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Anglian Water Group
Anglian Water Group Limited is the parent company of Anglian Water, the largest water and water recycling company in England and Wales by geographical area and the fourth largest as measured by regulatory capital value.
The majority of the group’s revenue is earned through tariffs regulated by Ofwat and linked to RPI.
The investment is held through 3i Osprey LP, an intermediary limited partnership whose partners comprise other third parties (including 3i Group, which has a small interest) and which is managed by the Investment Adviser.
Developments in the period
AWG continued to perform well. There were no major operational incidents during the period and water resource levels are normal for this point in the year. The company remains focused on implementing its cost efficiency and capital spending programmes to drive value through the current regulatory period (2015–2020).
In July 2017, the company won the Responsible Business of the Year award in the BiTC Gala Awards and Peter Simpson won the Highest Rated CEO award from Glassdoor, ahead of business leaders from various industries and international companies including Google, Microsoft, Nationwide and Rolls Royce.
AWG was taken private in 2006 by a group of investors, including 3i Group, which “seeded” part of its AWG holding into 3i Infrastructure when the Company was set up in 2007. The business has strong infrastructure characteristics:
In addition, AWG has attractive fundamentals:
AWG has flourished under private ownership. It has refocused on its core business, selling Morrison Utilities Services, Morrison Facilities Services and much of its property portfolio. The company has been able to optimise its capital structure compared to listed peers and to distribute a higher proportion of cash flows to shareholders, resulting in a strong yield. The regulated capital value has grown steadily, underpinned by a comprehensive capital expenditure programme, which will be maintained for the 2015–2020 regulatory period (“AMP6”), which began on 1 April 2015. In order to preserve greater financial flexibility, the board of AWG has decided to manage gearing downwards slightly through to the end of AMP6. This will reduce dividends to the Company from those previously anticipated, as announced previously.
A new management incentive scheme was put in place post investment, aligning compensation with long-term value growth, asset quality and customer service rather than short-term earnings and share price performance. The management team now balances long-term planning, for example, to respond to the challenges of climate change, with a clear focus on operational efficiency and customer service.
In FY2016, AWG completed its IRIS programme, which involved upgrading the telemetry system across its entire asset base. The new system gives AWG a much greater level of oversight of its asset base and operations, which assists it in planning and implementing its asset maintenance programme.
AWG ranked second among the Water and Sewerage Companies in Ofwat’s Customer Service Survey for the financial year to March 2016, the first to be measured under the new regime.
Cross London Trains ('XLT')
Cross London Trains is a company established to procure and lease the rolling stock for use on the Thameslink passenger rail franchise. As part of a wider upgrade of the Thameslink rail network, XLT is investing £1.6 billion in a fleet of new Siemens Desiro City commuter rail carriages to be leased to the Thameslink rail franchise operator.
Siemens is manufacturing and will deliver the trains over a period of five years, with the first delivery into service in 2016. The fleet will comprise 115 class 700 trains.
The fleet is maintained by Siemens under a long-term service agreement. Following the initial 20-year period, XLT will retain the ownership of the fleet and will be free to lease the trains for the remainder of their useful life. The Company owns 33.3% of the equity in XLT, in consortium with Siemens Project Ventures GmbH and Innisfree Limited.
Developments in the period
The Cross London Train programme continued to make good progress. The programme aims to deliver the contracted fleet of 115 class 700 trains by the second half of 2018.
Siemens had manufactured 95 trains as at 30 September 2017, out of which 70 had been accepted by the GTR rail franchise.
The Investment Adviser’s attention remains focused on both improving train performance and the ongoing acceptance of new trains. The discount rate remained unchanged from the previous period.
The investment has strong infrastructure characteristics and fits well within 3i Infrastructure’s investment mandate as:
A senior management team was installed at XLT, comprising an executive chairman and a managing director with relevant industry experience. Andy Pitt, executive chairman, was previously managing director of South West Trains. Charles Doyle, managing director, was previously a commercial principal at Transport for London. They have successfully set up all necessary business functions and built a strong working relationship with Eversholt Rail, which provides technical engineering and administrative services to the business under a long-term management services contract.
XLT, supported by its shareholders, has engaged proactively with a number of stakeholders, including Siemens, the DfT, Network Rail and the franchise holder, Govia Thameslink Railway (“GTR”). GTR has been the holder of the Thameslink franchise since September 2014 and XLT has built a good working relationship with its management team.
The Company and the Investment Adviser have built a strong working relationship with Siemens and Innisfree, the other shareholders in XLT.
Elenia owns the second largest electricity distribution network in Finland.Headquartered in Tampere, it serves around 417,000 customers in the south west of the country and has a market share of approximately 12%. The business is regulated on a four-year cycle, delivering a set return on its regulated asset base. The electricity distribution business accounts for approximately 90% of Elenia’s overall value.
Elenia Lämpö, which accounts for approximately 10% of Elenia’s overall value, owns and operates 16 local district heating networks, each with strong market shares in their local areas.
Developments in the period
Elenia’s two businesses (electricity distribution and district heating) continue to perform strongly.
The proportion of buried cables increased in line with expectation to reach 31% and 46% (vs. 9% and 31% at the start of 2012) of the medium and low-voltage networks respectively. This is strongly incentivised by the regulatory model in order to improve the networks’ long-term resilience to bad weather.
During the period, Elenia continued to take advantage of the favourable credit market conditions and, since March 2017, issued €214 million of new bonds with maturities between 2028 and 2034 on attractive terms. Following the agreement concluded in December 2016 to provide third-party customer service to Jyväskylän Energia, two further contracts were signed with other neighbouring networks (Tampereen Sähkölaitos and Auris Kaasunjakelu) in May 2017.
Elenia has strong infrastructure characteristics and operates in an attractive market:
The businesses were rebranded with the “Elenia” name in May 2012, reinforcing the separation from Vattenfall to domestic audiences.
The business successfully completed the post-acquisition corporate reorganisation in early January 2013. This allowed Elenia to begin distributing dividends to shareholders. In December 2013, Elenia’s original acquisition debt was fully refinanced through a Whole Business Securitisation, the first of its kind to be applied to a non-UK European utility. This was an important milestone for the business, with positive implications for value, as it provided a platform for access to the long-term capital markets and reduced the ongoing cost of debt. Elenia’s governance was enhanced through the appointment of new independent chairmen to the boards of each business, as well as through a number of management appointments to further strengthen the executive teams. In addition, management incentives were put in place to align management incentivisation to the objectives of the shareholders.
On 1 August 2015, Tommi Valento, formerly Group Treasurer at Pohjolan Voima Oy, was appointed as CFO of the business, replacing Aapo Nikunen.
Throughout the period of ownership, the consortium has supported the management team in its dialogue with the regulator. In December 2015, the Finnish Energy Authority, which regulates electricity distribution in Finland, published its final determination for the 2016–2019 and 2020–2023 regulatory periods. The new guidelines include several changes to address the issue of the low allowed return on capital experienced by all distribution companies over recent years, with the objective of incentivising distribution companies to improve the security of supply.
Headquartered in Esbjerg, Denmark, ESVAGT is a leading provider of emergency rescue and response vessels (“ERRV”) and related services to the offshore energy industry in and around the North Sea and the Barents Sea. The company is also the market leader in the fast growing segment of service operation vessels (“SOV”) for the offshore wind industry. ESVAGT has been operating since 1981, employs c.900 people and owns a fleet of c.40 vessels.
Its ERRV services mainly involve the rescue and recovery of personnel, but also include the dispersion and recovery of oil spills, crew transfers and towing. ESVAGT is the leading provider of ERRV services in Denmark and Norway, with market shares of approximately 100% and 50%, respectively, as well as an established and growing presence in the UK. The majority of ESVAGT’s ERRV revenues are associated with North Sea oil and gas production support, with the remainder generated by supporting exploration activity.
ESVAGT is also the pioneer and market leader in the provision of SOVs to offshore wind farms, with four bespoke vessels in operation and a further two under construction. SOVs are purpose-built, high performance vessels, providing efficient transport of maintenance technicians to wind turbines and other offshore wind equipment, under long term contracts. The offshore wind market, and hence demand for SOVs, is expected to grow strongly over the coming years, creating significant opportunities for the company.
Developments in the period
The market conditions in which ESVAGT operates remain challenging. The low oil price environment has reduced production profitability and is negatively impacting exploration investment in the North Sea, leading to a reduced utilisation rate for ESVAGT’s vessels. In this context, we have continued to focus on the cost base and increasing ESVAGT’s market share in the UK. We have also seen some improvements in the supply dynamics as competitors are retiring off-contract, older tonnage.
3i Infrastructure acquired ESVAGT from AP Møller-Maersk and other minority shareholders in September 2015, in a consortium with AMP Capital.
ESVAGT has strong infrastructure characteristics and operates in an attractive market:
The Investment Adviser has developed a strong working relationship with members of the management team and is working closely with them to drive the business forward. As part of this process, the Investment Adviser assisted with the appointment of a new Chairman, Jesper Lok, who took office on 1 November 2015. Jesper is a strong addition to the Board and brings over 25 years of experience from A.P. Møller-Maersk, having worked in Japan, Taiwan, Pakistan and Nigeria before heading SVITZER, the Maersk subsidiary that was formerly ESVAGT’s parent company, as CEO. In 2012, he joined DSB, the Danish railroads, as CEO and led the company’s turnaround. Most recently, he was CEO of Falck’s Emergency division.
ESVAGT is well placed to leverage its strong market position to capitalise on growth opportunities in the UK market as well as the offshore wind energy support market. In December 2015, it announced that it had signed an agreement with MHI Vestas to provide a bespoke service operation vessel in support of the Belwind 1 and Nobelwind Belgian offshore wind power developments. Under the terms of the agreement, ESVAGT will operate the vessel for the exclusive use of MHI Vestas’ on-site wind park engineering team for a period of 10 years from vessel delivery, which is expected in mid-2017. This agreement builds on an existing five-year partnership with MHI Vestas and demonstrates the company’s strong customer relationships, its best in class operations and its partnership approach.
Infinis is the largest generator of electricity from landfill gas (“LFG”) in the UK, with a portfolio of 121 landfill sites and total installed capacity of over 300MW.
Developments in the period
The business has performed well operationally and financially since our acquisition in December 2016, although long-term power price forecasts have decreased. As expected in our investment case, Infinis was a strong contributor to the Company’s income in the period, counter-balancing some other growth-orientated businesses in the portfolio.
Good progress has been made identifying opportunities to exploit the business’s spare engine and grid connection capacity. Together with the management team, we are reviewing projects in non-landfill gas generation activities, with 30MW of reserve power generation now under development. The Company has agreed to provide further equity of £12 million to support these projects.
In August 2017, Infinis appointed Tony Cocker as Chairman of the Board and Scott Longhurst as Non-executive Director and Chairman of the Audit Committee. Tony was previously CEO of E.ON UK. Scott is currently Group Finance Director at AWG and Managing Director of AWG’s non-regulated business.
The investment in Infinis is foremost a yield play. Its front-ended cashflows balance other recent investments by the Company in more growth-oriented businesses. Revenues are underpinned by the inflation-linked UK Renewables Obligation Certificate (“ROC”) regime until 2027. Infinis could also become a platform to make new investments in activities such as distributed power generation from other gas sources, distributed energy storage by exploiting the business’s spare engine and grid connection capacity, and additional landfill gas sites.
Infinis is the largest generator of electricity from LFG in the UK, with a portfolio of 121 landfill sites and total installed capacity of over 300MW. LFG is produced by decomposing organic matter in landfill sites. If released into the atmosphere unchecked, LFG contributes to pollution and is a potent greenhouse gas. By extracting LFG from landfill sites, Infinis fulfils an essential role in helping landfill operators meet their environmental compliance obligations. By using the collected LFG to generate electricity, Infinis supplies distribution networks with a consistent source of baseload power.
Oystercatcher is the holding company through which the Company holds 45% interests in five subsidiaries of Oiltanking, located in Belgium, Malta, the Netherlands and Singapore.
These businesses provide over five million cubic metres of oil, petroleum and other oil-related storage facilities and associated services to a broad range of clients, including private and state oil companies, refiners, petrochemical companies and traders.
Oiltanking is one of the world’s leading independent storage partners for oils, chemicals and gases, operating 73 terminals in 22 countries with a total storage capacity of 19 million cubic metres.
Developments in the period
The five terminals all performed well in the period, generating EBITDA in line with or ahead of budgeted levels. Each terminal enjoys a strong position in its market and benefits from Oiltanking’s reputation for excellent service standards. Capacity at each location remains substantially let.
In Singapore, favourable conditions underpin the terminal’s key activity, which is gasoline storage and provision of associated services. During the period, a new marine jetty entered operation. This additional jetty capacity will improve customer turnaround times and further cement the competitive position of the terminal.
Customer demand for capacity generally remains strong, but we have seen some softening of demand for storage of certain product types.
The investment in the Amsterdam, Malta and Singapore terminals was completed in August 2007, while the investment in the Ghent (Belgium) and Terneuzen (Netherlands) terminals was completed in June 2015.
The key elements of the investment case for the terminals are:
The transactions allowed 3i Infrastructure to partner with a leading player in the oil storage market, with a strong operational reputation.
The investment case has largely been confirmed, with the investments performing well. Storage capacity has been substantially let throughout the period of investment, and throughput levels have been high.
The Investment Adviser was actively involved in the assessment of a range of capital expenditure project proposals that have delivered long-term value accretion. In Singapore, a 160,000 cubic metre expansion project was completed in June 2009 to accommodate increasing demand from adjacent refineries and petrochemical industries. In Amsterdam, a 42,000 cubic metre expansion project to provide dedicated storage for biodiesel products for a new production facility adjacent to the site was completed in June 2011. This capacity was pre-let on a use-or-pay basis. In Malta, investment in a new 13,000 cubic metre tank was completed in February 2012, and let on a use-or-pay basis to an existing customer. Since investment, total capacity at these three terminals has increased by 28%.
Oystercatcher’s portfolio of investments was diversified further in June 2015 through the acquisition of 45% stakes in the Oiltanking Ghent and Oiltanking Terneuzen terminals, located in the strategically important Amsterdam-Rotterdam-Antwerp region.
Oystercatcher completed a refinancing of its acquisition debt facilities in March 2013, and a further refinancing in October 2014. Both achieved good terms, extending the maturity date and lowering debt servicing costs.
During the year to 31 March 2017, part of the Oystercatcher bank facility was refinanced through a long dated private placement funding in Singapore dollars. The refinancing extends Oystercatcher’s debt maturity profile and provides a natural currency hedge for distributions from the terminal located in Singapore.
Headquartered in Brussels, Belgium, TCR is Europe’s largest independent asset manager of airport ground support equipment (“GSE”) and operates at over 100 airports.
Since inception, TCR has defined the market for leased GSE, providing high quality assets and a full service leasing, maintenance and fleet management offering to its clients, which are predominantly independent ground handling companies, airlines and airports. This enables GSE operators to concentrate on their core business of ground handling. The GSE that TCR provides is critical infrastructure, without which some of Europe’s busiest airports could not operate.
Developments in the period
TCR performed well during the period. Contract renewal in its core European markets remains very high, demonstrating the defensive nature of the cashflows and TCR’s strong position in a growing market.
In the last six months, TCR has expanded its footprint (notably in Italy and Germany) and added new asset classes to its offering. It has won contracts with new customers including British Airways and Norwegian Air and has started operating the first equipment pooling system in the UK at Luton Airport.
Outside Europe, TCR continues to expand its foothold in Malaysia through additional contract wins with Malaysian Airlines. In Australia, it acquired Emerge Engineering & Maintenance, the leading local repair and maintenance business with workshops at six major airports. This provides TCR with an entry point to the Australian market.
TCR fits with the Company’s strategy of investing in companies with good asset backing, strong market positions and barriers to entry, yet with operational levers to achieve attractive returns for shareholders through active asset management:
Valorem is a leading independent renewable energy development and operating company. It is one of the largest onshore wind developers in France, having developed over 480MW of capacity over the last 10 years.
The French power market is experiencing a major transition as it looks to reduce its reliance on nuclear generation and to increase generation from renewable sources of energy such as wind and solar. The energy transition has been continuously supported by the French governments over the past decade. With in-house capabilities across the entire project cycle and a strong local footprint, Valorem is well positioned to benefit from this shift in energy mix.
Developments in the period
Since acquisition in September 2016, Valorem has grown its existing onshore wind asset base from 142MW in operation to 191MW as at 30 September 2017. These projects sell their electricity through 15-year fixed-indexed power purchase agreements to EDF.
The pipeline has also developed in line with expectations, with 42MW currently in construction and 630MW in advanced pipeline.
Since our investment, Valorem has closed its first 36MW of photovoltaic projects, and secured a feed-in-tariff for an additional 32MW in the last photovoltaic tariff auction in June 2017. To support the company’s expansion and strengthen the senior management team, Frédéric Lanoé was appointed COO in May 2017.
The French power market is experiencing a major transition as it looks to reduce its reliance on nuclear generation and to increase generation from renewable sources of energy such as wind and solar.
The energy transition has been continuously supported by the French governments over the past decade. With in-house capabilities across the entire project cycle and a strong local footprint, Valorem is well positioned to benefit from this shift in energy mix.
This investment diversifies the Company’s portfolio with exposure to a growing renewables business in one of the most attractive European markets, and access to recurring, inflation-linked cash flows underpinned by a robust regulatory regime.
Led by its experienced management team, Valorem is a best-in-class developer, being the fourth largest French wind developer and the largest independent one. It has a significant pipeline of projects at an advanced stage of development that it expects to convert into operating assets, with further projects at earlier stages to bring through the development process.
Wireless Infrastructure Group
WIG is the UK's second largest independent tower company and the largest to focus solely on telecom towers. It operates c. 2,000 towers and other wireless infrastructure assets, representing 7% of the UK market.
WIG is independent of any network operator and invests in shareable infrastructure that is made available to all networks.
Developments in the period
WIG’s core tower business performed well in the period, supporting customers with the expansion of their networks to deliver greater wireless bandwidth and geographic coverage, and increased resilience. WIG’s organic growth is benefiting from new greenfield infrastructure investment including new communication towers and fibre-connected small cell networks.
WIG’s small cell business unit delivers high capacity infrastructure into large public venues such as shopping centres, office blocks and stadiums. The business unit is targeting new infrastructure opportunities in busy outdoor city locations and recently announced its first 5G-ready deployment in Aberdeen.
WIG continues to review opportunities to acquire new towers where these are complementary to the existing portfolio.
The market outlook is favourable for tower companies as they support network customers in their projects to expand coverage in rural areas and densify networks and urban and suburban areas. Policy makers and mobile operators are becoming increasingly aware of the benefits of independently operated communications infrastructure and the market share of the independent tower sector continues to rise across Europe. The independent tower sector is also set to play a major role in supporting the deployment of 5G and the additional infrastructure this will require.
3i Infrastructure acquired a 36% economic interest in WIG investing approximately £75 million and joining existing majority shareholder Barings Alternative Investments (formerly known as Wood Creek Capital Management) and the management team as shareholders.
This investment diversifies the Company’s portfolio with exposure to a growing communications infrastructure business. Communication towers are critical pieces of infrastructure that are largely agnostic to technological change. The cash flows generated by the business are inflation-linked and are underpinned by long-term contracts. With its scalable platform and track record of building new infrastructure and making accretive acquisitions, WIG is well placed to target further growth in the UK and across Europe.