Utility Week

UTILITY WEEK | 9TH - 15TH MARCH 2018 | 17 Finance & Investment Analysis I nvesting in UK utilities goes far beyond buying a few shares in a household name FTSE-100 stocks, such as Severn Trent. Indeed, back in the early 1990s, there were almost 30 quoted UK utility stocks; nowa- days, the field is down to single figures. Instead, many long-term investors have homed in on quoted infrastructure funds. A‚er all, UK investment levels, especially in the energy and regulated utilities sectors, will remain high. Returns, too, are good. In some cases, quoted infrastructure funds are providing double-digit total returns – the increase in net asset value and dividends – each year. Investors can also spread their risk more efficiently. In the case of HICL, the UK's most valuable quoted infrastructure company, it is invested in 116 separate projects, many of which are in the UK. Furthermore, infrastructure investments are generally underpinned either by long- term contracts or by regulated returns. Com- mercial exposure is o‚en quite low, although Carillion-like events can impact even the most defensive of infrastructure funds. However, in recent months, infrastructure valuations – measured, like the water com- panies, by their trading premium or discount over their asset value – have fallen back from their highs attained during the latter part of 2017. Aside from regulatory risk, which con- tinues to dent the share price ratings of the two leading water stocks, Severn Trent and United Utilities, political risk is becoming increasingly prominent. With a weak government, propped up by a mercurial group of Democratic Unionist MPs, investors are increasingly concerned by the radical policies put forward by the shadow chancellor, John McDonnell. Renationalisation of many utilities, with compensation levels being determined by a three-line whipped Labour majority, is becoming a more feasible scenario than was the case before the 2017 general election. It is no surprise, therefore, that shares in Centrica have plummeted in recent months, while both Severn Trent and United Utilities – driven by the 2.4 per cent weighted aver- age cost of capital (Wacc) – have seen their shares fall by c25 per cent over the past six months. By contrast, the share prices of the lead- ing infrastructure stocks – the top three are valued at over £2 billion apiece – have been less volatile. The leading infrastructure investment player is HICL, which emerged from leading global bank, HSBC. HICL's latest net asset valuation exceeds £2.7 billion. While much of its recent interim update focused on the fallout from the collapsed Carillion, HICL's chairman, Ian Russell, a one-time Scottish Power chief executive, also addressed the higher risks attached to its stake in Affinity. Russell flagged that "the Investment Adviser expects to see a net overall reduction in the valuation of the group's investment as at 31 March, 2018". Clearly, Ofwat's con- troversial 2.4 per cent "minded" Wacc figure is the key driver of this expected downward revaluation. The quoted International Public Partner- ships, despite its low profile, has a range of investments in UK utilities, to which it is heavily exposed. It straddles the sub-sectors given its involvement in offshore electricity transmis- sion, its investment in gas distribution, and its participation in the controversial Thames Tideway Tunnel project. 3i Infrastructure is also valued by the market at over £2 billion, with 60 per cent of its portfolio invested in the UK. Recently, however, it ditched its minority stake in Anglian Water. Among the smaller quoted infrastruc- ture funds are GCP Infrastructure, which has highlighted a delightfully eclectic group of investment targets: anaerobic digestion; biomass; education; health; hydro-electric power; and solar (commercial). John Laing Environmental Assets, in its quest for predictable long-term cashflows, invests in onshore wind, waste and wastewa- ter along with PV Solar in the UK and France. Last week, Greencoat UK Wind reported that its extensive portfolio of onshore wind- farms generated over 1,450GWh of electric- ity in 2017. Its market capitalisation now exceeds £1.2 billion. The Renewable Infrastructure Group, is particularly focused as its seeks "an attrac- tive long-term, income-based return with a positive correlation to inflation". Over half its projects are UK based, split evenly between onshore wind and solar plants. The activities of NextEnergy Solar Fund, whose shares are capitalised at c£640 mil- lion on the UK market, are particularly interesting. The fund currently has 63 solar plants, with a capacity of 569MW. Except for a handful of plants in the Italian provinces of Campania and Apulia, all the solar plants are located in England and Wales, though not Scotland. Given the need for reasonably long sun- hours, NextEnergy Solar's most northerly plant is at Lower Bentham, a village located to the northeast of Lancaster. NextEnergy Solar's activities may be the precursor to major development of solar power in Eng- land and Wales – especially if unit costs con- tinue to fall sharply. Lastly, although Ancala is quite a small infrastructure investment player, it has recently made a splash with its opportunistic acquisition of Portsmouth Water. In summary, the utilities sector will con- tinue to attract infrastructure investment players – Portsmouth's take-out will not be the last. Nigel Hawkins, director, Nigel Hawkins Associates Infrastructure funds Listed utilities have been having a hard time of it recently, but infrastructure funds have managed to maintain bull market returns. Nigel Hawkins looks at the top funds investing in the UK. FUND MARKET CAP HICL £2.7bn International Public Partnerships £2.13bn 3i Infrastructure £2bn Greencoat UK Wind £1.2bn The Renewable Infrastructure Group £1bn GCP Infrastructure £930m NextEnergy £640m John Laing Environmental Assets £386m TOP LISTED INFRASTRUCTURE FUNDS

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