REG - Renew Infra Grp Ld - Announcement of Final Results <Origin Href="QuoteRef">TRIG.L</Origin> - Part 3
23/02/2016 07:23
- Part 3: For the preceding part double click ID:nRSW8156Pb
2014£'million
Statutory IFRS Basis Adjustments Expanded Basis Statutory IFRS Basis Adjustments Expanded Basis
Portfolio value 711.6 0.7 712.3 412.4 60.5 472.9
Working capital 0.1 (1.0) (0.9) 0.9 (0.9) -
Debt - - - - (60.1) (60.1)
Cash 14.9 0.3 15.2 12.4 0.5 12.9
Net assets 726.6 - 726.6 425.7 - 425.7
Net asset value per share 99.0p 99.0p 102.4p 102.4p
Expanded Basis versus Statutory IFRS Basis
The Statutory IFRS Basis includes TRIG UK's cash, debt and working capital balances as part of portfolio value. There is no
change to net assets as a result of the amended standard.
The majority of cash generated from investments had been passed up from TRIG UK to the Company at both 31 December 2015 and
31 December 2014.
At 31 December 2015, TRIG UK had no drawings under its revolving acquisition facility (2014: £60.1 million drawn) meaning
the adjustment between the Statutory IFRS Basis and the Expanded Basis is de minimis.
Analysis of Expanded Basis financial results
Portfolio value grew by £239.4 million in the year to £712.3 million, substantially as a result of the two acquisitions in
the year as described more fully in Section 2.7 of this Strategic Report.
Group cash at 31 December 2015 was £15.2 million (2014: £12.9 million) and acquisition facility debt drawn was £Nil (2014:
£60.1 million).
Net assets grew by £300.9 million in the year to £726.6 million. The Company raised £311.5 million (after issue expenses)
of new equity during the year and produced a £37.2 million profit in the period (before the impact of the Summer Budget),
with net assets being stated after accounting for dividends paid in the period (net of scrip take up) of £28.3 million and
the £20.2 million impact of the UK Summer Budget. Other movements in net assets totalled £0.7 million, being Managers'
shares accruing in H2 2015 and to be issued on or around 31 March 2016.
Net asset value ("NAV") per share as at 31 December 2015 was 99.0p compared to 102.4p at 31 December 2014.
Net asset value ("NAV") and Earnings per share ("EPS") reconciliation
NAV per share Shares in issue (million) Net assets (£'million)
Net assets at 31 December 2014 102.4p 415.9 425.7
Profit/EPS to 31 December 2015 before impact of Summer Budget 6.6p1 - 37.2
Impact of 8 July 2015 UK Summer Budget (3.9p)2 - (20.2)
Shares issued (net of costs) 0.1p 312.5 311.53
Dividends paid in 2015 (6.2p) - (32.8)
Scrip dividend take-up - 4.54 4.5
H2 2015 Managers' shares to be issued - 0.7 0.7
Net assets at 31 December 2015 99.0p 733.6 726.6
1. Calculated based on the weighted average number of shares during the year being 565.2 million shares
2. Calculated based on the number of shares in issue at 8 July 2015 being 524.7 million shares. If the £20.2 million UK
Summer Budget impact had been divided by the weighted average number of shares during the year, 565.2 million shares, the
EPS impact is (3.6p), which combined with the pre-UK Summer Budget EPS of 6.6p nets to the 3.0p EPS as reported in the
financial statements.
3. Includes shares issued to Managers (less costs) during the year.
4. Scrip dividend take-up comprises 0.9 million shares, equating to £0.9 million, and 3.6 million shares, equating to £3.6
million, issued in lieu of the dividends paid in March 2015 and September 2015, respectively.
Cash flow statement
Summary cash flow statement Year to 31 December 2015£'million Year to 31 December 2014£'million
Statutory IFRS Basis Adjustments Expanded Basis Statutory IFRS Basis Adjustments Expanded Basis
Cash received from investments 24.0 18.4 42.4 25.6 9.7 35.3
Operating and finance costs (0.8) (7.6) (8.4) (1.0) (3.7) (4.7)
Cash flow from operations 23.2 10.8 34.0 24.6 6.0 30.6
Debt arrangement costs - (1.6) (1.6) - (1.7) (1.7)
Foreign exchange gains 3.2 (0.1) 3.1 0.2 0.1 0.3
Issue of share capital (net of costs) 311.7 (0.9) 310.8 103.5 (0.5) 103.0
Acquisition facility drawn/(repaid) - (60.1) (60.1) - 60.1 60.1
Purchase of new investments (including acquisition costs) (307.3) 51.7 (255.6) (103.0) (76.8) (179.8)
Distributions paid (28.3) - (28.3) (15.8) - (15.8)
Cash movement in period 2.5 (0.2) 2.3 9.5 (12.8) (3.3)
Opening cash balance 12.4 0.5 12.9 2.9 13.3 16.2
Net cash at end of period 14.9 0.3 15.2 12.4 0.5 12.9
Expanded Basis versus Statutory IFRS Basis
The most significant differences in the year between the Statutory IFRS Basis and the Expanded Basis cash flows arise
because the Statutory IFRS Basis excludes the revolving credit facility debt repaid by TRIG UK during the year to 31
December 2015 facilitated by inter-company funding from the Company following equity fund-raisings. Other differences
include income received by TRIG UK applied to reinvestment and expenses incurred by TRIG UK, including the debt facility
arrangement costs and movements in TRIG UK's working capital that are excluded under the Statutory IFRS Basis.
Analysis of Expanded Basis financial results
Cash received from investments in the period was £42.4 million (2014: £35.3 million). The increase in cash received
compared with the previous year reflects the increase in the size of the portfolio. Cash flow from operations of £34.0
million (2014: £30.6 million) covers cash dividends paid in the period of £28.3 million (2014: £15.8 million), which
excludes £4.5 million (2014: £4.3 million) of scrip dividends, by 1.2 times. The reduced dividend cover reflects in
particular the reduction in income during the year due to reduced power prices in the period. The £34.0 million of cash
flow from operations was after £16.9 million of scheduled repayments of project-level debt made by the portfolio project
companies during the year (which contribute to NAV).
Share issue proceeds (net of costs) totalling £310.8 million (2014: £103.0 million) reflects the net proceeds of the 250
million shares issued during the year under the Share Issuance Programme launched in December 2014 and a further 62.0
million shares by way of tap issue in November 2015.
In the year cash balances increased by £2.3 million and £255.6 million was invested in acquisitions. This was funded
through the net addition of £310.8 million of share capital raised and £7.2 million reinvestment of investment income less
£60.1 million of acquisition facility debt repaid.
2.7 Valuation of the Group's Portfolio
Introduction
The Investment Manager is responsible for carrying out the fair market valuation of the Group's investments which is
presented to the Directors for their approval and adoption. The valuation is carried out on a six monthly basis as at 31
December and 30 June each year.
For non-market traded investments (being all the investments in the current portfolio), the valuation is based on a
discounted cash flow methodology, and adjusted in accordance with the European Venture Capital Associations' valuation
guidelines where appropriate to comply with IAS 39, given the special nature of infrastructure investments. Where an
investment is traded, a market quote is used.
The valuation for each investment reflected in the portfolio valuation is derived from the application of an appropriate
discount rate to reflect the perceived risk to the investment's future cash flows to give the present value of those cash
flows. The Investment Manager exercises its judgment in assessing both the expected future cash flows from each investment
based on the project's life and the financial models produced by each project company and the appropriate discount rate to
apply. This is the same method as applied since the inception of the Company.
The Directors' Valuation of the portfolio as at 31 December 2015 was £712.3 million. This valuation compares to £472.9
million as at 31 December 2014 and £699.4 million at 30 June 2015.
Valuation Movements
A breakdown of the movement in the Directors' valuation in the year is set out in the table below.
Valuation movement during the year to 31 December 2015 £'million £'million
Valuation at 31 December 2014 472.9
New investments in the period 254.6
Cash distributions from portfolio (42.4)
Rebased valuation of portfolio 685.1
Forex movement on euro investments (3.0)
Change in forecast power prices (26.0)
Change in economic assumptions - interest rates 0.7
Change in economic assumptions - discount rate 10.7
Impact of Summer Budget 2015 (20.2)
Portfolio return 65.0
Valuation at 31 December 2015 712.3
Allowing for investments of £254.6 million and cash receipts from investments of £42.4 million, the rebased valuation is
£685.1 million. The valuation at 31 December 2015 is £712.3 million, representing an increase over the rebased valuation of
4.0% over the year or 4.8% when the timing of acquisitions is taken into account, which would increase to 8.5% if the
impact of the UK Summer Budget was excluded.
Each movement between the rebased valuation and the 31 December 2015 valuation is considered in turn below:
(i) Foreign exchange: Weakening of the euro versus sterling has led to a £3.0 million loss on foreign exchange in the
period in relation to the euro-denominated investments located in France and the Republic of Ireland, or a £1.1 million
loss after the benefit of hedges as stated below. At 31 December 2014, euro-denominated investments comprised 13% and at 31
December 2015 comprised 8% of the portfolio (the reduction being largely due to the impact of acquisitions in the period
which were wholly in the UK).
The Group enters into forward hedging contracts against its expected income from euro-denominated investments over the
short term, currently approximately the next 18 months. In addition the Group enters into further forward hedging contracts
such that, when combined with the "income hedges", the overall level of hedge achieved in relation to the euro-denominated
assets is approximately 50%.
As the euro depreciated the currency hedge generated a £1.9 million gain in the year to 31 December 2015 and serves to
reduce the sensitivity to movements in the euro/sterling exchange rate. The negative impact on net assets of the foreign
exchange movement is hence £1.1 million after netting off the £1.9 million benefit of the foreign exchange hedge.
The Investment Manager keeps under review the level of exposure to the euro and utilises hedges, with the objective of
minimising variability in shorter term cash flows with a balance between managing the sterling value of cash flow receipts
and potential mark-to-market cash outflows.
(ii) Forecast power prices: Reductions in power price forecasts during the year had the impact of reducing the valuation
of the portfolio by a net £26.0 million. The valuation uses updated power price forecasts for each of the markets in which
TRIG invests, namely the GB market, the Irish Single Electricity Market, and the French market.
As in the later months of 2014, during 2015 power price forecasts have continued to decline. The main drivers reducing the
forecast power prices continue to be reduced short-term gas prices (caused in part by a warmer than average winter
2014/2015 and hence lower demand, combined with higher stocks of Liquefied Natural Gas ("LNG") during the period), and
lower gas prices being forecast over the longer term.
The weighted average power price used to determine the Directors' valuation is comprised of the blend of the forecasts for
each of the three power markets in which TRIG is invested after applying expected Power Purchase Agreement power sales
discounts. The forecast assumes an increase in power prices in real terms over time.
(iii) Change in Economic assumptions - interest rates: A reduction in interest receivable/payable rates has been applied to
cash deposits and project-level debt not subject to fixed rate swaps in the UK projects to reflect lower interest rate
projections applicable in the UK - rates now assumed are 1% until March 2019 and a 2.5% rate thereafter (previously 3% was
assumed). This change in assumption leads to an increase in the valuation of the UK investments of £0.7 million.
(iv) Change in Economic Assumptions - discount rates: During the year, there has continued to be strong demand for
income-producing infrastructure assets, including renewable energy projects, as the market matures and more investors seek
to gain exposure. This has resulted in a continued reduction in the prevailing discount rates applied for operating
projects which partially offsets the reductions in power price forecasts. Overall the Investment Manager, based on its
experience of bidding and transacting in the secondary market for renewable infrastructure assets, has applied an average
reduction of 0.3% in discount rates.
Without the impact of acquisitions in the period, the portfolio weighted average valuation discount rate would have
slightly reduced, however the Company made significant acquisitions in UK wind projects with in-place project finance debt
enhancing their returns and with higher than portfolio-average valuation discount rates. The overall impact on the weighted
average portfolio valuation discount rate of the market discount rate compression and the acquisitions in the period was to
leave it unchanged at 9.0%.
There have been no changes made to the discount rate methodology applied to the portfolio valuation. The discount rate used
for valuing each investment represents an assessment of the rate of return at which infrastructure investments with similar
risk profiles would trade at on the open market.
(v) Portfolio return: This refers to the balance of valuation movements in the period (excluding (i) to (iv) above and
represents an uplift of £65.0m. This represents a 9.5% increase on the rebased value of the portfolio. The balance of
portfolio return mostly reflects the increase in the net present value of the projected future cash flows brought forward
by a year at the prevailing portfolio discount rate (9.0%).
(vi) Impact of UK Summer Budget 2015: The UK Chancellor of the Exchequer announced on 8 July 2015 changes to tax
regulations which impacted the value of the portfolio as follows:
· The removal, effective 1 August 2015, of the exemption for renewably sourced electricity from the Climate Change
Levy (a tax on some non-domestic supplies of energy to help fund carbon reduction initiatives and provide energy efficiency
incentives). Many renewables projects in the UK derived benefit by way of the sale of Levy Exemption Certificates ("LECs")
which have been issued to accredited generators of renewable energy. LECs were expected to provide applicable UK projects
in the portfolio with incremental annual near-term revenue of approximately £4 per MWh and were expected to represent
approximately 4% of the Company's current portfolio revenues, and
· Future reductions in the rate of UK corporation tax from 20% to 19% in 2017 and to 18% in 2020.
The combined impact on the portfolio valuation of the removal of the projected income from the sale of LECs and the
reductions in UK corporation tax is an adverse impact of £20.2 million.
Valuation Sensitivities
The Investment Manager has provided sensitivity analysis to show the impact of changes in key assumptions adopted to arrive
at the valuation. For each of the sensitivities, it is assumed that potential changes occur independently of each other
with no effect on any other base case assumption, and that the number of investments in the portfolio remains static
throughout the model life. All of the NAV per share sensitivities assume 733.6 million Ordinary Shares as at 31 December
2015 (which includes those in issue as well as approximately 0.7 million shares due to be issued in March 2016 as
part-payment of the Managers' fees).
The analysis below shows the sensitivity of the portfolio value to changes in key assumptions as follows:
Discount rate assumptions
The weighted average valuation discount rate applied to calculate the portfolio valuation is 9.0% at 31 December 2015. The
sensitivity shows the impact on valuation of increasing or decreasing this rate by 0.5%.
Discount rate sensitivity -0.5% Base 9.0% +0.5%
Directors' valuation +£28.5m £712.3m -£27.0m
Implied change in NAV per Ordinary Share +3.9p/share -3.7p/share
Energy yield assumptions
The table below shows the sensitivity of the portfolio value to changes in the energy yield applied to cash flows from
project companies in the portfolio. The terms P90, P50 and P10 are explained below.
Energy yield sensitivity P90 (10-year) Base (P50) P10 (10-year)
Directors' valuation -£78.5m £712.3m +£77.0m
Implied change in NAV per Ordinary Share -10.7p/share +10.5p/share
The base case assumes a "P50" level of output. The P50 output is the estimated annual amount of electricity generation (in
MWh) that has a 50% probability of being exceeded - both in any single year and over the long term - and a 50% probability
of being under achieved. Hence the P50 is the expected level of generation over the long term.
The sensitivity illustrates the effect of assuming "P90 10-year" (a downside case) and "P10 10-year" (an upside case)
energy production scenarios. A P90 10-year downside case assumes the average annual level of electricity generation that
has a 90% probability of being exceeded over a 10 year period. A P10 10-year upside case assumes the average annual level
of electricity generation that has a 10% probability of being exceeded over a 10 year period. This means that the portfolio
aggregate production outcome for any given 10 year period would be expected to fall somewhere between these P90 and P10
levels with an 80% confidence level, with a 10% probability of it falling below that range of outcomes and a 10%
probability of it exceeding that range. The sensitivity includes the portfolio effect which reduces the variability because
of the diversification of the portfolio. The sensitivity is applied throughout the life of each asset in the portfolio
(even though this exceeds 10 years in all cases).
Power price assumptions
The sensitivity considers a flat 10% movement in power prices for all years, i.e. the effect of adjusting the forecast
electricity price assumptions in each of the jurisdictions applicable to the portfolio down by 10% and up by 10% from the
base case assumptions for each year throughout the operating life of the portfolio.
Power price sensitivity -10% Base +10%
Directors' valuation -£56.0m £712.3m +£55.8m
Implied change in NAV per Ordinary Share -7.6p/share +7.6p/share
Inflation assumptions
The projects' income streams are principally a mix of subsidies, which are amended each year with inflation, and power
prices, which the sensitivity assumes will move with inflation. The projects' management, maintenance and tax expenses
typically move with inflation but debt payments are fixed. This results in the portfolio returns and valuation being
positively correlated to inflation.
The portfolio valuation assumes 2.75% p.a. inflation for the UK (based on the Retail Prices Index) and 2.0% p.a. for each
of France and Ireland (based on the Consumer Prices Indices).
The sensitivity illustrates the effect of a 0.5% decrease and a 0.5% increase from the assumed annual inflation rates in
the financial model for each year throughout the operating life of the portfolio.
Inflation rate sensitivity -0.5% Base +0.5%
Directors' valuation -£35.0m £712.3m +£39.2m
Implied change in NAV per Ordinary Share -4.8p/share +5.4p/share
Operating costs at project company level
The sensitivity shows the effect of a 10% decrease and a 10% increase to the base case for annual operating costs for the
portfolio, in each case assuming that the change to the base case for operating costs occurs with effect from 1 January
2016 and that change to the base case remains reflected consistently thereafter during the life of the projects.
Operating cost sensitivity -10% Base +10%
Directors' valuation +£23.0m £712.3m -£23.2m
Implied change in NAV per Ordinary Share +3.1p/share -3.2p/share
Euro/sterling exchange rates
This sensitivity shows the effect of a 10% decrease and a 10% increase in the value of the euro relative to sterling used
for the 31 December 2015 valuation (based on a 31 December 2015 exchange rate of E1.3569 to £1). In each case it is assumed
that the change in exchange rate occurs from 1 January 2016 and thereafter remains constant at the new level throughout the
life of the projects.
At the year-end, 8% of the portfolio was located in France and Ireland comprising euro-denominated assets. The Group has
entered into forward hedging of the expected euro distributions for the next 18 months and in addition placed further
hedges to reach a position where approximately 50% of the valuation of euro-denominated assets is hedged. The hedge reduces
the sensitivity of the portfolio value to foreign exchange movements and accordingly the impact is shown net of the benefit
of the foreign exchange hedge in place.
Exchange rate sensitivity -10% Base +10%
Directors' valuation -£2.6m £712.3m +£2.6m
Implied change in NAV per Ordinary Share -0.4p/share +0.4p/share
The euro/sterling exchange rate sensitivity does not attempt to illustrate the indirect influences of currencies on UK
power prices which are interrelated with other influences on power prices.
The impact of a 10% move in the euro/sterling exchange rate increases to around 0.6p following the additional investment in
euro-denominated assets made by TRIG in January.
Interest rates applying to project company debt and cash balances
This shows the sensitivity of the portfolio valuation to the effects of a reduction of 1% and an increase of 2% in interest
rates. The change is assumed with effect from 1 January 2016 and continues unchanged throughout the life of the assets.
The portfolio is relatively insensitive to changes in interest rates. This is an advantage of TRIG's approach of favouring
long-term structured project financing (over shorter term corporate debt) which is secured with the substantial majority of
this debt having the benefit of long-term interest rate swaps which fix the interest cost to the projects.
Interest rate sensitivity -1% Base +2%
Directors' valuation +£1.0m £712.3m -£2.3m
Implied change in NAV per Ordinary Share +0.1p/share -0.3p/share
It should be noted that all of TRIG's sensitivities above are stated after taking into account the impact of project level
gearing on returns.
2.8 Outlook
Market Conditions and Impact on TRIG's Operating Portfolio
During 2015 and into early 2016, the UK and European renewables markets have continued to be affected by the same trends as
in 2014 of lower current and forecast power prices offset by a tightening in market discount rates for operating projects,
as a wide range of investors continue to exhibit demand for investment in large-scale renewable energy infrastructure
projects. The ongoing weakness in wholesale power prices (to some degree influenced by low oil prices) have fed through to
lower wholesale power price forecasts for both the near and long term, which have weighed on the NAV as the portfolio's
electricity sales - linked to wholesale power prices - are a significant proportion of long-term portfolio project
revenues.
There are many factors at play in wholesale power pricing - both current and forecast. Beyond the near-term concerns such
as lower levels of Chinese economic growth, recent warm winters and the potential for increased energy supply from Iran and
others, longer term power price-related considerations have a greater impact on TRIG's future cash flows and valuation.
These may include matters such as long-term local and global economic growth rates, geopolitical changes, technological
changes (for both fossil fuels and renewable energy), deferral or cancellation of harder-to-access fossil resources,
changes to the build-out rate of previously-planned fossil fuel or nuclear generation projects, longer term trends in
seasonal temperatures, the rate of electrification of transport or heating as well as the deployment of further local and
international carbon reduction initiatives (including carbon taxes, demand-response projects and products, as well as
public support (where required) for additional generation or distribution projects). While wholesale power prices are
notoriously difficult to predict, TRIG may benefit from upside in the investment portfolio if power prices rebound over
time - and indeed TRIG's assumption is that power prices will stabilise and recover (from today's relatively low levels) at
rates approximately 2% ahead of inflation on average over the long-term.
On government support for renewables, the UN Paris conference in late 2015 provided a boost for global momentum in favour
of a continued rollout of decarbonisation initiatives, on an increasingly coordinated and ratcheted basis, including the
further build-out of renewables generation capacity and supporting technologies. Further, the year 2015 has recently been
confirmed as the warmest globally on record (partly exacerbated by the current "El Nino" effect), eclipsing the record set
in 2014 and providing further impetus to overall decarbonisation efforts.
In the UK, TRIG's core market, the recently-reduced levels of support from the current Government for new solar PV and
onshore wind developments, while not welcome for developers, appear to be consistent with overall UK 2020 renewables
targets (providing that offshore wind in particular fulfils its targets). With the exception of the unexpected removal in
2015 by the UK Treasury of the exemption for renewables generators from the Climate Change Levy, the changes in 2015 have
not affected TRIG's operating portfolio or its potential returns. The UK Government continues to promote new developments
in offshore wind (relative to onshore wind and solar PV). To support offshore wind in the UK (and possibly other
technologies), it is expected that a second round Contracts-for-Difference programme (deferred from the end of 2015) will
be launched in the year ahead. This follows the first round which was successfully completed in early 2015 and which
achieved a more cost-efficient level of support for those projects that won contracts.
TRIG also continues to monitor changes in other areas that affect the growth and integration of renewables. As renewables
are generally intermittent generators, it is essential for grid networks to have sufficient back-up capacity which includes
some fossil fuel generation that is supported by the UK Government's Capacity Mechanism. TRIG also assumes a level of
discount will continue to be required in power purchase agreements negotiated by renewables generators with electricity
suppliers which help to compensate suppliers for the costs of grid balancing. Onshore wind projects in some locations are
approaching grid parity (i.e. viability of new developments without subsidy), although achieving that may require further
flexibility in national and local government policies to allow new, larger turbines to be installed. As some operating
projects begin to reach the end of their subsidy arrangements in the years ahead, repowering with larger, more productive
turbines also becomes an opportunity for TRIG, in relation to its existing portfolio as well as new opportunities in its
target markets.
Based on the current outlook for the portfolio and TRIG's assessment of the markets in which it operates, TRIG is
well-positioned to continue to deliver its target returns, although it should be noted that the long-term delivery of the
target IRR will require stabilisation and recovery in power prices from their current depressed levels as discussed above.
The Board and the Managers also seek opportunities to improve the performance ahead of target through the delivery of
additional operational scale efficiencies and through prudent portfolio and financial management.
The declared interim dividend of 3.11p with respect to the six months to 31 December 2015 is due to be paid on 31 March
2016, producing an aggregate annual dividend for 2015 of 6.19p. As noted in the Chairman's statement, in 2016 TRIG plans to
move towards a quarterly dividend (from semi-annual), targeting 1.5625p per share per quarter amounting to an aggregate
target dividend of 6.25p per share for the financial year to 31 December 2016. This reflects an inflationary uplift on the
aggregate dividend for 2015. The first quarterly dividend is expected to be paid in June 2016 with respect to the three
months to 31 March 2016.
TRIG's Investment Pipeline and Acquisition Approach
InfraRed, as the Company's Investment Manager, continues to report strong prospective deal flow following the approximately
50% increase in the portfolio scale by generating capacity in 2015. The UK solar PV pipeline for acquisition after 2016 is
expected to reduce following the reductions in support schemes for new developments (after several exceptional years of
growth to about 9GW and a high rate of transfer to long-term owners). For the onshore wind sector it is a more positive
story. There is about 9GW of current installed onshore wind capacity in the UK, which is expected to increase to around
12GW by 2020. With development and construction cycles being much longer for onshore wind than solar PV and with project
sizes generally being much higher (with fewer investors active in this more complex technology), TRIG expects to see a
broad range of onshore wind projects and portfolios available for sale in the years ahead as utilities and other developers
gradually recycle capital invested in developments which have become operational.
In addition, the UK offshore wind market continues to expand on the back of strong UK Government support, with the current
approximately 5GW of installed capacity expected to double by 2020. As highlighted in the Chairman's Statement, the
increasing predictability of the offshore wind sector (in both revenues and costs), as the early generations of installed
projects establish meaningful track records and the overall industry scale produces increasing efficiencies, results in
this sector becoming appropriate for consideration for investment by TRIG. With France and other European markets also
driving renewables growth across multiple technologies, TRIG will continue to assess an active pipeline of new investment
opportunities beyond the UK.
With long-term secular momentum in the allocation of capital to infrastructure as well as a continuation of the low
interest rate era, increasing competition for investment is to be expected for operating projects across renewables in
general. This makes the continued careful management of the acquisition pipeline a critical factor. TRIG's access to
knowledge on broader energy and infrastructure markets, provided by its Managers, InfraRed and RES, and TRIG's flexibility
to invest across different technologies and jurisdictions are both important advantages.
2.9 Ten Largest Investments
Set out below are the ten largest investments in the portfolio. As at 31 December 2015, the largest investment (the Crystal
Rig II Wind Farm) accounted for approximately 12% of the portfolio by value. In total, the 10 largest projects accounted
for approximately 56% of the project portfolio by value (2014: 65%).
Project Location Type % of project portfolio by value at 31 December 2015 % of project portfolio by value at 31 December 2014
Crystal Rig II Scotland Wind 12% -
Hill of Towie Scotland Wind 6% 10%
Green Hill Scotland Wind 5% 9%
Rothes II Scotland Wind 5% -
Parley England Solar 5% 8%
Paul's Hill Scotland Wind 5% -
Earlseat Scotland Wind 5% 8%
Mid Hill Scotland Wind 5% -
Egmere Airfield England Solar 4% 7%
Altahullion England Solar 4% 5%
Stour Fields England Solar 5%
Roos England Wind 5%
Haut Languedoc France Wind 5%
Grange England Wind 4%
Total 56% 65%
Further information on each of these investments and on other investments in the portfolio are set out in Section 2.3.
2.10 Risks and Risk Management
Risks and Uncertainties
While there are a broad range of risk elements that may potentially impact on TRIG including ones relating to general
macro-economic factors, there are three particular categories of variables that may be particularly relevant, given the
nature of its business: (1) portfolio energy production; (2) electricity price movements; (3) regulation, including levels
of government support schemes for renewables. These risks are long-term in nature, although other near-term risks exist,
including those associated for example with the UK's relationship with the European Union. TRIG's approach to risk is one
of systematic assessment, on an investment project basis on acquisition, and as part of the overall portfolio management
over time as external dynamics shift.
Major Risk Category Key Mitigants
Portfolio electricity production · Established nature of onshore wind and solar PV technologies· Complementary seasonal bias of wind and solar production· Number and diversity of portfolio projects by generating technology, weather system and specific locality· Experience of RES as
Operations Manager in monitoring and improving portfolio production· Diversity of underlying equipment manufacturers and O&M suppliers· Improvements in technology providing future opportunities for repowering and storage
Electricity prices · Approximately two-thirds of TRIG's current portfolio-level revenue is fixed-type in nature, without power price exposure Established nature of onshore wind and solar PV technologies· Electricity is sold into three distinct electricity markets (GB,
Irish SEM and France)· Long-term nature of revenues and forward pricing mechanisms provides some protection against short-term fluctuations· Revenues from different projects shift towards greater power exposure at different times depending on support
scheme, commissioning date and contractual arrangements · Recent falls in electricity prices provide upside opportunity from economic growth, increased carbon taxes, generation supply constraints or other factors that may cause prices to rebound· In the
longer term, storage technologies may provide ability for renewables to become dispatchable and able to capture higher prevailing prices at times of higher demand
Regulation/government support for renewables · UK and Northern European economies expected to continue to demonstrate a robust approach to grandfathering commitments to existing installed capacity· Future subsidies generally tracking the fall in development costs of maturing technologies, providing
appropriate public value-for-money· Recent emphasis on energy security as a key item on the public agenda, in light of both dwindling North Sea fossil fuel production and broader geopolitical concerns· Strong public and political momentum in TRIG's
markets of focus towards maintaining a growth in the contribution of renewables towards long-term United Nations, European Union and national decarbonisation efforts.
Further comment on these categories is provided below:
Portfolio Electricity Production
The Company has been structured to provide the Investment Manager with the flexibility to invest across a variety of
markets and technologies, to enable diversification across weather systems, renewables technologies and regulatory regimes.
Onshore wind and solar PV, the main focus, are well understood technologies, deployed extensively both in Europe and
world-wide. This operating experience provides a sound basis on which to predict energy yield performance based on average
long-term wind speed and solar irradiation data, as well as plant availability and maintenance costs, especially when these
technologies are deployed in a large geographically diversified portfolio with an experienced Operations Manager.
Wind power and solar PV, while both termed "intermittent" sources of electricity, compared say to coal or gas whose energy
outputs can be planned, in combination provide a smoothing effect, with solar more productive in the summer and wind more
productive in the winter and with the absolute level of the two energy sources month by month being uncorrelated. In
addition, solar provides greater predictability through the year, compensating for wind which is more variable in the short
term. Wind also typically offers a slightly higher return on investment reflecting this variability.
The second element important for maintaining productivity is minimising operating downtime or maximising "availability".
RES, as Operations Manager, has over 30 years' track record in both developing and managing renewables and has the
experience of global operations, bringing considerable expertise both to the prediction of energy yields prior to acquiring
assets, and to operation of assets in order to optimise energy production. This is done through careful planning and
execution of project operations and prompt repair works both directly and through subcontractors. As onshore wind and solar
PV are now well-proven technologies (with easy access to sites for maintenance compared to offshore wind), typical levels
of availability in a given year are around 96% to 98%. Adjustments are made to TRIG's cash flow assumptions prior to the
acquisition of an asset - for example a schedule of panel degradation over time for solar PV assets or higher planned
maintenance costs for older wind assets.
Electricity Prices
In valuing the TRIG portfolio it is necessary to take a long-term view on electricity prices - particularly wholesale
prices - which is done in consultation with independent energy price forecasters. It should be noted that TRIG is more
concerned about long-term energy prices, as in the near term its revenues comprise a large proportion of subsidies together
with power price agreements ("PPAs") with fixed prices or price floors, as well as some fixed price feed-in tariffs
("FITs").
In 2016, the portfolio expects to benefit from approximately two-thirds of its project-level revenues coming from fixed
PPAs, FITs, renewables obligation certificates and other embedded benefits , i.e. revenue sources other than those based on
electricity market prices. The Contracts for Difference feed-in tariff regime launched in the UK (with a successful first
auction round completed in early 2015 and available for future commissioned assets if further rounds are launched) will
likely lead to further security over the revenue stream as more assets are added which benefit from this regime, providing
predetermined pricing for 15 years from commissioning.
In general the expectation is that in the long-term European energy wholesale prices will increase in real terms from
current levels.While the fall in oil prices has influenced gas prices, it should be noted that oil is not in itself a
significant feedstock for electricity production. Other factors have also contributed to lower recent power prices. These
include the mild recent winters experienced in the UK and Northern Europe causing a build-up in gas supplies and the
absence of major disruptions to European gas supply versus expectations. While further power price falls cannot be
excluded, there are upside opportunities should the market experience any reversal of the recent trend.
Higher wholesale power prices may arise from factors such as increases in demand for electrical power from growing
economies, increases in carbon taxes following further international cooperation in decarbonisation initiatives, trends
towards greater electrical usage in the transportation sector, the ongoing phasing out of heavily polluting coal-fired
power stations and the net reduction in nuclear energy generation expected in the EU over the years ahead. With the
potential for further progress in storage technologies, intermittent producers of electricity like wind and solar
generation plants may become partially or wholly dispatchable, which can increase the average price received for power
sales. This can reduce the impact in the Company's valuations of the "cannibalisation effect" (which takes into account the
expectation that multiple weather-correlated renewable sources provide the grid with supply simultaneously, thereby
reducing spot prices for power).
While greater network interconnections and coordination between EU regions can be expected, further convergence of
wholesale or retail prices is expected to be gradual. As TRIG's portfolio is split across several jurisdictions, the
Company has the benefit of diversification across electricity markets. The Company further benefits from the experience of
the Managers in evaluating different contract types - typically with major utilities - to provide appropriate exposure to,
or in some cases protection from, predicted price movements.
Finally, the impact of future power prices can be smoothed out through the portfolio mix and growth strategy. The portfolio
valuation is based on wholesale prices in three different European markets with differing future pricing dynamics. With
different portfolio projects commissioned at different times in different support jurisdictions and technologies, the
portfolio experiences a gradual transition from subsidy-based to power price-based exposure over time. Also, projects are
purchased at different points in the power price "cycle", with the most recent power forecasts being incorporated for each
acquisition, producing a cost-averaging effect. The Group may be expected to acquire some portfolio projects at times when
the long-term power price forecasts utilised turn out to be relatively high, though these would be offset over time by
projects purchased when the power forecasts turn out to have been at relatively low levels.
If materially lower long-term energy prices in our investment markets arise, a reduction in the valuation of the existing
portfolio would be expected, although new assets may be available more cheaply. Forecasts for future energy prices evolve
over time and whilst asset values may not directly follow any such re-forecast from selected third-party providers at any
given time, shareholders should expect some variation in asset valuation from period to period, as and when a material
movement from prior expectations is identified by the Investment Manager.
Government Support for Renewables
The fundamental challenges for the future of the EU energy market, in which renewables play an increasing part, remain in
place. These challenges include the imperative of reducing carbon dioxide and other noxious emissions, the desire to
improve energy security and the requirement to replace inefficient or aging energy infrastructure. The gradual emergence of
local shale oil and gas opportunities may partially mitigate any reduction in North Sea oil and gas production, but the
expectation is that governments will continue to require a significantly increased contribution by renewables technologies
to meet the region's needs for energy security and carbon reduction.
Geographically, the Company focuses its investments on the UK and Northern Europe where there is a strong emphasis on
delivering versus challenging renewable energy deployment targets for 2020, and showing consistency in grandfathering prior
subsidy commitments to operating plants.
The United Nations "COP 21" meetings in Paris in November and December 2015 culminated in agreement by 195 nations on
initiatives to support decarbonisation. While this summit fell short of a definitive global agreement on country-specific
deliverables, with the level of burden on developed versus developing countries remaining a key point of debate, the
outcome is a clear consensus for escalating activity via 5-yearly ratchet mechanisms which look beyond short-term
individual country interests. The outcome recognises the importance of practical recognition of the need for continued
international monitoring and adjusting of initiatives both at country-level and internationally. In the longer-term, future
decarbonisation targets (i.e. beyond the EU's current 2020 targets) - and supporting initiatives - may provide a further
boost for renewables investment.
In the UK, the Government views that solar PV and onshore wind technologies have developed to a volume already nearing
sector targets for 2020 and that recent roll-out levels risk over-delivery (assuming other technologies also meet their
sector targets). Accordingly it has implemented changes to incentives to curtail build-out of these technologies. This is
expected to lead to fewer pipeline opportunities for TRIG, most notably in solar, as assets here typically pass from
developer to end-investor during or soon after construction, but also over time in onshore wind, until these assets can be
delivered without incentives above those of competing fossil-fuel technologies.
The UK Government continues to support the roll-out of offshore wind which remains underweight versus its targets. While
lower levels of Government support for further development of onshore wind and solar PV projects may in the medium-term
reduce the volume of pipeline opportunities for TRIG to address in these sectors, a moderation in the rate of new
development makes those projects that proceed (including further build-out in offshore wind) easier for the electricity
system to integrate and absorb. Ultimately this may lower the risk for TRIG's portfolio in the longer term and,
additionally, may help support valuations.
France is continuing its policy of reinforcing the build-out of renewables, including solar, onshore and offshore wind. The
French Government has stated its objective of reducing its reliance on nuclear energy to 50% of electricity generated by
2025 (from close to three-quarters today), with much of the deficit to be covered by renewable energy. The French market
and other North European markets provide considerable opportunity for further diversification of the TRIG portfolio.
Following the 2015 general election in the UK, the new Government unexpectedly removed renewables generators' exemption
from the Climate Change Levy with effect from 1 August 2015 (and the associated revenues from the sale of Levy Exemption
Certificates ("LECs")). This impacted TRIG's operating portfolio to the extent of reducing medium-term revenues by 4% and
NAV by a similar amount. Adjustment for this removal was already fully reflected in the Company's net asset value as set
out in the Company's 2015 interim report in August 2015. The Company had engaged in proceedings, along with other
participants in the renewables industry, for a judicial review regarding the insufficiency of the notice period given by HM
Treasury when removing LECs. On 10 February 2016, the UK High Court of Justice dismissed an application for judicial review
to which the Company's proceedings were linked. The Company does not assume any recovery of losses incurred (and fully
accounted for in 2015) as a result of removal of LECs.
Other Risk Factors
There are a range of other risks, for example those that are more macroeconomic in nature, including the potential impact
of material changes in market discount rates, inflation, interest rates, tax rates or exchange rates. The estimated impact
of these on NAV, together with the impact of power price, energy yield and operating cost variability, is illustrated in
the sensitivities section of the Company's portfolio valuation in Section 2.7.
Other risk factors which TRIG has been monitoring closely include:
Interest rates: While interest rates remain low in our markets of focus, the recent increase in US interest rates have
turned attention to the potential impact of higher rates elsewhere in due course. Current low levels of inflation and
modest European GDP growth rates suggest a slow and manageable trajectory of interest rate recovery over time. To the
extent that higher rates are correlated with higher inflation, the portfolio is protected by a natural hedge through
exposure to inflation-linked contracts and to power prices which can be expected over the long-term to have positive
correlation with inflation. In addition, TRIG's project-level debt is generally structured (including with swaps) to fix
the levels of interest payments.
UK referendum on EU membership: 2016 promises extensive debate on the UK's membership (or terms of it) of the EU towards a
planned referendum. At this stage it is not clear what the precise impact on the UK renewables industry will be of an exit
from the EU. Amongst many potential consequences of a UK exit, should this be the outcome, is the possibility of momentum
for a second Scottish independence referendum if Scottish politicians succeed in casting a vote for a UK exit from the EU
as a trigger for a new Scottish vote. Unchanged however would be the longer-term global imperative towards decarbonisation
reflected in the Paris initiatives, the need for fresh generating plant as well as the growing importance of the role of
private capital in financing infrastructure as demographics of maturing and aging economies weigh on national budgets.
Retrograde actions on established financial commitments inevitably impact on the attractiveness of an economy and
government credit-worthiness and threaten access to cheap global capital required to finance deficits.
BEPS: The OECD presented on 5 October 2015 a final package of measures for a reform of the international tax rules
regarding the OECD/G20 Base Erosion and Profit Shifting (BEPS) project that was then endorsed by G20 Finance Ministers on 8
October 2015. The UK's HM Treasury issued a consultation document on tax deductibility of corporate interest expense on 22
October 2015 which sought feedback on the potential amendments to UK tax arrangements. The Company, along with others in
the infrastructure sector, has taken part in the consultation, and continues to engage with the UK tax authorities as the
proposals develop. Having taken advice from the Company's tax advisers, the Investment Manager's initial assessment is
that, should the BEPS proposals be incorporated into UK tax law within the range of expected outcomes, the impact, if any,
on the Company's net asset value is not expected to be material. It is also not expected that the new rules arising from
the BEPS project will be introduced in the UK to take effect before April 2017. However, there can be no certainty that the
effect of such rules will be in accordance with the Investment Manager's assessment of the information published to date.
As announced by TRIG in October 2015, the Company and its advisers will continue to monitor the potential impact of the
BEPS project and will make further announcements, if required, in due course.
In addition, there are other risks also regularly assessed by TRIG - including in the areas of operations, markets,
liquidity, credit, counterparties and taxation, and these are set out in the following section on risk management.
Risk Management
Risk Management Framework
The Company has put a risk management framework in place covering all aspects of the Group's business. Given the nature of
the Company (being an Investment Company where the Company outsources key services to the Investment Manager, Operations
Manager and other service providers), reliance is placed on the Group's service providers' own systems and controls.
The identification, assessment and management of risk are integral elements of the Investment Manager's and the Operations
Manager's work in both managing the existing portfolio and in transacting new investment opportunities. The Managers have
established internal controls to manage these risks and they review and consider the Group's key risks with the Board on a
quarterly basis. If a new risk arises or the likelihood of a risk occurring increases, a mitigation strategy is, where
appropriate, developed and implemented together with enhanced monitoring by the Investment Manager and/or Operations
Manager.
The Board's Management Engagement Committee also reviews the performance of the Investment Manager and Operations Manager
(as well as all key service providers) annually and in particular this review includes a consideration of the Managers'
internal
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