TIDMHICL
RNS Number : 9647H
HICL Infrastructure Company Ld
21 November 2018
HICL Infrastructure Company Limited
21 November 2018
INTERIM RESULTS
The Board of HICL Infrastructure Company Limited announces
Interim Results for the six months ended 30 September 2018.
Highlights
For the six months ended 30 September 2018
-- HICL has delivered strong performance over the period.
-- NAV per share of 156.4p as at 30 September 2018 (March 2018: 149.6p).
-- Annualised NAV total return of 15.0% based on interim
dividends paid during the period plus uplift in NAV per share (six
months to 30 September 2017: 8.9%).
-- The Company is on target to deliver aggregate dividends of
8.05p per share(1) for the current financial year and the Board
reaffirms the 8.25p per share(1) target for the next financial year
ending 31 March 2020.
-- New dividend guidance for the financial year ending 31 March
2021 of 8.45p per share(1) , reflecting the Board's confidence in
the portfolio's forecast cash flows.
-- Directors' valuation of the portfolio of GBP2,905m as at 30
September 2018 (March 2018: GBP2,837m).
-- Strategy of portfolio optimisation has delivered good results
in the period, with accretion delivered through GBP146m of
disposals and GBP91m of investments.
-- Prudent utilisation of the Group's Revolving Credit Facility,
with drawings of approximately GBP70m at 20 November 2018, and a
further GBP45m to be allocated to the near-term investment
pipeline.
-- Further asset disposals remain possible if they contribute to
portfolio optimisation; accretive acquisitions will be considered
to improve portfolio diversification and to generate value for
HICL's shareholders.
-- The Board has announced today its proposal that the Company
move its investment business from Guernsey to the UK.
1. This is a target only and not a profit forecast. There can be
no assurance that this target will be met
Summary Financial Results
(on an Investment Basis)
for the six months to 30 September 30 September
2018 2017
Income GBP211.0m GBP108.1m
Profit before tax GBP192.8m GBP87.8m
Earnings per share 10.8p 5.1p
Net Asset Value 30 September 31 March
2018 2018
Net Asset Value (NAV) per share 156.4p 149.6p
Quarterly interim dividend declared 2.01p 1.97p
NAV per share after deducting quarterly
interim dividend 154.4p 147.6p
Ian Russell, Chairman of the Board, said:
"I am pleased that the Company has delivered further strong
performance in the period, and a total return since IPO in 2006 of
9.5% per annum. Robust portfolio cash flow forecasts give the Board
confidence to announce additional dividend guidance for the year to
31 March 2021 of 8.45p per share. We also reaffirm the existing
targets of 8.05p per share for the current year and of 8.25p per
share for the year to March 2020.
"Political uncertainty is currently heightened in the UK and
remains a key risk faced by the Company. However, InfraRed's
proactive and professional approach to managing HICL's portfolio
demonstrates the benefits that responsible private investors bring
to infrastructure stewardship. The value of private sector
expertise, risk-taking and resources is all too often disregarded
in the political debate on nationalisation and by regulators.
"The Board has announced today that it is proposing that the
Company should move its investment business from Guernsey to the
UK. We believe this is in the best interests of shareholders as a
whole in light of the evolving cross-border taxation landscape.
This proposal will require shareholder approval, which will be
sought at an Extraordinary General Meeting in Q1 2019.
"InfraRed's key strategic focus remains on delivering value
enhancement from HICL's existing portfolio and continued price
discipline when evaluating new investment opportunities. Overall,
the newly extended dividend guidance to 2021 reflects the Board's
continuing confidence in HICL's business model."
Harry Seekings, Co-Head of Infrastructure at InfraRed, the
Company's Investment Adviser, added:
"Active portfolio management remains at the heart of InfraRed's
activities for HICL. In addition to continuing to deliver on
existing value enhancement programmes, we have completed the
strategic disposals of the Highland Schools and AquaSure
Desalination PPP projects, achieving pricing in excess of their
carrying values. The proceeds have been used to make an accretive
incremental investment in A63 Motorway and to prudently manage
drawings on the Group's Revolving Credit Facility.
"Responsible investment, to the benefit of all stakeholders,
underpins our approach to asset management. InfraRed's Asset
Management team has continued to address the impact on HICL's
portfolio of the Carillion liquidation earlier in the year. We are
pleased with the progress that has been made, with ex-Carillion
employees transferred into new roles and replacement facilities
management subcontractors appointed at most of the affected
projects. Stakeholder engagement has been vital to the development
of Affinity Water's business plan, which offers a fine balance
between manageable customer bills and additional investment in the
network's resilience.
"Recent secondary market transactions across HICL's target
markets have seen strong competitive tension, predominantly from
unlisted capital, driving asset prices higher. Our commitment to
pricing discipline therefore remains fundamentally important when
assessing new opportunities.
"With few new PPP projects procured in the UK since 2013, HICL's
pipeline has been for some time predominantly drawn from outside UK
PPPs. Following the recent UK Budget announcement, this trend looks
set to continue, However, we passionately believe that responsible
private investment plays a vital role in the delivery of critical
infrastructure in the UK. We look forward to engaging with HM
Treasury on the future role for long-term, private capital in
financing the UK's infrastructure needs."
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 for the Investment Adviser on behalf of the Board:
InfraRed Capital Partners Limited: +44 (0) 20 7484 1800
Harry Seekings
Keith Pickard
Contacts for Tulchan Communications: +44 (0) 20 7353 4200
Toby Bates
Sheebani Chothani
Contacts for Canaccord Genuity Limited: +44 (0) 20 7523 8000
Will Barnett
Neil Brierley
Dominic Waters
David Yovichic
Copies of this announcement can be found on the Company's
website, www.hicl.com.
The Interim Report for the period ended 30 September 2018 will
be published in December and an electronic version will be
available from the Company's website at that time.
CHAIRMAN'S STATEMENT
I am pleased to present HICL's Interim Results for the six
months to 30 September 2018. The Company has delivered strong
performance, with a total return of 15.0%, on an annualised
basis(1) , or 9.5% per annum since IPO. This came from both
outperformance of base case valuation assumptions and a reduction
in the discount rates used to value the portfolio, largely the
result of elevated market pricing for assets. The valuation of the
Company's portfolio has increased by GBP68m in the period to
GBP2,905m(2) .
Robust cash flow forecasts from HICL's portfolio of 117
investments give the Board confidence in the Company's future
performance and I am delighted to announce further dividend
guidance to March 2021. We reaffirm the target dividend of 8.05p
per share(3) for the current year and of 8.25p per share(3) for the
next financial year, ending 31 March 2020. We are also adding
guidance of 8.45p per share(3) for the year ending 31 March
2021.
Shareholders value the proactive and professional approach that
HICL's Investment Adviser, InfraRed Capital Partners Limited
("InfraRed"), adopts in its role as a steward of infrastructure for
local communities and in support of the public sector's delivery of
essential services. This was exemplified in the aftermath of
Carillion's collapse and InfraRed continues to prioritise
uninterrupted service delivery and focuses on minimising the impact
on all stakeholders at the affected projects, including
ex-Carillion employees.
Investments in operational infrastructure typically produce
stable returns for investors. However, Carillion's collapse has
shown that when something goes wrong, active asset management built
on strong, local relationships is invaluable. InfraRed has led the
successful transition of six projects, which represent 40 separate
facilities, to long-term arrangements with financially stable
counterparties at no additional cost to the taxpayer.
Stakeholder considerations also underpinned the business plan
submitted by Affinity Water to Ofwat in September. It directly
addresses the desire of both Affinity Water's customers and Defra
to see additional investment in the water network in order to meet
the increasing demands on water resources caused by population
growth and the impact of climate change on rainfall patterns. This
plan also reflects the long-term nature of HICL's investment in
Affinity Water.
Strategic progress
As set out in the Company's 2018 Annual Results, the Investment
Adviser has continued to pursue a strategy of optimising the
portfolio and its performance, which is one important component of
delivering value through active portfolio management.
The sales of the Group's investments in the Highland Schools
PPP2 project (UK) and the AquaSure Desalination PPP project
(Australia) both achieved pricing that outperformed their
previously reported valuations. Following the disposals, the
portfolio's total return, cash flow longevity and inflation
correlation metrics are all improved. Proceeds from the sale of
Highland Schools were reinvested in the acquisition of an
incremental stake in the A63 Motorway (France).
As part of its report, the Investment Adviser has prepared a
case study on the demand-based assets within the portfolio,
including the A63 Motorway. These assets improve portfolio
construction and diversification and, notably, the toll road
investments in particular have significantly outperformed
InfraRed's acquisition assumptions.
Change in corporate domicile
Approximately 90% of HICL's shareholders are UK based, and
include retail investors (through online platforms, wealth managers
and brokers) and institutional investors (such as pension funds,
asset management groups and insurance companies). The Board
recognises that the Company has a predominantly UK shareholder base
and a portfolio that is largely invested in the UK, and is mindful
of the potential for future changes in the cross-border tax
landscape.
Following the discussion of domicile in the Company's September
2017 Interim Results, March 2018 Annual Results in May 2018, and an
informal consultation with a number of institutional shareholders,
the Board is recommending that the Company moves its investment
business from Guernsey to a new UK incorporated plc.
The proposed move onshore would be undertaken through a scheme
of arrangement transferring the Company's portfolio to a new,
listed UK plc with shareholders being given one share in the new
company for each share that they hold in HICL. An Extraordinary
General Meeting ("EGM") of shareholders will be required to approve
the new arrangements. A circular will be sent to shareholders in Q1
2019 giving notice of the EGM and setting out the details of the
Board's recommendation, which if approved by shareholders, is
expected to complete on 31 March 2019 or shortly thereafter.
Corporate governance
Chris Russell is approaching nine years as a Director and will
be stepping down from the Board on 31 March 2019. Chris has made an
invaluable contribution to the success of HICL and will be missed
greatly. We have commenced a search for a new Director, using an
external recruitment firm.
Key risks
Political uncertainty in the UK remains a key risk faced by the
Company. Commentary around the possibility of nationalisation of
infrastructure assets ignores the considerable benefits that
private capital brings to the public sector in terms of ring-fenced
capital maintenance budgets, private sector management expertise
and resource, and the transfer of significant operational risk away
from the public sector. More practically, nationalisation would be
highly complex and come at a considerable cost to tax payers.
The Investment Adviser witnesses at first hand the dedication of
Affinity Water's management and workforce to delivering
ever-improving efficiency and operational performance, which is
reflected in Affinity Water's business plan. Initial feedback on
the plan from Ofwat is expected in January 2019 with a final
determination made by the end of the calendar year. The business
plan reinforces the Board's conviction that the private sector is
very well placed to deliver the continuous improvement in water
services that all stakeholders rightly expect.
Acknowledgement of the benefits of responsible private sector
participation in infrastructure stewardship will be crucial for any
government to secure investment in the infrastructure required to
underpin the delivery of public services in the future. In that
context, policies and regulation aimed at addressing and penalising
the excesses of some past owners of water companies in England and
Wales, while tempting in the current political climate, are
retrograde and risk undermining the confidence of long-term,
responsible investors.
We remain alert to the financial stability of project company
subcontractors and have contingency plans should any of the weaker
counterparties to a small number of projects in HICL's portfolio
succumb to financial difficulties. InfraRed's network provides a
number of potential replacement service providers, as has been
demonstrated in the aftermath of Carillion's liquidation.
The outcome of Brexit remains unclear for the UK economy. HICL
is well-positioned to weather this period of flux with strong
inflation correlation. The portfolio benefits from a mix of
contracted and regulated revenues, together with diverse
investments in the demand-based assets market segment.
Outlook
Demand for infrastructure investments continues to be strong,
reflecting the development of the asset class over the past 20
years. Recent significant transaction activity includes the
takeover of John Laing Infrastructure Fund ("JLIF"). This
demonstrated that pricing for investments continues to be elevated
whilst investors seek long-term, stable income. Against this
backdrop, HICL's immediate pipeline remains relatively subdued as
InfraRed continues its disciplined approach to delivering accretive
acquisitions and portfolio optimisation.
The takeover of JLIF showed that certain investors are not
overly concerned by the current UK political climate. We take some
reassurance from the comment in the 2018 Budget speech that the
current government will "honour existing contracts".
Value enhancements remain core to HICL's business model, having
contributed significantly to the 32% growth in the Company's annual
dividend since IPO in 2006 and supporting the extended dividend
guidance to March 2021. The Board has confidence in InfraRed's
development of the Company's ongoing programme for future value
enhancement, and in the ability of the Company's business model to
continue to deliver its investment proposition into the
long-term.
Ian Russell, Chairman
20 November 2018
1. On a NAV appreciation plus interim dividends paid basis
2. On an Investment Basis, which excludes the AquaSure
Desalination PPP that was sold post-period end and includes
GBP35.3m of future commitments
3. This is a target only and not a profit forecast. There can be
no assurance that this target will be met
INVESTMENT ADVISERS REPORT
The Investment Adviser
InfraRed Capital Partners Limited ("InfraRed") acts as
Investment Adviser to HICL and as Operator of the Group's
investment portfolio. InfraRed is an independent investment
management firm:
-- Headquartered in London with offices in New York, Hong Kong, Seoul and Sydney;
-- 20-year track record of successful investment in infrastructure;
-- c. 75 infrastructure professionals with in-depth technical,
operational and investment knowledge; and
-- Authorised and regulated by the Financial Conduct Authority.
As Investment Adviser to HICL, InfraRed has day-to-day
responsibility for the Company and interfaces with HICL's key
stakeholders. Our activities include:
-- The development of HICL's strategy;
-- Investment due diligence and execution; and
-- Capital raising, investor relations and preparation of key external communications.
As Operator of the Group's portfolio, our Asset Management and
Portfolio Management teams preserve and, where possible, enhance
value for stakeholders and shareholders, with a heavy focus on
client engagement.
InfraRed takes its responsibilities to all stakeholders in
infrastructure seriously. It acknowledges its role in demonstrating
responsible management of key public assets, furthering dialogue on
the benefits of private investment and restoring trust in
partnerships between the public and private sectors as a valid
model to deliver services to tax payers and other stakeholders.
InfraRed has been, since 2011, a signatory of the Principles for
Responsible Investment ("PRI"), an investor initiative in
partnership with UNEP Finance Initiative and UN Global Compact. The
infrastructure business line achieved an A+ rating, the highest
attainable, for the fourth successive year in our 2018 PRI
assessment.
Strategic progress
Active portfolio management remains at the heart of InfraRed's
activities when delivering HICL's investment proposition. We
continue to seek opportunities to realise value for HICL's
shareholders through optimising portfolio construction and
performance. This has been achieved through unlocking value from
the existing portfolio, both in terms of value enhancements and,
where appropriate, disposals.
The portfolio has outperformed in the period with returns
exceeding budget and contributing an incremental 1.0p per share to
the overall NAV growth in the period. This was underpinned by value
enhancements, such as delivering construction assets and lifecycle
reviews. These and further examples are discussed in detail in the
Operating & Financial Review.
As explained in the Company's 2018 Annual Results, InfraRed
continues to seek opportunities to enhance HICL's portfolio
performance by making strategic disposals that take advantage of
ongoing favourable market conditions. The proceeds have been used
either to make accretive investments or to repay drawings under the
Group's Revolving Credit Facility ("RCF").
In the six months to 30 September 2018, InfraRed's teams in
London and Sydney completed the sale of the Highland Schools PPP2
project (UK) and exchanged contracts for the sale of the AquaSure
Desalination PPP project (Australia), which completed after the end
of the period. In combination, these disposals have enhanced key
portfolio performance metrics, including total return, inflation
correlation and weighted average asset life. In the case of the
sale of Highland Schools, the proceeds were re-invested in an
incremental stake in the A63 Motorway (France), which is forecast
to produce an attractive total return.
In the period, InfraRed completed four investments for the Group
across all HICL's target market segments. These additions to HICL's
portfolio stemmed from InfraRed's long-term relationships with
either the vendor or acquisition consortium partners:
-- The incremental stake in the A63 Motorway (operational demand-based asset; France);
-- The transmission assets associated with the Burbo Bank
Extension wind farm ("Burbo Bank OFTO") (operational regulated
asset; UK);
-- Belfast Metropolitan College project (operational PPP project; UK); and
-- The Biology, Pharmacy and Chemistry Department of the
Paris-Sud University (construction PPP project; France).
The Company's consortium was also announced as the preferred
bidder for the transmission assets associated with the Race Bank
wind farm ("Race Bank OFTO") (operational regulated asset; UK).
This project is expected to reach financial close in Q1 2019.
InfraRed continues to follow a consistent, disciplined approach
to improving portfolio construction. The impact of this in the two
years since 30 September 2016, which was the semi-annual reporting
date before HICL acquired its first toll road investment, has
been:
-- An increase in the weighted average asset life to 30.0 years
(30 September 2016: 20.8 years);
-- An increase in the portfolio's inflation correlation to 0.81 (30 September 2016: 0.7); and
-- Diversification of the portfolio's risk profile between 'core
infrastructure' market segments, with 22% comprising six
demand-based assets2 and 8% being two regulated assets (30
September 2016: 6% demand-based assets and no regulated
assets).
In addition to underlying outperformance of the portfolio, a
6.8p increase in the NAV per share at 30 September 2018 is
primarily attributable to a reduction in the discount rates used to
value the majority of assets in the portfolio. This change reflects
market conditions, as seen first hand through the Group's disposals
and also some of the elevated pricing implied in the recent
takeover of John Laing Infrastructure Fund. Demand for
infrastructure in HICL's target market segments and geographies,
and corresponding upwards pricing pressure on assets, is being
driven in large part by unlisted infrastructure funds and direct
institutional investors seeking to deploy increasing allocations to
the sector. Unless there is a material change to market conditions,
we do not see this appetite reducing in the near-term as investors
continue to seek long-term, stable income.
Change in corporate domicile
The Company intends to undertake a scheme of arrangement to
change the domicile and tax residency of HICL's investment business
to the UK, by transferring the Company's assets to a new UK
incorporated company whose shares would be listed on the UKLA's
Official List and admitted to the main market of the London Stock
Exchange. This will align HICL's domicile with its predominantly UK
shareholder base and a portfolio that is largely invested in the
UK.
The Board and InfraRed believe that this is in the best
interests of the Company and its shareholders as a whole given the
evolving environment including in relation to future changes in
cross-border taxation and the potential impact this could have on
future shareholder returns.
This recommendation follows a discussion of domicile in the
Company's September 2017 Interim Results, March 2018 Annual
Results, and an informal consultation with a number of
institutional shareholders. It will be the subject of a shareholder
circular and will be put before shareholders for a vote at an
Extraordinary General Meeting of the Company, to be held on a date
that will be notified to shareholders in due course. The aim,
subject to regulatory and other approvals, is to implement the
change on 31 March 2019 or shortly thereafter.
Operational highlights
PPP projects
Core to HICL's portfolio, PPP projects represent 70% of the
portfolio, by value. Their position at the lower end of the
infrastructure market risk spectrum is due to their:
-- Long-term contracts with strong public sector clients;
-- Availability-based revenue mechanisms; and
-- Long-term funding arrangements and maintenance contracts
which allocate risk to those parties that are best placed to manage
it.
InfraRed's Asset Management and Portfolio Management teams
continue to seek opportunities for value enhancement for
stakeholders and shareholders. In the period the A9 Road and Breda
Court PPP projects, both in the Netherlands, achieved major
construction milestones on time and on budget. For the project
companies' public sector clients, achieving availability allows
them to start using the road or occupying the facility. For
shareholders this reflects an important milestone in reducing the
risk profile of the investment. Further examples are provided in
the Operating & Financial Review.
Corporate responsibility is a priority for InfraRed. In the
period, we hosted a number of our corporate partners and management
teams of some of the Group's investments at our third annual
fancy-dress dodgeball tournament. Over GBP22,000 was raised to
contribute towards funding additional teaching facilities at Talbot
Specialist School, which is part of the Sheffield Schools PPP
project.
Carillion
Good progress has been made in respect of de-risking PPP
projects affected by the liquidation of Carillion. Six affected
projects where Carillion was previously the facilities management
contractor have been successfully transferred to long-term
arrangements with financially stable counterparties that were
approved by both public sector clients and project lenders. These
outcomes were achieved at no additional cost to the taxpayer under
the PPP contracts. The remaining four projects are on stable
interim arrangements whilst commercially-agreed long-term contracts
are finalised. More detail is provided in the Operating &
Financial Review.
Our expectation remains in line with previous guidance that
distribution lock-ups at the affected projects will be
substantially released by the end of the current financial year,
and that the impact of transition costs, distribution lock-ups and
historic liabilities will be within the valuation adjustment taken
in the Company's 2018 Annual Results.
We are working closely with public sector clients, central
government and other stakeholders. As noted in InfraRed's Code of
Conduct, available on the InfraRed website (www.ircp.com), the
focus is on transferring the delivery of services into safe hands
in a timely and coordinated manner. At the heart of this approach
is the aim to avoid any unnecessary uncertainty for ex-Carillion
employees and public-sector clients, or disruption for those that
use the facilities.
Demand-based assets
At 30 September 2018, HICL's six demand-based assets comprised
22% of portfolio value, including the incremental acquisition in
the A63 Motorway (France) made in the period.
Four of these assets have returns correlated to GDP growth rates
and they represented 19%, by value, of HICL's portfolio immediately
after the acquisition of the incremental stake in the A63 Motorway.
They provide diversification without compromising the portfolio's
overall position of providing returns that are relatively
uncorrelated to GDP.
Operational demand-based assets are at the lower end of the risk
spectrum when accompanied by strong usage history or limited
uncertainty in forecast demand. Typically, they are long-dated, add
good inflation correlation and provide returns at a premium to PPP
projects. These assets are generally less sensitive to political
and regulatory risks compared to PPP projects or regulated
assets.
In the period, the performance of the two toll roads was:
-- A63 Motorway (France): Traffic volumes were 0.5% higher in
the period than forecast in the 31 March 2018 valuation.
Outperformance of valuation assumptions was seen despite much lower
traffic levels on the weekend when France played in the Football
World Cup Final.
-- Northwest Parkway (USA): Traffic volumes were 7.5% higher in
the period than forecast in the 31 March 2018 valuation.
We are pleased to report that the investment performance of High
Speed 1 (UK) in the period was consistent with that forecast in the
31 March 2018 valuation.
Regulated assets
Regulated assets comprised 8% of the portfolio, by value, at 30
September 2018. These are assets with monopoly characteristics,
subject to regulatory price controls that balance performance
standards and affordable pricing for end users. Where the asset is
subject to periodic price reviews, these provide protection to
investors over the long-term from industry-wide movements in costs
(including the cost of capital, operations, maintenance and asset
replacement), and provide opportunities to reset the cost of
capital to reflect changing market conditions. Counterparty risk is
lower for regulated assets compared to PPP projects and
demand-based concessions, as operations and maintenance activities
are often either self-performed or contracted to a wide array of
local contractors.
During the period, HICL completed its investment in the Burbo
Bank OFTO3 and, alongside its consortium partner, was announced as
preferred bidder for the Race Bank OFTO. Like PPP projects, OFTOs
receive availability-based revenue payments. These two investments
provide additional diversification to both the regulated assets
segment of the portfolio and the portfolio as a whole.
Affinity Water
Affinity Water submitted its 2020 - 2025 business plan(4) to
Ofwat on 3 September 2018. Engagement with Ofwat, Defra(5) ,
customers and a wide range of stakeholders formed the basis of the
business plan to ensure it balances the needs of customers and
shareholders alike over the long term.
Affinity Water's Customer Challenge Group ("CCG") is made up of
representatives from organisations and charities who have an
interest in the industry. The members provide expertise, experience
and insight into social and welfare policy, community and
environment, and public affairs across the areas Affinity Water
serves. The CCG reported that the company "amassed and used a
significant evidence base about their customers' views, needs and
requirements."
Through the consultation process, Affinity Water found that 82%
of customers consider the final plan to be acceptable and more than
75% find it acceptable for bills to be increased by GBP3 - GBP5 in
real terms from 2020 to 2025 in return for a business plan that
proposes to:
-- Continue the supply of high-quality water;
-- Reduce leakage from water pipes by 15%;
-- Reduce average consumption from 147 to 129 litres per person per day;
-- Develop innovative demand management options based on real-time consumption data;
-- Improve the strategic sharing and management of regional resources;
-- Continue to support and protect the quality of water resources;
-- Reduce water abstraction by 36 Ml/d (mega-litres per day) to improve sustainability; and
-- Invest GBP1.4bn to maintain core network assets and build greater resilience in the future.
Financial highlights
The financial results for the six months to 30 September 2018
have been driven by a 0.2% reduction in the weighted average
valuation discount rate that largely reflects the ongoing elevated
pricing of market transactions, value enhancements resulting in
outperformance of portfolio returns against the base case, and
transaction activity since 31 March 2018 (four acquisitions and
three disposals).
Overall, this has resulted in NAV per share increasing by 6.8p,
from 149.6p as at 31 March 2018 to 156.4p as at 30 September 2018,
in addition to the two dividends paid of 1.97p per share in June
2018 and 2.01p per share in September 2018.
The Company's annualised total shareholder return ("TSR"), based
on growth in NAV per share plus dividends paid, was 15.0% for the
period (September 2017: 8.9%). Excluding the impact of changes in
economic assumptions and reference discount rates, other than in
relation to projects moving from construction to operations, the
annualised return from the underlying portfolio was 9.0%.
Overall portfolio performance has delivered cashflow receipts
for the Group on an Investment Basis(6) of GBP111.1m (2017:
GBP91.3m). Net operating cashflows after finance and operating
costs on an Investment Basis were GBP93.6m (2017: GBP77.9m), which
covered the interim dividends paid in the six-month period 1.33
times (2017: 1.26 times), or 1.06 times excluding profits on
disposal of GBP18.9m.
Earnings per share were higher at 10.8p (2017: 5.1p), which
included 3.5p for the change in reference discount rates.
The ongoing charges percentage for the period on an annualised
basis was 1.09%, using the Association of Investment Companies'
methodology, compared to 1.06% for the six months to 30 September
2017. The increase reflects higher gearing in the six months to 30
September 2018 compared to the six months to 30 September 2017.
The Group has drawings on its RCF of approximately GBP70m
following the receipt of the proceeds from the sale of the AquaSure
Desalination PPP project, which completed after the period end. We
consider this level of borrowing comfortable in light of the
Company's strong balance sheet and it does not materially impede
the Company's ability to fund additional investments (as and when
further attractive opportunities arise).
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 3.5 of the Company's 2018 Annual
Report.
Political and regulatory risk
In common with other investors in infrastructure, political and
regulatory risks are inherent in HICL's business model. This is due
to the contractual relationship that PPP project companies and
demand-based concessions have with public sector counterparties,
and the role of regulators in undertaking periodic reviews and
setting price controls for regulated assets.
We remain aware that political comment, particularly in the UK,
raises the possibility of nationalisation of infrastructure,
including regulated utilities. This rhetoric typically disregards
the considerable benefits that private capital brings to the public
sector, in terms of ring-fenced capital maintenance budgets,
long-term certainty of cash flows, private sector management
expertise and resource and the transfer of significant operational
risk, as well as the practical considerations and the material cost
to the taxpayer of nationalisation.
To address political risk, the value of private investment in
public infrastructure needs to gain a voice. Water UK is one
example. It reports that "Water companies in England and Wales have
spent around GBP150bn improving pipes, pumping stations, sewers and
treatment centres [since privatisation], and [they continue] to
spend GBP8bn a year to keep on improving"(7) , "which has cut
leakage by a third over the last 20 years"(8) . Meanwhile the
average bill for the supply of clean water in England and Wales in
2018-19 is GBP189 a year(9) or 52p a day. Affinity Water has
invested c. GBP3.2bn since privatisation and has proposed a further
GBP1.4bn of investment in its 2020 - 2025 business plan submission
to Ofwat. The business plan is now being reviewed by Ofwat and
detail on their initial assessment, which may result in changes to
the plan, will be provided as part of HICL's 2019 year-end
results.
Counterparties
The PPP project companies and demand-based asset concessionaires
in which the Group invests typically subcontract the provision of
the services to specialist providers (construction, operations or
maintenance companies). The failure of a supply chain provider
could negatively impact the project company's ability to fulfil its
contractual obligations with the client.
Counterparty credit risk is considered at regular intervals by
InfraRed's credit risk team. The portfolio has a small number of
projects with relatively weak counterparties. We are comfortable
with the level of exposure to these companies and with our
contingency plans. These contingency plans incorporate lessons
learned from the fallout of the Carillion collapse, and contemplate
a scenario in which a key subcontractor enters administration or
liquidation, and our network provides a number of potential
replacement service providers.
Brexit
The UK is scheduled to withdraw from the European Union on 29
March 2019. A range of outcomes is still possible. The impact of
Brexit on HICL is most likely to be seen in deviations from
economic assumptions used in the portfolio valuation and cash flow
forecasts, including metrics such as inflation and GDP growth rate.
The investment proposition provides long-term investors with
returns that have strong inflation linkage and relatively low
correlation to UK GDP.
HICL has a diversified portfolio of assets and so the overall
portfolio is relatively insensitive to changes in UK GDP(10) . The
Company's Risk Committee has considered specific stress tests.
Individual assets that are more likely to be impacted by Brexit are
undertaking contingency planning where possible. Sensitivities to
changes in economic assumptions are provided in the Valuation of
the Portfolio section.
Market and outlook
Recent secondary market transactions across HICL's target market
segments have seen unlisted capital competing for certain
high-profile assets, with the pricing achieved higher than might
have been expected. Correspondingly, pricing discipline around new
acquisitions remains important in the current market.
In the PPP market segment, our focus will be on greenfield and
primary market transactions where HICL has a track record in
creating value by successfully de-risking projects through
construction. We will continue to adopt a highly selective approach
to secondary market transactions.
We do not expect statements in the October 2018 Budget in the UK
regarding the future use of PF2s as procurement models to have a
material impact on HICL's ability to source investment
opportunities; noting that less than one quarter, by value, of the
acquisitions that HICL has made over the last three financial years
have been UK PPP projects. We look forward to entering into
dialogue with the Treasury in relation to the future involvement of
long-term, private capital in funding the UK's current and future
infrastructure needs and welcome the announcement that existing
contracts will be honoured.
Regulated asset opportunities continue to be sporadic and often
sizeable. We continue to evaluate regulated electricity and gas
transmission and distribution networks. We will pursue
opportunities that meet HICL's risk-reward appetite, which includes
continuing to bid for OFTOs.
We maintain previous guidance that the Company has a
self-imposed limit that at the point of investment no more than 20%
of the portfolio, by value, be demand-based assets with returns
correlated to GDP growth. As the portfolio is at this level, we do
not expect further investments in this market segment in the
short-term.
We will continue to optimise HICL's portfolio, firstly by taking
advantage of favourable market conditions to strategically dispose
of assets where it makes sense to do so; and, secondly, by making
selective acquisitions in HICL's core market segments. We will use
the flexibility of the Group's RCF to smooth the timing of these
transactions. As a result, InfraRed will continue to generate
additional value for HICL's shareholders while enhancing the
portfolio's diversification and the Company's accretion
metrics.
1. If outturn inflation were 1% p.a. higher than the valuation
assumption in each and every forecast period, the expected return
from the portfolio (before Group expenses) would increase by
0.8%
2. Demand-based assets with returns correlated to GDP comprise
20% of the portfolio, by value, at 30 September 2018
3. Electricity transmission cable under Ofgem's Offshore Transmission Owner ("OFTO") programme
4. The full plan is available: https://stakeholder.affinitywater.co.uk/business-plan.aspx
5. The Department for Environment, Food and Rural Affairs
6. Investment Basis is the same basis as was applied in prior
periods. See Section 3.1 of the March 2018 Annual Report &
Financial Statements for further details
7. https://www.working4water.org.uk/
8.
https://www.water.org.uk/news-water-uk/latest-news/michael-roberts-response-labours-clear-water-report
9. https://www.discoverwater.co.uk/annual-bill
10. If outturn UK GDP growth were 0.5% p.a. lower for all future
periods than the valuation assumption of 2.0% per annum, expected
return from the portfolio (before Group expenses) would decrease
0.1% from 7.2% to 7.1%
VALUATION OF THE PORTFOLIO
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 receives 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 the quoted
market price for 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 2018 was GBP2,904.9m(1) , compared to GBP2,836.5m
at 31 March 2018 (up 2.4%). A reconciliation between the Directors'
Valuation at 30 September 2018 and that shown in the financial
statements is given in Note 11 to the financial statements. The
Directors' Valuation includes GBP35.3m of future investment
commitments in respect of Willesden Hospital, N17 Road and the
Paris-Sud University project.
1. GBP2,904.9m excludes AquaSure Desalination PPP project, which
was sold post-period end, and reconciles, on an Investment Basis,
to GBP2,869.6m Investments at fair value through GBP35.3m of future
commitments.
Valuation(1) movements during the period Percentage
to 30 September 2018 (GBPm) change
---------------------------------------------------------- ----------- ----------------
Directors' Valuation at
31 March 2018 2,836.5
Investments 91.0
Divestments (146.4)
Cash receipts from
investments (92.2)
------------- -------------
(147.6)
Less future commitments (34.7)
Rebased valuation
of the portfolio 2,654.2
---------------------------- ------------- -------------------------- ----------------
Return2 from the portfolio 116.9 4.4%
Carillion write back 10.1 0.4%
Change in discount
rate3 61.4 2.3%
Economic assumptions 5.9 0.2%
FX movement on non-UK
investments 21.1 0.8%
------------- ------------- ----------- ----------------
215.4 8.1%
Future commitments 35.3
Directors' Valuation
at 30 September 20184 2,904.9
1. On an Investment Basis
2. "Return" comprises the unwinding of the discount rate and
portfolio outperformance, excluding the impact of changes in
economic assumptions and discount rates, other than project
specific changes such as projects moving from construction to
operations
3. Excludes the impact of the Carillion write back
4. A reconciliation between the Directors' Valuation and the
financial statements is given in Note 11 to the financial
statements
Allowing for the investments and divestments during the period,
and investment receipts of GBP92.2m, the rebased valuation was
GBP2,654.2m. The growth in the valuation of the portfolio excluding
future commitments at 30 September 2018 over the rebased value was
8.1%.
The increase arises from a GBP116.9m return from the portfolio,
a GBP10.1m increase from a partial reversal of discount rate
changes on projects impacted by Carillion's insolvency, GBP61.4m
from a reduction in reference discount rates, GBP5.9m uplift in
valuation attributable to change in economic assumptions arises
from a revised interpretation of recent US tax legislation
applicable to infrastructure projects, and a GBP21.1m (pre-hedging)
increase from a change in foreign exchange rates.
Return from the portfolio
The return from the portfolio of GBP116.9m (2017: GBP98.4m)
represents a 4.4% (2017: 3.6%) increase in the rebased value of the
portfolio over the six-month period. This gives an annualised
return from the underlying portfolio of 9.0% versus the discount
rate or expected annual return of 7.4% demonstrating outperformance
of the portfolio.
Incremental value was generated from operational outperformance
across various cost saving and efficiency initiatives as well as
actual UK inflation on average running above the 2.75% p.a.
forecast. Further detail on these factors is outlined in the
Operating & Financial Review.
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 judgement in assessing the expected future
cash flows 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 2018 is 7.2%,
down from 7.4% at 31 March 2018. This reflects the competitive
dynamics we have observed in the market place for transaction
pricing including the takeover of John Laing Infrastructure Fund
("JLIF") by a consortium of private infrastructure investors at a
premium to JLIF's NAV.
An analysis of the weighted average discount rates for the
investments in the portfolio analysed by territory, and showing
movement in the period, is shown below:
Country 30 September 2018 31 March Movement
2018
Discount
rate
---------- ---------
Long-term Risk premium Discount
government rate
bond yield
------------ ------------- --------- ---------- ---------
UK 1.9% 5.2% 7.1% 7.4% (0.3)%
--------------- ------------ ------------- --------- ---------- ---------
Eurozone 1.4% 5.7% 7.1% 7.6% (0.5)%
--------------- ------------ ------------- --------- ---------- ---------
North America 3.0% 5.0% 8.0% 8.2% (0.2)%
--------------- ------------ ------------- --------- ---------- ---------
Portfolio 1.9% 5.3% 7.2% 7.4% (0.2)%
=============== ============ ============= ========= ========== =========
The risk premium for each region is derived from the market
discount rate less the appropriate long-term government bond
yield.
Valuation assumptions
Apart from the discount rates, the other key economic
assumptions used in determining the Directors' Valuation of the
portfolio are as follows:
30 September 2018 31 March 2018
====================== ======================== ========================
Inflation Rates UK (RPI and RPIx)(1) 2.75% p.a. 2.75% p.a.
UK (CPIH)(2) 2.0% p.a. 2.0% p.a.
---------------------- ------------------------ ------------------------
Eurozone (CPI) 1.0% p.a. to 2019, 1.0% p.a. to 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.
====================== ======================== ========================
Interest Rates UK 1.0% p.a. to March 1.0% p.a. to March
2021, 2021,
2.0% p.a. thereafter 2.0% p.a. thereafter
---------------------- ------------------------ ------------------------
Eurozone 0.5% p.a. to March 0.5% p.a. to March
2021, 2021,
1.5% p.a. thereafter 1.5% p.a. thereafter
====================== ======================== ========================
Canada 2.0% p.a. to March 2.0% p.a. to March
2021, 2021,
3.0% p.a. thereafter 3.0% p.a. thereafter
====================== ======================== ========================
USA 2.0% p.a. with 2.0% p.a. with
a gradual increase a gradual increase
to 3.0% p.a. long-term to 3.0% p.a. long-term
====================== ======================== ========================
Foreign Exchange
Rates CAD / GBP 0.59 0.55
---------------------- ------------------------ ------------------------
EUR / GBP 0.89 0.88
========================================= ======================== ========================
USD / GBP 0.77 0.71
========================================= ======================== ========================
Tax Rates UK 19% to March 2020, 19% to March 2020,
17% thereafter 17% thereafter
====================== ======================== ========================
Eurozone Ireland 12.5% Ireland 12.5%
France 25% - 33.3% France 25% - 33.3%
Netherlands 20% Netherlands 20%
- 25% - 25%
====================== ======================== ========================
USA 21% Federal & 4.6% 21% Federal & 4.6%
Colorado State Colorado State
====================== ======================== ========================
Canada 26% and 27% 26% and 27%
====================== ======================== ========================
GDP Growth Rates UK 2.0% 2.0%
====================== ======================== ========================
Eurozone 1.8% 1.8%
========================================= ======================== ========================
USA 2.5% 2.5%
========================================= ======================== ========================
1. Retail Price Index ("RPI") and Retail Price Index excluding
mortgage interest payments ("RPIx")
2. Consumer Prices Index including owner occupiers' housing costs
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
valuation follows below. 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% -8.3p 9.1p
-------------- -------------
Inflation -/+ 0.5% -7.9p 8.5p
-------------- -------------
Tax Rate +/- 5% -6.2p 6.3p
-------------- -------------
GDP -/+ 0.5% -5.0p 4.8p
-------------- -------------
Interest Rate -/+ 0.5% -1.1p 1.3p
-------------- -------------
Foreign Exchange Rates(3) -/+ 5% -1.0p 1.0p
-------------- -------------
Discount rate sensitivity
Whilst not a macro-economic assumption, the weighted average
discount rate that is applied to each portfolio company's forecast
cash flows, for the purposes of valuing the portfolio, is the
single most important judgement and variable. The impact of a 0.5%
change in the discount rate on the Directors' Valuation and the NAV
per share is shown above.
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 Retail Price Index
("RPI") or RPI excluding mortgage interest payments ("RPIx") while
non-UK projects use Consumer Price Index ("CPI"), 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, for PPP projects in the UK this
is typically RPI, while non-UK projects use CPI. On Affinity Water,
one of the Company's regulated assets, 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 real terms for the five-year period by reference to RPI
currently and CPIH (Consumer Prices Index including owner
occupiers' housing costs) in the next regulatory period.
In the UK RPI and RPIx were both 3.3% for the year ended 30
September 2018. The portfolio valuation assumes UK inflation of
2.75% per annum for both RPI and RPIx, the same assumption as for
the comparative period. The September 2018 forecasts for RPI out to
December 2019 range from 2.3% to 4.2% from 20 independent
forecasters as compiled by HM Treasury, with an average forecast of
3.1%.
Gross Domestic Product ("GDP") growth rate sensitivity
At 30 September 2018, the portfolio had four investments which
are considered sensitive to GDP, namely the A63 Motorway, M1-A1
Road, Northwest Parkway and High Speed 1. At times of higher
economic activity there will be greater traffic volumes using these
roads and railways generating increased revenues for the projects
than compared to periods of lower economic activity and therefore
we assess these as GDP sensitive investments.
If outturn GDP growth were 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 7.2% to 7.0% (decrease by 0.2% to 7.2% at
31 March 2018).
Interest rate sensitivity
Each portfolio company's interest costs are at fixed rates,
either through fixed rate bonds, bank debt which is hedged with an
interest rate swap or linked to inflation through index-linked
bonds. However, there are two investments - Affinity Water (UK) and
Northwest Parkway (USA) - which have refinancing requirements,
exposing these investments to interest rate risk. Except for these
two, an investment's sensitivity to interest rates predominantly
relates to the cash deposits which the investment is required to
maintain as part of its senior debt funding. For example, most PPP
projects would have a debt service reserve account in which six
months of debt service payments are held.
At 30 September 2018, cash deposits for the portfolio were
earning interest at a rate of 0.2% per annum on average. There is a
consensus that UK base rates will remain low for an extended
period, with a current median forecast for UK base rates in
December 2019 of 1.25% p.a.
The portfolio valuation assumes UK deposit interest rates are
1.0% p.a. to March 2021 and 2.0% p.a. thereafter, this is unchanged
from March 2018. Overseas jurisdictions also remain unchanged.
Corporation tax rate sensitivity
The profits of each portfolio company are subject to corporation
tax in the country where the project 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 were
a 5% increase in UK corporation tax rates, there would be a NAV per
share reduction of 4.9p.
The UK corporation tax assumption for the portfolio valuation is
19% to March 2020 and 17% thereafter, which is unchanged from March
2018. There have been no changes to overseas tax rates in the
period.
Foreign exchange rates sensitivity
21% 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. Further detail on the
Company's foreign exchange policy is outlined in the Operating
& Financial Review.
Future cashflows
It is the forecast cashflows(1) from the Group's current
portfolio of investments that give the Board the confidence that
HICL remains on track to deliver a dividend of 8.05p per share(2)
for the year to 31 March 2019 and that there should be sufficient
cash cover for the target dividends which have been announced for
the following two years:
-- 8.25p per share(2) for the year to 31 March 2020; and
-- 8.45p per share(2) for the year to 31 March 2021.
1. The cashflows and the valuation are based on a number of
assumptions, including discount rates, inflation rates, deposit
interest rates, tax rates and foreign exchange rates. These
assumptions and the valuation of the current portfolio may vary
over time
2. This is a target only and not a profit forecast. There can be
no assurance that this target will be met
Discounted cashflow key assumptions and principles
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; and
-- 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 for all stakeholders; and
-- Accretive Investment in assets that enhance the delivery of the investment proposition.
The Company delegates the majority of the day-to-day activities
required to deliver the business model to the Investment Adviser,
InfraRed.
Value Preservation
InfraRed's Asset Management and Portfolio Management teams work
closely together, in partnership with the management teams in the
Group's portfolio companies, to deliver HICL's investment
proposition by preserving the value of the Group's investments for
shareholders and stakeholders. The objective is to ensure portfolio
companies perform in line with the relevant contractual obligations
and / or regulatory framework; and deliver the forecast base case
investment return.
Carillion
Counterparty risk is a focus of the Group. In relation to the
liquidation of Carillion, ten projects were affected where
Carillion was the primary facilities management contractor and a
further five projects where Carillion was the original construction
contractor.
Where Carillion was the facilities management contractor, the
Investment Adviser's Asset Management team's efforts have centred
around continuity of service delivery to the clients to quickly
transfer from Carillion to stable, reputable providers and a smooth
transition to new long-term arrangements for all stakeholders,
especially staff. In doing so, communication has been important and
the Investment Adviser has ensured that clients, staff, local MPs
and government departments have been kept informed of progress and
plans.
Six of these projects, comprising 11 primary care facilities, 20
police stations, six fire stations, and three police and fire
administrative and training facilities, have now transferred to
long-term arrangements. The replacement operators on these projects
are Bouygues, Engie and Integral. The remaining four projects are
being managed under stable interim arrangements. Long-term
arrangements have been commercially agreed for two of these
projects and are proceeding through the full consenting process.
Across the ten projects, the replacement facilities management
contractors were chosen, with the approval of clients, based on
their experience of operating similar infrastructure and their
financial strength.
Four of the five projects where Carillion was the original
construction contractor are out of distribution lock-up. In line
with previous guidance, distribution lock-ups at the affected
projects are expected to be substantially released during the
current financial year.
The Investment Adviser has reduced the discount rate adjustment
applied to the affected projects at 31 March 2018, which has
increased their value by GBP10m. This reflects a recovery of
approximately half of the initial GBP19.4m valuation reduction
associated with changes in discount rates following the improvement
in risk profile as long-term arrangements are secured. The
Investment Adviser continues to expect the impact of transition
costs, distribution lock-ups and historic liabilities to be within
the remaining GBP40m of the initial valuation adjustment.
Affinity Water
Affinity Water submitted its business plan for 2020 to 2025 to
Ofwat in September 2018. This reflects the output of engagement
with customers and other stakeholders, as well as assurance from
the company's Customer Challenge Group, and targets improvements to
the resilience and performance of the network through the
investment of GBP1.4bn and operational improvements.
These substantial investment plans will be funded through a
modest increase in customers' bills of 71p per year between 2020
and 2025, a total increase of GBP3.54 in real terms, which has the
support of customers. The additional financial burden of Ofwat's
Price Review 19 ("PR19") will fall upon shareholders.
HICL's valuation of its equity stake in Affinity Water assumes
that the business plan for PR19 is adopted for 2020 to 2025 and
makes similar assumptions thereafter. It does not make any
allowances for future regulatory reviews that may seek to encourage
faster investment than is currently planned to respond to the
increasing pressure on infrastructure, particularly in South East
England, from continuing population growth in the region, and the
potential for extreme weather linked to climate change.
Construction defects
Construction defects are in most cases revealed through the
regular programme of operations and maintenance activities or as a
result of proactive asset surveys commissioned by portfolio
companies. Defects detected within the statutory limitations period
are lodged with the relevant construction subcontractor for
remediation. The cost of remediation is the responsibility of the
construction subcontractor and is not borne by the PPP project
company. Contractual claim mechanisms, or ultimately a court
process, may be used where disputes arise, though the need to
escalate matters in this manner has been low historically.
Following the expiry of the statutory limitations period or in
certain other circumstances, for example if the subcontractor
becomes insolvent, the risk of remediation of construction defects
when detected typically falls to the PPP project company itself and
becomes an equity risk. The lifecycle budget would normally be a
source of cost mitigation.
The health and safety of users and people working on the
infrastructure is a priority for the Board, the Investment Adviser
and the project management teams. Areas of focus include fire
safety, in particular external cladding systems.
Cladding
We continue to focus on construction defects, including those
relating to fire safety, such as facilities' cladding systems. As a
result of a detailed review of the portfolio's fire safety that was
proactively commenced in early 2017, we identified that cladding
systems needed rectification works at a small number of assets. In
each case, the public-sector client was promptly informed and has
been apprised of fire prevention and protection measures and
progress towards rectification has been made. Where appropriate,
the project management teams have worked closely with the local
fire service, who advise and approve the adequacy of fire
prevention and protection measures in place whilst the defects are
remedied.
One of these assets was affected by the collapse of Carillion
and the current estimate to rectify the construction defect is
contained within the valuation of that asset. Costs to remedy the
defects at the other assets are expected to be borne by their
respective construction contractors.
Other construction defects
Progress resolving alleged building defects and operational
issues at a hospital PPP continues. A negotiated settlement is
likely. The value of the investment in the portfolio is in the
range of GBP0-5m.
As previously reported, there is a road PPP that has suffered
from operational issues and construction defects. An agreement was
reached with the construction subcontractor with compensation
having been paid to the project company. The value of the
investment in the portfolio is in the range of GBP0-5m.
Compensation on termination
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.
Heads of terms were agreed with respect to the compensation due
to the Group for a school PPP project which was voluntarily
terminated by the local authority client during the financial year
ended 31 March 2016. This has taken time to resolve due to the
commercial nature of the negotiations and the number of parties
involved. The project company will not be at risk for the
remediation of the outstanding construction defects. The value of
the investment in the portfolio was in the range of GBP0-5m, and
compensation will be received in line with market value.
As at 30 September 2018, the Investment Adviser estimated 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
2% of total portfolio value.
Value Enhancement
The Asset Management and Portfolio Management teams seek
opportunities to deliver outperformance from the portfolio for all
stakeholders through value enhancements. Financial upside is often
shared, between the Company's shareholders and public sector
clients for PPP projects or with the customers of regulated assets
through periodic regulatory price reviews.
Over the course of the six months, value enhancement initiatives
were a key component of the annualised return from the underlying
portfolio of 9.0%. Examples of value enhancement in the period
include:
-- Construction completion
During the period, the A9 Road and Breda Court, both in the
Netherlands, achieved major construction milestones on budget and
on time.
The Group has two investments remaining in construction: Irish
Primary Care, in Ireland, and the Biology, Pharmacy and Chemistry
Department of the Paris-Sud University, in France, which together
represent 1% of the portfolio. Progress in relation to both of
these projects remains good, and their delivery represents an
opportunity for future value enhancement.
De-risking construction projects in the portfolio added GBP5-10m
in the period through a reduction in the discount rates used to
value those assets.
-- Third party income
The hospitals in the portfolio often include a small number of
retail outlets; examples include coffee shops and newsagents.
Typically, a base level of rent is passed on to the client.
Outperformance against this may be retained by the project. Renewal
of leases is undertaken by the project management team and overseen
by the Investment Adviser. They will consider qualitative and
quantitative factors in determining new tenants. The retail leases
at two hospital facilities in the portfolio were agreed, which
increased the valuation of the assets by GBP0-5m in the period.
-- Lifecycle
Public sector clients to PPP projects typically contract the
long-term risk of asset condition to the private sector. Project
companies, and therefore equity, have retained this risk on a
proportion of the PPP portfolio. The risk has been contracted to
the operations and maintenance subcontractor(s) on the remainder of
the PPP portfolio.
Technical advisors evaluate whether efficiencies can be achieved
in lifecycle, or capital maintenance, budgets without compromising
maintenance programmes and taking into account the actual condition
of the assets and how well they are performing. These efficiencies
can result in a combination of the recognition of historic savings
and new budget forecasts. Lender consent is sought for revised
budgets. New lifecycle forecasts were completed on six projects,
which increased the valuation of the associated assets by GBP0 - 5m
in the period.
The Investment Adviser, project management teams and contractors
seek innovative approaches to managing the environment of the
infrastructure. At Central Middlesex Hospital, the project company
and its facilities management contractor commissioned artwork for
the new Park Royal Medical Practice, which opened in the hospital
in 2018 as a variation to the original design. This has created,
for both patients and staff, an improved and attractive
environment. It is expected that the fabric of the clinic will
suffer less wear and tear because users of the facility will treat
their surroundings with greater care as effort has gone into the
aesthetic appeal of its design. If this proves successful then the
idea may be rolled out more widely.
-- Strategic disposals
The Investment Adviser has been seeking opportunities to enhance
portfolio value by making strategic disposals that take advantage
of ongoing favourable market conditions. During the period, the
Group completed the sale of the Highland Schools PPP2 project and
the part sale of a stake in the Oldham Library PPP project. The
sale of AquaSure Desalination PPP project was completed shortly
after the period end. These sales contributed GBP5-10m to the
results for the period, which was in addition to gains recognised
in relation to these assets in the previous financial year ended 31
March 2018.
-- Demand-based assets
The Group's demand-based toll road assets continue to deliver
strong traffic growth. The historic rate of growth has exceeded
acquisition projections. The Investment Adviser has not changed the
assumed rate of future traffic growth. In the period, traffic
outperformance delivered an additional GBP0-5m to the Group.
Accretive Investment
The Company has a clearly defined Investment Policy, which can
be found on the Company's website. This sets the over-arching
framework within which the Company aims to build a portfolio that
delivers HICL's investment proposition and is consistent with the
Company's overall risk appetite.
Working within delegated parameters approved by the HICL Board,
InfraRed is responsible for the selection and pricing of new
investments and, from time to time, disposals. The Acquisition
Strategy is periodically reviewed by the Board and agreed with
InfraRed, most recently in September 2018.
During the half year, the Group made three new investments and
one incremental investment for a total consideration of GBP91m.
Date Amount Type Stage Asset Market Stake Overall
Segment Acquired Stake
Paris-Sud University
Apr 2018 EUR21m New Construction (France) PPP 85% 85%
------- ------------ ------------- ---------------------- ------------- ---------- --------
Belfast Metropolitan
Apr 2018 GBP6m New Operational College (UK) PPP 75% 75%
------- ------------ ------------- ---------------------- ------------- ---------- --------
Burbo Bank OFTO
Apr 2018 GBP10m New Operational (UK) Regulated 50% 50%
------- ------------ ------------- ---------------------- ------------- ---------- --------
Jun 2018 EUR62m Incremental Operational A63 Motorway (France) Demand-based 7% 21%
------- ------------ ------------- ---------------------- ------------- ---------- --------
HICL's consortium was also announced as the preferred bidder for
the Race Bank OFTO. HICL's 50% share of the consideration is
expected to be up to GBP30m when the project reaches financial
close in Q1 2019. The consortium continues to bid for the remaining
projects in Ofgem's Tender Round 5.
The Group made two divestments in the period:
-- Its 100% stake in the Highlands Schools PPP2 project (UK) for
GBP56m, which was reflected in the project's valuation at 31 March
2018. Sale proceeds, which exceeded the Directors' Valuation of
GBP46m as at 30 September 2017 by GBP10m, were redeployed in the
acquisition of the incremental stake in the A63 Motorway
(France).
-- A 15% stake in the Oldham Library PPP project (UK) to the
joint venture partner Kajima for consideration of GBP1m. The Group
retains a 75% interest in the project. This sale provided the Group
with an opportunity to make administrative cost savings by
incorporating the project into the wider strategic partnership with
Kajima.
On 1 November 2018, the Group completed the sale of its 9.7%
stake in the AquaSure Desalination PPP project (Australia) for
AUD$161m.
The value of the Group's investment in AquaSure was increased by
approximately 10% in September 2017, in line with a market
transaction earlier that year. The disposal price generated a
further premium for the Group, of approximately 7% over the
valuation of the investment at 31 March 2018. The proceeds were
used to reduce the balance on the Group's Revolving Credit
Facility.
Financial review
This section summarises the financial results of the Company for
the six-month period ended 30 September 2018. The Company prepares
IFRS financial statements which do not consolidate any
subsidiaries, including those that are themselves investment
entities.
Consistent with prior periods, 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 which consolidates the results
of the Company and its Corporate Subsidiaries. This basis is
designated the Investment Basis and provides shareholders with
further information regarding the Corporate Group's gearing and
expenses, and 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
2018 2017
Investment Consolidation IFRS Investment Consolidation IFRS
GBPm Basis adjustments Basis Basis adjustments Basis
----------- -------------- ------- ----------- -------------- ---------
Total income(1) 211.0 (17.1) 193.9 108.1 (19.6) 88.5
----------- -------------- ------- ----------- -------------- ---------
Expenses & finance
costs (18.2) 16.9 (1.3) (20.3) 19.4 (0.9)
-------------------- ----------- -------------- ------- ----------- -------------- ---------
Profit/(loss)
before tax 192.8 (0.2) 192.6 87.8 (0.2) 87.6
----------- -------------- ------- ----------- -------------- ---------
Tax (0.2) 0.2 - (0.2) 0.2 -
-------------------- ----------- -------------- ------- ----------- -------------- ---------
Earnings 192.6 - 192.6 87.6 - 87.6
-------------------- ----------- -------------- ------- ----------- -------------- ---------
Earnings per
share 10.8p - 10.8p 5.1p - 5.1p
-------------------- ----------- -------------- ------- ----------- -------------- ---------
(1) Includes net foreign exchange gain of GBP16.1m (2017:
GBP2.8m loss)
On an Investment Basis, Total income of GBP211.0m (2017:
GBP108.1m) represents the return from the portfolio recognised as
income comprising dividends, sub-debt interest and valuation
movements. The 95% (GBP102.9m) increase in Total income reflects a
0.2% reduction in the weighted average discount rate combined with
foreign exchange gains aligned with continued outperformance from
the portfolio. 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
GBP193.9m (2017: GBP88.5m) comprises income received by the Company
and valuation movements in its investments.
Foreign exchange movements comprise a GBP21.1m foreign exchange
gain (2017: GBP3.3m loss) on revaluing the non-UK assets in the
portfolio using September 2018 exchange rates, partly offset by a
GBP5.0m foreign exchange hedging loss (2017: GBP0.5m gain).
Earnings on an Investment Basis and IFRS Basis were GBP192.6m,
an increase of GBP105.0m against the prior period. This reflects
the factors stated above as well as reduced Expenses & finance
costs of GBP18.2m (2017: GBP20.3m) reflecting lower one-off
acquisition fees in the current period compared to the previous
period - further detail is given in Investment Basis Cost Analysis
below.
Earnings per share were 10.8p (2017: 5.1p), the increase being
driven by the growth in earnings.
Investment Basis Cost Analysis
GBPm Six months to 30 September 2018 Six months to 30 September 2017
Finance costs 2.2 1.8
-------------------------------- --------------------------------
Investment Adviser fees 14.6 17.0
-------------------------------- --------------------------------
Auditor - KPMG - for the Group 0.2 0.2
-------------------------------- --------------------------------
Directors' fees & expenses 0.2 0.2
-------------------------------- --------------------------------
Acquisition bid costs - 0.4
-------------------------------- --------------------------------
Professional fees 0.9 0.5
-------------------------------- --------------------------------
Other expenses 0.1 0.2
-------------------------------- -------------------------------- --------------------------------
Expenses & finance costs 18.2 20.3
-------------------------------- -------------------------------- --------------------------------
Total fees accruing to the Investment Adviser were GBP14.6m
(2017: GBP17.0m) 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, 0.8% for assets above
GBP2.25bn and 0.65% for assets above GBP3bn, a 1.0% fee on
acquisitions made from third parties, and the GBP0.1m p.a. advisory
fee.
The decrease in the Investment Adviser's fees is due to lower
one-off acquisition fees in the current period of GBP0.8m (2017:
GBP4.3m), partly offset by management fees on the larger
portfolio.
During the period, the Corporate Group incurred negligible
third-party acquisition bid costs (2017: GBP0.4m), mainly being
legal, technical and tax due diligence, on unsuccessful bids and
bids in progress.
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 and finance costs were GBP1.3m (2017:
GBP0.9m) as they exclude costs incurred by the Corporate
Subsidiaries where the main expenses are incurred.
Ongoing Charges
GBPm Six months to 30 September 2018 Six months to 30 September 2017
Investment Adviser(1) 13.8 12.7
----------------------------------- -----------------------------------
Auditor - KPMG - for the Group 0.2 0.2
----------------------------------- -----------------------------------
Directors' fees and expenses 0.2 0.2
----------------------------------- -----------------------------------
Other ongoing expenses 0.6 0.5
-------------------------------- ----------------------------------- -----------------------------------
Total expenses 14.8 13.6
----------------------------------- -----------------------------------
Average NAV 2,720.2 2,565.6
----------------------------------- -----------------------------------
Ongoing charges 1.09% 1.06%
-------------------------------- ----------------------------------- -----------------------------------
(1) Excludes acquisition fees of GBP0.8m (2017: GBP4.3m), in
line with AIC calculation methodology
Ongoing charges, in accordance with the Association of
Investment Companies' ("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 1.09% (2017: 1.06%). The slight increase reflects the
higher usage of the Group's multi-currency Revolving Credit
Facility ("RCF") to fund acquisitions during the period. The use of
gearing to fund acquisitions has the effect of increasing portfolio
value which increases total expenses without a commensurate
increase in net assets.
Investment Basis Summary Balance Sheet
30 September 2018 31 March 2018
Investment Basis Consolidation IFRS Investment Basis Consolidation IFRS
GBPm adjustments Basis adjustments Basis
----------------- ------------------ -------- ----------------- ------------------- --------
Investments at
fair value 2,869.6 (70.1) 2,799.5 2,794.6 (117.4) 2,677.2
----------------- ------------------ -------- ----------------- ------------------- --------
Working capital 83.8 (84.3) (0.5) (2.3) 1.5 (0.8)
----------------- ------------------ -------- ----------------- ------------------- --------
Net (debt)/cash (154.2) 154.4 0.2 (115.2) 115.9 0.7
------------------- ----------------- ------------------ -------- ----------------- ------------------- --------
Net assets
attributable to
Ordinary shares 2,799.2 - 2,799.2 2,677.1 - 2,677.1
------------------- ----------------- ------------------ -------- ----------------- ------------------- --------
NAV per share
(before dividend) 156.4p - 156.4p 149.6 - 149.6
----------------- ------------------ -------- ----------------- ------------------- --------
NAV per share
(post dividend) 154.4p - 154.4p 147.6 - 147.6
------------------- ----------------- ------------------ -------- ----------------- ------------------- --------
On an Investment Basis, Investments at fair value increased 3%
in the six months to GBP2,869.6m (March 2018: GBP2,794.6m), which
is the Directors' Valuation of GBP2,904.9m (March 2018:
GBP2,836.5m) net of GBP35.3m of future investment obligations
(March 2018: GBP41.9m). Further detail on the movement in
Investments at fair value is given in Portfolio &
Valuation.
Working capital on an Investment Basis includes an GBP89.0m
receivable for the sale proceeds of the AquaSure Desalination PPP
project on which the contract for sale had exchanged at 30
September 2018, with completion (and the receipt of sale proceeds)
occurring after the balance sheet date.
The Corporate Group had net debt, on an Investment Basis, at 30
September 2018 of GBP154.2m (March 2018: net debt of GBP115.2m);
the movement in the six months reflecting cash used for acquisition
activity. Drawings from the Group's RCF at the end of the period
were GBP159.7m (March 2018: GBP134.6m) and have reduced to
approximately GBP70m following the receipt of the AquaSure sale
proceeds.
An analysis of the movements in net cash is shown in the
cashflow analysis below.
On an IFRS Basis, Investments at fair value increased 5% to
GBP2,799.5m (March 2018: GBP2,677.2m), reflecting the Investment
Basis movements above as well as a GBP47.3m increase in the fair
value of the Corporate Subsidiaries from the sale of AquaSure
partly offset by higher drawings of the Group's RCF. On an IFRS
Basis, cash and cash equivalents were broadly unchanged from March
2018. The Group's cash and debt management is undertaken through
the Corporate Subsidiaries.
NAV per share was 156.4p before the 2.01p second quarterly
distribution (March 2018: 149.6p). NAV per share has increased
6.8p, reflecting 10.8p earnings per share net of 4.0p distributions
in the six month period to 30 September 2018.
Analysis of the Growth in NAV per Share
Pence per share
----- ----- -------
NAV per share at 31 March 2018 149.6p
----- ----- -------
Valuation movements
----- ----- -------
Reduction in discount rates 3.5p
----- ----- -------
Change in economic assumptions 0.3p
----- ----- -------
Forex gain 0.9p
----------------------------------------- ----- ----- -------
4.7p
----- ----- -------
Portfolio Performance
----- ----- -------
Portfolio outperformance(1) 1.0p
----- ----- -------
Carillion write back 0.6p
----- ----- -------
Expected NAV growth(2) 0.5p
----------------------------------------- ----- ----- -------
2.1p
----- ----- -------
Total 6.8p
----------------------------------------- ----- ----- -------
NAV per share at 30 September 2018 156.4p
----------------------------------------- ----- ----- -------
(1) Includes the impact of lower discount rates on projects
moving from construction to operations
(2) Expected NAV growth is the Company's budgeted EPS less
target dividend
Investment Basis Summary Cash Flow
Six months to 30 September 2018 Six months to 30 September 2017
Investment Basis Consolidation IFRS Investment Basis Consolidation IFRS
GBPm adjustment Basis adjustment Basis
----------------- ------------------- ------- ----------------- ------------------- --------
Cash from
investments(1) 111.1 (38.6) 72.5 91.3 (25.2) 66.1
----------------- ------------------- ------- ----------------- ------------------- --------
Operating and
finance costs
outflow (17.5) 15.9 (1.6) (13.4) 12.0 (1.4)
------------------- ----------------- ------------------- ------- ----------------- ------------------- --------
Net cash inflow
before
capital movements 93.6 (22.7) 70.9 77.9 (13.2) 64.7
----------------- ------------------- ------- ----------------- ------------------- --------
Cost of new
investments,
including
acquisition costs (99.1) 98.2 (0.9) (450.1) 181.2 (268.9)
----------------- ------------------- ------- ----------------- ------------------- --------
Disposal of
investments(2) 38.6 (38.6) -
----------------- ------------------- ------- ----------------- ------------------- --------
Share capital
raised net of
costs (0.2) - (0.2) 265.5 - 265.5
----------------- ------------------- ------- ----------------- ------------------- --------
Forex movement on
borrowings/
hedging(3) (1.6) 1.6 - (1.4) 1.4 -
----------------- ------------------- ------- ----------------- ------------------- --------
Distributions paid (70.3) - (70.3) (61.6) - (61.6)
------------------- ----------------- ------------------- ------- ----------------- ------------------- --------
Movement in the
period (39.0) 38.5 (0.5) (169.7) 169.4 (0.3)
------------------- ----------------- ------------------- ------- ----------------- ------------------- --------
Net (debt)/cash
at start of
period (115.2) 115.9 0.7 82.2 (81.3) 0.9
------------------- ----------------- ------------------- ------- ----------------- ------------------- --------
Net (debt)/cash at
end of period (154.2) 154.4 0.2 (87.5) 88.1 0.6
------------------- ----------------- ------------------- ------- ----------------- ------------------- --------
(1) Includes GBP18.9m profit on disposal (2017: GBPnil) based on
historic cost
(2) Historic cost of GBP38.6m and profit on disposal of GBP18.9m
equals the proceeds from disposal of investments of GBP57.5m
(3) Includes movement in capitalised debt issue costs of GBP0.3m
(2017: GBP1.0m)
Cash inflows from the portfolio on an Investment Basis were
GBP111.1m (2017: GBP91.3m) or 1% higher at GBP92.2m excluding the
impact of the disposals of the Highland Schools PPP2 project and
15% of the Oldham Library PPP project. Underlying cash generation
excluding profits on disposal was broadly flat in the period as
contributions from acquisitions combined with active cash
management across the portfolio more than offset the shortfall in
yield from the projects not distributing due to Carillion's
liquidation.
Cost of new investments by the Corporate Group on an Investment
Basis of GBP99.1m (2017: GBP450.1m) represents the cash cost of
three new investments, one incremental investment, loan note
subscriptions, and acquisition costs of GBP1.3m (2017:
GBP6.0m).
On an IFRS Basis, the Company received GBP72.5m from its direct
Corporate Subsidiary (2017: GBP66.1m). 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 GBP0.9m (2017: GBP268.9m) reflects funds extended by
the Company to its direct Corporate Subsidiary in the period, being
scrip dividend take up. The comparative period also includes share
capital raised net of costs through the June 2017 tap issue.
Hedging and borrowing is undertaken by a Corporate Subsidiary
and therefore the Company had no cashflows for this on an IFRS
Basis. On an Investment Basis, the GBP1.6m cash outflow (2017:
GBP1.4m cash outflow) comprised GBP1.3m from foreign exchange rate
hedging settlements in the period and GBP0.3m movement in
capitalised debt arrangement costs. The Corporate Group enters into
forward sales to hedge FX exposure in line with the Company's
hedging policy set out below.
Dividends paid in the period increased 14%, or GBP8.7m, to
GBP70.3m (2017: GBP61.6m) reflecting increased shares in issue
combined with a higher dividend per share. Dividend cash cover,
which compares operational cashflow excluding profits on disposal
of GBP74.7m (2017: GBP77.9m) to dividends paid, was 1.06 times
(2017: 1.26 times). Including profits on disposal of GBP18.9m,
dividend cash cover in the period was 1.33 times. The reduced
dividend cash cover arose from Carillion's insolvency which in the
period caused restrictions on distributions to equity on ten
projects.
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.
The Group's GBP400m RCF was renewed on 31 January 2018 on
improved terms and has an expiry date of 31 May 2021. The Company
is therefore able to confirm that sufficient working capital is
available for the financial year ending 31 March 2019, without
needing to refinance. Periodically, the Investment Adviser will,
however, consider refinancing options aligned to the pipeline of
potential transactions. The Group has drawings on its RCF of
approximately GBP70m following the receipt of the proceeds from the
sale of the AquaSure Desalination PPP, which was completed after
period end. Sufficient capacity is retained on the RCF for the
Group to fund additional investments as and when further attractive
opportunities arise.
Foreign Exchange Hedging
The Company's hedging policy targets NAV per share volatility of
no more than 2% for a 10% movement in foreign exchange rates. The
policy balances the cost / benefit of hedging activity whilst
retaining the key objective of materially mitigating the impact of
foreign exchange movements on HICL's financial results.
Hedging as at 30 September 2018 compared to non-Sterling
portfolio values were:
Non-UK assets FX Hedge FX Hedge as % of non-UK assets
GBPm GBPm %
Euro 356 162 46%
----------------- ------------ ----------------------------------
North America 228 59 26%
----------------- ------------ ----------------------------------
Australia 90 91 100%
--------------- ----------------- ------------ ----------------------------------
674 312 46%
--------------- ----------------- ------------ ----------------------------------
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.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company's website, and for the preparation and dissemination of
financial statements. Legislation in Guernsey governing the
preparation and dissemination of financial statements may differ
from legislation in other jurisdictions.
On behalf of the Board
I Russell
Chairman
20 November 2018
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 2018 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 2018 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 Dempsey
for and on behalf of KPMG Channel Islands Limited
Chartered Accountants, Guernsey
20 November 2018
Condensed Unaudited Income Statement
for the six months ended 30 September 2018
For the six For the six
months ended months ended
30 September 30 September
2018 2017
Total Total
Note GBPm GBPm
Investment income 5 193.9 88.5
-------------------------------- ----- -------------- --------------
Total income 193.9 88.5
-------------------------------- ----- -------------- --------------
Fund expenses 6 (1.3) (0.9)
-------------------------------- ----- -------------- --------------
Profit before tax 192.6 87.6
-------------------------------- ----- -------------- --------------
Profit for the period 9 192.6 87.6
-------------------------------- ----- -------------- --------------
Earnings per share - basic and
diluted (pence) 9 10.8 5.1
-------------------------------- ----- -------------- --------------
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 2018
30 September 31 March
2018 2018
Unaudited Audited
Note GBPm GBPm
Non-current assets
Investments at fair value through
profit or loss 11 2,799.5 2,677.2
--------------------------------------- ----- ------------- ---------
Total non-current assets 2,799.5 2,677.2
--------------------------------------- ----- ------------- ---------
Current assets
Trade and other receivables 0.1 -
Cash and cash equivalents 0.2 0.7
--------------------------------------- ----- ------------- ---------
Total current assets 0.3 0.7
--------------------------------------- ----- ------------- ---------
Total assets 2,799.8 2,677.9
--------------------------------------- ----- ------------- ---------
Current liabilities
Trade and other payables (0.6) (0.8)
--------------------------------------- ----- ------------- ---------
Total current liabilities (0.6) (0.8)
--------------------------------------- ----- ------------- ---------
Total liabilities (0.6) (0.8)
--------------------------------------- ----- ------------- ---------
Net Assets 2,799.2 2,677.1
--------------------------------------- ----- ------------- ---------
Equity
Ordinary share capital 12 0.2 0.2
Share Premium 12 2,026.3 2,025.6
Retained reserves 772.7 651.3
--------------------------------------- ----- ------------- ---------
Total equity 2,799.2 2,677.1
--------------------------------------- ----- ------------- ---------
Net assets per Ordinary Share (pence) 156.4 149.6
--------------------------------------- ----- ------------- ---------
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 20 November 2018, 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 2018
Six months ended 30 September 2018
Attributable to equity holders of the
parent
Share capital
and share Retained Total shareholders'
premium reserves equity
GBPm GBPm GBPm
------------------------------- -------------- ---------- --------------------
Shareholders' equity as at
31 March 2018 2,025.8 651.3 2,677.1
------------------------------- -------------- ---------- --------------------
Profit for the period - 192.6 192.6
Distributions paid to Company
shareholders in cash - (70.3) (70.3)
Distributions paid to Company
shareholders by scrip issue - (0.9) (0.9)
------------------------------- -------------- ---------- --------------------
Distributions paid to Company
shareholders in the period (71.2) (71.2)
------------------------------- -------------- ---------- --------------------
Ordinary Shares issued for
cash - - -
Ordinary Shares issued for
scrip dividend 0.9 - 0.9
------------------------------- -------------- ---------- --------------------
Total Ordinary Shares issued
in the period 0.9 - 0.9
------------------------------- -------------- ---------- --------------------
Costs of share issue (0.2) - (0.2)
------------------------------- -------------- ---------- --------------------
Shareholders' equity at 30
September 2018 2,026.5 772.7 2,799.2
------------------------------- -------------- ---------- --------------------
Six months ended 30 September 2017
Attributable to equity holders of the
parent
Share capital
and share Retained Total shareholders'
premium reserves equity
GBPm GBPm GBPm
------------------------------- -------------- ---------- --------------------
Shareholders' equity as 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)
------------------------------- -------------- ---------- --------------------
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 share issue (1.8) - (1.8)
------------------------------- -------------- ---------- --------------------
Shareholders' equity at 30
September 2017 2,024.0 687.3 2,711.3
------------------------------- -------------- ---------- --------------------
The accompanying Notes are an integral part of these financial
statements.
Condensed Unaudited Cash Flow Statement
for the six months ended 30 September 2018
Six months Six months
ended 30 ended 30
September September
2018 2017
GBPm GBPm
Cash flows from operating activities
Profit before tax 192.6 87.6
Adjustments for:
Investment income (193.9) (88.5)
-------------------------------------------------- ----------- -----------
Operating cash flows before movements in working
capital (1.3) (0.9)
Changes in working capital:
(Increase)/decrease in receivables (0.1) -
(Decrease)/increase in payables (0.2) (0.5)
-------------------------------------------------- ----------- -----------
Cash flow from operations (1.6) (1.4)
Interest received on investments 72.5 66.1
-------------------------------------------------- ----------- -----------
Net cash from operating activities 70.9 64.7
-------------------------------------------------- ----------- -----------
Cash flows from investing activities
Investment in subsidiary (0.9) (268.9)
-------------------------------------------------- ----------- -----------
Net cash used in investing activities (0.9) (268.9)
-------------------------------------------------- ----------- -----------
Cash flows from financing activities
Net (payment)/proceeds from issue of share
capital (0.2) 265.5
Distributions paid to Company shareholders (70.3) (61.6)
-------------------------------------------------- ----------- -----------
Net cash (used in)/from financing activities (70.5) 203.9
-------------------------------------------------- ----------- -----------
Net decrease in cash and cash equivalents (0.5) (0.3)
-------------------------------------------------- ----------- -----------
Cash and cash equivalents at beginning of
period 0.7 0.9
-------------------------------------------------- ----------- -----------
Cash and cash equivalents at end of period 0.2 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 2018
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 (the "interim financial statements")
as at and for the six months ended 30 September 2018 comprise the
financial statements for the Company only as explained in Note
2.
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 and
Europe.
The statutory financial statements for the year ended 31 March
2018 were approved by the Directors on 22 May 2018 and are
available from the Company's Administrator and on the Company's
website www.hicl.com. The auditor's report on these interim
financial statements was unmodified.
2. Key accounting policies
Basis of preparation
The interim financial statements were approved by the Board of
Directors on 20 November 2018.
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").
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 financial instruments are
classified as Investments at fair value through profit and
loss.
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 2018, except for the adoption of IFRS 9 Financial
Instruments and IFRS 15 Revenue from Contracts with Customers,
which became effective for accounting periods beginning on or after
1 January 2018. The adoption of the new standards had no material
impact on the Company's reported results.
Going concern
The Directors have considered areas of financial risk, the
Company's access to the Revolving Credit Facility ("RCF") 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 2018
Level Level Level Total
1 2 3
GBPm GBPm GBPm GBPm
----------------------------------- ------- ------- -------- --------
Investments at fair value through
profit or loss (Note 11) - - 2,799.5 2,799.5
----------------------------------- ------- ------- -------- --------
31 March 2018
Level Level Level Total
1 2 3
GBPm GBPm GBPm GBPm
----------------------------------- ------- ------- -------- --------
Investments at fair value through
profit or loss (Note 11) - - 2,677.2 2,677.2
----------------------------------- ------- ------- -------- --------
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, along with the
working capital of the Corporate Subsidiaries.
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 period. 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
cash flow valuations:
30 September 2018 31 March 2018
Inflation Rates UK (RPI and RPIx)(1) 2.75% p.a. 2.75% p.a.
CPIH(2) 2.0% p.a. 2.0% p.a.
---------------------- ------------------------ ------------------------
Eurozone (CPI) 1.0% p.a. to 2019, 1.0% p.a. to 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.
---------------------- ------------------------ ------------------------
Deposit Rates UK 1.0% p.a. to March 1.0% p.a. to March
2021, 2021,
2.0% p.a. thereafter 2.0% p.a. thereafter
---------------------- ------------------------ ------------------------
Eurozone 0.5% p.a. to March 0.5% p.a. to March
2021, 2021,
1.5% p.a. thereafter 1.5% p.a. thereafter
---------------------- ------------------------ ------------------------
Canada 2.0% p.a. to March 2.0% p.a. to March
2021, 2021,
3.0% p.a. thereafter 3.0% p.a. thereafter
---------------------- ------------------------ ------------------------
USA 2.0% p.a. with 2.0% p.a. with
a gradual increase a gradual increase
to 3.0% p.a. long-term to 3.0% p.a. long-term
---------------------- ------------------------ ------------------------
Foreign Exchange
Rates CAD / GBP 0.59 0.55
---------------------- ------------------------ ------------------------
EUR / GBP 0.89 0.88
----------------------------------------- ------------------------ ------------------------
USD / GBP 0.77 0.71
----------------------------------------- ------------------------ ------------------------
Tax Rates UK 19% to March 2020, 19% to March 2020,
17% thereafter 17% thereafter
---------------------- ------------------------ ------------------------
Eurozone Ireland 12.5% Ireland 12.5%
France 25% - 33.3% France 25% - 33.3%
Netherlands 20% Netherlands 20%
- 25% - 25%
---------------------- ------------------------ ------------------------
USA 21% Federal & 21% Federal &
4.6% Colorado 4.6% Colorado
State State
---------------------- ------------------------ ------------------------
Canada 26% and 27% 26% and 27%
---------------------- ------------------------ ------------------------
GDP Growth Rates UK 2.0% 2.0%
---------------------- ------------------------ ------------------------
Eurozone 1.8% 1.8%
----------------------------------------- ------------------------ ------------------------
USA 2.5% 2.5%
----------------------------------------- ------------------------ ------------------------
(1) Retail Price Index and Retail Price Index excluding mortgage
interest payments
(2) Consumer Prices Index including owner occupiers' housing
costs
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:
Period ended Range Weighted average
30 September 2017 4.9% to 9.8% 7.4%
-------------- -----------------
31 March 2018 4.1% to 9.8% 7.4%
-------------- -----------------
3.4%(1) to
30 September 2018 9.6% 7.2%
-------------- -----------------
(1) The 3.4% discount rate relates to the A13 senior bonds. The
rate is the implied rate from the quoted market price of the bonds
at 30 September 2018
A change to the weighted average rate of 7.2% 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% p.a. through profit +0.5% p.a.
Discount rates change or loss change
September 2018 +GBP163.5m GBP2,799.5m -GBP148.3m
-------------- ---------------- --------------
March 2018 +GBP152.4m GBP2,677.2m -GBP138.7m
-------------- ---------------- --------------
Implied change in NAV per
Ordinary Share(1) - September +9.1 pence 156.4 pence -8.3 pence
2018 (March 2018) (+8.5 pence) (149.6 pence) (-7.7 pence)
-------------- ---------------- --------------
(1) Net Asset Value per Ordinary Share based on 1,790 million
Ordinary Shares as at 30 September 2018
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 Retail Price Index
("RPI") or RPI excluding mortgage payments ("RPIx") while non-UK
projects use Consumer Price Index ("CPI"), 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% p.a. through profit +0.5% p.a.
Inflation rates change or loss change
September 2018 -GBP141.7m GBP2,799.5m +GBP152.1m
-------------- ---------------- --------------
March 2018 -GBP125.5m GBP2,677.2m +GBP146.3m
-------------- ---------------- --------------
Implied change in NAV per
Ordinary Share(1 2) - September -7.9 pence 156.4 pence +8.5 pence
2018 (March 2018) (-7.0 pence) (149.6 pence) (+8.2 pence)
-------------- ---------------- --------------
(1) Analysis is based on the Company's 35 largest investments,
pro-rata for the whole portfolio
(2) Net Asset Value per Ordinary Share based on 1,790 million
Ordinary Shares as at 30 September 2018
Interest rates
Each portfolio company'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
investments' senior debt funding, though a small number of projects
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 2018 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% p.a. through profit +0.5% p.a.
Interest rates change or loss change
September 2018 -GBP19.5m GBP2,799.5m +GBP22.8m
-------------- ---------------- --------------
March 2018 -GBP21.0m GBP2,677.2m +GBP24.0m
-------------- ---------------- --------------
Implied change in NAV per
Ordinary Share(1 2) - September -1.1 pence 156.4 pence +1.3 pence
2018 (March 2018) (-1.2 pence) (149.6 pence) (+1.3 pence)
-------------- ---------------- --------------
(1) Analysis is based on the Company's 35 largest investments,
pro-rata for the whole portfolio
(2) Net Asset Value per Ordinary Share based on 1,790 million
Ordinary Shares as at 30 September 2018
Gross Domestic Product ("GDP") growth rates
The portfolio has 4 projects (2017: 4 projects) where revenues
are positively correlated to changes in GDP. These projects are A63
Motorway, M1-A1 Road, Northwest Parkway and High Speed 1 which
together comprise 20% of the Investments at fair value through
profit or loss.
A change to the GDP growth 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% p.a. through profit +0.5% p.a.
GDP growth rates change or loss change
September 2018 -GBP88.9m GBP2,799.5m +GBP86.4m
-------------- ---------------- --------------
March 2018 -GBP69.4m GBP2,677.2m +GBP70.5m
-------------- ---------------- --------------
Implied change in NAV per
Ordinary Share(1) - September -5.0 pence 156.4 pence +4.8 pence
2018 (March 2018) (-3.9 pence) (149.6 pence) (+3.9 pence)
-------------- ---------------- --------------
(1) Net Asset Value per Ordinary Share based on 1,790 million
Ordinary Shares as at 30 September 2018
Tax rates
The profits of each project company are subject to corporation
tax in the country in which the project is located.
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
-5.0% p.a. through profit +5.0% p.a.
Tax rates change or loss change
September 2018 +GBP113.2m GBP2,799.5m -GBP110.6m
-------------- ---------------- --------------
March 2018 +GBP106.9m GBP2,677.2m -GBP106.2m
-------------- ---------------- --------------
Implied change in NAV per
Ordinary Share(1 2) - September +6.3 pence 156.4 pence -6.2 pence
2018 (March 2018) (+6.0 pence) (149.6 pence) (-5.9 pence)
-------------- ---------------- --------------
(1) Analysis is based on the Company's 35 largest investments,
pro-rata for the whole portfolio
(2) Net Asset Value per Ordinary Share based on 1,790 million
Ordinary Shares as at 30 September 2018
Foreign exchange
The Company's hedging policy 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% FX movement. Further detail on the Company's
hedging policy is included within the Operating & Financial
Review.
A change to foreign currency / Sterling exchange by plus or
minus 5.0% has the following effect on the valuation:
Investments
at fair value
-5.0% p.a. through profit +5.0% p.a.
Foreign exchange change or loss change
September 2018 -GBP18.0m GBP2,799.5m +GBP18.0m
-------------- ---------------- --------------
March 2018 -GBP14.9m GBP2,677.2m +GBP14.9m
-------------- ---------------- --------------
Implied change in NAV per
Ordinary Share(1 2) - September -1.0 pence 156.4 pence +1.0 pence
2018 (March 2018) (-0.8 pence) (149.6 pence) (+0.8 pence)
-------------- ---------------- --------------
(1) Analysis is based on the Company's 35 largest investments,
pro-rata for the whole portfolio
(2) Net Asset Value per Ordinary Share based on 1,790 million
Ordinary Shares as at 30 September 2018.
4. Geographical analysis
The tables below provide an analysis based on the geographical
location of the Company's underlying investments.
Investment income UK Eurozone North America Australia Total
September 2018 GBP124.4m GBP30.5m GBP30.9m GBP8.1m GBP193.9m
---------- --------- -------------- ---------- ----------
% of Total investment
income 64% 16% 16% 4% 100%
---------- --------- -------------- ---------- ----------
September 2017 GBP63.2m GBP11.7m GBP4.3m GBP9.3m GBP88.5m
---------- --------- -------------- ---------- ----------
% of Total investment
income 71% 13% 5% 11% 100%
---------- --------- -------------- ---------- ----------
Investments at fair
value through profit
or loss UK Eurozone North America Australia Total
September 2018 GBP2,125.1m GBP356.4m GBP227.6m GBP90.4m GBP2,799.5m
------------ ---------- -------------- ---------- ------------
% of Total investments 76% 13% 8% 3% 100%
------------ ---------- -------------- ---------- ------------
March 2018 GBP2,141.8m GBP267.7m GBP187.4m GBP80.3m GBP2,677.2m
------------ ---------- -------------- ---------- ------------
% of Total investments 80% 10% 7% 3% 100%
------------ ---------- -------------- ---------- ------------
5. Investment income
Six months Six months
ended 30 September ended 30 September
2018 2017
Total Total
GBPm GBPm
------------------------ -------------------- --------------------
Income from investment 72.5 66.1
Gain on valuation 121.4 22.4
------------------------ -------------------- --------------------
193.9 88.5
------------------------ -------------------- --------------------
6. Fund expenses
Six months Six months
ended 30 September ended 30 September
2018 2017
Total Total
GBPm GBPm
---------------------------------------- -------------------- --------------------
Fees paid to auditor and its associate 0.2 0.2
Investment Adviser fees (Note 13) 0.1 0.1
Directors' fees (Note 13) 0.2 0.2
Professional fees 0.8 0.4
---------------------------------------- -------------------- --------------------
1.3 0.9
---------------------------------------- -------------------- --------------------
The Company had no employees during the period (31 March 2018:
Nil).
7. Net finance income
In the six months ended 30 September 2018, 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 117
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 30 September ended 30 September
2018 2017
Total Total
Profit attributable to equity holders
of the Company GBP192.6m GBP87.6m
Weighted average number of Ordinary Shares
in issue 1,789.6m 1,725.5m
-------------------------------------------- -------------------- --------------------
Basic and diluted earnings per Ordinary
Share 10.8 pence 5.1 pence
-------------------------------------------- -------------------- --------------------
10. Dividends
Six months Six months
ended 30 September ended 30 September
2018 2017
Total Total
GBPm GBPm
-------------------------------------------------- -------------------- --------------------
Total distributions paid to Company shareholders
in the period:
Fourth quarterly interim dividend for
the year ended 31 March 2018 of 1.97p
(2017: 1.92p) per share 35.2 31.2
First quarterly interim dividend for the
year ending 31 March 2019 of 2.01p (2017:
1.96p) per share 36.0 35.0
-------------------------------------------------- -------------------- --------------------
71.2 66.2
-------------------------------------------------- -------------------- --------------------
The fourth quarterly interim dividend for the year ended 31
March 2018 of GBP35.2 million, representing 1.97 pence per share,
was paid on 29 June 2018. The first quarterly interim dividend for
the year ending 31 March 2019 of GBP36.0 million, representing 2.01
pence per share, was paid on 28 September 2018. Both dividends are
included in the Condensed Unaudited Statement of Changes in
Shareholders' Equity.
On 14 November 2018, the Board approved a second quarterly
interim dividend for the year ending 31 March 2019 of 2.01 pence
per share which will result in a total expected distribution of
GBP36.0m million, payable on 31 December 2018. 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 2018.
Interim dividend Year Year
for the period ending ended Year ended Year ended Year ended Year ended
31 March 31 March 31 March 31 March 31 March 31 March
2019 2018 2017 2016 2015 2014
---------- ---------- ----------- ----------- -----------
3 months ending
30
June 2.01p 1.96p 1.91p 1.86p 1.81p
3 months ending
30 September 2.01p 1.96p 1.91p 1.86p 1.81p
3 months ending
31 December 1.96p 1.91p 1.86p 1.81p
3 months ending
31 March 1.97p 1.92p 1.87p 1.87p
6 months ending
30 September 3.5p
6 months ending
31 March 3.6p
------------------ ---------- ---------- ----------- ----------- ----------- -----------
7.85p 7.65p 7.45p 7.3p 7.1p
------------------ ---------- ---------- ----------- ----------- ----------- -----------
11. Investments at fair value through profit or loss
30 September 31 March
2018 2018
GBPm GBPm
Opening balance 2,677.2 2,419.4
Investments in the period 0.9 266.7
Interest received on investments (72.5) (133.0)
Investment income 193.9 124.1
---------------------------------- ------------- ---------
Carrying amount at period end 2,799.5 2,677.2
---------------------------------- ------------- ---------
This is represented by:
Greater than one year 2,799.5 2,677.2
---------------------------------- ------------- ---------
Carrying amount at period end 2,799.5 2,677.2
---------------------------------- ------------- ---------
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, along with the
working capital of the Corporate Subsidiaries.
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 2018 reconciles to the Condensed Unaudited Balance Sheet
as follows:
30 September 31 March
2018 2018
GBPm GBPm
Directors' Valuation 2,904.9 2,836.5
Less: future commitments (Note 14) (35.3) (41.9)
------------------------------------------- ------------- ---------
Investments at fair value per Investment
Basis 2,869.6 2,794.6
Net debt in Corporate Subsidiaries (154.4) (115.9)
Working capital in Corporate Subsidiaries 84.3 (1.5)
------------------------------------------- ------------- ---------
Investments at fair value per Condensed
Unaudited Balance Sheet 2,799.5 2,677.2
------------------------------------------- ------------- ---------
Acquisitions
The Company, via its Corporate Subsidiaries, made the following
acquisitions during the six months ended 30 September 2018:
-- In April 2018 the Company acquired an 85% equity interest in
the Biology, Pharmacy and Chemistry Department of the Paris-Sud
University for a total commitment of EUR20.7 million, which
includes a loan stock subscription obligation payable following the
substantial completion of construction of the project.
-- In April 2018, the Company acquired a 75% equity and loan
interest in the Belfast Metropolitan College PFI project for total
consideration of GBP6.4 million through an existing joint venture
company, Redwood Partnership Ventures 2 Limited, in which the
Company has a 75% shareholding.
-- In April 2018, the Company acquired a 50% equity and loan
interest in the transmission assets associated with the Burbo Bank
Extension wind farm for total consideration of GBP9.9 million.
-- In June 2018, the Company acquired an incremental 7.2% equity
and loan interest in the A63 Motorway for EUR62.0 million.
Disposals
The Company, via its Corporate Subsidiaries, made the following
disposals during the six months ended 30 September 2018:
-- In June 2018, the Company disposed of its 100% equity and
subordinated debt interest in the Highland Schools PPP2 project for
GBP56.4 million.
-- In July 2018, the Company disposed of 15% of its 90% equity
and subordinated debt interest in the Oldham Library PPP project
for GBP0.9 million.
Note 15 details the disposal made by the Company, via its
Corporate Subsidiaries, since the period end.
12. Share capital and reserves
30 September 31 March
Ordinary Shares 2018 2018
m m
Authorised and issued at 1 April 1,789.5 1,623.3
Issued for cash - 162.2
Issued as a scrip dividend alternative 0.6 4.0
---------------------------------------- ------------- ---------
Authorised and issued at end of period
- fully paid 1,790.1 1,789.5
---------------------------------------- ------------- ---------
The holders of the 1,790,113,245 Ordinary Shares (31 March 2018:
1,789,556,677) are entitled to receive dividends as declared from
time to time and are entitled to one vote per share at meetings of
the Company.
30 September 31 March
Ordinary share capital and share premium 2018 2018
GBPm GBPm
Opening balance 2,025.8 1,753.5
Premium arising on issue of Ordinary Shares 0.9 274.2
Costs of issue of Ordinary Shares (0.2) (1.9)
--------------------------------------------- ------------- ---------
Balance at end of period 2,026.5 2,025.8
--------------------------------------------- ------------- ---------
Share capital is GBP179.0 thousand (31 March 2018: GBP179.0
thousand).
For the six month period ended 30 September 2018
On 28 September 2018, 0.6 million new Ordinary Shares of 0.01p
each fully paid in the Company were issued at a reference price of
158.12p as a scrip dividend alternative in lieu of cash for the
first quarterly interim dividend in respect of the year ending 31
March 2019.
Retained reserves
Retained reserves comprise retained earnings, as detailed in the
Statement of Changes in Shareholders' 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 GBP13.7 million, of which GBP6.9
million remained payable at the period end (2017: GBP12.6 million).
The total fees for new portfolio investments were GBP0.8 million,
of which the full balance remained payable at the period end (2017:
GBP4.3 million). These fees are charged to a Corporate
Subsidiary.
The Investment Adviser fee charged to the Company was GBP0.1
million (disclosed as Investor Adviser fees in Note 6) of which the
full balance remained payable at the period end (2017: GBP0.1
million).
The Directors of the Company, who are considered to be key
management, received fees for their services. Their fees were
GBP177k (disclosed as Directors' fees in Note 6) in the period
(2017: GBP157k). One Director also receives fees for serving as
Director of the two Luxembourg subsidiaries - the annual fees are
GBP6k (2017: GBP6k).
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 2018, the Company, via a Corporate
Subsidiary, had GBP35.3 million commitments for future project
investments (31 March 2018: GBP41.9 million).
15. Events after balance sheet date
On 1 November 2018, the Company, via its Corporate Subsidiaries,
completed the disposal of its 9.7% interest in the AquaSure
Desalination PPP project for AUD$161 million.
The second quarterly interim dividend for the year ending 31
March 2019 of 2.01 pence per share was approved by the Board on 14
November 2018 and is payable on 31 December 2018 to shareholders on
the register as at 23 November 2018.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
IR BMBLTMBMTBLP
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November 21, 2018 02:00 ET (07:00 GMT)
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