TIDMHICL
RNS Number : 1605X
HICL Infrastructure Company Ld
22 November 2017
HICL Infrastructure Company Limited
22 November 2017
INTERIM RESULTS
The Board of HICL Infrastructure Company Limited announces
interim results for the six months ended 30 September 2017.
Highlights
For the six months ended 30 September 2017
-- The portfolio achieved good cashflow generation and an
annualised total return ahead of expectations.
-- NAV per share of 151.6p as at 30 September 2017 (149.0p as at 31 March 2017).
-- Annualised NAV total return of 8.9% for the period (NAV per
share appreciation plus dividends paid basis).
-- The Company remains on target to deliver aggregate dividends
of 7.85p per share for the current financial year and the Board
re-affirms the 8.05p target for the next financial year ending 31
March 2019.
-- New dividend guidance for the financial year ending 31 March
2020 of 8.25p per share reflects the Board's confidence in the
forecast cashflow performance of the Group's portfolio.
-- The Directors' valuation of the portfolio on an Investment
Basis at 30 September 2017 is GBP2,844.4m (GBP2,380.0m at 31 March
2017).
-- Two new investments in the period in regulated (Affinity
Water) and demand-based (High Speed 1) assets for a combined
consideration of GBP452m.
-- The Company continues to play its part in providing proven
capital for investment in long-term, critical infrastructure
throughout the economic cycle.
Summary Financial Results
(on an Investment Basis)
for the six months to 30 September 30 September
2017 2016
Income GBP108.1m GBP99.5m +8.6%
Profit before tax GBP87.8m GBP85.6m +2.6%
Earnings per share 5.1p 6.1p (16.4%)
Net Asset Value
30 September 31 March
2017 2017
Net Asset Value (NAV) per
share 151.6p 149.0p
Quarterly interim dividend
declared 1.96p 1.92p
NAV per share
after deducting quarterly
interim dividend 149.7p 147.1p
Ian Russell, Chairman of the Board, said:
"I am pleased to report that the Company delivered a solid
performance in the six months to 30 September 2017. The portfolio
achieved good cashflow generation and an annualised total return of
8.9%, ahead of expectations.
"The Company's strategy is to maintain a disciplined and
proactive approach to investment and asset management, whilst
executing its three-pillar business model of both preserving and
enhancing the value of the existing portfolio, and making accretive
new investments.
"As at 30 September, 80% by value of HICL's portfolio and
approximately 90% of its shareholders were located in the UK. Our
shareholders include local authority and corporate pension funds,
and a large number of retail investors. The Board recognises that
heightened political uncertainty in the UK is a key concern for the
Company's shareholders.
"The private sector plays a key role in the efficient delivery
and management of infrastructure assets. Western economies face
ever-pressing financial challenges posed by ageing societies,
technological change and, in the UK, population growth. The Board
is confident that HICL will continue to play its part in providing
proven capital for investment in long-term, critical infrastructure
throughout the economic cycle."
Harry Seekings, Director - Infrastructure, InfraRed Capital
Partners Limited, the Investment Adviser added:
"HICL's portfolio uniquely combines low asset concentration
risk, strong correlation between portfolio returns and inflation
and long-dated, predictable cashflows.
"Investments in PPP projects represent 74% of the portfolio by
value as at 30 September 2017, and overall continue to perform
well. The Group's existing demand-based assets have also seen good
performance, with traffic and revenue of the two toll road
investments, Northwest Parkway and the A63 Motorway, ahead of
assumptions made at the time of acquisition.
"New investments in Affinity Water and High Speed 1 were
completed in the period. In both cases, InfraRed secured aligned
co-investment (from UK pension funds and international
institutions) which facilitated prudent management of portfolio
exposure. At 30 September 2017, the ten largest assets in the
portfolio represented circa 45% of portfolio value.
"We expect acquisition activity for the remainder of the
financial year to be muted and largely focused on PPP projects and
existing bids for OFTO Tender Round 5. Looking further into 2018,
we are optimistic that opportunities will arise to add value to the
existing portfolio."
The information contained within this announcement is deemed by
the Company to constitute inside information as stipulated under
the Market Abuse Regulations (EU) No. 596/2014 ("MAR").
Contacts:
InfraRed Capital Partners Limited +44 (0) 20 7484 1800
Harry Seekings
Keith Pickard
Tony Roper
Tulchan Communications +44 (0) 20 7353 4200
Latika Shah
David Allchurch
Canaccord Genuity Limited +44 (0) 20 7523 8000
Robbie Robertson
David Yovichic
Copies of this announcement can be found on the Company's
website at www.hicl.com. The Interim Report and Financial
Statements for the 6 months ended 30 September 2017 will be
published in late November and an electronic version will be
available from the Company's website at that time.
CHAIRMAN'S STATEMENT
Introduction
HICL is midway through its 12th year as a London-listed
infrastructure investment company, providing competitive, reliable
and long-term investment in critical UK and international
infrastructure.
The Company's strategy is to maintain a disciplined and
proactive approach to investment and asset management, while
executing its three-pillar business model of preserving and
enhancing the value of the existing portfolio and making accretive
new investments. The Company seeks to provide well-managed assets
for our key stakeholders - our clients and end-users. This approach
delivers an attractive, steady, long-term income for our
shareholders from a portfolio of infrastructure investments
positioned at the lower end of the risk spectrum.
I am pleased to report that the Company delivered solid
performance in the six months to 30 September 2017. The portfolio
achieved good cashflow generation and an annualised total return
ahead of expectations. In the period, the portfolio, which has
strong inflation-correlation in its returns, has also seen the
benefit of higher inflation currently in the UK economy.
The Company has continued to diversify its portfolio through
accretive investment. In the period we made two new investments in
line with the stated Acquisition Strategy in the respective market
segments of regulated (Affinity Water) and demand-based assets
(High Speed 1). HICL's alignment with strategic co-investors has
enabled the Company to exercise appropriate influence over these
investments whilst retaining low asset concentration within the
portfolio. In July 2017 the Company was announced as the preferred
bidder on the Burbo Bank Extension OFTO (an availability-based
regulated asset). Notwithstanding these new investments, PPP
projects continue to be the largest market segment for the Company,
representing 74% of the portfolio by value as at 30 September 2017.
Since the period end, the Group completed on an incremental
investment in a UK PPP project for a total consideration of
approximately GBP12m.
HICL takes pride in having a broad, consistent and knowledgeable
investor base. The shareholders (circa 90% of whom are UK-based)
include a wide range of UK local authority and corporate pension
funds, established UK financial and asset management groups, some
overseas institutions and a large number of UK retail investors,
investing either directly or via savings and investment programmes.
We completed another substantial capital raising in June 2017 by
way of a tap issuance. This was materially oversubscribed,
demonstrating strong demand for HICL shares, and we are grateful to
our shareholders for their ongoing support in these
fundraisings.
The Company remains on target to deliver aggregate dividends of
7.85p per share this financial year(1) and the Directors reaffirm
the 8.05p target for the next financial year ending 31 March
2019(1) . The Directors' confidence in the visibility we have over
the robustness and longevity of the portfolio cashflows has been
reflected in the Board's decision to publish new dividend guidance
for the financial year ending 31 March 2020 of 8.25p per share(1)
.
[1] Expressed in pence per ordinary share for financial years
ending 31 March. These are targets only and not profit forecasts.
There can be no assurance that these targets will be met
Financial Performance
The Directors have approved a valuation of GBP2,844.4m on an
Investment Basis for the Group's portfolio, as at 30 September 2017
(GBP2,380.0m at 31 March 2017). The Directors are satisfied with
the methodology and assumptions used and as usual have taken
independent, third party expert advice on the valuation. On an IFRS
basis at 30 September 2017 investments at fair value were
GBP2,711.1m (GBP2,419.4m as at 31 March 2017). A reconciliation
between the IFRS basis and Investment Basis can be found in the
Operating & Financial Review section.
The Company's Net Asset Value (NAV) per share increased by 2.6p
(1.7%) to 151.6p, up from 149.0p at 31 March 2017. Adjusting for
the timing of investments made during the period, this represents
an 8.9% annualised shareholder return based on NAV appreciation and
dividends paid. The NAV benefited from outperformance of the
portfolio, assisted by actual UK inflation above our valuation
assumption and issuing equity at a premium.
Distributions
The first quarterly interim dividend for the year to 31 March
2018 of 1.96p per share was paid on 30 September 2017. The second
quarterly interim dividend of 1.96p per share was declared on 16
November 2017 and is due to be paid on 29 December 2017.
The Company also offers a scrip dividend alternative. Full
details can be found in the "Scrip Dividend Circular 2017-18"
available on the Company's website (www.hicl.com).
Funding
In June 2017, the Company raised GBP267.7m (before expenses)
through a tap issue of 162.2m ordinary shares. The issue was
materially oversubscribed and, in light of the Company's investment
pipeline, the size of the issue was increased from its initial
target size of GBP205m to the maximum available to the Company.
Following the Annual General Meeting ("AGM") in July 2017, the
Company has the authority and tap issuance capacity to issue a
further approximately 179m ordinary shares.
The Investment Adviser estimates that the Company will have
drawings on its Revolving Credit Facility of approximately GBP130m
at the end of December 2017. The Board is comfortable maintaining
this level of borrowing for the foreseeable future in light of the
Company's strong balance sheet and given that it does not
materially impede the Company's ability to fund additional
investments (as and when further attractive opportunities arise).
The Directors are conscious of the elevated level of fundraising
undertaken during 2017 and will take account of market conditions
when considering the timing of further capital raising
activity.
Corporate Governance
As in previous years, and aligned to corporate governance best
practice, the Directors offered themselves for re-election at the
AGM on 17 July 2017 and were duly re-elected.
In light of the growth in the value of the Group's portfolio,
the Investment Adviser and the Board have reviewed the management
fee structure and agreed to reduce the fee due to the Investment
Adviser for the adjusted gross portfolio value in excess of
GBP3.0bn from 0.8% per annum to 0.65% per annum.
Key Risks
There is higher political uncertainty in the UK following the
June 2017 general election result and the continuing process to
leave the EU. Due to their monopolistic nature, infrastructure
assets typically interface with a variety of public sector
counterparties and regulators. Political risk therefore continues
to be a material risk that the Group's portfolio faces and is a key
focus for the Risk Committee and the Board, as outlined in the 2017
Annual Report. The UK public sector maintains an impressive record
of honouring its financial commitments in respect of infrastructure
projects, which is highly valued by international capital markets.
The Investment Adviser has not seen a material impact from the
current UK political environment on the valuation of investments in
the portfolio.
Following several recent profit warnings from UK-based
construction contractors and facilities management service
providers, counterparty exposure more generally is also of
particular note for the Risk Committee and the Board. While this
risk is diversified within HICL's portfolio across a range of
subcontractors, a number of possible scenarios have been assessed
by the Investment Adviser as part of its ongoing risk evaluation
and asset management work. Contingency plans are in place to ensure
continuity of operations if one or more of the Group's PPP projects
are affected by the failure of a subcontractor.
Safety matters are taken very seriously by the Board, including
the construction quality and fire safety of facilities that form
part of investments within the Group's portfolio. We continue to
work with our project company management teams and subcontractors
to prioritise safety and to ensure the compliance with applicable
standards and regulations.
As flagged in the 2017 Annual Report, and with effect from 1
October 2017, the Board and the Investment Adviser have agreed to
amend the Company's hedging policy to target variability of NAV per
share of no more than 2% (previously 1%) for a 10% movement in
foreign exchange rates.
Outlook
Overall, the pipeline for new opportunities is likely to be more
muted for the remainder of the financial year than we have seen
thus far and, in the short-term, we are bedding down new
acquisitions within the portfolio. The Investment Adviser will
continue to appraise new investment prospects as they arise, and
will continue to follow a disciplined approach to new investment,
only making acquisitions which are accretive to the existing
portfolio. Looking further into 2018, we expect that the bulk of
these will be opportunities for investment in PPP projects or in
regulated assets. Demand-based assets will be considered
opportunistically, if appropriate. Geographically, the Investment
Adviser's focus remains on HICL's core geographies.
For the future, we must look squarely at the economics of
infrastructure, which provide good reason for optimism around the
continuation of the role played by the private sector in the
efficient delivery and management of infrastructure assets. The
Board recognises that western economies have ever-pressing
financial challenges posed by ageing societies, technological
change and, in some cases (such as the UK), population growth. We
believe that the Company can continue to play its part in providing
proven capital for investment in long-term, critical infrastructure
throughout the economic cycle.
The Board remains assured of the outlook for the Company and in
the Investment Adviser's ability to deliver further value over
time. We remain confident that HICL will continue to deliver
stable, long-term income, and we are looking forward to further
positive engagement with shareholders and the Company's other key
stakeholders.
Ian Russell
Chairman
21 November 2017
INVESTMENT ADVISER'S REPORT
The Investment Adviser
InfraRed Capital Partners Limited ("InfraRed") acts as the
Company's Investment Adviser and Operator in respect of the
origination of new investments and the oversight of the Group's
investment portfolio on a day-to-day basis. InfraRed, an
independent investment management firm, is authorised and regulated
by the Financial Conduct Authority and has been the Investment
Adviser and Operator since inception in 2006, having sourced and
developed the original seed portfolio which was acquired at the
time of the Company's listing.
-- Headquartered in London with offices in New York, Sydney, Hong Kong and Seoul
-- A 20-year track record of investment in infrastructure
-- 70 infrastructure professionals with in-depth technical,
operational and investment knowledge
-- Strong support from InfraRed's central functions
HICL - A differentiated investment proposition
HICL's well-diversified portfolio uniquely combines low asset
concentration risk; strong correlation between portfolio returns
and inflation; and long-dated, predictable cashflows.
Low asset concentration risk
The portfolio comprised 116 assets invested across three market
segments at 30 September 2017. The largest single asset accounted
for 9% of portfolio value; the five largest assets equated to circa
29% of portfolio value; and the 10 largest assets equated to circa
45% of portfolio value. This sector-leading diversification of
concentration risk enhances portfolio resilience and offers
mitigation against the impact of specific risks affecting any
single asset.
Strong inflation correlation
The correlation of long-term returns from the portfolio to
inflation has improved to 0.8 (0.7 at 31 March 2017). This improved
correlation has been driven by HICL's investments in demand-based
and regulated assets. Returns correlated to inflation are not
consistently available from PPP projects, particularly in certain
markets outside the UK (e.g. North America and Australia).
Good cashflow longevity
HICL aims to offer long-term, stable income for shareholders
from predictable cashflows generated from long-life assets. The
portfolio's weighted average asset life is 30.6 years (24.4 years
at 31 March 2017), with the increase driven particularly by the
acquisitions of Affinity Water, assumed to have a 100-year asset
life, and Northwest Parkway (which has 89 years currently remaining
on its concession). The predictability of HICL's long-term
cashflows has allowed the Board to provide shareholders with
dividend guidance for the current financial year and the next two
financial years.
Operational & Strategic Highlights
PPP Projects
PPP projects with availability-based (or similar) payment
mechanisms continue to be the largest market segment for the
Company, representing 74% of the portfolio by value as at 30
September 2017. Overall the Group's investments in PPP projects
continue to perform well. In a large portfolio such as the Group's
it is to be expected that there are challenges with some assets;
and, conversely, a number of positive initiatives progressed during
the period. Although no individual initiatives or asset-level
issues materially changed portfolio value, we have provided some
highlights for shareholders in the Operating & Financial Review
section.
Following the period end, the Group completed a GBP12m
incremental investment in Addiewell Prison, a UK PPP project. This
is set out in more detail in the Operating & Financial Review
section.
Regulated Assets
The on-boarding of the investment in Affinity Water progressed
during the period (see Operating & Financial Review section for
more details) and HICL received its first distribution in line with
expectations at the time of acquisition. Higher UK inflation versus
HICL's valuation assumption underlines the importance of the
inflation-linked returns offered by the Group's investment in
Affinity Water. The year-on-year change in the UK's Retail Price
Inflation (All Items) was 4.0% (as at October 2017) compared to the
HICL valuation assumption of 2.75% p.a.
In July 2017, the Office of the Water Regulator ("Ofwat")
launched a consultation on the 2019 price review for the water
industry. InfraRed is actively engaging in this process to
represent HICL's interests, in partnership with the Affinity Water
management team and other shareholders. There are challenging
aspects emerging from the initial consultation document and these
have been picked up in responses to Ofwat. We anticipate that Ofwat
will produce final guidelines in December 2017. We will provide
further information to shareholders in due course once these have
been reviewed and analysed by InfraRed and Affinity Water's
management team.
Also in July 2017, HICL's partnership with Diamond Transmission
Corporation (a subsidiary of Mitsubishi Corporation) was announced
as Ofgem's preferred bidder to become the Burbo Bank Extension
offshore transmission owner ("OFTO"). The approximately GBP10m
investment will be HICL's first in a regulated electricity
transmission asset and the project will attract a 20-year,
availability-based revenue stream. Financial close is due to take
place in the first quarter of 2018.
Demand-based Assets
High Speed 1 ("HS1") is the most recent major addition to the
Group's portfolio, with completion achieved during September 2017.
This asset provides diversified revenue streams generated from
domestic and international train journeys, unregulated activities
(principally retail leases) and regulated activities (such as
maintenance and operations). HS1 meets HICL's accretion thresholds
most particularly on total return, yield and inflation correlation.
See Operating & Financial Review section for more detail on the
HS1 acquisition.
Other demand-based assets in the portfolio have either performed
well or in line with expectations during the period. The Group's
two toll road investments, Northwest Parkway (Colorado, USA) and
the A63 Motorway (France), have continued to see traffic ahead of
the forecasts made at the time of acquisition and overall
performance is ahead of plan.
Revenues on the HS1, Northwest Parkway, A63 Motorway and M1-A1
Link projects are also correlated with local GDP to some extent.
These assets represent 16% of the portfolio by value, below the 20%
self-imposed limit agreed with the Board and previously
communicated to shareholders. InfraRed conducts stress tests to
assess the resilience of the portfolio to various downside
scenarios.
In a recession stress scenario, assuming a 10% reduction in
revenues in all periods for the GDP correlated assets, none of the
relevant portfolio companies breach their debt covenants, while for
the Company it results in a reduction of NAV/share of 5.1p (as at
30 September 2017). The stress test demonstrates the robust nature
of the Group's portfolio cashflows and underpins our confidence
that the contribution these assets make to the portfolio does not
bring with it an undue increase in the risk profile.
Co-investment Strategy
As part of the Affinity Water transaction, InfraRed successfully
arranged a modest co-investment by several UK local authority
pension funds. This model was also used for the HS1 transaction,
with InfraRed sourcing co-investment alongside HICL from UK pension
funds and South Korean institutional investors (a market with deep
local and international infrastructure investment experience). The
use of co-investment has opened the opportunity to access
investments in larger assets on behalf of HICL whilst maintaining
prudent portfolio weightings and low single asset
concentrations.
Co-investment with strategically aligned parties on these larger
assets was executed while maintaining strong governance rights for
HICL. Representing substantial equity interests on the Board of
portfolio companies means InfraRed is well-positioned to bring
appropriate influence to bear on management teams in order to
deliver on HICL's business plans for value preservation and value
enhancement.
Financial Highlights
Following an active financial year to 31 March 2017, the
Origination and Transaction Team at InfraRed sourced opportunities
for two new investments during the period and one investment after
period end (as noted above). In addition, the Asset Management and
Portfolio Management Teams generated value enhancements for the
Company's shareholders through active management of the portfolio
and at asset level. Overall, this activity has resulted in NAV per
share, excluding dividends paid of 3.88p in the period, increasing
by 2.6p, from 149.0p as at 31 March 2017 to 151.6p as at 30
September 2017. Of this growth, 0.9p per share was delivered
through portfolio performance arising from various initiatives.
These included the reassessment of lifecycle expenditure on a
number of projects, a variation on the Helicopter Training Facility
and UK inflation in the period above our valuation assumptions more
than offsetting provisions recognised in respect of increased
counterparty risk.
The Company's annualised total shareholder return ("TSR"), based
on growth in NAV per share plus dividends paid, was 8.9% for the
period (September 2016: 10.4%).
Overall portfolio performance has delivered cashflow receipts
for the Group on an Investment Basis of GBP91.3m (September 2016:
GBP73.0m). Net operating cashflows after finance and operating
costs on an Investment Basis were GBP77.9m (September 2016:
GBP60.9m), which covered the interim dividends paid in the
six-month period 1.26 times (September 2016: 1.26 times).
Profit before tax increased to GBP87.6m (for the period to 30
September 2017) from GBP85.3m (September 2016). This was
principally due to incremental income from acquisitions being
largely countered by less beneficial changes in valuation
assumptions (discount rate reductions and changes in economic
assumptions) during the six months ending September 2017 when
compared to the same period in the prior year. Earnings per share
were lower at 5.1p (September 2016: 6.1p) due to the reduced
contribution from changes in valuation assumptions.
The ongoing charges percentage for the period on an annualised
basis was 1.06%, using the Association of Investment Companies'
methodology, compared to 1.08% for the six months to 30 September
2016. This compares well with other investment companies in the
infrastructure sector.
Key Risks
Each quarter the Risk Committee reviews the risk appetite of the
Company. The key risks and the strategies employed by InfraRed to
manage and mitigate those risks have not changed materially from
those set out in detail in section 3.6 of the Company's 2017 Annual
Report.
Political Risk
With a wide range of public sector counterparties, political
risk is inherent in HICL's business model and consistently has been
a key risk faced by the Company.
The use of PPPs (of which PFI is one example) to procure capital
investment in infrastructure in the UK has, at various times since
HICL's IPO, been subject to negative political comment. Most
recently, there has been political comment suggesting that a future
UK government could contemplate terminating some existing PPP
projects. Typically, public sector counterparties are entitled to
voluntarily terminate a PPP contract and, if this occurs, project
companies have a corresponding right to receive compensation. For
the majority of HICL's investments in UK PPP projects, this
compensation is contractually based on market value which would, we
believe, be equal to the prevailing value of the asset in the
portfolio.
We are aware of recent commentary comparing a) the compensation
payable by public sector counterparties in the event they choose to
terminate PPP contracts, with b) the value attributed to
investments in those PPP projects on the balance sheets of listed
infrastructure companies. We caution against drawing firm
conclusions from analysis based on scenarios that are unrealistic
and extrapolated to precisely quantify the effects of
portfolio-wide voluntary termination. For a number of years
InfraRed has selectively acquired and disposed of investments on
behalf of HICL in order to manage the exposure of the Group to
voluntary termination situations where compensation is not
equivalent to the prevailing market value of investments. We have
provided disclosure on this topic in the Operating & Financial
Review section.
There have also been suggestions in recent months that a future
UK government may consider taking utilities, including water
companies, back into public ownership. There is a need to balance
the interests of consumers and those of investors. According to
Water UK, over GBP150bn(2) has been invested in the industry since
privatisation and customer satisfaction levels are around 90%(3)
according to the independent water consumer watchdog. While future
public ownership is a possibility, some comfort can be taken from
the reasonable assumption that any future government will take a
pragmatic approach to its overall infrastructure investment
programme and seek to preserve the relationships that enable
this.
2 Press release, Water UK, 27 September 2017
3 Water Matters: Household Customers' Views on their Water and
Sewage Services 2016, published by Consumer Council for Water (June
2017)
HICL's Corporate Structure
HICL was structured as a Guernsey registered company at the time
of its IPO as a means to ensure retail investors were not in a
disadvantageous tax position compared to direct institutional
investors in infrastructure projects; in effect to emulate the
structure formalised for real estate investors by the creation of
Real Estate Investment Trusts (REITs), which was not possible for
infrastructure investments in the UK at the time. The Investment
Trust (Approved Company) (Tax) Regulations 2011 resolved these
structural obstacles and so it would now be possible for HICL to
become an onshore UK investment trust if necessary. We would not
expect this to have any material impact for the Company itself,
although we note that the tax treatment of interest income for
certain UK shareholders would, under current legislation, be
different in this scenario.
Counterparty Risk
We have noted recent profit warnings from a number of UK
construction and facilities management companies, some of which are
subcontractor counterparties to PPP projects in which the Group has
invested. Details on the Group's counterparty exposure can be found
in the Operating & Financial Review section. InfraRed monitors
counterparty creditworthiness regularly, and we report quarterly to
the HICL Risk Committee across a range of client, subcontractor and
financial counterparties, as well as ongoing intra-period
reviews.
InfraRed's Asset Management Team has contingency plans in place
to address scenarios where material issues lead to a failure of
service provision by a subcontractor to one or more projects in
which HICL has invested. These plans can be implemented at short
notice to ensure continuity of service provision, with the aim that
affected PPP projects continue to perform in line with contractual
requirements.
Construction Quality and Fire Safety
InfraRed is working closely with management of the Group's PPP
projects in relation to fire safety and building defects,
particularly in relation to fire-stopping, cladding systems and
wall-ties. Where defects have been identified, rectification plans
and work have been prioritised, involving key stakeholders and
appropriate specialists, with much work already completed. No
material fire safety defects have been identified to date which
have prevented projects continuing to operate safely.
Foreign Exchange Risk
As outlined in the 2017 Annual Report, the Board and InfraRed
have agreed to amend the Company's hedging policy to target
volatility of NAV per share of no more than 2% for a 10% movement
in foreign exchange rates from 1 October 2017 (versus the previous
policy of targeted volatility of NAV per share of no more than 1%
for a 10% movement in foreign exchange rates).
We believe this balances the cost / benefit of the hedging
policy whilst retaining the key objective of materially mitigating
the impact of foreign exchange movements on HICL's financial
results.
Hedging as at 30 September 2017 compared to non-Sterling
portfolio values were:
Portfolio FX Hedge GBPm FX Hedge as
Value (PV) % of Portfolio
GBPm Value
--------------- ------------ -------------- ----------------
Euro 239 175 73%
North America 190 114 60%
Australia 90 45 50%
--------------- ------------ -------------- ----------------
Total 519 334 64%
--------------- ------------ -------------- ----------------
Market Outlook
In line with its stated Acquisition Strategy, the Company
continues to focus new investment activity on its three principal
market segments: PPP projects, regulated assets (e.g. gas and
electricity transmission and distribution; district heating) and
demand-based assets (e.g. toll road concessions and student
accommodation). We also maintain an opportunistic approach to
assessing corporate asset opportunities with long-term counterparty
arrangements (such as rolling stock) which fall within HICL's
Investment Policy.
In the Company's 2017 Annual Report, we flagged increased
expectations for a new pipeline of PPP projects in the UK through
2017. The political environment remains changeable, and with the UK
general election in June 2017 unexpectedly resulting in a hung
parliament, alongside continuing negotiations over the process to
leave the EU, we have not seen a material change in the UK
greenfield PPP pipeline which we previously anticipated. While we
welcome the balanced comments on the infrastructure industry made
in the National Infrastructure Commission's report dated 13 October
2017, the weak greenfield pipeline has had the effect of materially
reducing the flow of opportunities to acquire operational UK PPP
projects.
New investment opportunities within the PPP market are therefore
expected to be sourced from both the UK and from overseas markets,
in the target geographies identified in the Company's Acquisition
Strategy, particularly Europe and North America.
Outside the PPP market segment, we anticipate that new
acquisition activity will be muted for the remainder of the current
financial year. In the regulated asset market segment, we are
continuing our partnership with Diamond Transmission Corporation in
bidding for both groups of OFTO Round 5. Looking further into 2018
regulated assets, with proven and stable regulatory regimes, are of
interest. Within the demand-based asset market segment we will take
an opportunistic approach to assets with economically correlated
returns, such as toll roads with a good operational track
record.
Pricing discipline across all segments continues to be of key
importance to ensure that investments that are acquired are
accretive to the existing portfolio.
PORTFOLIO & VALUATION
Valuation and Discount Rates
InfraRed, in its capacity as Investment Adviser to HICL, is
responsible for preparing the fair market valuation of the
Company's investment portfolio on a six-monthly basis at 31 March
and 30 September each year, which is presented to the Directors for
their approval and adoption. The Directors are ultimately
responsible for the valuation, therefore in addition to InfraRed's
advice which is considered by the auditors as part of their review
work, the Board also receive an independent expert third party
report and opinion on this valuation. The assumptions used and the
key sensitivities are published with the Valuation.
The Group's investments are predominantly non-market traded
investments, such that these investments are valued using a
discounted cashflow analysis of the forecast investment cashflows
from each portfolio company. The exception to this is the listed
senior debt in the A13 road project which is valued at a quoted
market price of the bonds. The valuation assumes a sum-of-the-parts
valuation and does not include any value attributable to matters
such as the size, scarcity and diversification of the portfolio.
This valuation methodology is the same as that used at the time of
the Company's launch and in each subsequent six-month reporting
period (further details can be found in the Company's February 2017
Prospectus, available from the Company's website).
The Directors' valuation of the portfolio on an Investment Basis
at 30 September 2017 is GBP2,844.4m, compared to GBP2,380.0m at 31
March 2017, up 20%. This includes GBP30.7m of future investment
commitments (GBP32.5m at 31 March 2017).
Valuation movement during the GBPm As % of
six months to 30 September 2017 rebased
valuation
========================================= ======== ===========
Directors' valuation at
31 March 2017 2,380.0
Net Investments 451.7
Cash receipts from investments (91.3)
-------
Less future commitments (29.6)
-------------------------------- ------- -------- -----------
Rebased valuation of the
portfolio 2,710.8
-------------------------------- ------- -------- -----------
Return from the portfolio
(1) 98.4 3.6%
Change in discount rates 6.2 0.2%
Change in economic assumptions 1.6 0.1%
Forex movement on non-UK
investments (3.3) (0.1%)
------- -------- -----------
102.9 3.8%
Future commitments 30.7
-------------------------------- ------- -------- -----------
Directors' valuation at
30 September 2017 (2) 2,844.4
-------------------------------- ------- -------- -----------
1. "Return" comprises the unwinding of the discount rate and project outperformance
2. GBP2,844.4m reconciles, on an Investment Basis, to
GBP2,813.7m Investments at fair value through GBP30.7m of future
commitments
Allowing for the investments in Affinity Water and High Speed 1
("HS1"), the partial disposal of Affinity Water to co-investors and
cash receipts of GBP91.3m, the rebased valuation was GBP2,710.8m.
The growth in the Directors' Valuation of the portfolio at 30
September 2017 over the rebased value can be attributed to the
GBP98.4m return from the portfolio, GBP6.2m from changes in the
discount rate used to value a number of assets in the portfolio and
a GBP1.6m movement in economic assumptions, offsetting a GBP3.3m
impact of foreign exchange rates on the non-UK investments.
Return from the portfolio
The return from the portfolio of GBP98.4m represents a 3.6%
increase in the rebased value of the portfolio over the six month
period. Adjusting this calculation, as above, for the timing of
acquisitions of Affinity Water and HS1 gives an annualised return
of 8.1%, versus the discount rate, or expected annualised return,
of 7.4% demonstrating outperformance of the portfolio.
This outperformance arose from a number of factors, including
the reassessment of future lifecycle expenditure on several
projects, a variation on the Helicopter Training Facility combined
with actual UK inflation in the period above our valuation
assumption of 2.75% which has more than offset a downside
recognised in respect of increased counterparty risk. Further
detail on these factors is outlined in the Operating &
Financial Review section.
Discount rates
Fair value for each unlisted investment is derived from the
present value of the investment's expected future cashflows, using
reasonable assumptions and forecasts, and an appropriate discount
rate. We exercise our judgment in assessing the expected future
cashflows from each investment based on the detailed concession
life financial models produced by each portfolio company, as
amended to reflect known or expected changes to future
cashflows.
The main method for determining the appropriate discount rate
used for valuing each investment is based on the Investment
Adviser's knowledge of the market, taking into account intelligence
gained from bidding activities, discussions with financial advisers
knowledgeable in these markets and publicly available information
on relevant transactions. The Board discusses the proposed discount
rates with the third party valuation expert to ensure that the
valuation of the Group's portfolio is appropriate.
The weighted average discount rate at 30 September 2017 is 7.4%,
unchanged from 31 March 2017. This reflects the competitive
dynamics we have observed in the market place where we have not
seen evidence of material changes in market pricing either from
movements in supply and demand or arising from the current UK
political environment.
30 September 2017
--------------------------------
Long-term 31 March
2017
Government Risk Discount Discount
Country Bond Premium Rate Rate Movement
yield
--------------- ----------- -------- --------- --------- ---------
UK 1.8% 5.5% 7.3% 7.2% 0.1%
Australia 2.9% 3.6% 6.5% 7.3% (0.8%)
Eurozone 1.4% 6.1% 7.5% 7.6% (0.1%)
North America 2.8% 5.4% 8.2% 8.2% -
--------------- ----------- -------- --------- --------- ---------
Portfolio 1.9% 5.5% 7.4% 7.4% -
--------------- ----------- -------- --------- --------- ---------
The risk premium for each region is derived from the market
discount rate less the appropriate long-term government bond yield.
As long-term government bond yields in the UK, Australia, North
America and the Eurozone are currently low, this has resulted in
higher country risk premiums (as discount rates have not fallen as
far as bond yields). The Investment Adviser's view is that discount
rates used to value investments do not rigidly follow bond yields,
although naturally there is some correlation over the longer term.
The implication from this is that an increase from these
historically low bond yields could happen without necessarily
directly adversely impacting discount rates.
The relatively large movement shown for the discount rate for
Australia and the GBP6.2m increase in portfolio valuation from
change in discount rate was driven by a re-appraisal of the value
of the Group's investment in the AquaSure project. This followed
receipt in the period of a pre-emption notice from an AquaSure
co-shareholder for their investment. The price on a pro-rata basis
was materially higher than the value we ascribed to the Group's
investment at 31 March 2017.
Other Key Valuation Assumptions
30 September 31 March 2017
2017
------------------ ---------------- -------------------------------- ---------------------
Inflation UK (RPI and 2.75% p.a. 2.75% p.a.
Rates RPIx)(1)
================== ---------------- -------------------------------- ---------------------
Eurozone (CPI) 1.0% p.a. 1.0% p.a. to
to 2019, 2019,
2.0% thereafter 2.0% thereafter
================== ---------------- -------------------------------- ---------------------
Canada (CPI) 2.0% p.a. 2.0% p.a.
---------------- -------------------------------- ---------------------
USA (CPI) 2.0% p.a. 2.0% p.a.
---------------- -------------------------------- ---------------------
Australia 2.5% p.a. 2.5% p.a.
(CPI)
================== ================ ================================ =====================
Deposit Rates UK 1.0% p.a. 1.0% p.a. to
to March 2021, March 2021,
2.0% p.a. 2.0% p.a.
thereafter thereafter
================== ---------------- -------------------------------- ---------------------
Eurozone 1.0% p.a. 1.0% p.a. to
to March 2021, March 2021,
2.0% p.a. 2.0% p.a.
thereafter thereafter
================== ---------------- -------------------------------- ---------------------
Canada 1.0% p.a. 1.0% p.a. to
to March 2021, March 2021,
2.0% p.a. 2.0% p.a.
thereafter thereafter
---------------- -------------------------------- ---------------------
USA 1.0% p.a. 1.0% p.a. with
with a gradual a gradual increase
increase to to 2.0%
2.0%
---------------- -------------------------------- ---------------------
Australia 2.6% p.a. 2.6% p.a. with
with a gradual a gradual increase
increase to to 3.0% p.a.
3.0% p.a. long-term
long-term
================== ================ ================================ =====================
Foreign Exchange
Rates EUR / GBP 0.88 0.85
================== ---------------- -------------------------------- ---------------------
CAD / GBP 0.60 0.60
----------------------------------- -------------------------------- ---------------------
USD / GBP 0.75 0.80
----------------------------------- -------------------------------- ---------------------
AUD / GBP 0.58 0.61
=================================== ================================ =====================
Tax Rates UK 19% p.a. to 19% p.a. to
March 2020, March 2020,
17% p.a. 17% p.a. thereafter
thereafter
----------------------------------- -------------------------------- ---------------------
Eurozone Various Various (no
change apart
from French
tax rate reducing
from 33.3%
p.a. to 28%
p.a. by 2019)
----------------------------------- -------------------------------- ---------------------
Canada 26% p.a. and 26% p.a. and
27% p.a. (territory-dependent) 27% p.a.
----------------------------------- -------------------------------- ---------------------
USA 35% p.a. Federal 35% p.a. Federal
& 4.6% p.a. & 4.6% p.a.
Colorado State Colorado State
----------------------------------- -------------------------------- ---------------------
Australia 27.5% stepping 30% p.a.
down to 25%
from 2024
=================================== ================================ =====================
GDP UK 2.0% 2.0%
Eurozone 1.8% 1.8%
USA 2.5% 2.5%.
=================================== ================================ =====================
(1) . Some portfolio company revenues are fully indexed, whilst
some are partially indexed.
(2) . Retail Price Index and Retail Price Index excluding
Mortgage Interest Payments.
Valuation Sensitivities
The portfolio's valuation is sensitive to each of the
macro-economic assumptions listed. An explanation of the reason for
the sensitivity and an analysis of how each variable in isolation
(i.e. while keeping the other assumptions constant) impacts the NAV
per share follows below(1,2) . The sensitivities are also contained
in Note 3 to the financial statements.
Change in NAV per share(1)
--------------------------- -----------------------------
Sensitivites(2) +ve delta -ve delta
--------------------------- -------------- -------------
Discount Rate +/- 0.5% -8.1p 8.8p
--------------------------- -------------- -------------
Inflation -/+ 0.5% -7.4p 8.5p
--------------------------- -------------- -------------
Tax Rate +/- 5% -5.5p 5.5p
--------------------------- -------------- -------------
GDP -/+ 0.5% -3.7p 3.7p
--------------------------- -------------- -------------
Interest Rate -/+ 0.5% -1.3p 1.3p
--------------------------- -------------- -------------
Foreign Exchange Rates(3)
+/- 5% -0.5p 0.5p
--------------------------- -------------- -------------
(1) NAV per share based on 1,788m Ordinary Shares as at 30
September 2017
(2) Sensitivities for inflation, interest rates and tax rates
are based on the 25 largest investments extrapolated for the whole
portfolio
(3) Foreign exchange rate sensitivity is net of Group hedging at
30 September 2017
Discount Rate Sensitivity
Whilst not a macro-economic assumption, the discount rates that
are applied to each project's forecast cashflows, for the purposes
of valuing the portfolio, constitute the single most important
judgement and variable.
Inflation Rate Sensitivity
PPP projects in the portfolio have contractual income streams
derived from public sector clients, which are rebased every year
for inflation. UK projects tend to use either RPI (Retail Price
Index) or RPIx (RPI excluding mortgage payments) while non-UK
projects use CPI (consumer price index), and revenues are either
partially or totally indexed (depending on the contract and the
nature of the project's financing). Facilities management and
operating sub-contracts have similar indexation arrangements.
On the demand-based assets the concession agreement usually
prescribes how user fees are set, which is generally rebased
annually for inflation. Similarly to PPP projects in the UK this is
typically RPI, while non-UK projects use CPI. On Affinity Water,
the Company's regulated asset, revenues are regulated by Ofwat in a
five-yearly cycle with the pricing of water bills set with the aim
of providing an agreed return for equity that is constant in terms
for the five-year period by reference to RPI.
The correlation and sensitivity of the portfolio to inflation
increased in the period with the acquisitions of Affinity Water and
HS1. The portfolio's inflation correlation at 30 September 2017 was
0.8 (0.7 at 31 March 2017) such that should inflation be 1% per
annum higher than the valuation assumption for all future periods
the expected return from the portfolio would increase 0.8% from
7.4% to 8.2%.
In the UK, RPI and RPIx were 3.9% and 4.1% respectively for
September 2017. The portfolio valuation assumes UK inflation of
2.75% per annum for both RPI and RPIx, the same assumption as for
the prior period. The November 2017 forecasts for RPI from 26
independent forecasters as compiled by HM Treasury out to December
2018 range from 2.5% to 3.8%, with an average forecast of 3.0%.
Gross Domestic Product ('GDP') Sensitivity
The acquisition of HS1 in the period has resulted in an increase
in the proportion of the portfolio (by value) that is correlated to
changes in GDP to 16% (10% at 31 March 2017).
At 30 September 2017 the portfolio had four investments which
are correlated to GDP, namely HS1 (UK), Northwest Parkway (USA),
the A63 Motorway (France) and the M1-A1 Link (UK). At times of
higher economic activity there will be greater traffic volumes
using these assets generating increased revenues than compared to
periods of lower economic activity and therefore we assess these as
GDP correlated investments.
If outturn GDP growth was 0.5% p.a. lower for all future periods
than those in the valuation assumptions for all future periods,
expected return from the portfolio (before Group expenses) would
decrease 0.2% from 7.4% to 7.2% (7.2% at 31 March 2017).
Interest Rate Sensitivity
Each portfolio company's interest costs are at fixed rates,
either through fixed rate bonds or bank debt which is hedged with
an interest rate swap, or linked to inflation through index-linked
bonds. The portfolio's sensitivity to interest rates primarily
relates to the cash deposits which the project company is required
to maintain as part of its senior debt funding. For example, most
project companies would have a debt service reserve account in
which six months of debt service payments are held. For those
projects that bear refinancing risk - Affinity Water, Northwest
Parkway and AquaSure - the sensitivity includes sensitivity to
interest costs on these assets from the point of refinancing.
At 30 September 2017, cash deposits for the portfolio were
earning interest at a rate of 0.2% per annum on average. On 2
November 2017, the Bank of England base rate increased from 0.25%
to 0.50%, however a consensus that UK base rates will remain low
for an extended period persists, with a current median forecast for
UK base rates in December 2018 of 0.63% p.a.
The portfolio valuation deposit interest rate assumptions are
unchanged from 31 March 2017. For the UK the deposit interest rate
assumptions are 1.0% p.a. to March 2021 and 2.0% p.a.
thereafter.
Corporation Tax Rate Sensitivity
The profits of each portfolio company are subject to corporation
tax in the country where the asset is located. The sensitivity
considers a 5% movement in tax rates in all jurisdictions.
There has been a suggestion that a future UK government could
consider raising UK Corporation Tax rates. To the extent there was
a 5% increase in UK corporation tax rates, there would be a NAV per
share reduction of 4.6p.
The corporation tax rates assumed are unchanged from those
applied at 31 March 2017 other than for the Australian corporation
tax rate where the assumption has reduced from 30% to 27.5% then
reducing to 25% from 2024 in line with draft Australian
legislation. These rate changes have resulted in an increase to the
portfolio valuation of GBP1.6m attributed to changes in Economic
Assumptions.
Foreign Exchange Rates Sensitivity
20% of the portfolio by value is represented by non-UK assets.
These assets are valued in local currency then converted into
Sterling at the period end exchange rates. The sensitivity is net
of the Group's foreign exchange hedges at 30 September 2017.
Further detail on the Company's foreign exchange policy is outlined
in the Investment Adviser's Report.
Future Cashflows
Based on current forecasts over the long term, the portfolio
will move into a repayment phase when cash receipts from the
portfolio will be paid to the Company's shareholders as capital and
the portfolio valuation reduces as projects reach the end of their
concession term, assuming that the proceeds are not invested in new
investments.
It is these forecast cashflows from the Group's current
portfolio of investments that give the Board the confidence that
HICL remains on track to deliver a dividend of 7.85p per share for
the year to 31 March 2018 and that there should be sufficient cash
cover for the target dividends which have been announced for the
following two years:
-- 8.05p per share for the year to 31 March 2019 and
-- 8.25p per share for the year to 31 March 2020.
As described above, the Group's investments are predominantly
valued using a discounted cashflow analysis of the forecast
investment cashflows from each portfolio company. The following is
an overview of the key assumptions and principles applied in the
valuation and forecasting of future cashflows:
-- Discount rates and other key valuation assumptions (as
outlined above) continue to be applicable
-- Contracts for PPP projects and demand-based assets are not
terminated before their contractual expiry date
-- A reasonable assessment is made of operational performance,
including in relation to PPP projects, payment deductions and the
ability to pass these down to subcontractors
-- Distributions from each portfolio company reflect reasonable
expectations, including consideration of financial covenant
restrictions from senior lenders
-- Lifecycle and capital maintenance risks are either not borne
by the portfolio company because they are passed down to a
subcontractor or, where borne by the portfolio company, are
incurred per current forecasts
-- For demand-based assets a reasonable assessment is made of
future revenue growth, typically supported by forecasts made by an
independent third party
-- Where assets are in construction a reasonable assessment is
made as to the timing of completion and the ability to pass down
any costs of delay to subcontractors
-- Where a portfolio company expects to receive residual value
from an asset, that the projected amount for this value is
realised
-- Non-UK investments are valued in local currency and converted
to Sterling at the period end exchange rates
-- A reasonable assessment is made of regulatory changes in the
future which may impact cashflow forecasts
-- Perpetual investments are assumed to have a finite life (e.g.
Affinity Water is valued using a terminal value assumption)
-- In forming the above assessments, the Investment Adviser
works with portfolio companies' management teams, as well as
engaging with suitably qualified third parties such as technical
advisers, traffic consultants, legal advisers and regulatory
experts.
OPERATING & FINANCIAL REVIEW
Operating Review
The Company's Business Model comprises three key pillars - Value
Preservation through active management of the underlying
investments; Value Enhancement by outperforming the base case,
delivering upside to shareholders; and Accretive Investment in
assets that enhance the delivery of the investment proposition.
Accretive Investment
The Company seeks to add value to the portfolio through
accretive investment in assets which deliver long-term, stable
returns to shareholders and are positioned at the lower end of the
risk spectrum.
During the period, the Group completed two major
investments.
In May 2017, the Group completed the acquisition of an interest
in the Affinity Water group, a regulated water utility in the UK.
The investment was secured following an off-market approach to
Affinity Water's previous owners. The Group initially acquired a
36.6% equity interest for GBP275m, representing a premium to
regulatory capital value (at 31 March 2017) of 39%. A short
presentation published at the time of the acquisition is available
on the Company's website. The investment was accretive on a total
returns basis and also improved both the inflation correlation of
the returns from the portfolio and the longevity of the future
cashflows from the portfolio. The Group subsequently sold down a
GBP25m portion of the Affinity Water investment to a small group of
UK local authority pension funds, exemplifying the Group's strategy
of building key relationships with aligned co-investors to enable
HICL to manage its portfolio exposure to larger investment
opportunities. This targeted sell-down completed in June 2017 and
subsequently leaves HICL with a 33.2% equity interest in Affinity
Water.
In July 2017, the Group announced the acquisition of an interest
in High Speed 1, the only dedicated high speed rail line in the UK.
HICL invested alongside a group of InfraRed-sourced co-investors,
comprising UK local authority pension funds and Korean
institutional investors. The combined consideration was
approximately GBP320m, of which HICL funded approximately GBP200m
(equivalent to a 21.8% interest).
In addition to completing the Affinity Water and High Speed 1
acquisitions, the Group announced in July 2017 that its consortium,
alongside Diamond Transmission Corporation, was selected by Ofgem
as the preferred bidder to own and operate the offshore
transmission link to the Burbo Bank Extension windfarm. Under the
offshore transmission owner ("OFTO") regime, the OFTO takes
ownership of an operational transmission asset and receives
contractual, availability-based revenues over a 20-year period. The
OFTO does not have exposure to construction risk, electricity
production or power price risk. Completion of the acquisition is
expected in early 2018. The Group is also partnered with Diamond
Transmission Corporation to participate in both phases of Tender
Round 5, which comprises five further bids for OFTO assets.
Following the period end, the Group acquired an incremental
33.3% equity interest in the Addiewell Prison PPP project from
Interserve Investments Limited for approximately GBP12m. HICL
acquired an initial 33.3% interest in this project in May 2013 and,
with completion of this incremental investment, now holds 66.7% of
the equity and loan stock.
Value Preservation and Value Enhancement
InfraRed's Asset Management and Portfolio Management Teams work
closely together, and in partnership with the management teams in
the Group's portfolio companies, to preserve the value of the
Group's investments by seeking to ensure that portfolio companies
deliver services in line with the relevant contractual and / or
regulatory framework, and delivering the forecast base case
investment return. Related to this is the ongoing monitoring of the
counterparty exposures and associated contingency planning, aimed
at evaluating and mitigating (where possible) third parties' impact
on the performance and value of portfolio companies.
A second area of focus for the Asset Management and Portfolio
Management Teams is to seek opportunities to deliver outperformance
from the portfolio. This upside is often shared, with benefit also
accruing to public sector clients or, as part of regulatory price
reviews, the customers of regulated assets.
At 30 September 2017, the portfolio consisted of 116
investments; 80% of the portfolio by value is invested in the UK
with the remainder invested in Australia, Canada, France, Ireland,
the Netherlands and the USA. There are currently four investments
in the portfolio under construction, which collectively constitute
approximately 2% of the portfolio by value.
The Investment Adviser reviews the performance of the Company's
portfolio on a quarterly basis and overall views that the Group's
investments continue to perform as expected. In the Operating
Review specific activities and events are highlighted to give
shareholders insight into the portfolio. However, none of these
resulted in a material impact on portfolio value (being defined as
a movement in NAV/share greater than 1%). Set out below is
commentary on the existing portfolio followed by highlights from
acquisitions made during the period (Affinity Water and High Speed
1).
Existing Portfolio
In the existing portfolio there are a number of asset-specific
initiatives to highlight:
-- Following a detailed review by technical advisors, lifecycle
(or capital maintenance) savings have been recognised across a
number of PPP projects. These savings are a combination of
recognising historic savings and new forecast budgets for the
future. The revised forecasts have been approved by the lenders on
these projects.
-- There are ongoing initiatives to reorganise the provision of
management services to the PPP projects in which the Group invests.
Rationalising the number of management service providers is aimed
at improving the quality and performance of the services.
-- A transformation agreement has been signed in the period to
extend the concession for the Helicopter Training Facility project.
This PPP project reached financial close in 1997 and the client's
requirements have evolved over the years. With senior debt now
fully repaid as scheduled, the project has converted to a
demand-based arrangement and new rates agreed for an eight-year
period, with the opportunity to negotiate new terms at the end of
this period for the remainder of the contract which extends to
2037. This initiative delivers savings for UK Ministry of Defence
and also additional value to the Group from the eight-year
extension to the project.
-- Northwest Parkway and the A63 Motorway both experienced
traffic ahead of forecasts made at the time of their acquisitions.
This results in increased revenue which should result in increased
distributions from these investments.
-- The construction of Ecole Centrale Supélec was completed in
June 2017. This is a 28-year PPP project to finance, construct,
operate, and maintain a new facility for the Ecole Centrale Supélec
on Plateau de Saclay, near Paris, France. The facilities comprise a
shared teaching and research facility, an underground car park, and
a hotel (the revenue from which does not form part of the
project).
As previously reported, some projects experience operational
challenges and have on occasion incurred deductions. These are
usually reclaimed from the relevant subcontractors but deductions
have occasionally adversely impacted the Company's investment
cashflows. On a portfolio basis, the impact of these deductions has
been immaterial.
A small number of project companies are considering initiating
litigation against particular construction subcontractors in
respect of enforcing the contractors' obligations regarding the
diligent rectification of construction defects. This is an example
of how the PPP project companies in which the Group invests enact
their duty to ensure that clients and other stakeholders have use
of facilities that are constructed to the relevant standards and
which are of appropriate quality.
On a regular basis, the Investment Adviser reviews and reports
to the Risk Committee on the portfolio's counterparty exposure to
both the operational supply chain, and the providers of bank
deposit accounts and interest rate swaps. In light of recent profit
warnings from certain counterparties (and a deterioration in their
balance sheets) a reduction in the valuation of between GBP5m and
GBP10m has been taken as at 30 September 2017.
The following provides updates on some previously reported
challenges in the portfolio:
-- There continues to be a number of actions to resolve alleged
building defects and operational issues at a hospital PPP project,
and as previously reported, progress is slow. The value of the
investment in the portfolio is in the range of GBP0-5m.
-- Negotiations continue with respect to the compensation due to
the Group from a school PPP project which was voluntarily
terminated by the local authority client during the previous
financial year, which has certain construction defects outstanding.
Third party mediation is underway to agree a resolution to both
parties' satisfaction. The value of the investment in the portfolio
is in the range of GBP5-10m.
-- Progress on the commercial settlement negotiations regarding
a road PPP project with a number of operational issues and
construction defects has been slower than expected due to
difficulties in finalising a settlement. If an amicable settlement
cannot be agreed, court action will be resumed. The value of the
investment in the portfolio is in the range of GBP0-5m.
During the period, InfraRed's Asset Management Team worked
closely with management teams of the Group's PPP projects in
relation to fire safety and building defects. The particular focus
in the period has been on cladding systems and wall-ties. The
objective is to ensure that facilities are constructed to the
appropriate standards and are safe to use.
Where defects have been identified, rectification plans and work
have been prioritised, involving key stakeholders and appropriate
specialists, with much work already completed. No material fire
safety defects have been identified to date which have prevented
projects continuing to operate safely.
Affinity Water
In the six months since the Group acquired an interest in the
Affinity Water group, this regulated water business has traded in
line with the investment case and HICL received its first
distribution from the company in September 2017. InfraRed has taken
a seat on the Board of Affinity Water and also has a seat on the
company's regulatory working group, which is working on Affinity
Water's response to the current price review ("PR19").
With the exception of properties affected by unplanned
interruptions (following two high impact water main bursts),
Affinity Water's operational performance metrics have been within
the range anticipated at the time of acquisition. Analysis of
customer contact is showing a better trend than forecast and
Affinity Water received considerable positive feedback from its
customers with respect to its handling of a significant mains burst
at Baldock, Hertfordshire in August 2017. In October 2017, Affinity
Water won two silver awards at the UK Customer Experience Awards
2017 for the best 'Customer Insight and Feedback' award and
'Customers at the Heart of Everything Award!', a considerable
achievement given the broad range of eligible companies and
sectors.
The company has taken advantage of innovative technical
approaches to maintaining and managing its network, winning an
innovation prize thanks to the application of "ice pigging" which
has enabled it to clean over 900km of pipes in an 18-month period.
20,000 acoustic data monitors have been installed across Affinity
Water's network to help the company meet the challenge of
delivering an ambitious leakage reduction programme during the
current regulatory period. In the 2016/17 year, the company
achieved its regulatory leakage target, reducing leakage by 7.9
Megalitres per day to 173.0 Megalitres per day (2015/16: 180.9
Megalitres per day).
As part of a clear plan for management succession, InfraRed is
working with co-shareholders to identify a new CEO, who will join
in 2018 to steer the company through PR19.
High Speed 1
A detailed asset on-boarding plan for High Speed 1 ("HS1"),
which has been agreed between the company and its shareholders, is
under way with a number of specific, high priority initiatives
already complete. Two members of the InfraRed team, specifically
representing HICL and its co-investors, have been appointed to the
Board of Directors of the HS1 concessionaire. The consortium of
shareholders partially funded the acquisition with a debt facility
which is fully drawn. InfraRed team members are actively engaging
with management to support delivery of the business plan.
Compensation on Termination
The following has been analysed using data as of 30 September
2017:
-- The Group's portfolio includes 115 investments in PPP
projects and demand-based assets (structured as concessions with
public sector counterparties) which have a combined portfolio value
of GBP2.6bn;
-- 99 of the Group's investments, comprising GBP2.4bn of
portfolio value (UK-only: 88 investments, GBP1.9bn of portfolio
value) are in PPP projects and demand-based assets that have
contracts where either a) the public sector counterparty has no
right to voluntarily terminate or b) where the public sector
counterparty has a right to terminate, compensation payable would
be calculated by reference to the prevailing market value of the
investment;
-- 16 investments, comprising GBP0.24bn of portfolio value
(UK-only: 10 projects; GBP0.18bn of portfolio value), are in PPP
projects that have contracts where the compensation payable by the
public sector on voluntary termination is calculated by reference
to formulas rather than to the market value of the investment.
In the current market, as at 30 September 2017, we estimate that
the difference between the Group's valuation of its investments in
PPP projects and demand-based assets, and the compensation
contractually payable in the hypothetical event of voluntary
terminations across the Group's portfolio, represents approximately
4% of total portfolio value.
Environmental, Social & Governance
The Investment Adviser recognises that Responsible Investment
("RI") and Environmental, Social and Governance ("ESG") are
fundamental to sustainable, responsible business operations.
Consequently, InfraRed is a signatory to the Principles for
Responsible Investment ("PRI") and holds an A+ rating for
Infrastructure, as assessed by PRI. During the period there have
been some key successes in this area:
-- At Southmead Hospital, the Brunel Building won the
prestigious European Healthcare Design (facilities larger than
25,000m(2) ) award. The charity abseiling event organised by the
Trust took place in September 2017 and raised in excess of
GBP7,000. Discussions with the Trust progressed regarding the use
of one of the vacated spaces in the Galleries Shopping Centre in
Bristol to promote the North Bristol NHS Trust and support
recruitment and charitable initiatives. The launch of the space
took place in November 2017.
-- The A63 Motorway project company launched a well-received
communication campaign in April 2017 in order to prevent forest
fires caused by customers throwing cigarette butts out of vehicles.
The A63 alignment takes the road through pine forests: forest fires
are therefore both an environmental concern and an operational
risk. The campaign is communicated through roadside variable
message signs, messages on the motorway radio channel and posters
on the back of a fleet of HGVs which regularly use the motorway.
Members of the HICL Board visited the A63 in July 2017, meeting the
management team and discussing specific subjects in relation to ESG
and other initiatives, including such things as the management of
cybersecurity risks.
Facilities Management and Operations Counterparty Exposure
There is a diverse range of facilities management and operations
companies who have service supply contracts with portfolio
companies in which the Group invests.
The largest exposure by value at 30 September 2017 was to
Carillion plc ("Carillion") and its subsidiaries. Following the
period end, Carillion announced the sale of certain contracts from
its Healthcare businesses. Once this sale is completed in line with
Carillion's announcement, it is expected that portfolio companies
with exposure to Carillion will reduce to circa 8% of the Group's
portfolio value, whilst exposure to Serco will increase to circa
6%.
Financial Review
This section summarises the financial results of the Company for
the six month period ending 30 September 2017. The Company prepares
IFRS financial statements which do not consolidate any
subsidiaries, including those that are themselves investment
entities.
The Company and its advisers have concluded that in order to
report the relevant financial performance and position to
stakeholders, the Company prepares pro forma summary financial
information on the basis that the Company consolidates the results
of the Corporate Subsidiaries - this is consistent with the prior
year. This basis is designated the Investment Basis and provides
shareholders with further information regarding the Group's gearing
and expenses, coupled with greater transparency in the Company's
capacity for investment and ability to make distributions.
In the Investment Basis results, the Company consolidates the
results of HICL Infrastructure S.a.r.l. 1, HICL Infrastructure
S.a.r.l. 2 and Infrastructure Investments Limited Partnership
(together the "Corporate Subsidiaries").
References to the "Corporate Group" in this section refer to the
Company and its Corporate Subsidiaries.
Summary Financial Statements
Investment Basis Summary Income Statement
Six months to 30 September Six months to 30 September
2017 2016
--------------------------------------- -------------------------------------
GBPm Investment Consolidation IFRS Investment Consolidation IFRS
Basis adjustments Basis Basis adjustments Basis
Total Income(1) 108.1 (19.6) 88.5 99.5 (13.3) 86.2
Expenses
& Finance
costs (20.3) 19.4 (0.9) (13.9) 13.0 (0.9)
------------ -------------- --------- ------------ -------------- -------
Profit /
(loss) before
tax 87.8 (0.2) 87.6 85.6 (0.3) 85.3
Tax (0.2) 0.2 - (0.3) 0.3 -
------------ -------------- --------- ------------ -------------- -------
Earnings 87.6 - 87.6 85.3 - 85.3
============ ============== ========= ============ ============== =======
Earnings
per share 5.1p - 5.1p 6.1p - 6.1p
(1) Includes net foreign exchange loss of GBP2.8m (2016: GBP0.7m
gain).
On an Investment Basis, Total Income of GBP108.1m (2016:
GBP99.5m) represents the return from the portfolio recognised as
income comprising dividends, sub-debt interest and valuation
movements. The 9% (GBP8.6m) increase in Total Income reflects a 30%
increase in the Directors' valuation in 12 months which has been
partly offset by an 16% (GBP16.0m) lower contribution from discount
rate reductions and changes in economic assumptions in the period
than in the prior period. Further detail on the valuation movements
is given in the Portfolio & Valuation section.
On an IFRS basis, both Total Income and Expenses & Finance
costs are lower than on the Investment Basis, as costs incurred by
the Corporate Subsidiaries are included within Total Income under
IFRS, not under Expenses & Finance costs. Total Income of
GBP88.5m (2016: GBP86.2m) comprises income received by the Company
and valuation movements in its investments.
Foreign exchange movements have not materially impacted profits
as a GBP3.3m foreign exchange loss (2016: GBP22.4m gain) on
revaluing the non-UK assets in the portfolio using September 2017
exchange rates has been offset by GBP0.5m (2016: GBP21.7m loss)
foreign exchange hedging gains.
Earnings on an Investment Basis and IFRS basis were GBP87.6m, an
increase of GBP2.3m against the prior period. This reflects the
factors stated above whilst Corporate Group Expenses & Finance
costs were higher at GBP20.3m compared with GBP13.9m in the
comparable period, reflecting GBP4.3m one-off acquisition fees and
costs rising in line with the growth in the Directors'
valuation.
Earnings per share were 5.1p (2016: 6.1p); the reduction
attributable to the prior period containing a 1.7p increase in
earnings from changes in valuation assumptions (discount rate
reductions and changes in economic assumptions) compared to a 0.4p
increase in the current period.
Investment Basis Cost Analysis
Six months Six months
to 30 September to 30 September
2017 2016
----------------- -----------------
GBPm
Interest expense 1.8 1.0
Investment Adviser
fees 17.0 10.9
Auditor - KPMG 0.2 0.2
Directors' fees & expenses 0.2 0.2
Acquisition bid costs 0.4 1.0
Professional fees 0.5 0.5
Other expenses 0.2 0.1
----------------- -----------------
Expenses & finance
costs 20.3 13.9
================= =================
Total fees accruing to InfraRed Capital Partners Limited (the
Investment Adviser) were GBP17.0m (2016: GBP10.9m) for the period,
comprising the 1.1% p.a. management fee for assets up to GBP750m,
1.0% for assets above GBP750m, 0.9% for assets above GBP1.5bn and
0.8% for assets above GBP2.25bn, a 1.0% fee on acquisitions made
from third parties, and the GBP0.1m p.a. advisory fee.
The increase in the Investment Adviser's fees is due to a larger
portfolio and includes acquisition fees of GBP4.3m (2016:
GBP0.8m).
In the period, the Corporate Group incurred GBP0.4m of third
party costs (2016: GBP1.0m) on unsuccessful bids and bids in
progress (mainly legal, technical and tax due diligence).
Neither the Investment Adviser nor any of its affiliates
receives other fees from the Corporate Group or the Corporate
Group's portfolio of investments.
On an IFRS basis, Expenses & Finance costs were GBP0.9m
(2016: GBP0.9m) as they exclude costs incurred by the Corporate
Subsidiaries where the main expenses are incurred.
Ongoing Charges
Six months to Six months to
30 September 30 September
2017 2016
----------------- ------------------
GBPm
Investment Adviser(1) 12.7 10.1
Auditor - KPMG 0.2 0.2
Directors' fees
and expenses 0.2 0.2
Other ongoing expenses 0.5 0.6
Total expenses 13.6 11.1
Average NAV 2,565.6 2,048.7
Ongoing charges 1.06% 1.08%
================= ==================
1. Excludes acquisition fees of GBP4.3m (2016: GBP0.8m), in line
with AIC calculation methodology.
Ongoing charges, in accordance with AIC guidance, is defined as
annualised ongoing charges (i.e. excluding acquisition costs and
other non-recurring items) divided by the average published
undiluted net asset value in the period. On this basis, the Ongoing
charges percentage is 1.06% (2016: 1.08%) with the small reduction
arising from the impact of growth in the portfolio providing
efficiencies.
Investment Basis Summary Balance Sheet
30 September 2017 31 March 2017
------------------------------------- -------------------------------------
GBPm Investment Consolidation IFRS Investment Consolidation IFRS
Basis adjustments Basis Basis adjustments Basis
Investments
at fair value 2,813.7 (102.6) 2,711.1 2,347.5 71.9 2,419.4
Working capital (14.9) 14.5 (0.4) (10.3) 9.4 (0.9)
Net cash
/ (debt) (87.5) 88.1 0.6 82.2 (81.3) 0.9
Net assets
attributable
to Ordinary
Shares 2,711.3 - 2,711.3 2,419.4 - 2,419.4
=========== ============== ======== =========== ============== ========
NAV per share
(before dividend) 151.6p - 151.6p 149.0p - 149.0p
NAV per share
(post dividend) 149.7p - 149.7p 147.1p - 147.1p
On an Investment Basis, Investments at fair value increased 20%
in the six months to GBP2,813.7m (March 2017: GBP2,347.5m), which
is the Directors' valuation of GBP2,844.4m (March 2017:
GBP2,380.0m) net of GBP30.7m of future investment obligations
(March 2017: GBP32.5m). Further detail on the movement in
Investments at fair value is given in the Portfolio & Valuation
section.
The Corporate Group had net debt, on an Investment Basis, at 30
September 2017 of GBP87.5m (March 2017: net cash of GBP82.2m); the
movement in the six months mainly reflecting cash used for
acquisition activity net of equity capital raised. Drawings from
the Corporate Group's Revolving Credit Facility at the end of the
period were GBP90m (2016: nil).
An analysis of the movements in net cash is shown in the
cashflow analysis below.
On an IFRS basis, Investments at fair value increased 12% to
GBP2,711.1m (March 2017: GBP2,419.4m), reflecting the Investment
Basis movements above as well as a GBP174m decrease in the fair
value of the Corporate Subsidiaries as a result of changes in net
cash held by the Corporate Subsidiaries. On an IFRS basis, cash and
cash equivalents decreased marginally to GBP0.6m (March 2017:
GBP0.9m). The Group's cash and debt management is undertaken
through the Corporate Subsidiaries.
NAV per share was 151.6p before the 1.96p second quarterly
distribution (March 2017: 149.0p). NAV per share has increased
2.6p, of which 1.3p was as a result of the 162m tap issue shares
issued at a premium in June 2017. The expected NAV growth, being
the budgeted return attributable to the unwinding of the discount
rate, less Corporate Group costs and the dividends paid, was
0.3p.
Analysis of the Growth in NAV per Share
Pence per share
NAV per share at 31 March
2017 149.0
Valuation movements
Reduction in discount rates(1) 0.4
0.4
Portfolio Performance
Project outperformance 0.6
Expected NAV growth(2) 0.3
0.9
Accretive Issuance of shares 1.3
--- -----
Total 2.6
NAV per share at 30 September
2017 151.6
=== === =====
1. Reduction in discount rates primarily relates to AquaSure
(see Portfolio & Valuation section)
2. Expected NAV growth is the Company's budgeted EPS less target dividend
Investment Basis Summary cashflow
GBPm Six months to 30 Six months to 30 September
September 2017 2016
------------------------------------- -------------------------------------
Investment Consolidation IFRS Investment Consolidation IFRS
Basis adjustments Basis Basis adjustments Basis
Cash from
investments 91.3 (25.2) 66.1 73.0 (21.3) 51.7
Operating
and finance
costs outflow (13.4) 12.0 (1.4) (12.1) 11.3 (0.8)
----------- -------------- -------- ----------- -------------- --------
Net cash inflow
before
capital movements 77.9 (13.2) 64.7 60.9 (10.0) 50.9
Net cost of
new investments (450.1) 181.2 (268.9) (75.8) (39.3) (115.1)
Share capital
raised net
of costs 265.5 - 265.5 112.5 - 112.5
Forex movement
on borrowings
/ hedging(1) (1.4) 1.4 - (18.9) 18.9 -
----------- -------------- -------- ----------- -------------- --------
Distributions
paid (61.6) - (61.6) (48.2) - (48.2)
----------- -------------- -------- ----------- -------------- --------
Movement in
the year (169.7) 169.4 (0.3) 30.5 (30.4) 0.1
-------------------- ----------- -------------- -------- ----------- -------------- --------
Net cash
at start of
year 82.2 (81.3) 0.9 52.7 (52.2) 0.5
-------------------- ----------- -------------- -------- ----------- -------------- --------
Net cash /
(debt) at
end of year (87.5) 88.1 0.6 83.2 (82.6) 0.6
----------- -------------- -------- ----------- -------------- --------
1. Includes movement in capitalised debt issue costs of GBP1.0m (2016: GBPnil)
Cash inflows from the portfolio on an Investment Basis were 25%
higher at GBP91.3m (2016: GBP73.0m). Growth in underlying cash
generation was driven by contributions from acquisitions combined
with active cash management across the portfolio.
The cost of new investments by the Corporate Group on an
Investment Basis of GBP450.1m (2016: GBP75.8m) represents the cash
cost of the two new investments, the loan note subscription on one
investment and acquisition costs of GBP6.0m (2016: GBP0.7m).
On an IFRS basis, the Company received GBP66.1m from its direct
Corporate Subsidiary (2016: GBP51.7m). These payments are sized to
pay shareholder dividends, assuming no scrip dividend take up, and
the Company's operating costs. On an IFRS basis, net cost of new
investments of GBP268.9m (2016: GBP115.1m) reflects funds extended
by the Company to its direct Corporate Subsidiary in the period and
broadly reflects scrip dividend take up and share capital raised
net of costs.
Hedging and borrowing for the Corporate Group is undertaken by a
Corporate Subsidiary and therefore the Company had no cashflows for
this on an IFRS basis. On an Investment Basis, the GBP1.4m cash
outflow (2016: GBP18.9m cash outflow) comprised GBP2.4m from
foreign exchange rate hedging arising from fluctuations of the
Euro, Australian Dollar and Canadian Dollar against Sterling in the
period net of GBP1.0m movement in capitalised debt arrangement
costs. The Corporate Group enters forward sales to hedge forex
exposure in line with the Company's hedging policy set out in the
Investment Adviser's Report. Overall foreign exchange movement has
not materially impacted the Company's total income in the period,
as set out in detail under the Summary Income Statement above.
The issue of 162m shares in June 2017 at a premium to the
prevailing NAV per share provided net cash receipts in the period
of GBP265.5m (2016: GBP112.5m).
Dividends paid in the period increased 28% or GBP13.4m to
GBP61.6m (2016: GBP48.2m). Dividend cash cover, which compares
operational cashflow of GBP77.9m (2016: GBP60.9m) to dividends
paid, was 1.26 times (2016: 1.26 times).
Financing
The Board's policy is that the Company should not hold material
amounts of un-invested cash beyond what is necessary to meet
outstanding equity commitments for existing investments or to fund
potential acquisitions in the near term.
New investments are typically funded initially by the Group's
Revolving Credit Facility ("RCF"). The Board will consider the
appropriate timing and price for the issuance of new shares to
repay the debt, in consultation with the Company's broker. The
Group's RCF was enlarged to GBP400m in May 2017. Santander was
added to the existing banking group of HSBC, Lloyds Bank, National
Australia Bank, Sumitomo Mitsui Banking Corporation, ING and The
Royal Bank of Scotland. The facility carries a margin of 1.70% and
the term runs until May 2019. It is available to be drawn in cash
and letters of credit for future investment obligations.
This acquisition financing is then repaid through tap issuance
or, where the annual tap capacity limit is fully utilised, through
the issue of new shares accompanied by a full prospectus.
In June 2017, the Company raised GBP267.7m of gross proceeds
through a tap issuance of 162.2m shares. The Issue was materially
oversubscribed and in light of the Company's investment pipeline at
the time, the size of the Issue was increased from its initial
target size of GBP205m to the maximum available to the Company. At
the end of December 2017, it is forecast that HICL will have
drawings on its RCF of approximately GBP130m. The RCF, which is
sized at GBP400m, retains sufficient capacity for the Company to
fund additional investments as and when further attractive
opportunities arise.
Every project in the portfolio has project-specific debt in
place. All are long-term debt financing, with the exception of
AquaSure, Affinity Water and Northwest Parkway which require
refinancing in a series of tranches, to meet their business plans.
At 30 September 2017 the weighted average remaining asset life
increased to 30.6 years (March 2017: 24.4 years) and the weighted
average debt tenor was 18.1 years (March 2017: 18.2 years),
excluding the A13 senior bonds.
Directors' statement of responsibilities
We confirm that to the best of our knowledge:
-- the condensed set of financial statements has been prepared
in accordance with International Accounting Standard 34 Interim
Financial Reporting ("IAS 34") as adopted by the European Union,
and
-- the interim management report, comprising the Chairman's
Statement, Investment Adviser's Report and Financial Results,
includes a fair review of the information required by:
a. DTR 4.2.7R of the Disclosure Guidance and Transparency Rules,
being an indication of important events that have occurred during
the first six months of the financial year and their impact on the
condensed set of financial statements; and a description of the
principal risks and uncertainties for the remaining six months of
the year; and
b. DTR 4.2.8R of the Disclosure Guidance and Transparency Rules,
being related party transactions that have taken place in the first
six months of the current financial year and that have materially
affected the financial position or performance of the entity during
that period; and any changes in the related party transactions
described in the last annual report that could do so.
On behalf of the Board
I Russell
Chairman
21 November 2017
Independent review report to HICL Infrastructure Company
Limited
Conclusion
We have been engaged by HICL Infrastructure Company Limited (the
"Company") to review the condensed set of financial statements in
the half-yearly financial report for the six months ended 30
September 2017 of the Company which comprises the Condensed
Unaudited Income Statement, the Condensed Unaudited Balance Sheet,
the Condensed Unaudited Statement of Changes in Shareholders'
Equity, the Condensed Unaudited Cash Flow Statement and the related
explanatory notes.
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half-yearly financial report for the six months ended 30
September 2017 is not prepared, in all material respects, in
accordance with IAS 34 Interim Financial Reporting as adopted by
the European Union (the "EU") and the Disclosure Guidance and
Transparency Rules (the "DTR") of the UK's Financial Conduct
Authority (the "UK FCA").
Scope of review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity issued by the Auditing Practices Board for use in the
UK. A review of interim financial information consists of making
enquiries, primarily of persons responsible for financial and
accounting matters, and applying analytical and other review
procedures. We read the other information contained in the
half-yearly financial report and consider whether it contains any
apparent misstatements or material inconsistencies with the
information in the condensed set of financial statements.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing (UK) and
consequently does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in
an audit. Accordingly, we do not express an audit opinion.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and
has been approved by, the directors. The directors are responsible
for preparing the half-yearly financial report in accordance with
the DTR of the UK FCA.
As disclosed in note 2, the annual financial statements of the
Company are prepared in accordance with International Financial
Reporting Standards as adopted by the EU. The directors are
responsible for preparing the condensed set of financial statements
included in the half-yearly financial report in accordance with IAS
34 as adopted by the EU.
Our responsibility
Our responsibility is to express to the Company a conclusion on
the condensed set of financial statements in the half-yearly
financial report based on our review.
The purpose of our review work and to whom we owe our
responsibilities
This report is made solely to the Company in accordance with the
terms of our engagement letter to assist the Company in meeting the
requirements of the DTR of the UK FCA. Our review has been
undertaken so that we might state to the Company those matters we
are required to state to it in this report and for no other
purpose. To the fullest extent permitted by law, we do not accept
or assume responsibility to anyone other than the Company for our
review work, for this report, or for the conclusions we have
reached.
Dermot A. Dempsey
For and on behalf of KPMG Channel Islands Limited
Chartered Accountants, Guernsey
21 November 2017
Condensed Unaudited Income Statement
for the six months ended 30 September 2017
Six months Six months
ended ended
30 30
September September
2017 2016
Total Total
Note GBPm GBPm
---------------------------- ---- ---------- ----------
Investment income 5 88.5 86.2
---------------------------- ---- ---------- ----------
Total income 88.5 86.2
---------------------------- ---- ---------- ----------
Fund expenses 6 (0.9) (0.9)
---------------------------- ---- ---------- ----------
Profit before tax 87.6 85.3
---------------------------- ---- ---------- ----------
Profit for the period 87.6 85.3
---------------------------- ---- ---------- ----------
Earnings per share - basic
and diluted (pence) 9 5.1 6.1
---------------------------- ---- ---------- ----------
All results are derived from continuing operations. There is no
other comprehensive income or expense and consequently a statement
of other comprehensive income has not been prepared. The
accompanying Notes are an integral part of the financial
statements.
Condensed Unaudited Balance Sheet
as at 30 September 2017
30 September
2017 31 March
Unaudited 2017
GBPm Audited
Note GBPm
----------------------------------- ---- ------------ ----------
Non-current assets
----------------------------------- ---- ------------ ----------
Investments at fair value through
profit or loss 11 2,711.1 2,419.4
----------------------------------- ---- ------------ ----------
Total non-current assets 2,711.1 2,419.4
----------------------------------- ---- ------------ ----------
Current assets
----------------------------------- ---- ------------ ----------
Trade and other receivables 0.1 0.1
----------------------------------- ---- ------------ ----------
Cash and cash equivalents 0.6 0.9
----------------------------------- ---- ------------ ----------
Total current assets 0.7 1.0
----------------------------------- ---- ------------ ----------
Total assets 2,711.8 2,420.4
----------------------------------- ---- ------------ ----------
Current liabilities
----------------------------------- ---- ------------ ----------
Trade and other payables (0.5) (1.0)
----------------------------------- ---- ------------ ----------
Total current liabilities (0.5) (1.0)
----------------------------------- ---- ------------ ----------
Total liabilities (0.5) (1.0)
----------------------------------- ---- ------------ ----------
Net assets 2,711.3 2,419.4
----------------------------------- ---- ------------ ----------
Equity
----------------------------------- ---- ------------ ----------
Ordinary Share capital 12 0.2 0.2
----------------------------------- ---- ------------ ----------
Share premium 12 2,023.8 1,753.3
----------------------------------- ---- ------------ ----------
Retained reserves 687.3 665.9
----------------------------------- ---- ------------ ----------
Total equity attributable to
equity shareholders of the
Company 2,711.3 2,419.4
----------------------------------- ---- ------------ ----------
Total equity 2,711.3 2,419.4
----------------------------------- ---- ------------ ----------
Net assets per Ordinary Share
(pence) 151.6 149.0
----------------------------------- ---- ------------ ----------
The accompanying Notes are an integral part of these financial
statements.
The financial statements were approved and authorised for issue
by the Board of Directors on 21 November 2017, and signed on its
behalf by:
I Russell S Farnon
Director Director
Condensed Unaudited Statement of Changes in Shareholders'
Equity
for the six months ended 30 September 2017
Six months ended 30
September 2017
Attributable to equity
shareholders of the
Company
--------------------------------- -----------------------------------
Share
capital
and Total
Share Retained shareholders'
premium reserves equity
GBPm GBPm GBPm
--------------------------------- -------- --------- --------------
Shareholders' equity at 31
March 2017 1,753.5 665.9 2,419.4
--------------------------------- -------- --------- --------------
Profit for the period - 87.6 87.6
--------------------------------- -------- --------- --------------
Distributions paid to Company
shareholders in cash - (61.6) (61.6)
--------------------------------- -------- --------- --------------
Distributions paid to Company
shareholders by scrip issue - (4.6) (4.6)
--------------------------------- -------- --------- --------------
Total distributions paid to
Company shareholders in the
period - (66.2) (66.2)
--------------------------------- -------- --------- --------------
Ordinary Shares issued for
cash 267.7 - 267.7
--------------------------------- -------- --------- --------------
Ordinary Shares issued for
scrip dividend 4.6 - 4.6
--------------------------------- -------- --------- --------------
Total Ordinary Shares issued
in the period 272.3 - 272.3
--------------------------------- -------- --------- --------------
Costs of Ordinary Shares issued (1.8) - (1.8)
--------------------------------- -------- --------- --------------
Shareholders' equity at 30
September 2017 2,024.0 687.3 2,711.3
--------------------------------- -------- --------- --------------
Six months ended 30
September 2016
Attributable to equity
shareholders of the
Company
--------------------------------- -----------------------------------
Share
capital
and Total
Share Retained shareholders'
premium reserves equity
GBPm GBPm GBPm
--------------------------------- -------- --------- --------------
Shareholders' equity at 31
March 2016 1,376.6 597.3 1,973.9
--------------------------------- -------- --------- --------------
Profit for the period - 85.3 85.3
--------------------------------- -------- --------- --------------
Distributions paid to Company
shareholders in cash - (48.2) (48.2)
--------------------------------- -------- --------- --------------
Distributions paid to Company
shareholders by scrip issue - (4.3) (4.3)
--------------------------------- -------- --------- --------------
Total distributions paid to
Company shareholders in the
period - (52.5) (52.5)
--------------------------------- -------- --------- --------------
Ordinary Shares issued for
cash 113.4 - 113.4
--------------------------------- -------- --------- --------------
Ordinary Shares issued for
scrip dividend 4.3 - 4.3
--------------------------------- -------- --------- --------------
Total Ordinary Shares issued
in the period 117.7 - 117.7
--------------------------------- -------- --------- --------------
Costs of Ordinary Shares issued (1.0) - (1.0)
--------------------------------- -------- --------- --------------
Shareholders' equity at 30
September 2016 1,493.3 630.1 2,123.4
--------------------------------- -------- --------- --------------
The accompanying Notes are an integral part of these financial
statements.
Condensed Unaudited Cash Flow Statement
for the six months ended 30 September 2017
Six months Six months
ended ended
30 September 30
2017 September
GBPm 2016
GBPm
-------------------------------------------- ------------- ----------
Cash flows from operating activities
-------------------------------------------- ------------- ----------
Profit before tax 87.6 85.3
-------------------------------------------- ------------- ----------
Adjustments for:
-------------------------------------------- ------------- ----------
Investment income (88.5) (86.2)
-------------------------------------------- ------------- ----------
Operating cash flow before changes
in working capital (0.9) (0.9)
-------------------------------------------- ------------- ----------
Changes in working capital:
-------------------------------------------- ------------- ----------
(Decrease)/Increase in payables (0.5) 0.1
-------------------------------------------- ------------- ----------
Cash flow from operations (1.4) (0.8)
-------------------------------------------- ------------- ----------
Interest received on investments 66.1 51.7
-------------------------------------------- ------------- ----------
Net cash from operating activities 64.7 50.9
-------------------------------------------- ------------- ----------
Cash flows from investing activities
-------------------------------------------- ------------- ----------
Purchases of investments (268.9) (115.1)
-------------------------------------------- ------------- ----------
Net cash used in investing activities (268.9) (115.1)
-------------------------------------------- ------------- ----------
Cash flows from financing activities
-------------------------------------------- ------------- ----------
Net proceeds from issue of share
capital 265.5 112.5
-------------------------------------------- ------------- ----------
Distributions paid to Company shareholders (61.6) (48.2)
-------------------------------------------- ------------- ----------
Net cash from financing activities 203.9 64.3
-------------------------------------------- ------------- ----------
Net (decrease)/increase in cash and
cash equivalents (0.3) 0.1
-------------------------------------------- ------------- ----------
Cash and cash equivalents at beginning
of period 0.9 0.5
-------------------------------------------- ------------- ----------
Cash and cash equivalents at end
of period 0.6 0.6
-------------------------------------------- ------------- ----------
The accompanying Notes are an integral part of these financial
statements.
Notes to the Condensed Unaudited Financial Statements
for the six months ended 30 September 2017
1. Reporting entity
HICL Infrastructure Company Limited (the "Company") is a company
domiciled in Guernsey, Channel Islands, whose shares are publicly
traded on the London Stock Exchange. The interim condensed
unaudited financial statements of the Company (the "interim
financial statements") as at and for the six months ended 30
September 2017 comprises the Company only.
The Company has three corporate level subsidiaries being HICL
Infrastructure S.a.r.l. 1, HICL Infrastructure S.a.r.l. 2 and
Infrastructure Investments Limited Partnership (each a "Corporate
Subsidiary" and together "Corporate Subsidiaries").
The Company and its Corporate Subsidiaries invest in
infrastructure projects in the United Kingdom, North America,
Europe and Australia.
The statutory accounts for the year ended 31 March 2017 were
approved by the Directors on 23 May 2017 and are available from the
Company's Administrator and on the Company's website www.hicl.com.
The auditor's report on these accounts was unmodified.
2. Key accounting policies
Basis of preparation
The interim financial statements were approved by the Board of
Directors on 21 November 2017.
The interim financial statements included in this report have
been prepared in accordance with International Accounting Standard
("IAS") 34 'Interim Financial Reporting'. The interim financial
statements have also been prepared in accordance with the
Disclosure Guidance and Transparency Rules ("DTR") of the UK's
Financial Conduct Authority ("FCA") and in compliance with the
Companies (Guernsey) Law, 2008.
The interim financial statements are prepared using accounting
policies in compliance with the recognition and measurement
requirements of International Financial Reporting Standards
("IFRS") as adopted by the European Union ("EU") using the
historical cost basis, except that the financial instruments
classified as Investments at fair value through profit and loss and
derivative financial instruments are stated at their fair
values.
The Company is judged to be an investment entity in accordance
with IFRS 10. Its subsidiaries and its portfolio of investments are
classified as Investments at fair value through profit and loss and
stated at their fair values.
The interim financial statements are presented in Sterling,
which is the Company's functional currency.
The Chief Operating Decision Maker (the "CODM") is of the
opinion that the Company is engaged in a single segment of
business, being investment in infrastructure. The Company does not
derive revenue from Guernsey and has no single major customer. The
Company's financial performance does not follow any material
seasonal fluctuations.
The same accounting policies and methods of computation are
followed in these interim financial statements as were applied in
the preparation of the Company's financial statements for the year
ended 31 March 2017.
Going concern
The Directors have considered areas of financial risk, the
group's access to the Revolving Credit Facility and reviewed
cashflow forecasts with a number of stress scenarios. The Directors
have concluded based on this analysis that the Company has adequate
resources to continue in operational existence for the foreseeable
future, a period of at least 12 months. Thus they consider it
appropriate to adopt the going concern basis of accounting in
preparing the interim financial statements.
3. Financial instruments
Fair value hierarchy
The fair value hierarchy is defined as follows:
-- Level 1: quoted prices (unadjusted) in active markets for
identical assets or liabilities
-- Level 2: inputs other than quoted prices included within
Level 1 that are observable for the asset or liability, either
directly
(i.e. as prices) or indirectly (i.e. derived from prices)
-- Level 3: inputs for the asset or liability that are not based
on observable market data (unobservable inputs).
30 September 2017
----------------------- ------------------------------
Level Level Level
1 2 3 Total
GBPm GBPm GBPm GBPm
----------------------- ----- ----- ------- -------
Investments at fair
value through profit
or loss (Note 11) - - 2,711.1 2,711.1
----------------------- ----- ----- ------- -------
31 March 2017
----------------------- ------------------------------
Level Level Level
1 2 3 Total
GBPm GBPm GBPm GBPm
----------------------- ----- ----- ------- -------
Investments at fair
value through profit
or loss (Note 11) - - 2,419.4 2,419.4
----------------------- ----- ----- ------- -------
There were no transfers between Level 1, 2 or 3 during the
period. A reconciliation of the movement in Level 3 assets is
disclosed in Note 11.
Level 3
Valuation methodology
The Company records the fair value of the single directly owned
top holding company by calculating and aggregating the fair value
of each of the individual project companies and holding companies
in which the Company holds an indirect investment.
The Directors have satisfied themselves as to the methodology
used, the discount rates and key assumptions applied, and the
valuation of all the underlying investments. All equity investments
in PPP or similar projects are valued using a discounted cashflow
methodology. The A13 investment in listed senior bonds is valued
based on the quoted market price at the Balance Sheet date. The
valuation techniques and methodologies have been applied
consistently with those used in the prior year. This valuation uses
key assumptions which are benchmarked from a review of recent
comparable market transactions in order to arrive at a fair market
value. Valuations are performed on a six-monthly basis every
September and March for all investments.
For the valuation of the underlying infrastructure investments,
the Directors have also obtained an independent opinion from a
third party expert with experience in valuing these types of
investments, supporting the reasonableness of the valuation.
Investments - The key valuation assumptions and sensitivities
for the valuation
The following economic assumptions were used in the discounted
cashflow valuations:
30 September 31 March 2017
2017
------------------ -------------- --------------------- ---------------------
Inflation UK (RPI and 2.75% p.a. 2.75% p.a.
Rates RPIx)
------------------ -------------- --------------------- ---------------------
Eurozone 1.0% p.a. to 1.0% p.a. to
(CPI) 2019, 2019,
2.0% p.a. thereafter 2.0% p.a. thereafter
------------------ -------------- --------------------- ---------------------
Canada (CPI) 2.0% p.a. 2.0% p.a.
-------------- --------------------- ---------------------
USA (CPI) 2.0% p.a. 2.0% p.a.
-------------- --------------------- ---------------------
Australia 2.5% p.a. 2.5% p.a.
(CPI)
------------------ -------------- --------------------- ---------------------
Deposit Rates UK 1.0% p.a. to 1.0% p.a. to
March 2021, March 2021,
2.0% p.a. thereafter 2.0% p.a. thereafter
------------------ -------------- --------------------- ---------------------
Eurozone 1.0% p.a. to 1.0% p.a. to
March 2021, March 2021,
2.0% p.a. thereafter 2.0% p.a. thereafter
------------------ -------------- --------------------- ---------------------
Canada 1.0% p.a. to 1.0% p.a. to
March 2021, March 2021,
2.0% p.a. thereafter 2.0% p.a. thereafter
-------------- --------------------- ---------------------
USA 1.0% p.a. with 1.0% p.a. with
a gradual increase a gradual increase
to 2.0% to 2.0%
-------------- --------------------- ---------------------
Australia 2.6% p.a. with 2.6% p.a. with
a gradual increase a gradual increase
to 3.0% long-term to 3.0% long-term
------------------ -------------- --------------------- ---------------------
Foreign Exchange
Rates CAD / GBP 0.60 0.60
------------------ -------------- --------------------- ---------------------
EUR / GBP 0.88 0.85
--------------------------------- --------------------- ---------------------
USD / GBP 0.75 0.80
--------------------------------- --------------------- ---------------------
AUD / GBP 0.58 0.61
--------------------------------- --------------------- ---------------------
Tax Rates UK 19% to March 19% to March
2020, 2020,
17% thereafter 17% thereafter
------------------ -------------- --------------------- ---------------------
Eurozone Various (no Various (no change
change apart apart from French
from French tax rate reducing
tax rate reducing from 33.3% to
from 33.3% to 28% by 2019)
28% by 2019)
------------------ -------------- --------------------- ---------------------
USA 35% Federal 35% Federal &
& 4.6% Colorado
4.6% Colorado State
State
-------------- --------------------- ---------------------
Canada 26% and 27% 26% and 27%
-------------- --------------------- ---------------------
27.5% stepping
down to 25%
Australia from 2024 30%
--------------------------------- --------------------- ---------------------
GDP UK 2.0% 2.0%
------------------ -------------- --------------------- ---------------------
Eurozone 1.8% 1.8%
--------------------------------- --------------------- ---------------------
USA 2.5% 2.5%
--------------------------------- --------------------- ---------------------
Discount rates
Judgement is used in arriving at the appropriate discount rate
for each investment based on the Investment Adviser's knowledge of
the market, taking into account intelligence gained from bidding
activities, discussions with financial advisers knowledgeable in
these markets and publicly available information on relevant
transactions.
The discount rates used for valuing each infrastructure
investment vary on a project-by-project basis and take into account
risks and opportunities associated with the project earnings (e.g.
predictability and covenant of the concession income), all of which
may be differentiated by project phase, jurisdiction and market
participants' appetite for these risks.
The discount rates used for valuing the projects in the
portfolio are as follows:
Weighted
Period ending Range average
------------------- --------- --------
6.5% to
30 September 2016 9.9% 7.3%
------------------- --------- --------
5.6% to
31 March 2017 9.8% 7.4%
------------------- --------- --------
4.9% (1)
30 September 2017 to 9.8% 7.4%
------------------- --------- --------
(1) The 4.9% discount rate relates to the A13 senior bonds. The
rate is the implied rate from the quoted market price of the bonds
as at 30 September 2017
A change to the weighted average rate of 7.4% by plus or minus
0.5% has the following effect on the Investments at fair value
through profit or loss and NAV per Ordinary Share:
Investments
at fair
value
-0.5% through +0.5%
p.a. profit p.a.
Discount rate change or loss change
----------------------------------- ---------- ----------- ----------
March 2017 +GBP121.5m GBP2,419.4m -GBP111.2m
----------------------------------- ---------- ----------- ----------
September 2017 +GBP157.9m GBP2,711.1m -GBP144.3m
----------------------------------- ---------- ----------- ----------
Implied change in NAV per Ordinary +8.8 pence 151.6 -8.1 pence
Share (1) - September 2017 (+7.5 pence (-6.9
(March 2017) pence) (149.0 pence)
pence)
----------------------------------- ---------- ----------- ----------
(1) Net Asset Value per Ordinary Share based on 1,788.3 million
Ordinary Shares as at 30 September 2017
Inflation rates
All PPP projects in the portfolio have contractual income
streams with public sector clients, which are rebased every year
for inflation. UK projects tend to use either RPI (Retail Price
Index) or RPIx (RPI excluding mortgage payments), and revenues are
either partially or totally indexed (depending on the contract and
the nature of the project's financing). Facilities management and
operating sub-contracts have similar indexation arrangements.
A change to the inflation rate by plus or minus 0.5% has the
following effect on the Investments at fair value through profit or
loss and NAV per Ordinary Share:
Investments
at
fair
value
-0.5% through +0.5%
p.a. profit p.a.
Inflation assumption change or loss change
----------------------------------- ---------- ----------- ----------
March 2017 -GBP90.9m GBP2,419.4m +GBP100.4m
----------------------------------- ---------- ----------- ----------
September 2017 -GBP132.5m GBP2,711.1m +GBP151.3m
----------------------------------- ---------- ----------- ----------
Implied change in NAV per Ordinary -7.4 pence 151.6 +8.5 pence
Share (1 2) - September 2017 (-5.6 pence (+6.2
(March 2017) pence) (149.0 pence)
pence)
----------------------------------- ---------- ----------- ----------
(1) Analysis is based on the Company's 25 largest investments,
pro-rata for the whole portfolio
(2) Net Asset Value per Ordinary Share based on 1,788.3 million
Ordinary Shares as at 30 September 2017
Interest rates
Each project's interest costs are either inflation-linked or
fixed rate. This is achieved through fixed rate or inflation-linked
bonds, or bank debt which is hedged with an interest rate swap. The
portfolio's sensitivity to interest rates primarily relates to the
cash deposits required as part of the project funding, though a
small number are sensitive to interest rates as future refinancings
are required.
Each PPP project and demand risk asset in the portfolio has cash
held in bank deposits, which is a requirement of their senior debt
financing. As at 30 September 2017, cash deposits for the portfolio
were earning interest at a rate of 0.2% per annum on average.
A change to the interest rate and/or deposit rate by plus or
minus 0.5% has the following effect on the Investments at fair
value through profit or loss and NAV per Ordinary Share:
Investments
at fair
value
-0.5% through +0.5%
p.a. profit p.a.
Interest rate change or loss change
----------------------------------- ---------- ----------- ----------
March 2017 -GBP25.3m GBP2,419.4m +GBP24.2m
----------------------------------- ---------- ----------- ----------
September 2017 -GBP22.8m GBP2,711.1m +GBP23.5m
----------------------------------- ---------- ----------- ----------
Implied change in NAV per Ordinary -1.3 pence 151.6 +1.3 pence
Share (1 2 3) - September 2017 (-1.6 pence (+1.5
(March 2017) pence) (149.0 pence)
pence)
----------------------------------- ---------- ----------- ----------
(1) Analysis is based on the Company's 25 largest investments,
pro-rata for the whole portfolio
(2) Net Asset Value per Ordinary Share based on 1,788.3 million
Ordinary Shares as at 30 September 2017
(3) March 2017 comparatives have been represented to be an
interest rate sensitivity rather than a deposit rate
sensitivity
Gross Domestic Product
The portfolio has 4 projects (2016: 1 project) where revenues
are positively correlated to changes in Gross domestic product.
These projects are A63 Motorway, M1-A1 Road, HS1 and Northwest
Parkway which together comprise 16% of the Investments at fair
value through profit or loss.
A change to the Gross Domestic Product by plus or minus 0.5% has
the following effect on the Investments at fair value through
profit or loss and NAV per Ordinary Share:
Investments
at
fair
value
through +0.5%
-0.5% profit p.a.
Gross Domestic Product (GDP) p.a. change or loss change
----------------------------------- ------------ ----------- ----------
March 2017 -GBP49.5m GBP2,419.4m +GBP46.5m
----------------------------------- ------------ ----------- ----------
September 2017 -GBP65.7m GBP2,711.1m +GBP66.2m
----------------------------------- ------------ ----------- ----------
Implied change in NAV per Ordinary -3.7 pence 151.6 +3.7 pence
Share (1) - September 2017 (-3.0 pence (+2.9
(March 2017) pence) (149.0 pence)
pence)
----------------------------------- ------------ ----------- ----------
(1) Net Asset Value per Ordinary Share based on 1,788.3 million
Ordinary Shares at 30 September 2017
Tax rates
The profits of each project company are subject to corporation
tax in the country in which the project is located. The UK Finance
Act 2016 enacted a reduction to the corporation tax rate to 17%
effective from April 2020, which is assumed in the valuation of the
portfolio.
A change to the tax rate by plus or minus 5.0% has the following
effect on the Investments at fair value through profit or loss and
NAV per Ordinary Share:
Investments
at fair
value
through +5.0%
-5.0% profit p.a.
Tax rate assumption p.a. change or loss change
----------------------------------- ------------ ----------- ----------
March 2017 +GBP73.7m GBP2,419.4m -GBP71.7m
----------------------------------- ------------ ----------- ----------
September 2017 +GBP98.5m GBP2,711.1m -GBP98.2m
----------------------------------- ------------ ----------- ----------
Implied change in NAV per Ordinary +5.5 pence 151.6 -5.5 pence
Share (1 2) - September 2017 (+4.5 pence (-4.4
(March 2017) pence) (149.0 pence)
pence)
----------------------------------- ------------ ----------- ----------
(1) Analysis is based on the Company's 25 largest investments,
pro-rata for the whole portfolio
(2) Net Asset Value per Ordinary Share based on 1,788.3 million
Ordinary Shares as at 30 September 2017
Foreign exchange
The Company's amended hedging policy (from 1 October 2017) is
designed to provide confidence in the near-term yield and to limit
NAV per share sensitivity to no more than 2% for a 10% forex
movement.
A change to foreign currency/Sterling exchange by plus or minus
5.0% has the following effect on the valuation:
Investments
at fair
value
through +0.5%
-0.5% profit p.a.
Foreign Exchange sensitivities p.a. change or loss change
----------------------------------- ------------ ----------- ----------
March 2017 -GBP4.8m GBP2,419.4m +GBP4.8m
----------------------------------- ------------ ----------- ----------
September 2017 -GBP9.3m GBP2,711.1m +GBP9.3m
----------------------------------- ------------ ----------- ----------
Implied change in NAV per Ordinary -0.5 pence 151.6 +0.5 pence
Share (1) - September 2017 (-0.3 pence (+0.3
(March 2017) pence) (149.0 pence)
pence)
----------------------------------- ------------ ----------- ----------
(1) Net Asset Value per Ordinary Share based on 1,788.3 million
Ordinary Shares as at 30 September 2017
4. Geographical analysis
The tables below analyse the investment income and investments
at fair value by the different regions the Company has indirect
investments in.
Investment Income UK Eurozone North Australia Total
America
----------------------- -------- -------- -------- --------- --------
September 2016 GBP67.7m GBP9.2m GBP2.6m GBP6.7m GBP86.2m
----------------------- -------- -------- -------- --------- --------
% of Total Investment
income 78% 11% 3% 8% 100%
----------------------- -------- -------- -------- --------- --------
September 2017 GBP63.2m GBP11.7m GBP4.3m GBP9.3m GBP88.5m
----------------------- -------- -------- -------- --------- --------
% of Total investment
income 71% 13% 5% 10% 100%
----------------------- -------- -------- -------- --------- --------
Investments at UK Eurozone North Australia Total
fair value through America
profit and loss
------------------------ ----------- --------- --------- --------- -----------
March 2017 GBP1,921.6m GBP224.0m GBP190.5m GBP83.3m GBP2,419.4m
------------------------ ----------- --------- --------- --------- -----------
% of Total investments 80% 9% 8% 3% 100%
------------------------ ----------- --------- --------- --------- -----------
September 2017 GBP2,175.5m GBP254.5m GBP190.6m GBP90.5m GBP2,711.1m
------------------------ ----------- --------- --------- --------- -----------
% of Total investments 80% 10% 7% 3% 100%
------------------------ ----------- --------- --------- --------- -----------
5. Investment income
Six Six
months months
ended ended
30 30
September September
2017 2016
Total Total
GBPm GBPm
------------------------ ---------- ----------
Income from investment 66.1 51.7
------------------------ ---------- ----------
Gain on valuation 22.4 34.5
------------------------ ---------- ----------
88.5 86.2
------------------------ ---------- ----------
6. Fund expenses
Six Six
months months
ended ended
30 30
September September
2017 2016
Total Total
GBPm GBPm
---------------------------------------- ---------- ----------
Fees paid to auditor and its associate 0.2 0.1
---------------------------------------- ---------- ----------
Investment Adviser fees (Note 13) 0.1 0.1
---------------------------------------- ---------- ----------
Directors' fees (Note 13) 0.2 0.2
---------------------------------------- ---------- ----------
Professional fees 0.4 0.5
---------------------------------------- ---------- ----------
0.9 0.9
---------------------------------------- ---------- ----------
The Company had no employees during the period (31 March 2017:
Nil).
7. Net finance income
In the six months ended 30 September 2017, the Company had de
minimus net finance income consisting of interest earned on bank
deposits offset by some bank charges.
8. Income tax
Guernsey
Under the current system of taxation in Guernsey, the Company
itself is exempt from paying taxes on income, profits or capital
gains. Therefore, income from investments is not subject to any
further tax in Guernsey.
Overseas tax jurisdictions
The interim financial statements do not include directly the tax
charges for any of the Company's intermediate companies or 116
investments as these are held at fair value. All of these
investments and intermediate companies are subject to taxes in the
countries in which they operate.
9. Earnings per share
Basic and diluted earnings per share is calculated by dividing
the profit attributable to equity shareholders of the Company by
the weighted average number of Ordinary Shares in issue during the
period.
Six months Six months
ended ended
30 30
September September
2017 2016
Total Total
--------------------------------------- ---------- ----------
Profit attributable to equity holders GBP87.6 GBP85.3
of the Company million million
--------------------------------------- ---------- ----------
Weighted average number of Ordinary 1,725.5 1,390.7
Shares in issue million million
--------------------------------------- ---------- ----------
Earnings per Ordinary Share - basic 5.1 pence 6.1 pence
and diluted
--------------------------------------- ---------- ----------
10. Dividends
Six months Six months
ended ended
30 30
September September
2017 2016
Total Total
GBPm GBPm
------------------------------------- ---------- ----------
Total distributions paid to Company
shareholders in the period:
------------------------------------- ---------- ----------
Fourth quarterly interim dividend
for the year ended 31 March 2017
of 1.92p (2016: 1.87p) per share 31.2 26.0
------------------------------------- ---------- ----------
First quarterly interim dividend
for the year ended 31 March 2018
of 1.96p (2016: 1.91p) per share 35.0 26.5
------------------------------------- ---------- ----------
66.2 52.5
------------------------------------- ---------- ----------
The fourth quarterly interim dividend for the year ended 31
March 2017 of GBP31.2 million, representing 1.92 pence per share,
was paid on 30 June 2017. The first quarterly interim dividend for
the year ending 31 March 2018 of GBP35.0 million, representing 1.96
pence per share, was paid on 30 September 2017. Both dividends are
included in the condensed unaudited statement of changes in
shareholders' equity.
On 16 November 2017, the Board approved a second quarterly
interim dividend for the year ending 31 March 2018 of 1.96 pence
per share which will result in a total expected distribution of
GBP35.1 million, payable on 29 December 2017. The second quarterly
interim dividend is offered to shareholders as a cash payment or
alternatively as a scrip dividend, as with previous distributions.
The second quarterly interim dividend has not been included as a
liability as at 30 September 2017.
Year Year Year Year Year Year
ending ended ended ended ended ended
Interim dividend 31 March 31 March 31 March 31 March 31 March 31 March
for the period 2018 2017 2016 2015 2014 2013
------------------ --------- --------- --------- --------- --------- ---------
3 months ending
30 June 1.96p 1.91p 1.86p 1.81p
------------------ --------- --------- --------- --------- --------- ---------
3 months ending
30 September 1.96p 1.91p 1.86p 1.81p
------------------ --------- --------- --------- --------- --------- ---------
3 months ending
31 December 1.91p 1.86p 1.81p
------------------ --------- --------- --------- --------- --------- ---------
3 months ending
31 March 1.92p 1.87p 1.87p
------------------ --------- --------- --------- --------- --------- ---------
6 months ending
30 September 3.5p 3.425p
------------------ --------- --------- --------- --------- --------- ---------
6 months ending
31 March 3.6p 3.575p
------------------ --------- --------- --------- --------- --------- ---------
7.65p 7.45p 7.3p 7.1p 7.0p
------------------ --------- --------- --------- --------- --------- ---------
11. Investments at fair value through profit or loss
30 September 31 March
2017 2017
GBPm GBPm
------------------------------- ------------ --------
Opening balance 2,419.4 1,973.7
------------------------------- ------------ --------
Investments in the period 268.9 375.7
------------------------------- ------------ --------
Gain on valuation 22.8 70.0
------------------------------- ------------ --------
Carrying amount at period end 2,711.1 2,419.4
------------------------------- ------------ --------
This is represented by:
------------------------------- ------------ --------
Greater than one year 2,711.1 2,419.4
------------------------------- ------------ --------
Carrying amount at period end 2,711.1 2,419.4
------------------------------- ------------ --------
The Company recognises the investment in its single directly
owned holding company at fair value which includes the fair value
of each of the individual project companies and holding companies
in which the Company holds an indirect investment.
Investments in the period reflect funds paid to the Company's
immediate Corporate Subsidiary following issuance of equity to
shareholders.
The valuation of the Company's underlying portfolio at 30
September 2017 reconciles to the Condensed Unaudited Balance Sheet
as follows:
30 31
September March
2017 2017
GBPm GBPm
------------------------------------------- ---------- -------
Directors' valuation 2,844.4 2,380.0
------------------------------------------- ---------- -------
Less: future commitments (Note 14) (30.7) (32.5)
------------------------------------------- ---------- -------
Investments at fair value on Investment
Basis 2,813.7 2,347.5
------------------------------------------- ---------- -------
Net (Debt)/Cash in Corporate Subsidiaries (88.1) 81.3
------------------------------------------- ---------- -------
Working capital in Corporate Subsidiaries (14.5) (9.4)
------------------------------------------- ---------- -------
Investments at fair value per Condensed
Unaudited Balance Sheet 2,711.1 2,419.4
------------------------------------------- ---------- -------
Acquisitions
The Company, via its Corporate Subsidiaries, made the following
acquisitions for the six months ended 30 September 2017:
-- In May 2017, the Company, via its Corporate Subsidiaries,
completed the acquisition of a 36.6% equity interest in the various
entities that comprise the Affinity Water Group ("Affinity Water")
(including the regulated entity, Affinity Water Limited) for a
consideration of GBP274.5 million.
HICL is part of a consortium, alongside DIF Infrastructure and
Allianz Capital Partners on behalf of Allianz Group, which has
acquired 100% of the equity interest in Affinity Water.
As part of the transaction to acquire Affinity Water, in June
2017, the Company, via its Corporate Subsidiaries, partially
disposed of its investment in the Affinity Water Group to a
co-investment fund managed by InfraRed Capital Partners Limited.
The transaction reduced the Company's 36.6% stake to 33.2%,
generating GBP24.8 million of proceeds.
-- In September 2017, the Company, via its Corporate
Subsidiaries, acquired a 21.8% equity and loan interest in the High
Speed 1 Project ("HS1") for a consideration of GBP202.0
million.
HICL is part of a consortium, alongside Equitix and National
Pension Service of the Republic of Korea, which has acquired 100%
of the equity interest in HS1.
12. Share capital and reserves
Six months
ended Year ended
30 September 31 March
2017 2017
Ordinary Shares m m
---------------------------------------- ------------- ------------
In issue at beginning of period 1,623.3 1,388.4
---------------------------------------- ------------- ------------
Issued for cash 162.2 230.2
---------------------------------------- ------------- ------------
Issued as a scrip dividend alternative 2.8 4.7
---------------------------------------- ------------- ------------
In issue at end of period - fully
paid 1,788.3 1,623.3
---------------------------------------- ------------- ------------
The holders of the 1,788,293,008 Ordinary Shares (31 March 2017:
1,623,260,735) are entitled to receive dividends as declared from
time to time and are entitled to one vote per share at meetings of
the Company.
Six months Year ended
ended 31 March
30 September 2017
Ordinary Share capital and share 2017 GBPm
premium GBPm
-------------------------------------- ------------- ----------
Opening balance 1,753.5 1,376.6
-------------------------------------- ------------- ----------
Premium arising on issue of Ordinary
Shares 272.3 380.9
-------------------------------------- ------------- ----------
Costs of issue of Ordinary Shares (1.8) (4.0)
-------------------------------------- ------------- ----------
Closing balance 2,024.0 1,753.5
-------------------------------------- ------------- ----------
Share capital is GBP178.8 thousand (31 March 2017: GBP162.3
thousand).
For the six month period ended 30 September 2017
On 30 June 2017, 0.5 million new Ordinary Shares of 0.01p each
fully paid in the Company were issued at a reference price of
171.0p as a scrip dividend alternative in lieu of cash for the
fourth quarterly interim dividend in respect of the year ended 31
March 2017.
On 30 September 2017, 2.3 million new Ordinary Shares of 0.01p
each fully paid in the Company were issued at a reference price of
161.98p as a scrip dividend alternative in lieu of cash for the
first quarterly interim dividend in respect of the year ending 31
March 2018.
In the period ended 30 September 2017, 162.2 million new
Ordinary Shares were issued to various institutional investors at
an issue price per share (before expenses) of 165.0p.
Retained reserves
Retained reserves comprise retained earnings, as detailed in the
statement of changes in shareholder's equity.
13. Related party transactions
The Investment Adviser to the Company and the Operator of
Infrastructure Investments Limited Partnership, a Corporate
Subsidiary and the limited partnership through which the Company
holds its investments, is InfraRed Capital Partners Limited
("InfraRed").
Total Operator fees were GBP12.6 million, of which the full
balance remained payable at the period end (2016: GBP10.1 million).
The total fees for new portfolio investments were GBP4.3 million,
of which the full balance remained payable at the period end (2016:
GBP0.8 million). These fees are charged to a Corporate
Subsidiary.
The Investment Adviser and the Board have reviewed the Operator
fee structure and, effective from 1 October 2017, agreed to reduce
the fee due to the Investment Adviser for the adjusted gross
portfolio value in excess of GBP3.0 billion from 0.8% per annum to
0.65% per annum.
The Investment Adviser fee charged to the Company was GBP0.1
million (disclosed as Fund expenses in Note 6) (2016: GBP0.1
million) of which the full balance remained payable at the period
end (2016: GBP0.1 million).
The Directors of the Company, who are considered to be key
management, received fees for their services. Their fees were
GBP156,691 (disclosed as Directors' fees in Note 6) in the period
(2016: GBP175,288). One Director also receives fees for serving as
Director of the two Luxembourg subsidiaries - the annual fees are
GBP6,000 (2016: GBP5,000).
In June 2017, the Company, via its Corporate Subsidiaries,
partially disposed of its investment in the Affinity Water Group to
a co-investment fund managed by InfraRed for GBP24.8 million.
In September 2017, the Company, via its Corporate Subsidiaries,
acquired a 21.8% equity and loan interest in the High Speed 1
Project ("HS1"). At the same time, an aggregate of 43.2% of HS1 was
acquired through investment vehicles managed by InfraRed.
All of the above transactions were undertaken on an arm's length
basis and there have been no changes in material related party
transactions since the last annual report.
14. Guarantees and other commitments
As at 30 September 2017, the Company, via a Corporate
Subsidiary, had GBP30.7 million commitments for future project
investments (31 March 2017: GBP32.5 million), and an additional
contingent commitment of EUR16.8 million (31 March 2017: EUR16.8
million) to acquire a further 32% equity and loan interest in the
N17/N18 Road project from existing co-shareholders following
completion of construction which is currently expected to occur in
2018.
15. Events after balance sheet date
The second quarterly interim dividend for the year ended 31
March 2018 of 1.96 pence per share was approved by the Board on 16
November 2017 and is payable on 29 December 2017 to shareholders on
the register as at 24 November 2017.
In November 2017, the Company, via its Corporate Subsidiaries,
acquired a further 33.3% equity and loan interest in the Addiewell
Prison Project for a consideration of GBP12.3m, which took the
Company's stake in the project to 66.7%.
In November 2017, the Company, via its Corporate Subsidiaries,
paid EUR4.0m in accordance with a contractual investment obligation
for the N17/N18 Road Project.
END
This information is provided by RNS
The company news service from the London Stock Exchange
END
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