HICL Infrastructure Company Limited

 

24 May 2017

 

ANNUAL RESULTS FOR THE YEAR ENDED 31 MARCH 2017

 

The Directors of HICL Infrastructure Company Limited announce the results for the year ended 31 March 2017.

 

Highlights

For the year ended 31 March 2017

 

·    Portfolio performance exceeded expectations during the year

·    NAV per share as at 31 March 2017 of 149.0p, up 4.8% from 142.2p as at 31 March 2016

·    Total shareholder return of 10.3% over the year (on a NAV per share appreciation plus dividends paid basis)

·    Aggregate dividends declared for the year of 7.65p per share

·    Target dividend per share of 7.85p for the year to March 2018 - a year-on-year increase of 2.6%

·    Further guidance on a target dividend per share of 8.05p for the year to March 2019, reflecting Board's confidence in near-term forecast cash flow performance

·    Profit before tax of £176.8m (2016: £157.2m)

·    Directors' valuation of the portfolio of £2,380.0m, up 17% from £2,030.3m at 31 March 2016

·    New investments for an aggregate consideration of £266.6m, comprising ten new acquisitions and five incremental investments

·    Successful capital raisings of £381.0m in aggregate and an increased Revolving Credit Facility of £400m

·    Post period-end, the Company has also acquired a significant interest in Affinity Water, a water-only company

·    Improved inflation correlation in the portfolio: 0.7 at year-end (rising to 0.8 following the Affinity Water acquisition)

·    Current funding requirement of £205m1

·    The Board is confident that the current pipeline will generate new investment opportunities

 

¹ Following the acquisition of an interest in Affinity Water and taking into account the planned sell-down of £25m announced on 22 May 2017

 

Summary Financial Results

(on an Investment Basis)

 

for the year to	31 March 2017	31 March 2016
Income	£207.6m	£182.9m	+ 13.5%
Profit before tax	£177.1m	£157.4m	+ 12.5%
Earnings per share	12.4p	11.9p	+ 4.2%
Total dividends declared per share for the year	7.65p	7.45p	+ 2.7%
Net Asset Values	31 March 2017	31 March 2016
Net Asset Value (NAV) per share	149.0p	142.2p
Fourth quarterly interim dividend declared	1.92p	1.87p
NAV per share after deducting fourth quarterly interim dividend	147.1p	140.3p

 

 

 

 

Ian Russell, Chairman of the Board, said:

"We are pleased to report that HICL has delivered another good set of results this year, underpinned by a portfolio performance that has exceeded expectations. The Company delivered a total shareholder return of 10.3% in the year. The Board is reaffirming the dividend targets for both the year to 31 March 2018 and to 31 March 2019 at 7.85p and 8.05p per share respectively, reflecting the Board's confidence in the future performance of the Group's portfolio.

 

"HICL's investment proposition to deliver sustainable, long-term income to shareholders, while preserving the capital value of its portfolio, continues to resonate well with investors, particularly in a continued low interest rate environment. This was most evident in the context of the Company's recent £260m equity issue, which was more than three times oversubscribed.

 

"We remain disciplined in our approach and are committed to ensuring that new investments enhance the existing portfolio. During the year we invested £266.6m in 10 new and five incremental investments, which increased both the scale and the diversity of the Company's portfolio. We are well placed to take advantage of new investment opportunities in our pipeline and, since the year-end, have secured an interest in Affinity Water which brings new benefits to the portfolio, including enhanced inflation correlation, which has increased from 0.6 at 31 March 2016 to 0.8 currently.

 

"Today marks the culmination of a two-year succession plan at our Investment Adviser, with Harry Seekings assuming leadership of the InfraRed team responsible for the Company. The Board wishes to thank Tony Roper for his leadership and vision which, together with the excellent team at InfraRed, have driven the Company's successful track record."

 

 

Tony Roper, Director, InfraRed Capital Partners Limited, the Investment Adviser added:

"The current Portfolio continues to perform well for both the Company's clients and shareholders, in part due to the value preservation and enhancement initiatives of our asset management team. We remain confident of our ability to deliver outperformance in the medium term, particularly by taking a strategic approach to realising economies of scale across the portfolio.

 

"Our broad range of industry relationships has enabled us to source a number of new investments at attractive prices during the year, such that only two of the 15 new investments were sourced via full market auctions.

 

"Although demand for operational infrastructure assets remains high, we remain disciplined in our approach to sourcing new investments. The pipeline for further investments is healthy and diversified across the Company's target market segments and geographies."

 

 

This announcement contains Inside Information.

 

 

Contacts for the Investment Adviser on behalf of the Board:

 

InfraRed Capital Partners Limited:                                               +44 (0) 20 7484 1800

Tony Roper

Keith Pickard

Harry Seekings

 

Contacts for Tulchan Communications:                                       +44 (0) 20 7353 4200

David Allchurch

Latika Shah

 

Contacts for Canaccord Genuity Limited:                                     +44 (0) 20 7523 8000

Dominic Waters

Neil Brierley

Will Barnett

David Yovichic

 

Copies of this announcement can be found on the Company's website, www.hicl.com. The Annual Report and Consolidated Financial Statements for the year ended 31 March 2017 will be published in late May and an electronic version will be available from the Company's website at that time.

 

Chairman's Statement

"HICL has delivered another good set of results, underpinned by portfolio performance that exceeded expectations."

I am pleased to present the Annual Report for HICL Infrastructure Company Limited. The Company has delivered another good set of results, underpinned by portfolio performance that exceeded expectations.

During the financial year the Company successfully raised £381.0m of new equity capital and completed fifteen investments for a combined value on an Investment Basis of £266.6m. In addition, since year-end we have completed the £269m acquisition of a substantial interest in Affinity Water. These investments demonstrate the excellent progress made in delivering the Company's Acquisition Strategy. The new investments are consistent with the Company's objective of delivering income to shareholders from a portfolio that is positioned at the lower end of the risk spectrum.

Dividends for the year amounted to 7.65p, an increase of 2.7% on the prior year, and a yield on the share price at 31 March 2017 of 4.5%. With our focus on delivering dividend income to shareholders, we believe the investment proposition has remained attractive in a climate of persistently low interest rates. Furthermore, with the prospect of higher inflation in the UK, the inflation-correlated returns generated over the long term by the Group's portfolio have come more into focus.

Both the Board and the Investment Adviser believe the Company is in a good position to make further, suitable investments, based on the current pipeline of prospective investments and the Investment Adviser's origination skills and investment network.

Financial Results

The Investment Adviser prepared a fair market valuation of the portfolio at 31 March 2017. As in prior years, this is based on a discounted cash flow analysis and it uses key assumptions recommended by the Investment Adviser based on its experience and having taken into account market intelligence gained from bidding activities. The Directors have satisfied themselves with the methodology and assumptions used and as usual have taken independent third party advice on the valuation. The Directors have approved the portfolio valuation of £2,380.0m on an Investment Basis at 31 March 2017 (£2,030.3m at 31 March 2016). A reconciliation between the IFRS basis and Investment Basis financial statements can be found in the Pro Forma Statements in Operational and Financial Review.

The Net Asset Value ("NAV") per share was 149.0p at 31 March 2017, an increase of 6.8p on the 142.2p at 31 March 2016. This increase was supported by portfolio performance that exceeded expectations, downward pressure on discount rates, contributions from new acquisitions and share issuance at a premium to NAV. After deducting the fourth quarterly interim dividend of 1.92p to be paid on 30 June 2017, the NAV per share at 31 March 2017 was 147.1p.

From IPO in March 2006 to 31 March 2017, the Company has delivered a total shareholder return of 9.6% p.a. based on dividends paid and the growth in NAV per share. This compares favourably to Company's long-term target of 7-8% per annum. Further guidance was given in the Company's recent prospectus, being a target long-term return of 5.6% p.a. based on an issue price of 159p per share.

Cash received from the portfolio by way of distributions was ahead of expectations. After operating and finance costs on an Investment Basis, a net cash flow of £122.8m (2016: £107.3m) covered the cash dividend 1.22 times (2016: 1.15 times).

On an IFRS basis at 31 March 2017 investments at fair value were £2,419.4m (2016: £1,973.7m).

The Portfolio

During the year the Company completed 10 new investments and made five incremental investments in existing projects. As at 31 March 2017, the portfolio consisted of 114 investments (2016: 104).

The Investment Adviser's Asset Management and Portfolio Management teams actively seek strong day-to-day relationships with key stakeholders and work to find efficiencies and savings across the portfolio over the longer term. This active engagement has contributed to a good performance during the year with cash flow from the portfolio being ahead of our projections.

The Company's acquisition strategy is focused on three principal market segments: PPP projects, regulated assets (e.g. gas and electricity transmission projects; water utilities) and demand-based assets (e.g. toll road concessions and student accommodation). The Investment Adviser maintains a disciplined approach to assessing potential investment opportunities based targeting those that are accretive to the existing portfolio.

The correlation of the portfolio's long-term returns to inflation improved during the year, being 0.7 at 31 March 2017 (2016: 0.6), and the portfolio's weighted-average asset life increased to 24.4 years (2016: 21.5 years). This improvement to the portfolio was largely the result of the investment made by the Group in the Northwest Parkway (Colorado, USA), a long-concession toll road with an operational track record of more than a decade.

The Company's Investment Policy permits up to 35% of the portfolio to be invested in demand-based assets, assets under construction and/or other funds. However, it is the current intention of the Board and the Investment Adviser that no more than 20% of the portfolio by value will be invested in demand-based assets with returns that are correlated to the economic cycle.

Capital Raising

During the period the Company raised equity capital of £381.0m, including scrip dividends. In September 2016, £113.4m was raised through a tap issue. In March 2017, the Company raised £260m through the issue of new shares via a Placing, Open Offer, Offer for Subscription and Intermediaries Offer. The latest issue was more than three times oversubscribed.

The Board is grateful for the support from the Company's shareholders, both existing and new. The success of the capital raisings reflects the attraction and popularity of infrastructure as an asset class and also the Company's track record, portfolio and business model. The Placing, Open Offer, Offer for Subscription and Intermediaries Offer represented the Company's first prospectus fundraising since 2013, enabling both existing and new retail shareholders to subscribe for new shares at a slight discount to the prevailing market share price.

The Company is in advanced discussions to partially sell down up to £25m of its investment in Affinity Water. This is part of a strategy to build relationships with aligned co-investors in order to enable the Group to manage its portfolio exposure to larger investment opportunities. Once this has been completed, the Company will have a net funding requirement of approximately £205m.

The Company increased the capacity of its revolving credit facility from £200m to £300m in December 2016 and to £400m in April 2017. The facility maintains the Company's flexibility to acquire further investments prior to raising fresh equity. This reduces the impact of cash drag on the investment returns which can result from holding uninvested cash on the balance sheet.

Distributions

Since IPO in 2006, the Company has met or exceeded all of its dividend guidance targets and this set of results marks the Company's tenth successive year of dividend growth.

On 18 May 2017 the Board declared a fourth quarterly interim dividend for the year to 31 March 2017 of 1.92p per share which will be paid on 30 June 2017. This results in an aggregate dividend for the year of 7.65p per share, an increase of 2.7% over the prior year. A scrip dividend alternative is available.

The Board's confidence in the near-term forecast cash flow performance of the Group's portfolio underpins the dividend targets of 7.85p per share for the year ended 31 March 2018 and 8.05p per share for the year ended 31 March 2019 (increases of 2.6% and 2.5% respectively). The Board intends to continue paying quarterly dividends, with a scrip dividend alternative.

Risks and Uncertainties

The risks to which the Company is exposed and the strategies employed to mitigate them have not changed materially since 31 March 2016. They are set out in detail in the February 2017 Prospectus, which is available on the Company's website.

2016 was marked by political uncertainty and this theme has continued into 2017, most recently with the decision to call a general election in the UK. The long-term impact of the UK's EU Referendum is still uncertain. Sterling experienced a significant devaluation in the aftermath of the referendum and, as in previous years, the Company's hedging policy has successfully mitigated the impact of foreign exchange movements on NAV. Another consequence of sterling's relative weakness during the year has been to increase inflationary pressures in the UK, although this may not be sustained over the longer term.

With a large portfolio, investments with operational challenges are to be expected. Overall, the Group's portfolio continues to experience good operational performance. Progress has been made with public sector clients where there had previously been disagreements over operational issues with a series of settlement agreements being concluded. Nonetheless, it is essential that the Group maintains an active approach by continuing to manage stakeholder relationships and monitoring and resolving operational difficulties.

The Board also recognises the importance of identifying and actively monitoring the financial and non-financial risks facing the Company. Following an external review in 2015, an enhanced risk management and reporting framework for the Company was developed with the Investment Adviser. This was reviewed and subsequently adopted by the Directors during 2016. A risk dashboard summarises how risks have evolved, the controls and mitigants and also uses stress and scenario analysis to quantify the potential cash flow and valuation impact of key risks.

Corporate Governance and Regulation

Simon Holden and Kenneth Reid joined the Board of Directors in the year, bringing with them highly relevant financial expertise and commercial knowledge.

On 31 March 2017, Sarah Evans retired from the Board. Sarah joined the Board in 2008 and was chair of the Audit Committee. I would like to thank Sarah for the major contribution that she has made to HICL and her exemplary dedication and professionalism. With effect from 1 April 2017, Susie Farnon became chair of the Audit Committee and Simon Holden assumed the role of chair of the Risk Committee.

As in previous years and in line with good corporate governance, the Directors offered themselves for re-election at the Annual General Meeting ("AGM") held in July 2016 and were duly re-elected. They will be offering themselves for re-election again at the forthcoming AGM on 17 July 2017.

Investment Adviser

At InfraRed, Tony Roper, who has led the Investment Adviser's fund management activity in relation to HICL since 2006, is handing over the day-to-day responsibility for leading the Investment Adviser's team to Harry Seekings, who joined InfraRed in 1998. This is part of a two-year, well-coordinated succession plan that was agreed with the Board. Tony continues as a member of the InfraRed HICL Investment Committee and remains available to both the InfraRed team and the Board for support and advice as needed.

 

Market Developments and Outlook

Following the UK's Autumn Statement, expectations were raised for the announcement of a new pipeline of PPP projects in 2017. The Board remains optimistic that the Government will bring forward new projects after the current election has concluded. However, HICL's readiness to invest in UK infrastructure opportunities is not limited to PPP projects, as evidenced by the Company's recent acquisition of Affinity Water and participation in the OFTO programme, as well as bids for a number of student accommodation projects. The Investment Adviser actively continues to seek opportunities in the other target geographies identified in the Company's Acquisition Strategy.

Competition across the infrastructure asset class remains intense. The year has seen continued muted activity in PPP secondary markets. Nonetheless, the Investment Adviser has continued to source appropriate opportunities, principally from long-standing relationships. The recent Affinity Water acquisition demonstrated the value of relationships, as the Company partnered with like-minded investors to secure the investment, without the need to participate in an auction process.

The Board remains confident in the Company's future prospects. The Investment Adviser continues to manage the existing portfolio to preserve value and to generate outperformance where possible. Looking ahead, the Board is confident that the current pipeline will generate new investment opportunities that secure the delivery of income to shareholders for the long term.

Ian
Russell

Chairman

23 May 2017

 

 

 

The Infrastructure Market

The Infrastructure market can be segmented by revenue type. Within each market segment, there are assets with differing risk profiles.

The infrastructure asset class covers a variety of sectors and risk profiles. HICL has segmented the market using revenue risk categories. The reason for this approach to segmentation is that in general terms infrastructure investments are perceived to offer long-term, stable and predictable cash flows and revenue is the fundamental building block of cash flow.

The spectrum of risk associated with infrastructure assets varies within each market segment and not all market segments offer the lowest categories of risk. For example, PPP projects can offer some of the lowest risk investment opportunities in the infrastructure market due to the contractual nature of revenues and limited residual risks borne by equity investors. However, if a PPP project is under construction or has not been structured to fully pass down key delivery risks to subcontractors, its risk profile can be incrementally higher when compared to a well-structured, operational PPP project. More information will be available in the Company's Annual Report.

HICL targets selective opportunities within each market segment, with a core focus on PPP projects, regulated assets and demand-based assets. The Company's positioning within the infrastructure market is discussed in more detail in Strategy & Objectives.

 

Investment Proposition

To deliver to shareholders a long-term, stable income from a portfolio of infrastructure investments positioned at the lower end of the risk spectrum.

 

Strategy & Objectives

This section summarises the Company's strategy for the key activities covered by the business model. It also sets out objectives against which the Directors measure the Company's delivery of its investment proposition to shareholders, both during the financial year and over the long term.

Strategy

The Company's investments are almost exclusively made as risk capital (e.g. equity) in unlisted companies that operate within highly-structured business environments, e.g. complex contractual frameworks or regulated markets. In this context, specialist skills are a necessary prerequisite for originating and managing infrastructure investments.

Since its IPO in 2006, the Company has delegated to the Investment Adviser, InfraRed Capital Partners ('InfraRed'), the bulk of the day-to-day activities required to deliver HICL's business model.

Value Preservation and Value Enhancement                                   

InfraRed's Asset Management and Portfolio Management teams work closely together, and in partnership with the management teams in the Group's portfolio companies, to preserve the value of the Group's investments: ensuring portfolio companies perform in line with the relevant contractual and/or regulatory framework; and delivering the forecast base case investment return.

A second area of focus for the Asset Management and Portfolio Management teams is to seek opportunities to deliver outperformance from the portfolio. This upside is often shared, with benefit accruing to the Company's shareholders and to public sector clients or, as part of regulatory price reviews, the customers of regulated assets.

More information is available in the Company's Annual Report.

Accretive Investment

The Company has a clearly defined Investment Policy, which can be found on the Company's website. This sets the over-arching framework within which the Company aims to build a portfolio that delivers the Investment Proposition and is consistent with the Company's overall risk appetite.

Working within delegated parameters approved by the HICL Board, InfraRed is responsible for the selection and pricing of new investments. The Acquisition Strategy is periodically reviewed by the Board and agreed with InfraRed, most recently in October 2016.

InfraRed's Origination and Transaction Team sources opportunities that are within the scope of the Acquisition Strategy by focusing on specific strategies and applying a consistent evaluation framework. More information is available in the Company's Annual Report.

InfraRed uses a variety of channels to source investments for the Group. These include:

·      soliciting off-market transactions through relationships within InfraRed's extensive network of investment partners and advisors;

·      acquiring further equity interests from co-shareholders of existing portfolio companies;

·      participating selectively in primary investment activity, as part of procurement processes sponsored by the public sector; and

·      participating in competitive auctions of investments in the secondary market.

Performance-based Objectives

Dividends

The Company's principal financial return objective is to offer long-term, sustainable income for shareholders. This is delivered through the Company's dividend target - an annual distribution of at least that paid during the prior financial year - with the prospect of increasing the figure, provided it is sustainable with regard to the portfolio's forecast operational performance and the prevailing macro-economic outlook. Interim dividends are paid quarterly.

Total Return

The Company's secondary financial return objective is to preserve the capital value of its investment portfolio and deliver an element of capital growth, as reflected in its longer-term IRR return target of 7-8%, set at IPO. This target has been achieved to date and the Directors believe that it remains achievable looking forward.

Cash Cover

An ability to pay cash-covered dividends is a key measure of the Group's operating cash flow performance. The Company targets a cash-covered dividend and performs stress test analysis to assess the robustness of cash coverage in the future.

Inflation Correlation

The Board considers inflation correlation to be one of the key attributes of infrastructure investment. The Company therefore seeks to provide shareholders who hold their investment for the long term with a total return that has good positive correlation with inflation.

Ongoing Charges

The Board is committed to offering shareholders a competitive investment proposition through management of efficient gross (portfolio level) to net (investor level) returns. This is achieved through attractive ongoing charges relative to the Company's peer group, with the intention to reduce such charges where possible.

 

Quality-based Objectives

The Company measures performance against other, important objectives to protect shareholders' interests, including to:

·      maintain a diversified portfolio of investments (e.g. by reference to single asset and/or counterparty concentration) and thereby mitigate concentration risk;

·      make accretive investments in line with the risk‑appetite of the Company and consistent with its Investment Policy;

·      target long-term, predictable cash flow receipts from the portfolio by seeking where possible assets that maintain or extend the weighted average unexpired portfolio concession life;

·      maintain effective treasury management processes, notably with respect to foreign exchange risk and efficient cash management; and

·      manage the Group's exposure to refinancing risk.

Treasury Group Cash Management and Financing

The Board's policy is that the Company should not hold material amounts of un-invested cash beyond what is necessary to meet outstanding equity commitments for existing investments or to fund potential acquisitions in the near term. New investments are typically funded initially by the Group's revolving credit facility. The Board will consider the appropriate timing and price for the issuance of new shares to repay the debt, in consultation with the Company's broker.

The Group's multi-currency revolving credit facility was enlarged during the year from £200m to £300m - and to £400m in April 2017. ING was added to the existing banking group of HSBC, Lloyds Bank, National Australia Bank, Sumitomo Mitsui Banking Corporation and The Royal Bank of Scotland. The facility carries a margin of 1.70% and the term runs until May 2019. It is available to be drawn in cash and letters of credit for future investment obligations.

Treasury Group Foreign Exchange Hedging

The Board's hedging policy is designed to provide confidence in the near-term yield and to limit NAV per share sensitivity to no more than 1% for a 10% foreign exchange movement. This policy is being reviewed by the Board and the Investment Adviser.

Foreign exchange risk from non-sterling assets is managed by hedging investment income from overseas assets through the forward sale of the respective foreign currency (for up to 24 months) combined with balance sheet hedging through the forward sale of non-sterling currencies and by debt drawings under the Group's credit facility.

Volatility

The Board's view is that one of the attributes of investments in infrastructure assets (such as those that form part of the Company's Acquisition Strategy) is that valuations and returns typically demonstrate low correlation to movements in the wider equities markets. In line with this theme, the Company's share price has historically exhibited low correlation to the FTSE All-share Index of the largest equities (by market capitalisation) listed on the London Stock Exchange.

The Directors wish to preserve this low correlation to the extent it is possible.

 

 

Case Study: A Decade of Outperformance

Over the 10 years following its IPO in 2006, HICL delivered returns to shareholders of 9.6% per annum, exceeding the target set at IPO of 7-8%.

The ten-year return comprises a combination of NAV growth and dividends of 109.6p per share in aggregate, 44.2p higher than the earnings that could have been forecast from the portfolio managed at IPO without any subsequent acquisition activity. All data expressed in pence (p) is on a pence per share basis, assuming the share was acquired at the time of the IPO.

The Investment Adviser has considered the composition of this growth and determined that of the 44.2p, around 30p is contributed by portfolio outperformance while 14.2p is attributable to changes in economic assumptions.

The table below shows an analysis over the ten-year period taking the NAV at IPO of 98.4p to the NAV (post interim dividend) at March 2016 of 140.3p, taking into account 67.7p of dividends paid or declared.

Portfolio Outperformance

The 30p NAV outperformance has arisen from a variety of initiatives and milestones, the attribution of which has been estimated into 9 different categories, none of which is significantly larger than the others.

The Investment Adviser's Portfolio and Asset Management teams have delivered a substantial increase in NAV growth over the ten years. This has been achieved by identifying and implementing value enhancement opportunities through multiple initiatives, both at asset level and across the portfolio, creating a number of incremental improvements.

Within the portfolio companies, the Investment Adviser's proactive management of project costs has generated savings across the portfolio. For example, InfraRed created an insurance portfolio which has seen a reduction in insurance costs since it was launched in 2007. Successful asset management of construction projects has created value by successfully achieving construction completions to time and budget, leading to steady state operations, and enabling reduced discount rates reflecting the lower risk operational phase.

At the Group level, increased scale through accretive acquisitions has driven a reduction of the ongoing charges ratio, supported by the tapered management fee. Equity issuance, to enable growth through acquisitions, has been at a premium to the prevailing NAV per share which has added further value. 

In summary, analysing historic performance shows the benefit of accretive acquisitions combined with proactive portfolio and asset management from InfraRed where many small incremental initiatives contribute to significant outperformance.

The Investment Adviser is confident that there will be future opportunities to outperform current forecasts. However, the scale of outperformance in the current portfolio may be less than delivered historically given the optimisation achieved to date.

Economic Assumptions

Changes in economic assumptions have clearly benefitted HICL over the 10 years with the largest benefit at 10.9p per share coming from reducing corporation tax rates, mainly in the UK which was 30% at IPO and at March 2016 was forecast to fall to 17% in 2020.

There has been a reduction in deposit interest rates since 2006. At IPO the UK assumption was 4% compared with the March 2016 assumption of 1% to March 2020 rising to 2.5% thereafter. This has reduced NAV by 8.4p per share which has largely been offset by the drop in discount rate that has contributed 8.3p of the total movement. The average discount rate at IPO was 8% rising to 8.7% in March 2010 before reducing over time to the average discount rate of 7.5% at March 2016.

Actual UK inflation over the 10 year period has averaged 2.84%, slightly up from valuation assumption applied since 2008 of 2.75% which is estimated to have increased NAV by 1.9p per share.

	Pence per share
NAV IPO		98.4p
Forecast EPS		65.3p
Portfolio outperformance		30.0p
Tax rates	10.9p
Change in discount rate	8.3p
Inflation assumptions	1.9p
Forex movement	1.5p
Deposit interest rates	(8.4p)
Sub-total economic assumptions		14.2p
Dividends paid/declared		(67.7p)
NAV March 2016 (post dividend)		140.3p

 

 

Investment Adviser's Report

The year ended 31 March 2017 saw the Group's portfolio deliver performance that exceeded expectations and the addition of new investments that were accretive, as well as increasing scale and diversity. Supporting this performance was an active year with a number of new initiatives pursued by our infrastructure team at InfraRed to increase efficiency, improve portfolio management and generate further value for the Company's shareholders.

The success of the Company is enhanced by our ability to deliver enhancements to portfolio value and cash flows. NAV per share, excluding dividends paid, increased by 6.8p, from 142.2p as at 31 March 2016 to 149.0p as at 31 March 2017. Of this growth, 1.6p per share was delivered through portfolio outperformance, continuing a successful trend over the last 10 years which is explored in more detail in Case Study - A Decade of Outperformance.

Financial Highlights

The Company achieved a profit before tax of £176.8m for the year ended 31 March 2017 (March 2016: £157.2m). The increase on the prior year's result was predominantly due to growth in the size of the portfolio, which was driven by acquisitions.

Cash received from the portfolio of investments on an Investment Basis was ahead of expectations at £148.9m (2016: £130.8m). After operating and finance costs, net operating cash flow on an Investment Basis of £122.8m covered the cash dividends paid 1.22 times.

The Company's ongoing charges for the year were 1.06% (2016: 1.12%), using the Association of Investment Companies' methodology.  This compares well with other investment companies in the sector. Total management fees accruing to the Investment Adviser amounted to £24.4m for the year (2016: £20.4m), increasing in line with portfolio value. These fees include the tapered management fee (1.1% for assets up to £750m, 1.0% for assets above £750m, 0.9% for assets above £1.5bn and 0.8% for assets above £2.25bn).

The Company's total shareholder return ('TSR'), based on growth in NAV per share plus dividends paid, was 10.3% for the year (2016: 9.6%). The annualised TSR since the Company's IPO was 9.6% at 31 March 2017, which compares favourably to the 6.2% total return delivered by the FTSE All-Share Index over the same period.

Dividends declared in relation to the financial year were 7.65p per share in total, a 2.7% increase on the previous financial year. This represented the Company's tenth successive year of dividend growth since IPO.

Value Preservation and Value Enhancement

The portfolio's operational performance was in large part driven by the active management undertaken by our Asset and Portfolio Management teams. With a portfolio the size of the Group's, operational challenges are inevitable. However, during the year there were no assets where issues impacted the Company's NAV per share by more than 1%.

Our Asset Management team works hard to maintain relationships with key stakeholders, creating a platform to reduce the risk of commercial problems escalating. Occasionally issues arise that are complex and sometimes intractable. In this situation the team's focus is on bringing parties together to reach a mutually acceptable resolution. However, reaching an agreement is not always possible and formal legal proceedings, although a last resort, are sometimes necessary. In every scenario, our Asset Management team's approach is proactive.

The Asset Management team also works closely with our Portfolio Management team to seek value enhancements across the portfolio, often through cost saving initiatives. A number of variations to PPP contracts were signed during the year, covering over £700m of new construction work for public sector clients. The management service agreements for a group of projects were re-tendered during the year as part of a cross-portfolio procurement initiative, the goal being to ensure each project company benefits from high quality management services at a price that provides value to the Group.

More detail on Value Enhancement and Value Preservation can be found in Operational and Financial Review.

Accretive Investment

As Investment Adviser, we have agreed with the Board a clear Acquisition Strategy for the Company, focused on three target market segments: PPP projects, demand-based assets and regulated assets. More detail can be found in Strategy & Objectives.

As in previous years the Acquisition Strategy was reviewed at a dedicated, two-day Board meeting in October 2016. Our team presented portfolio development scenario analysis and stress-tests, helping the Board to assess the alignment of the Acquisition Strategy with the Company's objective of delivering long-term, stable income to shareholders.

Although the Acquisition Strategy provides a framework for new investment, implementation depends on the ability of our Origination and Transaction team to source opportunities that are accretive to the existing portfolio. The year saw material progress in this regard with 15 investments made in PPP projects and operational demand-based assets that are positioned at the lower end of the risk spectrum.

Since 31 March 2017, the Company has also announced the acquisition of a significant equity interest in Affinity Water, its first investment in a UK regulated asset. As in previous years, our Origination and Transaction team's relationships were an important source of off-market opportunities - indeed only two of the Group's acquisitions during the year came as the result of a full market auction.

Two new investments were made during the year in operational demand-based assets: the Northwest Parkway toll road in the USA and the M1-A1 Link shadow toll road in the UK. In addition, completion was reached on the purchase of an interest in the A63 Motorway in France (announced in the year to 31 March 2016). These three road projects, in combination with the University of Sheffield Student Accommodation project, mean that demand-based assets represented 12% of the portfolio at 31 March 2017 (2016: 5%).

Long concessions and inflation-linked revenues are attractive features of toll roads. For example, the portfolio's weighted-average asset life increased to 24.4 years as at 31 March 2017 (2016: 21.5 years) largely due to the impact of the Northwest Parkway acquisition. However, toll road projects also have a degree of exposure to wider economic activity and hence have returns that are influenced by changes in Gross Domestic Product ("GDP"). The Board and the Investment Adviser do not wish to fundamentally change the uncorrelated nature of returns from the Group's portfolio and the current intention is that no more than 20% of the portfolio by value will be invested in demand-based assets with returns that are correlated to the economic cycle.

More detail on individual acquisitions can be found in Operational & Financial Review. Sensitivities on GDP exposure can be found in Valuation of the Portfolio.

Capital Raising/Investor Relations

Our Management team met a large number of shareholders during the year, both in the context of the routine reporting cycle but also in conjunction with the Placing, Open Offer, Offer for Subscription and Intermediaries Offer that took place in March 2017. Retail investors have been an important component of the Company's shareholder register since IPO and this capital raising represented an opportunity for individuals to subscribe for new equity alongside institutional investors.

Feedback from all shareholders is valued by the Board and by us. There was a notable change in sentiment following the 2016 EU Referendum, with investors particularly focused on how the return of inflationary pressures might impact the portfolio. The correlation of returns from the portfolio to inflation is strong, increasing to 0.7 as at 31 March 2017 (2016: 0.6). This improvement was down to a number of acquisitions during the year, in particular the Northwest Parkway and the A13 index-linked senior bonds.

In addition to the standard sensitivity showing the impact of inflation scenarios of NAV per share, a cash flow sensitivity has been provided in Valuation of the Portfolio.

Risk and Risk Management

Considerable focus during the year was given to evolving the Company's risk evaluation and reporting systems. Our Management team has developed bespoke tools to support the work of the Company's Risk Committee. These have been subject to in-depth review and refinement in conjunction with the Directors.

One notable benefit of this initiative was to allocate existing scenario modelling to different classes of risk. This has the effect of facilitating a) systematic quantification of the inherent risks faced by the Company and b) evaluation of the effectiveness of available mitigation.

During the year we worked with the Board to review the Company's hedging policy. In particular, as the number of overseas assets is expected to increase over the medium term, attention is being given to the cost and benefit of the current hedging policy. Although the current policy is effective, consideration is being given to whether it can be adjusted while retaining the key objective of materially mitigating the impact of foreign exchange movements.

Infrastructure Market Developments

United Kingdom

PPP procurement has been limited in recent years but, following indications in the Autumn Statement of a new procurement programme, there may be more UK PPP opportunities announced, once the general election in June is over. In the near term, most UK PPP opportunities are likely to be in the secondary market.

The financial year saw significant activity in the regulated asset market segment. This is expected to continue, both with transactions involving assets subject to price controls and also other models such as certain transportation assets and the OFTO programme.

Demand-based assets in the UK include a small number of PPP assets which have usage risk in their revenues, such as shadow toll roads, and an increasing number of university-sponsored student accommodation projects. The Group will continue to pursue on-campus projects in partnership with key contractor relationships.

Europe

Procurement of new PPP projects has continued, albeit in a limited number of countries (e.g. the Netherlands, Germany, Ireland and Norway) and involving a relatively small number of projects. We expect the current rate of activity to continue in the current financial year, with slightly more deal flow anticipated in the secondary market for PPP projects.

We believe there will be further opportunities to invest in regulated assets in Europe. There was notable deal activity over the last year and this is expected to continue. Sectors of interest include gas and electricity transmission and distribution, district heating and water utilities.

Demand-based assets are mostly in the toll road sector, which we monitor in case suitable opportunities arise. Other sectors, such as car parking, have been reviewed but not all are considered appropriate investments for the Group.

North America

The new US President's clear statements of support for the role of private capital in the US infrastructure market are encouraging. However, our experience since opening an InfraRed New York office in 2008 is that the translation of political will in Washington into PPP procurement activity across the country takes time. Momentum is steady rather than spectacular and the challenge for the Federal Government remains how best to encourage and incentivise new forms of infrastructure procurement - responsibility for which is typically implemented at state or agency level.

The Company will continue to participate in greenfield US PPP and will consider opportunities in demand-based assets (principally operational toll roads) to build on the success of the Northwest Parkway toll road investment.

The 2016 Canadian federal budget promised to double infrastructure spending over 10 years, with CAD60bn in new funds available to build transport and energy systems meant to grow the economy over the long term. The first CAD11.9bn is expected to be allocated in the next two-to-five years. As one of the most sophisticated infrastructure markets globally, Canada is a popular destination for private investment. We will continue to seek opportunities but the need for pricing discipline in the face of domestic competition is expected to continue to limit the opportunity for the Company.

Australia & New Zealand

Our Origination and Transaction team is looking for appropriate opportunities in both the Australian and New Zealand primary and secondary markets, while noting the competition from domestic investors is fierce. Australia has a long history of PPP procurement and there are some signs that the rate of primary investment is picking up. In addition we continue to seek opportunities to develop student accommodation projects which may give rise to opportunities for the Group to invest.

Competition

The tight supply-demand dynamics of the infrastructure asset class represent an ongoing challenge to source new investments at suitable valuations. However, our team's reach across geographies and sectors, through our network of offices, will lead to further investment opportunities.

In the current market conditions, where auction processes continue to attract significant demand, relationships remain key to successful origination through bilateral negotiations. We have a proven track record in this regard and continue to seek off-market opportunities wherever possible.

The InfraRed Team

Tony Roper is handing over day-to-day responsibility for leading InfraRed's activities as Investment Adviser to Harry Seekings. Tony has held the role since the Company's IPO in 2006, when the portfolio was seeded with 15 investments from an infrastructure fund managed by InfraRed. Harry has worked at InfraRed since 1998 and has recently focused on HICL's strategy and origination. The change has been planned over two years, in close co-ordination with the Board. Tony retains his role on the InfraRed HICL Investment Committee and remains available to provide support and advice to both the InfraRed team and the Board as needed.

Outlook

With an infrastructure team of over 60 professionals, we continue to actively manage the existing portfolio, seeking to preserve the value invested in the Group's assets. In addition, there remains scope to deliver outperformance in the medium term, particularly through active management and by taking a strategic approach to realising economies of scale across the portfolio.

The pipeline of new investment opportunities is healthy and diversified across a number of initiatives. Based on experience, existing relationships and the expertise of our Origination and Transaction team, we are confident of sourcing further accretive acquisitions for the Group.

In summary, the prospects remain good for building on the Company's 11-year track record of delivering income for shareholders from a portfolio of attractive infrastructure investments.

 

Key Performance and Quality Indicators

The Board has identified metrics against which to clearly measure the Company's performance of its strategic objectives. The results for the year ended 31 March 2017 are set out below.

Key Performance Indicators

	Measure	31 March 2017	31 March 2016
Dividends	Aggregate interim dividends declared per share for the year	7.65p	7.45p
Objective: An annual distribution of at least that achieved in the prior year		Commentary: Achieved.
Total Return	NAV growth and dividends paid per share since IPO	9.6% p.a.	9.5% p.a.
Objective: A long-term IRR target of 7% to 8% as set out at IPO1		Commentary: Exceeded.
Cash-covered Dividends	Operational cash flow / dividends paid to shareholders	1.22x	1.15x
Objective: Cash covered dividends		Commentary: Achieved.
Inflation Correlation	Changes in the expected portfolio return for 1% p.a. inflation change	0.7%	0.6%
Objective: Maintain positive correlation		Commentary: Exceeded.
Competitive Cost Proposition	Annualised ongoing charges/average undiluted NAV 2	1.06%	1.12%
Objective: Efficient gross (portfolio level) to net (investor level) returns, with the intention to reduce ongoing charges where possible		Commentary: Achieved.

 

1 Set by reference to the issue price of 100p/share, at the time of the Company's IPO in February 2006.  Previously reported on dividends declared basis.

2 Calculated in accordance with Association of Investment Companies' guidelines. Ongoing charges excluding non-recurring items such as acquisition costs.

Key Quality Indicators

KPI	Measure	31 March 2017	31 March 2016
Investment Concentration Risk	Percentage of the portfolio represented by the ten largest investments1	40%	39%
	Percentage of the portfolio represented by the single largest investment1	6%	6%
Objective: Maintain a diversified portfolio of investments (thereby mitigating concentration risk) and, at all times, remain compliant with the Company's Investment Policy		Commentary: Achieved.
Risk/Reward Characteristics	Percentage of the portfolio represented by the aggregate value of projects with construction and/or demand-based risk2	13%	6%
Objective: Compliance with the Company's Investment Policy		Commentary: Achieved. Substantially lower than the aggregate limit of 35% for such investments.
Unexpired Concession Length	Portfolio's weighted average unexpired concession length	24.4 years	21.5 years
Objective: Seek where possible investments that maintain or extend the portfolio concession life		Commentary: Achieved. Increase year-on-year primarily due to the acquisition of Northwest Parkway (89-year concession length remaining).
Treasury Management	FX gain (loss)3 as a percentage of the NAV	0.0%	0.3%
	Cash less current liabilities as a percentage of the NAV	2.7%	2.0%
Objective: Maintain effective treasury management processes, notably: Appropriate FX management (confidence in near term yield and managing NAV volatility from FX) Efficient cash management (low net cash position)		Commentary: Achieved.
Refinancing Risk	Investments with refinancing risk4 as a percentage of the portfolio	9%	3%
Objective: Manage exposure to refinancing risk		Commentary:  Increase year-on-year due to the acquisition of Northwest Parkway that has refinancing risk.

 

1 The Company's Investment Policy stipulates that any single investment (being, for this purpose, the sum of all incremental interests acquired by the Group in the same project) must be less than 20% (by value) of the gross assets of the Company, such assessment to be made immediately post acquisition of any interest in a project.

2 'More diverse infrastructure investments' which are made with the intention 'to enhance returns for shareholders', as permitted under the terms of the Company's Investment Policy - namely pre-operational projects, demand-based project and/or other vehicles making infrastructure investments. Further details are set out in the Investment Policy, available from the Company's website. In the year ended 31 March 2017, 2% of projects were in construction and 12% were demand-based (13% total); in the year ended 31 March 2016, 5% of projects were demand-based and 1% were in construction (6% total).

3 Impact of foreign exchange after hedging on NAV.

4 There are two projects with refinancing risk - Aquasure Desalination plant, Australia and Northwest Parkway, USA - and their future refinancing requirements are reflective of the fact that their respective debt markets do not offer debt for the concession term.

 

 

 

Operational and Financial Review

Operating Performance

Portfolio Statistics

During the year the number of investments in the portfolio increased from 104 to 114, with the 10 largest holdings representing 40% of the Directors' valuation as at 31 March 2017 (2016: 39%). In May 2017, the Group made a further acquisition, being an equity interest in Affinity Water Group, resulting in 115 investments in the portfolio as at 23 May 2017.

During the year two PPP projects (RD901 and PSBP Northeast Batch) completed construction. Of the 114 investments as at 31 March 2017, five (representing 2% of the portfolio, based on the Directors' valuation) are in construction: Irish Primary Care Centres, the A9 Road, Centrale Supelec, the N17/N18 Road and the accommodation project in northern Europe.

As at 31 March 2017 four assets were exposed to demand risk, comprising 12% of portfolio value, an increase from 31 March 2016 when there were two assets exposed to demand risk representing 5% of portfolio value.

Counterparty exposure

On a quarterly basis the portfolio's counterparty exposure to both the operational supply chain and the financial providers of bank deposit accounts and interest rate swaps is formally reviewed. The Investment Adviser's risk and control function monitors financial creditworthiness between the formal reviews, while the Asset Management team actively monitors the performance of the supply chain, where poor performance can be an early indication of looming financial difficulties. The review processes have not identified any material counterparty concerns for the portfolio's construction or facilities management contractors. The Directors ensure that the portfolio is diversified by counterparty to mitigate concentration risk.

Value Preservation

The operational performance of the portfolio has been good in the year ended 31 March 2017 and there have been no issues at asset level that have resulted in material losses to the Company. In this context, the threshold for materiality is defined as a loss from an investment that negatively impacts NAV per share by more than 1%. The commentary that follows in this section is therefore provided to give an insight into the asset management challenges and activities within the portfolio.

Solid progress has been made on projects which had previously suffered operational challenges. During the previous year, some of the Company's projects experienced instances of public sector clients who alleged asset faults and attempted to make deductions from their service payments using a strict interpretation of contractual terms. This year has seen the Asset Management team resolve many of these issues and a number of important settlement agreements have been signed that provide the solution to appropriately accommodate and bind all parties involved. In doing so, no material financial impact was borne by the Company's investments, with the costs and penalties of rectification being either passed down to the responsible contractor, or retracted.

There are some specific instances of latent construction defects that have caused operational challenges during the year. The following are examples that the Investment Adviser's Asset Management team has been actively managing during year:

In accommodation PPP projects the adequacy of fire-stopping measures in some assets has led to clients deducting - or threatening to deduct - against availability payments. A handful of projects were affected by such deductions and the focus of the Asset Management team has been on ensuring that the contractual framework operates as expected and that deductions applied are passed down to the supply chain.

There has been media coverage, particularly in Scotland, of the alleged deficient installation of brick wall ties (which secure exterior brick walls to the structure of a building) - in relation to public buildings procured both conventionally and using PPP. The Group takes the safety of all facilities seriously, and the Asset Management team is working closely with management service providers to actively investigate this issue, including in collaboration with public sector clients.

On the Aquasure PPP, the project company successfully rectified a defect with the power cable that connects the desalination plant to the local electricity grid. However, the re-powering of the facility led to a technical fault which, in turn, led to a delay in water production. The plant is now performing very well.

The Investment Adviser expects that such operational issues will arise from time to time but it has the resources in place, through its Asset Management team, to help prevent, resolve and mitigate them.

At the time of the 2016 Annual Report, the Company highlighted some non-material ongoing issues. These are updated below:

Progress resolving alleged building defects and operational issues at a hospital PPP has been slow. Although some of the outstanding matters were closed, a number of challenges remain. A concerted effort will be required from all parties if further progress is to be made. The value of the investment in the portfolio is in the range of £0-5m.

As previously reported, a school PPP project was voluntarily terminated during the year at the election of the local authority client. Certain building defects need to be solved, and negotiations are ongoing with the client regarding the quantification and payment of market value compensation to the Group. The value of the investment in the portfolio is in the range of £5-10m.

Progress has been made on the road PPP that has suffered from a number of operational issues and construction defects. The dispute with the construction subcontractor was proceeding to court but legal action was postponed when heads of terms for an acceptable commercial settlement were agreed between the parties. The focus during the coming year will be to document the agreement. The value of the investment in the portfolio is in the range of £0-5m.

The previously reported issues with a biomass boiler at a hospital PPP have been resolved. Since year-end the project has made its first distribution, representing a significant milestone and an indication of the progress made on the ground.

Remedial works on two grouped schools PPPs in the north of England were substantially completed during the year.

Value Enhancement

During the year, a number of cost savings and other incremental revenue-generating initiatives were undertaken by the Investment Adviser. Examples of such initiatives include:

Contract Variations
Public sector clients often make variation requests to amend the scope of services delivered, be it a capital project or an additional or amended service. In some cases the project may earn incremental revenue. During the year over £700m of new capital works commenced at PPP projects in the portfolio, including at the Allenby & Connaught project as part of the Army Basing Programme. Some variations do not involve new construction works but can greatly assist clients to more efficiently manage their estate. One example of this was with the Mid Yorkshire NHS Trust where a variation involving energy supply responsibilities saw significant benefit delivered to the Trust.

Re-tendering of Management Service Agreements ("MSAs")
The Investment Adviser identified MSA contracts that were capable of being re-tendered and created an innovative procurement plan to ensure that the best service would delivered by the winning provider at a price that represented best value. The focus of the plan was to select specialist MSA providers who were able to demonstrate an ability to work efficiently and effectively for each project company and in doing so increase robustness, resolve project issues and deliver cost savings. The first procurement batch, involving 18 projects, commenced in November 2016. Preferred providers for the projects have been selected and the handover process from incumbent providers, where applicable, has commenced. The process is expected to be concluded in 2017.

Refinancing of projects
Over £600m of debt and derivative products have been refinanced in the year across four projects, where the benefits of doing so are typically shared with the public sector clients in accordance with the contracts and agreed industry guidelines.

Accretive Investment

During the year the Group made 10 new investments and five incremental investments for a total consideration of £266.6m. Further detail can be found in Note 14 to the Financial Statements.

Date	Amount	Type	Stage	Asset	Market Segment	Stake Acquired	Overall Stake
April 16	£14.5m	New	Operational	M1--A1 Road	Demand--based	30.0%	30.0%
April 16	£5.3m	New	Operational	Hinchingbrooke Hospital	PPP	37.5%	37.5%
June 16		Incremental	Construction	Hinchingbrooke Hospital	PPP	37.5%	75.0%
May 16	£9.9m	New	Operational	Irish Primary Care Centres	PPP	60.0%	60.0%
September 16	£50.1m	New	Operational	A13 Senior Bonds	PPP	N/A	N/A
November 16	£22.7m	New	Operational	Bangor and Nendrum Schools	PPP	20.4%	20.4%
November 16		New	Operational	Salford Schools	PPP	25.5%	25.5%
November 16		New	Operational	East Ayrshire Schools;	PPP	25.5%	25.5%
November 16		New	Operational	North Ayrshire Schools	PPP	25.5%	25.5%
November 16		Incremental	Operational	Manchester School	PPP	25.5%	75.5%
November 16		Incremental	Operational	Cork School of Music	PPP	25.5%	75.5%
December 16	£19.8 m	New	Construction	A9 Road	PPP	20.0%	20.0%
December 16		Incremental	Operational	Zaanstad Prison	PPP	25.0%	100.0%
March 17	£136.8m	New	Operational	Northwest Parkway	Demand-based	33.3%	33.3%
March 17	£7.5m	Incremental	Operational	Helicopter Training Facility (loan)	PPP	N/A	N/A
	£266.6m

 

* Reconciles to £272.7m of investments shown in the analysis of change in the Directors' Valuation in Valuation of the Portfolio with the addition of a £6.1m foreign exchange movement on the Euro consideration for A63 Motorway between 31 March 2016 and completion in January 2017.

Since the financial year end, the Group has acquired an equity interest in the various entities that comprise the Affinity Water Group. HICL's share of the consideration for the acquisition amounted to approximately £269m, prior to a proposed sell-down of up to £25m of the investment to a group of co-investors.

Earlier in the year the Group bid (as part of a consortium) for a minority interest in one of the UK's regulated gas distribution businesses, losing narrowly to a rival bidder. The Group continues to participate in auction processes, gaining valuable market intelligence on competition and pricing. During the year, offers were made as part of eight separate market auction processes, with the Group successful in two of these situations.

Financial Performance

Accounting

The Company applies IFRS 10, 11 and 12 as well as Investment Entities - Amendments to IFRS 10, IFRS 12 and IAS 27. A further amendment to IFRS 10 - Investment Entities: Applying the Consolidation Exemption (Amendments to IFRS 10, IFRS 12 and IAS 28) as issued in December 2014 has been adopted by the Company for these financial statements following endorsement of the amendment by the EU in September 2016. This requires the Company to prepare IFRS financial statements which do not consolidate any subsidiaries, including those that are themselves investment entities.

This has resulted in a change from the March 2016 Consolidated Financial Statements in which the Company consolidated the results of HICL Infrastructure S.a.r.l. 1, HICL Infrastructure S.a.r.l. 2 and Infrastructure Investments Limited Partnership (together the "Corporate Subsidiaries") as under the current IFRS basis the Corporate Subsidiaries can no longer be consolidated.

References to the "Corporate Group" in this section refer to the Company and its Corporate Subsidiaries.

The adoption of the latest IFRS 10 Amendments has not changed the NAV per share or earnings per share compared to the previous approach used for the March 2016 Annual Report.

The Company and its advisers have concluded that in order to continue reporting the most relevant financial performance and position to stakeholders, the Company will prepare pro forma summary financial information on the basis that the Company consolidates the results of the Corporate Subsidiaries. This basis we designate the Investment Basis and presents the financial information in the same manner as previously in the March 2016 Consolidated Financial Statements. In particular they provide shareholders with further information regarding the Corporate Group's gearing and expenses, coupled with greater transparency in the Company's capacity for investment and ability to make distributions.

A reconciliation between the summary financial information prepared on the Investment Basis below and the results of the Company included in the Financial Statements under IFRS can be found in the Pro Forma Statements further below.

Summary financial statements

Investment Basis Summary Income Statement

	Year to 31 March 2017			Year to 31 March 2016
£m	Investment Basis	Consolidation adjustments	IFRS	Investment Basis	Consolidation adjustments	IFRS (Restated)
Total income1	207.6	(29.0)	178.6	182.9	(24.1)	158.8
Expenses & finance costs	(30.5)	28.7	(1.8)	(25.5)	23.9	(1.6)
Profit/(loss) before tax	177.1	(0.3)	176.8	157.4	(0.2)	157.2
Tax	(0.3)	0.3	-	(0.2)	0.2	-
Earnings	176.8	-	176.8	157.2	-	157.2
Earnings per share	12.4p	-	12.4p	11.9p	-	11.9p

 

1 Includes net foreign exchange gain of £0.1m (2016: £5.2m gain).

On an Investment Basis, Total income of £207.6m (2016: £182.9m) represents the return from the portfolio recognised as income comprising dividends, sub-debt interest and valuation movements. Total Income has increased by 14% (£24.7m) reflecting a 21% increase in investments at fair value on an Investment Basis which has been partly offset by a lower contribution from discount rate reductions in the year than in the prior year. Further detail on the valuation movements is given in Valuation of the Portfolio.

On an IFRS basis, both Total income and Expenses and finance costs are lower than the Investment Basis as they do not include expenses incurred by the Corporate Subsidiaries. Total Income of £178.6 (2016: £158.8m) comprises interest income received by the Company and valuation movements in its investments.

Foreign exchange movements have not materially impacted profits. On an Investment Basis a £17.8m foreign exchange gain (2016: £13.9m gain) on revaluing the non-UK assets in the portfolio using March 2017 exchange rates has been offset by £17.7m (2016: £8.7m loss) foreign exchange hedging losses. The net gain of £0.1m (2016: £5.2m) is included in Total Income.

Earnings on an Investment Basis and IFRS basis were £176.8m, an increase of £19.6m against the prior year. This reflects the factors stated above whilst Corporate Group Expenses and finance costs were higher at £30.5m compared with £25.5m in the comparable period, reflecting acquisition activity and the growth in the portfolio. Earnings per share were 12.4p (2016: 11.9p).

A reconciliation between the Investment Basis Income Statement and the Income Statement of the Company can be found further below.

Investment Basis Cost Analysis

£m	Year to 31 March 2017	Year to 31 March 2016
Interest expense	2.4	2.2
Investment Adviser fees	24.4	20.4
Auditor - KPMG - for the Group	0.3	0.3
Directors' fees & expenses	0.4	0.3
Acquisition bid costs	1.7	0.8
Professional fees	1.1	1.3
Other expenses	0.2	0.2
Expenses & finance costs	30.5	25.5

 

Total fees accruing to InfraRed Capital Partners Limited ("the Investment Adviser") were £24.4m (2016: £20.4m) for the year, comprising the 1.1% p.a. management fee for assets up to £750m, 1.0% for assets above £750m, 0.9% for assets above £1.5bn and 0.8% for assets above £2.25bn, a 1.0% fee on acquisitions made from third parties, and the £0.1m p.a. advisory fee.

The increase in the Investment Adviser's fees is due to a larger portfolio and includes acquisition fees of £3.4m (2016: £1.5m).

In the year, the Corporate Group incurred £1.7m of third party costs (2016: £0.8m) on unsuccessful bids and bids in progress (mainly legal, technical and tax due diligence). The increase in bid costs in the year arose from greater bid activity for regulated assets and demand-based assets.

Neither the Investment Adviser nor any of its affiliates receives other fees from the Corporate Group or the Corporate Group's portfolio of investments.

On an IFRS basis, expenses and finance costs were £1.8m (2016: £1.6m) as they exclude those incurred by the Corporate Subsidiaries.

Ongoing Charges

£m	Year to 31 March 2017	Year to 31 March 2016
Investment Adviser1	21.0	18.9
Auditor - KPMG - for the Group	0.3	0.3
Directors' fees and expenses	0.4	0.3
Other ongoing expenses	1.3	1.3
Total expenses	23.0	20.8
Average NAV	2,172.2	1,852.1
Ongoing charges	1.06%	1.12%

 

1 Excludes acquisition fees of £3.4m (2016: £1.5m), in line with AIC calculation methodology.

Ongoing charges, in accordance with AIC guidance, is defined as annualised ongoing charges (i.e. excluding acquisition costs and other non-recurring items) divided by the average published undiluted net asset value in the period. On the basis of including costs incurred by the Corporate Subsidiaries, the Ongoing charges percentage is 1.06% (March 2016: 1.12%) with the reduction arising from the impact of the £373m of equity capital raisings in September 2016 and March 2017 combined with the growth in the portfolio providing efficiencies.