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Case studies


Home / Capabilities / Private Markets / Infrastructure / Infrastructure case studies

Associated British Ports (‘ABP’) – Keeping Britain trading

Generic Port Images

ABP is the UK’s leading port group, owning and operating 21 ports in England, Scotland and Wales which handle around a quarter of the country’s seaborne trade. The company supports 84,000 jobs, and contributes £5.6bn to the UK economy every year, handling over 94 million tonnes of cargo in 2014.

The company operates in a sector with high barriers to entry with a resilient business model underpinned by a diversified cargo base, long term contracts with a broad mix of customers and a significant level of stable, long-term fixed or guaranteed revenues. ABP experienced c6% year on year EBITDA growth between 2006 and 2013, even through an economic cycle that included a severe downturn, ably demonstrating the robust nature of its business.

Hermes Infrastructure’s investment in ABP has been made as part of our Core Strategy where we seek to invest in mature assets with strong defensive characteristics. ABP’s position as the UK’s largest port group ensures a good strategic fit.

Acquisition and outlook 
In July 2015, Hermes Infrastructure, in consortium with the Canada Pension Plan Investment Board (‘CPPIB’), acquired a 33.3% stake in ABP. ABP’s other shareholders are Borealis (the infrastructure investment arm of the Ontario Municipal Employees Retirement System), the Government of Singapore Investment Corporation, and Wren House (the infrastructure investment arm of the Kuwait Investment Authority).

ABP is a high quality infrastructure business that delivers long term stable cash flows. The company owns substantially all of the land its ports occupy and also the statutory harbour authority, together referred to as ‘landlord activities’, with the associated revenues offering stable, long-term, fixed or guaranteed income streams through leases and the right to charge both ship and goods dues.

The UK conducts c95% of its trade through the ports sector, with the UK ports market having a limited number of suitable natural deep water harbours. ABP occupies a strong market position, with high development costs, long build times, and detailed planning and environmental approval processes associated with establishing new port facilities and related inter-modal transportation links acting as significant barriers to entry.

Governance and responsible investment
CPPIB and Hermes Infrastructure have jointly appointed Directors to the Board of ABP and will be actively involved in the governance and oversight of the business. A comprehensive ESG review was undertaken as part of the consortium’s investment process.

Eurostar: leading the way in high speed rail

21 years old this year, Eurostar has firmly established its credentials as one of Europe’s leading international high speed rail operators, carrying over 150 million passengers through the Channel Tunnel since services began in 1994.

Hermes Infrastructure’s investment in Eurostar has been made as part of our Value Added Strategy where we seek to invest in mature assets with strong market positions. Eurostar’s position as the sole provider of passenger rail services through the Channel Tunnel ensures a good strategic fit.

Acquisition and outlook
Hermes Infrastructure acquired a 10% interest in Eurostar in May 2015 in a process run by the UK Government as part of its current £20 billion privatisation programme.

We invested as part of a consortium alongside Caisse de dépôt et placement du Québec (‘CDPQ’), which acquired a 30% stake.  Eurostar’s other shareholders are Société Nationale des Chemins de Fer Français (‘SNCF’) (55%) and Société Nationale des Chemins de Fer Belges (‘SNCB’) (5%), the publicly owned national rail operators of France and Belgium respectively.  Both are highly experienced rail operators and have played a key role in the development of Eurostar.

Eurostar benefits from a high quality brand, an experienced management team and long term committed shareholders who are well aligned with the company’s objectives of maintaining growth and market share.  The existing train fleet is currently being upgraded which will offer customers an enhanced service, as well as allowing the company to carry more passengers and improve the energy efficiency of its operations.  Eurostar now offers links to over 100 destinations across Europe via Paris, Brussels and Lille, and has ambitious plans to continue to develop its international route network.

Governance and responsible investment
Hermes Infrastructure has appointed a Director to the Board of Eurostar and will be actively involved in the governance of the business.  ESG performance will be monitored regularly as part of our investment management strategy, in line with the Hermes responsible investment ethos.

Fallago Rig: at the core of the UK’s energy needs


Fallago Rig, the UK’s fifth-largest onshore wind farm (at acquisition on 6 December 2013), delivers what Hermes Infrastructure seeks in core assets: steady, inflation-linked returns with clear regulatory support.

The wind farm, which is majority-owned by funds managed by Hermes Infrastructure, is comprised of 48 turbines with 144 megawatts of generation capacity. Located 35km south-east of Edinburgh in a remote part of the Scottish Borders, Fallago Rig’s capacity to produce clean energy estimated at 445,800 megawatt hours of wind power per annum, will displace 190,000tn of CO2 each year.

Fallago Rig is a core asset in our portfolio: its predictable cashflows are generated in a stable, transparent and supportive regulatory environment and is forecast to deliver attractive risk adjusted returns for the life of the investment. Cashflows received from Fallago Rig show a high correlation to inflation, making it a suitable matching asset for our investors.

Acquisition and outlook
Hermes Infrastructure acquired a majority interest in Fallago Rig from EDF Energy in December 2013 in a debt-free transaction. The investment has been made without the use of third party leverage which materially reduces the potential dispersion of investment returns and volatility for our clients whilst still delivering attractive risk adjusted returns.

Energy sales
EDF Energy remains one of the wind farm’s primary customers. Under a long-term power purchase agreement (PPA), the electricity retailer  purchases 50% or more of Fallago Rig’s output for 15 years. The balance of the offtake has been purchased by BT plc under a long term PPA.

Certified revenue
Ofgem, the UK power regulator, expects reserve generation capacity to reduce in coming years. As coal- and oil-fired power stations close or reduce output to meet European environmental targets, new clean energy sources may not be fully operational and able to meet supply. During this transition, demand for electricity from sites such as Fallago Rig – which can provide about 90,000 typical UK households with power each year – is expected to remain strong.

The asset benefits from the Renewable Obligation government initiative supporting greater clean energy usage.

Under the Renewables Obligation, which sets an annual minimum amount of non-fossil fuel energy that UK energy retailers must provide, Ofgem issues ROCs to generators matching the volume of clean power they source. Generators sell the certificates to retailers for a premium on top of electricity sales. Retailers that fail to collect enough ROCs pay a penalty. The value of a ROC is negotiated between generators and retailers usually by reference to the price set by Government which is indexed by RPI and on an annual basis.

Issuing these renewable-energy instruments provides 40% or more of the net revenue delivered by Fallago Rig. Legislation ensures that the asset will continue to sell the certificates until 2033.

Governance and responsible investment
Hermes Infrastructure is represented by three members on the Fallago Rig board which employs a general manager who oversees the operation of the wind farm undertaken by EDF Energy, who continue to hold a minority stake. Believing that sound corporate governance is essential to long-term financial outperformance, the team prudently manages the asset with appropriate oversight and review, and endeavours to maintain healthy relationships with key stakeholders.

The above information does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments. It does not represent all of the securities bought or sold in the portfolio and that it should not be assumed that the above securities were or will be profitable. A list of all purchases and sales is available upon request. References to future expectations cannot be guaranteed. The above information is at 30 June 2015.