TIDMINPP
RNS Number : 4328L
International Public Partnerships
06 September 2019
THIS ANNOUNCEMENT AND THE INFORMATION CONTAINED HEREIN IS NOT
FOR PUBLICATION, RELEASE, OR DISTRIBUTION, DIRECTLY OR INDIRECTLY,
IN, OR INTO, THE UNITED STATES, AUSTRALIA, CANADA, JAPAN, SOUTH
AFRICA OR ANY JURISDICTION IN WHICH THE SAME WOULD BE UNLAWFUL OR
TO U.S. PERSONS. THE INFORMATION CONTAINED HEREIN DOES NOT
CONSTITUTE AN OFFER OF SECURITIES FOR SALE IN ANY JURISDICTION.
6 September 2019
INTERNATIONAL PUBLIC PARTNERSHIPS LIMITED
('INPP', 'the Company')
HALF YEAR RESULTS FOR THE SIX MONTHSED 30 JUNE 2019
-- High-quality investments continued to generate strong
operational cash flows supporting both the payment of a 3.5 pence
per share dividend(1) and a 2.2 pence increase in the net asset
value ('NAV') per share to 150.3p per share.
-- The Company's origination capability and use of pre-emption
rights resulted in GBP200.5 million of additional accretive
investments and commitments which have materially increased the
portfolio's inflation-linkage and geographic diversification.
-- An active approach to asset management and stewardship was
consistently demonstrated by a refinancing and continued
stakeholder engagement to support the portfolio's positive
development.
-- The predictability of long-term investment cash flows
supported a strong dividend yield, with an average annual dividend
growth of 2.5%, since IPO in 2006.
-- Total Shareholder Return since IPO is now 170.8%, implying an
average annualised growth rate of 8.2%.
-- Over 1,400 hours of scheduled management meetings with public
sector clients took place in the first six months of 2019, with the
portfolio recording 99.9% asset availability.(2)
FINANCIAL HIGHLIGHTS(3)
-- NAV per share growth to 150.3 pence (31 December 2018: 148.1 pence).
-- Interim dividend increase to 3.59 pence per share (30 June 2018: 3.50 pence per share).
-- IFRS profit before tax of GBP83.7 million (30 June 2018: GBP65.9 million).
-- Enhanced inflation-linkage with projected increase in return
of 0.86% p.a. for each 1% p.a. increase in inflation (31 December
2018: 0.82% p.a.).(4)
-- Target 2019 and 2020 full-year dividends of 7.18 and 7.36 pence per share, respectively.
-- Low correlation to the FTSE All Share Index of 0.18 and 0.17 over 12 months and 5 years, respectively.(5)
-- H1 2019 cash dividend cover of 1.3x.(6)
PORTFOLIO UPDATE
In the first half of 2019, the Company continued to apply its
proven long-term strategy of value-focused portfolio development,
active asset management and efficient financial management to a
portfolio of high quality, predictable, long-duration
infrastructure assets which provide essential services to the
public. This activity included:
-- Diligent management of the existing portfolio
o The Company undertook a refinancing of Blackburn Building
Schools for Future ('BSF') project during the period and completed
an additional refinancing of Ealing BSF in August 2019, which
generated improved shared financial returns for both the portfolio
and the respective local authorities. A combined GBP2 million was
invested in Luton BSF and Wolverhampton BSF to increase the
Company's ownership in each asset.
o In recapitalising the Midlands batch of the Priority Schools
Building Programme in which the Company held a minority senior debt
position, the Company committed to invest up to GBP12.4 million of
risk capital to replace the project's existing equity investors and
appointed a new contractor to allow the school's construction to
complete and in turn, generate stable, predictable returns in line
with the existing portfolio.
-- Selective exposure to stable, inflation-linked regulated assets
o As previously disclosed, the Company invested a further
GBP153.2 million to reach its long-term target shareholding of
7.25% of Cadent, thereby giving it access to a permanent board seat
as a platform to influence the business' long-term strategic
direction.
o The Investment Adviser continued to support Cadent's
engagement with Ofgem as part of the ongoing RIIO-2 consultation.
The further investment into Cadent during the period has
considerably enhanced the portfolio's inflation-linkage.
o Post-period end, the Company, as part of the Transmission
Capital Partners consortium, was appointed as preferred bidder for
the long-term license and operation of its eighth UK offshore
transmission project. The Company expects to invest c.GBP35-45m in
the transmission cable connection to the 400 MW Rampion Offshore
Wind Farm located 13km off the Sussex coast. The Company takes no
exposure to electricity production or price risk but is paid a
pre-agreed, availability-based revenue stream over 20 years which
is fully linked to UK inflation.
-- Continued global portfolio diversification
o The Company acquired an additional 51% shareholding in BeNEX,
the German rail business with an accretive investment of GBP29.4
million(7) . The acquisition increases the Company's ownership to
100%, following its initial acquisition in 2007.
o BeNEX provides high-quality public transport to 12 of 16
German federal states and generates government-backed cash flows
and geographic portfolio diversification for the Company, with
limited exposure to passenger volumes and fare prices.
-- Early-mover into emerging core infrastructure asset classes
o The Company continued to originate a hard-to-access pipeline
of UK digital infrastructure assets with GBP3.5 million of new
co-investment via the National Digital Infrastructure Fund
('NDIF'). This included the full fibre UK broadband provider,
toob.
o To date, the Company has invested GBP18.5 million out of the
original GBP45 million commitment to NDIF. The assets in which NDIF
invests generate long-term returns given the essential nature of
broadband connectivity they provide to the home and the
workplace.
ASSET STEWARDSHIP(8)
The Company's investments continue to deliver sustained value to
all stakeholders by supporting their public sector partners and the
wider communities in which they operate. Owing to the Investment
Adviser's active asset management approach, the Company delivered,
among other things:
-- 99.9% asset availability for those investments whose
performance is measured by availability;
-- 462 commissioned contract variations resulting in over GBP15
million of additional project work conducted on behalf of the
commissioning body;
-- Over 60,000 additional hours of asset availability dedicated to community use provided;
-- Over 3,250 permanently employed staff across social infrastructure assets;
-- Over 190,000 pupils at schools within the portfolio.
OUTLOOK
The Company's operating environment is both active and diverse.
Across the global markets in which the Company invests, policy and
regulatory environments continue to endorse long-term investment of
private capital into public infrastructure, which in turn supports
the Company's healthy pipeline. While headwinds exist for the new
nearer-term investment opportunities in the UK, the Company remains
very positive about the long-term quality and strength of the
existing portfolio in the UK. While the Company acknowledges
possible market and other issues arising from anything other than
an orderly Brexit, the Company is not unusually exposed to such
risks and does not expect there will be significant impact on the
portfolio or its assets' operation as a direct result.
Irrespective, developments are monitored closely as the withdrawal
process continues to evolve.
Michael Gerrard, Chairman of International Public Partnerships
Limited, said: "As a result of the Company's robust portfolio
performance, I am pleased to report another period of long-term,
inflation-linked returns to our shareholders. Over a third of the
Investment Adviser's employees are dedicated to asset management
and our focus in the period remained on ensuring the availability
of the assets we own. It is this differentiated approach to
portfolio development which continued to generate significant
direct and indirect value for the Company's shareholders, clients
and end-users. The global outlook for infrastructure investment
remains positive as the demand for the type of private capital we
provide grows. The quality and resilience of our portfolio,
combined with the future investment opportunities we are
well-positioned to pursue, provides me with full confidence in the
Company's future."
DIRECTORATE CHANGES
As previously announced, John Whittle will be retiring from the
Board of Directors (the 'Board') at the 2020 Annual General
Meeting. John Stares is expected to retire from the Board during
the course of 2020. Accordingly, the Board has commenced an
externally facilitated selection process to identify two new
Non-Executive Directors with suitably complementary skills and
knowledge.
http://www.rns-pdf.londonstockexchange.com/rns/4328L_1-2019-9-5.pdf
S.
INPP will be holding an analyst and investor presentation and
conference call at 9.30am on the day of announcement (6 September
2019).
For those analysts or investors who cannot attend in person, a
conference call facility will also be available by dialling +44
(0)330 336 9411 and using the confirmation code 6975335. Please
note the conference call is not open to the media or their third
party representatives.
A copy of the results presentation can be downloaded from the
Company's website:
www.internationalpublicpartnerships.com
NOTES TO EDITORS
Amber Infrastructure
Erica Sibree / Amy Joslin +44 (0)20 7939 0558 / 0587
FTI Consulting
Ed Berry / Mitch Barltrop +44 (0) 20 3727 1046 / 1039
Important Information
This announcement contains information that is inside
information for the purposes of the Market Abuse Regulation (EU)
No. 596/2014.
A copy of the Half-Yearly Report has been submitted to the
National Storage Mechanism and will shortly be available for
inspection at: http://www.morningstar.co.uk/uk/NSM.
This announcement is an advertisement. It does not constitute a
prospectus relating to the Company and does not constitute, or form
part of, any offer or invitation to sell or issue, or any
solicitation of any offer to purchase or subscribe for, any shares
in the Company in any jurisdiction nor shall it, or any part of it,
or the fact of its distribution, form the basis of, or be relied on
in connection with or act as any inducement to enter into, any
contract therefor.
Forward-looking statements are subject to risks and
uncertainties and accordingly the Company's actual future financial
results and operational performance may differ materially from the
results and performance expressed in, or implied by, the
statements. These forward-looking statements speak only as at the
date of this announcement. The Company, Amber and Numis Securities
expressly disclaim any obligation or undertaking to update or
revise any forward-looking statements contained herein to reflect
actual results or any change in the assumptions, conditions or
circumstances on which any such statements are based unless
required to do so by the Financial Services and Markets Act 2000,
the Prospectus Rules of the Financial Conduct Authority or other
applicable laws, regulations or rules.
About International Public Partnerships ('INPP'):
INPP is a listed infrastructure investment company that invests
in global public infrastructure projects and businesses, which
meets societal and environmental needs, both now, and into the
future.
INPP is a responsible, long-term investor in 130 infrastructure
projects and businesses. The portfolio consists of utility and
transmission, transport, education, health, justice and digital
infrastructure projects and businesses, in the UK, Europe,
Australia and North America. INPP seeks to provide its shareholders
with both a long-term yield and capital growth.
Amber Infrastructure Group ('Amber') is the Investment Adviser
to INPP and consists over 125 staff who are responsible for the
management of, advice on and origination of infrastructure
investments.
Visit the INPP website at
www.internationalpublicpartnerships.com for more information.
Notes
(1) For the 2018 second half year distribution paid on 10 June
2019.
2 For those investments whose performance is measured by
availability. Only applicable for projects where the Investment
Adviser provides oversight of the management services.
3 For the half-year ended 30 June 2019 unless otherwise
stated.
4 Projected increase in portfolio return for a 1.00% p.a.
increase in the inflation rate assumed in the current valuation
analysis for each asset in the portfolio.
5 Correlation (R) from Bloomberg - 12 months and 5 years to 30
June 2019.
6 Cash dividend payments to investors are paid from net
operating cash flow before non-recurring operating costs as
detailed.
7 In addition, there is a deferred commitment of GBP18.9 million
which is due to be settled from future returns generated by
BeNEX.
8 Metrics are estimates and exclude digital infrastructure, U.S.
Military Housing, Brescia Hospital, Italy and construction projects
(except Tideway). Where applicable, jobs referred to are employees
of the Company's Facilities Management subcontractors and not of
the Company or its subsidiaries.
International Public Partnerships Limited
Half-Yearly Financial Report for the six months ended 30 June
2019
Registered number: 45241
www.internationalpublicpartnerships.com
CONTENTS
HALF-YEAR FINANCIAL HIGHLIGHTS 01
COMPANY OVERVIEW 02
TOP 10 INVESTMENTS 04
CHAIRMAN'S LETTER 06
FINANCIAL AND OPERATING REVIEW
- BUSINESS MODEL 09
- PERFORMANCE AGAINST STRATEGIC PRIORITIES 11
- OPERATING REVIEW 13
ENVIRONMENTAL, SOCIAL AND GOVERNANCE30
BOARD OF DIRECTORS 36
DIRECTORS' RESPONSIBILITIES STATEMENT 38
INDEPENT REVIEW REPORT TO INTERNATIONAL PUBLIC PARTNERSHIPS LIMITED 39
FINANCIAL STATEMENTS 40
NOTES TO THE FINANCIAL STATEMENTS 44
KEY CONTACTS 59
COMPANY FACTS
- London Stock Exchange trading code: INPP.L
- Member of the FTSE 250 and FTSE All-Share indices
- GBP2.2 billion market capitalisation at 30 June 2019
- 1.485 billion shares in issue at 30 June 2019
- Eligible for ISA/PEPs and SIPPs
- Guernsey incorporated company
- International Public Partnerships (the 'Company', 'INPP', the
'Group' (where including consolidated entities)) shares are
excluded from the Financial Conduct Authority's ('FCA')
restrictions, which apply to non-mainstream investment products,
and can be recommended by independent financial advisers to their
clients
COVER IMAGE:
- Agilis depot in Germany, owned by BeNEX. Photo credit - Dirk Uhlenbrock, Hamburg
HALF-YEAR FINANCIAL Highlights
We aim to provide our investors with long-term, inflation-linked
returns, by growing our dividend and creating the potential for
capital appreciation.
We expect to achieve this through responsible investment in
public infrastructure, which meets societal and environmental needs
both now and into the future. Our investments are chosen with the
intention of creating robust and long-term cash flows.
DIVIDS
3.59p H1 2019 distribution(1) per share
7.18p 2019 full-year distribution target(2) per share
7.36p 2020 full-year distribution target(2) per share
c.2.5% Average annual dividend increase since Initial Public Offering ('IPO')(2)
1.3x H1 2019 cash dividend cover(3) (H1 2018: 1.2x)
NET ASSET VALUE ('NAV')(4)
GBP2.2bn NAV at 30 June 2019(4) (31 Dec 2018: GBP2.2bn)
1.5% Increase in NAV for the six months to 30 June 2019
150.3p NAV per share at 30 June 2019(4) (31 Dec 2018: 148.1p)
1.5% Increase in NAV per share for the six months to 30 June 2019
PORTFOLIO ACTIVITY
GBP200.5m Cash investments and commitments made during 1H
2019
PROFIT BEFORE TAX
GBP83.7 H1 2019 profit before tax (H1 2018: GBP65.9m)
REAL RETURNS
0.86% Portfolio inflation linkage(5) (31 Dec 2018: 0.82%)
TOTAL SHAREHOLDER RETURN ('TSR')
170.8% TSR since IPO(6)
8.2%p.a. Annualised TSR since IPO(6)
1 The forecast date for payment of the dividend relating to the
half-year ending 30 June 2019 is 7 November 2019.
2 Future profit projection and dividends cannot be guaranteed.
Projections are based on current estimates and may vary in
future.
3 Cash dividend payments to investors are paid from net
operating cash flow before capital activity as detailed on pages
20-21.
4 The methodology used to determine NAV is described in detail on pages 22-29.
5 Calculated by running a 'plus 1.00%' inflation sensitivity for
each investment and solving each investment's discount rate to
return the original valuation.
6 Since IPO November 2006. Source: Bloomberg. Share price plus
dividends assumed to be reinvested.
Company Overview
CONSISTENT AND GROWING RETURNS
INPP Dividend Payments
[Chart can be found in PDF version of this document on the
Company's website.]
Annualised TSR since IPO of 8.2% p.a.(1)
Since IPO, INPP has grown from GBP300m market capitalisation to
GBP2.2bn
Annual dividend growth has averaged 2.5% since IPO(2)
High degree of inflation linkage
LOW RISK, DIVERSIFIED PORTFOLIO
Sector Breakdown
Transport 21%
------------------ ----
Energy
Transmission 20%
------------------ ----
Education 18%
------------------ ----
Gas Distribution 18%
------------------ ----
Waste Water 10%
------------------ ----
Health 4%
------------------ ----
Courts 3%
------------------ ----
Military Housing 3%
------------------ ----
Other 3%
130 investments in infrastructure projects and businesses across
a variety of sectors
Geographic Split
U.K. 72%
----------- ----
Belgium 9%
----------- ----
Australia 9%
----------- ----
Germany 4%
----------- ----
U.S. 3%
----------- ----
Canada 2%
----------- ----
Ireland 1%
----------- ----
Italy <1%
Invested in selected global regions which meet INPP's specific
risk and return requirements
Investment Type
Investments with third
party senior debt 92%
--------------------------- ----
Investments with no third
party senior debt(4) 8%
Invested across the capital structure, taking into account
appropriate risks to returns
Mode of Acquisition/Asset Status
Construction 10%
-------------- ----
Operational 90%
-------------- ----
Early Stage
Investor(5) 66%
-------------- ----
Later Stage
Investor(6) 34%
Early stage investment gives first mover advantage and maximises
primary capital growth opportunities
Asset Ownership
100% 49%
--------- ----
50%-100% 6%
--------- ----
<50% 50%
Preference to hold majority positions/control or an alternative
position of influence e.g. board representation
Investment Life
<20 years 50%
--------------- ----
20 - 30 years 20%
--------------- ----
>30 years 30%
Weighted average portfolio life of 35 years(7)
1 Since IPO in November 2006. Source Bloomberg. Share price plus
dividends assumed to be reinvested.
2 Future dividends cannot be guaranteed. Projections based on
current estimates and may vary in the future.
3 There are many factors that may influence the actual
achievement of long-term cash flows to the Company. These include
both internal as well as external factors and investors should not
treat the chart above as being more than an indicative profile and
not a projection, estimate or profit forecast. The actual achieved
profile will almost certainly be different and may be higher or
lower than indicated.
4 Investments where the Company holds the Risk Capital and the
senior debt has been repaid. Risk Capital includes both project
level equity and subordinated shareholder debt.
5 'Early Stage Investor' - asset developed or originated by the
Investment Adviser or predecessor team in primary or early phase
investments.
6 'Later Stage Investor' - asset acquired from a third party
investor in the secondary market.
7 Includes non-concession entities which have potentially a
perpetual life but assumed to have finite lives for this
illustration.
International Public Partnerships invests in high-quality
infrastructure projects and businesses that are sustainable over
the long-term
Highly PREDICTABLE portfolio performance
Projected Investment Receipts(3)
[Diagram can be found in PDF version of this document on the
Company's website].
Note: This chart is not intended to provide any future profit
forecast. Cash flows shown are projections based on the current
individual asset financial models and may vary in the future. Only
investments committed as at 30 June 2019 are included.
Long-dated, predictable cash flows
Revenue streams from regulated or government-backed
counterparties
Investments focused on high-quality, OECD countries
Strong INVESTMENT stewardship
- Experienced independent Board and strong corporate governance
- We have a long-standing relationship with Amber Infrastructure
('Amber'), the Company's Investment Adviser - the Investment
Adviser has managed the Company's assets since IPO in 2006
- The Investment Adviser is a leading originator, asset and fund manager
- The Investment Adviser has one of the largest independent
teams in the sector with over 125 employees working
internationally
- The Investment Adviser has a strong track record of
originating and developing opportunities for new investment
- The Investment Adviser's active management approach to
underlying asset investments supports sustainable performance
- We aim to integrate ESG considerations throughout the investment lifecycle
- The Company has first right over qualifying infrastructure
assets developed by Amber and for U.S. investments, by its main
shareholder, U.S. Group, Hunt Companies LLC
Relationship with Amber Infrastructure (the 'Investment
Adviser')
[Diagram can be found in PDF version of this document on the
Company's website].
TOP 10 INVESTMENTS
International Public Partnerships' ('INPP's'), ('the Company's')
top 10 investments by fair value at 30 June 2019 are summarised
below. A complete listing of the Company's investments can be found
on the Company's website
(www.internationalpublicpartnerships.com).
% holding % investment % investment
Status at at fair value fair value
Name of 30 June 30 June 30 June 31 December
Investment Location Sector 2019 2019 2019 2018
------------------ ----------- ------------------ ------------------- -------------- ------------- -------------
7% Risk
Cadent U.K. Gas Distribution Operational Capital 17.7% 12.4%
------------------ ----------- ------------------ ------------------- -------------- ------------- -------------
Cadent owns four of the U.K.'s eight regional gas distribution networks
('GDNs') and in aggregate provides gas to approximately 11 million
consumers.
----------------------------------------------------------------------------------------------------------------------
16% Risk
Tideway U.K. Waste Water Under Construction Capital 9.7% 10.6%
------------------ ----------- ------------------ ------------------- -------------- ------------- -------------
Tideway is a GBP4.2 billion investment and relates to the design,
build and operation of a 25km 'super-sewer' under the River Thames.
----------------------------------------------------------------------------------------------------------------------
Diabolo Rail 100% Risk
Link Belgium Transport Operational Capital 9.0% 10.0%
------------------ ----------- ------------------ ------------------- -------------- ------------- -------------
Diabolo Rail link integrates Brussels Airport with the national rail
network allowing passengers to access high-speed trains, such as
Amsterdam-Brussels-Paris and NS Hispeed trains.
----------------------------------------------------------------------------------------------------------------------
Lincs Offshore Energy 100% Risk
Transmission U.K. Transmission Operational Capital 8.2% 9.0%
------------------ ----------- ------------------ ------------------- -------------- ------------- -------------
The project connects the 270MW Lincs offshore windfarm, located 8km
off the east coast of England, to the national grid. The transmission
cables comprise the onshore and offshore substations and under-sea
cables, 100km in length.
----------------------------------------------------------------------------------------------------------------------
100% Risk
Capital
Ormonde Offshore Energy and 100%
Transmission U.K. Transmission Operational senior debt 5.6% 6.2%
------------------ ----------- ------------------ ------------------- -------------- ------------- -------------
The project connects 132kV Ormonde offshore windfarm, located 10km
off the Cumbrian coast, to the National Grid. The transmission assets
comprise the onshore and offshore substations and under-sea cables,
41km in length.
----------------------------------------------------------------------------------------------------------------------
Reliance 33% Risk
Rail Australia Transport Operational Capital 3.9% 4.3%
------------------ ----------- ------------------ ------------------- -------------- ------------- -------------
Reliance Rail is responsible for financing, designing, manufacturing
and ongoing maintenance of 78 next-generation, electrified, 'Waratah'
train sets serving Sydney in New South Wales, Australia.
----------------------------------------------------------------------------------------------------------------------
100% Risk
BeNEX Rail Germany Transport Operational Capital 3.8% 2.0%
------------------ ----------- ------------------ ------------------- -------------- ------------- -------------
BeNEX is both a rolling stock leasing company as well as an investor
in train operating companies, providing approximately 40m kilometres
of annual rail transport.
----------------------------------------------------------------------------------------------------------------------
4% Risk
Angel Trains U.K. Transport Operational Capital 3.4% 3.5%
------------------ ----------- ------------------ ------------------- -------------- ------------- -------------
Angel Trains is a rolling stock leasing company asset base comprising
over 4,400 vehicles. Angel trains has invested over GBP5 billion
in new rolling stock and refurbishment since 1994, and is the second
largest private investor in the industry after Network Rail.
----------------------------------------------------------------------------------------------------------------------
U.S. Military Military 100% Risk
Housing(2) U.S. Housing Operational Capital 2.9% 3.1%
------------------ ----------- ------------------ ------------------- -------------- ------------- -------------
Two tranches of mezzanine debt underpinned by security over seven
operational PPP military housing projects, relating to a total of
19 operational military bases in the U.S. and comprising c.21,800
individual housing units.
----------------------------------------------------------------------------------------------------------------------
Dudgeon Offshore Energy 100% Risk
Transmission U.K. Transmission Operational Capital 2.1% 2.2%
------------------ ----------- ------------------ ------------------- -------------- ------------- -------------
The project connects the 402MW Dudgeon offshore windfarm, located
32km off the coast of Cromer in North Norfolk, to the National Grid.
The transmission asset comprises the onshore and offshore substations
and under-sea cables, 89km in length.
----------------------------------------------------------------------------------------------------------------------
1. Risk Capital includes both project level equity and subordinated shareholder debt.
2. Includes two tranches of investment into U.S. military housing.
Significant movements in the Group's portfolio for the year
ended 30 June 2019 can be found on page 13 of the Financial and
Operating Review.
Chairman's Letter
Dear Shareholders,
I am pleased to report on another successful six-month period
for the Company in which we have continued to generate high-quality
cash flows that underpin both our dividend payments and our
dividend targets for the future.
During the first half of the year, the Company's portfolio of
infrastructure projects and businesses has continued to deliver
robust operational performance. We attribute this to our long-term
focus and the active approach to asset management of our Investment
Adviser. The application of this approach over many years has
created the foundation for the delivery of strong financial returns
and, as a result, the Company's performance remains fully in line
with our expectations.
The predictable nature of the Company's long-dated investments
allows us to maintain good forward visibility of investment cash
flows. This, in turn, allows the Board to provide as much
transparency as possible concerning our future prospects, in
particular by providing two-year forward guidance of the Company's
expected dividends. Accordingly, the Board is pleased to reaffirm
its 2019 and 2020 dividend targets of 7.18 and 7.36 pence per share
respectively, and has announced a dividend of 3.59 pence per share
for the six months to 30 June 2019. This equates to a 2.6% increase
compared to the previous half-year period (30 June 2018: 3.50
pence) and is consistent with our track record of delivering an
average annual dividend increase of 2.5%.(1)
Inflation-linkage remains a cornerstone of the Company's
investment proposition. Currently, we project that a 1.00%
sustained increase in the currently assumed future inflation rate
across our portfolio would lead to a 0.86% increase in portfolio
returns.
As an infrastructure investment company, the Company invests in
what many call 'alternative assets', meaning assets that are
alternatives to more conventional investment categories such as
listed equity investment. An important consequence of this is the
historically low level of correlation between the Company's share
price and wider listed equity market indices. The correlation to
the FTSE All-Share over the five-year period to 30 June 2019 was
0.17, demonstrating the nature of the Company's shares as a genuine
alternative asset.
These and other factors have allowed us to generate a TSR of
170.8% since IPO in 2006. This is equivalent to an average
annualised TSR of 8.2%.
We continue to be optimistic about new investment opportunities
- in particular within Germany and North America, although not to
the exclusion of other jurisdictions. In the U.K., the Company
recognises the continued uncertainty of the current political
landscape, both in regard to Brexit and the emerging policies of
the Labour Party relating to the use of private capital in certain
infrastructure sectors.
The Company monitors these, and other relevant politico-economic
developments, carefully and regularly reviews ways in which such
risks that may affect portfolio performance can be mitigated, so as
to protect our shareholders' interests as far as possible. Whilst
the Company will be proactive as well as vigilant in the event that
these risks crystallise, the Company also believes that the best
counter argument to adverse political policy developments is to
continuously demonstrate, to the end-users of its assets,
governments and other key stakeholders, the value for money that
our investments deliver to the societies that they serve.
With this in mind, the Company (through the activities of its
Investment Adviser) continues to devote significant and growing
resources to evidencing its environmental, social and governance
policies and achievements.
1 Future profit projection and dividends cannot be guaranteed.
Projections are based on current estimates and may vary in
future.
ASSET STEWARDSHIP AND PORTFOLIO PERFORMANCE
Active asset management continues to govern the way in which the
Company manages its portfolio and interacts with its customers and
end-users who benefit from the services our assets provide. This
approach ensures that we are responsive to stakeholder feedback and
that the returns we generate, both social and financial, are well
understood by our stakeholders.
The Investment Adviser's role and reputation in delivering
high-quality stewardship of public infrastructure assets that
support the delivery of essential public services is fundamental to
the Company's long-term performance. This approach supported a 1.5%
increase in NAV to over GBP2.2 billion during the six months to 30
June 2019 (31 December 2018: GBP2.2 billion) or 150.3 pence per
share (31 December 2018: 148.1 pence per share). More information
is set out in the Investor Returns section of the report.
During the six months to 30 June 2019, the alignment of interest
between the Company and its public sector counterparties was again
underlined through the refinancing of the senior debt in Blackburn
Building Schools for Future ('BSF') (Phase 1). The refinancing
delivered significant financial benefit to Blackburn and Darwen
Council. The Company also completed a subsequent refinancing in
August 2019 of Ealing BSF.
We are pleased to announce that our Investment Adviser is now a
signatory to the United Nations Principles for Responsible
Investment ('UN PRI'), and we look forward to further developing
the Company's already robust approach to the integration of
environmental, social and governance ('ESG') concerns into the
Company's investment processes. Further details on our approach and
activity during the period are available on pages 30-35.
INVESTMENT ACTIVITY
The Company's globally diversified portfolio now comprises 130
projects and businesses. During the period, the Company made
value-enhancing new investments and investment commitments of
GBP200.5 million.
This included GBP153.2 million for the previously announced
acquisition of a remaining interest in Cadent, as part of a group
of leading institutional investors who make up the Quadgas
consortium (the 'Consortium'). Our additional investment delivers
long-term cash flows with low levels of volatility and a strong
degree of inflation-linkage. In aggregate, the Company now holds a
7.25% ownership interest in Cadent giving access to a permanent
board seat through which it can influence the long-term direction
of the business. This includes supporting the important work Cadent
is undertaking, as part of the current regulatory consultation, to
build greater network resilience, including through investing in
pilot programmes to examine ways in which Cadent's network can play
a leading role in the U.K.'s target to transition to a net-zero
emissions economy by 2050.
The Company also completed the acquisition of a further 51%
shareholding in BeNEX, a rolling stock leasing and operating
business in Germany, with an investment of GBP29.4 million(1) . The
Company has been a shareholder in the business since 2007 and our
additional investment will support BeNEX's ongoing role in
providing high-quality public transport to the areas of Germany
that the business services. Affordable public transport is critical
to reducing global emissions, so this investment also delivers
important environmental and social benefits. This is an example of
where the Company continues to make further investments in existing
projects and businesses, where opportunities are value
accretive.
As reported in the Company's full-year 2018 results, a small
amount of construction work remains outstanding on the Midlands
Batch Priority Schools Project (Batch 4), where the Company
originally provided senior debt to the project, and members of the
Carillion Group were previously equity sponsors. During the period,
the Company announced a recapitalisation of this project and
committed to invest up to GBP12.4 million of Risk Capital such that
it now additionally owns 92.5% of the equity in the project. This
proactive approach, which involved over 700 days' worth of
dedicated management resource time from our Investment Adviser and
notwithstanding that the assets in question represented less than
0.4% of NAV (as at 31 December 2018), demonstrates our commitment
to client service and the strength of our counterparty risk
management and asset management team. The remaining construction
and remedial works are due to complete in early 2020.
The Company continues to originate primary investment
opportunities where the skills and knowledge of the Investment
Adviser can be deployed most effectively to uncover unique,
harder-to-access assets that match our risk-return profile. As the
core infrastructure asset class continues to mature, there are
several sectors which are demonstrating the potential to offer the
future characteristics of more established utility-style businesses
in the way they are anticipated to generate long-term, predictable
cash flow with high barriers to entry. In March 2019, the Company
made an investment commitment into the full-fibre broadband
provider toob, via its commitment to the National Digital
Infrastructure Fund ('NDIF'). Digital infrastructure continues to
be a promising emerging asset class which is producing selective
investment opportunities for the Company via NDIF, and which to
date has invested GBP18.5 million of the Company's original GBP45
million commitment. Further details on investments made during the
period can be found on pages 13-16.
1 In addition, there is a deferred commitment of GBP18.9 million
which is due to be settled from future returns generated by
BeNEX.
CORPORATE GOVERNANCE
The Board seeks to maintain a direct dialogue with the Company's
shareholders and the broader investment community. Over the course
of the six months to 30 June 2019, I and other directors had the
pleasure of meeting with a number of the Company's largest
shareholders and I expect that this engagement will continue over
the remainder of the year.
The Board regularly monitors its composition and succession
plans. John Whittle has been a Board member since August 2009 and,
as previously signalled, will be retiring from the Board at the
2020 Annual General Meeting. John Stares has been a Board member
since August 2013 and is expected to retire from the Board during
the course of 2020. Accordingly, the Board has commenced an
externally facilitated selection process to identify two new
Non-Executive Directors with suitable complementary skills and
knowledge.
In accordance with the Company's Investment Policy, it is a
long-term holder of investments within its portfolio, and the Board
has a disciplined and structured approach to reviewing portfolio
performance and overall composition. This may include considering
divestment from time to time. During the period, the Board felt it
appropriate to formally set out its divestment policy and to assess
whether an investment continues to meet its investment
criteria.
As previously noted, a number of listed investment funds have
redomiciled from Guernsey to the U.K. and registered as U.K.
investment companies. The Company maintains, based on professional
advice, that whilst the Board will continue to keep this matter
under regular review, it sees no current compelling reason to
become a U.K. investment company or to otherwise change its
long-established domicile. The Board continues to monitor any
proposed legislative changes governing listed investment funds.
The Company complies with the Association of Investment
Companies Code of Corporate Governance and the U.K. Corporate
Governance Code as set out in the Corporate Governance section of
the 2018 Annual Report and financial statements.
BALANCE SHEET POSITION AND FINANCIAL RESOURCES
The Company's overall financial position remains robust. At 30
June 2019, the Company had used GBP144.7 million of the credit
available under its corporate debt facility ('CDF'), leaving
GBP255.3 million of the GBP400 million facility available. Of this,
GBP42.0 million is currently earmarked to meet existing and future
investment commitments, including to digital infrastructure via
NDIF, the Offenbach Police Headquarters in Germany and Midlands
Batch Priority Schools Project (Batch 4) - described above.
The Board has reviewed comprehensive cash flow forecasts, and
continues to believe, based on those forecasts and an assessment of
the Group's committed banking facilities and available headroom,
that it is appropriate to prepare the financial statements of the
Group on the going concern basis. Further details can be found on
page 44.
CURRENT MARKET ENVIRONMENT AND OUTLOOK
The infrastructure investment sector worldwide remains highly
active and diverse, and the pipeline for the types of assets in
which the Company invests remains strong and evolving. Moreover,
across the geographical areas in which the Company invests, the
general policy and regulatory environments continue to support
long-term investment of private capital into public infrastructure.
Notwithstanding my earlier comments about current uncertainties
within the U.K., it is encouraging to note that HM Treasury and the
Infrastructure and Projects Authority ('IPA') recently consulted on
the development of mechanisms for the continued delivery of private
capital into infrastructure investment. Our Investment Adviser
fully participated in this consultation.
The potential risks to the Company arising from Brexit continue
to be evaluated by our Investment Adviser and the Board. While we
see possible market and other issues arising from anything other
than an orderly Brexit, we do not believe that the Company is
unusually exposed to such risks, or that there will be significant
impact on the Company as a direct result of Brexit. However, this
cannot be guaranteed, and we continue to monitor developments
closely, as the withdrawal process continues to evolve.
While headwinds exist in terms of the nearer-term investment
opportunities in the U.K., we remain very positive about the
pipeline in the other jurisdictions in which the Company is active,
as highlighted earlier.
Overall, the Company remains confident in the ability of our
diversified portfolio of high-quality, well-performing assets to
continue to generate long-term, predictable cash flows with strong
inflation-linkage. Our focus and that of the Investment Adviser
remains on the completion and integration of our existing
commitments; continued development of suitable opportunities
arising from a strong and well-diversified global investment
pipeline; active and hands-on management of our existing assets;
and delivering on our commitment to achieve consistently high
levels of customer satisfaction delivered as part of our ESG
framework. It is these investment fundamentals that drive our
long-term success.
Mike Gerrard
Chairman
5 September 2019
1 Since IPO. Source: Bloomberg. Share price plus dividends assumed to be reinvested.
2 Future dividends cannot be guaranteed. Projections are based
on current estimates and many vary in the future.
BUSINESS MODEL
DELIVERING INVESTOR RETURNS
[Charts can be found in PDF version of this document on the
Company's website.]
PERFORMANCE AGAINST STRATEGIC PRIORITIES
The Company's strategy covers three interlinked areas of focus.
This three-pronged approach helps us to manage our assets and
finances throughout the investment cycle and also to identify new
opportunities that meet our investment objectives. We link Key
Performance Indicators ('KPIs') to these Strategic Priorities and
review our performance against these KPIs throughout the year. We
also assess the risks relating to each KPI (as identified in the
Risk Management section of the 2018 Annual Report and Financial
Statements).
STRATEGIC PRIORITIES DESCRIPTION
VALUE-FOCUSED PORTFOLIO DEVELOPMENT
INVEST IN ASSETS THAT ENHANCE
PORTFOLIO RETURNS RELATIVE TO * Make new investments that enhance prospects for
RISK AND MAINTAIN A WELL-BALANCED future value growth
INVESTMENT PORTFOLIO
* Make additional acquisitions off-market or through
preferential access (e.g. sourced through pre-emption
rights or via Amber/Hunt Companies LLC ('Hunt'))
* Manage portfolio composition with complementary
investments, in line with the Company's Investment
Policy and enhancing at least one of the following
aspects:
* Blend of risk to return
* Inflation-linkage
* Cash flow profile
* Capital attributes (such as construction risk and
residual value growth potential)
ACTIVE ASSET MANAGMENT
ACTIVE AND EFFECTIVE MANAGEMENT
OF ASSETS * Focus on delivery of target returns from existing
investments
* Maintain high levels of public sector client
satisfaction and asset performance
* Deliver additional value from existing assets through
management of construction risk and delivery of
operational improvements to meet client requirements
* Enhance prospects for capital growth by investing in
construction phase assets where available
* Increase long-term resilience through management of
environmental and social performance
EFFICIENT FINANCIAL MANAGEMENT
EFFICIENT MANAGEMENT OF THE
COMPANY'S FINANCES * Provide efficient management of cash holdings and
debt facilities available for investment and
appropriate hedging policies
* Efficient management of the Company's overall
finances, with the intention to reduce ongoing
charges where possible
* Manage portfolio in a cost-efficient manner
KPIs PERFORMANCE IN H1 2019
* Value of new investment * Up to GBP12.4 million commitment in Midlands Batch
Priority Schools Project (Batch 4)(1)
* 10.4% of portfolio currently under construction
* Proportion of investments in construction
* Value of additional investments acquired off-market * Acquisitions totalling GBP188.1 million secured
or through preferred access through preferential access including additional
stakes in Cadent, BeNEX, Luton and Wolverhampton BSF
projects, and further investments through NDIF
* Improvement of risk/return, inflation-linkage and * Assets acquired exhibited robust cash flow profiles
diversification of cash flows, including geographical
diversification
* Overall portfolio value inflation-linkage increased
from 0.82% to 0.86% for every 1.00% p.a. increase
over assumed inflation rates(2)
* Availability for all controlled investments at 98% or * Availability for investments at 99.9%
above - returns from investments in line with
expectations
* Performance deductions below 3% for all projects * Performance reductions of 0.38% for all projects
* Number of change requests from existing contracts
* Over 462 change requests undertaken
* Management of investments during the course of
construction projects in line with overall delivery
timetable * Majority of construction projects managed on time and
to budget. Costs of small project delays absorbed by
construction partners
* Number of investments actively managing ESG factors
* Over 94%(3) of the portfolio's total investments (by
number) have an ESG policy in place
* Dividends paid to investors covered by operating cash * Cash dividends paid to investors 1.3x times covered
flow by net operating cash flow
* New investments made from available cash (after * All investments in the year to date funded through
payment of dividend) ahead of using corporate debt excess cash in the first instance and subsequently by
utilising the CDF
* Competitive cash deposit rates
* Market benchmarked cash deposit rates
* Use of appropriate hedging strategies
* GBP64.7 million of foreign exchange forward contracts
in place to mitigate short-term foreign exchange cash
flow volatility
* Management of ongoing charges
* Ongoing charges 1.16% p.a. (H1 2018: 1.21%)
1 As at 30 June 2019, GBP5.3 million has been invested in the
Midlands Batch Priority Schools Project (Batch 4).
2 Calculated by running a 'plus 1.00%' inflation sensitivity for
each investment and solving each investment's discount rate to
return the original valuation. The inflation-linkage is the
increase in the portfolio weighted average discount rate.
3 The nature of ESG policies varies across investments,
depending on their ownership structure and services provided.
OPERATING REVIEW
VALUE-FOCUSED PORTFOLIO DEVELOPMENT
1. New investments that meet the Company's Investment Policy are
made after assessing their risk and return profile relative to the
existing portfolio. In particular, we seek investments to
complement the existing portfolio through enhancing long-term,
predictable cash flows and/or to provide the opportunity for higher
capital growth. The Board also regularly reviews the overall
composition of the portfolio to ensure it continues to remain
aligned with the Company's investment objectives. Long-term, stable
returns
2. Inflation-linked investor cash flows
3. Early stage investor (e.g. the Company is an early stage
investor in a new asset developed by the Investment Adviser)
4. Preferential access (e.g. sourced through pre-emptive rights
or through the activities of the Investment Adviser)
5. Enhanced capital attributes (e.g. potential for additional
capital growth through construction 'de-risking' or the potential
for residual/terminal value growth)
6. Broader ESG considerations
During the six months to 30 June 2019, the Company invested or
made investment commitments up to GBP200.5 million. The majority of
these opportunities were sourced by the Investment Adviser, either
from the start of the project (e.g. early stage developments in
response to an initial government procurement process); through
increasing its interest in existing assets; or as part of a larger
consortium, building on the Company's experience and credibility to
participate in multi-billion-pound regulated infrastructure
transactions. These three origination approaches are the Company's
preferred routes to market as they limit bidding in the competitive
secondary market.
Details of investment activity for the six months to 30 June
2019 are provided below.
LOCATION OPERATIONAL INVESTMENT INVESTMENT
STATUS DATE
INVESTMENTS MADE DURING THE SIX MONTHS TO 30 JUNE 2019
1 2 3 4 5 6
------------------------- ------- ------- ------- ------- ------- ------- ------------- ----------- -----------
BSF Luton U.K. ü ü ü ü Operational GBP0.2 17 January
Project million 2019
--------- ------- ------- ------- ------- ------- ------- ------------- ----------- -----------
Midlands U.K. ü ü ü ü Under GBP5.3 30 April
Batch construction million(1) 2019
Priority
Schools
Project
(Batch 4)
--------- ------- ------- ------- ------- ------- ------- ------------- ----------- -----------
BSF U.K. ü ü ü ü Operational GBP1.8 7 June
Wolverhampton million 2019
Projects
1 & 2
--------- ------- ------- ------- ------- ------- ------- ------------- ----------- -----------
Cadent U.K. ü ü ü ü ü Operational GBP153.2 28 June
million 2019
--------- ------- ------- ------- ------- ------- ------- ------------- ----------- -----------
BeNEX Germany ü ü ü ü ü ü Operational GBP29.4 28 June
million(2, 2019
3)
--------- ------- ------- ------- ------- ------- ------- ------------- ----------- -----------
NDIF U.K. ü ü ü ü Operational GBP3.5 Various
million
--------- ------- ------- ------- ------- ------- ------- ------------- ----------- -----------
GBP193.4 million
------------------------
INVESTMENT COMMITMENTS MADE DURING THE SIX MONTHS TO 30 COMMITMENT
JUNE 2019 DATE
-----------
Midlands U.K. ü ü ü ü Under GBP7.1 30 April
Batch construction million(1) 2019
Priority
Schools
Project
(Batch 4)
--------- ------- ------- ------- ------- ------- ------- ------------- ----------- -----------
1 Up to GBP12.4 million has been committed. As at 30 June 2019,
GBP5.3 million had been invested.
2 In addition, there is a deferred commitment of GBP18.9 million
which is due to be settled from future returns generated by
BeNEX.
3 GBP translated value of investment.
Further details for each of these transactions are provided
overleaf.
INVESTMENT OR INVESTMENT COMMITMENTS MADE DURING THE PERIOD
additional investment in BSF PROJECTS, U.K.
BSF is a former U.K. Government programme for the redevelopment
of secondary schools in the U.K. which used a combination of design
and build contracts and private finance type arrangements.
In January 2019, the Company acquired additional Risk Capital in
Luton BSF project, investing a further c.GBP0.2 million. As a
result, this has brought the Company's ownership level to 50%
equity and 54% subordinated debt.
In June 2019, the Company invested a further GBP1.8 million for
an additional 10% stake in Wolverhampton BSF projects 1 and 2. As a
result, the Company's investment was increased from 90% to
100%.
MIDLANDS BATCH PRIORITY SCHOOLS PROJECT (BATCH 4), U.K.
As part of a successful recapitalisation of the project, the
Company announced it will invest up to GBP12.4 million of
additional Risk Capital into the Midlands Batch Priority Schools
Project (Batch 4) such that it now owns 92.5% of the equity in the
project. The Company has been a lender to the project since March
2015, when its senior debt requirements were funded by the
Aggregator vehicle. The Aggregator was set up to combine lending
from the European Investment Bank (46%), Aviva Annuity UK Ltd (46%)
and the Company (8%) to fund five batches of new schools making up
the Priority Schools Building Programme sponsored by the Department
for Education.
Members of Carillion Group were one of the original equity
sponsors of the Midlands Batch Priority Schools Project (Batch 4),
and also provided construction and facilities management services
to it. At the time of Carillion's liquidation in January 2018, a
sports hall and some external post-completion works at five of the
eight schools in the project had not been completed.
The Company agreed, alongside the other Aggregator lenders, the
Department for Education, the IPA, and other stakeholders that it
would make the additional investment required to complete the
works, remedy defects and finance its operations. The additional
investment has been made on commercial terms and is projected to
provide returns in line with similar investments in the Company's
existing portfolio. A new construction contractor was appointed at
the same time as the additional Risk Capital was injected and
construction is now progressing towards completion.
CADENT GAS DISTRIBUTION NETWORK, U.K.
Cadent solely owns and operates four gas distribution networks
which, in aggregate, supply gas to approximately 50% of the U.K.
population, or over 11 million households and businesses. The
Consortium, of which the Company is a part, acquired a 61% interest
in Cadent in March 2017, and at the time of acquisition entered
into a put and call option to acquire an additional 14% stake of
Cadent. The Company then entered into a second put and call option
agreement in May 2018, in respect of the residual 25%
shareholding.
These options were exercised in June 2019, increasing the
Consortium's ownership to 100%. As part of this, the Company made a
further investment of GBP153.2 million which took the Company's
ownership to 7.25% and provided it with the permanent right to
appoint a board director. This was and remains the Company's
long-term target level shareholding. Cadent continues to be an
attractive asset for the Company and exhibits key characteristics
that we seek for the portfolio, including fully-inflation-linked
revenues, attractive cash yield, with no exposure to commodity
price or demand-risk, and insulated from GDP trends.
In July 2019, Cadent published their first safety and
sustainability report, demonstrating their ongoing commitment to
future-proofing the business. As one of their five key areas of
focus, Cadent continued their leadership towards a low carbon
future through testing of the networks to transport low carbon
fuels. For more detail, please see our ESG section on pages
30-35.
ADDITIONAL INVESTMENT IN BENEX, GERMANY
In June 2019, the Company acquired an additional 51%
shareholding in BeNEX from Hamburger Hochbahn AG ('HHA'),
increasing the Company's ownership from 49% to 100%. The
transaction involved the Company investing GBP29.4 million(1) , of
which part was committed as additional capital to BeNEX and the
remainder used to acquire the additional 51% shareholding. The
acquisition also included a deferred commitment which is due to be
settled through future returns generated by the project.
BeNEX both leases rolling stock and invests in train operating
companies which operate rail services under concession agreements
with German federal states. Since acquisition in 2007, BeNEX has
been a successful investment for the Company with continued
potential for growth.
DIGITAL INFRASTRUCTURE CO-INVESTMENT, U.K.
In July 2017, the Company committed jointly with HM Government
to invest in digital infrastructure and particularly the deployment
of fibre broadband connections through NDIF, a vehicle managed by
the Investment Adviser. The Company has agreed to invest up to
GBP45 million into U.K. digital infrastructure alongside HM
Government through NDIF. As part of this GBP45 million commitment,
in March 2019, the Company made an investment into toob, a new full
fibre broadband provider. The expectation is that this investment
will support the delivery of gigabit broadband speeds to more than
100,000 premises by the end of 2021. To date, GBP18.5 million of
the Company's GBP45 million commitment has been called by NDIF,
supporting NDIF's four investments.
The Company's commitment to digital infrastructure contributes
to reducing the digital divide in society and supporting U.K.
businesses, as well as playing an important role in reducing U.K.
emissions by delivering enhanced access to technology-enabled
solutions.
CURRENT MARKET ENVIRONMENT AND FUTURE OPPORTUNITIES
The Investment Adviser has an experienced team of specialists
that continue to originate and deliver investments that meet the
Company's risk-return profile. The Investment Adviser continues to
monitor opportunities and through the Investment Adviser's
specialist expertise and network we are able to access
high-quality, well-performing assets. All opportunities undergo
rigorous due diligence and are individually appraised to ensure
each investment opportunity contributes towards inflation-linkage,
yield and/or enhanced capital attributes and offers attractive
risk-adjusted returns. As part of the appraisal process, we also
consider the long-term viability of investments to ensure they are
fit for the future. As a long-term investor, the Investment Adviser
also considers ESG aspects including resilience to technology
changes, environmental impact and shifting societal expectations.
The Company's portfolio which has been carefully developed since
IPO, will continue to be enhanced by the Investment Adviser
focusing on both existing and future opportunities.
As referred to in the Chairman's Letter, the infrastructure
sector remains strong globally and there is a good pipeline for the
types of assets in which the Company invests. There continues to be
a number of drivers for new and improved infrastructure across the
geographical areas in which the Company invests, supporting the
need for private and public investment into infrastructure. For
example, the IPA have forecast that in the U.K. there is a
requirement for GBP600 billion of infrastructure investment over
the next 10 years, with contributions from both the public and
private sectors.
As discussed elsewhere, whilst the Company acknowledges that the
political landscape is somewhat uncertain, due to the emerging
policies of the U.K. opposition party to nationalise certain
infrastructure in the U.K., the Company and the Investment Adviser
believe there are practical mitigants that exist to the
implementation of these policies. While we continue to monitor
these and other portfolio risks very closely, we remain confident
about the pipeline in other jurisdictions in which the Company
operates.
The Board consistently monitors developments as Brexit
preparations progress. While we see obvious risks of possible
market and other issues arising from anything other than an orderly
Brexit, as previously outlined, we do not anticipate that the
Company is unusually exposed to such risks, or that there will
necessarily be a significant impact on the Company's existing
investments. However, this cannot be guaranteed and we continue to
monitor developments closely as the withdrawal process continues to
evolve.
1 In addition, there is a deferred commitment of GBP18.9 million
which is due to be settled from future returns generated by
BeNEX.
CURRENT PIPELINE
The Company's performance does not depend upon additional
investments to deliver projected returns. Further investment
opportunities will be judged by their anticipated contribution to
overall portfolio returns relative to risk. Selected opportunities
that may be considered for investment in due course, as identified
by the Investment Adviser, are outlined below.
KNOWN/COMMITTED LOCATION ESTIMATED INVESTMENT EXPECTED INVESTMENT INVESTMENT
OPPORTUNITIES PERIOD STATUS
NDIF U.K. GBP26.5 million(1) Operational As part of
businesses up to GBP45
million commitment
to NDIF, GBP18.5
million has
been invested
Offenbach Police Germany GBP8.4 million(2) c.30 years Investment
Headquarters commitment
made. Expected
to be funded
mid-2021
Midlands Batch U.K. GBP7.1 million c.24 years Investment
Priority Schools commitment
Project (Batch made. GBP5.3
4) million has
been invested
to date
SECTOR OF INVESTMENT LOCATION ESTIMATED CAPITAL EXPECTED INVESTMENT INVESTMENT
OPPORTUNITY VALUE(3) LENGTH STATUS
Other, including U.K., Europe c.GBP7.2 billion Various, including Regulated opportunities
regulated investments operational at varying
businesses stages of consideration
Shortlisted
on
c.GBP3.8 c.25 four
OFTO U.K. billion years OFTOs(4)
Variety
of
opportunities,
mainly
U.K., PPP-style
Europe, investments
Australia, under
Accommodation/PPP U.S. c.GBP2.4 billion Various review
Education U.K., Europe c.GBP670 million Various
Health Australia c.GBP460 million Various Opportunities
through variations
to existing
PPP contracts
and through
the Investment
Adviser's wider
relationships
U.K., Europe, Includes possible
Transport Australia c.GBP325 million Various follow-on opportunities
1 Represents the current estimate of total future investment
commitment by the Company.
2 Project has reached financial close. Commitment to invest once
construction has completed, expected to be mid-2021.
3 Includes both third-party debt and equity.
4 The Company was appointed as preferred bidder for Rampion OFTO
in August 2019, as part of the Transmission Capital Partners
consortium.
The pipeline above includes commitments and a selection of
potential opportunities currently under review by the Investment
Adviser comprising current bids, preferred bidder opportunities and
the estimated value of opportunities to acquire additional
investments including under pre-emption/first refusal rights and
future opportunities that meet the Company's investment criteria.
There is no certainty that potential opportunities will translate
to actual investments for the Company. In relation to opportunities
where the current estimated gross value of the relevant project or
business is given (which includes an estimate of both third-party
debt and equity), the estimates provided are not necessarily
indicative of the eventual acquisition price for, or the value of,
any interest that may be acquired.
ACTIVE ASSET MANAGEMENT
The active asset management approach taken by the Investment
Adviser and the Company across the portfolio is fundamental to its
long-term performance. This approach has enabled the Company to
develop a reputation of delivering transparent, responsible
stewardship of public infrastructure assets that support essential
public services.
Through the Company's Investment Adviser, we operate as an
active investor and are involved in the full investment lifecycle,
engaging with our service providers and clients, regulators, the
operating businesses and their end-users. The Company's Investment
Adviser has a global team of over 125 employees, of which c.35 are
dedicated in-house asset managers. This allows the Investment
Adviser the flexibility, resource and experience to respond quickly
to changing requirements of its clients and counterparties,
mitigate risks and identify opportunities to enhance value.
For our public-private partnership projects, the requirement to
ensure that the Company's assets are available for use and are
performing in accordance with contractual expectations is critical
for the Company and its service providers. By using contractual
requirements as a framework to deliver on its projects' expected
outcomes, the Company ensures that performance standards are met.
In addition to this, the Company works with its partners to improve
the Company's environmental and social performance through the
investment lifecycle in line with its ESG approach. Consistent with
the UN Principles for the UN PRI(1) , to which the Investment
Adviser has recently become a signatory, we consider material ESG
risks and value creation opportunities for each investment, and
actively manage assets in accordance with those ESG factors. The
Investment Adviser's knowledge of each project and business,
combined with frequent site visits, and interactions with
management and customer contacts, allows it to mitigate the risks
and ascertain the opportunities that each investment entails.
Each investment is actively managed to drive performance,
although the Investment Adviser's involvement varies depending on
each investment type. For investments where the Company does not
own 100%, we typically engage through our board director positions
and membership of management committees. Through these mechanisms,
we actively work with respective boards to establish appropriate
governance structures and practices that are focused on long-term
success.
OPERATIONAL PORTFOLIO PERFORMANCE
The Company's Investment Adviser maintains a highly experienced,
well-resourced, dedicated asset management team. This ensures a
high-level of integrated hands-on involvement across the Company's
portfolio with robust internal processes and monitoring. The
Company has a diverse exposure to service providers across its
portfolio and counterparty risk is actively managed and mitigated.
The chart below illustrates the Company's service providers (by
investment fair value), highlighting the diversification across the
portfolio.
INPP SERVICE PROVDERS
[Chart can be found in PDF version of this document on the
Company's website.]
During the year, the Company's public sector clients
commissioned over 462 contract variations in projects, resulting in
over GBP15.4 million of additional project work conducted on behalf
of the commissioning body, with individual variations ranging in
value to over GBP9.4 million. The Investment Adviser assesses each
case on its individual merits and ensures there is no material
change to the risk profile or financial return, whilst assisting
their clients to achieve their objectives. For example, due to
increased interest of public visitors at German Federal Ministry of
Education and Research ('BMBF') in Berlin, the authority requested
a new visitor entrance with enhanced security controls. The
extension works completed in Q2 2019 and the new entrance has been
operating since May 2019. The total value of the variation is
expected to exceed EUR1.5 million.
The Investment Adviser seeks to actively manage and add value to
the portfolio where it is in the best interests of its clients and
the end-user. During the period, the Company undertook a debt
refinancing of the senior debt in Blackburn BSF (Phase 1). The
refinancing delivered significant financial benefit to Blackburn
and Darwen Council, demonstrating the Investment Adviser's active
asset management approach across the portfolio. Such refinancings
generate improved financial returns which are shared with the
public sector counterparty and demonstrate an important pillar of
our active asset management and financial approach - delivering
benefits to our clients and the end-users, whilst not increasing
the charge paid by the public sector. The Company completed a
further refinancing at one of its education assets under the BSF
programme in August 2019 and expects further refinancings to
progress through 2019 (subject to market conditions remaining
favourable).
The Investment Adviser works with its public sector
counterparties to deliver ongoing value and operational savings. An
example is the ongoing efforts to identify and deliver operational
savings for North Wales Police Project, including the
responsibility for procurement and lifecycle for furniture,
fittings and equipment, change in law risk and insurance policy
payments. These initiatives are due to conclude in 2019 and are
expected to allow the authority to deliver savings of GBP280,000 in
the first year. During the period, two benchmarking exercises were
also performed across the Company's social accommodation projects,
which included reviewing facilities management services delivered
on the projects in order to assess value for money for the public
sector.
As part of our approach to ESG, we have continued to make
improvements against our five key focus areas. These areas are:
health, safety and wellbeing, commitment to protecting the
environment, supporting public sector clients, commitment to skills
and employment, and investing in the community. Further information
about our approach to ESG and our performance across these measures
is available on pages 30-35.
PROJECTS UNDER CONSTRUCTION
The Investment Adviser's asset management team have extensive
experience and possess the key skill sets needed to successfully
deliver projects through the construction and into the operational
phase. The Company has a strong track record of delivering
construction projects safely, on time, to budget and to a
high-quality by understanding the project environment and potential
risks that may occur. The team work closely with the contractors
and technical advisers throughout this stage in order to deliver
the expected project performance and create value for investors and
communities. Three projects, representing approximately 10.4% of
the Company's portfolio, were under construction at 30 June
2019.
Construction progress on Tideway continues in line with
expectations with over 40% of the project now completed and final
completion targeted for 2024, in line with the original schedule.
In April 2019, Tideway announced that their overall cost estimates
had been updated; however, the change in costs remain in line with
the Company's projections such that there will be no change to the
original estimated range of annual costs for Thames Water bill
payers and no further funding from stakeholders is required to
complete the project. The Company and Tideway remain confident that
the project will be delivered within the revised budget and to the
original schedule.
As noted in the 2018 Annual Report and financial statements, a
small amount of construction work remains outstanding on the
Midlands Batch Priority Schools Project (Batch 4). Following the
collapse of Carillion in January 2018, the project required a new
construction partner to be appointed. During the period, the
Company announced a recapitalisation of the project and committed
equity to the project (originally provided senior debt only to the
project). Construction contractors were appointed during the six
months to 30 June 2019 and the outstanding work is expected to
reach completion by early 2020. For more information, please refer
to page 14.
Construction works for Offenbach Police Headquarters continue to
proceed as scheduled and to budget. The underground car park has
been completed. In one building, the ground plate has been set, and
the structural work up to the ground floor has been completed for
two other building parts. The Company's expectation is that the
project will be delivered on schedule in 2021.
Projects under construction as at 30 June 2019 are set out in
the table below.
ASSET LOCATION CONSTRUCTION DEFECTS STATUS % OF FAIR
COMPLETION COMPLETION VALUE OF
DATE DATE INVESTMENT
Midlands Batch
Priority Schools Outstanding
Project (Batch construction
4) U.K. 2020 2020 works(1) 0.7%(2)
Tideway U.K. 2024(3) 2027(4) On schedule 9.7%
Offenbach Police
Headquarters Germany 2021 2025 On schedule 0.0%(5)
1 Construction remains outstanding on Midlands Batch Priority
Schools Project (Batch 4). These works predominately relate to the
outstanding construction of a sports hall at one school and the
external works at four other schools (within the eight schools in
the fourth batch). The construction works are scheduled to complete
in early 2020.
2 Includes Risk Capital and senior debt.
3 Scheduled handover date. Source: Tideway Annual Report 2018-2019.
4 Scheduled system acceptance date. Source: Tideway Annual Report 2018-2019.
5 The Investment Fair Value of Offenbach Police Headquarters as at 30 June 2019 was 0.02%.
EFFECTIVE FINANCIAL MANAGEMENT
The Company aims to manage its finances efficiently by
minimising its unutilised cash holdings, while maintaining the
financial flexibility to pursue new investment opportunities. This
is achieved through active monitoring of cash held and generated
from operations, appropriate hedging strategies, and prudent use of
the Company's CDF.
SUMMARY OF CASH FLOWS
SUMMARY OF CONSOLIDATED SIX MONTHS SIX MONTHS YEAR TO 31
CASH FLOW TO 3O JUNE TO 30 JUNE DECEMBER 2018
2019 2018 GBP MILLION
GBP MILLION GBP MILLION
Opening cash balance 84.7 33.9 33.9
Cash from investments 77.9 71.7 138.8
Corporate costs (for ongoing
charges ratio) (12.8) (12.4) (24.5)
Other corporate costs (0.1) (0.2) (0.1)
Net financing costs (1.3) (1.5) (3.2)
Net operating cash flows
before capital activity(1) 63.7 57.6 111.0
Cost of new investments (193.4) (10.5) (63.3)
Investment transaction costs - (0.3) (1.2)
Net movement of CDF 143.3 7.0 (17.8)
Proceeds of capital raisings
(net of costs) - - 114.9
Distributions paid (50.5) (47.9) (92.8)
Net cash at period end 47.8 39.8 84.7
Cash dividend cover 1.3x 1.2x 1.2x
1 Net operating cash flows before capital activity as disclosed
above of c.GBP63.7 million (30 June 2018: c.GBP57.6 million)
include net repayments from investments at fair value through
profit and loss of c.GBP19.5 million (30 June 2018: c.GBP21.5
million), and finance costs paid of c.GBP1.3 million (30 June 2018:
c.GBP1.5 million) and exclude investment transaction costs of
GBPnil (30 June 2018: c.GBP0.3 million) when compared to net cash
inflows from operations of c.GBP45.5 million (30 June 2018:
c.GBP37.4 million) as disclosed in the statutory cash flow
statement on page 43 of the financial statements.
CASH FLOWS ASSOCIATED WITH ONGOING CHARGES RATIO
CORPORATE COSTS SIX MONTHS TO 30 SIX MONTHS TO 30 YEAR TO 31 DECEMBER
JUNE 2019 GBP MILLION JUNE 2018 GBP MILLION 2018
GBP MILLION
--------------------- ----------------------- ----------------------- -------------------
Management fees (11.6) (11.4) (22.7)
Audit fees (0.2) (0.2) (0.3)
Directors' fees (0.2) (0.2) (0.4)
Other running costs (0.8) (0.6) (1.1)
Corporate costs (12.8) (12.4) (24.5)
--------------------- ----------------------- ----------------------- -------------------
ONGOING CHARGES SIX MONTHS TO 30 SIX MONTHS TO 30 YEAR TO 31 DECEMBER
RATIO JUNE 2019 GBP MILLION JUNE 2018 GBP MILLION 2018
GBP MILLION
-------------------- ----------------------- ----------------------- -------------------
Annualised Ongoing
Charges(1) (25.6) (24.8) (24.5)
Average NAV(2) 2,215.4 2,047.3 2,097.8
Ongoing Charges (1.16%) (1.21%) (1.17%)
-------------------- ----------------------- ----------------------- -------------------
1 The Ongoing Charges ratio was prepared in accordance with the
Association of Investment Companies' ('AIC') recommended
methodology, noting this excludes non-recurring costs.
2 Average of published NAVs for the relevant period.
The Company's cash balance at 30 June 2019 was GBP47.8 million
(December 2018: GBP84.7 million). The decrease in the cash balance
in the period was primarily a result of the GBP42.2 million of
capital raise proceeds remaining at the start of the year being
used in the period to fund new investments.
Cash receipts from investments in the period increased by GBP6.2
million compared to the previous half-year period, to GBP77.9
million (H1 2018: GBP71.7 million), reflecting the further growth
and maturity of the portfolio. Corporate costs overall have
increased as expected, driven by NAV growth, and include management
fees of GBP11.6 million for the six months to 30 June 2019 (H1
2018: GBP11.4 million). Net financing costs were GBP1.3 million
during the period, a slight decrease of GBP0.2 million compared to
June 2018 (H1 2018: GBP1.5 million) reflecting the varying level of
utilisation of the Company's CDF during the two corresponding
periods. Other corporate costs during the period were negligible
(H1 2018: GBP0.2 million).
During the six months to 30 June 2019, GBP193.4 million of new
investments were made (H1 2018: GBP10.5 million), and these are
further detailed in note 10 of the financial statements, as well as
on pages 13-16 of the Operating Review. Associated investment
transaction costs were mainly accrued as payable balances at 30
June 2019, with minimal transaction costs paid during the period
(H1 2018: GBP0.3 million).
The Company has a GBP400 million CDF (available until July 2021)
and as at 30 June 2019, the facility was GBP143.3 million cash
drawn (December 2018: nil cash drawn) to help fund new investments
made in the period. The Company continues to use the facility for
short-term funding, rather than for long-term financing.
Cash dividends paid in the period of GBP50.5 million (H1 2018:
GBP47.9 million) were in respect of the six months to 31 December
2018. The Company seeks to generate dividends paid to investors
through its operating cash flows, and cash dividends paid were 1.3
times covered by the Company's net operating cash flows before
capital activity in the period.
INVESTOR RETURNS
The Company has continued to deliver consistent dividend growth,
NAV growth and inflation-linkage from underlying cash flows.
DIVID GROWTH AND PERFORMANCE
The Company targets predictable and, where possible, growing
dividends. During the period, the Company paid a dividend of 3.50
pence per share relating to the six months ended 31 December 2018.
This brought the total dividends paid in respect of 2018 to 7.00
pence per share. As illustrated in the chart on page 2, the Company
has delivered a c.2.5% average annual dividend increase since IPO.
The Company forecasts to pay 7.18 pence and 7.36 pence per share in
respect of 2019 and 2020 respectively.
Total investment income in the period was GBP99.6 million (H1
2018: GBP79.5 million) including fair value movements, dividends
and interest. These returns were partially offset by operating
expenses (including finance costs) of GBP16.7 million (H1 2018:
GBP14.2 million), as shown in the Consolidated Statement of
Comprehensive Income on page 40.
Profit before tax was GBP83.7 million, an increase in comparison
to the same period in 2018 (H1 2018: GBP65.9 million) due to
increased investment income as a result of the growing portfolio as
well as the impact of fair value movements. Earnings per share were
5.64 pence (H1 2018: 4.70 pence).
TOTAL SHAREHOLDER RETURN
The Company's TSR (share price growth plus reinvested dividends)
since IPO in November 2006 to 30 June 2019 was 170.8% (8.2% on an
annualised basis). This compares to a FTSE All-Share index total
return over the same period of 101.5% (5.7% on an annualised
basis). As shown in the share price performance graph below, the
Company has historically exhibited relatively low levels of
volatility compared to the market. This is a continuing trend as
demonstrated by the correlation of 0.18 and 0.17 with the FTSE
All-Share index over the 12 months and five years to 30 June 2019
respectively.
The Company's Share Price Performance
[Chart can be found in PDF version of this document on the
Company's website.]
INFLATION LINKED CASH FLOWS
In an environment where investors are increasingly focused on
achieving long-term real rates of return on their investments,
inflation protection is an important consideration for the Company.
At 30 June 2019, the majority of assets in the portfolio had some
degree of inflation-linkage and, in aggregate, the weighted average
return of the portfolio (before fund-level costs) would be expected
to increase by 0.86% per annum in response to a 1.00% per annum
increase in the currently assumed inflation rates across the whole
portfolio(1) .
1 Calculated by running a 'plus 1.00%' inflation sensitivity for
each investment and solving each investment's discount rate to
return the original valuation. The inflation-linkage is the
increase in the portfolio weighted average discount rate.
VALUATIONS
NET ASSET VALUATION
The Company reported a 1.5% increase in NAV from GBP2,198.7
million at 31 December 2018 to GBP2,232.0 million at 30 June 2019.
Over the same period, the NAV per share also increased by 1.5%,
from 148.1 pence to 150.3 pence.
The NAV represents the fair value of the Company's investments
plus the value of other net assets or liabilities held within the
Group. The key drivers of the change to the NAV between 31 December
2018 and 30 June 2019 are described in more detail below.
NAV Movements (GBPm)
[Chart can be found in PDF version of this document on the
Company's website.]
The movements seen in the chart above are explained further
below:
- During the six months to 30 June 2019, government bond yields
decreased in all jurisdictions in which the Company is invested,
resulting in a positive impact on the NAV;
- This was broadly offset by an increase in the investment risk
premia which reflects the limited availability of recent
market-based evidence suggesting a change of pricing for
infrastructure investments;
- Sterling weakened against the Australian, Canadian and the
U.S. dollar, but strengthened against the euro. The net impact was
positive on the NAV, with the most significant impact seen on the
Company's Australian investments;
- Two adjustments were made to the macroeconomic assumptions,
including: (i) an increase in the deposit rate assumption used for
the Company's Canadian investments and (ii) a one-year delay in the
step-up to the long-term deposit rate assumptions used for all of
the Company's investments. These changes resulted in a small
negative impact on the NAV;
- In line with forward guidance provided previously, a cash
dividend totalling GBP50.5 million was paid to the Company's
shareholders during the six months to 30 June 2019. This dividend
was made in respect of the six months ended 31 December 2018;
- Among other things, the NAV Return of GBP73.7 million captures the impact of the following:
o The movement in the valuation date from 31 December 2018 to 30
June 2019 and the receipt of forecast distributions;
o The value generated by the investments made during the
period;
o Updated operating assumptions to reflect current expectations
of forecast cash flows;
o Actual distributions received above the forecast amount due to
active management of the Company's portfolio, including negotiating
and optimising investment cash flows; and
o Movements in the Company's working capital position.
INVESTMENTS AT FAIR VALUE
The valuation of the Company's investment portfolio is
determined by the Board, with the benefit of advice from the
Investment Adviser, and is reviewed by the Company's auditors. It
is considered quarterly for approval by the Company's Directors.
Investments at fair value as at 30 June 2019 were GBP2,311.9
million, an increase of 10.2% compared to 31 December 2018
(GBP2,097.5 million).
Investments at Fair Value Movements
[Chart can be found in PDF version of this document on the
Company's website.]
The movements seen in the chart above are explained further
below:
- An increase of GBP193.4 million owing to new investments made during the period;
- A decrease of GBP77.9 million due to investment distributions
paid out from the portfolio during the period;
- The Rebased Investments at Fair Value is presented in order to
allow an assessment of the Portfolio Return assuming that the
investments and distributions occurred at the start of the relevant
period;
- The Portfolio Return of GBP89.6 million captures broadly the
same items as the NAV Return (set out in detail on page 23) with
the principal exception being the fund-level operating costs;
- There was a small reduction in the discount rates used by the
Company to value its investments. The component parts of the GBP6.4
million impact shown above can be seen in the NAV movements chart
on page 23;
- Two adjustments were made to the macroeconomic assumptions,
including: (i) an increase in the deposit rate assumption used for
the Company's Canadian investments to reflect recent market
long-term interest rate forecasts and (ii) a one-year delay in the
step-up to the long-term deposit rate assumptions used for all of
the Company's investments to reflect the prevailing low interest
rate environment across all our investment jurisdictions. These
changes resulted in a GBP2.6 million negative impact on the
Investments at Fair Value; and
- Sterling weakened against the Australian, Canadian and the
U.S. dollar, but strengthened against the euro. The net impact was
a positive GBP5.5 million, with the most significant impact seen on
the Company's Australian investments.
Projected cash flows
The Company's investments are expected to continue to exhibit
predictable cash flows, owing to the principally contracted or
regulated nature of the underlying cash flows. As the Company has a
large degree of visibility over the forecast cash flows of its
current investments, the chart below sets out the Company's
forecast investment receipts from its current portfolio before
fund-level costs.
The majority of the forecast investment receipts are in the form
of dividends or interest and principal payments from subordinated
and senior debt investments. The Company's portfolio comprises both
investments with finite lives (determined by concession or licence
terms) and perpetual investments that may be held for a much longer
term. Over the term of investments with finite lives, the Company's
receipts from these investments effectively represent a return of
capital as well as income, and the fair value of such investments
is expected to reduce to zero over time.
Projected Investment Receipts
[Chart can be found in PDF version of this document on the
Company's website.]
MACROECONOMIC ASSUMPTIONS
The Company reviews the macroeconomic assumptions underlying its
forecasts on a regular basis. Following a thorough market
assessment, it was resolved that certain adjustments should be
made, including to the deposit rates and foreign exchange rates
used to value the Company's overseas investments.
The key macroeconomic assumptions used as the basis for deriving
the Company's portfolio valuation are summarised below, with
further details provided in note 9 of the financial statements.
MACROECONOMIC ASSUMPTIONS 30 JUNE 2019 31 DECEMBER 2018
Inflation Rates U.K. 2.75% RPI/2.00% 2.75% RPI/2.00%
CPIH CPIH
Australia 2.50% 2.50%
Europe 2.00% 2.00%
Canada 2.00% 2.00%
U.S.(1) N/A N/A
Long-term Deposit Rates(2) U.K. 2.00% 2.00%
Australia 3.00% 3.00%
Europe 2.00% 2.00%
Canada 2.50% 2.00%
U.S.(1) N/A N/A
Foreign Exchange Rates(3) GBP/AUD 1.84 1.88
GBP/EUR 1.06 1.05
GBP/CAD 1.71 1.80
GBP/USD 1.32 1.34
Tax Rates(4) U.K. 17.00%-19.00% 17.00%-19.00%
Australia 30.00% 30.00%
Europe Various (12.50%-29.58%) Various (12.50%-29.58%)
Canada Various (26.50%-27.00%) Various (26.50%-27.00%)
U.S.(1) N/A N/A
1 The Company's U.S. investment is in the form of subordinated
debt and therefore not directly impacted by inflation, deposit and
tax rate assumptions.
2 The portfolio valuation assumes actual current deposit rates
are maintained until 31 December 2020 before adjusting to the
long-term rates noted in the table above.
3 The Company uses the four-year forward curve and maintains the
four-year forward rate for the longer-term.
4 Tax rates reflect rates substantively enacted or enacted as at the valuation date.
DISCOUNT RATES
The discount rate used to value each investment comprises the
appropriate long-term government bond yield plus an
investment-specific risk premium which considers the perceived
risks and opportunities associated with each investment.
The majority of the Company's portfolio (92.4%) comprises Risk
Capital investments, while the remaining portfolio (7.6%) comprises
senior debt investments. To provide investors with a greater level
of transparency, the Company publishes both a Risk Capital weighted
average discount rate and a portfolio weighted average discount
rate, the latter of which captures the discount rates of all
investments including the senior debt interests.
The weighted average discount rates are presented in the table
overleaf. These rates need to be considered against the assumptions
and projections upon which the Company's forecast cash flows are
based.
30 JUNE 31 DECEMBER MOVEMENT
2019 2018
Weighted Average Government Bond
Yield - Portfolio 1.51% 1.83% (0.32%)
Weighted Average Investment Premium
over Government Bond Yield -
Portfolio 5.82% 5.43% 0.39%
Weighted Average Discount Rate
- Portfolio 7.33% 7.26% 0.07%
Weighted Average Discount Rate
- Risk Capital only 7.62% 7.55% 0.07%
NAV per share 150.3p 148.1p 2.2p
The Company is aware that there are subtle differences in
approach to the valuation of investments among different listed
infrastructure funds similar to the Company. In the Company's view,
comparisons of average discount rates between different listed
infrastructure funds are only meaningful if there is a comparable
level of confidence in the quality of forecast cash flows (i.e.
assumptions are homogenous); the risk and return characteristics of
different investment portfolios are understood; and allowance is
made for differences in the quality of asset management employed to
manage risk and deliver returns. Any focus on average discount
rates without an assessment of these and other factors would be
incomplete and could therefore derive misleading conclusions.
VALUATION SENSITIVITIES
This section indicates the sensitivity of the 30 June 2019 NAV
per share of 150.3 pence to changes in key assumptions. Further
details can be found in note 9 of the financial statements. This
analysis is provided as an indication of the potential impact of
these assumptions on the NAV per share on the basis that they apply
uniformly across the portfolio, whereas in practice the impact is
unlikely to be uniform. The movement in each assumption could be
higher or lower than presented. Further, forecasting the impact of
these assumptions on the NAV in isolation cannot be relied on as an
accurate guide to the future performance of the Company as many
other factors and variables will combine to determine what actual
future returns are available. These sensitivities should therefore
be used only for general guidance and not as an accurate prediction
of outcomes.
ESTIMATED IMPACT OF CHANGES IN KEY MACROECONOMIC VARIABLES TO 30
JUNE 2019 BASED ON NAV OF 150.3P PER SHARE
[Chart can be found in PDF version of this document on the
Company's website.]
DISCOUNT RATES
The chart above indicates the sensitivity of the NAV per share
to uniform changes to the discount rates applied to the forecast
cash flows from each individual investment.
INFLATION
The impact of inflation on the value of each investment depends
upon the extent to which the revenues and costs, including the
financing arrangements, of that particular investment are linked to
an inflation index. On a portfolio basis, there is a positive
correlation to inflation with a 1.00% sustained increase in the
assumed inflation rate projected to generate a 0.86% increase in
portfolio returns. The returns generated by the Company's U.K.
investments are typically linked to the Retail Price Index ('RPI'),
whereas the Company's non-U.K. investments are typically linked to
the relevant Consumer Price Index ('CPI') for that jurisdiction.
Further to recent announcements by the regulators, the revenues
earned by Cadent and Tideway will be linked to the CPIH (CPI
including owner occupied housing costs) from 2021 and 2030
respectively. The regulators have stated that this is not designed
to negatively impact companies but rather to reflect the perceived
shortcomings of the RPI (i.e. the regulators' intention is for the
transition from RPI to CPIH to be valuation neutral). The inflation
sensitivities by geographical region are provided in note 9.5 of
the financial statements.
FOREIGN EXCHANGE
The Company has a geographically diverse portfolio and forecast
cash flows from investments are subject to foreign exchange rate
risk in relation to euros, Australian dollars, Canadian dollars and
U.S. dollars. The Company seeks to mitigate the impact of foreign
exchange rate changes on near-term cash flows by entering into
forward contracts, but the Company does not hedge exposure to
foreign exchange rate risk on long-term cash flows. The impact of a
10% increase or decrease in these rates is provided for
illustration.
DEPOSIT RATES
The long-term weighted average deposit rate assumption across
the portfolio is 1.88% per annum. While operating cash balances
tend to be low given the structured nature of the investments,
project finance structures typically include reserve accounts to
mitigate certain costs and therefore variations to deposit rates
may impact valuations. The impact of a 1.00% increase or decrease
in these rates is provided for illustration.
TAX RATES
Post-tax investment cash inflows are impacted by tax rates
across all relevant jurisdictions. The impact of a 1.00% increase
or decrease in these rates is provided for illustration. Other
potential tax changes are not covered by this scenario.
LIFECYCLE SP
There is a process of renewal required to keep physical assets
fit for use and at the standard required of them under agreements
with relevant public sector counterparties. The proportion of total
cost that represents this 'lifecycle spend' will depend on the
nature of the asset. To enhance the certainty around cash flows,
and excluding the Company's regulated investments, around 80% of
the Company's assets (by value) are currently structured such that
lifecycle cost risk is taken by a sub-contractor for a fixed price
(isolating equity investors from such downside risk). As a result,
the impact of changes to the forecast lifecycle costs is relatively
small.
Regulated assets, such as Tideway and Cadent, are treated
differently due to the protections offered by the regulatory
regimes under which they operate. Regulated assets have their
revenues determined for a known regulatory period and each
settlement includes revenue sufficient to allow the owner to
undertake the efficient lifecycle management of its assets due in
that regulatory period. It is common practice to employ reputable
sub-contractors to undertake lifecycle work under contracts which
include incentive and penalty regimes aligned with the businesses
own regulatory targets. This approach ensures an alignment of
interest and helps to mitigate the risk of increased lifecycle
costs falling on the equity investor.
PRINCIPAL RISKS AND UNCERTAINTIES
The Board seeks to mitigate and manage risks relating to the
Group through continual review, policy setting and enforcement of
contractual obligations. It also regularly monitors the investment
environment and the management of the Group's portfolio.
The Group's approach to risk is set out in the Risk Report in
the 2018 Annual Report and financial statements (pages 40- 49), the
Risk Report includes an overview of the principal risks and their
mitigation. Risk factors are also detailed further in the Company's
last Prospectus (the Placing, Open Offer and Offer for Subscription
and Placing Programme Prospectus published on 12 April 2017). These
risks and uncertainties are expected to remain relevant to the
Group for the next six months of its financial year and include
(but are not limited to):
- Inflation risk - revenues and expenditures of project entities
with respect to infrastructure assets are generally partially or
wholly subject to indexation and an assumption is made regarding
the long-term average inflation rate. The Group's ability to meet
targets may be adversely or positively impacted by inflation
- Foreign exchange risk - the Group has exposure to foreign
currencies and therefore exposure to exchange rate fluctuations
- Credit and counterparty risks - the risk that a counterparty
will default on its contractual obligations resulting in financial
loss to the Group
- Liquidity risk - the ability to successfully access suitable
financial resources in the debt, equity and related financial
markets
- Contract risk - the ability of counterparties to operate
contracts to the detriment of the Group and the risk of default
under contract whether by the Group, its subsidiaries or their
counterparties
- Other external risks - includes political and regulatory risks
(including tax and accounting policies and practices) associated
with the Group and its projects; IT and cyber risks; and changes in
the competitive environment which may have an adverse impact on the
Group
The Board considers and reviews, on a regular basis, the risks
to which the Group is exposed.
By order of the Board
Mike Gerrard John Le Poidevin
Chairman Director
5 September 2019 5 September 2019
ENVIRONMENTAL, SOCIAL AND GOVERNANCE
STRONG PROJECT STEWARDSHIP
OUR APPROACH
Consideration of ESG drivers is an important part of how the
Company assesses the long-term viability of investments that it
makes. ESG drivers are non-financial factors that can influence,
and be influenced by our business activities and include issues
such as climate change, demography, resources, technology and
social values.
Consideration of ESG is important to the Company for the
following key reasons:
-- ESG drivers present an opportunity for new markets and investments. In response to evolving environmental and social challenges, there are increasing numbers of businesses, regulatory regimes and technologies being developed to help solve significant environmental and social challenges. For example, climate change has led the U.K. to be a leader in offshore wind production, which in turn led to the OFTO regulatory regime. Recognising this emerging trend, the Company was able to position itself strategically to capitalise on this trend and is now a leader in this market.
-- Incorporating ESG into the Company's management processes
supports its high standards of financial rigour and requirements
for long-term financial performance. The Company firmly believes
that a foundation of sound governance combined with positive
management of environmental and social factors will improve
whole-life performance of the investments it develops and
manages.
-- By investing in infrastructure and associated businesses, the
Company can meaningfully support sustainable development. The
infrastructure that the Company invests in determines how healthy
and productive communities can be, both now and in the future. For
example, by investing in public transport systems, local
communities can choose to use a healthy, clean way of commuting to
work or for leisure.
For these reasons, the Company incorporates ESG across the
investment lifecycle, both before and after investment. This
includes undertaking ESG screening and due diligence before making
an investment, and the integration of ESG requirements for
stewardship and monitoring of investments.
As part of the Company's evolving approach to ESG, the
Investment Adviser became a signatory to the UN PRI1 in 2019, UNPRI
is one of the world's leading proponents of responsible investment.
The Investment Adviser decided to become a signatory to the UN PRI,
as it will allow the Company to benchmark its ESG processes,
improve performance, and provide its investors with the comfort
that that the Company is in line with international best
practice.
Further to becoming a signatory to the UN PRI, the Investment
Adviser is increasingly focusing on driving action against the UN
Sustainable Development Goals ('UNSDGs'). This will guide action
across the Company as our approach to ESG develops and will
continue to help improve its approach to the communities that the
Company serves.
The Company's performance against the five key areas of impact
is summarised below.
[Chart can be found in the PDF version of this report on the
Company's website.]
1 https://www.unpri.org/
HEALTH, SAFETY & WELLBEING
Highlights(1)
-- 100% of investments are influenced by a Health, Safety and Wellbeing Policy in place
-- 88% of investments have at least partial access to greenspace
-- 83% of investments have provision to support active transport
Relevance to INPP
Health, Safety and Wellbeing are of paramount importance to the
Company. Infrastructure projects inherently involve health and
safety risk from construction through to operation. The health and
safety of the Company's end-users, delivery partners, employees and
members of the public who come into contact with our assets are of
the upmost importance to the Company, and we accordingly adopt the
highest priority to health and safety by adopting a zero-tolerance
approach to accidents and near-misses.
The agenda of public health, both physical and mental, continues
to grow in importance within the communities that the Company
serves and is receiving increased attention from government. For
example, advice published by the National Institute for Health and
Care Excellence estimates that physical inactivity is costing
businesses around GBP126,000 every year per 1,000 employees2.
Living and working environments are key determinants of how
healthy society can be and can impact the economic performance of
businesses and academic performance of our education institutions.
With statistics suggesting that the general public spends around
90% of its time indoors, it is unsurprising that factors such as
good air quality, comfortable ambient temperatures and lighting are
becoming increasingly important quality indicators for
high-performing buildings3.
This is directly relevant to the Company's performance and is an
important part of supporting its public sector clients over the
long-term.
Performance
Safety
The Company undertakes a proactive approach to ensuring that all
parties are aware of their health and safety obligations, which is
monitored through quarterly reporting.
In 2019, 100%(1) of the Company's assets continue to be covered
by a Health and Safety Policy, with several of our investments
taking a leading role in pushing the safety agenda forward. For
instance, Tideway's award-winning safety regime, Employers Project
Induction Centre ('EPIC'), trained an additional 3,300 staff and
contractors in 2018/2019(4) .
Physical health
Active transport includes non-motorised forms of transport
involving physical activity, such as walking and cycling. Biking or
walking to work has been associated with lower rates of diabetes,
hypertension, overweight and obesity(5) . By providing amenities
and facilities on-site, the Company can support the ability of
occupants to engage in active commuting(6) . In 2019, the Company
identified that 83%(1) of its investments provided equipment to
support active transport at site level, including bike racks and
showers.
Mental health
In 2019, Tideway continued to focus on mental health and there
are now more than 160 trained mental health first aiders at all
levels throughout the workforce(4) . This is extremely important,
considering the mental health challenges within the construction
sector(7) .
1 Metrics are estimates and exclude digital infrastructure
investments, U.S. Military Housing, Brescia Hospital and
construction projects (except Tideway).
2 https://www.nice.org.uk/guidance/ng13
3 https://www.wellcertified.com/certification/v1/
4 https://www.tideway.london/media/3326/tideway-ar18-19_d_full_web.pdf
5
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/256796/Briefing_Obesity_and_active_travel_final.pdf
6 https://standard.wellcertified.com/fitness/active-transportation-support
7
https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/deaths/articles/suicidebyoccupation/england2011to2015#main-points
COMMITMENT TO PROTECTING THE ENVIRONMENT
Highlights
-- 1.5GW offshore wind energy transported
-- 92%(1) of investments monitor their asset's energy usage
-- 92%(1) of investments have an Environmental Management System
Relevance to INPP
Environmental issues present both risk and opportunity for the
Company. By reducing the portfolio's impact on climate change,
improving air quality, and restoring biodiversity the Company can
help improve the health and wellbeing of its end-users and support
its main stakeholders delivering their key objectives.
The recent heatwave throughout Europe serves as another reminder
of the scale of the climate change challenge. In July, a widespread
and intense heatwave impacted Europe, with many new maximum
temperature records, disruption to transport and infrastructure and
stress on people's health and the environment. For instance,
Belgium, Germany, Luxembourg and the Netherlands saw new national
temperature records, as temperatures passed the 40degC mark at the
peak of the heatwave on 25 July.
With climate change continuing to rise, public consciousness and
the seriousness of the threat is becoming better understood and
governments are responding. In June, the U.K. became the first
country to pass net-zero emissions legislation, closely followed by
Sweden in July(2, 3) . Despite this increased action on mitigating
the impact of climate change, it is widely accepted that there will
be a degree of unavoidable climate change. The Company recognises
the need to understand how this risk might affect our
investments.
By staying informed of physical and political changes being
driven by climate change, the Company can support its stakeholders,
adapt to changing weather patterns and identify new areas for
potential investment.
Performance
Climate change
During 2018, the Company identified that 92% of its investments
monitored their energy usage(1) . In addition, 55% of the Company's
portfolio implemented energy saving initiatives(3) , increasing
from 34% last year.
Reflecting the importance of climate action, the Company has
been actively engaging with its investments, with the following
highlights so far in 2019:
In 2019, Cadent continued to explore how they can play a leading
role in transitioning the U.K. to a zero-carbon economy by
announcing practical trials of introducing hydrogen into the
network through the ground-breaking HyDeploy project(4) . HyDeploy
is an energy trial to establish the potential for blending
hydrogen, up to 20%, into the normal gas supply to reduce carbon
dioxide (CO2) emissions.
A year-long live trial of blended gas will take place on part of
the Keele gas network from summer 2019(4) . The results of this
trial will be used to inform feasibility of widespread use of
hydrogen on the network, which could lead to savings of around six
million tonnes of CO2 emissions every year, the equivalent of
taking 2.5 million cars off the road5.
Air quality
Angel Trains are working with their partners to develop reduced
pollution, lower carbon solutions for existing rolling stock.
Alongside Chiltern Railway, Angel Trains are working on technology
that would convert diesel trains to the U.K.'s first retrofitted
electric hybrids. The improved efficiency will cut pollution and
fuel use by around 25% without the cost and disruption of
installing overhead wires(6) .
Resource efficiency
In support of increasing resource efficiency, the Company
continues to monitor how many of its investments are actively
considering waste production and disposal. In 2019, 38%(3) of the
Company's investments monitored waste at the site level, which the
Company is looking to improve.
In 2018/2019 Cadent sent only 14% of their waste to landfill,
continuing their progress towards their goal of zero waste to
landfill by 2021/22(7) .
Biodiversity
In 2019 Tideway continued their association with the Zoological
Society of London ('ZSL') and biodiversity research. ZSL commenced
survey work on a study to improve understanding of how smelt fish
use the estuary as a breeding ground. Further survey work will be
undertaken in 2020 and the results published later that year(8)
.
1 Metrics are estimates and exclude digital infrastructure
investments, U.S. Military Housing, Brescia Hospital and
construction projects (except Tideway).
2
https://www.theccc.org.uk/publication/net-zero-the-uks-contribution-to-stopping-global-warming/
3
https://www.gov.uk/government/news/uk-becomes-first-major-economy-to-pass-net-zero-emissions-law
4 https://hydeploy.co.uk/keele/
5 https://hynet.co.uk/customers/
6 https://www.ft.com/content/4f7d9fd8-ba98-11e8-8274-55b72926558f
7 https://cadentgas.com/news-media/news/july-2019/safety-sustainability-report-published
8 https://www.tideway.london/media/3326/tideway-ar18-19_d_full_web.pdf
SUPPORTING PUBLIC-SECTOR CLIENTS
Highlights
-- >190,000(1) number of pupils at schools within the portfolio
-- 79%(1) Ofsted rating of 'Good' or above
-- 1,497(2) management meeting hours with public sector
Relevance to INPP
The provision of essential services to the Company's public
sector clients is a core component of their success and that of the
regions and societies in which it operates. The Company's
investments provide the capital required by the public sector to
deliver the vital infrastructure and services they need for local
communities to thrive.
By working in partnership with the Company's public sector
clients, the Company not only delivers services for which it is
contracted, but also provide job creation, place making and
economic development. The ability to work with the Company's
partners for the benefit of the local community that each project
serves is fundamental to the ongoing success of each
investment.
Performance
Partnerships
Stakeholder engagement is a key part of supporting our public
sector clients and the Company's 'hands-on' approach facilitates a
strong collaborative relationship that generates mutual benefits.
The Investment Adviser maintains these relationships by holding
regular meetings and engaging with the Company's public sector
clients, with over 1,400 hours2 of face-to-face meetings during the
first half of 2019.
For example, in 2019, the Investment Adviser has been working
with Maesteg School, the local authority and facilities management
company to identify ways in which the passive and active
supervision of students can be improved, with the intention of
reducing the instances of vandalism and reducing the wear and tear
on the building. Works identified, which will be carried out as
school funded enhancements to lifecycle works over summer 2019,
include enhancements to the CCTV system and remodelling of a toilet
block.
Availability
Ensuring that the facilities the Company provides are available
for their intended use, that areas are safe and secure, and that
the performance standards set out in the underlying agreements are
achieved is a key deliverable for the Investment Adviser. The
availability and performance data for the Company's investments are
monitored and appraised regularly to assess the overall performance
of each investment. Please see the availability of the Company's
investments on page 13.
Education performance
Educational assets within the portfolio represent c.20% of the
Company and provide educational development and facilities to over
190,000 pupils(1) . Over the first six months of 2019, the
Company's supply chain has prepared more than 300,000 free school
meals1. Across the INPP U.K. school estate, 79% of the portfolio
achieved an Ofsted rating of 'Good' or above(2) .
Whilst, of course, the services provided by the school
accommodation projects in which the Company invests do not include
teaching, there is understood to be a positive relationship between
the quality of the teaching environment and the pupils' standard of
educational attainment(4.)
1 www.gov.uk/government/organisations/ofsted
2 Metrics are estimates and exclude digital infrastructure
investments, U.S. Military Housing, Brescia Hospital and
construction projects (except Tideway).
3 Metrics are estimates and include U.K. school investments
4 Clark. H (2002) Building Education: The Role of the Physical
Environment in Enhancing Teaching and Research. Issues in
Practice.
COMMITMENT TO SKILLS AND EMPLOYMENT
Highlights(1)
-- 96% of investments have an employee development/training programme
-- 94% of investments are influenced by an Equality, Diversity and Inclusion Policy
Relevance to INPP
Well-run and maintained projects and businesses are of critical
importance to the success of the Company's portfolio. Through
active management of assets, the Company monitors the relationships
between its service providers and clients, the regulator, the
operating business and the end-user. Whilst the Company uses
contractual requirements as a framework to deliver on expected
outcomes, it recognises that companies with high employee
satisfaction can outperform their competitors(2) . To realise these
benefits, the Company is exploring how its service providers are
investing in their workforce.
By focusing on improved skills and employment, the Company can
encourage improvements in productivity of its supply chain.
Performance
Staff training
The Company actively engages with its delivery partners to
achieve a high-level of employee satisfaction. 96%2 of the
Company's assets are covered by a staff development/training
programme, with many providing additional performance
incentives.
Equality, Diversity and Inclusion
As part of the Company's approach to active management of our
investments, it is exploring how Equality, Diversity and Inclusion
is considered. 94%(1) of the Company's investments - or the
facilities management company delivering the services - has adopted
an Equality, Diversity and Inclusion Policy to help promote a good
working environment.
For instance, Cadent are supporting the new 'Talent Source
Network' programme(3) , which focuses on the engagement, attraction
and awareness of key target audiences, including:
-- Women;
-- Black, Asian and minority ethnic ('BAME');
-- Service leavers;
-- Parents;
-- Unemployed; and
-- Not in Education, Employment or Training ('NEETS').
Productivity
According to the U.K. government, apprenticeships are an
important component of improving the productivity of businesses,
their efficiency, boosting the economy and supporting young
people's employment prospects(4) .
In 2019, Tideway continued to be ahead of their target of one
apprentice for every 50 staff employed, achieving one in 49(5)
.
Cadent's Education and Skills Strategy focuses on STEM
enrichment, careers inspiration and work experience. By building
relationships with a number of schools in recruitment hotspots,
Cadent provides opportunities for its people to volunteer as
mentors across a range of subjects and age groups.
1 http://faculty.london.edu/aedmans/RoweAMP.pdf
2 Metrics are estimates and exclude digital infrastructure
investments, U.S. Military Housing, Brescia Hospital and
construction projects (except Tideway).
3 http://www.talentsourcenetwork.co.uk/
4
http://www.southampton.gov.uk/moderngov/documents/s17298/Appendix
5
https://www.tideway.london/media/3326/tideway-ar18-19_d_full_web.pdf
INVESTING IN THE COMMUNITY
Highlights(1)
-- 63,460 out of hours community use
-- >3,250 permanently employed staff on social infrastructure projects
Relevance to INPP
Engaged communities can play an important role in the successful
delivery of new assets and their long-term operations. Strong
communities have the potential to influence the operations of the
Company's assets as the positive effects can include lower crime
rates, better educational achievement, higher employment and better
health. Through its investments, the Company is exploring how it
can work with the local communities where it invests and bring
socio-economic benefits to the area.
Performance
Local employment
Providing employment opportunities for the communities the
Company serves is important. Through the Company's social
infrastructure projects, it has estimated that 3,2501 permanent
employment opportunities have been created as a result of the
Company's investments. One of Tideway's commitments is to target
employment in the boroughs affected by our works. At the end of
2018/19, 21% of Tideway's Mains Work Contract workforce resides
locally, within the 14 boroughs affected by the work.
Community hours
Across all of the Company's investments, an estimation of over
63,460 hours(1) have been provided to support local groups and
wider community use. For example, the Company's investment in
Newbold in Derby has provided an estimated >3,000 hours(1) of
community use. The school is typically used by a Church group at
the weekends, and a local football team use the all-weather sports
pitch.
Community support
In 2019, one of the Company's BSF investments committed to
sponsor a commercial café for a special education needs school in
Nottingham. The purpose is to provide students with an opportunity
to get some real-life experience, boost their confidence and build
their CVs.
In Australia, the Project Company which owns Long Bay Forensic
and Prison Hospitals supported the Authority (Western Area Health
District) Living Quality and Safety awards. The Project Company
sponsored and presented the 'Supporting our People Award' to the
winning clinical team.
1 Metrics are estimates and exclude digital infrastructure
investments, U.S. Military Housing, Brescia Hospital, Italy and
construction projects (except Tideway). Where applicable, jobs
referred to are employees of the Company's Facilities Management
subcontractors and not of the Company of its subsidiaries.
BOARD OF DIRECTORS
The table below details all Directors of the Company as at 30
June 2019.
BACKGROUND AND EXPERIENCE
Mike Gerrard Julia Bond(1) John Le John Stares(1) Claire John Whittle(1) Giles Frost
Board Chair, Chair, Poidevin(1) Chair, Whittet(1) Senior
Chair, Risk Chair, Risk Chair, Independent
Investment Sub-Committee Audit and Sub-Committee Management Director,
Committee (with effect Risk Committee (until Engagement
(with effect from 1 1 February Committee
from 31 February 2019),
December 2019), Chair,
2018) Chair, Nomination
Nomination and
and Remuneration
Remuneration Committee
Committee (until
(with effect 1 February
from 1 2019)
February
2019)
Aged 61 Aged 60 Aged 49 Aged 68 Aged 64 Aged 64, Aged 56
and a resident and a resident and a resident and a resident and a resident John is and a resident
in the U.K., in the of Guernsey, of Guernsey of Guernsey, a resident in the U.K.,
Mike has U.K., Julia John has since 2001, Claire of Guernsey. Giles is
30 years has 27 over 25 John has has 40 John is a founder
of financial years' years of over 40 years' a Fellow and director
and management experience business years' experience of the of Amber
experience of capital experience. experience. in the Institute Infrastructure
in global markets John is Before banking of Chartered and has
infrastructure in the a Fellow moving industry Accountants worked in
investment. financial of the to Guernsey, with Bank in England the
He has held sector Institute John worked of Scotland, and Wales infrastructure
a number and held of Chartered for 23 Bank of and holds investments
of senior senior Accountants years as Bermuda the Institute sector for
positions, positions in England a management and Rothschild of Directors over 20
including within and Wales consultant and Co Diploma years. Giles
as an Credit and a former with Bank in Company qualified
assistant Suisse, partner Accenture, International, Direction. as a solicitor
director including of BDO where he where she John holds and partner
of Morgan Head of LLP, where held a was latterly, non-executive in the law
Grenfell One Bank he held wide variety managing positions firm Wilde
plc, a Delivery a number of leadership director on a number Sapte (now
director and Global of leaderships roles. and co-Head of other Dentons).
of HM Treasury Head of rules, He currently until May boards. Giles is
Taskforce, Sovereign including holds 2016 when John was a director
deputy CEO Wealth Head of non-executive she became previously of Amber
and later funds Consumer positions a finance Infrastructure
CEO of activity. Markets, on the non-executive director Group Holdings
Partnerships where he boards director. of Close Ltd, the
U.K. plc developed of several She is Fund Services, ultimate
and, most an extensive other also a a large holding
recently, breadth companies. non-executive independent company
a managing of experience John is director administrator. of the
director and knowledge a Fellow of a number Prior to Investment
of Thames across of the of other moving Adviser
Water the real Institute investment to Guernsey, to the Company
Utilities estate, of Chartered companies John was and various
Limited. leisure Accountants and is at Price of its
Mike has and retail in England not involved Waterhouse subsidiaries.
a breadth sectors and Wales, in any in London
of experience in the a member trading before
across a U.K. and of the companies. embarking
range of overseas. Worshipful Claire on a career
economic John is Company is a member in business
and social a of Management of the services,
infrastructure non-executive Consultants, Chartered predominantly
sectors director and a Freeman Institute telecoms.
and has on several of the of Bankers
been involved plc boards City of in Scotland,
in some and chairs London. the Chartered
of the largest a number Insurance
infrastructure of Audit Institute,
projects Committees. is a Chartered
in the U.K. Banker,
He is a a member
Fellow of of the
the Institute
Institution of Directors
of Civil and holds
Engineers. the Institute
of Directors
Diploma
in Company
Direction.
DATE OF APPOINTMENT
4 September 1 September 1 January 28 August 10 September 6 August 2 August
2018 2017 2016 2013 2012 2009 2006
1 All of the independent directors are members of all Committees
with the exception of Mr Gerrard, who is not a member of the Audit
and Risk Committee. Mr Frost is a non-independent director.
LISTED COMPANY AND OTHER RELEVANT DIRECTORSHIPS
Mike Gerrard Julia Bond John Le John Stares Claire John Whittle Giles Frost
Poidevin Whittet
Mike holds European Episode Terra Firma BH Macro Aberdeen Giles is
several Assets Trust Inc (for a Ltd Frontier also a
non-executive ('EAT') BH Macro number Eurocastle Markets director
positions Julia is Ltd of Investment Investment of a number
within boards currently Stride Guernsey-based Ltd Company of the
and committees a non-executive Gaming entities) Riverstone Ltd Company's
that oversee director plc Governor Energy Globalworth subsidiary
the development and trustee of More Ltd Real Estate and investment
and delivery of several House School TwentyFour Investments holding
of governmental New Philanthropy Select Ltd entities
infrastructure bodies and Capital Monthly GLI Finance and of
investments charities (Trustee) Income Ltd other entities
in the U.K. including Fund Ltd India Capital in which
and Europe. the British Third Point Growth the Company
Foreign Offshore Fund Ltd has an
and Investors Starwood investment.
Commonwealth. Ltd European He does
Real Estate not receive
Finance directors'
Ltd fees from
Chenavari such roles
Toro Income for the
Fund Ltd Company.
DIRECTORS' RESPONSIBILITIES STATEMENT
The Directors are responsible for preparing the Half-yearly
Financial Report in accordance with applicable law and regulations.
The Directors confirm to the best of their knowledge:
a) The condensed set of financial statements have been prepared
in accordance with IAS 34 'Interim Financial Reporting';
b) The interim financial and operating review includes a fair
review of the information required by DTR 4.2.7R (indication of
important events during the first six months and description of
principal risks and uncertainties for the remaining six months of
the year); and
c) The interim financial and operating review includes a fair
review of the information required by DTR 4.2.8R (disclosure of
related parties' transactions and changes therein).
By order of the Board
Mike Gerrard John Le Poidevin
Chairman Director
5 September 2019 5 September 2019
INDEPENT REVIEW REPORT TO INTERNATIONAL PUBLIC PARTNERSHIPS
LIMITED
INTRODUCTION
We have been engaged by the Company to review the condensed set
of financial statements in the Half-yearly Financial Report for the
six months ended 30 June 2019 which comprises the Condensed
Consolidated Statement of Comprehensive Income, the Condensed
Consolidated Statement of Changes in Equity, the Condensed
Consolidated Balance Sheet, the Condensed Consolidated Cash Flow
Statement and the related notes 1 to 18. We have read the other
information contained in the Half-yearly Financial Report and
considered whether it contains any apparent misstatements or
material inconsistencies with the information in the condensed set
of financial statements.
This report is made solely to the Company in accordance with
guidance contained in International Standard on Review Engagements
2410 (U.K. and Ireland) 'Review of Interim Financial Information
Performed by the Independent Auditor of the Entity' issued by the
Auditing Practices Board. To the fullest extent permitted by law,
we do not accept or assume responsibility to anyone other than the
Company, for our work, for this report, or for the conclusions we
have formed.
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 Disclosure Guidance and Transparency Rules of the U.K.'s
Financial Conduct Authority.
As disclosed in note 1, the Annual Financial Statements of the
Company are prepared in accordance with International Financial
Reporting Standards ('IFRS') as adopted by the E.U. The condensed
set of financial statements included in this Half-yearly Financial
Report has been prepared in accordance with International
Accounting Standard 34, 'Interim Financial Reporting', as adopted
by the E.U.
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.
SCOPE OF REVIEW
We conducted our review in accordance with International
Standard on Review Engagements (U.K. 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 U.K. 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. A review is substantially less in scope than an audit
conducted in accordance with International Standards on Auditing
(U.K. and Ireland) 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.
CONCLUSION
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
June 2019 is not prepared, in all material respects, in accordance
with International Accounting Standard 34 as adopted by the E.U.
and the Disclosure Guidance and Transparency Rules of the U.K.'s
Financial Conduct Authority.
Ernst & Young LLP
Guernsey
5 September 2019
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
SIX MONTHSED 30 JUNE 2019
Notes Six months Six months
ended ended
30 June 30 June
2019 2018
GBP'000s GBP'000s
Interest income 4 36,533 35,224
Dividend income 4 22,654 13,161
Net change in investments at fair
value through profit or loss 4 40,427 31,115
Total investment income 99,614 79,500
Other operating income 5 745 673
Total income 100,359 80,173
Management costs 15 (11,607) (11,278)
Administrative costs (945) (761)
Transaction costs 15 (2,449) (168)
Directors' fees (198) (169)
Total expenses (15,199) (12,376)
Profit before finance costs and
tax 85,160 67,797
Finance costs 6 (1,480) (1,858)
Profit before tax 83,680 65,939
Tax credit 7 37 55
Profit for the period 83,717 65,994
Earnings per share
From continuing operations
Basic and diluted (pence) 8 5.64 4.70
All results are from continuing operations in the period.
All income is attributable to the equity holders of the parent.
There are no non-controlling interests within the consolidated
Group.
There are no other Comprehensive Income items in the current
period (30 June 2018: nil). The profit for the period represents
the Total Comprehensive Income for the period.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(UNAUDITED)
SIX MONTHSED 30 JUNE 2019
Notes Share Capital Other Distributable Retained Total
Reserve Earnings
GBP'000s GBP'000s GBP'000s GBP'000s
Balance at 31 December
2018 1,560,243 182,481 456,023 2,198,747
Total comprehensive income - - 83,717 83,717
Issue of Ordinary Shares 13 1,501 - - 1,501
Issue costs applied to 13 - - - -
new shares
Distributions in the period 13 - - (51,952) (51,952)
Balance at 30 June 2019 1,561,744 182,481 487,788 2,232,013
SIX MONTHSED 30 JUNE 2018
Notes Share Capital Other Distributable Retained Total
Reserve Earnings
GBP'000s GBP'000s GBP'000s GBP'000s
Balance at 31 December
2017 1,441,048 182,481 414,769 2,038,298
Total comprehensive income - - 65,994 65,994
Issue of Ordinary Shares 13 - - - -
Issue costs applied to 13 - - - -
new shares
Distributions in the period 13 - - (47,925) (47,925)
Balance at 30 June 2018 1,441,048 182,481 432,838 2,056,367
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
AS AT 30 JUNE 2019
Notes 30 June 31 December
2019 2018
GBP'000s GBP'000s
Non-current assets
Investments at fair value through
profit or loss 9 2,311,903 2,097,468
Total non-current assets 2,311,903 2,097,468
Current assets
Financial assets at amortised
cost 9, 11 25,780 25,234
Cash and cash equivalents 9 47,804 84,718
Derivative financial instruments 9 413 -
Total current assets 73,997 109,952
Total assets 2,385,900 2,207,420
Current liabilities
Trade and other payables 9, 12 10,587 8,366
Derivative financial instruments 9 - 307
Total current liabilities 10,587 8,673
Non-current liabilities
Bank loans 6, 9 143,300 -
Total non-current liabilities 143,300 -
Total liabilities 153,887 8,673
Net assets 2,232,013 2,198,747
Equity
Share capital 13 1,561,744 1,560,243
Other distributable reserve 13 182,481 182,481
Retained earnings 13 487,788 456,023
Equity attributable to equity
holders of the parent 2,232,013 2,198,747
Net assets per share (pence
per share) 14 150.3 148.1
The financial statements were approved by the Board of Directors
on 5 September 2019.
They were signed on its behalf by:
Mike Gerrard John Le Poidevin
Chairman Director
5 September 2019 5 September 2019
CONDENSED CONSOLIDATED CASH FLOW STATEMENT (UNAUDITED)
SIX MONTHSED 30 JUNE 2019
Notes Six months Six months
ended ended
30 June 30 June
2019 2018
GBP'000s GBP'000s
Profit before tax in the Consolidated Statement
of Comprehensive Income(1) 83,680 65,939
Adjusted for:
Gain on investments at fair value through
profit or loss 4 (40,427) (31,115)
Finance costs(2) 6 1,480 1,858
Fair value movement on derivative financial
instruments 5 (720) (1,039)
Working capital adjustments
(Increase)/decrease in receivables (609) 1,717
Increase in payables 2,222 214
45,626 37,574
Income tax paid(3) (163) (204)
Net cash inflow from operations(4) 45,463 37,370
Investing activities
Acquisition of investments at fair value
through profit or loss 10 (193,370) (10,504)
Net repayments from investments at fair
value through profit or loss 19,362 21,468
Net cash flow from investing activities (174,008) 10,964
Financing activities
Dividends paid 13 (50,450) (47,925)
Finance costs paid(2) (1,311) (1,458)
Loan drawdowns(2) 143,300 6,991
Net cash provided by financing activities 91,539 (42,392)
Net (decrease)/increase in cash and cash
equivalents (37,006) 5,942
Cash and cash equivalents at beginning
of period 84,718 33,850
Foreign exchange gain on cash and cash
equivalents 92 35
Cash and cash equivalents at end of period 47,804 39,827
1 Includes interest received of GBP34.1 million and dividends received of GBP22.7 million.
2 These are cash flows and non-cash flows for financing
liabilities in accordance with IAS 7, 44A-E.
3 Cash flows received from unconsolidated subsidiary entities in
respect of surrender of tax losses.
4 Net cash flows from operations above are reconciled to
operating cash flows as shown in the Operating Review on pages
20-21.
NOTES TO THE CONDENSED SET OF FINANCIAL STATEMENTS
(UNAUDITED)
SIX MONTHSED 30 JUNE 2019
1. BASIS OF PREPARATION
International Public Partnerships Limited is a closed-ended
authorised investment company incorporated in Guernsey under the
Companies (Guernsey) Law, 2008. The address of the registered
office is given on the inside back cover. The nature of the Group's
('Parent and consolidated subsidiary entities') operations and its
principal activities are set out on pages 2 and 11
respectively.
These financial statements are presented in pounds sterling as
this is the currency of the primary economic environment in which
the Group operates and represents the functional currency of the
Parent and all values are rounded to the nearest (GBP'000), except
where otherwise indicated.
The financial information for the year ended 31 December 2018
included in this Half-yearly Financial Report is derived from the
2018 Annual Report and Financial Statements and does not constitute
statutory accounts as defined in the Companies (Guernsey) Law,
2008. The auditors reported on those accounts; their report was
unqualified, did not draw attention to any matters by way of
emphasis, and did not contain a statement under section 263 (2) and
(3) of the Companies (Guernsey) Law, 2008.
ACCOUNTING POLICIES
The annual financial statements of the Company are prepared in
accordance with International Financial Reporting Standards
('IFRS') as adopted by the E.U. The set of condensed consolidated
financial statements included in this Half-yearly Financial Report
have been prepared in accordance with International Accounting
Standard 34 - 'Interim Financial Reporting' as adopted by the E.U.
and should be read in conjunction with the consolidated financial
statements for the year ended 31 December 2018, as they provide an
update of previously reported information.
The same accounting policies, presentation and methods of
computation are followed in this set of condensed financial
statements as applied in the Group's latest annual audited
financial statements for the year ended 31 December 2018. The new
and revised IFRS and interpretations becoming effective in the
period have had no material impact on the accounting policies of
the Group.
The Directors have determined that International Public
Partnerships Limited is an investment entity as defined by IFRS 10
on the basis that the Company:
a) obtains funds from one or more investor(s) for the purpose of
providing those investor(s) with investment management
services;
b) commits to its investors that its business purpose is to
invest funds solely for returns from capital appreciation,
investment income, or both; and
c) measures and evaluates the performance of substantially all
of its investments on a fair value basis.
Accordingly, these financial statements consolidate only those
subsidiaries that provide services relevant to its investment
activities, such as management services, strategic advice and
financial support to its investees, and that are not themselves
investment entities. Subsidiaries that do not provide
investment-related services are required to be measured at fair
value through profit or loss in accordance with IFRS 9 Financial
Instruments.
GOING CONCERN
The Directors have reviewed cash flow forecasts prepared by
management. Based on those forecasts and an assessment of the
Group's committed banking facilities, it has been considered
appropriate to prepare the financial statements of the Group on a
going concern basis.
In arriving at their conclusion that the Group has adequate
financial resources, the Directors were mindful that the Group had
unrestricted cash of GBP47.8 million as at 30 June 2019. The
Company continues to fully cover operating costs and distributions
from underlying cash flows from investments. The Company has access
to a CDF of GBP400 million, of which GBP255.3 million was
uncommitted as at 30 June 2019, and is available for investment in
new and existing projects until July 2021. In addition, a portion
of the facility can be utilised for working capital purposes. The
facility is forecast to continue in full compliance with the
associated banking covenants.
2. Significant Judgements and Estimates
FAIR VALUATION OF INVESTMENTS AT FAIR VALUE THROUGH PROFIT OR
LOSS
Fair values are determined using the income approach, which
discounts the expected cash flows at a rate appropriate to the risk
profile of each investment. In determining the discount rate,
relevant long-term government bond yields, specific investment
risks and evidence of recent transactions are considered. Details
of the valuation process and key sensitivities are provided in note
9.
3. SEGMENTAL REPORTING
Based on a review of information provided to the chief operating
decision makers of the Company, the Group has identified four
reportable segments based on the geographical risk associated with
the jurisdictions in which it operates. The factors used to
identify the Group's reportable segments are centred on the
risk-free rates and the maturity of the Infrastructure sector
within each region. Further, foreign exchange and political risk is
identified, as these also determine where resources are allocated.
Management has concluded that the Group is currently organised into
four operating segments, being U.K., Europe (excl. U.K.), North
America and Australia.
Six months ended 30 June 2019
U.K. Europe North America Australia Total
GBP'000s (Excl. U.K.) GBP'000s GBP'000s GBP'000s
GBP'000s
Segmental results
Dividend and interest
income 44,882 3,019 4,315 6,971 59,187
Fair value gain on
investments 14,302 19,646 2,564 3,915 40,427
Total investment income 59,184 22,665 6,879 10,886 99,614
Reporting segment
profit(1) 42,542 22,910 7,490 10,775 83,717
Segmental financial
position
Investments at fair
value 1,694,338 305,011 105,854 206,700 2,311,903
Current assets 73,997 - - - 73,997
Total assets 1,768,335 305,011 105,854 206,700 2,385,900
Total liabilities (153,887) - - - (153,887)
Net assets 1,614,448 305,011 105,854 206,700 2,232,013
Six months ended 30 June 2018
U.K. Europe North America Australia Total
GBP'000s (Excl. U.K.) GBP'000s GBP'000s GBP'000s
GBP'000s
Segmental results
Dividend and interest
income 36,265 3,283 4,090 4,747 48,385
Fair value gain/(loss)
on investments 23,725 8,719 (21) (1,308) 31,115
Total investment income 59,990 12,002 4,069 3,439 79,500
Reporting segment
profit(1) 45,812 12,310 4,129 3,743 65,994
Segmental financial
position
Investments at fair
value 1,443,639 279,336 97,988 204,480 2,025,443
Current assets 64,900 - - - 64,900
Total assets 1,508,539 279,336 97,988 204,480 2,090,343
Total liabilities (33,976) - - - (33,976)
Net assets 1,474,563 279,336 97,988 204,480 2,056,367
1 Reporting segment results are stated net of operational costs including management fees.
Revenue from investments which individually represent more than
10% of the Group's interest and dividend income approximates
GBP14.6 million (30 June 2018: GBP10.8 million).
4. Investment Income
Six months Six months
ended ended
30 June 2019 30 June 2018
GBP'000s GBP'000s
Interest income
Interest on investments 36,533 35,224
Interest on bank deposits - -
Total interest income 36,533 35,224
Dividend income 22,654 13,161
Net change in fair value of investments
at fair value through profit or loss 40,427 31,115
Total investment income 99,614 79,500
Dividend and interest income includes that from transactions
with unconsolidated subsidiary entities. Changes in investments at
fair value through profit or loss are also recognised in relation
to the Group's investments in unconsolidated subsidiaries.
5. Other Operating INCOME
Six months Six months
ended ended
30 June 2019 30 June 2018
GBP'000s GBP'000s
Fair value gain on foreign exchange contracts 720 1,039
Other foreign exchange movements 25 (366)
Total other operating income 745 673
6. Finance Costs
Finance costs for the period were GBP1.5 million (30 June 2018:
GBP1.9 million). The Group has a CDF of GBP400 million provided by
Royal Bank of Scotland, National Australia Bank, Barclays Bank and
Sumitomo Mitsui Banking Corporation. The drawdowns in the period
were in the form of cash drawdowns and issuance of letters of
credit. Cash drawdowns were used to partially fund investments and
the letter of credit drawdowns were used to back the Group's
commitment to specific future cash investments. As at 30 June 2019,
the facility was GBP143.3 million cash drawn. The uncommitted
balance of the facility which was not cash drawn or notionally
drawn via letters of credit was c.GBP255.3 million.
The interest rate margin on the CDF is 165 basis points over
Libor. The loan facility matures in July 2021 and is secured over
the assets of the Group.
7. Tax
Six months Six months
ended ended
30 June 2019 30 June
GBP'000s 2018
GBP'000s
Current tax:
U.K. corporation tax (credit) - current
period (67) (216)
U.K. corporation tax charge/(credit) - prior
period 23 (2)
Other overseas tax - current period 35 43
Other overseas tax - prior period (28) 120
Tax credit for the period (37) (55)
Reconciliation of effective tax rate
Six months Six months
ended ended
30 June 2019 30 June
GBP'000s 2018
GBP'000s
Profit before tax 83,680 65,939
Exempt tax status in Guernsey - -
Application of overseas tax rates 35 43
Group tax losses surrendered to unconsolidated
investee entities (67) (216)
Adjustment to prior period (5) 118
Tax credit for the period (37) (55)
The income tax credit above does not represent the full tax
position of the entire Group as the investment returns received by
the Company are net of tax payable at the underlying investee
entity level. As a consequence of the adoption of the IFRS 10
investment entity consolidation exception, underlying investee
entity tax is not consolidated within these financial statements.
To provide an indication of the tax paid across the wider
portfolio, total forecasted corporation tax payable by the Group's
underlying investments is in excess of GBP1 billion (30 June 2018:
GBP1 billion) over their full concession lives.
8. Earnings Per Share
The calculation of basic and diluted earnings per share is based
on the following data:
Six months Six months
ended ended
30 June 30 June
2019 2018
GBP'000s GBP'000s
Earnings for the purposes of basic and diluted
earnings per share being net profit attributable
to equity holders of the parent 83,717 65,994
Number Number
Weighted average number of Ordinary Shares for
the purposes of basic and diluted earnings per
share 1,484,433,340 1,405,420,125
Basic and diluted (pence) 5.64 4.70
The denominator for the purposes of calculating both basic and
diluted earnings per share is the same as the Group has not issued
any share options or other instruments that would cause
dilution.
9. Financial Instruments
Financial assets and financial liabilities are recognised when
the Group becomes a party to the contractual provisions of the
instrument. Financial assets are derecognised when the contractual
rights to the cash flows from the instrument expire or the asset is
transferred and the transfer qualifies for derecognition in
accordance with IFRS 9 Financial Instruments. Financial liabilities
are derecognised when the obligation is discharged, cancelled or
expired.
9.1 Financial assets
30 June 31 December
2019 2018
GBP'000s GBP'000s
Investments at fair value through profit and loss 2,311,903 2,097,468
Financial assets
Financial assets at amortised cost 25,780 25,234
Cash and cash equivalents 47,804 84,718
Derivative financial instruments
Foreign exchange contracts 413 -
Total financial assets 2,385,900 2,207,420
9.2 FINANCIAL LIABILITIES
30 June 31 December
2019 2018
GBP'000s GBP'000s
Financial liabilities at amortised cost
Trade and other payables 10,587 8,366
Bank loans 143,300 -
Derivative financial instruments
Foreign exchange contracts - 307
Total financial liabilities 153,887 8,873
9.3 FINANCIAL RISK MANAGEMENT
The Group's objective in managing risk is the protection of
shareholder value. Risk is inherent in the Group's activities and
is managed through a process of ongoing identification, measurement
and monitoring, subject to risk limits and other controls. The
process of risk management is critical to the Group's continuing
profitability. The Group is exposed to market risk (which includes
currency risk, interest rate risk and inflation risk), credit risk
and liquidity risk arising from the financial instruments it holds.
The Group's Investment Adviser is responsible for identifying and
controlling risks. The Board of Directors supervises the Investment
Adviser and is ultimately responsible for the overall risk
management of the Group.
The Group's risk management framework and approach is set out
within the Strategic Report, part of the 2018 Annual Report and
financial statements. The Board takes into account market, credit
and liquidity risks in forming the Group's risk management
strategy.
Market risk
Market risk is the risk that the fair value or future cash flows
of financial instruments will fluctuate due to changes in market
variables such as changes in inflation, foreign exchange rates and
interest rates.
Inflation risk
The majority of the Group's cash flows from underlying
investments are linked to inflation indices. Changes in inflation
rates can have a positive or negative impact on the Group's cash
flows from investments. The long-term inflation assumptions applied
in the Group's valuation of investments at fair value through
profit or loss are disclosed in the fair value hierarchy section
9.4.
The Group's portfolio of investments has been developed in
anticipation of continued inflation at or above the levels used in
the Group's valuation assumptions. Where inflation is at levels
below the assumed levels for a sustained period of time, investment
performance may be impaired. The level of inflation-linkage across
the investments held by the Group varies and is not consistent.
Interest rate risk
Interest rate risk arises from the possibility that changes in
interest rates will affect future cash flows from underlying
investments, therefore impacting the value of investments at fair
value through profit or loss. The Group has limited exposure to
interest rate risk as the underlying borrowings within the
unconsolidated investee entities are either hedged through interest
rate swap arrangements, are fixed rate loans, or the risk of
adverse movement in interest rates is limited through protections
provided by the regulatory regime. For example, it is generally a
requirement under a PFI/PPP concession that any borrowings are
matched to the life of the concession. Hedging activities are
aligned with the period of the loan, which also mirrors the
concession period, and are highly effective. However, particularly
in Australia, refinancing risk exists in a number of such
investments. The Group's CDF is unhedged on the basis it is
utilised as an investment bridging facility and therefore drawn for
a relatively short period of time. Therefore, the Group is not
significantly exposed to cash flow risk due to changes in interest
rates over its variable rate borrowings. Interest income on bank
deposits held within underlying investments is included within the
fair value of investments.
Foreign currency risk
The Group undertakes certain transactions denominated in foreign
currencies and therefore is exposed to exchange rate fluctuations.
Currency risk arises in financial instruments that are denominated
in a foreign currency other than the functional currency in which
they are measured. The Group uses forward foreign exchange
contracts to mitigate the risk of short-term volatility in foreign
exchange on significant investment returns from overseas
investments. The Group doesn't hedge its exposure to foreign
exchange in relation to foreign currency denominated investment
balances. The carrying amounts of the Group's foreign currency
denominated monetary financial instruments at the reporting date
are set out in the table below:
30 June 31 December
2019 2018
GBP'000s GBP'000s
Cash
Euro 2,652 2,555
Canadian dollar 675 1,184
Australian dollar 120 97
U.S. dollar 1,210 1,227
4,657 5,063
Current receivables
Euro receivables 590 1,454
U.S. dollar receivables 74 183
664 1,637
Investments at fair value through profit or loss
Euro 305,011 290,406
Canadian dollar 39,366 38,163
Australian dollar 206,700 206,872
U.S. dollar 66,488 65,604
617,565 601,045
Total 622,886 607,745
Sensitivity analysis showing the impact of variations of the
above risks on the fair value of investments is shown in section
9.5.
Credit risk
Credit risk refers to the risk that a counterparty will default
on its contractual obligations resulting in a financial loss to the
Group. The Group has adopted a policy of dealing with creditworthy
counterparties and reviewing this on a regular basis at the
underlying entity level. The majority of underlying investments are
in public-private partnerships and similar concessions (which are
entered into with government, quasi government, other public,
equivalent low-risk bodies), or in regulated businesses that
inherently exhibit low levels of credit risk. The maximum exposure
of credit risk over financial assets as a result of counterparty
default is the carrying value of those financial assets in the
balance sheet. In addition, the underlying investee entities
contract with third-party construction and facilities managements
contractors. The Group seeks to mitigate this risk through using a
diverse range of sub-contractors and through at least quarterly
review of the credit position of major contractors. The Group
considers that any impairment under the expected credit losses
model was not material at the balance sheet date.
Liquidity risk
Liquidity risk is defined as the risk that the Group would
encounter difficulty in meeting obligations associated with
financial liabilities that are settled by delivering cash or
another financial asset. The Group invests in relatively illiquid
investments (mainly non-listed equity and loans). As a closed-ended
investment vehicle there are no automatic capital redemption
rights. The Group manages liquidity risk by maintaining adequate
cash reserves, banking facilities and reserve borrowing facilities
and by continuously monitoring forecast and actual cash flows. Cash
flow forecasts assume full availability of underlying
infrastructure to the relevant public sector body or end-user.
Failure to maintain assets available for use or operating in
accordance with pre-determined performance standards or licence
conditions may lead to a reduction (wholly or partially) in the
investment income that the Group has projected to receive. The
Directors review the underlying performance of each investment on a
quarterly basis, allowing asset performance to be monitored. The
terms of public-private partnership contractual mechanisms also
allow for significant pass-down of unavailability and performance
risk to sub-contractors. Regulated asset regimes allow for the pass
through of efficiently incurred costs to the purchaser.
9.4 FAIR VALUE HIERARCHY
All financial instruments for which fair value is recognised or
disclosed are categorised within the fair value hierarchy,
described as follows, based on the lowest level input that is
significant to the fair value measurement as a whole:
Level 1 - Quoted market prices in an active market (that are
unadjusted) for identical assets or liabilities
Level 2 - Valuation techniques (for which the lowest level input
that is significant to the fair value measurement is directly or
indirectly observable)
Level 3 - Valuation techniques (for which the lowest level input
that is significant to the fair value measurement is
unobservable)
During the period there were no transfers between Level 2 and
Level 3 categories.
Level 1:
The Group has no financial instruments classified as Level
1.
Level 2:
This category includes derivative financial instruments such as
interest rate swaps, RPI Swaps and currency forward contracts. As
at 30 June 2019, the Group's only derivative financial instruments
were currency forward contracts amounting to an asset of GBP0.4
million (31 December 2018: liability of GBP0.3 million).
Financial instruments classified as Level 2 have been valued
using models whose inputs are observable in an active market (spot
exchange rates, yield curves, interest rate curves). Valuations
based on observable inputs include financial instruments such as
swaps and forward contracts which are valued using market standard
pricing techniques where all the inputs to the market standard
pricing models are observable.
Level 3:
This category consists of investments in equity and loan
instruments in underlying unconsolidated subsidiary entities and
other non-controlled investments which are classified at fair value
through profit or loss. At 30 June 2019, the fair value of
financial instruments classified within Level 3 totalled GBP2,311.9
million (31 December 2018: GBP2,097.5 million).
Financial instruments are classified within Level 3 if their
valuation incorporates significant inputs that are not based on
observable market data (unobservable inputs). A valuation input is
considered observable if it can be directly observed from
transactions in an active market, or if there is compelling
external evidence demonstrating an executable exit price.
Valuation process
Valuations are the responsibility of the Board of Directors. The
valuation of unlisted equity and debt investments is performed on a
quarterly(1) basis by the Investment Adviser and reviewed by the
senior members of the Investment Adviser.
1 Indicative valuations are calculated in respect of 31 March
and 30 September.
Valuation methodology
The valuation methodologies used are primarily based on
discounting projected net cash flows at appropriate discount rates.
Valuations are also reviewed against recent market transactions for
similar assets in comparable markets observed by the Group or the
Investment Adviser and adjusted where appropriate.
Cash flow forecasts for the full-term of each underlying
investment are generated by detailed investment specific financial
models. These models forecast the dividend, shareholder loan
interest payments, capital repayments and senior debt repayments
(where applicable) expected from the underlying investments. The
cash flows included in the forecasts used to determine fair value
are typically fixed under contracts, however there are certain
variable cash flows which are based on management's estimations.
The significant unobservable inputs and assumptions used in
projecting the Group's net future cash flows are shown below.
Europe
30 June 2019 U.K. (Excl. U.K.) North America Australia
============================= =========== ============== ================ ==========
Inflation rates 2.75% RPI, 2.00% 2.00% 2.50%
2.00% CPI
17.00% - 12.50% -
Tax rates 19.00% 29.58% 26.50% - 27.00% 30.00%
Foreign exchange rates N/A 1.06 1.32 - 1.71 1.84
Long-term deposit rates 2.00% 2.00% 2.50% 3.00%
============================= =========== ============== ================ ==========
Europe
31 December 2018 U.K. (Excl. U.K.) North America Australia
============================= =========== ============== ================ ==========
Inflation rates 2.75% RPI, 2.00% 2.00% 2.50%
2.00% CPI
17.00% - 12.50% -
Tax rates 19.00% 29.58% 26.50% - 27.00% 30.00%
Foreign exchange rates N/A 1.05 1.34 - 1.80 1.88
Long-term deposit rates 2.00% 2.00% 2.00% 3.00%
============================= =========== ============== ================ ==========
Discount rate
The discount rate used for valuation of each investment is the
aggregate of the following:
- Yield on a government bond with a remaining term equivalent to
(or as close as possible to) the investment being valued, issued by
the national government for the location of the relevant investment
('government bond yield')
- A premium to reflect the inherent greater risk in investing in
infrastructure assets over government bonds
- A further premium to reflect the state of maturity of the
asset with a larger premium applied to immature assets and/or
assets in construction and/or to reflect any current asset specific
or operational issues. Typically, this risk premium will reduce as
an asset matures, its operating performance becomes more
established, and the risks associated with its future cash flows
decrease. However, the rate may increase in relation to investments
with unknown residual values at the end of the relevant concession
life as that date nears
- A further adjustment reflective of market-based transaction
valuation evidence for similar assets
Over the period, the weighted average government bond yield
increased by 0.32%. The weighted average investment premium
increased, reflecting observable market-based evidence.
Valuation assumptions 30 June 2019 31 December Movement
2018
Weighted Average Government
Bond Yield 1.51% 1.83% (0.32%)
Weighted Average Investment
Premium over Government Bond
Yield 5.82% 5.43% 0.39%
Weighted Average Discount
Rate 7.33% 7.26% 0.07%
Weighted Average Discount
Rate on Risk Capital(1) 7.62% 7.55% 0.07%
1 Weighted average discount rate on Risk Capital only (equity
and subordinated debt).
30 June 31 December
Reconciliation of Level 3 fair value measurements 2019 2018
of financial assets: GBP'000s GBP'000s
Opening balance 2,097,468 2,005,292
Additional investments during the period 193,370 63,293
Net repayments during the period (19,362) (34,943)
Net change in fair value of investments
at fair value through profit or loss 40,427 63,826
Closing balance 2,311,903 2,097,468
9.5 SENSITIVITY ANALYSIS
The valuation requires management to make certain assumptions in
relation to unobservable inputs to the model. There are no
straightforward inter-relationships between the unobservable
inputs. A sensitivity analysis for reasonably possible alternative
assumptions is provided below:
Weighted
average Change in Change in
rate in fair value fair value
Significant assumptions base case Sensitivity of investment Sensitivity of investment
at 30 June 2019 valuations factor GBP'000s factor GBP'000s
Discount rate 7.33% +1.00% (219,050) -1.00% 263,176
Inflation rate
(overall) 2.23% +1.00% 262,764 -1.00% (222,515)
U.K. 2.75% +1.00% 207,985 -1.00% (175,916)
Europe 2.00% +1.00% 43,294 -1.00% (36,930)
North America 2.00% +1.00% 1,160 -1.00% (991)
Australia 2.50% +1.00% 10,318 -1.00% (8,677)
FX rate N/A +10.00% 65,372 -10.00% (65,368)
Tax rate 17.87% +1.00% (20,438) -1.00% 20,406
Deposit rate 1.89% +1.00% 27,325 -1.00% (25,519)
Weighted
average Change in Change in
Significant assumptions rate in fair value fair value
at 31 December base case Sensitivity of investment Sensitivity of investment
2018 valuations factor GBP'000s factor GBP'000s
Discount rate 7.26% +1.00% (215,216) -1.00% 259,450
Inflation rate
(overall) 2.38% +1.00% 260,898 -1.00% (220,864)
U.K. 2.75% +1.00% 204,773 -1.00% (173,197)
Europe 2.00% +1.00% 46,126 -1.00% (39,019)
North America 2.00% +1.00% 1,079 -1.00% (917)
Australia 2.50% +1.00% 8,920 -1.00% (7,709)
FX rate N/A +10.00% 60,833 -10.00% (60,820)
Tax rate 17.65% +1.00% (19,044) -1.00% 18,970
Deposit rate 1.87% +1.00% 23,842 -1.00% (22,310)
10. INVESTMENTS
Date of investment Description Consideration % Ownership
GBP'000s post investment
The Group made a follow on investment
into the Luton Building Schools
January 2019 for the Future project, U.K. 211 50.00%
The Group made further investments
as part of its commitment to the
March - June National Digital Infrastructure
2019 Fund, U.K. 3,452 45.00%
The Group made investments into
April - June the Midlands Batch Priority Schools
2019 Building Project (Batch 4), U.K. 5,270 92.50%
The Group made a follow on investment
into the Wolverhampton Building
Schools for the Future projects
June 2019 1 & 2, U.K. 1,800 100.00%
The Group, as part of a consortium,
made further investments into the
Cadent gas distribution network,
June 2019 U.K. 153,240 7.25%
The Group acquired an additional
June 2019 interest in BeNEX, Germany 29,397 100.00%
Total capital spend on investments during the
period 193,370
11. financial assets AT AMORTISED COST
30 June 2019 31 December
GBP'000s 2018
GBP'000s
Accrued interest receivable 21,521 20,704
Other debtors 4,259 4,530
Total trade and other receivables 25,780 25,234
Other debtors included GBP4.2 million (31 December 2018: GBP4.3
million) of receivables from unconsolidated subsidiary entities for
the surrender of Group tax losses.
12. Trade and Other Payables
30 June 2019 31 December
GBP '000s 2018
GBP'000s
Accrued management fee 6,972 7,131
Other creditors and accruals 3,615 1,235
Total trade and other payables 10,587 8,366
13. Share Capital and Reserves
Share capital 30 June 31 December
2019 2018 Shares
Shares '000s
'000s
In issue 1 January 1,484,329 1,405,420
Issued for cash - 76,066
Issued as a scrip dividend alternative 944 2,843
Closing balance 1,485,273 1,484,329
Share capital 30 June 31 December
2019 2018
GBP'000s GBP'000s
Opening balance 1,560,243 1,441,048
Issued for cash (excluding issue costs) - 116,000
Issued as a scrip dividend alternative 1,501 4,270
Total share capital issued in the period 1,501 120,270
Costs on issue of Ordinary Shares - (1,075)
Closing balance 1,561,744 1,560,243
At present, the Company has one class of Ordinary Shares which
carry no right to fixed income.
On 10 June 2019, 943,993 new Ordinary fully paid shares were
issued as a scrip dividend alternative in lieu of cash for the
interim dividend in respect of the six months ended 31 December
2018.
Other distributable reserve 30 June 2019 31 December
GBP'000s 2018
GBP'000s
Opening balance 182,481 182,481
Movement in the period - -
Closing balance 182,481 182,481
On 19 January 2007, the Company applied to the Royal Court of
Guernsey, following the initial placing of shares, to reduce its
share premium account. This was in order to provide a distributable
reserve to enable the Company to repurchase its shares if and when
the Board of Directors consider it beneficial to do so. Following
court approval, the distributable reserve account was created.
Retained earnings 30 June 2019 31 December
GBP'000s 2018
GBP'000s
Opening balance 456,023 414,769
Net profit for the period 83,717 138,369
Dividends paid(1) (51,952) (97,115)
Closing balance 487,788 456,023
1 Includes scrip element of GBP1.5 million in 2019 (December 2018: GBP4.3 million).
DISTRIBUTIONS
The Board is satisfied that, in every respect, the solvency test
as required by the Companies (Guernsey) Law, 2008 was satisfied for
the proposed dividend and the dividend paid in respect of the year
ended 31 December 2018. The Board has approved an interim
distribution of 3.59 pence per share (30 June 2018: 3.5 pence per
share).
CAPITAL RISK MANAGEMENT
The Group seeks to efficiently manage its financial resources to
ensure that it is able to continue as a going concern while
providing improved returns to shareholders through the management
of the debt and equity balances. The capital structure consists of
the Group's CDF and equity attributable to equity holders of the
parent, comprising issued capital, reserves and retained earnings.
The Group aims to deliver its objective by investing available cash
and using leverage whilst maintaining sufficient liquidity to meet
ongoing expenses and dividend payments.
The Group's Investment Adviser reviews the capital structure on
a semi-annual basis. As part of this review, the Investment Adviser
considers the cost of capital and the associated risks.
14. Net Assets per Share
30 June 2019 31 December
GBP'000s 2018
GBP'000s
============================================== ============= =============
Net assets attributable to equity holders of
the parent 2,232,013 2,198,747
=============================================== ============= =============
Number Number
============================================== ============= =============
Number of shares
Ordinary Shares outstanding at the end of the
period 1,485,273,024 1,484,329,031
=============================================== ============= =============
Net assets per share (pence per share) 150.3 148.1
=============================================== ============= =============
15. Related Party Transactions
During the period, Group companies entered into certain
transactions with related parties that are not members of the Group
but are related parties by reason of being in the same group as
Amber Infrastructure Group Holdings Limited, which is the ultimate
holding company of the Investment Adviser, Amber Fund Management
Limited ('AFML').
Under the Investment Advisory Agreement ('IAA'), AFML was
appointed to provide investment advisory services to the Group
including advising the Group as to the strategic management of its
portfolio of investments.
AFML and International Public Partnerships GP Limited are
subsidiary companies of Amber Infrastructure Group Holdings Limited
('Amber Group'), in which Mr. G Frost is a director and also a
substantial shareholder.
Mr. G Frost is also a Director of International Public
Partnerships Limited (the 'Company'); International Public
Partnerships Lux 1 Sarl; (a wholly owned subsidiary of the Group);
and the majority of other companies in which the Group indirectly
has an investment. The transactions with the Amber Group are
considered related party transactions under IAS 24 'Related Party
Disclosures'.
The Director's fees for Mr. G Frost's directorship of the
Company are paid to his employer, Amber Infrastructure Limited (a
member of the Amber Group).
The amounts of the transactions in the period that were related
party transactions are set out in the table below:
Amounts owing to
Related party expense related parties in
in the Income Statement the Balance Sheet
=========================== ========================
For the
For the six
six months
months to to At At
30 June 30 June 30 June 31 December
2019 2018 2019 2018
GBP'000s GBP'000s GBP'000s GBP'000s
=================================== ============== =========== ========= =============
International Public Partnerships
GP Limited 11,607 11,278 6,972 7,131
Amber Fund Management Limited(1) 2,449 168 2,413 2
=================================== ============== =========== ========= =============
Total 14,056 11,446 9,385 7,133
=================================== ============== =========== ========= =============
1. Represents amounts paid to related parties to acquire or make
investments or advisory fees associated with investments which are
subsequently recorded in the balance sheet.
INVESTMENT ADVISORY ARRANGEMENTS
Investment advisory fees payable during the period are
calculated as follows:
For existing construction assets:
- 1.2% per annum of the Gross Asset Value ('GAV') of investments bearing construction risk
For existing fully operational assets:
- 1.2% per annum of the GAV excluding uncommitted cash from
capital raisings up to GBP750 million
- 1.0% per annum where GAV (excluding uncommitted cash from
capital raisings) is between GBP750 million and GBP1.5 billion
- 0.9% per annum where GAV (excluding uncommitted cash from
capital raisings) value exceeds GBP1.5 billion
Asset origination fees in connection with new acquisitions are
charged at a rate of 1.5% of the value of new acquisitions.
The IAA can be terminated where less than 95% of the Group's
assets are available for use for certain periods and the Investment
Adviser fails to implement a remediation plan agreed with the
Group. The IAA may also be terminated by either party giving to the
other five years notice of termination, expiring at any time after
10 years from the date of the IAA.
As at 30 June 2019, Amber Infrastructure held 8,002,379 (31
December 2018: 8,002,379) shares in the Company. The shares held by
the Investment Adviser in the Company helps further strengthen the
alignment of interests between the two parties
Transactions with directors
Shares acquired by Directors in the six month period ended 30
June 2019 are disclosed below:
Number of New Ordinary
Director Shares
================= =======================
Michael Gerrard 53,515
Julia Bond 12,826
Claire Whittet 1,532
Giles Frost 13,011
================= =======================
Total purchased 80,884
================= =======================
16. CONTINGENT LIABILITIES AND COMMITMENTS
As at 30 June 2019, the Group has funding commitments of up to
c.GBP62.4 million (31 December 2018: GBP195.0 million), including
amounts supported by letter of credit which were notionally drawn
against the Group's CDF.
There were no contingent liabilities at the date of this
report.
17. EVENTS AFTER BALANCE SHEET DATE
In July and August 2019, the Group invested further amounts
totalling GBP3.6 million into the Midlands Batch Priority Schools
Project (Batch 4). In addition, in August 2019, the Group invested
a further GBP2.3 million as part of its commitment in the National
Digital Infrastructure Fund ('NDIF').
18. OTHER MANDATORY DISCOLSURES
New standards that the Group has applied from 1 January 2019
Standards and amendments to standards that became effective
during the period are listed below. These have no material impact
on the reported performance or financial statements of the
Group.
- IFRS 16 Leases (1 January 2019)
- Amendments to IFRS 9 Prepayment Features with Negative Compensation (1 January 2019)
- Amendments to IAS 28 Long-term Interests in Associates and Joint Ventures (1 January 2019)
- IFRIC Interpretation 23 Uncertainty over Income Tax Treatments (1 January 2019)
KEY CONTACTS
Investment Adviser Auditor Corporate Brokers
Amber Fund Management Ernst & Young LLP Numis Securities Limited
Limited Royal Chambers The London Stock Exchange
3 More London Riverside St Julian's Avenue Building
London St Peter Port 10 Paternoster Square
SE1 2AQ Guernsey London
Channel Islands EC4M 7LT
GY1 4AF
Registered Office Legal Adviser Public Relations
PO Box 286 Carey Olsen FTI Consulting
Floor 2, Trafalgar Court PO Box 98, Carey House 200 Aldersgate
Les Banques Les Banques Aldersgate Street
St Peter Port Guernsey London
Guernsey Channel Islands EC1A 4HD
Channel Islands GY1 4BZ
GY1 4LY
Administrator and Company
Secretary Corporate Banker
Estera International Royal Bank of Scotland
Fund Managers (Guernsey) International
Limited 1 Glategny Esplanade
PO Box 286 St Peter Port
Floor 2, Trafalgar Court Guernsey
Les Banques Channel Islands
St Peter Port GY1 4BQ
Guernsey
Channel Islands
GY1 4LY
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 DBGDCDGGBGCU
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