such as pension funds have long been attracted to utility com- panies, particularly regulated entities, thanks to their robust revenues and protection from normal business cycles. Their own liabilities – payments to scheme mem- bers – tend to be index linked. Companies reap benefits from private debt. Inves- tors execute on pre-agreed terms irrespective of market conditions on the day of issuance, whereas with public bond markets, spread and rate risk is taken up to the last minute. Companies can also tailor maturities to meet their requirements, issuing tranche sizes and drawdowns to fit their debt profile. They can also take advantage of structures such as inflation-linked debt in BBB-rated or subordinated entities. Moody's has recognised that long-dated inflation- linked securities can effectively match cashflow profiles and finance regulatory asset value expansion. With the next regulatory periods for water and electricity firms starting in 2015, we estimate that water companies will have an inflation-linked debt demand of £800 mil- lion, and electricity and gas utilities will require £300 million, alongside an extra £900 million of annual refi- nancing over the next four years. Private debt markets are an increasingly relevant option for utility borrowers. James Wilson, chief executive, Macquarie Infrastructure Debt Investment Solutions "The increasing opportunity to tap private debt markets for inflation-linked borrowing is generating interest." Investor view James Wilson Analysis RIIO ED1: a £1.4bn challenge to DNOs Can network operators shave £1.4 billion from their business plans? O fgem announces £17 billion investment for electricity network and cuts bills for customers," trumpeted the press release detailing the dra determinations for the first phase of the new regula- tory regime for power networks, RIIO ED1, on 30 July. As Ofgem seeks to appease public ire over rising energy bills, an average £12 a year per household cut over the next eight years is a major victory. But this means a further £1.4 billion has been wiped off the distribution network operator (DNO) business plans, in addition to £700 million of savings the companies had already found when redraing their plans. This has provoked outrage in the polite world of regulated utilities. Some £400 million of the £1.4 billion is expected to come from benefits arising from the smart meter rollout and smart grid solutions. Ofgem says the companies have failed to take proper account of these savings. Last summer, the Energy Networks Association estimated the potential savings from the smart meter rollout at between £47 million and £80 million for the ED1 period, including £12-26 million from time-of-use tariffs cutting peak demand. Ofgem says the companies have allowed for £27 million of savings arising from the smart meter rollout, but the potential savings are as high as £190 million. The disagreement centres on when the benefits of smart meters will be realised. The rollout should end in 2020 – five years into the eight-year ED1 price control. Ofgem identifies two sets of savings from smart grid solutions. The first, on required reinforcements to the grid, Ofgem puts at a potential £653 million, or 23-25 per cent of forecast reinforcement costs. DNOs, it said, have bid for just 14 per cent. The second set of savings arise from other smart grid benefits. Electricity North West (ENW) was the only DNO that factored in such savings, though Ofgem says it did not go far enough. Had the other networks taken ENW's approach, a total or of £200 million or more could have been cut, it said. It is clawing back £135 million of these potential savings as part of the overall £400 million, with the rest to be made up from savings arising from the smart meter rollout and lower reinforcement requirements. For Ofgem, the potential savings on offer are welcome as it tries to exert some control over spiralling energy costs. For DNOs, they remain a possibility only, with much of the control of the smart meter programme and its potential benefits out of their hands. As negotiations get underway before the final determinations in Novem- ber, these views will have to be reconciled. See www.utilityweek.co.uk for the full version of this article Private debt markets are an increasingly relevant option for utility borrowers "