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Labour threat to energy firms hits infrastructure funds

16 May 2019

Shares in HICL Infrastructure and International Public Partnership slide as Labour says it will pay investors less than market value for energy providers it wants to nationalise.

Shares in utilities and listed infrastructure funds came under pressure yesterday as Labour revealed its plans to nationalise the UK’s energy provides and confirmed it would pay less than market value to compensate their shareholders.

In a policy paper entitled ‘Bringing Energy Home’, Labour says the level of compensation to shareholders would be set by parliament and could reflect what it called the ’asset stripping’ and profiteering of the sector since privatisation by the Thatcher Conservative government in the 1980s.

The historic cost of government support and pension deficits could also be used to reduce the payments to shareholders in the energy distribution networks.

‘Parliament may seek to make deductions for compensation on the basis of: pension fund deficits; asset stripping since privatisation; stranded assets; the state of repair of assets; and state subsidies given to the energy companies since privatisation,’ says the document, which Labour leader Jeremy Corby will formally unveil in a speech today. 

Gas supplier SSE (SSE) slid 28p or 2.5% to £10.83, National Grid (NG) slipped 7.5p or 0.9% to 843p while Severn Trent (SVT) closed 15p or 0.8% lower at £19.66 and United Utilities (UU) eased 2p or 0.25% to 802p.

There were bigger falls among some infrastructure funds, which had already been rattled by comments at the weekend from shadow chancellor John McDonnell, that a Labour government would pay less than £15 billion to renationalise England’s water industry, far less than the market value of these monopolies. 

International Public Partnerships (INPP) tumbled 6.4p or 3.9% to 157p. According to analysts at Stifel, it has 22% of its £2 billion portfolio invested in the transmission links between offshore wind farms and the grid, and over 12% in Cadent, National Grid’s gas distribution network.

At last night’s close its shares stood at a premium of 8.6% to their estimated net asset value (NAV) of 114.6p and offered a 4.4% dividend yield, according to Morningstar.

HICL Infrastructure (HICL), which two years ago bought a third of Affinity Water, the UK’s largest water-only company operating in south-east England, sank 5.2p or 3.1% to 160p. The stake accounts for 8% of its £2.8 billion portfolio. It also owns small positions in two offshore transmission link operators. 

Last night the stock traded at 5% over NAV per share of 152.4p and yielded 5%.

The revived political uncertainty also saw 3i Infrastructure (3IN) and BBGI (BBGI) dip 2p and 1p respectively, although they have no exposure to UK utilities.

Infrastructure debt funds - which lend money but not shareholder capital to utilities and infrastructure projects - made small gains. 

GCP Infrastructure Investments (GCP), which also has no UK utility exposure, rose a penny or 0.8% to 128.4p.

Sequoia Economic Infrastructure Income (SEQI) firmed 0.2p to 111.4p. It holds 1.5% of its assets in a long-term, floating rate bond of National Grid. Earlier this week it said it was considering a new share issue to raise more money for its investment plans.

Labour’s hostility to private sector involvement in the public sector has cast a long shadow over infrastructure funds listed on the London Stock Exchange whose steady dividends are popular with income investors. 

In 2017 McDonnell’s vow to scrap private finance initiatives (PFI) in the NHS weakened the share prices of funds like HICL and GCP, with the collapse of PFI contractor Carillion in early 2018 further hitting sentiment. They subsequently recovered as investors calculated that a Labour government would target specific PFI contracts it didn’t like rather than pursue a wholesale abolition. 

In a note to investors, Iain Scouller of Stifel said: ‘We think that assuming the contractual obligations and payments due to PFI investors are met (potentially a big assumption!), the impact of PFI nationalisation may be easier to quantify than utility nationalisation. The PFI projects are subject to significant legal documentation around contract termination compensation and the listed funds have already indicated what they expect to receive in such a scenario.

‘In the case of utilities, the valuation to be paid appears more subjective to the opinions of  government and parliament, which is a cause for concern,’ Scouller said.

Labour wants to replace the National Grid with a National Energy Agency to oversee public, collective and private forms of energy ownership and to decarbonise the economy and usher in what shadow business secretary Rebecca Long-Bailey calls a ‘green industrial revolution’.

It claims to want to pursue a middle way between Old Labour and the Right. ‘This is not a return to the distant bureaucracies of the 1970s,’ the Labour policy document says. ‘Nor is this a Thatcherite prosumer model that promotes ownership for the rich, in which individual producer-consumers with access to generation and storage technologies trade energy on individually advantageous terms, exacerbating inequalities.

‘Rather, Labour proposes a model of public ownership that is more decentralised, democratic, transparent and accountable than Britain has ever seen before,’ it states.

Under Labour plans, energy investors would be issued new government bonds at no upfront cost to the Exchequer but adding billions to UK debts.

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