REG - Renew Infra Grp Ld - Announcement of Final Results <Origin Href="QuoteRef">TRIG.L</Origin> - Part 3
21/02/2017 07:07
- Part 3: For the preceding part double click ID:nRSU3791Xb
GB market, the Irish Single Electricity Market and the French market.
The £16.2 million valuation loss breaks down into a loss for the first half of the year of £43.0 million (that
predominately related to the first quarter of the year) and a valuation gain in the second half of the year of £26.8
million. This reflects a recovery in the GB power market prices, where imported fuel, notably gas, has increased in cost
when denominated in sterling as a result of the depreciation of sterling. It should be noted however that the power price
forecasts in France and the Single Electricity Market of Ireland declined throughout the year as gas prices in Euro have
remained low with globally weak demand and some oversupply.
The weighted average power price used in the Directors' valuation is comprised of the blend of 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.
(i) Foreign exchange: Significant weakening of sterling in the year versus the euro has led to a £16.0 million gain on
foreign exchange in the period in relation to the euro-denominated investments located in France and the Republic of
Ireland, which reduces to a £8.9m gain after the impact of hedges as stated below. As at 31 December 2016,
euro-denominated investments comprised 15% of the portfolio .
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 sterling depreciated the currency hedge incurred a £7.1 million loss in the year to 31 December 2016 and serves to
reduce the sensitivity to movements in the euro/sterling exchange rate. The overall positive impact on net assets of the
foreign exchange movement is hence £8.9 million after netting off the £7.1 million impact of the foreign exchange hedge.
(ii) 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 level of demand appears to be even stronger following the Brexit vote and at the year end the
Managers report the market for renewables investments being very strong. This has resulted in a continued reduction in the
prevailing discount rates applied for operating projects which more than offsets the valuation impact of the net overall
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 0.5% in discount rates in the
year (a 0.2% reduction was applied in the first half of the year and a further 0.3% reduction has been applied at the
year-end). The reduction in valuation discount rates increased the valuation by £31.6 million.
The weighted average portfolio valuation discount rate as at 31 December 2016 was 8.4% (31 December 2015: 9.0%). The
reduction reflects both the market discount rate compression and the investment in French solar projects in the year (which
have a lower level of return than the portfolio average).
(iii) Change in Economic assumptions - interest rates: The valuation assumes lower interest rates (with increases
occurring later than previously and a lower long term rate). This assumption affects interest receivable/payable rates
applied to cash deposits and project level debt not subject to fixed rate swaps to reflect lower interest rate projections
- rates now assumed are 1% until March 2021 (previously March 2019) and a 2.0% rate thereafter (previously 2.5%). This
change in assumption leads to an increase in the valuation of £0.4 million.
(iv) Changes in taxation assumptions: The most significant change was the Chancellor's announcement in the UK March 2016
Budget of further planned reductions in UK corporation tax (to 17% by 2020) partially offset by slower use of brought
forward corporation tax losses. The changes in tax announced provided a net benefit to the valuation of £6.2 million. (This
change is unchanged from that reported at the half year).
(v) Portfolio return: This refers to the balance of valuation movements in the period (excluding (i) to (iv) above and
represents an uplift of £50.2m. This represents a 6.9% increase in the rebased value of the portfolio. The balance of
portfolio return mostly reflects the net present value of the cash flows brought forward by a year at the prevailing
portfolio discount rate (8.7%). The lower than budgeted power generation production, caused mostly by lower wind speeds,
also impacts this item.
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 833.8 million Ordinary Shares as at 31 December
2016 (which includes those in issue as well as approximately 0.8 million shares due to be issued in March 2017 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 8.4% as at 31 December 2016.
The sensitivity shows the impact on valuation of increasing or decreasing this rate by 0.5%.
Discount rate sensitivity -0.5% Base 8.4% +0.5%
Directors' valuation +£32.0m £818.7m -£30.1m
Implied change in NAV per Ordinary Share +3.8p/share -3.6p/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 -£80.4m £818.7m +£77.8m
Implied change in NAV per Ordinary Share -9.6p/share +9.3p/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 -£63.6m £818.7m +£64.3m
Implied change in NAV per Ordinary Share -7.6p/share +7.7p/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 and 2.0% p.a. for each of France and Ireland .
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 -£39.8m £818.7m +£45.0m
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
2017 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 +£27.9m £818.7m -£27.9m
Implied change in NAV per Ordinary Share +3.3p/share -3.3p/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 2016 valuation (based on a 31 December 2016 exchange rate of E1.1709 to £1). In each case it is assumed
that the change in exchange rate occurs from 1 January 2017 and thereafter remains constant at the new level throughout the
life of the projects.
At the year-end, 15% 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 -£5.3m £818.7m +£5.3m
Implied change in NAV per Ordinary Share -0.6p/share +0.6p/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.
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 2017 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 +£1.9m £818.7m -£3.8m
Implied change in NAV per Ordinary Share +0.2p/share -0.5p/share
Corporation Tax Rate Sensitivity
The profits of each project company are subject to corporation tax in their home jurisdictions at the applicable rates (the
tax rates adopted in the valuation are set out in Note 4 to the financial statements).
The tax sensitivity looks at the effect on the Directors' valuation and the NAV per share of changing the tax rates by +/-
2% each year in each jurisdiction and is provided to show that tax can be a material variable in the valuation of
investments.
Tax sensitivity -2% Base +2%
Directors' valuation +£14.0m £818.7m -£14.0m
Implied change in NAV per Ordinary Share +1.7p/share -1.7p/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
2017 has begun with the prospect of continued political and economic uncertainty in the aftermath of the Brexit referendum
and the subsequent devaluation of sterling, with the impending elections in several major European countries and with the
recent change in the US presidency. Interest rates remain low and the prolonged effect of potentially lower economic growth
may prevail against a near-term rate rise in the UK, despite inflationary pricing pressures linked to sterling devaluation.
Amidst this uncertainty, TRIG is fundamentally well-positioned owing to its long-term yield-based returns, inflation-linked
upside and low correlation with equity markets.
Since 2013, the TRIG team has worked to create a strong portfolio of cash-generative assets enabling the Company to deliver
an attractive dividend, to withstand an array of external challenges and perform as a steady and diversifying income-based
investment. While some two-thirds of TRIG's near-term project portfolio revenues are fixed-type, the remainder are exposed
to fluctuations in expected wholesale power prices. Having faced the NAV impact of falling wholesale power prices since
IPO, there is the potential for shareholders to benefit from any sustained improvement in the UK and/or European power
markets, should this materialise.
The compelling income-based characteristics of operating renewables infrastructure projects ensure that the market for new
investments remains competitive. While this has been positive for the valuation of the Company's existing investments, many
of which were acquired when discount rates were higher, it is becoming more challenging to originate new investments that
are value-accretive. As well as numerous listed and private funds, insurance companies and pension funds are growing their
exposure to renewables. The UK and broader European renewables market has also seen increased interest from a range of
international investors, including state pension funds, energy groups (particularly from Asia) and high net worth
investors. The recent step-down in sterling (so far arguably the most significant outcome of the Brexit vote for
renewables) has provided an additional currency-based rationale for such investors looking at the UK.
Following an enormous volume of renewables development across Europe over the past five years, buttressed with supportive
government incentive schemes, TRIG and its peers have benefited from a steady stream of projects becoming available for
acquisition and recent development has been such that we can look forward to continued deal flow for several years. This
said, in the UK, TRIG's core market, the Government has been reducing subsidy levels for new wind and solar developments,
notably with the phasing out of ROC projects and the introduction of an alternative Contracts-for-Difference (CfD) system
which in the second round has not favoured the lowest price technologies of onshore wind and solar PV. Although this is
consistent with the costs of technologies coming down, it is likely that deployment in onshore wind and solar PV will slow
sharply over the near term as developers adjust to the new pricing dynamics and prepare for an unsubsidised future - which
is likely to be several years ahead of us for large-scale schemes.
2016 was a relatively quiet year for TRIG on the investment side - at least in terms of capacity and value of projects in
which it has completed investment, although 2017 has started with a full pipeline of opportunities under review and the
Investment Manager will continue to seek appropriate investments to increase the scale and diversification of the Company
without being drawn into excessive pricing in competition with some of the "strategic" bidders seen in 2016.
TRIG also has the advantage of being able to invest across a range of technologies and jurisdictions with attractive risk /
return dynamics. There is an increasing pipeline in alternative renewable technologies beyond onshore wind and solar PV,
including offshore wind, demand-side response and energy storage - as they build operational and financial track records.
Similarly, as TRIG continues to expand its portfolio, it will not only focus on further investment in the UK, France and
Ireland, but it is also considering additional appropriate geographies for investment, most likely in Northern Europe -
including Scandinavia, Germany and Benelux.
Over the longer term, the Manager remains confident about the renewables market in the UK. The UK is bound by
decarbonisation obligations nationally (under the Climate Change Act 2008) and internationally (through longer-term
commitments as a UN COP21 signatory as well as its nearer-term 2020 EU obligations). The UK requires a balanced generation
mix, in which renewables and supporting technologies such as storage and dispatchable generation will play an integral
role. With the closure of coal fired power stations, deployment of alternative energy sources is vital to maintaining a
generating capacity margin and to "keeping the lights on". The Company notes the UK Government's commitment in the second
half of 2016 both to new large-scale offshore wind as well as to new nuclear development and more recently, in January
2017, the positive Hendry Report on tidal lagoon technology, in which the UK is a pioneer and where InfraRed is one of the
leading proponents. There has also recently been a step-up in public concern regarding urban pollution in London as well as
elsewhere around the world which can only accelerate initiatives to further the electrification of transport systems.
The Board and Managers continue to work closely in reviewing the evolving landscape in renewables infrastructure and
assessing new opportunities for investment to grow the portfolio and to ensure the existing portfolio delivers to investors
a stable return. Despite current macro-economic and political uncertainties, the Company remains confident of its ability
to build on the strong foundations of its performance since its IPO in 2013 - based on a substantial, high-quality and
diversified portfolio and on skilled and disciplined management - and to continue to generate an attractive long-term
income-based return for investors well into the future.
2.9 Ten Largest Investments
Set out below are the ten largest investments in the portfolio. As at 31 December 2016, the largest investment (the Crystal
Rig II Wind Farm) accounted for approximately 11% of the portfolio by value. In total, the 10 largest projects accounted
for approximately 52% of the project portfolio by value (2015: 56%).
Project Location Type % of project portfolio by value as at 31 December 2016 % of project portfolio by value as at 31 December 2015
Crystal Rig II Scotland Wind (Atlantic) 11% 12%
Mid Hill Scotland Wind (Atlantic) 6% 5%
Hill of Towie Scotland Wind (Atlantic) 5% 6%
Altahullion N. Ireland Wind (Atlantic) 5% 4%
Green Hill Scotland Wind (Atlantic) 5% 5%
Rothes II Scotland Wind (Atlantic) 4% 5%
Earlseat Scotland Wind (Atlantic) 4% 5%
Parley England Solar PV 4% 5%
Pauls Hill Scotland Wind (Atlantic) 4% 5%
Egmere England Solar PV 4% 4%
Total 52% 56%
Further information on each of these investments and on other investments in the portfolio are set out in Section 2.3 of
this Strategic Report.
2.10 Risks and Risk Management
Risks and Uncertainties
While there are a broad range of risk elements that may potentially impact TRIG including ones relating to general
macro-economic factors, there are three particular variables that the Managers believe are most relevant, given the nature
of its business: (1) portfolio energy production; (2) electricity price movements; (3) regulation, including levels of
government support schemes. 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.
The Managers and the Board have considered and reviewed the key risks. The key event has been the Brexit vote in June 2016,
which adds further uncertainty. It is noted that the outturn of the exit negotiations could lead to a second independence
referendum for Scotland, discussed further below, and that the UK government may have a wider range of options when selling
energy policy in the future, but with the Climate Change Act expected to provide a positive overall direction for
renewables. This subject is covered under the commentary below on both 'Electricity Prices' and 'Government Support for
Renewables.
Major Risk Category Key Mitigants
Portfolio electricity production falling short of expectations · 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 enhancement and repowering
Electricity prices falling or not recovering as expected · Approximately two-thirds of TRIG's near-term portfolio-level revenue is fixed-type in nature, without power price exposure· Electricity is sold into three distinct electricity markets (GB, Irish SEM9 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 partly dispatchable and able to capture higher prevailing prices at times of higher demand
Government or regulatory support for renewables changes adversely · 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.
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.
An important element in maintaining high levels of energy production is minimising operating downtime (or maximising
"availability"). RES, as Operations Manager, has an extensive 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 the 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, typical levels of availability in a given year are around 96% to 98%.
Electricity Prices
In valuing the TRIG portfolio it is necessary to take a long-term view on wholesale electricity 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, fixed price feed-in tariffs ("FITs") and some assets with no
exposure at all.
In 2017, 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.
It is forecast that in the long term European wholesale electricity prices will increase in real terms from current levels.
The primary driver for rises in wholesale prices is recovering gas prices, with cheap sources of gas declining and an
increased reliance on more expensive gas (LNG) to meet demand. Carbon taxes are also expected to increase across Europe.
In the UK, TRIG's principal market, the recent depreciation of sterling brought on by the Brexit vote in June has raised
the domestic cost of internationally priced commodities, including coal and gas, putting upward pressure on electricity
prices. In the short term, TRIG has been able to benefit from these higher prices. Over the longer-term the outcome of the
UK's 'Leave' vote is less clear, not only for electricity prices but also in other respects, including broader political
and economic changes (for example whether in relation to regulations, GDP growth, foreign exchange, inflation or interest
rates) and potential resultant changes in investment appetite.
In France, TRIG's second most significant geographic exposure, electricity prices remain low, not having had a currency
boost, but have the potential to increase if there is a rise in gas and carbon prices which are still at relatively low
levels. Reduced nuclear generation in the coming years, as instigated by the Hollande government, may put upward pressure
on power prices with tightening of overall generation capacity. The recent 'Energy Transition Law,' which came into effect
in January 2016, caps nuclear capacity at 40% of national electricity production.
Progress in storage technologies may assist with dispatching wind and solar generation to a market with increasingly
intermittent generation. This can increase the average price received for power sales.
As TRIG's portfolio is split across several jurisdictions, the Company has the benefit of diversification across
electricity markets. Finally, 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.
Government Support for Renewables
The fundamental challenges for the future of the UK and 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 predominantly 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.
Ofgem, the UK energy regulator, is currently reviewing the arrangements for embedded generation which may result in changes
to the levels of 'embedded benefits.' These are additional regulatory incentives for the deployment of renewables capacity
connected to distribution networks. Although the outcome of this review is not yet clear, the Managers will continue to
monitor the consultation as it progresses and update forecasts accordingly.
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 above.
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. To the extent that higher rates are
correlated with higher inflation, the portfolio is protected by a natural hedge through exposure to inflation-linked
subsidies. In addition, TRIG's project-level debt is generally structured (including with swaps) to fix the levels of
interest payments.
The Brexit Vote: The UK's vote on 23 June 2016 to leave the EU has resulted in political and economic uncertainty with
consequent market volatility. The full implications of the Brexit vote are still difficult to assess with the Article 50
leaving negotiations yet to unfold. The impact of Brexit is already partially addressed under the major risk factors above,
although one additional uncertainty is how Brexit may affect Scotland and in particular how any further potential
independence initiatives might impact on its currency (potentially leaving sterling for the euro materially increasing the
Group's currency exposure) and on the renewables market, including future new capacity deployment, the treatment of
subsidies or the trajectory of power prices.
For TRIG's future portfolio valuations, the post-Brexit depreciation of sterling may cause overseas assets to become more
expensive relative to valuations using historic foreign exchange rates. The Company has foreign exchange hedges in place
that aim to offset approximately 50% of the Group's foreign exchange exposure leading to a manageable NAV per share and
mark to market exposure in the event of significant foreign exchange movements (as indeed have been the case during 2016).
The immediate effect has been an upward pressure on GB market electricity pricing, pushing up the portfolio valuation (see
Electricity Prices, discussed above). Over the longer term, the impacts on electricity pricing are harder to assess. In a
low GDP growth scenario, demand will be lower which will adversely impact electricity prices. However, there may
simultaneously be upward pressures on pricing if generating capacity margins tighten.
In terms of macroeconomic impact, inflationary pressure in the UK is likely. Higher inflation is mitigated by the inflation
linkage in the underlying contracts for the project companies.
BEPS: In December 2016, following consultation with industry, HMRC published their latest proposals for the implementation
in April 2017 of the OECD's Base Erosion Profit Shifting (BEPS) initiative in relation to the tax deductibility of
corporate interest expense. The Company's tax advisers and the Investment Manager took part in the consultation and have
been reviewing the development of the proposals and have considered the potential impact on the Company. Assuming the
draft proposals are implemented in their current form, they are not expected to materially impact the Company materially.
The Company and its advisers will continue to monitor the situation and participate alongside industry peers in the
consultation process.
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 the 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 controls and their effectiveness and the creation of a risk control matrix.
Given the limited number of expected disposals from the portfolio and the similar risk profile of the investments within
the portfolio (i.e. they are all renewable energy infrastructure projects in the UK or Northern Europe with broadly similar
contractual structures), the type and nature of the risks in the Group are not expected to change materially from period to
period.
The following table summarises some important areas considered on a regular basis in the risk assessment process by risk
category as set out in the Alternative Investment Fund Managers Directive:-
Category Key Elements
Operational Health and safety, risk of regulatory changes or breaches, fraud and management override, valuation error, political/regulatory changes, conflicts of interest, key man and service provider failure, breach of company policies or contractual covenants, energy yield, technology risk, project-level availability, equipment failure, project insurance, grid curtailment and outage, sub-contractor failure, tax
Liquidity Fund-level portfolio liquidity, fund-raising, project-level liquidity and gearing
Counterparty Contractual concentration
Credit Risk of counterparty failure
Market Power price, macro-economic (currency, interest rates, inflation), share price, competition
Tax Withdrawal of tax relief on interest deductions and other tax risks
Counterparty Exposures
Given the importance of state subsidies for investment in renewables, TRIG has exposure to the creditworthiness of and
policy commitments by national governments and is reliant on the consistency of government policy, for example
"grandfathering" within the UK whereby renewables generators continue to receive the same level of subsidy, set upon
commissioning, for the duration of the incentive. In addition, each project company enters into a commercial power purchase
agreement ("PPA") with a utility or energy trading company to enable them to sell the electricity generated and to receive
the feed-in tariff or Renewables Obligation Certificate ("ROC") subsidy payments. The project companies have entered into
PPAs with a range of providers. Each project company enters into a contract for the maintenance of the plant. In the case
of wind, this is usually with the turbine manufacturer. For both wind and solar sectors, projects may also benefit from
equipment provider warranties.
TRIG has a broad range of PPA counterparties, equipment providers and maintenance contractors. No supplier or off-taker is
currently involved in more than 50% of the projects by value or number (with the exception of RES, TRIG's Operations
Manager, which has project asset management and/or maintenance roles in relation to a number of the projects in addition to
the portfolio-level services it provides to TRIG). Further acquisitions are likely to provide further diversity of
counterparty exposures.
2.11 Sustainability and Corporate Culture
The Board recognises the importance of sustainability and corporate culture in meeting the Company's long-term objectives
and is ambitious in promoting behaviours and activities which maximise the Company's impact in these areas.
The Company's approach to sustainability and corporate culture includes:
· Considering the risk culture of the Company and within the Managers on a regular basis to confirm it is consistent
with the risk appetite of the Company's investors and expected to support the sustainability of the Company;
· Embedding and improving on good practices in the day-to-day management processes - which are assessed by the Board
in the course of the quarterly Board meetings as well as in a wide range of ad hoc interactions during the year;
· Promoting an appropriate culture of stewardship, responsibility, accountability and openness; and
· A focus by the Board and Managers on appropriate interaction with key stakeholders, including shareholders, lenders,
regulators, vendors, co-investors and suppliers.
The Board and Managers prioritise the engagement with the investment community, the renewables industry and regulators
where the Company's progress can be measured amongst the broader stakeholders. The Chairman sets the bar high in creating
and maintaining an effective corporate culture, for example, by her active advocacy of equal opportunities (outside TRIG,
the Chairman sits on the steering board advising the Parker Review regarding the ethnic diversity of UK boards), by
attending site visits with investors and investment industry events and by making a point of putting business in its proper
perspective at a more detailed level, for example by ensuring safety is the first issue addressed at Board meetings.
As TRIG has no employees, the Directors look through to the culture of TRIG's key service providers in annual review
processes as well as on an ongoing basis. The Board interacts regularly with staff of the Managers both at senior and
operational levels, in both formal and informal settings. This promotes greater openness and trust between the key
individuals engaged in delivering against the Company's objectives and ensures the Managers remain fully aligned with the
Company's corporate culture and approach to sustainability. The Board also engages closely throughout the year with the
Company's administrator, brokers, and legal and public relations advisers to gauge the broader positioning and direction of
the business.
The Investment Manager, InfraRed Capital Partners, has a strong and clear set of values - which it promotes and monitors
both group-wide and at the individual level (through assessments) - focusing on the principles of Passion, Curiosity,
Trust, Partnership and Fulfilment.
InfraRed also adopts and implements the Principles for Responsible Investment ("PRI") (an investor initiative in
partnership with UNEP Finance Initiative and UN Global Compact) which are widely recognised and highly regarded around the
world. The PRI can be summarised as follows:
· to showcase leadership in responsible investment;
· to incorporate sustainability issues into investment analysis and decision-making;
· to be active owners and incorporate sustainability issues into ownership policies and practices;
· to seek appropriate disclosures on sustainability issues by the entities in which the investments are made;
· to promote acceptance and implementation of PRI within the investment industry; and
· to report on activities and progress towards implementing the PRI.
Culture is very important for the Operations Manager, RES, from both a business perspective and to RES people. The RES
culture is what enables its strategy and what motivates its people to perform: in the last staff satisfaction survey, 92%
of RES employees said they were 'proud to be associated with RES'.
RES' leadership insists that as the organisation grows and adapts, it remains true to its culture, heritage and vision to
create a future where everyone has access to affordable low carbon energy. In 2013, RES staff members across the company
were involved in the development of the company's values. More recently these have been simplified to Passion,
Accountability, Collaboration and Excellence.
RES supervises a range of activities at a portfolio level designed to enhance the interaction with the local communities as
well as to make a difference to the amenities available in often remote locations where TRIG's projects are sited. These
community initiatives included more than £400,000 in financial contributions alongside substantial staff involvement.
The overall environmental contribution of the investment portfolio is substantial, with the portfolio as at 31 December
2016 capable of producing enough clean energy annually to power the equivalent of 390,000 homes in the UK, France and
Ireland while avoiding the emission of 570,000 tonnes of CO2 annually.
The integration of generating plants into the landscape is optimised to seek the maximum renewable energy generation while
minimising any local impacts through extensive consultation with statutory consultees, local authorities and the local
communities. Engagement with stakeholders once assets become operational is maintained at the highest standards.
As Operations Manager, RES has responsibility for monitoring the operational performance of the asset portfolio as well as
acting as the interface with underlying third party asset managers or O&M contractors and with local government and
communities. With RES' long history of developing and operating assets in the renewable energy sector in the UK, France and
Ireland as well as elsewhere around the world, it has developed a reputation for establishing and maintaining best
practices in sustainability matters with staff dedicated to support its operational management activities in these areas.
On the basis of the Managers' recommendations the Directors have considered the existing sustainability and corporate
culture policies relative to good industry practice as applicable to an infrastructure investment company and believe them
to be current and appropriate.
The Board remains committed to high standards of corporate governance and keeps the Company's practices under review with
respect to current best practice. Further details of how the Company complies with the various corporate governance
standards are set out in the section on Corporate Governance and Regulatory Matters.
The Board wishes to be at the forefront of disclosure and reporting of the Company's performance and strategic intentions.
The Board believes this is achieved by the communications as follows:
· annual report and accounts;
· interim statement and accounts;
· detailed presentations to accompany the results;
· announcements of all material acquisitions; and
· meetings with shareholders held by the Investment Manager and the Operations Manager.
The Company's website (www.trig-ltd.com) which includes the Company's prospectuses, financial disclosures and other
announcements since launch provides further information on TRIG and its investments.
Disclosure of key sensitivities and risks has been developed by the Board working with the Managers. The level and type of
disclosure has been developed and refined in order to assist in a full and fair analysis of the Company and its
investments.
This Strategic Report is approved by the Board of Directors of The Renewables Infrastructure Group Limited.
20 February 2017
Registered Office:
Trafalgar Court, Les Banques, St Peter Port, Guernsey GY1 3PP
Section 3
Board of Directors
Members of TRIG's Board of Directors, all of whom are non-executive and independent of the Managers, are listed below.
Helen Mahy CBE (Chairman, appointed 14 June 2013), aged 55, is an experienced chairman and non-executive director. Helen
was Group Company Secretary and General Counsel of National Grid plc and was a member of its Executive Committee from
September 2003 to January 2013 when she retired from National Grid plc. She is also a director of SSE plc where she joined
the board in March 2016. Her other directorships are with Bonheur ASA, an Oslo listed company, which she joined in October
2013 (and which in May 2016 merged with Ganger Rolf ASA where Helen was also on the board), and SVG Capital plc (from July
2014) where she chairs the Remuneration Committee. SVG Capital plc (SVG) is in the process (following shareholder
agreement) of selling its assets to an entity managed by HarbourVest Partners LLC and it is expected that SVG will be wound
up during 2017. Helen is also a member of the steering committee of the Parker Review which in 2016 reported on ethnic
minorities on UK Boards. She was a director of Stagecoach Group plc from January 2010 until February 2016 and she also
chaired the Health, Safety and Environment Committee there. She was also non-executive director of Aga Rangemaster Group
plc between March 2003 and December 2009. In 2005 and 2006, Helen sat on the General Management Committee of the Bar
Council and chaired its Employed Barristers' Committee in 2006 and was a Director of Bar Services Company Ltd between
January 2006 and February 2008. Helen was Chair of the General Counsel 100 Group in 2007. Helen qualified as a barrister
and was an Associate of the Chartered Insurance Institute. Helen was awarded a CBE for services to business in June 2015.
Helen is a resident of the UK.
Jon Bridel(Director, appointed 14 June 2013), aged 52, is currently a non-executive chairman or director of listed and
unlisted companies comprised mainly of investment funds and investment managers. These include Alcentra European Floating
Rate Income Fund Limited, Starwood European Real Estate Finance Limited, Sequoia Economic Infrastructure Income Fund
Limited and Funding Circle SME Income Fund Limited which are listed on the main market of the London Stock Exchange, as
well as DP Aircraft I Limited and Fair Oaks Income Fund Limited. He was previously Managing Director of Royal Bank of
Canada's investment businesses in the Channel Islands. Prior to this and after specialising in corporate finance with Price
Waterhouse, Jon served in senior management positions in the British Isles and Australia in banking, specialising in
corporate and commercial credit and in private businesses as chief financial officer. Graduating from the University of
Durham with a degree of Master of Business Administration in 1988, Jon also holds qualifications from the Institute of
Chartered Accountants in England and Wales where he is a Fellow, the Chartered Institute of Marketing and the Australian
Institute of Company Directors. Jon is a member of the Chartered Institute of Marketing, the Institute of Directors and a
Chartered Fellow of the Chartered Institute for Securities and Investment. Jon is a resident of Guernsey.
Shelagh Mason(Director, appointed 14 June 2013), aged 57, is an English property solicitor with over 30 years of experience
in commercial property. She retired as Senior Partner of Spicer and Partners Guernsey LLP on 30 November 2014 and has taken
up the position of consultant with Collas Crill, specialising in English commercial property. Her last position in the
United Kingdom was as a senior partner of Edge & Ellison. For two years until 2001, she was Chief Executive of a property
development company active throughout the United Kingdom and the Channel Islands. Shelagh was a member of the board of
directors of Standard Life Investments Property Income Trust, a property fund listed on the London Stock Exchange for 10
years until December 2014. She is also a director of Medicx Fund Limited, a main market listed investment company investing
in primary healthcare facilities. She is also non-executive Chairman of the Channel Islands Property Fund Limited which is
listed on the Channel Islands Securities Exchange and also holds other non-executive positions. She is a past Chairman of
the Guernsey Branch of the Institute of Directors and a member of the Chamber of Commerce, the Guernsey International Legal
Association and she also holds the IOD Company Direction Certificate and Diploma with distinction. Shelagh is a resident of
Guernsey.
Klaus Hammer(Director, appointed 1 March 2014), aged 61, is a graduate of the University of Hamburg and gained an MBA at
IMD Lausanne. He was previously Chief Operating Officer of the global combined-cycle gas turbine power plant business of
E.ON, and also served on a variety of boards including E.ON Värmekraft Sverige AB, Horizon Nuclear Power Ltd. and the UK
Association of Electricity Producers. Prior to E.ON, which he joined in 2005, he spent 20 years with Royal Dutch Shell in a
variety of roles in both Europe and Africa. Among his other recent roles, he was a public member of Network Rail until
mid-2014. Klaus also advises investors in energy-related businesses. Klaus is a resident of Germany.
Section 4
Statement of Directors' Responsibilities
The Directors are responsible for preparing the Directors' Report and the financial statements in accordance with
applicable law and regulations. The Companies (Guernsey) Law, 2008, as amended, requires the Directors to prepare financial
statements for each financial period. Under that law they have elected to prepare the financial statements in accordance
with International Financial Reporting Standards (IFRS) as adopted by the EU.
Under company law the directors must not approve the accounts unless they are satisfied that they give a true and fair view
of the state of affairs of the company and of the profit or loss of the company for that period. In preparing these
financial statements, International Accounting Standard 1 requires that directors:
· Properly select and apply accounting policies;
· Present information, including accounting policies, in a manner that provides relevant, reliable, comparable and
understandable information;
· Provide additional disclosures when compliance with the specific requirements in IFRS are insufficient to enable users
to understand the impact of particular transactions, other events and conditions on the entity's financial position and
financial performance; and
· Make an assessment of the company's ability to continue as a going concern.
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company's
transactions and disclose with reasonable accuracy at any time the financial position of the company and enable them to
ensure that the financial statements comply with the Companies (Guernsey) Law, 2008. They are also responsible for
safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and
other irregularities.
Under applicable law and regulations, the Directors are also responsible for preparing a Directors' Report and Corporate
Governance Statement. The Directors are responsible for the maintenance and integrity of the corporate and financial
information included on the Company's website. Legislation in Guernsey and the United Kingdom governing the preparation and
dissemination of financial statements may differ from legislation in other jurisdictions.
Directors' responsibility statement
We confirm that to the best of our knowledge:
· The financial statements, prepared in accordance with International Financial Reporting Standards, give a true and
fair view of the assets, liabilities, financial position and profit or loss of the Company;
· The Chairman's Statement and Report of the Directors include a fair review of the development and performance of the
business and the position of the Company and Group taken as a whole together with a description of the principal risks and
uncertainties that it faces; and
· The annual report and financial statements when taken as a whole is fair, balanced and understandable and provides
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